UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21637
Name of Fund: BlackRock Diversified Income Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, BlackRock Diversified Income Strategies Fund, Inc., 800 Scudders
Mill Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011,
Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/06
Date of reporting period: 09/01/05 - 08/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
BlackRock Diversified Income Strategies Portfolio, Inc. BLACKROCK
ANNUAL REPORT | AUGUST 31, 2006
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock Diversified Income Strategies Portfolio, Inc.
The Benefits and Risks of Leveraging
BlackRock Diversified Income Strategies Portfolio, Inc. utilizes 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, which normally will be lower than the income earned by the Fund on its
longer-term portfolio investments. To the extent that the total assets of the
Fund (including the assets obtained from leverage) are invested in
higher-yielding portfolio investments, the Fund's Common Stock shareholders will
be the beneficiaries of the incremental yield.
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, if the Fund were to issue 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, the Fund'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, the Fund'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.
Announcement of Annual Stockholders Meeting
The Fund has determined that its annual stockholders meeting originally
scheduled to be held in January 2007 will be postponed until and will be held in
June 2007. Proposals of stockholders intended to be presented at the meeting
must be received by the Fund by January 15, 2007 for inclusion in the Fund's
proxy statement and form of proxy for that meeting. The by-laws of the Fund
generally require that advance notice be given to the Fund in the event a
stockholder desires to transact any business from the floor at an annual meeting
of stockholders. Notice of any such business must be in writing and received at
the Fund's principal executive office by May 1, 2007. Written proposals and
notices should be sent to the Secretary of the Fund, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536.
Proxy Results
During the six-month period ended August 31, 2006, BlackRock Diversified Income
Strategies Fund, Inc.'s shareholders voted on the following proposals. Proposals
2 and 3 were approved at a shareholders' meeting on August 15, 2006. A
description of the proposals and number of shares voted were as follows:
- --------------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- --------------------------------------------------------------------------------------------------------------------------
2. To approve a new investment advisory agreement. 5,826,710 176,431 271,414
- --------------------------------------------------------------------------------------------------------------------------
3. To approve a contingent subadvisory agreement. 5,822,981 176,472 275,102
- --------------------------------------------------------------------------------------------------------------------------
Fund Certification
In January 2006, the Fund filed its Chief Executive Officer Certification and
its Annual Written Affirmation for the prior year with the New York Stock
Exchange pursuant to Section 303A.12 of the New York Stock Exchange Corporate
Listed Company Manual.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
2 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
A Letter to Shareholders
Dear Shareholder
It is my pleasure to welcome you to BlackRock.
On September 29, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch
Investment Managers, L.P. ("MLIM") united to form one of the largest asset
management firms in the world. Now with more than $1 trillion in assets under
management, over 4,000 employees in 18 countries and representation in key
markets worldwide, BlackRock's global presence means greater depth and scale to
serve you.
The new BlackRock unites some of the finest money managers in the industry. Our
ranks include more than 500 investment professionals globally -- portfolio
managers, research analysts, risk management professionals and traders. With
offices strategically located around the world, our investment professionals
have in-depth local knowledge and the ability to leverage our global presence
and robust infrastructure to deliver focused investment solutions. BlackRock's
professional investors are supported by disciplined investment processes and
best-in-class technology, ensuring that our portfolio managers are well equipped
to research, uncover and capitalize on the opportunities the world's markets
have to offer.
The BlackRock culture emphasizes excellence, teamwork and integrity in the
management of a variety of equity, fixed income, cash management, alternative
investment and real estate products. Our firm's core philosophy is grounded in
the belief that experienced investment and risk professionals using disciplined
investment processes and sophisticated analytical tools can consistently add
value to client portfolios.
As you probably are aware, former MLIM investment products now carry the
"BlackRock" name. This is reflected in newspapers and online fund reporting
resources. Your account statements will reflect the BlackRock name beginning
with the October month-end reporting period. Unless otherwise communicated to
you, your funds maintain the same investment objectives that they did prior to
the combination of MLIM and BlackRock. Importantly, this union does not affect
your brokerage account or your relationship with your financial advisor. Clients
of Merrill Lynch remain clients of Merrill Lynch.
We view this combination of asset management leaders as a complementary union
that reinforces our commitment to shareholders. Individually, each firm made
investment performance its single most important mission. Together, we are even
better prepared to capitalize on market opportunities on behalf of our
shareholders. Our focus on investment excellence is accompanied by an unwavering
commitment to service, enabling us to assist clients, in cooperation with their
financial professionals, in working toward their investment goals. We thank you
for allowing us the opportunity, and we look forward to serving your investment
needs in the months and years ahead as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
Vice Chairman
BlackRock, Inc.
Data, including assets under management, are as of June 30, 2006.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Portfolio outpaced its benchmark return for the fiscal year and
provided an attractive yield as we continued in our efforts to enhance the level
of income provided to shareholders.
Describe market conditions during the past 12 months.
During the year, the performance of the bank loan market benefited from the
rising London InterBank Offered Rate (LIBOR), decreasing spreads and increasing
demand for bank loans on the part of collateralized loan obligations (CLOs),
which kept prices close to par value. Investors earned total returns consisting
mainly of interest payments, as there were only marginal price changes. The
three-month LIBOR rose approximately 154 basis points (1.54%) to 5.40% during
the period. Leveraged loans returned +6.36% for the 12-month period, as measured
by the Credit Suisse Leveraged Loan Index. High yield bonds returned +5.41% for
the 12-month period, as measured by the Credit Suisse High Yield Index.
Standard and Poor's Leveraged Commentary & Data (LCD) reported a default rate of
1.36% as a percent of issuers at the end of August 2006. Despite the increase,
the rate is still below the historical average of 3.56%.
How did the Portfolio perform during the fiscal year in light of the existing
market conditions?
For the 12-month period ended August 31, 2006, the Common Stock of Diversified
Income Strategies Portfolio, Inc. had net annualized yields of 9.16% and 9.08%,
based on a year-end per share net asset value of $18.70 and a per share market
price of $18.85, respectively, and $1.713 per share income dividends. Over the
same period, the total investment return on the Portfolio's Common Stock was
+11.99%, based on a change in net asset value from $18.38 to $18.70, and
assuming reinvestment of all distributions. By comparison, the Portfolio's
unmanaged benchmark, which is comprised 20% of the Credit Suisse High Yield
Index and 80% of the Credit Suisse Leveraged Loan Index, posted a total return
of +6.18% for the 12-month period.
For the six-month period ended August 31, 2006, the total investment return on
the Portfolio's Common Stock was +5.73%, based on a change in net asset value
from $18.55 to $18.70, and assuming reinvestment of all distributions. The
Fund's composite benchmark returned +3.29% for the six-month period.
For a description of the Portfolio's total investment return based on a change
in the per share market value of the Portfolio's Common Stock (as measured by
the trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Portfolio's shares may trade
in the secondary market at a premium or discount to the Portfolio's net asset
value. As a result, total investment returns based on changes in the market
value of the Portfolio's Common Stock can vary significantly from total
investment returns based on changes in the Portfolio's net asset value.
What factors most influenced Portfolio performance?
The Portfolio's outperformance of its composite benchmark is attributed
primarily to favorable results from a number of specific holdings. Among the top
performers were Medis Technologies Ltd., ACES HY Credit Default Swap and Anchor
Glass Container Corp. The Portfolio's bond holding in Medis Technologies rallied
from 99.90 to 178.38 (even as its equity price fell from 28.21 to 20.50) as this
power cell company began shipping its 24/7 fuel cell power packs to early
customers. The company anticipates a full roll-out of this program this winter
and early spring. ACES HY is a structured credit investment that has had minimal
defaults and excellent recovery experience. In addition to yielding 5%, the
investment rose in price from 93.91 to 105.28 over the period. Finally, Anchor
Glass Container is the third-largest glass bottle manufacturer in the United
States, behind Owens-Illinois, Inc. and Saint-Gobain. The company's inability to
pass along rising raw material costs, such as natural gas and soda ash, led to a
Chapter 11 bankruptcy filing in August 2005. Once in Chapter 11, Anchor
successfully renegotiated contracts to include cost pass-throughs more in line
with the competition. The news had a salutary impact on the price of our bond
position, which we sold prior to the bond's restructuring into stock.
4 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Conversely, investments that detracted most from Portfolio performance during
the period included Ainsworth Lumber Co. Ltd., Stoneridge, Inc. and Telcordia
Technologies Inc. The Portfolio's investment in the floating rate notes of
Ainsworth declined during the period amid price weakness for oriented strand
board (OSB). Ainsworth is the fourth-largest OSB manufacturer in North America.
A slowdown in residential construction, coupled with additional OSB capacity,
resulted in the OSB price weakness, and this adversely impacted the company's
financial results. The Portfolio's bond holdings in automotive parts supplier
Stoneridge fell in price on general weakness in the automotive industry. Smaller
suppliers that depend on the big-three U.S. original equipment (OE) producers
were particularly hard hit. Finally, the Portfolio's bond investment in
Telcordia fell as this software and service provider to the communicating
industry experienced lower revenue and EBITDA (earnings before interest, taxes,
depreciation and amortization).
What changes were made to the Portfolio during the period?
We continued to opportunistically use a combination of leveraged bank loans,
floating rate high yield bonds, synthetic floaters and interest rate swaps to
construct a portfolio that is at least 80% floating rate. The Portfolio has
delivered on its promise of capturing rising interest rates, and was able to
achieve three dividend increases during the year.
During the fiscal year, the Fund purchased assets of approximately $278.1
million in par amount (face value), and experienced $32.2 million in repayments
from issuers. In addition, we sold roughly $294.3 million in assets.
We made use of the Portfolio's leverage lines during the year. Our use of
leverage averaged 27.4%. We intend to maintain our use of leverage within a
target range of 25% - 30%. (For a complete discussion of the benefits and risks
of leveraging, see page 2 of this report to shareholders.)
How would you characterize the Portfolio's position at the close of the period?
At the end of the period, the Portfolio was composed of 122 issuers spread among
32 industries. The Portfolio was underweight versus its composite benchmark in
securities rated Ba or better and unrated credits, and had an overweight
position in securities rated B, Caa1 and below.
Kevin Booth
Vice President and Portfolio Manager
September 15, 2006
- --------------------------------------------------------------------------------
Effective October 2, 2006, we are pleased to announce that Mark J. Williams has
joined Kevin Booth as Portfolio Manager and together they are primarily
responsible for the day-to-day management of the Fund. Mr. Williams is a
Managing Director and portfolio manager/loan originator with BlackRock. Prior to
joining BlackRock in 1998, Mr. Williams spent eight years with PNC Bank's New
York office and was a founding member of the bank's Leveraged Finance Group.
- --------------------------------------------------------------------------------
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 5
Portfolio Information
As of August 31, 2006
- --------------------------------------------------------------------------------
Percent of
Ten Largest Holdings Net Assets
- --------------------------------------------------------------------------------
Amkor Technology, Inc. Second Lien Term Loan, 9.898% due 10/27/2010 .... 2.5%
Omnova Solutions, Inc., 11.25% due 6/01/2010 ........................... 2.4
CCO Holdings LLC, 9.454% due 12/15/2010 ................................ 2.3
Universal City Florida Holding Co. I, 10.239% due 5/01/2010 ............ 2.3
RJ Tower Corp. Tranche B Term Loan, 8.25% due 2/02/2007 ................ 2.3
Abitibi-Consolidated, Inc., 8.829% due 6/15/2011 ....................... 2.2
JSG Funding Plc, 7.75% due 4/01/2015 ................................... 2.0
Galaxy Entertainment Finance Co., Ltd., 10.42% due 12/15/2010 .......... 1.9
Delco Remy International, Inc., 9.507% due 4/15/2009 ................... 1.8
Delta Air Lines Debtor in Possession Term Loan C, 12.773% due 3/16/2008 1.8
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Automotive ............................................................ 12.9%
Paper ................................................................. 11.1
Information Technology ................................................ 10.2
Housing ............................................................... 9.3
Broadcasting .......................................................... 8.2
- --------------------------------------------------------------------------------
For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease.
- --------------------------------------------------------------------------------
Percent of
Quality Ratings by Total
S&P/Moody's Investments
- --------------------------------------------------------------------------------
BBB/Baa .............................................................. 2.3%
BB/Ba ................................................................ 9.5
B/B .................................................................. 63.4
CCC/Caa .............................................................. 12.1
CC/Ca ................................................................ 0.7
NR (Not Rated) ....................................................... 10.2
Other* ............................................................... 1.8
- --------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks and short-term investments.
6 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Schedule of Investments (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Aerospace & Defense--1.4%
USD 3,500,000 Vought Aircraft Industries, Inc., 8% due
7/15/2011 $ 3,150,000
===============================================================================
Automotive--5.3%
2,700,000 AutoNation, Inc., 7.507% due 4/15/2013 (b)(d) 2,713,500
4,200,000 Delco Remy International, Inc., 9.507%
due 4/15/2009 (b) 4,137,000
2,700,000 Exide Technologies, 11.50% due 3/15/2013 (d) 2,376,000
2,500,000 Ford Motor Credit Co., 9.957% due 4/15/2012 (b) 2,642,900
------------
11,869,400
===============================================================================
Broadcasting--7.3%
3,000,000 Canadian Satellite Radio Holdings, Inc., 12.75%
due 2/15/2014 2,962,500
500,000 LIN Television Corp. Series B, 6.50%
due 5/15/2013 461,250
Paxson Communications Corp. (b)(d):
875,000 8.757% due 1/15/2012 881,562
1,750,000 11.757% due 1/15/2013 1,763,125
4,000,000 Sirius Satellite Radio, Inc., 9.625% due
8/01/2013 3,800,000
4,000,000 XM Satellite Radio, Inc., 9.989%
due 5/01/2013 (b)(d) 3,730,000
3,000,000 Young Broadcasting, Inc., 10% due 3/01/2011 2,775,000
------------
16,373,437
===============================================================================
Cable--International--1.7%
3,725,000 NTL Cable Plc, 9.125% due 8/15/2016 3,855,375
===============================================================================
Cable--U.S.--6.9%
5,000,000 CCO Holdings LLC, 9.454% due 12/15/2010 (b) 5,125,000
3,000,000 Cablevision Systems Corp. Series B, 9.62%
due 4/01/2009 (b) 3,198,750
3,000,000 Intelsat Bermuda Ltd., 11.55%
due 6/15/2013 (b)(d) 3,112,500
4,000,000 Intelsat Subsidiary Holding Co. Ltd., 10.484%
due 1/15/2012 (b) 4,060,000
------------
15,496,250
===============================================================================
Chemicals--5.8%
4,000,000 Nova Chemicals Corp., 8.405%
due 11/15/2013 (b) 4,085,000
5,000,000 Omnova Solutions, Inc., 11.25% due 6/01/2010 5,300,000
2,000,000 PolyOne Corp., 6.89% due 9/22/2008 1,917,500
1,600,000 Tronox Worldwide LLC, 9.50% due 12/01/2012 1,644,000
------------
12,946,500
===============================================================================
Consumer--Durables--1.7%
4,000,000 Simmons Bedding Co., 7.875% due 1/15/2014 3,860,000
===============================================================================
Consumer--Non-Durables--4.2%
2,200,000 Ames True Temper, Inc., 9.507% due 1/15/2012
(b) 2,183,500
4,000,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 3,560,000
3,500,000 Levi Strauss & Co., 10.258% due 4/01/2012 (b) 3,613,750
------------
9,357,250
===============================================================================
Diversified Media--3.6%
3,000,000 Houghton Mifflin Co., 12.031%
due 5/15/2011 (b)(d) 3,015,000
5,000,000 Universal City Florida Holding Co. I, 10.239%
due 5/01/2010 (b) 5,112,500
------------
8,127,500
===============================================================================
Energy--Other--2.7%
3,000,000 Ocean RIG ASA, 9.481% due 4/04/2011 2,977,500
3,000,000 Parker Drilling Co., 10.15% due 9/01/2010 (b) 3,056,250
------------
6,033,750
===============================================================================
Food & Drug--0.2%
500,000 Stripes Acquisition LLC, 10.625%
due 12/15/2013 (d) 525,000
===============================================================================
Food & Tobacco--0.6%
1,327,000 Dole Food Co., Inc., 8.75% due 7/15/2013 1,254,015
===============================================================================
Gaming--4.8%
Galaxy Entertainment Finance Co. Ltd. (d):
4,125,000 10.42% due 12/15/2010 (b) 4,320,937
375,000 9.875% due 12/15/2012 392,812
2,000,000 Inn of the Mountain Gods Resort & Casino, 12%
due 11/15/2010 2,020,000
2,000,000 Jacobs Entertainment Co., 9.75%
due 6/15/2014 (d) 1,997,500
1,025,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (d) 1,019,875
1,000,000 Tunica-Biloxi Gaming Authority, 9%
due 11/15/2015 (d) 1,027,500
------------
10,778,624
===============================================================================
Health Care--2.3%
2,000,000 Elan Finance Plc, 9.405% due 11/15/2011 (b) 2,020,000
HealthSouth Corp. (d):
1,500,000 11.418% due 6/15/2014 (b) 1,541,250
1,500,000 10.75% due 6/15/2016 1,533,750
------------
5,095,000
===============================================================================
Housing--5.4%
4,000,000 Builders FirstSource, Inc., 9.655%
due 2/15/2012 (b) 4,050,000
2,500,000 CPG International I Inc., 12.39%
due 7/01/2012 (b) 2,575,000
3,109,000 Goodman Global Holding Co., Inc., 8.329%
due 6/15/2012 (b) 3,109,000
1,250,000 Stanley-Martin Communities LLC, 9.75%
due 8/15/2015 975,000
1,500,000 Technical Olympic USA, Inc., 8.25%
due 4/01/2011 (d) 1,402,500
------------
12,111,500
===============================================================================
Hybrid--0.6%
1,350,000 North Street Referenced Linked Notes
Series 2005-8A Class D, 19.829%
due 6/15/2041 (b)(d) 1,350,000
===============================================================================
Information Technology--5.6%
4,000,000 MagnaChip Semiconductor SA, 8.579%
due 12/15/2011 (b) 3,420,000
SunGard Data Systems, Inc.:
1,800,000 9.125% due 8/15/2013 1,858,500
1,200,000 9.973% due 8/15/2013 (b) 1,254,000
2,000,000 10.25% due 8/15/2015 2,042,500
4,000,000 Telcordia Technologies Inc., 10%
due 3/15/2013 (d) 3,190,000
900,000 UGS Capital Corp. II, 10.38% due 6/01/2011
(d)(g) 906,750
------------
12,671,750
===============================================================================
Leisure--0.8%
1,650,000 FelCor Lodging LP, 9.57% due 6/01/2011 (b) 1,691,250
===============================================================================
Manufacturing--4.4%
2,975,000 Brand Services, Inc., 12% due 10/15/2012 3,348,898
4,000,000 CPI Holdco, Inc., 11.298% due 2/01/2015 (b) 4,120,000
2,500,000 Trimas Corp., 9.875% due 6/15/2012 2,368,750
------------
9,837,648
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Metal--Other--2.6%
Indalex Holding Corp.:
USD 500,000 11.50% due 2/01/2014 $ 532,500
1,950,000 11.50% due 2/01/2014 (d) 2,067,000
2,000,000 James River Coal Co., 9.375% due 6/01/2012 1,855,000
1,425,000 RathGibson, Inc., 11.25% due 2/15/2014 (d) 1,467,750
------------
5,922,250
===============================================================================
Packaging--1.9%
2,000,000 Packaging Dynamics Finance Corp., 10%
due 5/01/2016 (d) 2,000,000
2,750,000 Wise Metals Group LLC, 10.25% due 5/15/2012 2,172,500
------------
4,172,500
===============================================================================
Paper--10.0%
5,000,000 Abitibi-Consolidated, Inc., 8.829%
due 6/15/2011 (b) 4,925,000
Ainsworth Lumber Co. Ltd. (b):
3,000,000 9.249% due 10/01/2010 2,505,000
1,500,000 9.499% due 4/01/2013 1,170,000
2,000,000 Boise Cascade LLC, 8.382% due 10/15/2012 (b) 2,010,000
5,000,000 JSG Funding Plc, 7.75% due 4/01/2015 4,550,000
3,000,000 NewPage Corp., 11.739% due 5/01/2012 (b) 3,240,000
4,000,000 Verso Paper Holdings LLC, 9.235%
due 8/01/2014 (b)(d) 4,030,000
------------
22,430,000
===============================================================================
Retail--1.7%
Neiman Marcus Group, Inc.:
1,850,000 9% due 10/15/2015 1,965,625
1,800,000 10.375% due 10/15/2015 1,926,000
------------
3,891,625
===============================================================================
Service--0.5%
1,000,000 Neff Rental LLC, 11.25% due 6/15/2012 (d) 1,075,000
===============================================================================
Telecommunications--3.4%
Nordic Telephone Co. Holdings ApS (d):
EUR 500,000 8.352% due 5/01/2016 (b) 670,426
USD 800,000 8.875% due 5/01/2016 832,000
2,000,000 Qwest Communications International, Inc.,
8.905% due 2/15/2009 (b) 2,030,000
4,000,000 Time Warner Telecom Holdings, Inc., 9.405% due
2/15/2011 (b) 4,080,000
------------
7,612,426
===============================================================================
Wireless Communications--2.3%
2,000,000 AirGate PCS, Inc., 9.257% due 10/15/2011 (b) 2,045,000
3,000,000 Centennial Communications Corp., 11.258%
due 1/01/2013 (b) 3,097,500
------------
5,142,500
- -------------------------------------------------------------------------------
Total Corporate Bonds (Cost--$200,923,671)--87.7% 196,630,550
===============================================================================
Floating Rate Loan Interests (a)
===============================================================================
Aerospace & Defense--1.6%
3,703,703 Standard Aero Holdings Term Loan, 7.58% - 7.68%
due 8/24/2012 3,706,018
===============================================================================
Airlines--2.1%
Delta Air Lines:
500,000 Debtor in Possession Term Loan B, 10.023%
due 3/16/2008 506,607
4,000,000 Debtor In Possession Term Loan C, 12.773%
due 3/16/2008 4,127,000
------------
4,633,607
===============================================================================
Automotive--7.6%
2,890,021 Delphi Automotive Systems Term Loan B, 13.75%
due 6/14/2011 3,000,203
Intermet Corp.:
1,481,481 First Lien Term Loan, 10.283%
due 11/08/2010 1,209,877
518,518 Letter of Credit, 10.25% due 11/08/2010 423,457
JL French Corp.:
1,000,000 First Lien Term Loan, 8.50% due 6/30/2011 998,333
1,000,000 Second Lien Term Loan, 10.75%
due 6/05/2012 975,000
3,174,816 Metaldyne Corp. Term Loan D, 10%
due 12/31/2009 3,210,324
5,000,000 RJ Tower Corp. Tranche B Term Loan, 8.25%
due 2/02/2007 5,056,250
2,250,000 Visteon Corp. Term Loan B, 8.61% due 6/13/2013 2,250,000
------------
17,123,444
===============================================================================
Broadcasting--0.9%
2,000,000 Ellis Communications Term Loan, 10%
due 12/30/2011 2,000,000
===============================================================================
Cable--U.S.--1.6%
Cebridge Connections:
2,000,000 Second Lien Term Loan, 9.989%
due 5/05/2014 1,940,000
1,724,137 Term Loan B, 7.739% due 11/05/2013 1,714,130
------------
3,654,130
===============================================================================
Chemicals--1.3%
3,000,000 Wellman, Inc. Second Lien Term Loan, 12.239%
due 2/10/2010 2,932,500
===============================================================================
Diversified Media--0.9%
2,000,000 Nielsen Fin Tl Ci Pr, 8.19% due 8/09/2013 1,993,828
===============================================================================
Energy--Exploration & Production--1.6%
3,000,000 Frontier Drilling Term Loan B, 8.68%
due 6/21/2013 3,007,500
498,750 MEG Energy Corp. Term Loan B, 7.50%
due 4/03/2013 499,863
------------
3,507,363
===============================================================================
Energy--Other--2.4%
2,222,222 Alon USA Inc., Term Loan B, 7.906% due
6/22/2013 2,248,611
3,000,000 Scorpion Drilling Ltd. Second Lien Term Loan,
13.576% due 5/08/2014 3,120,000
------------
5,368,611
===============================================================================
Financial--1.4%
3,000,000 JG Wentworth Manufacturing Term Loan 9.008%
due 4/12/2011 3,033,750
===============================================================================
8 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (a) Value
===============================================================================
Food & Tobacco--1.6%
USD 500,000 Bolthouse Farms, Inc. Second Lien Term Loan,
10.999% due 12/01/2013 $ 509,584
Dole Food Co., Inc.:
93,024 Letter of Credit, 5.37% due 4/12/2013 91,790
208,779 Term Loan B, 7.375% -9.25% due 4/12/2013 206,010
695,930 Term Loan C, 7.375% - 9.25% due 4/12/2013 686,699
QCE LLC:
1,000,000 First Lien Term Loan, 7.75% due 5/05/2013 998,854
1,000,000 Second Lien Term Loan, 11.249%
due 11/05/2013 998,854
------------
3,491,791
===============================================================================
Gaming--2.2%
2,886,345 Resorts International Second Lien Term Loan,
16.499% due 4/26/2013 3,001,798
2,000,000 Venetian Macau U.S. Finance Co. Term B, 8.20%
due 5/25/2013 2,010,000
------------
5,011,798
===============================================================================
Housing--3.9%
3,000,000 LNR Property Corp. Term Loan B, 8.22%
due 7/12/2011 3,022,500
1,891,179 Lake at Las Vegas Joint Venture Term Loan,
8.21% - 8.249% due 11/01/2009 1,895,514
4,000,000 Stile U.S. Acquisition Corp. Bridge Loan, 11%
due 4/06/2015 3,793,332
------------
8,711,346
===============================================================================
Information Technology--4.6%
1,755,600 Activant Solutions Term Loan B, 7.438% - 7.50%
due 5/02/2013 1,733,655
5,500,000 Amkor Technology, Inc. Second Lien Term Loan,
9.898% due 10/27/2010 5,685,625
3,000,000 Aspect Software 2nd Lien PR, 12.563%
due 7/11/2012 3,007,500
------------
10,426,780
===============================================================================
Manufacturing--0.7%
1,500,000 Babcocks & Wilcox Letter of Credit, 5.399%
due 2/22/2012 1,515,000
===============================================================================
Metal--Other--1.7%
Euramax International Plc:
828,947 Second Lien Term Loan, 12.489%
due 6/29/2013 835,683
1,671,053 Second Lien Term Loan, 12.489%
due 6/29/2013 1,684,630
1,275,633 Tranche 3 Term Loan B, 8.063%
due 6/29/2012 1,283,605
------------
3,803,918
===============================================================================
Packaging--2.5%
1,921,182 Anchor Glass Container Corp. Term Loan B,
7.65% - 7.749% due 5/03/2013 1,925,985
3,571,429 Graham Packaging Co. LP Second Lien Term Loan,
9.75% due 4/07/2012 3,620,536
------------
5,546,521
===============================================================================
Paper--1.1%
2,500,000 Georgia Pacific Corp. Second Lien Term Loan C,
8.30% due 2/13/2013 2,525,520
===============================================================================
Service--3.0%
1,700,000 Alliance Laundry Systems LLC Term Loan, 7.62%
due 1/27/2012 1,709,032
3,000,000 Brock Holdings Term Loan B, 7.86%
due 8/21/2013 3,015,000
2,000,000 NES Rentals Holdings, Inc. Term Loan C, 12.125%
due 7/20/2013 2,019,166
------------
6,743,198
===============================================================================
Telecommunications--1.8%
4,000,000 SBA Senior Tl Sc, 7.33% due 1/27/2007 4,011,252
===============================================================================
Utility--1.7%
1,000,000 Calpine Corp. Delay Draw Term Loan, 9.499%
due 12/20/2007 1,014,583
Covanta Energy Corp.:
611,111 DD GS Pr, 7.749% due 6/30/2012 611,111
2,145,000 Second Lien Term Loan, 10.96%
due 6/24/2013 2,193,263
------------
3,818,957
===============================================================================
Wireless Communications--0.4%
1,000,000 Crown Castle Operating Co. Term Loan B, 7.65%
due 6/01/2014 1,006,667
- -------------------------------------------------------------------------------
Total Floating Rate Loan Interests
(Cost--$104,961,469)--46.6% 104,565,999
===============================================================================
Shares
Held Common Stocks
===============================================================================
Manufacturing--1.6%
176,126 Medis Technologies Ltd. (f) 3,527,804
- -------------------------------------------------------------------------------
Total Common Stocks
(Cost--$3,229,974)--1.6% 3,527,804
===============================================================================
Beneficial
Interest Short-Term Securities
===============================================================================
USD 2,005,273 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I 5.11% (c)(e) 2,005,273
- -------------------------------------------------------------------------------
Total Short-Term Securities
(Cost--$2,005,273)--0.9% 2,005,273
===============================================================================
Total Investments (Cost--$311,120,387*)--136.8% 306,729,626
Liabilities in Excess of Other Assets--(36.8%) (82,574,091)
------------
Net Assets--100.0% $224,155,535
============
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 9
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
August 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ............................................ $310,685,949
============
Gross unrealized appreciation ............................. $ 3,547,225
Gross unrealized depreciation ............................. (7,503,548)
------------
Net unrealized depreciation ............................... $ (3,956,323)
============
(a) Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally (i)
the lending rate offered by one or more major European banks, such as
LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one
or more major U.S. banks, or (iii) the certificate of deposit rate.
(b) Floating rate security.
(c) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $1,978,418 $ 34,106
--------------------------------------------------------------------------
(d) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(e) Represents the current yield as of August 31, 2006.
(f) Non-income producing security.
(g) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets. These industry
classifications are unaudited.
o Swaps outstanding as of August 31, 2006 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Sold credit default protection on Ford Motor
Co. and receive 8.75%
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2006 $ 3,000,000 $ 66,804
Sold credit default protection on General
Motors Corp. and receive 5.25%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2008 $ 3,000,000 54,759
Sold credit default protection on ACES
High Yield Index (10 - 13% Tranche) and
receive 5.0%
Broker, Morgan Stanley Capital Services, Inc.
Expires March 2010 $ 7,000,000 369,495
Pay a fixed rate of 4.823% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase Bank
Expires January 2013 $20,000,000 426,471
Pay a fixed rate of 4.853% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires March 2013 $31,000,000 605,967
--------------------------------------------------------------------------
Total $ 1,523,496
===========
o Currency Abbreviations:
EUR Euro
USD U.S. Dollar
See Notes to Financial Statements.
10 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Statement of Assets, Liabilities and Capital
As of August 31, 2006
===================================================================================================================================
Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$309,115,114) .... $ 304,724,353
Investments in affiliated securities, at value (identified cost--$2,005,273) ........ 2,005,273
Unrealized appreciation on swaps .................................................... 1,523,496
Receivables:
Interest receivable ................................................................ $ 5,043,366
Swaps .............................................................................. 175,209
Principal paydowns ................................................................. 73,892
Securities sold .................................................................... 50,000
Commitment fees .................................................................... 4,459 5,346,926
-------------
Prepaid expenses .................................................................... 14,032
-------------
Total assets ........................................................................ 313,614,080
-------------
===================================================================================================================================
Liabilities
- -----------------------------------------------------------------------------------------------------------------------------------
Loans ............................................................................... 88,800,000
Unfunded loan commitment ............................................................ 8,680
Payables:
Swaps ............................................................................ 332,238
Investment adviser ............................................................... 156,205
Interest on loans ................................................................ 90,067
Other affiliates ................................................................. 1,840 580,350
-------------
Accrued expenses .................................................................... 69,515
-------------
Total liabilities ................................................................... 89,458,545
-------------
===================================================================================================================================
Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets .......................................................................... $ 224,155,535
=============
===================================================================================================================================
Capital
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(11,985,463 shares issued and outstanding) ......................................... $ 1,198,546
Paid-in capital in excess of par .................................................... 227,266,840
Undistributed investment income--net ................................................ $ 1,262,021
Accumulated realized capital losses--net ............................................ (2,696,603)
Unrealized depreciation--net ........................................................ (2,875,269)
-------------
Total accumulated losses--net ....................................................... (4,309,851)
-------------
Total capital--Equivalent to $18.70 net asset value per share of
Common Stock (market price--$18.85) ................................................ $ 224,155,535
=============
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 11
Statement of Operations
For the Year Ended August 31, 2006
===================================================================================================================================
Investment Income
- -----------------------------------------------------------------------------------------------------------------------------------
Interest (including $34,106 from affiliates) ........................................ $ 28,140,315
Other income ........................................................................ 60,180
-------------
Total income ........................................................................ 28,200,495
-------------
===================================================================================================================================
Expenses
- -----------------------------------------------------------------------------------------------------------------------------------
Loan interest expense ............................................................... $ 4,166,119
Investment advisory fees ............................................................ 2,306,771
Borrowing costs ..................................................................... 186,319
Accounting services ................................................................. 85,812
Professional fees ................................................................... 79,465
Directors' fees and expenses ........................................................ 44,529
Transfer agent fees ................................................................. 39,201
Printing and shareholder reports .................................................... 34,501
Listing fees ........................................................................ 19,740
Pricing services .................................................................... 13,810
Custodian fees ...................................................................... 13,508
Other ............................................................................... 22,109
-------------
Total expenses ...................................................................... 7,011,884
-------------
Investment income--net .............................................................. 21,188,611
-------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
- -----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ................................................................. (2,723,513)
Swaps--net ....................................................................... (18,205)
Foreign currency transactions--net ............................................... 42,656 (2,699,062)
-------------
Unrealized appreciation/depreciation on:
Investments--net ................................................................. 3,099,146
Unfunded corporate loans--net .................................................... (8,001)
Swaps--net ....................................................................... 2,602,944
Foreign currency transactions--net ............................................... 6,202 5,700,291
-----------------------------
Total realized and unrealized gain--net ............................................. 3,001,229
-------------
Net Increase in Net Assets Resulting from Operations ................................ $ 24,189,840
=============
See Notes to Financial Statements.
12 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Statements of Changes in Net Assets
For the For the Period
Year Ended January 31, 2005+
August 31, to August 31,
Increase (Decrease) in Net Assets: 2006 2005
==================================================================================================================================
Operations
- ----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................................. $ 21,188,611 $ 9,971,405
Realized loss--net .................................................................. (2,699,062) (642,852)
Change in unrealized appreciation/depreciation--net ................................. 5,700,291 (8,575,560)
-----------------------------
Net increase in net assets resulting from operations ................................ 24,189,840 752,993
-----------------------------
==================================================================================================================================
Dividends to Shareholders
- ----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ............................... (20,336,039) (8,916,645)
-----------------------------
==================================================================================================================================
Common Stock Transactions
- ----------------------------------------------------------------------------------------------------------------------------------
Proceeds from issuance of Common Stock .............................................. -- 228,245,000
Value of shares issued to Common Stock shareholders in reinvestment of dividends .... 558,690 --
Offering costs resulting from the issuance of Common Stock .......................... (4,659) (433,653)
-----------------------------
Net increase in net assets resulting from Common Stock transactions ................. 554,031 227,811,347
-----------------------------
==================================================================================================================================
Net Assets
- ----------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ........................................................ 4,407,832 219,647,695
Beginning of period ................................................................. 219,747,703 100,008
-----------------------------
End of period* ...................................................................... $ 224,155,535 $ 219,747,703
=============================
* Undistributed investment income--net ............................................. $ 1,262,021 $ 648,249
=============================
+ Commencement of operations.
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 13
Statement of Cash Flows
For the Year Ended August 31, 2006
===================================================================================================================================
Cash Provided by Operating Activities
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations .............................................. $ 24,189,840
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables ........................................................................ 171,497
Increase in prepaid expenses and other assets .................................................. (803)
Increase in other liabilities and swap premiums received ....................................... 35,677
Realized and unrealized gain--net .............................................................. (3,001,229)
Amortization of premium and discount ........................................................... 396,049
Realized gain on foreign currency transactions .................................................... 42,656
Proceeds from sales and paydowns of long-term securities .......................................... 192,625,730
Other investment related transactions ............................................................. (17,526)
Purchases of long-term securities ................................................................. (196,574,539)
Net proceeds from sales of short-term investments ................................................. 15,135,113
-------------
Cash provided by operating activities ............................................................. 33,002,465
-------------
===================================================================================================================================
Cash Used for Financing Activities
- -----------------------------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings ..................................................................... 185,100,000
Cash payments on borrowings ....................................................................... (197,700,000)
Cash payments on offering costs ................................................................... (132,213)
Dividends paid to shareholders .................................................................... (20,270,295)
-------------
Cash used for financing activities ................................................................ (33,002,508)
-------------
===================================================================================================================================
Cash
- -----------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash .............................................................................. (43)
Cash at beginning of period ....................................................................... 43
-------------
Cash at end of period ............................................................................. $ 0
=============
===================================================================================================================================
Cash Flow Information
- -----------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest ............................................................................ $ 4,150,089
=============
===================================================================================================================================
Noncash Financing Activities
- -----------------------------------------------------------------------------------------------------------------------------------
Capital shares issued in reinvestment of dividends paid to shareholders ........................... $ 558,690
=============
See Notes to Financial Statements.
14 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Financial Highlights
For the For the Period
Year Ended January 31, 2005+
The following per share data and ratios have been derived August 31, to August 31,
from information provided in the financial statements. 2006 2005
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ............................................ $ 18.38 $ 19.10
--------------------------------
Investment income--net*** ....................................................... 1.77 .84
Realized and unrealized gain (loss)--net ........................................ .25 (.77)
--------------------------------
Total from investment operations ................................................ 2.02 .07
--------------------------------
Less dividends from investment income--net ...................................... (1.70) (.75)
--------------------------------
Offering costs resulting from the issuance of Common Stock ...................... --++ (.04)
--------------------------------
Net asset value, end of period .................................................. $ 18.70 $ 18.38
================================
Market price per share, end of period ........................................... $ 18.85 $ 17.53
================================
===================================================================================================================================
Total Investment Return**
- -----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .............................................. 11.99% .42%@
================================
Based on market price per share ................................................. 18.36% (8.53%)@
================================
===================================================================================================================================
Ratios to Average Net Assets
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses, net of waiver and excluding interest expense .......................... 1.29% 1.00%*
================================
Expenses, net of waiver ......................................................... 3.17% 2.20%*
================================
Expenses ........................................................................ 3.17% 2.48%*
================================
Investment income--net .......................................................... 9.57% 7.88%*
================================
===================================================================================================================================
Leverage
- -----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings, end of period (in thousands) .............................. $ 88,800 $101,400
================================
Average amount of borrowings outstanding during the period (in thousands) ....... $ 86,132 $ 75,543
================================
Average amount of borrowings outstanding per share during the period*** ......... $ 7.20 $ 6.33
================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ........................................ $224,156 $219,748
================================
Portfolio turnover .............................................................. 64.29% 17.43%
================================
* Annualized.
** Total investment returns based on market price, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Based on average shares outstanding.
+ Commencement of operations.
++ Amount is less than $(.01) per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 15
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Diversified Income Strategies Portfolio, Inc. was renamed
BlackRock Diversified Income Strategies Portfolio, Inc. (the "Fund"). The Fund
is registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. The Fund determines and makes
available for publication the net asset value of its Common Stock on a daily
basis. The Fund's Common Stock shares are listed on the New York Stock Exchange
("NYSE") under the symbol DVF.
(a) Corporate debt obligations -- The Fund invests principally in debt
obligations of companies, including loan interests made by banks and other
financial institutions and both privately and publicly offered corporate bonds
and notes. Because agents and intermediaries are primarily commercial banks or
other financial institutions, the Fund's investment in loan interests could be
considered concentrated in financial institutions.
(b) Valuation of investments -- Loan interests are valued in accordance with
guidelines established by the Board of Directors. Loan interests are valued at
the mean between the last available bid and asked prices from one or more
brokers or dealers as obtained from Loan Pricing Corporation. As of October 2,
2006, floating rate loan interests will be valued at the mean between the last
available bid prices. For the limited number of loan interests for which no
reliable price quotes are available, such loan interests may be valued by Loan
Pricing Corporation through the use of pricing matrixes to determine valuations.
If the pricing service does not provide a value for loan interests, Fund Asset
Management, L.P. ("FAM") will value the loan interests at fair value, which is
intended to approximate market value.
Debt securities are traded primarily in the over-the-counter ("OTC") markets and
are valued at the last available bid price in the OTC market or on the basis of
values obtained by a pricing service. Pricing services use valuation matrixes
that incorporate both dealer-supplied valuations and valuation models. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general direction of the Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Securities that are held by the Fund that are traded on stock exchanges or the
Nasdaq National Market are valued at the last sale price or official close price
on the exchange on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available asked price
for short positions. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions in securities traded in the OTC market, Nasdaq Small Cap or Bulletin
Board are valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board of Directors
of the Fund. Short positions in securities traded in the OTC market are valued
at the last available asked price. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest and
most representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Swap
agreements are valued based upon quoted fair valuations received daily by the
Fund from a pricing service or counterparty. Other investments, including
futures contracts and related options, are stated at market value. Obligations
with remaining maturities of 60 days or less are valued at amortized cost unless
FAM believes that this method no longer produces fair valuations. Valuation of
other short-term investment vehicles is generally based on the net asset value
of the underlying investment vehicle or amortized cost. Repurchase agreements
will be valued at cost plus accrued interest.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the NYSE.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign currency exchange rates
also are generally determined prior
16 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Notes to Financial Statements (continued)
to the close of business on the NYSE. As of October 2, 2006, foreign currency
exchange rates will be determined at the close of business on the NYSE.
Occasionally, events affecting the values of such securities and such exchange
rates may occur between the times at which they are determined and the close of
business on the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement, market
volatility or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of Directors
or by FAM using a pricing service and/or procedures approved by the Fund's Board
of Directors.
(c) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such financial futures contracts.
Financial futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
o Options -- The Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction is less
than or exceeds the premiums paid or received).
Written and purchased options are non-income producing investments.
o Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate;
the change in market value of a specified security, basket of securities,
or index; or the return generated by a security. These periodic payments
received or made by the Fund are recorded in the accompanying Statement of
Operations as realized gains or losses, respectively. Gains or losses are
realized upon termination of the swap agreements. Swaps are
marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to swap
agreements.
(d) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Fund invests in foreign securities, which may involve a number of risk
factors and special considerations not present with investments in securities of
U.S. corporations.
(e) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 17
Notes to Financial Statements (continued)
(f) Recent accounting pronouncement -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48") entitled
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
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 fiscal years beginning after December 15, 2006. The
impact on the Fund's financial statements, if any, is currently being assessed.
(g) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(h) Offering costs -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital.
(i) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. The Fund may at times pay out less than the entire amount of
net investment income earned in any particular period and may at times pay out
such accumulated undistributed income in other periods to permit the Fund to
maintain a more stable level of dividends.
(j) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
(k) Reclassification -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $238,800 has been reclassified between undistributed net investment income
and accumulated net realized capital losses as a result of permanent differences
attributable to foreign currency transactions, swap agreements and amortization
methods on fixed income securities. This reclassification has no effect on net
assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .75% of the Fund's average daily net assets plus the proceeds
of any outstanding borrowings used for leverage.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of
18 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Notes to Financial Statements (continued)
FAM, as the securities lending agent for a fee based on a share of the returns
on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest
cash collateral received by the Fund for such loans, among other things, in a
private investment company managed by MLIM, LLC or in registered money market
funds advised by Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate
of FAM.
For the year ended August 31, 2006, the Fund reimbursed FAM $4,788 for certain
accounting services.
In addition, MLPF&S received $7,781 in commissions on the execution of portfolio
security transactions for the Fund for the year ended August 31, 2006.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction will close on
September 29, 2006.
On August 15, 2006, shareholders of the Fund approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc. (the "Manager"), a wholly-owned
subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was reorganized into
BlackRock Advisors, LLC. The new advisory agreement will become effective on
September 29, 2006 and the investment advisory fee is unchanged. In addition,
the Manager has entered into a sub-advisory agreement with BlackRock Financial
Management, Inc., an affiliate, under which the Manager pays the Sub-Adviser for
services it provides a fee equal to 59% of the management fee paid to the
Manager.
In connection with the closing, MLIM, LLC, the security lending agent, will
become BlackRock Investment Management, LLC.
During the year ended August 31, 2006, certain officers and/or directors of the
Fund are officers and/or directors of FAM, PSI, MLIM, ML & Co., and/or MLIM,
LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the year ended August 31, 2006 were $196,574,539 and
$192,749,622, respectively.
4. Common Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock par value
$.10, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued shares
of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding for the year ended August 31, 2006 increased by
30,227 as a result of dividend reinvestment. Shares issued and outstanding
during the period January 31, 2005 to August 31, 2005 increased by 11,950,000
from shares sold.
5. Unfunded Loan Interest:
As of August 31, 2006, the Fund had unfunded loan commitments of approximately
$2,778,000 which would be extended at the option of the borrower, pursuant to
the following loan agreements:
(in Thousands)
- --------------------------------------------------------------------------------
Unfunded
Borrower Commitment Value
- --------------------------------------------------------------------------------
Alon USA Energy Inc. ........................... $ 278 $ 281
Calpine Corp. .................................. $1,000 $ 990
MEG Energy Corp. ............................... $ 500 $ 499
Venetian Macau U.S. Finance Co. ................ $1,000 $ 999
- --------------------------------------------------------------------------------
6. Short-Term Borrowings:
On May 22, 2006, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citigroup North
America, Inc. ("Citigroup") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The agreement
was renewed for one year and has a maximum limit of $125,000,000. Under the
Citigroup program, the conduits will fund advances to the Fund through the
issuance of highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund has granted a
security interest in substantially all of its assets to and in favor of the
Lenders. The interest rate on the Fund's borrowings is based on the interest
rate carried by the commercial paper plus a program fee. The Fund pays
additional borrowing costs including a backstop commitment fee.
The weighted average annual interest rate was 4.84% and the average borrowing
was approximately $86,132,000 for the year ended August 31, 2006.
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend in the amount of $.150000 per share on
September 29, 2006 to shareholders of record on September 15, 2006.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 19
Notes to Financial Statements (concluded)
The tax character of distributions paid during the fiscal years ended August 31,
2006 and August 31, 2005 was as follows:
- --------------------------------------------------------------------------------
8/31/2006 8/31/2005
- --------------------------------------------------------------------------------
Distributions paid from:
Ordinary income .................................. $20,336,039 $8,916,645
--------------------------
Total taxable distributions ........................ $20,336,039 $8,916,645
==========================
As of August 31, 2006, the components of accumulated losses on a tax basis were
as follows:
- -----------------------------------------------------------------------------
Undistributed ordinary income -- net ..................... $ 1,262,021
Undistributed long-term capital gains -- net ............. --
-----------
Total undistributed earnings -- net ...................... 1,262,021
Capital loss carryforward ................................ (1,755,964)*
Unrealized losses -- net ................................. (3,815,908)**
-----------
Total accumulated losses -- net .......................... $(4,309,851)
===========
* On August 31, 2006, the Fund had a capital loss carryforward of
$1,755,964, all of which expires in 2014. This amount will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized losses is
attributable primarily to the deferral of post-October capital losses for
tax purposes and other book/tax differences.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of BlackRock Diversified Income
Strategies Portfolio, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of BlackRock Diversified Income
Strategies Portfolio, Inc. (formerly Diversified Income Strategies Portfolio,
Inc.) (the "Fund") as of August 31, 2006, and the related statements of
operations and of cash flows for the year then ended, the statements of changes
in net assets and the financial highlights for the year then ended and for the
period January 31, 2005 (commencement of operations) through August 31, 2005.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit 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 Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of August 31, 2006, by correspondence with the custodian
and financial intermediaries; where replies were not received from financial
intermediaries, 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
BlackRock Diversified Income Strategies Portfolio, Inc. as of August 31, 2006,
the results of its operations and its cash flows for the year then ended, the
changes in its net assets and its financial highlights for the year then ended
and for the period January 31, 2005 through August 31, 2005, in conformity with
U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 23, 2006
20 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by Computershare Trust
Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market price
per share (a condition often referred to as a "market discount"), the Plan Agent
will invest the dividend amount by purchasing on the open market additional
shares. If the Plan Agent is unable to invest the full dividend amount in open
market purchases, or if the market discount shifts to a market premium during
the purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the dividend
by either (i) when the shares are newly issued, the net asset value per share on
the date the shares are issued or (ii) when shares are purchased in the open
market, the average purchase price per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of the Fund's shares is above the net asset value, participants
in the Plan will receive shares of the Fund for less than they could otherwise
purchase them and with a cash value greater than the value of any cash
distribution they would have received. However, there may not be enough shares
available in the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price on resale
may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash. The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount reinvested would
be excluded from gross income. If, when the Fund's shares are trading at a
market premium, the Fund issues shares pursuant to the Plan that have a greater
fair market value than the amount of cash reinvested, it is possible that all or
a portion of the discount from the market value (which may not exceed 5% of the
fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
the shareholders, including shareholders who do not participate in the Plan.
Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at Computershare
Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010, Telephone:
800-426-5523.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 21
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the combination of Merrill Lynch's investment advisory
business, including Fund Asset Management, L.P. (the "Previous Investment
Adviser"), with that of BlackRock, Inc. ("BlackRock") to create a new
independent company ("New BlackRock") (the "Transaction"), the Fund's Board of
Directors considered and approved a new investment advisory agreement (the
"BlackRock Investment Advisory Agreement") between the Fund and BlackRock
Advisors, LLC ("BlackRock Advisors"). The Fund's shareholders subsequently
approved the BlackRock Investment Advisory Agreement and it became effective on
September 29, 2006, replacing the investment advisory agreement with the
Previous Investment Adviser (the "Previous Investment Advisory Agreement").
The Board discussed the BlackRock Investment Advisory Agreement at telephonic
and in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the BlackRock Investment Advisory Agreement at
an in-person meeting held on May 12, 2006.
To assist the Board in its consideration of the BlackRock Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the BlackRock Investment
Advisory Agreement. The additional information was provided in advance of the
May 12, 2006 meeting. In addition, the independent directors consulted with
their counsel and Fund counsel on numerous occasions, discussing, among other
things, the legal standards and certain other considerations relevant to the
directors' deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Fund. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The directors also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Previous Investment Adviser, and of its affiliates, to be
transferred to BlackRock in connection with the Transaction. The independent
directors of the Board also conferred separately and with their counsel about
the Transaction and other matters related to the Transaction on a number of
occasions, including in connection with the April and May 2006 meetings. After
the presentations and after reviewing the written materials provided, the
independent directors met in executive sessions with their counsel to consider
the BlackRock Investment Advisory Agreement.
In connection with the Board's review of the BlackRock Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the directors about a variety
of matters. The advice included the following, among other matters:
o that there was not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and its shareholders by
BlackRock Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm would enhance its ability to attract and retain talented
professionals;
o that the Fund was expected to benefit from having access to BlackRock's
state of the art technology and risk management analytic tools, including
investment tools, provided under the BlackRock Solutions brand name;
o that BlackRock had no present intention to alter any applicable expense
waivers or reimbursements that were currently in effect and, while it
reserved the right to do so in the future, it would seek the approval of
the Board before making any changes;
o that in connection with the Transaction, Merrill Lynch and BlackRock had
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Previous Investment Adviser (or affiliates),
respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they had a financial interest in the
matters being considered that was different from that of Fund
shareholders.
22 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the BlackRock Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
would not increase under the BlackRock Investment Advisory Agreement, but
would remain the same;
o that in February 2006, the Board had performed a full annual review of the
Previous Investment Advisory Agreement, as required by the 1940 Act, and
had determined that the Previous Investment Adviser had the capabilities,
resources and personnel necessary to provide the advisory and
administrative services that were then being provided to the Fund; and
that the advisory and/or management fees paid by the Fund, taking into
account any applicable agreed-upon fee waivers and breakpoints, had
represented reasonable compensation to the Previous Investment Adviser in
light of the services provided, the costs to the Previous Investment
Adviser of providing those services, economies of scale, the fees and
other expenses paid by similar funds (including information provided by
Lipper Inc. ("Lipper")), and such other matters as the directors had
considered relevant in the exercise of their reasonable judgment; and
o that Merrill Lynch had agreed to pay all expenses of the Fund in
connection with the Board's consideration of the BlackRock Investment
Advisory Agreement and related agreements and all costs of shareholder
approval of the BlackRock Investment Advisory Agreement and as a result
the Fund would bear no costs in obtaining shareholder approval of the
BlackRock Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the BlackRock Investment Advisory Agreement, the Board assessed
the nature, quality and scope of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the BlackRock
Investment Advisory Agreement, the Board also considered a range of information
in connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors and its affiliates
by the Fund; (b) Fund operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Fund's investment
objective, policies and restrictions, and its compliance with its Code of Ethics
and BlackRock Advisors' compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services to be provided by
BlackRock Advisors and its affiliates.
In the period prior to the Board meeting to consider renewal of the Previous
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Previous Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information comparing the Fund's market price
with its net asset value per share; (c) a discussion by the Fund's portfolio
management team on investment strategies used by the Fund during its most recent
fiscal year; (d) information on the profitability to the Previous Investment
Adviser of the Previous Investment Advisory Agreement and other payments
received by the Previous Investment Adviser and its affiliates from the Fund;
and (e) information provided by the Previous Investment Adviser concerning
services related to the valuation and pricing of Fund portfolio holdings, the
Fund's portfolio turnover statistics, and direct and indirect benefits to the
Previous Investment Adviser and its affiliates from their relationship with the
Fund.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 23
Disclosure of New Investment Advisory Agreement (continued)
In their deliberations, the directors considered information received in
connection with their most recent approval of the continuance of the Previous
Investment Advisory Agreement, in addition to information provided by BlackRock
and BlackRock Advisors in connection with their evaluation of the terms and
conditions of the BlackRock Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling, and
each director attributed different weights to the various factors. The
directors, including a majority of the independent directors, concluded that the
terms of the BlackRock Investment Advisory Agreement are appropriate, that the
fees to be paid are reasonable in light of the services to be provided to the
Fund, and that the BlackRock Investment Advisory Agreement should be approved
and recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, quality and extent of services provided by the Previous Investment
Adviser, including the investment advisory services and the resulting
performance of the Fund, as well as the nature, quality and extent of services
expected to be provided by BlackRock Advisors. The Board focused primarily on
the Previous Investment Adviser's investment advisory services and the Fund's
investment performance, but also considered certain areas in which both the
Previous Investment Adviser and the Fund received services as part of the
Merrill Lynch complex. The Board compared the Fund's performance -- both
including and excluding the effects of fees and expenses -- to the performance
of a comparable group of funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Previous Investment Adviser's investment goals,
the Board attaches more importance to performance over relatively long periods
of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the BlackRock Investment Advisory Agreement, the
directors considered, among other things, the expected impact of the Transaction
on the operations, facilities, organization and personnel of New BlackRock and
how it would affect the Fund; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Fund. The directors considered BlackRock's
advice as to proposed changes in portfolio management personnel of the Fund
after the closing of the Transaction.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions(R) brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund would continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the BlackRock Investment Advisory Agreement were expected to be as good as
or better than that provided under the Previous Investment Advisory Agreement.
It was noted, however, that changes in personnel were expected to follow the
Transaction and the combination of the operations of the Previous Investment
Adviser and its affiliates with those of BlackRock. The directors noted that if
portfolio managers or other personnel were to cease to be available prior to the
closing of the Transaction, the Board would consider all available options,
including seeking the investment advisory or other services of BlackRock
affiliates. Accordingly, the directors concluded that, overall, they were
satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, quality and extent of the services to be
provided to the Fund under the BlackRock Investment Advisory Agreement.
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Previous Investment Advisory
Agreement, the directors had received, among other things, a report from Lipper
comparing the Fund's fees and expenses to those of a peer group selected by
Lipper, and information as to the fees charged by the Previous Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory fees and the
effects of any fee
24 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
waivers -- compared to the other funds in its Lipper category. They also
compared the Fund's total expenses to those of other comparable funds. The
information showed that the Fund had fees and expenses within the range of fees
and expenses of comparable funds. The Board considered the services to be
provided by and the fees to be charged by BlackRock Advisors to other funds with
similar investment mandates and noted that the fees charged by BlackRock
Advisors in those cases, including fee waivers and expense reimbursements, were
generally comparable to those being charged to the Fund. The Board also noted
that, as a general matter, according to the information provided by BlackRock,
fees charged to institutional clients were lower than the fees charged to the
Fund, but BlackRock Advisors provided less extensive services to such clients.
The Board concluded that the Fund's management fee and fee rate and overall
expense ratio are reasonable compared to those of other comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the BlackRock Investment Advisory Agreement, the directors considered,
among other things, whether advisory fees or other expenses would change as a
result of the Transaction. Based on their review of the materials provided and
the fact that the BlackRock Investment Advisory Agreement is substantially
similar to the Previous Investment Advisory Agreement in all material respects,
including the rate of compensation, the directors determined that the
Transaction should not increase the total fees payable, including any fee
waivers and expense reimbursements, for advisory and administrative services.
The directors noted that it was not possible to predict how the Transaction
would affect BlackRock Advisors' profitability from its relationship with the
Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund. The directors noted that they expect to receive profitability information
from BlackRock Advisors on at least an annual basis and thus be in a position to
evaluate whether any adjustments in Fund fees and/or fee breakpoints would be
appropriate.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in order
to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the BlackRock Investment Advisory Agreement
is substantially similar to the Previous Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under the Previous Investment Advisory Agreement. The
directors noted that in conjunction with their most recent deliberations
concerning the Previous Investment Advisory Agreement, they had determined that
the total fees for advisory and administrative services for the Fund were
reasonable in light of the services provided. It was noted that in conjunction
with the recent review of the Previous Investment Advisory Agreement, the
directors had received, among other things, a report from Lipper comparing the
Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Previous Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The directors concluded that because the rates
for advisory fees for the Fund would be no higher than the fee rates in effect
at the time, the proposed management fee structure, including any fee waivers,
was reasonable and that no additional changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the BlackRock Investment Advisory Agreement, the
directors considered whether BlackRock Advisors would experience such benefits
to the same extent that the Previous Investment Adviser was experiencing such
benefits under the Previous Investment Advisory Agreement. Based on their review
of the materials provided, including materials received in connection with their
most recent approval of the continuance of the Previous Investment Advisory
Agreement, and their discussions with management of the Previous Investment
Adviser and BlackRock, the directors determined that BlackRock Advisors' fall
out benefits could include increased ability for BlackRock to distribute shares
of its funds and other investment products. The directors noted that any
fall-out benefits were difficult to quantify with certainty at this time, and
indicated that they would continue to evaluate them going forward.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of funds, and the performance of a rele-
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 25
Disclosure of New Investment Advisory Agreement (concluded)
vant index or combination of indexes. The comparative information received from
Lipper showed Fund performance at various levels within the range of performance
of comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Previous Investment
Adviser's investment goals, the Board attaches more importance over relatively
long periods of time, typically three to five years. The directors believed the
Fund's performance was satisfactory. Also, the directors took into account the
investment performance of funds advised by BlackRock Advisors. The Board
considered comparative information from Lipper which showed that the performance
of the funds advised by BlackRock Advisors was within the range of performance
of comparable funds over different time periods. The Board also noted that,
following the close of the Transaction, BlackRock Advisors intended to implement
steps to seek to improve the investment performance of the Fund, including
changes in the portfolio management personnel. The Board noted BlackRock's
considerable investment management experience and capabilities, but was unable
to predict what effect, if any, consummation of the Transaction would have on
the future performance of the Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the BlackRock Investment Advisory Agreement, concluding that the
advisory fee rate was reasonable in relation to the services provided and that
the BlackRock Investment Advisory Agreement was in the best interests of the
shareholders. In approving the BlackRock Investment Advisory Agreement, the
Board noted that it anticipated reviewing the continuance of the agreement in
advance of the expiration of the initial two-year period.
New BlackRock Sub-Advisory Agreement -- Matters Considered by the Board
At an in-person meeting held on August 14-16, 2006, the Board of Directors,
including the independent directors, discussed and approved the sub-advisory
agreement (the "BlackRock Sub-Advisory Agreement") between BlackRock Advisors
and its affiliate, BlackRock Financial Management, Inc. (the "Sub-Adviser"). The
BlackRock Sub-Advisory Agreement became effective on September 29, 2006, at the
same time the BlackRock Investment Advisory Agreement became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors equal to 59% of the advisory fee received by
BlackRock Advisors from the Fund. BlackRock Advisors pays the Sub-Adviser out of
its own resources, and there is no increase in Fund expenses as a result of the
BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in person
meeting, the Board reviewed its considerations in connection with its approval
of BlackRock Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the BlackRock Investment Advisory Agreement, and
came to the same conclusions. In reviewing the sub-advisory fee rate provided in
the BlackRock Sub-Advisory Agreement, the Board noted the fact that both
BlackRock Advisors and the Sub-Adviser have significant responsibilities under
their respective advisory agreements. BlackRock Advisors remains responsible for
oversight of the Fund's operations and administration, and the Sub-Adviser
provides advisory services to the Fund and is responsible for the day-to-day
management of the Fund's portfolio under the BlackRock Sub-Advisory Agreement.
The Board also took into account the fact that there is no increase in total
advisory fees paid by the Fund as a result of the BlackRock Sub-Advisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the Sub-Adviser to receive 59% of the advisory
fee paid by the Fund to BlackRock Advisors.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the BlackRock Sub-Advisory
Agreement, concluding that the sub-advisory fee was reasonable in relation to
the services provided and that the Sub-Advisory Agreement was in the best
interests of shareholders.
26 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
- ------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to Vice Chairman and Director of BlackRock, and Global 129 Funds None
Doll, Jr.* Princeton, NJ and present Chief Investment Officer for Equities, Chairman of 174 Portfolios
08543-9011 Director the BlackRock Private Client Operating Committee,
Age: 52 and member of the BlackRock Executive Committee
since 2006; President of the Funds advised by
Merrill Lynch Investment Managers ("MLIM") and its
affiliates ("MLIM/FAM-advised funds") from 2005 to
2006 and Chief Investment Officer thereof from 2001
to 2006; President of MLIM and Fund Asset
Management, L.P. ("FAM") from 2001 to 2006; Co-Head
(Americas Region) thereof from 2000 to 2001 and
Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
from 2001 to 2006; Chief Investment Officer of
OppenheimerFunds, Inc. in 1999 and Executive Vice
President thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which
BlackRock acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company
Act, of the Fund based on his current and former positions with BlackRock, Inc. and its affiliates. Directors
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
- ------------------------------------------------------------------------------------------------------------------------------------
Ronald W. P.O. Box 9095 Director 2005 to Professor Emeritus of Finance, School of Business, 49 Funds None
Forbes** Princeton, NJ present State University of New York at Albany since 2000 51 Portfolios
08543-9095 and Professor thereof from 1989 to 2000; Interna-
Age: 65 tional Consultant, Urban Institute, Washington, D.C.
from 1995 to 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Cynthia A. P.O. Box 9095 Director 2005 to Professor, Harvard Business School since 1989; 49 Funds Newell
Montgomery Princeton, NJ present Associate Professor, J.L. Kellogg Graduate School of 51 Portfolios Rubbermaid,
08543-9095 Management, Northwestern University from 1985 to Inc.
Age: 54 1989; Associate Professor, Graduate School of (manufactur-
Business Administration, University of Michigan from ing)
1979 to 1985; Director, Harvard Business School
Publishing since 2005; Director, McLean Hospital
since 2005.
- ------------------------------------------------------------------------------------------------------------------------------------
Jean Margo P.O. Box 9095 Director 2005 to Self-employed consultant since 2001; Counsel of 49 Funds None
Reid Princeton, NJ present Alliance Capital Management (investment adviser) in 51 Portfolios
08543-9095 2000; General Counsel, Director and Secretary of
Age: 61 Sanford C. Bernstein & Co., Inc. (investment
adviser/broker-dealer) from 1997 to 2000;
Secretary, Sanford C. Bernstein Fund, Inc. from 1994
to 2000; Director and Secretary of SCB, Inc. since
1998; Director and Secretary of SCB Partners, Inc.
since 2000; and Director of Covenant House from 2001
to 2004.
- ------------------------------------------------------------------------------------------------------------------------------------
Roscoe S. P.O. Box 9095 Director 2005 to President, Middle East Institute from 1995 to 2001; 49 Funds None
Suddarth Princeton, NJ present Foreign Service Officer, United States Foreign 51 Portfolios
08543-9095 Service, from 1961 to 1995 and Career Minister from
Age: 71 1989 to 1995; Deputy Inspector General, U.S.
Department of State, from 1991 to 1994; U.S.
Ambassador to the Hashemite Kingdom of Jordan from
1987 to 1990.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 27
Officers and Directors (concluded)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Independent Directors* (concluded)
- ------------------------------------------------------------------------------------------------------------------------------------
Richard R. P.O. Box 9095 Director 2005 to Professor of Finance from 1984 to 1995, Dean from 49 Funds Bowne & Co.,
West Princeton, NJ present 1984 to 1993 and since 1995 Dean Emeritus of 51 Portfolios Inc.
08543-9095 New York University's Leonard N. Stern School of (financial
Age: 68 Business Administration. printers);
Vornado
Realty Trust
(real estate
company);
Alexander's,
Inc. (real
estate
company).
- ------------------------------------------------------------------------------------------------------------------------------------
Edward D. P.O. Box 9095 Director 2005 to Self-employed financial consultant since 1994; 49 Funds None
Zinbarg Princeton, NJ present Executive Vice President of the Prudential Insurance 51 Portfolios
08543-9095 Company of America from 1988 to 1994; Former
Age: 71 Director of Prudential Reinsurance Company and
former Trustee of the Prudential Foundation.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
- ------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length of
Held with Time
Name Address & Age Fund Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
- ------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2005 to Managing Director of BlackRock since 2006; Managing Director of MLIM and FAM from
Burke Princeton, NJ President present 2005 to 2006 and Treasurer thereof from 1999 to 2006; First Vice President of MLIM
08543-9011 and and FAM from 1997 to 2005; Senior Vice President and Treasurer of Princeton
Age: 46 Treasurer Services from 1999 to 2006 and Director from 2004 to 2006; Vice President of FAM
Distributors, Inc. ("FAMD") from 1999 to 2006 and Director from 2004 to 2006; Vice
President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds from 2004 to 2006.
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin J. P.O. Box 9011 Vice 2005 to Managing Director of BlackRock since 2006; Managing Director (Global Fixed Income)
Booth Princeton, NJ President present of MLIM from January 2006 to September 2006; Director of MLIM from 1998 to 2005;
08543-9011 Vice President of MLIM from 1991 to 1998.
Age: 52
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Fund Chief 2005 to Managing Director of BlackRock and Fund Chief Compliance Officer since 2006; Chief
Hiller Princeton, NJ Compliance present Compliance Officer of the MLIM/FAM-advised funds and First Vice President and Chief
08543-9011 Officer Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief Compliance
Age: 55 Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Securities and Exchange
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
- ------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2005 to Director of BlackRock since 2006; Director (Legal Advisory) of MLIM from 2002 to
Pellegrino Princeton, NJ present 2006; Vice President of MLIM from 1999 to 2002; Attorney associated with MLIM from
08543-9011 1997 to 2006; Secretary of MLIM, FAM, FAMD and Princeton Services from 2004 to
Age: 46 2006.
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
- ------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
DVF
28 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
Important Tax Information
The following information is provided with respect to the ordinary income
distributions paid monthly by BlackRock Diversified Income Strategies Fund, Inc.
for the fiscal year ended August 31, 2006:
- --------------------------------------------------------------------------------
Interest-Related Dividends for Non-U.S. Residents
- --------------------------------------------------------------------------------
Month Paid: September 2005 ........................................ 38.09%*
October 2005 - January 2006 ........................... 77.09%*
February 2006 - August 2006 ........................... 90.82%*
- --------------------------------------------------------------------------------
* Represents the portion of the taxable ordinary income dividends eligible
for exemption from U.S. withholding tax for nonresident aliens and foreign
corporations.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 29
Electronic Delivery
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial adviser. Please note that not all investment
advisers, banks or brokerages may offer this service.
30 BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006
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 nonpublic
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.
BLACKROCK DIVERSIFIED INCOME STRATEGIES PORTFOLIO, INC. AUGUST 31, 2006 31
BlackRock Diversified Income Strategies Portfolio, Inc. seeks a high current
income by investing primarily in a diversified portfolio of floating rate debt
securities and instruments.
This report, including the financial information herein, is transmitted for use
only to shareholders of BlackRock Diversified Income Strategies Portfolio, Inc.
for their information. It is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any securities
mentioned in this report. Past performance results shown in this report should
not be considered a representation of future performance. The Fund leverages its
Common Stock to provide Common Stock shareholders with a potentially higher rate
of return. Leverage creates risk for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price of Common
Stock shares, and the risk that fluctuations in short-term interest rates may
reduce the Common Stock's yield. Statements and other information herein are as
dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-441-7762; (2) at
www.blackrock.com; and (3) on the Securities and Exchange Commission's Web site
at http://www.sec.gov. 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 (1) at www.blackrock.com and (2) on the Securities
and Exchange Commission's Web site at http://www.sec.gov.
BlackRock Diversified Income Strategies Portfolio, Inc.
Box 9011
Princeton, NJ 08543-9011
BLACKROCK
#DISP-8/06
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. 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
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: (1) Ronald W.
Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending August 31, 2006 - $38,500
Fiscal Year Ending August 31, 2005 - $40,000
(b) Audit-Related Fees - Fiscal Year Ending August 31, 2006 - $8,000
Fiscal Year Ending August 31, 2005 - $9,600
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.
(c) Tax Fees - Fiscal Year Ending August 31, 2006 - $6,000
Fiscal Year Ending August 31, 2005 - $7,900
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending August 31, 2006 - $0
Fiscal Year Ending August 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending August 31, 2006 - $3,098,500
Fiscal Year Ending August 31, 2005 - $7,377,027
(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 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) - $1,739,500, 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)):
Ronald W. Forbes
Cynthia A. Montgomery
Jean Margo Reid
Roscoe S. Suddarth
Richard R. West
Edward D. Zinbarg
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of October 2, 2006.
(a)(1) The Fund is managed by a team of investment professionals that
is responsible for the day-to-day management of the Fund's
portfolio. The lead members of this team are Mark J. Williams,
Managing Director at BlackRock, and Kevin J. Booth, Managing
Director at BlackRock. Mr. Williams and Mr. Booth each has been
a portfolio manager of the Fund since 2006. Mr. William is
responsible for setting the Fund's overall investment strategy
and overseeing the management of the Fund. Mr. Booth is
responsible for the day-to-day management of the Fund's
portfolio and the selection of its investments.
Mr. Williams is the head of BlackRock's bank loan group and a
member of the Investment Strategy Group. His primary
responsibility is originating and evaluating bank loan
investments for the firm's collateralized bond obligations. He
is also involved in the evaluation and sourcing of mezzanine
investments. Prior to joining BlackRock in 1998, Mr. Williams
spent eight years with PNC Bank's New York office and was a
founding member of the bank's Leveraged Finance Group. In that
capacity he was responsible for structuring proprietary middle
market leveraged deals and sourcing and evaluating broadly
syndicated leveraged loans in the primary and secondary markets
for PNC Bank's investment portfolio. From 1984 until 1990, Mr.
Williams worked in PNC Bank's Philadelphia office in a variety
of marketing and corporate finance positions.
Mr. Booth is a member of BlackRock's bank loan group. He joined
BlackRock in 2006. Prior to joining BlackRock, Mr. Booth was a
Managing Director (Global Fixed Income) of Merrill Lynch
Investment Managers, L.P. ("MLIM") since 2006 and a member of
MLIM's bank loan group from 2000 to 2006. He was a Director of
MLIM from 2000 to 2006 and was a Vice President of MLIM from
1994 to 2000. He has been portfolio manager with BlackRock or
MLIM since 2000.
(a)(2) As of October 2, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
Registered Other Pooled Registered Other Pooled
(i) Name of Investment Investment Other Investment Investment Other
Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts
Kevin J. Booth 7 5 1 0 2 0
$3,179,846,415 $2,357,557,822 $ 25,390,431 $ 0 $ 587,029,626 $ 0
Mark Williams 9 17 7 0 10 4
$4,323,568,443 $6,368,469,951 $1,222,718,181 $ 0 $2,908,136,350 $1,030,000,000
(iv) Potential Material Conflicts of Interest
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 2, 2006:
BlackRock has adopted the compensation program utilized by MLIM for the
remainder of 2006 with respect to Mr. Booth.
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of BlackRock and its
affiliates, including the Investment Adviser, 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 certain BlackRock and its
affiliates portfolio managers are a 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,
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, certain BlackRock and its affiliates portfolio manager incentive
compensation is based on a formulaic compensation program. BlackRock's formulaic
portfolio manager compensation program includes: investment performance relative
to the CSFB Leveraged Loan Index and CSFB Global High Yield Index over 1-, 3-
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. 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. A 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 portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of BlackRock stock. 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 BlackRock stock price performance. As such, the stock bonus
aligns each portfolio manager's financial interests with those of the BlackRock
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 BlackRock's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and financial
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of certain BlackRock mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of BlackRock products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to employees of BlackRock and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
With respect to Mr. Williams, the following compensation structure applies:
BlackRock Portfolio Manager Compensation
BlackRock's financial arrangements with its portfolio managers, its
competitive compensation and its career path emphasis at all levels
reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year
to year based on a number of factors. The principal components of
compensation include a base salary, a discretionary bonus,
participation in various benefits programs and one or more of the
incentive compensation programs established by BlackRock such as its
Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base compensation. Generally, portfolio managers receive base
compensation based on their seniority and/or their position with the
firm.
Discretionary compensation. In addition to base compensation, portfolio
managers may receive discretionary compensation, which can be a
substantial portion of total compensation. Discretionary compensation
can include a discretionary cash bonus as well as one or more of the
following:
Long-Term Retention and Incentive Plan ("LTIP") --The LTIP is a
long-term incentive plan that seeks to reward certain key employees.
The plan provides for the grant of awards that are expressed as an
amount of cash that, if properly vested and subject to the attainment
of certain performance goals, will be settled in cash and/or in
BlackRock, Inc. common stock.
Deferred Compensation Program --A portion of the compensation paid to
each portfolio manager may be voluntarily deferred by the portfolio
manager into an account that tracks the performance of certain of the
firm's investment products. Each portfolio manager is permitted to
allocate his deferred amounts among various options, including to
certain of the firm's hedge funds and other unregistered products. In
addition, prior to 2005, a portion of the annual compensation of
certain senior managers was mandatorily deferred in a similar manner
for a number of years. Beginning in 2005, a portion of the annual
compensation of certain senior managers is paid in the form of
BlackRock, Inc. restricted stock units which vest ratably over a number
of years.
Options and Restricted Stock Awards --While incentive stock options are
not currently being awarded to BlackRock employees, BlackRock, Inc.
previously granted stock options to key employees, including certain
portfolio managers who may still hold unexercised or unvested options.
BlackRock, Inc. also has a restricted stock award program designed to
reward certain key employees as an incentive to contribute to the
long-term success of BlackRock. These awards vest over a period of
years.
Incentive Savings Plans --The PNC Financial Services Group, Inc. has
created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including an Employee Stock
Purchase Plan ("ESPP") and a 401(k) plan. The 401(k) plan may involve a
company match of the employee's contribution of up to 6% of the
employee's salary. The company match is made using BlackRock, Inc.
common stock. The firm's 401(k) plan offers a range of investment
options, including registered investment companies managed by the firm.
Each portfolio manager is eligible to participate in these plans.
Annual incentive compensation for each portfolio manager is a function
of several components: the performance of BlackRock, Inc., the
performance of the portfolio manager's group within BlackRock, the
investment performance, including risk-adjusted returns, of the firm's
assets under management or supervision by that portfolio manager
relative to predetermined benchmarks, and the individual's teamwork and
contribution to the overall performance of these portfolios and
BlackRock. Unlike many other firms, portfolio managers at BlackRock
compete against benchmarks rather than each other. In most cases,
including for the portfolio managers of the Fund, these benchmarks are
the same as the benchmark or benchmarks against which the performance
of the Fund or other accounts are measured. A group of BlackRock,
Inc.'s officers determines the benchmarks against which to compare the
performance of funds and other accounts managed by each portfolio
manager. With respect to Mr. Williams, such benchmarks will include:
the CSFB Leveraged Loan Index and CSFB Global High Yield Index.
The group of BlackRock, Inc.'s officers then makes a subjective
determination with respect to the portfolio manager's compensation
based on the performance of the funds and other accounts managed by
each portfolio manager relative to the various benchmarks. Senior
portfolio managers who perform additional management functions within
BlackRock may receive additional compensation for serving in these
other capacities.
(a)(4) Beneficial Ownership of Securities. As of October 2, 2006, Mr.
Booth beneficially owns stock issued by the Fund valued in the
range $100,001-$500,000. As of October 2, 2006, Mr. Williams
does not beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - The registrant's
Nominating 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 sets forth the qualifications of the
proposed nominee to the registrant's Secretary. There have been no
material changes to these procedures.
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits 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 Diversified Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Diversified Income Strategies Fund, Inc.
Date: October 19, 2006
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/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Diversified Income Strategies Fund, Inc.
Date: October 19, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock Diversified Income Strategies Fund, Inc.
Date: October 19, 2006