See Notes to Financial Statements.
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NOTES TO FINANCIAL STATEMENTS |
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Note 1. Organization & Accounting Policies
BlackRock High Income Shares (“High Income”), a Massachusetts business trust, is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). BlackRock Global Floating Rate Income Trust (“Global”) and BlackRock Preferred Opportunity Trust (“Preferred Opportunity”) are organized as Delaware statutory trusts and are registered as non-diversified and diversified, closed-end management investment companies, respectively, under the 1940 Act. Global, High Income and Preferred Opportunity are individually referred to as a “Trust” and collectively as the “Trusts”.
On September 29, 2006, BlackRock, Inc., the parent of BlackRock Advisors, LLC (formerly BlackRock Advisors, Inc.) (the “Advisor”)and Merrill Lynch & Co., Inc. (“Merrill Lynch”) combined Merrill Lynch’s investment management business, Merrill Lynch Investment Managers (“MLIM”), with BlackRock, Inc. to create a new independent company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest in the combined company and The PNC Financial Services Group, Inc. (“PNC’’), has approximately a 34% economic and voting interest. The new company operates under the BlackRock name and is governed by a board of directors with a majority of independent members.
Under the Trusts’ organizational documents, their officers and Trustees are indemnified against certain liabilities arising out of the performance of their duties to the Trusts. In addition, in the normal course of business, the Trusts enter into contracts with their vendors and others that provide for general indemnifications. The Trusts’ maximum exposure under these arrangements are unknown as this would involve future claims that may be made against the Trusts. However, based on experience, the Trusts consider the risk of loss from such claims to be remote.
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 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. Swap quotations are provided by dealers selected under supervision of the Board. A futures contract is valued at the last sale price as of the close of the commodities exchange on which it trades. Short-term securities may be valued at amortized cost. Investments or other assets for which such current market quotations are not readily available are valued at fair value (“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 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 arms-length transaction. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deems relevant.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Management is currently evaluating the implication of FAS 157. At this time, its impact on the Trusts’ financial statements has not been determined.
Investment Transactions and Investment Income: Investment transactions are recorded on trade date. The cost of investments sold and the related gain or loss is determined by use of the specific identification method, generally first-in, first out, for both financial reporting and federal income tax purposes. 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.
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 the Trusts’ 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.
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 33 1/3% 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 granted a security interest in its portfolio assets as collateral for the borrowing.
Bank Loans: In the process of buying, selling and holding bank loans, a Trust may receive and/or pay certain fees. These fees are included in the purchase price and may include facility fees, commitment fees, amendment fees, commissions and prepayment penalty fees. These fees are amortized as premium and/or accreted as discount over the term of the loan. 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 por-
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tion 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.
A Trust may invest in multiple series or tranches of an issuer. A different series or tranche may have varying terms and carry different associated risks.
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.
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:
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| (i) | market value of investment securities, assets and liabilities at the current rate of exchange. |
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| (i) | 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 includes 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
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settle such short positions. The value of the underlying collateral securities or cash 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 1940 Act, and the interpretive positions of the Securities and Exchange Commission (“SEC”) require that each Trust segregate assets in connection with certain investments (e.g., when issued securities, reverse repurchase agreements or futures contracts), each Trust will, consistent with certain interpretive letters issued by the SEC, designate on its books and records cash or other liquid debt securities having a market value at least equal to the amount that would otherwise be required to be physically segregated.
Federal Income Taxes: It is each Trust’s 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 have been recorded.
On July 13, 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing the Trusts’ tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. Adoption of FIN 48 is required for the last net asset value calculation in the first required financial statement reporting period for fiscal years beginning after December 15, 2006. At this time, management is evaluating the implications of FIN 48 and its impact on the financial statements has not yet been determined.
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, if necessary, other sources. Net long-term capital gains, if any, in excess of loss car-ryforwards may be distributed in accordance with the 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 and such differences may be material.
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. These amounts are shown on the Statement of Assets and Liabilities as “Investments in Affiliates”. This has approximately the same economic effect for the Trustees as if the Trustees had invested the deferred amounts directly 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.
Other: Expenses that are directly related to one of the Trusts are charged directly to that Trust. Other operating expenses are generally prorated to the Trusts on the basis of relative net assets of all the BlackRock Closed-End Funds.
Note 2. Agreements and Other Transactions with Affiliates and Related Parties
Each Trust has an Investment Management Agreement with BlackRock Advisors, LLC, which is a wholly owned subsidiary of BlackRock, Inc. BlackRock Financial Management, Inc., (“BFM”) a wholly owned sub-sidiary of BlackRock, Inc., serves as sub-advisor to the Trusts. BlackRock, Inc. may be presumed to be an affiliate of Merrill Lynch and PNC. The Investment Management Agreements for the Trusts covers both investment advisory and administration services.
Effective March 2, 2005, High Income entered into an Investment Management Agreement with the Advisor, and a sub-advisory agreement with BFM. 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.
The investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate equal to 0.75% of Global’s and 0.65% of Preferred Opportunity’s average weekly managed assets. “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 investment advisory fee paid to the Advisor (and CIAI prior to March 2, 2005) is computed weekly and payable monthly based on an annual rate equal to 0.75% of the first $200 million of High Income’s average weekly managed assets and 0.50% thereafter. The Advisor has voluntarily agreed to waive a portion of the investment advisory fees or other expenses on Global as a percentage of its average weekly managed assets as follows: 0.20% for the first five years of the Trust’s operations (through August 30, 2009), 0.15% in year six (through August 30, 2010), 0.10% in year seven (though August 30, 2011) and 0.05% in year eight (through August 30, 2012).
The Advisor pays BFM fees for its sub-advisory services.
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Pursuant to the Investment Management and Administration 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 of 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 provided 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 Trust’s Treasurer and Secretary and certain persons who assisted in carrying out the responsibilities of those offices. For the year ended December 31, 2006, the Trusts reimbursed the Advisor the following amounts, which are included in miscellaneous expenses in the Statements of Operations:
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Trust | | Amount | |
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Global | | $ | 34,905 | |
High Income | | | 7,250 | |
Preferred Opportunity | | | 53,392 | |
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. These credits are shown on the Statements of Operations as “fees paid indirectly”.
During the year ended December 31, 2006, Merrill Lynch, through its affiliated broker dealer Merrill Lynch, Pierce, Fenner & Smith Incorporated, earned $29,727 in commissions on transactions of securities in High Income.
Investments in companies considered to be an affiliate of the Trusts, for purposes of Section 2(a)(3) of the 1940 Act in Preferred Opportunity were as follows:
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Portfolio Company | | Beginning
Shares | | Purchases | | Sales | | Ending
Shares | | Net
Realized
Gain (Loss) | | Dividend/
Interest
Income | | Market Value
of Affiliates at
December 31,
2006 | |
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Merrill Lynch & Co., Inc., Ser. 3 | | | 200,000 | | | — | | | (200,000 | ) | | — | | $ | 199,840 | | | $ | — | | $ | — | | |
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Merrill Lynch Preferred Capital Trust III | | | 20,000 | | | — | | | (20,000 | ) | | — | | | (5,676 | ) | | | 17,500 | | | — | | |
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Merrill Lynch Preferred Capital Trust V | | | 86,900 | | | — | | | (86,900 | ) | | — | | | 63,041 | | | | 79,079 | | | — | | |
For the year ended December 31, 2006, Merrill Lynch earned direct commissions on the reinvestment of dividends and distributions of common shares of $5,219 for High Income.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments, dollar rolls and U.S. govern- ment securities, for the year ended December 31, 2006 aggregated as follows:
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Trust | | Purchases | | Sales | |
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| |
| |
Global | | $ | 429,825,895 | | $ | 404,796,817 | |
High Income | | | 165,508,866 | | | 174,892,784 | |
Preferred Opportunity | | | 362,528,185 | | | 364,127,522 | |
Purchases and sales of U.S. government securities for the year ended December 31, 2006 aggregated as follows:
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Trust | | Purchases | | Sales | |
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| |
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Preferred Opportunity | | $ | 229,729,543 | | $ | 229,725,392 | |
Details of open forward currency contracts held in Global at December 31, 2006 were as follows:
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Foreign
Currency | | Settlement
Date | | Contract to
Sell /
Deliver | | Value at
Settlement
Date | | Value at
December 31,
2006 | | Unrealized
Depreciation | |
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Sold: | | | | | | | | | | | | | | | | |
Swiss Franc | | | 1/10/07 | | $ | 8,369,000 | | $ | 6,852,181 | | $ | 6,875,992 | | $ | (23,811 | ) | |
Euro | | | 1/10/07 | | | 67,764,632 | | | 87,075,528 | | | 89,505,909 | | | (2,430,381 | ) | |
British Pound | | | 1/10/07 | | | 9,491,600 | | | 18,034,865 | | | 18,586,031 | | | (551,166 | ) | |
Mexican Peso | | | 1/10/07 | | | 21,517,417 | | | 1,936,862 | | | 1,990,794 | | | (53,932 | ) | |
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| | | | | | | | | | | | | | $ | (3,059,290 | ) | |
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Details of open interest rate swaps held in Preferred Opportunity at December 31, 2006 were as follows:
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Notional
Amount
(000) | | Fixed
Rate(a) | | Counter
Party | | Floating
Rate | | Effective
Date | | Termination
Date | | Unrealized
Appreciation |
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22,600 | | 5.076% | | Lehman Brothers | | 3-month LIBOR | | 12/21/06 | | 12/21/16 | | | $ | 173,805 | |
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(a) | Preferred Opportunity pays fixed interest rate and receives floating rate. |
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Note 4. Borrowings
Details of open reverse repurchase agreements held in Global at December 31, 2006 were as follows (please see Corresponding Underlying Collateral Chart below):
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Counter Party | | Rate | | Trade
Date | | Maturity
Date | | Net Closing
Amount | | Par | |
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Credit Suisse First Boston LLC | | | 5.450 | % | | | 11/21/06 | | | 1/12/07 | | | $ | 1,678,107 | | | | $ | 1,665,000 | | |
| | | 5.450 | | | | 11/21/06 | | | 1/12/07 | | | | 1,850,175 | | | | | 1,836,000 | | |
| | | 5.280 | | | | 11/29/06 | | | 1/16/07 | | | | 5,683,981 | | | | | 5,644,672 | | |
| | | 5.500 | | | | 11/29/06 | | | 1/16/07 | | | | 4,209,107 | | | | | 4,179,733 | | |
| | | 5.500 | | | | 12/28/06 | | | 1/16/07 | | | | 12,819,354 | | | | | 12,782,250 | | |
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| | | | | | | | | | | | | | | | | $ | 26,107,655 | | |
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Details of underlying collateral for open reverse repurchase agreements held in Global at December 31, 2006 were as follows:
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Counter Party | | Description | | Rate | | | Maturity
Date | | Original
Face | | | Current
Face | | | | Market
Value | | |
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|
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Credit Suisse First Boston LLC | | United Mexican States | | | 6.073 | % | | | 01/13/09 | | $ | 4,800,000 | | | $ | 4,800,000 | | | | $ | 4,843,200 | | |
| | Republic of Chile | | | 6.875 | | | | 04/28/09 | | | 1,000,000 | | | | 1,000,000 | | | | | 1,037,500 | | |
| | Pemex Project Funding Master Trust | | | 9.375 | | | | 12/02/08 | | | 800,000 | | | | 800,000 | | | | | 856,000 | | |
| | Republic of South Africa | | | 7.375 | | | | 04/25/12 | | | 2,400,000 | | | | 2,400,000 | | | | | 2,580,000 | | |
| | Federative Republic of Brazil | | | 11.114 | | | | 06/29/09 | | | 3,925,000 | | | | 3,925,000 | | | | | 4,458,800 | | |
| | Ukraine | | | 8.903 | | | | 08/05/09 | | | 13,000,000 | | | | 13,000,000 | | | | | 13,763,750 | | |
| | | | | | | | | | | | | | | | | | | |
|
| | |
| | | | | | | | | | | | | | | | | | | $ | 27,539,250 | | |
| | | | | | | | | | | | | | | | | | |
|
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The tax character of distributions paid during the year ended December 31, 2006 and 2005 were as follows:
Note 5. Income Tax Information
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2006 | |
| |
| |
Distributions Paid From: | | Ordinary
Income | | | Long-term
Capital Gains | | | Total
Distributions | |
| |
| | |
| | |
| |
Global | | $ | 45,130,597 | | | $ | 640,846 | | | | $ | 45,771,443 | | |
High Income | | | 12,792,689 | | | | — | | | | | 12,792,689 | | |
Preferred Opportunity | | | 42,381,795 | | | | 4,836,485 | | | | | 47,218,280 | | |
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2005 | |
| |
| |
Distributions Paid From: | | Ordinary
Income | | | Long-term
Capital Gains | | | Total
Distributions | |
| |
| | |
| | |
| |
Global | | $ | 36,326,312 | | | $ | 135,572 | | | | $ | 36,461,884 | | |
High Income | | | 14,468,525 | | | | — | | | | | 14,468,525 | | |
Preferred Opportunity | | | 38,101,545 | | | | 12,112,919 | | | | | 50,214,464 | | |
As of December 31, 2006 the components of distributable earnings on a tax basis were as follows:
| | | | | | | | | | | | | | |
Trust | | Undistributed
Ordinary
Income | | | Undistributed
Long-term
Capital Gains | | | Net Unrealized
Appreciation | |
| |
| | |
| | |
| |
Global | | $ | — | | | $ | — | | | | $ | 4,526,795 | | |
High Income | | | — | | | | — | | | | | 246,249 | | |
Preferred Opportunity | | | 608,891 | | | | 400,000 | | | | | 14,399,047 | | |
For federal income tax purposes, High Income had the following capital loss carryforwards at December 31, 2006:
| | | | | | |
Capital Loss
Carryforward
Amount | | Expires | |
| |
| |
| $ | 24,744,772 | | | 2007 | |
| | 35,363,213 | | | 2008 | |
| | 55,878,284 | | | 2009 | |
| | 102,576,339 | | | 2010 | |
| | 28,467,396 | | | 2011 | |
| | 2,339,279 | | | 2012 | |
| | 7,060,004 | | | 2014 | |
|
|
| | | | |
| $ | 256,429,287 | | | | |
|
|
| | | | |
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 capital loss carryforward amounts.
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Reclassification of Capital Accounts: In order to present undistributed (distribution in excess of) net investment income (“UNII”) and accumulated net realized gain (“Accumulated Gain”) more closely to its tax character, the following accounts for each Trust were increased (decreased):
| | | | | | | | | | |
Trust | | | UNII | | Accumulated Gain | |
| | |
| |
| |
Global | | | $ | (2,163,392 | ) | | $ | 2,163,392 | | |
High Income | | | | 424,200 | | | | (424,200 | ) | |
Preferred Opportunity | | | | (7,457 | ) | | | 7,457 | | |
Note 6. Capital
There are an unlimited number of $0.001 par value common shares authorized for Global and Preferred Opportunity. There are an unlimited number of no par value shares authorized for High Income. At December 31, 2006, the shares owned by affiliates of the Advisor of Global were 6,921.
During the years ended December 31, 2006 and 2005, the Trusts issued the following additional shares under their respective dividend reinvestment plan:
| | | | | | | | | | |
Trust | | | December 31, 2006 | | December 31, 2005 | |
| | |
| |
| |
Global | | | $ | 21,644 | | | $ | — | | |
High Income | | | | 127,532 | | | | 302,078 | | |
Preferred Opportunity | | | | 49,079 | | | | — | | |
As of December 31, 2006, 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 | |
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 ranges on the preferred shares for Global and Preferred Opportunity for the year ended December 31, 2006 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Trust | | Series | | Low | | High | | Average | | Trust | | Series | | Low | | High | | Average |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Global | | T7 | | | 3.61 | % | | 5.25 | % | | 4.65 | % | | Preferred Opportunity | | T7 | | | 4.11 | % | | 5.25 | % | | 4.79 | % |
| | W7 | | | 3.93 | | | 5.29 | | | 4.64 | | | | | W7 | | | 4.11 | | | 5.29 | | | 4.78 | |
| | R7 | | | 3.70 | | | 5.25 | | | 4.69 | | | | | R7 | | | 4.11 | | | 5.26 | | | 4.80 | |
Note 7. Dividends
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 1940 Act 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 8. Subsequent Events
Subsequent to December 31, 2006, the Boards declared dividends from undistributed earning per common share for Global and Preferred Opportunity payable January 31, 2007, to shareholders of record on January 17, 2007 and for High Income payable February 12, 2007 to shareholders of record on January 30, 2007. The per share common dividends declared were as follows:
| | | | | |
Trust | | | Common Dividend
Per Share |
| | |
|
Global | | | $ | 0.125000 | |
High Income | | | | 0.018200 | |
Preferred Opportunity | | | | 0.166667 | |
The dividends declared on preferred shares for the period January 1, 2007 to January 31, 2007 for Global and Preferred Opportunity were as follows:
| | | | | | | | | | | | | | | | |
Trust | | Series | | | Dividends
Declared | | Trust | | Series | | | Dividends
Declared |
| |
| | |
| |
| |
| | |
|
Global | | T7 | | | $ | 386,858 | | | Preferred Opportunity | | T7 | | | $ | 352,986 | |
| | W7 | | | | 317,946 | | | | | W7 | | | | 286,952 | |
| | R7 | | | | 313,239 | | | | | R7 | | | | 281,299 | |
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REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
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To the Trustees and Shareholders of:
BlackRock Global Floating Rate Income Trust
BlackRock Preferred Opportunity Trust
(collectively the “Trusts”)
We have audited the accompanying statements of assets and liabilities of the Trusts, including the portfolios of investments, as of December 31, 2006, and the related statements of operations and cash flows for the year then ended, statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the periods presented. These financial statements and financial highlights are the responsibility of the Trusts’ 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. The Trusts are not required to have, nor were we engaged to perform audits of their internal control over financial reporting. Our audits included 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 Trusts’ 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 include confirmation of the securities owned as of December 31, 2006, 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, 2006, the results of their operations and cash flows for the year then ended, the changes in their net assets for each of the two years in the period 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.
Boston, Massachusetts
February 23, 2007
To the Trustees and Shareholders of:
BlackRock High Income Shares
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of BlackRock High Income Shares (the “Trust”), as of December 31, 2006, and the related statements of operations and cash flows for the year then ended, statements of changes in net assets and the financial highlights for each of the two years in the period then ended. 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. The financial highlights for each of the three years in the period ended December 31, 2004 were audited by other auditors whose report, dated February 22, 2005, expressed an unqualified opinion on the financial highlights.
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. The Trust is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included 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, 2006, by correspondence with the custodian. 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 Trust as of December 31, 2006, the results of its operations and cash flows for the year then ended, the changes in its net assets and the financial highlights for each of the two years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Boston, Massachusetts
February 23, 2007
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DIVIDEND REINVESTMENT PLANS |
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Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), shareholders of High Income may elect, while shareholders of Global and Preferred Opportunity are automatically enrolled, to have all distributions of dividends and capital gains reinvested by Computershare 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 each Trust 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.
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INVESTMENT MANAGEMENT AGREEMENTS |
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Under the 1940 Act, the continuation of each Trust’s investment management and sub-advisory agreements is required to be approved annually by the Boards, including the Independent Trustees. At a meeting held on May 23, 2006, the Board of each Trust, including the Independent Trustees, met to consider the annual continuation of each management agreement in effect prior to such date (the “Old Management Agreement”). The Boards first considered the annual continuation of each Old Management Agreement without considering the impending acquisition by BlackRock, Inc. of the investment management business of Merrill Lynch & Co., Inc. (the “Transaction”) because the Old Management Agreements needed to be reapproved whether or not the Transaction closed. Accordingly, it was appropriate to review each Old Management Agreement without considering the impending Transaction, and then to separately consider the impact of the Transaction on the Old Management Agreements.
At the meeting on May 23, 2006, the Board of each Trust, including those trustees/directors of each Trust who are not interested persons of the Trusts for purposes of the Investment Company Act of 1940, as amended (the “Independent Trustees”), unanimously approved the continuance of each Old Management Agreement and, if applicable, Sub-Advisory Agreement for each Trust with a contract considered for renewal and then approved a new management agreement for each Trust to take effect following the completion of the Transaction (the “New Management Agreements”).
Information Received by the Boards
To assist each Board in its evaluation of the Old Management Agreements, the Independent Trustees received information from BlackRock on or about April 22, 2006 which detailed, among other things: the organization, business lines and capabilities of BlackRock Advisors, LLC (formerly BlackRock Advisors, Inc., “BlackRock”) the sub-advisors, if any, for each trust (collectively, the “Advisors”), including the responsibilities of various departments and key personnel and biographical information relating to key personnel; financial statements for BlackRock, The PNC Financial Services Group, Inc. (“PNC”) and each Trust; the advisory and/or administrative fees paid by each Trust to the Advisors, 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 “fall-out” 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, and 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 each Board 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 as well as factors to be considered by the boards in voting on advisory agreements.
The Independent Trustees reviewed this information and discussed it with independent counsel in executive session prior to the Board meeting. At the Board meeting on May 23, 2006, BlackRock made a presentation to and responded to additional questions from the Boards. After the presentations and after additional discussion each Board considered each Old Management Agreement and, in consultation with independent counsel, reviewed the factors set out in judicial decisions and SEC statements relating to the renewal of the Old Management Agreements.
Matters Considered by the Boards
The Old Management Agreements
In connection with their deliberations with respect to the Old Management Agreements, 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 the Advisors; the investment performance of each Trust; the costs of the services to be provided and profits to be realized by the Advisors and their affiliates from their relationship with the Trusts; the extent to which economies of scale would be realized as the BlackRock closed-end fund 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 the Advisors’ services, the Boards reviewed information concerning the types of services that the Advisors provide and are 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 noted the willingness of the personnel of BlackRock to engage in open, candid discussions with the Boards. The Boards further considered the quality of the Advisors’ 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. The Boards also noted that the formation of Portfolio Review Committees and a Compliance Committee had helped the Boards to continue to improve their understanding of BlackRock’s organization, operations and personnel.
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, the Advisors provide 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, the Advisors and their affiliates provide each Trust with services such as: preparing
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shareholder reports and communications, including annual and semi-annual financial statements and Trust websites; 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). The Boards considered the Advisors’ policies and procedures for assuring compliance with applicable laws and regulations.
Investment Performance of the Trusts. As previously noted, the Boards received 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’ median performance).
The Boards reviewed a narrative analysis of the third-party Peer rankings that was prepared 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 that BGT and BPP had performed better than or equal to the median of their Peers and benchmarks in the past one-year period. The Boards also noted that HIS had performed worse than the median of its Peers in at least one of the past one-, three- and five-year periods or worse than its applicable benchmark in more than one of these periods. The Boards considered the following reasons why HIS may have underperformed its Peers or its benchmarks, but also noted that it is often difficult to determine why a Trust underperformed a Peer because it is difficult to obtain perfect information with respect to the Peers.
The Board noted that HIS has under-performed its respective Peers in each of the above periods, but that it invests in relatively high quality debt because the Advisor has been concerned that relatively lower quality debt was not providing adequate returns for the increased risk present. The Board noted that higher quality debt had been under-performing lower quality debt during 2005, reducing the Trust’s relative performance. The Board also noted that the Advisor had been managing HIS only since March 2005 and restructured its portfolio through April 2005.
After considering this information, the Boards concluded that the performance of each Trust, in light of and after considering the other facts and circumstances applicable to each Trust, supports a conclusion that each Trust’s Old Management 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 after any applicable reimbursements and fee waivers and total expense ratios 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 noted that with the Old Management Agreement subject to annual continuation, BGT pays fees lower than or equal to the median fees paid by its Peers in each of (i) contractual management fees payable by a Trust prior to any fee waivers (“contractual management fees”), (ii) actual management fees paid by a Trust after taking into consideration fee waivers (“actual management fees”) and (c) total expenses. The Boards noted the following reasons why BPP and HIS have contractual or actual management fees or total expenses higher than the median of their Peers:
| | |
| • | De minimis. The Board of BPP noted that the Trust pays actual management fees and/or incur total expenses that are no more than four bps higher than the median of its Peers. Nevertheless, the Trust has contractual management fees that are lower than the median of its peers. |
| | |
| • | Other Factors. The Board of HIS noted that the Trust pays actual management fees and incurs total expenses and is subject to contractual management fees that are worse than the median of its Peers. The Boards noted that BlackRock has agreed to cap HIS’s operating expenses. |
The Boards also compared the management fees charged to the Trusts and other closed-end investment companies by the Advisors to the management fees the Advisors charge other types of clients (such as open-end investment companies and separately managed institutional 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 the Advisors provide 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 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 the Advisors in managing and operating the Trusts. For instance, the Advisors and their 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
50
noted the increased compliance requirements for the Trusts in light of new SEC regulations and other legislations. These services are generally not required to the same extent, if at all, for separate accounts.
In connection with the Boards’ consideration of this information, the Boards reviewed the considerable investment management experience of the Advisors and considered the high level of investment management, administrative and other services provided by the Advisors. In light of these factors and the other facts and circumstances applicable to each Trust, the Boards concluded that the fees paid and expenses incurred by each Trust under its Old Management Agreement supports a conclusion that each Trust’s Old Management Agreement should be renewed.
Profitability. The Directors also considered BlackRock’s profitability in conjunction with their review of fees. The Directors reviewed BlackRock’s revenues, expenses and profitability margins on a before- and after-tax basis. In reviewing profitability, the Directors recognized that one of the most difficult issues in determining profitability is establishing a method of allocating expenses. The Directors also reviewed BlackRock’s assumptions and methodology of allocating expenses, noting 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. The comparison indicated that BlackRock’s pre-tax profitability was in the second quartile of the fifteen companies compared (including BlackRock), with the most profitable quartile being ranked first and the least profitable quartile being ranked fourth.
In evaluating the reasonableness of the Advisors’ compensation, the Boards also considered any other revenues paid to the Advisors, including partial reimbursements paid to the Advisors for certain non-investment advisory services. The Boards noted that these payments were less than the Advisors’ costs for providing these services. The Boards also considered indirect benefits (such as soft dollar arrangements) that the Advisors and their 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 Trusts’ 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 Boards also noted that the one Trust that has a breakpoint in its fee structure, HIS, was inherited by BlackRock when it took over managing HIS from another manager and that BlackRock simply retained the structure it inherited. The information also revealed that only one closed-end fund complex used a complex-level breakpoint structure for advisory fees, and that this complex generally is homogeneous with regard to the types of funds managed and is about three times as large as the Trusts’ complex.
The Boards concluded that BlackRock’s profitability, in light of all the other facts and circumstances applicable to each Trust, supports a conclusion that each Trust’s Old Management Agreement should be renewed.
Other Benefits. In evaluating fees, the Boards also considered indirect benefits or profits the Advisors or their 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 the Advisors and their affiliates by virtue of their relationships with the Trusts, including potential benefits accruing to the Advisors and their affiliates as a result of participating in offerings of the Trusts’ shares, potentially stronger relationships with members of the broker-dealer community, increased name recognition of the Advisors and their affiliates, enhanced sales of other investment funds and products sponsored by the Advisors and their affiliates and increased assets under management which may increase the benefits realized by the Advisors 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 Old Management 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 the Advisors’ 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 the Advisors, without regard to whether the Advisors ultimately pay any portion of the anticipated compensation to the underwriters.
Conclusion with respect to the Old Management Agreements. In reviewing the Old Management Agreements without considering the impending Transaction, the Trustees did not identify any single factor discussed above as all important or controlling. The Trustees, including the Independent Trustees, unanimously 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 Old Management 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 each Old Management Agreement should be approved.
The Transaction
On September 19, 2006, Merrill Lynch contributed its investment management business, MLIM, to BlackRock, one of the largest publicly traded investment management firms in the United States and the parent company of the Advisor, to form a new asset management company that is one of the world’s preeminent, diversified global money management organizations with approximately $1 trillion in assets under management. Based in New York, BlackRock manages assets for institutional and individual investors worldwide through a variety of equity, fixed income, cash management and alternative investment products. The new company operates under the BlackRock name and is governed by a board of directors with a majority of independent members. The new company offers a full range of equity, fixed income, cash management and alternative investment products with strong representation in both retail and institutional channels, in the United States and in non-U.S.
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markets. It has over 4,500 employees in 18 countries and a major presence in most key markets, including the United States, the United Kingdom, Asia, Australia, the Middle East and Europe. Merrill Lynch owns no more than 49.8% of the total capital stock of the new company on a fully diluted basis it owns no more than 45% of the new company’s voting power, and PNC, which previously held a majority interest in BlackRock, retains approximately 34% of the new company’s common stock. Each of Merrill Lynch and PNC has agreed that it will vote all of its shares on all matters in accordance with the recommendation of BlackRock’s board of directors.
The New Management Agreements
Consequences of the Transaction. On February 23, 2006, April 21, 2006 and May 23, 2006, members of BlackRock management made presentations on the Transaction to the Trustees and the Trustees discussed with management and amongst themselves management’s general plans and intentions regarding the Trusts, including the preservation, strengthening and growth of BlackRock’s business and its combination with MLIM’s business. The Boards also inquired about the plans for and anticipated roles and responsibilities of certain BlackRock employees and officers after the Transaction. The Independent Trustees also met in executive session to discuss the Transaction. After these meetings, BlackRock continued to update the Boards with respect to its plans to integrate the operations of BlackRock and MLIM and the potential impact of those plans on the Trusts as those plans were further developed.
After considering and approving the Old Management Agreements, the Boards (including the Independent Trustees) then considered the information received at or prior to the meeting and the consequences of the Transaction to each Trust, including, among other things:
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| (i) that BlackRock, MLIM and their investment advisory subsidiaries are experienced and respected asset management firms, and that BlackRock advised the Boards that in connection with the closing of the Transaction, it intends to take steps to combine the investment management operations of BlackRock and MLIM, which, among other things, may involve sharing common systems and procedures, employees (including portfolio managers), investment and trading platforms, and other resources. Furthermore, it is expected that these combination processes will result in changes to the portfolio management teams for each of the Trusts; |
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| (ii) that BlackRock advised the Boards that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Trusts and their shareholders by the Advisors, including compliance services; |
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| (iii) that BlackRock advised the Boards that it has no present intention to alter the expense waivers and reimbursements currently in effect for certain of the Trusts; |
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| (iv) the experience, expertise, resources and performance of MLIM that will be contributed to BlackRock after the closing of the Transaction and their anticipated impact on BlackRock’s ability to manage the Trusts; |
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| (v) that BlackRock and MLIM would derive benefits from the Transaction and that as a result, they have a financial interest in the matters that were being considered; |
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| (vi) the potential effects of regulatory restrictions on the Trusts as a result of Merrill Lynch’s equity stake in BlackRock after the Transaction; |
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| (vii) the fact that each Trust’s aggregate investment advisory and sub-advisory fees payable under the New Management Agreements and the Old Management Agreements are identical; |
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| (viii) the terms of the New Agreements, including the differences from the Old Management Agreements (see “Comparison of Old Management Agreements to the New Management Agreements” above); |
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| (ix) that the Trusts would not bear the costs of obtaining shareholder approval of the New Management Agreements; and |
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| (x) that BlackRock and Merrill Lynch have agreed to conduct their respective businesses (and use reasonable best efforts to cause their respective affiliates to conduct their respective businesses) to enable the conditions of Section 15(f) to be true in relation to any registered investment companies advised by MLIM and registered under the 1940 Act and have agreed to the same conduct in relation to the BlackRock registered investment companies to the extent it is determined the Transaction is an assignment under the 1940 Act. |
Nature and Quality of Investment Advisory and Sub-Advisory Services. The Boards considered the expected impact of the Transaction on the operations, facilities, organization and personnel of the Advisors, the potential implications of regulatory restrictions on the Trusts following the Transaction and the ability of the Advisors to perform their duties after the Transaction. The Boards considered that the services to be provided and the standard of care under the New Management Agreements are the same as under the Old Management Agreements. The Boards also considered statements by management of BlackRock that, in connection with integrating the operations of the Advisors and MLIM, the objective was to preserve the best of both organizations in order to enhance BlackRock’s ability to provide investment advisory services following completion of the Transaction.
The Boards noted that it is impossible to predict with certainty the impact of the Transaction on the nature, quality and extent of the services provided by the Advisors to the Trusts, but concluded based on the information currently available and in light of all of the current facts and circumstances that the Transaction is likely to provide the Advisors with additional resources with which to serve the Trusts and was not expected to adversely affect the nature, quality and extent of the services to be provided to the Trusts and their shareholders by the Advisors and was not expected to materially adversely affect the ability of the Advisors to provide those services.
The Boards considered that BlackRock portfolio managers for the Trusts would remain the same following completion of the Transaction.
Investment Performance of the Trusts. The Boards examined MLIM’s investment performance with respect to its closed-end funds. The Boards noted the Advisors’ and MLIM’s considerable investment management experience and capabilities. The Boards considered this information together with the level of services expected to be provided to the Trusts. Although the Boards noted that it is impossible to predict the effect,
52
if any, that consummation of the Transaction would have on the future performance of the Trusts, the Boards concluded that the information currently available, in light of all of the current facts and circumstances, supported approving the New Management Agreements.
Fees. The Boards noted that the fees payable by the Trusts under the New Management Agreements are identical to the fees payable under the Old Management Agreements. The Boards also considered the fees paid by the MLIM closed-end funds. In light of (i) the Boards’ approval of the fees paid by each Trust pursuant to the Old Management Agreements at the May 23, 2006 meeting, (ii) the fact that no change to the fees paid by any Trust was proposed solely as a result of the Transaction, and (iii) the Boards’ earlier conclusion with respect to the services expected to be provided to the Trusts under the New Management Agreements, the Boards concluded that the fee structure under the New Management Agreements was reasonable.
Profitability. Management of the Advisors stated to the Boards that, following the Transaction, the current intention is to continue to determine profitability and report profitability to the Boards in the same way as they did prior to the Transaction, subject to management’s desire to preserve the best practices of MLIM. Management of the Advisors stated that any changes in the methods used to determine profitability and report profitability to the Boards would be discussed with the Boards. The Boards considered the potential for increased economies of scale as a result of the Transaction and whether any economies of scale should be reflected in the Trusts’ fee structures. The Boards also considered that the process of integrating the operations of the Advisors and MLIM was in the early stages and that considerable expense would be incurred in connection with integrating such operations, all of which made it difficult to conclude that economies of scale would be realized as a result of the Transaction. In light of the foregoing, the Boards concluded that, at this time, no changes were necessary to the fee structure of the Trusts as a result of the Transaction.
Other Benefits. In evaluating ancillary benefits to be received by the Advisors and their affiliates under the New Management Agreements, the Boards considered whether the Transaction would have an impact on the ancillary benefits received by the Advisors by virtue of the Old Management Agreements. Based on its review of the materials provided, including materials received in connection with its approval of the continuance of each Old Management Agreement earlier at the May 23, 2006 meetings of the Boards and its discussions with the Advisors, the Boards noted that such benefits were difficult to quantify with certainty at this time and indicated that it would continue to evaluate them going forward.
Conclusion with respect to the New Management Agreements. The Trustees did not identify any single consequence of the Transaction discussed above as all-important or controlling. The Boards determined that all of the factors referred to in their evaluation of the Old Management Agreements described above under “Matters Considered by the Boards - The Old Management Agreements” are applicable to the evaluation of the New Management Agreements and concluded that these factors, in light of all the other factors and all of the facts and circumstances applicable to each Trust, were acceptable for each Trust and supported the Trustees’ conclusion that the terms of each New Management Agreement were fair and reasonable, that the fees in each New Management Agreement are fair and reasonable in light of the services provided to the respective Trust and that each New Management Agreement should be approved.
Shareholder Meeting
At the shareholder meeting for each Trust held on August 23, 2006, the shareholders of each Trust approved the New Management Agreement for each Trust.
53
60 Day Notice
We are required by the Internal Revenue Code to advise you within 60 days of a Trust’s tax year-end as to the federal tax status of dividends paid by the Trusts1 during such tax year. Shareholders, however, must report distributions on a calendar year basis for income tax purposes. Please consult your tax advisor for proper treatment of this information.
The following information is provided with respect to the distributions paid by the BlackRock Closed-End Funds for the fiscal year ended December 31, 2006:
| | | | | | | | | | | | | | | | | | | | | | |
| | Share Class
(Common/
Preferred) | | Payable
Date | | Federal
Obligation
Interest1 | | Qualifying
Dividend
Income for
Individuals2 | | Dividends
Qualifying
for the
Dividends
Received
Deduction for
Corporations2 | | Interest
Related
Dividends for
Non- U.S.
Residents3 | | Long-Term
Capital
Gains Per
Share ($) | | Short-Term
Capital Gain
Dividends for
Non- U.S.
Residents2 | |
Global | | Common | | 2/28/06 – 1/31/07 | | 0.50 | % | | — | | | — | | | 74.03 | % | | — | | — | | |
| | Common | | 12/29/06 | | — | | | — | | | — | | | — | | | 0.020429 | | — | | |
| | Series T7 | | 1/4/06 – 12/27/06 | | 0.50 | % | | — | | | — | | | 74.03 | % | | — | | — | | |
| | Series T7 | | 12/27/06 | | — | | | — | | | — | | | — | | | 16.43 | | — | | |
| | Series W7 | | 1/5/06 – 12/28/06 | | 0.50 | % | | — | | | — | | | 74.03 | % | | — | | — | | |
| | Series W7 | | 12/28/06 | | — | | | — | | | — | | | — | | | 16.43 | | — | | |
| | Series R7 | | 1/6/06 – 12/29/06 | | 0.50 | % | | — | | | — | | | 74.03 | % | | — | | — | | |
| | Series R7 | | 12/29/06 | | — | | | — | | | — | | | — | | | 16.65 | | — | | |
High Income | | Common | | 2/10/06 – 1/10/07 | | 1.51 | % | | — | | | — | | | 86.95 | % | | — | | — | | |
Preferred Opportunity | | Common | | 2/28/06 | | 3.02 | % | | 17.26 | % | | 11.94 | % | | 34.22 | % | | — | | 11.85 | % | |
| | Common | | 2/28/06 | | — | | | — | | | — | | | — | | | 0.004614 | | — | | |
| | Common | | 3/31/06 – 12/29/06 | | 3.02 | % | | 17.51 | % | | 12.11 | % | | 34.63 | % | | — | | 12.03 | % | |
| | Common | | 12/29/06 | | — | | | — | | | — | | | — | | | 0.035625 | | — | | |
| | Common | | 1/31/07 | | — | | | — | | | — | | | — | | | 0.166667 | | — | | |
| | Series T7 | | 1/4/06 – 11/29/06 | | 3.02 | % | | 17.51 | % | | 12.11 | % | | 34.63 | % | | — | | 11.78 | % | |
| | Series T7 | | 9/20/06 | | — | | | — | | | — | | | — | | | 2.33 | | — | | |
| | Series T7 | | 11/29/06 | | — | | | — | | | — | | | — | | | 18.86 | | — | | |
| | Series T7 | | 12/6/06 | | — | | | — | | | — | | | — | | | 24.36 | | — | | |
| | Series T7 | | 12/13/06 | | — | | | — | | | — | | | — | | | 24.36 | | — | | |
| | Series T7 | | 12/20/06 | | — | | | — | | | — | | | — | | | 24.57 | | — | | |
| | Series T7 | | 12/27/06 | | — | | | — | | | — | | | — | | | 25.17 | | — | | |
| | Series W7 | | 1/5/06 – 11/24/06 | | 3.02 | % | | 17.51 | % | | 12.11 | % | | 34.63 | % | | — | | 11.78 | % | |
| | Series W7 | | 9/21/06 | | — | | | — | | | — | | | — | | | 2.33 | | — | | |
| | Series W7 | | 11/24/06 | | — | | | — | | | — | | | — | | | 0.75 | | — | | |
| | Series W7 | | 11/30/06 | | — | | | — | | | — | | | — | | | 20.96 | | — | | |
| | Series W7 | | 12/7/06 | | — | | | — | | | — | | | — | | | 23.01 | | — | | |
| | Series W7 | | 12/14/06 | | — | | | — | | | — | | | — | | | 24.45 | | — | | |
| | Series W7 | | 12/21/06 | | — | | | — | | | — | | | — | | | 23.11 | | — | | |
| | Series W7 | | 12/28/06 | | — | | | — | | | — | | | — | | | 25.17 | | — | | |
| | Series R7 | | 1/6/06 –12/1/06 | | 3.02 | % | | 17.51 | % | | 12.11 | % | | 34.63 | % | | — | | 11.78 | % | |
| | Series R7 | | 9/22/06 | | — | | | — | | | — | | | — | | | 2.34 | | — | | |
| | Series R7 | | 12/1/06 | | — | | | — | | | — | | | — | | | 19.71 | | — | | |
| | Series R7 | | 12/8/06 | | — | | | — | | | — | | | — | | | 23.97 | | — | | |
| | Series R7 | | 12/15/06 | | — | | | — | | | — | | | — | | | 24.45 | | — | | |
| | Series R7 | | 12/22/06 | | — | | | — | | | — | | | — | | | 24.93 | | — | | |
| | Series R7 | | 12/29/06 | | — | | | — | | | — | | | — | | | 25.22 | | — | | |
| |
1 | The law varies in each state as to whether and what percentage of dividend income attributable to Federal Obligations is exempt from state income tax. We recommend that you consult your tax advisor to determine if any portion of the dividends you received is exempt from state income taxes. |
| |
2 | Expressed as a percentage of the ordinary income distributions paid. |
| |
3 | Represents the portion of the ordinary distributions paid that are exempt from U.S withholding tax for nonresident aliens and foreign corporations. |
In January 2007, a form 1099-DIV was sent to shareholders providing the amount and composition of distributions and information with respect to their appropriate tax treatment.
54
Shareholder Meetings
A Special Meeting of Shareholders of BlackRock Closed-End Funds was held on August 23, 2006 for shareholders of record as of June 5, 2006, to approve a new Investment Management Agreement and Sub-Advisory Agreement for each of the following Trusts:
Approved the Investment Management Agreement as follows:
| | | | | | | | | | | | | | | | | | | |
| | Votes For | | Votes Against | | Votes Abstain | | | | | | | | | | |
| |
| |
| |
| | | | | | | | | | |
Global | | 10,371,202 | | | 448,156 | | | 975,401 | | | | | | | | | | | |
High Income | | 30,780,152 | | | 1,629,821 | | | 1,800,726 | | | | | | | | | | | |
Preferred Opportunity | | 9,492,644 | | | 433,603 | | | 503,943 | | | | | | | | | | | |
Approved the Sub-Advisory Agreement as follows:
| | | | | | | | | | | | | | | | | | | |
| | Votes For | | Votes Against | | Votes Abstain | | | | | | | | | | |
| |
| |
| |
| | | | | | | | | | |
Global | | 10,342,623 | | | 453,985 | | | 998,151 | | | | | | | | | | | |
High Income | | 30,739,059 | | | 1,587,119 | | | 1,884,521 | | | | | | | | | | | |
Preferred Opportunity | | 9,477,012 | | | 438,751 | | | 514,427 | | | | | | | | | | | |
The Joint Annual Meeting of Shareholders was held on May 23, 2006 for shareholders of record as of February 28, 2006, to elect a certain number of Trustees for each of the following Trusts to three-year terms expiring in 2009:
Elected a Class I Trustee as follows:
| | | | | | | | | | | | | | | | | | | |
| | Richard E. Cavanagh | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | | |
| | Votes For | | Votes Withheld | | | | | | | | | | | | | |
| |
| |
| | | | | | | | | | | | | |
Global | | 20,989,376 | | | 281,296 | | | | | | | | | | | | | | |
Preferred Opportunity | | 17,002,345 | | | 220,430 | | | | | | | | | | | | | | |
Elected the Class II Trustees as follows:
| | | | | | | | | | | | | | | | | | | |
| | Frank J. Fabozzi | | Kathleen F. Feldstein | | Ralph L. Schlosstein | |
| |
| |
| |
| |
| | Votes For | | Votes Withheld | | Votes For | | Votes Withheld | | Votes For | | Votes Withheld | |
| |
| |
| |
| |
| |
| |
| |
Global | | 8,412 | 1 | | 19 | 1 | | 8,412 | 1 | | 19 | 1 | | 20,992,753 | | | 277,919 | | |
High Income | | 49,238,439 | | | 1,144,514 | | | 49,164,938 | | | 1,218,015 | | | 49,213,688 | | | 1,169,265 | | |
Preferred Opportunity | | N/A | | | N/A | | | 7,768 | 1 | | 74 | 1 | | N/A | | | N/A | | |
| | | | | | | | | | | | | | | | | | | |
Elected the Class III Trustees as follows:
| | | | | | | | | | | | | | | | | | | |
| | Andrew F. Brimmer | | Kent Dixon | | Robert S. Kapito | |
| |
| |
| |
| |
| | Votes For | | Votes Withheld | | Votes For | | Votes Withheld | | Votes For | | Votes Withheld | |
| |
| |
| |
| |
| |
| |
| |
Preferred Opportunity | | 16,982,874 | | | 239,901 | | | 17,001,489 | | | 221,286 | | | 17,008,291 | | | 214,484 | | |
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|
1 | Voted on by holders of preferred shares only. |
On May 23, 2006, the Board of High Income approved a change to its non-fundamental investment policy to eliminate the average maturity restriction of its portfolio.
Each Trust listed for trading on the NewYork Stock Exchange (“NYSE”) has filed with the NYSE its chief executive officer certification regarding compliance with the NYSE’s listing standards and have 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.
The Trusts do not make available copies of their respective Statements of Additional Information because the Trusts’ shares are not continuously offered, which means that the Statement of Additional Information of each Trust has not been updated after completion of such Trust’s offering and the information contained in each Trust’s Statement of Additional Information may have become outdated.
During the period, there were no material changes in the investment objective or policies or their charters or by-laws of Global or Preferred Opportunity that have not been approved by the 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 these 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. This reference to BlackRock’s Web site is intended to allow investors public access to information regarding the Trusts and does not, and is not intended, to incorporate BlackRock’s Web site 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, Donald Burke, Anne Ackerley, Bartholomew Battista, Vincent Tritto and Brian Kindelan—Managing Directors of the Advisor and the Sub-Advisor, James Kong—Managing Director of the Sub-Advisor.
55
Important Information Regarding the BlackRock Closed-End Funds Annual Investor Update
The Annual Investor Update (“Update”) is available on the Internet and may be accessed through BlackRock’s Web site at http://www.black-rock.com. The Update provides information on the fixed income markets and summaries of BlackRock Closed-End Funds’ investment objectives and strategies. It also contains recent news regarding the BlackRock Closed-End Funds.
Historically, BlackRock provided this information in materials mailed with the Trusts’Annual report. However, we believe that making this information available through BlackRock’s Web site allows us to communicate more fully and efficiently with the Trusts’ shareholders.
If you would like to receive a hard copy of the BlackRock Closed-End Funds Annual Investor Update, please call (800) 699-1BFM.
56
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DIRECTORS/TRUSTEES INFORMATION (Unaudited) |
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Name, address, age | | Current positions
held with the Trusts | | Term of office
and length of time
served | | Principal occupations
during the past five years | | Number of
portfolios over-
seen within the
fund complex1 | | Other Directorships
held outside the
fund complex1 | | Events or transactions by
reason of which the Trustee
is an interested person as
defined in Section 2(a)
(19) of the 1940 Act |
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Interested Directors/Trustees2 |
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Ralph L.
Schlosstein
BlackRock, Inc.
40 East 52nd Street
New York, NY
10022
Age: 55 | | Chairman of the Board | | 3 years3/since inception | | Director since 1999 and President of BlackRock, Inc. since its formation in 1998 and of BlackRock, Inc.’s predecessor entities since 1988. Member of the Management Committee and Investment Strategy Group of BlackRock, Inc. Formerly, Managing Director of Lehman Brothers, Inc. and Co-head of its Mortgage and Savings Institutions Group. Chairman and President of the BlackRock Liquidity Funds and Director of several of BlackRock’s alternative investment vehicles. | | 68 | | Chairman of the Board of Anthracite Capital, Inc., Member of the Visiting Board of Overseers of the John F. Kennedy School of Government at Harvard University, a member of the board of the Financial Institutions Center of The Wharton School of the University of Pennsylvania, a Trustee of the 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 of The Public Theater in New York City and the James Baird Foundation. 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. | | Director and President of the Advisor. |
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Robert S. Kapito
BlackRock, Inc.
40 East 52nd Street
New York, NY
10022
Age: 49 | | President and Trustee4 | | 3 years3/since August 22, 2002 | | Vice Chairman of BlackRock, Inc. Head of the Portfolio Management Group. Also a member of the Executive Committee, the Management Committee, the Global Fixed Income and Global Equity Operating Committees of BlackRock. Responsible for the port- folio management of the Fixed Income, Equity, Liquidity, and Alternative Investment Groups of BlackRock. | | 58 | | Chairman of the Hope and Heroes Children’s Cancer Fund. President of the Board of Directors of the Periwinkle National Theatre for Young Audiences. | | Director and Vice Chairman of the Advisor. |
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57
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DIRECTORS/TRUSTEES INFORMATION (Unaudited) (Continued) |
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Name, address, age | | Current positions held
with the Trusts | | Term of office and
length of time served | | Principal occupations
during the past five years | | Number of
portfolios overseen
within the fund
complex1 | | Other Directorships held
outside the fund complex |
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Independent Directors/Trustees |
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Andrew F. Brimmer
P.O. Box 4546
New York, NY
10163-4546
Age: 80 | | Lead Trustee Audit Committee Chairman5,6 | | 3 years3/since inception | | President of Brimmer & Company, Inc., a Washington, D.C.-based economic and financial consulting firm, also Wilmer D. Barrett Professor of Economics, University of Massachusetts – Amherst. Formerly member of the Board of Governors of the Federal Reserve System. Former Chairman, District of Columbia Financial Control Board. | | 58 | | Former Director of CarrAmerica Realty Corporation and Borg- Warner Automotive, Airborne Express, BankAmerica Corporation (Bank of America), BellSouth 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). |
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Richard E. Cavanagh
P.O. Box 4546
New York, NY
10163-4546
Age: 60 | | Trustee Audit Committee Member7 | | 3 years3/since inception | | President and Chief Executive Officer of The Conference Board, Inc., a leading global business research organization, from 1995-present. Former Executive Dean of the John F. Kennedy School of Government at Harvard University from 1988-1995. Acting Director, Harvard Center for Business and Government (1991-1993). 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). | | 58 | | Trustee: Aircraft Finance Trust (AFT) and Chairman of the Board of Trustees, Educational Testing Service (ETS). Director, Arch Chemicals, Fremont Group and The Guardian Life Insurance Company of America. |
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Kent Dixon
P.O. Box 4546
New York, NY
10163-4546
Age: 69 | | Trustee Audit Committee Member6 | | 3 years3/since inception | | Consultant/Investor. Former President and Chief Executive Officer of Empire Federal Savings Bank of America and Banc PLUS Savings Association, former Chairman of the Board, President and Chief Executive Officer of Northeast Savings. | | 58 | | Former Director of ISFA (the owner of INVEST, a national securities broker- age service designed for banks and thrift institutions). |
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Frank J. Fabozzi
P.O. Box 4546
New York, NY
10163-4546
Age: 58 | | Trustee Audit Committee Member6 | | 3 years3/since inception | | Consultant. Editor of THE JOURNAL OF PORTFOLIO MANAGEMENT and Adjunct Professor of Finance at the School of Management at Yale University. Author and editor of several books on fixed income portfolio management. | | 58 | | Director, Guardian Mutual Funds Group (18 portfolios). |
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58
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DIRECTORS/TRUSTEES INFORMATION (Unaudited) (Continued) |
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Name, address, age | | Current positions
held with the Trusts | | Term of office and
length of time served | | Principal occupations
during the past five years | | Number of
portfolios
overseen
within
the fund
complex1 | | Other Directorships held
outside the fund complex |
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Independent Directors/Trustees (continued) |
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Kathleen F. Feldstein
P.O. Box 4546
New York, NY
10163-4546
Age: 65 | | Trustee | | 3 years3/since January 19, 2005 | | President of Economics Studies, Inc., a Belmont, MA-based private economic consulting firm, since 1987; Chair, Board of Trustees, McLean Hospital in Belmont, MA. | | 58 | | Director of The McClatchy Company; Trustee of the Partners Community Healthcare, Inc.; the Museum of Fine Arts, 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. |
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R. Glenn Hubbard
P.O. Box 4546
New York, NY
10163-4546
Age: 48 | | Trustee | | 3 years3/since November 16, 2004 | | Dean of Columbia Business School since July 1, 2004. Columbia faculty member since 1988. Co-director of Columbia Business School’s Entrepreneurship Program 1994-1997. Visiting professor at the John F. Kennedy School of Government at Harvard and the Harvard Business School, as well as the University of Chicago. Visiting scholar at the American Enterprise Institute in Washington and member of International Advisory Board of the MBA Program of Ben-Gurion University. Deputy assistant secretary of the U.S. Treasury Department for Tax Policy 1991-1993. Chairman of the U.S. Council of Economic Advisers under the President of the United States 2001–2003. | | 58 | | Director of ADP, R.H. Donnelly, Duke Realty, KKR Financial Corporation, and Ripplewood Holdings, the Council on Competitiveness, the American Council on Capital Formation, the Tax Foundation and the Center for Addiction and Substance Abuse. Trustee of Fifth Avenue Presbyterian Church of New York. |
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1 | The Fund Complex means two or more registered investments companies that: (1) hold themselves out to investors as related companies for purposes 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. |
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2 | Interested Director/Trustee as defined by Section 2(a)(19) of the Investment Company Act of 1940. |
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3 | 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. |
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4 | Resigned effective December 31, 2006. |
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5 | Retired effective December 31, 2006. |
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6 | The Board of each Trust has determined that each Trust has three Audit Committee financial experts serving on its Audit Committee, Dr. Brimmer, Mr. Dixon and Mr. Fabozzi, each of whom are independent for the purpose of the definition of Audit Committee financial expert as applicable to the Trusts. |
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7 | Became lead Trustee and Audit Committee Chairman upon resignation of Dr. Brimmer on December 31, 2006. |
59
Set forth below is a summary of distributions which required each Trust, if any, to notify shareholders of the type of distributions paid pursuant to Section 19 of the Investment Company Act of 1940. Section 19 requires each Trust to accompany dividend payments with a notice if any part of that payment is from a source other than accumulated net investment income, not including profits or losses from the sale of securities. The amounts and sources of distributions reported in the notice are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for tax reporting purposes will depend upon the Trust’s investment experience during the remainder of its fiscal year and may be subject to changes based on the tax regulations. The Trust will send you a Form 1099-DIV for the calendar year that will tell you how to report these distributions for federal income tax purpose.
| | | | | | | | | | | | | | | | | | | |
| | Date of
Distribution | | Total
Distributions | | Net Investment
Income | | Distributions from
proceeds from the
sale of securities | |
| |
| |
| |
| |
| |
Global | | | | | | | | | | | | | | | | | | | |
| | | December 2006 | | | $ | 0.125000 | | | | $ | 0.104571 | | | | $ | 0.020429 | | |
High Income | | | | | | | | | | | | | | | | | | | |
| | | February 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | March 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | April 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | May 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | June 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | July 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | August 2006 | | | $ | 0.020500 | | | | $ | 0.020500 | | | | $ | — | | |
| | | September 2006 | | | $ | 0.018200 | | | | $ | 0.018200 | | | | $ | — | | |
| | | October 2006 | | | $ | 0.018200 | | | | $ | 0.018200 | | | | $ | — | | |
| | | November 2006 | | | $ | 0.018200 | | | | $ | 0.018200 | | | | $ | — | | |
| | | December 2006 | | | $ | 0.018200 | | | | $ | 0.018200 | | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | |
Preferred Opportunity | | | | | | | | | | | | | | | | | | | |
| | | February 2006 | | | $ | 0.166667 | | | | $ | 0.142847 | | | | $ | 0.023820 | | |
| | | March 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | April 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | May 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | June 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | July 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | August 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | September 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | October 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | November 2006 | | | $ | 0.166667 | | | | $ | 0.146625 | | | | $ | 0.020042 | | |
| | | December 2006 | | | $ | 0.166667 | | | | $ | 0.115284 | | | | $ | 0.051383 | | |
60
BlackRock Closed-End Funds
| |
Directors/Trustees
Ralph L. Schlosstein, Chairman
Andrew F. Brimmer, Lead Trustee1
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
Kathleen Feldstein
R. Glenn Hubbard
Robert S. Kapito2 Officers
Robert S. Kapito, President
Donald C. Burke, Treasurer
Bartholomew Battista, Chief Compliance Officer
Anne Ackerley, Vice President
Neal Andrews, Assistant Treasurer
Jay Fife, Assistant Treasurer
Spencer Fleming, Assistant Treasurer
James Kong, Assistant Treasurer
Robert Mahar, Assistant Treasurer
Vincent B. Tritto, Secretary
Brian P. Kindelan, Assistant Secretary Investment Advisor
BlackRock Advisors, LLC
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
2 Avenue De Lafayette
Boston, MA 02111 Transfer Agent
Computershare Trust Company, N.A.
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
4 Times Square
New York, NY 10036 Legal Counsel – Independent Directors/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, LLC
100 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM |
| |
|
1 | Retired December 31, 2006. |
2 | Resigned December 31, 2006. |
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 without charge, 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 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 1-800-SEC-0330. Each Trust’s Form N-Q 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-5-1206 |
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 available without charge at www.blackrock.com.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Trustees has determined that it has three audit committee financial experts serving on its audit committee, each of whom is an "independent" Trustee: Dr. Andrew F. Brimmer, Kent Dixon and Frank Fabozzi. 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. Dr. Brimmer retired from the Board of Trustees as of December 31, 2006.
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 $33,000 for the fiscal year ended December 31, 2006 and $34,200 for the fiscal year ended December 31, 2005.
(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 $1,975 for the fiscal year ended December 31, 2006 and $2,400 for the fiscal year ended December 31, 2005. The nature of the service includes assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees.
(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 $8,000 for the fiscal year ended December 31, 2006 and $7,500 for the fiscal year ended December 31, 2005. 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. The aggregate 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) were $3,500 for the fiscal year ended December 31, 2006 and $3,500 for the fiscal year ended December 31, 2005. The nature of the service includes a review of compliance procedures and provided an attestation regarding such review.
(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 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.
(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 Registrant’s accountant for services rendered to the Registrant, the Registrant’s investment adviser (except for any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment advisor) and any entity controlling, controlled by, or under common control with the Registrant’s investment adviser that provides ongoing services to the Registrant for each of the last two fiscal years were $286,200 for the fiscal year ended December 31, 2006 and $286,200 for the fiscal year ended December 31, 2005.
(h) The Registrant's Audit Committee of the Board of Trustees has considered whether the provision of non-audit services that were rendered to the Registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence.
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 J. Fabozzi. Dr. Brimmer retired from the Board of Trustees as of December 31, 2006.
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, LLC (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
(a)(1) BlackRock’s fund management team involved with the Registrant is led by a team of investment professionals, including the following individuals who have day-to-day responsibility: Robert S. Kapito, Scott Amero, and Daniel Chen.
Robert Kapito, Vice Chairman and a Director of BlackRock, is head of Portfolio Management and a member of the Executive and Management Committees and Investment Strategy Groups. Mr. Kapito oversees all portfolio management within BlackRock, including the Fixed Income, Equity, Liquidity, and Alternative Investment Groups. Mr. Kapito also serves as President for BlackRock's family of closed-end mutual funds. Mr. Kapito has been a portfolio manager with BlackRock since 1988.
Scott Amero, Managing Director, is co-head of BlackRock's fixed income portfolio management team, a member of the Management Committee and co-chair of the Fixed Income Investment Strategy Group. Mr. Amero is a senior strategist and portfolio manager with responsibility for overseeing all fixed income sector strategy and the overall management of client portfolios. He is also the head of global fixed income research. In addition, he is a director of Anthracite Capital, Inc., BlackRock's publicly-traded real estate investment trust. Mr Amero joined BlackRock in 1990.
Daniel Chen, Director and portfolio manager, is a member of the Investment Strategy Group. His primary responsibility is managing total return client portfolios, with a sector emphasis on corporate bonds and preferred securities. Mr. Chen joined BlackRock in 1999 as an analyst and has been a portfolio manager since 2002.
(a)(2) As of December 31, 2006, Robert Kapito managed or was a member of the management team for the following client accounts:
| Type of Account | Number of | Assets of | Number of | Assets Subject to |
| | Accounts | Accounts | Accounts Subject | a Performance |
| | | | to a Performance | Fee |
| | | | |
| Registered | 2 | $415,983,964 | 2 | $415,983,964 |
| Investment | | | | |
| | | | |
| Pooled Investment | 1 | $921,038,105 | 0 | $ 0 |
| Vehicles Other | | | | |
| Than Registered | | | | |
| Investment | | | | |
| | | | |
| Other Accounts | 2 | $800,001 | 0 | $ 0 |
As of December 31, 2006, Scott Amero managed or was a member of the management team for the following client accounts:
| Type of Account | Number | Assets of | Number of | Assets Subject |
| | of | Accounts | Accounts | to a Performance |
| | Accounts | | Subject to a | Fee |
| | | | Performance Fee | |
| Registered | 42 | $31,452,826,161 | 0 | $ 0 |
| Investment | | | | |
| Companies | | | | |
| Pooled | 30 | $ 7,843,229,370 | 4 | $1,672,225,308 |
| Investment | | | | |
| Vehicles Other | | | | |
| Than Registered | | | | |
| Investment | | | | |
| Companies | | | | |
| Other Accounts | 267 | $ 94,103,967,099 | 24 | $ 7,870,504,381 |
As of December 31, 2006, Daniel Chen managed or was a member of the management team for the following client accounts:
| Type of Account | Number of | Assets of | Number of | Assets Subject to |
| | Accounts | Accounts | Accounts Subject | a Performance |
| | | | to a Performance | Fee |
| | | | Fee | |
| Registered | 5 | $ 3,990,014,395 | 0 | $0 |
| Investment | | | | |
| Companies | | | | |
| Pooled Investment | 3 | $231,818,994 | | $0 |
| Vehicles Other | | | | |
| Than Registered | | | | |
| Investment | | | | |
| Companies | | | | |
| Other Accounts | 3 | $415,597,651 | 0 | $0 |
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Registrant, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Registrant. In addition,
BlackRock, its affiliates and any officer, director, stockholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Registrant. BlackRock, or any of its affiliates, or any officer, director, stockholder, employee or any member of their families may take different actions than those recommended to the Registrant by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock’s (or its affiliates’) officers, directors or employees are directors or officers, or companies as to which BlackRock or any of its affiliates or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Each portfolio manager also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for the Registrant. In this connection, it should be noted that portfolio management team may manage certain accounts that are subject to performance fees. In addition, the portfolio management team may assist in managing certain hedge funds and may be entitled to receive a portion of any incentive fees earned such funds and a portion of such incentive fees may be voluntarily or involuntarily deferred. Additional portfolio managers may in the future manage other such accounts or funds and may be entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted a policy that is intended to ensure that investment opportunities are allocated fairly and equitably among client accounts over time. This policy also seeks to achieve reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base.
(a)(3) BlackRock’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock such as its Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with the firm.
Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus as well as one or more of the following:
Long-Term Retention and Incentive Plan (LTIP) —The LTIP is a long-term incentive plan that seeks to reward certain key employees. The plan provides for the grant of awards that are expressed as an amount of cash that, if properly vested and subject to the attainment of certain performance goals, will be settled in cash and/or in BlackRock, Inc. common stock.
Deferred Compensation Program —A portion of the compensation paid to each portfolio manager may be voluntarily deferred by the portfolio manager into an account that tracks the performance of certain of the firm’s investment products. Each portfolio manager is permitted to allocate his deferred amounts among various options, including to certain of the firm’s hedge funds and other unregistered products. In addition, prior to 2005, a portion of the annual compensation of certain senior managers was mandatorily deferred in a similar manner for a number of years. Beginning in 2005, a portion of the annual compensation of certain senior managers was paid in the form of BlackRock, Inc. restricted stock units which vest ratably over a number of years.
Options and Restricted Stock Awards —While incentive stock options are not currently being awarded to BlackRock employees, BlackRock, Inc. previously granted stock options to key employees, including certain portfolio managers who may still hold unexercised or unvested options. BlackRock, Inc. also has a restricted stock award program designed to reward certain key employees as an incentive to contribute to the long-term success of BlackRock. These awards vest over a period of years.
Incentive Savings Plans —BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP) and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 6% of eligible pay contributed to the plan capped at $4,000 per year, and a company retirement contribution equal to 3% of eligible compensation, plus an additional contribution of 2% for any year in which BlackRock has positive net operating income. The RSP offers a range of investment options, including registered investment companies managed by the firm. Company contributions follow the investment direction set by participants for their own contributions or absent, employee investment direction, are invested into a stable value fund. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares or a dollar value of $25,000. Each portfolio manager is eligible to participate in these plans.
Annual incentive compensation for each portfolio manager is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager’s group within BlackRock, the investment performance, including risk-adjusted returns and income generation, of the firm’s assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individual’s teamwork and contribution to the overall performance of these portfolios and BlackRock.
Unlike many other firms, portfolio managers at BlackRock compete against benchmarks rather than each other. In most cases, including for the portfolio managers of the Registrant, these benchmarks are the same as the benchmark or benchmarks against which the investment performance, including risk-adjusted returns and income generation, of the Registrant or other accounts are measured. A group of BlackRock, Inc.’s officers determines which benchmarks against which to compare the performance of funds and other accounts managed by each portfolio manager. With respect to the Registrant, such benchmarks include the Merrill Lynch Fixed Rate Preferred Index, the 10-year United States Treasury Note and certain customized indices and fund industry peer groups.
The group of BlackRock, Inc.’s officers then makes a subjective determination with respect to the portfolio manager’s compensation based on the performance of the funds and other accounts managed by each portfolio manager relative to the various benchmarks. This determination may take into consideration the fact that a benchmark may not perfectly correlate to the way the Registrant or other accounts are managed, even if it is the benchmark that is most appropriate for the Registrant or other account. For example, a benchmark’s return may be based on the total return of the securities comprising the benchmark, but the Registrant or other account may be managed to maximize income and not total return. Senior portfolio managers who perform additional management functions within BlackRock may receive additional compensation for serving in these other capacities.
(a)(4) As of December 31, 2006, the end of the Registrant’s most recently completed fiscal year, the dollar range of securities beneficially owned by each portfolio manager in the Registrant is shown below:
Robert Kapito: $10,001-$50,000
Scott Amero: None
Daniel Chen: None
(b) 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.
The Registrant’s Governance Committee will consider nominees to the Board of Trustees recommended by shareholders when a vacancy becomes available. Shareholders who wish to recommend a nominee should send nominations which include biographical information and sets forth the qualifications of the proposed nominee to the Registrant’s Secretary. There have been no material changes to these procedures.
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 within 90 days of this filing and have concluded, as of that date, that the Registrant’s disclosure controls and procedures were reasonably designed to ensure that information required to be disclosed by the Registrant in this Form N-CSR was recorded, processed, summarized, and reported within the required time periods and that information required to be disclosed by the Registrant in this Form N-CSR was accumulated and communicated to the Registrant’s management, including its principle executive and principle financial officers, as appropriate to allow timely decisions regarding required disclosure.
(b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a -3(d)) that occurred during the Registrant's fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting.
Item 12. Exhibits.
(a) (2) Certifications of Principal Executive and Financial Officers pursuant to Rule 30a-2(a) under the 1940 Act attached as EX-99.CERT.
(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.
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/ Donald C. Burke
Name: Donald C. Burke
Title: Treasurer and Principal Financial Officer
Date: March 6, 2007
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: President and Principal Executive Officer
Date: March 6, 2007
By: /s/ Donald C. Burke
Name: Donald C. Burke
Title: Treasurer and Principal Financial Officer
Date: March 6, 2007
