- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
ANNUAL REPORT TO SHAREHOLDERS
REPORT OF INVESTMENT ADVISER
- --------------------------------------------------------------------------------
November 30, 1996
Dear Trust Shareholder:
Interest rate volatility in the domestic fixed income markets was once
again a major factor over the past twelve months. Significant swings in the pace
of U.S. economic growth influenced the bond market's performance, as every
release of economic data led to market participant speculation regarding the
direction of Federal Reserve monetary policy.
Despite strong growth and rising wage pressures, the Fed's decision not to
raise interest rates at their two most recent policy meetings has markedly
increased the stakes in the bond market. The rationale behind the Fed's decision
not to raise interest rates appears to focus on the benign inflation data
released during the third quarter. Should economic growth slow and inflation
remain benign, the Fed will be proven correct in their inaction and the market
would be expected to rally significantly. On the other hand, signs of a stronger
economy could result in weaker bond prices as the likelihood of a Fed tightening
would increase.
BlackRock maintains a positive view on the bond market. On balance, the
outlook for moderate inflation remains intact, suggesting that further declines
in interest rates are likely. In addition to this favorable fundamental
backdrop, foreign demand for U.S. bonds has increased due to the renewed
attractiveness of the bond market on a global basis.
This annual report is designed to help you stay informed about your
investment and represents our ongoing commitment to improving our communication
with you. We hope you find this report useful now and in the future. We
appreciate your confidence and look forward to helping you reach your long-term
investment goals.
Sincerely,
/s/Laurence D. Fink /s/Ralph L. Schlosstein
- ------------------- -----------------------
Laurence D. Fink Ralph L. Schlosstein
Chairman President
1
<PAGE>
November 30, 1996
Dear Shareholder:
We are pleased to present the annual report for The BlackRock Income Trust
Inc. ("the Trust") for the year ended October 31, 1996. 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" by Moody's at the time of purchase (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 the time of purchase.
The table below summarizes the performance of the Trust's stock price and
NAV over the period:
<TABLE>
<CAPTION>
=============================================================================================
10/31/96 10/31/95 CHANGE HIGH LOW
<S> <C> <C> <C> <C> <C>
STOCK PRICE $6.25 $7.25 (13.79%) $7.25 $5.875
NET ASSET VALUE (NAV) $7.61 $7.66 (0.65%) $7.85 $7.27
=============================================================================================
</TABLE>
For the twelve months ended October 31, 1996, the Trust posted a NAV total
return of 7.51%, which matched the average total return for its Lipper peer
group of U.S. Mortgage Closed-End Bond Funds. The Trust's stock price continues
to trade at a discount to its NAV, however, reflecting the overall weakness in
demand for closed-end mortgage funds. As an example, the average discount of the
Trust's peer group widened by over 20% during the past twelve months. Recently,
the Trust's stock price has shown some strength, climbing to $6.25 on October
31, 1996 after trading at $5.875 as recently as July 5.
THE FIXED INCOME MARKETS
Significant swings in the pace of U.S. economic growth influenced the
performance of the fixed income markets during the year ended October 31, 1996.
Throughout the fourth quarter of 1995 and through the first six weeks of 1996,
weak inflationary data and sluggish retail demand spurred two reductions of
short term interest rates totaling 50 basis points (0.50%) by the Federal
Reserve to 5.25%. In response to these reductions, as well as the sharp decline
in interest rates throughout 1995, economic growth began to pick up in
mid-February and accelerated throughout the second quarter of 1996. Economic
growth as measured by Gross Domestic Product (GDP) was measured at an annualized
4.7% for the second quarter of 1996, which led investors to believe that the
Federal Reserve would be forced to raise interest rates for the first time in
over a year to curb the pace of the economy. However, the pace of economic
growth has slowed during the past few months. Softer economic data and continued
moderation in the broad inflation measures during the third quarter of 1996
allowed the Fed to leave short term interest rates unchanged at their August and
September policy meetings.
2
<PAGE>
Yields of most maturity Treasuries posted minimal net changes over the
past twelve months. As an example, the yield of the 10-Year Treasury note ended
October 1996 at 6.34%, 32 basis points higher than the October 31, 1995 closing
yield of 6.02%. However, the modest net change in yield levels masks
considerable intra-year movements. After falling to a low of 5.52% in
mid-January, the yield of the 10-year Treasury rose to 7.05% in July in response
to stronger economic data before rallying to 6.34% at the end of the fiscal
year.
The market for mortgage-backed securities (MBS) posted strong performance
versus the broader investment grade bond market during 1996. Prepayments, as
measured by the MBA Refinancing Index, displayed considerable stability as
homeowners refinanced their mortgages at a relatively steady rate. An equally
important contributor to mortgage performance was a strong technical
environment, as new issue supply declined from its May peak. Additionally,
financial institution demand for MBS increased in light of an overall scarcity
of high quality fixed income products with a yield advantage over Treasuries.
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)
resembling that of the Salomon Brothers Mortgage Index; this means that the
portfolio's NAV will change similarly to the price of the Index given a change
in interest rates. The following chart compares the Trust's current and October
31, 1995 asset composition.
<TABLE>
<CAPTION>
======================================================================================
COMPOSITION OCTOBER 31, 1996 OCTOBER 31, 1995
<S> <C> <C>
Stripped Mortgage-Backed Securities 17% 10%
Adjustable & Inverse Floating Rate Mortgages 16% 18%
FHA Project Loans 14% 15%
U.S. Government Securities 14% 2%
Agency Multiple Class Mortgage Pass-Throughs 14% 16%
Mortgage Pass-Throughs 11% 24%
Non-Agency Multiple Class Mortgage Pass-Throughs 7% 7%
Asset-Backed Securities 3% 4%
Commercial Mortgage-Backed Securities 3% 1%
CMO Residuals 1% 3%
======================================================================================
</TABLE>
The Trust took advantage of the strong 1996 year-to-date total return
performance of the mortgage-backed securities (MBS) market, which saw mortgages
as represented by the Lehman Brothers Mortgage Index outperform the broader
investment grade bond market (represented by the Lehman Brothers Aggregate
Index) by 4.41% to 2.84%. Over the past few months, however, BlackRock has taken
a decidedly defensive outlook on the mortgage market given the tight yield
spread levels at which mortgages are currently trading and our anticipation of a
pick-up in interest rate volatility. Accordingly, the Trust's overall mortgage
exposure has been reduced from 94% as of October 31, 1995 to approximately 83%
on October 31, 1996.
The reduction in mortgage allocation was most pronounced in the
pass-through and adjustable-rate mortgage (ARM) sectors. Within the mortgage
pass-through sector, the Trust has aggressively sold generic, or newly issued,
pass-throughs. The Fund's remaining mortgage pass-through holdings emphasize
seasoned securities, which have weathered several interest rate cycles and are
expected to provide more prepayment stability should interest rates decline
significantly. As of October 31, 1996, over half of the Trust's pass-through
holdings were seasoned mortgages versus less than 20% one year ago. The Trust
also took advantage of strong year-to-date ARM performance by selling
approximately two-thirds of its ARM
3
<PAGE>
holdings, as we have become less positive onthat market due to the potential for
increased ARM supply and already tight yield spreads.
The overall reduction in mortgage securities has allowed for an increase
in the Fund's allocation to Treasuries and Agency bonds. The Fund purchased 10-
and 20-year Small Business Administration Loans (SBAs), which offer agency
credit quality, attractive yield spreads over Treasuries and relatively strong
prepayment protection. The Trust has also added inverse floating rate mortgages,
which are securities backed by government agency collateral whose coupons move
inversely to interest rates. The Trust purchased these securities at attractive
price levels and significant yields above Treasuries. Because of their coupon
structure, inverse floating rate mortgages are good securities to own in a
declining or stable interest rate environment. Securities with low dollar prices
and good convexity characteristics, which are expected to aid their performance
in a market rally, were emphasized. As we currently are modestly bullish on the
domestic bond market and believe that interest rates will continue to fall, we
expect that these securities will perform well while offering a significant
yield advantage over Treasuries.
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 Kapito /s/Michael P. Lustig
- ---------------- --------------------
Robert Kapito Michael P. Lustig
Vice Chairman and Portfolio Manager Principal 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 10/31/96: $6.25
- --------------------------------------------------------------------------------
Net Asset Value as of 10/31/96: $7.61
- --------------------------------------------------------------------------------
Yield on Closing Stock Price as of 10/31/96 ($6.25)1: 9.00%
- --------------------------------------------------------------------------------
Current Monthly Distribution per Share2: $0.046875
- --------------------------------------------------------------------------------
Current Annualized Distribution per Share2: $0.56250
================================================================================
- --------
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
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
S&P/
MOODY'S PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--139.2%
MORTGAGE PASS-THROUGHS--32.7%
Federal Home Loan Mortgage Corporation,
$ 505 6.50%, 4/01/26 ........ ............... $ 483,846
38 6.702%, 2/01/18, 1 year CMT (ARM) ..... 38,796
126 7.00%, 2/01/26 ........................ 123,889
6,449+ 7.50%, 7/01/07 - 2/01/23 .............. 6,560,852
1,455++ 8.00%, 11/01/15 ....................... 1,519,731
3,176+ 8.50%, 5/01/01 - 3/01/08, 15 year ..... 3,307,811
1,678 8.50%, 6/01/06 - 4/01/25 .............. 1,749,942
4,426++ 9.00%, 9/01/20 ........................ 4,697,163
42 10.50%, 6/01/19 ....................... 46,803
Federal Housing Administration,
1,908 Altercare Bucyrus, 8.25%, 6/25/34 ..... 1,954,118
2,323 Beachwood Manor, 8.25%, 10/01/34 ...... 2,378,999
4,290 Brookville, 7.50%, 8/01/28 ............ 4,223,336
3,743 Country Estates, 8.375%, 1/01/35 ...... 3,835,242
1,515 Elkton Care Center, 7.30%, 6/01/35 .... 1,476,251
GMAC,
6,325 Series 33, 7.43%, 9/01/21 .......... 6,456,068
2,193 Series 46, 7.43%, 1/01/22 .......... 2,238,541
906 Series 48, 7.43%, 6/01/22 .......... 923,563
502 Series 51, 7.43%, 2/01/23 .......... 512,048
7,936 Series 56, 7.43%, 11/01/22 ......... 8,101,700
Merrill
1,285 Series 54, 7.43%, 5/15/23 .......... 1,314,863
1,418 Series 95, 7.43%, 3/01/22 .......... 1,447,289
1,257 Middlesex, 8.625%, 9/01/34 .............. 1,287,944
1,684 Overlook Green South, 7.50%, 9/01/34 .... 1,694,986
4,802 Parkside, 7.30%, 2/01/13 ................ 4,747,439
1,913 Providence Apartments, 7.25%, 12/01/34 .. 1,854,814
Reilly
1,885 Series 41, 8.28%, 3/01/20 .......... 1,981,036
563 Series 74, 7.43%, 10/01/23 ......... 551,996
3,129 Series 34, 7.43%, 8/01/19 .......... 3,178,787
2,338 Retreat at Windmere, 7.375%, 11/01/34 ... 2,339,109
2,115 Rosewood, 7.875%, 12/01/34 .............. 2,128,474
1,520 Senaca Hills, 8.525%, 8/01/34 ........... 1,572,581
1,479 St. Camillus Nursing, 7.875%, 5/01/35 ... 1,488,834
2,323 Summit Place, 7.90%, 11/01/34 ........... 2,342,613
2,879 Tuttle Grove, 7.25%, 10/01/35 ........... 2,790,898
USGI,
4,412 Polaris 982, 7.43%, 11/01/21 ....... 4,504,285
938 Series 87, 7.43%, 12/01/22 ......... 959,963
5,023 Series 99, 7.43%, 10/01/23 ......... 5,106,832
2,785 Series 1003, 7.43%, 3/01/24 ........ 2,718,463
2,796 Series 6302, 7.43%, 12/01/21 ....... 2,843,214
7,150 Yorkville 6094, 7.43%, 6/01/21 .......... 7,299,485
3,622 Waterford, 8.625%, 7/25/27 .............. 3,774,421
1,415 Whitehall, 8.25%, 5/25/35 ............... 1,449,634
Federal National Mortgage Association,
2,500 6.50%, Series 1994-M1, Class B, 10/25/03
Multifamily.............................. 2,476,172
1,866++ 7.00%, 11/01/08 ......................... 1,895,785
150 7.50%, 2/01/22 - 9/01/23 ................ 150,557
5,680 7.50%, 11/01/24, 18 year Multifamily .... 5,813,125
2,072 7.785%, 1/01/01, 7 year Multifamily ..... 2,152,249
7,235+++ 8.00%, 5/01/08 - 5/01/22 ................ 7,461,028
735 9.317%, 6/01/19, 10 year Multifamily .... 806,469
1,876+ 9.484%, 7/01/19, Multifamily ............ 2,070,882
1,460 9.497%, 6/01/24, Multifamily ............ 1,611,523
259 9.50%, 1/01/19 - 6/01/20 ................ 278,871
783 9.732%, 7/01/19, 10 year Multifamily .... 865,270
Government National Mortgage
Association,
3,051+ 6.00%, 3/15/09 - 4/15/09, 15 year ....... 2,964,195
12,319++ 6.50%, 2/20/23, 1 year CMT (ARM) ........ 12,489,809
681 7.00%, 10/15/17 ......................... 667,423
2,313 7.25%, 3/15/02-11/15/04 ................. 2,347,297
80 8.50%, 5/15/01 - 2/15/17 ................ 82,689
1,252 9.00%, 6/15/18 - 9/15/21 ................ 1,323,589
14 9.50%, 7/15/16 .......................... 14,758
219 10.00%, 7/15/17 - 11/15/19 .............. 239,703
567 11.00%, 8/15/18 - 6/15/20 ............... 645,897
-----------
156,363,950
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--53.6%
AAA 2,100 Citicorp Mortgage Securities Inc.,
Series 1994-9, Class A4, 6/25/09 ....... 1,969,191
AAA 663 Collateralized Mortgage Obligation
Trust 13, Class Q, 1/20/03 ............. 735,767
AAA 25,845@@ Community Program Loan Trust,
Series 1987-A, Class A-4,
10/01/18 ............................... 22,194,390
Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificate,
27,426++ Series G13, Class 13-PP,
5/25/21 (I) ....................... 8,976,121
8,000+ Series 120, Class 120-H,
2/15/21 ........................... 8,354,960
1,000 Series 1388, Class 1388-H,
6/15/07 ........................... 828,630
8,143+ Series 1443, Class 1443-OC,
12/15/22 (ARM) .................... 7,352,292
1,034 Series 1508, Class 1508-OC,
5/15/23 (ARM) ..................... 692,133
2,000 Series 1523, Class 1523-SA,
6/15/23 (ARM) ..................... 1,325,140
2,000 Series 1526, Class 1526- SA,
6/15/23 (ARM) ..................... 1,432,500
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
S&P/
MOODY'S PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
MULTIPLE CLASS MORTGAGE
PASS-THROUGH (cont'd)
$ 4,152 Series 1530, Class 1530-OA,
6/15/23 (ARM) ....................... $ 2,366,608
908 Series 1541, Class 1541-T,
7/15/23 ............................. 764,391
3,700++ Series 1552, Class 1552-W,
8/15/23 (ARM) ....................... 2,590,000
17,384@@+ Series 1584, Class 1584-FB,
9/15/23 (ARM) ....................... 17,731,354
1,804 Series 1596, Class 1596-SB,
12/15/12 (ARM) ...................... 1,307,089
2,356 Series 1609, Class 1609-LE,
11/15/23 ............................ 1,778,509
6,387+ Series 1621, Class 1621-SB,
10/15/21 (ARM) ...................... 5,085,783
6,543 Series 1627, Class 1627-S,
12/15/23 (ARM) ...................... 4,078,645
3,084 Series 1629, Class 1629-OD,
12/15/23 (ARM) ...................... 1,665,204
23,765@@ Series 1632, Class 1632-S,
4/15/23 (ARM) ....................... 940,840
4,000 Series 1637, Class 1637-TA,
7/15/23 (ARM) ....................... 2,965,000
4,520 Series 1686, Class 1686-SB,
2/15/24 (ARM) ....................... 3,028,609
3,799 Series 1710, Class 1710-GF,
4/15/24 (ARM) ....................... 3,839,732
32,000 Series 1809, Class 1809-SC,
12/15/23 (ARM) ...................... 3,240,000
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
REMIC PASS-THROUGH CERTIFICATES,
4,181 Trust 1988-16, Class16-B,
6/25/18 ............................. 4,469,657
1,607 Trust 1990-12, Class 12-G,
2/25/20 ............................. 1,351,386
2,341 Trust 1991-38, Class 38-SA,
4/25/21 (ARM) ....................... 2,236,998
3,069 Trust 1991-38, Class 38-F,
4/25/21 (ARM) ....................... 3,257,820
3,514 Trust 1991-87, Class 87-S,
8/25/21 (ARM) ....................... 3,575,524
22 Trust G1992-12 Class C
2/25/22 (I) ......................... 596,503
25,649 Trust G1992-20, Class 20-SB,
10/25/22 (ARM) ...................... 1,202,929
6,000 Trust 1992-43,Class 43-E,
4/25/22 ............................. 6,038,700
36,264@@+ Trust 1992-69, Class 69-Z,
5/25/22 ............................. 38,039,644
9,840 Trust 1992-187, Class 187-JA,
10/25/06 (I) ........................ 1,000,907
45,614 Trust 1992-216, Class 216-S,
12/25/22 (ARM) ...................... 4,732,428
768 Trust G1993-27, Class 27-SB,
8/25/23 (ARM) ....................... 496,215
1,504 Trust 1993-50, Class 50-SH,
1/25/23 (ARM) ....................... 1,193,988
434 Trust 1993-94, Class 94-S,
5/25/23 (ARM) ....................... 262,653
864 Trust 1993-97, Class 97-TA,
5/25/23 ............................. 754,720
4,780 Trust 1993-107, Class 107-SA,
6/25/08 (ARM) ....................... 3,755,270
628 Trust 1993-116, Class 116-SB,
7/25/23 (ARM) ....................... 433,613
2,000 Trust 1993-120, Class 120-SN,
7/25/23 (ARM) ....................... 1,288,900
1,749 Trust 1993-129, Class 129-SE,
8/25/08 (ARM) ....................... 1,556,820
2,793 Trust 1993-139, Class 139-SJ,
8/25/23 (ARM) ....................... 1,658,115
809 Trust 1993-141, Class 141-SB,
3/25/23 (ARM) ....................... 635,086
6,000 Trust 1993-169, Class 169-SC,
3/25/23 ............................. 3,860,640
8,464 Trust 1993-178, Class 178-SA,
9/25/23 (ARM) ....................... 5,311,310
1,346 Trust 1993-179, Class 179-VC,
10/25/21 (ARM) ...................... 849,622
2,783 Trust 1993-183, Class 183-SE,
10/25/23 (ARM) ...................... 2,198,920
3,314 Trust 1993-187, Class 187-S,
9/25/23 (ARM) ....................... 2,495,787
499 Trust 1993-202, Class 202-VS,
2/25/23 (ARM) ....................... 459,484
1,000 Trust 1993-223, Class 223-SJ,
12/25/23 (ARM) ...................... 635,230
1,988 Trust 1993-224, Class 224-SH,
11/25/23 (ARM) ...................... 1,346,809
1,908 Trust 1993-224, Class 224-SH,
11/25/23 (ARM) ...................... 1,339,285
1,467 Trust 1993-256, Class 256-F,
11/25/23 (ARM) ...................... 1,247,144
23,927 Trust G1994-6, Class 6-PK,
11/17/22 (I) ........................ 3,804,084
3,777 Trust 1994-14, Class 14-S,
10/25/23 (ARM) ...................... 1,869,477
2,602 Trust 1994-19, Class 19-SB,
1/25/24 (ARM) ....................... 1,265,452
387 Trust 1994-27, Class 27-SE,
3/25/23 (ARM) ....................... 367,672
5,294 Trust 1994-29, Class 29-SD,
7/25/23 (ARM) ....................... 3,289,474
6,797 Trust 1996-14, Class 14-M,
10/25/21 ............................. 5,450,424
14,300 Trust 1996-14, Class 14-PE,
8/25/23 (P) ......................... 4,245,312
149,103 Trust 1996-43, Class 43-SA,
10/25/03 (ARM) ...................... 5,718,750
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
S&P/
MOODY'S PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
Prudential Home Mortgage
Securities Co., Mortgage
Pass-Through Certificate
AAA $7,182 Series 1992-41, Class A1
(ARM) ............................... $ 7,289,462
AAA 743 Series 1993-43,
Class A-16 (ARM) .................... 581,318
AAA 2,500 Series 1993-48, Class A8 (ARM) ......... 1,850,000
AAA 3,605 Series 1993-55, Class A1 (ARM) ......... 3,682,709
AAA 600 Resolution Trust Corporation,
Mortgage Pass-Through
Certificates, Series 1992-2,
Class B-3, 11/25/21 .................. 603,264
AAA 12,144 Salomon Capital Access
Corporation, Collaterized
Mortgage Obligations,
Series 1986-1, Class C, 9/01/15 ...... 12,416,913
-----------
255,959,306
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--3.8%
AAA 140,000 KPAC, Series 1994-C1,
Zero Coupon, 2/01/01 ................. 1,400
AAA 6,000 ML Mortgage Investments,
Series 1996-C1, Class A3,
7.42%, 4/25/28 ....................... 6,129,715
AAA 10,250 NYC Mortgage Loan Trust,
Series 1996, Class A-2, 144A
6.75%, 6/25/11 ....................... 9,843,203
AA 2,000 PaineWebber Mortgage Acceptance
Corporation IV,
Series1995-M1, Class B,
6.95%, 1/15/07 ....................... 2,002,870
-----------
17,977,188
-----------
ASSET-BACKED SECURITIES--3.7%
Aaa 11,247@@ Chase Manhattan Grantor Trust, Series
1996-Class A Automobile Loan
Pass-Through, 5.20%,
2/15/02 .............................. 11,126,995
AAA 7,200++ Discover Card Master Trust,
Series 1996-3, Class A, 6.05%,
8/18/08 .............................. 6,774,696
-----------
17,901,691
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--23.6%
AAA 1,109 Chase Mortgage Finance Corporation,
Mortgage Pass-Through
Certificates, Series 1994-A,
Class AP, 1/25/10 (P/O) .............. 824,899
Collateralized Mortgage Obligation,
AAA 1,422 Trust 36, Class A, 10/25/17 (P/O) .... 1,068,303
AAA 1,497 Trust 29, Class A, Zero Coupon,
5/23/17 (P/O) ..................... 1,122,661
DBL, Collateralized Mortgage
Obligation,
AAA 573 Trust K, Class K-1, 9/23/17 (P/O) .... 321,030
AAA 5,755 Trust V, Class V-1, 9/01/18 (P/O) .... 4,323,768
Federal Home Loan Mortgage
Corporation,
37,500 Series G-54 Class S, 3/18/25 (I/O) ... 2,812,500
53 Series 188, Class 188-G,
9/15/21 (I/O) ..................... 1,763,410
112 Series 194, Class F,
9/15/21 (I/O) ..................... 4,882,395
26 Series 1003-0, Class 1003-0
10/15/20 (I/O) .................... 814,157
677 Series 1418, Class 1418-M,
11/15/22 (P/O) .................... 210,796
2,474 Series 1473, Class 1473-JA,
2/15/05 (I/O) ..................... 176,676
9,461 Series 1690, Class 1690-B,
11/15/23 (P/O) .................... 3,731,105
14,069+ Series 1828, Class 1828-A,
5/15/24 (P/O) ..................... 7,922,577
Federal National Mortgage Association,
52 Trust A, Class A-2, 8/01/10 (I/O) .... 1,104,178
14,289 Trust 2, Class 2, 2/01/17 (I/O) ...... 4,338,536
12 Trust G50, Class 50-G,
12/25/21 (I/O) .................... 656,770
6,301 Trust 225, Class 1, 2/01/23 (P/O) .... 4,674,709
32,742 Trust G-233, Class 2,
8/01/23 (I/O) ..................... 10,559,197
88 Trust 1991-24, Class 24-O,
3/25/21, (I/O) .................... 4,165,069
53 Trust G1992-34, Class 34-A,
4/25/22 (I/O) ..................... 1,645,767
41 Trust 1992-68, Class 68-K,
10/25/05 (I/O) .................... 686,619
1,405 Trust G1993-2, Class 2-KB,
1/25/23 (P/O) ..................... 347,436
7,152 Trust 1993-159, Class 159-C,
7/25/23 (P/O) ..................... 3,672,022
14,844 Trust 1993-213, Class 213-H,
9/25/23 (P/O) ..................... 11,483,893
4,956 Trust 1994-57, Class 57-C,
1/25/24 (P/O) ..................... 3,475,818
22,710+ Trust 1994-61, Class 61-DB,
3/25/24 (P/O) ..................... 14,505,721
9,963 Trust 1996- 38, Class 38-E,
8/25/23 (P/O) ..................... 4,277,863
2,444 Trust 1996-56, Class 56-E,
4/25/23 (P/O) ..................... 1,622,070
First Boston Mortgage Securities
Corporation,
AAA 1,507 Series 1987-C, Class Z,
4/25/17 (I/O) ..................... 369,213
AAA 20,164 Series 1988-E Class 2,
10/01/18 (I/O) .................... 5,645,928
Housing Security Incorporated,
AAA 456 Series 1992-EB, Class B-8,
9/25/22 (P/O) ..................... 275,395
AAA 672 Series 1993-D, Class D-8,
6/25/23 (P/O) ..................... 399,627
Kidder Peabody Acceptance
Corporation,
AAA 2,014 Series 87, Class B-1,
4/22/18 (P/O) ..................... 1,563,420
AAA 2,014 Series 87, Class B-2,
4/22/18 (1/0) ..................... 605,988
AAA 590 ML Trust XIX, Collateralized
Mortgage Obligation, Class B,
Zero Coupon, 11/25/17 (P/O) .......... 442,829
AAA 1 Prudential Home Mortgage Securities
Co., Mortgage Pass-Through
Certificates, Series 1993-29,
Class A18, 8/25/08 (I/O) ............. 3,380,000
See Notes to Financial Statements
7
<PAGE>
- --------------------------------------------------------------------------------
S&P/
MOODY'S PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
AAA $ 5 Prudential Securities, Inc.
Collateralized Mortgage Obligation,
Trust 15, Class 1G, 5/20/21 (I/O) .... $ 666,288
AAA 62 Structured Asset Securities
Corporation, Series 1991-2,
Class GA, 12/20/21 (I/O) ............. 1,640,639
AAA 1,042 Structured Mortgage Asset Trust,
Series 1993-3C, Class CX,
4/25/24 (P/O) ........................ 610,581
-----------
112,789,853
-----------
CMO RESIDUALS**--1.7%
AAA 5,435 American Housing Trust III, Senior
Mortgage Pass-Through Certificates,
Series 1, Class 4, (REMIC)#,
3/25/19 ................................ 848,046
AAA 375 American Housing Trust VII,
Senior Mortgage Pass-Through
Certificates, Series A, Class R,
(REMIC) 11/25/20 ..................... 2,143,254
AAA 25 Collateralized Mortgage Obligation,
Trust 13#, 1/20/03 ................... 752,480
AAA 4 Collateralized Mortgage Securities
Corporation, Series 1990-3,
Class 3-R, (REMIC), 5/25/20 .......... 283,861
AAA 45 FBC Mortgage Securities
Trust 16, Variable Rate
Collateralized Mortgage Obligation,
Series A#, 7/01/17 ................... 1,026,576
AAA 3,115 FBC Mortgage Securities Trust 19,
Variable Rate Collateralized
Mortgage Obligation,
Series A#, 10/20/18 .................. 218,400
AAA 7,310 ML Collateralized Mortgage
Obligations, Trust V#,
3/20/18 .............................. 2,280,564
AAA 10 P-B Collateralized Mortgage
Obligation, Trust 8, Class 8-H,
(REMIC)#, 3/01/19 .................... 200,000
AAA 43 PaineWebber, Collateralized
Mortgage Obligation,
Series N, Class 7, (REMIC),
1/01/19 .............................. 332,015
-----------
8,085,196
-----------
U.S. GOVERNMENT SECURITIES--20.1%
Small Business Administration,
4,755 Series 1996 20-E, 7.60%,
5/01/16 ........................... 4,861,987
4,301 Series 1996 20-G7, 7.70%,
6/01/16 ........................... 4,436,750
4,000 Series 1996 20-F, 7.55%,
6/01/16 ........................... 4,102,500
4,300 Series 1995-10, Class 10-C,
7.35%, 8/01/05 .................... 4,353,750
4,000 Series 1996 20-H,
7.25%, 8/01/16 .................... 4,060,000
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
$26,450++ United States Treasury Bonds,
6.75%, 8/15/26 ................. $26,763,962
United States Treasury Notes,
5,980 6.00%, 8/15/99 ................. 5,995,907
18,730++ 6.375%, 5/15/99-3/31/01 ........ 18,951,914
12,500++ 6.50%, 10/15/06 ................ 12,623,000
8,600++ 6.625%, 6/30/01 ................ 8,781,374
1,250 7.00%, 7/15/06 ................. 1,305,075
-----------
96,236,219
-----------
Total Long-Term Investments 139.2%
(cost $ 654,654,391) ........... 665,313,403
Liabilities in excess of
other assets--(39.2%) .......... (187,228,210)
-----------
NET ASSETS--100% ..................... $478,085,193
===========
- -------
* Using the higher of Standard & Poor's or Moody's rating.
** Illiquid securities representing 1.2% of portfolio assets.
# Private placements restricted as to resale.
+ Entire principal amount pledged as collateral for futures transactions.
++ $5,254,658 principal amount pledged as collateral for futures
transactions.
@ Entire principal amount pledged as collateral for mortgage swap.
@@ $11,557,439 principal amount pledged as collateral for mortgage swap.
+ $106,158,630 principal amount pledged as collateral for reverse
repurchase agreements.
++ Entire principal amount pledged as collateral for reverse repurchase
agreements.
================================================================================
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
CMT -- Constant Maturity Treasury.
I -- Denotes a CMO with interest only characteristics.
I/O -- Interest Only.
P -- Denotes a CMO with principal only characteristics.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
================================================================================
See Notes to Financial Statements
8
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $654,654,391) (Note 1) .. $665,313,403
Cash ................................................ 255,386
Receivable for investments sold ..................... 21,593,002
Interest receivable ................................. 7,206,246
------------
694,368,037
------------
LIABILITIES
Reverse repurchase agreements (Note 4) .............. 204,437,538
Payable for investments purchased ................... 9,320,497
Due to broker-variation margin ...................... 716,802
Swap option written, at value
(Premium received $954,250) ....................... 322,666
Interest payable .................................... 345,772
Dividends payable ................................... 267,627
Advisory fee payable (Note 2) ....................... 260,585
Administration fee payable (Note 2) ................. 80,180
Unrealized depreciation on interest rate cap
(Notes 1 & 3) ..................................... 7,379
Other accrued expenses .............................. 523,798
------------
216,282,844
------------
NET ASSETS $478,085,193
============
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
Distributions in excess of net investment income... (2,522,559)
Accumulated net realized losses ................... (88,725,353)
Net unrealized appreciation ....................... 5,348,837
------------
Net assets, October 31, 1996 ...................... $478,085,193
============
Net asset value per share:
($478,085,193 / 62,849,878 shares of
common stock issued and outstanding) .............. $7.61
=====
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of $15,335,337
and interest expense of $10,913,445) .............. 39,883,411
------------
Expenses
Investment advisory ............................... 3,091,171
Administration .................................... 951,130
Reports to shareholders ........................... 250,000
Custodian ......................................... 210,000
Transfer agent .................................... 185,000
Directors ......................................... 78,000
Audit ............................................. 61,500
Legal ............................................. 25,000
Miscellaneous ..................................... 237,725
------------
Total operating expenses ........................ 5,089,526
------------
Net investment income ............................. 34,793,885
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain (loss)
Investments ....................................... (16,349,944)
Futures ........................................... (2,976,786)
Short sales ....................................... (120,063)
------------
(19,446,793)
------------
Net change in unrealized appreciation (depreciation)
Investments ....................................... 23,924,925
Futures ......................................... (5,802,828)
Options ......................................... 631,584
------------
18,753,681
------------
Net loss on investments ........................... (693,112)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................... $ 34,100,773
============
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows provided by operating activities:
Interest received ....................................... $65,523,532
Operating expenses paid ................................ (4,958,575)
Interest expense paid ................................... (11,156,941)
Proceeds from disposition of short-term portfolio
investments including options, net .................... 2,252,922
Purchase of long-term portfolio investments ............. (3,246,526,955)
Proceeds from disposition of long-term
portfolio investments ................................. 3,250,326,599
Variation margin on futures ............................. (8,032,179)
---------------
Net cash flows provided by operating activities ......... 47,428,403
---------------
Cash flows used for financing activities:
Decrease in reverse repurchase agreements ............... (10,000,337)
Cash dividends paid ..................................... (37,510,689)
---------------
Net cash used for financing activities .................... (47,511,026)
---------------
Net decrease in cash ...................................... (82,623)
Cash at beginning of year ................................. 338,009
---------------
Cash at end of year ....................................... $255,386
===============
RECONCILIATION OF NET INCREASE IN NET
ASSETS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net increase in net assets resulting from
operations ............................................... $34,100,773
------------
Decrease in investments .................................... 27,788,065
Increase in interest receivable ............................ (608,661)
Decrease in receivable for investments sold ................ 38,069,081
Increase in appreciation on mortgage swap .................. (2,502,451)
Decrease in variation margin receivable .................... 747,435
Net realized loss .......................................... 19,446,793
Increase in unrealized depreciation ........................ (18,753,681)
Increase in options ........................................ 322,666
Decrease in payable for investments purchased .............. (50,384,123)
Decrease in interest payable ............................... (243,496)
Decrease in depreciation of interest rate cap .............. (684,949)
Increase in accrued expenses and other
liabilities .............................................. 130,951
------------
Total adjustments ........................................ 13,327,630
------------
Net cash provided by operating activities .................. $47,428,403
============
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENTS OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
OCTOBER 31, 1996 OCTOBER 31, 1996
---------------- ----------------
Operations:
<S> <C> <C>
Net investment income .................... $34,793,885 $31,941,790
Net realized loss on investments,
futures, short sales and options ....... (19,446,793) (16,509,006)
Net change in net unrealized
appreciation on
investments, futures,
short sales and options ................ 18,753,681 57,353,523
------------ ------------
Net increase in
net assets resulting from
operations ............................. 34,100,773 72,786,307
Dividends from net investment
income ................................... (34,793,885) (41,414,771)
Distributions in excess of net
investment income ........................ (2,522,559) (192,946)
Return of capital .......................... ---- (5,529,060)
------------ ------------
Total increase (decrease) ................ (3,215,671) 25,649,530
NET ASSETS
Beginning of year ...................... 481,300,864 455,651,334
----------- -----------
End of year ............................ $478,085,193 $481,300,864
============ ============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended October 31,
---------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: 1996 1995 1994 1993 1992
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................... $ 7.66 $ 7.25 $ 8.75 $ 8.90 $ 9.43
--------- ------ ------ ------ ------
Net investment income (net of $.17, $.22, $.10,
$.09, and $.09, respectively, of interest expense) .55 .51 .73 .91 .74
Net realized and unrealized gain (losses) on
investments, short sales, futures and
options ........................................... (.01) .65 (1.45) (.21) (.31)
--------- ------ ------ ------ ------
Net increase (decrease) from investment operations .... .54 1.16 (.72) .70 .43
--------- ------ ------ ------ ------
Dividends from net investment income .................. (.55) (.66) (.78) (.85) (.83)
Distributions in excess of net investment income ...... (.04) -- -- -- (.05)
Return of capital distribution ........................ -- (.09) -- -- (.08)
--------- ------ ------ ------ ------
Total dividends and distributions ................... (.59) (.75) (.78) (.85) (.96)
--------- ------ ------ ------ ------
Net asset value, end of year* ......................... $ 7.61 $ 7.66 $ 7.25 $ 8.75 $ 8.90
========= ====== ====== ====== ======
Per share market value, end of year* ................. $ 6 1/4 $7 1/4 $6 3/8 $ 8 3/8 $9 1/8
========= ====== ====== ====== ======
TOTAL INVESTMENT RETURN+ (5.36%) 26.50% (15.31%) 1.01% (.55%)
RATIOS TO AVERAGE NET ASSETS:
- ---------------------------------------------------------------------------------------------------------------------------
Operating expenses# ................................... 1.08% 1.08% 1.10% 1.03% 1.02%
Net investment income ................................. 7.36% 6.85% 9.21% 10.19% 7.85%
SUPPLEMENTAL DATA:
Average net assets (in thousands) ..................... $473,056 $466,449 $496,707 $558,530 $582,984
Portfolio turnover .................................... 440% 267% 223% 121% 131%
Net assets, end of year (in thousands) ................ $478,085 $481,301 $455,651 $549,755 $555,737
Reverse repurchase agreements outstanding,
end of year (in thousands) .......................... $204,438 $214,438 $109,286 $ 74,700 $168,150
Asset coverage++ ...................................... $ 3,339 $ 3,244 $ 5,169 $ 8,360 $ 4,305
</TABLE>
- -----------------
* NAV and market value are published in The Wall Street Journal each Monday.
** Annualized.
# The ratios of operating expenses including interest expense to average net
assets were 3.38%, 4.08%, 2.32%, 2.02%, and 1.97% 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. Total investment
returns for periods of less than one full year are not annualized.
++ Per $1,000 of reverse repurchase agreement outstanding. The information
above represents the audited operating performance data 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.
11
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING The BlackRock Income Trust Inc. (the "Trust"), a
POLICIES Maryland corporation, is a diversified closed-end
management investment 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 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 informatio
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 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.
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"
more volatile 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
12
<PAGE>
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 option 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.
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.
SWAP OPTIONS: The swap option is similar to an option on securities except
that instead of purchasing the right to buy a security, the purchaser of the
swap option has the right to enter into a previously agreed upon interest rate
swap agreement at any time before the expiration of the option. Premiums
received from writing options are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. The Trust, as writer of an option, bears the market risk of an unfavorable
change in the value of the swap contract underlying the written option. Written
interest rate swap options may be used as part of an income producing strategy
reflecting the view of the Trust's management on 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 payments 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. 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. 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" more volatile 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 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
13
<PAGE>
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. The
Trust did not engage in securities lending during the year ended October 31,
1996.
MORTGAGE SWAPS: Mortgage swaps are a variation on 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. Mortgage swaps
combine the fixed/floating concept with an amortizing feature that is indexed to
mortgage securities. Scheduled amortization and prepayments on the index pools
reduce the notional amount.
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.
Mortgage swaps are intended to enhance the Trust's income earning ability by
effectively owning mortgage pass-throughs and locking-in the financing rate at a
very attractive spread to market levels. This allows mortgage pass-throughs to
be held more cheaply than if they were owned outright and financed, but at a
decreased level of liquidity.
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.
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 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. 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. 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.
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 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. 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. Owning interest rate floors
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 falling 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 floor. However, the Trust does not anticipate
non-performance by any counterparty.
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
14
<PAGE>
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.
NOTE 2. AGREEMENTS The Trust has an Investment Advisory Agreement
with BlackRock Financial Management, Inc. (the
"Adviser"), a wholly- owned corporate subsidiary
of PNC Asset Management Group, Inc., the holding company for PNC's asset
management business, and an Administration Agreement with Prudential Mutual Fund
Management LLC ("PMF"), 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 PMF 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. PMF
pays occupancy and certain clerical and accounting costs of the Trust. The Trust
bears all other costs and expenses.
NOTE 3. PORTFOLIO Purchases and sales of investment securities,
SECURITIES other than short-term investments and dollar
rolls, for the year ended October 31, 1996
aggregated $3,194,850,406 and $3,186,712,482, 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, 1996, the Trust held 1.2% 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. It is possible under
certain circumstances, PNC Mortgage Securities Corp. or its affiliates 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.
The federal income tax basis of the Trust's investments at October 31, 1996
was $657,082,491 and, accordingly, net unrealized appreciation for federal
income tax purposes was $8,230,912 (gross unrealized appreciation-$25,477,268;
gross unrealized depreciation-$17,246,356).
For federal income tax purposes, the Trust has a capital
loss carryforward at October 31, 1996 of approximately $92,357,300 of which
approximately $6,398,700 will expire in 1997, approximately $4,473,500 will
expire in 1998, approximately $15,072,600 will expire in 2001, approximately
$23,358,200 will expire in 2002, approximately $15,428,200 will expire in 2003
and $27,626,100 will expire in 2004. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such amounts.
During the year ended October 31, 1996, the Trust entered into financial
futures contracts. Details of open contracts at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION TRADE OCTOBER 31, APPRECIATION/
CONTRACTS TYPE DATE DATE 1996 (DEPRECIATION)
- --------- ---- ---------- --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Short positions:
915 10 yr. T-Note Dec. 1996 $97,341,199 $100,306,875 $(2,965,676)
1.154 30 yr. T-Bond Dec. 1996 127,790,171 130,402,000 (2,611,829)
375 Eurodollar Dec. 1996 88,101,594 88,212,625 (111,033)
270 Eurodollar Mar. 1997 63,512,333 63,591,000 (78,667)
260 Eurodollar June 1997 61,091,135 61,173,500 (82,365)
255 Eurodollar Sept.1997 59,850,440 59,935,250 (84,810)
----------
$(5,934,380)
==========
</TABLE>
The Trust sold a swap option ("swaption") which settled on October 3, 1996
with a notional amount of $275 million. Under this swaption, the Trust received
$954,250. The contract consists of an option for the purchaser to enter into a
swap agreement with the trust. The swap would involve the Trust receiving a
fixed rate of 8.1% and the Trust paying a variable rate of 6-month LIBOR, both
based on the $275 million notional amount, for a period of ten years. The option
expires on April 3, 1997. At October 31, 1996, unrealized appreciation was
$631,584.
15
<PAGE>
The Trust entered into an interest rate cap which settled on November 5, 1991
with a notional amount of $200 million. Under this agreement, the Trust receives
the excess, if any, of three-month LIBOR over the fixed rate of 8.50%. The
agreement terminates on November 5, 1996. At October 31, 1996 unrealized
depreciation was $7,379.
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, 1996 was approximately $185,200,932 at a weighted
average interest rate of approximately 5.52%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the period was
$243,918,988 as of November 30, 1995, which was 23.0% 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 average monthly balance of dollar rolls outstanding during the year
ended October 31, 1996 was approximately $19,074,457. The maximum amount of
dollar rolls outstanding at any month-end during the year was $31,133,190 as of
April 30, 1996 which was 4.5% of total assets.
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, 1996, the Adviser owned 10,753 shares.
NOTE 6. DIVIDENDS Since October 31, 1996, the Board of Directors of
the Trust declared dividends from undistributed
earnings of $0.046875 per share payable November 29, 1996 to shareholders of
record on November 15, 1996.
NOTE 7. QUARTERLY DATA
(UNAUDITED)
<TABLE>
<CAPTION>
===========================================================================================================
NET REALIZED AND
UNREALIZED
GAINS (LOSSES) ON
NET INVESTMENT INVESTMENTS, SHORT
INCOME SALES AND FUTURES
AND OPTIONS
TOTAL PER PER
QUARTERLY PERIOD INCOME AMOUNT SHARE AMOUNT SHARE
- ---------------- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
November 1, 1994
to January 31, 1995 $ 7,966,522 6,718,106 $.11 6,924,347 $.11
February 1, 1995
to April 30, 1995 13,875,262 12,635,132 .20 12,679,455 .20
May 1, 1995
to July 31, 1995 9,186,628 7,888,261 .13 4,537,191 .07
August 1, 1995
to October 31, 1995 5,947,291 4,700,291 .07 16,703,524 .27
November 1, 1995
to January 31, 1996 11,192,969 9,880,763 .16 21,999,110 .35
February 1, 1996
to April 30, 1996 10,119,137 8,832,056 .14 (36,326,097) (.58)
May 1, 1996
to July 31, 1996 8,280,416 6,895,691 .11 (244,568) --
August 1, 1996
to October 31, 1996 10,290,889 9,185,375 .14 13,878,448 .22
</TABLE>
<TABLE>
<CAPTION>
NET INCREASE (DECREASE)
IN NET ASSETS
RESULTING DIVIDENDS
FROM OPERATIONS AND DISTRIBUTIONS
SHARE PRICE
PERIOD END
PER PER NET ASSET
QUARTERLY PERIOD AMOUNT SHARE AMOUNT SHARE HIGH LOW VALUE
- ---------------- ------ ----- ------ ----- ---- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
November 1, 1994
to January 31, 1995 $13,642,453 $.22 $11,784,164 $.188 $6 7/8 $5 7/8 $7.28
February 1, 1995
to April 30, 1995 25,314,587 .40 11,784,196 .188 7 1/4 6 5/8 7.49
May 1, 1995
to July 31, 1995 12,425,452 .20 11,784,243 .188 7 3/8 6 7/8 7.50
August 1, 1995
to October 31, 1995 21,403,815 .34 11,784,174 .188 7 3/8 6 7/8 7.66
November 1, 1995
to January 31, 1996 31,879,873 .51 10,802,096 .172 7 1/4 6 1/4 8.00
February 1, 1996
to April 30, 1996 (27,494,041) (.44) 8,838,134 .141 6 5/8 6 7.42
May 1, 1996
to July 31, 1996 6,651,123 .11 8,838,114 .141 6 1/4 5 7/8 7.39
August 1, 1996
to October 31, 1996 23,063,823 .36 8,838,100 .141 6 1/2 6 1/8 7.61
===========================================================================================================
</TABLE>
16
<PAGE>
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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, 1996 and the related statements of operations and of cash flows for
the year then ended and of changes in net 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, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. 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, 1996 and the results of its operations, its cash
flows, the changes in its net assets and the 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 6, 1996
17
<PAGE>
- --------------------------------------------------------------------------------
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, 1996.
During the fiscal year ended October 31, 1996, the Trust paid dividends
and distributions of $.59 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 1996 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.
For the purpose of preparing your 1996 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 1997.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
18
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
THE TRUST'S INVESTMENT OBJECTIVE
The Trust's investment objective is to manage a portfolio of high quality
securities to achieve high monthly income consistent with preservation of
capital. The Trust will seek to distribute monthly income that is greater than
that obtainable on an annualized basis by investment in United States Treasury
securities having the same maturity as the average dollar weighted maturity of
the Trust's investments.
WHO MANAGES THE TRUST?
BlackRock Financial Management, Inc. ("BlackRock") is the investment adviser for
the Trust. BlackRock is a registered investment adviser specializing in fixed
income securities. Currently, BlackRock manages over $43 billion of assets
across the government, mortgage, corporate and municipal sectors. These assets
are managed on behalf of institutional and individual investors in 21 closed-end
funds, which trade on either the New York or American stock exchanges, several
open-end funds and separate accounts for more than 100 clients in the U.S. and
overseas. BlackRock is a subsidiary of PNC Asset Management Group which is a
division of PNC Bank, one of the nation's largest banking organizations.
WHAT CAN THE TRUST INVEST IN?
The Trust will invest at least 65% of its assets in mortgage-backed securities.
At least 85% of the Trust's assets must be rated at least "AAA" by Standard &
Poor's or "Aaa" by Moody's at the time of purchase; of this 85% at least 80% of
the Trust's assets must be rated at least "AAA" by Standard & Poor's at the time
of purchase while the remaining 5% can be invested in securities at least "AAA"
by Standard & Poor's, "Aaa" by Moody's or deemed "AAA" by the Advisor at the
time of purchase. Additionally, 15% of the Trust's assets can be invested in
securities rated at least "AA" by Standard & Poor's or "Aa" by Moody's at time
of purchase. Under current market conditions, BlackRock expects that the primary
investments of the Trust will be U.S. government securities, securities backed
by government agencies (such as mortgage-backed securities), privately issued
mortgage-backed securities, commercial mortgage-backed securities and
asset-backed securities.
WHAT IS THE ADVISER'S INVESTMENT STRATEGY?
The Adviser will seek to meet the Trust's investment objective by managing the
assets 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. 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. In
seeking the investment objective, the Adviser may actively manage among various
types of securities in different interest rate environments.
Traditional 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 mortgage-backed securities in the Trust are of high credit
quality, they typically offer a yield spread above Treasuries due to the
uncertainty of the timing of their cash flows as they are subject to changes in
the rate of prepayments when interest rates change and either a larger or
smaller proportion of mortgage holders refinance their mortgages or move. While
mortgage-backed securities 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.
Multiple-class mortgage pass-through securities, or collateralized mortgage
obligations (CMOs), are also an investment that may be used in the Trust's
portfolio. These securities are issued in multiple classes each of which has a
different coupon rate, stated maturity and prioritization on the timing of
receipt of cash flows coming from interest and principal payments on the
underlying mortgages. Principal prepayments can be allocated among the different
classes of a CMO in a number of ways; for instance, they can be applied to each
of the classes in the order of their respective stated maturities. This feature
allows an investor to better plan the average life of their investment. As a
result, these securities may be used by the Trust to help manage prepayment risk
and align the assets of the portfolio more closely with its targeted average
life.
Additionally, in order to attempt to protect the portfolio from interest rate
risk, the Adviser will attempt to locate securities with call protection, such
as commercial mortgage-backed securities with prepayment penalties or lockouts.
Securities with call protection should provide the portfolio with some degree of
protection against reinvestment risk during times of lower prevailing interest
rates.
19
<PAGE>
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 fund 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 33.33% 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 fund 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 interests 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. 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.
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: BKT) 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.
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 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.
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.
20
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
GLOSSARY
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED
SECURITIES (ARMS): Mortgage instruments with interest rates
that 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.
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 OBLIGATIONS (CMOS): Mortgage-backed securities which separate
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.
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.
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 ASSET VALUE (NAV): Net 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.
REMIC: A real estate mortgage investment conduit is
a multiple-class security backed by
mortgage-backed securities or whole mortgage
loans and formed as a trust, corporation,
partnership, or segregated pool of assets
that elects to be treated as a REMIC for
federal tax purposes. Generally, Fannie Mae
REMICs are formed as trusts and are backed
by mortgage-backed securities.
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 Arrangements in which a pool of assets is
BACKED 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.
22
<PAGE>
- --------------------------------------------------------------------------------
BLACKROCK FINANCIAL MANAGEMENT, INC.
SUMMARY OF CLOSED-END FUNDS
- --------------------------------------------------------------------------------
TAXABLE TRUSTS
- --------------------------------------------------------------------------------
STOCK MATURITY
PERPETUAL TRUSTS SYMBOL DATE
------ ------
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
PERPETUAL TRUSTS SYMBOL DATE
------ ------
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.
23
<PAGE>
DIRECTORS
Laurence D. Fink, Chairman
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, President
Scott Amero, Vice President
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 Mutual 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 BLACKROCK INCOME TRUST INC.
C/O PRUDENTIAL MUTUAL FUND MANAGEMENT LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 227-7BFM
THE BLACKROCK
INCOME
TRUST INC.
================================================================================
ANNUAL REPORT
OCTOBER 31, 1996
