-----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, M/Ki9RsR6D0QGTm0a1WbMw8jlZRFEmfEFky97AgiVHHCg1QcXV0Vx80eDnaniqgh /Xq2flHMLpzVrdbsWprjEQ== 0001193805-07-001244.txt : 20070510 0001193805-07-001244.hdr.sgml : 20070510 20070510110449 ACCESSION NUMBER: 0001193805-07-001244 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20070228 FILED AS OF DATE: 20070510 DATE AS OF CHANGE: 20070510 EFFECTIVENESS DATE: 20070510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Diversified Income Strategies Portfolio, Inc. CENTRAL INDEX KEY: 0001303649 IRS NUMBER: 000000000 STATE OF INCORPORATION: NJ FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-21637 FILM NUMBER: 07835544 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 609-282-5904 MAIL ADDRESS: STREET 1: 800 SCUDDERS MILL RD CITY: PLAINSBORO STATE: NJ ZIP: 08536 FORMER COMPANY: FORMER CONFORMED NAME: Diversified Income Strategy Portfolio, Inc. DATE OF NAME CHANGE: 20040920 FORMER COMPANY: FORMER CONFORMED NAME: Deversified Income Strategy Portfolio, Inc. DATE OF NAME CHANGE: 20040920 N-CSRS 1 e602030_ncsrs-diverincome.txt SEMI-ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSRS CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-21637 Name of Fund: BlackRock Diversified Income Strategies Fund, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Robert C. Doll, Jr., Chief Executive Officer, BlackRock Diversified Income Strategies Fund, Inc., 800 Scudders Mill Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 08/31/07 Date of reporting period: 09/01/06 - 02/28/07 Item 1 - Report to Stockholders ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES FIXED INCOME LIQUIDITY REAL ESTATE BlackRock Diversified Income BLACKROCK Strategies Fund, Inc. SEMI-ANNUAL REPORT FEBRUARY 28, 2007 | (UNAUDITED) NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE BlackRock Diversified Income Strategies Fund, Inc. The Benefits and Risks of Leveraging BlackRock Diversified Income Strategies Fund, Inc. utilizes leveraging through borrowings or issuance of short-term debt securities or shares of Preferred Stock. The concept of leveraging is based on the premise that the cost of assets to be obtained from leverage will be based on short-term interest rates, which normally will be lower than the income earned by the Fund on its longer-term portfolio investments. To the extent that the total assets of the Fund (including the assets obtained from leverage) are invested in higher-yielding portfolio investments, the Fund's Common Stock shareholders will be the beneficiaries of the incremental yield. Leverage creates risks for holders of Common Stock including the likelihood of greater net asset value and market price volatility. In addition, there is the risk that fluctuations in interest rates on borrowings (or in the dividend rates on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce the Common Stock's yield and negatively impact its net asset value and market price. If the income derived from securities purchased with assets received from leverage exceeds the cost of leverage, the Fund's net income will be greater than if leverage had not been used. Conversely, if the income from the securities purchased is not sufficient to cover the cost of leverage, the Fund's net income will be less than if leverage had not been used, and therefore the amount available for distribution to Common Stock shareholders will be reduced. Announcement of Annual Stockholders Meeting The Fund has determined that its annual stockholders meeting originally scheduled to be held in April 2007 will be postponed and will be held in September 2007. Proposals of stockholders intended to be presented at the meeting must be received by the Fund by May 15, 2007 for inclusion in the Fund's proxy statement and form of proxy for that meeting. The persons named as proxies in the proxy materials for the Fund's 2007 annual meeting of stockholders may exercise discretionary authority with respect to any stockholder proposal presented at such meeting if written notice of such proposal has not been received by the Fund by July 1, 2007. Written proposals and notices should be sent to the Secretary of the Fund, 800 Scudders Mill Road, Plainsboro, New Jersey 08536. 2 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 A Letter to Shareholders Dear Shareholder The new year began on a positive note for most financial markets, continuing the momentum from the fourth quarter of 2006. At the end of February, however, global equity markets registered their first significant decline since last summer. The market jitters were triggered by a significant setback in the Chinese market and were exacerbated by several concerns, notably a weakening economy, some disappointing corporate earnings announcements, geopolitical concerns related to Iran's nuclear program and increasing delinquencies in the subprime mortgage market. Despite the recent spate of volatility, underlying stock market fundamentals appear quite sound, supported by a generally good global economic backdrop, tame inflation, relatively low interest rates and attractive valuations. Not unlike the equity market, the bond market also has seen volatility recently as observers have attempted to interpret mixed economic signals. A bond market rally late last year reversed early in 2007 as the economic data strengthened. Prices improved (and yields fell) again in February as equities struggled. Notably, the Treasury curve remained inverted for much of 2006 and into 2007. The 30-year Treasury yield stood at 4.68% on February 28, 2007, while the one-month Treasury offered the highest yield on the curve at 5.24%. For its part, the Federal Reserve Board (the Fed) has left the target short-term interest rate on hold at 5.25% since first pausing on August 8, 2006. Although the central bankers continue to express concern about potential inflationary pressures, they also have made reference to signs of economic weakness in their public statements. Most observers expect the Fed to keep interest rates on hold for now, but acknowledge that the combination of a mild economic slowdown and moderating inflation could prompt an interest rate cut later in 2007. Notwithstanding the volatility along the way, most major market indexes managed to post positive returns for the annual and semi-annual reporting periods ended February 28, 2007:
Total Returns as of February 28, 2007 6-month 12-month ============================================================================================================== U.S. equities (Standard & Poor's 500 Index) + 8.93% +11.97% - -------------------------------------------------------------------------------------------------------------- Small cap U.S. equities (Russell 2000 Index) +10.76 + 9.87 - -------------------------------------------------------------------------------------------------------------- International equities (MSCI Europe, Australasia, Far East Index) +12.17 +21.07 - -------------------------------------------------------------------------------------------------------------- Fixed income (Lehman Brothers Aggregate Bond Index) + 3.66 + 5.54 - -------------------------------------------------------------------------------------------------------------- Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.89 + 4.96 - -------------------------------------------------------------------------------------------------------------- High yield bonds (Credit Suisse High Yield Index) + 8.62 +12.36 - --------------------------------------------------------------------------------------------------------------
If the recent market movements are any guide, 2007 could be a year of enhanced market volatility. As you navigate the uncertainties of the financial markets, we encourage you to review your investment goals with your financial professional and to make portfolio changes, as needed. We thank you for trusting BlackRock with your investment assets, and we look forward to continuing to serve you in the months and years ahead. Sincerely, /s/ Robert C. Doll, Jr. Robert C. Doll, Jr. Fund President and Director BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 3 A Discussion With Your Fund's Portfolio Managers The Fund outpaced its benchmark return for the period and provided an attractive yield as we continued our efforts to enhance the level of income provided to shareholders. How did the Fund perform during the period in light of the existing market conditions? For the six-month period ended February 28, 2007, the Common Stock of BlackRock Diversified Income Strategies Fund, Inc. had net annualized yields of 9.45% and 9.17%, based on a period-end per share net asset value of $19.21 and a per share market price of $19.80, respectively, and $.900 per share income dividends. Over the same period, the total investment return on the Fund's Common Stock was +7.73%, based on a change in net asset value from $18.70 to $19.21, and assuming reinvestment of all distributions. By comparison, the Fund's benchmark, which is comprised 20% of the Credit Suisse High Yield Index and 80% of the Credit Suisse Leveraged Loan Index, posted a total return of +5.06% for the six-month period. For a description of the Fund's total investment return based on a change in the per share market value of the Fund's Common Stock (as measured by the trading price of the Fund's shares on the New York Stock Exchange), and assuming reinvestment of distributions, please refer to the Financial Highlights section of this report. As a closed-end fund, the Fund's shares may trade in the secondary market at a premium or discount to the Fund's net asset value. As a result, total investment returns based on changes in the market value of the Fund's Common Stock can vary significantly from total investment returns based on changes in the Fund's net asset value. The leveraged loan market, as measured by the Credit Suisse Leveraged Loan Index, returned +4.19% for the semi-annual period, while the high yield bond market, as measured by the Credit Suisse High Yield Index, returned +8.62%. Despite some volatility late in the reporting period, the non-investment grade markets continued to post strong results. The leveraged loan and the high yield markets both posted positive returns in each of the past six months. The markets have been aided by the continuation of historically low default rates and strong inflows into the asset classes, both of which have helped to support the prices of the underlying issues. Support for the leveraged loan market also came from soaring investor demand, which pushed spreads to new lows. The primary driver of this demand is collateralized loan obligations (CLOs), which now account for approximately two-thirds of the leveraged loan market. The cost of funding for these CLOs has dropped dramatically over the past few years, enabling the structured finance vehicles to absorb bank loans at increasingly tighter spreads and still achieve their targeted equity returns. The fact that default rates are at historic lows also has assisted this trend. To supply the CLO juggernaut, the demand for bank loans has been so voracious that we have actually seen bond deals migrate to the loan market, a reversal of historic flows that typically saw deals move from loans into bonds. This trend has marginally curtailed the supply of high yield bonds, keeping spreads there tighter than they otherwise would be. What factors most influenced Fund performance? Given the inverted shape of the yield curve, the Fund benefited from its overweight exposure to floating rate high yield bonds and bank loans, as opposed to fixed rate high yield issues. The Fund's performance also was aided by its overweight exposure to lower-tier credits, particularly B-rated and CCC-rated issues, as these segments of the non-investment grade market generated the strongest returns. Given the relative strength of the market, we continued to make extensive use of the Fund's leverage line, with an average level of about 30% of total assets. This, too, proved beneficial to performance. (For a complete explanation of the benefits and risks of leveraging, refer to page 2 of this report to shareholders.) What changes were made to the Fund during the period? During the period, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill Lynch") combined Merrill Lynch's investment management business, Merrill Lynch Investment Managers, L.P. and its affiliates, including Fund Asset Management, L.P., with BlackRock, Inc. to form a new independent company. While this resulted in some additions to the portfolio management team, there was no change in the overall investment philosophy or focus of the Fund. The most notable shift in sector exposures occurred in the automotive sector, where we reduced our underweight position during the period. 4 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 How would you characterize the Fund's position at the close of the period? While volatility picked up at the end of the period, resulting in an investor flight to quality, fundamental and technical valuations remained favorable for the leveraged loan and high yield markets. Even with the noise at the end of the reporting period, the leveraged loan market posted a return of +.74% in February, while the high yield market posted a return of better than +1%. This marked the seventh month out of eight in which the Credit Suisse High Yield Index posted monthly returns in excess of 1% and the eighth consecutive month that the Credit Suisse Leveraged Loan Index posted returns of at least +.50%. Market fundamentals remain very strong, with default rates near historic lows and a new-issue calendar that is just beginning to satisfy the non-investment grade investor. As a result, we remain positioned with an overweight to lower-tier credits (B and CCC), as we expect these segments of the market to post the strongest returns. Kevin Booth Vice President and Portfolio Manager Mark Williams Portfolio Manager April 3, 2007 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 5 Portfolio Information As of February 28, 2007 Percent of Ten Largest Holdings Net Assets - -------------------------------------------------------------------------------- Amkor Technology, Inc. Second Lien Term Loan, 9.86% due 10/27/2010.................................... 2.5% Universal City Florida Holding Co. I, 10.11% due 5/01/2010.................................... 2.2 CCO Holdings LLC, 9.485% due 12/15/2010................... 2.2 Smurfit Kappa Funding Plc, 7.75% due 4/01/2015..................................... 2.2 Abitibi-Consolidated, Inc., 8.855% due 6/15/2011.................................... 2.2 CPI Holdco, Inc., 11.151% due 2/01/2015................... 1.8 Verso Paper Holdings LLC, 9.11% due 8/01/2014..................................... 1.8 Simmons Bedding Co., 7.875% due 1/15/2014.................................... 1.8 Delta Airlines, Debtor In Possession Term Loan C, 10.098% due 3/16/2008................................... 1.7 Insight Midwest Holdings LLC Delay Draw Term Loan, 7.61% due 4/03/2014..................................... 1.7 - -------------------------------------------------------------------------------- Percent of Five Largest Industries Net Assets - -------------------------------------------------------------------------------- Information Technology.................................... 14.5% Paper..................................................... 11.1 Cable -- U.S.............................................. 9.3 Automotive................................................ 9.3 Housing................................................... 7.8 - -------------------------------------------------------------------------------- For Fund compliance purposes, the Fund's Industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. - -------------------------------------------------------------------------------- Percent of Quality Ratings by Total S&P/Moody's Investments - -------------------------------------------------------------------------------- BB/Ba..................................................... 13.2% B/B....................................................... 57.8 CCC/Caa................................................... 13.5 CC/Ca..................................................... 0.8 NR (Not Rated)............................................ 10.9 Other*.................................................... 3.8 - -------------------------------------------------------------------------------- * Includes portfolio holdings in common stocks and short-term investments. 6 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Schedule of Investments as of February 28, 2007 (Unaudited) (in U.S. dollars)
Face Amount Corporate Bonds Value ==================================================================================== Aerospace & Defense -- 2.8% USD 160,000 Argo-Tech Corp., 9.25% due 6/01/2011 $ 173,600 EUR 2,000,000 Bombardier, Inc., 6.939% due 11/15/2013 (b)(h) 2,712,860 USD 130,000 TransDigm, Inc., 7.75% due 7/15/2014 (h) 133,575 3,500,000 Vought Aircraft Industries, Inc., 8% due 7/15/2011 3,412,500 ----------- 6,432,535 ==================================================================================== Automotive -- 5.2% 2,700,000 AutoNation, Inc., 7.36% due 4/15/2013 (b) 2,740,500 1,825,000 Delco Remy International, Inc., 9.36% due 4/15/2009 (b) 1,774,813 185,000 Ford Motor Co., 7.45% due 7/16/2031 148,463 Ford Motor Credit Co.: 210,000 5.80% due 1/12/2009 206,271 1,340,000 8.11% due 1/13/2012 (b) 1,347,231 2,500,000 9.81% due 4/15/2012 (b) 2,703,683 The Goodyear Tire & Rubber Co. (h): 1,000,000 9.14% due 12/01/2009 (b) 1,010,000 530,000 8.625% due 12/01/2011 563,125 660,000 Lear Corp., 8.75% due 12/01/2016 636,075 460,000 Titan International, Inc., 8% due 1/15/2012 (h) 469,200 380,000 United Auto Group, Inc., 7.75% due 12/15/2016 (h) 386,650 ----------- 11,986,011 ==================================================================================== Broadcasting -- 3.7% 3,000,000 Canadian Satellite Radio Holdings, Inc., 12.75% due 2/15/2014 3,082,500 500,000 LIN Television Corp. Series B, 6.50% due 5/15/2013 487,500 875,000 Paxson Communications Corp., 8.757% due 1/15/2012 (b)(h) 890,313 1,120,000 XM Satellite Radio, Inc., 9.871% due 5/01/2013 (b) 1,106,000 3,040,000 Young Broadcasting, Inc., 10% due 3/01/2011 3,017,200 ----------- 8,583,513 ==================================================================================== Cable -- International -- 1.7% 3,725,000 NTL Cable Plc, 9.125% due 8/15/2016 3,957,813 ==================================================================================== Cable -- U.S. -- 5.8% 5,000,000 CCO Holdings LLC, 9.485% due 12/15/2010 (b) 5,100,000 3,000,000 Cablevision Systems Corp. Series B, 9.87% due 4/01/2009 (b) 3,195,000 Intelsat Bermuda Ltd. (b)(h): 3,195,000 11.354% due 6/15/2013 3,426,638 1,735,000 8.872% due 1/15/2015 1,776,206 ----------- 13,497,844 ==================================================================================== Chemicals -- 2.9% 440,000 American Pacific Corp., 9% due 2/01/2015 (h) 443,850 Momentive Performance Materials, Inc. (h): 310,000 10.125% due 12/01/2014 (e) 326,275 520,000 11.50% due 12/01/2016 540,800 3,305,000 Nova Chemicals Corp., 8.502% due 11/15/2013 (b) 3,305,000 2,000,000 PolyOne Corp., 6.89% due 9/22/2008 1,925,000 290,000 Terra Capital, Inc., 7% due 2/01/2017 (h) 288,550 ----------- 6,829,475 ==================================================================================== Consumer -- Durables -- 1.8% 4,000,000 Simmons Bedding Co., 7.875% due 1/15/2014 4,100,000 ==================================================================================== Consumer -- Non-Durables -- 4.5% 3,425,000 Ames True Temper, Inc., 9.36% due 1/15/2012 (b) 3,510,625 4,000,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 3,360,000 3,500,000 Levi Strauss & Co., 10.11% due 4/01/2012 (b) 3,574,375 ----------- 10,445,000 ==================================================================================== Diversified Media -- 3.0% Affinion Group, Inc.: USD 80,000 10.125% due 10/15/2013 86,400 175,000 11.50% due 10/15/2015 189,875 1,400,000 Idearc Inc., 8% due 11/15/2016 (h) 1,438,500 5,000,000 Universal City Florida Holding Co. I, 10.11% due 5/01/2010 (b) 5,175,000 ----------- 6,889,775 ==================================================================================== Energy -- Exploration & Production -- 0.3% 700,000 Stone Energy Corp., 8.11% due 7/15/2010 (b)(h) 700,875 ==================================================================================== Energy -- Other -- 2.5% 850,000 Aleris International, Inc., 9% due 12/15/2014 (e)(h) 901,000 3,000,000 Ocean RIG ASA, 9.36% due 4/04/2011 (b) 3,000,000 2,000,000 Parker Drilling Co., 10.119% due 9/01/2010 (b) 2,040,000 ----------- 5,941,000 ==================================================================================== Financial -- 0.7% 1,525,000 NCO Group, Inc., 10.23% due 11/15/2013 (b)(h) 1,532,625 ==================================================================================== Food & Tobacco -- 0.1% 200,000 Swift & Co., 12.50% due 1/01/2010 209,500 ==================================================================================== Gaming -- 3.4% Galaxy Entertainment Finance Co. Ltd. (h): 800,000 10.42% due 12/15/2010 (b) 848,000 375,000 9.875% due 12/15/2012 409,219 800,000 Little Traverse Bay Bands of Odawa Indians, 10.25% due 2/15/2014 (h) 824,000 Snoqualmie Entertainment Authority (h): 305,000 9.15% due 2/01/2014 (b) 309,575 140,000 9.125% due 2/01/2015 144,550 1,050,000 Tropicana Entertainment, 9.625% due 12/15/2014 (h) 1,056,563 1,000,000 Tunica-Biloxi Gaming Authority, 9% due 11/15/2015 (h) 1,062,500 3,100,000 Turning Stone Resort Casino Enterprise, 9.125% due 9/15/2014 (h) 3,224,000 ----------- 7,878,407 ==================================================================================== Health Care -- 2.5% 1,500,000 Angiotech Pharmaceuticals, Inc., 9.11% due 12/01/2013 (b)(h) 1,548,750 2,000,000 Elan Finance Plc, 9.36% due 11/15/2011 (b) 2,035,000 HealthSouth Corp. (h): 1,500,000 11.418% due 6/15/2014 (b) 1,665,000 450,000 10.75% due 6/15/2016 502,875 ----------- 5,751,625 ==================================================================================== Housing -- 4.6% 920,000 Esco Corp., 9.23% due 12/15/2013 (b)(h) 956,800 1,607,000 Goodman Global Holding Co., Inc., 8.36% due 6/15/2012 (b) 1,627,088 2,850,000 Masonite Corp., 11% due 4/06/2015 (h) 2,842,875 2,500,000 Scranton Products, Inc., 12.117% due 7/01/2012 (b) 2,575,000 1,250,000 Stanley-Martin Communities LLC, 9.75% due 8/15/2015 1,143,750 1,500,000 Technical Olympic USA, Inc., 8.25% due 4/01/2011 (h) 1,455,000 ----------- 10,600,513 ==================================================================================== Hybrid -- 0.6% 1,350,000 North Street Referenced Linked Notes Series 2005-8A Class D, 19.86% due 6/15/2041 (b)(h) 1,350,000 ====================================================================================
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 7 Schedule of Investments (continued) (in U.S. dollars)
Face Amount Corporate Bonds Value ==================================================================================== Information Technology -- 6.1% Amkor Technology, Inc.: USD 60,000 7.75% due 5/15/2013 $ 58,200 110,000 9.25% due 6/01/2016 112,200 650,000 BMS Holdings, Inc., 12.40% due 2/15/2012 (b)(h) 640,142 200,000 Compagnie Generale de Geophysique-Veritas, 7.75% due 5/15/2017 207,000 Freescale Semiconductor, Inc. (h): 2,670,000 9.125% due 12/15/2014 (e) 2,706,713 2,810,000 9.23% due 12/15/2014 (b) 2,838,100 300,000 Nortel Networks Ltd., 9.61% due 7/15/2011 (b)(h) 321,000 135,000 Open Solutions, Inc., 9.75% due 2/01/2015 (h) 139,388 SunGard Data Systems, Inc.: 3,000,000 9.973% due 8/15/2013 (b) 3,135,000 2,000,000 10.25% due 8/15/2015 2,175,000 1,005,000 Telcordia Technologies, Inc., 10% due 3/15/2013 (h) 939,675 945,414 UGS Capital Corp. II, 10.348% due 6/01/2011 (e)(h) 961,959 ------------ 14,234,377 ==================================================================================== Leisure -- 0.4% 945,000 Travelport, Inc., 9.985% due 9/01/2014 (b)(h) 975,713 ==================================================================================== Manufacturing -- 4.2% 4,000,000 CPI Holdco, Inc., 11.151% due 2/01/2015 (b) 4,130,000 800,000 Jarden Corp., 7.50% due 5/01/2017 811,000 NXP BV (h): 670,000 8.11% due 10/15/2013 (b) 685,075 710,000 9.50% due 10/15/2015 733,075 RBS Global, Inc. (h): 440,000 9.50% due 8/01/2014 464,200 505,000 8.875% due 9/01/2016 515,100 2,385,000 Trimas Corp., 9.875% due 6/15/2012 2,373,075 ------------ 9,711,525 ==================================================================================== Metal -- Other -- 2.3% Indalex Holding Corp.: 500,000 11.50% due 2/01/2014 537,500 1,950,000 11.50% due 2/01/2014 (h) 2,086,500 1,350,000 James River Coal Co., 9.375% due 6/01/2012 1,161,000 1,425,000 RathGibson, Inc., 11.25% due 2/15/2014 1,510,500 ------------ 5,295,500 ==================================================================================== Packaging -- 3.3% Berry Plastics Holding Corp.: 60,000 8.875% due 9/15/2014 62,100 3,175,000 9.23% due 9/15/2014 (b) 3,278,188 1,570,000 Packaging Dynamics Finance Corp., 10% due 5/01/2016 (h) 1,648,500 2,750,000 Wise Metals Group LLC, 10.25% due 5/15/2012 2,653,750 ------------ 7,642,538 ==================================================================================== Paper -- 11.1% 5,000,000 Abitibi-Consolidated, Inc., 8.855% due 6/15/2011 (b) 5,025,000 Ainsworth Lumber Co. Ltd. (b): 3,000,000 9.249% due 10/01/2010 2,535,000 1,500,000 9.499% due 4/01/2013 1,170,000 2,000,000 Boise Cascade LLC, 8.235% due 10/15/2012 (b) 2,000,000 EUR 2,000,000 LECTA SA, 0% due 2/15/2014 2,666,543 USD 3,000,000 NewPage Corp., 11.61% due 5/01/2012 (b) 3,270,000 5,000,000 Smurfit Kappa Funding Plc, 7.75% due 4/01/2015 5,050,000 4,000,000 Verso Paper Holdings LLC, 9.11% due 8/01/2014 (b)(h) 4,120,000 ------------ 25,836,543 ==================================================================================== Retail -- 3.4% USD 765,000 Buffets, Inc., 12.50% due 11/01/2014 803,250 Michaels Stores Inc. (h): 1,190,000 10% due 11/01/2014 1,273,300 3,470,000 11.375% due 11/01/2016 3,764,950 1,800,000 Neiman Marcus Group, Inc., 10.375% due 10/15/2015 2,016,000 ------------ 7,857,500 ==================================================================================== Service -- 1.5% 1,000,000 Neff Rental LLC, 11.25% due 6/15/2012 1,112,500 330,000 PNA Intermediate Holding Corp., 12.36% due 2/15/2013 (b)(h) 331,650 1,300,000 Sally Holdings LLC, 10.50% due 11/15/2016 (h) 1,345,500 40,000 Seitel Acquisition Corp., 9.75% due 2/15/2014 (h) 40,600 Yankee Acquisition Corp. (h): 240,000 8.50% due 2/15/2015 245,400 435,000 9.75% due 2/15/2017 445,875 ------------ 3,521,525 ==================================================================================== Telecommunications -- 1.5% Nordic Telephone Co. Holdings ApS (h): 800,000 8.875% due 5/01/2016 862,000 EUR 500,000 8.352% due 5/01/2016 (b) 680,696 USD 2,000,000 Qwest Communications International, Inc., 8.86% due 2/15/2009 (b) 2,020,000 ------------ 3,562,696 ==================================================================================== Transportation -- 0.2% 500,000 Navios Maritime Holdings, Inc., 9.50% due 12/15/2014 (h) 513,750 ==================================================================================== Utility -- 0.1% 350,000 Conexant Systems, Inc., 9.11% due 11/15/2010 (b)(h) 360,500 ==================================================================================== Wireless Communications -- 4.5% EUR 348,306 BCM Ireland Preferred Equity Ltd., 10.597% due 2/15/2017 (e)(h) 466,691 USD 3,000,000 Centennial Communications Corp., 11.11% due 1/01/2013 (b) 3,165,000 1,650,000 Cricket Communications, Inc., 9.375% due 11/01/2014 (h) 1,740,750 Digicel Group Ltd. (h): 1,070,000 8.875% due 1/15/2015 1,044,588 2,140,000 9.125% due 1/15/2015 (e) 2,083,825 650,000 FiberTower Corp., 9% due 11/15/2012 (a)(h) 745,063 200,000 Orascom Telecom Finance SCA, 7.875% due 2/08/2014 199,000 985,000 West Corp., 11% due 10/15/2016 (h) 1,066,263 ------------ 10,511,180 ==================================================================================== Total Corporate Bonds (Cost -- $194,103,433) -- 84.7% 196,709,858 ==================================================================================== ==================================================================================== Floating Rate Loan Interests (g) ==================================================================================== Aerospace & Defense -- 1.4% 3,148,148 Standard Aero Holdings Term Loan, 7.57% - 7.63% due 8/24/2012 3,161,921 ====================================================================================
8 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Schedule of Investments (continued) (in U.S. dollars)
Face Amount Floating Rate Loan Interests (g) Value ==================================================================================== Airlines -- 2.0% Delta Air Lines: USD 4,000,000 Debtor In Possession Term Loan C, 10.098% due 3/16/2008 $ 4,042,172 500,000 Term Loan B, 10.118% due 3/16/2008 502,292 ----------- 4,544,464 ==================================================================================== Automotive -- 4.1% Intermet Corp.: 1,481,481 First Lien Term Loan, 10.39% due 11/08/2010 1,237,037 518,519 Letter of Credit, 10.20% due 11/08/2010 432,963 JL French Corp.: 1,000,000 First Lien Term Loan B, 8.375% due 6/05/2011 974,375 1,000,000 Second Lien Term Loan, 10.875% due 6/05/2012 916,667 Metaldyne Corp.: 86,538 Letter of Credit, 8.92% - 9.125% due 1/15/2012 87,476 627,404 Term Loan, 9.125% due 1/15/2014 634,201 Navistar International Transportation Corp.: 800,000 Revolving Credit, 5.22% - 8.61% due 6/30/2012 813,200 2,200,000 Term Loan, 8.61% due 6/30/2012 2,236,300 2,250,000 Visteon Corp. Term Loan, 8.38% due 6/13/2013 2,271,375 ----------- 9,603,594 ==================================================================================== Broadcasting -- 1.7% 2,000,000 Ellis Communications Term Loan, 10% due 12/30/2011 1,995,000 1,000,000 NEP II, Inc. Term Loan B, 7.760% due 2/13/2014 1,009,688 1,000,000 Persona Communications Second Lien Term Loan, 11.373% due 4/30/2014 1,008,750 ----------- 4,013,438 ==================================================================================== Cable -- U.S. -- 3.5% Cequel Communications: 2,024,137 First Lien A, 7.61% due 11/05/2013 2,043,429 2,000,000 Second Lien Term Loan A, 9.86% due 5/04/2014 2,048,750 4,000,000 Insight Midwest Holdings LLC Delay Draw Term Loan, 7.61% due 4/03/2014 4,037,000 ----------- 8,129,179 ==================================================================================== Chemicals -- 1.1% 3,000,000 Wellman, Inc. Second Lien Term Loan, 12.11% due 2/10/2010 2,586,000 ==================================================================================== Consumer -- Durables -- 0.2% 500,000 Evenflo Co., Inc. Term Loan, 7.82% due 2/15/2013 504,375 ==================================================================================== Diversified Media -- 4.4% 1,150,000 Affinion Group Term Loan, 11.66% due 3/01/2012 1,137,542 525,000 Alix Partners Term Loan, 7.86% due 10/30/2013 528,609 4,000,000 Idearc Inc. Term Loan, 7.33% - 7.35% due 11/15/2014 4,032,500 1,995,000 Nielsen Finance LLC Term Loan, 7.61% due 8/09/2013 2,012,975 Penton Media Term Loan: 1,000,000 7.625% due 2/15/2013 1,009,167 1,000,000 10.345% due 2/15/2014 1,018,125 520,000 Riverdeep Group Ltd. Bridge Loan, 11.066% due 12/21/2007 518,700 ----------- 10,257,618 ==================================================================================== Energy -- Exploration & Production -- 1.5% USD 3,000,000 Frontier Drilling Term Loan B, 8.62% - 8.69% due 6/21/2013 3,000,000 496,250 MEG Energy Corp. Term Loan, 7.375% due 4/03/2013 499,429 ----------- 3,499,429 ==================================================================================== Energy -- Other -- 2.5% Alon USA, Inc.: 2,211,111 Paramount Facility, 7.62% - 7.876% due 6/22/2013 2,223,549 276,389 Term Loan, 7.57% - 7.62% due 6/22/2013 277,944 250,000 Exco Resources, Inc. Term Loan, 10.938% - 11.375% due 10/31/2011 252,188 3,000,000 Scorpion Drilling Ltd. Second Lien Term Loan, 13.61% due 5/05/2015 3,090,000 ----------- 5,843,681 ==================================================================================== Financial -- 1.3% JG Wentworth Manufacturing Term Loan: 2,000,000 8.864% due 4/12/2011 2,020,000 1,000,000 8.864% due 4/14/2011 1,010,000 ----------- 3,030,000 ==================================================================================== Food & Tobacco -- 3.7% Aramark Corp.: 197,524 Letter of Credit, 7.445% due 1/30/2014 199,475 2,802,476 Term Loan, 7.445% due 1/30/2014 2,830,150 500,000 Bolthouse Farms, Inc. Second Lien Term Loan, 10.864% due 12/01/2013 505,417 Dole Food Co., Inc.: 416,888 Term Loan B, 7.438% - 9.25% due 4/12/2013 417,097 697,184 Term Loan C, 7.438% - 9.25% due 3/31/2013 697,533 692,442 Term Loan C, 7.438% - 9.25% due 4/12/2013 692,788 186,684 Tranche B, 5.23% due 4/12/2013 186,777 Quiznos LLC: 995,000 First Lien Term Loan, 7.75% due 5/05/2013 999,008 1,000,000 Second Lien Term Loan, 11.117% due 11/05/2013 1,004,028 1,000,000 Sturm Foods Inc. Term Loan, 7.875% due 1/30/2014 1,005,938 ----------- 8,538,211 ==================================================================================== Gaming -- 2.2% 1,000,000 Edge-Star Partners LLC First Lien Term Loan, 9.375% due 11/18/2007 1,000,000 500,000 Foamex LP Term Loan, 7.57% due 2/15/2013 503,750 500,000 Great Canadian Gaming Corp. Term Loan B, 6.86% due 2/15/2014 502,813 Green Valley Ranch Gaming LLC Term Loan: 481,818 7.36% due 1/29/2012 487,038 500,000 8.61% due 1/29/2012 508,000 2,000,000 Venetian Macau U.S. Finance Co. LLC Term Loan B, 8.12% due 5/25/2013 2,020,250 ----------- 5,021,851 ==================================================================================== Health Care -- 1.3% 3,000,000 Health Management Associates, Inc. Term Loan B, 7.07% due 1/15/2014 3,021,564 ====================================================================================
BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 9 Schedule of Investments (continued) (in U.S. dollars)
Face Amount Floating Rate Loan Interests (g) Value ==================================================================================== Housing -- 3.2% USD 3,000,000 LNR Property Corp. Term Loan B, 8.11% due 7/12/2011 $ 3,017,679 1,881,179 Lake at Las Vegas Joint Venture Term Loan, 10% - 10.12% due 11/01/2009 1,892,265 2,497,500 Ply Gem Industries, Inc. First Lien Term Loan, 8.37% - 11.12% due 10/31/2011 2,525,597 ------------ 7,435,541 ==================================================================================== Information Technology -- 8.4% 1,638,379 Activant Solutions Term Loan, 7.375% due 5/02/2013 1,639,403 5,500,000 Amkor Technology, Inc. Second Lien Term Loan, 9.86% due 10/27/2010 5,694,794 3,000,000 Aspect Software Second Lien Term Loan, 12.438% due 7/05/2012 3,005,001 1,000,000 ClientLogic Holding Corp. Term Loan B, 7.82% - 7.86% due 1/30/2014 1,005,417 Dealer Comp Services: 2,000,000 First Lien Term Loan, 7.82% due 10/31/2012 2,018,572 1,500,000 Second Lien Term Loan, 10.82% due 10/31/2013 1,542,657 500,000 Intergraph Corp. Term Loan, 11.36% due 11/15/2014 503,438 4,000,000 Sanmina-SCI Corp. Term Loan, 7.875% due 1/30/2008 4,016,000 ------------ 19,425,282 ==================================================================================== Leisure -- 1.3% 1,080,000 Easton-Bell Sports Inc. Term Loan B, 11.39% due 5/01/2012 1,053,000 2,000,000 National Cinemedia LLC Term Loan B, 7.09% due 2/28/2015 2,015,000 ------------ 3,068,000 ==================================================================================== Manufacturing -- 1.5% 1,500,000 Babcocks & Wilcox Letter of Credit, 5.264% due 2/22/2012 1,515,000 1,000,000 Baldor Electric Co. Term Loan B, 7.063% due 2/15/2014 1,008,500 1,000,000 Brand Energy Term Loan B, 7.625% due 2/15/2014 1,011,250 ------------ 3,534,750 ==================================================================================== Metal -- Other -- 1.9% Euramax International Plc: 828,947 Second Lien Term Loan, 12.36% due 6/29/2013 832,056 1,275,633 Tranche 3 Term Loan B, 8.063% due 6/29/2012 1,279,459 1,671,053 Tranche 4 Second Lien Term Loan, 12.36% due 6/29/2013 1,677,319 Wire Rope Corp. of America, Inc.: 85,714 Delayed Draw Term Loan, 9.50% due 1/30/2014 86,357 535,714 Term Loan B, 7.60% - 7.61% due 1/30/2014 539,732 ------------ 4,414,923 ==================================================================================== Packaging -- 2.3% 1,822,906 Anchor Glass Container Corp. Term Loan B, 7.614% - 7.62% due 5/03/2013 1,818,349 3,571,429 Graham Packaging Co. LP Second Lien Term Loan, 9.625% due 4/07/2012 3,603,571 ------------ 5,421,920 ==================================================================================== Retail -- 0.2% USD 400,000 Petco Animal Supplies, Inc. Term Loan, 8.10% due 10/31/2012 404,417 ==================================================================================== Service -- 1.9% 1,620,426 Alliance Laundry Systems LLC Term Loan, 7.57% - 7.60% due 1/27/2012 1,632,579 750,000 Brickman Group, Inc. Term Loan, 7.36% - 7.399% due 1/23/2014 753,281 2,000,000 NES Rentals Holdings, Inc. Term Loan C, 12.125% due 7/12/2013 2,012,500 ------------ 4,398,360 ==================================================================================== Steel -- 0.3% 750,000 McJunkin Corp. Term Loan, 7.595% due 1/30/2014 757,500 ==================================================================================== Telecommunications -- 0.2% 500,000 Kentucky Data Link Inc. Term Loan B, 7.57% due 2/28/2015 503,750 ==================================================================================== Utility -- 1.7% 1,000,000 Calpine Corp. Second Priority Debtor in Possession Term Loan, 9.364% due 12/20/2007 1,008,321 3,000,000 Generac Portable Products, Inc. Second Lien Term Loan, 11.36% due 5/15/2014 2,992,500 ------------ 4,000,821 ==================================================================================== Wireless Communications -- 1.9% 2,000,000 West Corp. Term Loan, 8.10% due 10/31/2013 2,016,388 2,250,000 Wind Telecomunicazione SpA Term Loan B, 12.54% due 12/21/2011 2,262,656 ------------ 4,279,044 ==================================================================================== Total Floating Rate Loan Interests (Cost -- $129,871,892) -- 55.7% 129,399,633 ==================================================================================== ==================================================================================== Shares Held Common Stocks ==================================================================================== Manufacturing -- 1.3% 176,126 Medis Technologies Ltd. (d) 3,025,845 - ------------------------------------------------------------------------------------ Total Common Stocks (Cost -- $3,229,974) -- 1.3% 3,025,845 ==================================================================================== ==================================================================================== Beneficial Interest Short-Term Securities ==================================================================================== USD 9,775,931 BlackRock Liquidity Series, LLC Cash Sweep Series 5.33% (c)(f) 9,775,931 - ------------------------------------------------------------------------------------ Total Short-Term Securities (Cost -- $9,775,931) -- 4.2% 9,775,931 - ------------------------------------------------------------------------------------ Total Investments (Cost -- $336,981,230*) -- 145.9% 338,911,267 Liabilities in Excess of Other Assets -- (45.9%) (106,634,623) ------------- Net Assets -- 100.0% $ 232,276,644 =============
10 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Schedule of Investments (concluded) (in U.S. dollars) * The cost and unrealized appreciation (depreciation) of investments as of February 28, 2007, as computed for federal income tax purposes, were as follows: Aggregate cost........................................ $ 336,546,792 ============= Gross unrealized appreciation......................... $ 6,411,951 Gross unrealized depreciation......................... (4,047,476) ------------- Net unrealized appreciation........................... $ 2,364,475 ============= (a) Convertible security. (b) Floating rate security. (c) Investments in companies considered to be an affiliate of the Fund, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as follows: -------------------------------------------------------------------------- Net Interest Affiliate Activity Income -------------------------------------------------------------------------- BlackRock Liquidity Series, LLC Cash Sweep Series $7,770,658 $103,412 -------------------------------------------------------------------------- (d) Non-income producing security. (e) Represents a pay-in-kind security which may pay interest/dividends in additional face/shares. (f) Represents the current yield as of February 28, 2007. (g) Floating rate loan interests in which the Fund invests generally pay interest at rates that are periodically redetermined by reference to a base lending rate plus a premium. The base lending rates are generally (i) the lending rate offered by one or more major European banks, such as LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one or more major U.S. banks, or (iii) the certificate of deposit rate. (h) The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. o For Fund compliance purposes, the Fund's industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. Industries are shown as a percent of net assets. o Forward foreign exchange contracts as of February 28, 2007 were as follows: -------------------------------------------------------------------------- Foreign Settlement Unrealized Currency Sold Date Depreciation -------------------------------------------------------------------------- EUR 4,340,000 April 2007 $(83,834) -------------------------------------------------------------------------- Total Unrealized Depreciation on Forward Foreign Exchange Contracts -- Net (USD Commitment -- $5,671,477) $(83,834) ======== o Swaps outstanding as of February 28, 2007 were as follows:
-------------------------------------------------------------------------------- Unrealized Notional Appreciation Amount (Depreciation) -------------------------------------------------------------------------------- Sold credit default protection on Novelis Inc. and receive 1.4% Broker, JPMorgan Chase Expires January 2008 $ 2,000,000 $ (2,816) Sold credit default protection on General Motors Corp. and receive 5.25% Broker, Morgan Stanley Capital Services, Inc. Expires June 2008 $ 3,000,000 133,611 Sold credit default protection on Ford Motor Co. and receive 4.2% Broker, Deutsche Bank Expires March 2010 $ 4,000,000 59,384 Sold credit default protection on ACES High Yield Index (10% - 13% Tranche) and receive 5.0% Broker, Morgan Stanley Capital Services, Inc. Expires March 2010 $ 7,000,000 982,499 Sold credit default protection on BAA Ferovial Junior Term Loan and receive 2.0% Broker, Deutsche Bank Expires June 2012 $ 300,000 -- Bought credit default protection on Smithfield Foods, Inc. and pay 1.52% Broker, Credit Suisse First Boston Expires March 2012 $ 1,000,000 (481) Pay a fixed rate of 4.823% and receive a floating rate based on 3-month LIBOR Broker, JPMorgan Chase Expires January 2013 $20,000,000 185,754 Pay a fixed rate of 4.853% and receive a floating rate based on 3-month LIBOR Broker, Lehman Brothers Special Finance Expires March 2013 $31,000,000 243,166 -------------------------------------------------------------------------------- Total $1,601,117 ==========
o Currency Abbreviations: EUR Euro USD U.S. Dollar See Notes to Financial Statements. BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 11 Statement of Assets, Liabilities and Capital As of February 28, 2007 (Unaudited) ================================================================================================================================= Assets - --------------------------------------------------------------------------------------------------------------------------------- Investments in unaffiliated securities, at value (identified cost -- $327,205,299) $ 329,135,336 Investments in affiliated securities, at value (identified cost -- $9,775,931) . 9,775,931 Unrealized appreciation on swaps ............................................... 1,604,414 Receivables: Interest receivable ......................................................... $ 4,741,410 Securities sold ............................................................. 1,888,819 Swaps ....................................................................... 573,307 Commitment fees ............................................................. 4,841 7,208,377 ------------- Prepaid expenses ............................................................... 14,032 ------------- Total assets ................................................................... 347,738,090 ------------- ================================================================================================================================= Liabilities - --------------------------------------------------------------------------------------------------------------------------------- Loans .......................................................................... 90,000,000 Bank overdraft ................................................................. 5,011,817 Unfunded loan commitment ....................................................... 2,812 Unrealized depreciation on forward foreign exchange contracts .................. 83,834 Unrealized depreciation on swaps ............................................... 3,297 Payables: Securities purchased ........................................................ 19,278,216 Swaps ....................................................................... 779,132 Investment adviser .......................................................... 186,513 Interest on loans ........................................................... 54,276 Other affiliates ............................................................ 1,790 20,299,927 ------------- Accrued expenses ............................................................... 59,759 ------------- Total liabilities .............................................................. 115,461,446 ------------- ================================================================================================================================= Net Assets - --------------------------------------------------------------------------------------------------------------------------------- Net assets ..................................................................... $ 232,276,644 ============= ================================================================================================================================= Capital - --------------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.10 per share; 200,000,000 shares authorized (12,090,244 shares issued and outstanding) .................................... $ 1,209,024 Paid-in capital in excess of par ............................................... 229,229,633 Undistributed investment income -- net ......................................... $ 1,431,171 Accumulated realized capital losses -- net ..................................... (3,038,424) Unrealized appreciation -- net ................................................. 3,445,240 ------------- Total accumulated earnings -- net .............................................. 1,837,987 ------------- Total capital -- Equivalent to $19.21 net asset value per share of Common Stock (market price -- $19.80) ......................................... $ 232,276,644 =============
See Notes to Financial Statements. 12 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Statement of Operations For the Six Months Ended February 28, 2007 (Unaudited) ================================================================================================================================= Investment Income - --------------------------------------------------------------------------------------------------------------------------------- Interest (including $103,412 from affiliates) ......................... $ 15,021,597 Other income .......................................................... 148,649 ------------- Total income .......................................................... 15,170,246 ------------- ================================================================================================================================= Expenses - --------------------------------------------------------------------------------------------------------------------------------- Loan interest expense ................................................. $ 2,702,371 Investment advisory fees .............................................. 1,203,650 Borrowing costs ....................................................... 85,147 Professional fees ..................................................... 41,752 Accounting services ................................................... 40,243 Printing and shareholder reports ...................................... 20,524 Directors' fees and expenses .......................................... 20,142 Transfer agent fees ................................................... 17,070 Custodian fees ........................................................ 13,857 Pricing services ...................................................... 10,112 Listing fees .......................................................... 9,418 Other ................................................................. 9,438 ------------- Total expenses ........................................................ 4,173,724 ------------- Investment income -- net .............................................. 10,996,522 ------------- ================================================================================================================================= Realized & Unrealized Gain (Loss) -- Net - --------------------------------------------------------------------------------------------------------------------------------- Realized gain (loss) on: Investments -- net ................................................. (806,428) Swaps -- net ....................................................... 505,407 Foreign currency transactions -- net ............................... (40,800) (341,821) ------------- Change in unrealized appreciation/depreciation on: Investments -- net ................................................. 6,320,798 Unfunded corporate loans -- net .................................... 5,809 Swaps -- net ....................................................... 77,621 Foreign currency transactions -- net ............................... (83,719) 6,320,509 ------------------------------- Total realized and unrealized gain -- net ............................. 5,978,688 ------------- Net Increase in Net Assets Resulting from Operations .................. $ 16,975,210 =============
See Notes to Financial Statements. BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 13 Statements of Changes in Net Assets
For the Six Months Ended For the February 28, Year Ended 2007 August 31, Increase (Decrease) in Net Assets: (Unaudited) 2006 ================================================================================================================================= Operations - --------------------------------------------------------------------------------------------------------------------------------- Investment income -- net ....................................................... $ 10,996,522 $ 21,188,611 Realized loss -- net ........................................................... (341,821) (2,699,062) Change in unrealized appreciation/depreciation -- net .......................... 6,320,509 5,700,291 ------------------------------- Net increase in net assets resulting from operations ........................... 16,975,210 24,189,840 ------------------------------- ================================================================================================================================= Dividends to Shareholders - --------------------------------------------------------------------------------------------------------------------------------- Dividends to shareholders from investment income -- net ........................ (10,827,372) (20,336,039) ------------------------------- ================================================================================================================================= Stock Transactions - --------------------------------------------------------------------------------------------------------------------------------- Value of shares issued to Common Stock shareholders in reinvestment of dividends 1,973,271 558,690 Offering costs resulting from the issuance of Common Stock ..................... -- (4,659) ------------------------------- Net increase in net assets resulting from stock transactions ................... 1,973,271 554,031 ------------------------------- ================================================================================================================================= Net Assets - --------------------------------------------------------------------------------------------------------------------------------- Total increase in net assets ................................................... 8,121,109 4,407,832 Beginning of period ............................................................ 224,155,535 219,747,703 ------------------------------- End of period* ................................................................. 232,276,644 $ 224,155,535 =============================== * Undistributed investment income -- net ...................................... $ 1,431,171 $ 1,262,021 ===============================
See Notes to Financial Statements. 14 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Statement of Cash Flows For the Six Months Ended February 28, 2007 (Unaudited) ================================================================================================================================= Cash Provided by Operating Activities - --------------------------------------------------------------------------------------------------------------------------------- Net increase in net assets resulting from operations .................................... $ 16,975,210 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Decrease in receivables .............................................................. 301,574 Decrease in other liabilities ........................................................ (15,289) Realized and unrealized gain -- net .................................................. (5,270,257) Amortization of premium and discount ................................................. 175,866 Realized loss on foreign currency transactions ....................................... (40,688) Proceeds from sales and paydowns of long-term securities ................................ 117,511,209 Purchases of long-term securities ....................................................... (119,226,757) Purchases of short-term securities ...................................................... (7,768,584) ------------- Cash provided by operating activities ................................................... 2,642,284 ------------- ================================================================================================================================= Cash Used for Financing Activities - --------------------------------------------------------------------------------------------------------------------------------- Cash receipts from borrowings ........................................................... 31,300,000 Cash payments on borrowings ............................................................. (30,100,000) Dividends paid to shareholders .......................................................... (8,854,101) Increase in bank overdraft .............................................................. 5,011,817 ------------- Cash used for financing activities ...................................................... (2,642,284) ------------- ================================================================================================================================= Cash - --------------------------------------------------------------------------------------------------------------------------------- Net increase/decrease in cash ........................................................... 0 Cash at beginning of period ............................................................. 0 ------------- Cash at end of period ................................................................... $ 0 ============= ================================================================================================================================= Cash Flow Information - --------------------------------------------------------------------------------------------------------------------------------- Cash paid for interest .................................................................. $ 2,738,162 ============= ================================================================================================================================= Noncash Financing Activities - --------------------------------------------------------------------------------------------------------------------------------- Capital shares issued in reinvestment of dividends paid to shareholders ................. $ 1,973,271 =============
See Notes to Financial Statements. BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 15 Financial Highlights
For the Six Months Ended For the For the Period February 28, Year Ended January 31, 2005+ The following per share data and ratios have been derived 2007 August 31, to August 31, from information provided in the financial statements. (Unaudited) 2006 2005 ==================================================================================================================================== Per Share Operating Performance - ------------------------------------------------------------------------------------------------------------------------------------ Net asset value, beginning of period .................................... $ 18.70 $ 18.38 $ 19.10 ------------------------------------------- Investment income -- net*** ............................................. .91 1.77 .84 Realized and unrealized gain (loss) -- net .............................. .50 .25 (.77) ------------------------------------------- Total from investment operations ........................................ 1.41 2.02 .07 ------------------------------------------- Less dividends from investment income -- net ............................ (.90) (1.70) (.75) ------------------------------------------- Offering costs resulting from the issuance of Common Stock .............. -- --++ (.04) ------------------------------------------- Net asset value, end of period .......................................... $ 19.21 $ 18.70 $ 18.38 =========================================== Market price per share, end of period ................................... $ 19.80 $ 18.85 $ 17.53 =========================================== ==================================================================================================================================== Total Investment Return** - ------------------------------------------------------------------------------------------------------------------------------------ Based on net asset value per share ...................................... --@ 11.99% .42%@ =========================================== Based on market price per share ......................................... --@ 18.36% (8.53%)@ =========================================== ==================================================================================================================================== Ratios to Average Net Assets - ------------------------------------------------------------------------------------------------------------------------------------ Expenses, net of waiver and excluding interest expense .................. 1.31%* 1.29% 1.00%* =========================================== Expenses, net of waiver ................................................. 3.71%* 3.17% 2.20%* =========================================== Expenses ................................................................ 3.71%* 3.17% 2.48%* =========================================== Investment income -- net ................................................ 9.78%* 9.57% 7.88%* =========================================== ==================================================================================================================================== Leverage - ------------------------------------------------------------------------------------------------------------------------------------ Amount of borrowings, end of period (in thousands) ...................... $ 90,000 $ 88,800 $101,400 =========================================== Average amount of borrowings outstanding during the period (in thousands) $ 96,940 $ 86,132 $ 75,543 =========================================== Average amount of borrowings outstanding per share during the period*** . $ 8.06 $ 7.20 $ 6.33 =========================================== ==================================================================================================================================== Supplemental Data - ------------------------------------------------------------------------------------------------------------------------------------ Net assets, end of period (in thousands) ................................ $232,277 $224,156 $219,748 =========================================== Portfolio turnover ...................................................... 37.39% 64.29% 17.43% ===========================================
* Annualized. ** Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges. *** Based on average shares outstanding. + Commencement of operations. ++ Amount is less than $(.01) per share. @ Aggregate total investment return. See Notes to Financial Statements. 16 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Notes to Financial Statements (Unaudited) 1. Significant Accounting Policies: BlackRock Diversified Income Strategies Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Fund's financial statements are prepared in conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and estimates. Actual results may differ from these estimates. These unaudited financial statements reflect all adjustments, which are, in the opinion of management, necessary to present a fair statement of the results for the interim period. All such adjustments are of a normal, recurring nature. The Fund determines and makes available for publication the net asset value of its Common Stock on a daily basis. The Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE") under the symbol DVF. (a) Corporate debt obligations -- The Fund invests principally in debt obligations of companies, including loan interests made by banks and other financial institutions and both privately and publicly offered corporate bonds and notes. Because agents and intermediaries are primarily commercial banks or other financial institutions, the Fund's investment in loan interests could be considered concentrated in financial institutions. (b) Valuation of investments -- Loan interests are valued in accordance with guidelines established by the Board of Directors. As of October 2, 2006, floating rate loan interests will be valued at the mean between the last available bid prices from one or more brokers or dealers as obtained from the Loan Pricing Corporation. Previously, floating rate loan interests were valued at the mean between the last available bid and asked prices as obtained from the same pricing source. This change had no significant effect on the valuation of these loans. For the limited number of loan interests for which no reliable price quotes are available, such loan interests may be valued by Loan Pricing Corporation through the use of pricing matrixes to determine valuations. If the pricing service does not provide a value for loan interests, BlackRock Advisors, LLC (the "Manager"), a wholly owned subsidiary of BlackRock, Inc., will value the loan interests at fair value, which is intended to approximate market value. Debt securities are traded primarily in the over-the-counter ("OTC") markets and are valued at the last available bid price in the OTC market or on the basis of values obtained by a pricing service. Pricing services use valuation matrixes that incorporate both dealer-supplied valuations and valuation models. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general direction of the Board of Directors. Such valuations and procedures will be reviewed periodically by the Board of Directors of the Fund. Securities held by the Fund that are traded on stock exchanges or the NASDAQ Global Market are valued at the last sale price or official close price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available asked price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Directors of the Fund. Long positions in securities traded in the OTC market, NASDAQ Capital Market or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions in securities traded in the OTC market are valued at the last available asked price. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based on the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last bid price. Swap agreements are valued based upon quoted fair valuations received daily by the Fund from a pricing service or counterparty. Other investments, including futures contracts and related options, are stated at market value. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless the Manager believes that this method no longer produces fair valuations. Valuation of other short-term investment vehicles is generally based on the net asset value of the underlying investment vehicle or amortized cost. Repurchase agreements will be valued at cost plus accrued interest. Generally, trading in foreign securities, as well as U.S. government securities, money market instruments and certain fixed income securities, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 17 Notes to Financial Statements (continued) value of the Fund's shares are determined as of such times. Foreign currency exchange rates will generally be determined as of the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund's net asset value. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, those securities will be valued at their fair value as determined in good faith by the Fund's Board of Directors or by the Manager using a pricing service and/or procedures approved by the Fund's Board of Directors. (c) Derivative financial instruments -- The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. Losses may arise due to changes in the value of the contract due to an unfavorable change in the price of the underlying security or index or if the counterparty does not perform under the contract. o Financial futures contracts -- The Fund may purchase or sell financial futures contracts and options on such financial futures contracts. Financial futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. o Options -- The Fund may write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction is less than or exceeds the premiums paid or received). Written and purchased options are non-income producing investments. o Swaps -- The Fund may enter into swap agreements, which are OTC contracts in which the Fund and a counterparty agree to make periodic net payments on a specified notional amount. The net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate; the change in market value of a specified security, basket of securities, or index; or the return generated by a security. These periodic payments received or made by the Fund are recorded in the accompanying Statement of Operations as realized gains or losses, respectively. Gains or losses are realized upon termination of the swap agreements. Swaps are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). Risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts' terms and the possible lack of liquidity with respect to swap agreements. (d) Foreign currency transactions -- Transactions denominated in foreign currencies are recorded at the exchange rate prevailing when recognized. Assets and liabilities denominated in foreign currencies are valued at the exchange rate at the end of the period. Foreign currency transactions are the result of settling (realized) or valuing (unrealized) assets or liabilities expressed in foreign currencies into U.S. dollars. Realized and unrealized gains or losses from investments include the effects of foreign exchange rates on investments. The Fund invests in foreign securities, which may involve a number of risk factors and special considerations not present with investments in securities of U.S. corporations. (e) Income taxes -- It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. 18 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Notes to Financial Statements (continued) (f) Security transactions and investment income -- Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Interest income is recognized on the accrual basis. The Fund amortizes all premiums and discounts on debt securities. (g) Offering costs -- Direct expenses relating to the public offering of the Fund's Common Stock were charged to capital. (h) Dividends and distributions -- Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The Fund may at times pay out less than the entire amount of net investment income earned in any particular period and may at times pay out such accumulated undistributed income in other periods to permit the Fund to maintain a more stable level of dividends. (i) Securities lending -- The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. (j) Bank overdraft -- The Fund recorded a bank overdraft, which resulted from management estimates of available cash. (k) Recent accounting pronouncements -- In July 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109." FIN 48 prescribes the minimum recognition threshold a tax position must meet in connection with accounting for uncertainties in income tax positions taken or expected to be taken by an entity including mutual funds before being measured and recognized in the financial statements. Adoption of FIN 48 is required for the last net asset value calculation in the first required financial statement reporting period for fiscal years beginning after December 15, 2006. The impact on the Fund's financial statements, if any, is currently being assessed. In September 2006, Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("FAS 157"), was issued and is effective for fiscal years beginning after November 15, 2007. FAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. At this time, management is evaluating the implications of FAS 157 and its impact on the Fund's financial statements, if any, has not been determined. In addition, in February 2007, FASB issued "Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"), which is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FAS 157. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. At this time, management is evaluating the implications of FAS 159 and its impact on the Fund's financial statements, if any, has not been determined. 2. Investment Advisory Agreement and Transactions with Affiliates: On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill Lynch") combined Merrill Lynch's investment management business, Merrill Lynch Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset Management, L.P. ("), with BlackRock, Inc. to create a new independent company. Merrill Lynch has a 49.8% BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 19 Notes to Financial Statements (continued) economic interest and a 45% voting interest in the combined company and The PNC Financial Services Group, Inc. has approximately a 34% economic and voting interest. The new company operates under the BlackRock name and is governed by a board of directors with a majority of independent members. The Investment Advisory Agreement between the Fund and the Manager became effective on September 29, 2006. Prior to September 29, 2006, FAM was the Fund's Manager. The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly owned subsidiary of Merrill Lynch, which is the limited partner. The Manager is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .75% of the Fund's average daily net assets plus the proceeds of any outstanding borrowings used for leverage. In addition, the Manager has entered into a Sub-Advisory Agreement with BlackRock Financial Management, Inc., an affiliate of the Manager, under which the Manager pays the Sub-Adviser for services it provides a monthly fee that is a percentage of the management fee paid by the Fund to the Manager. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of the Manager, or its affiliates. Pursuant to that order, the Fund has retained BlackRock Investment Management, LLC ("BIM"), an affiliate of the Manager, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. Prior to September 29, 2006, BIM was organized as Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of MLIM, and MLIM, LLC was the securities lending agent. BIM may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by the Manager or in registered money market funds advised by the Manager or its affiliates. For the six months ended February 28, 2007, the Fund reimbursed FAM and the Manager $335 and $1,675, respectively, for certain accounting services. Prior to September 29, 2006, certain officers and/or directors of the Fund were officers and/or directors of FAM, PSI, MLIM, Merrill Lynch, and/or MLIM, LLC. Commencing September 29, 2006, certain officers and/or directors of the Fund are officers and/or directors of BlackRock, Inc. or its affiliates. 3. Investments: Purchases and sales (including paydowns) of investments, excluding short-term securities, for the six months ended February 28, 2007 were $138,504,973 and $119,276,136, respectively. 4. Common Stock Transactions: The Fund is authorized to issue 200,000,000 shares of capital stock par value $.10, all of which are initially classified as Common Stock. The Board of Directors is authorized, however, to classify and reclassify any unissued shares of capital stock without approval of the holders of Common Stock. Shares issued and outstanding for the six months ended February 28, 2007 and the year ended August 31, 2006 increased by 104,781 and 30,227, respectively, as a result of dividend reinvestment. 5. Unfunded Loan Commitment: As of February 28, 2007, the Fund had unfunded loan commitments of approximately $2,497,000 which would be extended at the option of the borrower, pursuant to the following loan agreements: (in Thousands) - -------------------------------------------------------------------------------- Value of Unfunded Underlying Borrower Commitment Loan - -------------------------------------------------------------------------------- Calpine Corp. ........................... $1,000 $ 997 MEG Energy Corp. ........................ $ 500 $ 497 Venetian Macau U.S. Finance Co. ........................... $1,000 $1,003 - -------------------------------------------------------------------------------- 6. Short-Term Borrowings: On May 22, 2006, the Fund renewed its revolving credit and security agreement funded by a commercial paper asset securitization program with Citicorp North America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and certain asset securitization conduits as lenders (the "Lenders"). The agreement was renewed for one year and has a maximum limit of $125,000,000. Under the Citicorp program, the conduits will fund advances to the Fund 20 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 Notes to Financial Statements (concluded) through the issuance of highly rated commercial paper. As security for its obligations to the Lenders under the revolving securitization facility, the Fund has granted a security interest in substantially all of its assets to and in favor of the Lenders. The interest rate on the Fund's borrowings is based on the interest rate carried by the commercial paper plus a program fee. The Fund pays additional borrowing costs including a backstop commitment fee. The weighted average annual interest rate was 5.62% and the average borrowing was approximately $96,940,000 for the year ended February 28, 2007. 7. Capital Loss Carryforward: On August 31, 2006, the Fund had a capital loss carryforward of $1,755,964, all of which expires in 2014. This amount will be available to offset like amounts of any future taxable gains. 8. Subsequent Event: The Fund paid an ordinary income dividend in the amount of $.150000 per share on March 30, 2007 to shareholders of record on March 15, 2007. BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 21 Officers and Directors Robert C. Doll, Jr., President and Director Ronald W. Forbes, Director Cynthia A. Montgomery, Director Jean Margo Reid, Director Roscoe S. Suddarth, Director Richard R. West, Director Donald C. Burke, Vice President and Treasurer Kevin J. Booth, Vice President Jeffrey Hiller, Fund Chief Compliance Officer Alice A. Pellegrino, Secretary Custodian State Street Bank and Trust Company P.O. Box 351 Boston, MA 02101 Transfer Agent Computershare Trust Company, N.A. P.O. Box 43010 Providence, RI 02940-3010 800-426-5523 NYSE Symbol DVF - -------------------------------------------------------------------------------- Effective January 1, 2007, Edward D. Zinbarg retired as a Director of BlackRock Diversified Income Strategies Fund, Inc. The Fund's Board of Directors wishes Mr. Zinbarg well in his retirement. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Effective April 13, 2007, Jeffrey Hiller resigned his position as Chief Compliance Officer of the Fund. Also effective April 13, 2007, Karen Clark was appointed Chief Compliance Officer of the Fund. Ms. Clark has been a Managing Director of BlackRock, Inc. since 2007. She was a Director thereof from 2005 to 2007. Prior to that, Ms. Clark was a principal and senior compliance officer at State Street Global Advisors from 2001 to 2005. Ms. Clark was a principal consultant with PricewaterhouseCoopers, LLP from 1998 to 2001. From 1993 to 1998, Ms. Clark was Branch Chief, Division of Investment Management and Office of Compliance Examinations, with the U.S. Securities and Exchange Commission. - -------------------------------------------------------------------------------- Availability of Quarterly Schedule of Investments The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. 22 BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 BlackRock Privacy Principles BlackRock is committed to maintaining the privacy of its current and former fund investors and individual clients (collectively, "Clients") and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties. If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations. BlackRock obtains or verifies personal nonpublic information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our Web sites. BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic personal information about its Clients, except as permitted by law or as is necessary to service Client accounts. These nonaffiliated third parties are required to protect the confidentiality and security of this information and to use it only for its intended purpose. We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts access to nonpublic personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural safeguards that are designed to protect the nonpublic personal information of its Clients, including procedures relating to the proper storage and disposal of such information. Electronic Delivery Electronic copies of most financial reports and prospectuses are available on the Fund's Web site. Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual reports and prospectuses by enrolling in the Fund's electronic delivery program. To enroll: Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages: Please contact your financial advisor. Please note that not all investment advisers, banks or brokerages may offer this service. BLACKROCK DIVERSIFIED INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2007 23 BlackRock Diversified Income Strategies Fund, Inc. seeks a high current income by investing primarily in a diversified portfolio of floating rate debt securities and instruments. This report, including the financial information herein, is transmitted for use only to shareholders of BlackRock Diversified Income Strategies Fund, Inc. for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report. Past performance results shown in this report should not be considered a representation of future performance. The Fund leverages its Common Stock to provide Common Stock shareholders with a potentially higher rate of return. Leverage creates risk for Common Stock shareholders, including the likelihood of greater volatility of net asset value and market price of Common Stock shares, and the risk that fluctuations in short-term interest rates may reduce the Common Stock's yield. Statements and other information herein are as dated and are subject to change. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-441-7762; (2) at www.blackrock.com; and (3) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund's portfolio during the most recent 12-month period ended June 30 is available (1) at www.blackrock.com and (2) on the Securities and Exchange Commission's Web site at http://www.sec.gov. BlackRock Diversified Income Strategies Fund, Inc. P.O. Box 9011 Princeton, NJ 08543-9011 BlackRock #DISP-2/07 Item 2 - Code of Ethics - Not Applicable to this semi-annual report Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual report Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-annual report Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-annual report Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Not Applicable to this semi-annual report Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as of February 28, 2007. (a)(1) The Fund is managed by a team of investment professionals that is responsible for the day-to-day management of the Fund's portfolio. The lead members of this team are Mark J. Williams, Managing Director at BlackRock, and Kevin J. Booth, Managing Director at BlackRock. Mr. Williams and Mr. Booth each has been a portfolio manager of the Fund since 2006. Mr. William is responsible for setting the Fund's overall investment strategy and overseeing the management of the Fund. Mr. Booth is responsible for the day-to-day management of the Fund's portfolio and the selection of its investments. Mr. Williams is the head of BlackRock's bank loan group and a member of the Investment Strategy Group. His primary responsibility is originating and evaluating bank loan investments for the firm's collateralized bond obligations. He is also involved in the evaluation and sourcing of mezzanine investments. Prior to joining BlackRock in 1998, Mr. Williams spent eight years with PNC Bank's New York office and was a founding member of the bank's Leveraged Finance Group. In that capacity he was responsible for structuring proprietary middle market leveraged deals and sourcing and evaluating broadly syndicated leveraged loans in the primary and secondary markets for PNC Bank's investment portfolio. From 1984 until 1990, Mr. Williams worked in PNC Bank's Philadelphia office in a variety of marketing and corporate finance positions. Mr. Booth is a member of BlackRock's bank loan group. He joined BlackRock in 2006. Prior to joining BlackRock, Mr. Booth was a Managing Director (Global Fixed Income) of Merrill Lynch Investment Managers, L.P. ("MLIM") since 2006 and a member of MLIM's bank loan group from 2000 to 2006. He was a Director of MLIM from 2000 to 2006 and was a Vice President of MLIM from 1994 to 2000. He has been portfolio manager with BlackRock or MLIM since 2000. (a)(2) As of February 28, 2007:
(iii) Number of Other Accounts and (ii) Number of Other Accounts Managed Assets for Which Advisory Fee is and Assets by Account Type Performance-Based Other Other Registered Other Pooled Registered Other Pooled (i) Name of Investment Investment Other Investment Investment Other Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts ---------- ---------- Kevin J. Booth 9 2 1 0 2 0 $5,534,036,036 $ 529,770,486 $ 56,698,833 $ 0 $ 529,770,486 $ 0 Mark J. Williams 8 18 1 0 10 0 $4,781,904,844 $6,003,278,704 $ 158,013,679 $ 0 $3,985,661,008 $ 0
(iv) Potential Material Conflicts of Interest BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, its affiliates and any officer, director, stockholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, or any of its affiliates, or any officer, director, stockholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock's (or its affiliates') officers, directors or employees are directors or officers, or companies as to which BlackRock or any of its affiliates or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Each portfolio manager also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for the Fund. In this connection, it should be noted that certain portfolio managers currently manage certain accounts that are subject to performance fees. In addition, certain portfolio managers assist in managing certain hedge funds and may be entitled to receive a portion of any incentive fees earned on such funds and a portion of such incentive fees may be voluntarily or involuntarily deferred. Additional portfolio managers may in the future manage other such accounts or funds and may be entitled to receive incentive fees. As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock has adopted a policy that is intended to ensure that investment opportunities are allocated fairly and equitably among client accounts over time. This policy also seeks to achieve reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base. (a)(3) As of February 28, 2007: Compensation Program BlackRock's financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock such as its Long-Term Retention and Incentive Plan and Restricted Stock Program. Base Compensation Generally, portfolio managers receive base compensation based on their seniority and/or their position with the firm. Discretionary Compensation In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus as well as one or more of the following: Long-Term Retention and Incentive Plan (LTIP) The LTIP is a long-term incentive plan that seeks to reward certain key employees. The plan provides for the grant of awards that are expressed as an amount of cash that, if properly vested and subject to the attainment of certain performance goals, will be settled in cash and/or in BlackRock, Inc. common stock. Deferred Compensation Program A portion of the compensation paid to each portfolio manager may be voluntarily deferred by the portfolio manager into an account that tracks the performance of certain of the firm's investment products. Each portfolio manager is permitted to allocate his deferred amounts among various options, including to certain of the firm's hedge funds and other unregistered products. In addition, prior to 2005, a portion of the annual compensation of certain senior managers was mandatorily deferred in a similar manner for a number of years. Beginning in 2005, a portion of the annual compensation of certain senior managers was paid in the form of BlackRock, Inc. restricted stock units which vest ratably over a number of years. Options and Restricted Stock Awards While incentive stock options are not currently being awarded to BlackRock employees, BlackRock, Inc. previously granted stock options to key employees, including certain portfolio managers who may still hold unexercised or unvested options. BlackRock, Inc. also has a restricted stock award program designed to reward certain key employees as an incentive to contribute to the long-term success of BlackRock. These awards vest over a period of years. Incentive Savings Plans BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP) and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 6% of eligible pay contributed to the plan capped at $4,000 per year, and a company retirement contribution equal to 3% of eligible compensation, plus an additional contribution of 2% for any year in which BlackRock has positive net operating income. The RSP offers a range of investment options, including registered investment companies managed by the firm. Company contributions follow the investment direction set by participants for their own contributions or absent, employee investment direction, are invested into a stable value fund. The ESPP allows for investment in BlackRock common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares or a dollar value of $25,000. Each portfolio manager is eligible to participate in these plans. Annual incentive compensation for each portfolio manager is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager's group within BlackRock, the investment performance, including risk-adjusted returns and income generation, of the firm's assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individual's teamwork and contribution to the overall performance of these portfolios and BlackRock. Unlike many other firms, portfolio managers at BlackRock compete against benchmarks rather than each other. In most cases, including for the portfolio managers of the Registrant, these benchmarks are the same as the benchmark or benchmarks against which the investment performance, including risk-adjusted returns and income generation, of the Registrant or other accounts are measured. A group of BlackRock, Inc.'s officers determines which benchmarks against which to compare the performance of funds and other accounts managed by each portfolio manager. The group of BlackRock, Inc.'s officers then makes a subjective determination with respect to the portfolio manager's compensation based on the performance of the funds and other accounts managed by each portfolio manager relative to the various benchmarks. This determination may take into consideration the fact that a benchmark may not perfectly correlate to the way the Registrant or other accounts are managed, even if it is the benchmark that is most appropriate for the Registrant or other account. For example, a benchmark's return may be based on the total return of the securities comprising the benchmark, but the Registrant or other account may be managed to maximize income and not total return. Senior portfolio managers who perform additional management functions within BlackRock may receive additional compensation for serving in these other capacities. (a)(4) Beneficial Ownership of Securities. As of February 28, 2007, Mr. Booth beneficially owns stock issued by the Fund in the range of $100,001-$500,000. As of February 28, 2007, Mr. Williams does not beneficially own any stock issued by the Fund. Item 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 11 - Controls and Procedures 11(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. 11(b) - As of September 29, 2006, with the conclusion of the combination of Merrill Lynch's asset management business with BlackRock, the registrant was migrated to BlackRock's trading and compliance monitoring systems, and various personnel changes occurred. In conjunction with these business improvements, there were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under Act (17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year of the period covered by this report that has materially affected, or is reasonably likely to affect, the registrant's internal control over financial reporting. Item 12 - Exhibits attached hereto 12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report 12(a)(2) - Certifications - Attached hereto 12(a)(3) - Not Applicable 12(b) - Certifications - Attached hereto Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BlackRock Diversified Income Strategies Fund, Inc. By: /s/ Robert C. Doll, Jr. -------------------------------------------------- Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc. Date: April 23, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert C. Doll, Jr. -------------------------------------------------- Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc. Date: April 23, 2007 By: /s/ Donald C. Burke -------------------------------------------------- Donald C. Burke, Chief Financial Officer of BlackRock Diversified Income Strategies Fund, Inc. Date: April 23, 2007 EX-99.CERT 2 e602030_ex99-cert.txt CERTIFICATION OF PURSUANT 302 EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - -------------------------------------------------------------------------------- I, Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of BlackRock Diversified Income Strategies Fund, Inc.; 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(s) 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 out 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(s) 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: April 23, 2007 /s/ Robert C. Doll, Jr. ---------------------------- Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc. EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - -------------------------------------------------------------------------------- I, Donald C. Burke, Chief Financial Officer of BlackRock Diversified Income Strategies Fund, Inc., certify that: 1. I have reviewed this report on Form N-CSR of BlackRock Diversified Income Strategies Fund, Inc.; 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(s) 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 out 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(s) 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: April 23, 2007 /s/ Donald C. Burke ---------------------------- Donald C. Burke, Chief Financial Officer of BlackRock Diversified Income Strategies Fund, Inc. EX-99.1350 CERT 3 e602030_ex99-1350cert.txt CERTIFICATION OF PURSUANT 906 Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (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 Fund. Dated: April 23, 2007 /s/ Robert C. Doll, Jr. ---------------------------- Robert C. Doll, Jr., Chief Executive Officer of BlackRock Diversified Income Strategies Fund, Inc. A signed original of this written statement required by Section 906, 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 BlackRock Diversified Income Strategies Fund, Inc. and will be retained by BlackRock Diversified Income Strategies Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Donald C. Burke, Chief Financial Officer of BlackRock Diversified Income Strategies Fund, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (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 Fund. Dated: April 23, 2007 /s/ Donald C. Burke ---------------------------- Donald C. Burke, Chief Financial Officer of BlackRock Diversified Income Strategies Fund, Inc. A signed original of this written statement required by Section 906, 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 BlackRock Diversified Income Strategies Fund, Inc. and will be retained by BlackRock Diversified Income Strategies Fund, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----