BLACKROCK MQE INVESTORS
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ANNUAL REPORT
DECEMBER 31, 1996
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BLACKROCK MQE INVESTORS
REPORT OF INDEPENDENT AUDITORS
The Shareholders and Board of Trustees of
BlackRock MQE Investors:
We have audited the accompanying statement of assets and liabilities of
BlackRock MQE Investors as of December 31, 1996 and the related statements of
operations and cash flows for the period then ended and the statement of changes
in net assets and financial highlights for the period November 1, 1996
(commencement of investment operations) to December 31, 1996. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit 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. 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 audit provides a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of BlackRock MQE Investors as of December 31,
1996, and the results of its operations and its cash flows for the period then
ended and the statement of changes in its net assets and the financial
highlights for the period November 1, 1996 (commencement of investment
operations) to December 31, 1996, in conformity with generally accepted
accounting principles.
As explained in Note 1, the financial statements include investments valued at
$48,619,325 (106.25% of net assets), whose value of underlying investments have
been estimated by the Board of Trustees in the absence of readily ascertainable
market values. We have reviewed the procedures used by the Board of Trustees in
arriving at its estimate of value of such investments and have inspected
underlying documentation, and, in the circumstances, we believe the procedures
are reasonable and the documentation appropriate. However, because of the
inherent uncertainty of valuation, those estimated values may differ
significantly from the values that would have been used had a ready market for
the investments existed, and the differences could be material.
New York, New York
February 20, 1997
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BLACKROCK MQE INVESTORS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
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ASSETS
Investment in Annington subordinated debt (United Kingdom)
at estimated fair value, which includes unrealized gain
of $2,083,285 (cost $45,372,600)* $ 47,455,885
Investment in Annington warrants (United Kingdom) at
estimated fair value, which includes unrealized
gain of $51,074 (cost $1,112,366) 1,163,440
Repurchase agreement dated 12/31/96 with State Street
Bank and Trust, Co. 5.00% due 1/2/97,
collateralized by United States Treasury Note
6.00% due 5/31/98 (market value $146,285)
(repurchase proceeds $140,058) (cost $140,000) 140,000
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Total investments ($46,484,966) 48,759,325
Cash including cash held in foreign banks of $15,757 31,773
Interest receivable 812,042
Deferred organization expenses and other assets (Note 1) 106,324
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Total assets $ 49,709,464
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LIABILITIES
Unrealized loss on forward currency contracts 3,739,592
Investment advisory fee payable (Note 2) 77,846
Other accrued expenses 132,178
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Total liabilities 3,949,616
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NET INVESTMENT ASSETS $ 45,759,848
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Net assets were comprised of:
Common units of beneficial interest, at par (Note 4) $ 466
Paid in capital in excess of par 46,579,534
Preferred units (100 units issued and outstanding), at
par (Note 4) 50,000
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46,630,000
Accumulated net investment income 734,456
Net unrealized depreciation on investments, forward
currency contracts and foreign currency
transactions (1,604,608)
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Total net investment assets $ 45,759,848
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Net assets applicable to common unitholders 45,709,848
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Net asset value per common unit ($45,709,848 divided
by 46,580 common units issued and outstanding) $ 981.32
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Total units outstanding at end of period 46,580.00
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* This security has been partially or fully pledged as collateral in connection
with forward currency contracts.
See Notes to Financial Statements.
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BLACKROCK MQE INVESTORS
STATEMENT OF OPERATIONS
FOR THE PERIOD NOVEMBER 1, 1996* THROUGH DECEMBER 31, 1996
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NET INVESTMENT INCOME
Income
Interest $ 837,346
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Expenses
Management fee 77,846
Audit 8,500
Legal 4,178
Directors 3,676
Amortization of deferred organization expenses 3,676
Administration/Custody/Transfer Agent 3,342
Amortization of prepaid insurance 836
Miscellaneous 836
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Total expenses 102,890
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Net investment income 734,456
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UNREALIZED LOSS ON INVESTMENTS, FORWARD
CURRENCY CONTRACTS, AND FOREIGN CURRENCY
TRANSACTIONS (NOTE 1)
Net change in unrealized depreciation on investments,
forward currency contracts and foreign currency
transactions (1,604,608)
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Net unrealized loss (1,604,608)
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NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ (870,152)
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* Commencement of investment operations.
See Notes to Financial Statements.
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BlackRock MQE Investors
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
November 1, 1996*
Through
December 31, 1996
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INCREASE (DECREASE) IN NET INVESTMENT ASSETS
<S> <C>
Operations:
Net investment income $ 734,456
Net change in unrealized depreciation on investments,
forward currency contracts and foreign currency transactions (1,604,608)
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Net decrease in net assets resulting
from operations (870,152)
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Fund unit transactions:
Proceeds from Fund preferred units issued 50,000
Proceeds from Fund common units issued 46,580,000
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Net increase 46,630,000
NET INVESTMENT ASSETS
Beginning of period --
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End of period $ 45,759,848
==================
</TABLE>
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* Commencement of investment operations.
See Notes to Financial Statements.
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BLACKROCK MQE INVESTORS
STATEMENT OF CASH FLOWS
FOR THE PERIOD NOVEMBER 1, 1996* THROUGH DECEMBER 31, 1996
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INCREASE (DECREASE) IN CASH
Cash flows used for operating activities:
Interest received (net) $ 26,114
Net gain from forward currency contracts and
foreign currency transactions 625
Purchase of repurchase agreements, net (140,000)
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Net cash flows used for operating activities (113,261)
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Cash flows provided by investing activities:
Proceeds from Fund preferred units issued 50,000
Purchase of investments (46,484,966)
Proceeds from Fund common units issued 46,580,000
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Net cash flows provided by investing activities 145,034
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Net increase in cash 31,773
Cash, beginning of period --
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Cash, end of period $ 31,773
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RECONCILIATION OF NET DECREASE IN NET
ASSETS RESULTING FROM OPERATIONS
TO NET CASH FLOWS USED FOR
OPERATING ACTIVITIES
Net decrease in net assets resulting from operations $ (870,152)
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Increase in repuchase agreement (140,000)
Increase in unrealized depreciation 1,605,233
Increase in accrued expenses and other liabilities 210,024
Increase in prepaid and other assets (918,366)
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Total adjustments 756,891
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Net cash flows used for operating activities $ (113,261)
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* Commencement of investment operations.
See Notes to Financial Statements.
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BLACKROCK MQE INVESTORS
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
November 1, 1996*
Through
December 31, 1996
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PER COMMON UNIT OPERATING
PERFORMANCE:
<S> <C>
Net asset value, beginning of period $ 1,000.00
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Net investment income 15.77 (a)
Net unrealized gain (loss) on investments,
forward currency contracts and foreign
currency transactions (34.45) (a)
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Net decrease from investment operations (18.68)
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Net asset value, end of period $ 981.32
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TOTAL INVESTMENT RETURN (b) (1.87)%
RATIOS TO AVERAGE NET ASSETS (e):
Expenses 1.33% (c) (d)
Net investment income 9.46% (c) (d)
SUPPLEMENTAL DATA:
Average net assets of common unitholders (in thousands) $46,580
Portfolio turnover -
Net assets of common unitholders, end of period (in thousands) $45,710
Asset coverage per share of preferred units, end of period (in thousands) $458
Preferred units outstanding (in thousands) $50
</TABLE>
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(a) Calculated based on average units.
(b) Total investment return is calculated assuming a purchase of a common
units of beneficial interest at net asset value per unit on the first day
and a sale at net asset value per unit on the last day of the period
reported. Dividends are assumed, for purposes of this calculation, to be
reinvested at the net asset value per unit on the payment date. Total
investment return for periods of less than one full year are not
annualized.
(c) Annualized.
(d) The ratio of expenses and net investment income to total investor capital
commitments of $46,580,000 on an annualized basis is 1.33% and 9.46%,
respectively, for the period ended December 31, 1996.
(e) Ratios are calculated on the basis of income and expenses applicable to
both the common and preferred units relative to average net assets of
common unitholders.
Contained above is the audited operating performance based on an average
unit of beneficial interest outstanding, total investment return, ratios
to average net assets and other supplemental data, for the period
indicated. This information has been determined based upon financial
information provided in the financial statements.
* Commencement of investment operations.
See Notes to Financial Statements.
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BLACKROCK MQE INVESTORS
NOTES TO FINANCIAL STATEMENTS
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NOTE 1. ORGANIZATION AND ACCOUNTING POLICIES
BlackRock MQE Investors (the "Trust") is a non-diversified closed-end
investment company organized as a Delaware business trust registered under the
Investment Company Act of 1940. The Trust will elect to be treated as a
partnership for federal income tax purposes. The Units of the Trust are offered
to investors in BlackRock Fund Investors I, II, and III (the "Funds") and to
other institutional or qualified investors. The Preferred Units are offered only
to Accredited Investors.
The Trust invests in subordinated debentures and, at the discretion of the
Trustees of the Trust, working capital financing (the "Subordinated Debt"), of
Annington Finance No. 3 Limited or its affiliates ("Annington Finance"),
warrants ("the Warrants") exercisable for common stock of Annington Homes
Limited or its affiliates (together with its affiliates "Annington") and other
securities issued in respect of such securities. The Annington companies have
been organized to acquire the Married Quarters Estate ("MQE") from the United
Kingdom Ministry of Defence. MQE includes approximately 58,000 units of housing.
The Trust will seek to earn a high total rate of return through investment
in the Subordinated Debt and Warrants and other securities subsequently issued
in respect of such securities.
The following is a summary of significant accounting policies followed by
the Trust.
INVESTMENT VALUATION: In valuing the Trust's assets, quotations of foreign
securities in a foreign currency are converted to U.S. dollar equivalents at the
then current currency value. The Trust values mortgage-backed and other debt
securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Trustees. 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.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost, if their term to maturity from date of purchase
was 60 days or less, or by amortizing their value on the 61st day prior to
maturity, if their original term to maturity from date of purchase exceeded 60
days.
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.
<PAGE>
FORWARD CURRENCY CONTRACTS: The Trust enters into forward currency contracts
primarily to hedge foreign currency risk. A forward contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. Risks may arise as a result of the potential inability of the counterparts
to meet the terms of their contract.
Forward currency contracts, when used by the Trust, help to manage the
overall exposure to the foreign currency backing many of the investments held by
the Trust. Forward currency contracts are not meant to be used to eliminate all
of the exposure to foreign currency.
Details of open forward currency sale contracts at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Settlement Contract Settlement December 31, Appreciation/
Date to Sell Date 1996 (Depreciation)
- ----------------- ----------------- ---------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Dec. 13, 1999 GBP 36,734,694 $ 55,800,000 $ 59,539,592 $ (3,739,592)
</TABLE>
FOREIGN CURRENCY TRANSLATION: The books and records of the Trust are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(I) market value of investment securities, assets and liabilities
at the current rate of exchange; and
(II) purchases and sales of investment securities, income and
expenses at the relevant rates of exchange prevailing on the
respective dates of such transactions
The Trust isolates that portion of gains and losses on investment
securities which is due to changes in the foreign exchange rates from that which
is due to changes in market prices of such securities.
The Trust reports certain foreign currency related transactions as
components of realized and unrealized gains for financial reporting purposes,
whereas such components are treated as ordinary income for federal income tax
purposes.
SECURITIES TRANSACTIONS AND 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 amortizes premium or accretes discount on securities
purchased using the interest method.
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 or excise tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and distributes dividends at
least annually first from net investment income, then from realized short-term
capital gains and other sources, and lastly from paid-in capital. 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.
DEFERRED ORGANIZATION EXPENSES: A total of $110,000 was incurred in connection
with the organization of the Trust. These costs have been deferred and are being
amortized ratably over a period of 60 months from the date the Trust commenced
investment operations.
<PAGE>
NOTE 2. AGREEMENTS
Pursuant to the Declaration of Trust ("DOT"), the Trust will pay BlackRock
Financial Management, Inc., as Manager of the Trust, a 1.00% allocation of all
Capital Contributions, on an annualized basis, subject to certain criteria as
defined in the DOT.
The Trust has also entered into an agreement with State Street Bank and
Trust Company ("State Street") which provides that State Street will receive an
annual fee of $20,000 in exchange for Administration, Custody and Transfer Agent
services.
Pursuant to the agreements, the Advisor provides continuous supervision of
the investment portfolio and pays the compensation of officers of the Trust, who
are affiliated persons of the Advisor. State Street pays occupancy and certain
clerical and accounting costs of the Trust. The Trust bears all other costs and
expenses.
Trustees of the Trust, who are not interested parties, are paid a fee for
their services in the amount of $6,000 each on an annual basis plus meeting fees
of $1,000 per meeting, telephonic meeting fees of $125 per meeting and certain
out-of-pocket expenses.
NOTE 3. PORTFOLIO SECURITIES
Purchases and proceeds from sales of investment securities, other than
short-term investments, for the year ended December 31, 1996 aggregated
$46,484,966 and $0, respectively. The federal income tax basis of the
investments at December 31, 1996 was substantially the same as the basis for
financial reporting.
The Trust may invest without limit in securities which are not readily
marketable, including those which are restricted as to disposition under
securities law.
NOTE 4. CAPITAL
The Trust has obtained capital commitments from shareholders in the form of
subscription agreements to engage in the real estate debt investment activities
described herein. When notified by the Trust, in accordance with the Declaration
of Trust, the shareholders shall make capital contributions as are required to
satisfy their outstanding capital commitments. The Trust must give fourteen days
advance notice before contributions are due. As of December 31, 1996, the total
capital commitments from investors was $46,630,000 of which $46,630,000 had been
called and received.
There are 100 million common units of $.01 par value authorized and there
are 200 preferred units of $.01 par value authorized. The preferred units have a
liquidation value of $500 per share plus any accumulated but unpaid dividends.
Dividends are cumulative and are paid at an annual rate of 10%.
The holders of preferred units have voting rights equal to the holder of
common units (one vote per unit) and will vote together with holders of common
units as a single class. However, holders of preferred units are also entitled
to elect two of the Trust's directors. In addition, the Investment Company Act
of 1940 requires that, along with approval by unitholders that might otherwise
be required, the approval of the holders of a majority of any outstanding
preferred units, voting separately as a class would be required to (a) adopt any
plan of reorganization that would adversely affect the preferred units, and (b)
take any action requiring a vote of security holders, including, among other
things, changes in the Trust's subclassification as a closed-end investment
company or changes in its fundamental investment restrictions.
<PAGE>
TRUSTEES
Laurence D. Fink, Chairman
Donald G. Drapkin
Kendrick R. Wilson, III
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Wesley R. Edens, CHIEF OPERATING OFFICER
Robert I. Kauffman, MANAGING DIRECTOR
Randal A. Nardone, MANAGING DIRECTOR
Erik P. Nygaard, MANAGING DIRECTOR
Henry Gabbay, TREASURER
Susan L. Wagner, SECRETARY
James Kong, ASSISTANT TREASURER
MASTER ADMINISTRATOR
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
Two Heritage Drive
North Quincy, MA 02171
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1431
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 Trust shares.
BLACKROCK MQE INVESTORS
Two Heritage Drive
North Quincy, MA 02171
