-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KBAFoLhdh/EzEWlSXg5eZX4p9L1Wl8m++7mN5SLqyTnFx+VBZM4Q0TOyhX9/p+/j 7eQiMoA0xkRnj6x79Ez14A== 0000930413-98-001068.txt : 19981231 0000930413-98-001068.hdr.sgml : 19981231 ACCESSION NUMBER: 0000930413-98-001068 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981230 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLACKROCK INCOME TRUST INC CENTRAL INDEX KEY: 0000832327 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-05542 FILM NUMBER: 98777792 BUSINESS ADDRESS: STREET 1: 199 WATER ST CITY: NEW YORK STATE: NY ZIP: 10292 BUSINESS PHONE: 2122142189 FORMER COMPANY: FORMER CONFORMED NAME: BLACKSTONE INCOME TRUST INC DATE OF NAME CHANGE: 19920703 N-30D 1 ANNUAL REPORT - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. ANNUAL REPORT TO SHAREHOLDERS REPORT OF INVESTMENT ADVISER - -------------------------------------------------------------------------------- November 30, 1998 Dear Shareholders: Over the past twelve months, U.S. Treasury securities have experienced a strong rally, as investors sought a safe haven from global market turmoil and the Federal Reserve continued to cut interest rates. Other segments of the fixed income market have lagged behind Treasuries, but still produced positive returns since our last report. We anticipate that the Federal Reserve will remain prepared to combat any signs of a credit crunch through interest rate cuts, and given the unstable economic situation in Brazil, the Fed likely will retain a loosening bias. Despite previous worries of a second half slowdown in 1998, the U.S. economy continues to expand rapidly. Third quarter GDP registered a 3.3% annualized growth rate, supported by strong consumer spending. This momentum, however, may not continue as briskly into the new year, based on weaker corporate profits and a loosening of the labor markets. Already, major corporations have warned of slower profit growth and announced major layoffs. This report contains detailed market and portfolio strategy by your Trust's managers in addition to the Trust's audited financial statements and a detailed portfolio list of the portfolio's holdings. We thank you for your continued investment in the Trust and look forward to serving your investment needs in the future. Sincerely, /s/ Laurence D. Fink /s/ Ralph L. Schlosstein - -------------------- ------------------------ Laurence D. Fink Ralph L. Schlosstein Chairman President 1 November 30, 1998 Dear Shareholder: We are pleased to present the annual report for The BlackRock Income Trust Inc. ("the Trust") for the fiscal year ended October 31, 1998. We would like to take this opportunity to review the Trust's stock price and net asset value (NAV) performance, summarize market developments and discuss recent portfolio management activity. The Trust is a diversified, actively managed closed-end bond fund whose shares are traded on the New York Stock Exchange under the symbol "BKT". The Trust's investment objective is to provide high current income consistent with the preservation of capital. The Trust seeks this objective by investing primarily in mortgage-backed securities backed by U.S. Government agencies (such as Fannie Mae, Freddie Mac or Ginnie Mae) and, to a lesser extent, U.S. Government securities, asset-backed securities and privately issued mortgage-backed securities. At least 85% of the Trust's assets must be issued or guaranteed by the U.S. government or its agencies or rated "AAA" by Standard & Poor's or "Aaa" Moody's (up to 5% can be unrated and deemed by the Adviser to be of equivalent credit quality); the remaining 15% of the Trust's assets must be rated at least "AA" by Standard & Poor's or "Aa" by Moody's at time of purchase. The table below summarizes the performance of the Trust's stock price and NAV over the period: ------------------------------------------------
10/31/98 10/31/97 CHANGE HIGH LOW STOCK PRICE $ 6.9375 $ 6.875 0.91% $ 7.25 $ 6.75 NET ASSET VALUE (NAV) $ 7.94 $ 8.12 ( 2.22%) $ 8.36 $ 7.83 10-YEAR U.S. TREASURY NOTE 4.61 % 5.83 % (20.93%) 5.95% 4.16%
THE FIXED INCOME MARKETS The first half of the Trust's fiscal year was characterized by the positive momentum and bull market trend that brought Treasury yields towards historic lows. The low Treasury yields were due to budget surplus projections as well as the Fed's decision to move from a tightening to a neutral policy. The positive economic momentum throughout the first half of the fiscal year was strengthened by unseasonably warm weather that led to increased consumer spending and job gains, and a less than expected impact on trade from the Asian financial crisis. GDP growth measured at a very strong 5% for the first quarter of 1998; however, signs of a slowdown became evident when economic data for April and May began to lag. The second half of the trust's fiscal year witnessed virtually unparalleled market turbulence. During the second quarter of 1998, GDP growth faltered to a 1.8% rate due to slower output and an increasing trade deficit created by a strong U.S. dollar. Although consumers continued their spending domestically, demand for U.S. goods abroad faltered, as the strong dollar and weakness overseas, especially Asia, drove prices for U.S. goods higher relative to foreign goods. In the Trust's final quarter, U.S. GDP growth rebounded to a 3.3% pace; however, the instability in global financial markets began to rattle investor confidence. The devaluation of the Russian ruble and the fear of a possible devaluation of the Brazilian currency caused a flight-to-quality to U.S. Treasuries. Spread sectors widened dramatically as a result of the sell-off. In addition, the global financial markets witnessed a credit crunch where even higher-grade securities were affected. This dramatic shift of investor sentiment culminated in the near collapse of a prominent hedge fund. The Treasury market rally pushed Treasury yields to historic levels below the 5% barrier. In response, to the financial fragility in the third quarter 1998 the Fed eased interest rates on September 29, 1998 by 25bps and again on October 15, in an unusual between-meetings move. On November 17, the Fed eased interest rates again by 25bps. 2 THE TRUST'S PORTFOLIO AND INVESTMENT STRATEGY BlackRock actively manages the Trust's portfolio holdings consistent with BlackRock's overall market outlook and the Trust's investment objectives. The Trust is managed to maintain an interest rate sensitivity (or duration) approximately 150% of the Salomon Brothers Mortgage Index; this means that the portfolio's NAV will change roughly 1.5 times the price of the Index given a change in interest rates. The following chart compares the Trust's current and October 31, 1997 asset composition: SECTOR BREAKDOWN
COMPOSITION OCTOBER 31, 1998 OCTOBER 31, 1997 Agency Multiple Class Mortgage Pass-Throughs 19% 14% Adjustable & Inverse Floating Rate Mortgages 17% 20% U.S. Government Securities 17% 15% Commercial Mortgage-Backed Securities 10% 3% Principal Only Mortgage-Backed Securities 9% 13% FHA Project Loans 9% 9% Interest Only Mortgage-Backed Securities 6% 12% Mortgage Pass-Throughs 6% 8% Non-Agency Multiple Class Mortgage Pass-Throu 3% 4% Asset Backed Securities 3% 1% CMO Residuals 1% 1%
Global instability has caused a flight to quality to US Treasuries causing mortgages to severely underperform Treasuries as well as the broad bond market. During the period, mortgage-backed securities (MBS), as measured by the Salomon Brothers Mortgage Index, underperformed the broader investment grade domestic bond market (Lehman Aggregate Index) on a total return basis by 7.29% vs. 9.33%. 3 We look forward to continuing to manage the Trust to benefit from the opportunities available to investors in the fixed income markets as well as to maintain the Trust's ability to meet its investment objectives. We thank you for your investment in the BlackRock Income Trust Inc. Please feel free to contact our marketing center at (800) 227-7BFM (7236) if you have specific questions which were not addressed in this report. Sincerely, /s/ ROBERT S. KAPITO /s/ MICHAEL P. LUSTIG - -------------------- ---------------------- Robert S. Kapito Michael P. Lustig Vice Chairman and Portfolio Manager Director and Portfolio Manager BlackRock Financial Management, Inc. BlackRock Financial Management, Inc. THE BLACKROCK INCOME TRUST INC. Symbol on New York Stock Exchange: BKT Initial Offering Date: July 22, 1988 Closing Stock Price as of October 31, 1998: $ 6.9375 Net Asset Value as of October 31, 1998: $ 7.94 Yield on Closing Stock Price as of 10/31/98 ($6.9375)1: 8.11% Current Monthly Distribution per Share2: $ 0.046875 Current Annualized Distribution per Share2: $ 0.562500
1Yield on Closing Stock Price is calculated by dividing the current annualized distribution per share by the closing stock price per share. 2The distribution is not constant and is subject to change. 4 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. PORTFOLIO OF INVESTMENTS OCTOBER 31, 1998
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ========================================== ================== LONG-TERM INVESTMENTS-136.4% MORTGAGE PASS-THROUGHS-19.4% Federal Home Loan Mortgage Corp., $ 3,792+ 7.50%, 7/01/07 - 2/01/23 ................. $ 3,887,006 949+ 8.00%, 11/01/15 .......................... 984,135 1,583 8.50%, 3/01/06 - 3/01/08, 15 year......... 1,650,079 2,570 9.00%, 9/01/20 ........................... 2,730,752 Federal Housing Administration, 4,223 Brookville, 7.50%, 8/01/28 ............... 4,434,590 GMAC, 6,137 Series 33, 7.43%, 9/01/21 ............... 6,383,299 2,128 Series 46, 7.43%, 1/01/22 ............... 2,213,895 877 Series 48, 7.43%, 6/01/22 ............... 931,776 311 Series 51, 7.43%, 2/01/23 ............... 322,839 7,229 Series 56, 7.43%, 11/01/22 .............. 7,314,180 1,249 Merrill, Series 54, 7.43%, 5/15/23........ 1,300,918 1,248 Middlesex, 8.625%, 9/01/34 ............... 1,321,837 4,482 Continental, 7.30%, 2/01/13 .............. 4,639,186 1,038 Reilly, Series 41, 8.30%, 3/01/20 ........ 1,071,154 2,852 Tuttle Grove, 7.25%, 10/01/35 ............ 2,974,759 USGI, 4,279 Polaris 982, 7.43%, 11/01/21 ............ 4,451,020 913 Series 87, 7.43%, 12/01/22 .............. 950,606 4,804 Series 99, 7.43%, 10/01/23 .............. 5,010,415 2,719 Series 1003, 7.43%, 3/01/24 ............. 2,786,530 2,715 Series 6302, 7.43%, 12/01/21 ............ 2,824,772 6,933 Yorkville, Series 6094, 7.43%, 6/01/21 ................................. 7,208,255 Federal National Mortgage Association, 5,711+ 7.50%, 11/01/14 - 9/01/23, 18 year Multifamily ..................... 6,035,807 4,746+ 8.00%, 5/01/08 - 5/01/22 Multifamily...... 5,002,664 716 9.317%, 6/01/19, 10 year Multifamily...... 813,963 1,438++ 9.497%, 6/01/24, Multifamily ............. 1,506,638 89 9.50%, 1/01/19 - 6/01/20 ................. 95,488 Government National Mortgage Association, 550 7.00%, 10/15/17 .......................... 563,216 15,799+ 7.50%, 8/15/21 - 12/15/23 ................ 16,268,442 40 8.50%, 5/15/01 - 2/15/17 ................. 42,311 685 9.00%, 6/15/18 - 9/15/21 ................. 729,875 ----------- 96,450,407 ----------- MULTIPLE CLASS MORTGAGE PASS-THROUGHS-53.7% AAA 833 Collateralized Mortgage Obligation Trust, Series 13, Class Q, 1/20/03, (ARM) .......................... 926,589 Countrywide Funding Corp., Mortgage Certificates, AAA 3,394 Series 1993-10, Class A-8, 1/25/24, (ARM) .......................... 3,327,754 Aa 6,202 Series 1994-9, Class A-16, 5/25/24, (ARM) .......................... 5,901,129
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ========================================== ================== AAA $ 16,795++ DLJ Mortgage Acceptance Corp.**, Series 1998-2, Class A-1, 6/19/28 ................................. $16,818,180 Federal Home Loan Mortgage Corp., Multiclass Mortgage Participation Certificates, 27,426+ Series G-13, Class 13-PP, 5/25/21, (I) ............................ 6,788,315 1,980 Series G-24, Class G24-SG, 11/25/23, (ARM) ......................... 2,044,661 7,500 Series 1104, Class 1104-L, 6/15/21 ................................. 7,906,875 1,742+ Series 1347, Class 1347-HC, 12/15/21 ................................ 1,683,748 2,000 Series 1523, Class 1523-SA, 6/15/23, (ARM) .......................... 1,831,000 658 Series 1534, Class 1534-NE, 6/15/23, (ARM) .......................... 660,967 2,453++ Series 1541, Class 1541-T, 7/15/23 ................................. 2,432,377 1,539 Series 1559, Class 1559- WA, 7/15/22 ................................. 1,550,570 13,281+ Series 1584, Class 1584-FB**, 9/15/23 ................................. 13,618,156 1,195 Series 1590, Class 1590-OA, 10/15/23, (ARM) ......................... 1,363,412 332 Series 1596, Class 1596-SB, 12/15/12, (ARM) ......................... 330,976 3,892 Series 1608, Class 1608-SD, 6/15/23, (ARM) .......................... 3,962,857 362 Series 1609, Class 1609-KA, 11/15/23 ................................ 364,179 1,744 Series 1611, Class 1611-PD, 11/15/23, (ARM) ......................... 1,457,999 500 Series 1625, Class 1625-SL, 12/15/08, (ARM) ......................... 545,000 6,543 Series 1627, Class 1627-S, 12/15/23, (ARM) ......................... 6,061,828 5,038 Series 1627, Class 1627-SC, 12/15/23, (ARM) ......................... 4,310,582 3,084 Series 1629, Class 1629-OD, 12/15/23, (ARM) ......................... 2,393,176 8,000 Series 1673, Class 1673-SD 2/15/24, (ARM) .......................... 8,277,500 687 Series 1720, Class 1720-PK, 1/15/24, (I) ............................ 239,955 1,225++ Series 1750, Class 1750-PC, 3/15/24, (P) ............................ 1,072,904 4,564 Series 1882, Class 1882-PJ, 4/15/22, (I) ............................ 580,049 8,208 Series 1910, Class 1910-IC, 5/15/25, (I) ............................ 1,646,146
See Notes to Financial Statements. 5
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ====================================== ================== $ 67,873 Series 1914, Class 1914-PC, 12/15/11, (I) ....................... $1,476,247 11,214 Series 1992, Class 1992-PV, 9/15/27, (I) ........................ 4,509,848 16,189 Series 1998, Class 1998-L, 3/25/20, (I) ........................ 1,165,938 17,644 Series 1998, Class 1998-PK, 12/18/21, (I) ....................... 2,370,575 9,955 Series 2037, Class 2037-IB, 12/15/26, (I) ....................... 2,366,380 10,000 Series 2062, Class 2062-QL, 3/15/28, (I) ........................ 2,948,897 4,500 Series 2066, Class 2066-PJ, 12/15/26, (I) ....................... 887,145 18,000 Series 2080, Class 2080-PL, 1/15/27, (I) ........................ 4,342,500 Federal National Mortgage Association, REMIC Pass-Through Certificates, 3,460 Trust G-92, Class 5-H, 1/25/22, (I) ........................ 922,715 2,582 Trust 1988-16, Class16-B, 6/25/18 ............................. 2,764,678 4,697@ Trust 1990-12, Class 12-G, 2/25/20 ............................. 4,511,374 10,088 Trust 1991-15, Class 15-S, 6/25/21, (I) ........................ 1,682,921 2,416 Trust 1991-38, Class 38-F, 4/25/21, (ARM) ...................... 2,475,702 2,045@@ Trust 1991-38, Class 38-SA, 4/25/21, (ARM) ...................... 2,112,421 2,152 Trust 1991-87, Class 87-S, 8/25/21, (ARM) ...................... 2,470,422 882 Trust 1992-12, Class 12-C, 2/25/22, (I) ........................ 275,267 6,000+ Trust 1992-43, Class 43-E, 4/25/22 ............................. 6,426,960 3,041 Trust 1992-187, Class 187-JA, 10/25/06, (I) ....................... 229,931 8,774 Trust 1992-200, Class 200-K, 11/25/21, (I) ....................... 1,066,550 719 Trust 1993-27, Class 27-SB, 8/25/23, (ARM) ...................... 678,102 9,996 Trust 1993-46, Class 46-J, 5/25/22, (I) ........................ 791,913 565 Trust 1993-50, Class 50-SH, 1/25/23, (ARM) ...................... 545,514 1,040++ Trust 1993-53, Class 53-M, 4/25/23 ............................. 1,037,143 2,202 Trust 1993-82, Class 82-SC, 5/25/23, (ARM) ...................... 2,370,445 817 Trust 1993-87, Class 87-L, 6/25/23 ............................. 824,580 604 Trust 1993-116, Class 116-SB, 7/25/23, (ARM) ...................... 569,420
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ====================================== ================== $ 617 Trust 1993-129, Class 129-SE, 8/25/08, (ARM) ...................... $ 620,185 817 Trust 1993-167, Class 167-SA, 9/25/23, (ARM) ...................... 836,150 6,000@@ Trust 1993-169, Class 169-SC, 3/25/23, (ARM) ...................... 5,194,020 3,000 Trust 1993-170, Class 170-SC, 9/25/08, (ARM) ...................... 3,232,230 2,035+ Trust 1993-178, Class 178-A, 9/25/23 ............................. 2,021,449 2,776 Trust 1993-179, Class 179-SC, 10/25/23, (ARM) ..................... 3,375,884 2,871 Trust 1993-179, Class 179-VC, 10/25/21, (ARM) ..................... 2,464,576 1,345 Trust 1993-183, Class 183-SM 10/25/23, (ARM) ..................... 1,351,540 4,000 Trust 1993-196, Class 196-SC, 10/25/08, (I) ....................... 4,359,720 16,000 Trust 1993-201, Class 201-JC, 5/25/19, (I) ........................ 2,624,160 10,000 Trust 1993-202, Class 202-QA, 6/25/19, (I) ........................ 821,875 1,776 Trust 1993-223, Class 223-SJ, 12/25/23, (ARM) ..................... 1,495,694 2,802 Trust 1993-224, Class 224-S, 11/25/23, (ARM) ..................... 2,599,171 1,786 Trust 1993-224, Class 224-SH, 11/25/23, (ARM) ..................... 1,715,144 2,562 Trust 1993-247, Class 247-SN, 12/25/23, (ARM) ..................... 2,817,815 4,854 Trust 1993-248, Class 248-FB, 9/25/23, (ARM) ...................... 4,503,974 2,988 Trust 1993-256, Class 256-F, 11/25/23, (ARM) ..................... 2,920,057 3,777 Trust 1994-14, Class 14-S, 10/25/23, (ARM) ..................... 2,750,095 5,574 Trust 1994-19, Class 19-SB**, 1/25/24, (ARM) ...................... 3,791,808 387 Trust 1994-27, Class 27-SE, 3/25/23, (ARM) ...................... 438,656 14,300 Trust 1996-14, Class 14-E, 8/25/23, (P) ........................ 7,936,500 6,797++ Trust 1996-14, Class 14-M, 10/25/21 ............................ 6,170,475 25,000 Trust 1997-50, Class 50-HK, 8/25/27, (I) ........................ 6,358,697 51,000++ Trust 1997-90, Class 90-M, 1/25/28, (I) ........................ 16,941,562 13,562 Trust 1998-12, Class 12-PL, 7/18/19, (I) ........................ 1,330,807 7,378 Trust 1998-25, Class 25-PG, 3/18/22, (I) ........................ 908,451 10,000 Trust 1998-45, Class 45-PL 3/18/24, (I) ........................ 2,218,750
See Notes to Financial Statements. 6
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ========================================= ================== $ 31,782 Trust 1998-48, Class 48-J, 11/25/27, (I) .......................... $ 2,433,315 Aaa 8,598 G. E. Capital Mortgage Services Inc., REMIC Certificate 94-7, Class A-17, 2/25/09, (ARM) ............. 7,609,165 AAA 7,083 PNC Mortgage Corp., Mortgage Pass-Through Certificates, Series 1997-6, Class-A2, 7/25/27, (ARM) ......................... 7,094,457 Prudential Home Mortgage Securities Co., Mortgage Pass-Through Certificates, Aaa 743 Series 1993-43, Class A-16, 10/25/23, (ARM) ........................ 740,113 Aaa 2,500 Series 1993-48, Class A-8, 12/25/08, (ARM) ........................ 2,701,525 AAA 5,690 Salomon Capital Access Corp., CMO, Series 1986-1, Class C, 9/01/15 ......... 5,839,555 ----------- 268,138,047 ----------- COMMERCIAL MORTGAGE-BACKED SECURITIES-13.2% AAA 3,143 Asset Securitization Corp., Series 1997-D5, Class PS-1, 2/14/41, (I/O) ......................... 303,709 AAA 43,854 Credit Suisse First Boston Mortgage, Series 1997, Class C-1***, 6/20/29, (I/O) ......................... 4,433,388 AAA 47,095 GMAC Commercial Mortgage Corp., Series 1997-C1, Class-X, 7/15/27, (I/O) ......................... 4,236,042 AAA 25,500++ Series 1998-C2, Class A-2, 6.42%, 8/15/08 ......................... 25,711,000 AAA 6,000 ML Mortgage Investments, Series 1996-C1, Class A-3, 7.42%, 4/25/28 ......................... 6,370,750 AAA 20,035 Morgan Stanley Capital I Inc., Series 1997, Class HF-1**, 6/15/17, (I/O) ......................... 1,814,896 AAA 10,250 NYC Mortgage Loan Trust, Series 1996, Class A-2***, 6.75%, 6/25/11 ......................... 10,493,438 AA 2,000 PaineWebber Mortgage Acceptance Corp. IV, Series 1995-M1**, Class B, 6.95%, 1/15/07 ................ 2,053,477 AAA 10,000 Prudential Securities Secured Financing Corp., Series 1998-C1, Class A-1B, 7/15/08 .................... 10,169,266 ----------- 65,585,966 ----------- ASSET-BACKED SECURITIES-4.0% AAA 11,600 Chase Credit Card Master Trust, Series 1997-5, Class A, 6.194%, 8/15/05 ........................ 11,929,295 AAA 3,555 Chase Manhattan Grantor Trust, Series 1996-B, Class A, 6.61%, 9/15/02 ......................... 3,590,200 A 4,581 Money Store Trust, Series 1998-A, Class MH-2, 7.23%, 5/15/30, MBIA ................... 4,543,805 ----------- 20,063,300 -----------
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ========================================= ================== STRIPPED MORTGAGE-BACKED SECURITIES-21.8% Aaa $ 882 Chase Mortgage Finance Corp., Mortgage Pass-Through Certificates, Series 1994-A, Class AP, 1/25/10, (P/O) ......................... $ 706,960 AAA 855 Collateralized Mortgage Obligation Trust, Series 29, Class A, 5/23/17, (P/O) .................................. 708,656 Drexel Burnham Lambert, AAA 309 Trust K, Class K-1, 9/23/17, (P/O) ...... 276,922 AAA 3,284 Trust V, Class V-2A, 9/01/18, (P/O)...... 2,840,454 Federal Home Loan Mortgage Corp., 2,802 Series 1238, Class 1238-J, 1/15/07, (I/O) ......................... 535,322 21,293 Series 1353, Class 1353-S, 8/15/07, (I/O) ......................... 2,288,095 671 Series 1418, Class 1418-M, 11/15/22, (P/O) ........................ 306,192 486 Series 1473, Class 1473-JA, 2/15/05, (I/O) ......................... 16,804 12,000++ Series 1506, Class 1506-L, 3/15/22, (I/O) ......................... 1,987,320 9,586 Series 1632, Class 1632-S, 4/15/23, (I/O) ......................... 436,568 53,000 Series 1809, Class 1809-SC, 12/15/23, (I/O) ........................ 4,715,410 9,407++ Series 1828, Class 1828-A, 5/15/24, (P/O) ......................... 7,724,251 17,664 Series 1850, Class 1850-SA, 2/15/24, (I/O) ......................... 1,836,680 3,926+ Series 1857, Class 1857-PB, 12/15/08, (P/O) ........................ 3,658,112 5,000 Series 1900, Class 1900-SV, 8/15/08, (I/O) ......................... 1,030,100 4,563 Series 1917, Class 1917-AS, 5/15/08, (I/O) ......................... 962,858 17,938 Series 1946, Class 1946-SG, 3/15/24, (I/O) ......................... 2,126,233 40,000 Series 1965, Class 1965-SA, 3/15/24, (I/O) ......................... 1,943,200 15,106 Series 2002, Class 2002-HJ, 10/15/08, (I/O) ........................ 1,494,859 5,500 Series 2009, Class 2009-HJ, 10/15/22, (P/O) ........................ 3,834,820 Federal Housing Administration, 34,525 Series 184, Class 184-IO, 12/01/26, (I/O) ........................ 6,195,840 2,169 Series T-8, Class 273 A-10, 11/15/28, (P/O) ........................ 1,393,010 Federal National Mortgage Association, 3,322 Trust A, Class A-2, 8/01/10, (I/O) ......................... 621,008 1,201 Trust 50, Class 50-G, 12/25/21, (I/O) ........................ 385,739 4,766 Trust 225, Class 1, 2/01/23, (P/O) ......................... 4,050,966
See Notes to Financial Statements. 7
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ======================================== ================== $ 4,575 Trust 279, Class 1, 7/01/26, (P/O) ........................ $ 4,026,035 25,354 Trust 299, Class 2, 5/01/28 (I/O) ......................... 4,423,491 911 Trust 1991-7, Class 7-J, 2/25/21, (P/O) ........................ 754,645 3,132 Trust 1992-34, Class 34-A, 4/25/22, (I/O) ........................ 901,352 12,090 Trust 1992-60, Class 60-SB, 10/25/22, (I/O) ....................... 471,640 882 Trust 1992-68, Class 68-K, 10/25/05, (I/O) ....................... 42,611 1,428 Trust 1993-2, Class 2-KB, 1/25/23, (I/O) ........................ 736,185 8,686++ Trust 1993-213, Class 213-H, 9/25/23, (P/O) ........................ 8,334,461 2,314 Trust 1994-57, Class 57-C, 1/25/24, (P/O) ........................ 2,183,066 2,194++ Trust 1994-94, Class 94-C, 8/25/23, (P/O) ........................ 1,914,594 13,853 Trust 1995-26, Class 26-SW, 2/25/24, (I/O) ........................ 2,915,152 1,452 Trust 1996-5, Class 5-PV, 11/25/23, (P/O) ....................... 1,305,961 9,331++ Trust 1996-38, Class 38-E, 8/25/23, (P/O) ........................ 8,569,749 12,371 Trust 1996-68, Class 68-SC, 1/25/24, (I/O) ........................ 1,360,797 73,108 Trust 1997-37, Class 37-SE, 10/25/22, (I/O) ....................... 1,206,375 35,476 Trust 1997-65, Class 65-SB, 3/25/24, (I/O) ........................ 1,143,806 27,000 Trust 1997-65, Class 65-SG, 6/25/23, (I/O) ........................ 3,176,719 11,139 Trust 1997-76, Class 76-SP, 12/25/23, (I/O) ....................... 1,546,492 2,210+ Trust 1997-85, Class 85-LE, 10/25/23 (P/O) ........................ 2,122,507 5,294 Trust 1997-85, Class 85-EL, 7/25/23, (P/O) ........................ 5,057,090 AAA 920 First Boston Mortgage Securities Corp., Series 1987-C, Class Z, 4/25/17, (I/O) ........................ 300,282 Housing Security Inc., AAA 262 Series 1992-EB, Class B-8, 9/25/22, (P/O) ........................ 223,099 AAA 539+ Series 1993-D, Class D-8, 6/25/23, (P/O) ........................ 404,366 Kidder Peabody Acceptance Corp., AAA 2,324 Series B, Class B-1, 4/22/18, (P/O) ........................ 1,976,286 Aaa 1,259 Series B, Class B-2, 4/22/18, (I/O) ........................ 337,871 AAA 294 Prudential Securities, Inc., Trust 15, Class 1G, 5/20/21, (I/O) ........................ 252,724 AAA 1,816 Structured Asset Securities Corp., Series 1991-2, Class GA, 12/20/21, (I/O) ....................... 631,932
PRINCIPAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) =============== ===================== ======================================== ================== AAA $ 703 Structured Mortgage Asset Trust, Series 1993-3C, Class CX, 4/25/24, (P/O) ........................ $ 541,593 ----------- 108,937,260 ----------- U.S. GOVERNMENT AND AGENCY SECURITIES-23.7% Overseas Private Investment Corp., 264 5.46%, 5/29/12 ......................... 259,550 310 5.88%, 5/29/12 ......................... 311,757 200 6.27%, 5/29/12 ......................... 204,104 400 6.84%, 5/29/12 ......................... 418,014 Small Business Administration, Series 1996-20E, 4,336 7.60%, 5/01/16 ........................ 4,716,136 Series 1996-20G, 3,870 7.70%, 7/01/16 ........................ 4,222,620 Series 1996-20H, 3,674 7.25%, 8/01/16 ........................ 3,948,054 Series 1996-20K, 6,591 6.95%, 11/01/16 ....................... 6,986,301 3,684 7.55%, 6/01/16 ........................ 3,997,576 Series 1997-20C, 2,805 7.15%, 3/01/17 ........................ 2,999,589 Series 1998-10A, 5,490 6.12%, 2/01/08 ........................ 5,607,488 United States Treasury Bonds, 110,000++ Zero Coupon, 8/15/17 .................. 38,657,300 46,046+ 3.625%, 4/15/28 (TIPS) ................ 46,074,376 ----------- 118,402,865 ----------- COLLATERALIZED MORTGAGE OBLIGATION RESIDUALS-0.6% AAA 5,435 American Housing Trust III, Senior Mortgage Pass-Through Certificates, Series 1, Class 4, (REMIC) **, 3/25/19 ............................... 761,324 AA+ 273 American Housing Trust VII, Senior Mortgage Pass-Through Certificates, Series A, Class R, (REMIC), 11/25/20 .............................. 1,928,025 AAA 25 Collateralized Mortgage Obligation, Trust 13**, Class R, 1/20/03 ........... 136,666 AAA 45 FBC Mortgage Securities Trust 16, CMO, Series A-1**, 7/01/17 ............................... 150,199 NR 43 PaineWebber Trust, Series N, Class 7, (REMIC), 1/01/19 ............................... 128,780 ----------- 3,104,994 ----------- NOTIONAL AMOUNT (000) ---------------- OPTIONS PURCHASED-1.6% CALL OPTIONS-1.5% 97,000 Interest Rate Swap, 5.85% over 3 month LIBOR, expires 8/07/00 .......... 3,634,260 185,000 Interest Rate Swap, 5.25% over 3 month LIBOR, expires 9/24/01 .......... 3,585,300 ----------- 7,219,560 -----------
See Notes to Financial Statements. 8
NOTIONAL RATING* AMOUNT VALUE (UNAUDITED) (000) DESCRIPTION (NOTE 1) ============= ============ ================================= ================= PUT OPTIONS-0.1% $150,000 Interest Rate Swap, 7.25% over 3 month LIBOR, expires 5/10/00 $ 566,040 ------------ Total Options Purchased (cost $12,325,050).............. 7,785,600 ------------ Total Long-Term Investments (cost $677,615,604)............. 688,468,439 ------------ PRINCIPAL AMOUNT (000) -------- SHORT-TERM INVESTMENTS-0.9% DISCOUNT NOTE 4,504 Federal Home Loan Mortgage Corp., 5.42%, 11/02/98 (cost $4,504,322) ............... 4,504,322 ------------ Total Investments-138.9% (cost $682,119,926).............. 692,972,761 Liabilities in excess of other assets-(38.9%) .................. (193,898,032) ------------ NET ASSETS-100% ................. 499,074,729 ============
- --------------------- * Using the higher of Standard & Poor's or Moody's rating. ** Private placements restricted as to resale. *** Illiquid securities representing 3.8% of portfolio assets. + (Partial) principal amount pledged as collateral for reverse repurchase agreements. ++ Entire principal amount pledged as collateral for reverse repurchase agreements. @ (Partial) principal amount pledged as collateral for futures transactions. @@ Entire principal amount pledged as collateral for futures transactions. KEY TO ABBREVIATIONS ARM - Adjustable Rate Mortgage. CMO - Collateralized Mortgage Obligation. I - Denotes a CMO with Interest only characteristics. I/O - Interest only. LIBOR - London InterBank Offer Rate. P - Denotes a CMO with Principal only characteristics. P/O - Principal only. REMIC - Real Estate Mortgage Investment Conduit. TIPS - Treasury Inflation Protection Securities.
See Notes to Financial Statements. 9 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. STATEMENT OF ASSETS AND LIABILITIES OCTOBER 31, 1998 - -------------------------------------------------------------------------------- ASSETS Investments, at value (cost $682,119,926) (Note 1)......... $692,972,761 Cash ...................................................... 281,176 Interest receivable ....................................... 5,845,825 Interest rate caps, at value (amortized cost $8,227,744) (Notes 1 & 3) ................ 1,494,114 Due from broker-variation margin .......................... 885,004 Receivable for investments sold ........................... 36,167 ------------- 701,515,047 ------------- LIABILITIES Reverse repurchase agreements (Note 4) .................... 198,335,893 Payable for investments purchased ......................... 987,755 Unrealized depreciation on interest rate swaps (Note 1 & 3) ............................................ 1,209,739 Interest payable .......................................... 697,483 Investment advisory fee payable (Note 2) .................. 278,255 Administration fee payable (Note 2) ....................... 85,504 Other accrued expenses .................................... 845,689 ------------- 202,440,318 ------------- NET ASSETS ................................................ $499,074,729 ============= Net assets were comprised of: Common stock, at par (Note 5) ........................... $ 628,499 Paid-in capital in excess of par ......................... 563,355,769 ------------- 563,984,268 Undistributed net investment income ...................... 2,250,590 Accumulated net realized losses .......................... (67,345,775) Net unrealized appreciation .............................. 185,646 ------------- Net assets, October 31, 1998 .............................. $499,074,729 ============= NET ASSET VALUE PER SHARE: ($499,074,729 [div] 62,849,878 shares of common stock issued and outstanding) .................... $ 7.94 =============
- -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. STATEMENT OF OPERATIONS YEAR ENDED OCTOBER 31, 1998 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest (net of premium amortization of $9,449,719 and interest expense of $11,688,747)............... $44,371,768 ----------- Expenses Investment advisory ................................ 3,304,129 Administration ..................................... 1,016,655 Custodian .......................................... 136,000 Transfer agent ..................................... 129,000 Reports to shareholders ............................ 110,000 Directors .......................................... 94,000 Audit .............................................. 73,000 Legal .............................................. 15,000 Miscellaneous ...................................... 261,264 ----------- Total operating expenses .......................... 5,139,048 ----------- Net investment income .............................. 39,232,720 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3) Net realized gain (loss) on: Investments ........................................ 23,718,109 Futures ............................................ (2,231,694) Short sales ........................................ (12,279,973) Swaps .............................................. 1,231,981 ----------- 10,438,423 ----------- Net change in unrealized appreciation (depreciation) on: Investments ........................................ (25,006,878) Options ............................................ 2,830,500 Interest rate caps ................................. (1,594,313) Futures ............................................ (1,712,645) Short sales ........................................ 628,781 Swaps .............................................. (619,200) ----------- (25,473,755) ----------- Net loss on investments ............................ (15,035,332) ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ........................... $24,197,388 ===========
See Notes to Financial Statements. 10 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. STATEMENT OF CASH FLOWS YEAR ENDED OCTOBER 31, 1998 - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH Cash flows provided by operating activities: Interest received ....................................... $ 65,349,736 Operating expenses paid ................................. (5,848,081) Interest expense paid ................................... (11,329,070) Purchase of short-term portfolio investments including options, net ................................. 1,488,859 Purchase of long-term portfolio investments ............. (1,640,163,831) Proceeds from disposition of long-term portfolio investments .................................. 1,653,545,362 Variation margin on futures ............................. 2,970,321 -------------- Net cash flows provided by operating activities ......... 66,013,296 -------------- Cash flows used for financing activities: Decrease in reverse repurchase agreements ............... (30,194,307) Cash dividends paid ..................................... (35,583,306) -------------- Net cash flows used for financing activities ............ (65,777,613) -------------- Net increase in cash ..................................... 235,683 Cash at beginning of year ................................ 45,493 -------------- Cash at end of year ...................................... $ 281,176 ============== RECONCILIATION OF NET INCREASE IN NET ASSETS TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net increase in net assets resulting from operations ............................................. $ 24,197,388 -------------- Decrease in investments .................................. 16,005,898 Increase in interest receivable .......................... (160,498) Decrease in receivable for investments sold .............. 62,891,659 Increase in due from broker variation margin ............. (1,467,020) Net realized gain ........................................ (10,438,423) Decrease in unrealized appreciation ...................... 25,473,755 Increase in depreciation on interest rate swaps .......... 1,172,661 Decrease in call options written ......................... (3,901,500) Decrease in payable for investments sold short ........... (25,765,500) Decrease in payable for investments purchased ............ (51,270,274) Increase in interest payable ............................. 359,677 Decrease in deposits with brokers for investments sold short ................................. 25,937,500 Decrease in interest rate caps ........................... 3,687,006 Decrease in accrued expenses and other liabilities ............................................ (709,033) -------------- Total adjustments ....................................... 41,815,908 -------------- Net cash provided by operating activities ................ $ 66,013,296 ==============
- -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS
YEAR ENDED OCTOBER 31, ----------------------------------- 1998 1997 ---------------- ---------------- Operations: Net investment income ................. $ 39,232,720 $ 36,244,955 Net realized gain ..................... 10,438,423 10,941,155 Net change in net unrealized appreciation (depreciation) ......... (25,473,755) 20,310,564 ------------ ------------ Net increase in net assets resulting from operations .......................... 24,197,388 67,496,674 Dividends from net investment income ............................... (35,352,217) (35,352,309) ------------ ------------ Total increase (decrease) ............. (11,154,829) 32,144,365 NET ASSETS Beginning of year ..................... 510,229,558 478,085,193 ------------ ------------ End of year ........................... $499,074,729 $510,229,558 ============ ============
See Notes to Financial Statements. 11 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, ----------------------------------- 1998 1997 PER SHARE OPERATING PERFORMANCE: ---------------------- ------------ Net asset value, beginning of year ....................... $ 8.12 $ 7.61 ----------- ------- Net investment income (net of $0.19, $0.18, $0.17, $0.22 and $0.10, respectively, of interest expense) .................................. 0.62 0.58 Net realized and unrealized gains (losses) .............. (0.24) 0.49 ----------- ------- Net increase (decrease) from investment operations .............................................. 0.38 1.07 ----------- ------- Dividends from net investment income ..................... (0.56) (0.56) Distributions in excess of net investment income ......... - - Return of capital distribution ........................... - - ----------- -------- Total dividends and distributions ....................... (0.56) (0.56) ----------- -------- Net asset value, end of year* ............................ $ 7.94 $ 8.12 =========== ======== Per share market value, end of year* ..................... $ 6.94 $ 6.88 =========== ======== TOTAL INVESTMENT RETURN+ ................................ 9.29% 19.68% RATIOS TO AVERAGE NET ASSETS: Operating expenses# ...................................... 1.01% 1.02% Net investment income .................................... 7.74% 7.63% SUPPLEMENTAL DATA: Average net assets (in thousands) ........................ $ 506,858 $474,903 Portfolio turnover ....................................... 214% 220% Net assets, end of year (in thousands) ................... $ 499,075 $510,230 Reverse repurchase agreements outstanding, end of year (in thousands) .............................. $ 198,336 $228,530 Asset coverage++ ....................................... $ 3,520 $ 3,233 YEAR ENDED OCTOBER 31, --------------------------------------- 1996 1995 1994 PER SHARE OPERATING PERFORMANCE: ------------ ------------ ------------- Net asset value, beginning of year ....................... $ 7.66 $ 7.25 $ 8.75 -------- ------- -------- Net investment income (net of $0.19, $0.18, $0.17, $0.22 and $0.10, respectively, of interest expense) .................................. 0.55 0.51 0.73 Net realized and unrealized gains (losses) .............. (0.01) 0.65 (1.45) -------- ------- -------- Net increase (decrease) from investment operations .............................................. 0.54 1.16 (0.72) -------- ------- -------- Dividends from net investment income ..................... (0.55) (0.66) (0.78) Distributions in excess of net investment income ......... (0.04) -- -- Return of capital distribution ........................... -- (0.09) -- -------- -------- -------- Total dividends and distributions ....................... (0.59) (0.75) (0.78) -------- -------- -------- Net asset value, end of year* ............................ $ 7.61 $ 7.66 $ 7.25 ======== ======== ======== Per share market value, end of year* ..................... $ 6.25 $ 7.25 $ 6.38 ======== ======== ======== TOTAL INVESTMENT RETURN+ ................................ (5.36%) 26.50% (15.31%) RATIOS TO AVERAGE NET ASSETS: Operating expenses# ...................................... 1.08% 1.08% 1.10% Net investment income .................................... 7.36% 6.85% 9.21% SUPPLEMENTAL DATA: Average net assets (in thousands) ........................ $473,056 $466,449 $496,707 Portfolio turnover ....................................... 440% 267% 223% Net assets, end of year (in thousands) ................... $478,085 $481,301 $455,651 Reverse repurchase agreements outstanding, end of year (in thousands) .............................. $204,438 $214,438 $109,286 Asset coverage++ ......................................... $ 3,339 $ 3,244 $ 5,169
- ---------- * NAV and market value are published in THE WALL STREET JOURNAL each Monday. # The ratios of operating expenses including interest expense to average net assets were 3.33%, 3.44%, 3.38%, 4.08% and 2.32% for the periods indicated above, respectively. + Total investment return is calculated assuming a purchase of common stock at the current market price on the first day and a sale at the current market price on the last day of each year reported. Dividends and distributions are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Trust's dividend reinvestment plan. This calculation does not reflect brokerage commissions. ++ Per $1,000 of reverse repurchase agreement outstanding. The information above represents the audited operating performance for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data, for each of the periods indicated. This information has been determined based upon financial information provided in the financial statements and market value data for the Trust's shares. See Notes to Financial Statements. 12 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. ORGANIZATION ACCOUNTING POLICIES The BlackRock Income Trust Inc. (the "Trust"), a Maryland & corporation, is a diversified closed-end management in-vestment company. The investment objective of the Trust is to achieve high monthly income consistent with preservation of capital. The ability of issuers of debt securities held by the Trust to meet their obligations may be affected by economic developments in a specific industry or region. No assurance can be given that the Trust's investment objective will be achieved. The following is a summary of significant accounting policies followed by the Trust. SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other debt securities, interest rate swaps, caps, floors and non-exchange traded options on the basis of current market quotations provided by dealers or pricing services approved by the Trust's Board of Directors. In determining the value of a particular security, pricing services may use certain information with respect to transactions in such securities, quotations from dealers, market transactions in comparable securities, various relationships observed in the market between securities, and calculated yield measures based on valuation technology commonly employed in the market for such securities. Exchange-traded options are valued at their last sales price as of the close of options trading on the applicable exchanges. In the absence of a last sale, options are valued at the average of the quoted bid and asked prices as of the close of business. A futures contract is valued at the last sale price as of the close of the commodities exchange on which it trades unless the Trust's Board of Directors determines that such price does not reflect its fair value, in which case it will be valued at its fair value as determined by the Trust's Board of Directors. Any securities or other assets for which such current market quotations are not readily available are valued at fair value as determined in good faith under procedures established by and under the general supervision and responsibility of the Trust's Board of Directors. Short-term securities which mature in 60 days or less are valued at amortized cost, if their term to maturity from date of purchase is 60 days or less. Short-term securities with a term to maturity greater than 60 days from the date of purchase are valued at current market quotations until maturity. In connection with transactions in repurchase agreements, the Trust's custodian takes possession of the underlying collateral securities, the value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market on a daily basis to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Trust may be delayed or limited. OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an amount equal to the premium received or paid by the Trust is recorded as a liability or an asset and is subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expire unexercised are treated by the Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commissions, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the proceeds from the sale or cost of the purchase in determining whether the Trust has realized a gain or a loss on investment transactions. The Trust, as writer of an option, may have no control over whether the underlying securities may be sold (call) or purchased (put) and as a result bears the market risk of an unfavorable change in the price of the security underlying the written option. Options, when used by the Trust, help in maintaining a targeted duration. Duration is a measure of the price sensitivity of a security or a portfolio to relative changes in interest rates. For instance, a duration of "one" means that a portfolio's or a security's price would be expected to change by approximately one percent with a one percent change in interest rates, while a duration of five would imply that the price would move approximately five percent in relation to a one percent change in interest rates. Option selling and purchasing is used by the Trust to effectively "hedge" positions so that changes in interest rates do not change the duration of the portfolio unexpectedly. In general, the Trust uses options to hedge a long or short position or an overall portfolio that is longer or shorter than the benchmark security. A call option gives the purchaser of the option the right (but not obligation) to buy, and obligates the seller to sell (when the option is exercised), the underlying position at the exercise price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying position at the exercise price at any time or at a specified time during the opti on period. Put options can be purchased to effectively hedge a position or a portfolio against price declines if a portfolio is long. In the same sense, call options can be purchased to hedge a portfolio that is shorter than its benchmark against price changes. The Trust can also sell (or write) covered call options and put options to hedge portfolio positions. 13 The main risk that is associated with purchasing options is that the option expires without being exercised. In this case, the option expires worthless and the premium paid for the option is considered the loss. The risk associated with writing call options is that the Trust may forego the opportunity for a profit if the market value of the underlying position increases and the option is exercised. The risk in writing put options is that the Trust may incur a loss if the market value of the underlying position decreases and the option is exercised. In addition, as with futures contracts, the Trust risks not being able to enter into a closing transaction for the written option as the result of an illiquid market. INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Rate swaps were conceived as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by "marking-to-market" to reflect the market value of the swap. When the swap is terminated, the Trust will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust's basis in the contract, if any. The Trust is exposed to credit loss in the event of non-performance by the other party to the mortgage swap. However, the Trust does not anticipate non-performance by any counterparty. SWAP OPTIONS: Swap options are similar to options on securities except that instead of selling or purchasing the right to buy or sell a security, the writer or purchaser of the swap option is granting or buying the right to enter into a previously agreed upon interest rate swap agreement at any time before the expiration of the option. Premiums received or paid from writing or purchasing options are recorded as liabilities or assets and are subsequently adjusted to the current market value of the option written or purchased. Premiums received or paid from writing or purchasing options which expires unexercised are treated by the Trust on the expiration date as realized gains or losses. The difference between the premium and the amount paid or received on effecting a closing purchase or sale transaction, including brokerage commission, is also treated as a realized gain or loss. If an option is exercised, the premium paid or received is added to the proceeds from the sale or cost of the purchase in determining whether the Trust has realized a gain or loss on investment transactions. The main risk that is associated with purchasing swap options is that the swap option expires without being exercised. In this case, the option expires worthless and the premium paid for the swap option is considered the loss. The main risk that is associated with the writing of a swap option is the market risk of an unfavorable change in the value of the interest rate swap underlying the written swap option. Swap options may be used by the Trust to manage the duration of the Trust's portfolio reflecting the view of the Trust's management in the direction of interest rates. FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two parties to buy and sell a financial instrument for a set price on a future date. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking- to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin pay ments are made or received, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Trust records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Trust's basis in the contract. Financial futures contracts, when used by the Trust, help in maintaining a targeted duration. Futures contracts can be sold to effectively shorten an otherwise longer duration portfolio. In the same sense, futures contracts can be purchased to lengthen a portfolio that is shorter than its duration target. Thus, by buying or selling futures contracts, the Trust can effectively "hedge" positions so that changes in interest rates do not change the duration of the portfolio unexpectedly. The Trust may invest in financial futures contracts primarily for the purpose of hedging its existing portfolio securities or securities the Trust intends to purchase against fluctuations in value caused by changes in prevailing market interest rates. Should interest rates move unexpectedly, the Trust may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. The Trust is also at the risk of not being able to enter into a closing transaction for the futures contract because of an illiquid secondary market. In addition, since futures are used to shorten or lengthen a portfolio's duration, there is a risk that the portfolio may have temporarily performed better without the hedge or that the Trust may lose the opportunity to realize appreciation in the market price of the underlying positions. SHORT SALES: The Trust may make short sales of securities as a method of hedging potential price declines in similar securities owned. When the Trust makes a short sale, it may borrow the security sold short and deliver it to the broker-dealer through 14 which it made the short sale as collateral for its obligation to deliver the security upon conclusion of the sale. The Trust may have to pay a fee to borrow the particular securities and may be obligated to pay over any payments received on such borrowed securities. A gain, limited to the price at which the Trust sold the security short, or a loss, unlimited as to dollar amount, will be recognized upon the termination of a short sale if the market price is greater or less than the proceeds originally received. SECURITIES LENDING: The Trust may lend its portfolio securities to qualified institutions. The loans are secured by collateral at least equal, at all times, to the market value of the securities loaned. The Trust may bear the risk of delay in recovery of, or even loss of rights in, the securities loaned should the borrower of the securities fail financially. The Trust receives compensation for lending its securities in the form of interest on the loan. The Trust also continues to receive interest on the securities loaned, and any gain or loss in the market price of the securities loaned that may occur during the term of the loan will be for the account of the Trust. INTEREST RATE CAPS: Interest rate caps are similar to interest rate swaps, except that one party agrees to pay a fee, while the other party pays the excess, if any, of a floating rate over a specified fixed or floating rate. Interest rate caps are intended to both manage the duration of the Trust's portfolio and its exposure to changes in short term rates. Owning interest rate caps reduces the portfolio's duration, making it less sensitive to changes in interest rates from a market value perspective. The effect on income involves protection from rising short term rates, which the Trust experiences primarily in the form of leverage. The Trust is exposed to credit loss in the event of non-performance by the other party to the interest rate cap. However, the Trust does not anticipate non-performance by any counterparty. Transactions fees paid or received by the Trust are recognized as assets or liabilities and amortized or accreted into interest expense or income over the life of the interest rate cap. The asset or liability is subsequently adjusted to the current market value of the interest rate cap purchased or sold. Changes in the value of the interest rate cap are recognized as unrealized gains and losses. INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps, except that one party agrees to pay a fee, while the other party pays the excess, if any, of a floating rate under a specified fixed or floating rate. Interest rate floors are used by the Trust to both manage the duration of the portfolio and its exposure to changes in short-term interest rates. Selling interest rate floors reduces the portfolio's duration, making it less sensitive to changes in interest rates from a market value perspective. The Trust's leverage provides extra income in a period of falling rates. Selling floors reduces some of that advantage by partially monetizing it as an up front payment which the Trust receives. The Trust is exposed to credit loss in the event of non-performance by the other party to the interest rate floor. However, the Trust does not anticipate non-performance by any counterparty. Transactions fees paid or received by the Trust are recognized as assets or liabilities and amortized or accreted into interest expense or income over the life of the interest rate floor. The asset or liability is subsequently adjusted to the current market value of the interest rate floor purchased or sold. Changes in the value of the interest rate floor are recognized as unrealized gains and losses. SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions are recorded on the trade date. Realized and unrealized gains and losses are calculated on the identified cost basis. Interest income is recorded on the accrual basis and the Trust accretes discount and amortizes premium on securities purchased using the interest method. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. TAXES: It is the Trust's intention to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to shareholders. Therefore, no federal income tax provision is required. DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and distributions monthly, first from net investment income, then from realized short-term capital gains and other sources, if necessary. Net long-term capital gains, if any, in excess of loss carryforwards are distributed at least annually. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 15 NOTE 2. AGREEMENTS The Trust has an Investment Advisory Agreement with BlackRock Financial Management, Inc. (the "Adviser"), a wholly- owned corporate subsidiary of BlackRock Advisors, Inc., which is an indirect majority-owned subsidiary of PNC Bank, N.A., and an Administration Agreement with Prudential Investments Fund Management LLC ("PIFM"), an indirect, wholly-owned subsidiary of The Prudential Insurance Co. of America. The investment fee paid to the Adviser is computed weekly and payable monthly at an annual rate of 0.65% of the Trust's average weekly net assets. The administration fee paid to PIFM is also computed weekly and payable monthly at an annual rate of 0.20% of the first $500 million of the Trust's average weekly net assets and 0.15% of any excess. Pursuant to the agreements, the Adviser provides continuous supervision of the investment portfolio and pays the compensation of officers of the Trust. PIFM pays occupancy and certain clerical and accounting costs of the Trust. The Trust bears all other costs and expenses. NOTE 3. PORTFOLIO SECURITIES Purchases and sales of investment securities, other than short-term investments and dollar rolls, for the year ended October 31, 1998 aggregated $1,589,447,018 and $1,509,958,130, respectively. The Trust may invest without limit in securities which are not readily marketable, including those which are restricted as to disposition under securities law ("restricted securities") although the Trust does not expect that such investments will generally exceed 25% of its portfolio assets. At October 31, 1998, the Trust held 3.8% of its portfolio assets in illiquid securities all of which were securities restricted as to resale. The Trust may from time to time purchase in the secondary market certain mortgage pass-through securities packaged or master serviced by PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded to rights and duties of Sears) or mortgage related securities containing loans or mortgages originated by PNC Bank or its affiliates, including Midland Loan Services, Inc. It is possible under certain circumstances, PNC Mortgage Securities Corp. or its affiliates, including Midland Loan Services, Inc. could have interests that are in conflict with the holders of these mortgage backed securities, and such holders could have rights against PNC Mortgage Securities Corp. or its affiliates, including Midland Loan Services, Inc. The federal income tax basis of the Trust's investments at October 31, 1998 was $682,726,382 and, accordingly, net unrealized appreciation was $10,246,379 (gross unrealized appreciation $54,426,199; gross unrealized depreciation $44,179,820). For federal income tax purposes, the Trust has a capital loss carryforward at October 31, 1998 of approximately $69,599,900 of which approximately $3,440,300 will expire in 2001, approximately $23,358,100 will expire in 2002, approximately $15,428,300 will expire in 2003 and approximately $27,373,200 will expire in 2004. Such carryforward is after utilization of approximately $11,896,700 to offset the Trust's net taxable gains recognized in the year ended October 31, 1998. Accordingly, no capital gains distribution is expected to be paid to shareholders until net gains have been realized in excess of such amounts. Details of open financial futures contracts at October 31, 1998 are as follows:
VALUE AT VALUE AT UNREALIZED NUMBER OF EXPIRATION TRADE OCTOBER 31, APPRECIATION CONTRACTS TYPE DATE DATE 1998 (DEPRECIATION) - ----------------- --------------- ------------ --------------- --------------- --------------- Long Positions: 2,851 30 yr. T-Bond Dec. 1998 $178,176,052 $174,152,344 $(4,023,708) Short Positions: 2,279 10 yr. T-Note Dec. 1998 326,312,388 325,012,500 1,299,888 ----------- $(2,723,820) ===========
The Trust entered into four interest rate caps. Under all agreements the Trust receives the excess, if any, of a floating rate over a fixed rate. The Trust paid a transaction fee for each agreement. Details of the caps at October 31, 1998 are as follows:
NOTIONAL VALUE AT AMOUNT FIXED FLOATING TERMINATION AMORTIZED OCTOBER 31, UNREALIZED (000) RATE RATE DATE COST 1998 DEPRECIATION - ---------- ---------- ------------- ------------- ------------- ------------- --------------- $50,000 6.00% 3 mth LIBOR 2/19/02 $1,064,662 $ 246,750 $ (817,912) 100,000 6.50% 3 mth LIBOR 4/4/02 2,457,557 377,364 (2,080,193) 100,000 7.00% 3 mth LIBOR 4/18/03 2,555,776 470,000 (2,085,776) 100,000 7.25% 3 mth LIBOR 4/23/03 2,149,749 400,000 (1,749,749) ---------- ---------- ----------- $8,227,744 $1,494,114 $(6,733,630) ========== ========== ===========
Details of open interest rate swaps at October 31, 1998 are as follows:
NOTIONAL UNREALIZED AMOUNT FIXED TERMINATION APPRECIATION (000) TYPE RATE FLOATING RATE DATE (DEPRECIATION) - ---------------- --------------- ---------- --------------- ------------- --------------- $ (20,000) Interest Rate 7.50% 1 month LIBOR 04/25/02 $(1,287,200) (5,455) Forward Rate 7.235% 1 month LIBOR 06/15/11 77,461 ----------- $(1,209,739) ===========
16 Details of open swaptions at October 31, 1998 are as follows:
NOTIONAL VALUE AT AMOUNT FIXED FLOATING TERMINATION OCTOBER 31, (000) TYPE RATE RATE DATE COST 1998 - ---------- ------ ---------- ------------- ------------- ------------- ------------ Purchased: $97,000 Call 5.85% 3 mth LIBOR 8/07/00 $2,022,450 $3,634,260 185,000 Call 5.25% 3 mth LIBOR 9/24/01 3,507,600 3,585,300 150,000 Put 7.25% 3 mth LIBOR 5/12/00 6,795,000 566,040 ---------- $7,785,600 ==========
NOTE 4. BORROWINGS REVERSE REPURCHASE AGREEMENTS: The Trust enters into reverse repurchase agreements with qualified, third party broker-dealers as determined by and under the direction of the Trust's Board of Directors. Interest on the value of reverse repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. At the time the Trust enters into a reverse repurchase agreement, it establishes and maintains a segregated account with the lender containing liquid high grade securities having a value not less than the repurchase price, including accrued interest, of the reverse repurchase agreement. The average daily balance of reverse repurchase agreements outstanding during the year ended October 31, 1998 was approximately $218,735,000 at a weighted average interest rate of approximately 5.47%. The maximum amount of reverse repurchase agreements outstanding at any month-end during the period was $198,335,893 as of October 31, 1998, which was 28.27% of total assets. DOLLAR ROLLS: The Trust enters into dollar rolls in which the Trust sells securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (same type, coupon and maturity) securities on a specified future date. During the roll period the Trust forgoes principal and interest paid on the securities. The Trust is compensated by the interest earned on the cash proceeds of the initial sale and by the lower repurchase price at the future date. The Trust did not enter into dollar rolls during the year ended October 31, 1998. NOTE 5. CAPITAL There are 200 million shares of $.01 par value common stock authorized. Of the 62,849,878 shares outstanding at October 31, 1998, the Adviser owned 10,753 shares. NOTE 6. DIVIDENDS Since October 31, 1998, the Board of Directors of the Trust declared dividends from undistributed earnings of $0.046875 per share payable November 16, 1998 to shareholders of record on November 30, 1998. 17 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- The Shareholders and Board of Directors of The BlackRock Income Trust Inc.: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of The BlackRock Income Trust Inc. as of October 31, 1998 and the related statements of operations for the year then ended and of changes in net investment assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at October 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of The BlackRock Income Trust Inc. at October 31, 1998, and the results of its operations, the changes in its net investment assets and its financial highlights for the respective stated periods in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - ------------------------- Deloitte & Touche LLP New York, New York December 11, 1998 18 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. TAX INFORMATION - -------------------------------------------------------------------------------- We wish to advise you as to the federal tax status of dividends and distributions paid by the Trust during its fiscal year ended October 31, 1998 During the fiscal year ended October 31, 1998, the Trust paid dividends and distributions of $0.56 per share from net investment income. For federal income tax purposes, the aggregate of any dividends and short-term capital gains distributions you received are reportable in your 1998 federal income tax return as ordinary income. Further, we wish to advise you that your income dividends do not qualify for the dividends received deduction. We are required by Massachusetts, Missouri and Oregon to inform you that dividends which have been derived from interest on federal obligations are not taxable to shareholders. Please be advised that 9.66% of the dividends paid from ordinary income in the fiscal year ended October 31, 1998, qualify for each of these states' tax exclusion. For the purpose of preparing your 1998 annual federal income tax return, however, you should report the amounts as reflected on the appropriate Form 1099 DIV which will be mailed to you in January 1999. - -------------------------------------------------------------------------------- DIVIDEND REINVESTMENT PLAN - -------------------------------------------------------------------------------- Pursuant to the Trust's Dividend Reinvestment Plan (the "Plan"), shareholders may elect to have all distributions of dividends and capital gains automatically reinvested by State Street Bank & Trust Company (the "Plan Agent") in Trust shares pursuant to the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash paid by check in United States dollars mailed directly to the shareholders of record (or if the shares are held in street or other nominee name, then to the nominee) by the Custodian, as dividend disbursing agent. The Plan Agent serves as agent for the shareholders in administering the Plan. After the Trust declares a dividend or determines to make a capital gain distribution, the Plan Agent will, as agent for the participants, receive the cash payment and use it to buy Trust shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts. The Trust will not issue shares under the Plan below net asset value. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent and will receive certificates for whole Trust shares and a cash payment will be made for any fraction of a Trust share. The Plan Agent's fees for the handling of the reinvestment of dividends and distributions will be paid by the Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of dividends and distributions. The automatic reinvestment of dividends and distributions will not relieve participants of any federal, state or local income taxes that may be payable on such dividend or distributions. Experience under the Plan may indicate that changes are desirable. Accordingly, the Trust reserves the right to amend or terminate the Plan as applied to any dividend or distribution paid subsequent to written notice of the change sent to all shareholders of the Trust at least 90 days before the record date for the dividend or distribution. The Plan also may be amended or terminated by the Plan Agent upon at least 90 days' written notice to all shareholders of the Trust. All correspondence concerning the Plan should be directed to the Plan Agent at (800) 699-1BFM. The addresses are on the front of this report. 19 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. ADDITIONAL INFORMATION - -------------------------------------------------------------------------------- There have been no material changes in the Trust's investment objectives or policies that have not been approved by the shareholders or to its charter or by-laws or in the principal risk factors associated with investment in the Trust. There have been no changes in the persons who are primarily responsible for the day-to-day management of the Trust's portfolio. YEAR 2000 READINESS DISCLOSURE. The Trust is currently in the process of evaluating its information technology infrastructure for Year 2000 compliance. Substantially all of the Trust's information systems are supplied by the Adviser. The Adviser has advised the Trust that it is currently evaluating whether such systems are year 2000 compliant and that it expects to incure costs of up to approximately five hundred thousand dollars to complete such evaluation and to make any modifications to its systems as may be necessary to achieve Year 2000 compliance. The Adviser has advised the Trust that it expects to have fully tested its systems for Year 2000 compliance by December 31, 1998. The Trust may be required to bear a portion of such cost incurred by the Adviser in this regard. The Adviser has advised the Trust that it does not anticipate any material disruption in the operations of the Trust as a result of any failure by the Adviser to achieve Year 2000 compliance. There can be no assurance that the costs will not exceed the amount referred to above or that the Trust will not experience a disruption in operations. The Adviser has advised the Trust that it is in the process of evaluating the Year 2000 compliance of various suppliers of the Adviser and the Trust. The Adviser has advised the Trust that it intends to communicate with such suppliers to determine their Year 2000 compliance status and the extent to which the Adviser or the Trust could be affected by any supplier's Year 2000 compliance issues. To date, however, the Adviser has not received responses from all such suppliers with respect to their Year 2000 compliance, and there can be no assurance that the systems of such suppliers, who are beyond the Trust's control, will be Year 2000 compliant. In the event that any of the Trust's significant suppliers do not successfully and timely achieve Year 2000 compliance, the Trust's business or operations could be adversely affected. The Adviser has advised the Trust that it is in the process of preparing a contingency plan for Year 2000 compliance by its suppliers. There can be no assurance that such contingency plan will be successful in preventing a disruption of the Trust's operations. The Trust is designating this disclosure as its year 2000 readiness disclosure for all purposes under the Year 2000 Information and Readiness Disclosure Act and the foregoing information shall constitute a Year 2000 statement for purposes of that Act. 20 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. INVESTMENT SUMMARY - -------------------------------------------------------------------------------- THE TRUST'S INVESTMENT OBJECTIVE The BlackRock Income Trust's investment objective is to manage a portfolio of high grade securities to achieve high monthly income consistent with preservation of capital. The Trust will seek to achieve its objective by investing in Canadian and U.S. dollar-denominated securities. WHO MANAGES THE TRUST? BlackRock Financial Management, Inc. ("BlackRock") is an SEC-registered investment adviser. BlackRock and its affiliates currently manage over $122 billion on behalf of taxable and tax-exempt clients worldwide. Strategies include fixed income, equity and cash and may incorporate both domestic and international securities. Domestic fixed income strategies utilize the government, mortgage, corporate and municipal bond sectors. BlackRock manages twenty-one closed-end funds that are traded on either the New York or American stock exchanges, and a $23 billion family of open-end equity and bond funds. Current institutional clients number 410, domiciled in the United States and overseas. WHAT CAN THE TRUST INVEST IN? The Trust will invest primarily in securities issued or guaranteed by the federal governments of Canada and the United States, their political subdivisions (which include the Canadian provinces) and their agencies and instrumentalities. The Trust's investments will be either government securities or securities rated "BBB" or higher at the time of investment by Standard & Poor's or "A2" by Moody's, or securities which BlackRock deems as of comparable quality. Under current market conditions, it is expected that the percentage of the Trust's assets invested in Canadian dollar-denominated securities will be approximately 65% and 75%. Examples of types of securities in which the Trust may invest include Canadian and U.S. government or government agency residential mortgage-backed securities, privately issued mortgage-backed securities, Canadian provincial debt securities, U.S. Government securities, commercial mortgage-backed securities, asset-backed securities and other debt securities issued by Canadian and U.S. corporations and other entities. Under current market conditions, BlackRock expects that the primary investments of the Trust to be Canadian mortgage-backed securities, Canadian provincial debt securities, U.S. government securities, securities backed by U.S. government agencies (such as residential mortgage-backed securities), privately issued mortgage-backed securities and commercial mortgage-backed securities. WHAT IS THE ADVISER'S INVESTMENT STRATEGY? The Adviser will seek to meet the Trust's investment objective by managing the asset of the Trust so as to provide high monthly income consistent with the preservation of capital. The Trust will seek to provide monthly income that is greater than that which could be obtained by investing in U.S. Treasury securities with an average life similar to that of the Trust's assets. In seeking the investment objective, BlackRock actively manages the Trust's assets in relation to market conditions and changes in general economic conditions in Canada and the U.S., including its expectations regarding interest rate changes and changes in currency exchange rates between the U.S. dollar and the Canadian dollar, to attempt to take advantage of favorable investment opportunities in each country. As such, the allocation between Canadian and U.S. securities will change from time to time. Under current market conditions, the average life of the Trust's assets is expected to be in the range of seven to ten years. Under other market conditions, the Trust's average life may vary and may not be predictable using any formula. While the Adviser has the opportunity to hedge against currency risks associated with Canadian securities, the Trust is intended to provide exposure to the Canadian marketplace. As a result, historically, currency hedging has not been widely practiced by the Trust. However, BlackRock will attempt to limit interest rate risk by constantly monitoring the duration (or price sensitivity with respect to changes in interest rates) of the Trust's assets so that it is within the range of U.S. Treasury securities with average lives of seven to ten years. In doing so, the Adviser will attempt to locate securities with better predictability of cash flows such as U.S. commercial mortgage-backed securities. In addition, the Canadian mortgage-backed securities in which the Trust invests are not prepayable, contributing to the predictability of the Trust's cash flows. Traditional residential U.S. 21 mortgage pass-through securities make interest and principal payments on a monthly basis and can be a source of attractive levels of income to the Trust. While the U.S. mortgage-backed securities in the Trust are of high credit quality, they typically offer a yield spread over Treasuries due to the uncertainty of the timing of their cash flows as they are subject to prepayment exposure when interest rates change and mortgage holders refinance their mortgages or move. While U.S. mortgage-backed securities do offer the opportunity for attractive yields, they subject a portfolio to interest rate risk and prepayment exposure which result in reinvestment risk when prepaid principal must be reinvested. HOW ARE THE TRUST'S SHARES PURCHASED AND SOLD? Does the Trust Pay Dividends Regularly? The Trust's shares are traded on the New York Stock Exchange which provides investors with liquidity on a daily basis. Orders to buy or sell shares of the Trust must be placed through a registered broker or financial advisor. The Trust pays monthly dividends which are typically paid on the last business day of the month. For shares held in the shareholder's name, dividends may be reinvested in additional shares of the Trust through the Trust's transfer agent, State Street Bank & Trust Company. Investors who wish to hold shares in a brokerage account should check with their financial advisor to determine whether their brokerage firm offers dividend reinvestment services. LEVERAGE CONSIDERATIONS IN THE TRUST Under current market conditions, leverage increases the income earned by the Trust. The Trust employs leverage primarily through the use of reverse repurchase agreements and dollar rolls. Leverage permits the Trust to borrow money at short-term rates and reinvest that money in longer-term assets which typically offer higher interest rates. The difference between the cost of the borrowed funds and the income earned on the proceeds that are invested in longer term assets is the benefit to the Trust from leverage. In general, the portfolio is typically leveraged at approximately 331|M/3% of total assets. Leverage also increases the duration (or price volatility of the net assets) of the Trust, which can improve the performance of the Trust in a declining rate environment, but can cause net assets to decline faster than the market in a rapidly rising rate environment. BlackRock's portfolio managers continuously monitor and regularly review the Trust's use of leverage and the Trust may reduce, or unwind, the amount of leverage employed should BlackRock consider that reduction to be in the best interest of shareholders. SPECIAL CONSIDERATIONS AND RISK FACTORS RELEVANT TO THE TRUST THE TRUST IS INTENDED TO BE A LONG-TERM INVESTMENT AND IS NOT A SHORT-TERM TRADING VEHICLE. INVESTMENT OBJECTIVE. Although the objective of the Trust is to provide high monthly income consistent with preservation of capital, there can be no assurance that this objective will be achieved. DIVIDEND CONSIDERATIONS. The income and dividends paid by the Trust are likely to vary over time as fixed income market conditions change. Future dividends may be higher or lower than the dividend the Trust is currently paying. CURRENCY EXCHANGE RATE CONSIDERATIONS. Because the Trust's net asset value is expressed in U.S. dollars, and the Trust invests a substantial percentage of its assets in Canadian dollar-denominated assets, any change in the exchange rate between these two currencies will have an effect on the net asset value of the Trust. As a result, if the U.S. dollar appreciates against the Canadian dollar, the Trust's net asset value would decrease if not offset by other gains. LEVERAGE. The Trust utilizes leverage through reverse repurchase agreements and dollar rolls, which involves special risks. The Trust's net asset value and market value may be more volatile due to its use of leverage. MARKET PRICE OF SHARES. The shares of closed-end investment companies such as the Trust trade on the New York Stock Exchange (NYSE symbol: BNA) and as such are subject to supply and demand influences. As a result, shares may trade at a discount or a premium to their net asset value. 22 MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The cash flow and yield characteristics of these securities differ from traditional debt securities. The major differences typically include more frequent payments and the possibility of prepayments on certain U.S. mortgage-backed securities which will change the yield to maturity of the security. ILLIQUID SECURITIES. The Trust may invest in securities that are illiquid, although under current market conditions the Trust expects to do so to only a limited extent. These securities involve special risks. NON-U.S. SECURITIES. The Trust may invest a portion of its assets in non-U.S. dollar-denominated securities which involve special risks such as currency, political and economic risks, although under current market conditions does not do so. ANTITAKEOVER PROVISIONS. Certain antitakeover provisions will make a change in the Trust's business or management more difficult without the approval of the Trust's Board of Directors and may have the effect of depriving shareholders of an opportunity to sell their shares at a premium above the prevailing market price. 23 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. GLOSSARY - -------------------------------------------------------------------------------- ADJUSTABLE RATE MORTGAGE-BACKED Mortgage instruments with interest rates that SECURITIES (ARMS): adjust at periodic intervals at a fixed amount over the market levels of interest rates as reflected in specified indexes. ARMS are backed by mortgage loans secured by real property. ASSET-BACKED SECURITIES: Securities backed by various types of receivables such as automobile and credit card receivables. CANADIAN MORTGAGE SECURITIES: Canadian Mortgage instruments which are guaranteed by the Canadian Mortgage Housing Corporation (CMHC), a federal agency backed by the full faith and credit of the Canadian Government. CLOSED-END FUND: Investment vehicle which initially offers a fixed number of shares and trades on a stock exchange. The fund invests in a portfolio of securities in accordance with its stated investment objectives and policies. COLLATERALIZED Mortgage-backed securities which separate MORTGAGE OBLIGATIONS (CMOS): mortgage pools into short, medium, and long-term securities with different priorities for receipt of principal and interest. Each class is paid a fixed or floating rate of interest at regular intervals. Also known as multiple-class mortgage pass-throughs. DISCOUNT: When a fund's net asset value is greater than its stock price the fund is said to be trading at a discount. DIVIDEND: This is income generated by securities in a portfolio and distributed to shareholders after the deduction of expenses. This Trust declares and pays dividends on a monthly basis. DIVIDEND REINVESTMENT: Shareholders may elect to have all distributions of dividends and capital gains automatically reinvested into additional shares of the Trust. FHA: Federal Housing Administration, a government agency that facilitates a secondary mortgage market by providing an agency that guarantees timely payment of interest and principal on mortgages. FHLMC: Federal Home Loan Mortgage Corporation, a publicly owned, federally chartered corporation that facilitates a secondary mortgage market by purchasing mortgages from lenders such as savings institutions and reselling them to investors by means of mortgage-backed securities. Obligations of FHLMC are not guaranteed by the U.S. government, however; they are backed by FHLMC's authority to borrow from the U.S. government. Also known as Freddie Mac. FNMA: Federal National Mortgage Association, a publicly owned, federally chartered corporation that facilitates a secondary mortgage market by purchasing mortgages from lenders such as savings institutions and reselling them to investors by means of mortgage-backed securities. Obligations of FNMA are not guaranteed by the U.S. government, however; they are backed by FNMA's authority to borrow from the U.S. government. Also known as Fannie Mae. GNMA: Government National Mortgage Association, a government agency that facilitates a secondary mortgage market by providing an agency that guarantees timely payment of interest and principal on mortgages. GNMA's obligations are supported by the full faith and credit of the U.S. Treasury. Also known as Ginnie Mae.
24 GOVERNMENT SECURITIES: Securities issued or guaranteed by the U.S. government, or one of its agencies or instrumentalities, such as GNMA (Government National Mortgage Association), FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan Mortgage Corporation). INTEREST-ONLY SECURITIES (I/O): Mortgage securities that receive only the interest cash flows from an underlying pool of mortgage loans or underlying pass-through securities. Also known as a STRIP. INVERSE-FLOATING RATE MORTGAGES: Mortgage instruments with coupons that adjust at periodic intervals according to a formula which sets inversely with a market level interest rate index. MARKET PRICE: Price per share of a security trading in the secondary market. For a closed-end fund, this is the price at which one share of the fund trades on the stock exchange. If you were to buy or sell shares, you would pay or receive the market price. MORTGAGE DOLLAR ROLLS: A mortgage dollar roll is a transaction in which the Trust sells mortgage- backed securities for delivery in the current month and simultaneously contracts to repurchase substantially similar (although not the same) securities on a specified future date. During the "roll" period, the Trust does not receive principal and interest payments on the securities, but is compensated for giving up these payments by the difference in the current sales price (for which the security is sold) and lower price that the Trust pays for the similar security at the end date as well as the interest earned on the cash proceeds of the initial sale. MORTGAGE PASS-THROUGHS: Mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae. MULTIPLE-CLASS PASS-THROUGHS: Collateralized Mortgage Obligations. Net NET ASSET VALUE (NAV): asset value is the total market value of all securities held by the Trust, plus income accrued on its investments, minus any liabilities including accrued expenses, divided by the total number of outstanding shares. It is the underlying value of a single share on a given day. Net asset value for the Trust is calculated weekly and published in BARRON'S on Saturday and THE WALL STREET JOURNAL each Monday. PRINCIPAL-ONLY SECURITIES (P/O): Mortgage securities that receive only the principal cash flows from an underlying pool of mortgage loans or underlying pass-through securities. Also known as a STRIP. PROJECT LOANS: Mortgages for multi-family, low- to middle-income housing. PREMIUM: When a fund's stock price is greater than its net asset value, the fund is said to be trading at a premium. RESIDUALS: Securities issued in connection with collateralized mortgage obligations that generally represent the excess cash flow from the mortgage assets underlying the CMO after payment of principal and interest on the other CMO securities and related administrative expenses. REVERSE REPURCHASE AGREEMENTS: In a reverse repurchase agreement, the Trust sells securities and agrees to repurchase them at a mutually agreed date and price. During this time, the Trust continues to receive the principal and interest payments from that security. At the end of the term, the Trust receives the same securities that were sold for the same initial dollar amount plus interest on the cash proceeds of the initial sale. STRIPPED MORTGAGE BACKED Arrangements in which a pool of assets is SECURITIES separated into two classes that receive different proportions of the interest and principal distribution from underlying mortgage-backed securities. IO's and PO's are examples of STRIPs.
25 - -------------------------------------------------------------------------------- THE BLACKROCK FINANCIAL MANAGEMENT, INC. SUMMARY OF CLOSED-END FUNDS TAXABLE TRUST - -------------------------------------------------------------------------------- TAXABLE TRUSTS - --------------------------------------------------------------------------------
STOCK MATURITY SYMBOL DATE PERPETUAL TRUSTS ---------- --------- The BlackRock Income Trust Inc. BKT N/A The BlackRock North American Government Income Trust Inc. BNA N/A TERM TRUSTS The BlackRock 1998 Term Trust Inc. BBT 12/98 The BlackRock 1999 Term Trust Inc. BNN 12/99 The BlackRock Target Term Trust Inc. BTT 12/00 The BlackRock 2001 Term Trust Inc. BLK 06/01 The BlackRock Strategic Term Trust Inc. BGT 12/02 The BlackRock Investment Quality Term Trust Inc. BQT 12/04 The BlackRock Advantage Term Trust Inc. BAT 12/05 The BlackRock Broad Investment Grade 2009 Term Trust Inc. BCT 12/09
TAX-EXEMPT TRUSTS - --------------------------------------------------------------------------------
STOCK MATURITY SYMBOL DATE PERPETUAL TRUSTS --------- --------- The BlackRock Investment Quality Municipal Trust Inc. BKN N/A The BlackRock California Investment Quality Municipal Trust Inc. RAA N/A The BlackRock Florida Investment Quality Municipal Trust RFA N/A The BlackRock New Jersey Investment Quality Municipal Trust Inc. RNJ N/A The BlackRock New York Investment Quality Municipal Trust Inc. RNY N/A TERM TRUSTS The BlackRock Municipal Target Term Trust Inc. BMN 12/06 The BlackRock Insured Municipal 2008 Term Trust Inc. BRM 12/08 The BlackRock California Insured Municipal 2008 Term Trust Inc. BFC 12/08 The BlackRock Florida Insured Municipal 2008 Term Trust BRF 12/08 The BlackRock New York Insured Municipal 2008 Term Trust Inc. BLN 12/08 The BlackRock Insured Municipal Term Trust Inc. BMT 12/10
IF YOU WOULD LIKE FURTHER INFORMATION PLEASE DO NOT HESITATE TO CALL BLACKROCK AT (800) 227-7BFM (7236) OR CONSULT WITH YOUR FINANCIAL ADVISOR. 26 - -------------------------------------------------------------------------------- BLACKROCK FINANCIAL MANAGEMENT, INC. AN OVERVIEW - -------------------------------------------------------------------------------- BlackRock Financial Management, Inc. ("BlackRock") is an SEC-registered investment adviser. BlackRock and its affiliates currently manage over $122 billion on behalf of taxable and tax-exempt clients worldwide. Strategies include fixed income, equity and cash and may incorporate both domestic and international securities. BlackRock manages twenty-one closed-end funds that are traded on either the New York or American stock exchanges, and a $23 billion family of open-end equity and bond funds. Current institutional clients number 410, domiciled in the United States and overseas. BlackRock's fixed income product was introduced in 1988 by a team of highly seasoned fixed income professionals. These professionals had extensive experience creating, analyzing and trading a variety of fixed income instruments, including the most complex structured securities. In fact, several individuals at BlackRock were responsible for developing many of the major innovations in the mortgage-backed and asset-backed securities markets, including the creation of the first CMO, the floating rate CMO, the senior/subordinated pass-through and the multi-class asset-backed security. BlackRock is unique among asset management and advisory firms in the emphasis it places on the development of proprietary analytical capabilities. Over one quarter of the firm's professionals is dedicated to the design, maintenance and use of these systems, which are not otherwise available to investors. BlackRock's proprietary analytical tools are used for evaluating, and designing fixed income investment strategies for client portfolios. Securities purchased include mortgages, corporate bonds, municipal bonds and a variety of hedging instruments. BlackRock has developed investment products that respond to investors' needs and has been responsible for several major innovations in closed-end funds. In fact, BlackRock introduced the first closed-end mortgage fund, the first taxable and tax-exempt closed-end funds to offer a finite term, the first closed-end fund to achieve a AAA rating by Standard & Poor's, and the first closed-end fund to invest primarily in North American Government securities. Currently, BlackRock's closed-end funds have dividend reinvestment plans, which are designed to provide ongoing demand for the stock in the secondary market. BlackRock manages a wide range of investment vehicles, each having specific investment objectives and policies. In view of our continued desire to provide a high level of service to all our shareholders, BlackRock maintains a toll-free number for your questions. The number is (800) 227-7BFM (7236). We encourage you to call us with any questions that you may have about your BlackRock funds and we thank you for the continued trust that you place in our abilities. IF YOU WOULD LIKE FURTHER INFORMATION PLEASE DO NOT HESITATE TO CALL BLACKROCK AT (800) 227-7BFM 27 BLACKROCK DIRECTORS Laurence D. Fink, CHAIRMAN Andrew F. Brimmer Richard E. Cavanagh Kent Dixon Frank J. Fabozzi James Grosfeld James Clayburn La Force, Jr. Walter F. Mondale Ralph L. Schlosstein OFFICERS Ralph L. Schlosstein, PRESIDENT Scott Amero, VICE PRESIDENT Vice Keith T. Anderson, VICE PRESIDENT Michael C. Huebsch, VICE PRESIDENT Robert S. Kapito, VICE PRESIDENT Richard M. Shea, VICE PRESIDENT/TAX Henry Gabbay, TREASURER James Kong, ASSISTANT TREASURER Karen H. Sabath, SECRETARY INVESTMENT ADVISER BlackRock Financial Management, Inc. 345 Park Avenue New York, NY 10154 (800) 227-7BFM ADMINISTRATOR Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 CUSTODIAN AND TRANSFER AGENT State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 (800) 699-1BFM INDEPENDENT AUDITORS Deloitte & Touche LLP Two World Financial Center New York, NY 10281-1434 LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP 919 Third Avenue New York, NY 10022 This report is for shareholder information. This is not a prospectus intended for use in the purchase or sale of any securities. THE BACKROCK INCOME TRUST INC. c/o Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 227-7BFM [GRAPHIC OMITTED] [logo] Printed on recycled paper 09247F-10-0 - -------------------------------------------------------------------------------- THE BLACKROCK INCOME TRUST INC. - -------------------------------------------------------------------------------- ANNUAL REPORT OCTOBER 31, 1998
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