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
Note 1. Organization & Accounting Policies
The BlackRock Advantage Term Trust Inc. (“Advantage”), a Maryland corporation, is registered as a diversi-fied, closed-end management investment company under the Investment Company Act of 1940, as amended. BlackRock Global Floating Rate Income Trust (“Global”) and BlackRock Preferred Opportunity Trust (“Preferred Opportunity”), are organized as Delaware statutory trusts (collectively with Advantage, the “Trusts”), are registered as non-diversified and diversified, closed-end management investment companies, respectively, under the Investment Company Act of 1940, as amended.
Advantage transferred, on October 31, 1998, a substantial portion of its total assets to a 100% owned regulated investment company subsidiary called BAT Subsidiary, Inc. The financial statements and these notes to the financial statements for Advantage are consolidated and include the operations of Advantage and its wholly owned subsidiary after elimination of all intercompany transactions and balances.
The Board of Directors of Advantage adopted a Plan of Liquidation and Dissolution (each a “Plan”) effective January 2, 2004. Pursuant to the terms of the Plan, the Board of Directors shall oversee the complete liquidation and winding up of Advantage in an orderly fashion prior to December 31, 2005.
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 in open-end investment companies are valued at net asset value. Investments or other assets for which such current market quotations are not readily available are valued at fair value (“Fair Value Assets”) as determined in good faith under procedures established by, and under the general supervision and responsibility of, each Trust’s Board. The investment advisor and/or sub-advisor will submit its recommendations regarding the valuation and/or valuation methodologies for Fair Value Assets to a valuation committee. The valuation committee may accept, modify or reject any recommendations. The pricing of all Fair Value Assets shall be subsequently reported to and ratified by the Board.
When determining the price for a Fair Value Asset, the investment advisor and/or sub-advisor shall seek to determine the price that the Trust might reasonably expect to receive from the current sale of that asset in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that BlackRock Advisors, Inc., the investment advisor, deems relevant.
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.
Bank Loans: In the process of buying, selling and holding bank loans, a Trust may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, amendment fees, commissions and prepayment penalty fees. When a Trust buys a bank loan it may receive a facility fee and when it sells a bank loan it may pay a facility fee. On an ongoing basis, a Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a bank loan. In certain circumstances, a Trust may receive a prepayment penalty fee upon the prepayment of a bank loan by a borrower. Other fees received by a Trust may include covenant waiver fees and covenant modification fees. For these loans, the Trust commits to provide funding up to the face amount of the loan. The amount drawn down by the borrower may vary during the term of the loan.
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
27
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.
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.
28
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.
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 year ended December 31, 2004.
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 that each Trust segregate assets in connection with certain investments (e.g., extended settlements, 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 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 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 its 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 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.
29
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.
Reclassification of CapitalAccounts: In order to present undistributed (distribution in excess of) net investment income (“UNII”), accumulated net realized gain (“Accumulated Gain”) and paid-in capital (“PIC”) more closely to its tax character, the following accounts for each Trust were increased (decreased):
| | | | | Accumulated | | | | |
| Trust | UNII | | Gain | | PIC | |
|
|
| |
|
| |
|
| |
| Advantage | $ | (2,997,897 | ) | $ | 13,761 | | $ | 2,984,136 | |
| Global | | 163,845 | | | (148,845 | ) | | (15,000 | ) |
| Preferred Opportunity | | (390,838 | ) | | 388,338 | | | 2,500 | |
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 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 and Preferred Opportunity covers both investment advisory and administration services. Advantage 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, of the Trust’s average weekly net assets and 0.75% for Global and 0.65% for Preferred Opportunity of each 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 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. For the period ended December 31, 2004, the Trusts reimbursed the Advisor the following amounts:
| Trust | Amount |
|
|
|
| Advantage | $ | 8,418 |
| Global | | 11,858 |
| Preferred Opportunity | | 17,550 |
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.
Note 3. Portfolio Investments
Purchases and sales of investment securities, other than short-term investments, dollar rolls and U.S. government securities, for the period ended December 31, 2004, aggregated as follows:
| Trust | Purchases | | Sales | |
|
|
| |
|
| |
| Advantage | $ | 23,843,784 | | $ | 31,203,646 | |
| Global | | 749,888,742 | | | 52,351,077 | |
| Preferred Opportunity | | 582,778,552 | | | 626,721,834 | |
Purchases and sales of U.S. government securities for the period ended December 31, 2004, aggregated as follows:
| Trust | Purchases | | Sales | |
|
|
| |
|
| |
| Advantage | $ | 1,096,813 | | $ | — | |
| Preferred Opportunity | | 9,993,975 | | | 5,751,993 | |
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.
30
At December 31, 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 | $ | 137,226,910 | | $ | 3,165,548 | | $ | 271,666 | | $ | 2,893,882 | |
| Global | | 730,551,946 | | | 9,079,421 | | | 713,945 | | | 8,365,476 | |
| Preferred Opportunity | | 659,479,232 | | | 33,064,704 | | | 1,524,093 | | | 31,540,611 | |
For Federal income tax purposes, the following Trust had capital loss carryforwards at December 31, 2004:
| | Capital Loss | | | |
| Trust | Carryforward Amount | | Expires | |
|
|
| |
| |
| Advantage | $ | 98,294 | | 2005 | |
| | | 161,872 | | 2008 | |
| | | 127,941 | | 2009 | |
| | | 274,645 | | 2010 | |
| | | 83,667 | | 2011 | |
| | | 5,589,003 | | 2012 | |
|
|
| | | |
| | $ | 6,335,422 | | | |
|
|
| | | |
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 December 31, 2004, were as follows:
| | Number of | | | | | Expiration | | Value at | | Value at | | Unrealized | |
| | Contracts | | | Type | Date | | Trade Date | | December 31, 2004 | | Depreciation | |
|
|
| | |
|
|
| |
|
| |
|
| |
|
| |
| Short Position: | | | | | | | | | | | | | | | | | | |
| Preferred Opportunity | | 700 | | | 30 Yr. U.S. T-Bond | | March ’05 | | $ | 77,569,959 | | $ | 78,750,000 | | $ | (1,180,041 | ) |
| | | 872 | | | 10 Yr. U.S. T-Note | | March ’05 | | | 96,955,225 | | | 97,609,500 | | | (654,275 | ) |
| | | | | | | | | | | | | | | |
|
| |
| | | | | | | | | | | | | | | | | $ | (1,834,316 | ) |
| | | | | | | | | | | | | | | |
|
| |
Details of open forward currency contracts in Global at December 31, 2004, were as follows:
| | | | | | | |
| | | | | | Contract to | Value at | | Value at | | | | | | | |
| | | Settlement | | | Purchase/ | Settlement | | December 31, | | Unrealized | | | | |
| Foreign Currency | | Date | | | Receive | Date | | 2004 | | Depreciation | | | | |
|
|
|
| |
|
|
| |
|
| |
|
| | | | |
| Sold: | | | | | | | | | | | | | | | | | | |
| Euro | | 01/25/05 | | | 2,530,000 € | $ | 3,367,954 | | $ | 3,425,437 | | $ | (57,483 | ) | | | |
| | | | | | | | | | | | |
|
| | | | |
Details of open interest rate swaps at December 31, 2004, were as follows:
| | | | | | | | | | |
| | | Notional | | | | | | | | | | | | Unrealized | | | | |
| Trust | | Amount | | | Fixed | | Floating | | | Termination | | | Appreciation | | | | |
| | | (000) | | | Rate | | Rate | | | Date | | | (Depreciation) | | | | |
| |
|
| |
|
|
|
| |
|
| |
|
| | | | |
| Preferred Opportunity | | $ 80,000 | | | 4.495 | % | | 3-month LIBOR | | | 10/19/2014 | | $ | 347,503 | | | | |
| | | 35,000 | | | 5.19 | % | | 3-month LIBOR | | | 10/19/2034 | | | (23,644 | ) | | | |
| | | | | | | | | | | | |
|
| | | | |
| | | | | | | | | | | | | | $ | 323,859 | | | | |
| | | | | | | | | | | | |
|
| | | | |
Preferred Opportunity pays a fixed interest rate and receives a floating rate.
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 December 31, 2004, were as follows (please see corresponding Underlying Collateral chart on page 32):
| | | | | | Trade | Maturity | | Net Closing | | | |
| Trust/Counter Party | | Rate | | Date | Date | | Amount | | Par |
| |
|
| |
|
| |
|
| |
|
|
| Advantage | | | | | | | | | | | | | |
| Deutsche Bank Securities, Inc. | | 2.28 | % | | 12/2/04 | | 1/7/05 | | $ | 20,757,160 | | $ | 20,711,250 |
| | | 2.17 | | | 12/2/04 | | 1/7/05 | | | 13,291,733 | | | 13,263,750 |
| | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | 33,975,000 |
| | | | | | | | | | | |
|
|
| |
| Lehman Brothers, Inc. | | 2.35 | | | 12/31/04 | | 1/7/05 | | | 296,010 | | | 295,875 |
| | | 2.35 | | | 12/31/04 | | 1/7/05 | | | 2,727,746 | | | 2,726,500 |
| | | 2.35 | | | 12/1/04 | | 1/6/05 | | | 2,954,043 | | | 2,947,500 |
| | | | | | | | | | | |
|
|
| | | | | | | | | | | | | $ | 5,969,875 |
| | | | | | | | | | | |
|
|
31
Details of underlying collateral for open reverse repurchase agreements at December 31, 2004, were as follows:
| | | | | | | | Maturity | | Original | | Current | | Market |
| Trust/Counter Party | | Description | | Rate | | Date | | Face | | Face | | Value |
| |
| |
|
| |
| |
|
| |
|
| |
|
|
| Advantage | | | | | | | | | | | | | | | | |
| Deutsche Bank Securities, Inc. | | Resolution Funding Corp. | | 0.00 | % | | 7/15/05 | | $ | 21,000,000 | | $ | 21,000,000 | | $ | 22,658,224 |
| | | U.S. Treasury Strips | | 0.00 | | | 8/15/05 | | | 13,500,000 | | | 13,500,000 | | | 13,286,646 |
| | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | | 35,944,870 |
| | | | | | | | | | | | | | |
|
|
| |
| Lehman Brothers, Inc. | | Resolution Funding Corp. | | 0.00 | | | 7/15/05 | | | 300,000 | | | 300,000 | | | 296,496 |
| | | Financing Corp. (FICO) Strips | | 0.00 | | | 7/15/05 | | | 2,800,000 | | | 2,800,000 | | | 2,724,831 |
| | | U.S. Treasury Strips | | 0.00 | | | 8/15/05 | | | 3,000,000 | | | 3,000,000 | | | 2,952,588 |
| | | | | | | | | | | | | | |
|
|
| | | | | | | | | | | | | | | | $ | 5,973,915 |
| | | | | | | | | | | | | | |
|
|
The average daily balance and weighted average interest rate of reverse repurchase agreements during the period ended December 31, 2004, were as follows:
| | Average Daily | | Weighted Average |
| Trust | Balance | | Interest Rate |
|
|
| |
|
|
| Advantage | $ | 28,839,818 | | 1.48 | % |
| Global | | 113,937 | | 2.24 | |
| Preferred Opportunity | | 781,845 | | 1.50 | |
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 December 31, 2004.
Note 5. Distributions to Shareholders
The tax character of distributions paid during the period ended December 31, 2004, and December 31, 2003, were as follows:
| | December 31, 2004 |
|
|
|
|
|
|
|
|
|
| | Ordinary | | Long-term | | | | | Total |
| Distributions Paid From: | Income | | Gains | | Liquidating | | Distributions |
|
|
| |
|
| |
|
| |
|
|
| Advantage* | $ | 554,749 | | $ | — | | $ | 8,917,875 | | $ | 9,472,624 |
| Global | | 9,709,034 | | | — | | | — | | | 9,709,034 |
| Preferred Opportunity | | 39,597,946 | | | 1,646,231 | | | — | | | 41,244,177 |
| |
| | | | | December 31, 2003 | | | |
|
|
|
|
|
|
|
|
|
| | | Ordinary | | Long-term | | | | | | Total |
| Distributions Paid From: | | Income | | Gains | | | Liquidating | | | Distributions |
|
|
| |
|
| |
|
| |
|
|
| Advantage* | $ | 6,657,165 | | $ | — | | $ | — | | $ | 6,657,165 |
| Preferred Opportunity | | 32,241,139 | | | 78,793 | | | — | | | 32,319,932 |
As of December 31, 2004, the components of distributable earnings on a tax basis were as follows:
| | Undistributed | | Undistributed | | | |
| | Ordinary | | Long-term | | Unrealized Net |
| Trust | Income | | Gains | | Appreciation |
|
|
| |
|
| |
|
|
| Advantage* | $ | 2,838,030 | | $ | — | | $ | 11,719,004 |
| Global | | — | | | — | | | 8,305,353 |
| Preferred Opportunity | | 1,125,172 | | | 7,752,383 | | | 31,392,631 |
* 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. At December 31, 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 | | | — | | |
| Global | | 23,481,021 | | | 6,021 | | |
| Preferred Opportunity | | 18,305,777 | | | — | | |
32
Transactions in common shares of beneficial interest from August 30, 2004, (commencement of investment operations) through December 31, 2004, for Global, and 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 |
| |
| |
| |
| |
|
| Global | | 23,006,021 | | 475,000 | | — | | 23,481,021 |
| 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 period ended December 31, 2004, there were no additional shares issued under the terms of the Trusts’ Dividend Reinvestment Plans.
Offering costs of $924,000 ($0.04 per common share) and $900,000 ($0.05 per common share) incurred in connection with Global’s and Preferred Opportunity’s offering of common shares, respectively, have been charged to paid-in capital in excess of par of the common shares.
As of December 31, 2004, 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 $2,208,000 ($0.12 per common share) and offering costs of $400,260 ($0.02 per common share) and $389,000 ($0.02 per common share) incurred in connection with the preferred share offering of Global and Preferred Opportunity, respectively, 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 period ended December 31, 2004, was 0.98% to 2.66%, and 1.90% to 2.67%, 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 December 31, 2004, each Board declared dividends from undistributed earnings per common share payable January 31, 2005, to shareholders of record on January 15, 2005. The per share common dividends declared were as follows:
| | Common Dividend | |
| Trust | Per Share | |
|
|
| |
| Advantage | $ | 0.058333 | |
| Global | | 0.093300 | |
| Preferred Opportunity | | 0.166667 | |
The dividends declared on preferred shares for the period January 1, 2005, to January 31, 2005, for Global and Preferred Opportunity were as follows:
| | | | | Dividends | | | | | | Dividends |
| Trust | | Series | | Declared | | Trust | | Series | | Declared |
| |
| |
| |
| |
| |
|
| Global | | T7 | | $142,629 | | | Preferred Opportunity | | T7 | | $130,301 | |
| | | W7 | | 142,499 | | | | | W7 | | 129,153 | |
| | | R7 | | 138,052 | | | | | R7 | | 128,682 | |
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors/Trustees and Shareholders of:
BlackRock Advantage Term Trust Inc.
BlackRock Global Floating Rate Income Trust
BlackRock Preferred Opportunity Trust
We have audited the accompanying statements of assets and liabilities of BlackRock Advantage Term Trust Inc., BlackRock Global Floating Rate Income Trust and BlackRock Preferred Opportunity Trust (collectively, the “Trusts”), including the portfolios of investments, as of December 31, 2004, and the related statements of operations and cash flows for the periods then ended, the statements of changes in net assets for each of the periods then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Trusts as of December 31, 2004, the results of their operations and their cash flows for the periods then ended, and the changes in their net assets for each of the periods then ended, and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
February 28, 2005
34
| DIRECTORS/TRUSTEES INFORMATION (Unaudited) |
|
|
| | | | | | | | | | | | | Events or transactions by |
| | | | | | | | | Number of | | | | reason of which the Trustee |
| | | | | Term of office | | | | portfolios over- | | Other Directorships | | is an interested person as |
| | | Current positions | | and length of time | | Principal occupations | | seen within the | | held outside the | | defined in Section 2(a) |
| Name, address, age | | held with the Trusts | | served | | during the past five years | | fund complex1 | | fund complex1 | | (19) of the 1940 Act |
|
| Interested Directors/Trustees2 |
|
| Ralph L. | | Chairman of the | | 3 years4 / since | | Director since 1999 and President of | | 62 | | Member of the | | Director and President of |
| Schlosstein | | Board3 | | inception | | BlackRock, Inc. since its formation | | | | Visiting Board of | | the Advisor |
| BlackRock, Inc. | | | | | | in 1998 and of BlackRock, Inc.’s | | | | Overseers of the John | | |
| 40 East 52nd Street | | | | | | predecessor entities since 1988. | | | | F. Kennedy School of | | |
| New York, NY | | | | | | Member of the Management | | | | Government at | | |
| 10022 | | | | | | Committee and Investment Strategy | | | | Harvard University, a | | |
| Age: 53 | | | | | | Group of BlackRock, Inc. Formerly, | | | | member of the board | | |
| | | | | | | Managing Director of Lehman | | | | of the Financial | | |
| | | | | | | Brothers, Inc. and Co-head of its | | | | Institutions Center of | | |
| | | | | | | Mortgage and Savings Institutions | | | | The Wharton School | | |
| | | | | | | Group. Chairman and President of | | | | of the University of | | |
| | | | | | | the BlackRock Liquidity Funds and | | | | Pennsylvania, a | | |
| | | | | | | Director of several of BlackRock’s | | | | trustee of the | | |
| | | | | | | alternative investment vehicles. | | | | American Museum of | | |
| | | | | | | | | | | Natural History, a | | |
| | | | | | | | | | | trustee of Trinity | | |
| | | | | | | | | | | School in New York | | |
| | | | | | | | | | | City, a member of the | | |
| | | | | | | | | | | Board of Advisors of | | |
| | | | | | | | | | | Marujupu LLC, and a | | |
| | | | | | | | | | | trustee of New | | |
| | | | | | | | | | | Visions for Public | | |
| | | | | | | | | | | Education and of The | | |
| | | | | | | | | | | Public Theater in New | | |
| | | | | | | | | | | York City. Formerly, a | | |
| | | | | | | | | | | director of Pulte | | |
| | | | | | | | | | | Corporation, the | | |
| | | | | | | | | | | nation’s largest home- | | |
| | | | | | | | | | | builder, a Trustee of | | |
| | | | | | | | | | | Denison University | | |
| | | | | | | | | | | and a member of | | |
| | | | | | | | | | | Fannie Mae’s | | |
| | | | | | | | | | | Advisory Council. | | |
|
| Robert S. Kapito | | President and | | 3 years4 / since | | Vice Chairman of BlackRock, Inc. | | 52 | | Chairman of the | | Director and Vice |
| BlackRock, Inc. | | Trustee | | August 22, | | Head of the Portfolio Management | | | | Hope and Heroes | | Chairman of the Advisor |
| 40 East 52nd Street | | | | 2002 | | Group. Also a member of the | | | | Children’s Cancer | | |
| New York, NY | | | | | | Management Committee, the | | | | Fund. President of | | |
| 10022 | | | | | | Investment Strategy Group, the Fixed | | | | the Board of | | |
| Age: 48 | | | | | | Income and Global Operating | | | | Directors of the | | |
| | | | | | | Committees and the Equity | | | | Periwinkle National | | |
| | | | | | | Investment Strategy Group. | | | | Theatre for Young | | |
| | | | | | | Responsible for the portfolio man- | | | | Audiences. Director | | |
| | | | | | | agement of the Fixed Income, | | | | of icruise.com, Corp. | | |
| | | | | | | Domestic Equity and International | | | | | | |
| | | | | | | Equity, Liquidity, and Alternative | | | | | | |
| | | | | | | Investment Groups of BlackRock. | | | | | | |
|
35
| DIRECTORS/TRUSTEES INFORMATION (Unaudited) (Continued) |
|
|
| | | | | | | | | Number of portfo- | | |
| | | | | | | | | lios overseen | | |
| | | Current positions held | | Term of office and | | Principal occupations | | within the fund | | Other Directorships held out- |
| Name, address, age | | with the Trusts | | length of time served | | during the past five years | | complex1 | | side the fund complex |
|
| Independent Trustees |
|
| Andrew F. Brimmer | | Lead Trustee | | 3 years4 / since | | President of Brimmer & Company, Inc., a | | 52 | | Director of CarrAmerica |
| P.O. Box 4546 | | Audit Committee | | inception | | Washington, D.C.-based economic and | | | | Realty Corporation and |
| New York, NY | | Chairman5 | | | | financial consulting firm, also Wilmer D. | | | | Borg-Warner Automotive. |
| 10163-4546 | | | | | | Barrett Professor of Economics, University | | | | Formerly Director of |
| Age: 78 | | | | | | of Massachusetts – Amherst. Formerly | | | | Airborne Express, |
| | | | | | | member of the Board of Governors of the | | | | BankAmerica |
| | | | | | | Federal Reserve System. Former | | | | Corporation (Bank of |
| | | | | | | Chairman, District of Columbia Financial | | | | America), BellSouth |
| | | | | | | Control Board. | | | | Corporation, College |
| | | | | | | | | | | Retirement Equities Fund |
| | | | | | | | | | | (Trustee), Commodity |
| | | | | | | | | | | Exchange, Inc. (Public |
| | | | | | | | | | | Governor), Connecticut |
| | | | | | | | | | | Mutual Life Insurance |
| | | | | | | | | | | Company, E.I. du Pont de |
| | | | | | | | | | | Nemours & Company, |
| | | | | | | | | | | Equitable Life Assurance |
| | | | | | | | | | | Society of the United |
| | | | | | | | | | | States, Gannett Company, |
| | | | | | | | | | | Mercedes-Benz of North |
| | | | | | | | | | | America, MNC Financial |
| | | | | | | | | | | Corporation (American |
| | | | | | | | | | | Security Bank), NCM |
| | | | | | | | | | | Capital Management, |
| | | | | | | | | | | Navistar International |
| | | | | | | | | | | Corporation, PHH Corp. |
| | | | | | | | | | | and UAL Corporation |
| | | | | | | | | | | (United Airlines). |
|
| Richard E. Cavanagh | | Trustee | | 3 years4 / since | | President and Chief Executive Officer of | | 52 | | Trustee: Aircraft Finance |
| P.O. Box 4546 | | Audit Committee | | inception6 | | The Conference Board, Inc., a leading | | | | Trust (AFT) and |
| New York, NY | | Member | | | | global business research organization, from | | | | Educational Testing |
| 10163-4546 | | | | | | 1995-present. Former Executive Dean of | | | | Service (ETS). Director, |
| Age: 58 | | | | | | the John F. Kennedy School of Government | | | | Arch Chemicals, Fremont |
| | | | | | | at Harvard University from 1988-1995. | | | | Group and The Guardian |
| | | | | | | Acting Director, Harvard Center for | | | | Life Insurance Company |
| | | | | | | Business and Government (1991-1993). | | | | of America. |
| | | | | | | Formerly Partner (principal) of McKinsey | | | | |
| | | | | | | & Company, Inc. (1980-1988). Former | | | | |
| | | | | | | Executive Director of Federal Cash | | | | |
| | | | | | | Management, White House Office of | | | | |
| | | | | | | Management and Budget (1977-1979). Co- | | | | |
| | | | | | | author, THE WINNING PERFORMANCE | | | | |
| | | | | | | (best selling management book published in | | | | |
| | | | | | | 13 national editions). | | | | |
|
| Kent Dixon | | Trustee | | 3 years4 / since | | Consultant/Investor. Former President and | | 52 | | Former Director of ISFA |
| P.O. Box 4546 | | Audit Committee | | inception | | Chief Executive Officer of Empire Federal | | | | (the owner of INVEST, a |
| New York, NY | | Member5 | | | | Savings Bank of America and Banc PLUS | | | | national securities broker- |
| 10163-4546 | | | | | | Savings Association, former Chairman of | | | | age service designed for |
| Age: 67 | | | | | | the Board, President and Chief Executive | | | | banks and thrift |
| | | | | | | Officer of Northeast Savings. | | | | institutions). |
|
| Frank J. Fabozzi | | Trustee | | 3 years4 / since | | Consultant. Editor of THE JOURNAL OF | | 52 | | Director, Guardian |
| P.O. Box 4546 | | Audit Committee | | inception | | PORTFOLIO MANAGEMENT and | | | | Mutual Funds Group (18 |
| New York, NY | | Member7 | | | | Frederick Frank Adjunct Professor of | | | | portfolios). |
| 10163-4546 | | | | | | Finance at the School of Management at | | | | |
| Age: 56 | | | | | | Yale University. Author and editor of sev- | | | | |
| | | | | | | eral books on fixed income portfolio man- | | | | |
| | | | | | | agement. Visiting Professor of Finance and | | | | |
| | | | | | | Accounting at the Sloan School of | | | | |
| | | | | | | Management, Massachusetts Institute of | | | | |
| | | | | | | Technology from 1986 to August 1992. | | | | |
|
36
| DIRECTORS/TRUSTEES INFORMATION (Unaudited) (Continued) |
|
| | | | | | | | | Number of | | |
| | | | | | | | | portfolios | | |
| | | | | | | | | overseen | | |
| | | | | | | | | within | | |
| | | Current positions held | | Term of office and | | Principal occupations | | the fund | | Other Directorships held outside |
| Name, address, age | | with the Trusts | | length of time served | | during the past five years | | complex1 | | the fund complex |
|
| Independent Trustees (continued) |
|
| Kathleen F. Feldstein | | Trustee / Advisory | | 3 years4 / since | | President of Economics Studies, Inc., a | | 199 | | Director of BellSouth Inc., |
| P.O. Box 4546 | | Trustee8 | | January 19, 2005 | | Belmont, MA-based private economic | | | | Ionics, Inc., and Knight |
| New York, NY | | | | | | consulting firm, since 1987; Chair, Board | | | | Ridder, Inc.; Trustee of the |
| 10163-4546 | | | | | | of Trustees, McLean Hospital in Belmont, | | | | Museum of Fine Arts, |
| Age: 63 | | | | | | MA. | | | | Boston, and of the |
| | | | | | | | | | | Committee for Economic |
| | | | | | | | | | | Development; Corporation |
| | | | | | | | | | | Member, Partners HealthCare |
| | | | | | | | | | | and Sherrill House; Member |
| | | | | | | | | | | of the Visiting Committee of |
| | | | | | | | | | | the Harvard University Art |
| | | | | | | | | | | Museums and of the |
| | | | | | | | | | | Advisory Board to the |
| | | | | | | | | | | International School of |
| | | | | | | | | | | Business at Brandeis |
| | | | | | | | | | | University. |
|
| R. Glenn Hubbard | | Trustee | | 3 years4 / since | | Dean of Columbia Business School since | | 52 | | Director of ADP, Dex Media, |
| P.O. Box 4546 | | | | November 16, 2004 | | July 1, 2004. Columbia faculty member | | | | KKR Financial Corporation, |
| New York, NY | | | | | | since 1988. Co-director of Columbia | | | | and Ripplewood Holdings. |
| 10163-4546 | | | | | | Business School’s Entrepreneurship Program | | | | Member of Board of |
| Age: 46 | | | | | | 1994-1997. Visiting professor at the John F. | | | | Directors of Duke Realty. |
| | | | | | | Kennedy School of Government at Harvard | | | | Formerly on the advisory |
| | | | | | | and the Harvard Business School, as well as | | | | boards of the Congressional |
| | | | | | | the University of Chicago. Visiting scholar at | | | | Budget Office, the Council |
| | | | | | | the American Enterprise Institute in | | | | on Competitiveness, the |
| | | | | | | Washington and member of International | | | | American Council on Capital |
| | | | | | | Advisory Board of the MBA Program of | | | | Formation, the Tax |
| | | | | | | Ben-Gurion University. Deputy assistant sec- | | | | Foundation and the Center |
| | | | | | | retary of the U.S. Treasury Department for | | | | for Addiction and Substance |
| | | | | | | Tax Policy 1991-1993. Chairman of the U.S. | | | | Abuse. Trustee of Fifth |
| | | | | | | Council of Economic Advisers under the | | | | Avenue Presbyterian Church |
| | | | | | | President of the United States 2001–2003. | | | | of New York. |
|
| James Clayburn | | Trustee | | 3 years4 / since | | Dean Emeritus of the John E. Anderson | | 52 | | Director of Payden & Rygel |
| La Force, Jr. | | | | inception10 | | Graduate School of Management, | | | | Investment Trust, Metzler- |
| P.O. Box 4546 | | | | | | University of California since July 1, 1993. | | | | Payden Investment Trust, |
| New York, NY | | | | | | Acting Dean of the School of Business, | | | | Advisors Series Trust, Arena |
| 10163-4546 | | | | | | Hong Kong University of Science and | | | | Pharmaceuticals, Inc. and |
| Age: 76 | | | | | | Technology 1990-1993. From 1978 to | | | | CancerVax Corporation. |
| | | | | | | September 1993, Dean of the John E. | | | | |
| | | | | | | Anderson Graduate School of | | | | |
| | | | | | | Management, University of California. | | | | |
|
| Walter F. Mondale | | Trustee | | 3 years4 / since | | Senior Counsel, Dorsey & Whitney, LLP, a | | 52 | | Chairman of Panasonic |
| P.O. Box 4546 | | | | inception11 | | law firm (January 2004-present); Partner, | | | | Foundation’s Board of |
| New York, NY | | | | | | Dorsey & Whitney, LLP, (December 1996- | | | | Directors and Director of |
| 10163-4546 | | | | | | December 2003, September 1987-August | | | | United Health Foundation. |
| Age: 77 | | | | | | 1993). Formerly U.S. Ambassador to Japan | | | | Member of the Hubert H. |
| | | | | | | (1993-1996). Formerly Vice President of | | | | Humphrey Institute of Public |
| | | | | | | the United States, U.S. Senator and | | | | Affairs Advisory Board, The |
| | | | | | | Attorney General of the State of | | | | Mike and Maureen Mans- |
| | | | | | | Minnesota. 1984 Democratic Nominee for | | | | field Foundation and the |
| | | | | | | President of the United States. | | | | Dean’s Board of Visitors of |
| | | | | | | | | | | the Medical School at the |
| | | | | | | | | | | University of Minnesota. |
|
|
| 1 | The Fund Complex means two or more registered investments companies that: (1) hold themselves out to investors as related companies for pur- poses of investment and investor services; or (2) have a common investment advisor or have an investment advisor that is an affiliated person of the investment advisor of any of the other registered investment companies. |
| 2 | Interested Director/Trustee as defined by Section 2(a)(19) of the Investment Company Act of 1940. |
| 3 | Director/Trustee since inception; appointed Chairman of the Board on August 22, 2002. |
| 4 | The Board is classified into three classes of which one class is elected annually. Each Director/Trustee serves a three-year term concurrent with the class from which they are elected. |
| 5 | The Board of each Trust has determined that each Trust has two Audit Committee financial experts serving on its Audit Committee, Dr. Brimmer and Mr. Dixon, both of whom are independent for the purpose of the definition of Audit Committee financial expert as applicable to the Trusts. |
| 6 | For Advantage appointed Director on August 11, 1994. |
| 7 | Appointed Audit Committee Member on May 25, 2004. |
| 8 | Trustee on Advantage and an Advisory Trustee on Preferred Opportunity and Global. |
| 9 | Director/Trustee on 19 of the closed-end Trusts and an Advisory Director/Trustee on the remaining 33 closed-end Trusts. |
| 10 | For Advantage appointed Director on June 19, 1992. |
| 11 | Except during the periods August 12, 1993 through April 15, 1997 and October 31, 2002 through November 11, 2002 for Advantage. |
37
DIVIDEND REINVESTMENT PLANS
Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), shareholders of Advantage and Global 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 Global 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.
ADDITIONAL INFORMATION
On August 25, 2004, BlackRock, Inc., the parent of BlackRock Advisors, Inc., the Trusts’ investment advisor, entered into an agreement with MetLife, Inc.® to acquire SSRM Holdings, Inc., the parent of State Street Research & Management Company, the investment advisor to the State Street Research mutual funds. This acquisition was completed on January 31, 2005. Management believes there will be no impact to the Trusts as a result of this transaction.
Each Trust listed for trading on the New York Stock Exchange (NYSE) has filed with the NYSE its chief executive officer certification regarding compliance with the NYSE’s listing standards and has filed with the Securities and Exchange Commission the certification of its chief executive officer and chief financial officer required by Section 302 of the Sarbanes-Oxley Act.
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/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, Henry Gabbay, Anne Ackerley and Bartholomew Battista—Managing Directors of the Advisor and the Sub-Advisor, Richard M. Shea, James Kong and Vincent B. Tritto—Managing Directors of the Sub-Advisor, and Brian P. Kindelan—Managing Director of the Advisor.
38
[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 Hubbard3
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
Richard M. Shea, Vice President/Tax
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-Advisor2
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.
250 Royall Street
Canton, MA 02021
(800) 699-1BFM Auction Agent2
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 Trustee for Advantage only. Advisory Trustee for Global and Preferred Opportunity. Appointed on January 19, 2005 for each trust.2 For Global and Preferred Opportunity.
3 Appointed on November 16, 2004.
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)669-1BFM.
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 December 31st 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 schedule 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 will be available on the Commission’s website at http://www.sec.gov. Each Trust’s Form N-Q, when available, 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, when available, may also be obtained, upon request, 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-ANN-5 | |
Item 2. Code of Ethics.
(a) The Registrant has adopted a code of ethics (the "Code of Ethics") that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
(b) Not applicable.
(c) The Registrant has not amended its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto.
(d) The Registrant has not granted a waiver or an implicit waiver from a provision of its Code of Ethics during the period covered by the shareholder report presented in Item 1 hereto.
(e) Not applicable.
(f) The Registrant's Code of Ethics is attached as an Exhibit hereto.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that it has two audit committee financial experts serving on its audit committee, each of whom is an "independent" Trustee: Dr. Andrew F. Brimmer and Mr. Kent Dixon. Under applicable securities laws, a person who is determined to be an audit committee financial expert will not be deemed an "expert" for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification of a person as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities that are greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and Board of Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
(a) Audit Fees. The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were $32,000 for the fiscal year ended December 31, 2004 and $32,800 for the fiscal year ended December 31, 2003.
(b) Audit-Related Fees. The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not
reported above in Item 4(a) were $5,300 for the fiscal year ended December 31, 2004 and $3,000 for the fiscal year ended December 31, 2003. The nature of these services was attest services not required by statute or regulation, overhead and out-of-pocket expenses.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning were $6,200 for the fiscal year ended December 31, 2004 and $25,000 for the fiscal year ended December 31, 2003. The nature of these services was federal, state and local income and excise tax return preparation and related advice and planning and miscellaneous tax advice.
(d) All Other Fees. There were no fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported above in Items 4(a) through (c).
(e) Audit Committee Pre-Approval Policies and Procedures.
(1) The Registrant has polices and procedures (the "Policy") for the pre-approval by the Registrant's Audit Committee of Audit, Audit-Related, Tax and Other Services (as each is defined in the Policy) provided by the Trust's independent auditor (the "Independent Auditor") to the Registrant and other "Covered Entities" (as defined below). The term of any such pre-approval is 12 months from the date of pre-approval, unless the Audit Committee specifically provides for a different period. The amount of any such pre-approval is set forth in the appendices to the Policy (the "Service Pre-Approval Documents"). At its first meeting of each calendar year, the Audit Committee will review and re-approve the Policy and approve or re-approve the Service Pre-Approval Documents for that year, together with any changes deemed necessary or desirable by the Audit Committee. The Audit Committee may, from time to time, modify the nature of the services pre-approved, the aggregate level of fees pre-approved or both.
For the purposes of the Policy, "Covered Services" means (A) all engagements for audit and non-audit services to be provided by the Independent Auditor to the Trust and (B) all engagements for non-audit services related directly to the operations and financial reporting or the Trust to be provided by the Independent Auditor to any Covered Entity, "Covered Entities" means (1) the Advisor or (2) any entity controlling, controlled by or under common control with the Advisor that provides ongoing services to the Trust.
In the intervals between the scheduled meetings of the Audit Committee, the Audit Committee delegates pre-approval authority under this Policy to the Chairman of the Audit Committee (the "Chairman"). The Chairman shall report any pre-approval decisions under this Policy to the Audit Committee at its next scheduled meeting. At each scheduled meeting, the Audit Committee will review with the Independent Auditor the Covered Services pre-approved by the Chairman pursuant to delegated authority, if any, and the fees related thereto. Based on these reviews, the Audit Committee can modify, at its discretion, the pre-approval originally granted by the Chairman pursuant to delegated authority. This modification can be to the nature of services pre-approved, the aggregate level of fees approved, or both. Pre-approval of Covered Services by the Chairman pursuant to delegated authority is expected to be the exception rather than the rule and the
2
Audit Committee may modify or withdraw this delegated authority at any time the Audit Committee determines that it is appropriate to do so.
Fee levels for all Covered Services to be provided by the Independent Auditor and pre-approved under this Policy will be established annually by the Audit Committee and set forth in the Service Pre-Approval Documents. Any increase in pre-approved fee levels will require specific pre-approval by the Audit Committee (or the Chairman pursuant to delegated authority).
The terms and fees of the annual Audit services engagement for the Trust are subject to the specific pre-approval of the Audit Committee. The Audit Committee (or the Chairman pursuant to delegated authority) will approve, if necessary, any changes in terms, conditions or fees resulting from changes in audit scope, Trust structure or other matters.
In addition to the annual Audit services engagement specifically approved by the Audit Committee, any other Audit services for the Trust not listed in the Service Pre-Approval Document for the respective period must be specifically pre-approved by the Audit Committee (or the Chairman pursuant to delegated authority).
Audit-Related services are assurance and related services that are not required for the audit, but are reasonably related to the performance of the audit or review of the financial statements of the Registrant and, to the extent they are Covered Services, the other Covered Entities (as defined in the Joint Audit Committee Charter) or that are traditionally performed by the Independent Auditor. Audit-Related services that are Covered Services and are not listed in the Service Pre-Approval Document for the respective period must be specifically pre-approved by the Audit Committee (or the Chairman pursuant to delegated authority).
The Audit Committee believes that the Independent Auditor can provide Tax services to the Covered Entities such as tax compliance, tax planning and tax advice without impairing the auditor’s independence. However, the Audit Committee will not permit the retention of the Independent Auditor in connection with a transaction initially recommended by the Independent Auditor, the sole business purpose of which may be tax avoidance and the tax treatment of which may not be supported in the Internal Revenue Code and related regulations. Tax services that are Covered Services and are not listed in the Service Pre-Approval Document for the respective period must be specifically pre-approved by the Audit Committee (or the Chairman pursuant to delegated authority).
All Other services that are covered and are not listed in the Service Pre-Approval Document for the respective period must be specifically pre-approved by the Audit Committee (or the Chairman pursuant to delegated authority).
Requests or applications to provide Covered Services that require approval by the Audit Committee (or the Chairman pursuant to delegated authority) must be submitted to the Audit Committee or the Chairman, as the case may be, by both the Independent Auditor and the Chief Financial Officer of the respective Covered Entity, and must include a joint statement as to whether, in their view, (a) the request or application is consistent with the rules of the Securities and Exchange Commission ("SEC") on auditor independence and (b) the requested service is or is not a non-audit service prohibited by the SEC. A request or application submitted to the Chairman between scheduled meetings of the Audit Committee should include a discussion as to why approval is being sought prior to the next regularly scheduled meeting of the Audit Committee.
3
(2) None of the services described in each of Items 4(b) through (d) were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the Trust's accountant for services rendered to the Trust, the Advisor (except for any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) or any entity controlling, controlled by, or under common control with the Advisor that provides ongoing services to the registrant that directly impacted the Trust for each of the last two fiscal years were $11,500 for the fiscal year ended December 31, 2004 and $28,000 for the fiscal year ended December 31, 2003.
(h) Not applicable.
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee of the Registrant is comprised of: Dr. Andrew F. Brimmer; Richard E. Cavanagh; Kent Dixon and Frank Fabozzi.
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.
The Registrant has delegated the voting of proxies relating to its voting securities to its investment advisor, BlackRock Advisors, Inc. (the "Advisor") and its sub-advisor, BlackRock Financial Management, Inc. (the "Sub-Advisor"). The Proxy Voting Policies and Procedures of the Advisor and Sub-Advisor (the "Proxy Voting Policies") are attached as an Exhibit 99.PROXYPOL hereto.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Companies and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
4
(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 last fiscal half-year that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (1) Code of Ethics attached as EX-99.CODE ETH.
(a) (2) Separate certifications of Principal Executive and Financial Officers pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 attached as EX-99.CERT.
(a) (3) Not applicable.
(b) Certification of Principal Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished as EX-99.906CERT.
Proxy Voting Policies attached as EX-99.PROXYPOL.
5
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: | September 15, 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: | Treasurer |
| Date: | September 15, 2005 |
| By: | /s/ Henry Gabbay |
| |
|
| Name: | Henry Gabbay |
| Title: | Principal Financial Officer |
| Date: | September 15, 2005 |
6
