The information in the above Financial Highlights represents the operating performance for a common share outstanding, total investment returns, ratios to average net assets and other supplemental data for each period indicated. This information has been determined based upon financial information provided in the financial statements and market price data for the Trust’s common shares.
NOTES TO FINANCIAL STATEMENTS (unaudited)
Note 1. Organization & Accounting Policies
The BlackRock Advantage Term Trust Inc. (“Advantage”) and The BlackRock Investment Quality Term Trust Inc. (“Investment Quality”), each a Maryland corporation, are registered as diversified, closed-end management investment companies under the Investment Company Act of 1940, as amended. BlackRock Preferred Opportunity Trust (“Preferred Opportunity”), a Delaware statutory trust (collectively with Advantage and Investment Quality, the “Trusts”), is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended.
Advantage and Investment Quality each transferred, on October 31, 1998, and July 31, 2001, respectively, a substantial portion of their total assets to 100% owned regulated investment company subsidiaries called BAT Subsidiary, Inc. and BQT Subsidiary, Inc., respectively. The financial statements and these notes to the financial statements for Advantage and Investment Quality are consolidated and include the operations of both Advantage and Investment Quality and their respective wholly owned subsidiary after elimination of all intercompany transactions and balances.
The Boards of Directors of Advantage and Investment Quality each adopted a Plan of Liquidation and Dissolution (each a “Plan”) effective January 2, 2004, and January 2, 2003, respectively. Pursuant to the terms of each Plan, the respective Board of Directors shall oversee the complete liquidation and winding up of Advantage and Investment Quality in an orderly fashion prior to December 31, 2005, and December 31, 2004, respectively.
The following is a summary of significant accounting policies followed by the Trusts.
Investment Valuation: The Trusts value most of their investments on the basis of current market quotations provided by dealers or pricing services selected under the supervision of each Trust’s Board (the “Board”) of Directors/Trustees (the “Trustees”). In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, market transactions in comparable investments, various relationships observed in the market between investments, and calculated yield measures based on valuation technology commonly employed in the market for such investments. Exchange-traded options are valued at their last sales price as of the close of options trading on applicable exchanges. In the absence of a last sale, options are valued at the average of the quoted bid and asked prices as of the close of business. A futures contract is valued at the last sale price as of the close of the commodities exchange on which it trades. Short-term securities may be valued at amortized cost. Investments or other assets for which such current market quotations are not readily available are valued at fair value as determined in good faith under procedures established by, and under the general supervision and responsibility of, each Trust’s Board.
Investment Transactions and Investment Income: Investment transactions are recorded on trade date. Realized and unrealized gains and losses are calculated on the identified cost basis. Each Trust records interest income on an accrual basis and amortizes premium and/or accretes discount on securities purchased using the interest method. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed. These dividends are recorded as soon as the Trust is informed of the ex-dividend date. Dividend income on foreign securities is recorded net of any withholding tax.
Repurchase Agreements: In connection with transactions in repurchase agreements, a Trust’s custodian takes possession of the underlying collateral securities, the value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by a Trust may be delayed or limited.
Option Writing/Purchasing: When a Trust writes or purchases an option, an amount equal to the premium received or paid by the Trust is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or the proceeds from the sale in determining whether a Trust has realized a gain or a loss on investment transactions. A Trust, as writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option.
Options, when used by the Trusts, help in maintaining a targeted duration. Duration is a measure of the price sensitivity of a security or a portfolio to relative changes in interest rates. For instance, a duration of “one” means that a portfolio’s or a security’s price would be expected to change by approximately one percent with a one percent change in interest rates, while a duration of five would imply that the price would move approximately five percent in relation to a one percent change in interest rates.
Option writing and purchasing may be used by the Trusts as an attempt to manage the duration of positions, or collections of positions, so that changes in interest rates do not adversely affect the targeted duration of the portfolio unexpectedly. A call option gives the purchaser of the option the right (but not obligation) to buy, and obligates the seller to sell (when the option is exercised), the underlying position at the exercise price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying position at the exercise price at any time or at a specified time during the option period. Put or call options can be purchased or sold to effectively help manage the targeted duration of the portfolio.
The main risk that is associated with purchasing options is that the option expires without being exercised. In this case, the option expires worthless and the premium paid for the option is considered the loss. The risk associated with writing call options is that a Trust may forgo the opportunity for a profit if the market value of the underlying position increases and the option is exercised. The risk in writing put options is that a Trust may incur a loss if the market value of the underlying position decreases and the option is exercised. In addition, the Trust risks not being able to enter into a closing transaction for the written option as the result of an illiquid market.
22
Interest Rate Swaps: In an interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Interest rate swaps are efficient as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time.
During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by “marking-to-market” to reflect the market value of the swap. When the swap is terminated, a Trust will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract, if any.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the swap. However, the Trusts closely monitor swaps and do not anticipate non-performance by any counterparty.
Swap Options: Swap options are similar to options on securities except that instead of selling or purchasing the right to buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into a previously agreed upon interest rate swap agreement at any time before the expiration of the option. Premiums received or paid from writing or purchasing options are recorded as liabilities or assets and are subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by a Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commission, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or the proceeds from the sale in determining whether a Trust has realized a gain or loss on investment transactions.
The main risk that is associated with purchasing swap options is that the swap option expires without being exercised. In this case, the option expires worthless and the premium paid for the swap option is considered the loss. The main risk that is associated with the writing of a swap option is the market risk of an unfavorable change in the value of the interest rate swap underlying the written swap option.
Swap options may be used by the Trusts to manage the duration of the Trusts’ portfolios in a manner similar to more generic options described above.
Interest Rate Caps: Interest rate caps are similar to interest rate swaps, except that one party agrees to pay a fee, while the other party pays the excess, if any, of a floating rate over a specified fixed or floating rate.
Interest rate caps are intended to both manage the duration of the Trusts’ portfolios and their exposure to changes in short-term interest rates. Owning interest rate caps reduces a portfolio’s duration, making it less sensitive to changes in interest rates from a market value perspective. The effect on income involves protection from rising short-term interest rates, which the Trusts experience primarily in the form of leverage.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the interest rate cap. However, the Trusts do not anticipate non-performance by any counterparty.
Transaction fees paid or received by the Trusts are recognized as assets or liabilities and amortized or accreted into interest expense or income over the life of the interest rate cap. The asset or liability is subsequently adjusted to the current market value of the interest rate cap purchased or sold. Changes in the value of the interest rate cap are recognized as unrealized gains and losses.
Interest Rate Floors: Interest rate floors are similar to interest rate swaps, except that one party agrees to pay a fee, while the other party pays the deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trusts to both manage the duration of the portfolios and their exposure to changes in short-term interest rates. Selling interest rate floors reduces a portfolio’s duration, making it less sensitive to changes in interest rates from a market value perspective. The Trusts’ leverage provides extra income in a period of falling rates. Selling floors reduces some of that extra income by partially monetizing it as an up front payment which the Trusts receive.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the interest rate floor. However, the Trusts do not anticipate non-performance by any counterparty.
Transaction fees paid or received by the Trusts are recognized as assets or liabilities and amortized or accreted into interest expense or income over the life of the interest rate floor. The asset or liability is subsequently adjusted to the current market value of the interest rate floor purchased or sold. Changes in the value of the interest rate floor are recognized as unrealized gains and losses.
Financial Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin payments are made or received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, a Trust records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract.
Financial futures contracts, when used by the Trusts, help in maintaining a targeted duration. Futures contracts can be sold to effectively shorten an otherwise longer duration portfolio. In the same sense, futures contracts can be purchased to lengthen a portfolio that is shorter than its duration target. Thus, by buying or selling futures contracts, the Trusts may attempt to manage the duration of positions so that changes in interest rates do not change the duration of the portfolio unexpectedly.
23
Short Sales: The Trusts may make short sales of securities as a method of managing potential price declines in similar securities owned. When a Trust makes a short sale, it may borrow the security sold short and deliver it to the broker-dealer through which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trusts may have to pay a fee to borrow the particular securities and may be obligated to pay over any payments received on such borrowed securities. A gain, limited to the price at which a Trust sold the security short, or a loss, unlimited as to dollar amount, will be recognized upon the termination of a short sale if the market price is greater or less than the proceeds originally received.
Security Lending: The Trusts may lend their portfolio securities to qualified institutions. The loans are secured by collateral at least equal, at all times, to the market value of the securities loaned. The Trusts may bear the risk of delay in recovery of, or even loss of rights in, the securities loaned should the borrower of the securities fail financially. The Trusts receive compensation for lending their securities in the form of interest on the loan. The Trusts also continue to receive interest on the securities loaned, and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the accounts of the Trusts. The Trusts did not enter into any security lending transactions during the period ended June 30, 2004.
Segregation: In cases in which the Investment Company Act of 1940, as amended, and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that each Trust segregate assets in connection with certain investments (e.g., when issued securities, reverse repurchase agreements or futures contracts), each Trust will, consistent with certain interpretive letters issued by the SEC, designate on its books and records cash or other liquid debt securities having a market value at least equal to the amount that would otherwise be required to be physically segregated.
Federal Income Taxes: It is each Trust’s (excluding Preferred Opportunity) intention to continue, and Preferred Opportunity intends to elect, to be treated as a regulated investment company under the Internal Revenue Code and to distribute sufficient amounts of their taxable income to shareholders. Therefore, no Federal income tax provisions are required. As part of a tax planning strategy, Advantage and Investment Quality may retain a portion of their taxable income and pay excise tax on the undistributed amounts.
Dividends and Distributions: Each Trust declares and pays dividends and distributions to common shareholders monthly from net investment income, net realized short-term capital gains and other sources, if necessary. Net long-term capital gains, if any, in excess of loss carryforwards may be distributed annually. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America.
Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Deferred Compensation and BlackRock Closed-End Share Equivalent Investment Plan: Under the deferred compensation plan approved by each Trust’s Board, non-interested Trustees are required to defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of other BlackRock closed-end funds selected by the Trustees. This has the same economic effect for the Trustees as if the Trustees had invested the deferred amounts in such Trusts.
The deferred compensation plan is not funded and obligations thereunder represent general unsecured claims against the general assets of the Trust. Each Trust may, however, elect to invest in common shares of those Trusts selected by the Trustees in order to match its deferred compensation obligations.
Note 2. Agreements
Each Trust has an Investment Management Agreement with BlackRock Advisors, Inc. (the “Advisor”), a wholly owned subsidiary of BlackRock, Inc. BlackRock Financial Management, Inc., a wholly owned subsidiary of BlackRock, Inc., serves as sub-advisor to Preferred Opportunity. BlackRock, Inc. is an indirect, majority owned subsidiary of The PNC Financial Services Group, Inc. The Investment Management Agreement for Preferred Opportunity covers both investment advisory and administration services. Each Advantage and Investment Quality has an Administration Agreement with the Advisor.
Each Trust’s investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.50% for Advantage and 0.60% for Investment Quality, of each Trust’s average weekly net assets and 0.65% for Preferred Opportunity of the Trust’s average weekly managed assets. The administration fee paid to the Advisor is computed weekly and payable monthly based on an annual rate of 0.08% for Advantage and Investment Quality based on each Trust’s average weekly net assets.
Pursuant to the agreements, the Advisor provides continuous supervision of the investment portfolio and pays the compensation of officers of each Trust who are affiliated persons of the Advisor, occupancy and certain clerical and accounting costs for each Trust. Each Trust bears all other costs and expenses, which include reimbursements to the Advisor for certain operational support services provided to each Trust.
Pursuant to the terms of their custody agreements, each Trust received earnings credits from its custodian for positive cash balances maintained, which are used to offset custody fees.
24
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments, dollar rolls and U.S. government securities, for the six months ended June 30, 2004, aggregated as follows:
Trust | Purchases | | Sales | |
|
| |
| |
| Advantage | $ | 4,758,714 | | $ | 6,558,271 | |
| Investment Quality | 497,145,345 | | 770,258,688 | |
| Preferred Opportunity | 235,681,965 | | 248,546,527 | |
Purchases and sales of U.S. government securities for the six months ended June 30, 2004 aggregated as follows:
Trust | Purchases | | Sales | |
|
| |
| |
| Advantage | $ | 1,096,813 | | $ | — | |
| Investment Quality | | — | | | 5,400,000 | |
| Preferred Opportunity | | 5,119,511 | | | 4,457,375 | |
A 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.
At June 30, 2004, the total cost of securities for Federal income tax purposes and the aggregate gross unrealized appreciation and depreciation for securities held by each Trust were as follows:
Trust | Cost | | Appreciation | | Depreciation | | Net | |
|
| |
| |
| |
| |
| Advantage | $ | 121,513,325 | | $ | 10,362,197 | | $ | 921,612 | | $ | 9,440,585 | |
| Investment Quality | | 410,052,678 | | | 28,169,806 | | 12,381,394 | | | 15,788,412 | |
| Preferred Opportunity | | 626,574,204 | | | 21,478,842 | | 11,141,607 | | | 10,337,235 | |
For Federal income tax purposes, the following Trusts had capital loss carryforwards at June 30, 2004:
| | Capital Loss | | | | | Capital Loss | | | |
Trust | Carryforward Amount | | Expires | | Trust | Carryforward Amounts | | Expires | |
|
| |
| |
|
| |
| |
| Advantage | $ | 98,294 | | 2005 | | Investment Quality | $ | 1,498,011 | | 2005 | |
| | | 81,418 | | 2008 | | | | 9,901,383 | | 2007 | |
| | | 253,874 | | 2010 | | | | 6,843,565 | | 2008 | |
| | 83,667 | | 2011 | | | | 3,059,351 | | 2009 | |
| |
| | | | | | 1,548,342 | | 2010 | |
| | $ | 517,253 | | | | |
|
| | | |
| |
|
| | | | | $ | 22,850,652 | | | |
| | | | | | | |
|
| | | |
| | | | | | | | | | | | |
Accordingly, no capital gain distributions are expected to be paid to shareholders of a Trust until that Trust has net realized capital gains in excess of its carryforward amounts.
Details of open financial futures contracts at June 30, 2004 were as follows:
| | | | | | | | | | | | Unrealized | |
| | Number of | | | | Expiration | | Value at | | Value at | | Appreciation | |
| | Contracts | | Type | | Date | | Trade Date | | June 30, 2004 | | (Depreciation) | |
| |
| |
| |
| |
| |
| |
| |
| Long Position: | | | | | | | | | | | | |
| Investment Quality | 814 | | 10 Yr. U.S. T-Note | | Sept ’04 | | $ | 88,981,322 | | $ | 88,993,093 | | $ | 11,771 | |
| | | | | | | | | | | | | |
|
| |
| Short Positions: | | | | | | | | | | | | | | | |
| Investment Quality | 500 | | 5 Yr. U.S. T-Note | | Sept ’04 | | | 54,280,025 | | | 54,343,746 | | (63,721 | ) |
| | 1000 | | 30 Yr. U.S. T-Bond | | Sept ’04 | | | 105,895,990 | | | 106,375,000 | | (479,010 | ) |
| | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | $ | (542,731 | ) |
| | | | | | | | | | | | | |
|
| |
| Preferred Opportunity | 451 | | 5 Yr. U.S. T-Note | | Sept ’04 | | | 48,602,560 | | | 49,018,053 | | $ | (415,493 | ) |
| | | | | | | | | | | | | |
|
| |
Details of open interest rate swaps at June 30, 2004, were as follows:
| | Notional | | | | | | | | | | |
| | Amount | | Fixed | | Floating | | Termination | | Unrealized | |
Trust | (000) | | Rate | | Rate | | Date | | Appreciation | |
|
| |
| |
| |
| |
| |
| Preferred Opportunity | $ | 85,000 | | 4.74 | % | | 3-month LIBOR | | 11/17/13 | | $ | 1,053,871 | |
| | | 40,000 | | 5.39 | | | 3-month LIBOR | | 10/10/23 | | 1,733,703 | |
| | | | | | | | | | | |
| |
| | | | | | | | | | | | $ | 2,787,574 | |
| | | | | | | | | | | |
|
| |
Preferred Opportunity pays a fixed interest rate and receives a floating rate.
25
Note 4. Borrowings
Reverse Repurchase Agreements: The Trusts may enter into reverse repurchase agreements with qualified, third-party broker-dealers as determined by and under the direction of each Trust’s Board. Interest on the value of reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. At the time a Trust enters into a reverse repurchase agreement, it will establish and maintain a segregated account with the lender, containing liquid investment grade securities having a value not less than the repurchase price, including accrued interest of the reverse repurchase agreement. Details of open reverse repurchase agreements and their respective underlying collateral at June 30, 2004, are below.
Details of open reverse repurchase agreements at June 30, 2004, were as follows:
| | Corresponding | | | | | | | | | | | | | | |
| | Underlying | | | | | | | | | | | | | | |
| | Collateral | | Counter | | | | | Trade | | Maturity | | Net Closing | | | |
Trust | (See chart below) | | Party | | Rate | | Date | | Date | | Amount | | Par | |
|
| |
| |
| |
| |
| |
| |
| |
| Advantage | 1 | | Lehman Brothers | | 1.80 | % | | 6/30/04 | | 7/01/04 | | $ | 294,015 | | $ | 294,000 | |
| | 2 | | Barclays Capital, Inc. | | 0.60 | | | 6/30/04 | | 7/01/04 | | | 1,112,644 | | | 1,112,625 | |
| | 3 | | Citigroup Global Markets, Inc. | | 1.20 | | | 6/30/04 | | 7/01/04 | | | 1,473,612 | | | 1,473,563 | |
| | 4 | | Citigroup Global Markets, Inc. | | 1.40 | | | 6/30/04 | | 7/01/04 | | | 780,030 | | | 780,000 | |
| | 5 | | Lehman Brothers | | 1.07 | | | 6/08/04 | | 7/02/04 | | | 684,738 | | | 684,250 | |
| | 6 | | Lehman Brothers | | 1.13 | | | 6/21/04 | | 7/08/04 | | | 4,389,704 | | | 4,387,500 | |
| | 7 | | Lehman Brothers | | 1.21 | | | 6/14/04 | | 7/16/04 | | | 16,635,373 | | 16,617,500 | |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | $ | 25,349,438 | |
| | | | | | | | | | | | | | | |
|
| |
| Investment Quality | 8 | | Lehman Brothers | | 1.09 | | | 6/14/04 | | 7/06/04 | | | 29,832,358 | | | 29,812,500 | |
| | 9 | | Lehman Brothers | | 1.18 | | | 6/14/04 | | 7/08/04 | | | 551,433 | | | 551,000 | |
| | 10 | | Lehman Brothers | | 1.20 | | | 6/16/04 | | 7/09/04 | | | 36,425,693 | | 36,399,000 | |
| | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | $ | 66,762,500 | |
| | | | | | | | | | | | | | | |
|
| |
| Preferred Opportunity | 11 | | Lehman Brothers | | 0.60 | | | 6/30/04 | | 7/01/04 | | | 580,510 | | $ | 580,500 | |
| | | | | | | | | | | | | | | |
|
| |
Details of underlying collateral for open reverse repurchase agreements at June 30, 2004, were as follows:
| | Corresponding | | | | | | | | | | | | | | |
| | Reverse | | | | | | | | | | | | | | |
| | Repurchase | | | | | | | | | | | | | | |
| | Agreement | | | | | | | Maturity | | Original | | Current | | Market | |
Trust | (See chart above) | | Description | | Rate | | Date | | Face | | Face | | Value | |
|
| |
| |
| |
| |
| |
| |
| |
| Advantage | 1 | | Resolution Funding Corp. | | 0.00 | % | | 7/15/05 | | $ | 300,000 | | $ | 300,000 | | $ | 293,754 | |
| | 2 | | U.S. Treasury Notes | | 4.00 | | | 2/15/04 | | | 1,150,000 | | | 1,150,000 | | | 1,095,916 | |
| | 3 | | U.S. Treasury Notes | | 3.50 | | | 11/15/06 | | | 1,450,000 | | | 1,450,000 | | | 1,468,748 | |
| | 4 | | U.S. Treasury Bonds | | 0.00 | | | 8/15/05 | | | 800,000 | | | 800,000 | | | 780,770 | |
| | 5 | | Resolution Funding Corp. | | 0.00 | | | 7/15/05 | | | 700,000 | | | 700,000 | | | 685,426 | |
| | 6 | | U.S. Treasury Bonds | | 0.00 | | | 8/15/05 | | | 4,500,000 | | | 4,500,000 | | | 4,391,829 | |
| | 7 | | Resolution Funding Corp. | | 0.00 | | | 7/15/05 | | 17,000,000 | | 17,000,000 | | 16,646,060 | |
| | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | $ | 25,362,503 | |
| | | | | | | | | | | | | | | | |
|
| |
| Investment Quality | 8 | | U.S. Treasury Notes | | 0.00 | | | 11/15/04 | | 30,000,000 | | 30,000,000 | | | 29,829,000 | |
| | 9 | | Federal National Mortgage Assoc. | | 6.50 | | | 2/01/29 | | | 4,000,000 | | | 552,930 | | | 577,257 | |
| | 10 | | Federal National Mortgage Assoc. | | 4.00 | | | 3/25/10 | | 46,100,000 | | 30,944,000 | | | 31,082,939 | |
| | 10 | | Federal Home Loan Mortgage Corp. | | 4.00 | | | 5/15/10 | | | 8,000,000 | | | 5,455,000 | | 5,484,348 | |
| | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | $ | 66,973,544 | |
| | | | | | | | | | | | | | | | |
|
| |
| Preferred Opportunity | 11 | | U.S. Treasury Notes | | 4.00 | | | 2/15/14 | | | 600,000 | | | 600,000 | | $ | 571,782 | |
| | | | | | | | | | | | | | | | |
|
| |
The average daily balance and weighted average interest rate of reverse repurchase agreements during the period ended June 30, 2004, were as follows:
| | Average Daily | | Weighted Average |
Trust | Balance | | Interest Rate |
|
| |
|
| Advantage | $ | 25,291,859 | | 1.07 | % |
| Investment Quality | | 75,803,835 | | 1.12 | |
| Preferred Opportunity | | 542,255 | | 1.69 | |
Dollar Rolls: The Trusts may enter into dollar rolls in which a Trust sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period the Trusts forgo principal and interest paid on the securities. The Trusts will be compensated by the interest earned on the cash proceeds of the initial sale and/or by the lower repurchase price at the future date. The Trusts did not enter into any dollar roll transactions during the six months ended June 30, 2004.
26
Note 5. Distributions to Shareholders
The tax character of distributions paid by the parent during the six months ended June 30, 2004, and the period ended December 31, 2003, were as follows:
| | | Six months ended June 30, 2004 | |
| | |
| |
| | | Ordinary | | Long-term | | Total | |
| Distributions Paid From: | | Income | | Gains | | Distributions | |
| |
| |
| |
| |
| Advantage* | | $ | 2,773,966 | | $ | — | | $ | 2,773,966 | |
| Investment Quality* | | | 6,171,327 | | | — | | | 6,171,327 | |
| Preferred Opportunity | | | 16,523,052 | | | — | | | 16,523,052 | |
| | Period ended December 31, 2003 | |
| |
| |
| | Ordinary | | Long-term | | Return | | Total | |
| | Income | | Capital Gains | | of Capital | | Distributions | |
| |
| |
| |
| |
| |
| Advantage* | $ | 6,657,165 | | $ | — | | $ | — | | $ | 6,657,165 | |
| Investment Quality* | | 2,454,143 | | | — | | | — | | | 2,454,143 | |
| Preferred Opportunity | | 32,241,139 | | | 78,793 | | | — | | | 32,319,932 | |
As of June 30, 2004, the components of distributable earnings of the parent on a tax basis were as follows:
| | Undistributed | | Undistributed | | | |
| | Ordinary | | Long-term | | Unrealized Net | |
| | Income | | Gains | | Appreciation | |
| |
| |
| |
| |
| Advantage* | $ | 7,276,364 | | $ | — | | $ | 3,028,139 | |
| Investment Quality* | | 1,658,252 | | | — | | | — | |
| Preferred Opportunity | | 7,494,339 | | 490,938 | | | 12,939,878 | |
*The Trust is currently under a plan of liquidation. Shareholders should consult their tax advisor as to the proper tax treatment of distribution from the Trust.
Note 6. Capital
There are 200 million of $0.01 par value common shares authorized for Advantage and Investment Quality. There are an unlimited number of $0.001 par value common shares authorized for Preferred Opportunity. At June 30, 2004, the common shares outstanding and the shares owned by affiliates of the Advisor of each Trust were as follows:
| | Common Shares | | Common Shares | |
Trust | Outstanding | | Owned | |
|
| |
| |
| Advantage | 9,510,667 | | — | |
| Investment Quality | 36,810,639 | | — | |
| Preferred Opportunity | 18,305,777 | | — | |
There were no transactions in common shares of beneficial interest for the six months ended June 30, 2004. Transactions in common shares of beneficial interest from February 28, 2003 (commencement of investment operations) through December 31, 2003, for Preferred Opportunity, were as follows:
| | Shares from | | | |
| |
| | | |
| | Initial | | Underwriters’ Exercising | | Reinvestment | | Net Increase in | |
Trust | Public Offering | | the Over-allotment Option | | of Dividends | | Shares Outstanding | |
|
| |
| |
| |
| |
| Preferred Opportunity | 16,304,817 | | 2,000,000 | | 960 | | 18,305,777 | |
During the period February 28, 2003 (commencement of investment operations) through December 31, 2003, Preferred Opportunity issued 960 common shares, under the terms of its Dividend Reinvestment Plan. During the six months ended June 30, 2004, there were no additional shares issued under the terms of the Trusts’ Dividend Reinvestment Plans.
Offering costs of $900,000 ($0.05 per common share) incurred in connection with Preferred Opportunity’s offering of common shares have been charged to paid-in capital in excess of par of the common shares.
As of June 30, 2004, Preferred Opportunity had the following series of preferred shares outstanding as listed in the table below. The preferred shares have a liquidation value of $25,000 per share plus any accumulated unpaid dividends.
| Trust | Series | | Shares | |
|
| |
| |
| Preferred Opportunity | T7 | | 2,944 | |
| | W7 | | 2,944 | |
| | R7 | | 2,944 | |
27
Underwriting discounts of $2,208,000 ($0.12 per common share) and offering costs of $389,000 ($0.02 per common share) incurred in connection with the preferred share offering have been charged to paid-in capital in excess of par of the common shares.
Dividends on seven-day preferred shares are cumulative at a rate which is reset every seven days based on the results of an auction. The dividend range on the preferred shares for Preferred Opportunity for the six months ended June 30, 2004, was 1.00% to 1.54%.
Preferred Opportunity may not declare dividends or make other distributions on common shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding preferred shares and any other borrowings would be less than 200%. The preferred shares are redeemable at the option of Preferred Opportunity, in whole or in part, on any dividend payment date at $25,000 per share plus any accumulated or unpaid dividends whether or not declared. The preferred shares are also subject to mandatory redemption at $25,000 per share plus any accumulated or unpaid dividends, whether or not declared, if certain requirements relating to the composition of the assets and liabilities of Preferred Opportunity, as set forth in Preferred Opportunity’s Declaration of Trust, are not satisfied. The holders of preferred shares have voting rights equal to the holders of common shares (one vote per share) and will vote together with holders of common shares as a single class. However, holders of preferred shares, voting as a separate class, are also entitled to elect two Trustees for Preferred Opportunity. In addition, the Investment Company Act of 1940, as amended, requires that along with approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding preferred shares, voting separately as a class would be required to (a) adopt any plan of reorganization that would adversely affect the preferred shares, (b) change a Trust’s sub-classification as a closed-end investment company or change its fundamental investment restrictions and (c) change the nature of its business so as to cease to be an investment company.
Note 7. Dividends
Subsequent to June 30, 2004, each Board of Advantage and Preferred Opportunity declared dividends from undistributed earnings per common share payable July 30, 2004, to shareholders of record on July 13, 2004. The per share common dividends declared were as follows:
| | Common Dividend | |
Trust | Per Share | |
|
| |
| Advantage | $ | 0.058333 | |
| Preferred Opportunity | | 0.166667 | |
The dividends declared on preferred shares for the period July 1, 2004 to July 31, 2004, for Preferred Opportunity were as follows:
| | | | Dividends | |
Trust | Series | | Declared | |
|
| |
| |
| Preferred Opportunity | T7 | | $ | 89,203 | |
| | W7 | | | 100,361 | |
| | R7 | | | 111,784 | |
28
DIVIDEND REINVESTMENT PLANS
Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), shareholders of Advantage and Investment Quality may elect, while shareholders of Preferred Opportunity are automatically enrolled, to have all distributions of dividends and capital gains reinvested by EquiServe Trust Company, N.A. (the “Plan Agent”) in the respective Trust’s shares pursuant to the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, which serves as agent for the shareholders in administering the Plan.
After Advantage and/or Investment Quality declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participants’ account, by the purchase of outstanding shares on the open market, on the Trust’s primary exchange or elsewhere (“open market purchases”). These Trusts will not issue any new shares under the Plan.
After Preferred Opportunity declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participants’ account, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Trust (“newly issued shares”) or (ii) by open market purchases. If, on the dividend payment date, the NAV is equal to or less than the market price per share plus estimated brokerage commissions (such condition being referred to herein as “market premium”), the Plan Agent will invest the dividend amount in newly issued shares on behalf of the participants. The number of newly issued shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the payment date, the dollar amount of the dividend will be divided by 95% of the market price on the payment date. If, on the dividend payment date, the NAV is greater than the market value per share plus estimated brokerage commissions (such condition being referred to herein as “market discount”), the Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases.
Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Plan Administrator prior to the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Plan Agent’s fees for the handling of the reinvestment of dividends and distributions will be paid by each Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any Federal income tax that may be payable on such dividends or distributions.
Each Trust reserves the right to amend or terminate the Plan. There is no direct service charge to participants in the Plan; however, each Trust reserves the right to amend the Plan to include a service charge payable by the participants. Participants that request a sale of shares through the Plan Agent are subject to a $2.50 sales fee and a $0.15 per share sold brokerage commisson. All correspondence concerning the Plan should be directed to the Plan Agent at 250 Royall Street, Canton, MA 02021 or (800) 699-1BFM.
29
ADDITIONAL INFORMATION (Unaudited)
The Joint Annual Meeting of Shareholders was held on May 26, 2004, to elect a certain number of Directors/Trustees for each of the following Trusts to three year terms, expiring in 2007 for Preferred Opportunity and expiring on the expected termination date for Advantage and Investment Quality:
| Advantage | | | | |
| | | | |
| Elected the Class I Directors as follows: | | | | |
| | | | | |
| Director | Votes for | | Votes Withheld |
|
| |
|
| Richard E. Cavanagh | 7,649,686 | | 92,310 | |
| James Clayburn La Force, Jr. | 7,636,881 | | 105,115 | |
| | | | | |
| Investment Quality | | | | |
| | | | |
| Elected the Class III Directors as follows: | | | | |
| | | | | |
| Director | Votes for | | Votes Withheld |
|
| |
|
| Andrew F. Brimmer | 28,431,304 | | 264,770 | |
| Kent Dixon | 28,434,824 | | 261,250 | |
| Robert S. Kapito | 28,430,584 | | 265,490 | |
| | | | | |
| Preferred Opportunity | | | | |
| | | | |
| Elected the Class I Trustees as follows: | | | | |
| | | | | |
| Trustee | Votes for | | Votes Withheld |
|
| |
|
| Richard E. Cavanagh1 | 5,701 | | 79 | |
| James Clayburn La Force, Jr. | 14,300,002 | | 178,541 | |
1 Voted on by holders of preferred shares only. There have been no material changes in the Trusts’ investment objectives or policies that have not been approved by the shareholders or to their charters or by-laws or in the principal risk factors associated with investment in the Trusts. There have been no changes in the persons who are primarily responsible for the day-to-day management of the Trusts’ portfolios.
Quarterly performance and other information regarding the Trusts may be found on BlackRock’s website, which can be accessed at http://www.blackrock.com/funds/cefunds/index.html. This reference to BlackRock’s website is intended to allow investors public access to information regarding the Trusts and does not, and is not intended, to incorporate BlackRock’s website into this report.
Certain of the officers of the Trusts listed on the inside back cover of this Report to Shareholders are also officers of the Advisor or Sub-Advisor. They serve in the following capacities for the Advisor or Sub-Advisor; Robert S. Kapito—Director and Vice Chairman of the Advisor and the Sub-Advisor, Henry Gabbay and Anne Ackerley—Managing Directors of the Advisor and the Sub-Advisor, Richard M. Shea and James Kong—Managing Directors of the Sub-Advisor, Vincent B. Tritto—Director of the Sub-Advisor, and Brian P. Kindelan—Director of the Advisor.
30
BlackRock Closed-End Funds
| Directors/Trustees | Transfer Agent |
| Ralph L. Schlosstein, Chairman | EquiServe Trust Company, N.A. |
| Andrew F. Brimmer | 250 Royall Street |
| Richard E. Cavanagh | Canton, MA 02021 |
| Kent Dixon | (800) 699-1BFM |
| Frank J. Fabozzi | |
| Robert S. Kapito | Auction Agent1 |
| James Clayburn La Force, Jr. | Bank of New York |
| Walter F. Mondale | 100 Church Street, 8th Floor |
| | New York, NY 10286 |
| Officers | |
| Robert S. Kapito, President | Independent Accountants |
| Henry Gabbay, Treasurer | Deloitte & Touche LLP |
| Anne Ackerley, Vice President | 200 Berkeley Street |
| Richard M. Shea, Vice President/Tax | Boston, MA 02116 |
| James Kong, Assistant Treasurer | |
| Vincent B. Tritto, Secretary | Legal Counsel |
| Brian P. Kindelan, Assistant Secretary | Skadden, Arps, Slate, Meagher & Flom LLP |
| | Four Times Square |
| Investment Advisor | New York, NY 10036 |
| BlackRock Advisors, Inc. | |
| 100 Bellevue Parkway | Legal Counsel – Independent Directors/Trustees |
| Wilmington, DE 19809 | Debevoise & Plimpton LLP |
| (800) 227-7BFM | 919 Third Avenue |
| | New York, NY 10022 |
| Sub-Advisor1 | |
| BlackRock Financial Management, Inc. | This report is for shareholder information. This is not a prospectus |
| 40 East 52nd Street | intended for use in the purchase or sale of Trust shares. |
| New York, NY 10022 | Statements and other information contained in this report are as |
| | dated and are subject to change. |
| Custodian | |
| State Street Bank and Trust Company | BlackRock Closed-End Funds |
| 225 Franklin Street | c/o BlackRock Advisors, Inc. |
| Boston, MA 02110 | 100 Bellevue Parkway |
| | Wilmington, DE 19809 |
| | (800) 227-7BFM |
| |
| 1 For Preferred Opportunity only. | |
The Trusts 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 Trusts at (800)227-7BFM.
The Trusts have 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) 699-1236. These policies and procedures are also available on the website of the Securities and Exchange Commission at http://www.sec.gov.
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. CLF-SEMI-5 | | |
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.
Not applicable for reports for periods ending on or before July 9, 2004.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semi-annual reports.
Item 8. Purchases of Equity Securities by Closed-End Management Company and
Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The Registrant's principal executive officer and principal financial officer have evaluated the Registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the Registrant's disclosure controls and procedures are effective, as of a 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 most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 11. 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) | The BlackRock Preferred Opportunity Trust |
| |
|
| By: | /s/ Henry Gabbay | |
| |
| |
| Name: | Henry Gabbay | |
| Title: | Treasurer | |
| Date: | September 8, 2004 | |
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: | September 8, 2004 | |
| By: | /s/ Henry Gabbay | |
| |
| |
| Name: | Henry Gabbay | |
| Title: | Principal Financial Officer | |
| Date: | September 8, 2004 | |
