- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
ANNUAL REPORT TO SHAREHOLDERS
REPORT OF INVESTMENT ADVISER
- --------------------------------------------------------------------------------
November 30, 1997
Dear Trust Shareholder:
U.S. fixed income investors have been rewarded with solid total returns
over the past twelve months, as moderate economic growth and low inflation drove
Treasury yields below year-end 1996 levels by October 31, 1997.
The economy has shown some signs of slowing, which BlackRock expects may
persist as early indicators suggest that holiday spending may be tepid. We do
not see immediate signs of inflationary pressure nor do we anticipate an
imminent change in monetary policy by the Federal Reserve. Our long-term outlook
for the bond market remains optimistic, based on the fundamentally favorable
backdrop of slower economic growth, low inflation and declining Treasury
borrowing.
This report contains detailed market and portfolio strategy commentary by
your Trust's managers in addition to the Trust's audited financial statements
and a detailed portfolio listing. We thank you for your continued investment in
the Trust and wish you a successful new year.
Sincerely,
/s/ Laurence D. Fink /s/ Ralph L. Schlosstein
- -------------------- ------------------------
Laurence D. Fink Ralph L. Schlosstein
Chairman President
1
<PAGE>
November 30, 1997
Dear Shareholder:
We are pleased to present the annual report for The BlackRock Income Trust
Inc. ("the Trust") for the year ended October 31, 1997. 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 monthly 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 at least "AAA" by
Standard & Poor's or "Aaa" by Moody's (up to 5% can be unrated and deemed by the
Adviser to be of equivalent credit quality); the remaining 15% of the Trust's
assets must be rated at least "AA" by Standard & Poor's or "Aa" by Moody's at
the time of purchase.
The table below summarizes the performance of the Trust's stock price and
NAV over the period:
<TABLE>
<CAPTION>
-----------------------------------------------------------------
10/31/97 10/31/96 CHANGE HIGH LOW
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STOCK PRICE $6.875 $6.25 10.00% $7.00 $6.25
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE (NAV) $8.12 $7.61 6.70% $8.12 $7.54
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
THE FIXED INCOME MARKETS
The first half of the Trust's fiscal year was characterized by increased
concern over potential inflationary pressures. Bond prices fell and yields rose
between mid-December 1996 and mid-April 1997, as economic data indicated a very
strong economy. Although inflationary measures such as commodity, producer and
consumer prices generally remained relatively stable, labor markets remained
strong throughout the period (with the unemployment rate consistently hovering
near historically low levels), which suggested future wage pressures and higher
inflation. In an effort to subdue this growth and pre-emptively fight inflation,
the Federal Reserve raised the Federal funds rate by 25 basis points (1/4%) to
5.50% at their March 25 FOMC policy meeting. During the second quarter, however,
signs of more moderate economic growth began to appear. Lower factory orders,
decreased consumer spending and higher inventories, in addition to continued
benign inflationary forces, soothed investor fears over inflation. Accordingly,
the Federal Reserve left interest rates unchanged at their May 20, July 2 and
September 30 policy meetings.
U.S. Treasury yields reflected investor expectations of Federal Reserve
policy activity. The yield of the 10-year note rose from a period low of 6.04%
in late November 1996 to 6.98% in mid-April 1997 in response to Federal Reserve
Chairman Alan Greenspan's warning of excessive equity market euphoria and in
anticipation of a Federal funds rate increase. As economic data softened,
however, the yield of the 10-year fell over 100 basis points from 6.98% to close
at 5.83% on October 31, 1997. Foreign investors also contributed to the strong
demand for U.S. Treasuries, as the Asian market volatility led foreign and
domestic investors to look to U.S. government securities as a safe haven. For
the 12 month period ended October 31, 1997, the 10-year Treasury rallied,
posting a net decline of 51 basis points (0.51%).
2
<PAGE>
During the period, mortgage-backed securities (MBS), as measured by the
Lehman Mortgage Index, modestly outperformed the broader investment grade
domestic bond market (Lehman Aggregate Index) on a total return basis by 9.12%
vs. 8.89%. Demand for mortgage securities was largely concentrated in the first
half of 1997, when MBS decisively outperformed Treasuries due to low interest
rate volatility and relatively stable mortgage prepayment activity. Recently,
MBS have fallen out of favor, as declining interest rates have heightened
prepayment fears and increased interest rate volatility has had a negative
impact on valuations of mortgage securities. Further, as corporate bond prices
have fallen, yields in the corporate sector have increased, offering investors
an alternative to MBS which also yields more than 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)
approximately 150% of the Salomon Brothers Mortgage Index; this means that the
portfolio's NAV will change roughly 1.5 times the price of the Index given a
change in interest rates. The following chart compares the Trust's current and
October 31, 1996 asset composition.
- --------------------------------------------------------------------------------
COMPOSITION OCTOBER 31, 1997 OCTOBER 31, 1996
- --------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities 25% 17%
- --------------------------------------------------------------------------------
Adjustable & Inverse Floating Rate Mortgages 20% 16%
- --------------------------------------------------------------------------------
U.S. Government Securities 15% 14%
- --------------------------------------------------------------------------------
Agency Multiple Class Mortgage Pass-Throughs 14% 14%
- --------------------------------------------------------------------------------
FHA Project Loans 9% 14%
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs 8% 11%
- --------------------------------------------------------------------------------
Non-Agency Multiple Class Mortgage Pass-Throughs 4% 7%
- --------------------------------------------------------------------------------
Commercial Mortgage-Backed Securities 3% 3%
- --------------------------------------------------------------------------------
Asset-Backed Securities 1% 3%
- --------------------------------------------------------------------------------
CMO Residuals 1% 1%
- --------------------------------------------------------------------------------
Over the past year, the Trust reduced its overall exposure to residential
mortgage pass-through securities, as fundamental conditions in that market have
worsened. Mortgages performed well over the first half of 1997 when interest
rate volatility remained low and the rate at which homeowners were prepaying
their mortgages remained fairly constant. As interest rate volatility increased
and mortgages became less favorable towards the middle of the year, the Trust
began to take profits and reallocate the proceeds. We believe that the
environment for mortgages will continue to worsen and that the mortgage market
is at risk for sustained underperformance versus Treasuries in the current low
interest rate levels.
The Trust added to its stripped mortgage-backed security holdings, which
can be broken into two sectors: principal-only securities (POs) and
interest-only securities (IOs). Over the past twelve months, the Trust primarily
added POs, which are the principal portion of a mortgage pass-through security.
These new positions are bonds that have been structured to have low interest
rate sensitivity (or "duration") and were bought at attractive dollar prices. As
interest rates have fallen since mid-1997, these securities have posted
excellent total returns.
3
<PAGE>
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 10/31/97: $6.875
- --------------------------------------------------------------------------------
Net Asset Value as of 10/31/97: $8.12
- --------------------------------------------------------------------------------
Yield on Closing Stock Price as of 10/31/97 ($6.875)1: 8.18%
- --------------------------------------------------------------------------------
Current Monthly Distribution per Share2: $0.046875
- --------------------------------------------------------------------------------
Current Annualized Distribution per Share2: $0.56250
- --------------------------------------------------------------------------------
1 Yield on Closing Stock Price is calculated by dividing the current annualized
distribution per share by the closing stock price per share.
2 The distribution is not constant and is subject to change.
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
PORTFOLIO OF INVESTMENTS
OCTOBER 31, 1997
- ------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--140.4%
MORTGAGE PASS-THROUGHS--23.8%
Federal Home Loan Mortgage
Corporation,
<S> <C> <C> <C>
$ 44 7.00%, 8/01/26 .................................. $ 43,921
5,245+ 7.50%, 7/01/07 - 2/01/23 ........................ 5,375,841
1,227++ 8.00%, 11/01/15 ................................. 1,287,586
744+ 8.50%, 6/01/11 .................................. 780,281
2,064 8.50%, 3/01/06 - 3/01/08, 15 year ............... 2,157,754
3,627 9.00%, 9/01/20 .................................. 3,914,190
Federal Housing Administration,
4,258 Brookville, 7.50%, 8/01/28 ...................... 4,395,198
3,732 Country Estates, 8.375%, 1/01/35 ................ 3,975,844
GMAC,
6,233 Series 33, 7.43%, 9/01/21 ....................... 6,384,490
2,161 Series 46, 7.43%, 1/01/22 ....................... 2,224,839
892 Series 48, 7.43%, 6/01/22 ....................... 918,359
495 Series 51, 7.43%, 2/01/23 ....................... 508,126
7,813 Series 56, 7.43%, 11/01/22 ...................... 8,031,400
Merrill,
1,268 Series 54, 7.43%, 5/15/23 ....................... 1,306,415
1,398 Series 95, 7.43%, 3/01/22 ....................... 1,438,647
1,253 Middlesex, 8.625%, 9/01/34 ...................... 1,344,344
4,648 Parkside, 7.30%, 2/01/13 ........................ 4,746,217
1,069 Reilly, Series 41, 8.28%, 3/01/20 ............... 1,131,308
2,865 Tuttle Grove, 7.25%, 10/01/35 ................... 2,911,616
USGI,
4,348 Polaris 982, 7.43%, 11/01/21 .................... 4,466,846
926 Series 87, 7.43%, 12/01/22 ...................... 956,603
4,959 Series 99, 7.43%, 10/01/23 ...................... 5,144,036
2,753 Series 1003, 7.43%, 3/01/24 ..................... 2,838,460
2,748 Series 6302, 7.43%, 12/01/21 .................... 2,830,510
3,597 Waterford, 8.625%, 7/25/27 ...................... 3,859,021
7,054 Yorkville 6094, 7.43%, 6/01/21 .................. 7,254,293
Federal National Mortgage Association,
2,500+ 6.50%, 10/25/03, Multifamily .................... 2,524,219
1,351++ 7.00%, 11/01/08 ................................. 1,370,601
5,773+ 7.50%, 11/01/14 - 9/01/23,
18 year Multifamily ............................. 5,797,219
6,031+@ 8.00%, 5/01/08 - 5/01/22 ........................ 6,276,806
726 9.317%, 6/01/19, 10 year Multifamily ............ 817,282
590++ 9.484%, 7/01/19, Multifamily .................... 625,393
1,450 9.497%, 6/01/24, Multifamily .................... 1,532,593
202 9.50%, 1/01/19 - 6/01/20 ........................ 217,369
Government National
Mortgage Association,
659 7.00%, 10/15/17 ................................. 662,787
19,304 7.50%, 8/15/21 - 12/15/23 ....................... 19,740,945
41 8.50%, 5/15/01 - 2/15/17 ........................ 43,449
1,034 9.00%, 6/15/18 - 9/15/21 ........................ 1,103,106
13 9.50%, 7/15/16 .................................. 14,519
400 Overseas Private Investment
Corporation, 6.84%, 5/29/12 ...................... 403,250
------------
121,355,683
------------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--52.9%
AAA 2,100 Citicorp Mortgage Securities Inc.,
Series 1994-9, Class A4, 6/25/09 ................ 1,998,885
AAA 1,332 Collateralized Mortgage Obligation,
Trust 13, Class Q, 1/20/03 ...................... 1,452,930
AAA 24,175++ Community Program Loan Trust,
Series 1987-A, Class A-4,
10/01/18 ........................................ 21,674,650
CWMBS Incorporated, Mortgage
Certificate,
AAA 3,394 SERIES 1993-10, CLASS A-8,
1/25/24 (ARM) .................................. 3,095,511
AAA 6,202 Series 1994-9, Class A-16,
5/25/24 (ARM) .................................. 5,034,855
Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificate,
27,426+ Series G-13, Class 13-PP,
5/25/21 (I) .................................... 7,862,608
2,799 Series G24, Class G24-SG,
11/25/23 (ARM) ................................. 2,315,395
7,500++ Series 1104, Class 1104-L,
6/15/21 ........................................ 8,090,625
922 Series 1347, Class 1347-HC,
12/15/21 ....................................... 777,642
28,468+ Series 1353, Class 1353-S,
8/15/07 (ARM) .................................. 3,407,295
1,617 Series 1508, Class 1508-OC,
5/15/23 (ARM) .................................. 1,377,533
2,000 Series 1523, Class 1523-SA,
6/15/23 (ARM) .................................. 1,398,120
2,000 Series 1526, Class 1526-SA,
6/15/23 (ARM) .................................. 1,790,900
2,026 Series 1534, Class 1534-NE,
6/15/23 (ARM) .................................. 1,988,204
1,321 Series 1541, Class 1541-T,
7/15/23 ........................................ 1,185,924
2,711 Series 1559, Class 1559- WA,
7/15/22 ........................................ 2,606,300
3,562+ Series 1577, Class 1577-SG,
10/15/22 (ARM) ................................. 2,953,884
12,305++ Series 1584, Class 1584-FB,
9/15/23 ........................................ 12,524,868
1,804 Series 1596, Class 1596-SB,
12/15/12 (ARM) ................................. 1,535,032
See Notes to Financial Statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 930 Series 1609, Class 1609-KA,
11/15/23 ....................................... $ 918,830
2,356 Series 1609, Class 1609-LE,
11/15/23 (ARM) ................................. 1,975,275
1,308 Series 1611, Class 1611-PD,
11/15/23 (ARM) ................................. 818,561
5,050 Series 1619, Class 1619-SC,
11/15/23 (ARM) ................................. 4,764,457
6,543++ Series 1627, Class 1627-S,
12/15/23 (ARM) ................................. 4,793,860
5,038 Series 1627, Class 1627-SC,
12/15/23 (ARM) ................................. 3,603,436
3,084 Series 1629, Class 1629-OD,
12/15/23 (ARM) ................................. 2,050,668
4,805@@ Series 1633, Class 1633-SB,
6/15/23 (ARM) .................................. 4,519,899
5,499@ Series 1673, Class 1673-SC,
10/15/22 (ARM) ................................. 4,508,995
1,460 Series 1686, Class 1686-A,
2/15/24 ........................................ 1,290,406
75,000 Series 1914, Class 1914-PC,
12/15/11 (I) ................................... 1,912,500
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
3,746 Trust 1988-16, Class 16-B,
6/25/18 ........................................ 4,032,060
1,654 Trust 1990-12, Class 12-G,
2/25/20 ........................................ 1,516,718
14,737 Trust G1991-15, Class 15-S,
6/25/21 (ARM) .................................. 2,814,689
3,069 Trust 1991-38, Class 38-F,
4/25/21 (ARM) .................................. 3,130,338
2,597@ Trust 1991-38, Class 38-SA,
4/25/21 (ARM) .................................. 2,709,930
2,876 Trust 1991-87, Class 87-S,
8/25/21 (ARM) .................................. 3,056,191
1,240 Trust G1992-12, Class 12-C,
2/25/22 (I) .................................... 415,988
6,000++ Trust 1992-43, Class 43-E,
4/25/22 (ARM) .................................. 6,225,780
5,752 Trust 1992-187, Class 187-JA,
10/25/06 (I) ................................... 512,946
11,550 Trust 1992-200, Class 200-K,
11/25/21 (I) ................................... 1,574,222
768 Trust G1993-27, Class 27-SB,
8/25/23 (ARM) .................................. 597,473
1,504 Trust 1993-50, Class 50-SH,
1/25/23 (ARM) .................................. 1,327,006
2,768+ Trust 1993-53, Class 53-M,
4/25/23 ........................................ 2,522,869
2,867 Trust 1993-54, Class 54-SD,
4/25/23 (ARM) .................................. 2,490,461
2,137 Trust 1993-82, Class 82-SB,
5/25/23 (ARM) .................................. 1,696,280
2,232 Trust 1993-87, Class 87-L,
6/25/23 ........................................ 2,226,760
864 Trust 1993-97, Class 97-TA,
5/25/23 ........................................ 837,207
3,759++ Trust 1993-98, CLASS 98-SC,
7/25/22 (ARM) .................................. 3,548,501
983 Trust 1993-116, Class 116-SB,
7/25/23 (ARM) .................................. 784,085
2,000 Trust 1993-120, Class 120-SN,
7/25/23 (ARM) .................................. 1,728,780
1,963 Trust 1993-129, Class 129-SE,
8/25/08 (ARM) .................................. 1,914,807
2,793 Trust 1993-139, Class 139-SJ,
8/25/23 (ARM) .................................. 1,865,271
817 Trust 1993-167, Class 167-SA,
9/25/23 (ARM) .................................. 817,407
6,000 Trust 1993-169, Class 169-SC,
3/25/23 (ARM) .................................. 4,368,420
5,358 Trust 1993-178, Class 178-A,
9/25/23 ........................................ 5,229,263
2,776 Trust 1993-179, Class 179-SC,
10/25/23 (ARM) ................................. 3,127,939
1,346 Trust 1993-179, Class 179-VC,
10/25/21 (ARM) ................................. 955,614
2,783 Trust 1993-183, Class 183-SE,
10/25/23 (ARM) ................................. 2,428,915
3,314 Trust 1993-187, Class 187-S,
9/25/23 (ARM) .................................. 2,810,105
5,494 Trust 1993-202, Class 202-VS,
2/25/23 (ARM) .................................. 5,466,966
1,576 Trust 1993-223, Class 223-SJ,
12/25/23 (ARM) ................................. 1,157,205
2,223 Trust 1993-224, Class 224-S,
11/25/23 (ARM) ................................. 1,769,012
1,908 Trust 1993-224, Class 224-SH,
11/25/23 (ARM) ................................. 1,595,856
2,562 Trust 1993-247, Class 247-SN,
12/25/23 (ARM) ................................. 2,975,539
5,643 Trust 1993-248, Class 248-FB,
9/25/23 ........................................ 5,042,104
3,935 Trust 1993-256, Class 256-F,
11/25/23, (ARM) ................................ 3,677,332
15,428 Trust G1994-6, Class 6-PK,
11/17/22 (I) ................................... 2,569,906
3,777 Trust 1994-14, Class 14-S,
10/25/23 (ARM) ................................. 2,261,312
4,627 Trust 1994-19, Class 19-SB,
1/25/24 (ARM) .................................. 2,377,915
387 Trust 1994-27, Class 27-SE,
3/25/23 (ARM) .................................. 431,937
5,294 Trust 1994-29, Class 29-SD,
7/25/23 (ARM) .................................. 4,016,663
4,329 Trust 1994-41, Class 41-SA,
3/25/24 (ARM) .................................. 4,136,963
10,623 Trust 1994-59, Class 59-SB,
3/25/24 (ARM) .................................. 6,334,233
14,300+ Trust 1996-14, Class 14-AB,
8/25/23 (P) .................................... 5,380,375
See Notes to Financial Statements.
6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 6,797+ Trust 1996-14, Class 14-M,
10/25/21 ....................................... 5,760,542
15,070++ Trust 1997-30, Class 30-I,
1/25/23 (I) .................................... 4,238,521
25,000 Trust 1997-50, Class 50-HK,
8/25/27 (I) .................................... 9,886,719
AAA 8,598 G. E. Capital Mortgage Services
Incorporated, REMIC Certificate 94-7
Class A-17, 2/25/09 (ARM) ...................... 7,275,996
Prudential Home Mortgage
Securities Co., Mortgage
Pass-Through Certificates,
Aaa 743 Series 1993-43, Class A-16,
10/25/23 (ARM) .................................. 650,037
Aaa 2,500 Series 1993-48, Class A-8,
12/25/08 (ARM) .................................. 2,050,000
AAA 146 Resolution Trust Corporation,
Mortgage Pass-Through Certificates,
Series 1992-2, Class B-3, 11/25/21 ............ 145,526
AAA 8,935 Salomon Capital Access Corporation,
Collateralized Mortgage Obligations,
Series 1986-1, Class C, 9/01/15 ................. 9,180,276
-----------
269,875,008
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--4.7%
AAA 3,180 Asset Securitization Corporation,
Commercial Mortgage 1997-D5,
Class PS 1, 1.375%, 2/14/41 ..................... 347,813
AAA 44,410 Credit Suisse First Boston Mortgage,
Commercial Mortgage Certificate
1997, Class C-1, 144A,
1.77%, 6/20/29 .................................. 5,114,144
AAA 140,000 KPAC, Series 1994-C1,
Zero Coupon, 2/01/01 ............................ 1,400
AAA 6,000 ML Mortgage Investments,
Series 1996-C1, Class A-3,
7.42%, 4/25/28 .................................. 6,307,672
AAA 57 Morgan Stanley Capital I Incorporated,
Commercial Mortgage Certificate
1997, Class HF-1, 144A,
Zero Coupon, 6/15/17 ............................ 5,562
AAA 10,250 NYC Mortgage Loan Trust,
Series 1996, Class A-2, 144A,
6.75%, 6/25/11 .................................. 10,278,828
AAA 2,000 PaineWebber Mortgage Acceptance
Corporation IV, Series1995-M1,
Class B, 144A, 6.95%, 1/15/07 ................... 2,039,727
----------
24,095,146
----------
ASSET-BACKED SECURITIES--1.8%
AAA 6,167++ Chase Manhattan Grantor Trust,
Series 1996-B, Class A,
6.61%, 9/15/02 ................................. 6,207,074
AAA 3,000 Student Loan Marketing Trust,
Series 1997-3, Class A-2,
5.78%, 10/25/10 ................................ 2,975,625
-----------
9,182,699
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--34.6%
Aaa 1,008 Chase Mortgage Finance Corporation,
Mortgage Pass-Through Certificates,
Series 1994-A, Class AP,
1/25/10 (P/O) .................................. 789,681
AAA 1,175 Collateralized Mortgage Obligation,
Trust 29, Class A, 5/23/17 (P/O) ............... 914,244
DBL, Collateralized Mortgage
Obligation,
AAA 426 Trust K, Class K-1, 9/23/17 (P/O) .............. 368,338
AAA 4,443 Trust V, Class V-1, 9/01/18 (P/O) .............. 3,493,007
Federal Home Loan Mortgage
Corporation Participation
2,317 Series T-8, Class A-10,
8/15/27 (P/O) ................................. 1,416,933
4,790 Series 1238, Class 1238-J,
1/15/07 (I/O) ................................. 1,051,104
22,407 Series 1366, Class 1366-KA,
9/15/07 (I/O) ................................. 6,612,814
669 Series 1418, Class 1418-M,
11/15/22 (P/O) ................................ 248,073
1,054 Series 1473, Class 1473-JA,
2/15/05 (I/O) ................................. 75,083
12,000++ Series 1506, Class 1506-L,
3/15/22 (I/O) ................................. 2,579,160
15,540 Series 1632, Class 1632-S,
4/15/23 (I/O) ................................. 615,395
8,067 Series 1801, Class 1801-SB,
8/15/23 (I/O) ................................. 1,119,276
32,000 Series 1809, Class 1809-SC,
12/15/23 (I/O) ................................ 3,400,000
14,069++ Series 1828, Class 1828-A,
5/15/24 (P/O) ................................. 9,566,885
18,029 Series 1850, Class 1850-SA,
2/15/24 (I/O) ................................. 3,031,142
7,815++ Series 1857, Class 1857-PB,
12/15/08 (P/O) ................................ 6,798,931
5,000 Series 1900, Class 1900-SV,
8/15/08 (I/O) ................................. 1,046,450
4,828 Series 1917, Class 1917-AS,
5/15/08 (I/O) ................................. 1,308,846
38,863 Series 1930, Class 1930-SM,
9/15/23 (I/O) ................................. 467,567
17,938 Series 1946, Class 1946-SG,
3/15/24 (I/O) ................................. 2,550,610
40,000 Series 1965, Class 1965-SA,
3/15/24 (I/O) ................................. 5,975,000
See Notes to Financial Statemens.
7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------------
STRIPPED MORTGAGE-BACKED
SECURITIES (CONTINUED)
<S> <C> <C> <C>
$127,250 Series 1968, Class 1968-S,
10/15/26 (I/O) ................................ $ 6,780,024
15,106 Series 2002, Class 2002-HJ,
10/15/08 (I/O) ................................ 2,341,447
Federal National Mortgage Association,
4,277 Trust A, Class A-2,
8/01/10 (I/O) ................................. 802,774
1,250 Trust G50, Class 50-G,
12/25/21 (I/O) ................................ 551,788
6,834 Trust 225, Class 1, 2/01/23 (P/O) .............. 5,404,836
29,261++ Trust G-233, Class 2,
8/01/23 (I/O) ................................. 8,860,316
1,916 Trust 267, Class 1,
10/01/24 (P/O) ................................ 1,527,415
18,086+ Trust 374, Class 1,
10/01/25 (P/O) ................................ 14,565,272
3,600 Trust 280, Class 1,
12/31/99 (P/O) ................................ 2,908,451
1,065 Trust 1991-7, Class 7-J,
2/25/21 (P/O) ................................. 799,416
4,389 Trust G1992-34, Class 34-A,
4/25/22 (I/O) ................................. 1,380,615
20,426 Trust G1992-60, Class 60-SB,
10/25/22 (I/O) ................................ 703,075
2,786 Trust 1992-68, Class 68-K,
10/25/05 (I/O) ................................ 306,379
41,462 Trust 1992-216, Class 216-S,
12/25/22 (I/O) ................................ 5,727,147
1,428 Trust 1993-2, Class 2-KB,
1/25/23 (P/O) ................................. 508,215
67,093++ Trust 1993-82, Class 82-SB,
5/25/23 (I/O) ................................. 7,754,589
2,466 Trust 1993-113, Class 113-B,
7/25/23 (P/O) ................................. 1,807,634
7,152++ Trust 1993-159, Class 159-C,
7/25/23 (P/O) ................................. 4,648,695
13,982++ Trust 1993-213, Class 213-H,
9/25/23 (P/O) ................................. 11,902,794
2,295 Trust 1994-9, Class 9-C,
8/25/23 (P/O) ................................. 1,890,270
3,877 Trust 1994-24, Class 24-D,
11/25/23 (P/O) ................................ 3,188,719
4,778 Trust 1994-57, Class 57-C,
1/25/24 (P/O) ................................. 3,969,516
99++ Trust 1994-61, Class 61-DB,
3/25/24 (P/O) ................................. 69,539
23,000 Trust 1994-77, Class 77- SB,
4/25/24 (I/O) ................................. 2,371,875
13,853 Trust 1995-26, Class 26-SW,
2/25/24 (I/O) ................................. 2,480,608
2,560 Trust 1996-5, Class 5-PV,
11/25/23 (P/O) ................................ 2,156,549
9,963 Trust 1996-38, Class 38-E,
8/25/23 (P/O) ................................. 5,414,268
2,953 Trust 1996-56, Class 56-E,
4/25/23 (P/O) ................................. 2,146,290
12,371 Trust 1996-68, Class 68-SC,
1/25/24 (I/O) ................................. 1,484,506
77,001 Trust 1997-1, Class 1- S,
2/18/04 (I/O) ................................. 2,707,060
99,143 Trust 1997-37, Class 37-SE,
10/25/22 (I/O) ................................ 2,323,673
27,000 Trust 1997-65, Class 65-SG,
6/25/23 (I/O) ................................. 4,573,125
35,476 Trust 1997-65, Class 65-SB,
3/25/24 (I/O) ................................. 1,718,384
11,139 Trust 1997-76, Class 76-SP,
12/25/23 (I/O) ................................ 1,709,140
AAA 1,223 First Boston Mortgage Securities
Corporation, Series 1987-C
Class Z, 4/25/17 (I/O) ......................... 426,080
Housing Security Incorporated,
AAA 437 Series 1992-EB, Class B-8,
9/25/22 (P/O) ................................. 278,434
AAA 624 Series 1993-D, Class D-8,
6/25/23 (P/O) ................................. 394,551
Kidder Peabody Acceptance
Corporation,
AAA 1,594 Series B, Class B-2,
4/22/18 (I/O) ................................. 448,370
AAA 2,979 Series B Class B-1,
4/22/18 (P/O) ................................. 2,269,954
AAA 4,224 Structured Asset Securities Corporation,
Series 1991-2, Class GA,
12/20/21 (I/O) ................................. 1,069,325
AAA 918 Structured Mortgage Asset Trust,
Series 1993-3C, Class CX,
4/25/24 (P/O) .................................. 577,254
AAA 421 Prudential Securities, Inc. Collateralized
Mortgage Obligation, Trust 15,
Class 1G, 5/20/21 (I/O)......................... 521,563
-----------
176,898,474
-----------
U.S GOVERNMENT SECURITIES--21.8%
Small Business Administration,
4,274 Series 1995-10C,
7.35%, 8/01/05 ................................ 4,467,946
4,571 Series 1996-20E,
7.60%, 5/01/16 ................................ 4,834,010
4,164 Series 1996-20G,
7.70%, 7/01/16 ................................ 4,430,289
3,893 Series 1996-20H,
7.25%, 8/01/16 ................................ 4,040,817
6,836 Series 1996-20K,
6.95%, 11/01/16 ............................... 7,009,312
3,845 Series 1996-20F,
7.55%, 6/01/16 ................................ 4,055,862
2,959 Series 1997-20C,
7.15%, 3/01/17 ................................ 3,055,472
See Notes to Financial Statemens.
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- ------------------------------------------------------------------------------------
<S> <C> <C>
$ 6,500 United States Treasury Bonds,
6.625%, 2/15/27 ............................... $ 6,892,015
United States Treasury Notes,
60,000+ 5.75%, 10/31/02 ............................... 60,084,600
775 6.00%, 8/15/00 ................................ 781,177
11,140++ 6.125%, 8/15/07 ............................... 11,381,961
------------
111,033,461
------------
CMO RESIDUALS***--0.8%
AAA 5,435 American Housing Trust III, Senior
Mortgage Pass-Through Certificates,
Series 1, Class 4, (REMIC)**, 3/25/19 .......... 845,915
AAA 328 American Housing Trust VII, Senior
Mortgage Pass-Through Certificates,
Series A, Class R, (REMIC)**,
11/25/20 ....................................... 2,142,250
AAA 25 Collateralized Mortgage Obligation,
Trust 13**, 1/20/03 ............................ 232,155
AAA 45 FBC Mortgage Securities Trust 16,
Variable Rate Collateralized Mortgage
Obligation, Series A**, 7/01/17 ................ 434,130
AAA 3,115 FBC Mortgage Securities Trust 19,
Variable Rate Collateralized Mortgage
Obligation, Series A**, 10/20/18 ............... 176,600
AAA 43 PaineWebber, Collateralized Mortgage
Obligation, Series N, Class 7,
(REMIC), 1/01/19 ............................... 208,550
------------
4,039,600
------------
Total Long-Term Investments
(cost $676,285,372) ........................... 716,480,071
------------
CONTRACTS # SHORT TERM INVESTMENTS--1.5%
-----------
CALL OPTIONS PURCHASED--0.8%
150,000 Interest Rate Swap
6.20% over 3 month LIBOR
expires 8/13/99
(cost $2,238,750) ............................. 3,828,000
------------
PUT OPTIONS PURCHASED--.7%
190 U.S. Treasury Note 6.625%
5/31/07 @ 100 expiring 3/19/98 ................... 240,920
150,000 Interest Rate Swap
7.25% over 3 month LIBOR
expires 5/12/00 ................................ 3,465,000
------------
Total put options purchased
(Cost $9,630,156) ............................. 3,705,920
------------
Total Short-Term Investments
(Cost $11,868,906) ............................... 7,533,920
------------
Total Investments before outstanding
call options written and investments sold
short--141.9%
(Cost $688,154,278) .............................. 724,013,991
------------
CALL OPTIONS WRITTEN--(0.8%)
(450,000) Interest Rate Swap
3 month LIBOR over 6.10%
expires 2/13/98 ................................ (3,901,500)
(Premium received $1,071,000)
INVESTMENTS SOLD SHORT--(5.0%)
(25,000) United States Treasury Bonds,
6.375%, 8/15/27
(proceeds $25,136,719) ........................... (25,765,500)
------------
Total investments, net of
outstanding call options
written and short sales--136.1%
(Cost $661,946,559) ............................. 694,346,991
Liabilities in excess of other
assets--(36.1%) .................................. (184,117,433)
------------
NET ASSETS--100% ................................. $510,229,558
============
</TABLE>
- --------------------------
* Using the higher of Standard & Poor's or Moody's rating.
** Private placements restricted as to resale.
*** Illiquid securities representing .6% of portfolio assets.
# One contract equals 100,000 face value.
+ (Partial) principal amount pledged as collateral for reverse repurchase
agreements.
++ Entire principal amount pledged as collateral for reverse repurchase
agreements.
@ (Partial) principal amount pledged as collateral for futures transactions.
@@ Entire principal amount pledged as collateral for futures transactions.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
I -- Denotes a CMO with Interest only characteristics.
I/O -- Interest only.
P -- Denotes a CMO with Principal only characteristics.
P/O -- Principal only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $688,154,278) (Note 1) ......... $724,013,991
Cash ....................................................... 45,493
Receivable for investments sold ............................ 62,927,826
Deposit with brokers as collateral for
investments sold short (Note 1) ............................ 25,937,500
Interest receivable ........................................ 5,685,327
Interest rate caps, at value
(amortized cost $10,320,437)
(Notes 1 & 3) .............................................. 5,181,120
------------
823,791,257
------------
LIABILITIES
Reverse repurchase agreements (Note 4) ..................... 228,530,200
Payable for investments purchased .......................... 52,258,029
Investment sold short, at value
(proceeds $25,136,719) (Note 1) .......................... 25,765,500
Call option written, at value
(premium received $1,071,000)
(Note 1) ............................................... 3,901,500
Unrealized depreciation on interest
rate swaps
(Note 1 & 3) ............................................. 590,539
Due to broker-variation margin ............................. 582,016
Interest payable ........................................... 337,806
Advisory fee payable (Note 2) .............................. 276,710
Dividends payable .......................................... 231,089
Administration fee payable (Note 2) ........................ 85,142
Other accrued expenses ..................................... 1,003,168
------------
313,561,699
------------
NET ASSETS ................................................. $510,229,558
============
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 ...................................... (1,629,913)
Accumulated net realized losses .......................... (77,784,198)
Net unrealized appreciation .............................. 25,659,401
------------
Net assets, October 31, 1997 ............................... $510,229,558
============
Net asset value per share:
($510,229,558 / 62,849,878 shares of
common stock issued and outstanding) ..................... $8.12
=====
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of $15,366,825
and interest expense of $11,495,300) ..................... $ 41,109,234
------------
Expenses
Investment advisory ...................................... 3,146,229
Administration ........................................... 968,071
Reports to shareholders .................................. 240,000
Transfer agent ........................................... 100,000
Audit .................................................... 70,000
Directors ................................................ 70,000
Custodian ................................................ 55,000
Legal .................................................... 25,000
Miscellaneous ............................................ 189,979
------------
Total operating expenses ............................... 4,864,279
------------
Net investment income .................................... 36,244,955
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments .............................................. 22,213,381
Options .................................................. 664,669
Futures .................................................. (10,768,972)
Short sales .............................................. (1,167,923)
------------
10,941,155
------------
Net change in unrealized appreciation/(depreciation) on:
Investments .............................................. 28,952,527
Options .................................................. (7,797,070)
Interest rate caps ....................................... (5,139,317)
Futures .................................................. 4,923,205
Short sales .............................................. (628,781)
------------
20,310,564
------------
Net gain on investments .................................. 31,251,719
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................. $ 67,496,674
============
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1997
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows provided by operating activities:
Interest received ............................. $ 69,492,278
Operating expenses paid ....................... (4,363,822)
Interest expense paid ......................... (11,503,266)
Proceeds of short-term portfolio investments
including options, net ...................... 17,833,982
Purchase of long-term portfolio investments ... (1,544,376,562
Proceeds from disposition of long-term
portfolio investments ....................... 1,489,911,159
Variation margin on futures ................... (5,980,553)
---------------
Net cash flows provided by operating activities 11,013,216
---------------
Cash flows used for financing activities:
Increase in reverse repurchase agreements ..... 24,092,662
Cash dividends paid ........................... (35,315,771)
---------------
Net cash flows used for financing activities .. (11,223,109)
---------------
Net decrease in cash ............................ (209,893)
Cash at beginning of year ....................... 255,386
---------------
Cash at end of year ............................. $ 45,493
===============
RECONCILIATION OF NET INCREASE IN NET
ASSETS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net increase in net assets resulting from
operations ................................. $ 67,496,674
---------------
Increase in investments ...................... (27,514,566)
Decrease in interest receivable .............. 1,520,919
Increase in receivable for investments sold .. (41,334,824)
Decrease in variation margin payable ......... (134,786)
Net realized gains ........................... (10,941,155)
Increase in unrealized appreciation .......... (20,310,564)
Increase in depreciation of forward swap ..... 590,539
Increase in options .......................... 3,578,834
Increase in payable for investments sold short 25,765,500
Increase in payable for investments purchased 42,937,532
Decrease in interest payable ................. (7,966)
Increase in deposits with brokers for
investments sold short ..................... (25,937,500)
Increase in interest rate caps ............... (5,195,878)
Increase in accrued expenses and other
liabilities ................................ 500,457
---------------
Total adjustments .......................... (56,483,458)
---------------
Net cash provided by operating activities .... $ 11,013,216
===============
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
STATEMENTS OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
INCREASE (DECREASE)
IN NET ASSETS
Year Year
Ended Ended
October 31, 1997 October 31, 1996
---------------- ----------------
Operations:
Net investment income ........... $ 36,244,955 $ 34,793,885
Net realized gain (loss) on
investments, futures,
short sales, and options ...... 10,941,155 (19,446,793)
Net change in net unrealized
appreciation on investments,
futures, short sales and
options ...................... 20,310,564 18,753,681
------------ ------------
Net increase in
net assets resulting from
operations .................... 67,496,674 34,100,773
Dividends from net investment
income ............................ (35,352,309) (34,793,885)
Distributions in excess of net
investment income ............... -- (2,522,559)
------------ ------------
Total increase (decrease) ....... 32,144,365 (3,215,671)
NET ASSETS
Beginning of year ............... 478,085,193 481,300,864
------------ ------------
End of year ..................... $510,229,558 $478,085,193
============ ============
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE: 1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Net asset value, beginning of year ................. $ 7.61 $ 7.66 $ 7.25 $ 8.75 $ 8.90
-------- -------- -------- -------- --------
Net investment income (net of $.18, $.17, $.22, $.10
and $.09, respectively, of interest expense) ... .58 .55 .51 .73 .91
Net realized and unrealized gain (losses) on
investments, short sales, futures and options .. .49 (.01) .65 (1.45) (.21)
-------- -------- -------- -------- --------
Net increase (decrease) from investment operations . 1.07 .54 1.16 (.72) .70
-------- -------- -------- -------- --------
Dividends from net investment income (.56) (.55) (.66) (.78) (.85)
Distributions in excess of net investment income ... -- (.04) -- -- --
Return of capital distribution ..................... -- -- (.09) -- --
-------- -------- -------- -------- --------
Total dividends and distributions ................ (.56) (.59) (.75) (.78) (.85)
-------- -------- -------- -------- --------
Net asset value, end of year* ...................... $ 8.12 $ 7.61 $ 7.66 $ 7.25 $ 8.75
======== ======== ======== ======== ========
Per share market value, end of year* ............... $ 67/8 $ 61/4 $ 71/4 $ 63/8 $ 83/8
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+ ........................... 19.68% (5.36%) 26.50% (15.31%) 1.01%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses# ................................ 1.02% 1.08% 1.08% 1.10% 1.03%
Net investment income .............................. 7.63% 7.36% 6.85% 9.21% 10.19%
SUPPLEMENTAL DATA:
Average net assets (in thousands) .................. $474,903 $473,056 $466,449 $496,707 $558,530
Portfolio turnover ................................. 220% 440% 267% 223% 121%
Net assets, end of year (in thousands) ............. $510,230 $478,085 $481,301 $455,651 $549,755
Reverse repurchase agreements outstanding,
end of year (in thousands) ....................... $228,530 $204,438 $214,438 $109,286 $ 74,700
Asset coverage++ ................................... $ 3,233 $ 3,339 $ 3,244 $ 5,169 $ 8,360
- -------------------
* NAV and market value are published in The Wall Street Journal each Monday.
# The ratios of operating expenses including interest expense to average net
assets were 3.44%, 3.38%, 4.08%, 2.32%, and 2.02% for the years 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.
</TABLE>
12
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK INCOME TRUST INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The BlackRock Income Trust Inc. (the "Trust"), a 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 information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determines that such price does not reflect its fair value, in which case it
will be valued at its fair value as determined by the Trust's Board of
Directors. Any securities or other assets for which such current market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Trust's Board of Directors.
Short-term securities which mature in 60 days or less are valued at amortized
cost, if their term to maturity from date of purchase is 60 days or less.
Short-term securities with a term to maturity greater than 60 days from the date
of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited. OPTION SELLING/PURCHASING: When the Trust sells
or purchases an option, an amount equal to the premium received or paid by the
Trust is recorded as a liability or an asset and is subsequently adjusted to the
current market value of the option written or purchased. Premiums received or
paid from writing or purchasing options which expire unexercised are treated by
the Trust on the expiration date as realized gains or losses. The difference
between the premium and the amount paid or received on effecting a closing
purchase or sale transaction, including brokerage commissions, is also treated
as a realized gain or loss. If an option is exercised, the premium paid or
received is added to the proceeds from the sale or cost of the purchase in
determining whether the Trust has realized a gain or a loss on investment
transactions. The Trust, as writer of an option, may have no control over
whether the underlying securities may be sold (call) or purchased (put) and as a
result bears the market risk of an unfavorable change in the price of the
security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly. In general, the Trust uses options to hedge a long or
short position or an overall portfolio that is longer or shorter than the
benchmark security. A call option gives the purchaser of the option the right
(but not obligation) to buy, and obligates the seller to sell (when the option
is exercised), the underlying position at the exercise price at any time or at a
specified time during the option period. A put option gives the holder the right
to sell and obligates the writer to buy the underlying position at the exercise
price at any time or at a specified time during the 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
13
<PAGE>
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: Swap options are similar to options on securities except that
instead of selling or purchasing the right to buy or sell a security, the writer
or purchaser of the swap option is granting or buying the right to enter into a
previously agreed upon interest rate swap agreement at any time before the
expiration of the option. Premiums received or paid from writing or purchasing
options are recorded as liabilities or assets and are subsequently adjusted to
the current market value of the option written or purchased. Premiums received
or paid from writing or purchasing options which 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 commission, is also treated as
a realized gain or loss. If an option is exercised, the premium paid or received
is added to the proceeds from the sale or cost of the purchase in determining
whether the Trust has realized a gain or loss on investment transactions.
The main risk that is associated with purchasing swap options is that the
swap option expires without being exercised. In this case, the option expires
worthless and the premium paid for the swap option is considered the loss. The
main risk that is associated with the writing of a swap option is the market
risk of an unfavorable change in the value of the interest rate swap underlying
the written swap option.
Swap options may be used by the Trust to manage the duration of the Trust's
portfolio reflecting the view of the Trust's management in the direction of
interest rates.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin 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. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. In the same sense, futures contracts can be
purchased to lengthen a portfolio that is shorter than its duration target.
Thus, by buying or selling futures contracts, the Trust can effectively "hedge"
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the purpose
of hedging its existing portfolio securities or securities the Trust intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Trust may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets. The Trust is also at the risk of not being able to
enter into a closing transaction for the futures contract because of an illiquid
secondary market. In addition, since futures are used to shorten or lengthen a
portfolio's duration, there is a risk that the portfolio may have temporarily
performed better without the hedge or that the Trust may lose the opportunity to
realize appreciation in the market price of the underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
dollar amount, will be recognized upon the termination of a short sale if the
market price is greater or less than the proceeds originally received.
SECURITIES LENDING: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on
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<PAGE>
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, 1997.
INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Rate swaps were conceived as asset/liability management tools. In more
complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are recognized
as unrealized gains or losses by "marking-to-market" to reflect the market value
of the swap. When the swap is terminated, the Trust will record a realized gain
or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and the Trust's basis in the contract, if any.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the mortgage swap. However, the Trust does not anticipate
non-performance by any counterparty.
INTEREST RATE CAPS: Interest rate caps are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate over a specified fixed or floating rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changes in short term rates. Owning interest rate
caps reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate cap. The asset or liability is subsequently adjusted
to the current market value of the interest rate cap purchased or sold. Changes
in the value of the interest rate cap are recognized as unrealized gains and
losses.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of the
portfolio and its exposure to changes in short-term interest rates. 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.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate floor. The asset or liability is subsequently adjusted
to the current market value of the interest rate floor purchased or sold.
Changes in the value of the interest rate floor are recognized as unrealized
gains and losses.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Trust accretes discount and amortizes premium on
securities purchased using the interest method. Expenses are recorded on the
accrual basis which may require the use of certain estimates by management.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and
distributions monthly, first from net investment income, then from realized
short-term capital gains and other sources, if necessary. Net long-term capital
gains, if any, in excess of loss carryforwards are distributed at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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<PAGE>
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 Investments Fund
Management LLC ("PIFM"), an indirect, wholly-owned subsidiary of The Prudential
Insurance Co. of America.
The investment fee paid to the Adviser is computed weekly and payable monthly
at an annual rate of 0.65% of the Trust's average weekly net assets. The
administration fee paid to PIFM is also computed weekly and payable monthly at
an annual rate of 0.20% of the first $500 million of the Trust's average weekly
net assets and 0.15% of any excess.
Pursuant to the agreements, the Adviser provides continuous supervision of
the investment portfolio and pays the compensation of officers of the trust.
PIFM pays occupancy and certain clerical and accounting costs of rhe Trust. The
Trust bears all other costs and expenses.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the year ended October 31, 1997 aggregated $1,587,314,094
and $1,527,682,678, 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, 1997, the Trust held .6% 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, 1997
was $688,184,038 and, accordingly, net unrealized appreciation for federal
income tax purposes was $35,829,953 (gross unrealized appreciation-$50,656,113;
gross unrealized depreciation-$14,826,160).
For federal income tax purposes, the Trust has a capital loss carryforward at
October 31, 1997 of approximately $81,496,600 of which approximately $264,400
will expire in 1998, approximately $15,072,600 will expire in 2001,
approximately $23,358,100 will expire in 2002, approximately $15,428,300 will
expire in 2003 and approximately $27,373,200 will expire in 2004. Such
carryforward is after utilization of approximately $10,860,700 to offset the
Trust's net taxable gains recognized in the year ended October 31, 1997.
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, 1997, the Trust entered into financial
futures contracts. Details of open contracts at October 31, 1997 are as follows:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION OCTOBER 31, TRADE APPRECIATION/
CONTRACTS TYPE DATE 1997 DATE (DEPRECIATION)
- --------- ---- ---------- ----------- -------- --------------
Long Positions:
1,000 10 yr. T-Note Dec 1997 $111,750,000 $111,580,250 $ 169,750
Short Positions:
1,084 30 yr. T-Bond Dec 1997 128,438,125 127,784,219 (653,906)
116 Eurodollar Dec 1997 27,336,885 027,226,566 (110,284)
111 Eurodollar Mar 1998 26,152,988 26,032,217 (120,771)
96 Eurodollar June 1998 22,604,400 22,491,971 (112,429)
86 Eurodollar Sept 1998 20,233,650 20,133,336 (100,314)
71 Eurodollar Dec 1998 16,686,775 16,603,554 (83,221)
-----------
$(1,011,175)
===========
The Trust entered into four interest rate caps. Under all agreements the
Trust receives the excess, if any, of a floating rate over a fixed rate. The
Trust paid a transaction fee for each agreement. Details of the caps are as
follows:
<TABLE>
<CAPTION>
NOTIONAL VALUE AT
AMOUNT FLOATING FIXED TERMINATION AMORTIZED OCTOBER 31, UNREALIZED
(000) RATE RATE DATE COST 1997 GAIN (LOSS)
- ----- ---- ---- ---- ---- ---- -----------
<C> <C> <C> <C> <C> <C> <C>
$50,000 3 mth LIBOR 6.00% 2/19/02 $ 1,386,885 $1,022,500 $ (364,385)
100,000 3 mth LIBOR 6.50% 4/4/02 3,175,163 1,454,620 (1,720,543)
100,000 3 mth LIBOR 7.00% 4/18/03 3,128,433 1,471,000 (1,657,433)
100,000 3 mth LIBOR 7.25% 4/23/03 2,629,956 1,233,000 (1,396,956)
----------- ---------- -----------
$10,320,437 $5,181,120 $(5,139,317)
=========== ========== ===========
</TABLE>
Details of open interest rate swaps at October 31, 1997 are as follows:
CURRENT
NOTIONAL
AMOUNT FIXED TERMINATION UNREALIZED
(000) TYPE RATE FLOATING RATE DATE DEPRECIATION
------- ---- ----- ------------- ----------- ------------
$ (20,000) Interest Rate 7.50% 1 month LIBOR0 4/25/02 $ (668,000)
(5,455) Forward Rate 7.235% 1 month LIBOR0 6/15/11 77,461
----------
$ (590,539)
==========
Details of open swaption at October 31, 1997 are as follows:
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION COST/ OCTOBER 31,
(000) TYPE RATE RATE DATE (PREMIUM) 1997
- ------- ---- ----- -------- ----------- --------- -----------
Purchased:
$150,000 Call 6.20% 3 month LIBOR 8/13/99 $2,238,750 $3,828,000
150,000 Put 7.25% 3 month LIBOR 5/12/00 6,795,000 3,465,000
Written:
(450,000) Call 6.10% 3 month LIBOR 2/23/98 $(1,071,000) $(3,901,500)
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
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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, 1997 was approximately $207,489,000 at a weighted
average interest rate of approximately 5.54%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the period was
$237,843,125 as of May 31, 1997, which was 32.92% of total assets.
DOLLAR ROLLS: The Trust enters into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities. The Trust is compensated by the interest earned
on the cash proceeds of the initial sale and by the lower repurchase price at
the future date. The Trust did not enter into dollar rolls during the year ended
October 31, 1997.
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, 1997, the Adviser owned 10,753
shares.
NOTE 6. DIVIDENDS
Since October 31, 1997, the Board of Directors of the Trust declared dividends
from undistributed earnings of $0.046875 per share payable November 28, 1997 to
shareholders of record on November 14, 1997.
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THE BLACKROCK INCOME TRUST INC.
REPORT OF INDEPENDENT AUDITORS
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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, 1997 and the related statements of operations for the year then
ended and of changes in net investment assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at October
31, 1997, 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, 1997, and the results of its operations, the changes
in its net investment assets and its financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
New York, New York
December 12, 1997
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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, 1997.
During the fiscal year ended October 31, 1997, the Trust paid dividends
and distributions of $0.56 per share from net investment income. For federal
income tax purposes, the aggregate of any dividends and short-term capital gains
distributions you received are reportable in your 1997 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 1997 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 1998.
- --------------------------------------------------------------------------------
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.
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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.
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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 $50 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 125 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.
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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 33-1/3% of total assets.
Leverage also increases the duration (or price volatility of the net assets) of
the Trust, which can improve the performance of the 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.
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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.
22
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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 BACKED SECURITIES: Arrangements in which a pool of assets is
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.
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BLACKROCK
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
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
Frank Smith, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of any securities.
THE BLACKROCK INCOME TRUST INC.
C/O PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 227-7BFM
[LOGO] Printed on recycled paper 09247F-10-0
THE BLACKROCK
INCOME
TRUST INC.
============================
ANNUAL REPORT
OCTOBER 31, 1997
