UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21506
Name of Fund: BlackRock Capital and Income Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, BlackRock Capital and Income Strategies Fund, Inc., 800
Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box
9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 12/31/06
Date of reporting period: 01/01/06 - 12/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY
REAL ESTATE
BlackRock Capital and Income
Strategies Fund, Inc.
ANNUAL REPORT DECEMBER 31, 2006
(BLACKROCK logo)
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock Capital and Income Strategies Fund, Inc. seeks to provide
shareholders with current income and capital appreciation. The Fund seeks
to achieve its investment objectives by investing in a portfolio of equity
and debt securities of U.S. and foreign issuers.
This report, including the financial information herein, is transmitted to
shareholders of BlackRock Capital and Income Strategies Fund, Inc. for their
information. It is not a prospectus. The Fund leverages its Common Stock to
provide Common Stock shareholders with a potentially higher rate of return.
Leverage creates risk for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of Common Stock
shares, and the risk that fluctuations in short-term interest rates may reduce
the Common Stock's yield. Past performance results shown in this report should
not be considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-441-7762; (2) at
www.blackrock.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.blackrock.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
BlackRock Capital and Income Strategies Fund, Inc.
P.O. Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS... logo)
It's Fast, Convenient, & Timely!
BlackRock Capital and Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
BlackRock Capital and Income Strategies Fund, Inc. utilizes leveraging through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term interest or
dividend rates, which normally will be lower than the income earned by the
Fund on its longer-term portfolio investments. To the extent that the total
assets of the Fund (including the assets obtained from leverage) are invested
in higher-yielding portfolio investments, the Fund's Common Stock shareholders
are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend
rates on any Preferred Stock, if the Fund were to issue the Preferred Stock)
may reduce the Common Stock's yield and negatively impact its net asset value
and market price. If the income derived from securities purchased with assets
received from leverage exceeds the cost of leverage, the Fund's net income
will be greater than if leverage had not been used. Conversely, if the income
from the securities purchased is not sufficient to cover the cost of leverage,
the Fund's net income will be less than if leverage had not been used, and
therefore the amount available for distribution to Common Stock shareholders
will be reduced.
Share Repurchase Program
On February 17, 2006, the Board of Directors of Capital and Income Strategies
Fund, Inc. (CII--the "Fund") authorized the Fund, at the discretion of the
Fund officers, to engage in periodic open market repurchases of up to 5% of
the Fund's outstanding Common Stock. As of December 31, 2006, the Fund had
repurchased a total of 641,500 shares, representing 5% of the outstanding
shares as of April 28, 2006. The shares were repurchased at a weighted average
price, including transaction costs, of $18.145, which was 17.5% below the
average daily net asset value of $21.99 for the period during the repurchase.
Portfolio Information as of December 31, 2006
Percent of
Total
Asset Mix Investments
Common Stocks 58.3%
Preferred Stocks 18.8
Foreign Government Obligations 9.9
Corporate Bonds 6.4
Capital Trusts 2.0
Trust Preferreds 0.9
Municipal Bonds 0.4
Real Estate Investments Trusts 0.2
Other* 3.1
* Includes portfolio holdings in options and short-term investments.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
A Letter to Shareholders
Dear Shareholder
As 2007 begins, we are able to look back on 2006 as a volatile, but ultimately,
a positive year for most major markets. Returns for the annual and semi-annual
periods ended December 31, 2006, were as follows:
Total Returns as of December 31, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) +12.74% +15.79%
Small cap U.S. equities (Russell 2000 Index) + 9.38 +18.37
International equities (MSCI Europe, Australasia, Far East Index) +14.69 +26.34
Fixed income (Lehman Brothers Aggregate Bond Index) + 5.09 + 4.33
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 4.55 + 4.84
High yield bonds (Credit Suisse High Yield Index) + 8.14 +11.92
After raising the target short-term interest rate 17 times between June 2004
and June 2006, the Federal Reserve Board (the Fed) finally opted to pause on
August 8, 2006. This left the federal funds rate at 5.25%, where it remained
through year-end. In interrupting its two-year interest rate-hiking campaign,
the Fed acknowledged that economic growth is slowing, led by a downturn in the
housing market, but has maintained a cautionary view on inflation.
Overall, it was a good 12 months for U.S. equities, despite a significant
correction in the middle of the year that was largely triggered by rising
interest rates, inflation fears, elevated oil prices and geopolitical
uncertainties. Nevertheless, strong corporate earnings, abundant liquidity and
record merger-and-acquisition activity provided a solid backdrop for stocks.
Many international equity markets (with the notable exception of Japan)
performed even better, outpacing U.S. stocks for the fifth consecutive year.
Strength was especially notable in European equities and select emerging
markets.
Bonds experienced a more modest annual return than stocks. Interest rates and
bond yields moved higher for much of the year as bond prices, which move
opposite of yields, declined. Prices began to improve in the summer as the
economy showed signs of weakening and the Fed paused. Notably, the Treasury
curve remained inverted for much of 2006. The 10-year Treasury yield ended
December at 4.71%, well below the federal funds rate.
As we begin a new year, investors are left with a few key questions: Will the
U.S. economy achieve a soft landing, will the Fed reverse its prior policy and
cut interest rates, and how might these outcomes impact the investment
climate. As you navigate the uncertainties inherent in the financial markets,
we encourage you to start the year by reviewing your investment goals with
your financial professional and making portfolio changes, as needed. For more
reflection on 2006 and our thoughts on the year ahead, please ask your
financial professional for a copy of "What's Ahead in 2007: An Investment
Perspective," or view it online at www.blackrock.com/funds. We thank you for
trusting BlackRock with your investment assets, and we look forward to
continuing to serve you in the new year and beyond.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
A Discussion With Your Fund's Portfolio Managers
The Fund provided shareholders with an attractive level of income during the
fiscal year while continuing to protect investor principal.
How did the Fund perform during the fiscal year in light of the existing
market and economic conditions?
For the 12-month period ended December 31, 2006, the Common Stock of BlackRock
Capital and Income Strategies Fund, Inc. (formerly Capital and Income
Strategies Fund, Inc.) had net annualized yields of 3.93% and 4.41%, based on
a year-end per share net asset value of $22.91 and a per share market price of
$20.41, respectively, and $0.900 per share income dividends. Over the same
period, the total investment return on the Fund's Common Stock was +21.70%,
based on a change in per share net asset value from $20.31 to $22.91, and
assuming reinvestment of all distributions.
For the same 12-month period, the Fund's composite benchmark returned
+14.62%*, while its comparable Lipper category of Income and Preferred Stock
Funds had an average return of +13.90%. (Funds in this Lipper category
normally seek a high level of current income through investment in income-
producing stocks, bonds and money market instruments, or funds in the category
may invest primarily in preferred securities, often considering tax-code
implications.)
Consistent with its stated investment objective, the Fund was able to provide
investors with current income while also seeking capital appreciation. The
Fund's shareholders realized a level of cash flow during the period.
It was a volatile year for financial markets, although both equities and bonds
ultimately landed in positive territory. Fixed income markets struggled early
in the year amid solid economic growth and rising commodity prices, especially
oil and gasoline prices. Stocks, meanwhile, successfully weathered volatility
and posted their best first-quarter gains in several years. Momentum shifted
toward mid-year as a far-reaching market correction sent the average U.S.
stock 12% lower. Emerging markets were particularly hard hit. The pullback
could be attributed to several factors, but primarily, it appeared that the
lagged effects of higher interest rates and oil prices were finally taking
their toll on the economy and stock prices. In addition, a resurgence of
inflation fears had prompted the Federal Reserve Board (the Fed) to continue
its interest rate tightening campaign through June.
* The Fund's composite benchmark is a blend of the Merrill Lynch
Preferred Stock DRD-Eligible Index; the JPMorgan Emerging
Markets Bond Global Index; three-month LIBOR; and the
S&P 500/Citigroup Value Index.
Conditions began to improve in the summer. Yields began to fall, and bond
prices increase, as economic growth softened and the Fed refrained from
raising its target interest rate at its August 8 meeting. Oil prices, after
reaching an all-time high near $78 per barrel in July, also began to recede
and ended the year where they started - at $61 per barrel. Stocks found favor
in these developments as well and generally climbed back above the levels they
reached prior to the market's retrenchment.
For the six-month period ended December 31, 2006, the total investment return
on the Fund's Common Stock was +17.01%, based on a change in per share net
asset value from $20.43 to $22.91, and assuming reinvestment of all
distributions.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
Within the equity portion of the portfolio, one of the most significant shifts
over the past year involved deemphasizing energy and turning some of that
focus toward health care. This reflects the changing leadership in the
marketplace and the specific values we have been able to find. Notably, as
indicated in our last report to shareholders, we have found attractive
valuations in several large, multinational companies and added these types of
investments to the equity portfolio. This contributed to performance during
the year.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
The preferred portfolio remained underweight in agency paper in favor of QDI
(qualified dividend income)-eligible securities, which offer more attractive
yields. Preferred securities underperformed corporate bonds in the first half
of 2006 due to the dramatic increase in interest rates, which negatively
impacted the asset class. This scenario improved as the market rallied in the
second half of the year, resulting in strong performance. At period-end, our
duration position closely matched that of our benchmark.
Within the emerging markets segment of the portfolio, we continued to evaluate
our country exposures and make adjustments based on our assessment of risk and
reward in individual markets. We focused on making relative value trades and
sought to take advantage of opportunities to enhance yield whenever possible.
Of final note, the Fund was approximately 28% leveraged at December 31, 2006.
For a complete discussion of the benefits and risks of leveraging, see page 2
of this report to shareholders.
How would you characterize the Fund's position at the close of the period?
The Fund's allocation at the end of the year comprised 62% U.S. large cap
value stocks, 19% preferred stocks, 12% short-term emerging markets debt
and 7% intermediate-/long-term emerging markets bonds. This compared to 58%
U.S. large cap value stocks, 22% preferred stocks, 14% short-term emerging
markets debt and 6% intermediate-/long-term emerging markets bonds on
December 31, 2005.
At year-end, the equity portfolio was overweight versus the S&P 500 Citigroup
Value Index in energy, consumer staples, information technology, health care
and consumer discretionary. It had underweights in financials, utilities,
industrials and telecommunication services. We continue to find that large-
capitalization companies offer a more compelling value proposition as we enter
a potentially slower phase of economic growth. We have been encouraged by the
economy, which has led to healthy corporate profits, strong corporate balance
sheets and an active merger-and-acquisition landscape. This has translated
into healthy equity markets. We believe a Goldilocks economy (not too hot, not
too cold) has begun to take hold. While we expect these factors should remain
in place, we are mindful that weakness in the housing market could lead to a
slower rate of growth for the economy in the future.
Within the preferred portfolio, we maintain a positive outlook based on
attractive valuations and abundant liquidity. In addition, we believe the
sector remains largely insulated from leveraged buyout risk. We continue to
emphasize QDI- and floating rate DRD (dividends received deduction)-eligible
securities for their attractive yields.
In emerging market bonds, the Fund ended the year overweight in Argentina, the
Dominican Republic, Peru and the Philippines, where we expect continued
improvement in credit fundamentals to lead to spread tightening. The portfolio
maintained exposure to local currency markets in Turkey, Brazil and Mexico,
where we are seeking to profit from the interest rate easing policies already
under way. The emerging markets portfolio is also positioned to benefit from
Asian currencies' appreciation trend against the U.S. dollar through exposure
to high-yielding currencies like the Indonesian Rupiah and Philippine Peso.
Finally, we are poised to take advantage of potential credit upgrades among
sovereign issues.
The Fund will continue to monitor market and economic conditions in an effort
to make the most effective use of its strategic allocations.
Scott Amero
Co-Portfolio Manager, Fixed Income Investments
John Burger
Vice President and Co-Portfolio Manager,
Fixed Income Investments
Daniel Chen
Co-Portfolio Manager, Fixed Income Investments
Robert J. Martorelli
Vice President and Co-Portfolio Manager, Equity Investments
Kevin M. Rendino
Vice President and Co-Portfolio Manager, Equity Investments
January 31, 2007
Effective October 2, 2006, Scott Amero and Daniel Chen joined the Fund's
portfolio management team and share responsibility with Mr. Burger and
Mr. Rendino for the management of the Fund's portfolio and selection of its
investments. Mr. Amero is a Managing Director of BlackRock, co-head of the
fixed income portfolio management team and a member of the Management
Committee and the Investment Strategy Group. He joined BlackRock in 1990. Mr.
Chen is a Vice President of and portfolio manager with BlackRock and a member
of the Investment Strategy Group. He joined BlackRock in 1999.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Schedule of Investments as of December 31, 2006 (in U.S. dollars)
Preferred Securities
Face
Industry Capital Trusts Amount Value
Commercial Banks--2.7%
Dresdner Funding Trust I, 8.151%
due 6/30/2031 (f) $1,000,000 $ 1,204,451
Mizuho JGB Investment LLC,
9.87% (c)(f)(j) 2,000,000 2,119,430
SB Treasury Co. LLC, 9.40% (c)(f)(j) 2,000,000 2,105,042
Westpac Capital Trust III,
5.819% (c)(f)(j) 2,000,000 1,983,220
Total Capital Trusts
(Cost--$7,689,590)--2.7% 7,412,143
Shares
Preferred Stocks Held
Capital Markets--2.3%
Deutsche Bank Capital Funding
Trust VIII, 6.375% 10,000 258,125
Goldman Sachs Group, Inc.
Series A, 3.91% 80,000 2,104,000
Lehman Brothers Holdings,
Inc., 6.50% 40,000 1,024,000
Lehman Brothers Holdings, Inc.
Series G, 3% 40,000 1,027,500
Morgan Stanley Group, Inc.
Series A, 6.186% 80,000 2,028,000
--------------
6,441,625
Commercial Banks--5.0%
Banco Santander Central Hispano SA
Series 1, 6.41% 60,000 1,521,600
First Republic Bank, 6.25% 27,734 717,617
First Tennessee Bank NA, 3.90% (c)(f) 1,674 1,727,359
HSBC USA, Inc. Series F, 3.50% 80,000 2,072,504
Royal Bank of Scotland Group Plc
Series N, 6.35% 60,000 1,530,600
SG Preferred Capital II, 6.302% 2,000 2,081,250
Santander Finance Preferred SA
Unipersonal, 6.80% 50,000 1,253,123
Sovereign Bancorp, Inc. Series C,
7.30% (b) 40,000 1,114,400
SunTrust Banks, Inc., 5.92% 40,000 1,036,000
U.S. Bancorp Series B, 5.56% 40,000 1,028,000
--------------
14,082,453
Diversified Financial Services--1.0%
Bank of America Corp.:
Series D, 6.20% 9,200 238,280
Series E, 5.718% 49,400 1,232,530
CIT Group, Inc. Series A, 6.35% 50,000 1,303,500
--------------
2,774,310
Electric Utilities--3.2%
Connecticut Light & Power, 5.28% 11,109 497,475
Delmarva Power & Light, 4.20% 11,394 1,176,075
Delmarva Power & Light, 4.28% 11,250 1,172,109
Entergy Arkansas, Inc., 6.45% 6,800 171,275
Entergy Louisiana LLC, 6.95% 12,000 1,236,000
Interstate Power & Light Co.
Series B, 8.375% 40,000 1,252,000
Preferred Securities
Shares
Industry Preferred Stocks Held Value
Electric Utilities (concluded)
PPL Electric Utilities Corp., 6.25% 20,000 $ 521,876
Peco Energy Co. Series D, 4.68% 10,000 882,500
Southern California Edison Co.,
5.349% 20,000 2,030,000
--------------
8,939,310
Food Products--1.4%
General Mills, Inc., 4.50% 2,000 1,997,800
HJ Heinz Finance Co., 6.226% (f) 20 2,052,500
--------------
4,050,300
Gas Utilities--0.3%
Southern Union Co., 7.55% 35,000 892,500
Insurance--4.9%
ACE Ltd. Series C, 7.80% 40,000 1,036,000
Aegon NV, 6.375% 80,000 2,072,504
Arch Capital Group Ltd., 8% 40,000 1,058,752
Aspen Insurance Holdings Ltd.,
7.401% 10,000 246,250
Axis Capital Holdings Ltd.
Series A, 7.25% 8,000 206,480
Endurance Specialty Holdings Ltd.
Series A, 7.75% 48,000 1,246,080
Genworth Financial, Inc.
Series A, 5.25% 30,000 1,499,062
MetLife, Inc. Series B, 6.50% 42,000 1,105,020
Principal Financial Group
Series B, 6.518% 32,000 870,720
Prudential Plc, 6.75% 80,000 2,051,200
Zurich RegCaPS Funding Trust,
6.58% (c)(f) 2,200 2,267,375
--------------
13,659,443
Multi-Utilities--0.8%
Pacific Gas & Electric Co. Series A, 6% 80,000 2,136,800
Oil, Gas & Consumable Fuels--0.7%
Apache Corp. Series B, 5.68% (b) 19,500 1,944,517
Thrifts & Mortgage Finance--5.7%
Fannie Mae Series I, 5.375% 25,000 1,205,000
Fannie Mae Series L, 5.125% 59,350 2,650,571
Fannie Mae Series O, 7% (c) 45,000 2,399,063
Freddie Mac Series M, 3.93% 150,000 6,562,500
Freddie Mac Series S, 5.87% 40,000 2,000,000
Washington Mutual Capital Trust
2001 Series K, 6.09% 40,000 1,013,200
--------------
15,830,334
Total Preferred Stocks
(Cost--$68,489,183)--25.3% 70,751,592
Real Estate Investment Trusts
Real Estate Investment Trusts (REITs)--0.2%
Public Storage, Inc., 6.75% 25,000 630,470
Total Real Estate Investment Trusts
(Cost--$625,000)--0.2% 630,470
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Preferred Securities
Face
Industry Trust Preferreds Amount Value
Gas Utilities--0.4%
Southwest Gas Capital II, 7.70%
due 9/15/2043 $1,000,000 $ 1,043,359
Insurance--0.8%
ABN AMRO North America Capital
Funding Trust I, 6.968%
due 9/15/2010 (c)(f) 2,000,000 2,090,532
Thrifts & Mortgage Finance--0.0%
Countrywide Capital V, 7%
due 11/01/2066 125,000 126,000
Total Trust Preferreds
(Cost--$3,235,004)--1.2% 3,259,891
Total Preferred Securities
(Cost--$80,038,777)--29.4% 82,054,096
Corporate Bonds
Commercial Banks--3.2%
ALB Finance B.V., 9.25%
due 9/25/2013 (f) 140,000 138,775
Alfa MTN Issuance Ltd., 7.75%
due 2/09/2007 500,000 500,260
Alliance Bank JSC, 9% due 6/27/2008 750,000 762,263
Bangkok Bank PCL, 8.75%
due 3/15/2007 1,350,000 1,357,150
Export-Import Bank of Korea, 4.25%
due 11/27/2007 700,000 692,392
ICICI Bank Ltd., 4.75%
due 10/22/2008 750,000 735,372
Kazkommerts International B.V.:
10.125% due 5/08/2007 750,000 759,293
8.50% due 4/16/2013 200,000 213,874
8% due 11/03/2015 100,000 103,625
Lloyds TSB Bank Plc, 6.90% (j) 2,000,000 2,020,000
RSHB Capital SA for OJSC Russian
Agricultural Bank, 7.175%
due 5/16/2013 220,000 231,284
SunTrust Preferred Capital I,
5.853% (c)(j) 225,000 226,717
VTB Capital SA for Vneshtorgbank,
5.97% due 8/01/2008 (c)(f) 1,200,000 1,200,600
--------------
8,941,605
Diversified Financial Services--0.3%
AC International Finance Ltd.,
8.125% due 2/21/2008 900,000 921,330
Diversified Telecommunication Services--0.8%
Empresa Brasileira de Telecom SA
Series B,11% due 12/15/2008 750,000 823,125
Excelcomindo Finance Co. B.V., 8%
due 1/27/2009 1,175,000 1,198,500
Philippine Long Distance Telephone
Co., 7.85% due 3/06/2007 300,000 300,750
--------------
2,322,375
Face
Industry Corporate Bonds Amount Value
Electric Utilities--0.2%
AES Panama SA, 6.35%
due 12/21/2016 (f) $ 110,000 $ 107,931
Tenaga Nasional Bhd, 7.20%
due 4/29/2007 500,000 502,222
--------------
610,153
Independent Power Producers
& Energy Traders--0.1%
Aes Dominicana Energia Finance SA,
11% due 12/13/2015 (f) 150,000 157,500
Industrial Conglomerates--0.1%
SM Investments Corp., 8%
due 10/16/2007 250,000 253,124
Insurance--0.5%
AXA SA, 6.379% (c)(f)(j) 350,000 345,577
Financial Security Assurance Holdings
Ltd., 6.40% due 12/15/2066 (c)(f) 395,000 399,552
MetLife, Inc., 6.40%
due 12/15/2036 (c) 600,000 602,764
--------------
1,347,893
Metals & Mining--0.1%
Vale Overseas Ltd., 6.875%
due 11/21/2036 300,000 307,694
Oil, Gas & Consumable Fuels--2.6%
Gaz Capital for Gazprom, 6.212%
due 11/22/2016 (f) 105,000 105,735
MEI Euro Finance Ltd.,10%
due 3/19/2007 250,000 250,000
Morgan Stanley Bank AG for OAO
Gazprom, 9.625% due 3/01/2013 550,000 655,380
Pemex Project Funding Master Trust:
8.85% due 9/15/2007 900,000 919,800
6.125% due 8/15/2008 300,000 302,400
Petrobras Energia SA:
9% due 1/30/2007 610,000 609,238
9% due 5/01/2009 500,000 528,750
Petroliam Nasional Bhd, 7.75%
due 8/15/2015 175,000 204,660
Salomon Brothers AG for OAO
Gazprom, 9.125% due 4/25/2007 1,920,000 1,939,968
YPF SA Series A, 7.75%
due 8/27/2007 1,750,000 1,767,500
--------------
7,283,431
Paper & Forest Products--0.1%
SINO-FOREST Corp., 9.125%
due 8/17/2011 (f) 250,000 270,313
Wireless Telecommunication Services--0.7%
Mobile Telesystems Finance SA,
9.75% due 1/30/2008 625,000 647,813
UBS Luxembourg SA for OJSC
Vimpel Communications:
10% due 6/16/2009 1,000,000 1,078,300
8.25% due 5/23/2016 163,000 171,329
--------------
1,897,442
Total Corporate Bonds
(Cost--$24,315,059)--8.7% 24,312,860
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Foreign Government Face
Obligations Amount Value
Foreign Government Obligations--13.3%
Argentina Bonos, 5.59%
due 8/03/2012 (c) $2,178,750 $ 2,058,573
Argentina Government International
Bond:
8.28% due 12/31/2033 (a) 267,068 290,437
.62% due 12/15/2035 (g) 300,000 39,900
Brazilian Government International
Bond:
10% due 1/16/2007 1,670,000 1,670,000
11.50% due 3/12/2008 2,290,000 2,456,025
10.50% due 7/14/2014 1,450,000 1,834,250
8% due 1/15/2018 450,000 500,400
Bulgaria Government International
Bond, 8.25% due 1/15/2015 30,000 35,517
Chile Government International
Bond:
5.625% due 7/23/2007 1,000,000 1,001,400
5.50% due 1/15/2013 110,000 110,814
Colombia Government International
Bond:
7.625% due 2/15/2007 500,000 500,000
8.625% due 4/01/2008 1,420,000 1,476,800
11.75% due 2/25/2020 180,000 261,450
7.375% due 9/18/2037 220,000 236,170
Dominican Republic International
Bond, 9.04% due 1/23/2018 142,087 162,832
Ecuador Government International
Bond,10% due 8/15/2030 133,000 98,420
Federative Republic of Brazil:
12.50% due 1/05/2022 (a) 375,000 200,094
10.25% due 6/17/2013 1,000,000 1,235,000
Indonesia Government International
Bond:
6.75% due 3/10/2014 400,000 418,636
7.50% due 1/15/2016 (f) 325,000 355,875
Mexico Government International
Bond:
9.875% due 1/15/2007 1,170,000 1,170,000
8.30% due 8/15/2031 560,000 715,960
Series A, 6.75% due 9/27/2034 550,000 594,000
Panama Government International
Bond:
8.25% due 4/22/2008 450,000 463,500
7.25% due 3/15/2015 150,000 162,375
8.875% due 9/30/2027 435,000 552,450
Peru Government International
Bond:
9.125% due 1/15/2008 1,590,000 1,650,420
9.875% due 2/06/2015 550,000 694,650
8.75% due 11/21/2033 175,000 230,125
Philippine Government International
Bond:
7.50% due 9/11/2007 1,700,000 1,718,120
8.375% due 2/15/2011 250,000 273,750
9% due 2/15/2013 1,405,000 1,622,775
8.875% due 3/17/2015 180,000 213,075
Republic of Peru, Front-Loaded
Interest Rate Reduction Bonds,
5% due 3/07/2017 (a)(c) 134,400 133,392
Russia Government International Bond:
10% due 6/26/2007 2,595,000 2,650,014
11% due 7/24/2018 375,000 541,650
5% due 3/31/2030 530,000 598,317
Foreign Government Face
Obligations Amount Value
Foreign Government Obligations (concluded)
Turkey Government International
Bond:
10% due 9/19/2007 $ 1,000,000 $ 1,030,470
11.50% due 1/23/2012 715,000 870,513
7% due 9/26/2016 340,000 345,525
7.375% due 2/05/2025 500,000 512,500
6.875% due 3/17/2036 230,000 219,650
Ukraine Government International
Bond:
11% due 3/15/2007 345,432 348,795
7.65% due 6/11/2013 (f) 50,000 54,063
Ukraine Ministry of Finance, 6.58%
due 11/21/2016 (f) 125,000 125,000
United Mexican States, 8.125%
due 12/30/2019 375,000 455,625
Uruguay Government International
Bond:
9.25% due 5/17/2017 200,000 244,500
7.875% due 1/15/2033 (h) 273,345 304,780
Venezuela Government International
Bond:
9.125% due 6/18/2007 1,710,000 1,727,100
5.375% due 8/07/2010 360,000 353,700
10.75% due 9/19/2013 1,125,000 1,397,813
7.65% due 4/21/2025 40,000 43,600
9.25% due 9/15/2027 50,000 63,750
Series DL, 6.25%
due 12/18/2007 (c) 190,444 190,444
Total Foreign Government Obligations
(Cost--$36,483,228)--13.3% 37,214,994
Municipal Bonds
Municipal Bonds--0.6%
Dresdner Bank AG for City of Kiev,
8.75% due 8/08/2008 1,100,000 1,139,270
Dresdner Bank AG for Kyivstar GSM:
10.375% due 8/17/2009 450,000 490,820
7.75% due 4/27/2012 100,000 103,207
Total Municipal Bonds
(Cost--$1,728,570)--0.6% 1,733,297
Shares
Industry Common Stocks Held
Aerospace & Defense--5.3%
Honeywell International, Inc. 69,200 3,130,608
Lockheed Martin Corp. 30,000 2,762,100
Northrop Grumman Corp. 60,700 4,109,390
Raytheon Co. 91,800 4,847,040
--------------
14,849,138
Beverages--0.6%
Coca-Cola Enterprises, Inc. 77,700 1,586,634
Capital Markets--3.4%
The Bank of New York Co., Inc. 125,000 4,921,250
Morgan Stanley 56,600 4,608,938
--------------
9,530,188
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Chemicals--1.0%
E.I. du Pont de Nemours & Co. 57,400 $ 2,795,954
Commercial Banks--2.3%
Wells Fargo & Co. 182,600 6,493,256
Communications Equipment--0.7%
Motorola, Inc. 82,500 1,696,200
Nortel Networks Corp. (e) 9,800 261,954
--------------
1,958,154
Computers & Peripherals--4.4%
Hewlett-Packard Co. 69,800 2,875,062
International Business Machines Corp. 72,000 6,994,800
Sun Microsystems, Inc. (e) 450,000 2,439,000
--------------
12,308,862
Diversified Financial Services--6.6%
Bank of America Corp. 82,727 4,416,794
Citigroup, Inc. 115,190 6,416,083
JPMorgan Chase & Co. 158,772 7,668,688
--------------
18,501,565
Diversified Telecommunication
Services--3.7%
AT&T Inc. 95,400 3,410,550
BellSouth Corp. 71,600 3,373,076
Verizon Communications, Inc. 93,100 3,467,044
--------------
10,250,670
Electric Utilities--2.5%
FPL Group, Inc. 60,800 3,308,736
The Southern Co. 100,900 3,719,174
--------------
7,027,910
Energy Equipment & Services--2.5%
BJ Services Co. 46,200 1,354,584
GlobalSantaFe Corp. 68,300 4,014,674
Halliburton Co. 48,600 1,509,030
--------------
6,878,288
Food Products--3.8%
Cadbury Schweppes Plc (b) 10,400 446,472
General Mills, Inc. (e) 77,500 4,464,000
Kraft Foods, Inc. 42,100 1,502,970
Unilever NV (b) 153,100 4,171,975
--------------
10,585,417
Health Care Equipment & Supplies--1.8%
Baxter International, Inc. 110,100 5,107,539
Hotels, Restaurants & Leisure--1.2%
McDonald's Corp. 77,000 3,413,410
Household Durables--1.5%
Koninklijke Philips Electronics NV 68,600 2,577,988
Sony Corp. (b) 38,100 1,631,823
--------------
4,209,811
Household Products--1.6%
Kimberly-Clark Corp. 65,700 4,464,315
Shares
Industry Common Stocks Held Value
IT Services--1.2%
Unisys Corp. (e) 436,100 $ 3,419,024
Industrial Conglomerates--3.1%
General Electric Co. 122,800 4,569,388
Tyco International Ltd. 128,700 3,912,480
--------------
8,481,868
Insurance--6.8%
The Allstate Corp. 35,600 2,317,916
American International Group, Inc. 51,200 3,668,992
Genworth Financial, Inc. Class A 46,200 1,580,502
Hartford Financial Services Group, Inc. 36,100 3,368,491
Marsh & McLennan Cos., Inc. 54,900 1,683,234
The St. Paul Travelers Cos., Inc. 79,500 4,268,355
XL Capital Ltd. Class A 30,500 2,196,610
--------------
19,084,100
Machinery--0.8%
Deere & Co. 24,100 2,291,187
Media--5.9%
Comcast Corp. Special Class A (e) 97,300 4,074,924
Gannett Co., Inc. 27,000 1,632,420
Idearc Inc. (e) 6,045 173,189
Interpublic Group of Cos., Inc. (e) 143,600 1,757,664
Time Warner, Inc. 267,600 5,828,328
Walt Disney Co. 85,200 2,919,804
--------------
16,386,329
Metals & Mining--1.4%
Alcan, Inc. 37,400 1,822,876
Alcoa, Inc. 69,500 2,085,695
--------------
3,908,571
Multi-Utilities--1.5%
Consolidated Edison, Inc. 47,200 2,268,904
Dominion Resources, Inc. 22,000 1,844,480
--------------
4,113,384
Office Electronics--1.1%
Xerox Corp. (e) 176,500 2,991,675
Oil, Gas & Consumable Fuels--5.4%
Chevron Corp. 46,400 3,411,792
Consol Energy, Inc. 13,500 433,755
Devon Energy Corp. 13,300 892,164
Exxon Mobil Corp. 121,000 9,272,230
Peabody Energy Corp. 26,700 1,078,947
--------------
15,088,888
Pharmaceuticals--4.9%
GlaxoSmithKline Plc (b) 62,700 3,308,052
Johnson & Johnson 37,900 2,502,158
Pfizer, Inc. 170,700 4,421,130
Schering-Plough Corp. 137,100 3,241,044
Wyeth 4,600 234,232
--------------
13,706,616
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Schedule of Investments (concluded) (in U.S. dollars)
Shares
Industry Common Stocks Held Value
Semiconductors & Semiconductor
Equipment--2.5%
Fairchild Semiconductor
International, Inc. (e) 149,700 $ 2,516,457
Intel Corp. 85,900 1,739,475
LSI Logic Corp. (e) 311,800 2,806,200
--------------
7,062,132
Specialty Retail--0.8%
The Gap, Inc. 108,700 2,119,650
Wireless Telecommunication
Services--0.5%
Sprint Nextel Corp. 69,900 1,320,411
Total Common Stocks
(Cost--$181,276,406)--78.8% 219,934,946
Beneficial
Short-Term Securities Interest
BlackRock Liquidity Series,
LLC Cash Sweep Series,
5.26% (d)(i) $12,010,406 12,010,406
Total Short-Term Securities
(Cost--$12,010,406)--4.3% 12,010,406
Number of
Options Purchased Contracts Value
Call Options Purchased
Baxter International, Inc., expiring
January 2007 at USD 45 280 $ 8,400
Total Options Purchased
(Premiums Paid--$34,955)--0.0% 8,400
Total Investments
(Cost--$335,887,401)--135.1% 377,268,999
Options Written
Call Options Written
Baxter International, Inc., expiring
May 2007 at USD 50 280 (31,080)
Comcast Corp. Special Class A, expiring
January 2007 at USD 40 438 (99,426)
Northrop Grumman Corp., expiring
February 2007 at USD 70 88 (7,040)
Wells Fargo & Co., expiring
January 2007 at USD 35 2,000 (181,800)
Total Options Written
(Premiums Received--$461,466)--(0.1%) (319,346)
Total Investments, Net of Options Written
(Cost--$335,425,935*)--135.0% 376,949,653
Liabilities in Excess of Other Assets--(35.0%) (97,677,347)
--------------
Net Assets--100.0% $ 279,272,306
==============
* The cost and unrealized appreciation (depreciation) of investments,
net of options written, as of December 31, 2006, as computed for federal
income tax purposes, were as follows:
Aggregate cost $ 336,158,646
================
Gross unrealized appreciation $ 42,670,390
Gross unrealized depreciation (1,879,383)
----------------
Net unrealized appreciation $ 40,791,007
================
(a) Brady Bonds are securities which have been issued to refinance
commercial bank loans and other debt. The risk associated with these
instruments is the amount of any uncollateralized principal or interest
payments since there is a high default rate of commercial bank loans by
countries issuing these securities.
(b) Depositary receipts.
(c) Floating rate security.
(d) Investments in companies considered to be an affiliate of the Fund,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
BlackRock Liquidity Series, LLC
Cash Sweep Series $ (138,799) $ 277,973
(e) Non-income producing security.
(f) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(g) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(h) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(i) Represents the current yield as of December 31, 2006.
(j) The security is a perpetual bond and has no definite maturity date.
o Swaps outstanding as of December 31, 2006 were as follows:
Notional Unrealized
Amount Appreciation
Pay a fixed rate of 5.076% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires December 2016 $ 1,800,000 $ 14,752
o For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used by
one or more widely recognized market indexes or ratings group indexes,
and/or as defined by Fund management. This definition may not apply for
purposes of this report, which may combine industry sub-classifications
for reporting ease. Industries are shown as a percent of net assets.
These industry classifications are unaudited.
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Statement of Assets, Liabilities and Capital
As of December 31, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$323,842,040) $ 365,250,193
Investments in affiliated securities, at value (identified cost--$12,010,406) 12,010,406
Cash 1,826,353
Options purchased, at value (premiums paid--$34,955) 8,400
Unrealized appreciation on swaps 14,752
Receivables:
Securities sold $ 2,035,088
Interest 1,547,040
Dividends 630,779
Swaps 2,950 4,215,857
---------------
Prepaid expenses 5,434
---------------
Total assets 383,331,395
---------------
Liabilities
Loans 100,000,000
Options written, at value (premiums received--$461,466) 319,346
Payables:
Securities purchased 1,770,659
Dividends to shareholders 1,444,277
Investment adviser 283,066
Interest on loans 123,144
Swaps 2,792
Other affiliates 2,588 3,626,526
---------------
Accrued expenses 113,217
---------------
Total liabilities 104,059,089
---------------
Net Assets
Net assets $ 279,272,306
===============
Capital
Common Stock, $.10 par value; 200,000,000 shares authorized $ 1,218,874
Paid-in capital in excess of par 231,130,228
Undistributed investment income--net $ 200,725
Undistributed realized capital gains--net 5,184,009
Unrealized appreciation--net 41,538,470
---------------
Total accumulated earnings--net 46,923,204
---------------
Total capital--Equivalent to $22.91 per share based on 12,188,736 shares of
capital stock outstanding (market price--$20.41) $ 279,272,306
===============
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Statement of Operations
For the Year Ended December 31, 2006
Investment Income
Dividends (net of $44,793 foreign withholding tax) $ 9,049,123
Interest (including $277,973 from affiliates) 5,182,143
---------------
Total income 14,231,266
---------------
Expenses
Loan interest expense $ 5,715,935
Investment advisory fees 3,197,217
Asset securitization fees 169,950
Accounting services 130,417
Custodian fees 92,172
Professional fees 53,838
Printing and shareholder reports 47,186
Transfer agent fees 39,530
Directors' fees and expenses 27,344
Listing fees 14,016
Pricing services 9,952
Other 26,631
---------------
Total expenses 9,524,188
---------------
Investment income--net 4,707,078
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 18,116,386
Options written--net (1,736,619)
Swaps--net 158 16,379,925
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 26,774,053
Options written--net 1,059,081
Swaps--net 14,752 27,847,886
--------------- ---------------
Total realized and unrealized gain--net 44,227,811
---------------
Net Increase in Net Assets Resulting from Operations $ 48,934,889
===============
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Statements of Changes in Net Assets
For the Year Ended
December 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 4,707,078 $ 5,949,548
Realized gain--net 16,379,925 13,884,930
Change in unrealized appreciation/depreciation--net 27,847,886 (10,144,730)
--------------- ---------------
Net increase in net assets resulting from operations 48,934,889 9,689,748
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net (4,463,881) (5,977,423)
Realized gain--net (13,797,677) (9,418,861)
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (18,261,558) (15,396,284)
--------------- ---------------
Capital Stock Transactions
Shares redeemed in repurchase offer (12,039,454) --
--------------- ---------------
Net decrease in net assets resulting from capital stock transactions (12,039,454) --
--------------- ---------------
Net Assets
Total increase (decrease) in net assets 18,633,877 (5,706,536)
Beginning of year 260,638,429 266,344,965
--------------- ---------------
End of year* $ 279,272,306 $ 260,638,429
=============== ===============
* Undistributed (accumulated distributions in excess of) investment income--net $ 200,725 $ (57,570)
=============== ===============
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Statement of Cash Flows
For the Year Ended December 31, 2006
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 48,934,889
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables 110,921
Increase in prepaid expenses (792)
Increase in other liabilities 58,571
Realized and unrealized gain--net (44,227,653)
Amortization of premium/discount and payups 1,600,451
Proceeds from sales and paydowns of long-term securities 181,678,769
Purchases of long-term securities (144,233,417)
Proceeds from short-term securities--net 138,799
Premiums received from options written 904,954
Cash paid on closing options written (4,180,259)
---------------
Net cash provided by operating activities 40,785,233
---------------
Cash Used for Financing Activities
Shares redeemed in repurchase offer (12,039,454)
Cash receipts from borrowings 6,000,000
Cash payments on borrowings (15,000,000)
Dividends paid to shareholders (17,803,871)
Decrease in bank overdraft (115,555)
---------------
Cash used for financing activities (38,958,880)
---------------
Cash
Net increase in cash 1,826,353
Cash at beginning of year --
---------------
Cash at end of year 1,826,353
===============
Cash Flow Information
Cash paid for interest $ 5,716,118
===============
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Financial Highlights
For the Period
For the Year Ended April 30, 2004++
The following per share data and ratios have been derived December 31, to December 31,
from information provided in the financial statements. 2006 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 20.31 $ 20.76 $ 19.10
----------- ----------- -----------
Investment income--net .37*** .46*** .46
Realized and unrealized gain--net 3.69 .29 1.84
----------- ----------- -----------
Total from investment operations 4.06 .75 2.30
----------- ----------- -----------
Less dividends and distributions:
Investment income--net (.33) (.47) (.48)
Realized gain--net (1.13) (.73) (.11)
Tax return of capital -- -- (.01)
----------- ----------- -----------
Total dividends and distributions (1.46) (1.20) (.60)
----------- ----------- -----------
Offering costs resulting from the issuance of Common Stock -- -- (.04)
----------- ----------- -----------
Net asset value, end of period $ 22.91 $ 20.31 $ 20.76
=========== =========== ===========
Market price per share, end of period $ 20.41 $ 17.21 $ 18.32
=========== =========== ===========
Total Investment Return**
Based on net asset value per share 21.70% 4.69% 12.30%+++
=========== =========== ===========
Based on market price per share 27.95% .52% (5.36%)+++
=========== =========== ===========
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.42% 1.47% 1.20%*
=========== =========== ===========
Expenses, net of waiver 3.54% 2.96% 1.96%*
=========== =========== ===========
Expenses 3.54% 2.96% 2.19%*
=========== =========== ===========
Investment income--net 1.75% 2.28% 3.52%*
=========== =========== ===========
Leverage
Amount of borrowings outstanding (in thousands) $ 100,000 $ 109,000 $ 109,000
=========== =========== ===========
Average amount of borrowings outstanding during the period (in thousands) $ 107,504 $ 109,000 $ 98,750
=========== =========== ===========
Average amount of borrowings outstanding per share during the period*** $ 8.51 $ 8.50 $ 7.70
=========== =========== ===========
Supplemental Data
Net assets, end of period (in thousands) $ 279,272 $ 260,638 $ 266,345
=========== =========== ===========
Portfolio turnover 37.77% 61.07% 19.88%
=========== =========== ===========
* Annualized.
** Total investment returns based on market price, which can be significantly greater or lesser than
the net asset value, may result in substantially different returns. Total investment returns
exclude the effects of sales charges.
*** Based on average shares outstanding.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Capital and Income Strategies Fund, Inc. was renamed
BlackRock Capital and Income Strategies Fund, Inc. (the "Fund"). The Fund is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. The Fund determines and makes
available for publication the net asset value of its Common Stock on a daily
basis. The Fund's Common Stock shares are listed on the New York Stock
Exchange ("NYSE") under the symbol CII. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Debt securities are traded primarily in the over-
the-counter ("OTC") markets and are valued at the last available bid price in
the OTC markets or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
direction of the Board of Directors. Such valuations and procedures will be
reviewed periodically by the Board of Directors of the Fund. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. Options traded in the OTC market are valued at the last asked price
(options written) or the last bid price (options purchased). Swap agreements
are valued based upon quoted fair valuations received daily by the Fund from a
pricing service or counterparty. Short-term investments with a remaining
maturity of 60 days or less are valued at amortized cost, which approximates
market value, under which method the investment is valued at cost and any
premium or discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest. The Fund
employs pricing services to provide certain securities prices for the Fund.
Securities and assets for which market quotations are not readily available
are valued at fair value as determined in good faith by or under the direction
of the Board of Directors of the Fund, including valuations furnished by the
pricing services retained by the Fund, which may utilize a matrix system for
valuations.
Equity securities held by the Fund that are traded on stock exchanges or the
NASDAQ Global Market are valued at the last sale price or official close price
on the exchange, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available bid price for long
positions, and at the last available asked price for short positions. In cases
where equity securities are traded on more than one exchange, the securities
are valued on the exchange designated as the primary market by or under the
authority of the Board of Directors of the Fund. Long positions traded in the
OTC markets, NASDAQ Capital Market or Bulletin Board are valued at the last
available bid price or yield equivalent obtained from one or more dealers or
pricing services approved by the Board of Directors of the Fund. Short
positions traded in the OTC markets are valued at the last available asked
price. Portfolio securities that are traded both in the OTC markets and on a
stock exchange are valued according to the broadest and most representative
market.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the NYSE. The values of such securities used in computing the net
asset value of the Fund's shares are determined as of such times. Foreign
currency exchange rates will generally be determined as of the close of
business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of business on the NYSE that may not be reflected
in the computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur during
such periods that are expected to materially affect the value of such
securities, those securities will be valued at their fair value as determined
in good faith by the Fund's Board of Directors or by the Manager using a
pricing service and/or procedures approved by the Fund's Board of Directors.
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract resulting from an unfavorable price change in the underlying security
or index, or if the counterparty does not perform under the contract.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
* Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such financial futures contracts. Financial futures
contracts are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a contract,
the Fund deposits and maintains as collateral such initial margin as required
by the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount of
cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margin and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was closed.
* Swaps--The Fund may enter into swap agreements, which are OTC contracts in
which the Fund and a counterparty agree to make periodic net payments on a
specified notional amount. The net payments can be made for a set period of
time or may be triggered by a predetermined credit event. The net periodic
payments may be based on a fixed or variable interest rate; the change in
market value of a specified security, basket of securities, or index; or the
return generated by a security. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as realized
gains or losses, respectively. Gains or losses are realized upon termination
of the swap agreements. Swaps are marked-to-market and changes in value are
recorded as unrealized appreciation (depreciation). Risks include changes in
the returns of the underlying instruments, failure of the counterparties to
perform under the contracts' terms and the possible lack of liquidity with
respect to the swap agreements.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Dividends and distributions--Dividends are declared and paid quarterly.
Distribution of capital gains are recorded on the ex-dividend dates.
(f) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return the borrowed securities
within five business days. The Fund may pay reasonable finder's, lending
agent, administrative and custodial fees in connection with its loans. In the
event that the borrower defaults on its obligation to return borrowed
securities because of insolvency or for any other reason, the Fund could
experience delays and costs in gaining access to the collateral. The Fund also
could suffer a loss where the value of the collateral falls below the market
value of the borrowed securities, in the event of borrower default or in the
event of losses on investments made with cash collateral.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (continued)
(g) Recent accounting pronouncements--In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet
in connection with accounting for uncertainties in income tax positions taken
or expected to be taken by an entity including mutual funds before being
measured and recognized in the financial statements. Adoption of FIN 48 is
required for the last net asset value calculation in the first required
financial statement reporting period for fiscal years beginning after December
15, 2006. The impact on the Fund's financial statements, if any, is currently
being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"), was issued and is effective
for fiscal years beginning after November 15, 2007. FAS 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. Management is currently evaluating
the implications of FAS 157. At this time, its impact on the Fund's financial
statements has not been determined.
(h) Reclassification--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $15,098 has been reclassified between undistributed net realized
capital gains and undistributed net investment income as a result of permanent
differences attributable to amortization methods on fixed income securities,
accounting for paydowns and swap agreements. This reclassification has no
effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset
Management, L.P. ("FAM"), with BlackRock, Inc. to create a new independent
company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest
in the combined company and The PNC Financial Services Group, Inc. ("PNC"),
has approximately a 34% economic and voting interest. The new company operates
under the BlackRock name and is governed by a board of directors with a
majority of independent members.
On August 15, 2006, shareholders of the Fund approved a new Investment
Advisory Agreement with BlackRock Advisors, Inc. (the "Manager"), an indirect,
wholly owned subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was
recently reorganized into a limited liability company and renamed BlackRock
Advisors, LLC. The new Investment Advisory Agreement between the Fund and the
Manager became effective on September 29, 2006. Prior to September 29, 2006,
FAM was the Fund's Manager. The general partner of FAM is Princeton Services,
Inc. ("PSI"), an indirect, wholly owned subsidiary of Merrill Lynch, which is
the limited partner.
The Manager is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund
pays a monthly fee at an annual rate of .85% of the Fund's average daily net
assets, including the proceeds of any outstanding borrowings used for
leverage. In addition, the Manager has entered into sub-advisory agreements
with BlackRock Investment Management, LLC ("BIM") and BlackRock Financial
Management, Inc., both affiliates of the Manager, under which the Manager pays
each Sub-Adviser for services it provides a fee that is a percentage of the
management fee paid by the Fund to the Manager.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of the Manager,
or its affiliates. Pursuant to that order, the Fund has retained BIM as the
securities lending agent for a fee based on a share of the returns on
investment of cash collateral. Prior to September 29, 2006, BIM was organized
as Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM,
and MLIM, LLC was the securities lending agent. BIM may, on behalf of the
Fund, invest cash, collateral received by the Fund for such loans, among other
things, in a private investment company managed by the Manager or in
registered money market funds advised by the Manager or its affiliates.
In addition, MLPF&S received $54,920 in commissions on the execution of
portfolio security transactions for the Fund for the year ended December 31,
2006.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Notes to Financial Statements (concluded)
For the year ended December 31, 2006, the Fund reimbursed FAM and the Manager
$4,437 and $1,299, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or directors of the Fund
were officers and/or directors of FAM, PSI, Merrill Lynch, MLIM, and/or
MLIM, LLC.
Commencing September 29, 2006, certain officers and/or directors of the Fund
are officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases (including payups) and sales (including paydowns) of investments,
excluding short-term securities, for the year ended December 31, 2006 were
$140,241,207 and $182,891,840, respectively.
Transactions in options written for the year ended December 31, 2006 were as
follows:
Number of Premiums
Call Options Written Contracts Received
Outstanding call options written,
beginning of year 34,279 $ 2,000,152
Options written 6,806 904,954
Options closed (21,225) (1,593,126)
Options expired (17,054) (850,514)
-------------- ---------------
Outstanding call options written,
end of year 2,806 $ 461,466
============== ===============
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10 per share, all of which were initially classified as Common Stock. The
Board of Directors is authorized, however, to reclassify any unissued shares
of stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the year ended December 31, 2006
decreased by 641,500 as a result of a share repurchase program. Shares issued
and outstanding during the year ended December 31, 2005 remained constant.
The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals. The shares tendered in the share repurchase program will
be subject to a repurchase fee retained by the Fund to compensate the Fund for
expenses directly related to the repurchase offer.
5. Short-Term Borrowings:
On May 22, 2006, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citicorp North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The
agreement was renewed for one year and has a maximum limit of $135,000,000.
Under the Citicorp program, the conduits will fund advances to the Fund
through the issuance of highly rated commercial paper. As security for its
obligations to the Lenders under the revolving securitization facility, the
Fund has granted a security interest in substantially all of its assets to and
in favor of the Lenders. The interest rate on the Fund's borrowings is based
on the interest rate carried by the commercial paper plus a program fee. The
Fund pays additional borrowing costs including asset securitization fees and a
backstop commitment fee.
For the year ended December 31, 2006, the average amount borrowed was
approximately $107,504,000 and the daily weighted average interest rate was
5.32%.
6. Distributions to Shareholders:
The tax character of distributions paid during the fiscal years ended December
31, 2006 and December 31, 2005 was as follows:
12/31/2006 12/31/2005
Distributions paid from:
Ordinary income $ 10,997,211 $ 11,547,213
Long-term capital gains 7,264,347 3,849,071
-------------- ---------------
Total taxable distributions $ 18,261,558 $ 15,396,284
============== ===============
As of December 31, 2006, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 295,648
Undistributed long-term capital gains--net 6,162,294
---------------
Total undistributed earnings--net 6,457,942
Capital loss carryforward --
Unrealized gains--net 40,465,262*
---------------
Total accumulated earnings--net $ 46,923,204
===============
* The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on wash
sales, the tax deferral of losses on straddles, the difference between
book and tax amortization methods for premiums and discounts on
fixed income securities and other book/tax temporary differences.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of BlackRock Capital and Income Strategies Fund, Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments of BlackRock Capital and Income
Strategies Fund, Inc. (formerly Capital and Income Strategies Fund, Inc.) as
of December 31, 2006 and the related statements of operations and cash flows
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for the
respective periods then ended. These financial statements and financial
highlights are the responsibility of the Fund'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 the standards of the Public Company
Accounting Oversight Board (United States). 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. The Fund is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Fund's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of December 31, 2006,
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
BlackRock Capital and Income Strategies Fund, Inc. as of December 31, 2006,
the results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for the respective periods then ended, in
conformity with accounting principles generally accepted in the United States
of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 26, 2007
Important Tax Information (unaudited)
The following information is provided with respect to the per-share
distributions paid by BlackRock Capital and Income Strategies Fund, Inc.
during the fiscal year ended December 31, 2006:
Dividends
Qualifying for
Qualified the Dividends
Net Dividend Received Interest- Short-Term
Payable Ordinary Long-Term Income for Deduction for Related Capital Gain
Date Dividend Capital Gain Individuals (1) Corporations (1) Dividends (1)(2) Dividends (1)(2)
3/31/2006 $.266461 $.033539 $.208772 $0.170675 $.012954 $.216648
6/30/2006 $.300000 $.000000 $.300000 $0.261854 $.036079 $.000000
9/29/2006 $.300000 $.000000 $.300000 $0.261854 $.000000 $.300000
12/29/2006 $.000000 $.560000 $.000000 $ .000000 $.000000 $.000000
(1) The Fund hereby designates the per-share amounts indicated above or the maximum
amounts allowable by law.
(2) Represents the portion of the taxable ordinary income dividends eligible for exemption
from U.S. withholding tax for nonresident aliens and foreign corporations.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Fund Certification
In September 2006, the Fund filed its Chief Executive Officer Certification
for the prior year with the New York Stock Exchange pursuant to Section
303A.12(a) of the New York Stock Exchange Corporate Governance Listing
Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Managed Distribution Policy
The Fund has adopted a policy of paying regular distributions on its Common
Stock (the "Managed Distribution Policy"). The Fund's Board of Directors has
initially determined to pay quarterly distributions at an annualized rate of
6% of the initial public offering price per share ($.30 per share, per
quarter). The Fund's Board of Directors has determined to pay additional
distributions on an annual basis equal to any income earned by the Fund in
excess of the quarterly distributions as may be necessary to distribute
substantially all of the Fund's net investment company taxable income for that
year.
The Fund generally is not permitted to distribute net realized long-term
capital gains more than once per year without exemptive relief from the
Securities and Exchange Commission. As a result, the Fund has applied for an
exemptive order that will permit the Fund to make periodic distributions of
realized long-term capital gains to its shareholders. Until such time, if any,
as the exemptive relief is granted, the Fund intends to make distributions
from its net investment income on a quarterly basis and from its net realized
long-term capital gains, if any, on an annual basis. If such exemptive relief
is granted, the Fund intends to make distributions from its net investment
income and its realized long-term capital gains, if any, on a quarterly basis.
If the total distributions paid by the Fund to its shareholders for any
calendar year exceed the Fund's net investment company taxable income and net
realized capital gain for that year, the excess will generally be treated as a
tax-free return of capital up to the amount of a shareholder's tax basis in
his or her stock. Any distributions that constitute tax-free return of capital
will reduce a shareholder's tax basis in his or her stock. In effect, a return
of capital is the return of a shareholder's investment in the Fund and will
result in a corresponding decline in the Fund's net asset value. Return of
capital distributions also may have the effect of increasing the Fund's
operating expense ratio. Any amounts distributed to a shareholder in excess of
such shareholder's tax basis in his or her stock will generally be taxable to
the shareholder as capital gain.
The Fund currently expects that the amount of distributions made under the
Managed Distribution Policy generally will be independent of, and not
contingent upon, the Fund's performance in any of the first three quarters of
the Fund's fiscal year. Distribution rates under the Managed Distribution
Policy may be increased in the Fund's fourth fiscal quarter in light of the
Fund's performance for the fiscal year and to enable the Fund to comply with
the distribution requirements applicable to regulated investment companies. It
also is currently expected that the Fund's investment portfolio initially will
not produce sufficient dividend and interest income to fully fund
distributions under the Managed Distribution Policy. Consequently, if the Fund
does not realize sufficient short-term capital gains and long-term capital
gains to make up any shortfall, distributions to the Fund's Common Stock
shareholders will include returns of capital. Prior to receipt of the above-
referenced exemptive order, long-term capital gains will be available to make
up any shortfall in funding distributions only on an annual basis, thereby
increasing the likelihood that distributions will include returns of capital
to shareholders. The Fund is not required to maintain the Managed Distribution
Policy and such policy (including the amount of the quarterly distribution)
may be modified or terminated at any time without notice. Any such
modification or termination of the Managed Distribution Policy may have an
adverse effect on the market price of the Fund's Common Stock.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York
(the "Plan Agent"). Under the Plan, whenever the Fund declares a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized
shares of the Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market on the New York Stock Exchange or
elsewhere. If, on the dividend payment date, the Fund's net asset value per
share is equal to or less than the market price per share plus estimated
brokerage commissions (a condition often referred to as a "market premium"),
the Plan Agent will invest the dividend amount in newly issued shares. If the
Fund's net asset value per share is greater than the market price per share (a
condition often referred to as a "market discount"), the Plan Agent will
invest the dividend amount by purchasing on the open market additional shares.
If the Plan Agent is unable to invest the full dividend amount in open market
purchases, or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will invest any uninvested portion in newly
issued shares. The shares acquired are credited to each shareholder's account.
The amount credited is determined by dividing the dollar amount of the
dividend by either (i) when the shares are newly issued, the net asset value
per share on the date the shares are issued or (ii) when shares are purchased
in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan, must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, if the
market price plus commissions of the Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Fund for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. Participation in the Plan generally will not affect the tax-
exempt status of exempt interest dividends paid by the Fund. If, when the
Fund's shares are trading at a market premium, the Fund issues shares pursuant
to the Plan that have a greater fair market value than the amount of cash
reinvested, it is possible that all or a portion of the discount from the
market value (which may not exceed 5% of the fair market value of the Fund's
shares) could be viewed as a taxable distribution. If the discount is viewed
as a taxable distribution, it is also possible that the taxable character of
this discount would be allocable to all the shareholders, including
shareholders who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Contact Information--All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York, Church Street Station, P.O. Box 11258, New York, NY 10286-1258,
Telephone: 800-432-8224.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement
BlackRock Investment Advisory Agreement--Matters Considered by the Board
The following disclosure appeared in the June 30, 2006 Semi-Annual Report of
the Fund and is the discussion referred to in "New BlackRock Sub-Advisory
Agreements - Matters Considered by the Board" below. The term "Investment
Adviser" as used herein refers to Fund Asset Management, L.P.
In connection with the Transaction between Merrill Lynch and BlackRock, the
Fund's Board of Directors considered a new investment advisory agreement (the
"New Investment Advisory Agreement") between the Fund and BlackRock Advisors,
Inc. or its successor ("BlackRock Advisors"). If the New Investment Advisory
Agreement is approved by the Fund's shareholders, it will become effective
upon the expected closing of the Transaction, which is expected in the third
quarter of 2006.
The Board discussed the New Investment Advisory Agreement at telephonic and
in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the New Investment Advisory Agreement at a
meeting held on May 10, 2006.
To assist the Board in its consideration of the New Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal
counsel, also requested and received additional information from Merrill Lynch
and BlackRock in connection with their consideration of the New Investment
Advisory Agreement. The additional information was provided in advance of the
May 10, 2006 meeting. In addition, the independent directors consulted with
their counsel and Fund counsel on numerous occasions, discussing, among other
things, the legal standards and certain other considerations relevant to the
directors' deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management
and certain BlackRock representatives the Transaction, its strategic rationale
and BlackRock's general plans and intentions regarding the Fund. At these
Board meetings, representatives of Merrill Lynch and BlackRock made
presentations to and responded to questions from the Board. The directors also
inquired about the plans for and anticipated roles and responsibilities of
certain employees and officers of the Investment Adviser and certain
affiliates being transferred to BlackRock in connection with the Transaction.
The independent directors also conferred separately and with their counsel
about the Transaction and other matters related to the Transaction on a number
of occasions, including in connection with the April and May 2006 meetings.
After the presentations and after reviewing the written materials provided,
the independent directors met in executive sessions with their counsel to
consider the New Investment Advisory Agreement.
In connection with the Board's review of the New Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the directors about a
variety of matters. The advice included the following, among other matters:
* that there is not expected to be any diminution in the nature, quality and
extent of services provided to the Fund and its shareholders by BlackRock
Advisors, including compliance services;
* that operation of New BlackRock as an independent investment management
firm will enhance its ability to attract and retain talented professionals;
* that the Fund should benefit from having access to BlackRock's state of the
art technology and risk management analytic tools, including investment
tools, provided under the BlackRock Solutions (R) brand name;
* that BlackRock has no present intention to alter any applicable expense
waivers or reimbursements currently in effect and, while it reserves the
right to do so in the future, it would seek the approval of the Board
before making any changes;
* that in connection with the Transaction, Merrill Lynch and BlackRock have
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in compliance
with the conditions of Section 15(f) of the Investment Company Act of 1940
(the "1940 Act") in relation to any public funds advised by BlackRock or
the Investment Adviser (or its affiliates), respectively; and
* that Merrill Lynch and BlackRock would derive benefits from the Transaction
and that, as a result, they have a different financial interest in the
matters that were being considered than do Fund shareholders.
The directors considered the information provided by Merrill Lynch and
BlackRock above, and, among other factors, the following:
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement (continued)
* the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies of
scale and access to investment opportunities;
* the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength and
resources of New BlackRock;
* the compliance policies and procedures of BlackRock Advisors;
* the terms and conditions of the New Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees will
not increase by virtue of the New Investment Advisory Agreement, but will
remain the same;
* that in May 2005, the Board had performed a full annual review of the
investment advisory agreement currently in effect for the Fund (the
"Current Investment Advisory Agreement") as required by the 1940 Act and
has determined that the Investment Adviser has the capabilities, resources
and personnel necessary to provide the advisory and administrative services
currently provided to the Fund; and that the advisory and/or management
fees paid by the Fund, taking into account any applicable agreed-upon fee
waivers and breakpoints, represent reasonable compensation to the
Investment Adviser in light of the services provided, the costs to the
Investment Adviser of providing those services, economies of scale, the
fees and other expenses paid by similar funds (including information
provided by Lipper Inc. ["Lipper"]), and such other matters as the
directors have considered relevant in the exercise of their reasonable
judgment; and
* that Merrill Lynch agreed to pay all expenses of the Fund in connection
with the Board's consideration of the New Investment Advisory Agreement and
related agreements and all costs of shareholder approval of the New
Investment Advisory Agreement and as a result the Fund would bear no costs
in obtaining shareholder approval of the New Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the New Investment Advisory Agreement, the Board assessed the
nature, scope and quality of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the New Investment
Advisory Agreement, the Board also considered a range of information in
connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and BlackRock Advisors' compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services to be
provided by BlackRock Advisors and its affiliates.
In the period prior to the Board meeting to consider renewal of the Current
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Current Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) information comparing the Fund's market
price with its net asset value per share; (c) a discussion by the Fund's
portfolio management team on investment strategies used by the Fund during its
most recent fiscal year; (d) information on the profitability to the
Investment Adviser of the Current Investment Advisory Agreement and other
payments received by the Investment Adviser and its affiliates from the Fund;
and (e) information provided by the Investment Adviser concerning services
related to the valuation and pricing of Fund portfolio holdings, allocation of
Fund brokerage fees, the Fund's portfolio turnover statistics, and direct and
indirect benefits to the Investment Adviser and its affiliates from their
relationship with the Fund.
In their deliberations, the directors considered information received in
connection with the most recent continuation of the Current Investment
Advisory Agreement, in addition to information provided by BlackRock and
BlackRock Advisors in connection with their evaluation of the terms and
conditions of the New Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling, and
each director attributed different weights to the various factors. The
directors, including a majority of the independent directors, concluded that
the terms of the New Investment Advisory Agreement are appropriate, that the
fees to be paid are reasonable in light of the services to be provided to the
Fund, and that the New Investment Advisory Agreement should be approved and
recommended to Fund shareholders.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Nature, Quality and Extent of Services Provided--The Board reviewed the
nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund, as well as the nature, quality and extent of services expected to be
provided by BlackRock Advisors. The Board focused primarily on the Investment
Adviser's advisory services and the Fund's investment performance, but also
considered certain areas in which both the Investment Adviser and the Fund
receive services as part of the Merrill Lynch complex. The Board compared the
Fund's performance - both including and excluding the effects of the Fund's
fees and expenses - to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attaches more importance to performance
over relatively long periods of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered, among other things, the expected impact of the Transaction on the
operations, facilities, organization and personnel of BlackRock Advisors and
how it would affect the Fund; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Fund. The directors considered
BlackRock's advice as to proposed changes in portfolio management personnel of
the Fund after the closing of the Transaction.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the
art technology and risk management analytic tools, including the investment
tools provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity
interest in BlackRock after the Transaction, the Fund will continue to be
subject to restrictions concerning certain transactions involving Merrill
Lynch affiliates (for example, transactions with a Merrill Lynch broker-dealer
acting as principal) absent revised or new regulatory relief. The directors
were advised that a revision of existing regulatory relief with respect to
these restrictions was being sought from the Securities and Exchange
Commission and were advised of the possibility of receipt of such revised
regulatory relief. There can be no assurance that such relief will be
obtained.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the New Investment Advisory Agreement were expected to be as good as or
better than that provided under the Current Investment Advisory Agreement. It
was noted, however, that it is expected that there will be changes in
personnel following the Transaction and the combination of the operations of
the Investment Adviser and its affiliates with those of BlackRock. The
directors noted that if current portfolio managers or other personnel cease to
be available, the Board would consider all available options, which could
include seeking the investment advisory or other services of BlackRock
affiliates. Accordingly, the directors concluded that, overall, they were
satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, extent and quality of the services to be
provided to the Fund under the New Investment Advisory Agreement.
Costs of Services Provided and Profitability--It was noted that, in
conjunction with the recent review of the Current Investment Advisory
Agreement, the directors had received, among other things, a report from
Lipper comparing the Fund's fees, expenses and performance to those of a peer
group selected by Lipper, and information as to the fees charged by the
Investment Adviser or its affiliates to other registered investment company
clients for investment management services. The Board reviewed the Fund's
contractual management fee rate and actual management fee rate as a percentage
of total assets at common asset levels - the actual rate includes advisory
fees and the effects of any fee waivers - compared to the other funds in its
Lipper category. They also compared the Fund's total expenses to those of
other comparable funds. The information showed that the Fund had fees and
expenses within the range of fees and expenses of comparable funds. The Board
considered the services to be provided by and the fees to be charged by
BlackRock Advisors to other funds with similar investment mandates and noted
that the fees charged by BlackRock Advisors in those cases, including fee
waivers and expense reimbursements, were generally comparable to those being
charged to the Fund. The Board also noted that, as a general matter, according
to the information provided by BlackRock, fees charged to institutional
clients were lower than the fees charged to the Fund, but BlackRock Advisors
provided less extensive services to such clients. The Board concluded that the
Fund's management fee and fee rate and overall expense ratio are reasonable
compared to those of other comparable funds.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Disclosure of Investment Advisory Agreement (concluded)
In evaluating the costs of the services to be provided by BlackRock Advisors
under the New Investment Advisory Agreement, the directors considered, among
other things, whether advisory fees or other expenses would change as a result
of the Transaction. Based on their review of the materials provided and the
fact that the New Investment Advisory Agreement is substantially similar to
the Current Investment Advisory Agreement in all material respects, including
the rate of compensation, the directors determined that the Transaction should
not increase the total fees payable, including any fee waivers and expense
reimbursements, for advisory and administrative services. The directors noted
that it was not possible to predict with certainty New BlackRock's future
profitability from its relationship with the Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining New BlackRock's profitability with respect to its
relationship with the Fund. The directors noted that they expect to receive
profitability information from New BlackRock on at least an annual basis and
thus be in a position to evaluate whether any adjustments in Fund fees and/or
fee breakpoints would be appropriate.
Fees and Economies of Scale--The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in
order to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary and that the Fund
appropriately participated in these economies of scale.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the New Investment Advisory Agreement is
substantially similar to the Current Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors
determined that as a result of the Transaction, the Fund's total advisory fees
would be no higher than the fees under its Current Investment Advisory
Agreement. The directors noted that in conjunction with their most recent
deliberations concerning the Current Investment Advisory Agreement, they had
determined that the total fees for advisory and administrative services for
the Fund were reasonable in light of the services provided. It was noted that
in conjunction with the recent review of the Current Investment Advisory
Agreement, the directors had received, among other things, a report from
Lipper comparing the Fund's fees, expenses and performance to those of a peer
group selected by Lipper, and information as to the fees charged by the
Investment Adviser or its affiliates to other registered investment company
clients for investment management services. The directors concluded that,
because the rates for advisory fees for the Fund would be no higher than its
current fee rates, the proposed management fee structure, including any fee
waivers, was reasonable and that no additional changes were currently
necessary.
Fall-Out Benefits--In evaluating the fall-out benefits to be received by
BlackRock Advisors under the New Investment Advisory Agreement, the directors
considered whether the Transaction would have an impact on the fall-out
benefits received by the Investment Adviser by virtue of the Current
Investment Advisory Agreement. Based on their review of the materials
provided, including materials received in connection with their most recent
continuance of the Current Investment Advisory Agreement, and their
discussions with management of the Investment Adviser and BlackRock, the
directors determined that those benefits could include increased ability for
BlackRock to distribute shares of its funds and other investment products and
to obtain research services using the Fund's portfolio transaction brokerage
commissions. The directors noted that any fall-out benefits were difficult to
quantify with certainty at this time, and indicated that they would continue
to evaluate them going forward.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Investment Performance--The directors considered investment performance for
the Fund. The directors compared the Fund's performance - both including and
excluding the effects of the Fund's fees and expenses - to the performance of
a comparable group of funds, and the performance of a relevant index or
combination of indexes. The comparative information received from Lipper
showed Fund performance at various levels within the range of performance of
comparable funds over different time periods. While the Board reviews
performance data at least quarterly, consistent with the Investment Adviser's
investment goals, the Board attaches more importance over relatively long
periods of time, typically three to five years. The directors believed the
Fund's performance was satisfactory. Also, the directors took into account the
investment performance of funds currently advised by BlackRock Advisors. The
Board considered comparative information from Lipper which showed that the
performance of the funds advised by BlackRock Advisors was within the range of
performance of comparable funds over different time periods. The Board noted
BlackRock's considerable investment management experience and capabilities,
but was unable to predict what effect, if any, consummation of the Transaction
would have on the future performance of the Fund.
Conclusion--After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the New Investment Advisory Agreement, concluding that the advisory
fee rate was reasonable in relation to the services provided and that the New
Investment Advisory Agreement was in the best interests of the shareholders.
In approving the New Investment Advisory Agreement, the Board noted that it
anticipated reviewing the continuance of the agreement in advance of the
expiration of the initial two-year period.
Contingent BlackRock Sub-Advisory Agreement--Matters Considered by the Board
At the telephonic and in-person meetings held during April and May 2006 at
which the Board of Directors discussed and approved the New Investment
Advisory Agreement, the Board, including the independent directors, also
considered and approved a contingent sub-advisory agreement (the "Contingent
Sub-Advisory Agreement") between the Investment Adviser and BlackRock Advisors
(the "BlackRock Sub-Adviser"). The Contingent Sub-Advisory Agreement is
intended to ensure that the Fund operate with efficient portfolio management
services until the closing of the Transaction, in the event that the Board
deems it necessary and in the best interests of the Fund and its shareholders
that the BlackRock Sub-Adviser assist in managing the operations of the Fund
during the interim period until the closing of the Transaction. If
shareholders approve the Contingent Sub-Advisory Agreement, it will take
effect only upon recommendation from the Investment Adviser and upon
subsequent approval of the Board in the period up to the closing of the
Transaction. The effectiveness of the Contingent Sub-Advisory Agreement,
therefore, would be contingent on further Board approval after shareholders
approve it. Pursuant to the Contingent Sub-Advisory Agreement, the BlackRock
Sub-Adviser would receive a monthly fee from the Investment Adviser equal to
50% of the advisory fee received by the Investment Adviser. The Investment
Adviser would pay the BlackRock Sub-Adviser out of its own resources. There
would be no increase in Fund expenses as a result of the Contingent Sub-
Advisory Agreement.
In making its approval at the May in-person meeting, the Board considered the
Contingent Sub-Advisory Agreement in conjunction with the New Investment
Advisory Agreement and reviewed the same information and factors discussed
above. The Board also considered in conjunction with the Contingent Sub-
Advisory Agreement the necessity of ensuring that the Fund operates with
effective management services until the closing of the Transaction. In
reviewing the sub-advisory fee rate provided in the Contingent Sub-Advisory
Agreement, the Board took note of the fact that both the Investment Adviser
and the BlackRock Sub-Adviser would have significant responsibilities under
their respective advisory agreements. The Investment Adviser would remain
responsible for oversight of the Fund's operations and administration and the
BlackRock Sub-Adviser would provide advisory services to the Fund under the
Contingent Sub-Advisory Agreement. The Board also took into account the
expected short duration of the term of any Contingent Sub-Advisory Agreement
and the fact that total advisory fees paid by the Fund would not increase as a
result of the Contingent Sub-Advisory Agreement. Under all of the
circumstances, the Board concluded that it was a reasonable allocation of fees
for the BlackRock Sub-Adviser to receive 50% of the advisory fee paid by the
Fund to the Investment Adviser.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the Contingent Sub-
Advisory Agreement, concluding that the advisory fee was reasonable in
relation to the services provided and that the Contingent Sub-Advisory
Agreement was in the best interests of shareholders.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Disclosure of Sub-Advisory Agreement
New BlackRock Sub-Advisory Agreements--Matters Considered by the Board
At an in-person meeting held on August 24 - 25, 2006, the Board of Directors,
including the independent directors, discussed and approved the sub-advisory
agreements with respect to the Fund between BlackRock Advisors, LLC
(previously organized as BlackRock Advisors, Inc.) ("BlackRock Advisors") and
each of BlackRock Financial Management, Inc. and BlackRock Investment
Management, LLC, each an affiliate (the "Sub-Advisers") (the "BlackRock Sub-
Advisory Agreements"). The BlackRock Sub-Advisory Agreements became effective
on September 29, 2006, at the same time the New Investment Advisory Agreement
with BlackRock Advisors (which had been approved by the Fund's shareholders)
became effective.
Pursuant to the pertinent BlackRock Sub-Advisory Agreement, each Sub-Adviser
receives a monthly fee from BlackRock Advisors at an annual rate equal to 37%
of the advisory fee received by BlackRock Advisors from the Fund. BlackRock
Advisors pays the Sub-Adviser out of its own resources, and there is no
increase in Fund expenses as a result of the BlackRock Sub-Advisory
Agreements.
In approving the BlackRock Sub-Advisory Agreements at the August in-person
meeting, the Board reviewed its considerations in connection with its approval
of the New Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the New Investment Advisory Agreement. In
reviewing the sub-advisory fee rate provided for in the BlackRock Sub-Advisory
Agreements, the Board noted the fact that both BlackRock Advisors and each Sub-
Adviser have significant responsibilities under their respective advisory
agreements. Under the New Investment Advisory Agreement, BlackRock Advisors
remains responsible for the overall management of the Fund and for oversight
of the Fund's operations and administration. Under the BlackRock Sub-Advisory
Agreements, each Sub-Adviser provides advisory services to the Fund and is
responsible for the day-to-day management of the Fund's portfolio. The Board
also took into account the fact that there is no increase in total advisory
fees paid by the Fund as a result of the BlackRock Sub-Advisory Agreements.
Based on its considerations, the Board concluded that it was a reasonable
allocation of fees for each Sub-Adviser to receive a fee at an annual rate
equal to 37% of the advisory fee paid by the Fund to BlackRock Advisors
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved each BlackRock Sub-
Advisory Agreement, concluding that the sub-advisory fee was reasonable in
relation to the services provided and that each BlackRock Sub-Advisory
Agreement was in the best interests of the Fund's shareholders.
Proxy Results
During the six-month period ended December 31, 2006, BlackRock Capital and
Income Strategies Fund, Inc.'s shareholders voted on the following proposals,
which were approved at an annual shareholders' meeting on August 15, 2006. A
description of the proposals and number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
To elect the Fund's Board of Directors: Robert C. Doll, Jr. 9,081,547 1,062,851
David O. Beim 9,082,987 1,061,411
James T. Flynn 9,082,397 1,062,001
W. Carl Kester 9,083,546 1,060,852
Karen P. Robards 9,082,900 1,061,498
Shares Voted Shares Voted Shares Voted
For Against Abstain
To approve a new investment advisory agreement with
BlackRock Advisors, Inc. 7,532,495 674,902 365,428
To approve a contingent subadvisory agreement with
BlackRock Advisors, Inc. 7,521,133 685,156 366,536
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Officers and Directors
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to Vice Chairman and Director of BlackRock, Inc., 122 Funds None
P.O. Box 9011 and present Global Chief Investment Officer for Equities, 168 Portfolios
Princeton, Director Chairman of the BlackRock Retail Operating
NJ 08543-9011 Committee, and member of the BlackRock
Age: 52 Executive Committee since 2006; President of
the funds advised by Merrill Lynch Investment
Managers, L.P. ("MLIM") and its affiliates
("MLIM/FAM-advised funds") from 2005 to
2006 and Chief Investment Officer thereof from
2001 to 2006; President of MLIM and Fund Asset
Management, L.P. ("FAM") from 2001 to 2006;
Co-Head (Americas Region) thereof from 2000
to 2001 and Senior Vice President from 1999 to
2001; President and Director of Princeton Services,
Inc. ("Princeton Services") and President of
Princeton Administrators, L.P. ("Princeton
Administrators") from 2001 to 2006; Chief
Investment Officer of OppenheimerFunds, Inc. in
1999 and Executive Vice President thereof from
1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of certain other
investment companies for which BlackRock Advisors, LLC and its affiliates act as
investment adviser. Mr. Doll is an "interested person," as described in the
Investment Company Act, of the Fund based on his positions with BlackRock, Inc.
and its affiliates. Directors serve until their resignation, removal or death, or
until December 31 of the year in which they turn 72. As Fund President, Mr. Doll
serves at the pleasure of the Board of Directors.
Independent Directors*
David O. Beim** Director 2004 to Professor of Finance and Economics at the 17 Funds None
P.O. Box 9095 present Columbia University Graduate School of Business 24 Portfolios
Princeton, since 1991; Chairman of Outward Bound USA
NJ 08543-9095 from 1997 to 2001; Chairman of Wave Hill Inc.,
Age: 66 since 1990; Trustee of Phillips Exeter Academy
from 2002 to present.
James T. Flynn Director 2004 to Chief Financial Officer of JPMorgan & Co., Inc. 17 Funds None
P.O. Box 9095 present from 1990 to 1995 and an employee of 24 Portfolios
Princeton, JPMorgan in various capacities from 1967
NJ 08543-9095 to 1995.
Age: 67
W. Carl Kester Director 2004 to Deputy Dean for Academic Affairs, Harvard 17 Funds None
P.O. Box 9095 present Business School since 2006; Mizuho Financial 24 Portfolios
Princeton, Group, Professor of Finance, Harvard Business
NJ 08543-9095 School; Unit Head, Finance from 2005 to 2006;
Age: 55 Senior Associate Dean and Chairman of the
MBA Program of Harvard Business School from
1999 to 2005, Member of the faculty of Harvard
Business School since 1981; Independent
Consultant since 1978.
* Directors serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72.
** Chairman of the Audit Committee.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Officers and Directors (concluded)
Number of
Funds and
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors* (concluded)
Karen P. Robards*** Director 2004 to Partner of Robards & Company LLC, a financial 17 Funds AtriCure, Inc.
P.O. Box 9095 present advisory firm since 1987; formerly an investment 24 Portfolios (medical
Princeton, banker with Morgan Stanley for more than ten devices)
NJ 08543-9095 years; Director of Enable Medical Corp. from
Age: 56 1996 to 2005; Director of AtriCure, Inc. since
2000; Director of the Cooke Center for Learning
and Development, a not-for-profit organization,
since 1987.
* Directors serve until their resignation, removal or death, or until
December 31 of the year in which they turn 72.
*** Chair of the Board of Directors.
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 2004 to Managing Director of BlackRock, Inc. since 2006; Managing Director of Merrill
P.O. Box 9011 President present Lynch Investment Managers, L.P. ("MLIM") and Fund Asset Management, L.P.
Princeton, and ("FAM") in 2006; First Vice President of MLIM and FAM from 1997 to 2005 and
NJ 08543-9011 Treasurer Treasurer thereof from 1999 to 2006; Vice President of MLIM and FAM from 1990
Age: 46 to 1997.
John Burger Vice 2004 to Managing Director of BlackRock, Inc. since 2006; Managing Director (Global Fixed
P.O. Box 9011 President present Income) of MLIM from 2004 to 2006; Director of MLIM from 1998 to 2004; Vice
Princeton, President thereof from 1993 to 1998.
NJ 08543-9011
Age: 44
Robert J. Martorelli Vice 2004 to Managing Director of BlackRock, Inc. since 2006; Managing Director (Equities) of
P.O. Box 9011 President present MLIM from 2000 to 2006; First Vice President of MLIM from 1997 to 2000.
Princeton,
NJ 08543-9011
Age: 49
Kevin M. Rendino Vice 2004 to Managing Director of BlackRock, Inc. since 2006; Managing Director (Equities) of
P.O. Box 9011 President present MLIM from 2000 to 2006; First Vice President of MLIM from 1998 to 2000; Vice
Princeton, President of MLIM from 1997 to 1998.
NJ 08543-9011
Age: 40
Jeffrey Hiller Fund Chief 2004 to Managing Director of BlackRock, Inc. and Fund Chief Compliance Officer since 2006;
P.O. Box 9011 Compliance present Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President
Princeton, Officer and Chief Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief
NJ 08543-9011 Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Age: 55 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Securities and Exchange Commission's Division of Enforcement in Washington,
D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director of BlackRock, Inc. since 2006; Director (Legal Advisory) of MLIM from
P.O. Box 9011 present 2002 to 2006; Vice President of MLIM from 1999 to 2002; Attorney associated with
Princeton, MLIM from 1997 to 2006; Secretary of MLIM, FAM, FAM Distributors, Inc. and
NJ 08543-9011 Princeton Services from 2004 to 2006.
Age: 46
* Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109-3661
Transfer Agent
The Bank of New York
101 Barclay Street--11 East
New York, NY 10286
NYSE Symbol
CII
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former
fund investors and individual clients (collectively, "Clients") and to
safeguarding their nonpublic personal information. The following information
is provided to help you understand what personal information BlackRock
collects, how we protect that information and why in certain cases we share
such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about
you from different sources, including the following: (i) information we
receive from you or, if applicable, your financial intermediary, on
applications, forms or other documents; (ii) information about your
transactions with us, our affiliates, or others; (iii) information we receive
from a consumer reporting agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any
nonpublic personal information about its Clients, except as permitted by law
or as is necessary to service Client accounts. These nonaffiliated third
parties are required to protect the confidentiality and security of this
information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that
may be of interest to you. In addition, BlackRock restricts access to
nonpublic personal information about its Clients to those BlackRock employees
with a legitimate business need for the information. BlackRock maintains
physical, electronic and procedural safeguards that are designed to protect
the nonpublic personal information of its Clients, including procedures
relating to the proper storage and disposal of such information.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
Electronic copies of most financial reports and prospectuses are available on
the Funds' Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Funds' electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial advisor. Please note that not all investment
advisers, banks or brokerages may offer this service.
BLACKROCK CAPITAL AND INCOME STRATEGIES FUND, INC. DECEMBER 31, 2006
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of
the end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial
officer and principal accounting officer, or persons performing
similar functions. A copy of the code of ethics is available
without charge at www.blackrock.com.
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee and
(ii) each audit committee financial expert is independent: (1) David
O. Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen P.
Robards.
The registrant's board of directors has determined that David O.
Beim, W. Carl Kester and Karen P. Robards qualify as financial
experts pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions. For
25 years, Mr. Beim was an investment banker actively engaged in
financial analysis for securities transactions and mergers. These
transactions presented a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements. Mr. Beim has also been a
professor of finance and economics at the Columbia University
Graduate School of Business for the past 13 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions.
Prof. Kester has been involved in providing valuation and other
financial consulting services to corporate clients since 1978.
Prof. Kester's financial consulting services present a breadth and
level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can
reasonably be expected to be raised by the Registrant's financial
statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control
over financial reporting as well as audit committee functions.
Ms. Robards has been President of Robards & Company, a financial
advisory firm, since 1987. Ms. Robards was formerly an investment
banker for more than 10 years where she was responsible for
evaluating and assessing the performance of companies based on their
financial results. Ms. Robards has over 30 years of experience
analyzing financial statements. She also is the member of the Audit
Committees of two privately held companies and a non-profit
organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2006 - $37,000
Fiscal Year Ending December 31, 2005 - $36,000
(b) Audit-Related Fees -
Fiscal Year Ending December 31, 2006 - $8,000
Fiscal Year Ending December 31, 2005 - $0
The nature of the services include agreed upon procedures related to
credit facility.
(c) Tax Fees - Fiscal Year Ending December 31, 2006 - $6,000
Fiscal Year Ending December 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2006 - $3,071,450
Fiscal Year Ending December 31, 2005 - $5,577,771
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,739,500, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals
are members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
David O. Beim
James T. Flynn
W. Carl Kester
Karen P. Robards
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors has delegated to the Manager
authority to vote all proxies relating to the Fund's portfolio
securities. The Manager has adopted policies and procedures (the
"Proxy Voting Procedures") with respect to the voting of proxies
related to the portfolio securities held in the account of one or
more of its clients, including a Fund. Pursuant to these Proxy
Voting Procedures, the Manager's primary objective when voting
proxies is to make proxy voting decisions solely in the best
interests of each Fund and its shareholders, and to act in a manner
that the Manager believes is most likely to enhance the economic
value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Manager considers the
interests of its clients, including each Fund, and not the interests
of the Manager, when voting proxies and that real (or perceived)
material conflicts that may arise between the Manager's interest and
those of the Manager's clients are properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Manager has
formed a Proxy Voting Committee (the "Committee"). The Committee,
which is a subcommittee of the Manager's Equity Investment Policy
Oversight Committee ("EIPOC"), is comprised of a senior member of
the Manager's equity management group who is also a member of EIPOC,
one or more other senior investment professionals appointed by
EIPOC, portfolio managers and investment analysts appointed by EIPOC
and any other personnel EIPOC deems appropriate. The Committee will
also include two non-voting representatives from the Manager's Legal
Department appointed by the Manager's General Counsel. The
Committee's membership shall be limited to full-time employees of
the Manager. No person with any investment banking, trading, retail
brokerage or research responsibilities for the Manager's affiliates
may serve as a member of the Committee or participate in its
decision making (except to the extent such person is asked by the
Committee to present information to the Committee on the same basis
as other interested knowledgeable parties not affiliated with the
Manager might be asked to do so). The Committee determines how to
vote the proxies of all clients, including a Fund, that have
delegated proxy voting authority to the Manager and seeks to ensure
that all votes are consistent with the best interests of those
clients and are free from unwarranted and inappropriate influences.
The Committee establishes general proxy voting policies for the
Manager and is responsible for determining how those policies are
applied to specific proxy votes, in light of each issuer's unique
structure, management, strategic options and, in certain
circumstances, probable economic and other anticipated consequences
of alternate actions. In so doing, the Committee may determine to
vote a particular proxy in a manner contrary to its generally stated
policies. In addition, the Committee will be responsible for
ensuring that all reporting and recordkeeping requirements related
to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires
a case-by-case determination. In such cases, the Committee may elect
not to adopt a specific voting policy applicable to that issue. The
Manager believes that certain proxy voting issues require investment
analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may
elect to adopt a common position for the Manager on certain proxy
votes that are akin to investment decisions, or determine to permit
the portfolio manager to make individual decisions on how best to
maximize economic value for a Fund (similar to normal buy/sell
investment decisions made by such portfolio managers). While it is
expected that the Manager will generally seek to vote proxies over
which the Manager exercises voting authority in a uniform manner for
all the Manager's clients, the Committee, in conjunction with a
Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Manager in voting proxies, the Committee has retained
Institutional Shareholder Services ("ISS"). ISS is an independent
adviser that specializes in providing a variety of fiduciary-level
proxy-related services to institutional investment managers, plan
sponsors, custodians, consultants, and other institutional
investors. The services provided to the Manager by ISS include in-
depth research, voting recommendations (although the Manager is not
obligated to follow such recommendations), vote execution, and
recordkeeping. ISS will also assist the Fund in fulfilling its
reporting and recordkeeping obligations under the Investment Company
Act.
The Manager's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Manager generally
will not seek to vote proxies related to portfolio securities that
are on loan, although it may do so under certain circumstances. In
addition, the Manager will vote proxies related to securities of
foreign issuers only on a best efforts basis and may elect not to
vote at all in certain countries where the Committee determines that
the costs associated with voting generally outweigh the benefits.
The Committee may at any time override these general policies if it
determines that such action is in the best interests of a Fund.
From time to time, the Manager may be required to vote proxies in
respect of an issuer where an affiliate of the Manager (each, an
"Affiliate"), or a money management or other client of the Manager,
including investment companies for which the Manager provides
investment advisory, administrative and/or other services (each, a
"Client"), is involved. The Proxy Voting Procedures and the
Manager's adherence to those procedures are designed to address such
conflicts of interest. The Committee intends to strictly adhere to
the Proxy Voting Procedures in all proxy matters, including matters
involving Affiliates and Clients. If, however, an issue representing
a non-routine matter that is material to an Affiliate or a widely
known Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular
proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes
of ensuring that an independent determination is reached, retain an
independent fiduciary to advise the Committee on how to vote or to
cast votes on behalf of the Manager's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the Committee may pass the voting power to a
subcommittee, appointed by EIPOC (with advice from the Secretary of
the Committee), consisting solely of Committee members selected by
EIPOC. EIPOC shall appoint to the subcommittee, where appropriate,
only persons whose job responsibilities do not include contact with
the Client and whose job evaluations would not be affected by the
Manager's relationship with the Client (or failure to retain such
relationship). The subcommittee shall determine whether and how to
vote all proxies on behalf of the Manager's clients or, if the proxy
matter is, in their judgment, akin to an investment decision, to
defer to the applicable portfolio managers, provided that, if the
subcommittee determines to alter the Manager's normal voting
guidelines or, on matters where the Manager's policy is case-by-
case, does not follow the voting recommendation of any proxy voting
service or other independent fiduciary that may be retained to
provide research or advice to the Manager on that matter, no proxies
relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Manager's fiduciary duties.
In addition to the general principles outlined above, the Manager
has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Manager may elect to
vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at
any time upon the request of a Committee member and may be amended
or deleted upon the vote of a majority of Committee members present
at a Committee meeting at which there is a quorum.
The Manager has adopted specific voting guidelines with respect to
the following proxy issues:
* Proposals related to the composition of the board of directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's board of directors (rather
than shareholders) is most likely to have access to important,
nonpublic information regarding a company's business and
prospects, and is, therefore, best-positioned to set corporate
policy and oversee management. The Committee, therefore, believes
that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to
diligently represent the interests of shareholders and oversee
management of the corporation in a manner that will seek to
maximize shareholder value over time. In individual cases, the
Committee may look at a nominee's number of other directorships,
history of representing shareholder interests as a director of
other companies or other factors, to the extent the Committee
deems relevant.
* Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the
interests of shareholders and provide an independent view on the
propriety of financial reporting decisions of corporate
management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the
Committee may look at an auditors' history of representing
shareholder interests as auditor of other companies, to the extent
the Committee deems relevant.
* Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure of
an issuer's compensation and benefit policies and opposes
excessive compensation, but believes that compensation matters are
normally best determined by an issuer's board of directors, rather
than shareholders. Proposals to "micro-manage" an issuer's
compensation practices or to set arbitrary restrictions on
compensation or benefits will, therefore, generally not be
supported.
* Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support
requests that enhance the rights of common shareholders and oppose
requests that appear to be unreasonably dilutive.
* Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* Proposals related to proxy issues associated solely with holdings
of investment company shares. As with other types of companies,
the Committee believes that a fund's board of directors (rather
than its shareholders) is best positioned to set fund policy and
oversee management. However, the Committee opposes granting boards
of directors authority over certain matters, such as changes to a
fund's investment objective, which the Investment Company Act
envisions will be approved directly by shareholders.
* Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social
concerns. The Committee generally believes that annual shareholder
meetings are inappropriate forums for discussion of larger social
issues, and opposes shareholder resolutions "micromanaging"
corporate conduct or requesting release of information that would
not help a shareholder evaluate an investment in the corporation
as an economic matter. While the Committee is generally supportive
of proposals to require corporate disclosure of matters that seem
relevant and material to the economic interests of shareholders,
the Committee is generally not supportive of proposals to require
disclosure of corporate matters for other purposes.
Information about how a Fund voted proxies relating to securities
held in the Fund's portfolio during the most recent 12 month period
ended December 31 is available without charge (1) at
www.blackrock.com and (2) on the Commission's web site at
http://www.sec.gov.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of December 31, 2006.
(a)(1) The Fund is managed by a team, who are jointly responsible
for the day-to-day management of the Fund's portfolio.
Scott Amero is co-head of BlackRock's fixed income portfolio
management group. He is a member of the Management Committee
and the Investment Strategy Group. Mr. Amero is a senior
strategist and portfolio manager with responsibility for
overseeing all fixed income sector strategy and the overall
management of client portfolios. He is also the head of
global credit research. He is director of Anthracite
Capital, Inc., BlackRock's publicly-traded real estate
investment trust. Mr. Amero has been with BlackRock since
1990.
Kevin Rendino and Robert J. Martorelli are the co-portfolio
managers responsible for the common stock portion of the
Fund's portfolio. John Burger, Daniel Chen and Imran Hussain
are the co-portfolio managers responsible for the fixed
income portion of the Fund's portfolio.
Mr. Rendino joined BlackRock in 2006. Prior to joining
BlackRock, he was a Managing Director of Merrill Lynch
Investment Managers ("MLIM") from 2000 to 2006 and was
Director from 1997 to 2000. He has been a co-portfolio
manager and Vice President of the Fund since 2004. He has
been a co-portfolio manager and Vice President of the Fund
since 2004.
Mr. Martorelli joined BlackRock in 2006. Prior to joining
BlackRock, he was a Managing Director of MLIM from 2000 to
2006 and was Director of MLIM from 1997 to 2000. He has been
a co-portfolio manager and Vice President of the Fund since
2004.
Mr. Burger joined BlackRock in 2006. Prior to joining
BlackRock, he was a Managing Director of MLIM from 2002 to
2006 and a Director of MLIM from 1996 to 2004. From 1992 to
1996, he was a portfolio manager of MLIM. Mr. Burger has
been a portfolio manager and Vice President of the Fund
since 2004.
Mr. Chen has been a portfolio manager at BlackRock since
2002 and is a member of BlackRock's fixed income portfolio
management group. He is primarily responsible for managing
total return client portfolios, with a sector emphasis on
corporate bonds. Mr. Chen has been with BlackRock since
1999.
Mr. Hussain is a Managing Director and portfolio manager
with BlackRock and is head of the Emerging Markets Debt team
within BlackRock's Fixed Income Portfolio Management Group.
He is primarily responsible for developing and implementing
strategies in the non-dollar and emerging markets sectors of
the fixed income markets. Mr. Hussain has been with
BlackRock since 1998.
(a)(2) As of December 31, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Scott Amero 26 28 300 0 4 23
$ 17,958,956,805 $ 7,490,790,969 $ 110,873,665,633 $ 0 $ 1,672,225,308 $ 7,609,690,579
John D.
Burger 3 0 11 0 0 0
$ 2,942,008,539 $0 $ 2,147,627,132 $ 0 $ 0 $ 0
Daniel Chen 4 3 3 0 0 0
$ 3,612,741,291 $ 231,818,994 $ 415,597,651 $ 0 $ 0 $ 0
Imran
Hussain 7 5 73 0 0 0
$ 1,068,052,471 $ 720,495,822 $ 31,103,442,161 $ 0 $ 0 $ 0
Robert J.
Martorelli 5 0 2 0 0 0
$ 9,048,810,987 $0 $ 11,710,299,944 $ 0 $ 0 $ 0
Kevin
Rendino 11 2 2 0 0 0
$ 12,379,388,154 $ 2,094,720,980 $ 11,710,299,944 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over
another. BlackRock has adopted policies and procedures that address
the allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with
applicable law, make investment recommendations to other clients or
accounts (including accounts which are hedge funds or have
performance or higher fees paid to BlackRock, or in which portfolio
managers have a personal interest in the receipt of such fees),
which may be the same as or different from those made to the Fund.
In addition, BlackRock, its affiliates and any officer, director,
stockholder or employee may or may not have an interest in the
securities whose purchase and sale BlackRock recommends to the Fund.
BlackRock, or any of its affiliates, or any officer, director,
stockholder, employee or any member of their families may take
different actions than those recommended to the Fund by BlackRock
with respect to the same securities. Moreover, BlackRock may refrain
from rendering any advice or services concerning securities of
companies of which any of BlackRock's (or its affiliates') officers,
directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or the officers, directors
and employees of any of them has any substantial economic interest
or possesses material non-public information. Each portfolio manager
also may manage accounts whose investment strategies may at times be
opposed to the strategy utilized for the Fund. In this connection,
it should be noted that certain portfolio managers currently manage
certain accounts that are subject to performance fees. In addition,
certain portfolio managers assist in managing certain hedge funds
and may be entitled to receive a portion of any incentive fees
earned on such funds and a portion of such incentive fees may be
voluntarily or involuntarily deferred. Additional portfolio managers
may in the future manage other such accounts or funds and may be
entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells
securities for more than one account, the trades must be allocated
in a manner consistent with its fiduciary duties. BlackRock attempts
to allocate investments in a fair and equitable manner among client
accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve
reasonable efficiency in client transactions and provide BlackRock
with sufficient flexibility to allocate investments in a manner that
is consistent with the particular investment discipline and client
base.
(a)(3) As of December 31, 2006:
Compensation Program (Messrs. Amero, Burger, Chen and Hussain)
BlackRock's financial arrangements with its portfolio
managers, its competitive compensation and its career path emphasis
at all levels reflect the value senior management places on key
resources. Compensation may include a variety of components and may
vary from year to year based on a number of factors. The principal
components of compensation include a base salary, a discretionary
bonus, participation in various benefits programs and one or more of
the incentive compensation programs established by BlackRock such as
its Long-Term Retention and Incentive Plan and Restricted Stock
Program.
Base Compensation
Generally, portfolio managers receive base compensation based
on their seniority and/or their position with the firm.
Discretionary Compensation
In addition to base compensation, portfolio managers may
receive discretionary compensation, which can be a substantial
portion of total compensation. Discretionary compensation can
include a discretionary cash bonus as well as one or more of the
following:
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards
that are expressed as an amount of cash that, if properly vested and
subject to the attainment of certain performance goals, will be
settled in cash and/or in BlackRock, Inc. common stock.
Deferred Compensation Program
A portion of the compensation paid to each portfolio manager
may be voluntarily deferred by the portfolio manager into an account
that tracks the performance of certain of the firm's investment
products. Each portfolio manager is permitted to allocate his
deferred amounts among various options, including to certain of the
firm's hedge funds and other unregistered products. In addition,
prior to 2005, a portion of the annual compensation of certain
senior managers was mandatorily deferred in a similar manner for a
number of years. Beginning in 2005, a portion of the annual
compensation of certain senior managers was paid in the form of
BlackRock, Inc. restricted stock units which vest ratably over a
number of years.
Options and Restricted Stock Awards
While incentive stock options are not currently being awarded
to BlackRock employees, BlackRock, Inc. previously granted stock
options to key employees, including certain portfolio managers who
may still hold unexercised or unvested options. BlackRock, Inc. also
has a restricted stock award program designed to reward certain key
employees as an incentive to contribute to the long-term success of
BlackRock. These awards vest over a period of years.
Incentive Savings Plans
BlackRock, Inc. has created a variety of incentive savings
plans in which BlackRock employees are eligible to participate,
including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP)
and the BlackRock Employee Stock Purchase Plan (ESPP). The employer
contribution components of the RSP include a company match equal to
50% of the first 6% of eligible pay contributed to the plan capped
at $4,000 per year, and a company retirement contribution equal to
3% of eligible compensation, plus an additional contribution of 2%
for any year in which BlackRock has positive net operating income.
The RSP offers a range of investment options, including registered
investment companies managed by the firm. Company contributions
follow the investment direction set by participants for their own
contributions or absent, employee investment direction, are invested
into a stable value fund. The ESPP allows for investment in
BlackRock common stock at a 5% discount on the fair market value of
the stock on the purchase date. Annual participation in the ESPP
is limited to the purchase of 1,000 shares or a dollar value of
$25,000. Each portfolio manager is eligible to participate in these
plans.
Annual incentive compensation for each portfolio manager is a
function of several components: the performance of BlackRock, Inc.,
the performance of the portfolio manager's group within BlackRock,
the investment performance, including risk-adjusted returns and
income generation, of the firm's assets under management or
supervision by that portfolio manager relative to predetermined
benchmarks, and the individual's teamwork and contribution to the
overall performance of these portfolios and BlackRock. Unlike many
other firms, portfolio managers at BlackRock compete against
benchmarks rather than each other. In most cases, including for the
portfolio managers of the Registrant, these benchmarks are the same
as the benchmark or benchmarks against which the investment
performance, including risk-adjusted returns and income generation,
of the Registrant or other accounts are measured. A group of
BlackRock, Inc.'s officers determines which benchmarks against which
to compare the performance of funds and other accounts managed by
each portfolio manager.
The group of BlackRock, Inc.'s officers then makes a
subjective determination with respect to the portfolio manager's
compensation based on the performance of the funds and other
accounts managed by each portfolio manager relative to the various
benchmarks. This determination may take into consideration the fact
that a benchmark may not perfectly correlate to the way the
Registrant or other accounts are managed, even if it is the
benchmark that is most appropriate for the Registrant or other
account. For example, a benchmark's return may be based on the total
return of the securities comprising the benchmark, but the
Registrant or other account may be managed to maximize income and
not total return. Senior portfolio managers who perform additional
management functions within BlackRock may receive additional
compensation for serving in these other capacities.
Compensation Program (Messrs. Martorelli and Rendino)
The elements of total compensation for portfolio managers on
BlackRock's Equity Investments team include a fixed base salary,
annual performance-based cash and stock compensation (cash and stock
bonus) and other benefits. BlackRock has balanced these components
of pay to provide these portfolio managers with a powerful incentive
to achieve consistently superior investment performance. By design,
compensation levels for these portfolio managers fluctuate--both up
and down--with the relative investment performance of the portfolios
that they manage.
Base compensation
Like that of many asset management firms, base salaries
represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value
of the performance-based (and therefore variable) compensation
elements of the compensation program.
Performance-Based Compensation
BlackRock believes that the best interests of investors are
served by recruiting and retaining exceptional asset management
talent and managing their compensation within a consistent and
disciplined framework that emphasizes pay for performance in the
context of an intensely competitive market for talent. To that end,
BlackRock and its affiliates portfolio manager incentive
compensation is based on a formulaic compensation program.
BlackRock's formulaic portfolio manager compensation program
includes: investment performance over 1-, 3- and 5-year performance
periods and a measure of operational efficiency. Portfolio managers
are compensated based on the pre-tax performance of the products
they manage. If a portfolio manager's tenure is less than 5 years,
performance periods will reflect time in position. Portfolio
managers are compensated based on products they manage. A
discretionary element of portfolio manager compensation may include
consideration of: financial results, expense control, profit
margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation,
compliance and risk control, leadership, workforce diversity,
supervision, technology and innovation. All factors are considered
collectively by BlackRock management.
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards
that are expressed as an amount of cash that, if properly vested and
subject to the attainment of certain performance goals, will be
settled in cash and/or in BlackRock, Inc. common stock.
Cash Bonus
Performance-based compensation is distributed to portfolio
managers in a combination of cash and stock. Typically, the cash
bonus, when combined with base salary, represents more than 60% of
total compensation for portfolio managers.
Stock Bonus
A portion of the dollar value of the total annual performance-
based bonus is paid in restricted shares of BlackRock stock. Paying
a portion of annual bonuses in stock puts compensation earned by a
portfolio manager for a given year "at risk" based on the company's
ability to sustain and improve its performance over future periods.
The ultimate value of stock bonuses is dependent on future BlackRock
stock price performance. As such, the stock bonus aligns each
portfolio manager's financial interests with those of the BlackRock
shareholders and encourages a balance between short-term goals and
long-term strategic objectives. Management strongly believes that
providing a significant portion of competitive performance-based
compensation in stock is in the best interests of investors and
shareholders. This approach ensures that portfolio managers
participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers
therefore have a direct incentive to protect BlackRock's reputation
for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance
and financial management objectives during a performance year are
eligible to participate in a deferred cash program. Awards under
this program are in the form of deferred cash that may be
benchmarked to a menu of BlackRock mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program
aligns the interests of participating portfolio managers with the
investment results of BlackRock products and promotes continuity of
successful portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-
based plans offered generally to employees of BlackRock and its
affiliates, including broad-based retirement, 401(k), health, and
other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of December 31,
2006, none of the managers listed below beneficially owns
any stock issued by the Fund:
Scott Amero
Kevin Rendino
Robert Martorelli
John Burger
Daniel Chen
Imran Hussain
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the
registrant was migrated to BlackRock's trading and compliance
monitoring systems, and various personnel changes occurred. In
conjunction with these business improvements, there were no changes
in the registrants internal control over financial reporting (as
defined in Rule 30a-3(d) under Act (17 CFR 270.30a-3(d)) that
occurred during the last fiscal half-year of the period covered by
this report that has materially affected, or is reasonably likely to
affect, the registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Capital and Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
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Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Capital and Income Strategies Fund, Inc.
Date: February 20, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
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Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Capital and Income Strategies Fund, Inc.
Date: February 20, 2007
By: /s/ Donald C. Burke
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Donald C. Burke,
Chief Financial Officer of
BlackRock Capital and Income Strategies Fund, Inc.
Date: February 20, 2007