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 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.
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.
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 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.
Forward Currency Contracts: The Trusts enter into forward currency contracts primarily to facilitate settlement of purchases and sales of foreign securities and to help manage the overall exposure to foreign currency. A forward contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. In the event that a security fails to settle within the normal settlement period, the forward currency contract is renegotiated at a new rate. The gain or loss arising from the difference between the settlement value of the original and renegotiated forward contracts is isolated and is included in net realized gains (losses) from foreign currency transactions. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contract.
Forward currency contracts, when used by the Trusts, help to manage the overall exposure to the foreign currency backing some of the investments held by the Trusts. Forward currency contracts are not meant to be used to eliminate all of the exposure to the foreign currency, rather they allow the Trusts to limit their exposure to foreign currency within a narrow band to the objectives of the Trusts.
Foreign Currency Translation: Foreign currency amounts are translated into United States dollars on the following basis:
| | |
| (i) | market value of investment securities, other assets and liabilities—at the London 4:00 PM rates of exchange. |
| | |
| (ii) | Purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions. |
The Trusts isolate that portion of the results of operations arising as a result of changes in the foreign exchange rates from the fluctuations arising from changes in the market prices of securities held at period end. Similarly, the Trusts isolate the effect of changes in foreign exchange rates from the fluctuations arising from changes in the market prices of portfolio securities sold during the period.
Net realized and unrealized foreign exchange gains and losses including realized foreign exchange gains and losses from sales and maturities of foreign portfolio securities, maturities of foreign reverse repurchase agreements, sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, the difference between the amounts of interest and discount recorded on the Trusts’ books and the U.S. dollar equivalent amounts actually received or paid and changes in unrealized foreign exchange gains and losses in the value of portfolio securities and other assets and liabilities arising as a result of changes in the exchange rate.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.
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.
Bonds Borrowed Agreements: In a bonds borrowed agreement, the Trust borrows securities from a third party, with the commitment that they will be returned to the lender on an agreed-upon date. Bonds borrowed agreements are primarily entered into to settle short positions. In a bonds borrowed agreement, the Trust’s prime broker or third party broker takes possession of the underlying collateral securities or cash to settle such
40
short positions. The value of the underlying collateral securities approximates the principal amount of the bonds borrowed transaction, including accrued interest. To the extent that bonds borrowed transactions exceed one business day, the value of the collateral with any counterparty is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the lender defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the lender of the security, realization of the collateral by the Trust may be delayed or limited.
Segregation: In cases in which the Investment Company Act of 1940, as amended, and the interpretive positions of the Securities and Exchange Commission (the “Commission”) require a Trust to 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 Commission, designate on its books and records cash or liquid 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 intention to continue 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 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 car-ryforwards may be distributed in accordance with 1940 Act. 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
Advantage, Global and Preferred Opportunity have 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 Global and Preferred Opportunity. BlackRock, Inc. is an indirect, majority owned subsidiary of The PNC Financial Services Group, Inc. The Investment Management Agreement for Global, High Income and Preferred Opportunity covers both investment advisory and administration services. Advantage has an Administration Agreement with the Advisor.
Effective March 2, 2005, High Income entered into an Investment Management Agreement with BlackRock Advisors, Inc. (the “Advisor”), and a sub-advisory agreement with BlackRock Financial Management, Inc. Prior to March 2, 2005, High Income had an Investment Management Agreement with CIGNA Investment Advisors, Inc. (“CIAI”) and a sub-advisory agreement with Shenkman Capital Management, Inc.
Each Trust’s, other than High Income, investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.50% of Advantage’s, average weekly net assets and 0.75% of Global’s and 0.65% of Preferred Opportunity’s average weekly managed assets. High Income’s investment advisory fee paid to the current Advisor and CIAI is/was computed weekly and payable monthly based on an annual rate of 0.75% of the first $200 million of the Trust’s average weekly managed assets and 0.50% thereafter. The Advisor, in turn, pays BFM its sub-advisory fee. “Managed assets” means the total assets of a Trust (including any assets attributable to any borrowing that may be outstanding) minus the sum of accrued liabilities (other than debt representing financial leverage). The administration fee paid to the Advisor is computed weekly and payable monthly based on an annual rate of 0.08% for Advantage based on the 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, as well as 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 costs of employees that provide pricing, secondary market support and compliance services to each Trust. Prior to March 2, 2005, for administrative services, High Income reimbursed CIAI for a portion of the compensation and related expenses of the Treasurer and Secretary and certain persons who assist in carrying out the responsibilities of those offices. For the six months ended June 30, 2005, the Trusts reimbursed the Advisor the following amounts:
| | | | |
Trust | | Amount | |
| |
| |
Advantage | | $ | 4,163 | |
Global | | | 17,309 | |
High Income | | | — | |
Preferred Opportunity | | | 8,679 | |
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.
41
Note 3. Portfolio Investments
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, 2005, aggregated as follows:
| | | | | | | |
Trust | | Purchases | | Sales | |
| |
| |
| |
Advantage | | $ | 6,681,039 | | $ | 44,566,971 | |
Global Floating Rate | | | 174,348,766 | | | 169,825,306 | |
High Income | | | 160,356,505 | | | 167,856,042 | |
Preferred Opportunity | | | 225,042,230 | | | 213,793,796 | |
Purchases and sales of U.S. government securities for the six months ended June 30, 2005, aggregated as follows:
| | | | | | | |
Trust | | Purchases | | Sales | |
| |
| |
| |
Advantage | | $ | — | | $ | 2,545,996 | |
Preferred Opportunity | | | 13,911,037 | | | 13,891,016 | |
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.
For Federal income tax purposes, the following Trust had capital loss carryforwards at December 31, 2004:
| | | | | | | | | | | | | | | | |
Trust | | Capital Loss
Carryforward Amount | | Expires | | | Trust | | Capital Loss
Carryforward Amount | | Expires | |
| |
| |
| | |
| |
|
| |
| |
Advantage | | $ | 98,294 | | 2005 | | | High Income | | $ | 28,686,393 | | 2007 | |
| | | 161,872 | | 2008 | | | | | | 35,363,213 | | 2008 | |
| | | 127,941 | | 2009 | | | | | | 55,878,284 | | 2009 | |
| | | 274,645 | | 2010 | | | | | | 102,576,339 | | 2010 | |
| | | 83,667 | | 2011 | | | | | | 28,467,396 | | 2011 | |
| | | 5,589,003 | | 2012 | | | | | | 2,339,279 | | 2012 | |
| |
|
| | | | | | |
|
| | | |
| | $ | 6,335,422 | | | | | | | | 253,310,904 | | | |
| |
|
| | | | | | |
|
| | | |
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 forward currency contracts at June 30, 2005 were as follows:
| | | | | | | | | | | | | | | | |
Foreign Currency | | Settlement
Date | | Contract to
Purchase/
Receive | | Value at
Settlement
Date | | Value at
June 30,
2005 | | Unrealized
Appreciation
(Depreciation) | |
| |
| |
| |
| |
| |
| |
Global: | | | | | | | | | | | | | | | | |
Bought: | | | | | | | | | | | | | | | | |
Euro | | | 07/26/05 | | | 2,000,000 | € | $ | 2,594,866 | | $ | 2,421,797 | | $ | (173,069 | ) |
| | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | |
Sold: | | | | | | | | | | | | | | | | |
Euro | | | 07/26/05 | | | 7,745,200 | € | $ | 10,169,633 | | $ | 9,378,652 | | $ | 790,981 | |
| | | 07/26/05 | | | 1,800,000 | € | $ | 2,358,243 | | $ | 2,179,618 | | | 178,625 | |
| | | 07/26/05 | | | 2,000,000 | € | $ | 2,595,660 | | $ | 2,421,797 | | | 173,863 | |
Mexican Peso | | | 7/25/05 | | $ | 19,600,000 | | $ | 1,767,326 | | $ | 1,811,184 | | | (43,858 | ) |
| | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | $ | 1,099,611 | |
| | | | | | | | | | | | | |
|
| |
High Income: | | | | | | | | | | | | | | | | |
Sold: | | | | | | | | | | | | | | | | |
Euro | | | 07/26/05 | | | 1,238,000 | € | $ | 1,613,461 | | $ | 1,499,093 | | $ | 114,368 | |
| | | | | | | | | | | | | |
|
| |
Details of open interest rate swaps at June 30, 2005 were as follows:
| | | | | | | | | | | | | | | | |
Trust | | Notional
Amount
(000) | | Fixed
Rate | | Floating
Rate | | Termination
Date | | Unrealized
Appreciation | |
| |
| |
| |
| |
| |
| |
Preferred Opportunity | | $ | 80,000 | | | 4.495 | %(b) | | 3-month LIBOR | | | 10/19/14 | | $ | (1,002,984 | ) |
| | | 35,000 | | | 5.19 | (b) | | 3-month LIBOR | | | 10/19/34 | | | (3,006,539 | ) |
| | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | $ | (4,009,523 | ) |
| | | | | | | | | | | | | |
|
| |
Details of credit default swaps at June 30, 2005 were as follows: | | | | | | | |
Advantage | | $ | 800 | | | 0.23 | %(a) | | Contingent on | | | 11/1/05 | | $ | 589 | |
| | | | | | | | | Credit Event | | | | |
|
| |
| | | | | | | | | | | | | | | | |
Global | | $ | 4,300 | | | 0.23 | (a) | | Contingent on | | | 11/1/05 | | $ | 163 | |
| | | | | | | | | Credit Event | | | | |
|
| |
(a) Trust pays floating interest rate and receives fixed rate.
(b) Trust pays a fixed interest rate and receives a floating rate.
42
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 at June 30, 2005 were as follows:
| | | | | | | | | | | | | | | | | | |
Trust/Counter party | | | | Rate | | Trade
Date | | Maturity
Date | | Net Closing
Amount | | Par | |
| | | |
| |
| | |
| |
| |
| |
Advantage | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | | | | 3.13 | % | | 6/08/05 | | | 7/15/05 | | $ | 22,911,517 | | $ | 22,840,028 | |
| | | | | 3.13 | | | 6/08/05 | | | 7/15/05 | | | 8,991,556 | | | 8,963,500 | |
| | | | | 3.55 | | | 6/30/05 | | | 7/01/05 | | | 99,885 | | | 99,875 | |
| | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | 31,903,403 | |
| | | | | | | | | | | | | | | |
|
| |
Global | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | | | | 3.27 | % | | 6/16/05 | | | 7/07/05 | | $ | 10,898,764 | | $ | 10,879,000 | |
| | | | | 3.27 | | | 6/16/05 | | | 7/07/05 | | | 12,844,010 | | | 12,844,000 | |
| | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | 23,723,000 | |
| | | | | | | | | | | | | | | |
|
| |
Preferred Opportunity | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | | | | 3.4 | | | 6/30/05 | | | 7/11/05 | | $ | 1,438,493 | | $ | 1,437,000 | |
| | | | | | | | | | | | | | | |
|
| |
Details of underlying collateral for open reverse repurchase agreements at June 30, 2005 were as follows:
| | | | | | | | | | | | | | | | | | |
Trust/Counter party | | Description | | Rate | | Maturity
Date | | Original
Face | | Current
Face | | Market
Value | |
| |
| |
| |
| |
| |
| |
| |
Advantage | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | Resolution Funding Corp. | | | 0.00 | % | | 7/15/05 | | $ | 22,926,000 | | $ | 22,926,000 | | $ | 22,835,213 | |
| | Financing Grp. (FICO) Strips | | | 0.00 | | | 12/06/05 | | | 9,100,000 | | | 9,100,000 | | | 8,963,591 | |
| | Tennessee Valley Authority | | | 0.00 | | | 11/01/05 | | | 100,000 | | | 100,000 | | | 98,986 | |
| | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | 31,897,790 | |
| | | | | | | | | | | | | | | |
|
| |
Global | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | Republic of Chile | | | 6.875 | % | | 4/28/09 | | $ | 2,400,000 | | $ | 2,400,000 | | $ | 2,622,960 | |
| | United Mexican States | | | 3.84 | | | 1/13/09 | | | 4,800,000 | | | 4,800,000 | | | 4,864,800 | |
| | Republic of South Africa | | | 7.375 | | | 4/25/12 | | | 2,400,000 | | | 2,400,000 | | | 2,749,440 | |
| | Malaxsio | | | 8.75 | | | 6/01/09 | | | 800,000 | | | 800,000 | | | 924,952 | |
| | Rouse Co. | | | 5.375 | | | 11/26/13 | | | 6,350,000 | | | 6,350,000 | | | 6,220,714 | |
| | Federative Republic of Brazil | | | 9.23 | | | 9/29/09 | | | 7,000,000 | | | 7,000,000 | | | 8,120,000 | |
| | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | 25,502,866 | |
| | | | | | | | | | | | | | | |
|
| |
Preferred Opportunity | | | | | | | | | | | | | | | | | | |
Lehman Brothers, Inc. | | American General Institute | | | | | | | | | | | | | | | | |
| | Capital A | | | 7.57 | % | | 12/01/45 | | $ | 1,500,000 | | $ | 1,500,000 | | $ | 1,943,280 | |
| | | | | | | | | | | | | | | |
|
| |
Loan Payable: High Income has an $80 million revolving credit Agreement (the “Agreement”), which expires on October 31, 2007. Prior to expiration of the Agreement, principal is repayable in whole or in part at the option of the Trust. Borrowings under this Agreement bear interest at a variable rate tied to the lender’s average daily cost of funds, or at fixed rates, as may be agreed to between the Trust and the lender. The Trust may borrow up to 331/3% of its total assets up to the committed amount or 100% of the borrowing base eligible assets, as determined under the terms of the Agreement. In accordance with the terms of the Agreement, the Trust has pledged its portfolio assets as collateral for the borrowing.
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 period ended June 30, 2005.
43
Note 5. Distributions to Shareholders
The estimated tax character of distributions paid during the six months ended June 30, 2005, and the tax character of distributions paid during the year ended December 31, 2004, were as follows:
| | | | | | | | | | | | | |
| | June 30, 2005 | |
| |
| |
Distributions Paid From: | | Ordinary
Income | | Long-term
Gains | | Liquidating | | Total
Distributions | |
| |
| |
| |
| |
| |
Advantage* | | $ | — | | $ | — | | $ | 2,456,919 | | $ | 2,456,919 | |
Global | | | 14,318,463 | | | — | | | — | | | 14,318,463 | |
High Income | | | 7,497,359 | | | — | | | — | | | 7,497,359 | |
Preferred Opportunity | | | 18,347,587 | | | — | | | — | | | 18,347,587 | |
| | | | | | | | | | | | | |
| | December 31, 2004 | |
| |
| |
Distributions Paid From: | | Ordinary
Income | | Long-term
Gains | | Liquidating | | Total
Distributions | |
| |
| |
| |
| |
| |
Advantage* | | $ | 554,749 | | $ | — | | $ | 8,917,875 | | $ | 9,472,624 | |
Global | | | 9,709,034 | | | — | | | — | | | 9,709,034 | |
High Income | | | 16,001,963 | | | — | | | — | | | 16,001,963 | |
Preferred Opportunity | | | 37,476,397 | | | 3,767,780 | | | — | | | 41,244,177 | |
As of June 30, 2005, the components of distributable earnings on a tax basis were as follows:
| | | | | | | | | | |
Trust | | Undistributed
Ordinary
Income | | Undistributed
Long-term
Gains | | Unrealized Net
Appreciation | |
| |
| |
| |
| |
Advantage* | | $ | 3,416,669 | | $ | — | | $ | 9,211,413 | |
Global | | | 2,723,323 | | | — | | | 5,710,909 | |
High Income | | | 615,006 | | | — | | | — | |
Preferred Opportunity | | | 499,409 | | | 9,313,602 | | | 17,497,913 | |
| |
|
* 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. There are an unlimited number of $0.001 par value common shares authorized for Preferred Opportunity and Global. There are an unlimited number of no par value shares authorized for High Income. At June 30, 2005, the common shares outstanding and the shares owned by affiliates of the Advisor of each Trust were as follows:
| | | | | | | | | |
Trust | | Common Shares
Outstanding | | Common Shares
Owned | |
| |
| |
| |
Advantage | | | 9,510,667 | | | | — | | |
Global | | | 23,481,021 | | | | 6,021 | | |
High Income | | | 54,404,224 | | | | — | | |
Preferred Opportunity | | | 18,305,777 | | | | — | | |
Transactions in common shares of beneficial interest from August 30, 2004 (commencement of investment operations) through December 31, 2004 for Global were as follows:
| | | | | | | | | | | | | |
| | Shares from | | | |
| |
| | | |
Trust | | Initial
Public Offering | | Underwriters’ Exercising
the Over-allotment Option | | Reinvestment
of Dividends | | Net Increase in
Shares Outstanding | |
| |
| |
| |
| |
| |
Global | | 23,006,021 | | 475,000 | | — | | 23,481,021 | |
During the six months ended June 30, 2005, there were no additional shares issued under the terms of Advantage’s, Global’s and Preferred Opportunity’s Dividend Reinvestment Plans. During the six months ended June 30, 2005, High Income issued 212,961 common shares under the terms of its Dividend Reinvestment Plan.
Offering costs of $924,000 ($0.04 per common share) incurred in connection with Global’s offering of common shares have been charged to paid-in capital in excess of par of the common shares.
44
As of June 30, 2005, Global and Preferred Opportunity have 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 | | Trust | | Series | | Shares | |
| |
| |
| |
| |
| |
| |
Global | | | | T7 | | | 3,246 | | | Preferred Opportunity | | | | T7 | | | 2,944 | |
| | | | W7 | | | 3,246 | | | | | | | W7 | | | 2,944 | |
| | | | R7 | | | 3,246 | | | | | | | R7 | | | 2,944 | |
Underwriting discounts of $2,434,500 ($0.10 per common share) and offering costs of $400,260 ($0.02 per common share) incurred in connection with the preferred share offering of Global 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 Global and Preferred Opportunity for the six months ended June 30, 2005 was 2.14% to 3.40%, and 2.21% to 3.46%, respectively.
Global and 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 Global and 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 Global and Preferred Opportunity, as set forth in Global’s and 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 Global and 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, 2005, each Board declared dividends from undistributed earnings per common share payable July 31, 2005, to shareholders of record on July 15, 2005. The per share common dividends declared were as follows:
| | | | |
Trust | | Common Dividend
Per Share | |
| |
| |
Advantage | | | $ | 0.050000 | | |
Global Floating Rate | | | | 0.093300 | | |
High Income | | | | 0.023000 | | |
Preferred Opportunity | | | | 0.166667 | | |
The dividends declared on preferred shares for the period July 1, 2005 to July 31, 2005 for Global and Preferred Opportunity were as follows:
| | | | | | | | | | | | | | | | | |
Trust | | Series | | Dividends
Declared | | Trust | | Series | | Dividends
Declared | |
| |
| |
| |
| |
| |
| |
Global | | | | T7 | | | 195,896 | | Preferred Opportunity | | | | T7 | | | 179,348 | |
| | | | W7 | | | 202,453 | | | | | | W7 | | | 181,527 | |
| | | | R7 | | | 245,365 | | | | | | R7 | | | 228,366 | |
45
|
DIVIDEND REINVESTMENT PLANS |
|
Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), shareholders of Advantage, Global and High Income 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, Global and/or High Income declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participant’s 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 participant’s 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 who 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 commission. All correspondence concerning the Plan should be directed to the Plan Agent at 250 Royall Street, Canton, MA 02021 or (800) 699-1BFM.
|
BOARD REVIEW OF INVESTMENT MANAGEMENT AGREEMENTS |
|
At a meeting held on May 26, 2005, the board of trustees (the “Board” or the “Trustees”) of each trust (each a “Trust”), including the independent trustees (the “Independent Trustees”), unanimously approved the continuance of an Investment Management Agreement between each Trust and BlackRock Advisors, Inc. (the “Advisor”). For each Investment Management Agreement, the Boards also approved a related Sub-Investment Advisory Agreement, when applicable, among each respective 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 each 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 each Trust; the advisory and/or administrative fees paid by each 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 each Trust, including comparisons of the respective Trust’s expense ratios (both before and after any fee waivers) with the expense ratios of its Peers; and each Trust’s performance for the past one-, three-, five- and ten-year periods, when applicable, as well as each Trust’s performance compared to its Peers. This information supplemented the information received by each Board throughout the year regarding each 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.
46
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 Boards. 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 Boards considered all factors they believed relevant with respect to each Trust, including the following: the nature, extent and quality of the services to be provided by BlackRock; the investment performance of each Trust; the costs of the services to be provided and profits to be realized by BlackRock and its affiliates from their relationship with the Trusts; 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 Trusts.
Nature and Quality of Investment Advisory and Sub-Advisory Services. In evaluating the nature, extent and quality of BlackRock’s services, the Boards reviewed information concerning the types of services that BlackRock provides and is expected to provide to each Trust, narrative and statistical information concerning each Trust’s performance record and how such performance compares to each Trust’s Peers, information describing BlackRock’s organization and its various departments, the experience and responsibilities of key personnel and available resources. The Boards further noted the willingness of the personnel of BlackRock to engage in open, candid discussions with the Boards. The Boards further considered the quality of BlackRock’s investment process in making portfolio management decisions. Given the Boards’ experience with BlackRock, the Boards 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 Trusts. In this regard, BlackRock provides each Trust with such administrative and other services (exclusive of, and in addition to, any such services provided by others for the Trusts) and officers and other personnel as are necessary for the operations of the respective Trust. In addition to investment management services, BlackRock and its affiliates provide each 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 Boards considered, in particular, BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations in light of the new Securities and Exchange Commission regulations governing compliance. The Boards 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 Boards received myriad performance information regarding each Trust and its Peers. Among other things, the Boards received materials reflecting each Trust’s historic performance and each Trust’s performance compared to its Peers. More specifically, each 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 Boards also reviewed a narrative analysis of the Peer rankings that was prepared by an independent third party and summarized by BlackRock at the Boards’ 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 Boards noted that the Peers most similar to a given Trust still would not adequately reflect such Trust’s investment objectives and strategies, thereby limiting the usefulness of the comparisons of such Trust’s performance with that of its Peers. The Boards noted the quality of information provided by BlackRock throughout the year with respect to the performance of the Trusts. The Boards considered this information in connection with its deliberations as to whether the level of management services provided to each Trust, in light of all the other facts and circumstances relating to that Trust, supports a conclusion that the Trust’s Agreement should be renewed.
Fees and Expenses. In evaluating the management fees and expenses that a Trust is expected to bear, the Boards considered each 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 Boards, among other things, reviewed comparisons of each 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 Boards 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 Boards. This summary placed the rankings into context by analyzing various factors that affect these comparisons.
The Boards also compared the management fees charged to the Trusts 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 Trusts generally were higher than those charged to the open-end investment companies. The Boards also noted that BlackRock provides the Trusts 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
47
employed by the Trusts and secondary market support and other services not provided to the Trusts, 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 Trusts. The Boards noted, however, the various services that are provided and the costs incurred by BlackRock in managing and operating the Trusts. For instance, BlackRock and its affiliates provide numerous services to the Trusts 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 Boards noted the increased compliance requirements for the Trusts 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 Boards considered this information in connection with its deliberations as to whether the fees paid by each Trust under its Agreements, in light of all the other facts and circumstances relating to that 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 Boards noted the inherent limitations in allocating costs among various advisory products. The Boards also recognized that individual fund or product line profitability of other advisors is generally not publicly available.
The Boards 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 Boards 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 Boards also considered any other revenues paid to BlackRock, including partial reimbursements paid to BlackRock for certain non-investment advisory services. The Boards noted that these payments were less than BlackRock’s costs for providing these services. The Boards 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 Trusts.
In reviewing each Trust’s fees and expenses, the Boards 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 Boards 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 each fund is managed independently consistent with its own 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 Boards concluded that breakpoints were not warranted at this time.
Other Benefits. In evaluating fees, the Boards also considered indirect benefits or profits BlackRock or its affiliates may receive as a result of their relationships with the Trusts. The Trustees, including the Independent Trustees, considered the intangible benefits that accrue to BlackRock and its affiliates by virtue of their relationships with the Trusts, 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 Boards also considered the unquantifiable nature of these potential benefits.
Miscellaneous. During the Boards’deliberations in connection with the Agreements, the Boards were 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 Boards 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 each respective Trust, was acceptable for each 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 respective Trust, and that the renewal of each Agreement should be approved.
48
The Joint Annual Meeting of Shareholders was held on May 26, 2005, to elect a certain number of Directors/Trustees for each of the following Trusts to three year terms, unless otherwise indicated, expiring in 2008:
| | | | | | | | |
Advantage | | | | | | | |
| | | | | | | |
| Elected the Class I Director as follows: | | | | | | | |
|
Director
| | Votes For | | Votes Withheld | |
|
| |
| |
| |
| R. Glenn Hubbard1 | | 7,765,403 | | | 774,075 | | |
| Elected the Class II Directors as follows: | | | | | | | |
|
Director
| | Votes For | | Votes Withheld | |
|
| |
| |
| |
| Frank J. Fabozzi | | 7,772,629 | | | 757,849 | | |
| Kathleen F. Feldstein | | 7,765,148 | | | 765,330 | | |
| Walter F. Mondale | | 7,734,911 | | | 795,567 | | |
| Ralph L. Schlosstein | | 7,772,015 | | | 758,463 | | |
| | | | | | | | |
Global | | | | | | | |
| | | | | | | |
| Elected the Class I Trustees as follows: | | | | | | | |
|
Trustee
| | Votes For | | Votes Withheld | |
|
| |
| |
| |
| Richard E. Cavanagh2 | | 7,729 | | | 24 | | |
| R. Glenn Hubbard1 | | 20,177,093 | | | 1,094,202 | | |
| James Clayburn La Force, Jr. | | 20,174,396 | | | 1,096,899 | | |
| Elected the Class II Trustee as follows: | | | | | | | |
|
Trustee
| | Votes For | | Votes Withheld | |
|
| |
| |
| |
| Kathleen F. Feldstein1 | | 20,177,284 | | | 1,094,011 | | |
| | | | | | | | |
Preferred Opportunity | | | | | | | |
| | | | | | | |
| Elected the Class II Trustees as follows: | | | | | | | |
|
Trustee
| | Votes For | | Votes Withheld | |
|
| |
| |
| |
| Frank J. Fabozzi2 | | 6,985 | | | 161 | | |
| Kathleen F. Feldstein | | 17,520,587 | | | 215,310 | | |
| Walter F. Mondale | | 17,451,899 | | | 283,998 | | |
| Ralph L. Schlosstein | | 17,524,145 | | | 211,752 | | |
| |
|
1 | Mr. Hubbard and Ms. Feldstein will serve until the end of the term for the class of Directors/Trustees to which they were elected, if such class was not standing for election at May 26, 2005 annual shareholders meeting. |
The following Trust had an additional proposal (Proposal #2A) to amend its Declaration of Trust in order to change the maximum number of permitted Trustees allowed on its Board to 11:
| | | |
| Votes For | Votes Against | Votes Withheld |
Preferred Opportunity | 17,142,812 | 392,617 | 200,467 |
The following Trust had an additional proposal (Proposal #2B) to amend its Declaration of Trust in order to reduce the maximum number of permitted Trustees allowed on its Board from 15 to 11:
| Votes For | Votes Against | Votes Withheld |
| |
|
|
|
Global | 19,981,501 | 1,093,656 | 196,138 |
On March 1, 2005, the shareholders of CIGNA High Income Shares approved proposals to: approve an advisory agreement between the Trust and BlackRock Advisors, Inc., approve a sub-advisory agreement among the Trust, BlackRock Advisors, Inc. and BlackRock Financial Management, Inc., and elect new Trustees, all of whom currently oversee BlackRock’s 54 closed-end funds, to serve until the next Annual Meeting of Shareholders. Upon approval of the Trustees, BlackRock Advisors, Inc. changed the name of the Trust to BlackRock High Income Shares.
There has been no material changes in the Trusts’ investment objective or policies or to their charters or by-laws that have not been approved by shareholders 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/indiv/products/closedendfunds/funds.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, Kevin M. Klingert—Director of BlackRock Advisors, Inc. and Managing Director of the Advisor and the Sub-Advisor, Henry Gabbay, Anne Ackerley and Bartholomew Battista—Managing Directors of the Advisor and the Sub-Advisor, James Kong and Vincent Tritto—Managing Directors of the Sub-Advisor, and Brian P. Kindelan—Managing Director of the Advisor.
49
(This page intentionally left blank)
(This page intentionally left blank)
(This page intentionally left blank)
BlackRock Closed-End Funds
Directors/Trustees
Ralph L. Schlosstein, Chairman
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
Kathleen F. Feldstein1
R. Glenn Hubbard2
Robert S. Kapito
James Clayburn La Force, Jr.
Walter F. Mondale
Officers
Robert S. Kapito, President
Henry Gabbay, Treasurer
Bartholomew Battista, Chief Compliance Officer
Anne Ackerley, Vice President
James Kong, Assistant Treasurer
Vincent B. Tritto, Secretary
Brian P. Kindelan, Assistant Secretary
Investment Advisor
BlackRock Advisors, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
Sub-Advisor3
BlackRock Financial Management, Inc.
40 East 52nd Street
New York, NY 10022
Accounting Agent and Custodian
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
Transfer Agent
Equiserve Trust Company, N.A.
c/o Computershare Investor Services
250 Royall Street
Canton, MA 02021
(800) 699-1BFM
Auction Agent3
Bank of New York
101 Barclay Street, 7 West
New York, NY 10286
Independent Registered Public Accounting Firm
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, NY 10036
Legal Counsel – Independent Trustees
Debevoise & Plimpton LLP
919 Third Avenue
New York, NY 10022
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.
BlackRock Closed-End Funds
c/o BlackRock Advisors, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
| |
|
1 | Appointed as a Director/Trustee of all Trusts on January 19, 2005 and elected by Shareholders on May 26, 2005. |
2 | Appointed as a Director/Trustee of each Trust on November 16, 2004. Elected by Shareholders on May 26, 2005 as a Director/Trustee for each Trust, except Preferred Opportunity for which Mr. Hubbard’s class of Directors/Trustees did not stand for election. |
3 | For Global and Preferred Opportunity. |
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) 699-1BFM.
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 policies and 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 Trusts’ 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 Trusts file their complete schedules of portfolio holdings for the first and third quarters of their respective fiscal years with the Commission on Form N-Q. Each Trust’s Form N-Q is available on the Commission’s website at http://www.sec.gov. Each Trust’s Form N-Q 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. Each 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. | 
|
| |
CEF-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.
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) BlackRock Preferred Opportunity Trust
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
