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 811-21342
---------------------------------------------
Lehman Brothers First Trust Income Opportunity Fund
--------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
399 Park Ave., New York, NY 10022
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Bradley Tank, Chief Executive Officer of Lehman Brothers Asset Management Inc.
399 Park Ave., New York, NY 10022
--------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (212) 526-7000
------------------
Date of fiscal year end: 12/31/2005
---------------------
Date of reporting period: 06/30/2005
--------------------
ITEM 1. REPORTS TO STOCKHOLDERS.
The semi-annual report for the period January 1, 2005 through June 30,
2005 is filed herewith.
SEMI ANNUAL REPORT 2005
LEHMAN BROTHERS
FIRST TRUST INCOME
OPPORTUNITY FUND
[GRAPHIC]
[LEHMAN BROTHERS LOGO]
CONTENTS
Chairman's and President's Letter 2
Portfolio Manager's Report 3
Fund Overview 4
Schedule of Investments 5
Notes to Schedule of Investments 15
Statement of Assets and Liabilities 16
Statement of Operations 17
Statements of Changes in Net Assets 18
Financial Highlights 19
Notes to Financial Statements 20
Shareholder Voting Results 24
Dividend Reinvestment Plan 25
Trustees and Officers Table 26
Approval of Advisory and Sub-Advisory
Agreements by the Board of Trustees 29
CHAIRMAN AND PRESIDENT'S LETTER
Dear Shareholder:
We are pleased to present to you this semi-annual report of the Lehman Brothers
First Trust Income Opportunity Fund for the period ending June 30, 2005. The
report includes portfolio commentary, a listing of the Fund's investments, and
its financial statements for the reporting period.
The high yield segment of the bond market posted modestly positive returns
during the reporting period, despite a challenging environment. During the
period, high yield bonds were affected by major market factors, including the
expected downgrade of General Motors corporate debt to high yield status, which
came to pass in early May, and the Fed's continued interest rate increases.
Looking ahead, we expect the Fed to continue raising interest rates at a
measured pace, but believe these increases will not prevent modest improvements
in economic growth. Overall, we remain optimistic about the prospects for high
yield bonds, although we recognize that general uncertainty over interest rates,
economic growth, and continued fallout from the GM downgrade are likely to
result in ongoing volatility throughout the remainder of the year.
The Fund's investment objective is to seek high total return through income plus
capital appreciation. The Fund pursues this investment objective by investing
primarily in high yield debt securities. Its performance will be dependent on
several factors, including the rate of interest received on securities held by
the Fund, the interest cost of Money Market Cumulative Preferred Shares issued
by the Fund, and the credit quality of securities held by the Fund of interest
rate hedges used by the Fund in seeking to manage short-term interest rate
costs.
Portfolio manager Ann H. Benjamin and her team of seasoned investment
professionals at Lehman Brothers Asset Management LLC manage the portfolio. A
review of the portfolio's performance and Ann's outlook for the high yield
markets may be found on the following page.
Ann and her team take a proactive approach to high yield asset management and
integrate detailed security and industry analysis within the context of a global
economic outlook. Ann's research analysts are industry specialists who carry out
independent primary research on companies and industries. In addition to seeking
value from specific issue selections, they also implement strategies seeking to
take advantage of valuation opportunities across industry sectors and credit
quality tiers.
We thank you for your trust in the Lehman Brothers First Trust Income
Opportunity Fund. We will continue to do our best to keep earning it.
Sincerely,
/s/ Kurt A. Locher /s/ Brad Tank
Kurt A. Locher Brad Tank
CHAIRMAN AND TRUSTEE PRESIDENT
PORTFOLIO MANAGER'S REPORT
For the semi-annual reporting period ended June 30, 2005, the Lehman Brothers
First Trust Income Opportunity Fund (NYSE: LBC) returned 1.07% on a Net Asset
Value (NAV) basis and -2.40% on a market value basis.
The high yield segment of the bond market ended 2004 on a reasonably strong
note, but saw a great deal of volatility in the first six months of 2005. High
yield posted negative absolute returns in the first quarter of the year, fueled
primarily by increased speculation that certain auto issuers would be downgraded
to below investment grade at an accelerated pace.
With the uncertainties concerning the auto issuers behind it, the high yield
market rebounded in the second quarter, leaving the six-month period in positive
territory overall. As the market focuses on an improving economy and low default
rates, we would expect the next six months to produce coupon-like returns of 4%
to 5%.
We expect moderate economic activity for the second half of 2005. Our
expectations are for GDP to average at or above trend -- in the neighborhood of
3.5% to 4.0%. We expect interest rates to remain reasonably stable, with the
10-year Treasury trading in a range of 3.75% to 4.75%. The Fed has not given any
indication that it plans to stop raising interest rates in the near future. In
our view, it will continue to raise the fed funds rate at a measured pace,
ending 2005 at a level closer to 4.0%, thereby allowing the economy to remain on
its current trajectory. In addition, given our economic outlook, we believe that
default rates for high yield issuers will hold below 2.0% for the rest of 2005
and potentially well into 2006.
Over the six-month reporting period, our holdings in the wireless, retail,
paper, and media sectors contributed positively to performance. Negative
contributors to returns included companies in the metals and mining industry and
cable holdings.
We expect to continue to slowly upgrade the aggregate credit quality of the Fund
in recognition that we are moving into the later stages of the economic cycle.
We are willing to be patient in this process, as we do not envision a
precipitous decline in economic activity. In the same vein, we have been slowly
rotating away from cyclicals and into more stable industries.
We expect to continue to underweight the automotive sector. While the markets
have handled the post-downgrade of General Motors and Ford reasonably well, we
believe that the sector will continue to face very difficult conditions
throughout 2005 and beyond.
Fundamental business knowledge, credit research and proprietary financial
modeling have been essential to our success in managing this portfolio. Relative
value analysis across issuers, business sectors, and credit sectors drives our
portfolio positioning. By maintaining this investment approach, we will seek to
continue providing high total returns to our shareholders.
Sincerely,
/s/ Ann H. Benjamin
Ann H. Benjamin
PORTFOLIO MANAGER
3
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FUND OVERVIEW (AS OF 06/30/05)(1)
PERFORMANCE HIGHLIGHTS(2)
3 MONTHS ENDED 6 MONTHS ENDED
------------------- -------------- CUMULATIVE TOTAL RETURN
3/31/05 6/30/05 6/30/05 SINCE INCEPTION(3)
--------------------------------------------------------------------------------------------------------------
Net Asset Value (NAV) -2.36% 3.52% 1.07% 27.59%
Market Price -7.57% 5.59% -2.40% 24.50%
FUND FACTS
Ticker NYSE: LBC
Market Price (06/30/2005) $ 15.27
Net Asset Value (NAV) $ 14.95
Premium / (Discount) 2.14%
Shares outstanding: 12,241,999
CUSIP number: 525178 10 9
Inception Date: 7/28/03
PORTFOLIO CHARACTERISTICS
Portfolio Turnover (annualized) 46.13%
Expense Ratio 1.53%
Wtd. Avg. Maturity 8.38 Years
Average Coupon 8.21%
Average Credit Quality B
Portfolio Composition (% High Yield) 91.9%
CAPITAL STRUCTURE AND LEVERAGE ($mm)
Total Net Assets $ 273.0
Net Assets Attributable to Common Shares $ 183.0
Net Assets Attributable to Preferred Shares $ 90.0
Net Assets Attributable to Other Borrowings -
Leverage (% of total net assets) 33.0%
[CHART]
CREDIT QUALITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH)(4)
Cash (AAA) 2.6%
BBB 5.5%
BB 34.9%
B 43.0%
CCC 12.6%
Not Rated 1.4%
[CHART]
MARKET PRICE AND NAV PERFORMANCE
PRICE ($) NAV ($) PREMIUM/DISCOUNT (%)
7/29/2003 $ 15.00 $ 14.30 4.90%
8/8/2003 $ 15.00 $ 14.16 5.93%
8/15/2003 $ 15.10 $ 13.98 8.01%
8/22/2003 $ 14.56 $ 14.39 1.18%
8/29/2003 $ 14.45 $ 14.60 -1.03%
9/5/2003 $ 14.75 $ 14.75 0.00%
9/12/2003 $ 14.83 $ 14.93 -0.67%
9/19/2003 $ 14.82 $ 14.90 -0.54%
9/26/2003 $ 14.78 $ 14.92 -0.94%
10/3/2003 $ 14.93 $ 14.87 0.40%
10/10/2003 $ 15.14 $ 15.00 0.93%
10/17/2003 $ 15.10 $ 14.95 1.00%
10/24/2003 $ 15.23 $ 14.80 2.91%
10/31/2003 $ 15.25 $ 14.88 2.49%
11/7/2003 $ 15.27 $ 14.94 2.21%
11/14/2003 $ 15.48 $ 15.01 3.13%
11/21/2003 $ 15.14 $ 14.99 1.00%
11/28/2003 $ 15.26 $ 15.06 1.33%
12/5/2003 $ 15.36 $ 15.34 0.13%
12/12/2003 $ 15.32 $ 15.43 -0.71%
12/19/2003 $ 15.43 $ 15.60 -1.09%
12/26/2003 $ 15.49 $ 15.46 0.19%
12/31/2003 $ 15.91 $ 15.51 2.78%
1/9/2004 $ 15.79 $ 15.92 -0.82%
1/16/2004 $ 16.59 $ 15.98 3.82%
1/23/2004 $ 16.25 $ 15.95 1.88%
1/30/2004 $ 16.10 $ 15.60 3.21%
2/6/2004 $ 16.00 $ 15.31 4.51%
2/13/2004 $ 16.52 $ 15.49 6.65%
2/20/2004 $ 15.99 $ 15.22 5.06%
2/27/2004 $ 16.17 $ 15.17 6.59%
3/5/2004 $ 16.03 $ 15.27 4.98%
3/12/2004 $ 16.22 $ 15.25 6.36%
3/19/2004 $ 16.43 $ 15.12 8.66%
3/26/2004 $ 16.02 $ 14.98 6.94%
3/31/2004 $ 16.20 $ 15.09 7.36%
4/2/2004 $ 16.16 $ 15.06 7.30%
4/8/2004 $ 15.90 $ 15.16 4.88%
4/16/2004 $ 14.82 $ 15.17 -2.36%
4/23/2004 $ 14.90 $ 15.14 -1.61%
4/30/2004 $ 14.71 $ 15.02 -2.11%
5/7/2004 $ 14.39 $ 14.65 -1.81%
5/21/2004 $ 13.87 $ 14.35 -3.46%
5/28/2004 $ 14.94 $ 14.54 2.75%
6/4/2004 $ 14.95 $ 14.54 2.82%
6/10/2004 $ 14.98 $ 14.62 2.46%
6/18/2004 $ 14.95 $ 14.71 1.63%
6/25/2004 $ 14.75 $ 14.69 0.41%
6/30/2004 $ 14.85 $ 14.67 1.23%
7/2/2004 $ 14.94 $ 14.72 1.49%
7/9/2004 $ 15.00 $ 14.85 1.01%
7/16/2004 $ 15.20 $ 14.98 1.47%
7/23/2004 $ 15.18 $ 14.85 2.22%
7/30/2004 $ 15.15 $ 14.82 2.23%
8/13/2004 $ 15.44 $ 14.81 4.25%
8/20/2004 $ 15.55 $ 14.88 4.50%
8/27/2004 $ 15.49 $ 14.85 4.31%
8/31/2004 $ 15.58 $ 14.87 4.77%
8/13/2004 $ 15.44 $ 14.81 4.25%
8/20/2004 $ 15.55 $ 14.88 4.50%
8/27/2004 $ 15.49 $ 14.85 4.31%
8/31/2004 $ 15.58 $ 14.87 4.77%
9/3/2004 $ 15.53 $ 14.91 4.16%
9/10/2004 $ 15.73 $ 15.06 4.45%
9/17/2004 $ 15.85 $ 15.11 4.90%
9/24/2004 $ 15.67 $ 15.03 4.26%
10/1/2004 $ 15.75 $ 15.03 4.79%
10/15/2004 $ 16.29 $ 15.20 7.17%
10/22/2004 $ 16.13 $ 15.08 6.96%
10/29/2004 $ 15.86 $ 15.32 3.52%
11/5/2004 $ 16.30 $ 15.53 4.96%
11/12/2004 $ 16.10 $ 15.49 3.94%
11/19/2004 $ 16.35 $ 15.57 5.01%
11/26/2004 $ 16.34 $ 15.48 5.56%
12/3/2004 $ 16.40 $ 15.43 6.29%
12/10/2004 $ 16.10 $ 15.55 3.54%
12/17/2004 $ 16.48 $ 15.63 5.44%
12/23/2004 $ 16.26 $ 15.55 4.57%
12/31/2004 $ 16.48 $ 15.59 5.71%
1/7/2005 $ 15.98 $ 15.61 2.37%
1/14/2005 $ 16.30 $ 15.53 4.96%
1/21/2005 $ 16.00 $ 15.36 4.17%
1/28/2005 $ 15.91 $ 15.46 2.91%
1/31/2005 $ 15.91 $ 15.49 2.71%
2/4/2005 $ 15.84 $ 15.65 1.21%
2/11/2005 $ 15.99 $ 15.68 1.98%
2/18/2005 $ 15.73 $ 15.64 0.58%
2/25/2005 $ 15.53 $ 15.72 -1.21%
2/28/2005 $ 15.50 $ 15.75 -1.59%
3/4/2005 $ 15.44 $ 15.73 -1.84%
3/11/2005 $ 15.23 $ 15.69 -2.93%
3/18/2005 $ 15.05 $ 15.45 -2.59%
3/24/2005 $ 14.20 $ 15.02 -5.46%
3/31/2005 $ 14.85 $ 14.83 0.13%
4/1/2005 $ 14.78 $ 14.85 -0.47%
4/8/2005 $ 15.00 $ 15.03 -0.20%
4/15/2005 $ 14.58 $ 14.68 -0.68%
4/22/2005 $ 14.68 $ 14.66 0.14%
4/29/2005 $ 14.72 $ 14.38 2.36%
5/6/2005 $ 14.94 $ 14.45 3.39%
5/13/2005 $ 14.87 $ 14.27 4.20%
5/20/2005 $ 14.86 $ 14.16 4.94%
5/27/2005 $ 14.78 $ 14.56 1.51%
5/31/2005 $ 15.01 $ 14.65 2.46%
6/3/2005 $ 15.01 $ 14.94 0.47%
6/10/2005 $ 15.13 $ 14.87 1.75%
6/17/2005 $ 15.34 $ 14.95 2.61%
6/24/2005 $ 15.17 $ 14.84 2.22%
6/30/2005 $ 15.27 $ 14.95 2.14%
[CHART]
TOP INDUSTRIES (% OF TOTAL INVESTMENTS)
Media Broadcasting & Publishing 16.2%
Telephone Systems 5.6%
Entertainment & Leisure 8.6%
Electric Utilities 11.1%
Automotive 4.9%
Oil & Gas 7.3%
Health Care Providers 6.1%
Communications 3.9%
Commercial Services 5.5%
Forest Products & Paper 3.8%
Other 27.0%
[CHART]
MATURITY BREAKDOWN (% OF TOTAL INVESTMENTS AND CASH)
< 1 Year 2.6%
1-3 Years 5.4%
3-5 Years 14.4%
5-7 Years 26.0%
7-10 Years 37.6%
10+ Years 14.0%
----------
(1). Unless noted, data at or for six months ended June 30, 2005. High yield
securities, also known as "junk bonds," are subject to additional risks
such as the increased risk of default. Portfolio holdings are subject to
change.
(2). Performance for NAV and Market Price assume reinvestment of all dividends
and capital gains. Shares of the Fund fluctuate in value. Fund performance
changes over time and currently may be different from that shown as of
06/30/05. Past performance is no guarantee of future results. More current
Fund performance information can be obtained by visiting the Fund's website
at www.lbftincomeopportunity.com.
(3). The Fund's inception date was July 28, 2003. Cumulative total returns since
inception are not annualized.
(4). Percentage compiled using the highest rating for each security. Securities
not rated are of quality which is permitted to be invested in by the Fund.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 2005
(UNAUDITED)
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITIES -- 0.9%
AIRLINES -- 0.9%
$ 1,805,000 Delta Airlines, Inc., Series 2000-1, Class A2
7.570%, 11/18/2010 BB Ba B $ 1,698,084
TOTAL ASSET BACKED SECURITIES (IDENTIFIED COST $1,646,428) 1,698,084
CORPORATE DEBT -- 140.9% OF TOTAL NET ASSETS
AUTOMOTIVE -- 7.0%
625,000 Dana Corp., Note
7.000%, 3/01/2029 BBB Ba BBB 546,003
2,000,000 Ford Motor Co., Global Note
7.450%, 7/16/2031 BB Baa BBB 1,669,632
1,500,000 Ford Motor Credit Co., Global Note
7.875%, 6/15/2010 BB Baa BBB 1,482,303
2,830,000 General Motors Acceptance Corp., Global Note
6.875%, 9/15/2011 BB Baa BB 2,612,339
3,375,000 General Motors Acceptance Corp., Note
8.000%, 11/01/2031 BB Baa BB 3,011,658
3,450,000 Navistar International Corp., Senior Note
7.500%, 6/15/2011 BB Ba BB 3,519,000
12,840,935
BEVERAGES, FOOD & TOBACCO -- 1.2%
140,000 Burns Philp Capital Property, Ltd./Burns Philp Capital
US, Inc., Senior Subordinated Note
10.750%, 2/15/2011 B B NR 154,350
1,000,000 Del Monte Corp., Senior Subordinated Note
8.625%, 12/15/2012 B B BB 1,100,000
955,000 Dole Food, Inc., Senior Note
8.625%, 5/01/2009 B B B 1,017,075
2,271,425
BUILDING MATERIALS -- 1.4%
2,685,000 Nortek, Inc., Senior Subordinated Note
8.500%, 9/01/2014 CCC Caa NR 2,497,050
CHEMICALS -- 5.0%
1,320,000 Equistar Chemicals, LP/Equistar Funding Corp., Senior Note
10.625%, 5/01/2011 BB B B 1,456,950
195,000 Huntsman LLC, Senior Note
11.500%, 7/15/2012 B B NR 228,637
See accompanying notes to financial statements.
5
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
CHEMICALS -- CONTINUED
$ 767,000 Huntsman LLC, Senior Secured Note
11.625%, 10/15/2010 BB B NR $ 898,349
2,910,000 Methanex Corp., Senior Note
8.750%, 8/15/2012 BBB Ba BBB 3,328,312
2,000,000 Millennium Chemicals, Inc., Senior Note
9.250%, 6/15/2008 BB B B 2,165,000
1,110,000 PQ Corp., Senior Subordinated Note, 144A
7.500%, 2/15/2013 B B NR 1,090,575
9,167,823
COMMERCIAL SERVICES -- 7.8%
1,424,000 Coinmach Corp., Senior Note
9.000%, 2/01/2010 CCC B NR 1,459,600
2,945,000 Knowledge Learning Corp., Inc., Senior Subordinated
Note, 144A
7.750%, 2/01/2015 B B NR 2,812,475
2,475,000 Language Line, Inc., Note
11.125%, 6/15/2012 CCC Caa NR 2,227,500
3,105,000 Monitronics International, Inc., Senior Subordinated Note
11.750%, 9/01/2010 B B NR 3,229,200
6,078,000 Muzak LLC/Muzak Finance Corp., Senior Subordinated Note
9.875%, 3/15/2009 CCC Ca NR 2,932,635
1,595,000 Service Corp. International/US, Senior Note, 144A
7.000%, 6/15/2017 BB Ba NR 1,638,862
14,300,272
COMMUNICATIONS -- 5.5%
4,270,000 Intelsat Bermuda, Ltd., Senior Note, 144A
8.625%, 1/15/2015 B B B 4,504,850
1,000,000 L-3 Communications Corp., Senior Subordinated Note
7.625%, 6/15/2012 BB Ba BB 1,065,000
1,225,000 PanAmSat Corp., Senior Note
9.000%, 8/15/2014 B B NR 1,336,781
2,360,000 PanAmSat Holding Corp., Senior Note, Step-Up
0.000%/10.375%, 11/01/2014 (c) B B NR 1,622,500
2,390,000 Zeus Special Subsidiary, Ltd., Note, Step-Up, 144A
0.000%/9.250%, 2/01/2015 (c) B B B 1,595,325
10,124,456
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
CONTAINERS & PACKAGING -- 4.2%
$ 510,000 Crown European Holdings SA, Senior Secured Note
9.500%, 3/01/2011 B B NR $ 563,550
3,160,000 Crown European Holdings SA, Senior Secured Note
10.875%, 3/01/2013 B B NR 3,713,000
3,000,000 Owens-Brockway Glass Container, Senior Secured Note
8.750%, 11/15/2012 BB B B 3,307,500
7,584,050
COSMETICS & PERSONAL CARE -- 1.2%
1,985,000 Playtex Products, Inc., Senior Secured Note
8.000%, 3/01/2011 B B NR 2,121,469
ELECTRIC UTILITIES -- 15.8%
4,305,000 AES Corp. (The), Senior Secured Note, 144A
8.750%, 5/15/2013 B Ba BB 4,810,837
2,875,000 Calpine Corp., Senior Note
8.750%, 7/15/2007 CCC Caa CCC 2,242,500
7,373,663 Calpine Corp., Senior Note, 144A, (FRN)
8.890%, 7/15/2007 B NR B 6,304,481
2,250,000 CMS Energy Corp., Senior Note
7.750%, 8/01/2010 B B B 2,418,750
301,000 CMS Energy Corp., Senior Note
9.875%, 10/15/2007 B B B 328,090
440,000 Edison Mission Energy Corp., Senior Note
9.875%, 4/15/2011 B B B 515,350
1,785,000 Midwest Generation LLC, Senior Secured Note
8.750%, 5/01/2034 B B B 1,999,200
1,410,000 Mission Energy Holding Co., Senior Secured Note
13.500%, 7/15/2008 CCC B B 1,674,375
2,610,000 Reliant Energy, Inc., Senior Secured Note
9.500%, 7/15/2013 B B BB 2,897,100
3,000,000 TECO Energy, Inc., Note
7.500%, 6/15/2010 BB Ba BB 3,270,000
490,000 Texas Genco LLC/Texas Genco Financing Corp.,
Senior Note, 144A
6.875%, 12/15/2014 B B NR 515,725
2,000,000 TXU Corp., Senior Note, 144A
6.500%, 11/15/2024 BB Ba BBB 1,959,084
28,935,492
See accompanying notes to financial statements.
7
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
ELECTRONICS -- 1.8%
$ 415,000 Celestica, Inc., Senior Subordinated Note
7.625%, 7/01/2013 B B NR $ 416,037
945,000 Freescale Semiconductor, Inc., Senior Note
7.125%, 7/15/2014 BB Ba BB 1,015,875
1,720,000 Xerox Corp., Note
7.625%, 6/15/2013 BB Ba BB 1,851,150
3,283,062
ENTERTAINMENT & LEISURE -- 12.2%
2,400,000 AMF Bowling Worldwide, Inc., Senior Subordinated Note
10.000%, 3/01/2010 CCC B NR 2,424,000
2,300,000 Blockbuster, Inc., Senior Subordinated Note, 144A
9.000%, 9/01/2012 B B B 2,150,500
2,200,000 Choctaw Resort Development Enterprise, Senior Note, 144A
7.250%, 11/15/2019 BB B NR 2,194,500
3,165,000 Chukchansi Economic Development Authority,
Senior Note, 144A
14.500%, 6/15/2009 NR NR NR 3,869,212
2,000,000 Chumash Casino & Resort Enterprise, Senior Note, 144A
9.000%, 7/15/2010 BB Ba NR 2,165,000
2,230,000 Marquee, Inc., Series B, Senior Note
8.625%, 8/15/2012 B B NR 2,285,750
360,000 Mohegan Tribal Gaming Authority, Senior Subordinated Note
8.000%, 4/01/2012 B Ba NR 385,200
1,295,000 Royal Caribbean Cruises, Ltd., Senior Note
7.500%, 10/15/2027 BB Ba NR 1,418,025
3,510,000 Station Casinos, Inc., Senior Subordinated Note
6.875%, 3/01/2016 B B NR 3,606,525
2,665,000 WMG Holdings Corp., Senior Note, Step-Up, 144A
0.000%/9.500%, 12/15/2014 (c) B Caa NR 1,838,850
22,337,562
FINANCIAL SERVICES -- 0.7%
1,340,000 American Real Estate, Senior Note 144A
7.125%, 2/15/2013 BB Ba NR 1,326,600
FOOD RETAILERS -- 0.7%
1,205,000 Stater Brothers Holdings, Senior Note
8.125%, 6/15/2012 BB B NR 1,174,875
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
FOREST PRODUCTS & PAPER -- 5.5%
$ 4,370,000 Abitibi-Consolidated, Inc., Guaranteed Note
8.375%, 4/01/2015 BB Ba NR $ 4,457,400
1,030,000 Domtar, Inc., Note
7.875%, 10/15/2011 BB Ba NR 1,089,150
1,260,000 Georgia-Pacific Corp., Note
7.750%, 11/15/2029 BB Ba BB 1,415,925
2,000,000 Georgia-Pacific Corp., Senior Note
8.875%, 2/01/2010 BB Ba BB 2,270,000
650,000 Georgia-Pacific Corp., Senior Note
9.375%, 2/01/2013 BB Ba BB 735,312
9,967,787
HEALTH CARE PROVIDERS -- 8.7%
1,210,000 DaVita, Inc., Senior Subordinated Note, 144A
7.250%, 3/15/2015 B B NR 1,243,275
3,980,000 HCA, Inc., Note
7.500%, 11/06/2033 BB Ba BB 4,280,633
1,785,000 Rural/Metro Corp., Senior Subordinated Note, 144A
9.875%, 3/15/2015 CCC Caa NR 1,767,150
2,175,000 Spheris, Senior Subordinated Note, 144A
11.000%, 12/15/2012 CCC Caa NR 2,088,000
4,165,000 US Oncology Holdings, Inc., Senior Note, 144A
8.620%, 3/15/2015 B Caa NR 3,883,862
2,500,000 US Oncology, Inc., Senior Note
9.000%, 8/15/2012 B B NR 2,675,000
15,937,920
HEAVY MACHINERY -- 2.8%
3,310,000 Mueller Group, Inc., Senior Subordinated Note
10.000%, 5/01/2012 B Caa NR 3,475,500
2,280,000 Mueller Holdings, Inc., Senior Note, Step-Up
0.000%/14.750%, 4/15/2014 (c) B NR NR 1,664,400
5,139,900
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES -- 2.0%
655,000 Beazer Homes USA, Inc., Senior Note
8.375%, 4/15/2012 BB Ba BB 702,487
560,000 K Hovnanian Enterprises, Inc., Senior Note
8.000%, 4/01/2012 BB Ba BB 593,600
See accompanying notes to financial statements.
9
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
HOME CONSTRUCTION, FURNISHINGS & APPLIANCES -- CONTINUED
$ 1,255,000 Simmons Bedding Co., Senior Subordinated Note
7.875%, 1/15/2014 B Caa NR $ 1,079,300
1,255,000 Standard-Pacific Corp., Senior Note
7.750%, 3/15/2013 BB Ba NR 1,305,200
3,680,587
MEDIA - BROADCASTING & PUBLISHING -- 22.6%
470,000 CanWest Media, Inc., Series B, Senior Note
7.625%, 4/15/2013 B Ba NR 502,900
4,070,000 Charter Communications Holdings, Inc., Senior Note
10.000%, 5/15/2011 CCC Ca CCC 2,971,100
1,845,000 Charter Communications Operating LLC/Charter
Communications Capital Corp., Senior Note, 144A
8.000%, 4/30/2012 B B B 1,835,775
4,130,000 CSC Holdings, Inc., Series B, Senior Note
8.125%, 8/15/2009 BB B BB 4,181,625
97,000 Dex Media East LLC/Dex Media East Finance Co.,
Guaranteed Note
12.125%, 11/15/2012 B B B 116,158
1,545,000 Dex Media, Inc., Note
8.000%, 11/15/2013 B B CCC 1,641,563
550,000 DirecTV Holdings LLC/DirecTV Financing Co., Senior Note
8.375%, 3/15/2013 BB Ba BB 609,125
665,000 Houghton Mifflin Co., Senior Note
8.250%, 2/01/2011 B B B 689,938
555,000 Houghton Mifflin Co., Senior Subordinated Note
9.875%, 2/01/2013 B Caa CCC 592,463
1,225,000 Mediacom LLC/Mediacom Capital Corp., Senior Note
9.500%, 1/15/2013 B B B 1,221,938
7,300,000 Ono Finance Plc, Note
14.000%, 2/15/2011 CCC Caa B 8,212,500
1,265,000 Paxson Communications Corp., Senior Subordinated Note
10.750%, 7/15/2008 CCC Caa NR 1,246,025
7,330,000 Paxson Communications Corp., Senior Subordinated
Note, Step-Up
0.000%/12.250%, 1/15/2009 (c) CCC Caa NR 6,853,550
650,000 Primedia, Inc., Senior Note
8.875%, 5/15/2011 B B NR 680,875
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
MEDIA - BROADCASTING & PUBLISHING -- CONTINUED
$ 3,050,000 RH Donnelley Inc., Senior Subordinated Note
10.875%, 12/15/2012 B B NR $ 3,545,625
795,000 Rogers Cable, Inc., Senior Secured Note
7.875%, 5/01/2012 BB Ba BB 862,575
1,170,000 Rogers Cable, Inc., Senior Secured Note
8.750%, 5/01/2032 BB Ba BB 1,327,950
1,610,000 Sinclair Broadcast Group, Inc., Senior Subordinated Note
8.000%, 3/15/2012 B B NR 1,650,250
2,735,000 Young Broadcasting, Inc., Senior Subordinated Note
10.000%, 3/01/2011 CCC Caa NR 2,598,250
41,340,185
MEDICAL SUPPLIES -- 1.2%
3,785,000 CDRV Investors, Inc., Note, Step-Up, 144A
0.000%/9.625%, 1/01/2015 (c) B Caa NR 1,854,650
435,000 VWR International, Inc., Senior Subordinated Note
8.000%, 4/15/2014 B Caa NR 414,338
2,268,988
METALS -- 2.1%
1,505,000 AK Steel Corp., Guaranteed Senior Note
7.750%, 6/15/2012 B B NR 1,271,725
880,000 IPSCO, Inc., Senior Note
8.750%, 6/01/2013 BB Ba NR 982,300
1,075,000 Novelis, Inc., Senior Note, 144A
7.250%, 2/15/2015 B B NR 1,079,031
460,000 Texas Industries, Inc., Senior Note, 144A
7.250%, 7/15/2013 BB Ba NR 471,500
3,804,556
MULTIPLE UTILITIES -- 3.9%
2,650,000 Coastal Corp., Note
7.750%, 6/15/2010 B Caa NR 2,703,000
920,000 Coastal Corp., Senior Note
9.625%, 5/15/2012 B Caa NR 1,007,400
1,970,000 El Paso Natural Gas Co., Note
8.375%, 6/15/2032 B B NR 2,291,110
1,095,000 El Paso Natural Gas Co., Senior Note
7.625%, 8/01/2010 B B NR 1,155,992
7,157,502
See accompanying notes to financial statements.
11
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
OIL & GAS -- 10.3%
$ 1,170,000 Chesapeake Energy Corp., Senior Note
6.875%, 1/15/2016 BB Ba BB $ 1,219,725
2,380,000 Chesapeake Energy Corp., Senior Note
7.000%, 8/15/2014 BB Ba BB 2,522,800
1,970,000 Dynegy Holdings, Inc., Senior Note, 144A
10.125%, 7/15/2013 B B B 2,226,100
840,000 Forest Oil Corp., Senior Note
7.750%, 5/01/2014 BB Ba NR 903,000
1,710,000 Forest Oil Corp., Senior Note
8.000%, 12/15/2011 BB Ba NR 1,885,275
2,085,000 Kerr-McGee Corp., Note
6.950%, 7/01/2024 BB Ba BB 2,154,374
500,000 Newfield Exploration Co., Senior Note
7.625%, 3/01/2011 BB Ba BB 547,500
3,000,000 Newfield Exploration Co., Senior Subordinated Note
8.375%, 8/15/2012 BB Ba BB 3,277,500
435,000 Southern Natural Gas Co., Note
8.000%, 3/01/2032 B B NR 494,722
1,965,000 Transcontinental Gas Pipe Line Corp., Note
7.250%, 12/01/2026 B Ba BB 2,163,956
1,370,000 Vintage Petroleum, Inc., Senior Note
8.250%, 5/01/2012 BB Ba NR 1,486,450
18,881,402
PHARMACEUTICALS -- 1.7%
3,080,000 Biovail Corp., Senior Subordinated Note
7.875%, 4/01/2010 BB B NR 3,149,300
RETAILERS -- 3.2%
2,330,000 Amscan Holdings, Inc., Senior Subordinated Note
8.750%, 5/01/2014 B B NR 2,131,950
2,045,000 JC Penney Co., Inc., Note
8.125%, 4/01/2027 BB Ba BB 2,157,475
585,000 Jean Coutu Group, Inc., Senior Note
7.625%, 8/01/2012 B B NR 604,013
1,010,000 Jean Coutu Group, Inc., Senior Subordinated Note
8.500%, 8/01/2014 B B NR 997,375
5,890,813
See accompanying notes to financial statements.
PRINCIPAL S&P MOODY'S FITCH
AMOUNT DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
CORPORATE DEBT -- CONTINUED
TELEPHONE SYSTEMS -- 8.0%
$ 640,000 American Cellular Corp., Series B, Senior Note
10.000%, 8/01/2011 B Caa NR $ 649,600
2,592,460 Calpoint Receivables Structured Trust 2001, Note, 144A
7.440%, 12/10/2006 NR Caa CCC 2,605,423
2,195,000 Centennial Cellular Operating Co./Centennial
Communications Corp., Guaranteed Senior Note
10.125%, 6/15/2013 CCC B NR 2,480,350
3,115,000 Dobson Communications Corp., Senior Note
8.875%, 10/01/2013 CCC Ca NR 2,850,225
3,500,000 Qwest Corp., Note
8.875%, 3/15/2012 BB Ba BB 3,806,250
665,000 Rogers Wireless Communications, Inc., Senior Secured Note
7.500%, 3/15/2015 BB Ba BB 723,188
1,490,000 Time Warner Telecom Holdings, Inc., Senior Note, 144A
9.250%, 2/15/2014 CCC B NR 1,437,850
14,552,886
TEXTILES, CLOTHING & FABRICS -- 1.6%
2,930,000 Broder Brothers, Senior Note
11.250%, 10/15/2010 B B NR 2,959,300
TRANSPORTATION -- 2.8%
2,640,000 Grupo Transportacion Ferroviaria Mexicana SA de CV,
Note, 144A
9.375%, 5/01/2012 B B B 2,745,600
220,000 Grupo Transportacion Ferroviaria Mexicana SA de CV,
Senior Note
12.500%, 6/15/2012 B B B 257,400
175,000 Stena AB, Note
9.625%, 12/01/2012 BB Ba NR 190,750
2,055,000 Stena AB, Senior Note
7.000%, 12/01/2016 BB Ba NR 1,906,013
5,099,763
TOTAL CORPORATE DEBT (IDENTIFIED COST $252,549,616) 257,795,960
See accompanying notes to financial statements.
13
S&P MOODY'S FITCH
SHARES DESCRIPTION RATINGS RATINGS RATINGS VALUE (a)
------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS -- 0.4%
MEDIA - BROADCASTING & PUBLISHING -- 0.4%
122 Paxson Communications Corp. CCC Caa NR $ 786,900
TOTAL PREFERRED STOCKS (IDENTIFIED COST $962,535) 786,900
TOTAL INVESTMENTS -- 142.2%
(IDENTIFIED COST $255,158,579) (b) 260,280,944
Other Assets, Less Liabilities -- 7.0% 12,712,439
Auction Market Preferred Shares plus cumulative unpaid
dividends (49.2%) (90,008,230)
TOTAL NET ASSETS -- 100% $ 182,985,153
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO SCHEDULE OF INVESTMENTS (UNAUDITED)
(a) See Note 2a of Notes to Financial Statements.
(b) Federal Tax Information:
At June 30, 2005, the net unrealized appreciation on investments based
on cost of $255,404,566 for federal income tax purposes was as follows:
Aggregate gross unrealized appreciation for all investments in which there is an
excess of value over tax cost $ 10,079,843
Aggregate gross unrealized depreciation for all investments in which there is an
excess of tax cost over value (5,203,465)
Net unrealized appreciation $ 4,876,378
(c) Denotes a step-up bond: a zero coupon bond that converts to a fixed rate
of interest at a designated future date.
FRN Floating Rate Note
144A Securities exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of 144A Securities amounted to $62,015,092 or 33.9% of
net assets.
Quality Profile
The quality ratings of securities in the Fund as of June 30, 2005 were
as follows:
PERCENT OF
TOTAL INVESTMENTS
S&P RATING/MOODY'S RATING/FITCH RATING AND CASH**
BBB/Baa/BBB 5.5%
BB/Ba/BB 34.9
B/B/B 43.0
CCC/Caa/CCC 12.6
NR (Not Rated)*** 1.4
Cash 2.6
100.0%
** Percentages compiled using the highest rating for each security.
*** Securities not rated are of quality that is permitted to be invested in
by the Fund.
See accompanying notes to financial statements.
15
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
STATEMENT OF ASSETS & LIABILITIES
JUNE 30, 2005
(UNAUDITED)
ASSETS
Investments at cost $ 255,158,579
Net unrealized appreciation 5,122,365
INVESTMENTS AT VALUE 260,280,944
Cash 7,030,538
Receivable for securities sold 10,647,608
Interest receivable 5,457,374
Unrealized appreciation on swap contracts 1,280,000
Prepaid expenses 24,407
TOTAL ASSETS 284,720,871
LIABILITIES
Payable for securities purchased 9,959,850
Management fees payable 134,316
Cash collateral for open swap contracts 1,500,000
Other accrued expenses 133,322
TOTAL LIABILITIES 11,727,488
MONEY MARKET CUMULATIVE PREFERRED SHARES (3,600 SHARES ISSUED AND OUTSTANDING)
AT LIQUIDATION VALUE PLUS CUMULATIVE UNPAID DIVIDENDS 90,008,230
NET ASSETS APPLICABLE TO COMMON SHARES $ 182,985,153
------------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Common Shares, no par value; unlimited number of shares authorized, 12,241,999 shares
issued and outstanding $ 173,791,143
Overdistributed net investment income (139,157)
Accumulated net realized gain on investments 2,930,802
Net unrealized appreciation of investments and swap agreements 6,402,365
NET ASSETS APPLICABLE TO COMMON SHARES $ 182,985,153
COMPUTATION OF NET ASSET VALUE PER COMMON SHARE:
NET ASSETS $ 182,985,153
COMMON SHARES ISSUED AND OUTSTANDING 12,241,999
NET ASSET VALUE PER SHARE $ 14.95
MARKET VALUE (CLOSING PRICE PER SHARE ON THE NEW YORK STOCK EXCHANGE) $ 15.27
See accompanying notes to financial statements.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005 (UNAUDITED)
INVESTMENT INCOME
Interest $ 12,094,155
Expenses
Management fee 817,595
Investor service fee 68,133
Trustees' fees and expenses 58,515
Custodian fee 160,279
Audit and tax services 23,952
Legal fee 61,987
Shareholder reports 27,649
Preferred shares auction 114,746
Insurance expense 43,723
Miscellaneous 21,708
TOTAL EXPENSES 1,398,287
NET INVESTMENT INCOME 10,695,868
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain on:
Investments -- net 2,185,523
Interest rate swap contracts -- net 124,728
Change in unrealized appreciation (depreciation) of:
Investments -- net (10,124,259)
Interest rate swap contracts -- net 200,000
Net realized and unrealized loss on investments (7,614,008)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 3,081,860
------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS TO PREFERRED SHAREHOLDERS FROM NET INVESTMENT INCOME (1,287,592)
------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS APPLICABLE TO COMMON SHARES $ 1,794,268
------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
17
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
JUNE 30,
2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
FROM OPERATIONS:
Net investment income $ 10,695,868 $ 21,013,341
Net realized gain on investments and swaps 2,310,251 222,124
Net change in unrealized appreciation (depreciation) of investments (9,924,259) 1,240,507
Dividends to preferred shareholders from net investment income (1,287,592) (1,380,048)
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS 1,794,268 21,095,924
LESS DISTRIBUTIONS TO COMMON SHAREHOLDERS
Net investment income (9,547,433) (19,016,408)
Net realized gain on investments -- (1,173,302)
(9,547,433) (20,189,710)
INCREASE IN NET ASSETS DERIVED FROM
COMMON SHARE TRANSACTIONS: 38,757 128,713
------------------------------------------------------------------------------------------------------------------
Offering costs and underwriting discounts on preferred shares -- 1,000
TOTAL INCREASE (DECREASE) IN NET ASSETS (7,714,408) 1,035,927
NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS
Beginning of period 190,699,561 189,663,634
End of period $ 182,985,153 $ 190,699,561
OVERDISTRIBUTED NET INVESTMENT INCOME $ (139,157) $ --
See accompanying notes to financial statements.
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS
SIX MONTHS FOR THE PERIOD
ENDED YEAR JULY 28, 2003
JUNE 30, ENDED THROUGH
2005 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 2004 2003*
NET ASSET VALUE, BEGINNING OF PERIOD (COMMON SHARES) $ 15.58 $ 15.51 $ 14.33(a)
Net Investment Income (b) 0.87 1.72 0.64
Net Realized and Unrealized Gain (Loss) on Investments (0.62) 0.11 1.31
Dividends to Preferred Shareholders from Net Investment Income (0.10) (0.11) (0.02)
TOTAL FROM INVESTMENT OPERATIONS APPLICABLE TO COMMON SHAREHOLDERS 0.15 1.72 1.93
Less Distributions to Common Shareholders
From Net Investment Income (0.78) (1.55) (0.60)
From Net Realized Gains -- (0.10) (0.02)
TOTAL DISTRIBUTIONS TO COMMON SHAREHOLDERS (0.78) (1.65) (0.62)
Common Shares Offering Costs Charged to Paid-in Capital -- -- (0.03)
Preferred Shares Underwriting Commissions and Offering Costs
Charged to Paid-in Capital -- -- (0.10)
NET ASSET VALUE, END OF PERIOD (COMMON SHARES) $ 14.95 $ 15.58 $ 15.51
---------------------------------------------------------------------------------------------------------------------
MARKET VALUE - END OF PERIOD (COMMON SHARES) $ 15.27 $ 16.48 $ 15.91
---------------------------------------------------------------------------------------------------------------------
Total Return on Net Asset Value (%) 1.07 11.99 12.73(c)
Total Return on Market Value (%) (2.40) 15.48 10.47(d)
Ratio of Expenses (excluding interest expense) to Average Net Assets
Applicable to Common Shares (%) (f) 1.53(e) 1.48 1.42(e)
Ratio of Interest Expense to Average Net Assets Applicable to
Common Shares (%) (f) -- -- 0.19(e)
Ratio of Net Investment Income to Average Net Assets Applicable to
Common Shares (%) (f) 11.67(e) 11.36 10.00(e)
Portfolio Turnover Rate (%) 46.13 106.76 32.08
Net Assets Applicable to Common Shares, End of Period (000) $ 182,985 $ 190,700 $ 189,644
MONEY MARKET CUMULATIVE PREFERRED SHARES
Preferred Shares Outstanding, End of Period (000) 90,000 90,000 90,000
Asset Coverage Per $1,000 $ 3,033 $ 3,119 $ 3,107
Involuntary Liquidation Preference Per Share $ 25,000 $ 25,000 $ 25,000
Approximate Market Value Per Share $ 25,000 $ 25,000 $ 25,000
* Commencement of operations.
(a) Net asset value at beginning of period reflects the deduction from the
$15.00 offering price of the sales load of $0.675 per share paid by the
shareholder.
(b) Calculated using average shares outstanding during the period.
(c) Total return on net asset value is calculated assuming a purchase at the
offering price of $15.00 less the sales load of $0.675 paid by the
shareholder on the first day and the ending net asset value per share and
is not annualized.
(d) Total return on market value is calculated assuming a purchase at the
offering price of $15.00 on the first day and and a sale at the current
market price on the last day of the period and is not annualized.
(e) Annualized.
(f) Expense and net investment income ratios include accumulated and unpaid
dividends.
See accompanying notes to financial statements.
19
LEHMAN BROTHERS FIRST TRUST INCOME OPPORTUNITY FUND
NOTES TO FINANCIAL STATEMENTS JUNE 30, 2005 (UNAUDITED)
NOTE 1 -- ORGANIZATION
Lehman Brothers First Trust Income Opportunity Fund (the "Fund") was organized
as a statutory trust under the laws of the state of Delaware on April 8, 2003,
and is registered under the Investment Company act of 1940, as amended (the
"1940 Act"), as a diversified, closed-end management investment company. Lehman
Brothers Asset Management Inc. (the "Adviser") is investment adviser to the
Fund. Lehman Brothers Asset Management LLC (formerly Lincoln Capital Fixed
Income Management Company, LLC) is the sub-adviser to the Fund. The Fund's
common shares are listed on the New York Stock Exchange under the symbol LBC.
The Fund's investment objective is to seek high total return (income plus
capital appreciation). The Fund will pursue its investment objective by
investing its assets primarily in high yield debt securities.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
a) VALUATION: Debt securities are valued using an independent pricing service
approved by the Board of Trustees, which utilizes closing market prices, market
quotations and transactions, quotations from dealers and various relationships
among securities in determining value. Securities for which closing market
prices or market quotations are not available or are not considered by the
Adviser to be reflective of a security's market value, are valued at fair value
as determined in good faith under consistently applied procedures established by
and under the supervision of the Board of Trustees. Criteria considered in
making this determination may include, but is not limited to, a review of other
securities by the same issuer for which market quotations are available, recent
bid and ask prices for the security, the issuer's position in and economic
outlook of the industry and, if necessary, a review of similar securities in
similar industries. Securities with remaining maturities of 60 days or less are
valued at amortized cost. This method involves valuing a portfolio security
initially at its cost and thereafter assumes a constant amortization to maturity
of any discount or premium.
b) SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME: Security transactions
are recorded on a trade date basis. Dividend income is recorded on the
ex-dividend date. Interest income, including amortization of premium and
accretion of discount on securities, is recorded on the accrual basis. Realized
gains and losses on investments are recorded on the basis of identified cost.
c) FEDERAL INCOME TAXES: It is the policy of the Fund to continue to comply with
the requirements of the Internal Revenue Code applicable to regulated investment
companies and distribute all of its net taxable income, including any net
realized gains on investments, to its shareholders. Therefore, no federal income
tax provision is required.
d) REVERSE REPURCHASE AGREEMENTS: The Fund is permitted to enter into reverse
repurchase agreements with banks or securities firms deemed creditworthy by the
Adviser. A reverse repurchase agreement involves the sale of a security by the
Fund, with an agreement to repurchase the same or substantially similar security
at an agreed upon price and date. Securities purchased subject to repurchase
agreements must have an aggregate market value greater than or equal to the
repurchase price plus accrued interest at all times. Reverse repurchase
agreements involve the risk that the market value of the securities purchased
with the proceeds from the sale of securities received by the Fund may decline
below the price of the securities that the Fund is obligated to repurchase.
There were no reverse repurchase agreements outstanding at June 30, 2005.
e) SWAP AGREEMENTS: The Fund may invest in swap agreements. A swap is an
agreement to exchange the return generated by one instrument for the return
generated by another instrument. The Fund may enter into interest rate swap
agreements to manage its exposure to interest rates and credit risk. Interest
rate swap agreements involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest. Swaps are marked to
market daily based upon quotations from market makers and the change in value,
if any, is recorded as unrealized gain or loss in the Statement of Operations.
Net payments of interest on interest rate swap agreements are included as part
of realized gain or loss. Entering into these agreements involves, to varying
degrees, elements of credit, market and documentation
risk in excess of the amounts recognized on the Statement of Assets and
Liabilities. Such risks involve the possibility that there will be no liquid
market for these agreements, that the counterparty to these agreements may
default on its obligation to perform and that there may be unfavorable changes
in interest rates. At June 30, 2005, the Fund had the following open swap
agreements:
NET UNREALIZED
NOTIONAL AMOUNT EXPIRATION DATE DESCRIPTION APPRECIATION
---------------------------------------------------------------------------------------------------------------------
$ 22,500,000 03/15/06 Agreement with Citibank N.A. dated 03/11/04 to $ 325,000
pay the notional amount multiplied by 1.78%
and to receive the notional amount multiplied
by the 1 month U.S. Dollars -- London Interbank
Offered Rate - British Bankers Association
(USD -- LIBOR -- BBA) adjusted for
compounding.
$ 22,500,000 03/15/07 Agreement with Citibank N.A. dated 03/11/04 to $ 615,000
pay the notional amount multiplied by 2.27%
and to receive the notional amount multiplied
by the 1 month U.S. Dollars -- London Interbank
Offered Rate -- British Bankers Association
(USD -- LIBOR -- BBA) adjusted for
compounding.
$ 22,500,000 09/28/07 Agreement with Citibank N.A. dated 09/24/04 to $ 340,000
pay the notional amount multiplied by 3.22%
and to receive the notional amount multiplied
by the 1 month U.S. Dollars -- London
Interbank Offered Rate -- British Bankers
Association (USD -- LIBOR -- BBA) adjusted for
compounding.
NOTE 3 -- FEES AND TRANSACTIONS WITH RELATED PARTIES
The Fund pays all expenses incurred in connection with the operations of the
Fund. These expenses, among others, include custodian and fund accounting and
administrative fees, legal and audit fees, fees and expenses of the
disinterested Trustees, registration fees, and printing expenses.
The Fund pays the Adviser a monthly fee computed at an annual rate of 0.60% of
the Fund's average daily "Managed Assets" (net assets, including assets
attributable to any outstanding preferred shares, plus the aggregate principal
amount of any borrowings). The Adviser is responsible for developing,
implementing and supervising the Fund's investment program and providing certain
administrative services to the Fund. The Adviser has retained Lehman Brothers
Asset Management LLC ("LBAM LLC") to serve as the sub-adviser of the Fund and to
manage the Fund's investment portfolio. The Adviser compensates LBAM LLC for its
services as sub-adviser. The Adviser pays LBAM LLC a monthly sub-advisory fee
calculated at the following annual percentage rates of the Fund's average daily
Managed Assets: 0.55% on the Fund's first $25 million of Managed Assets, 0.45%
on the next $25 million of Managed Assets, 0.35% on the next $50 million of
Managed Assets, and 0.30% on Managed Assets that are in excess of $100 million.
The Adviser and LBAM LLC are wholly owned subsidiaries of Lehman Brothers
Holdings Inc., a publicly traded corporation.
First Trust Portfolios L.P. ("First Trust") serves as the Fund's distribution
and marketing agent, and investor servicing agent. As the Fund's distribution
and marketing agent, First Trust
21
provides certain distribution and marketing services for the Fund's common
shares including preparing marketing materials and presentations, developing
contacts with brokers whose clients may have an interest in acquiring Fund
shares and replying to information requests from prospective investors. In
consideration for these services, First Trust receives a fee paid by the
Adviser.
First Trust, as the investor servicing agent, developed and maintains a website
for the Fund, assists in the review of shareholder materials, assists in the
dissemination of the Fund's net asset value and market price, provides ongoing
shareholder and account maintenance services, replies to information requests
from shareholders and aids in secondary market support. In consideration for
these services, the Fund pays First Trust a monthly fee computed at the annual
rate 0.05% of the Fund's average daily Managed Assets. For the six months ended
June 30, 2005, the Fund paid First Trust, as the investor servicing agent, a fee
equal to $68,133.
The Fund pays no compensation to its officers or to its Trustees who are
interested Trustees of the Adviser or its affiliates.
NOTE 4 -- INVESTMENT IN SECURITIES
For the six months ended June 30, 2005, purchases and sales of investments,
other than short-term securities, aggregated $122,260,206 and $129,514,471,
respectively.
NOTE 5 -- MONEY MARKET CUMULATIVE PREFERRED SHARES
The Fund is authorized to issue 3,750 Money Market Cumulative Preferred Shares
("MMP"), each without par value. On October 22, 2003, the Fund issued 3,600 MMP
with proceeds of $90,000,000 in a public offering. The underwriting commissions
and offering costs of $1,236,545 were incurred in connection with the offering
and were charged directly to paid-in capital of the common shares. Dividends on
the MMP are cumulative at a rate which was established at the offering and have
been reset every twenty-eight days thereafter by an auction. The Fund pays
commissions to certain broker-dealers at the end of each auction at an annual
rate of 0.25%. For the six months ended June 30, 2005, Lehman Government
Securities, Inc., an affiliate of the Adviser, earned $111,274 in commissions.
The MMP are redeemable at the option of the Fund at a redemption price equal to
$25,000 per share, plus accumulated and unpaid dividends, on any dividend
payment date. The MMP are also subject to mandatory redemption at a redemption
price equal to $25,000 per share, plus accumulated and unpaid dividends, if the
Fund defaults on its asset maintenance requirements with respect to the MMP and
fails to cure such a default within the time permitted. If the dividends on the
MMP shall remain unpaid in an amount equal to two full years' dividends, the
holders of the MMP, as a class, have the right to elect a majority of the Board
of Trustees. In general, the holders of the MMP and the common shares have equal
voting rights of one vote per share, except that the holders of the MMP, as a
separate class, have the right to elect at least two members of the Board of
Trustees and to vote under certain other circumstances specified in the Fund's
Amended By-Laws. The MMP have a liquidation preference of $25,000 per share,
plus accumulated and unpaid dividends. The Fund is required to maintain certain
asset coverage with respect to the MMP as defined in the Fund's Amended By-Laws
and the Investment Company Act of 1940.
NOTE 6 -- DISTRIBUTIONS TO SHAREHOLDERS
The Fund intends to make monthly distributions of net investment income to
common shareholders, after payments of any dividends on outstanding MMP.
Distributions to common shareholders are recorded on the ex-dividend date.
Distributions to preferred shareholders are recorded daily and are payable at
the end of each dividend period. Each dividend payment period for the MMP is
generally twenty-eight days. For the six months ended June 30, 2005, the
dividend rates for MMP ranged from 2.41% to 3.35%. The dividend rate for MMP on
June 30, 2005 was 3.35%. In addition, at least annually, the Fund intends to
distribute net capital gains, if any. The timing and characterization of certain
income and capital gains distributions are determined in accordance with federal
tax regulations which may differ from accounting principles generally accepted
in the lehman brothers first trust income opportunity fund semi-annual report
2005United States of America. Permanent differences between book and tax
accounting relating to distributions are reclassified to paid-in capital.
NOTE 7 -- SHARES OF BENEFICIAL INTEREST
The Fund's Declaration of Trust authorizes the Trustees to issue an unlimited
number of common shares for the Fund, each without par value. Transactions in
common shares were as follows:
SIX MONTHS
ENDED
JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
-------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- -------- -----------
Shares issued pursuant to the Fund's
dividend reinvestment plan 2,609 $ 38,757 8,448 $ 128,713
----- --------- ----- ----------
Increase derived from capital share transactions 2,609 $ 38,757 8,448 $ 128,713
===== ========= ===== ==========
NOTE 8 -- CONCENTRATION OF CREDIT RISK
The Fund will normally invest at least 80% of its Managed Assets in investments
offering high current income, which generally will be in the lower rating
categories of recognized rating agencies. These investments are regarded as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations and will generally
involve more credit risk than securities in the higher rating categories. In
addition, the trading market for high yield investments may be relatively less
liquid than the market for higher-rated investments.
NOTE 9 -- RISK ASSOCIATED WITH THE USE OF LEVERAGE
The Fund's use of leverage through the issuance of preferred shares and
borrowings, as well as the economic leverage inherent in certain derivatives,
including credit default swaps, creates risks for holders of common shares.
There is no assurance that the Fund's leveraging strategies will be successful.
If the Fund issues preferred shares or borrows money to make additional
investments and the income and capital appreciation from those investments
exceed the dividends payable on the preferred shares or the costs of borrowing,
the Fund's investment return will be greater than if leverage had not been used.
However, if the dividends payable on the preferred shares or the costs of
borrowing exceed the income and capital appreciation from the additional
investments, the Fund would lose money and its investment return will be lower
than if leverage had not been used. An increase in interest rates, which would
increase the costs of leverage, may be likely because market rates of interest
are currently near their lowest levels in recent years. Leverage creates risks
which may adversely affect the return for holders of common shares, including:
(a) the likelihood of greater volatility of net asset value and market price of
the Fund's common shares;
(b) the possibility either that common share income will fall if the preferred
share dividend rate rises or the Fund's borrowing costs increase, or that
common share income will fluctuate because of changes in the preferred
share dividend rates or borrowing costs.
NOTE 10 -- INDEMNIFICATIONS
In the ordinary course of business, the Fund enters into contracts that contain
a variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
NOTE 11 -- UNAUDITED FINANCIAL INFORMATION
The financial information included in this interim report is taken from the
records of the Fund without audit by independent auditors. Annual reports
contain audited financial statements.
23
OTHER INFORMATION
SHAREHOLDER VOTING RESULTS (UNAUDITED)
The annual meeting of the Trust's shareholders was held on May 25, 2005 at which
shareholders considered and approved the following proposals. The voting results
were the following:
With respect to the election of Stephanie E. Dolan as a
Trustee of the Fund:
11,799,430.812 shares of Common Shares and MMP Shares,
voting together as a single class, or 99.514% of shares
cast, in the affirmative, with 57,670 shares, or 0.486% of
shares cast, withheld;
With respect to the election of Scott Hall as a Trustee of
the Fund:
11,803,145.812 shares of Common Shares and MMP Shares,
voting together as a single class, or 99.545% of shares
cast, in the affirmative, with 53,955 shares, or 0.455% of
shares cast, withheld; and
With respect to the election of Michael M. Knetter as a
Trustee of the Fund:
1,917 MMP shares, or 100% of shares cast, in the
affirmative, with 0 shares or 0% of shares cast withheld.
DIVIDEND REINVESTMENT PLAN (UNAUDITED)
The Fund has a Dividend Reinvestment Plan (the "Plan") commonly referred to as
an "opt-out" plan. Each common shareholder will have all distributions of
dividends and capital gains automatically reinvested in additional common shares
by Investors Bank & Trust Company, as agent for shareholders pursuant to the
Plan (the "Plan Agent"), unless the shareholder elects to receive cash or unless
the shares are registered in the name of a broker-dealer or other nominee (that
is, in "street name") and the respective nominee does not participate in the
Plan. For Plan participants, the Plan Agent will either (i) effect purchases of
common shares under the Plan in the open market or (ii) distribute newly issued
common shares of the Fund. Shareholders who elect not to participate in the Plan
will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the shares are held in street or other nominee
name, then to the nominee) by the Plan Agent, as dividend disbursing agent.
Certain broker-dealers and nominees do not permit their clients to participate
in dividend reinvestment plans. Shareholders whose common shares are held in the
name of a broker or nominee should contact the broker or nominee to determine
whether and how they may participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Fund declares a dividend or makes a capital gain distribution, the
Plan Agent will, as agent for the participants, either (i) receive the cash
payment and use it to buy common shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts or (ii) distribute
newly issued common shares of the Fund on behalf of the participants. The Plan
Agent will receive cash from the Fund with which to buy common shares in the
open market if, on the determination date, the net asset value per share exceeds
the market price per share plus estimated brokerage commissions on that date.
The Plan Agent will receive the dividend or distribution in newly issued common
shares of the Fund if, on the determination date, the market price per share
plus estimated brokerage commissions equals or exceeds the net asset value per
share of the Fund on that date. The number of shares to be issued will be
computed at a per share rate equal to the greater of (i) the net asset value or
(ii) 95% of the closing market price per share on the payment date.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. Such withdrawal will be effective immediately if received not less
than ten days prior to a distribution record date; otherwise, it will be
effective for all subsequent dividend record dates. When a participant withdraws
from the Plan or upon termination of the Plan as provided below, certificates
for whole common shares credited to his or her account under the Plan will be
issued and a cash payment will be made for any fraction of a common share
credited to such account. In the alternative, upon receipt of the participant's
instructions, common shares will be sold and the proceeds sent to the
participant less brokerage commissions and any applicable taxes.
The Plan Agent maintains each shareholder's account in the Plan and furnishes
confirmations of all acquisitions made for the participant. Common shares in the
account of each Plan participant will be held by the Plan Agent on behalf of the
participant. Proxy material relating to shareholders' meetings of the Fund will
include those shares purchased as well as shares held pursuant to the Plan.
In the case of shareholders, such as banks, brokers or nominees, which hold
common shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of common shares certified from
time to time by the record shareholders as representing the total amount
registered in the record shareholder's name and held for the account of
beneficial owners who are participants in the Plan.
The Plan Agent's fees for the handling of reinvestment of dividends and other
distributions will be paid by the Fund. Each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of distributions. There are
no other charges to participants for reinvesting dividends or capital gain
distributions; however, the Fund reserves the right to amend the Plan to include
a service charge payable by the participants.
The automatic reinvestment of dividends and other distributions will not relieve
participants of any income tax that may be payable or required to be withheld on
such dividends or distributions.
The Fund and the Plan Agent reserve the right to amend or terminate the Plan.
All correspondence concerning the Plan should be directed to: Investors Bank &
Trust Company, 200 Clarendon Street, Mail Stop OPS22, Boston, MA 02116
(Telephone) 800-988-5196.
25
TRUSTEES AND OFFICERS TABLE (UNAUDITED)
Set forth below is information about the Trustees. The address for each Trustee
is Lehman Brothers Asset Management Inc., 399 Park Avenue, New York, NY 10022.
NUMBER OF
PORTFOLIOS
OVERSEEN IN OTHER
LEHMAN TRUSTEESHIPS
BROTHERS HELD OUTSIDE OF
ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
General James E. Dalton, Trustee Trustee since Formerly, Vice President of Logicon 1 Formerly Director,
USAF (Retired) 2003 Inc., a wholly-owned subsidiary of Chair of the Audit
10/17/1930 Northrop Grumman (1985-1998); Committee at William
General Manager of Logicon's Defense Lyon Homes, a home
Technology Group (1995-1998). building business
(since 1991);
resigned effective
August 5, 2005
Director of Defense
Group, Inc., a
defense business
(since 1999);
formerly Director of
Finance America, a
mortgage business
(2002-2004);
Margaret M. (Peggy) Eisen Trustee Trustee since Managing Director and Chief 1 Director, Chair of
6/19/1953 2003 Investment Officer of EAM Compensation
International, LLC, an investment Committee, and Member
banking and asset management firm of the Audit
(since 2003); formerly, Managing Committee of
Director of DeGuardiola Advisors, an Antigenics
investment bank (2001-2002); Corporation, a
formerly, Managing Director of North bio-pharmaceutical
American Equities of General Motors company (since 2003);
Investment Management Corporation Trustee of Columbia
(1995-2001). Acorn family of
mutual funds of
Wanger Asset
Management (six
portfolios under
management) (since
2002).
NUMBER OF
PORTFOLIOS
OVERSEEN IN OTHER
LEHMAN TRUSTEESHIPS
BROTHERS HELD OUTSIDE OF
ASSET LEHMAN
LENGTH OF MANAGEMENT BROTHERS ASSET
NAME AND POSITION TIME PRINCIPAL OCCUPATIONS FOR LAST FIVE FUNDS MANAGEMENT
DATE OF BIRTH WITH FUND SERVED YEARS COMPLEX FUNDS COMPLEX
----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES:
Michael M. Knetter Trustee Trustee since Dean of the University of 1 Director, Great Wolf
4/8/1960 2003 Wisconsin-Madison School of Business Resorts (since 2004)
(since 2002); formerly, Professor of
International Economics and
Associate Dean at the Amos Tuck
School of Business -- Dartmouth
College (1997-2002).
Eugene A. Matthews Trustee Trustee since President of Nintai, Incorporated, 1 None
11/9/1958 2003 an investment advisory firm (since
1997); formerly, Senior Fellow of
Asia Studies for the Council of
Foreign Relations (2001-2003);
formerly, Asia Studies Project
Director for the Japan Economic Task
Force and Leader of Asia Roundtable
(2001-2003); Founding and General
Partner of Apax-Globis Japan, Inc.,
a private equity investment firm
(1998-present); formerly
Founder/President of Ashta
International, a Vietnamese
investment firm (1989-1997).
George W. Morriss Trustee Trustee since Director of Element Long/Short 1 None
9/24/1947 2003 Investors Ltd., a private investment
company (since 2005); Formerly
Executive Vice President and Chief
Financial Officer of People's Bank,
a financial services company
(1991-2001).
INTERESTED TRUSTEES:
Stephanie E. Dolan Trustee Trustee since Senior Vice President of Lehman 1 None
4/4/1963 2003 Brothers Inc. (since 2000);
Controller of Lehman Brothers Asset
Management Inc (since 2003).
Scott Hall Trustee Trustee since Managing Director of First Trust 1 None
1/12/1957 2003 Advisors L.P. and First Trust
Portfolios L.P. (since 1992).
Kurt A. Locher Trustee Trustee since Managing Director of Lehman Brothers 1 None
5/9/1966 2003 Inc. (since 1998); Managing Director
of Lehman Brothers Asset Management
Inc. (since 2003); formerly Director
of BNC Mortgage Inc. (2000-2004),
Finance America LLC (1999-2004), and
TrueLink Inc. (1999-2004); formerly,
President of Lehman Brothers Bank,
F.S.B. (1999-2000); formerly, Senior
Vice President of Lehman Brothers
Inc. (1995-1998).
27
Set forth below is information about the officers of the Fund. Each officer
serves for a one-year term. The address for each officer is Lehman Brothers
Asset Management Inc., 399 Park Avenue, New York, NY 10022.
NAME AND POSITION
DATE OF BIRTH WITH FUND PRINCIPAL OCCUPATION FOR LAST FIVE YEARS
-----------------------------------------------------------------------------------------------
Bradley Tank President Chief Executive Officer of Lehman Brothers Asset Management;
9/29/1957 Managing Director and Global Head of Fixed Income Asset
Management for Lehman Brothers (since 2002); Chief Executive
Officer and Managing Director of Lehman Brothers Asset
Management LLC; formerly, Director of Fixed Income for
Strong Capital Management in Menomonee Falls, Wisconsin
(1990-2002).
Edward Grieb Treasurer Chief Financial Officer of Lehman Brothers Asset Management
9/22/1961 Inc.; Managing Director (since 2003) and Assistant
Controller for Lehman Brothers (since 1997).
Stephanie Dolan Assistant Senior Vice President of Lehman Brothers Inc.; Controller of
4/4/1963 Treasurer Lehman Brothers Asset Management.
Jonathan Morris Secretary Senior Vice President of Lehman Brothers Asset Management
3/1/1956 Inc.; Senior Vice President and General Counsel for Lehman
Brother's Investment Management Division which includes
Lehman Brothers private investment management business and
asset management and investment advisory business (since
1997).
Philip R. Carroll Chief Vice President, Neuberger Berman since 2002; Associate
12/2/1934 Compliance General Counselor, Neuberger Berman since 2001; Director --
Officer Mutual Fund Compliance, NB Management since 1995; Chief
Legal Officer, fourteen registered investment companies for
which NB Management acts as an investment manager and
administrator (ten since 2003, four since 2004); Chief
Compliance Officer, fourteen registered investment companies
for which NB Management acts as investment manager and
administrator (fourteen since 2004).
The Fund's Statement of Additional Information includes additional information
about the Trustees of the Fund and is available without charge, upon request, by
calling 1-800-988-5196 or visiting the Fund's website at
www.lbftincomeopportunity.com.
A description of the Fund's proxy voting policies and procedures is available
(1) without charge, upon request, by calling 1-800-988-5196 (2) on the Fund's
website at www.lbftincomeopportunity.com and (3) on the Commission's website at
www.sec.gov.
Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12 month period ended June 30, 2005 is
available (1) on the Fund's website at www.lbftincomeopportunity.com and (2) on
the Commission's website at www.sec.gov.
In accordance with Section 303A.12 (a) of the New York Stock Exchange Listed
Company Manual, the Fund's Annual CEO Certification certifying as to compliance
with NYSE's Corporate Governance Listing Standards was submitted to the Exchange
on June 13, 2005.
The Fund files a complete schedule of investments with the Commission for the
first and third quarters of its fiscal year on Form N-Q, which when filed will
be available on the Commission's website at www.sec.gov. The Fund's Form N-Q may
be reviewed and copied at the Commission's Public Reference Room, which may be
obtained by calling 1-800-SEC-0330.
APPROVAL OF ADVISORY AND SUB-ADVISORY AGREEMENTS BY THE BOARD OF TRUSTEES
During the six-month period covered by this report, the Fund's Board of Trustees
approved the continuation of each of those agreements pursuant to which the Fund
is provided with investment advisory services. In accordance with regulations
promulgated by the Securities and Exchange Commission, a summary of the material
factors taken into consideration by the Board of Trustees has been prepared,
which summary includes the conclusions reached by the Board of Trustees and the
conclusions that formed the basis for the Board's approval. The agreements
considered by the Board were the Fund's Advisory Agreement with Lehman Brothers
Asset Management Inc. (the "Adviser") and the Sub-Advisory Agreement with Lehman
Brothers Asset Management LLC (the "Sub Adviser"). Overall, the Board concluded
that continuation of the Advisory and Sub-Advisory Agreements (referred to
collectively as the "Agreements"), would be in the best interests of the Fund
and its shareholders and that the services provided by the Adviser and
Sub-Adviser under the Advisory and Sub-Advisory Agreements are satisfactory and
continue to support the Board's original selection of the Adviser and
Sub-Adviser.
In connection with its review of the nature and quality of the services provided
by the Adviser and Sub-Adviser, the Board considered the administrative services
provided by the Adviser (including the fact that officers of the Adviser serve
as executive and compliance officers for the Fund); the Adviser's demonstrated
commitment to building its overall management capabilities and the Adviser's and
Sub-Adviser's investment philosophy and experience, investment processes and
strategies and the background and experience of the persons responsible for the
day-to-day management of the Fund. The Board also considered, as a material
factor in evaluating the quality of the services provided under the Agreements,
the Fund's performance both relative to its designated benchmark and in light of
the Fund's specific investment strategies and objectives and concluded that the
Fund's performance was satisfactory. The Board considered publicly available
statistical information ("Peer Group information") regarding the performance
achieved by funds generally considered comparable to the Fund. In concluding
that the Fund's performance was satisfactory and merited continuation of the
agreements, the Board based its conclusion on the specific facts and
circumstances of the Fund and did not rely primarily upon such Peer Group
information.
The performance of the Fund relative to unregistered institutional accounts of
the Sub-Adviser was not a material factor in the Board's deliberations in light
of the difference between the regulatory and investment environments experienced
by such accounts and the Fund.
In connection with its review of the Fund's advisory fee structure, the Board
considered information provided by the Adviser and Sub-Adviser with respect to
the costs incurred (including, in the case of the Adviser, fees payable to the
Sub-Adviser), profits achieved and ancillary or "fall-out" benefits enjoyed, by
each such entity as a result of its relationship with the Fund. The Board
concluded that the profit levels reported were not excessive and were within the
range that would have been negotiated at arm's length in light of the specific
facts and circumstances of the Fund and in this respect, were aided by Peer
Group information to the effect that expense levels of the Fund compared
favorably to the expense levels of other comparable funds. Fees received by the
Sub-Adviser for managing other unregistered institutional accounts were not a
material factor in the Board's deliberations in light of the difference between
the regulatory and investment environments experienced by such accounts and the
Fund. Similarly, "fall out" benefits were not deemed a material factor, in light
of the small size of the Fund relative to other assets managed by the Adviser
and Sub-Adviser and the fact that securities transactions for the Fund generally
do not involve brokerage commissions due to the nature of the securities in
which the Fund invests.
Finally, in connection with its review of the Fund's advisory fee structure, the
Board considered the extent to which there is any potential for the realization
of economies of scale that may be appropriately reflected in fee schedules, and
concluded that, because the Fund is a closed-end vehicle, the potential for
growth in assets is limited to investment gains and should not be a material
factor in evaluating the advisory fee levels at this time.
SUBSEQUENT EVENT
Since its inception, the Fund has pursued its investment objective by investing
its assets primarily in high yield debt securities, with at least 80% of its
Managed Assets held in below investment grade (high yield) debt securities
(including corporate loans) of U.S. issuers and issuers whose securities are
traded within the U.S. Effective August 24, 2005, the Fund is permitted to
invest in securities of Canadian issuers without regard to the issuer's trading
market.
29
[LEHMAN BROTHERS LOGO]
(C)2005 LEHMAN BROTHERS INC.ALL RIGHTS RESERVED. LB10183
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEMS 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Included in report in Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEMS 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable.
ITEMS 9. PURCHASE OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEMS 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's Principal Executive Officer and Principal Financial
Officer concluded that the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company
Act of 1940) were effective as of a date within 90 days prior to the
filing date of this report, based upon their evaluation of the
effectiveness of the Registrant's disclosure controls and procedures
as of the evaluation date.
(b) There were no changes in the Registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Investment
Company 1940 Act that occurred during the second fiscal quarter that
has materially affected, or is reasonably likely to materially affect,
the Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Separate certifications for the Registrant's Principal Executive
Officer and Principal Financial Officer, as required by Rule 30a-2(a)
under the Investment Company Act of 1940 (17 CFR 270.30a-2(a)) are
attached hereto as Exhibit 99.CERT.
(b) Certifications for the Registrant's Principal Executive Officer and
Principal Financial Officer, as required by Rule 30a-2(b), under the
Investment Company Act of 1940 are attached here to as Exhibit
99.906.CERT. These certifications are being furnished to the Securities
and Exchange Commission solely pursuant to 18 U.S.C. section 1350 and are
not being filed as part of the Form N-CSR with the Commission.
SIGNATURES
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.
Lehman Brothers/First Trust Income Opportunity Fund
---------------------------------------------------------------------
By: /s/ Bradley Tank
--------------------------------------------------------
Bradley Tank, President/Chief Executive Officer
Date 08/31/05
-----------------------
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/ Bradley Tank
--------------------------------------------------------
Bradley Tank, President/Chief Executive Officer
Date 08/31/05
-----------------------
By: /s/ Edward Grieb
--------------------------------------------------------
Edward Grieb, Treasurer/Chief Financial Officer
Date 08/31/05
-----------------------