UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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: 08/31/07
Date of reporting period: 09/01/06 - 02/28/07
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
BlackRock Diversified Income BLACKROCK
Strategies Fund, Inc.
SEMI-ANNUAL REPORT
FEBRUARY 28, 2007 | (UNAUDITED)
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock Diversified Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
BlackRock Diversified Income Strategies Fund, 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 April 2007 will be postponed and will be held in
September 2007. Proposals of stockholders intended to be presented at the
meeting must be received by the Fund by May 15, 2007 for inclusion in the Fund's
proxy statement and form of proxy for that meeting. The persons named as proxies
in the proxy materials for the Fund's 2007 annual meeting of stockholders may
exercise discretionary authority with respect to any stockholder proposal
presented at such meeting if written notice of such proposal has not been
received by the Fund by July 1, 2007. Written proposals and notices should be
sent to the Secretary of the Fund, 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
2 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
A Letter to Shareholders
Dear Shareholder
The new year began on a positive note for most financial markets, continuing the
momentum from the fourth quarter of 2006. At the end of February, however,
global equity markets registered their first significant decline since last
summer. The market jitters were triggered by a significant setback in the
Chinese market and were exacerbated by several concerns, notably a weakening
economy, some disappointing corporate earnings announcements, geopolitical
concerns related to Iran's nuclear program and increasing delinquencies in the
subprime mortgage market. Despite the recent spate of volatility, underlying
stock market fundamentals appear quite sound, supported by a generally good
global economic backdrop, tame inflation, relatively low interest rates and
attractive valuations.
Not unlike the equity market, the bond market also has seen volatility recently
as observers have attempted to interpret mixed economic signals. A bond market
rally late last year reversed early in 2007 as the economic data strengthened.
Prices improved (and yields fell) again in February as equities struggled.
Notably, the Treasury curve remained inverted for much of 2006 and into 2007.
The 30-year Treasury yield stood at 4.68% on February 28, 2007, while the
one-month Treasury offered the highest yield on the curve at 5.24%.
For its part, the Federal Reserve Board (the Fed) has left the target short-term
interest rate on hold at 5.25% since first pausing on August 8, 2006. Although
the central bankers continue to express concern about potential inflationary
pressures, they also have made reference to signs of economic weakness in their
public statements. Most observers expect the Fed to keep interest rates on hold
for now, but acknowledge that the combination of a mild economic slowdown and
moderating inflation could prompt an interest rate cut later in 2007.
Notwithstanding the volatility along the way, most major market indexes managed
to post positive returns for the annual and semi-annual reporting periods ended
February 28, 2007:
Total Returns as of February 28, 2007 6-month 12-month
==============================================================================================================
U.S. equities (Standard & Poor's 500 Index) + 8.93% +11.97%
- --------------------------------------------------------------------------------------------------------------
Small cap U.S. equities (Russell 2000 Index) +10.76 + 9.87
- --------------------------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +12.17 +21.07
- --------------------------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) + 3.66 + 5.54
- --------------------------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.89 + 4.96
- --------------------------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) + 8.62 +12.36
- --------------------------------------------------------------------------------------------------------------
If the recent market movements are any guide, 2007 could be a year of enhanced
market volatility. As you navigate the uncertainties of the financial markets,
we encourage you to review your investment goals with your financial
professional and to make portfolio changes, as needed. We thank you for trusting
BlackRock with your investment assets, and we look forward to continuing to
serve you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
Fund President and Director
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 3
A Discussion With Your Fund's Portfolio Managers
The Fund outpaced its benchmark return for the period and provided an
attractive yield as we continued our efforts to enhance the level of income
provided to shareholders.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended February 28, 2007, the Common Stock of BlackRock
Diversified Income Strategies Fund, Inc. had net annualized yields of 9.45% and
9.17%, based on a period-end per share net asset value of $19.21 and a per share
market price of $19.80, respectively, and $.900 per share income dividends. Over
the same period, the total investment return on the Fund's Common Stock was
+7.73%, based on a change in net asset value from $18.70 to $19.21, and assuming
reinvestment of all distributions. By comparison, the Fund's 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 +5.06% for the six-month period.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of distributions, please refer to the Financial Highlights section
of this report. As a closed-end fund, the Fund's shares may trade in the
secondary market at a premium or discount to the Fund's net asset value. As a
result, total investment returns based on changes in the market value of the
Fund's Common Stock can vary significantly from total investment returns based
on changes in the Fund's net asset value.
The leveraged loan market, as measured by the Credit Suisse Leveraged Loan
Index, returned +4.19% for the semi-annual period, while the high yield bond
market, as measured by the Credit Suisse High Yield Index, returned +8.62%.
Despite some volatility late in the reporting period, the non-investment grade
markets continued to post strong results. The leveraged loan and the high yield
markets both posted positive returns in each of the past six months. The markets
have been aided by the continuation of historically low default rates and strong
inflows into the asset classes, both of which have helped to support the prices
of the underlying issues.
Support for the leveraged loan market also came from soaring investor demand,
which pushed spreads to new lows. The primary driver of this demand is
collateralized loan obligations (CLOs), which now account for approximately
two-thirds of the leveraged loan market. The cost of funding for these CLOs has
dropped dramatically over the past few years, enabling the structured finance
vehicles to absorb bank loans at increasingly tighter spreads and still achieve
their targeted equity returns. The fact that default rates are at historic lows
also has assisted this trend. To supply the CLO juggernaut, the demand for bank
loans has been so voracious that we have actually seen bond deals migrate to the
loan market, a reversal of historic flows that typically saw deals move from
loans into bonds. This trend has marginally curtailed the supply of high yield
bonds, keeping spreads there tighter than they otherwise would be.
What factors most influenced Fund performance?
Given the inverted shape of the yield curve, the Fund benefited from its
overweight exposure to floating rate high yield bonds and bank loans, as opposed
to fixed rate high yield issues. The Fund's performance also was aided by its
overweight exposure to lower-tier credits, particularly B-rated and CCC-rated
issues, as these segments of the non-investment grade market generated the
strongest returns. Given the relative strength of the market, we continued to
make extensive use of the Fund's leverage line, with an average level of about
30% of total assets. This, too, proved beneficial to performance. (For a
complete explanation of the benefits and risks of leveraging, refer to page 2 of
this report to shareholders.)
What changes were made to the Fund during the period?
During the period, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. and its affiliates, including Fund Asset Management,
L.P., with BlackRock, Inc. to form a new independent company. While this
resulted in some additions to the portfolio management team, there was no change
in the overall investment philosophy or focus of the Fund. The most notable
shift in sector exposures occurred in the automotive sector, where we reduced
our underweight position during the period.
4 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
How would you characterize the Fund's position at the close of the period?
While volatility picked up at the end of the period, resulting in an investor
flight to quality, fundamental and technical valuations remained favorable for
the leveraged loan and high yield markets. Even with the noise at the end of the
reporting period, the leveraged loan market posted a return of +.74% in
February, while the high yield market posted a return of better than +1%. This
marked the seventh month out of eight in which the Credit Suisse High Yield
Index posted monthly returns in excess of 1% and the eighth consecutive month
that the Credit Suisse Leveraged Loan Index posted returns of at least +.50%.
Market fundamentals remain very strong, with default rates near historic lows
and a new-issue calendar that is just beginning to satisfy the non-investment
grade investor. As a result, we remain positioned with an overweight to
lower-tier credits (B and CCC), as we expect these segments of the market to
post the strongest returns.
Kevin Booth
Vice President and Portfolio Manager
Mark Williams
Portfolio Manager
April 3, 2007
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 5
Portfolio Information
As of February 28, 2007
Percent of
Ten Largest Holdings Net Assets
- --------------------------------------------------------------------------------
Amkor Technology, Inc. Second Lien Term Loan,
9.86% due 10/27/2010.................................... 2.5%
Universal City Florida Holding Co. I,
10.11% due 5/01/2010.................................... 2.2
CCO Holdings LLC, 9.485% due 12/15/2010................... 2.2
Smurfit Kappa Funding Plc,
7.75% due 4/01/2015..................................... 2.2
Abitibi-Consolidated, Inc.,
8.855% due 6/15/2011.................................... 2.2
CPI Holdco, Inc., 11.151% due 2/01/2015................... 1.8
Verso Paper Holdings LLC,
9.11% due 8/01/2014..................................... 1.8
Simmons Bedding Co.,
7.875% due 1/15/2014.................................... 1.8
Delta Airlines, Debtor In Possession Term Loan C,
10.098% due 3/16/2008................................... 1.7
Insight Midwest Holdings LLC Delay Draw Term Loan,
7.61% due 4/03/2014..................................... 1.7
- --------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
- --------------------------------------------------------------------------------
Information Technology.................................... 14.5%
Paper..................................................... 11.1
Cable -- U.S.............................................. 9.3
Automotive................................................ 9.3
Housing................................................... 7.8
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
BB/Ba..................................................... 13.2%
B/B....................................................... 57.8
CCC/Caa................................................... 13.5
CC/Ca..................................................... 0.8
NR (Not Rated)............................................ 10.9
Other*.................................................... 3.8
- --------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks and short-term investments.
6 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Schedule of Investments as of February 28, 2007 (Unaudited) (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Aerospace & Defense -- 2.8%
USD 160,000 Argo-Tech Corp., 9.25% due 6/01/2011 $ 173,600
EUR 2,000,000 Bombardier, Inc., 6.939% due 11/15/2013 (b)(h) 2,712,860
USD 130,000 TransDigm, Inc., 7.75% due 7/15/2014 (h) 133,575
3,500,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 3,412,500
-----------
6,432,535
====================================================================================
Automotive -- 5.2%
2,700,000 AutoNation, Inc., 7.36% due 4/15/2013 (b) 2,740,500
1,825,000 Delco Remy International, Inc., 9.36%
due 4/15/2009 (b) 1,774,813
185,000 Ford Motor Co., 7.45% due 7/16/2031 148,463
Ford Motor Credit Co.:
210,000 5.80% due 1/12/2009 206,271
1,340,000 8.11% due 1/13/2012 (b) 1,347,231
2,500,000 9.81% due 4/15/2012 (b) 2,703,683
The Goodyear Tire & Rubber Co. (h):
1,000,000 9.14% due 12/01/2009 (b) 1,010,000
530,000 8.625% due 12/01/2011 563,125
660,000 Lear Corp., 8.75% due 12/01/2016 636,075
460,000 Titan International, Inc., 8% due 1/15/2012 (h) 469,200
380,000 United Auto Group, Inc., 7.75% due 12/15/2016 (h) 386,650
-----------
11,986,011
====================================================================================
Broadcasting -- 3.7%
3,000,000 Canadian Satellite Radio Holdings, Inc., 12.75%
due 2/15/2014 3,082,500
500,000 LIN Television Corp. Series B, 6.50% due 5/15/2013 487,500
875,000 Paxson Communications Corp., 8.757%
due 1/15/2012 (b)(h) 890,313
1,120,000 XM Satellite Radio, Inc., 9.871% due 5/01/2013 (b) 1,106,000
3,040,000 Young Broadcasting, Inc., 10% due 3/01/2011 3,017,200
-----------
8,583,513
====================================================================================
Cable -- International -- 1.7%
3,725,000 NTL Cable Plc, 9.125% due 8/15/2016 3,957,813
====================================================================================
Cable -- U.S. -- 5.8%
5,000,000 CCO Holdings LLC, 9.485% due 12/15/2010 (b) 5,100,000
3,000,000 Cablevision Systems Corp. Series B, 9.87%
due 4/01/2009 (b) 3,195,000
Intelsat Bermuda Ltd. (b)(h):
3,195,000 11.354% due 6/15/2013 3,426,638
1,735,000 8.872% due 1/15/2015 1,776,206
-----------
13,497,844
====================================================================================
Chemicals -- 2.9%
440,000 American Pacific Corp., 9% due 2/01/2015 (h) 443,850
Momentive Performance Materials, Inc. (h):
310,000 10.125% due 12/01/2014 (e) 326,275
520,000 11.50% due 12/01/2016 540,800
3,305,000 Nova Chemicals Corp., 8.502%
due 11/15/2013 (b) 3,305,000
2,000,000 PolyOne Corp., 6.89% due 9/22/2008 1,925,000
290,000 Terra Capital, Inc., 7% due 2/01/2017 (h) 288,550
-----------
6,829,475
====================================================================================
Consumer -- Durables -- 1.8%
4,000,000 Simmons Bedding Co., 7.875% due 1/15/2014 4,100,000
====================================================================================
Consumer -- Non-Durables -- 4.5%
3,425,000 Ames True Temper, Inc., 9.36% due 1/15/2012 (b) 3,510,625
4,000,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 3,360,000
3,500,000 Levi Strauss & Co., 10.11% due 4/01/2012 (b) 3,574,375
-----------
10,445,000
====================================================================================
Diversified Media -- 3.0%
Affinion Group, Inc.:
USD 80,000 10.125% due 10/15/2013 86,400
175,000 11.50% due 10/15/2015 189,875
1,400,000 Idearc Inc., 8% due 11/15/2016 (h) 1,438,500
5,000,000 Universal City Florida Holding Co. I, 10.11%
due 5/01/2010 (b) 5,175,000
-----------
6,889,775
====================================================================================
Energy -- Exploration & Production -- 0.3%
700,000 Stone Energy Corp., 8.11% due 7/15/2010 (b)(h) 700,875
====================================================================================
Energy -- Other -- 2.5%
850,000 Aleris International, Inc., 9% due 12/15/2014 (e)(h) 901,000
3,000,000 Ocean RIG ASA, 9.36% due 4/04/2011 (b) 3,000,000
2,000,000 Parker Drilling Co., 10.119% due 9/01/2010 (b) 2,040,000
-----------
5,941,000
====================================================================================
Financial -- 0.7%
1,525,000 NCO Group, Inc., 10.23% due 11/15/2013 (b)(h) 1,532,625
====================================================================================
Food & Tobacco -- 0.1%
200,000 Swift & Co., 12.50% due 1/01/2010 209,500
====================================================================================
Gaming -- 3.4%
Galaxy Entertainment Finance Co. Ltd. (h):
800,000 10.42% due 12/15/2010 (b) 848,000
375,000 9.875% due 12/15/2012 409,219
800,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (h) 824,000
Snoqualmie Entertainment Authority (h):
305,000 9.15% due 2/01/2014 (b) 309,575
140,000 9.125% due 2/01/2015 144,550
1,050,000 Tropicana Entertainment, 9.625%
due 12/15/2014 (h) 1,056,563
1,000,000 Tunica-Biloxi Gaming Authority, 9%
due 11/15/2015 (h) 1,062,500
3,100,000 Turning Stone Resort Casino Enterprise, 9.125%
due 9/15/2014 (h) 3,224,000
-----------
7,878,407
====================================================================================
Health Care -- 2.5%
1,500,000 Angiotech Pharmaceuticals, Inc., 9.11%
due 12/01/2013 (b)(h) 1,548,750
2,000,000 Elan Finance Plc, 9.36% due 11/15/2011 (b) 2,035,000
HealthSouth Corp. (h):
1,500,000 11.418% due 6/15/2014 (b) 1,665,000
450,000 10.75% due 6/15/2016 502,875
-----------
5,751,625
====================================================================================
Housing -- 4.6%
920,000 Esco Corp., 9.23% due 12/15/2013 (b)(h) 956,800
1,607,000 Goodman Global Holding Co., Inc., 8.36%
due 6/15/2012 (b) 1,627,088
2,850,000 Masonite Corp., 11% due 4/06/2015 (h) 2,842,875
2,500,000 Scranton Products, Inc., 12.117% due 7/01/2012 (b) 2,575,000
1,250,000 Stanley-Martin Communities LLC, 9.75%
due 8/15/2015 1,143,750
1,500,000 Technical Olympic USA, Inc., 8.25%
due 4/01/2011 (h) 1,455,000
-----------
10,600,513
====================================================================================
Hybrid -- 0.6%
1,350,000 North Street Referenced Linked Notes Series 2005-8A
Class D, 19.86% due 6/15/2041 (b)(h) 1,350,000
====================================================================================
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
====================================================================================
Information Technology -- 6.1%
Amkor Technology, Inc.:
USD 60,000 7.75% due 5/15/2013 $ 58,200
110,000 9.25% due 6/01/2016 112,200
650,000 BMS Holdings, Inc., 12.40% due 2/15/2012 (b)(h) 640,142
200,000 Compagnie Generale de Geophysique-Veritas,
7.75% due 5/15/2017 207,000
Freescale Semiconductor, Inc. (h):
2,670,000 9.125% due 12/15/2014 (e) 2,706,713
2,810,000 9.23% due 12/15/2014 (b) 2,838,100
300,000 Nortel Networks Ltd., 9.61% due 7/15/2011 (b)(h) 321,000
135,000 Open Solutions, Inc., 9.75% due 2/01/2015 (h) 139,388
SunGard Data Systems, Inc.:
3,000,000 9.973% due 8/15/2013 (b) 3,135,000
2,000,000 10.25% due 8/15/2015 2,175,000
1,005,000 Telcordia Technologies, Inc., 10% due 3/15/2013 (h) 939,675
945,414 UGS Capital Corp. II, 10.348% due 6/01/2011 (e)(h) 961,959
------------
14,234,377
====================================================================================
Leisure -- 0.4%
945,000 Travelport, Inc., 9.985% due 9/01/2014 (b)(h) 975,713
====================================================================================
Manufacturing -- 4.2%
4,000,000 CPI Holdco, Inc., 11.151% due 2/01/2015 (b) 4,130,000
800,000 Jarden Corp., 7.50% due 5/01/2017 811,000
NXP BV (h):
670,000 8.11% due 10/15/2013 (b) 685,075
710,000 9.50% due 10/15/2015 733,075
RBS Global, Inc. (h):
440,000 9.50% due 8/01/2014 464,200
505,000 8.875% due 9/01/2016 515,100
2,385,000 Trimas Corp., 9.875% due 6/15/2012 2,373,075
------------
9,711,525
====================================================================================
Metal -- Other -- 2.3%
Indalex Holding Corp.:
500,000 11.50% due 2/01/2014 537,500
1,950,000 11.50% due 2/01/2014 (h) 2,086,500
1,350,000 James River Coal Co., 9.375% due 6/01/2012 1,161,000
1,425,000 RathGibson, Inc., 11.25% due 2/15/2014 1,510,500
------------
5,295,500
====================================================================================
Packaging -- 3.3%
Berry Plastics Holding Corp.:
60,000 8.875% due 9/15/2014 62,100
3,175,000 9.23% due 9/15/2014 (b) 3,278,188
1,570,000 Packaging Dynamics Finance Corp., 10%
due 5/01/2016 (h) 1,648,500
2,750,000 Wise Metals Group LLC, 10.25% due 5/15/2012 2,653,750
------------
7,642,538
====================================================================================
Paper -- 11.1%
5,000,000 Abitibi-Consolidated, Inc., 8.855% due 6/15/2011 (b) 5,025,000
Ainsworth Lumber Co. Ltd. (b):
3,000,000 9.249% due 10/01/2010 2,535,000
1,500,000 9.499% due 4/01/2013 1,170,000
2,000,000 Boise Cascade LLC, 8.235% due 10/15/2012 (b) 2,000,000
EUR 2,000,000 LECTA SA, 0% due 2/15/2014 2,666,543
USD 3,000,000 NewPage Corp., 11.61% due 5/01/2012 (b) 3,270,000
5,000,000 Smurfit Kappa Funding Plc, 7.75% due 4/01/2015 5,050,000
4,000,000 Verso Paper Holdings LLC, 9.11%
due 8/01/2014 (b)(h) 4,120,000
------------
25,836,543
====================================================================================
Retail -- 3.4%
USD 765,000 Buffets, Inc., 12.50% due 11/01/2014 803,250
Michaels Stores Inc. (h):
1,190,000 10% due 11/01/2014 1,273,300
3,470,000 11.375% due 11/01/2016 3,764,950
1,800,000 Neiman Marcus Group, Inc., 10.375%
due 10/15/2015 2,016,000
------------
7,857,500
====================================================================================
Service -- 1.5%
1,000,000 Neff Rental LLC, 11.25% due 6/15/2012 1,112,500
330,000 PNA Intermediate Holding Corp., 12.36%
due 2/15/2013 (b)(h) 331,650
1,300,000 Sally Holdings LLC, 10.50% due 11/15/2016 (h) 1,345,500
40,000 Seitel Acquisition Corp., 9.75% due 2/15/2014 (h) 40,600
Yankee Acquisition Corp. (h):
240,000 8.50% due 2/15/2015 245,400
435,000 9.75% due 2/15/2017 445,875
------------
3,521,525
====================================================================================
Telecommunications -- 1.5%
Nordic Telephone Co. Holdings ApS (h):
800,000 8.875% due 5/01/2016 862,000
EUR 500,000 8.352% due 5/01/2016 (b) 680,696
USD 2,000,000 Qwest Communications International, Inc.,
8.86% due 2/15/2009 (b) 2,020,000
------------
3,562,696
====================================================================================
Transportation -- 0.2%
500,000 Navios Maritime Holdings, Inc., 9.50%
due 12/15/2014 (h) 513,750
====================================================================================
Utility -- 0.1%
350,000 Conexant Systems, Inc., 9.11%
due 11/15/2010 (b)(h) 360,500
====================================================================================
Wireless Communications -- 4.5%
EUR 348,306 BCM Ireland Preferred Equity Ltd., 10.597%
due 2/15/2017 (e)(h) 466,691
USD 3,000,000 Centennial Communications Corp., 11.11%
due 1/01/2013 (b) 3,165,000
1,650,000 Cricket Communications, Inc., 9.375%
due 11/01/2014 (h) 1,740,750
Digicel Group Ltd. (h):
1,070,000 8.875% due 1/15/2015 1,044,588
2,140,000 9.125% due 1/15/2015 (e) 2,083,825
650,000 FiberTower Corp., 9% due 11/15/2012 (a)(h) 745,063
200,000 Orascom Telecom Finance SCA, 7.875%
due 2/08/2014 199,000
985,000 West Corp., 11% due 10/15/2016 (h) 1,066,263
------------
10,511,180
====================================================================================
Total Corporate Bonds
(Cost -- $194,103,433) -- 84.7% 196,709,858
====================================================================================
====================================================================================
Floating Rate Loan Interests (g)
====================================================================================
Aerospace & Defense -- 1.4%
3,148,148 Standard Aero Holdings Term Loan, 7.57% - 7.63%
due 8/24/2012 3,161,921
====================================================================================
8 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (g) Value
====================================================================================
Airlines -- 2.0%
Delta Air Lines:
USD 4,000,000 Debtor In Possession Term Loan C, 10.098%
due 3/16/2008 $ 4,042,172
500,000 Term Loan B, 10.118% due 3/16/2008 502,292
-----------
4,544,464
====================================================================================
Automotive -- 4.1%
Intermet Corp.:
1,481,481 First Lien Term Loan, 10.39% due 11/08/2010 1,237,037
518,519 Letter of Credit, 10.20%
due 11/08/2010 432,963
JL French Corp.:
1,000,000 First Lien Term Loan B, 8.375% due 6/05/2011 974,375
1,000,000 Second Lien Term Loan,
10.875% due 6/05/2012 916,667
Metaldyne Corp.:
86,538 Letter of Credit, 8.92% - 9.125%
due 1/15/2012 87,476
627,404 Term Loan, 9.125% due 1/15/2014 634,201
Navistar International Transportation Corp.:
800,000 Revolving Credit, 5.22% - 8.61%
due 6/30/2012 813,200
2,200,000 Term Loan, 8.61% due 6/30/2012 2,236,300
2,250,000 Visteon Corp. Term Loan, 8.38% due 6/13/2013 2,271,375
-----------
9,603,594
====================================================================================
Broadcasting -- 1.7%
2,000,000 Ellis Communications Term Loan, 10%
due 12/30/2011 1,995,000
1,000,000 NEP II, Inc. Term Loan B, 7.760%
due 2/13/2014 1,009,688
1,000,000 Persona Communications Second Lien Term Loan,
11.373% due 4/30/2014 1,008,750
-----------
4,013,438
====================================================================================
Cable -- U.S. -- 3.5%
Cequel Communications:
2,024,137 First Lien A, 7.61% due 11/05/2013 2,043,429
2,000,000 Second Lien Term Loan A, 9.86% due 5/04/2014 2,048,750
4,000,000 Insight Midwest Holdings LLC Delay Draw Term Loan,
7.61% due 4/03/2014 4,037,000
-----------
8,129,179
====================================================================================
Chemicals -- 1.1%
3,000,000 Wellman, Inc. Second Lien Term Loan, 12.11%
due 2/10/2010 2,586,000
====================================================================================
Consumer -- Durables -- 0.2%
500,000 Evenflo Co., Inc. Term Loan, 7.82% due 2/15/2013 504,375
====================================================================================
Diversified Media -- 4.4%
1,150,000 Affinion Group Term Loan, 11.66% due 3/01/2012 1,137,542
525,000 Alix Partners Term Loan, 7.86% due 10/30/2013 528,609
4,000,000 Idearc Inc. Term Loan, 7.33% - 7.35%
due 11/15/2014 4,032,500
1,995,000 Nielsen Finance LLC Term Loan, 7.61%
due 8/09/2013 2,012,975
Penton Media Term Loan:
1,000,000 7.625% due 2/15/2013 1,009,167
1,000,000 10.345% due 2/15/2014 1,018,125
520,000 Riverdeep Group Ltd. Bridge Loan, 11.066%
due 12/21/2007 518,700
-----------
10,257,618
====================================================================================
Energy -- Exploration & Production -- 1.5%
USD 3,000,000 Frontier Drilling Term Loan B, 8.62% - 8.69%
due 6/21/2013 3,000,000
496,250 MEG Energy Corp. Term Loan, 7.375%
due 4/03/2013 499,429
-----------
3,499,429
====================================================================================
Energy -- Other -- 2.5%
Alon USA, Inc.:
2,211,111 Paramount Facility, 7.62% - 7.876%
due 6/22/2013 2,223,549
276,389 Term Loan, 7.57% - 7.62% due 6/22/2013 277,944
250,000 Exco Resources, Inc. Term Loan, 10.938% -
11.375% due 10/31/2011 252,188
3,000,000 Scorpion Drilling Ltd. Second Lien Term Loan,
13.61% due 5/05/2015 3,090,000
-----------
5,843,681
====================================================================================
Financial -- 1.3%
JG Wentworth Manufacturing Term Loan:
2,000,000 8.864% due 4/12/2011 2,020,000
1,000,000 8.864% due 4/14/2011 1,010,000
-----------
3,030,000
====================================================================================
Food & Tobacco -- 3.7%
Aramark Corp.:
197,524 Letter of Credit, 7.445% due 1/30/2014 199,475
2,802,476 Term Loan, 7.445% due 1/30/2014 2,830,150
500,000 Bolthouse Farms, Inc. Second Lien Term Loan,
10.864% due 12/01/2013 505,417
Dole Food Co., Inc.:
416,888 Term Loan B, 7.438% - 9.25% due 4/12/2013 417,097
697,184 Term Loan C, 7.438% - 9.25% due 3/31/2013 697,533
692,442 Term Loan C, 7.438% - 9.25% due 4/12/2013 692,788
186,684 Tranche B, 5.23% due 4/12/2013 186,777
Quiznos LLC:
995,000 First Lien Term Loan, 7.75% due 5/05/2013 999,008
1,000,000 Second Lien Term Loan, 11.117%
due 11/05/2013 1,004,028
1,000,000 Sturm Foods Inc. Term Loan, 7.875%
due 1/30/2014 1,005,938
-----------
8,538,211
====================================================================================
Gaming -- 2.2%
1,000,000 Edge-Star Partners LLC First Lien Term Loan,
9.375% due 11/18/2007 1,000,000
500,000 Foamex LP Term Loan, 7.57% due 2/15/2013 503,750
500,000 Great Canadian Gaming Corp. Term Loan B,
6.86% due 2/15/2014 502,813
Green Valley Ranch Gaming LLC Term Loan:
481,818 7.36% due 1/29/2012 487,038
500,000 8.61% due 1/29/2012 508,000
2,000,000 Venetian Macau U.S. Finance Co. LLC Term Loan B,
8.12% due 5/25/2013 2,020,250
-----------
5,021,851
====================================================================================
Health Care -- 1.3%
3,000,000 Health Management Associates, Inc. Term Loan B,
7.07% due 1/15/2014 3,021,564
====================================================================================
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 9
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests (g) Value
====================================================================================
Housing -- 3.2%
USD 3,000,000 LNR Property Corp. Term Loan B, 8.11%
due 7/12/2011 $ 3,017,679
1,881,179 Lake at Las Vegas Joint Venture Term Loan,
10% - 10.12% due 11/01/2009 1,892,265
2,497,500 Ply Gem Industries, Inc. First Lien Term Loan,
8.37% - 11.12% due 10/31/2011 2,525,597
------------
7,435,541
====================================================================================
Information Technology -- 8.4%
1,638,379 Activant Solutions Term Loan, 7.375%
due 5/02/2013 1,639,403
5,500,000 Amkor Technology, Inc. Second Lien Term Loan,
9.86% due 10/27/2010 5,694,794
3,000,000 Aspect Software Second Lien Term Loan, 12.438%
due 7/05/2012 3,005,001
1,000,000 ClientLogic Holding Corp. Term Loan B,
7.82% - 7.86% due 1/30/2014 1,005,417
Dealer Comp Services:
2,000,000 First Lien Term Loan, 7.82% due 10/31/2012 2,018,572
1,500,000 Second Lien Term Loan, 10.82%
due 10/31/2013 1,542,657
500,000 Intergraph Corp. Term Loan, 11.36% due 11/15/2014 503,438
4,000,000 Sanmina-SCI Corp. Term Loan, 7.875%
due 1/30/2008 4,016,000
------------
19,425,282
====================================================================================
Leisure -- 1.3%
1,080,000 Easton-Bell Sports Inc. Term Loan B, 11.39%
due 5/01/2012 1,053,000
2,000,000 National Cinemedia LLC Term Loan B, 7.09%
due 2/28/2015 2,015,000
------------
3,068,000
====================================================================================
Manufacturing -- 1.5%
1,500,000 Babcocks & Wilcox Letter of Credit, 5.264%
due 2/22/2012 1,515,000
1,000,000 Baldor Electric Co. Term Loan B, 7.063%
due 2/15/2014 1,008,500
1,000,000 Brand Energy Term Loan B, 7.625% due 2/15/2014 1,011,250
------------
3,534,750
====================================================================================
Metal -- Other -- 1.9%
Euramax International Plc:
828,947 Second Lien Term Loan, 12.36% due 6/29/2013 832,056
1,275,633 Tranche 3 Term Loan B, 8.063% due 6/29/2012 1,279,459
1,671,053 Tranche 4 Second Lien Term Loan, 12.36%
due 6/29/2013 1,677,319
Wire Rope Corp. of America, Inc.:
85,714 Delayed Draw Term Loan, 9.50% due 1/30/2014 86,357
535,714 Term Loan B, 7.60% - 7.61% due 1/30/2014 539,732
------------
4,414,923
====================================================================================
Packaging -- 2.3%
1,822,906 Anchor Glass Container Corp. Term Loan B,
7.614% - 7.62% due 5/03/2013 1,818,349
3,571,429 Graham Packaging Co. LP Second Lien Term Loan,
9.625% due 4/07/2012 3,603,571
------------
5,421,920
====================================================================================
Retail -- 0.2%
USD 400,000 Petco Animal Supplies, Inc. Term Loan, 8.10%
due 10/31/2012 404,417
====================================================================================
Service -- 1.9%
1,620,426 Alliance Laundry Systems LLC Term Loan,
7.57% - 7.60% due 1/27/2012 1,632,579
750,000 Brickman Group, Inc. Term Loan, 7.36% - 7.399%
due 1/23/2014 753,281
2,000,000 NES Rentals Holdings, Inc. Term Loan C, 12.125%
due 7/12/2013 2,012,500
------------
4,398,360
====================================================================================
Steel -- 0.3%
750,000 McJunkin Corp. Term Loan, 7.595% due 1/30/2014 757,500
====================================================================================
Telecommunications -- 0.2%
500,000 Kentucky Data Link Inc. Term Loan B, 7.57%
due 2/28/2015 503,750
====================================================================================
Utility -- 1.7%
1,000,000 Calpine Corp. Second Priority Debtor in Possession
Term Loan, 9.364% due 12/20/2007 1,008,321
3,000,000 Generac Portable Products, Inc. Second Lien Term
Loan, 11.36% due 5/15/2014 2,992,500
------------
4,000,821
====================================================================================
Wireless Communications -- 1.9%
2,000,000 West Corp. Term Loan, 8.10% due 10/31/2013 2,016,388
2,250,000 Wind Telecomunicazione SpA Term Loan B, 12.54%
due 12/21/2011 2,262,656
------------
4,279,044
====================================================================================
Total Floating Rate Loan Interests
(Cost -- $129,871,892) -- 55.7% 129,399,633
====================================================================================
====================================================================================
Shares
Held Common Stocks
====================================================================================
Manufacturing -- 1.3%
176,126 Medis Technologies Ltd. (d) 3,025,845
- ------------------------------------------------------------------------------------
Total Common Stocks
(Cost -- $3,229,974) -- 1.3% 3,025,845
====================================================================================
====================================================================================
Beneficial
Interest Short-Term Securities
====================================================================================
USD 9,775,931 BlackRock Liquidity Series, LLC
Cash Sweep Series 5.33% (c)(f) 9,775,931
- ------------------------------------------------------------------------------------
Total Short-Term Securities
(Cost -- $9,775,931) -- 4.2% 9,775,931
- ------------------------------------------------------------------------------------
Total Investments (Cost -- $336,981,230*) -- 145.9% 338,911,267
Liabilities in Excess of Other Assets -- (45.9%) (106,634,623)
-------------
Net Assets -- 100.0% $ 232,276,644
=============
10 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
February 28, 2007, as computed for federal income tax purposes, were as
follows:
Aggregate cost........................................ $ 336,546,792
=============
Gross unrealized appreciation......................... $ 6,411,951
Gross unrealized depreciation......................... (4,047,476)
-------------
Net unrealized appreciation........................... $ 2,364,475
=============
(a) Convertible security.
(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
--------------------------------------------------------------------------
BlackRock Liquidity Series,
LLC Cash Sweep Series $7,770,658 $103,412
--------------------------------------------------------------------------
(d) Non-income producing security.
(e) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(f) Represents the current yield as of February 28, 2007.
(g) 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.
(h) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
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.
o Forward foreign exchange contracts as of February 28, 2007 were as
follows:
--------------------------------------------------------------------------
Foreign Settlement Unrealized
Currency Sold Date Depreciation
--------------------------------------------------------------------------
EUR 4,340,000 April 2007 $(83,834)
--------------------------------------------------------------------------
Total Unrealized Depreciation on Forward Foreign Exchange
Contracts -- Net (USD Commitment -- $5,671,477) $(83,834)
========
o Swaps outstanding as of February 28, 2007 were as follows:
--------------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
--------------------------------------------------------------------------------
Sold credit default protection on Novelis Inc.
and receive 1.4%
Broker, JPMorgan Chase
Expires January 2008 $ 2,000,000 $ (2,816)
Sold credit default protection on General
Motors Corp. and receive 5.25%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2008 $ 3,000,000 133,611
Sold credit default protection on Ford
Motor Co. and receive 4.2%
Broker, Deutsche Bank
Expires March 2010 $ 4,000,000 59,384
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 $ 7,000,000 982,499
Sold credit default protection on BAA
Ferovial Junior Term Loan
and receive 2.0%
Broker, Deutsche Bank
Expires June 2012 $ 300,000 --
Bought credit default protection on
Smithfield Foods, Inc. and pay 1.52%
Broker, Credit Suisse First Boston
Expires March 2012 $ 1,000,000 (481)
Pay a fixed rate of 4.823% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase
Expires January 2013 $20,000,000 185,754
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 $31,000,000 243,166
--------------------------------------------------------------------------------
Total $1,601,117
==========
o Currency Abbreviations:
EUR Euro
USD U.S. Dollar
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 11
Statement of Assets, Liabilities and Capital
As of February 28, 2007 (Unaudited)
=================================================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost -- $327,205,299) $ 329,135,336
Investments in affiliated securities, at value (identified cost -- $9,775,931) . 9,775,931
Unrealized appreciation on swaps ............................................... 1,604,414
Receivables:
Interest receivable ......................................................... $ 4,741,410
Securities sold ............................................................. 1,888,819
Swaps ....................................................................... 573,307
Commitment fees ............................................................. 4,841 7,208,377
-------------
Prepaid expenses ............................................................... 14,032
-------------
Total assets ................................................................... 347,738,090
-------------
=================================================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------------
Loans .......................................................................... 90,000,000
Bank overdraft ................................................................. 5,011,817
Unfunded loan commitment ....................................................... 2,812
Unrealized depreciation on forward foreign exchange contracts .................. 83,834
Unrealized depreciation on swaps ............................................... 3,297
Payables:
Securities purchased ........................................................ 19,278,216
Swaps ....................................................................... 779,132
Investment adviser .......................................................... 186,513
Interest on loans ........................................................... 54,276
Other affiliates ............................................................ 1,790 20,299,927
-------------
Accrued expenses ............................................................... 59,759
-------------
Total liabilities .............................................................. 115,461,446
-------------
=================================================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets ..................................................................... $ 232,276,644
=============
=================================================================================================================================
Capital
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(12,090,244 shares issued and outstanding) .................................... $ 1,209,024
Paid-in capital in excess of par ............................................... 229,229,633
Undistributed investment income -- net ......................................... $ 1,431,171
Accumulated realized capital losses -- net ..................................... (3,038,424)
Unrealized appreciation -- net ................................................. 3,445,240
-------------
Total accumulated earnings -- net .............................................. 1,837,987
-------------
Total capital -- Equivalent to $19.21 net asset value per share of
Common Stock (market price -- $19.80) ......................................... $ 232,276,644
=============
See Notes to Financial Statements.
12 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Statement of Operations
For the Six Months Ended February 28, 2007 (Unaudited)
=================================================================================================================================
Investment Income
- ---------------------------------------------------------------------------------------------------------------------------------
Interest (including $103,412 from affiliates) ......................... $ 15,021,597
Other income .......................................................... 148,649
-------------
Total income .......................................................... 15,170,246
-------------
=================================================================================================================================
Expenses
- ---------------------------------------------------------------------------------------------------------------------------------
Loan interest expense ................................................. $ 2,702,371
Investment advisory fees .............................................. 1,203,650
Borrowing costs ....................................................... 85,147
Professional fees ..................................................... 41,752
Accounting services ................................................... 40,243
Printing and shareholder reports ...................................... 20,524
Directors' fees and expenses .......................................... 20,142
Transfer agent fees ................................................... 17,070
Custodian fees ........................................................ 13,857
Pricing services ...................................................... 10,112
Listing fees .......................................................... 9,418
Other ................................................................. 9,438
-------------
Total expenses ........................................................ 4,173,724
-------------
Investment income -- net .............................................. 10,996,522
-------------
=================================================================================================================================
Realized & Unrealized Gain (Loss) -- Net
- ---------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments -- net ................................................. (806,428)
Swaps -- net ....................................................... 505,407
Foreign currency transactions -- net ............................... (40,800) (341,821)
-------------
Change in unrealized appreciation/depreciation on:
Investments -- net ................................................. 6,320,798
Unfunded corporate loans -- net .................................... 5,809
Swaps -- net ....................................................... 77,621
Foreign currency transactions -- net ............................... (83,719) 6,320,509
-------------------------------
Total realized and unrealized gain -- net ............................. 5,978,688
-------------
Net Increase in Net Assets Resulting from Operations .................. $ 16,975,210
=============
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 13
Statements of Changes in Net Assets
For the Six
Months Ended For the
February 28, Year Ended
2007 August 31,
Increase (Decrease) in Net Assets: (Unaudited) 2006
=================================================================================================================================
Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Investment income -- net ....................................................... $ 10,996,522 $ 21,188,611
Realized loss -- net ........................................................... (341,821) (2,699,062)
Change in unrealized appreciation/depreciation -- net .......................... 6,320,509 5,700,291
-------------------------------
Net increase in net assets resulting from operations ........................... 16,975,210 24,189,840
-------------------------------
=================================================================================================================================
Dividends to Shareholders
- ---------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income -- net ........................ (10,827,372) (20,336,039)
-------------------------------
=================================================================================================================================
Stock Transactions
- ---------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment of dividends 1,973,271 558,690
Offering costs resulting from the issuance of Common Stock ..................... -- (4,659)
-------------------------------
Net increase in net assets resulting from stock transactions ................... 1,973,271 554,031
-------------------------------
=================================================================================================================================
Net Assets
- ---------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets ................................................... 8,121,109 4,407,832
Beginning of period ............................................................ 224,155,535 219,747,703
-------------------------------
End of period* ................................................................. 232,276,644 $ 224,155,535
===============================
* Undistributed investment income -- net ...................................... $ 1,431,171 $ 1,262,021
===============================
See Notes to Financial Statements.
14 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Statement of Cash Flows
For the Six Months Ended February 28, 2007 (Unaudited)
=================================================================================================================================
Cash Provided by Operating Activities
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations .................................... $ 16,975,210
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables .............................................................. 301,574
Decrease in other liabilities ........................................................ (15,289)
Realized and unrealized gain -- net .................................................. (5,270,257)
Amortization of premium and discount ................................................. 175,866
Realized loss on foreign currency transactions ....................................... (40,688)
Proceeds from sales and paydowns of long-term securities ................................ 117,511,209
Purchases of long-term securities ....................................................... (119,226,757)
Purchases of short-term securities ...................................................... (7,768,584)
-------------
Cash provided by operating activities ................................................... 2,642,284
-------------
=================================================================================================================================
Cash Used for Financing Activities
- ---------------------------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings ........................................................... 31,300,000
Cash payments on borrowings ............................................................. (30,100,000)
Dividends paid to shareholders .......................................................... (8,854,101)
Increase in bank overdraft .............................................................. 5,011,817
-------------
Cash used for financing activities ...................................................... (2,642,284)
-------------
=================================================================================================================================
Cash
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase/decrease in cash ........................................................... 0
Cash at beginning of period ............................................................. 0
-------------
Cash at end of period ................................................................... $ 0
=============
=================================================================================================================================
Cash Flow Information
- ---------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest .................................................................. $ 2,738,162
=============
=================================================================================================================================
Noncash Financing Activities
- ---------------------------------------------------------------------------------------------------------------------------------
Capital shares issued in reinvestment of dividends paid to shareholders ................. $ 1,973,271
=============
See Notes to Financial Statements.
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 15
Financial Highlights
For the Six
Months Ended For the For the Period
February 28, Year Ended January 31, 2005+
The following per share data and ratios have been derived 2007 August 31, to August 31,
from information provided in the financial statements. (Unaudited) 2006 2005
====================================================================================================================================
Per Share Operating Performance
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................................... $ 18.70 $ 18.38 $ 19.10
-------------------------------------------
Investment income -- net*** ............................................. .91 1.77 .84
Realized and unrealized gain (loss) -- net .............................. .50 .25 (.77)
-------------------------------------------
Total from investment operations ........................................ 1.41 2.02 .07
-------------------------------------------
Less dividends from investment income -- net ............................ (.90) (1.70) (.75)
-------------------------------------------
Offering costs resulting from the issuance of Common Stock .............. -- --++ (.04)
-------------------------------------------
Net asset value, end of period .......................................... $ 19.21 $ 18.70 $ 18.38
===========================================
Market price per share, end of period ................................... $ 19.80 $ 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 .................. 1.31%* 1.29% 1.00%*
===========================================
Expenses, net of waiver ................................................. 3.71%* 3.17% 2.20%*
===========================================
Expenses ................................................................ 3.71%* 3.17% 2.48%*
===========================================
Investment income -- net ................................................ 9.78%* 9.57% 7.88%*
===========================================
====================================================================================================================================
Leverage
- ------------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings, end of period (in thousands) ...................... $ 90,000 $ 88,800 $101,400
===========================================
Average amount of borrowings outstanding during the period (in thousands) $ 96,940 $ 86,132 $ 75,543
===========================================
Average amount of borrowings outstanding per share during the period*** . $ 8.06 $ 7.20 $ 6.33
===========================================
====================================================================================================================================
Supplemental Data
- ------------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................................ $232,277 $224,156 $219,748
===========================================
Portfolio turnover ...................................................... 37.39% 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.
16 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Notes to Financial Statements (Unaudited)
1. Significant Accounting Policies:
BlackRock Diversified Income Strategies Fund, Inc. (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. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. All such adjustments are
of a normal, recurring nature. 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. As of October 2, 2006,
floating rate loan interests will be valued at the mean between the last
available bid prices from one or more brokers or dealers as obtained from the
Loan Pricing Corporation. Previously, floating rate loan interests were valued
at the mean between the last available bid and asked prices as obtained from the
same pricing source. This change had no significant effect on the valuation of
these loans. 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, BlackRock Advisors,
LLC (the "Manager"), a wholly owned subsidiary of BlackRock, Inc., 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 held by the Fund that are traded on stock exchanges or the NASDAQ
Global 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 Capital Market 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 the Manager
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
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 17
Notes to Financial Statements (continued)
value of the Fund's shares are determined as of such times. Foreign currency
exchange rates will generally be determined as of 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
will be valued at their fair value as determined in good faith by the Fund's
Board of Directors or by the Manager 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 due to an
unfavorable change in the price of the underlying security or index 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.
18 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Notes to Financial Statements (continued)
(f) 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.
(g) Offering costs -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital.
(h) 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.
(i) 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.
(j) Bank overdraft -- The Fund recorded a bank overdraft, which resulted from
management estimates of available cash.
(k) Recent accounting pronouncements -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "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
the last net asset value calculation in the first required financial statement
reporting period for fiscal years beginning after December 15, 2006. The impact
on the Fund's financial statements, if any, is currently being assessed.
In September 2006, Statement of Financial Accounting Standards No. 157, Fair
Value Measurements ("FAS 157"), was issued and is effective for fiscal years
beginning after November 15, 2007. FAS 157 defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. At this time, management is evaluating the implications of FAS 157
and its impact on the Fund's financial statements, if any, has not been
determined.
In addition, in February 2007, FASB issued "Statement of Financial Accounting
Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities" ("FAS 159"), which is effective for fiscal years beginning after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also elects
to apply the provisions of FAS 157. FAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. FAS 159 also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. At this time, management is evaluating
the implications of FAS 159 and its impact on the Fund's financial statements,
if any, has not been determined.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset
Management, L.P. ("), with BlackRock, Inc. to create a new independent company.
Merrill Lynch has a 49.8%
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 19
Notes to Financial Statements (continued)
economic interest and a 45% voting interest in the combined company and The PNC
Financial Services Group, Inc. has approximately a 34% economic and voting
interest. The new company operates under the BlackRock name and is governed by a
board of directors with a majority of independent members.
The Investment Advisory Agreement between the Fund and the Manager became
effective on September 29, 2006. Prior to September 29, 2006, FAM was the Fund's
Manager. The general partner of FAM is Princeton Services, Inc. ("PSI"), an
indirect, wholly owned subsidiary of Merrill Lynch, which is the limited
partner.
The Manager 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. In
addition, the Manager has entered into a Sub-Advisory Agreement with BlackRock
Financial Management, Inc., an affiliate of the Manager, under which the Manager
pays the Sub-Adviser for services it provides a monthly fee that is a percentage
of the management fee paid by the Fund to the Manager.
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 the Manager, or its
affiliates. Pursuant to that order, the Fund has retained BlackRock Investment
Management, LLC ("BIM"), an affiliate of the Manager, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. Prior to September 29, 2006, BIM was organized as Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, and MLIM, LLC was
the securities lending agent. BIM 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 the Manager or in registered money market funds
advised by the Manager or its affiliates.
For the six months ended February 28, 2007, the Fund reimbursed FAM and the
Manager $335 and $1,675, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or directors of the Fund were
officers and/or directors of FAM, PSI, MLIM, Merrill Lynch, and/or MLIM, LLC.
Commencing September 29, 2006, certain officers and/or directors of the Fund are
officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended February 28, 2007 were $138,504,973 and
$119,276,136, 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 six months ended February 28, 2007 and the
year ended August 31, 2006 increased by 104,781 and 30,227, respectively, as a
result of dividend reinvestment.
5. Unfunded Loan Commitment:
As of February 28, 2007, the Fund had unfunded loan commitments of approximately
$2,497,000 which would be extended at the option of the borrower, pursuant to
the following loan agreements:
(in Thousands)
- --------------------------------------------------------------------------------
Value of
Unfunded Underlying
Borrower Commitment Loan
- --------------------------------------------------------------------------------
Calpine Corp. ........................... $1,000 $ 997
MEG Energy Corp. ........................ $ 500 $ 497
Venetian Macau U.S.
Finance Co. ........................... $1,000 $1,003
- --------------------------------------------------------------------------------
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 Citicorp North
America, Inc. ("Citicorp") 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
Citicorp program, the conduits will fund advances to the Fund
20 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
Notes to Financial Statements (concluded)
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 5.62% and the average borrowing
was approximately $96,940,000 for the year ended February 28, 2007.
7. Capital Loss Carryforward:
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.
8. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of $.150000 per share on
March 30, 2007 to shareholders of record on March 15, 2007.
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 21
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Donald C. Burke, Vice President and Treasurer
Kevin J. Booth, Vice President
Jeffrey Hiller, Fund Chief Compliance Officer
Alice A. Pellegrino, Secretary
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
800-426-5523
NYSE Symbol
DVF
- --------------------------------------------------------------------------------
Effective January 1, 2007, Edward D. Zinbarg retired as a Director of BlackRock
Diversified Income Strategies Fund, Inc. The Fund's Board of Directors wishes
Mr. Zinbarg well in his retirement.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Effective April 13, 2007, Jeffrey Hiller resigned his position as Chief
Compliance Officer of the Fund. Also effective April 13, 2007, Karen Clark was
appointed Chief Compliance Officer of the Fund. Ms. Clark has been a Managing
Director of BlackRock, Inc. since 2007. She was a Director thereof from 2005 to
2007. Prior to that, Ms. Clark was a principal and senior compliance officer at
State Street Global Advisors from 2001 to 2005. Ms. Clark was a principal
consultant with PricewaterhouseCoopers, LLP from 1998 to 2001. From 1993 to
1998, Ms. Clark was Branch Chief, Division of Investment Management and Office
of Compliance Examinations, with the U.S. Securities and Exchange Commission.
- --------------------------------------------------------------------------------
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.
22 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007
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.
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 advisor. Please note that not all investment
advisers, banks or brokerages may offer this service.
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 23
BlackRock Diversified Income Strategies Fund, 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 Fund, 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 Fund, Inc.
P.O. Box 9011
Princeton, NJ 08543-9011
BlackRock
#DISP-2/07
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of February 28, 2007.
(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 February 28, 2007:
(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 9 2 1 0 2 0
$5,534,036,036 $ 529,770,486 $ 56,698,833 $ 0 $ 529,770,486 $ 0
Mark J.
Williams 8 18 1 0 10 0
$4,781,904,844 $6,003,278,704 $ 158,013,679 $ 0 $3,985,661,008 $ 0
(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 February 28, 2007:
Compensation Program
BlackRock's financial arrangements with its portfolio
managers, its competitive compensation and its career path emphasis at
all levels reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year
to year based on a number of factors. The principal components of
compensation include a base salary, a discretionary bonus,
participation in various benefits programs and one or more of the
incentive compensation programs established by BlackRock such as its
Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base Compensation
Generally, portfolio managers receive base compensation based
on their seniority and/or their position with the firm.
Discretionary Compensation
In addition to base compensation, portfolio managers may
receive discretionary compensation, which can be a substantial portion
of total compensation. Discretionary compensation can include a
discretionary cash bonus as well as one or more of the following:
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards that
are expressed as an amount of cash that, if properly vested and subject
to the attainment of certain performance goals, will be settled in cash
and/or in BlackRock, Inc. common stock.
Deferred Compensation Program
A portion of the compensation paid to each portfolio manager
may be voluntarily deferred by the portfolio manager into an account
that tracks the performance of certain of the firm's investment
products. Each portfolio manager is permitted to allocate his deferred
amounts among various options, including to certain of the firm's hedge
funds and other unregistered products. In addition, prior to 2005, a
portion of the annual compensation of certain senior managers was
mandatorily deferred in a similar manner for a number of years.
Beginning in 2005, a portion of the annual compensation of certain
senior managers was paid in the form of BlackRock, Inc. restricted
stock units which vest ratably over a number of years.
Options and Restricted Stock Awards
While incentive stock options are not currently being awarded
to BlackRock employees, BlackRock, Inc. previously granted stock
options to key employees, including certain portfolio managers who may
still hold unexercised or unvested options. BlackRock, Inc. also has a
restricted stock award program designed to reward certain key employees
as an incentive to contribute to the long-term success of BlackRock.
These awards vest over a period of years.
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings
plans in which BlackRock employees are eligible to participate,
including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP)
and the BlackRock Employee Stock Purchase Plan (ESPP). The employer
contribution components of the RSP include a company match equal to 50%
of the first 6% of eligible pay contributed to the plan capped at
$4,000 per year, and a company retirement contribution equal to 3% of
eligible compensation, plus an additional contribution of 2% for any
year in which BlackRock has positive net operating income. The RSP
offers a range of investment options, including registered investment
companies managed by the firm. Company contributions follow the
investment direction set by participants for their own contributions or
absent, employee investment direction, are invested into a stable value
fund. The ESPP allows for investment in BlackRock common stock at a 5%
discount on the fair market value of the stock on the purchase date.
Annual participation in the ESPP is limited to the purchase of 1,000
shares or a dollar value of $25,000. Each portfolio manager is eligible
to participate in these plans.
Annual incentive compensation for each portfolio manager is a
function of several components: the performance of BlackRock, Inc., the
performance of the portfolio manager's group within BlackRock, the
investment performance, including risk-adjusted returns and income
generation, of the firm's assets under management or supervision by
that portfolio manager relative to predetermined benchmarks, and the
individual's teamwork and contribution to the overall performance of
these portfolios and BlackRock. Unlike many other firms, portfolio
managers at BlackRock compete against benchmarks rather than each
other. In most cases, including for the portfolio managers of the
Registrant, these benchmarks are the same as the benchmark or
benchmarks against which the investment performance, including
risk-adjusted returns and income generation, of the Registrant or other
accounts are measured. A group of BlackRock, Inc.'s officers determines
which benchmarks against which to compare the performance of funds and
other accounts managed by each portfolio manager.
The group of BlackRock, Inc.'s officers then makes a
subjective determination with respect to the portfolio manager's
compensation based on the performance of the funds and other accounts
managed by each portfolio manager relative to the various benchmarks.
This determination may take into consideration the fact that a
benchmark may not perfectly correlate to the way the Registrant or
other accounts are managed, even if it is the benchmark that is most
appropriate for the Registrant or other account. For example, a
benchmark's return may be based on the total return of the securities
comprising the benchmark, but the Registrant or other account may be
managed to maximize income and not total return. Senior portfolio
managers who perform additional management functions within BlackRock
may receive additional compensation for serving in these other
capacities.
(a)(4) Beneficial Ownership of Securities. As of February 28, 2007, Mr.
Booth beneficially owns stock issued by the Fund in the range of
$100,001-$500,000. As of February 28, 2007, 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 - Not Applicable
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) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the registrant
was migrated to BlackRock's trading and compliance monitoring systems,
and various personnel changes occurred. In conjunction with these
business improvements, there were no changes in the registrants internal
control over financial reporting (as defined in Rule 30a-3(d) under Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of
the period covered by this report that has materially affected, or is
reasonably likely to affect, the registrant's internal control over
financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
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: April 23, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
--------------------------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Diversified Income Strategies Fund, Inc.
Date: April 23, 2007
By: /s/ Donald C. Burke
--------------------------------------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock Diversified Income Strategies Fund, Inc.
Date: April 23, 2007