Notes to Financial Statements (Unaudited)
1 Significant Accounting Policies
Eaton Vance Enhanced Equity Income Fund II (the Fund) is
a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Fund’s primary investment
objective is to provide current income, with a secondary objective of capital appreciation.
The following is a summary of significant accounting
policies of the Fund. The policies are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Fund is an investment company and follows accounting and reporting guidance in the Financial
Accounting Standards Board (FASB) Accounting Standards Codification Topic 946.
A Investment Valuation — The following methodologies are used to determine the market value or fair value of investments.
Equity
Securities. Equity securities listed on a U.S. securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and ask prices on the
exchange where such securities are principally traded. Equity securities listed on the NASDAQ Global or Global Select Market generally are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or
closing quotations are not available are valued at the mean between the latest available bid and ask prices.
Derivatives. U.S. exchange-traded
options are valued at the mean between the bid and ask prices at valuation time as reported by the Options Price Reporting Authority. Non U.S. exchange-traded options and
over-the-counter options are valued by a third party pricing service using techniques that consider factors including the value of the underlying instrument, the
volatility of the underlying instrument and the period of time until option expiration.
Foreign Securities and Currencies. Foreign securities and
currencies are valued in U.S. dollars, based on foreign currency exchange rate quotations supplied by a third party pricing service. The pricing service uses a proprietary model to determine the exchange rate. Inputs to the model include reported
trades and implied bid/ask spreads. The daily valuation of exchange-traded foreign securities generally is determined as of the close of trading on the principal exchange on which such securities trade. Events occurring after the close of trading on
foreign exchanges may result in adjustments to the valuation of foreign securities to more accurately reflect their fair value as of the close of regular trading on the New York Stock Exchange. When valuing foreign equity securities that meet
certain criteria, the Fund’s Trustees have approved the use of a fair value service that values such securities to reflect market trading that occurs after the close of the applicable foreign markets of comparable securities or other
instruments that have a strong correlation to the fair-valued securities.
Affiliated Fund. The Fund may invest in Eaton Vance Cash Reserves Fund,
LLC (Cash Reserves Fund), an affiliated investment company managed by Eaton Vance Management (EVM). While Cash Reserves Fund is not a registered money market mutual fund, it conducts all of its investment activities in accordance with the
requirements of Rule 2a-7 under the 1940 Act. Investments in Cash Reserves Fund are valued at the closing net asset value per unit on the valuation day. Cash Reserves Fund generally values its investment
securities based on available market quotations provided by a third party pricing service.
Fair Valuation. Investments for which valuations or
market quotations are not readily available or are deemed unreliable are valued at fair value using methods determined in good faith by or at the direction of the Trustees of the Fund in a manner that most fairly reflects the security’s
“fair value”, which is the amount that the Fund might reasonably expect to receive for the security upon its current sale in the ordinary course. Each such determination is based on a consideration of relevant factors, which are likely to
vary from one pricing context to another. These factors may include, but are not limited to, the type of security, the existence of any contractual restrictions on the security’s disposition, the price and extent of public trading in similar
securities of the issuer or of comparable companies or entities, quotations or relevant information obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for
exchange-traded securities), an analysis of the company’s or entity’s financial statements, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.
B Investment Transactions — Investment transactions for financial statement purposes
are accounted for on a trade date basis. Realized gains and losses on investments sold are determined on the basis of identified cost.
C Income — Dividend income is recorded on the
ex-dividend date for dividends received in cash and/or securities. However, if the ex-dividend date has passed, certain dividends from foreign securities are recorded as
the Fund is informed of the ex-dividend date. Withholding taxes on foreign dividends and capital gains have been provided for in accordance with the Fund’s understanding of the applicable countries’
tax rules and rates.
D Federal Taxes — The Fund’s policy is to
comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its net investment income, and all or substantially all of its net realized capital
gains. Accordingly, no provision for federal income or excise tax is necessary.
As of June 30, 2020, the Fund had no uncertain tax positions that
would require financial statement recognition, de-recognition, or disclosure. The Fund files a U.S. federal income tax return annually after its fiscal year-end, which
is subject to examination by the Internal Revenue Service for a period of three years from the date of filing.
E Foreign
Currency Translation — Investment valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange
rates. Purchases and sales of foreign investment securities and income and expenses denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions.
Recognized gains or losses on investment transactions attributable to changes in foreign currency exchange rates are recorded for financial statement purposes as net
Eaton Vance
Enhanced Equity Income Fund II
June 30, 2020
Notes to Financial Statements (Unaudited) — continued
realized gains and losses on investments. That portion of unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.
F Use of Estimates — The preparation of the financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual
results could differ from those estimates.
G Indemnifications — Under
the Fund’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Fund. Under Massachusetts law, if certain conditions prevail,
shareholders of a Massachusetts business trust (such as the Fund) could be deemed to have personal liability for the obligations of the Fund. However, the Fund’s Declaration of Trust contains an express disclaimer of liability on the part of
Fund shareholders and the By-laws provide that the Fund shall assume, upon request by the shareholder, the defense on behalf of any Fund shareholders. Moreover, the
By-laws also provide for indemnification out of Fund property of any shareholder held personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such
liability. Additionally, in the normal course of business, the Fund enters into agreements with service providers that may contain indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve
future claims that may be made against the Fund that have not yet occurred.
H Written Options — Upon the writing of a call or a put option, the premium received by the Fund is included in the Statement of Assets and Liabilities as a liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written, in accordance with the Fund’s policies on investment valuations discussed above. Premiums
received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or are closed are added to or offset against the proceeds or amount paid on the transaction to determine the
realized gain or loss. When an index option is exercised, the Fund is required to deliver an amount of cash determined by the excess of the exercise price of the option over the value of the index (in the case of a put) or the excess of the value of
the index over the exercise price of the option (in the case of a call) at contract termination. If a put option on a security is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as a writer of an
option, may have no control over whether the underlying securities or other assets may be sold (call) or purchased (put) and, as a result, bears the market risk of an unfavorable change in the price of the securities or other assets underlying the
written option. The Fund may also bear the risk of not being able to enter into a closing transaction if a liquid secondary market does not exist.
I Interim Financial Statements — The interim financial statements relating to June 30, 2020 and for the six months then ended
have not been audited by an independent registered public accounting firm, but in the opinion of the Fund’s management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the
financial statements.
2 Distributions to Shareholders and Income Tax Information
Subject to its Managed Distribution Plan, the Fund makes monthly distributions from its cash available for distribution, which consists of the Fund’s dividends
and interest income after payment of Fund expenses, net option premiums and net realized and unrealized gains on stock investments. The Fund intends to distribute all or substantially all of its net realized capital gains. Distributions are recorded
on the ex-dividend date. Distributions to shareholders are determined in accordance with income tax regulations, which may differ from U.S. GAAP. As required by U.S. GAAP, only distributions in excess of tax
basis earnings and profits are reported in the financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital.
For tax purposes, distributions from short-term capital gains are considered to be from ordinary income. Distributions in any year may include a substantial return of capital component. For the six months ended June 30, 2020, the amount of
distributions estimated to be a tax return of capital was approximately $24,423,000. The final determination of tax characteristics of the Fund’s distributions will occur at the end of the year, at which time it will be reported to the
shareholders.
In December 2019, the Fund accelerated the declaration, record and payment dates of its regular January 2020 distribution to allow the
Fund to meet its distribution requirements for federal excise tax purposes for the year ended December 31, 2019. For tax purposes, a portion of such distribution, amounting to $3,423,664 or $0.069 per share, is considered to be a distribution
made in the Fund’s taxable year ended December 31, 2020 and its tax character will be determined in such year. Management of the Fund estimates that the tax character of this distribution will be from long-term capital gain.
The cost and unrealized appreciation (depreciation) of investments, including open derivative contracts, of the Fund at June 30, 2020, as determined on a
federal income tax basis, were as follows:
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Aggregate cost
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$
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472,142,428
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Gross unrealized appreciation
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$
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408,619,717
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Gross unrealized depreciation
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(8,380,288
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)
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Net unrealized appreciation
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$
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400,239,429
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Eaton Vance
Enhanced Equity Income Fund II
June 30, 2020
Notes to Financial Statements (Unaudited) — continued
3 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee
is earned by EVM as compensation for management and investment advisory services rendered to the Fund. The fee is computed at an annual rate of 1.00% of the Fund’s average daily gross assets and is payable monthly. Gross assets as referred to
herein represent net assets plus obligations attributable to investment leverage, if any. For the six months ended June 30, 2020, the Fund’s investment adviser fee amounted to $4,068,338. The Fund invests its cash in Cash Reserves Fund.
EVM does not currently receive a fee for advisory services provided to Cash Reserves Fund. EVM also serves as administrator of the Fund, but receives no compensation.
Trustees and officers of the Fund who are members of EVM’s organization receive remuneration for their services to the Fund out of the investment adviser fee. Trustees of the Fund who are not affiliated with
EVM may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the six months ended June 30, 2020, no significant amounts have been deferred. Certain
officers and Trustees of the Fund are officers of EVM.
4 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations, aggregated $233,921,982 and $276,785,915, respectively, for the six months ended
June 30, 2020.
5 Common Shares of Beneficial Interest and Shelf Offering
Common shares issued by the Fund pursuant to its dividend reinvestment plan for the six months ended June 30, 2020 and the year ended December 31, 2019
were 55,909 and 157,939, respectively.
Pursuant to a registration statement filed with and declared effective on April 11, 2019 by the SEC, the
Fund is authorized to issue up to an additional 3,584,261 common shares through an equity shelf offering program (the “shelf offering”). Under the shelf offering, the Fund, subject to market conditions, may raise additional capital from
time to time and in varying amounts and offering methods at a net price at or above the Fund’s net asset value per common share. During the six months ended June 30, 2020 and the year ended December 31, 2019, the Fund sold 600,882 and
1,106,090 common shares, respectively, and received proceeds (net of offering costs) of $10,647,903 and $18,409,016, respectively, through its shelf offering. The net proceeds in excess of the net asset value of the shares sold were $22,966 for the
six months ended June 30, 2020 and $221,215 for the year ended December 31, 2019. Offering costs (other than the applicable sales commissions) incurred in connection with the shelf offering were borne directly by EVM. Eaton Vance
Distributors, Inc. (EVD), an affiliate of EVM, is the distributor of the Fund’s shares and is entitled to receive a sales commission from the Fund of 1.00% of the gross sales price per share, a portion of which is
re-allowed to sales agents. The Fund was informed that the sales commissions retained by EVD during the six months ended June 30, 2020 and the year ended December 31, 2019 were $21,511 and $37,191,
respectively.
In August 2012, the Board of Trustees initially approved a share repurchase program for the Fund. Pursuant to the reauthorization of the
share repurchase program by the Board of Trustees in March 2019, the Fund is authorized to repurchase up to 10% of its common shares outstanding as of the last day of the prior calendar year at market prices when shares are trading at a discount to
net asset value. The share repurchase program does not obligate the Fund to purchase a specific amount of shares. There were no repurchases of common shares by the Fund for the six months ended June 30, 2020 and the year ended December 31,
2019.
6 Financial Instruments
The Fund may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities.
These financial instruments may include written options and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related
and offsetting transactions are considered. A summary of obligations under these financial instruments at June 30, 2020 is included in the Portfolio of Investments. At June 30, 2020, the Fund had sufficient cash and/or securities to cover
commitments under these contracts.
The Fund is subject to equity price risk in the normal course of pursuing its investment objectives. The Fund writes
covered call options on individual stocks above the current value of the stock to generate premium income. In writing call options on individual stocks, the Fund in effect sells potential appreciation in the value of the applicable stock above the
exercise price in exchange for the option premium received. The Fund retains the risk of loss, minus the premium received, should the price of the underlying stock decline.
Eaton Vance
Enhanced Equity Income Fund II
June 30, 2020
Notes to Financial Statements (Unaudited) — continued
The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is equity price risk at June 30, 2020 was
as follows:
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Fair Value
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Derivative
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Asset Derivative
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Liability Derivative(1)
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Written options
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$
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—
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$
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(15,323,318
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)
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(1)
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Statement of Assets and Liabilities location: Written options outstanding, at value.
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The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary underlying risk exposure is equity price risk for
the six months ended June 30, 2020 was as follows: