The Trust may from time to time purchase in the secondary market certain mortgage pass-through securities packaged or master serviced by affiliates or mortgage-related securities containing loans or mortgages originated by PNC Bank or its affiliates, including Midland Loan Services, Inc., all of which are affiliates of the Advisor. It is possible, under certain circumstances, that Midland Loan Services, Inc., or its affiliates, could have interests that are in conflict with the holders of these mortgage-backed securities, and such holders could have rights against Midland Loan Services, Inc. or its affiliates.
For Federal income tax purposes, the Trust had capital loss carryforwards as follows:
Accordingly, no capital gain distributions are expected to be paid to shareholders of the Trust until the Trust has net realized capital gains in excess of its carryforward amounts. The tax year-end for the Trust is September 30th.
(a) Trust pays floating interest rate and receives fixed rate.
The tax character of distributions paid during the six months ended June 30, 2005 and the year ended December 31, 2004 were as follows:
As of June 30, 2005, the components of distributable earnings on a tax basis were as follows:
There are 200 million shares of $0.01 par value common shares authorized for the Trust. BAT owned all of the Trust’s shares outstanding at June 30, 2005.
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENTS
At a meeting held on May 26, 2005, the board of trustees (the “Board” or the “Trustees”) of the Trust, including the independent trustees (the “Independent Trustees”), unanimously approved the continuance of an Investment Management Agreement between the Trust and BlackRock Advisors, Inc. (the “Advisor”). For the Investment Management Agreement, the Boards also approved a related Sub-Investment Advisory Agreement among the Trust, the Advisor and BlackRock Financial Management, Inc. (the “Sub-Advisor”). The Investment Management Agreements and the Sub-Investment Advisory Agreements sometimes are referred to herein collectively as the “Agreements”. The Advisor and the Sub-Advisor sometimes are referred to herein collectively as “BlackRock”.
Information Received by the Boards
To assist the Board in its evaluation of the Agreements, the Independent Trustees received information from BlackRock on or about April 27, 2005 which detailed, among other things: the organization, business lines and capabilities of BlackRock, including the responsibilities of various departments and key personnel and biographical information relating to key personnel; financial statements for BlackRock, Inc., the PNC Financial Services Group, Inc. and the Trust; the advisory and/or administrative fees paid by the Trust to BlackRock, including comparisons, compiled by an independent third party, with the management fees of funds with similar investment objectives (“Peers”); the profitability of BlackRock and certain industry profitability analyses for advisors to registered investment companies; the expenses of BlackRock in providing the various services; non-investment advisory reimbursements and “fallout” benefits to BlackRock; the expenses of the Trust, including comparisons of the Trust’s expense ratios (both before and after any fee waivers) with the expense ratios of its Peers; and the Trust’s performance for the past one-, three-, five- and ten-year periods, when applicable, as well as the Trust’s performance compared to its Peers. This information supplemented the information received by the Board throughout the year regarding the Trust’s performance, expense ratios, portfolio composition, trade execution and compliance.
In addition to the foregoing materials, independent legal counsel to the Independent Trustees provided a legal memorandum outlining, among other things, the duties of the Boards under the 1940 Act as well as the general principles of relevant law in reviewing and approving advisory contracts, the requirements of the 1940 Act in such matters, an advisor’s fiduciary duty with respect to advisory agreements and compensation, and the standards used by courts in determining whether investment company boards of directors have fulfilled their duties and factors to be considered by the boards in voting on advisory agreements.
Prior to the Board meeting, the Independent Trustees reviewed a preliminary binder of information, and, in consultation with independent counsel, submitted a memorandum on May 12, 2005, to BlackRock setting forth certain questions and requests for additional information. BlackRock responded to these questions in writing on May 24, 2005 and May 25, 2005. The Independent Trustees reviewed these responses with independent counsel on May 25, 2005.
At the Board meeting on May 26, 2005, BlackRock made a presentation to and responded to additional questions from the Board. After the presentations and after reviewing the written materials, the Independent Trustees met in executive session with their legal counsel to review the Boards’ duties in reviewing the Agreements and to consider the renewal of the Agreements. With this background, the Boards considered each Agreement and, in consultation with independent counsel, reviewed the factors set out in judicial decisions and Securities and Exchange Commission statements relating to the renewal of the Agreements.
Matters Considered by the Boards
In connection with their deliberations, the Board considered all factors they believed relevant with respect to the Trust, including the following: the nature, extent and quality of the services to be provided by BlackRock; the investment performance of the Trust; the costs of the services to be provided and profits to be realized by BlackRock and its affiliates from their relationship with the Trust; the extent to which economies of scale would be realized as the BlackRock closed-end complex grows; and whether BlackRock realizes other benefits from its relationship with the Trust.
Nature and Quality of Investment Advisory and Sub-Advisory Services. In evaluating the nature, extent and quality of BlackRock’s services, the Board reviewed information concerning the types of services that BlackRock provides and is expected to provide to the Trust, narrative and statistical information concerning the Trust’s performance record and how such performance compares to the Trust’s Peers, information describing BlackRock’s organization and its various departments, the experience and responsibilities of key personnel and available resources. The Board further noted the willingness of the personnel of BlackRock to engage in open, candid discussions with the Board. The Board further considered the quality of BlackRock’s investment process in making portfolio management decisions. Given the Board’s experience with BlackRock, the Board noted that they were familiar with and continue to have a good understanding of the organization, operations and personnel of BlackRock.
In addition to advisory services, the Independent Trustees considered the quality of the administrative or non-investment advisory services provided to the Trust. In this regard, BlackRock provides the Trust with such administrative and other services (exclusive of, and in addition to, any such services provided by others for the Trust) and officers and other personnel as are necessary for the operations of the Trust. In addition to investment management services, BlackRock and its affiliates provide the Trust with a wide range of services, including: preparing shareholder reports and communications, including annual and semi-annual financial statements and Trust web sites; communications with analysts to support secondary market trading; assisting with daily accounting and pricing; preparing periodic filings with regulators and stock exchanges; overseeing and coordinating the activities of other service providers; administering and organizing Board meetings and preparing the Board materials for such meetings; providing legal and compliance support (such as helping to prepare proxy statements and responding to regulatory inquiries); and performing other Trust administrative tasks necessary for the operation of the respective Trust (such as tax reporting and fulfilling regulatory filing requirements). In addition, in evaluating the administrative services, the Board considered, in particular, BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations in light of the new Securities and Exchange
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Commission regulations governing compliance. The Board noted BlackRock’s focus on compliance and its compliance systems. The Independent Trustees noted that BlackRock’s commitment to supporting the secondary market for the common shares of its closed-end funds is particularly noteworthy.
The Investment Performance of the Trusts. As previously noted, the Board received myriad performance information regarding the Trust and its Peers. Among other things, the Board received materials reflecting the Trust’s historic performance and the Trust’s performance compared to its Peers. More specifically, the Trust’s one-, three-, five- and ten-year total returns (when applicable) were evaluated relative to its respective Peers (including the performance of individual peers as well as the Peers’ average performance).
The Board also reviewed a narrative analysis of the Peer rankings that was prepared by an independent third party and summarized by BlackRock at the Board’s request. The summary placed the Peer rankings into context by analyzing various factors that affect these comparisons. In evaluating the performance information, in certain limited instances, the Board noted that the Peers most similar to the Trust still would not adequately reflect such Trust’s investment objectives and strategies, thereby limiting the usefulness of the comparisons of the Trust’s performance with that of its Peers. The Board noted the quality of information provided by BlackRock throughout the year with respect to the performance of the Trust. The Board considered this information in connection with its deliberations as to whether the level of management services provided to the Trust, in light of all the other facts and circumstances relating to the Trust, supports a conclusion that the Trust’s Agreement should be renewed.
Fees and Expenses. In evaluating the management fees and expenses that the Trust is expected to bear, the Board considered the Trust’s current management fee structure and the Trust’s expected expense ratios in absolute terms as well as relative to the fees and expense ratios of applicable Peers. In reviewing fees, the Board, among other things, reviewed comparisons of the Trust’s gross management fees before and after any applicable reimbursements and fee waivers and total expense ratios before and after any applicable waivers with those of the applicable Peers. The Board also reviewed a narrative analysis of the Peer rankings that was prepared by an independent third party and summarized by BlackRock at the request of the Board. This summary placed the rankings into context by analyzing various factors that affect these comparisons.
The Board also compared the management fees charged to the Trust by BlackRock to the management fees BlackRock charges other types of clients (such as open-end investment companies and institutional separately managed accounts). With respect to open-end investment companies, the management fees charged to the Trust generally were higher than those charged to the open-end investment companies. The Board also noted that BlackRock provides the Trust with certain services not provided to open-end funds, such as leverage management in connection with the issuance of preferred shares, stock exchange listing compliance requirements, rating agency compliance with respect to the leverage employed by the Trust and secondary market support and other services not provided to the Trust, such as monitoring of subscriptions and redemptions. With respect to separately managed institutional accounts, the management fees for such accounts were generally lower than those charged to the comparable Trust. The Boards noted, however, the various services that are provided and the costs incurred by BlackRock in managing and operating the Trust. For instance, BlackRock and its affiliates provide numerous services to the Trust that are not provided to institutional accounts including, but not limited to: preparing shareholder reports and communications, including annual and semi-annual financial statements; preparing periodic filings with regulators and stock exchanges; overseeing and coordinating the activities of other service providers; administering and organizing Board meetings and preparing the Board materials for such meetings; income monitoring; expense budgeting; preparing proxy statements; and performing other Trust administrative tasks necessary for the operation of the respective Trust (such as tax reporting and fulfilling regulatory filing requirements). Further, the Board noted the increased compliance requirements for the Trust in light of new Securities and Exchange Commission regulations and other legislation. These services are generally not required to the same extent, if at all, for separate accounts.
The Board considered this information in connection with its deliberations as to whether the fees paid by the Trust under its Agreements, in light of all the other facts and circumstances relating to the Trust, supports a conclusion that the Trust’s Agreements should be renewed.
Profitability. The Trustees also considered BlackRock’s profitability in conjunction with their review of fees. The Trustees reviewed BlackRock’s revenues, expenses and profitability margins on an after-tax basis. In reviewing profitability, the Trustees recognized that one of the most difficult issues in determining profitability is establishing a method of allocating expenses. The Trustees also reviewed BlackRock’s assumptions and methodology of allocating expenses. In this regard, the methods of allocation used appeared reasonable but the Board noted the inherent limitations in allocating costs among various advisory products. The Board also recognized that individual fund or product line profitability of other advisors is generally not publicly available.
The Board recognized that profitability may be affected by numerous factors including, among other things, the types of funds managed, expense allocations and business mix, and therefore comparability of profitability is somewhat limited. Nevertheless, to the extent available, the Board considered BlackRock’s pre-tax profit margin compared to the pre-tax profitability of various publicly-traded investment management companies and/or investment management companies that publicly disclose some or all of their financial results.
In evaluating the reasonableness of BlackRock’s compensation, the Board also considered any other revenues paid to BlackRock, including partial reimbursements paid to BlackRock for certain non-investment advisory services. The Board noted that these payments were less than BlackRock’s costs for providing these services. The Board also considered indirect benefits (such as soft dollar arrangements) that BlackRock and its affiliates are expected to receive that are attributable to their management of the Trust.
In reviewing the Trust’s fees and expenses, the Board examined the potential benefits of economies of scale, and whether any economies of scale should be reflected in the Trust’s fee structures, for example through the use of breakpoints. In this connection, the Board reviewed information provided by BlackRock, noting that most closed-end fund complexes do not have fund-level breakpoints, as closed-end funds generally do not experience substantial growth after their initial public offering and the fund is managed independently consistent with its own
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investment objectives. The information also revealed that only one closed-end fund complex used a complex-level breakpoint structure, and that this complex generally is homogeneous with regard to the types of funds managed and is about four times as large as the Trust’s complex. The Board concluded that breakpoints were not warranted at this time.
Other Benefits. In evaluating fees, the Board also considered indirect benefits or profits BlackRock or its affiliates may receive as a result of their relationships with the Trust. The Trustees, including the Independent Trustees, considered the intangible benefits that accrue to BlackRock and its affiliates by virtue of their relationships with the Trust, including potential benefits accruing to BlackRock and its affiliates as a result of potentially stronger relationships with members of the broker-dealer community, increased name recognition of BlackRock and its affiliates, enhanced sales of other investment funds and products sponsored by BlackRock and its affiliates and increased assets under management which may increase the benefits realized by BlackRock from soft dollar arrangements with broker-dealers. The Board also considered the unquantifiable nature of these potential benefits.
Miscellaneous. During the Board’s deliberations in connection with the Agreements, the Board was aware that the Advisor pays compensation, out of its own assets, to the lead underwriter and to certain qualifying underwriters of many of its closed-end funds, and to employees of BlackRock and its affiliates that participated in the offering of such funds. The Board considered whether the management fee met applicable standards in light of the services provided by BlackRock, without regard to whether BlackRock ultimately pays any portion of the anticipated compensation to the underwriters.
Conclusion
The Trustees did not identify any single factor discussed above as all-important or controlling. The Trustees, including a majority of Independent Trustees, determined that each of the factors described above, in light of all the other factors and all of the facts and circumstances applicable to the Trust, was acceptable for the Trust and supported the Trustees’ conclusion that the terms of each Agreement were fair and reasonable, that the respective Trust’s fees are reasonable in light of the services provided to the Trust, and that the renewal of each Agreement should be approved.
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BAT Subsidiary, Inc.
| Directors | | Accounting Agent and Custodian |
| Ralph L. Schlosstein, Chairman | | State Street Bank and Trust Company |
| Andrew F. Brimmer | | 225 Franklin Street |
| Richard E. Cavanagh | | Boston, MA 02110 |
| Kent Dixon | | |
| Frank J. Fabozzi | | Independent Registered Public Accounting Firm |
| Kathleen F. Feldstein1 | | Deloitte & Touche LLP |
| R. Glenn Hubbard2 | | 200 Berkeley Street |
| Robert S. Kapito | | Boston, MA 02116 |
| James Clayburn La Force, Jr. | | |
| Walter F. Mondale | | Legal Counsel |
| | | Skadden, Arps, Slate, Meagher & Flom LLP |
| Officers | | Four Times Square |
| Robert S. Kapito, President | | New York, NY 10036 |
| Henry Gabbay, Treasurer | | |
| Bartholomew Battista, Chief Compliance Officer | | Legal Counsel – Independent Directors |
| Anne Ackerley, Vice President | | Debevoise & Plimpton LLP |
| James Kong, Assistant Treasurer | | 919 Third Avenue |
| Vincent B. Tritto, Secretary | | New York, NY 10022 |
| Brian P. Kindelan, Assistant Secretary | | |
| | | This report is for shareholder information. This is not a prospec- |
| Investment Advisor | | tus intended for use in the purchase or sale of Trust shares. |
| BlackRock Advisors, Inc. | | Statements and other information contained in this report are as |
| 100 Bellevue Parkway | | dated and are subject to change. |
| Wilmington, DE 19809 | | |
| (800) 227-7BFM | | |
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| 1 | Appointed as a Director on January 19, 2005. Elected by shareholders as a Director on May 26, 2005. |
| 2 | Appointed as a Director on November 16, 2004. Elected by shareholders as a Director on May 26, 2005. |
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The Trust will mail only one copy of shareholder documents, including annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called “householding” and is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please contact the Trust at (800) 699-1BFM.
The Trust has delegated to the Advisor the voting of proxies relating to their voting securities pursuant to the Advisor’s proxy voting policies and procedures. You may obtain a copy of these proxy voting procedures, without charge, by calling (800) 699-1BFM. These policies and procedures are also available on the website of the Securities and Exchange Commission (the “Commission”) at http://www.sec.gov.
Information on how proxies relating to the Trust’s voting securities were voted (if any) by the Advisor during the most recent 12-month period ended June 30th is available, upon request, by calling (800) 699-1BFM or on the website of the Commission at http://www.sec.gov.
The Trust files its complete schedule of portfolio holdings for the first and third quarters of its fiscal year with the Commission on Form N-Q. The Trust’s Form N-Q is available on the Commission’s website at http://www.sec.gov. The Trust’s Form NQ may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. The Trust’s Form N-Q may also be obtained upon request, without charge, by calling (800) 699-1BFM.
This report is for shareholder information. This is not a prospectus intended for
use in the purchase or sale of Trust shares. Statements and other information
contained in this report are as dated and are subject to change. | | |
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semi-annual reports.
Item 6. Schedule of Investments.
The Registrant’s Schedule of Investments is included as part of the Report to Shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable for semi-annual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable for semi-annual reports.
Item 9. Purchases of Equity Securities by Closed-End Management Company and Affiliated Purchasers.
Not applicable because no such purchases were made during the period covered by this report.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable because no applicable matters were voted on by shareholders during the period covered by this report.
Item 11. Controls and Procedures.
(a) The Registrant's principal executive officer and principal financial officer have evaluated the Registrant's disclosure controls and procedures as of a date within 90 days of this filing and have concluded that the Registrant’s disclosure controls and procedures are effective, as of such date, in ensuring that information required to be disclosed by the Registrant in this Form
N-CSR was recorded, processed, summarized, and reported timely.
(b) The Registrant's principal executive officer and principal financial officer are aware of no changes in the Registrant's internal control over financial reporting that occurred during the Registrant's second fiscal quarter 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.
(a) (1) Not applicable.
(a) (2) Separate certifications of Principal Executive and Financial Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(a) (3) Not applicable.
(b) Certification of Principal Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
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.
(Registrant) BAT Sub.
By: /s/ Henry Gabbay
Name: Henry Gabbay
Title: Treasurer
Date: August 19, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Robert S. Kapito
Name: Robert S. Kapito
Title: Principal Executive Officer
Date: August 19, 2005
By: /s/ Henry Gabbay
Name: Henry Gabbay
Title: Principal Financial Officer
Date: August 19, 2005
