The information in the above Financial Highlights represents the operating performance for a common share outstanding, total investment returns, ratios to average net assets and other supplemental data for each period indicated. This information has been determined based upon financial information provided in the financial statements and market price data for the Trust’s common shares.
Notes to Financial Statements
Note 1. Organization & Accounting Policies
BlackRock Broad Investment Grade 2009 Term Trust Inc. (“Broad Investment Grade”), BlackRock Core Bond Trust (“Core Bond”), BlackRock High Yield Trust (“High Yield”), BlackRock Income Opportunity Trust (“Income Opportunity”), BlackRock Income Trust Inc. (“Income Trust”), BlackRock Limited Duration Income Trust (“Limited Duration”) and BlackRock Strategic Bond Trust (“Strategic Bond”) are registered as diversified, closed-end management investment companies under the Investment Company Act of 1940, as amended (the “1940 Act”). BlackRock Preferred and Equity Advantage Trust (“Preferred and Equity”) is registered as a non-diversified, closed-end management investment company under the 1940 Act. Broad Investment Grade, Income Opportunity and Income Trust are organized as Maryland corporations. Core Bond, High Yield, Limited Duration and Strategic Bond are organized as Delaware statutory trusts. Broad Investment Grade, Core Bond, High Yield, Income Opportunity, Income Trust, Limited Duration, Preferred and Equity and Strategic Bond are individually referred to as a “Trust” and collectively as the “Trusts”.
Preferred and Equity was organized on October 26, 2006 and had no transactions until November 21, 2006 when the Trust sold 4,817 common shares for $115,006 to BlackRock Funding, Inc. Investment operations for Preferred and Equity commenced on December 27, 2006. The Trust incurred organization costs which were deferred from the organization date until the commencement of operations.
On December 3, 1999, Broad Investment Grade transferred a substantial portion of its total assets to a 100% owned registered investment company subsidiary called BCT Subsidiary, Inc. The financial statements and these notes to the financial statements for Broad Investment Grade are consolidated and include the operations of both Broad Investment Grade and its wholly owned subsidiary after elimination of all intercompany transactions and balances.
The following is a summary of significant accounting policies followed by the Trusts.
Investments Valuation: The Trusts value most of their investments on the basis of current market quotations provided by dealers or pricing services selected under the supervision of each Trust’s Board (the “Board”) of Directors or Trustees, as appropriate (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. Effective September 4, 2007, exchange-traded options are valued at the mean between the last bid and ask prices at the close of the options market in which the options trade and previously were valued at the last sales price as of the close of options trading on applicable exchanges. 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.
Bank loans (“loan interests”) are valued in accordance with guidelines established by the Board. Loan interests are valued at the average between the last available bid prices from one or more brokers or dealers as obtained from Loan Pricing Corporation (“LPC”). If no reliable price quotes are available, LPC values such interests through the use of pricing matrixes. If the pricing service does not provide a value for the loan interests, BlackRock Advisors, LLC (the “Manager”), an indirect, wholly owned subsidiary of BlackRock, Inc., will value the loan interests at fair value under methods approved by the Funds’ Board.
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 arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Manager deems relevant.
In September 2006, Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”), was issued and 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. At this time, management is evaluating the implication of FAS 157 and its impact on the Trusts’ financial statements, if any, has not been determined.
In addition, in February 2007, Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”), was issued and is effective for fiscial years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS 157. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. At this time, management is evaluating the implications of FAS 159 and its impact on the Trusts’ financial statements, if any, has not been determind.
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.
| | | |
|
| | | |
63 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Notes to Financial Statements (continued)
Each trust may from time to time purchase in the secondary market certain mortgage pass-through securities packaged or master serviced by affiliates or mortgage-related securities containing loans or mortgages originated by Merrill Lynch & Co., Inc. (“Merrill Lynch”) and The PNC Financial Services Group, Inc. (“PNC”), both principal owners of BlackRock, Inc., or their affiliates, including Midland Loan Services, Inc. It is possible under certain circumstances, that Merrill Lynch Mortgage Investors, Inc. and PNC Mortgage Securities Corp. or their affiliates, including Midland Loan Services, Inc., could have interest that are conflict with the holders of these mortgage-backed securities, and such holders could have rights against Merrill Lynch Mortgage Investors, Inc. and PNC Mortgage Securitites Corp. or their affiliates, including Midland Loan Services, Inc.
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.
Dollar Rolls: The Trusts may enter into dollar rolls in which a Trust sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period the Trusts forgo principal and interest paid on the securities. The Trusts will be compensated by the interest earned on the cash proceeds of the initial sale and/or by the lower repurchase price at the future date.
Loan Payable: High Yield has a $32 million committed credit facility (the “facility”). Under the terms of the facility, the Trust borrows at the London Interbank Offered Rate (“LIBOR”) plus facility and administrative fees. In addition, the Trust pays a liquidity fee on the unused portion of the facility. The Trust may borrow up to 331/3% of its total assets up to the committed amount. In accordance with the terms of the facility, the Trust has pledged 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 portion of the underlying line of credit portion of a bank loan. In certain circumstances, a Trust may receive a prepayment penalty fee upon the prepayment of a bank loan by a borrower. Other fees recieved 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.
Option Writing/Purchasing: When a Trust writes or purchases an option, an amount equal to the premium received or paid by the Trust is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or the proceeds from the sale in determining whether a Trust has realized a gain or a loss on investment transactions. A Trust, as writer of an option, has no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option.
Option writing and purchasing may be used by the Trusts as an attempt to manage the duration of positions, or collections of positions, so that changes in interest rates do not adversely affect the targeted duration of the portfolio unexpectedly. Duration is a measure of the price sensitivity of a security or a portfolio to relative changes in interest rates. For instance, a duration of “one” means that a portfolio’s or a security’s price would be expected to change by approximately one percent with a one percent change in interest rates, while a duration of five would imply that the price would move approximately five percent in relation to a one percent change in interest rates.
A call option gives the purchaser of the option the right (but not obligation) to buy, and obligates the writer to sell (when the option is exercised), the underlying position at the exercise price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying position at the exercise price at any time or at a specified time during the option period. The main risk that is associated with purchasing options is that the option expires without being exercised. In this case, the option expires worthless and the premium paid for the option is considered the loss. The risk associated with writing call options is that a Trust may forgo the opportunity for a profit if the market value of the underlying position increases and the option is exercised. The risk in writing put options is that a Trust may incur a loss if the market value of the underlying position decreases and the option is exercised. In addition, the Trust risks not being able to enter into a closing transaction for the written option as the result of an illiquid market.
Stripped Mortgage-Backed Securities: Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. In certain cases, one class will receive all of the interest (the interest-only or “IO” class), while the other class will receive all of the principal (the principal-only or “PO” class). The yield to maturity on IOs is sensitive to the rate of principal repayments (including prepayments) on the related underlying mortgage assets, and principal payments may have a material effect on yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, a Trust may not fully recoup its initial
| | | |
|
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 64 |
Notes to Financial Statements (continued)
investment in IOs. Such securities will be considered liquid only if so determined in accordance with guidelines established by the Trustees.
Inverse Floating Rate Securities: The Trusts may invest in inverse floating rate securities that pay interest at a rate that varies inversely with interest rates. As interest rates rise, inverse floating rates decline. The market value of such securities is more volatile than comparable fixed rate securities.
Credit Default Swaps: Credit default swaps are agreements in which one party pays fixed periodic payments to a counterparty in consideration for a guarantee from the counterparty to make a specific payment should a negative credit event take place. Risks arise from the possible inability of the counterparties to meet the terms of their contracts.
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.
Total Return Swaps: Total return swaps are agreements in which one party commits to pay interest in exchange for a market-linked return. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Trust will receive a payment from or make a payment to the counterparty.
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.
Interest Rate Swaps: In an interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Interest rate swaps are efficient as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time.
During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by “marking-to-market” to reflect the market value of the swap. When the swap is terminated, a Trust will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust’s basis in the contract, if any.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the swap. However, the Trusts closely monitor swaps and do not anticipate non-performance by any counterparty.
Swap Options: Swap options are similar to options on securities except that instead of selling or purchasing the right to buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into a previously agreed upon interest rate swap agreement at any time before the expiration of the option. Premiums received or paid from writing or purchasing options are recorded as liabilities or assets and are subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by a Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commission, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the cost of the purchase or the proceeds from the sale in determining whether a Trust has realized a gain or loss on investment transactions.
The main risk that is associated with purchasing swap options is that the swap option expires without being exercised. In this case, the option expires worthless and the premium paid for the swap option is considered the loss. The main risk that is associated with the writing of a swap option is the market risk of an unfavorable change in the value of the interest rate swap underlying the written swap option.
Swap options may be used by the Trusts to manage the duration of the Trusts’ portfolios in a manner similar to more generic options described above.
Interest Rate Floors: Interest rate floors are similar to interest rate swaps, except that one party agrees to pay a fee, while the other party pays the deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trusts to both manage the duration of the portfolios and their exposure to changes in short-term interest rates. Selling interest rate floors reduces a portfolio’s duration, making it less sensitive to changes in interest rates from a market value perspective. The Trusts’ leverage provides extra income in a period of falling rates. Selling floors reduces some of that extra income by partially monetizing it as an up front payment which the Trusts receive.
The Trusts are exposed to credit loss in the event of non-performance by the other party to the interest rate floor. However, the Trusts do not anticipate non-performance by any counterparty.
Transaction fees paid or received by the Trusts are recognized as assets or liabilities and amortized or accreted into interest expense or income over the life of the interest rate floor. The asset or liability is subsequently adjusted to the current market value of the interest rate floor purchased or sold. Changes in the value of the interest rate floor are recognized as unrealized gains and losses.
Financial Futures Contracts: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the market value of the contract at the end of each day’s trading. Variation margin pay-
| | | |
|
| | | |
65 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Notes to Financial Statements (continued)
ments 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 attempt to manage the duration of positions so that changes in interest rates do not change the duration of the portfolio unexpectedly.
Forward Currency Contracts: The Trusts enter into forward currency contracts primarily to facilitate settlement of purchases and sales of foreign securities and to help manage the overall exposure to foreign currency. A forward contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. In the event that a security fails to settle within the normal settlement period, the forward currency contract is renegotiated at a new rate. The gain or loss arising from the difference between the settlement value of the original and renegotiated forward contracts is isolated and is included in net realized gains (losses) from foreign currency transactions. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contract.
Forward currency contracts, when used by the Trusts, help to manage the overall exposure to the foreign currency backing some of the investments held by the Trusts. Forward currency contracts are not meant to be used to eliminate all of the exposure to the foreign currency, rather they allow the Trusts to limit their exposure to foreign currency within a narrow band to the objectives of the Trusts.
Foreign Currency Translation: Foreign currency amounts are translated into United States dollars on the following basis:
(i) market value of investment securities, assets and liabilities at the current rate of exchange.
(ii) purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions.
For fixed income securities, 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, 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/Borrowed Bonds: The Trusts engage in short selling of securities as a method of managing potential price declines in similar securities owned by the Trust. When a Trust engages in short selling, it may enter into a borrowed bond agreement to borrow the security sold short and deliver it to the broker-dealer with which it engaged in the short sale. A gain, limited to the price at which a Trust sold the security short or pursuant to the borrowed bond agreement, or a loss, unlimited as to dollar amount, will be recognized upon the termination of a short sale or borrowed bond agreement if the market price is greater or less than the proceeds originally received.
Borrowed Bond Agreements: In a borrowed bond agreement, each Trust borrows securities from a third party, with the commitment that they will be returned to the lender on an agreed-upon date. Borrowed bond agreements are primarily entered into to settle short positions. In a borrowed bond agreement, the Trust’s prime broker or third party broker takes possession of cash as collateral. The Trusts receive interest income on the cash collateral relating to the borrowed bond agreement and are obligated to pay the prime broker or third party broker payments received on such borrowed securities. The cash collateral approximates the principal amount of the bonds borrowed transaction. To the extent that the bonds borrowed transactions exceed one business day, the value of the collateral with any counter-party 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.
Trust Preferred Stock: These securities are typically issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics, or by an affiliated business trust of a corporation, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The securities can be structured as either fixed or adjustable coupon securities that can have either a perpetual or stated maturity date. Dividends can be deferred without creating an event of default or acceleration, although maturity cannot take place unless all cumulative payment obligations have been met. The deferral of payments does not affect the purchase or sale of these securities in the open market. Payments on these securities are treated as interest rather than dividends for Federal income tax purposes. These securities can have a rating that is slightly below that of the issuing company’s senior debt securities.
TBA Purchase Commitments: The Trusts may enter into to be announced (“TBA”) commitments to purchase or sell securities for a fixed price at a future date. TBA commitments are considered securities in themselves, and involve a risk of loss if the value of the security to be purchased or sold
| | | |
|
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 66 |
Notes to Financial Statements (continued)
declines or increases prior to settlement date, which is in addition to the risk of decline in the value of the Trusts’ other assets. Unsettled TBA commitments are valued at the current market value of the underlying securities, according to the procedures described under “Investments Valuation”.
Mortgage Dollar Rolls: The Trusts may enter into mortgage dollar rolls (principally using TBA commitments) in which the Trusts sell mortgage securities for delivery in the current month and simultaneously contract to repurchase similar, but not identical, securities at an agreed upon price on a fixed date. The Trusts receive compensation, in either “fee” or “drop”, as consideration for entering into the commitment to repurchase. A Trust must maintain liquid securities having a value not less than the repurchase price (including accrued interest) for such dollar rolls. The market value of the securities that a Trust is required to purchase may decline below the agreed upon repurchase price of those securities. In a “fee” roll, the compensation received is recorded as deferred income and amortized to income over the roll period. In a “drop” roll, the compensation is paid via a lower price for the security upon its repurchase. The counterparty receives all principal and interest payments, including prepayments, made in respect of a security subject to such a contract while it is the holder. Mortgage dollar rolls may be renewed with a new purchase and repurchase price and a cash settlement made on settlement date without physical delivery of the securities subject to the contract. A Trust engages in dollar rolls for the purpose of enhancing its yield, principally by earning a negotiated fee.
Financing Transactions: The Trusts may enter into financing transactions consisting of sales by a Trust of securities together with a commitment to repurchase similar securities at a future date. The difference between the selling price and the future purchase price is an adjustment to interest income. If the counterparty to whom the Trust sells the security becomes insolvent, a Trust’s right to repurchase the security may be restricted. The value of the security may change over the term of the financing transaction.
Segregation: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (the “Commission”) require that each Trust segregate assets in connection with certain investments (e.g., when issued securities, reverse repurchase agreements, swaps 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.
In July 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an interpretation of FAS Statement No. 109.” FIN 48 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity, including mutual funds, before being measured and recognized in the financial statements. 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. The impact on the Trusts’, excluding Preferred and Equity, financial statements, if any, from FIN 48 is currently being assessed.
Effective October 31, 2007, Preferred and Equity implemented Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity, including investment companies, before being measured and recognized in the financial statements. Management has evaluated the application of FIN 48 to Preferred and Equity and has determined that the adoption of FIN 48 does not have a material impact on the financial statements. Preferred and Equity will file its first Federal and state tax returns in 2008 for the period ended October 31, 2007.
Dividends and Distributions: Each Trust declares and pays dividends and distributions to common shareholders monthly from net investment income, net realized short-term capital gains and other sources, if necessary. Net long-term capital gains, if any, in excess of loss carryforwards may be distributed in accordance with the 1940 Act. If the total dividends and distributions made in any tax year exceeds net investment income and accumulated realized captial gains, a portion of the total distribution may be treated as a tax-free return of capital. 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. Dividends and distributions to preferred shareholders are accrued and determined as described in Note 7.
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 including investment valuations 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 (“Independent Trustees”) 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 the other BlackRock Closed-End Funds selected by the Independent 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 Independent Trustees as if the Independent 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.
| | | |
|
| | | |
67 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Notes to Financial Statements (continued)
Each Trust may, however, elect to invest in common shares of those Trusts selected by the Independent 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 the Manager. BlackRock Financial Management, Inc. (“BFM”), a wholly owned subsidiary of BlackRock, Inc., serves as sub-advisor to Core Bond, Limited Duration, Preferred and Equity and Strategic Bond. BlackRock Investment Management, LLC (“BIM”), a wholly owned subsidiary of BlackRock, Inc., also serves as sub-advisor to Preferred and Equity. Merrill Lynch and PNC are principal owners of BlackRock, Inc.
Broad Investment Grade, High Yield, Income Opportunity and Income Trust each have an Administration Agreement with the Advisor. The Investment Management Agreement for Core Bond, Limited Duration, Preferred and Equity and Strategic Bond covers both investment advisory and administration services.
Each Trust’s investment advisory fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.55% for Broad Investment Grade, 0.60% for Income Opportunity and 0.65% for Income Trust, of each Trust’s average net assets and 0.55% for Core Bond and Limited Duration, 0.65% for Preferred and Equity, 1.05% for High Yield and 0.75% for Strategic Bond, of each Trust’s average managed assets. “Net assets” means the total assets of the Trust minus the sum of accrued liabilities. “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 Advisor has voluntarily agreed to waive a portion of the investment advisory fees or other expenses on Strategic Bond as a percentage of its average weekly managed assets as follows: 0.20% for the first five years of the Trust’s operations from 2002 through February 28, 2007, 0.15% through February 28, 2008, 0.10% through February 28, 2009 and 0.05% through February 28, 2010.
The Advisor pays BFM fees for its sub-advisory services.
The administration fee paid to the Advisor is computed weekly and payable monthly based on an annual rate, 0.15% for Broad Investment Grade, 0.10% for Income Opportunity, and 0.15% for Income Trust, of each Trust’s average net assets and 0.10% for High Yield of the Trust’s average managed assets.
Pursuant to the advisory 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 cost of employees that provide pricing and secondary market support to each Trust. These expenses are generally pro-rated to the Trusts on the basis of relative net assets of all the BlackRock Closed-End Funds. For the year ended October 31, 2007, the Trusts reimbursed the Advisor the following amounts, which are included in miscellaneous expenses in the Statements of Operations:
| | | | |
| | | | | |
Trust | | | Amount | |
| | | | | |
Broad Investment Grade | | $ | 2,929 | |
Core Bond | | | 22,028 | |
High Yield | | | 2,530 | |
Income Opportunity | | | 22,733 | |
Income Trust | | | 26,282 | |
Limited Duration | | | 40,812 | |
Preferred and Equity | | | 25,990 | |
Strategic Bond | | | 5,617 | |
| | | | | |
Pursuant to the terms of their custody agreements, each Trust may receive 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 October 31, 2007, Merrill Lynch, through its affiliated broker dealer Merrill Lynch, Pierce, Fenner & Smith, Inc., earned commissions on transactions of securities as follows:
| | | | |
| | | | | |
Trust | | | Commission
Amount | |
| | | | | |
Core Bond | | $ | 104,454 | |
High Yield | | | 8 | |
Income Opportunity | | | 110,446 | |
Income Trust | | | 66,166 | |
Limited Duration | | | 1,603 | |
Preferred and Equity | | | 757,239 | |
Strategic Bond | | | 28 | |
| | | | | |
| | | |
|
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 68 |
Notes to Financial Statements (continued)
Investments in companies considered to be an affiliate of the Trusts, for purposes of Section 2(a)(3) of the 1940 Act, were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Trust | | | Portfolio
Company | | Beginning
Principal
Amount | | Purchases | | Sales | | Ending
Principal
Amount | | Interest
Income | | Market
Value of
Affiliates
at October
31, 2007 | |
| | | | | | | | | | | | | | | | | |
Core Bond | | | Merrill Lynch | | $ | 1,509,548 | | $ | — | | $ | 1,509,548 | | $ | — | | $ | 45,271 | | $ | — | |
| | | Mortgage | | | | | | | | | | | | | | | | | | | |
| | | Investors, Inc., | | | | | | | | | | | | | | | | | | | |
| | | Ser. HE2, | | | | | | | | | | | | | | | | | | | |
| | | Class A2A | | | | | | | | | | | | | | | | | | | |
| | | Merrill Lynch | | | — | | | 925,000 | | | — | | | 925,000 | | | 7,589 | | | 933,463 | |
| | | Mortgage Trust, | | | | | | | | | | | | | | | | | | | |
| | | Ser. C1, | | | | | | | | | | | | | | | | | | | |
�� | | | Class AM | | | | | | | | | | | | | | | | | | | |
Income | | | Merrill Lynch | | | 1,651,471 | | | — | | | 1,651,471 | | | — | | | 49,245 | | | — | |
Opportunity | | | Mortgage | | | | | | | | | | | | | | | | | | | |
| | | Investors, Inc., | | | | | | | | | | | | | | | | | | | |
| | | Ser. HE2, | | | | | | | | | | | | | | | | | | | |
| | | Class A2A | | | | | | | | | | | | | | | | | | | |
| | | Merrill Projects, | | | 152,326 | | | — | | | 102,166 | | | 50,160 | | | 10,465 | | | 50,662 | |
| | | Ser. 29 | | | | | | | | | | | | | | | | | | | |
| | | Merrill Projects, | | | 51,398 | | | — | | | 2,145 | | | 49,253 | | | 3,746 | | | 49,745 | |
| | | Ser. 42 | | | | | | | | | | | | | | | | | | | |
Income | | | Merrill Projects, | | | 51,249 | | | — | | | 1,726 | | | 49,523 | | | 3,731 | | | 50,019 | |
Trust | | | Ser. 54 | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Certain officers and/or directors of the Trusts are officers and/or directors of BlackRock, Inc. or its affiliates.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments, dollar rolls and U.S. government securities, for the year ended October 31, 2007 were as follows:
| | | | | | | |
| | | | | | | | |
Trust | | | Purchases | | | Sales | |
| | | | | | | | |
Broad Investment Grade | | $ | 3,771,896 | | $ | 4,504,593 | |
Core Bond | | | 722,652,874 | | | 440,021,114 | |
High Yield | | | 45,730,396 | | | 53,761,581 | |
Income Opportunity | | | 1,000,463,875 | | | 694,999,046 | |
Income Trust | | | 1,181,095,299 | | | 1,209,086,090 | |
Limited Duration | | | 654,114,184 | | | 991,030,609 | |
Preferred and Equity | | | 2,424,297,184 | | | 773,130,150 | |
Strategic Bond | | | 34,511,252 | | | 56,088,950 | |
| | | | | | | | |
Purchases and sales of U.S. government securities for the year ended October 31, 2007, aggregated as follows:
| | | | | | | |
| | | | | | | | |
Trust | | | Purchases | | | Sales | |
| | | | | | | | |
Broad Investment Grade | | $ | — | | $ | 5,655,469 | |
Core Bond | | | 188,022,696 | | | 260,028,377 | |
Income Opportunity | | | 213,262,623 | | | 298,489,442 | |
Income Trust | | | 132,824,013 | | | 163,361,268 | |
Limited Duration | | | — | | | 10,000,000 | |
Preferred and Equity | | | 479,869,532 | | | 487,606,224 | |
Strategic Bond | | | 172,822 | | | 933,000 | |
| | | | | | | | |
| | | |
|
| | | |
69 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Notes to Financial Statements (continued)
Details of open forward currency contracts at October 31, 2007 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Trust | | Foreign
Currency | | | Settlement
Date | | Contract to
Receive | | Value at
Settlement
Date | | Value at
Unrealized
October 31, 2007 | | Appreciation
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | |
Core | | Bought: | | | | | | | | | | | | | | | | | | | | | | | | |
Bond | | Japanese | | | | | | | | | | | | | | | | | | | | | | | | |
| | Yen | | | 1/15/08 | | | $ | 793,358,661 | | | | $ | 6,876,169 | | | | $ | 6,937,915 | | | | $ | 61,746 | | |
| | Sold: | | | | | | | | | | | | | | | | | | | | | | | | |
| | Euro | | | 1/23/08 | | | | 1,233,067 | | | | | 1,747,256 | | | | | 1,787,871 | | | | | (40,615 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | $ | 21,131 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited | | Sold: | | | | | | | | | | | | | | | | | | | | | | | | |
Duration | | Euro | | | 1/23/08 | | | $ | 20,975,550 | | | | $ | 29,722,354 | | | | $ | 30,413,254 | | | | $ | (690,900 | ) | |
| | British | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pounds | | | 1/23/08 | | | | 5,195,000 | | | | | 10,540,239 | | | | | 10,771,890 | | | | | (231,651 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | $ | (922,551 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income Trust held interest rate floors at October 31, 2007. Under the agreement, Income Trust pays the excess, if any, of a fixed rate over a floating rate. Income Trust received a transaction fee for the floor. Transaction fees are amortized through the termination of the agreement. Details of the interest rate floor held at October 31, 2007 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Notional
Amount
(000) | | Variable
Rate | | Counter Party | | Floating Rate | | Effective
Date | | Termination
Date | | Amortized
Cost | | Value at
October 31, 2007 | | Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 145,000 | | 4.80 | % | | Goldman Sachs | | 3-month LIBOR | | 12/25/05 | | 03/25/11 | | $ | (1,603,115 | ) | | $ | (953,577 | ) | | | $ | 649,538 | | |
| | 96,000 | | 4.95 | | | JPMorgan | | 3-month LIBOR | | 03/27/06 | | 03/25/11 | | | (1,243,216 | ) | | | (443,318 | ) | | | | 799,898 | | |
| | 70,000 | | 5.50 | | | Union Bank of Switzerland | | 3-month LIBOR | | 12/15/06 | | 03/15/10 | | | (916,771 | ) | | | (1,244,600 | ) | | | | (327,829 | ) | |
| | 39,000 | | 5.50 | | | Citibank | | 3-month LIBOR | | 06/15/07 | | 09/15/11 | | | (716,795 | ) | | | (1,042,470 | ) | | | | (325,675 | ) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | $ | (4,479,897 | ) | | $ | (3,683,965 | ) | | | $ | 795,932 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details of open interest rate swaps at October 31, 2007 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Trust | | Notional
Amount
(000) | | Fixed Rate | | Counter Party | | Floating Rate | | Effective Date | | Termination Date | | Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | |
Core Bond | | $ | 41,200 | | 4.510 | %(a) | | Citibank | | 3-month LIBOR | | 10/29/04 | | 10/29/14 | | | $ | 1,063,372 | | |
| | | 2,800 | | 4.500 | (a) | | JPMorgan | | 3-month LIBOR | | 05/26/05 | | 05/26/15 | | | | 62,565 | | |
| | | 4,800 | | 4.372 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 06/30/05 | | 06/30/15 | | | | (139,248 | ) | |
| | | 6,200 | | 4.725 | (b) | | Morgan Stanley | | 3-month LIBOR | | 08/02/05 | | 08/02/15 | | | | (121,184 | ) | |
| | | 4,600 | | 5.000 | (b) | | Deutsche Bank | | 3-month LIBOR | | 11/07/05 | | 11/07/10 | | | | 98,394 | | |
| | | 5,000 | | 4.870 | (b) | | Goldman Sachs | | 3-month LIBOR | | 01/25/06 | | 01/25/16 | | | | 5,336 | | |
| | | 4,800 | | 5.723 | (b) | | JPMorgan | | 3-month LIBOR | | 07/14/06 | | 07/14/16 | | | | 296,976 | | |
| | | 25,100 | | 5.496 | (b) | | Bank of America | | 3-month LIBOR | | 07/28/06 | | 07/28/11 | | | | 1,016,550 | | |
| | | 3,000 | | 5.025 | (b) | | Deutsche Bank | | 3-month LIBOR | | 11/21/06 | | 11/21/11 | | | | 66,000 | | |
| | | 2,200 | | 4.950 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 11/29/06 | | 11/29/11 | | | | 41,734 | | |
| | | 8,300 | | 5.002 | (a) | | Union Bank of Switzerland | | 3-month LIBOR | | 01/08/07 | | 01/08/12 | | | | (178,865 | ) | |
| | | 8,545 | | 5.411 | (b) | | JPMorgan | | 3-month LIBOR | | 02/05/07 | | 08/15/22 | | | | 147,914 | | |
| | | 11,300 | | 5.295 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 02/08/07 | | 02/08/17 | | | | 187,806 | | |
| | | 13,500 | | 4.922 | (a) | | Lehman Brothers | | 3-month LIBOR | | 03/22/07 | | 03/22/11 | | | | (98,145 | ) | |
| | | 700 | | 5.250 | (b) | | Goldman Sachs | | 3-month LIBOR | | 04/12/07 | | 04/12/17 | | | | 8,291 | | |
| | | 1,400 | | 5.411 | (b) | | Goldman Sachs | | 3-month LIBOR | | 04/30/07 | | 04/30/27 | | | | 18,746 | | |
| | | 1,600 | | 5.545 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/07/07 | | 06/07/17 | | | | (77,360 | ) | |
| | | 1,200 | | 5.740 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/13/07 | | 06/13/17 | | | | (76,656 | ) | |
| | | 900 | | 5.850 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/14/07 | | 06/14/17 | | | | (65,367 | ) | |
| | | 4,600 | | 5.683 | (a) | | Lehman Brothers | | 3-month LIBOR | | 06/29/07 | | 06/29/17 | | | | (278,070 | ) | |
| | | 6,500 | | 5.643 | (a) | | Citibank | | 3-month LIBOR | | 07/05/07 | | 07/05/17 | | | | (369,720 | ) | |
| | | 12,300 | | 5.775 | (a) | | Deutsche Bank | | 3-month LIBOR | | 07/09/07 | | 07/09/17 | | | | (828,528 | ) | |
| | | 42,000 | | 5.589 | (a) | | Goldman Sachs | | 3-month LIBOR | | 07/16/07 | | 07/16/12 | | | | (1,940,683 | ) | |
| | | 19,500 | | 5.105 | (b) | | Goldman Sachs | | 3-month LIBOR | | 08/20/07 | | 08/20/12 | | | | 226,522 | | |
| | | 82,500 | | 5.076 | (b) | | Citibank | | 3-month LIBOR | | 08/21/07 | | 08/21/12 | | | | 884,400 | | |
| | | 49,300 | | 5.057 | (b) | | Bank of America | | 3-month LIBOR | | 08/22/07 | | 08/22/12 | | | | 485,112 | | |
| | | 27,800 | | 4.771 | (b) | | Lehman Brothers | | 3-month LIBOR | | 08/23/07 | | 08/23/09 | | | | 42,812 | | |
| | | 40,200 | | 4.880 | (b) | | Lehman Brothers | | 3-month LIBOR | | 08/24/07 | | 08/24/09 | | | | 143,514 | | |
| | | 40,000 | | 5.076 | (b) | | Morgan Stanley | | 3-month LIBOR | | 08/28/07 | | 08/28/12 | | | | 416,828 | | |
| | | 30,000 | | 4.903 | (b) | | Barclays | | 3-month LIBOR | | 09/07/07 | | 09/07/12 | | | | 54,879 | | |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 70 |
Notes to Financial Statements (continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Trust | | Notional
Amount
(000) | | Fixed Rate | | Counter Party | | Floating Rate | | Effective Date | | Termination Date | | Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | |
Core Bond | | $ | 12,500 | | 5.040 | %(a) | | Deutsche Bank | | 3-month LIBOR | | 09/12/07 | | 09/12/17 | | | $ | 67,500 | | |
(cont’d) | | | 50,000 | | 4.624 | (b) | | Credit Suisse International | | 3-month LIBOR | | 09/20/07 | | 09/20/09 | | | | (52,500 | ) | |
| | | 8,000 | | 5.365 | %(a) | | Bank of America | | 3-month LIBOR | | 09/21/07 | | 09/21/27 | | | | (55,120 | ) | |
| | | 10,900 | | 5.155 | (a) | | Citibank | | 3-month LIBOR | | 09/21/07 | | 09/21/17 | | | | (51,666 | ) | |
| | | 5,100 | | 5.261 | (a) | | Morgan Stanley | | 3-month LIBOR | | 09/28/07 | | 09/28/17 | | | | (61,132 | ) | |
| | | 13,800 | | 5.308 | (a) | | Barclays | | 3-month LIBOR | | 10/15/07 | | 10/15/17 | | | | (226,458 | ) | |
| | | 5,400 | | 5.307 | (a) | | Deutsche Bank | | 3-month LIBOR | | 10/18/07 | | 10/18/17 | | | | (88,884 | ) | |
| | | 9,400 | | 4.856 | (b) | | Deutsche Bank | | 3-month LIBOR | | 10/19/07 | | 10/19/12 | | | | 14,194 | | |
| | | 9,500 | | 5.005 | (b) | | JPMorgan | | 3-month LIBOR | | 10/22/07 | | 10/22/14 | | | | 16,569 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $ | 656,428 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income | | | 27,500 | | 4.399 | %(a) | | Deutsche Bank | | 3-month LIBOR | | 10/25/04 | | 10/25/14 | | | | 896,225 | | |
Opportunity | | | 13,800 | | 4.510 | (a) | | Citibank | | 3-month LIBOR | | 10/29/04 | | 10/29/14 | | | | 356,178 | | |
Trust | | | 3,000 | | 4.500 | (a) | | JPMorgan | | 3-month LIBOR | | 05/26/05 | | 05/26/15 | | | | 67,034 | | |
| | | 5,200 | | 4.372 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 06/30/05 | | 06/30/15 | | | | (150,852 | ) | |
| | | 8,000 | | 4.670 | (b) | | Goldman Sachs | | 3-month LIBOR | | 09/20/05 | | 09/20/15 | | | | (191,440 | ) | |
| | | 5,000 | | 5.000 | (b) | | Deutsche Bank | | 3-month LIBOR | | 11/07/05 | | 11/07/10 | | | | 106,950 | | |
| | | 5,200 | | 5.723 | (b) | | JPMorgan | | 3-month LIBOR | | 07/14/06 | | 07/14/16 | | | | 321,724 | | |
| | | 27,900 | | 5.496 | (b) | | Bank of America | | 3-month LIBOR | | 07/28/06 | | 07/28/11 | | | | 1,129,608 | | |
| | | 3,200 | | 5.025 | (b) | | Deutsche Bank | | 3-month LIBOR | | 11/21/06 | | 11/21/11 | | | | 70,400 | | |
| | | 3,100 | | 4.950 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 11/29/06 | | 11/29/11 | | | | 58,807 | | |
| | | 10,000 | | 4.897 | (b) | | JPMorgan | | 3-month LIBOR | | 12/12/06 | | 12/12/11 | | | | 163,300 | | |
| | | 12,000 | | 5.002 | (a) | | Union Bank of Switzerland | | 3-month LIBOR | | 01/08/07 | | 01/08/12 | | | | (258,600 | ) | |
| | | 12,000 | | 5.295 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 02/08/07 | | 02/08/17 | | | | 199,440 | | |
| | | 14,800 | | 4.922 | (a) | | Lehman Brothers | | 3-month LIBOR | | 03/22/07 | | 03/22/11 | | | | (107,596 | ) | |
| | | 5,000 | | 5.071 | (a) | | Union Bank of Switzerland | | 3-month LIBOR | | 03/26/07 | | 03/26/17 | | | | 950 | | |
| | | 800 | | 5.250 | (b) | | Goldman Sachs | | 3-month LIBOR | | 04/12/07 | | 04/12/17 | | | | 9,475 | | |
| | | 1,550 | | 5.411 | (b) | | Goldman Sachs | | 3-month LIBOR | | 04/30/07 | | 04/30/27 | | | | 20,755 | | |
| | | 1,800 | | 5.545 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/07/07 | | 06/07/17 | | | | (87,030 | ) | |
| | | 1,400 | | 5.740 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/13/07 | | 06/13/17 | | | | (89,432 | ) | |
| | | 1,000 | | 5.850 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/14/07 | | 06/14/17 | | | | (72,630 | ) | |
| | | 5,100 | | 5.683 | (a) | | Lehman Brothers | | 3-month LIBOR | | 06/29/07 | | 06/29/17 | | | | (308,295 | ) | |
| | | 7,200 | | 5.643 | (a) | | Citibank | | 3-month LIBOR | | 07/05/07 | | 07/05/17 | | | | (409,536 | ) | |
| | | 13,600 | | 5.775 | (a) | | Deutsche Bank | | 3-month LIBOR | | 07/09/07 | | 07/09/17 | | | | (916,096 | ) | |
| | | 46,800 | | 5.589 | (a) | | Goldman Sachs | | 3-month LIBOR | | 07/16/07 | | 07/16/12 | | | | (2,184,663 | ) | |
| | | 9,405 | | 5.411 | (b) | | JPMorgan | | 3-month LIBOR | | 08/15/07 | | 08/15/22 | | | | 162,801 | | |
| | | 21,600 | | 5.105 | (b) | | Goldman Sachs | | 3-month LIBOR | | 08/20/07 | | 08/20/12 | | | | 250,916 | | |
| | | 91,000 | | 5.076 | (b) | | Citibank | | 3-month LIBOR | | 08/21/07 | | 08/21/12 | | | | 975,520 | | |
| | | 54,600 | | 5.057 | (b) | | Bank of America | | 3-month LIBOR | | 08/22/07 | | 08/22/12 | | | | 537,264 | | |
| | | 30,700 | | 4.771 | (b) | | Lehman Brothers | | 3-month LIBOR | | 08/23/07 | | 08/23/09 | | | | 47,278 | | |
| | | 44,500 | | 4.880 | (b) | | Lehman Brothers | | 3-month LIBOR | | 08/24/07 | | 08/24/09 | | | | 158,865 | | |
| | | 45,000 | | 5.076 | (b) | | Morgan Stanley | | 3-month LIBOR | | 08/28/07 | | 08/28/12 | | | | 468,932 | | |
| | | 35,000 | | 4.903 | (b) | | Barclays | | 3-month LIBOR | | 09/07/07 | | 09/07/12 | | | | 64,026 | | |
| | | 12,500 | | 5.040 | (a) | | Deutsche Bank | | 3-month LIBOR | | 09/12/07 | | 09/12/17 | | | | 67,500 | | |
| | | 50,000 | | 4.624 | (b) | | Credit Suisse International | | 3-month LIBOR | | 09/20/07 | | 09/20/09 | | | | (52,500 | ) | |
| | | 8,900 | | 5.365 | (a) | | Bank of America | | 3-month LIBOR | | 09/21/07 | | 09/21/27 | | | | (61,321 | ) | |
| | | 12,000 | | 5.155 | (a) | | Citibank | | 3-month LIBOR | | 09/21/07 | | 09/21/17 | | | | (56,880 | ) | |
| | | 5,700 | | 5.261 | (a) | | Morgan Stanley | | 3-month LIBOR | | 09/28/07 | | 09/28/17 | | | | (68,324 | ) | |
| | | 15,300 | | 5.308 | (a) | | Barclays | | 3-month LIBOR | | 10/15/07 | | 10/15/17 | | | | (251,073 | ) | |
| | | 6,000 | | 5.307 | (a) | | Deutsche Bank | | 3-month LIBOR | | 10/18/07 | | 10/18/17 | | | | (98,760 | ) | |
| | | 10,300 | | 4.856 | (b) | | Deutsche Bank | | 3-month LIBOR | | 10/19/07 | | 10/19/12 | | | | 15,553 | | |
| | | 10,500 | | 5.005 | (b) | | JPMorgan | | 3-month LIBOR | | 10/22/07 | | 10/22/14 | | | | 18,313 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $ | 802,786 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Income Trust | | | 19,000 | | 4.889 | %(a) | | Goldman Sachs | | 3-month LIBOR | | 04/22/04 | | 04/22/14 | | | | 51,374 | | |
| | | 12,500 | | 4.399 | % (a) | | Deutsche Bank | | 3-month LIBOR | | 10/25/04 | | 10/25/14 | | | | 407,375 | | |
| | | 25,000 | | 4.883 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 03/21/05 | | 03/21/15 | | | | (151,000 | ) | |
| | | 16,000 | | 4.925 | (a) | | Deutsche Bank | | 3-month LIBOR | | 03/22/05 | | 03/22/15 | | | | 53,760 | | |
| | | 3,000 | | 4.500 | (a) | | JPMorgan | | 3-month LIBOR | | 05/26/05 | | 05/26/15 | | | | 67,034 | | |
| | | 4,500 | | 4.442 | (b) | | Morgan Stanley | | 3-month LIBOR | | 07/11/05 | | 07/11/15 | | | | (114,160 | ) | |
| | | 12,000 | | 4.320 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 09/08/05 | | 09/08/10 | | | | (132,240 | ) | |
| | | 2,800 | | 5.940 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 12/07/05 | | 12/07/15 | | | | 213,220 | | |
| | | 5,500 | | 4.870 | (b) | | Goldman Sachs | | 3-month LIBOR | | 01/25/06 | | 01/25/16 | | | | 5,869 | | |
| | | 5,400 | | 5.723 | (b) | | JPMorgan | | 3-month LIBOR | | 07/14/06 | | 07/14/16 | | | | 334,098 | | |
| | | 3,000 | | 5.025 | (b) | | Deutsche Bank | | 3-month LIBOR | | 11/21/06 | | 11/21/11 | | | | 66,000 | | |
| | | |
| | | |
71 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Notes to Financial Statements
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Trust | | Notional
Amount
(000) | | Fixed Rate | | Counter Party | | Floating Rate | | Effective Date | | Termination Date | | Unrealized
Appreciation
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | |
Income Trust | | $ | 4,400 | | 4.950 | %(b) | | Union Bank of Switzerland | | 3-month LIBOR | | 11/29/06 | | 11/29/11 | | | $ | 83,468 | | |
(cont’d) | | | 11,900 | | 5.295 | (b) | | Union Bank of Switzerland | | 3-month LIBOR | | 02/08/07 | | 02/08/17 | | | | 197,778 | | |
| | | 800 | | 5.250 | (b) | | Goldman Sachs | | 3-month LIBOR | | 04/12/07 | | 04/12/17 | | | | 9,475 | | |
| | | 64,000 | | 5.393 | (b) | | Credit Suisse International | | 3-month LIBOR | | 06/05/07 | | 06/05/12 | | | | 2,403,840 | | |
| | | 1,800 | | 5.545 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/07/07 | | 06/07/17 | | | | (87,030 | ) | |
| | | 1,400 | | 5.740 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/13/07 | | 06/13/17 | | | | (89,432 | ) | |
| | | 1,000 | | 5.850 | (a) | | Deutsche Bank | | 3-month LIBOR | | 06/14/07 | | 06/14/17 | | | | (72,630 | ) | |
| | | 5,200 | | 5.683 | (a) | | Lehman Brothers | | 3-month LIBOR | | 06/29/07 | | 06/29/17 | | | | (314,340 | ) | |
| | | 200,000 | | 5.383 | (b) | | Credit Suisse International | | 3-month LIBOR | | 07/16/07 | | 07/16/09 | | | | 5,234,000 | | |
| | | 187,370 | | 5.376 | (b) | | Bank of America | | 3-month LIBOR | | 07/20/07 | | 07/20/09 | | | | 4,950,315 | | |
| | | 165,647 | | 5.505 | (b) | | Bank of America | | 3-month LIBOR | | 08/03/07 | | 08/03/17 | | | | 5,401,736 | | |
| | | 9,565 | | 5.411 | (b) | | JPMorgan | | 3-month LIBOR | | 02/05/07 | | 08/15/22 | | | | 165,570 | | |
| | | 18,800 | | 4.778 | (b) | | Citibank | | 3-month LIBOR | | 08/23/07 | | 08/23/09 | | | | 31,396 | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $ | 18,715,476 | | |
| | | | | | | | | | | | | | | | | | | | |
| |
(a) | Trust pays fixed interest rate and receives floating rate. |
(b) | Trust pays floating interest rate and receives fixed rate. |
Details of open credit default swaps at October 31, 2007 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Trust | | Notional
(000) | | Fixed Rate | | Counter Party | | Effective Date | | Termination Date | | Unrealized
(Depreciation) | |
| | | | | | | | | | | | | | | | | | | | | |
Core Bond | | | $ | 340 | (a) | | 0.950 | % | | Deutsche Bank | | 08/02/07 | | 09/20/12 | | | $ | (462 | ) | |
| | | | | | | | | | | | | | | | | | | | |
Income Opportunity Trust | | | | 375 | (a) | | 0.950 | | | Deutsche Bank | | 08/02/07 | | 09/20/12 | | | $ | (98 | ) | |
| | | | | | | | | | | | | | | | | | | | |
Limited Duration | | | | 4,500 | (b) | | 1.200 | | | Morgan Stanley | | 05/23/07 | | 06/20/12 | | | $ | (156,669 | ) | |
| | | | 4,500 | (b) | | 1.200 | | | JP Morgan | | 05/23/07 | | 06/20/12 | | | | (156,669 | ) | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | $ | (313,338 | ) | |
| | | | | | | | | | | | | | | | | | | | |
| |
(a) | The terms were to receive the quarterly notional amount multiplied by the fixed rate and pay the counterparty, upon default of Lehman Brothers Holdings, Inc., the par value of the notional amount of Lehman Brothers Holdings, Inc. |
(b) | The terms were to receive the quarterly notional amount multiplied by the fixed rate and pay the counterparty, upon default of LCDX, the par value of the notional amount of LCDX. |
Transaction in options written during the year ended October 31, 2007 were as follows:
| | | | | | | | | | | | | |
| | Calls | | Puts | |
| | | | | |
Trust | | Contracts/
Notional
Amount | | Premium
Received | | Contracts/
Notional
Amount | | Premium
Received | |
| | | | | | | | | | |
Core Bond | | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2006 | | $ | 21,300,000 | | $ | 991,347 | | $ | 135,100,037 | | $ | 2,068,284 | |
Options written | | | 18,200,000 | | | 455,276 | | | 18,200,000 | | | 455,276 | |
Options closed | | | (11,600,000 | ) | | (315,851 | ) | | (125,400,037 | ) | | (1,392,787 | ) |
| | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2007 | | $ | 27,900,000 | | $ | 1,130,772 | | $ | 27,900,000 | | $ | 1,130,773 | |
| | | | | | | | | | | | | |
Income Opportunity Trust | | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2006 | | $ | 23,400,000 | | $ | 1,085,069 | | $ | 148,200,041 | | $ | 2,236,554 | |
Options written | | | 19,700,000 | | | 491,847 | | | 19,700,000 | | | 491,847 | |
Options closed | | | (12,400,000 | ) | | (337,634 | ) | | (137,200,041 | ) | | (1,489,123 | ) |
| | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2007 | | $ | 30,700,000 | | $ | 1,239,282 | | $ | 30,700,000 | | $ | 1,239,278 | |
| | | | | | | | | | | | | |
Income Trust | | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2006 | | $ | 23,500,000 | | $ | 1,088,815 | | $ | 150,100,000 | | $ | 2,223,745 | |
Options written | | | 160,860,047 | | | 4,960,873 | | | 160,860,000 | | | 4,875,117 | |
Options closed | | | (46,835,007 | ) | | (1,047,343 | ) | | — | | | — | |
Options expired | | | (16 | ) | | (27,150 | ) | | (173,435,000 | ) | | (2,169,641 | ) |
| | | | | | | | | | | | | |
Options outstanding | | | | | | | | | | | | | |
at October 31, 2007 | | $ | 137,525,024 | | $ | 4,975,195 | | $ | 137,525,000 | | $ | 4,929,221 | |
| | | | | | | | | | | | | |
| | | | | | | |
| | Calls | |
| | | |
Trust | | Contracts/
Notional
Amount | | Premium
Received | |
| | | | | | | | |
Preferred and Equity | | | | | | | |
Options outstanding | | | | | | | |
at beginning of period | | $ | — | | $ | — | |
Options written | | | 3,335,500 | | | 57,773,808 | |
Options closed | | | (3,079,500 | ) | | (52,286,976 | ) |
Options expired | | | (10,500 | ) | | (60,705 | ) |
| | | | | | | |
Options outstanding | | | | | | | |
at October 31, 2007 | | $ | 245,500 | | $ | 5,426,127 | |
| | | | | | | |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 72 |
|
|
Notes to Financial Statements |
Note 4. Borrowings
Details of open reverse repurchase agreements at October 31, 2007 were as follows (please see Corresponding Underlying Collateral Chart):
| | | | | | | | | | | | | |
| |
Trust/Counter Party | | Rate | | Trade
Date | | Maturity
Date1 | | Net Closing
Amount | | Par | |
| |
Core Bond | | | | | | | | | | | | | |
Barclay’s Bank | | 5.250 | % | 09/06/07 | | TBD | | $ | 6,920,063 | | $ | 6,865,000 | |
| | 5.270 | | 09/06/07 | | TBD | | | 3,189,475 | | | 3,164,000 | |
| | 5.270 | | 09/06/07 | | TBD | | | 2,980,808 | | | 2,957,000 | |
| | 5.290 | | 09/06/07 | | TBD | | | 3,003,076 | | | 2,979,000 | |
| | 5.290 | | 09/06/07 | | TBD | | | 2,589,763 | | | 2,569,000 | |
| | 5.290 | | 09/24/07 | | TBD | | | 1,707,280 | | | 1,698,048 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 20,232,048 | |
| | | | | | | | | | | | | |
Credit Suisse First | | | | | | | | | | | | | |
Boston LLC | | 5.100 | | 09/17/07 | | TBD | | | 2,014,479 | | $ | 2,002,000 | |
| | 5.100 | | 09/17/07 | | TBD | | | 1,771,977 | | | 1,761,000 | |
| | 4.900 | | 10/11/07 | | 11/13/07 | | | 60,535,343 | | | 60,371,000 | |
| | 5.100 | | 10/11/07 | | TBD | | | 2,016,020 | | | 2,010,325 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 66,144,325 | |
| | | | | | | | | | | | | |
Lehman Brothers | | 4.200 | | 10/02/07 | | TBD | | | 9,963,295 | | $ | 9,929,700 | |
| | 4.600 | | 10/23/07 | | TBD | | | 3,000,939 | | | 2,997,875 | |
| | 4.600 | | 10/26/07 | | TBD | | | 2,423,047 | | | 2,421,500 | |
| | 4.150 | | 10/31/07 | | 11/07/07 | | | 1,051,794 | | | 1,051,794 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 16,400,869 | |
| | | | | | | | | | | | | |
Morgan Stanley | | 0.000 | | 10/19/07 | | TBD | | | 576,450 | | $ | 576,450 | |
| | | | | | | | | | | | | |
Income Opportunity | | | | | | | | | | | | | |
Barclay’s Bank | | 5.120 | | 08/06/07 | | TBD | | | 7,317,925 | | $ | 7,229,500 | |
| | 5.120 | | 08/06/07 | | TBD | | | 1,973,243 | | | 1,949,400 | |
| | 5.120 | | 08/07/07 | | TBD | | | 643,038 | | | 635,357 | |
| | 5.140 | | 08/13/07 | | TBD | | | 1,407,495 | | | 1,391,796 | |
| | 5.140 | | 08/15/07 | | TBD | | | 2,362,693 | | | 2,337,000 | |
| | 5.120 | | 08/17/07 | | TBD | | | 1,335,584 | | | 1,321,488 | |
| | 5.140 | | 08/17/07 | | TBD | | | 2,054,810 | | | 2,033,040 | |
| | 5.140 | | 08/17/07 | | TBD | | | 2,528,732 | | | 2,501,940 | |
| | 5.140 | | 08/17/07 | | TBD | | | 1,628,615 | | | 1,611,360 | |
| | 5.120 | | 08/21/07 | | TBD | | | 1,082,805 | | | 1,071,980 | |
| | 5.140 | | 08/22/07 | | TBD | | | 2,766,799 | | | 2,739,420 | |
| | 5.140 | | 08/22/07 | | TBD | | | 1,716,619 | | | 1,699,632 | |
| | 5.140 | | 09/13/07 | | TBD | | | 1,171,977 | | | 1,164,000 | |
| | 5.160 | | 09/13/07 | | TBD | | | 1,681,490 | | | 1,670,000 | |
| | 5.160 | | 09/13/07 | | TBD | | | 1,490,686 | | | 1,480,500 | |
| | 5.140 | | 09/13/07 | | TBD | | | 1,800,757 | | | 1,788,500 | |
| | 5.140 | | 09/13/07 | | TBD | | | 845,757 | | | 840,000 | |
| | 5.160 | | 09/13/07 | | TBD | | | 1,929,182 | | | 1,916,000 | |
| | 5.290 | | 09/14/07 | | TBD | | | 2,083,390 | | | 2,069,100 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 37,450,013 | |
| | | | | | | | | | | | | |
Credit Suisse | | | | | | | | | | | | | |
First Boston LLC | | 5.100 | | 08/20/07 | | TBD | | | 2,207,211 | | $ | 2,184,925 | |
| | 5.100 | | 08/20/07 | | TBD | | | 1,977,972 | | | 1,958,000 | |
| | 5.100 | | 08/20/07 | | TBD | | | 2,099,423 | | | 2,078,225 | |
| | 5.100 | | 08/20/07 | | TBD | | | 1,914,329 | | | 1,895,000 | |
| | 5.100 | | 08/20/07 | | TBD | | | 614,394 | | | 608,190 | |
| | 5.100 | | 08/30/07 | | TBD | | | 1,593,878 | | | 1,580,000 | |
| | 5.100 | | 08/30/07 | | TBD | | | 1,187,338 | | | 1,177,000 | |
| | 5.100 | | 08/30/07 | | TBD | | | 1,174,224 | | | 1,164,000 | |
| | 5.600 | | 08/31/07 | | 11/01/07 | | | 1,933,171 | | | 1,915,000 | |
| | 5.100 | | 08/31/07 | | TBD | | | 1,603,740 | | | 1,590,000 | |
| | 4.900 | | 10/10/07 | | 11/13/07 | | | 26,408,268 | | | 26,333,000 | |
| | 4.900 | | 10/11/07 | | 11/13/07 | | | 4,518,266 | | | 4,506,000 | |
| | 5.100 | | 10/18/07 | | TBD | | | 4,278,469 | | | 4,270,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 51,259,340 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| |
Trust/Counter Party | | Rate | | Trade
Date | | Maturity
Date1 | | Net Closing
Amount | | Par | |
| |
Income Opportunity (cont’d) | | | | | | | | | | | | | |
Lehman Brothers | | 4.200 | % | 10/01/07 | | TBD | | $ | 8,485,395 | | $ | 8,455,800 | |
| | 4.900 | | 10/11/07 | | 11/01/07 | | | 1,973,232 | | | 1,967,875 | |
| | 4.800 | | 10/25/07 | | 11/13/07 | | | 4,322,455 | | | 4,319,000 | |
| | 4.150 | | 10/31/07 | | 11/07/07 | | | 1,165,916 | | | 1,165,781 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 15,908,456 | |
| | | | | | | | | | | | | |
Morgan Stanley | | 0.000 | | 10/19/07 | | TBD | | | 643,703 | | $ | 643,703 | |
| | | | | | | | | | | | | |
Income Trust | | | | | | | | | | | | | |
Lehman Brothers | | 4.600 | | 11/01/07 | | TBD | | | 24,280,081 | | $ | 24,280,113 | |
| | 4.800 | | 11/01/07 | | 11/02/07 | | | 3,035,595 | | | 3,036,000 | |
| | 4.800 | | 11/01/07 | | 11/02/07 | | | 1,073,107 | | | 1,073,250 | |
| | 4.900 | | 11/01/07 | | 11/02/07 | | | 5,505,251 | | | 5,506,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 33,895,363 | |
| | | | | | | | | | | | | |
Limited Duration | | | | | | | | | | | | | |
Barclay’s Bank | | 5.220 | | 04/24/07 | | TBD | | | 967,952 | | $ | 942,000 | |
| | 5.220 | | 05/01/07 | | TBD | | | 4,508,542 | | | 4,392,000 | |
| | 5.200 | | 05/01/07 | | TBD | | | 4,834,245 | | | 4,709,751 | |
| | 5.170 | | 05/01/07 | | TBD | | | 5,005,043 | | | 4,876,875 | |
| | 5.220 | | 05/01/07 | | TBD | | | 4,890,798 | | | 4,764,375 | |
| | 5.220 | | 05/01/07 | | TBD | | | 4,775,313 | | | 4,651,875 | |
| | 5.220 | | 05/01/07 | | TBD | | | 3,093,874 | | | 3,013,900 | |
| | 5.220 | | 05/01/07 | | TBD | | | 571,375 | | | 556,605 | |
| | 5.200 | | 05/17/07 | | TBD | | | 3,091,825 | | | 3,019,000 | |
| | 5.220 | | 07/09/07 | | TBD | | | 771,546 | | | 759,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 31,685,381 | |
| | | | | | | | | | | | | |
Credit Suisse | | | | | | | | | | | | | |
First Boston LLC | | 5.375 | | 11/26/13 | | TBD | | | 1,809,853 | | $ | 1,722,000 | |
| | 5.100 | | 12/05/06 | | TBD | | | 5,565,373 | | | 5,316,812 | |
| | 5.100 | | 12/05/06 | | TBD | | | 7,491,361 | | | 7,156,781 | |
| | 5.100 | | 12/07/06 | | TBD | | | 2,997,342 | | | 2,864,250 | |
| | 5.100 | | 12/07/06 | | TBD | | | 4,817,122 | | | 4,603,225 | |
| | 5.100 | | 01/18/07 | | TBD | | | 2,295,602 | | | 2,206,213 | |
| | 5.300 | | 01/18/07 | | TBD | | | 2,491,177 | | | 2,390,523 | |
| | 5.300 | | 04/17/07 | | TBD | | | 1,604,750 | | | 1,559,520 | |
| | 0.000 | | 10/04/07 | | TBD | | | 2,784,000 | | | 2,784,000 | |
| | 5.300 | | 05/16/07 | | TBD | | | 1,796,358 | | | 1,753,000 | |
| | 5.300 | | 06/11/07 | | TBD | | | 3,966,218 | | | 3,885,000 | |
| | 5.300 | | 06/11/07 | | TBD | | | 5,165,782 | | | 5,060,000 | |
| | 5.300 | | 06/29/07 | | TBD | | | 2,878,082 | | | 2,826,483 | |
| | 5.300 | | 07/09/07 | | TBD | | | 1,511,957 | | | 1,487,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 45,614,807 | |
| | | | | | | | | | | | | |
Lehman Brothers | | 5.100 | | 7/26/06 | | TBD | | | 1,474,583 | | $ | 1,384,000 | |
| | 4.750 | | 09/06/06 | | TBD | | | 937,210 | | | 888,000 | |
| | 5.000 | | 11/27/06 | | TBD | | | 349,679 | | | 334,000 | |
| | 4.550 | | 01/09/07 | | TBD | | | 3,472,764 | | | 3,347,938 | |
| | 4.510 | | 01/12/07 | | TBD | | | 17,203,359 | | | 16,596,250 | |
| | 4.470 | | 02/12/07 | | TBD | | | 1,841,028 | | | 1,783,238 | |
| | 4.520 | | 02/28/07 | | TBD | | | 709,164 | | | 688,000 | |
| | 4.520 | | 03/01/07 | | TBD | | | 5,395,680 | | | 5,235,293 | |
| | 1.250 | | 09/07/07 | | TBD | | | 1,733,244 | | | 1,730,000 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 31,986,719 | |
| | | | | | | | | | | | | |
Preferred and Equity Advantage | | | | | | | | | | | | | |
Credit Suisse | | | | | | | | | | | | | |
First Boston LLC | | 0.000 | | 10/04/07 | | TBD | | | 4,988,000 | | $ | 4,988,000 | |
| | 4.000 | | 10/22/07 | | TBD | | | 5,290,535 | | | 5,285,250 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 10,273,250 | |
| | | | | | | | | | | | | |
Lehman Brothers | | 5.000 | | 10/23/07 | | TBD | | | 27,566,470 | | $ | 27,535,875 | |
| | 5.000 | | 10/23/07 | | TBD | | | 25,046,799 | | | 25,019,000 | |
| | 5.000 | | 10/23/07 | | TBD | | | 25,490,792 | | | 25,462,500 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | $ | 78,017,375 | |
| | | | | | | | | | | | | |
Strategic Bond | | | | | | | | | | | | | |
Morgan Stanley | | 0.000 | | 10/19/07 | | TBD | | | 413,123 | | $ | 413,123 | |
| | | | | | | | | | | | | |
| | | |
| | | |
73 | ANNUAL REPORT | OCTOBER 31, 2007 | |
|
|
|
Notes to Financial Statements (continued) |
Details of underlying collateral for open reverse repurchase agreements at October 31, 2007 were as follows:
| | | | | | | | | | | | | | | | |
| |
Trust/Counter Party | | Description | | Rate | | Maturity Date | | Original Face | | Current Face | | Market Value | |
| |
Core Bond | | | | | | | | | | | | | | | | |
Barclay’s Bank | | General Electric Capital Corp. | | 6.150 | % | 8/7/2037 | | $ | 6,855,000 | | $ | 6,855,000 | | $ | 7,103,041 | |
| | Deutsche Telekom Intl. Finance BV | | 5.750 | | 3/23/2016 | | | 3,000,000 | | | 3,000,000 | | | 3,007,887 | |
| | Verizon Virginia, Inc. | | 4.625 | | 3/15/2013 | | | 3,150,000 | | | 3,150,000 | | | 3,024,873 | |
| | AT&T, Inc. | | 6.500 | | 9/1/2037 | | | 2,600,000 | | | 2,600,000 | | | 2,742,532 | |
| | Intl. Business Machines Corp. | | 5.700 | | 9/14/2017 | | | 1,760,000 | | | 1,760,000 | | | 1,786,375 | |
| | Morgan Stanley | | 5.493 | | 1/19/2012 | | | 3,300,000 | | | 3,300,000 | | | 3,246,860 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 20,911,568 | |
| | | | | | | | | | | | | | | | |
Credit Suisse | | Eli Lilly & Co. | | 5.550 | | 3/15/2037 | | | 2,275,000 | | | 2,275,000 | | $ | 2,172,347 | |
| | U.S. Bank | | 6.500 | | 2/1/2008 | | | 1,800,000 | | | 1,800,000 | | | 1,803,074 | |
| | Federal Home Loan Mortgage Corp. | | 5.500 | | 11/1/2018 | | | 2,832,896 | | | 1,169,936 | | | 1,175,041 | |
| | Federal National Mortgage Assoc. | | 5.000 | | 1/1/2018 | | | 3,536,110 | | | 1,041,164 | | | 1,029,288 | |
| | Federal National Mortgage Assoc. | | 5.000 | | 7/1/2036 | | | 6,784,029 | | | 6,254,571 | | | 6,004,420 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 2/1/2036 | | | 1,116,625 | | | 894,711 | | | 901,470 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 4/1/2036 | | | 1,091,509 | | | 908,081 | | | 914,940 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 4/1/2036 | | | 1,018,042 | | | 895,122 | | | 882,170 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 2/1/2036 | | | 1,134,707 | | | 891,461 | | | 898,195 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 9/1/2036 | | | 1,039,072 | | | 863,698 | | | 870,222 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 12/1/2035 | | | 44,000,000 | | | 42,351,254 | | | 41,778,926 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 10/1/2036 | | | 3,304,703 | | | 3,100,363 | | | 3,123,783 | |
| | Federal National Mortgage Assoc. | | 5.000 | | 3/1/2037 | | | 1,009,339 | | | 997,326 | | | 957,244 | |
| | Federal National Mortgage Assoc. | | 5.000 | | 5/1/2037 | | | 4,257,973 | | | 4,204,831 | | | 4,035,841 | |
| | Royal Bank of Scotland Group PLC | | 7.640 | | N/A1 | | | 2,000,000 | | | 2,000,000 | | | 2,073,024 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 68,619,985 | |
| | | | | | | | | | | | | | | | |
Lehman | | U.S. Treasury Inflation Indexed Bonds | | 2.375 | | 1/15/2027 | | | 5,220,000 | | | 5,220,000 | | $ | 5,523,085 | |
| | U.S. Treasury Notes | | 4.750 | | 8/15/2017 | | | 10,750,000 | | | 10,750,000 | | | 10,986,833 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 16,509,918 | |
| | | | | | | | | | | | | | | | |
Morgan Stanley | | Michaels Stores, Inc. | | 11.375 | | 11/1/2016 | | | 600,000 | | | 600,000 | | $ | 598,500 | |
| | | | | | | | | | | | | | | | |
Income Opportunity | | | | | | | | | | | | | | | | |
Barclay’s Bank | | General Electric Capital Corp. | | 6.150 | | 8/7/2037 | | | 7,610,000 | | | 7,610,000 | | $ | 7,885,360 | |
| | General Electric Capital Corp. | | 6.750 | | 3/15/2032 | | | 1,900,000 | | | 1,900,000 | | | 2,120,377 | |
| | Berkshire Hathaway Finance Corp. | | 3.375 | | 10/15/2008 | | | 2,025,000 | | | 2,025,000 | | | 1,997,982 | |
| | Morgan Stanley | | 5.493 | | 1/9/2012 | | | 3,620,000 | | | 3,620,000 | | | 3,561,707 | |
| | Citigroup, Inc. | | 4.125 | | 2/22/2010 | | | 2,425,000 | | | 2,425,000 | | | 2,384,488 | |
| | Bank of America Corp. | | 7.800 | | 2/15/2010 | | | 2,450,000 | | | 2,450,000 | | | 2,597,750 | |
| | Eli Lilly & Co. | | 5.550 | | 3/15/2037 | | | 1,800,000 | | | 1,800,000 | | | 1,718,780 | |
| | Johnson & Johnson | | 5.950 | | 8/15/2037 | | | 1,120,000 | | | 1,120,000 | | | 1,171,362 | |
| | Bank of America Corp. | | 6.000 | | 9/1/2017 | | | 2,850,000 | | | 2,850,000 | | | 2,905,373 | |
| | Bank of America NA | | 6.100 | | 6/15/17 | | | 1,740,000 | | | 1,740,000 | | | 1,780,847 | |
| | Morgan Stanley | | 6.250 | | 8/28/2017 | | | 1,200,000 | | | 1,200,000 | | | 1,228,642 | |
| | Kraft Foods, Inc. | | 7.000 | | 8/11/2037 | | | 1,670,000 | | | 1,670,000 | | | 1,813,260 | |
| | Societe Generale | | 5.922 | | N/A1 | | | 1,575,000 | | | 1,575,000 | | | 1,498,912 | |
| | AstraZeneca Plc | | 6.450 | | 9/15/2037 | | | 1,825,000 | | | 1,825,000 | | | 1,923,044 | |
| | Citigroup, Inc. | | 6.125 | | 8/25/2036 | | | 900,000 | | | 900,000 | | | 877,919 | |
| | AT&T, Inc. | | 6.500 | | 9/1/2037 | | | 1,980,000 | | | 1,980,000 | | | 2,088,544 | |
| | Intl. Business Machines Corp. | | 5.700 | | 9/14/2017 | | | 2,200,000 | | | 2,200,000 | | | 2,232,968 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 39,787,315 | |
| | | | | | | | | | | | | | | | |
Credit Suisse | | UBS Preferred Funding Trust I | | 8.622 | | N/A1 | | | 2,000,000 | | | 2,000,000 | | $ | 2,170,314 | |
| | Morgan Stanley | | 6.250 | | 8/9/2026 | | | 2,100,000 | | | 2,100,000 | | | 2,069,773 | |
| | Wells Fargo Bank NA | | 7.550 | | 6/21/10 | | | 2,000,000 | | | 2,000,000 | | | 2,124,152 | |
| | Allstate Corp. | | 6.500 | | 5/15/2057 | | | 2,150,000 | | | 2,150,000 | | | 2,084,728 | |
| | General Electric Capital Corp. | | 6.750 | | 3/15/2032 | | | 570,000 | | | 570,000 | | | 636,113 | |
| | Vodafone Group Plc | | 5.288 | | 12/28/2007 | | | 1,615,000 | | | 1,615,000 | | | 1,615,326 | |
| | United Technologies Corp. | | 4.875 | | 5/1/2015 | | | 1,250,000 | | | 1,250,000 | | | 1,209,314 | |
| | Amgen, Inc. | | 5.585 | | 11/28/2008 | | | 1,200,000 | | | 1,200,000 | | | 1,197,836 | |
| | ConocoPhillips Australia Funding Co. | | 5.343 | | 4/9/2009 | | | 1,970,000 | | | 1,970,000 | | | 1,964,845 | |
| | Wyeth | | 5.950 | | 4/1/2037 | | | 1,690,000 | | | 1,690,000 | | | 1,671,373 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 1/1/2033 | | | 16,270,578 | | | 6,219,377 | | | 6,147,618 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 2/1/2033 | | | 17,464,674 | | | 6,144,495 | | | 6,073,600 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 2/1/2035 | | | 5,014,015 | | | 3,066,745 | | | 3,030,676 | |
| | Federal National Mortgage Assoc. | | 5.000 | | 7/1/2035 | | | 15,659,841 | | | 13,178,821 | | | 12,661,887 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 10/1/2020 | | | 1,641,812 | | | 1,178,209 | | | 1,180,664 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 3/1/2021 | | | 677,502 | | | 561,380 | | | 562,448 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 6/1/2036 | | | 1,001,094 | | | 912,150 | | | 898,951 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 3/1/2021 | | | 654,254 | | | 539,250 | | | 540,276 | |
| | Federal National Mortgage Assoc. | | 6.000 | | 6/1/2037 | | | 910,396 | | | 896,952 | | | 903,619 | |
| | JP Morgan Chase Capital XXV | | 6.800 | | 10/1/2037 | | | 4,375,000 | | | 4,375,000 | | | 4,370,175 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 53,113,688 | |
| | | | | | | | | | | | | | | | |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 74 |
|
|
|
Notes to Financial Statements (continued) |
| | | | | | | | | | | | | | | | |
| |
Trust/Counter Party | | Description | | Rate | | Maturity Date | | Original Face | | Current Face | | Market Value | |
| |
Income Opportunity (cont’d) | | | | | | | | | | | | | | | | |
Lehman Brothers | | U.S. Treasury Notes | | 4.750 | % | 8/15/2017 | | $ | 9,415,000 | | $ | 9,415,000 | | $ | 9,622,422 | |
| | Resolution Funding Corp. | | 0.000 | | 4/15/2030 | | | 6,055,000 | | | 6,055,000 | | | 2,018,561 | |
| | Federal Home Loan Mortgage Corp. | | 5.067 | | 1/1/2035 | | | 7,644,276 | | | 1,881,935 | | | 1,858,585 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 7/1/2016 | | | 1,539,074 | | | 481,759 | | | 484,728 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 3/1/2018 | | | 4,172,428 | | | 485,682 | | | 488,057 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 11/1/2017 | | | 3,217,577 | | | 496,702 | | | 499,351 | |
| | Federal National Mortgage Assoc. | | 5.500 | | 8/1/2017 | | | 3,622,323 | | | 1,075,243 | | | 1,080,979 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 16,052,683 | |
| | | | | | | | | | | | | | | | |
Morgan Stanley | | Michaels Stores, Inc. | | 11.375 | | 11/1/2016 | | | 670,000 | | | 670,000 | | $ | 668,325 | |
| | | | | | | | | | | | | | | | |
Income Trust | | | | | | | | | | | | | | | | |
Lehman Brothers | | U.S. Treasury Strip Principal | | 0.000 | | 11/15/2024 | | | 56,630,000 | | | 56,630,000 | | $ | 24,656,589 | |
| | Resolution Funding Corp. | | 0.000 | | 4/15/2030 | | | 12,440,000 | | | 12,440,000 | | | 4,147,135 | |
| | Federal Home Loan Mortgage Corp. | | 5.500 | | 3/1/2022 | | | 6,083,988 | | | 5,641,353 | | | 5,650,273 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 34,453,997 | |
| | | | | | | | | | | | | | | | |
Limited Duration | | | | | | | | | | | | | | | | |
Barclay’s Bank | | Huntsman LLC | | 11.625 | | 10/15/2010 | | | 1,495,000 | | | 1,495,000 | | $ | 1,584,700 | |
| | Midwest Generation LLC | | 8.560 | | 1/2/2016 | | | 5,180,000 | | | 4,324,265 | | | 4,648,585 | |
| | Turkey | | 7.000 | | 9/26/2016 | | | 5,093,000 | | | 5,093,000 | | | 5,328,806 | |
| | Columbia | | 9.750 | | 4/23/2009 | | | 5,000,000 | | | 6,144,495 | | | 6,543,887 | |
| | Group 1 Automotive, Inc. | | 8.250 | | 8/15/2013 | | | 5,000,000 | | | 5,000,000 | | | 5,000,000 | |
| | Rite Aid Corp. | | 8.125 | | 5/1/2010 | | | 3,429,659 | | | 5,000,000 | | | 5,031,250 | |
| | Freeport-McMoRan Copper & Gold, Inc. | | 8.375 | | 4/1/2017 | | | 3,034,000 | | | 3,034,000 | | | 3,322,230 | |
| | Comcast Cable Communications LLC | | 6.875 | | 6/15/2009 | | | 2,907,000 | | | 2,907,000 | | | 2,980,881 | |
| | Reynolds American, Inc. | | 7.625 | | 6/1/2016 | | | 756,000 | | | 756,000 | | | 817,930 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 35,258,269 | |
| | | | | | | | | | | | | | | | |
Credit Suisse | | Rouse Co. LP | | 5.375 | | 11/26/2013 | | | 2,000,000 | | | 2,000,000 | | $ | 1,812,352 | |
| | Deutsche Telekom Intl. Finance BV | | 8.000 | | 6/15/2010 | | | 5,000,000 | | | 5,000,000 | | | 5,361,380 | |
| | Daimler Finance North America LLC | | 4.050 | | 6/4/2008 | | | 7,500,000 | | | 7,500,000 | | | 7,439,415 | |
| | DR Horton, Inc. | | 5.875 | | 7/1/2013 | | | 3,000,000 | | | 3,000,000 | | | 2,688,714 | |
| | JC Penney Corp., Inc. | | 8.000 | | 3/1/2010 | | | 4,400,000 | | | 4,400,000 | | | 4,687,540 | |
| | Comcast Cable Communications LLC | | 6.875 | | 6/15/2009 | | | 2,185,000 | | | 2,185,000 | | | 2,240,532 | |
| | Windstream Corp. | | 8.125 | | 8/1/2013 | | | 2,340,000 | | | 2,340,000 | | | 2,474,550 | |
| | Sanmina-SCI Corp. | | 8.125 | | 3/1/2016 | | | 1,710,000 | | | 1,710,000 | | | 1,500,525 | |
| | Michaels Stores, Inc. | | 11.375 | | 11/1/2016 | | | 2,800,000 | | | 2,800,000 | | | 2,793,000 | |
| | Celestica, Inc. | | 7.625 | | 7/1/2013 | | | 1,965,000 | | | 1,965,000 | | | 1,886,400 | |
| | Chesapeake Energy Corp. | | 7.500 | | 9/15/2013 | | | 4,000,000 | | | 4,000,000 | | | 4,110,000 | |
| | American Real Estate Partners LP/American | | | | | | | | | | | | | | |
| | Real Estate Finance Corp. | | 8.125 | | 6/1/2012 | | | 5,390,000 | | | 5,390,000 | | | 5,430,425 | |
| | Qwest Corp. | | 8.875 | | 3/15/2012 | | | 2,640,000 | | | 2,640,000 | | | 2,890,800 | |
| | Rite Aid Corp. | | 7.500 | | 3/1/2017 | | | 1,628,000 | | | 1,628,000 | | | 1,514,040 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 46,829,673 | |
| | | | | | | | | | | | | | | | |
Lehman Brothers | | NewPage Corp | | 11.606 | | 5/1/2012 | | | 1,500,000 | | | 1,500,000 | | $ | 1,616,250 | |
| | Metaldyne Corp. | | 10.000 | | 11/1/13 | | | 1,000,000 | | | 1,000,000 | | | 930,000 | |
| | Grant Prideco Inc | | 6.125 | | 8/15/2015 | | | 380,000 | | | 380,000 | | | 381,900 | |
| | U.S. Treasury Notes | | 3.375 | | 9/15/2009 | | | 3,425,000 | | | 3,425,000 | | | 3,391,284 | |
| | U.S. Treasury Notes | | 3.375 | | 12/15/2008 | | | 17,000,000 | | | 17,000,000 | | | 16,881,799 | |
| | U.S. Treasury Notes | | 4.250 | | 8/15/2015 | | | 1,815,000 | | | 1,815,000 | | | 1,801,388 | |
| | U.S. Treasury Notes | | 3.875 | | 5/15/2009 | | | 5,945,000 | | | 5,945,000 | | | 5,937,105 | |
| | Sally Holdings LLC | | 10.500 | | 11/15/2016 | | | 1,790,000 | | | 1,790,000 | | | 1,781,050 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 32,720,776 | |
| | | | | | | | | | | | | | | | |
Preferred and Equity | | | | | | | | | | | | | | | | |
Credit Suisse | | Michaels Stores, Inc. | | 11.375 | | 11/1/2016 | | | 5,000,000 | | | 5,000,000 | | $ | 4,987,500 | |
| | ICICI Bank Ltd. | | 7.250 | | N/A1 | | | 6,600,000 | | | 6,600,000 | | | 6,128,298 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 11,115,798 | |
| | | | | | | | | | | | | | | | |
Lehman Brothers | | BOI Capital Funding No. 3 | | 6.107 | | N/A1 | | | 30,000,000 | | | 30,000,000 | | $ | 27,601,950 | |
| | State Street Capital Trust IV | | 6.694 | | 6/15/2037 | | | 28,305,000 | | | 28,305,000 | | | 25,559,273 | |
| | Swiss Re Capital I LP | | 6.854 | | N/A1 | | | 25,000,000 | | | 25,000,000 | | | 25,215,175 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | $ | 78,376,398 | |
| | | | | | | | | | | | | | | | |
Strategic Bond | | | | | | | | | | | | | | | | |
Morgan Stanley | | Michaels Stores, Inc. | | 11.375 | | 11/1/2016 | | | 430,000 | | | 430,000 | | $ | 428,925 | |
| | | | | | | | | | | | | | | | |
| |
1 | The security is a perpetual bond and has no stated maturity date. |
| | | |
| | | |
75 | ANNUAL REPORT | OCTOBER 31, 2007 | |
|
|
|
Notes to Financial Statements (continued) |
Note 5. Commitments
Bridge Debt Commitments: Limited Duration may invest in floating rate senior loans. In connection with these investments, Limited Duration may, with its Manager, also enter into senior unsecured bridge financing commitments. Bridge financing commitments may obligate Limited Duration to furnish temporary financing to a borrower until permanent financing can be arranged. These commitments range in duration from 43 to 294 days. At October 31, 2007, Limited Duration had outstanding bridge financing commitments of $20,740,000. In connection with these commitments, Limited Duration earns a commitment fee, typically set as a percentage of the commitment amount. Such fee income, which is classified in the statement of operations as interest income, is recognized ratably over the commitment period. During the year ended October 31, 2007, Limited Duration earned $254,615 in commitment fee income and the unrecognized commitment fee income is recoded on the statement of assets and liabilities as “deferred income liability.”
Note 6. Income Tax Information
No provision is made for U.S. federal taxes as it is the portfolios intention to continue to qualify for and elect the tax treatment applicable to regulated investment companies under Subchapter M of the Internal Revenue Code of 1986, as amended, and to make the requisite distributions to its shareholders which will be sufficient to relieve it from federal income and excise taxes.
Dividends from net investment income and distributions from net capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined under accounting principles generally accepted in the United States. These Book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital, undistributed net investment income, or accumulated net realized gain, as appropriate, in the period the difference arise.
Reclassification of Capital Accounts: The following permanent differences as of October 31, 2007, attributable to swap income/(loss), transactions involving foreign securities and currencies, expiration of capital loss carryfor-wards and other differences between financial reporting and tax accounting were reclassified to the following accounts.
| | | | | | | | | | | | |
Trust | | Undistributed Net
Investment Income/
Distributions in Excess
of Net Investment Income | | Accumulated
Gain/(Loss) | | Paid In
Capital | |
| |
Broad Investment Grade | | | $ | 282,885 | | | $ | 172 | | $ | (283,057 | ) |
Core Bond | | | | 786,797 | | | | (786,797 | ) | | — | |
High Yield | | | | 2,368 | | | | 2,556,500 | | | (2,558,868 | ) |
Income Opportunity | | | | 1,070,069 | | | | (1,070,069 | ) | | — | |
Income Trust | | | | (5,959,196 | ) | | | 39,067,148 | | | (33,107,952 | ) |
Limited Duration | | | | (2,414,790 | ) | | | 2,414,790 | | | — | |
Preferred and Equity | | | | (48,592 | ) | | | 78,130 | | | (29,538 | ) |
The tax character of distributions paid during the year ended October 31, 2007 and 2006 were as follows:
| | | | | | | | | | | | | |
| | Year ended October 31, 2007 | |
| |
Distributions
Paid from: | | Ordinary
Income | | Non-taxable
Return of
Capital | | Long-term
Capital Gains | | Total
Distributions | |
| |
Broad Investment Grade | | $ | 4,490,035 | | $ | — | | $ | — | | $ | 4,490,035 | |
Core Bond | | | 11,064,934 | | | 5,227,386 | | | — | | | 16,292,320 | |
High Yield | | | 3,927,807 | | | — | | | — | | | 3,927,807 | |
Income Opportunity | | | 20,862,233 | | | 1,874,570 | | | — | | | 22,736,803 | |
Income Trust | | | 18,808,452 | | | 4,978,175 | | | — | | | 23,786,627 | |
Limited Duration | | | 51,967,739 | | | 1,074,826 | | | 2,229,742 | | | 55,272,307 | |
Preferred and Equity | | | 65,002,006 | | | 24,171,991 | | | — | | | 89,173,997 | |
Strategic Bond | | | 6,521,963 | | | — | | | — | | | 6,521,963 | |
| | | | | | | | | | | | | |
| | Year ended October 31, 2006 | |
| |
Distributions
Paid from: | | Ordinary
Income | | Non-taxable
Return of
Capital | | Long-term
Capital Gains | | Total
Distributions | |
| |
Broad Investment Grade | | $ | 4,241,016 | | $ | — | | $ | 20,078 | | $ | 4,261,094 | |
Core Bond | | | 25,048,230 | | | — | | | 7,914,351 | | | 32,962,581 | |
High Yield | | | 4,175,232 | | | — | | | — | | | 4,175,232 | |
Income Opportunity | | | 22,238,533 | | | 2,162,198 | | | 8,976,685 | | | 33,377,416 | |
Income Trust | | | 21,910,288 | | | 5,576,693 | | | — | | | 27,486,981 | |
Limited Duration | | | 55,725,066 | | | 760,960 | | | — | | | 56,486,026 | |
Strategic Bond | | | 6,969,104 | | | 251,641 | | | — | | | 7,220,745 | |
As of October 31, 2007, the components of distributable earnings on a tax basis were as follows:
| | | | | | | | | | |
Trust | | Undistributed
Ordinary
Income | | Undistributed
Long-term
Gains/
Capital Loss
Carryforward
Amount | | Unrealized
Gain/(Loss)
Net | |
| |
Broad Investment Grade | | $ | 4,855,266 | | $ | (3,222,226 | ) | $ | (287,678 | ) |
Core Bond | | | (2,423,603 | ) | | (9,296,969 | ) | | (833,467 | ) |
High Yield | | | 148,061 | | | (36,514,583 | ) | | (3,298,228 | ) |
Income Opportunity | | | — | | | (4,794,548 | ) | | (1,062,523 | ) |
Income Trust | | | — | | | (66,753,313 | ) | | 3,726,058 | |
Limited Duration | | | — | | | — | | | (18,232,683 | ) |
Preferred and Equity | | | — | | | (49,741,712 | ) | | (47,853,961 | ) |
Strategic Bond | | | 214,202 | | | (447,113 | ) | | (808,018 | ) |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 76 |
Notes to Financial Statements (concluded)
For federal income tax purposes, the following Trusts had capital loss carry-forward as of their last respective tax year-end. These amounts may be used to offset future realized capital gains, if any:
| | | | | | | |
Trust | | Capital Loss
Carryforward
Amount | | Expires | |
| | | | | | |
Broad Investment Grade | | $ | 2,061,303 | | 2011 | | |
| | | 684,360 | | 2012 | | |
| | | 479,567 | | 2014 | | |
| | | | | | | |
| | $ | 3,225,230 | | | | |
| | | | | | | |
|
Core Bond | | $ | 6,643,266 | | 2014 | | |
| | | | | | | |
|
High Yield | | $ | 3,270,311 | | 2008 | | |
| | | 15,159,280 | | 2009 | | |
| | | 8,468,860 | | 2010 | | |
| | | 4,771,417 | | 2011 | | |
| | | 316,410 | | 2012 | | |
| | | 2,060,533 | | 2014 | | |
| | | 2,467,773 | | 2015 | | |
| | | | | | | |
| | $ | 36,514,584 | | | | |
| | | | | | | |
|
Income Opportunity | | $ | 2,451,626 | | 2014 | | |
| | | 2,342,922 | | 2015 | | |
| | | | | | | |
| | $ | 4,794,548 | | | | |
| | | | | | | |
|
Income Trust | | $ | 1,352,206 | | 2008 | | |
| | | 13,940,898 | | 2009 | | |
| | | 21,960,613 | | 2011 | | |
| | | 10,100,201 | | 2012 | | |
| | | 3,861,222 | | 2013 | | |
| | | 6,952,429 | | 2014 | | |
| | | 8,585,744 | | 2015 | | |
| | | | | | | |
| | $ | 66,753,313 | | | | |
| | | | | | | |
|
Preferred and Equity | | $ | 49,741,712 | | 2015 | | |
| | | | | | | |
|
Strategic Bond | | $ | 447,113 | | 2014 | | |
| | | | |
Note 7. Capital
There are 200 million of $0.01 par value common shares authorized for Broad Investment Grade, Income Opportunity and Income Trust. There are an unlimited number of $0.001 par value common shares authorized for Core Bond, High Yield, Limited Duration, Preferred and Equity and Strategic Bond. At October 31, 2007, the shares owned by an affiliate of the Advisor of Limited Duration and Preferred and Equity were 6,021 and 4,817, respectively.
Preferred and Equity, which commenced on December 27, 2006, issued 47,004,817 common shares under the initial public offering. On February 1, 2007, an additional 4,750,000 shares were issued by the underwriters exercising their over-allotment option. Offering costs incurred in connection with the offering of common shares have been charged against the proceeds from the initial common share offering in the amount of $1,367,957.
During the years ended October 31, 2007 and 2006, the following Trusts issued additional shares under their respective dividend reinvestment plan:
| | | | | | | |
| | | | | | | | |
Trust | | October 31, 2007 | | October 31, 2006 | |
| | | | | | | | |
High Yield | | 1,496 | | | 6,259 | | |
Limited Duration | | 107,367 | | | 13,785 | | |
Preferred and Equity | | 73,340 | | | — | | |
As of October 31, 2007, Preferred and Equity has 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.
| | | | |
| | | | | |
Series | | | Shares | |
| | | | | |
T7 | | | 4,620 | |
W7 | | | 4,620 | |
R7 | | | 4,620 | |
F7 | | | 4,620 | |
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 Preferred and Equity for the period ended October 31, 2007 were as follows:
| | | | | | | | | | |
| | | | | | | | | | | |
Series | | Low | | High | | Average | |
| | | | | | | | |
T7 | | | 5.05 | % | | 6.40 | % | | 5.38 | % |
W7 | | | 5.08 | | | 6.40 | | | 5.39 | |
R7 | | | 4.99 | | | 6.30 | | | 5.39 | |
F7 | | | 5.00 | | | 6.35 | | | 5.36 | |
Note 8. Subsequent Events
Subsequent to October 31, 2007, the Board of each of the Trusts declared dividends per common share payable November 30, 2007, to shareholders of record on November 15, 2007. The per share common dividends declared were as follows:
| | | | |
| | | | | |
Trust | | Common Dividend
Per Share | |
| | | | | |
Broad Investment Grade | | | $ | 0.04900 | | |
Core Bond | | | | 0.06700 | | |
High Yield | | | | 0.05100 | | |
Income Opportunity | | | | 0.05500 | | |
Income Trust | | | | 0.03100 | | |
Limited Duration | | | | 0.12500 | | |
Preferred and Equity | | | | 0.15625 | | |
Strategic Bond | | | | 0.07700 | | |
The dividends declared on preferred shares for the period November 1, 2007 to November 30, 2007 for Preferred and Equity were as follows:
| | | | |
| | | | | |
Series | | Dividends
Declared | |
| | | | | |
T7 | | $ | 458,581 | |
W7 | | | 455,301 | |
R7 | | | 567,983 | |
F7 | | | 574,127 | |
| | |
On November 29, 2007, Broad Investment Grade’s Board of Trustees approved a Plan of Liquidation and Dissolution. Accordingly, the Broad Investment Grade will liquidate substantially all of its assets on or about the close of business on December 31, 2009.
| | |
|
| | | |
77 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Report of Independent Registered Public Accounting Firm
To the Directors/Trustees and Shareholders of:
BlackRock Broad Investment Grade 2009 Term Trust Inc.
BlackRock Core Bond Trust
BlackRock High Yield Trust
BlackRock Income Opportunity Trust
BlackRock Income Trust Inc.
BlackRock Limited Duration Income Trust
BlackRock Preferred and Equity Advantage Trust
BlackRock Strategic Bond Trust
(Collectively the “Trusts”)
We have audited the accompanying statements of assets and liabilities of the Trusts, including the portfolios of investments, as of October 31, 2007, and the related statements of operations for the year then ended, the statements of changes in net assets and the financial highlights for each of the periods presented. We have also audited the statements of cash flows of BlackRock Core Bond Trust, BlackRock High Yield Trust, BlackRock Income Opportunity Trust, BlackRock Income Trust Inc., BlackRock Limited Duration Income Trust and BlackRock Preferred and Equity Advantage Trust, for the year ended October 31, 2007. 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, an audit 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 included confirmation of securities owned as of October 31, 2007, 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 October 31, 2007, the results of their operations and the cash flows of BlackRock Core Bond Trust, BlackRock High Yield Trust, BlackRock Income Opportunity Trust, BlackRock Income Trust Inc., BlackRock Limited Duration Income Trust and BlackRock Preferred and Equity Advantage Trust, for the year then ended, the changes in their net assets and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
December 28, 2007
| | |
|
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 78 |
The Benefits and Risks of Leveraging (unaudited)
The Trusts may utilize leveraging through borrowings or issuance of short-term debt securities or shares of Preferred Stock. The concept of leveraging is based on the premise that the cost of assets to be obtained from leverage will be based on short-term interest rates on borrowings or dividend rates on the Preferred Stock, which normally will be lower than the income earned by each Trust on its longer-term portfolio investments. To the extent that the total assets of each Trust (including the assets obtained from leverage) are invested in higher-yielding portfolio investments, each Trust’s Common Stock shareholders will be the beneficiaries of the incremental yield.
As of October 31, 2007, the Trusts had the following leverage amounts to total net assets before the deduction of leverage of:
| | | | |
| | | | | |
Trust | | | Leverage% | |
| | | | | |
Core Bond | | | 22% | |
High Yield | | | 15% | |
Income Opportunity | | | 22% | |
Income Trust | | | 8% | |
Limited Duration | | | 14% | |
Preferred and Equity | | | 33% | |
Leverage creates risks for holders of Common Stock including the likelihood of greater net asset value and market price volatility. In addition, there is the risk that fluctuations in interest rates on borrowings or in the dividend rates on any Preferred Stock may reduce the Common Stock’s yield and negatively impact its net asset value and market price. If the income derived from securities purchased with assets received from leverage exceeds the cost of leverage, each Trust’s net income will be greater than if leverage had not been used. Conversely, if the income from the securities purchased is not sufficient to cover the cost of leverage, each Trust’s net income will be less than if leverage had not been used, and therefore the amount available for distribution to Common Stock shareholders will be reduced.
| | |
|
| | | |
79 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Dividend Reinvestment Plans (unaudited)
Pursuant to each Trust’s respective Dividend Reinvestment Plan (the “Plan”), common shareholders of Broad Investment Grade, Income Opportunity and Income Trust may elect, while shareholders of Core Bond, High Yield, Limited Duration, Preferred and Equity and Strategic Bond 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 Broad Investment Grade declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participants’ account, by the purchase of outstanding shares on the open market, on the Trust’s primary exchange or elsewhere (“open market purchases”). The Trust will not issue any new shares under the Plan.
After Core Bond, High Yield, Income Trust, Limited Duration, Preferred and Equity and/or Strategic Bond declares a dividend or determines to make a capital gain distribution, the Plan Agent will acquire shares for the participants’ account, depending upon the circumstances described below, either (i) through receipt of unissued but authorized shares from the Trust (“newly issued shares”) or (ii) by open market purchases. If, on the dividend payment date, the net asset value per share (“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.
At a meeting of the Board of Trustees of the Income Opportunity Trust on November 21, 2006, the Board approved an amendment to the Dividend Reinvestment Plan of the Income Opportunity Trust. The Plan previously operated in a manner similar to Broad Investment Grade’s Plan, and permitted shares to be purchased only on the open market. As a result of the amendment, the Plan will permit purchases of newly issued shares on terms similar to the Plans described in the next paragraph. This amendment took effect on April 1, 2007.
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.
|
BlackRock Privacy Principles |
BlackRock is committed to maintaining the privacy of its current and former fund investors and individual clients (collectively, “Clients”) and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any non-public personal information about its Clients, except as permitted by law or as is necessary to service Client accounts. These nonaffiliated third parties are required to protect the confidentiality and security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural safeguards that are designed to protect the nonpublic personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
| | |
|
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 80 |
Additional Information (unaudited)
TAX NOTICE
The following information is provided with respect to the distributions paid by the BlackRock Closed-End Funds for the fiscal year ended October 31, 2007:
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Payable Date | | Federal
Obligation
Interest1 | | Interest Related
Dividends for
Non- U.S.
Residents2 | | Long-Term
Capital Gains
Per Share ($) | |
| | | | | | | | | | | |
Broad Investment Grade 2009 Term Trust (BCT) | | | 11/30/06 –1/31/07 | | 3.48 | % | | 8.50 | % | | — | | |
| | | 2/28/07 – 10/31/07 | | 2.13 | % | | 42.10 | % | | — | | |
High Yield Trust (BHY) | | | 11/30/06 – 1/31/07 | | 2.08 | % | | 58.91 | % | | — | | |
| | | 2/28/07 – 10/31/07 | | 1.78 | % | | 87.67 | % | | — | | |
Income Opportunity Trust (BNA) | | | 11/30/06 – 1/31/06 | | 8.24 | % | | 51.11 | % | | — | | |
| | | 2/28/07 – 10/31/07 | | 1.97 | % | | 100 | % | | | | |
Income Trust (BKT) | | | 11/30/06 – 1/31/07 | | 7.80 | % | | 58.17 | % | | — | | |
| | | 2/28/07 – 10/31/07 | | 12.22 | % | | 84.45 | % | | — | | |
Limited Duration Income Trust (BLW) | | | 11/30/06 – 1/31/07 | | 2.41 | % | | 57.97 | % | | — | | |
| | | 2/28/07 – 9/30/07 | | 1.93 | % | | 100 | % | | — | | |
| | | 10/31/07 | | 1.93 | % | | 100 | % | | 0.060444 | | |
Preferred and Equity Advantage Trust (BTZ)* | | | 1/31/07 – 10/31/07 | | 2.31 | % | | 37.89 | % | | — | | |
Strategic Bond Trust (BHD) | | | 11/30/06 – 1/31/07 | | 2.50 | % | | 57.18 | % | | — | | |
| | | 2/28/07 – 10/31/07 | | 3.76 | % | | 100 | % | | — | | |
| | | | | | | | | | | | | | |
| |
* | Of the ordinary distributions paid by Preferred and Equity Advantage Trust, 37 percent consist of qualified dividend income for individuals and dividends qualifying for the dividends received deduction for corporations. |
| |
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 | Represents the portion of the distributions paid that are exempt from U.S withholding tax for nonresident aliens and foreign corporations. |
In January 2008, a form 1099-DIV will be sent to shareholders which will state the amount and composition of distributions and provide information with respect to their appropriate tax treatment.
| | |
|
| | | |
81 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Additional Information (unaudited) (continued)
Shareholder Meetings
The Joint Annual Meeting of Shareholders was held on August 16, 2007 for shareholders of record on June 20, 2007, to elect director or trustee nominees of each Trust. This proposal was part of the reorganization of the Trust’s Boards of Trustees (the “Boards”) to take effect on or about November 1, 2007. The Board is organized into three classes one class of which is elected annually. Each Trustee serves a three-year term concurrent with the class into which he or she is elected.
Approved the Class I Directors/Trustees as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | G. Nicholas Beckwith, III | | Kent Dixon | | R. Glenn Hubbard | |
| | | | | | | |
| | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | |
| | | | | | | | | | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,540,504 | | | 205,001 | | | 21,534,431 | | | 211,073 | | | 21,540,366 | | | 205,138 | |
High Yield | | | 5,938,569 | | | 96,163 | | | 5,941,585 | | | 93,147 | | | 5,937,943 | | | 96,789 | |
Income Opportunity | | | 27,451,182 | | | 274,088 | | | 27,449,422 | | | 275,848 | | | 27,444,122 | | | 281,147 | |
Income Trust | | | 54,004,899 | | | 878,220 | | | 54,007,568 | | | 875,552 | | | 54,012,161 | | | 870,958 | |
Limited Duration | | | 31,528,458 | | | 301,321 | | | 31,522,202 | | | 307,576 | | | 31,527,975 | | | 301,804 | |
Preferred and Equity | | | 49,178,575 | | | 636,127 | | | 49,172,672 | | | 642,030 | | | 49,178,097 | | | 636,605 | |
Strategic Bond | | | 5,838,976 | | | 188,565 | | | 5,839,626 | | | 187,915 | | | 5,838,876 | | | 188,665 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | W. Carl Kester | | Robert S. Salomon, Jr. | |
| | | | | |
| | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | |
| | | | | | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,542,541 | | | 202,963 | | | 21,532,904 | | | 212,601 | |
High Yield | | | 5,940,393 | | | 94,339 | | | 5,941,060 | | | 93,672 | |
Income Opportunity | | | 27,459,822 | | | 265,448 | | | 27,427,963 | | | 297,307 | |
Income Trust | | | 54,014,548 | | | 868,572 | | | 53,998,127 | | | 884,992 | |
Limited Duration | | | 31,535,465 | | | 294,314 | | | 31,529,737 | | | 300,042 | |
Preferred and Equity | | | 12,415 | 1 | | 63 | 1 | | 49,178,951 | | | 635,751 | |
Strategic Bond | | | 5,839,476 | | | 188,065 | | | 5,839,776 | | | 187,765 | |
Approved the Class II Directors/Trustees as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Richard S. Davis | | Frank J. Fabozzi | | James T. Flynn | |
| | | | | | | |
| | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | |
| | | | | | | | | | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,528,535 | | | 216,970 | | | 21,543,679 | | | 201,825 | | | 21,535,708 | | | 209,796 | |
High Yield | | | 5,939,343 | | | 95,389 | | | 5,938,756 | | | 95,976 | | | 5,941,378 | | | 93,354 | |
Income Opportunity | | | 27,452,493 | | | 272,777 | | | 27,456,158 | | | 269,112 | | | 27,447,610 | | | 277,660 | |
Income Trust | | | 54,011,445 | | | 871,675 | | | 54,017,461 | | | 865,659 | | | 54,012,426 | | | 870,694 | |
Limited Duration | | | 31,533,743 | | | 296,036 | | | 31,534,354 | | | 295,425 | | | 31,531,608 | | | 298,171 | |
Preferred and Equity | | | 49,181,551 | | | 633,151 | | | 12,415 | 1 | | 63 | 1 | | 49,179,416 | | | 635,286 | |
Strategic Bond | | | 5,839,276 | | | 188,265 | | | 5,836,791 | | | 190,750 | | | 5,839,776 | | | 187,765 | |
| | | | | | | |
| | | | | | | | |
| | Karen P. Robards | |
| | | |
| | Votes For | | Votes
Withheld | |
| | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,546,810 | | | 198,695 | |
High Yield | | | 5,939,791 | | | 94,941 | |
Income Opportunity | | | 27,457,771 | | | 267,499 | |
Income Trust | | | 54,006,888 | | | 876,232 | |
Limited Duration | | | 31,534,697 | | | 295,081 | |
Preferred and Equity | | | 49,180,119 | | | 634,583 | |
Strategic Bond | | | 5,839,676 | | | 187,865 | |
| |
1 | Voted on by holders of preferred shares only. |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 82 |
Additional Information (unaudited) (concluded)
Approved the Class III Directors/Trustees as follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Richard E. Cavanagh | | Kathleen F. Feldstein | | Henry Gabbay | |
| | | | | | | |
| | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | | Votes For | | Votes
Withheld | |
| | | | | | | | | | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,545,394 | | | 200,110 | | | 21,537,449 | | | 208,056 | | | 21,528,340 | | | 217,164 | |
High Yield | | | 5,939,949 | | | 94,783 | | | 5,937,482 | | | 97,250 | | | 5,939,881 | | | 94,851 | |
Income Opportunity | | | 27,447,696 | | | 277,574 | | | 27,434,374 | | | 290,896 | | | 27,449,506 | | | 275,764 | |
Income Trust | | | 54,014,874 | | | 868,245 | | | 53,992,362 | | | 890,757 | | | 54,015,668 | | | 867,452 | |
Limited Duration | | | 31,529,595 | | | 300,184 | | | 31,523,085 | | | 306,693 | | | 31,527,485 | | | 302,294 | |
Preferred and Equity | | | 49,151,157 | | | 663,545 | | | 49,177,230 | | | 637,472 | | | 49,184,426 | | | 630,276 | |
Strategic Bond | | | 5,839,176 | | | 188,365 | | | 5,838,876 | | | 188,665 | | | 5,839,926 | | | 187,615 | |
| | | | | | | | |
| | | | | | | |
| | Jerrold B. Harris | |
| | | |
| | Votes For | | Votes
Withheld | |
| | | | | | |
Broad Investment Grade | | | 2,600,006 | | | 20,037 | |
Core Bond | | | 21,544,954 | | | 200,551 | |
High Yield | | | 5,941,378 | | | 93,354 | |
Income Opportunity | | | 27,441,156 | | | 284,114 | |
Income Trust | | | 54,010,458 | | | 872,661 | |
Limited Duration | | | 31,525,195 | | | 304,584 | |
Preferred and Equity | | | 49,180,428 | | | 634,274 | |
Strategic Bond | | | 5,838,976 | | | 188,565 | |
The following Trusts had an additional proposal (Proposal #2) to amend their respective Declarations of Trust to increase the maximum number of Board Members to 15:
| | | | | | | | | | |
| | | | | | | | |
| | Votes For | | Votes
Against | | Votes
Abstain | |
| | | | | | | | |
Core Bond | | | 21,397,280 | | | 273,953 | | | 74,272 | |
High Yield | | | 5,853,627 | | | 164,515 | | | 16,590 | |
Limited Duration | | | 30,858,715 | | | 452,424 | | | 518,639 | |
Preferred and Equity | | | 48,460,779 | | | 990,861 | | | 363,061 | |
Strategic Bond | | | 5,817,653 | | | 131,815 | | | 78,074 | |
Each Trust listed for trading on the New York Stock Exchange (“NYSE”) has filed with the NYSE its annual chief executive officer certification regarding compliance with the NYSE’s listing standards and each Trust listed for trading on the American Stock Exchange (“AMEX”) has filed with the AMEX its corporate governance certification regarding compliance with the AMEX’s listing standards. All of the Trusts 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 any Trust’s investment objective or policies or to any Trust’s charters or by-laws that were not approved by the shareholders or in the principal risk factors associated with investment in the Trusts.
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 website is intended to allow investors public access to information regarding the Trusts and does not, and is not intended, to incorporate BlackRock’s website into this report.
| | | |
| | | |
83 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Section 19 Notices (unaudited)
The amounts and sources of distributions reported are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources 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 purposes.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| | Total Fiscal Year to Date Cumulative
Distributions by Character | | Percentage of Fiscal Year to Date Cumulative
Distributions by Character | |
| | | | | |
Trust | | Net
Investment
Income | | Net
Realized
Capital
Gains | | Return
of
Capital | | Total Per
Common
Share | | Net
Investment
Income | | Net
Realized
Capital
Gains | | Return
of
Capital | | Total Per
Common
Share | |
| | | | | | | | | | | | | | | | | | |
Core Bond | | $ | 0.72 | | $ | — | | $ | 0.09 | | $ | 0.80 | | | 89 | % | | — | % | | 11 | % | | 100 | % |
Income Opportunity | | | 0.61 | | | — | | | 0.05 | | | 0.66 | | | 92 | | | — | | | 8 | | | 100 | |
Income Trust | | | 0.32 | | | — | | | 0.05 | | | 0.37 | | | 85 | | | — | | | 15 | | | 100 | |
Preferred and Equity | | | 0.89 | | | — | | | 0.52 | | | 1.41 | | | 63 | | | — | | | 37 | | | 100 | |
Each Trust estimates that it has distributed more than its income and net realized gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that you invested in the Fund is paid back to the shareholder. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income’.
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 84 |
Directors/Trustees Information (unaudited)
| | | | | | | | | | | | |
Name, Address and
Year of Birth | | 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 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 |
| |
Interested Director/Trustee2 | | | | | | |
| |
Ralph L. Schlosstein
BlackRock, Inc.
40 East 52nd Street
New York, NY 10022
1951 | | Chairman of the Board3 | | 3 years4/ since inception | | Director from 1999 to 2007 and President of BlackRock, Inc. from 1998 to 2007. Chairman and President of the BlackRock Liquidity Funds. | | 70 | | None | | Former Director and President of the Advisor until September 2007. |
| |
| |
1 | The Fund Complex means two or more registered investment 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. |
2 | Interested Director/Trustee as defined by Section 2(a)(19) of the Investment Company Act of 1940. |
3 | Director/Trustee since inception; appointed Chairman of the Board on August 22, 2002. |
4 | The Board is classified into three classes of which one class is elected annually. Each Director/Trustee serves a three-year term concurrent with the class from which they are elected. |
| | | |
| | | |
85 | ANNUAL REPORT | OCTOBER 31, 2007 | |
Directors/Trustees Information (unaudited) (continued)
| | | | | | | | | | |
Name, Address and
Year of Birth | | 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 |
| |
Independent Directors/Trustees | | | | |
| |
Richard E. Cavanagh
P.O. Box 4546
New York, NY
10163-4546
1946 | | Lead Trustee Audit Committee Member2 | | 3 years3/since inception | | Trustee, Aircraft Finance Trust (AFT) from 1999 to the present; Director, The Guardian Life Insurance Company of America and The Mutual Life Insurance Company from 1998 to the present; Trustee, Educational Testing Service (ETS) from 1997 until the present; Director, the Freemont Group from 1996 until the present. President and Chief Executive Officer of The Conference Board, Inc. (a leading global busi- ness research organization) from 1995 to 2007. | | 60 | | Arch Chemical (Chemicals and Allied Products). |
| |
Kent Dixon
P.O. Box 4546
New York, NY
10163-4546
1937 | | Trustee Audit Committee Member2 | | 3 years3/since
inception | | Consultant/Investor since 1988. | | 60 | | None |
| |
Frank J. Fabozzi
P.O. Box 4546
New York, NY
10163-4546
1948 | | Trustee Audit Committee Member2 | | 3 years3/since inception | | Consultant/Editor of, “The Journal of Portfolio Management”; Yale University, School of Management, Professor in the Practice of Finance and Becton Fellow from 2006 until present; Adjunct Professor of Finance and Becton Fellow from 2005 to 2006; Professor in the practice of Finance from 2003 to 2005; Adjunct Professor of Finance from 1994 to 2003; Author and Editor. | | 60 | | None |
| |
| |
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. |
2 | The Board of each Trust has determined that each Trust has three Audit Committee financial experts serving on its Audit Committee, Mr. Cavanagh, Mr. Dixon and Mr. Fabozzi, each of whom is independent for the purpose of the definition of Audit Committee financial expert as applicable to the Trusts. |
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. |
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | 86 |
Directors/Trustees Information (unaudited) (concluded)
| | | | | | | | | | |
Name, Address and
Year of Birth | | 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 |
| |
Independent Directors/Trustees | | | | |
| |
Kathleen F. Feldstein
P.O. Box 4546
New York, NY
10163-4546
1941 | | Trustee | | 3 years3/since January 19, 2005 | | President of Economic Studies, Inc., (a Belmont MA-based private economic consulting firm) since 1987; Chair, Board of Trustees, McLean Hospital since 2000. Member of the Board of Partners Community Healthcare, Inc. from 2005 until the present; Member of the Board of Partners HealthCare and Sherrill House from 1990 to the present; Trustee, Museum of Fine Arts, Boston from 1992 until the present and a Member of the Visiting Committee to the Harvard University Art Museum from 2003 to the present; Trustee, The Committee for Economic Development (a research organization of business leaders and educators) from 1990 to the present; Member of the Advisory Board to the International School of Business, Brandeis University from 2002 to the present. | | 60 | | Director, The McClatchy
Company. |
| |
R. Glenn Hubbard
P.O. Box 4546
New York, NY
10163-4546
1958 | | Trustee | | 3 years3/since November 16, 2004 | | Dean of Columbia Business School since 2004; Columbia faculty member since 1988; Co-director of Columbia Business School’s Entrepreneurship Program 1997 to 2004; Visiting Professor at the John F. Kennedy School of Government at Harvard University and the Harvard Business School from 1985, as well as the University of Chicago from 1994; Deputy Assistant Secretary of the U.S. Treasury Department for Tax Policy from 1991 to 1993; Chairman of the U.S. Council of Economic Advisers under the President of the United States from 2001 to 2003. | | 60 | | ADP, KKR Financial Corporation, Duke Realty, Metropolitan Life Insurance Company. |
| |
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. |
2 | The Board of each Trust has determined that each Trust has three Audit Committee financial experts serving on its Audit Committee, Mr. Cavanagh, Mr. Dixon and Mr. Fabozzi, each of whom is independent for the purpose of the definition of Audit Committee financial expert as applicable to the Trusts. |
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. |
| | | |
| | | |
87 | ANNUAL REPORT | OCTOBER 31, 2007 | |
|
BlackRock Closed-End Funds |
|
Officers |
Robert S. Kapito, President |
Donald C. Burke, Treasurer |
Bartholomew Battista, Chief Compliance Officer |
Anne Ackerley, Vice President |
Vincent B. Tritto, Secretary |
|
Investment Advisor |
BlackRock Advisors, LLC |
100 Bellevue Parkway |
Wilmington, DE 19809 |
(800) 227-7BFM |
|
Sub-Advisor |
BlackRock Financial Management, Inc.1 |
40 East 52nd Street |
New York, NY 10022 |
|
BlackRock Investment Management, LLC2 |
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 Agent2 |
Bank of New York |
101 Barclay Street, 7 West |
New York, NY 10286 |
|
Independent Registered Public Accounting Firm |
Deloitte & Touche LLP |
200 Berkeley Street |
Boston, MA 02116 |
|
Legal Counsel |
Skadden, Arps, Slate, Meagher & Flom LLP |
Four Times Square |
New York, NY 10036 |
|
Legal Counsel – Independent Trustees |
Debevoise & Plimpton LLP |
919 Third Avenue |
New York, NY 10022 |
This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of Trust shares. Statements and other information contained in this report are as dated and are subject to change.
BlackRock Closed-End Funds
c/o BlackRock Advisors, LLC
100 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
| |
|
1 | For Core Bond, Limited Duration, Preferred and Equity and Strategic Bond. |
2 | For Preferred and Equity. |
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 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 is available on the Commission’s website at http://www.sec.gov. Each Trust’s Form N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C. Information regarding the operation of the Public Reference Room may be obtained by calling (800) SEC-0330. Each Trust’s Form N-Q may also be obtained without charge, upon request, by calling (800) 699-1BFM.
| | | |
| | | |
| ANNUAL REPORT | OCTOBER 31, 2007 | |
| |
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-3-1007 | 
|
Item 2 – | Code of Ethics – The registrant (or the “Fund”) has adopted a code of ethics, as of the end of the period covered by this report, applicable to the registrant’s principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. During the period covered by this report, there have been no amendments to or waivers granted under the code of ethics. A copy of the code of ethics is available without charge at www.blackrock.com. |
| |
Item 3 – | Audit Committee Financial Expert – The registrant’s board of directors or trustees, as applicable (the “board of directors”) has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: |
| Kent Dixon
Frank J. Fabozzi
Dr. Andrew F. Brimmer (retired as of December 31, 2006)
Robert S. Salomon, Jr. (term began effective November 1, 2007)
W. Carl Kester (term began effective November 1, 2007)
James T. Flynn (term began effective November 1, 2007)
Karen P. Robards (term began effective November 1, 2007) |
| |
| The registrant’s board of directors has determined that W. Carl Kester and Karen P. Robards qualify as financial experts pursuant to Item 3(c)(4) of Form N-CSR. |
| |
| Prof. Kester has a thorough understanding of generally accepted accounting principles, financial statements and internal control over financial reporting as well as audit committee functions. Prof. Kester has been involved in providing valuation and other financial consulting services to corporate clients since 1978. Prof. Kester’s financial consulting services present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements. |
| |
| Ms. Robards has a thorough understanding of generally accepted accounting principles, financial statements and internal control over financial reporting as well as audit committee functions. Ms. Robards has been President of Robards & Company, a financial advisory firm, since 1987. Ms. Robards was formerly an investment banker for more than 10 years where she was responsible for evaluating and assessing the performance of companies based on their financial results. Ms. Robards has over 30 years of experience analyzing financial statements. She also is the member of the Audit Committees of one publicly held company and a non-profit organization. |
| |
| Under applicable securities laws, a person 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 as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification. |
Item 4 – | Principal Accountant Fees and Services |
| | | | (a) Audit Fees | | (b) Audit-Related Fees1 | | (c) Tax Fees2 | | (d) All Other Fees3 |
| | Entity Name | | Current
Fiscal Year
End | | Previous
Fiscal Year
End | | Current
Fiscal Year
End | | Previous
Fiscal Year
End | | Current
Fiscal Year
End | | Previous
Fiscal Year
End | | Current
Fiscal Year
End | | Previous
Fiscal Year
End |
| | | | | | | | | | | | | | | | | | |
| | BlackRock Income
Opportunity Trust, Inc. | | $64,000 | | $64,000 | | $0 | | $0 | | $6,100 | | $8,000 | | $1,042 | | $2,700 |
1 The nature of the services include assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees.
2 The nature of the services include tax compliance, tax advice and tax planning.
3 The nature of the services include a review of compliance procedures and attestation thereto.
| (e)(1) Audit Committee Pre-Approval Policies and Procedures: |
| |
| 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 Fund’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 Fund and (B) all engagements for non-audit services related directly to the operations and financial reporting or the Fund 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 Fund. |
| |
| 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 Fund 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, Fund structure or other matters. |
| | |
| In addition to the annual Audit services engagement specifically approved by the audit committee, any other Audit services for the Fund 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. |
| |
| (e)(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) Affiliates’ Aggregate Non-Audit Fees: |
| | Entity Name | | Current Fiscal Year
End | | Previous Fiscal Year
End |
| | | | | | |
| | BlackRock Income Opportunity Trust, Inc. | | $ 291,642 | | $ 296,900 |
| (h) The registrant’s audit committee has considered and determined that the provision of non-audit services that were rendered to the registrant’s investment adviser (not including any non-affiliated sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by the registrant’s 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. |
| |
| Regulation S-X Rule 2-01(c)(7)(ii) – $284,500, 0% |
| |
Item 5 – | Audit Committee of Listed Registrants – The following individuals are members of the registrant’s separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)): |
| |
| Dr. Andrew F. Brimmer (retired as of December 31, 2006)
Richard E. Cavanagh (not reappointed to Audit Committee as of November 1, 2007)
Kent Dixon
Frank J. Fabozzi
Robert S. Salomon, Jr. (term began effective November 1, 2007)
W. Carl Kester (term began effective November 1, 2007)
James T. Flynn (term began effective November 1, 2007)
Karen P. Robards (term began effective November 1, 2007) |
| |
Item 6 – | Schedule of Investments – The registrant’s Schedule of Investments is included as part of the Report to Stockholders 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 Fund portfolio securities to its investment adviser, BlackRock Advisors, LLC and its sub-adviser, as applicable. The Proxy Voting Policies and Procedures of the adviser and sub-adviser are attached hereto as Exhibit 99.PROXYPOL. |
| |
| Information about how the Fund voted proxies relating to securities held in the Fund’s portfolio during the most recent 12 month period ended June 30 is available without charge (1) at www.blackrock.com and (2) on the Commission’s web site at http://www.sec.gov. |
| |
Item 8 – | Portfolio Managers of Closed-End Management Investment Companies – as of October 31, 2007. |
| |
| (a)(1) BlackRock Income Opportunity Trust is managed by a team of investment professionals comprised of Robert S. Kapito, Vice Chairman and a Director of BlackRock, Michael P. Lustig, Managing Director at BlackRock, Jeffrey Gary, CPA, Managing Director at BlackRock, Kevin J. Booth, CFA, Managing Director at BlackRock and James E. Keenan, CFA, Director at BlackRock. Each is a member of BlackRock’s fixed income portfolio management group. Messrs. Kapito and Lustig are responsible for setting overall investment strategy and overseeing management of the Fund. Mr. Gary is responsible for setting the Fund’s overall credit strategy. Messrs. Booth and Keenan are the Fund’s co-portfolio managers and are responsible for the day-to-day management of the Fund’s portfolio and the selection of its investments. Mr. Lustig has been a member of the |
| | Fund’s management team since 1994. Mr. Gary has been a member of the Fund’s management team since 2003. Mr. Kapito has been a member of the Fund’s management team since 2006. Messrs. Booth and Keenan have been the Fund’s co-portfolio managers since 2007. |
| | |
| Robert S. Kapito 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 has been a portfolio manager with BlackRock since 1988. |
| |
| Michael P. Lustig, Managing Director and portfolio manager, is a member of the Fixed Income Portfolio Management Group. Mr. Lustig is responsible for managing the firm’s taxable closed-end funds, the structured mortgage and derivative products sector, and the markets-based risk advisory effort as well as the internal training program. Mr Lustig has been with BlackRock since 1989. |
| |
| Jeffrey Gary is the head of BlackRock’s high yield team within the Fixed Income Portfolio Management Group. Prior to joining BlackRock in 2003, Mr. Gary was a Managing Director and portfolio manager with AIG (American General) Investment Group. |
| |
| Kevin Booth is co-head of the high yield team within BlackRock’s Fixed Income Portfolio Management Group. His primary responsibilities are managing portfolios and directing investment strategy. He specializes in hybrid high yield portfolios, consisting of leveraged bank loans, high yield bonds, and distressed obligations. Prior to joining BlackRock, Mr. Booth was a Managing Director (Global Fixed Income) of Merrill Lynch Investment Managers (“MLIM”) in 2006, a Director from 1998 to 2006 and was a Vice President of MLIM from 1991 to 1998. He has been a portfolio manager with BlackRock or MLIM since 1992, and was a member of MLIM’s bank loan group from 2000 to 2006. |
| |
| James Keenan is a high yield portfolio manager and trader within BlackRock’s Fixed Income Portfolio Management Group. His primary responsibilities are managing client portfolios, executing trades and ensuring consistency across high yield portfolios. Mr. Keenan has been with BlackRock since 2004. Prior to joining BlackRock, he was a senior high yield trader at Columbia Management Group. Mr. Keenan began his investment career at UBS Global Asset Management where he held roles as a trader, research analyst and a portfolio analyst from 1998 through 2003. |
| |
| (a)(2) As of October 31, 2007: |
| | | | (ii) Number of Other Accounts Managed
and Assets by Account Type | | (iii) Number of Other Accounts and
Assets for Which Advisory Fee is
Performance-Based |
| | (i) Name of
Portfolio
Manager | | Other
Registered
Investment
Companies | | Other Pooled
Investment
Vehicles | | Other
Accounts | | Other
Registered
Investment
Companies | | Other Pooled
Investment
Vehicles | | Other
Accounts |
| | | | | | | | | | | | | | |
| | Robert Kapito | | 4 | | 1 | | 1 | | 0 | | 1 | | 0 |
| | | | $1,027,125,840 | | $771,998,104 | | $6,385,960 | | $0 | | $771,198,104 | | $0 |
| | | | | | | | | | | | | | |
| | Michael Lustig | | 4 | | 1 | | 4 | | 0 | | 1 | | 0 |
| | | | $1,027,125,840 | | $771,998,104 | | $4,209,857,310 | | $0 | | $771,198,104 | | $0 |
| | | | | | | | | | | | | | |
| | Jeffrey Gary | | 17 | | 12 | | 17 | | 0 | | 5 | | 5 |
| | | | $8,372,339,771 | | $3,521,329,269 | | $7,450,262,711 | | $0 | | $2,134,982,068 | | $929,839,511 |
| | | | | | | | | | | | | | |
| | Kevin Booth | | 23 | | 9 | | 7 | | 0 | | 3 | | 3 |
| | | | $11,230,005,290 | | $2,807,991,314 | | $1,342,876,998 | | $0 | | $983,503,746 | | $597,096,279 |
| | | | | | | | | | | | | | |
| | James Keenan | | 17 | | 9 | | 16 | | 0 | | 2 | | 5 |
| | | | $8,372,339,771 | | $2,533,806,875 | | $3,031,198,440 | | $0 | | $1,211,076,381 | | $780,980,221 |
| (iv) Potential Material Conflicts of Interest |
| |
| BlackRock, Inc. and its affiliates (collectively, herein “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 Fund, 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 Fund. 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 Fund. 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 Fund 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 Fund. In this connection, it should be noted that certain portfolio managers currently manage certain accounts that are subject to performance fees. In addition, certain portfolio managers assist in managing certain hedge funds and may be entitled to receive a portion of any incentive fees earned on 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) As of October 31, 2007: |
| |
Portfolio Manager Compensation |
| |
| The portfolio manager compensation program of BlackRock is critical to BlackRock’s ability to attract and retain the most talented asset management professionals. This program ensures that compensation is aligned with maximizing investment returns and it provides a competitive pay opportunity for competitive performance. |
| |
| Compensation Program |
| |
| The elements of total compensation for BlackRock portfolio managers are: fixed base salary, annual performance-based cash and stock compensation (cash and stock bonus) and other benefits. BlackRock has balanced these components of pay to provide portfolio managers with a powerful incentive to achieve consistently superior investment performance. By design, portfolio manager compensation levels fluctuate — both up and down — with the relative investment performance of the portfolios that they manage. |
| |
| Base Salary |
| |
| Under the BlackRock approach, like that of many asset management firms, fixed base salaries represent a relatively small portion of a portfolio manager’s total compensation. This approach serves to enhance the motivational value of the performance-based (and therefore variable) compensation elements of the compensation program. |
| |
| Performance-Based Compensation |
| |
| BlackRock believes that the best interests of investors are served by recruiting and retaining exceptional asset management talent and managing their compensation within a consistent and disciplined framework that emphasizes pay for performance in the context of an intensely competitive market for talent. To that end, the portfolio manager incentive compensation is based on a formulaic compensation program. |
| |
| BlackRock’s formulaic portfolio manager compensation program includes: pre-tax investment performance relative to the appropriate competitors or benchmarks over 1-, 3- and 5-year performance periods and a measure of operational efficiency. If a portfolio manager’s tenure is less than 5 years, performance periods will reflect time in position. Portfolio managers are compensated based on products they manage. For these purposes, the performance of the Fund is compared to the Lipper Closed-end Corporate BBB-Rated Debt Funds classification, the Lehman Brothers U.S. Government/Credit Index and the Lehman Brothers U.S. Corporate High-Yield Index. A smaller discretionary element of portfolio manager compensation may include consideration of: financial results, expense control, profit margins, strategic planning and implementation, quality of client service, market share, corporate reputation, capital allocation, compliance and risk control, leadership, workforce diversity, supervision, technology and innovation. All factors are considered collectively by BlackRock management. |
| Cash Bonus |
| |
| Performance-based compensation is distributed to portfolio managers in a combination of cash and stock. Typically, the cash bonus, when combined with base salary, represents more than 60% of total compensation for the portfolio managers. |
| |
| Stock Bonus |
| |
| A portion of the dollar value of the total annual performance-based bonus is paid in restricted shares of stock of BlackRock, Inc. (the “Company”). Paying a portion of annual bonuses in stock puts compensation earned by a portfolio manager for a given year “at risk” based on the Company’s ability to sustain and improve its performance over future periods. The ultimate value of stock bonuses is dependent on future Company stock price performance. As such, the stock bonus aligns each portfolio manager’s financial interests with those of the Company’s shareholders and encourages a balance between short-term goals and long-term strategic objectives. Management strongly believes that providing a significant portion of competitive performance-based compensation in stock is in the best interests of investors and shareholders. This approach ensures that portfolio managers participate as shareholders in both the “downside risk” and “upside opportunity” of the Company’s performance. Portfolio managers, therefore, have a direct incentive to protect the Company’s reputation for integrity. |
| |
| Other Benefits |
| |
| Portfolio managers are also eligible to participate in broad-based plans offered generally to BlackRock employees, including broad-based retirement, 401(k), health, and other employee benefit plans. For example, 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. |
| (a)(4) Beneficial Ownership of Securities. As of October 31, 2007, none of Messrs. Lustig, Gary, Keenan or |
| Booth beneficially owned any stock issued by the Fund. As of October 31, 2007, Mr. Kapito beneficially owned stock issued by the Fund in the range of $1 - $10,000. |
| | |
Item 9 – | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not Applicable due to no such purchases during the period covered by this report. |
Item 10 – | Submission of Matters to a Vote of Security Holders – The registrant’s Nominating and Governance Committee will consider nominees to the Board recommended by shareholders when a vacancy becomes available. Shareholders who wish to recommend a nominee should send nominations which include biographical information and set 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 |
| |
11(a) – | The registrant’s principal executive and principal financial officers or persons performing similar functions have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities and Exchange Act of 1934, as amended. |
| |
11(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) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| |
Item 12 – | Exhibits attached hereto |
| |
12(a)(1) – | Code of Ethics – See Item 2 |
| |
12(a)(2) – | Certifications – Attached hereto |
| |
12(a)(3) – | Not Applicable |
| |
12(b) – | Certifications – Attached hereto |
| |
| 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. |
| | | |
| BlackRock Income Opportunity Trust, Inc. |
| |
| By: | /s/ Donald C. Burke |
| |
| |
| | Donald C. Burke, |
| | Chief Executive Officer of |
| | BlackRock Income Opportunity Trust, Inc. |
|
| Date: December 19, 2007 |
| |
| Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. |
| |
| By: | /s/ Donald C. Burke |
| |
| |
| | Donald C. Burke, |
| | Chief Executive Officer (principal executive officer) of |
| | BlackRock Income Opportunity Trust, Inc. |
| | |
| Date: December 19, 2007 |
| | |
| By: | /s/ Neal J. Andrews |
| |
| |
| | Neal J. Andrews, |
| | Chief Financial Officer (principal financial officer) of |
| | BlackRock Income Opportunity Trust, Inc. |
| | |
| Date: December 19, 2007 |
