BlackRock MQE Investors DRAFT
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Annual Report
December 31, 1997
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BlackRock MQE Investors
Statement of Assets and Liabilities
December 31, 1997
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<TABLE>
<CAPTION>
<S> <C>
Assets
Repurchase agreement dated 12/31/97 with State
Street Bank and Trust, Co. 5.50% due 1/02/98,
collateralized by $1,000,000 United States Treasury
Note 6.25% due 3/31/99 (market value $1,022,203)
(repurchase proceeds $1,000,306) (cost $1,000,000) $ 1,000,000
Cash (Including cash owed to foreign banks of $1,296) 7,691
Deferred organization expenses and other assets (Note 1) 26,416
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Total assets $ 1,034,107
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Liabilities
Investment advisory fee payable (Note 4) 466,300
Accrued expenses 76,314
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Total liabilities 542,614
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Net Investment Assets $ 491,493
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Net assets were comprised of:
Common units of beneficial interest, at par (Note 5) $ 466
Preferred units (100 units issued and outstanding) at par (Note 5) 50,000
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50,466
Accumulated net investment income 2,729,568
Accumulated net realized loss on foreign currency and forward
currency contracts (2,288,563)
Appreciation on foreign currency transactions 22
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Total net investment assets $ 491,493
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Net assets applicable to common unitholders 441,493
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Net asset value per common unit ($441,493 divided by 46,580
common units issued and outstanding) $ 9.48
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Total units outstanding at end of year 46,580.00
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</TABLE>
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See Notes to Financial Statements.
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BlackRock MQE Investors
Statement of Operations
For the Year Ended December 31, 1997
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<TABLE>
<CAPTION>
Net Investment Income
Income
<S> <C>
Investment (net of interest and other expense of $128,405) $ 18,451,688
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Expenses
Management fee 466,000
Legal 25,000
Amortization of deferred organization 22,000
Directors 22,000
Administration/Custody/Transfer Agent 20,000
Audit and Tax 8,500
Miscellaneous 5,741
Amortization of prepaid insurance 4,000
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Total expenses 573,241
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Net investment income 17,878,447
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Realized and Unrealized Gain (Loss) on Investments,
Forward Currency Contracts, and Foreign
Currency Transactions, (Note 1)
Net realized loss on foreign currency and forward currency contracts (2,288,563)
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Net change in unrealized appreciation (depreciation) on:
Foreign currency and forward currency contracts 3,738,989
Investments (2,134,359)
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Total change in unrealized appreciation 1,604,630
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Net realized and unrealized loss (683,933)
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Net Increase In Net Assets
Resulting from Operations $ 17,194,514
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</TABLE>
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See Notes to Financial Statements.
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BlackRock MQE Investors
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
For the Year November 1, 1996*
Ended Through
December 31, 1997 December 31, 1996
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Increase (Decrease) in Net Assets
Operations:
<S> <C> <C>
Net investment income $ 17,878,447 $ 734,456
Net realized loss on foreign currency
contracts and foreign currency transactions (2,288,563) --
Net change in unrealized appreciation/depreciation on
investments and foreign currency transactions 1,604,630 (1,604,608)
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Net increase (decrease) in net assets resulting
from operations 17,194,514 (870,152)
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Dividends and distributions to common unitholders from:
Net investment income (15,883,335) --
Return of capital (46,579,534) --
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Total dividends and distributions to common unitholders (62,462,869) --
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Fund unit transactions:
Proceeds from preferred units issued -- 50,000
Proceeds from common units issued -- 46,580,000
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Net increase in net assets resulting
from fund unit transactions -- 46,630,000
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Net increase (decrease) (45,268,355) 45,759,848
Net Investment Assets
Beginning of period 45,759,848 --
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End of period $ 491,493 $ 45,759,848
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</TABLE>
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*Commencment of investment operations.
See Notes to Financial Statements.
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BlackRock MQE Investors
Statement of Cash Flows
For the Year Ended December 31, 1997
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Increase (Decrease) in Cash
Cash flows provided by operating activities:
Investment income received, net 19,263,578
Expenses paid (161,888)
Net realized loss from forward currency contracts and
foreign currency transactions (2,288,563)
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Net cash flows provided by operating activities 16,813,127
Cash flows provided by investing activities:
Proceeds from sales of investments 46,485,660
Purchase of repurchase agreements, net (860,000)
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Net cash flows provided by investing activities 45,625,660
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Cash flows used for financing activities
Distributions to unitholders (62,462,869)
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Net decrease in cash (24,082)
Cash, beginning of year 31,773
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Cash, end of year $ 7,691
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Reconciliation of Net Increase in Net
Assets Resulting from Operations
to Net Cash Flows Provided By
Operating Activities
Net increase in net assets resulting from operations $ 17,194,514
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Net unrealized appreciation (1,604,630)
Increase in other accrued expenses 331,294
Decrease in interest receivable and other assets 891,949
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Total adjustments (381,387)
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Net cash flows provided by operating activities $ 16,813,127
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See Notes to Financial Statements
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BlackRock MQE Investors
Financial Highlights
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<TABLE>
<CAPTION>
For the Year November 1, 1996*
Ended Through
December 31, 1997 December 31, 1996
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PER COMMON UNIT OPERATING
PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period $ 981.32 $ 1,000.00
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Net investment income (a) 383.82 15.77
Net realized and unrealized gain (loss) on investments,
forward currency contracts and foreign currency
transactions (a) (14.68) (34.45)
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Net increase (decrease) from investment operations 369.14 (18.68)
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Less distributions to common unitholders:
Net investment income (340.99) --
Return of Capital (999.99) --
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Net decrease from distributions to common unitholders (1,340.98) --
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Net asset value, end of period $ 9.48 $ 981.32
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TOTAL INVESTMENT RETURN (b) 37.61% (1.87)%
RATIOS TO AVERAGE NET ASSETS (c):
Expenses 1.25% 1.33%(d)
Net investment income 39.00% 9.46%(d)
SUPPLEMENTAL DATA:
Average net assets of common unitholders (in thousands) $ 45,845 $ 46,580
Portfolio turnover 0% 0%
Net assets of common unitholders, end of period (in thousands) $ 441 $ 45,710
Asset coverage per preferred unit, end of period (in thousands) $ 5 $ 458
Preferred units outstanding (in thousands) $ 50 $ 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. Distributions 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) 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.
(d) Annualized.
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 periods
indicated. This information has been determined based upon financial
information provided in the financial statements.
* Commencement of investment operations. See Notes to Financial Statements.
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 is 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
and other qualified investors. The Preferred Units are offered only to
Accredited Investors.
The Trust was organized to invest in subordinated debentures and 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 Defense in a complex
transaction.
The following is a summary of significant accounting policies followed by
the Trust.
Investment Valuation: Regarding the Trust's assets for which market quotations
are not readily available, the Trust will value such investments at estimated
fair value which is generally defined as the amount for which the investment or
asset could be sold in an orderly disposition over a reasonable period of time
taking into account the nature of the investment or the asset.
In determining estimated fair value, the Trust will consider all factors
that reasonably appear to be relevant including, but not limited to, (i) the
type of investment or asset, (ii) maturity and duration, (iii) liquidity, (iv)
size of holding, (v) market value of the same or similar investments or assets
that are readily marketable, (vi) reports by analysts or appraisers, and (vii)
information as to recent transactions in the same or similar investments or
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
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 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase was 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.
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
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currency at a future date at a negotiated forward rate. The gain or loss arising
from the difference between the settlement value of the original and
renegotiated forward contracts is isolated and is included in net realized
losses from foreign currency transactions. 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, rather they allow the Trust to limit its
exposure to foreign currency within a narrow band to the objectives of the fund.
There were no forward currency contracts open at December 31, 1997.
Foreign Currency Translation: The books and records of the Trust are maintained
in U.S. dollars. Foreign currency amounts are translated into United States
dollars on the following basis:
(I) market value of investment securities, other 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 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.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of domestic origin,
including unanticipated movements in the value of the British Sterling relative
to the US dollar.
The exchange rate for the British Pound at December 31, 1997 was US$1.00
to UK(pounds)0.60883.
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.
Distributions: The Trust makes distributions first from net investment income,
then from realized short-term capital gains and other sources, and lastly from
paid-in capital. 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 $51,939 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.
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.
Note 2. Investments
On November 1, 1996 and November 5, 1996, the Trust purchased Subordinated
Debt and Warrants of Annington Finance and Annington Homes Limited ("AHL") for
$45,372,600 and
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$1,112,366, respectively. The Warrants represent 6.79% of the total Warrants
issued by AHL. Each Warrant is convertible into one share of common stock. On
December 22, 1997 the Subordinated Debt was prepaid by Annington Finance at par.
In addition, on December 29, 1997 the Trust received approximately $14,649,052
on the Warrants pursuant to an agreement which increased the subscription price
on the Warrants from a nominal amount to approximately $6,350. Of the amount
received approximately $13,559,513 is included in net investment income. At
December 31, 1997, BlackRock Financial Management, Inc., in accordance with the
Trust's Investment Valuation policies regarding investments for which market
quotations are not readily available, have valued the Warrants at $0.
Note 3. Portfolio Securities
Purchases and proceeds from sales of investment securities, other than
short-term investments, for the year ended December 31, 1997 aggregated $0 and
$46,485,660, respectively. The federal income tax basis of the investments at
December 31, 1997 was substantially the same as the basis for financial
reporting.
Note 4. Agreements
Pursuant to the Declaration of Trust ("DOT") the Trust will pay BlackRock
Financial Management, Inc., 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 5. Capital
The Trust has obtained capital commitments from unitholders 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 unitholders 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, 1997, 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 when, as and if declared by the Trustees,
at an annual rate of 10%. On April 16, 1997 and on December 30, 1997, the Trust
declared a cash distribution per common unit at a rate of $23.99327 and
$316.99673 per unit respectively, which represents substantially all of the
accumulated income earned by the fund for the year ended December 31, 1997. The
Trust also declared a return of capital distribution on December 30, 1997 at a
per unit rate of $999.99.
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 units of
common stock as a single class. However, holders of preferred units are also
entitled to elect two of the Trust's directors. In
<PAGE>
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>
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, 1997 and the related statements of
operations and cash flows for the year then ended, and the statement of changes
in net assets and financial highlights for the year ending December 31, 1997 and
for the period November 1, 1996 (commencement of operations) through 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 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. 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 present fairly, in all material
respects, the financial position of BlackRock MQE Investors as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended, and the changes in its net assets and financial highlights for the year
then ended and for the period November 1, 1996 (commencement of operations) to
December 31, 1996 in conformity with generally accepted accounting principles.
New York, New York
February 23, 1998
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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
