-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HmABSEOOtZaY8HE9jbBaKI/FzmY5CsbbxlK6gnS0TuFrrW+If/XNy0Iptxt+xEMR u4I1yVPKKbGxr40iDLaUmw== 0001047469-05-006003.txt : 20050310 0001047469-05-006003.hdr.sgml : 20050310 20050310104407 ACCESSION NUMBER: 0001047469-05-006003 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050310 DATE AS OF CHANGE: 20050310 EFFECTIVENESS DATE: 20050310 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND CENTRAL INDEX KEY: 0001228361 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-21342 FILM NUMBER: 05671043 MAIL ADDRESS: STREET 1: 399 PARK AVE CITY: NEW YORK STATE: NY ZIP: 10022 N-CSR 1 a2150870zn-csr.txt N-CSR 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 811-21342 --------------------------------------------- Lehman Brothers First Trust Income Opportunity Fund - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 399 Park Ave., New York, NY 10022 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Bradley Tank, Chief Executive Officer of Lehman Brothers Asset Management Inc. 399 Park Ave., New York, NY 10022 - ------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (212) 526-7000 ---------------------------- Date of fiscal year end: 12/31/2004 ------------------------ Date of reporting period: 12/31/2004 ------------------------ ITEM 1. REPORTS TO STOCKHOLDERS. The annual report for the period January 1, 2004 through December 31, 2004 is filed herewith. ANNUAL REPORT 2004 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND [GRAPHIC] LEHMAN BROTHERS CONTENTS Chairman's and President's Letter 2 Portfolio Manager's Report 3 Fund Overview 4 Schedule of Investments 5 Notes to Schedule of Investments 15 Statement of Assets and Liabilities 16 Statement of Operations 17 Statements of Changes in Net Assets 18 Financial Highlights 19 Notes to Financial Statements 20 Report of Independent Registered Public Accounting Firm 25 Dividend Reinvestment Plan (Unaudited) 26 Trustees and Officers Table (Unaudited) 27
CHAIRMAN'S AND PRESIDENT'S LETTER Dear Shareholder: We are pleased to present to you this annual report of the Lehman Brothers First Trust Income Opportunity Fund for the year ended December 31, 2004. The report includes portfolio commentary, a listing of the Fund's investments, and its financial statements for the reporting period. In the bond market, 2004 proved to be a bumpy but ultimately gratifying time, as bonds advanced for the fifth consecutive year in spite of a concerted effort by the Federal Reserve to tighten monetary conditions. High-yield bonds, in particular, generated strong gains for the year as their spreads over Treasuries narrowed steadily, reflecting healthy economic conditions as well as stronger corporate balance sheets. The Fund's investment objective is to seek high total return through income plus capital appreciation. The Fund pursues this investment objective by investing primarily in high-yield debt securities.* In seeking to achieve its investment objective, the Fund employs leverage through the issuance of Money Market Cumulative Preferred Shares. As noted in the accompanying Notes to the Financial Statements, the use of leverage can enhance the return of the Fund, but also involves a certain degree of risk for holders of common shares (Note #9). Portfolio manager Ann H. Benjamin and her team of experienced investment professionals at Lincoln Capital manage the portfolio. A review of the portfolio's performance and Ann's outlook for the high-yield markets may be found on the following page. Ann and her team take a proactive approach to high-yield asset management and integrate detailed security and industry analysis within the context of a global economic outlook. Ann's research analysts are industry specialists who carry out independent primary research on companies and industries. In addition to seeking value from specific issue selections, they also implement strategies seeking to take advantage of valuation opportunities across industry sectors and credit quality tiers. We thank you for your trust in Lehman Brothers Asset Management and Lincoln Capital. We will continue to do our best to keep earning it. Sincerely, /s/ Kurt A. Locher /s/ Brad Tank Kurt A. Locher Brad Tank CHAIRMAN AND TRUSTEE PRESIDENT - ---------- * Portfolios that invest in bonds and other fixed income securities can provide regular income and have historically been less volatile than most stock funds. However, they are subject to risks including credit risk, default on principal or interest payments and interest rate fluctuations. High-yield bonds, also known as "junk bonds," are subject to additional risks such as the increased risk of default. PORTFOLIO MANAGER'S REPORT For the annual reporting period ended December 31, 2004, the Lehman Brothers First Trust Income Opportunity Fund (NYSE: LBC) returned 11.99% on a Net Asset Value (NAV) basis and 15.48% on a market value basis. High-yield bonds* generated strong gains for the year as their spreads over Treasuries narrowed, reflecting healthy economic conditions, as well as stronger corporate balance sheets. The first half of 2004 was marked by ups and downs in the high-yield market. The Lehman Brothers U.S. High Yield Index rose more than 3% in the first few weeks of January, before falling back modestly due to an increase in issuance. Returns stabilized in March, helped by declining Treasury rates, but declined again in April and May. However, the winds shifted in June, as an improving economy combined with relatively benign inflation news and only a "measured" tightening campaign by the Federal Reserve, helped to lift the high-yield market over the rest of 2004. Over the 12-month reporting period, the sectors that contributed to our outperformance versus the benchmark included Gaming, Media, Metals and Mining, Health Care, and Cable. The sectors that detracted from results were Wireless, Restaurants, and Telecommunications, all of which underperformed primarily due to issue selection. Looking ahead, we believe that the high-yield market will continue its strong performance. However, if the Federal Reserve decides to raise interest rates more aggressively, a subsequent rise in U.S. Treasury rates may negatively affect overall high-yield returns. In addition, an adverse increase in short-term interest rates would increase the cost of the outstanding Money Market Preferred Shares issued by the Fund and thus could negatively impact the performance of the Fund. The good news is that, even with healthy new issuance, we anticipate a reasonable level of investor demand for high-yield securities, particularly from pension plan sponsors. Fundamental business knowledge, credit research and proprietary financial modeling have been essential to our record in managing this portfolio. Relative value analysis across issuers, business sectors, and credit sectors drives our portfolio positioning. By maintaining this investment approach, we will seek to continue providing high total returns to our shareholders. Sincerely, /s/ Ann H. Benjamin Ann H. Benjamin PORTFOLIO MANAGER - ---------- Past performance is not indicative of future results. * Portfolios that invest in bonds and other fixed income securities can provide regular income and have historically been less volatile than most stock funds. However, they are subject to risks including credit risk, default on principal or interest payments and interest rate fluctuations. High-yield bonds, also known as "junk bonds," are subject to additional risks such as the increased risk of default. 3 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND FUND OVERVIEW (AS OF 12/31/04)(1) PERFORMANCE HIGHLIGHTS
NOVEMBER 30- Q4 YEAR CUMULATIVE TOTAL RETURN INCEPTION DATE DEC 31, 2004 2004 2004 SINCE INCEPTION -------------- ------------ ---- ----- ---------------------- NAV 07/28/03 1.99% 6.52% 11.99% 26.24% Market Price 07/28/03 3.26% 6.24% 15.48% 27.57%
FUND FACTS Ticker NYSE: LBC Market Price (12/31/2004) $ 16.48 Net Asset Value (NAV) $ 15.58 Premium / (Discount) 5.78% Shares outstanding: 12,239,390 CUSIP number: 525178 10 9 Inception Date: 7/28/03
PORTFOLIO CHARACTERISTICS Portfolio Turnover 106.76% Expense Ratio 1.48% Wtd. Avg. Maturity 8.36 Years Average Coupon 8.65% Average Credit Quality B Portfolio Composition -- % High Yield 97.40%
CAPITAL STRUCTURE AND LEVERAGE ($MM) Total Managed Assets $ 280.8 Net Assets Attributable to Common Shares $ 190.7 Net Assets Attributable to Preferred Shares $ 90.1 Net Assets Attributable to Other Borrowings -- Leverage (% of total net assets) 32.1%
[CHART] CREDIT QUALITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH)(2) Cash (AAA) 0.5% BBB 6.4% BB 30.2% B 44.6% CCC 16.9% Not Rated 1.4%
[CHART] MARKET PRICE AND NAV PERFORMANCE
PRICE($) NAV($) PREMIUM/DISCOUNT(%) -------- ------ ------------------- 7/29/2003 $ 15.00 $ 14.30 4.9% 8/8/2003 $ 15.00 $ 14.16 5.9% 8/15/2003 $ 15.10 $ 13.98 8.0% 8/22/2003 $ 14.56 $ 14.39 1.2% 8/29/2003 $ 14.45 $ 14.60 -1.0% 9/5/2003 $ 14.75 $ 14.75 0.0% 9/12/2003 $ 14.83 $ 14.93 -0.7% 9/19/2003 $ 14.82 $ 14.90 -0.5% 9/26/2003 $ 14.78 $ 14.92 -0.9% 10/3/2003 $ 14.93 $ 14.87 0.4% 10/10/2003 $ 15.14 $ 15.00 0.9% 10/17/2003 $ 15.10 $ 14.95 1.0% 10/24/2003 $ 15.23 $ 14.80 2.9% 10/31/2003 $ 15.25 $ 14.88 2.5% 11/7/2003 $ 15.27 $ 14.94 2.2% 11/14/2003 $ 15.48 $ 15.01 3.1% 11/21/2003 $ 15.14 $ 14.99 1.0% 11/28/2003 $ 15.26 $ 15.06 1.3% 12/5/2003 $ 15.36 $ 15.34 0.1% 12/12/2003 $ 15.32 $ 15.43 -0.7% 12/19/2003 $ 15.43 $ 15.60 -1.1% 12/26/2003 $ 15.49 $ 15.46 0.2% 12/31/2003 $ 15.91 $ 15.51 2.8% 1/9/2004 $ 15.79 $ 15.92 -0.8% 1/16/2004 $ 16.59 $ 15.98 3.8% 1/23/2004 $ 16.25 $ 15.95 1.9% 1/30/2004 $ 16.10 $ 15.60 3.2% 2/6/2004 $ 16.00 $ 15.31 4.5% 2/13/2004 $ 16.52 $ 15.49 6.6% 2/20/2004 $ 15.99 $ 15.22 5.1% 2/27/2004 $ 16.17 $ 15.17 6.6% 3/5/2004 $ 16.03 $ 15.27 5.0% 3/12/2004 $ 16.22 $ 15.25 6.4% 3/19/2004 $ 16.43 $ 15.12 8.7% 3/26/2004 $ 16.02 $ 14.98 6.9% 3/31/2004 $ 16.20 $ 15.09 7.4% 4/2/2004 $ 16.16 $ 15.06 7.3% 4/8/2004 $ 15.90 $ 15.16 4.9% 4/16/2004 $ 14.82 $ 15.17 -2.4% 4/23/2004 $ 14.90 $ 15.14 -1.6% 4/30/2004 $ 14.71 $ 15.02 -2.1% 5/7/2004 $ 14.39 $ 14.65 -1.8% 5/21/2004 $ 13.87 $ 14.35 -3.5% 5/28/2004 $ 14.94 $ 14.54 2.8% 6/4/2004 $ 14.95 $ 14.54 2.8% 6/10/2004 $ 14.98 $ 14.62 2.5% 6/18/2004 $ 14.95 $ 14.71 1.6% 6/25/2004 $ 14.75 $ 14.69 0.4% 6/30/2004 $ 14.85 $ 14.67 1.2% 7/2/2004 $ 14.94 $ 14.72 1.5% 7/9/2004 $ 15.00 $ 14.85 1.0% 7/16/2004 $ 15.20 $ 14.98 1.5% 7/23/2004 $ 15.18 $ 14.85 2.2% 7/30/2004 $ 15.15 $ 14.82 2.2% 8/13/2004 $ 15.44 $ 14.81 4.3% 8/20/2004 $ 15.55 $ 14.88 4.5% 8/27/2004 $ 15.49 $ 14.85 4.3% 8/31/2004 $ 15.58 $ 14.87 4.8% 8/13/2004 $ 15.44 $ 14.81 4.3% 8/20/2004 $ 15.55 $ 14.88 4.5% 8/27/2004 $ 15.49 $ 14.85 4.3% 8/31/2004 $ 15.58 $ 14.87 4.8% 9/3/2004 $ 15.53 $ 14.91 4.2% 9/10/2004 $ 15.73 $ 15.06 4.4% 9/17/2004 $ 15.85 $ 15.11 4.9% 9/24/2004 $ 15.67 $ 15.03 4.3% 10/1/2004 $ 15.75 $ 15.03 4.8% 10/15/2004 $ 16.29 $ 15.20 7.2% 10/22/2004 $ 16.13 $ 15.08 7.0% 10/29/2004 $ 15.86 $ 15.32 3.5% 11/5/2004 $ 16.30 $ 15.53 5.0% 11/12/2004 $ 16.10 $ 15.49 3.9% 11/19/2004 $ 16.35 $ 15.57 5.0% 11/26/2004 $ 16.34 $ 15.48 5.6% 12/3/2004 $ 16.40 $ 15.43 6.3% 12/10/2004 $ 16.10 $ 15.55 3.5% 12/17/2004 $ 16.48 $ 15.63 5.4% 12/23/2004 $ 16.26 $ 15.55 4.6% 12/31/2004 $ 16.48 $ 15.58 5.7%
[CHART] TOP INDUSTRIES (% OF TOTAL INVESTMENTS) Media Broadcasting & Publishing 15.6% Telephone Systems 6.1% Entertainment & Leisure 11.0% Electric Utilities 11.3% Multiple Utilities 3.8% Oil & Gas 6.6% Health Care Providers 3.8% Transportation 4.4% Commercial Services 4.7% Chemicals 3.9% Other 28.8%
[CHART] MATURITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH) LESS THAN 1 Year 0.5% 1-3 Years 2.9% 3-5 Years 12.8% 5-7 Years 29.3% 7-10 Years 42.8% 10+ Years 11.7%
- ---------- 1. High yield bonds are lower quality debt instruments also known as "junk bonds". Such instruments entail greater risks than those found in higher quality securities. 2. Percentages compiled using the highest rating for each security. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND SCHEDULE OF INVESTMENTS DECEMBER 31, 2004
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- CORPORATE DEBT--143.1% OF TOTAL NET ASSETS AIRLINES--2.6% $ 4,985,000 Delta Airlines, Inc., Series 2000-1, Class A2 7.570%, 11/18/2010 BBB Ba B $ 4,917,225 AUTOMOTIVE--3.6% 2,000,000 Dana Corp., Note 7.000%, 3/01/2029 BBB Ba BBB 1,995,000 2,000,000 General Motors Acceptance Corp., Note 8.000%, 11/01/2031 BBB Baa BBB 2,055,770 2,685,000 Navistar International Corp., Senior Note 7.500%, 6/15/2011 BB Ba BB 2,879,662 6,930,432 BEVERAGES, FOOD & TOBACCO--1.3% 1,000,000 Del Monte Corp., Senior Subordinated Note 8.625%, 12/15/2012 B B BB 1,120,000 1,250,000 Dole Food, Inc., Senior Note 8.625%, 5/01/2009 B B B 1,359,375 2,479,375 BUILDING MATERIALS--0.9% 1,595,000 THL Buildco, Inc., Senior Subordinated Note, 144A 8.500%, 9/01/2014 B B NR 1,666,775 CHEMICALS--5.5% 3,375,000 Equistar Chemicals, LP/Equistar Funding Corp., Senior Note 10.625%, 5/01/2011 B B B 3,915,000 1,195,000 Huntsman LLC, Senior Secured Note 11.625%, 10/15/2010 B B NR 1,413,087 2,545,000 Methanex Corp., Senior Note 8.750%, 8/15/2012 BBB Ba BBB 2,971,287 2,000,000 Millennium Chemicals, Inc., Senior Note 9.250%, 6/15/2008 B B B 2,275,000 10,574,374 COAL--0.2% 310,000 Peabody Energy Corp., Senior Note 5.875%, 4/15/2016 BB Ba BB 308,450
See accompanying notes to financial statements. 5
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL SERVICES--6.8% $ 1,265,000 Allied Waste North America, Inc., Senior Secured Note 8.875%, 4/01/2008 BB B BB $ 1,353,550 1,424,000 Coinmach Corp., Senior Note 9.000%, 2/01/2010 CCC B NR 1,488,080 3,105,000 Monitronics International, Inc., Senior Subordinated Note 11.750%, 9/01/2010 B B NR 3,388,331 2,960,000 Muzak LLC/Muzak Finance Corp., Senior Note 10.000%, 2/15/2009 CCC Caa NR 2,756,500 3,940,000 Muzak LLC/Muzak Finance Corp., Senior Subordinated Note 9.875%, 3/15/2009 CCC Caa NR 2,753,075 1,070,000 UGS Corp., Senior Subordinated Note, 144A 10.000%, 6/01/2012 B B NR 1,217,125 12,956,661 COMMUNICATIONS--4.1% 1,000,000 L-3 Communications Corp., Senior Subordinated Note 7.625%, 6/15/2012 BB Ba BB 1,097,500 2,305,000 Language Line, Inc., Note 11.125%, 6/15/2012 CCC Caa NR 2,443,300 2,005,000 PanAmSat Corp., Senior Note, 144A 9.000%, 8/15/2014 B B NR 2,238,081 2,900,000 PanAmSat Holding Corp., Senior Note,144A 0.000%/10.375%, 11/01/2014 (c) B Caa NR 1,993,750 7,772,631 COMPUTERS--0.2% 440,000 Unisys Corp., Senior Note 6.875%, 3/15/2010 BB Ba BBB 470,800 CONTAINERS & PACKAGING--4.0% 510,000 Crown European Holdings SA, Senior Secured Note 9.500%, 3/01/2011 B B NR 581,400 3,160,000 Crown European Holdings SA, Senior Secured Note 10.875%, 3/01/2013 B B NR 3,736,700 3,000,000 Owens-Brockway Glass Container, Senior Secured Note 8.750%, 11/15/2012 BB B B 3,382,500 7,700,600
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- COSMETICS & PERSONAL CARE--1.0% $ 1,755,000 Playtex Products, Inc., Senior Secured Note 8.000%, 3/01/2011 B B NR $ 1,917,337 ELECTRIC UTILITIES--16.2% 4,305,000 AES Corp. (The), Senior Secured Note, 144A 8.750%, 5/15/2013 B B BB 4,891,556 3,215,000 Calpine Corp., Senior Note, 144A 9.625%, 9/30/2014 B NR B 3,327,525 1,635,000 Calpine Corp., Senior Secured Note, 144A 8.750%, 7/15/2013 B NR B 1,348,875 2,720,000 Calpine Corp., Senior Secured Note, 144A 9.875%, 12/01/2011 B NR B 2,380,000 2,250,000 CMS Energy Corp., Senior Note 7.750%, 8/01/2010 B B B 2,460,937 1,060,000 CMS Energy Corp., Senior Note 9.875%, 10/15/2007 B B B 1,184,550 440,000 Edison Mission Energy Corp., Senior Note 9.875%, 4/15/2011 B B B 521,400 1,785,000 Midwest Generation LLC, Senior Secured Note 8.750%, 5/01/2034 B B B 2,025,975 1,410,000 Mission Energy Holding Co., Senior Secured Note 13.500%, 7/15/2008 CCC B B 1,758,975 3,610,000 Reliant Resources, Inc., Senior Secured Note 9.500%, 7/15/2013 B B BB 4,101,862 500,000 TECO Energy, Inc., Note 7.000%, 5/01/2012 BB Ba BB 546,250 4,000,000 TECO Energy, Inc., Note 7.500%, 6/15/2010 BB Ba BB 4,420,000 1,950,000 Texas Genco LLC/Texas Genco Financing Corp., Senior Note, 144A 6.875%, 12/15/2014 B B NR 2,015,812 30,983,717 ELECTRICAL EQUIPMENT--0.9% 1,700,000 Hexcel Corp., Senior Subordinated Note 9.750%, 1/15/2009 CCC Caa NR 1,768,000
See accompanying notes to financial statements. 7
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- ELECTRONICS--1.9% $ 1,675,000 Freescale Semiconductor, Inc., Senior Note 7.125%, 7/15/2014 BB Ba BB $ 1,817,375 1,720,000 Xerox Corp., Note 7.625%, 6/15/2013 B Ba BB 1,887,700 3,705,075 ENTERTAINMENT & LEISURE--15.8% 2,215,000 AMF Bowling Worldwide, Inc., Senior Subordinated Note 10.000%, 3/01/2010 CCC B B 2,364,512 2,500,000 Blockbuster, Inc., Senior Subordinated Note, 144A 9.000%, 9/01/2012 B B B 2,468,750 2,160,000 Choctaw Resort Development Enterprise, Senior Note, 144A 7.250%, 11/15/2019 BB B NR 2,181,600 3,165,000 Chukchansi Economic Development Authority, Senior Note, 144A 14.500%, 6/15/2009 NR NR NR 3,987,900 2,000,000 Chumash Casino & Resort Enterprise, Senior Note, 144A 9.000%, 7/15/2010 BB Ba NR 2,215,000 3,130,000 Hollywood Entertainment Corp., Senior Subordinated Note 9.625%, 3/15/2011 B B NR 3,317,800 2,230,000 Marquee, Inc., Senior Note, 144A 8.625%, 8/15/2012 B B NR 2,464,150 360,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note 8.000%, 4/01/2012 B Ba NR 390,600 1,295,000 Royal Caribbean Cruises, Ltd., Senior Note 7.500%, 10/15/2027 BB Ba NR 1,413,169 1,510,000 Seneca Gaming Corp., Senior Note 7.250%, 5/01/2012 BB B NR 1,589,275 3,510,000 Station Casinos, Inc., Senior Subordinated Note 6.875%, 3/01/2016 B B NR 3,654,787 1,210,000 Turning Stone Casino Resort Enterprise, Senior Note, 144A 9.125%, 12/15/2010 B B NR 1,309,825 2,560,000 WMG Holdings Corp., Senior Note, 144A 0.000%/9.500%, 12/15/2014 (c) B Caa NR 1,635,200 1,185,000 Wynn Las Vegas LLC/Wynn Las Vegas Capital Corp., Note, 144A 6.625%, 12/01/2014 B B NR 1,173,150 30,165,718
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- FINANCE & INSURANCE--0.7% $ 1,215,000 Arch Western Finance LLC, Guaranteed Senior Note 6.750%, 7/01/2013 BB Ba NR $ 1,254,487 FOOD RETAILERS--1.5% 2,705,000 Stater Brothers Holdings, Senior Note 8.125%, 6/15/2012 BB B NR 2,860,538 FOREST PRODUCTS & PAPER--2.3% 665,000 Abitibi-Consolidated, Inc., Guaranteed Note 6.000%, 6/20/2013 BB Ba NR 634,244 1,260,000 Georgia-Pacific Corp., Note 7.750%, 11/15/2029 BB Ba BB 1,411,200 2,000,000 Georgia-Pacific Corp., Senior Note 8.875%, 2/01/2010 BB Ba BB 2,327,500 4,372,944 HEALTH CARE PROVIDERS--5.4% 2,305,000 HCA, Inc., Note 7.500%, 11/06/2033 BB Ba BB 2,351,407 1,705,000 Spheris, Senior Subordinated Note, 144A 11.000%, 12/15/2012 CCC Caa NR 1,747,625 2,500,000 US Oncology, Inc., Senior Note, 144A 9.000%, 8/15/2012 B B NR 2,793,750 535,000 US Oncology, Inc., Senior Subordinated Note, 144A 10.750%, 8/15/2014 B B NR 619,263 2,585,000 Vanguard Health Holding Co. II, Senior Subordinated Note, 144A 9.000%, 10/01/2014 CCC Caa NR 2,765,950 10,277,995 HEAVY MACHINERY--2.4% 3,310,000 Mueller Group, Inc., Senior Subordinated Note 10.000%, 5/01/2012 B Caa NR 3,607,900 1,280,000 Mueller Holdings, Inc., Senior Note, Step-Up 0.000%/14.750%, 4/15/2014 (c) B NR NR 876,800 4,484,700 HOME CONSTRUCTION, FURNISHINGS & APPLIANCES--1.4% 655,000 Beazer Homes USA, Inc., Senior Note 8.375%, 4/15/2012 BB Ba BB 720,500
See accompanying notes to financial statements. 9
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- HOME CONSTRUCTION, FURNISHINGS & APPLIANCES--CONTINUED $ 560,000 K Hovnanian Enterprises, Inc., Senior Note 8.000%, 4/01/2012 BB Ba BB $ 611,800 1,255,000 Standard-Pacific Corp., Senior Note 7.750%, 3/15/2013 BB Ba NR 1,355,400 2,687,700 MEDIA - BROADCASTING & PUBLISHING--22.4% 3,295,000 Charter Communications Holdings, Inc., Senior Note 10.000%, 5/15/2011 CCC Ca CCC 2,817,225 2,435,000 Charter Communications Operating LLC/Charter Communications Capital Corp., Senior Note, 144A 8.000%, 4/30/2012 B B B 2,532,400 1,835,000 CSC Holdings, Inc., Series B, Senior Note 8.125%, 8/15/2009 BB B BB 2,007,031 97,000 Dex Media East LLC/Dex Media East Finance Co., Guaranteed Note 12.125%, 11/15/2012 B B B 118,219 1,000,000 Dex Media East LLC/Dex Media East Finance Co., Senior Note 9.875%, 11/15/2009 B B B 1,138,750 1,545,000 Dex Media, Inc., Note 8.000%, 11/15/2013 B B CCC 1,672,463 2,275,000 Echostar DBS Corp., Senior Note, 144A 6.625%, 10/01/2014 BB Ba BB 2,303,438 795,000 Houghton Mifflin Co., Senior Note 8.250%, 2/01/2011 B B B 846,675 2,195,000 Houghton Mifflin Co., Senior Subordinated Note 9.875%, 2/01/2013 B Caa CCC 2,403,525 7,300,000 Ono Finance PLC, Note 14.000%, 2/15/2011 CCC Caa B 8,395,000 1,265,000 Paxson Communications Corp., Senior Subordinated Note 10.750%, 7/15/2008 CCC Caa NR 1,328,250 7,330,000 Paxson Communications Corp., Senior Subordinated Note 0.000%/12.250%, 1/15/2009 (c) CCC Caa NR 6,853,550 2,490,000 RH Donnelley Finance Corp. I, Senior Subordinated Note 10.875%, 12/15/2012 B B NR 2,956,875 1,325,000 Rogers Cable, Inc., Senior Secured Note 6.250%, 6/15/2013 BB Ba NR 1,328,313 1,990,000 Rogers Cable, Inc., Senior Secured Note 7.875%, 5/01/2012 BB Ba NR 2,179,050
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- MEDIA - BROADCASTING & PUBLISHING--CONTINUED $ 1,435,000 Rogers Cable, Inc., Senior Secured Note 8.750%, 5/01/2032 BB Ba NR $ 1,592,850 700,000 Young Broadcasting, Inc., Senior Subordinated Note 8.750%, 1/15/2014 CCC Caa NR 705,250 1,350,000 Young Broadcasting, Inc., Senior Subordinated Note 10.000%, 3/01/2011 CCC Caa NR 1,441,125 42,619,989 MEDICAL SUPPLIES--0.8% 2,500,000 CDRV Investors, Inc., Note, 144A 0.000%/9.625%, 1/01/2015 (c) B Caa NR 1,553,125 METALS--3.6% 3,005,000 AK Steel Corp., Guaranteed Senior Note 7.750%, 6/15/2012 B B NR 3,095,150 3,270,000 IPSCO, Inc., Senior Note 8.750%, 6/01/2013 BB Ba NR 3,744,150 6,839,300 MULTIPLE UTILITIES--5.5% 2,650,000 Coastal Corp., Note 7.750%, 6/15/2010 CCC Caa NR 2,769,250 3,630,000 Coastal Corp., Senior Note 9.625%, 5/15/2012 CCC Caa NR 4,029,300 1,280,000 El Paso Natural Gas Co., Note 8.375%, 6/15/2032 B B NR 1,425,600 1,985,000 El Paso Natural Gas Co., Senior Note 7.625%, 8/01/2010 B B NR 2,173,575 10,397,725 OIL & GAS--9.4% 390,000 Chesapeake Energy Corp., Senior Note 6.875%, 1/15/2016 BB Ba BB 408,525 1,595,000 Chesapeake Energy Corp., Senior Note 7.000%, 8/15/2014 BB Ba BB 1,698,675 1,000,000 Enterprise Products Operating, LP, Senior Note 6.875%, 3/01/2033 BB Baa BBB 1,062,867 840,000 Forest Oil Corp., Senior Note 7.750%, 5/01/2014 BB Ba NR 913,500 1,710,000 Forest Oil Corp., Senior Note 8.000%, 12/15/2011 BB Ba NR 1,953,675
See accompanying notes to financial statements. 11
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- OIL & GAS--CONTINUED $ 500,000 Newfield Exploration Co., Senior Note 7.625%, 3/01/2011 BB Ba NR $ 562,500 3,000,000 Newfield Exploration Co., Senior Subordinated Note 8.375%, 8/15/2012 BB Ba NR 3,360,000 3,250,000 Petroleos Mexicanos, Global Guaranteed Note 9.500%, 9/15/2027 BBB Baa BBB 4,078,750 2,245,000 Transcontinental Gas Pipe Line Corp., Note 7.250%, 12/01/2026 B Ba BB 2,441,438 1,370,000 Vintage Petroleum, Inc., Senior Note 8.250%, 5/01/2012 BB Ba NR 1,510,425 17,990,355 PHARMACEUTICALS--3.7% 4,870,000 Biovail Corp., Senior Subordinated Note 7.875%, 4/01/2010 BB B NR 5,040,450 1,915,000 Elan Finance PLC/Elan Finance Corp., Senior Note, 144A 7.750%, 11/15/2011 B B NR 2,039,475 7,079,925 RESTAURANTS--0.1% 215,000 Carrols Corp., Senior Subordinated Note, 144A 9.000%, 1/15/2013 B B NR 222,525 RETAILERS--2.2% 2,330,000 Amscan Holdings, Inc., Senior Subordinated Note 8.750%, 5/01/2014 B B NR 2,330,000 585,000 Jean Coutu Group, Inc., Senior Note, 144A 7.625%, 8/01/2012 B B NR 618,638 1,245,000 Jean Coutu Group, Inc., Senior Subordinated Note, 144A 8.500%, 8/01/2014 B B NR 1,276,125 4,224,763 TELEPHONE SYSTEMS--8.8% 3,425,000 Centennial Cellular Operating Co./Centennial Communications Corp., Guaranteed Senior Note 10.125%, 6/15/2013 CCC Caa NR 3,844,563 3,840,000 Dobson Communications Corp., Senior Note 8.875%, 10/01/2013 CCC Ca NR 2,697,600 2,525,000 LCI International, Inc., Senior Note 7.250%, 6/15/2007 NR NR B 2,455,563
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH AMOUNT DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- TELEPHONE SYSTEMS--CONTINUED $ 750,000 Qwest Capital Funding, Inc., Note 7.900%, 8/15/2010 B Caa B $ 757,500 2,000,000 Qwest Services Corp., Senior Subordinated Note, 144A 13.500%, 12/15/2010 B Caa B 2,405,000 3,395,139 Receivables Structured Trust Corp., Note, 144A 7.440%, 12/10/2006 NR Caa CCC 3,471,529 415,000 Rogers Wireless Communications, Inc., Senior Secured Note, 144A 7.250%, 12/15/2012 BB Ba BB 439,900 665,000 Rogers Wireless Communications, Inc., Senior Secured Note, 144A 7.500%, 3/15/2015 BB Ba BB 701,575 16,773,230 TEXTILES, CLOTHING & FABRICS--1.6% 1,930,000 Broder Brothers, Senior Note 11.250%, 10/15/2010 B B NR 2,016,850 1,000,000 Broder Brothers, Senior Note, 144A 11.250%, 10/15/2010 B B NR 1,045,000 3,061,850 TRANSPORTATION--6.3% 4,850,000 Grupo Transportacion Ferroviaria Mexicana SA de CV, Senior Note 0.000%/11.750%, 6/15/2009 (c) B B B 4,940,938 220,000 Grupo Transportacion Ferroviaria Mexicana SA de CV, Senior Note 12.500%, 6/15/2012 B B B 256,850 950,000 Kansas City Southern Railway Co., Senior Note 9.500%, 10/01/2008 B B NR 1,079,438 3,390,000 Laidlaw International, Inc., Senior Note 10.750%, 6/15/2011 B B NR 3,957,825 175,000 Stena AB, Note 9.625%, 12/01/2012 BB Ba NR 197,750 1,525,000 Stena AB, Senior Note, 144A 7.000%, 12/01/2016 BB Ba NR 1,509,750 11,942,551 TOTAL CORPORATE DEBT (IDENTIFIED COST $257,588,642) 272,960,872
See accompanying notes to financial statements. 13
S&P MOODY'S FITCH SHARES DESCRIPTION RATINGS* RATINGS* RATINGS* VALUE(a) - ---------------------------------------------------------------------------------------------------------------------------------- PREFERRED STOCKS--0.4% MEDIA - BROADCASTING & PUBLISHING--0.4% 11,400 Paxson Communications Corp. CCC Caa NR $ 837,900 TOTAL PREFERRED STOCKS (IDENTIFIED COST $963,506) 837,900 TOTAL INVESTMENTS--143.5% (IDENTIFIED COST $258,552,148)(b) 273,798,772 Other Assets, Less Liabilities--3.7% 6,997,455 Auction Market Preferred Shares plus cumulative unpaid dividends(47.2%) (90,096,666) TOTAL NET ASSETS--100% $ 190,699,561
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND NOTES TO SCHEDULE OF INVESTMENTS DECEMBER 31, 2004 * Ratings of issues shown are not audited by Ernst & Young LLP. (a) See Note 2a of Notes to Financial Statements. (b) Federal Tax Information: At December 31, 2004, the net unrealized appreciation on investments based on cost of $258,650,293 for federal income tax purposes was as follows: Aggregate gross unrealized appreciation for all investments in which there is an excess of value over tax cost $ 16,974,125 Aggregate gross unrealized depreciation for all investments in which there is an excess of tax cost over value (1,825,646) Net unrealized appreciation $ 15,148,479
(c) Denotes a step-up bond: a zero coupon bond that converts to a fixed rate of interest at a designated future date. 144A Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of 144A Securities amounted to $66,560,142 or 34.9% of net assets. Quality Profile (unaudited) The quality ratings of securities in the Fund as of December 31, 2004 were as follows:
PERCENT OF TOTAL INVESTMENTS S&P RATING/MOODY'S RATING/FITCH RATING AND CASH** BBB/Baa/BBB 6.4% BB/Ba/BB 30.2 B/B/B 44.6 CCC/Caa/CCC 16.9 NR (Not Rated) *** 1.4 Cash 0.5 100.0%
** Percentages compiled using the highest rating for each security. *** Securities not rated are of quality that is permitted to be invested in by the Fund. See accompanying notes to financial statements. 15 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2004
ASSETS Investments at cost $ 258,552,148 Net unrealized appreciation 15,246,624 INVESTMENTS AT VALUE 273,798,772 Cash 1,406,087 Interest receivable 4,826,671 Unrealized appreciation on swap contracts 1,080,000 Prepaid expenses 63,449 TOTAL ASSETS 281,174,979 LIABILITIES Management fees payable 142,489 Other accrued expenses 236,263 TOTAL LIABILITIES 378,752 MONEY MARKET CUMULATIVE PREFERRED SHARES (3,600 SHARES ISSUED AND OUTSTANDING) AT LIQUIDATION VALUE PLUS CUMULATIVE UNPAID DIVIDENDS 90,096,666 NET ASSETS APPLICABLE TO COMMON SHARES $ 190,699,561 NET ASSETS CONSIST OF: Common Shares, no par value; unlimited number of shares authorized, 12,239,390 shares issued and outstanding $ 173,752,386 Accumulated net realized gain on investments 620,551 Net unrealized appreciation of investments and swap agreements 16,326,624 NET ASSETS APPLICABLE TO COMMON SHARES $ 190,699,561 COMPUTATION OF NET ASSET VALUE PER COMMON SHARE: NET ASSETS $ 190,699,561 COMMON SHARES ISSUED AND OUTSTANDING 12,239,390 NET ASSET VALUE PER SHARE $ 15.58 MARKET VALUE (CLOSING PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE) $ 16.48
See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004
INVESTMENT INCOME Interest $ 23,409,624 Dividends 335,009 23,744,633 Expenses Management fee 1,650,405 Investor service fee 137,534 Trustees' fees and expenses 100,685 Custodian fee 310,495 Audit and tax services 43,230 Legal fee 137,024 Shareholder Reports 1,000 Preferred shares auction 232,619 Insurance expense 93,005 Miscellaneous 25,295 TOTAL EXPENSES 2,731,292 NET INVESTMENT INCOME 21,013,341 REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Realized gain (loss) on: Investments -- net 477,437 Interest rate swap contracts -- net (255,313) Change in unrealized appreciation of: Investments -- net 160,507 Interest rate swap contracts -- net 1,080,000 Net realized and unrealized gain on investments 1,462,631 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 22,475,972 LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM NET INVESTMENT INCOME (1,380,048) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO COMMON SHARES $ 21,095,924
See accompanying notes to financial statements. 17 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD YEAR ENDED JULY 28, 2003* DECEMBER 31, TO 2004 DECEMBER 31, 2003 FROM OPERATIONS: Net investment income $ 21,013,341 $ 7,542,906 Net realized gain on investments and swaps 222,124 1,163,262 Net change in unrealized appreciation of investments 1,240,507 15,086,117 Dividends to preferred shareholders from net investment income (1,380,048) (202,338) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 21,095,924 23,589,947 LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS Net investment income (19,016,408) (7,356,716) Net realized gain on investments (1,173,302) (192,270) (20,189,710) (7,548,986) INCREASE (DECREASE) IN NET ASSETS DERIVED FROM COMMON SHARE TRANSACTIONS: 128,713 174,859,218 Offering costs and underwriting discounts on preferred shares 1,000 (1,236,545) TOTAL INCREASE IN NET ASSETS 1,035,927 189,663,634 NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS Beginning of period 189,663,634 0 End of period $ 190,699,561 $ 189,663,634 UNDISTRIBUTED NET INVESTMENT INCOME $ 0 $ 343,688
* Commencement of operations. See accompanying notes to financial statements. LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND FINANCIAL HIGHLIGHTS
FOR THE PERIOD YEAR JULY 28, 2003 ENDED THROUGH DECEMBER 31, DECEMBER 31, 2004 2003* NET ASSET VALUE, BEGINNING OF YEAR (COMMON SHARES) $ 15.51 $ 14.33(a) Net Investment Income (b) 1.72 0.64 Net Realized and Unrealized Gain (Loss) on Investments 0.11 1.31 Dividends to Preferred Shareholders from Net Investment Income (0.11) (0.02) TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 1.72 1.93 Less Distributions to Common Shareholders From Net Investment Income (1.55) (0.60) From Net Realized Gains (0.10) (0.02) TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (1.65) (0.62) Common Shares Offering Costs Charged to Paid-in Capital -- (0.03) Preferred Shares Underwriting Commissions and Offering Costs Charged to Paid in Capital -- (0.10) NET ASSET VALUE, END OF YEAR (COMMON SHARES) $ 15.58 $ 15.51 MARKET VALUE -- END OF PERIOD (COMMON SHARES) $ 16.48 $ 15.91 Total Return on Net Asset Value (%) 11.99 12.73(c) Total Return on Market Value (%) 15.48 10.47(d) Ratio of Expenses (excluding interest expense) to Average Net Assets Applicable to Common Shares (%) (f) 1.48 1.42(e) Ratio of Interest Expense to Average Net Assets Applicable to Common Shares (%) (f) -- 0.19(e) Ratio of Net Investment Income to Average Net Assets Applicable to Common Shares (%) (f) 11.36 10.00(e) Portfolio Turnover Rate (%) 106.76 32.08 Net Assets Applicable to Common Shares, End of the Year (000) $ 190,700 $ 189,644 MONEY MARKET CUMULATIVE PREFERRED SHARES Preferred Shares Outstanding, End of Period (000) $ 90,000 $ 90,000 Asset Coverage Per $1,000 $ 3,119 $ 3,107 Involuntary Liquidation Preference Per Share $ 25,000 $ 25,000 Approximate Market Value Per Share $ 25,000 $ 25,000
* Commencement of operations. (a) Net asset value at beginning of period reflects the deduction from the $15.00 offering price of the sales load of $0.675 per share paid by the shareholder. (b) Calculated using average shares outstanding during the period. (c) Total return on net asset value is calculated assuming a purchase at the offering price of $15.00 less the sales load of $0.675 paid by the shareholder on the first day and the ending net asset value per share and is not annualized. (d) Total return on market value is calculated assuming a purchase at the offering price of $15.00 on the first day and a sale at the current market price on the day of the period and is not annualized. (e) Annualized. (f) Expense and net investment income ratios include accumulated and unpaid dividends. See accompanying notes to financial statements. 19 LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2004 NOTE 1 -- ORGANIZATION Lehman Brothers First Trust Income Opportunity Fund (the "Fund") was organized as a statutory trust under the laws of the state of Delaware on April 8, 2003, and is registered under the Investment Company act of 1940, as amended (the "1940 Act"), as a diversified, closed-end management investment company. Lehman Brothers Asset Management Inc. (the "Adviser") is investment adviser to the Fund. Lincoln Capital Fixed Income Management Company, LLC (a wholly owned subsidiary of Lehman Brothers Holdings Inc.) is the subadviser to the Fund. The Fund's common shares are listed on the New York Stock Exchange under the symbol LBC. The Fund's investment objective is to seek high total return (income plus capital appreciation). The Fund will pursue its investment objective by investing its assets primarily in high yield debt securities. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. A) VALUATION: Debt securities are valued using an independent pricing service approved by the Board of Trustees, which utilizes closing market prices, market quotations and transactions, quotations from dealers and various relationships among securities in determining value. Securities for which closing market prices or market quotations are not available or are not considered by the Adviser to be reflective of a security's market value, are valued at fair value as determined in good faith under consistently applied procedures established by and under the supervision of the Board of Trustees. Criteria considered in making this determination may include, but is not limited to, a review of other securities by the same issuer for which market quotations are available, recent bid and ask prices for the security, the issuer's position in and economic outlook of the industry and, if necessary, a review of similar securities in similar industries. Securities with remaining maturities of 60 days or less are valued at amortized cost. This method involves valuing a portfolio security initially at its cost and thereafter assumes a constant amortization to maturity of any discount or premium. B) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions are recorded on a trade date basis. Dividend income is recorded on the ex-dividend date. Interest income, including amortization of premium and accretion of discount on securities, is recorded on the accrual basis. Realized gains and losses on investments are recorded on the basis of identified cost. C) ORGANIZATION AND OFFERING COSTS: The Adviser has agreed to pay all organizational expenses and the amount by which the Fund's offering costs for common stock (other than sales load) exceeded $0.03 per share. Offering costs for common stock paid for the Fund were charged as a reduction of common stock paid-in-capital at the completion of the Fund's offering and amounted to $366,000. Additionally, offering costs of approximately $337,000 incurred with respect to the issuance of Preferred Shares and paid by the Fund were charged as a reduction to common shares outstanding paid-in-capital at the completion of the Fund's preferred shares offering. D) FEDERAL INCOME TAXES: It is the policy of the Fund to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute all of its net taxable income, including any net realized gains on investments, to its shareholders. Therefore, no federal income tax provision is required. E) REVERSE REPURCHASE AGREEMENTS: The Fund is permitted to enter into reverse repurchase agreements with banks or securities firms deemed creditworthy by the Adviser. A reverse repurchase agreement involves the sale of a security by the Fund, with an agreement to repurchase the same or substantially similar security at an agreed upon price and date. Securities purchased subject to repurchase agreements must have an aggregate market value greater than or equal to the repurchase price plus accrued interest at all times. Reverse repurchase agreements involve the risk that the market value of the securities purchased with the proceeds from the sale of securities received by the Fund may decline below the price of the securities that the Fund is obligated to repurchase. There were no reverse repurchase agreements outstanding at December 31, 2004. F) SWAP AGREEMENTS: The Fund may invest in swap agreements. A swap is an agreement to exchange the return generated by one instrument for the return generated by another instrument. The Fund may enter into interest rate swap agreements to manage its exposure to interest rates and credit risk. Interest rate swap agreements involve the exchange by the Fund with another party of their respective commitments to pay or receive interest. Swaps are marked to market daily based upon quotations from market makers and the change in value, if any, is recorded as unrealized gain or loss in the Statement of Operations. Net payments of interest on interest rate swap agreements are included as part of realized gain or loss. Entering into these agreements involves, to varying degrees, elements of credit, market and documentation risk in excess of the amounts recognized on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to these agreements may default on its obligation to perform and that there may be unfavorable changes in interest rates. At December 31, 2004, the Fund had the following open swap agreements:
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION NET UNREALIZED APPRECIATION - ----------------- --------------- -------------------------------------------------- --------------------------- $ 22,500,000 03/15/06 Agreement with Citibank N.A. dated 03/11/04 to $ 360,000 pay the notional amount multiplied by 1.78% and to receive the notional amount multiplied by the 1 month U.S. Dollars - London Interbank Offered Rate - British Bankers Association (USD - LIBOR - BBA) adjusted for compounding $ 22,500,000 03/15/07 Agreement with Citibank N.A. dated 03/11/04 to $ 545,000 pay the notional amount multiplied by 2.27% and to receive the notional amount multiplied by the 1 month U.S. Dollars - London Interbank Offered Rate - British Bankers Association (USD - LIBOR - BBA) adjusted for compounding $ 22,500,000 09/28/07 Agreement with Citibank N.A. dated 09/24/04 to $ 175,000 pay the notional amount multiplied by 3.22% and to receive the notional amount multiplied by the 1 month U.S. Dollars - London Interbank Offered Rate - British Bankers Association (USD - LIBOR - BBA) adjusted for compounding
NOTE 3 -- FEES AND TRANSACTIONS WITH RELATED PARTIES The Fund pays all expenses incurred in connection with the operations of the Fund. These expenses, among others, include custodian and fund accounting and administrative fees, legal and audit fees, fees and expenses of the disinterested Trustees, registration fees, and printing expenses. The Fund pays the Adviser a monthly fee computed at an annual rate of 0.60% of the Fund's average daily "Managed Assets" (net assets, including assets attributable to any outstanding preferred shares, plus the aggregate principal amount of any borrowings). The Adviser is responsible for developing, implementing and supervising the Fund's investment program and providing certain administrative services to the Fund. The Adviser has retained Lincoln Capital Fixed Income Management Company, LLC ("Lincoln Capital"), to serve as the sub-adviser of the Fund and to manage the Fund's investment portfolio. The Adviser compensates Lincoln Capital for its services as sub-adviser. The Adviser pays Lincoln Capital a monthly sub-advisory fee calculated at the following annual percentage rates of the Fund's average daily Managed Assets: 0.55% on the Fund's first $25 million of Managed Assets, 0.45% on the next $25 million of Managed Assets, 0.35% 21 on the next $50 million of Managed Assets, and 0.30% on Managed Assets that are in excess of $100 million. The Adviser and Lincoln Capital are wholly owned subsidiaries of Lehman Brothers Holdings Inc., a publicly traded corporation. First Trust Portfolio L.P. ("First Trust") serves as the Fund's distribution and marketing agent, and investor servicing agent. As the Fund's distribution and marketing agent, First Trust provides certain distribution and marketing services for the Fund's common shares including preparing marketing materials and presentations, developing contacts with brokers whose clients may have an interest in acquiring Fund shares and replying to information requests from prospective investors. In consideration for these services, First Trust receives a fee paid by the Adviser. First Trust, as the investor servicing agent, developed and maintains a website for the Fund, assists in the review of shareholder materials, assists in the dissemination of the Fund's net asset value and market price, provides ongoing shareholder and account maintenance services, replies to information requests from shareholders and aids in secondary market support. In consideration for these services, the Fund pays First Trust a monthly fee computed at the annual rate 0.05% of the Fund's average daily Managed Assets. For the year ended December 31, 2004, the Fund paid First Trust, as the investor servicing agent, a fee equal to $137,534. During the period July 28, 2003 (commencement of operations) through December 31, 2003, Lehman Brothers Inc., an affiliate of the Adviser, received underwriting commissions equal to $900,000 in connection with the offering of the Fund's preferred stock. The Fund pays no compensation to its officers or to its Trustees who are interested Trustees of the Adviser or its affiliates. NOTE 4 -- INVESTMENT IN SECURITIES For the year ended December 31, 2004, purchases and sales of investments, other than short-term securities, aggregated $285,303,532 and $285,154,566, respectively. NOTE 5 -- MONEY MARKET CUMULATIVE PREFERRED SHARES The Fund is authorized to issue 3,750 Money Market Cumulative Preferred Shares ("MMP"), each without par value. On October 22, 2003, the Fund issued 3,600 MMP with proceeds of $90,000,000 in a public offering. The underwriting commissions and offering costs of $1,236,545 were incurred in connection with the offering and were charged directly to paid-in capital of the common shares. Dividends on the MMP are cumulative at a rate which was established at the offering and have been reset every twenty-eight days thereafter by an auction. The Fund pays commissions to certain broker-dealers at the end of each auction at an annual rate of 0.25%. For the year ended December 31, 2004, Lehman Government Securities, Inc., an affiliate of the Adviser, earned $225,617 in commissions. The MMP are redeemable at the option of the Fund at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, on any dividend payment date. The MMP are also subject to mandatory redemption at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, if the Fund defaults on its asset maintenance requirements with respect to the MMP and fails to cure such a default within the time permitted. If the dividends on the MMP shall remain unpaid in an amount equal to two full years' dividends, the holders of the MMP, as a class, have the right to elect a majority of the Board of Trustees. In general, the holders of the MMP and the common shares have equal voting rights of one vote per share, except that the holders of the MMP, as a separate class, have the right to elect at least two members of the Board of Trustees and to vote under certain other circumstances specified in the Fund's Amended By-Laws. The MMP have a liquidation preference of $25,000 per share, plus accumulated and unpaid dividends. The Fund is required to maintain certain asset coverage with respect to the MMP as defined in the Fund's Amended By-Laws and the Investment Company Act of 1940. NOTE 6 -- DISTRIBUTIONS TO SHAREHOLDERS The Fund intends to make monthly distributions of net investment income to common shareholders, after payments of any dividends on outstanding MMP. Distributions to common shareholders are recorded on the ex-dividend date. Distributions to preferred shareholders are recorded daily and are payable at the end of each dividend period. Each dividend payment period for the MMP is generally twenty-eight days. For the year ended December 31, 2004, the dividend rates for MMP ranged from 1.09% to 2.45%. The dividend rate for MMP on December 31, 2004 was 2.45%. In addition, at least annually, the Fund intends to distribute net capital gains, if any. The timing and characterization of certain income and capital gains distributions are determined in accordance with federal tax regulations which may differ from accounting principles generally accepted in the United States of America. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. NOTE 7 -- SHARES OF BENEFICIAL INTEREST The Fund's Declaration of Trust authorizes the Trustees to issue an unlimited number of common shares for the Fund, each without par value. Transactions in common shares were as follows:
FOR THE PERIOD YEAR ENDED JULY 28, 2003 (a) DECEMBER 31, TO 2004 DECEMBER 31, 2003 ----------------------------- ----------------------------- SHARES AMOUNT SHARES AMOUNT ------------- ------------- ------------ ------------- Shares purchased by investement adviser -- $ -- 6,667 $ 100,005 Initial Public Offering on July 28, 2003 (b) -- -- 11,000,000 157,245,000 Purchase of additional shares by undewriters on August 22, 2003 and September 16, 2003 (c) -- -- 1,200,000 17,154,000 Shares issued pursuant to the Fund's dividend reinvestment plan 8,448 128,713 24,275 360,213 ------------- ------------- ------------ ------------- Increase derived from capital share transactions 8,448 $ 128,713 12,230,942 $ 174,859,218 ============= ============= ============ =============
(a) Commencement of operations. (b) After deduction of underwriting commissions and offering costs of $7,775,000. (c) After deduction of underwriting commissions and offering costs of $846,000. NOTE 8 -- CONCENTRATION OF CREDIT RISK The Fund will normally invest at least 80% of its Managed Assets in investments offering high current income, which generally will be in the lower rating categories of recognized rating agencies. These investments are regarded as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligations and will generally involve more credit risk than securities in the higher rating categories. In addition, the trading market for high yield investments may be relatively less liquid than the market for higher-rated investments. NOTE 9 -- RISK ASSOCIATED WITH THE USE OF LEVERAGE The Fund's use of leverage through the issuance of preferred shares and borrowings, as well as the economic leverage inherent in certain derivatives, including credit default swaps, creates risks for holders of common shares. There is no assurance that the Fund's leveraging strategies will be successful. If the Fund issues preferred shares or borrows money to make additional investments and the income and capital appreciation from those investments exceed the dividends payable on the preferred shares or the costs of borrowing, the Fund's investment return will be greater than if leverage had not been used. However, if the dividends payable on the preferred shares or the costs of borrowing exceed the income and capital appreciation from the additional investments, the Fund would lose money and its investment return will be lower than if leverage had not been used. An increase in interest rates, which would increase the costs of leverage, may be likely because market rates of interest are currently near their lowest levels in recent years. Leverage creates risks which may adversely affect the return for holders of common shares, including: a) the likelihood of greater volatility of net asset value and market price of the Fund's common shares; b) the possibility either that common share income will fall if the preferred share dividend rate rises or the Fund's borrowing costs increase, and that common share income will fluctuate because of changes in the preferred share dividend rates or borrowing costs. 23 NOTE 10 -- INDEMNIFICATIONS In the ordinary course of business, the Fund enters into contracts that contain a variety of indemnifications. The Fund's maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote. NOTE 11 -- FEDERAL INCOME TAX INFORMATION For the year December 31, 2004 and for the period December 31, 2003, the tax character of distributions paid was $21,569,758 and $7,751,324 of ordinary income, respectively. As of December 31, 2004, the components of accumulated earnings on a tax basis were as follows: Undistributed long-term capital gains $ 234,950 Undistributed ordinary income 483,746 Unrealized gains 16,228,479* TOTAL ACCUMULATED EARNINGS $ 16,947,175
* The difference between book-basis and tax-basis net unrealized gains is attributed primarily to wash sales. A permanent difference incurred during the period ended December 31, 2004, resulting from differences in book and tax accounting due to the tax treatment for paydown gains and losses on mortgage backed securities, the tax treatment for swaps and return of capital distributions received from preferred stock, has been reclassified at year end from undistributed net income for $(960,573) to undistributed realized gain for $960,573. ADDITIONAL INFORMATION (UNAUDITED) TAX INFORMATION For the dividends paid during the year ended December 31, 2004 the Fund designates $71,950 as qualified dividend income. For corporate shareholders, 0.34% of the income dividends paid by the Fund qualifies for the dividends received deduction. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Trustees Lehman Brothers First Trust Income Opportunity Fund We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Lehman Brothers First Trust Income Opportunity Fund (the "Fund") as of December 31, 2004, the related statement of operations for the year then ended and statements of changes in net assets and the financial highlights for the year then ended and for the period July 28, 2003 (Commencement of Operations) to December 31, 2003. 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 audit. 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. An audit includes 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 and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2004, by correspondence with the custodian and others. 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 the Fund at December 31, 2004, the results of its operations, changes in its net assets and the financial highlights for the year then ended and for the period July 28 2003 (Commencement of Operations) to December 31, 2003, in conformity with U.S. generally accepted accounting principles. /s/ Ernst & Young LLP New York, New York February 14, 2005 25 DIVIDEND REINVESTMENT PLAN (UNAUDITED) The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to as an "opt-out" plan. Each common shareholder will have all distributions of dividends and capital gains automatically reinvested in additional common shares by Investors Bank & Trust Company, as agent for shareholders pursuant to the Plan (the "Plan Agent"), unless the shareholder elects to receive cash or unless the shares are registered in the name of a broker-dealer or other nominee (that is, in "street name") and the respective nominee does not participate in the Plan. For Plan participants, the Plan Agent will either (i) effect purchases of common shares under the Plan in the open market or (ii) distribute newly issued common shares of the Fund. Shareholders who elect not to participate in the Plan will receive all distributions in cash paid by check mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, then to the nominee) by the Plan Agent, as dividend disbursing agent. Certain broker-dealers and nominees do not permit their clients to participate in dividend reinvestment plans. Shareholders whose common shares are held in the name of a broker or nominee should contact the broker or nominee to determine whether and how they may participate in the Plan. The Plan Agent serves as agent for the shareholders in administering the Plan. After the Fund declares a dividend or makes a capital gain distribution, the Plan Agent will, as agent for the participants, either (i) receive the cash payment and use it to buy common shares in the open market, on the New York Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute newly issued common shares of the Fund on behalf of the participants. The Plan Agent will receive cash from the Fund with which to buy common shares in the open market if, on the determination date, the net asset value per share exceeds the market price per share plus estimated brokerage commissions on that date. The Plan Agent will receive the dividend or distribution in newly issued common shares of the Fund if, on the determination date, the market price per share plus estimated brokerage commissions equals or exceeds the net asset value per share of the Fund on that date. The number of shares to be issued will be computed at a per share rate equal to the greater of (i) the net asset value or (ii) 95% of the closing market price per share on the payment date. Participants in the Plan may withdraw from the Plan upon written notice to the Plan Agent. Such withdrawal will be effective immediately if received not less than ten days prior to a distribution record date; otherwise, it will be effective for all subsequent dividend record dates. When a participant withdraws from the Plan or upon termination of the Plan as provided below, certificates for whole common shares credited to his or her account under the Plan will be issued and a cash payment will be made for any fraction of a common share credited to such account. In the alternative, upon receipt of the participant's instructions, common shares will be sold and the proceeds sent to the participant less brokerage commissions and any applicable taxes. The Plan Agent maintains each shareholder's account in the Plan and furnishes confirmations of all acquisitions made for the participant. Common shares in the account of each Plan participant will be held by the Plan Agent on behalf of the participant. Proxy material relating to shareholders' meetings of the Fund will include those shares purchased as well as shares held pursuant to the Plan. In the case of shareholders, such as banks, brokers or nominees, which hold common shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of common shares certified from time to time by the record shareholders as representing the total amount registered in the record shareholder's name and held for the account of beneficial owners who are participants in the Plan. The Plan Agent's fees for the handling of reinvestment of dividends and other distributions will be paid by the Fund. Each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan Agent's open market purchases in connection with the reinvestment of distributions. There are no other charges to participants for reinvesting dividends or capital gain distributions; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. The automatic reinvestment of dividends and other distributions will not relieve participants of any income tax that may be payable or required to be withheld on such dividends or distributions. The Fund and the Plan Agent reserve the right to amend or terminate the Plan. All correspondence concerning the Plan should be directed to: Investors Bank & Trust Company, 200 Clarendon Street, Mail Stop OPS22, Boston, MA 02116 (Telephone) 800-988-5196. TRUSTEES AND OFFICERS TABLE (UNAUDITED) Set forth below is information about the Trustees. The address for each Trustee is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022. INDEPENDENT TRUSTEES:
NUMBER OF PORTFOLIOS OVERSEEN IN OTHER LEHMAN TRUSTEESHIPS BROTHERS HELD OUTSIDE OF ASSET LEHMAN LENGTH OF MANAGEMENT BROTHERS ASSET NAME AND DATE OF POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX General James E. Dalton, Trustee Trustee Board of Directors, Chair of the Audit 1 None USAF (Retired) since 2003 Committee at William Lyon Homes, a 10/17/1930 home building business (since 1991); Director of Defense Group Inc., a defense business (since 1999); formerly Director of Finance America, a mortgage business (2002-2004); formerly, Vice President of Logicon Inc., a wholly-owned subsidiary of Northrop Grumman (1985-1998); General Manager of Logicon's Defense Technology Group (1995-1998). Margaret M. (Peggy) Eisen Trustee Trustee Managing Director and Chief Investment 1 Director, Chair 6/19/1953 since 2003 Officer of EAM International, LLC, an of Compensation investment banking and asset Committee, and management firm (since 2003); Member of the formerly, Managing Director of Audit Committee DeGuardiola Advisors, an investment of Antigenics bank specializing in mergers and Corporation, a acquisitions of investment management bio-pharmaceutical firms (2001-2002); Managing Director company (since of North American Equities of General 2003); Trustee Motors Investment Management of Columbia Corporation (1995-2001). Acorn family of Wanger Asset Management (six portfolios under management) (since 2002).
27
NUMBER OF PORTFOLIOS OVERSEEN IN OTHER LEHMAN TRUSTEESHIPS BROTHERS HELD OUTSIDE OF ASSET LEHMAN LENGTH OF MANAGEMENT BROTHERS ASSET NAME AND DATE OF POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX Michael M. Knetter Trustee Trustee Dean of the University of 1 None 4/8/1960 since 2003 Wisconsin-Madison School of Business (since 2002); formerly, Professor of International Economics and Associate Dean at the Amos Tuck School of Business -- Dartmouth College (1997-2002). Eugene A. Matthews Trustee Trustee President of Nintai, Incorporated, an 1 None 11/9/1958 since 2003 investment advisory firm (since 1997); formerly, Senior Fellow of Asia Studies for the Council of Foreign Relations (2001-2003); founding and general Partner of Apax-Globis Japan, Inc., a private equity investment firm (1998-present); formerly Founder/President of Ashta International, a Vietnamese investment firm (1989). George W. Morriss Trustee Trustee Executive Vice President and Chief 1 None 9/24/1947 since 2003 Financial Officer of People's Bank, a financial services company (1991-2001). INTERESTED TRUSTEES: Stephanie E. Dolan Trustee Trustee Senior Vice President of Lehman 1 None 4/4/1963 since 2003 Brothers Inc.; Controller of Lehman Brothers Asset Management. Scott Hall Trustee Trustee Managing Director of First Trust 1 None 1/12/1957 since 2003 Advisors L.P. and First Trust Portfolios L.P. (since 1992). Kurt A. Locher Trustee Trustee Managing Director of Lehman Brothers 1 None 5/9/1966 since 2003 Inc. (since 1998); Managing Director of Lehman Brothers Asset Management (since 2003); Vice President of Lincoln Capital (since 2003); formerly Director of BNC Mortgage Inc. (2000-2004), Finance America LLC (1999-2004), and TrueLink Inc. (1999-2004); formerly, President of Lehman Brothers Bank, F.S.B. (1999); and Senior Vice President of Lehman Brothers Inc. (1995-1998).
Set forth below is information about the officers of the Fund. Each officer serves for a one-year term. The address for each officer is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022.
NAME AND DATE OF POSITION BIRTH WITH FUND PRINCIPAL OCCUPATION FOR LAST FIVE YEARS Bradley Tank President Chief Executive Officer of Lehman Brothers Asset Management; Managing Director and 9/29/1957 Global Head of Fixed Income Asset Management for Lehman Brothers (since 2002); formerly, Director of Fixed Income for Strong Capital Management in Menomonee Falls, Wisconsin (1990-2002). Edward Grieb Treasurer Chief Financial Officer of Lehman Brothers Asset Management; Managing Director (since 9/22/1961 2003) and Assistant Controller for Lehman Brothers (since 1997). Jonathan Morris Secretary Senior Vice President of Lehman Brothers Asset Management; Senior Vice President and 3/1/1956 General Counsel for Lehman Brother's Wealth and Asset Management business, including Lehman Brothers Private Client Services Division and asset management and investment advisory business (since 1997).
The Fund's Statement of Additional Information includes additional information about the Trustees of the Fund and is available without charge, upon request, by calling 1-800-988-5196 or visiting the Fund's website at www.lbftincomeopportunity.com. A description of the Fund's proxy voting policies and procedures is available (1) on the Fund's website at www.lbftincomeopportunity.com and (2) on the Commission's website at www.sec.gov. Information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12 month period ended June 30, 2004 is available (1) on the Fund's website www.lbftincomeopportunity.com and (2) on the Commission's website at www.sec.gov. In accordance with Section 303A.12 (a) of the New York Stock Exchange Listed Company Manual, the Fund's Annual CEO Certification certifying as to compliance with NYSE's Corporate Governance Listing Standards was submitted to the Exchange on June 23, 2004. The Fund files a complete schedule of investments with the Commission for the first and third quarters of its fiscal year on Form N-Q, which when filed will be available on the Commission's website at www.sec.gov. The Fund's Form N-Q may be reviewed and copied at the Commission Public Reference Room, which may be obtained by calling 1-800-SEC-0330. 29 This page intentionally left blank This page intentionally left blank This page intentionally left blank LEHMAN BROTHERS (C)2004 Lehman Brother Inc. All Rights Reserved. LB10183 ITEM 2. CODE OF ETHICS. For the year ended December 31, 2004, there were no amendments to a provision of the code of ethics, nor were there any waivers granted from a provision of the code of ethics. A copy of the Registrant's code of ethics is filed with this Form N-CSR under Item 11(a). ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. The Registrant's Board of Trustees designated George Morriss as the Registrant's Audit Committee Financial Expert. George Morriss is deemed "independent" for purposes of this item because (i) he does not accept directly or indirectly any consulting, advisory, or compensatory fee from the issuer (other than in his capacity as a committee member or a member of the board of trustees); and (ii) he is not an "interested person" of the Registrant as that term is defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended (the "1940 Act"). ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) AUDIT FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the audit of the Registrant's annual financial statements for the year ended 2004 were $36,400. The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the audit of the Registrant's annual financial statements and for the initial seed audit for 2003 were $35,000 and $8,400, respectively. (b) AUDIT RELATED FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the review of related filing of Form N-2 for the years ended 2004 and 2003 were none and $16,800, respectively. (c) TAX FEES: The aggregate fees accrued for professional services rendered by Ernst & Young LLP for tax compliance, tax advice, and tax planning for the years ended 2004 and 2003 were $4,200 and $4,000, respectively. Such services included the preparation of the year-end tax provision and excise tax work. (d) ALL OTHER FEES: The aggregate fees billed by the Registrant for professional services rendered by its independent auditors, Ernst & Young LLP, for the initial and year end agreed upon procedures reporting for the preferred shares for years ended 2004 and 2003 were $5,400 and $10,000, respectively. (e) (1) The Registrant's Audit Committee pre-approved the provision of audit and non-audit services by Ernst & Young LLP for the fiscal years ended December 31, 2004 and December 31, 2004. The Registrant has not delegated the pre-approval of audit and non-audit services to a member of the audit committee. Rather, any action of the audit committee with respect to the pre-approval process requires the vote of a majority of the audit committee members present, whether in person or otherwise, at the meeting at which such action is considered. One member of the audit committee shall constitute a quorum for the purpose of taking any action. (2)The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: (b) 100% (c) 100% (d) 100% (f) Not applicable. (g) Aggregate non-audit fees billed to the Registrant by the Registrant's accountant for the fiscal years ended December 31, 2004 and 2003 were $9,600 and $30,800, respectively. Aggregate non-audit fees billed to the Investment Adviser or Sub-Adviser by the Registrant's accountant were $0 and $0 for the fiscal years ended December 31, 2004 and 2003, respectively. (h) Not applicable. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The Board of Trustees of the Registrant established an audit committee for the purpose of overseeing the accounting and financial reporting processes of the Registrant and audits of the financial statements of the Registrant in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). To be eligible to serve as a member of the Registrant's audit committee, a trustee must be an "Independent Trustee," which term shall mean a Trustee (i) who is not an "interested person," as that term is defined in Section 2(a)(19) of the 1940 Act, as amended of the Registrant; and (ii) who has not accepted directly or indirectly any consulting, advisory, or other compensatory fee from the Registrant (other than fees for serving as a trustee or committee member). The Registrant's Audit Committee Members are: James E. Dalton Margaret M. Eisen Michael M. Knetter Eugene A. Matthews George Morriss ITEM 6. SCHEDULE OF INVESTMENTS Not applicable to this filing. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Board of the Registrant has delegated to the Registrant's sub-advisor (the "Sub-Advisor") the authority to vote proxies on behalf of the Fund and has approved the Sub-Advisor's proxy voting guidelines and procedures. A copy of the Sub-Advisor's proxy voting procedures and guidelines are filed with this Form N-CSR under Item 11(b). ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable to this registrant. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 10. CONTROLS AND PROCEDURES. (a) The Registrant's Principal Executive Officer and Principal Financial Officer concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) were effective as of a date within 90 days prior to the filing date of this report, based on their evaluation of the effectiveness of the Registrant's disclosure controls and procedures as of the Evaluation Date. (b) There were no significant changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a) Sox Code of Ethics is attached. (b) Proxy voting procedures and guidelines are attached. (c) Section 302 Certification letters are attached. (d) Section 906 Certifications are attached. Pursuant to the requirements of the Exchange Act and the 1940 Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Lehman Brothers First Trust Income Opportunity Fund By: /S/ Bradley Tank ------------------------------------------------------ Bradley Tank, President/Chief Executive Officer Date: March 9, 2005 Pursuant to the requirements of the Exchange Act and the 1940 Act, 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/ Bradley Tank ----------------------------------------------------------------- Bradley Tank, President/Chief Executive Officer Date: March 9, 2005 By: /S/ Edward Grieb ----------------------------------------------------------------- Edward Grieb, Treasurer/Chief Financial Officer Date: March 9, 2005 EX-99.CODEETH 2 a2150870zex-99_codeeth.txt EX-99.CODEETH Exhibit 99.CODE ETH N-CSR EXHIBIT FOR ITEM 11(a): CODE OF ETHICS LEHMAN BROTHERS/FIRST TRUST INCOME OPPORTUNITY FUND CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS/PURPOSE OF THE CODE The code of ethics (this "Code") for Lehman Brothers/First Trust Income Opportunity Fund (the "Fund") applies to the Fund's principal executive officer and principal financial and accounting officer (the "Covered Officers," each of whom is set forth in Exhibit A) for the purpose of promoting: - honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; - full, fair, accurate, timely and understandable disclosure in reports and documents that the Fund files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Fund; - compliance with applicable laws and governmental rules and regulations; - the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and - accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interests interfere with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund. Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the Investment Company Act of 1940, as amended ("Investment Company Act") and the Investment Advisers Act of 1940, as amended ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as "affiliated persons" of the Fund. The compliance programs and procedures of the Fund or the Fund's investment adviser or sub-adviser (the "investment adviser") are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts may arise from, or as a result of, the contractual relationship between the Fund and the investment adviser or a third party service provider of which a Covered Officer is also an officer or employee. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Fund and/or for the investment adviser or a third party service provider) be involved in establishing policies and implementing decisions that will have different effects on the investment adviser or a third party service provider and the Fund. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and the investment adviser or a third party service provider and is consistent with the performance by the Covered Officers of their duties as officers of the Fund. The foregoing activities, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, will be deemed to have been handled ethically. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The overarching principle with respect to all conflicts of interest covered by this Code is that the personal interest of a Covered Officer should not be placed improperly before the interest of the Fund. Each Covered Officer must: - not use personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; - not cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; - report at least annually any affiliations or other relationships that could potentially present a conflict of interest with the Fund. III. DISCLOSURE AND COMPLIANCE - Each Covered Officer shall become familiar with the disclosure requirements generally applicable to the Fund; - each Covered Officer shall not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Fund's management, and auditors, and to governmental regulators and self-regulatory organizations; - each Covered Officer may, to the extent appropriate within the Covered Officer's area of responsibility and to the extent deemed necessary in the sole discretion of the Covered Officer, consult with other officers and employees of the Fund and the investment adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Fund files with, or submits to, the SEC and in other public communications made by the Fund; and - each Covered Officer should seek to promote the Fund's compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: - - upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to Chamaine Williams or such other person designated by the Secretary of the Fund (the "Compliance Officer") that the Covered Officer has received, read and understands this Code; - - annually thereafter affirm to the Compliance Officer that the Covered Officer has complied with the requirements of this Code; - - not retaliate against any other Covered Officer or any employee of the Fund or its affiliated persons for reports of potential violations of this Code that are made in good faith; and - - notify the Compliance Officer promptly if the Covered Officer knows of any violation of this Code. Failure to do so is itself a violation of this Code. The Compliance Officer is responsible for applying this Code to specific situations in which questions are presented under it and has the authority to interpret this Code in any particular situation. The Compliance Officer is authorized to consult, as appropriate, with counsel to the Fund, and is encouraged to do so. However, any approvals or waivers(1) must be considered by the trustees of the Fund who are not "interested persons," as defined by Section 2(a)(19) of the Investment Company Act, of the Fund (the "Independent Trustees"). The Fund will follow these procedures in investigating and enforcing this Code: - The Compliance Officer will endeavor to take all appropriate action to investigate any reported potential violations reported to him; - if, after such investigation, the Compliance Officer believes that no violation has occurred, the Compliance Officer is not required to take any further action; - any matter that the Compliance Officer believes is a violation will be reported to the Independent Trustees; - if the Independent Trustees concur that a violation has occurred, the Compliance Officer will inform and make a recommendation to the Fund's board of trustees (the "Board"), which will consider appropriate action, which may include a review of, and appropriate modifications to, applicable Fund policies and procedures; notification to appropriate personnel of the investment adviser or other relevant service provider; or a recommendation to dismiss the Covered Officer; and - any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Fund for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies there under. Insofar as other policies or procedures of the Fund, investment adviser, principal underwriter or service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Fund's and the investment adviser's and the principal underwriter's codes of ethics under Rule 17j-1 under the Investment Company Act are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Amendments to this Code may be made from time to time, as deemed appropriate by the Compliance Officer. The Board shall be informed of any such amendment to the extent deemed material by the Compliance Officer. VII. CONFIDENTIALITY All reports and records relating to the Fund prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the investment adviser, Board, and counsel to the Fund. VIII. INTERNAL USE The Code is intended solely for the internal use by the Fund and does not constitute an admission, by or on behalf of the Fund, as to any fact, circumstance, or legal conclusion. - ---------- (1) For this purpose, the term "waiver" includes the approval by the Fund of a material departure from a provision of this Code or the Fund's failure to take action within a reasonable period of time regarding a material departure from a provision of this Code that has been made known to the Fund's management. Date: November 18, 2003 EXHIBIT A PERSONS COVERED BY THIS CODE OF ETHICS Bradley Tank, President Edward S. Grieb, Treasurer N-CSR EXHIBIT FOR ITEM 11(b): REGISTRANT'S PROXY VOTING PROCEDURES AND GUIDELINES LINCOLN CAPITAL FIXED INCOME MANAGEMENT COMPANY, LLC PROXY VOTING POLICIES Lincoln Capital Fixed Income Management Company, LLC (Lincoln Capital) is aware and compliant with SEC Rule 206(4)-6 regarding proxy voting and disclosure and Rule 204-2 pertaining to books and records. Therefore, Lincoln Capital shall vote corporate governance proposals in a manner that promotes clear responsibility of management and boards to the long run interests of shareholders. Lincoln Capital shall be diligent, independent and consider the best interest of our clients in arriving at proxy voting decisions. Upon a client's request, Lincoln Capital will disclose how the client's proxies were voted. Clients can send their requests via e-mail to Csedlak@Lincap.Com. PROXY VOTING PROCEDURES Ann Benjamin, a Managing Director, or a designee, is responsible for Lincoln Capital's proxy votes and guidelines for high yield products. The Security Control unit within the Portfolio Management Information Department has administrative responsibility. Guidelines have been established to apply to the most frequently appearing proxy proposals. Proxy proposals for shares in closed-end funds are excepted from the guidelines, and voting decisions relating to such proposals will be determined on a case-by-case basis. Where specific guidelines don't apply, the general principles of the Proxy Voting Policies are used. Specific fact situations might warrant departure from the guidelines. Proxies are voted after review of relevant materials (annual report, SEC filings -10K, and votes registered from the prior year) in accordance with these guidelines. The voting rights of securities that are on loan are determined at the time of signing the loan agreement between our clients and their custodian banks; usually the securities on loan do not allow Lincoln Capital the voting rights. Administratively, Lincoln Capital utilizes paper ballots. Paper ballots are received via the United States Postal System and holdings for all clients as of record date are obtained from the accounting system (Portia). The ballots' shares and Lincoln Capital's holdings are verified. If there are discrepancies between the ballot shares and Lincoln Capital's holdings, the custodian is contacted for resolution. Proxies are voted by choosing the appropriate vote selection and the signing of the paper ballots. The signed proxies are mailed in the provided pre-addressed envelope. In rare instances where ballot shares have not been received from all custodians within two weeks of the meeting date, Lincoln Capital contacts the custodian. The custodian will follow up with a faxed copy of the paper ballot. If a copy of the ballot is faxed, Lincoln Capital returns (via fax or by mail) the proxy with voting instructions to the custodian. After all proxies are voted, the Portfolio Management Information Department of Lincoln Capital keeps a copy of the signed ballot as record of the security, meeting date, proposals, and how we voted for each client. Records are maintained in the Portfolio Management Information Department of Lincoln Capital office for five years; after that time the records can be moved to an off-site facility. The guidelines are designed to eliminate the influence of any conflicts of interest on Lincoln Capital's proxy voting decisions. Although Lincoln Capital does not foresee any material conflicts of interest arising, in the event a material conflict of interest does arise, the facts and circumstances of the conflict would be discussed with Lori Loftus, the Compliance Manager, prior to voting. Lori Loftus and Ann Benjamin will decide if the conflict can be resolved or avoided by applying the guidelines. If the conflict cannot be resolved or avoided by applying the guidelines, Lincoln Capital may rely on the advice of an independent third party to determine how to vote the proxy. Original Date: January 31, 2003 Revised Date: June 30, 2003 Revised Date: July 23, 2003 LINCOLN CAPITAL FIXED INCOME MANAGEMENT PROXY GUIDELINES BOARD RELATED ISSUES June 23, 2003
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Election of directors For, w/ caveat Ownership of the stock typically means support of Directors, unless there is an issue of independence or performance. Classification of directors Against The idea, in theory, is to provide stability. However, in practice boards have demonstrated considerable continuity because the majority of votes are for management's slate. Declassification of Board For Annual Election of directors For Directors should be held accountable to shareholders on an annual basis. Director removal only for cause Against Shareholders should not need cause to remove a director. As owners of the corporation, shareholders should have the right to remove directors as they see fit. Require a majority of independent directors For The presence of independent directors allows the board to be more objective in its decisions regarding business operations and top management. Increase in size of the board Against The greater number of directors, the less the w/caveat accountability. However, it may be a good idea if management can show a compelling need (e.g. needed expertise) for additional members. Indemnification and liability protection for For Such protection is necessary to attract and retain directors w/caveat competent individuals to sit on boards for normal remuneration. Companies need to protect their directors as long as they act in the best interest of their shareholders. However, if directors seriously breech their fiduciary duty, they should not be protected. Advisory committees Against The board already has a fiduciary duty to represent all shareholders and is accountable to them by law. It often is not necessary for a corporation to bear the additional expense of an advisory committee.
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Grant Stock to Non-Employee Directors Against, w/ We would vote against a management proposal to grant (added 1996 proxy season) caveat stock to non-employee directors except in cases where grant would replace a fee. Separation of CEO and Chairman For Although not required this is generally a good governance model.
EMPLOYEE COMPENSATION
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Employee Stock Ownership Plan Case by In general, it is a good idea to support option plans Case which provide incentive to directors, managers and other employees by aligning their economic interest with those of the shareholders while limiting the transfer of wealth out of the company. However, a vote for a specific plan should be decided by weighing a number of factors: - the number and structure of other plans the company currently has in place - the potential dilution percentage of the proposed plan, (in conjunction with other plans in place) - the degree of power the board has to choose a plan among several options, (those proposals allowing the board to chose between five or more options should rarely be approved) - who will administer the plan, (it should be administered by a committee of outside directors who are ineligible to receive benefits from the plan) - the percentage of the company already owned by insiders
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Compensation caps or restraints For Consideration should be given to withholding votes from, (by situation) or voting against, directors who support excessive compensation or compensation arrangements that are not in the interest of shareholders. Minimum share ownership to be a director Against Stock Options & Incentive Comp - pricing at fair market value and expire For with 5 years - repricing options to a lower price Against - option plan dilution greater than 5% Against - restricted stock should vest over a For specified time (greater than 1 year) - interest free or low interest loans Against - reload options Against - options for directors Against
MANAGEMENT ENTRENCHMENT
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Increase in authorized shares of common stock For Vote for an increase in authorized shares of common w/caveat stock if: - management has already issued most of the authorized shares - the increase is reasonable - past history suggests a prudent issuance - shares are needed for a stock split or dividend - management presents a specific and acceptable reason for the increase. Otherwise, vote no. Targeted share placement Against Targeted share placements dilute ownership and voting rights, entrench current management, and are anti-takeover in nature. Dual Class Stock Against The new class of stock may dilute our ownership, make the company less attractive as a takeover target, entrench incumbent directors or management, and discourage both merger proposals and proxy contests. Authorize or increase a class of preferred Against Available academic evidence indicates that shareholder stock value is decreased when blank-check preferred stock is authorized. Share repurchase For The share repurchase process increases our ownership percentage and raises the equilibrium price by decreasing the supply. Appointment of auditors For Vote for the recommended auditor unless the auditor w/caveat has become complacent or has questionable independence.
SHAREHOLDER RIGHTS
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Elimination of preemptive rights For These rights give current shareholders the right to maintain their current ownership percentage through any subsequent equity offerings. These provisions are no longer common in the U.S., and can restrict management's ability to raise new capital. Eliminate shareholders right to call a special Against These proposals limit shareholder rights, and are meeting. anti-takeover in nature. Prohibit shareholder action outside Against These proposals limit shareholders rights. meetings Voting confidentiality For These proposals are often introduced by shareholders w/caveat as a means of reducing management pressure on shareholders regarding their vote on proxy issues. We support the suspension of confidential voting during proxy contest since dissidents have access to the information and we do not wish to put management at an unfair disadvantage. Cumulative voting Against Cumulative voting permits access to the board by special interest groups. Company submission of poison pill and For Management rarely submits its defense mechanisms to defense mechanisms for shareholder shareholders voluntarily so shareholders should vote ratification for authority to ratify such plans when proposed by other shareholders.
ANTI-TAKEOVER
SUBJECT VOTE JUSTIFICATION - --------------------------------------------------------------------------------------------------------------------------- Anti-Greenmail provisions For The only one who reaps any benefit from greenmail is the greenmailer. Shareholders are always harmed. Reincorporation For Vote in favor of reincorporation proposals if there w/caveat are legitimate business reasons for the move. If a corporation is simply attempting to move in order to subject itself to more stringent anti-takeover laws, then vote against it. Require more than simple majority vote to Against These proposals limit shareholder rights. amend or repeal by-laws or remove directors Blank check preferred Against These proposals are for the authorization of shares for which voting rights are not established in advance. Instead, voting rights are established at the discretion of the board of directors when the shares are issued. This gives the board the ability to place a block of stock with an investor sympathetic to management, thereby foiling a takeover bid without a shareholder vote. This proposal is a transfer of authority from shareholders to the board, and a possible entrenchment device. Stockholder provision Against These proposals introduce the concept that the board may consider the interest of constituents other than shareholders in the evaluation of takeover offers. This concept is inconsistent with public ownership of corporations. Poison pill plans Against Poison pill plans are the most effective anti-takeover weapon available to management. Shareholder value declines upon the adoption of these plans. Supermajority vote Against Requiring a high majority vote (i.e. 80%) for corporate charter and by-law amendments relating to term of office, election or removal of directors. Requiring a supermajority vote to convene meetings is an anti-takeover measure.
SOCIAL ISSUES Most social issues are handled on a case-by-case basis. Unique social, environmental, and political issues are decided on the merits of the specific proposal. Therefore, it has not been Lincoln's policy to recommend, general guidelines to cover such issues. EX-99.CERT 3 a2150870zex-99_cert.txt EX-99.CERT Exhibit 99.CERT N-CSR EXHIBIT FOR ITEM 11(c): SECTION 302 CERTIFICATIONS I, Bradley Tank, certify that: 1. I have reviewed this report on Form N-CSR of Lehman Brothers First Trust Income Opportunity Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /S/ Bradley Tank ------------------------------------------------------- Bradley Tank, President/Chief Executive Officer N-CSR EXHIBIT FOR ITEM 11(c): SECTION 302 CERTIFICATIONS I, Edward Grieb, certify that: 1. I have reviewed this report on Form N-CSR of Lehman Brothers First Trust Income Opportunity Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 9, 2005 /S/ Edward Grieb ------------------------------------------------------- Edward Grieb, Treasurer/Chief Financial Officer EX-99.906CERT 4 a2150870zex-99_906cert.txt EX-99.906CERT Exhibit 99.906.CERT N-CSR EXHIBIT FOR ITEM 11(d): SECTION 906 CERTIFICATIONS CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Certified Shareholder Report of Lehman Brothers First Trust Income Opportunity Fund (the "Registrant") on Form N-CSR for the year ended December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof ("the Report"), the undersigned hereby certifies that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: March 9, 2005 /S/ Bradley Tank ---------------- ------------------------------------------------------- Bradley Tank, President/Chief Executive Officer Date: March 9, 2005 /S/ Edward Grieb ---------------- ------------------------------------------------------- Edward Grieb, Treasurer/Chief Financial Officer A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission (the "Commission") or its staff upon request. This certification is being furnished to the Commission solely pursuant to Rule 30a.2(b) under the Investment Company Act of 1940, as amended, and 18 U.S.C. Section 1350 and is not being filed as part of the Form N-CSR with the Commission. -----END PRIVACY-ENHANCED MESSAGE-----