- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Portfolio of Investments
December 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--120.4%
Mortgage Pass-Throughs--2.2%
Federal Home Loan Mortgage
Corporation,
$ 1,500 6.50%, 01/01/99........................... $ 1,482,656
Federal Housing Administration,
6,040 Massachusetts Housing
Finance Agency, Series 1991-B,
Class B, 6.85%, 10/01/20.................. 5,928,381
Federal National Mortgage
Association,
14,401 7.00%, 01/01/19-10/01/22.................. 14,506,195
--------------
21,917,232
--------------
Multiple Class Mortgage
Pass-Throughs--12.6%
AAA 412 Collateralized Mortgage
Securities Corporation,
Series F, Class F-4A,
11/01/15.................................. 447,117
Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates,
17,275 Series G-30, Class G-30-J,
02/25/23 (I)............................. 2,600,549
15,976 Series G-32, Class G-32-PT,
02/25/19 (I)............................. 1,738,642
32,964 Series 1261, Class 1261-H,
08/15/19................................. 33,818,706
4,700 Series 1378, Class 1378-DA,
01/15/18 (I)............................. 1,116,922
38 Series 1388, Class 1388-G,
05/15/06 (I)............................. 614,447
1,123 Series 1563, Class 1563-SB,
08/15/08 (ARM)........................... 1,130,156
2,577 Series 1606, Class 1606-SB,
11/15/08 (ARM)........................... 2,510,830
Federal National Mortgage
Association, REMIC
Pass-Through Certificates,
15,000 Trust 1992-43,
Class 43-E, 04/25/22..................... 15,431,259
1,500 Trust G1993-17, Class 17-SH,
04/25/23 (ARM)........................... 951,645
1,556 Trust 1993-117, Class 117-S,
07/25/08 (ARM)........................... 1,467,026
15,350 Trust 1993-152, Class 152-D,
08/25/23 (P)............................. 14,061,828
6,874 Trust 1993-196, Class 196-SM,
10/25/08 (ARM)........................... 6,027,902
5,904 Trust 1993-214, Class 214-SO,
12/25/08 (ARM)........................... 5,398,040
1,162 Trust 1993-222, Class 222-B,
07/25/22 (P)............................. 990,917
3,833 Trust 1994-46, Class 46-B,
11/25/23 (P)............................. 3,763,142
12,224 Trust 1996-T6, Class T6-C,
02/26/01................................. 12,166,578
3,117 Trust 1996-T6, Class T6-D,
02/26/01................................. 3,134,056
7,210 Government National Mortgage
Association, REMIC,
Trust 1994-1, Class 1-PL,
06/16/24 (I).............................. 1,298,134
AAA 18,949 Residential Asset Securitization,
Trust 1997-A9, Class A1,
11/26/27.................................. 19,175,816
--------------
127,843,712
--------------
Commercial Mortgage Backed
Securities--7.9%
BBB 10,000 CBA Mortgage Corporation,
Series 1993-C1, Class D,
12/25/03.................................. 10,067,400
AA+ 3,444 Central Life Assurance Co.,
Series 1994-1, Class A2,
11/01/20 #................................ 3,579,828
AAA 126,884 CS First Boston Mortgage Corp.,
Series 1997-C1, Class AX,
06/20/29 #................................ 14,333,962
AAA 5,200 PaineWebber Mortgage Acceptance Corp.,
Series 1995-M1, Class A,
01/15/07 #................................ 5,263,924
A- 6,000 Phoenix Real Estate
Incorporated, Series 1993-1,
Class C, 11/25/23......................... 6,065,625
Resolution Trust Corporation,
AA- 6,151 Series 1992-C6, Class B,
07/25/24................................. 6,150,633
AA 8,050 Series 1994-C1, Class C,
06/25/26................................. 8,200,938
A 5,563 Series 1994-C2, Class D,
04/25/25................................. 5,633,427
BBB 3,000 Series 1995-C1, Class D,
02/25/27................................. 2,971,875
AA 4,859 Salomon Brothers, Series 1997-TZH,
Class A1, 03/25/25........................ 4,992,759
AAA 12,800 Structured Asset Securities
Corporation, Series 1996-CFL,
Class B, 02/25/28......................... 12,711,438
--------------
79,971,809
--------------
See Notes to Financial Statements
1
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
Corporate Bonds--29.9%
Banking and Finance--13.2%
A3 $ 1,300@ Amsouth Bancorporation,
6.75%, 11/01/25........................... $ 1,305,551
A- 5,000 Aristar Incorporated,
7.25%, 06/15/01........................... 5,151,700
Associates Corporation,
AA- 5,000 6.68%, 07/25/00........................... 5,065,850
AA- 5,000 7.46%, 03/28/00........................... 5,139,000
A- 15,000 Donaldson, Lufkin & Jenrette,
5.625%, 02/15/16.......................... 14,725,650
A+ 6,750 Goldman Sachs Group LP,
6.20%, 12/15/00 #......................... 6,739,470
A3 5,000 Great Western Financial Corporation,
6.375%, 07/01/00.......................... 5,018,400
A 7,000 Household Finance Corporation,
6.65%, 05/26/98........................... 7,020,650
A1 5,700 Meridian Bancorp Incorporated,
6.625%, 06/15/00.......................... 5,756,158
Merrill Lynch & Co. Incorporated,
AA- 7,200 6.00%, 01/15/01........................... 7,169,832
AA- 5,800 6.00%, 03/01/01........................... 5,769,956
A+ 3,800 Morgan Stanley Incorporated,
5.75%, 02/15/01........................... 3,756,338
A+ 10,000 NationsBank Corporation,
7.00%, 09/15/01........................... 10,279,400
BBB 12,500 Salomon Incorporated,
6.625%, 11/30/00.......................... 12,606,625
Salomon Smith Barney Holdings
Incorporated,
A 13,000 5.875%, 02/01/01.......................... 12,831,910
A 3,600 7.00%, 05/15/00........................... 3,653,784
A 1,925 Security Pacific Corporation,
11.00%, 03/01/01.......................... 2,184,551
A 15,000 Transamerica Finance Corporation,
6.75%, 06/01/00........................... 15,177,150
BBB+ 5,000 Union Planters National Bank,
6.76%, 10/30/01........................... 5,069,887
--------------
134,421,862
--------------
Industrial--6.2%
BBB 7,500 Erac Usa Finance Company,
7.00%, 06/15/00 #......................... 7,623,407
A 10,000 Ford Motor Credit,
6.18%, 12/27/01........................... 9,995,000
A- 20,600 General Motors Acceptance
Corporation,
6.125%, 09/18/98.......................... 20,613,997
A- 7,000 Hospital Corporation,
Zero Coupon, 06/01/01..................... 5,480,090
BBB- 6,000 RJR Nabisco Brands Incorporated,
8.00%, 07/15/01........................... 6,177,600
Sears Roebuck & Company,
A- 4,250 6.50%, 06/15/00........................... 4,289,312
A- 5,000 7.29%, 04/24/00........................... 5,108,356
BBB 3,500 Tenneco Credit Corporation,
8.075%, 10/01/02.......................... 3,744,370
--------------
63,032,132
--------------
Utilities--1.4%
BBB 9,000 Pacificorp Holdings,
6.75%, 04/01/01 #......................... 8,964,990
BBB+ 5,000 Potomac Capital Corporation,
6.90%, 08/09/00 #......................... 5,056,050
--------------
14,021,040
--------------
Yankee--8.8%
African Development,
Aa1 5,000 7.75%, 12/15/01........................... 5,270,293
Aaa 3,350 8.625%, 05/01/01.......................... 3,594,264
BBB- 15,000 Empresa Electric Guacolda,
7.60%, 04/30/01 #......................... 15,208,578
A 4,000 Household Finance Corporation,
7.45%, 04/01/00........................... 4,111,240
A3 6,500 Slovenia (Republic of),
7.00%, 08/06/01 #......................... 6,541,287
A+ 18,000 Quebec (Province of),
9.125%, 08/22/01.......................... 19,560,641
BBB- 6,880 Terra Nova Insurance United
Kingdom Holdings PLC,
10.75%, 07/01/05.......................... 7,654,000
BBB- 12,000 Transpatadora de Gas
10.25%, 04/25/01.......................... 12,423,058
NR 15,000 US Remittance Master,
Zero Coupon, 01/01/01..................... 15,079,687
--------------
89,443,048
--------------
Other--0.3%
BBB- 3,000 Colombia (Republic of),
8.00%, 06/14/01........................... 3,031,798
--------------
Total Corporate Bonds....................... 303,949,880
--------------
Asset-Backed Securities--12.1%
AAA 6,311 Amresco Securitized Interest,
Series 1996-1, Class A,
8.10%, 04/26/26 #......................... 6,273,818
AAA 23,718 Chase Manhattan Grantor Trust,
Series 1996-B, Class A,
6.61%, 09/15/02........................... 23,858,579
AAA 35,000@ Citibank Credit Card Trust,
Series 1996-1, Class A,
5.79%, 02/07/03........................... 29,017,100
AAA 15,000 Keycorp Student Loan Trust,
Series 1997-1, Class A2,
6.00%, 01/27/23........................... 14,943,750
AAA 3,051 NationsBank Auto Grantor Trust,
Series 1995-A, Class A,
5.85%, 06/15/02........................... 3,046,331
AAA 10,000 SMS Student Loan Trust,
Series 1997-A, Class A,
5.76%, 10/27/25........................... 9,846,875
AAA 5,750 Standard Credit Card Master Trust,
Series 1995-3, Class A,
7.85%, 02/07/02........................... 5,933,252
See Notes to Financial Statements
2
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
Asset-Backed Securities--(cont'd)
Structured Mortgage Asset,
AAA $ 11,396 Series 1997-2,
8.24%, 03/15/06.......................... $ 11,468,666
AAA 11,822 Series 1997-3,
8.72%, 04/15/06.......................... 12,024,705
AAA 6,784 Series 1997-4,
7.85%, 09/15/01.......................... 6,825,010
--------------
123,238,086
--------------
Stripped Mortgage-Backed
Securities--4.2%
Aaa 5,100 CMO Mortgage Investors Trust,
Collateralized Mortgage
Obligations, Trust 7, Class P,
09/22/21 (I/O)............................ 875,086
Collateralized Mortgage Securities
Corporation,
AAA 1,500 Series 1990-5, Class 5-L,
09/20/20 (I/O)........................... 38,957
AAA 4,000 Series 1991-9, Class 9-M,
11/20/21 (I/O)........................... 553,463
Federal Home Loan Mortgage
Corporation,
21,418 Series G-3, Class G-3-S,
04/25/19 (I/O)........................... 956,533
5,300 Series 113, Class 113-M,
05/15/21 (I/O)........................... 1,440,540
13,500 Series 181, Class 181-F,
08/15/21 (I/O)........................... 2,093,364
1,400 Series 1125, Class 1125-F,
08/15/21 (I/O)........................... 392,824
822 Series 1338, Class 1338-Q,
08/15/07 (P/O)........................... 698,683
4,700 Series 1360, Class 1360-PT,
12/15/17 (I/O)........................... 1,031,551
700 Series 1404, Class 1404-E,
01/15/06 (I/O)........................... 613,152
18,315 Series 1621, Class 1621-SJ,
10/15/20 (I/O)........................... 753,308
7,053 Series 1662, Class 1662-PO,
01/15/09 (P/O)........................... 5,484,798
143,000 Series 1809, Class 1809-SC,
12/15/23 (I/O)........................... 14,836,250
Federal National Mortgage
Association,
2,647 Trust 5, Class 1, 09/01/07 (P/O).......... 2,155,938
1,414 Trust 60, Class 1,
01/01/19 (P/O)........................... 1,131,955
1,800 Trust 1990-76, Class 76-N,
07/25/20 (I/O)........................... 47,306
2,300 Trust 1990-106, Class 106-K,
09/25/20 (I/O)........................... 622,954
694 Trust 1991-G44, Class G44-H,
11/25/21 (P/O)........................... 594,978
1,000 Trust 1991-29, Class 29-J,
04/25/21 (I/O)........................... 345,984
3,100 Trust 1991-80, Class 80-Q,
07/25/21 (I/O)........................... 946,622
13,179 Trust 1992-G45, Class G45-2,
08/25/22 (I/O)........................... 3,611,789
282 Trust 1993-194, Class 194-C,
09/25/23 (P/O)........................... 279,659
58,879 Trust 1997-37, Class 37-SX,
08/18/18 (I/O)........................... 1,582,375
8,305 Merrill Lynch Trust,
Series 43, Class F, 08/27/15 (I/O)........ 1,527,143
--------------
42,615,212
--------------
Collateralized Mortgage
Obligation Residuals**--0.1%
AAA 10 Fleet Mortgage Securities, Inc.,
Series 1989-3, Class R,
09/01/19 #................................ 528,918
--------------
U.S. Government Securities--28.5%
270,000+ U.S. Treasury Bonds,
6.125%, 11/15/27.......................... 277,468,200
12,500+ U.S. Treasury Notes,
6.125%, 08/15/07.......................... 12,845,750
--------------
290,313,950
--------------
Taxable Zero Coupon Bonds--10.8%
U.S. Treasury Receipt,
133,000+ 05/15/01.................................. 110,013,610
--------------
Taxable Municipal Bonds--2.6%
AAA 1,000 Kern County California Pension
Obligation, 6.27%, 08/15/01............... 1,005,670
AAA 2,035 Long Beach California Pension
Obligation, 6.45%, 09/01/01............... 2,057,120
AAA 6,000 Los Angeles County California
Pension Obligation, Series D,
6.38%, 06/30/01........................... 6,064,980
BBB+ 5,000 New York City, G.O., Series 1,
6.40%, 03/15/01........................... 5,010,800
BBB+ 5,000 New York City, G.O., Series 1,
7.24%, 04/15/01........................... 5,132,000
BBB 1,000 New York State Environmental Facility,
Series A, 6.62%, 03/15/01................. 1,011,290
BBB 3,345 New York State Housing
Finance Agency, Series B,
7.14%, 09/15/02........................... 3,435,148
BBB 2,000 New York State Urban Development,
Series B, 6.90%, 04/01/01................. 2,032,040
AA 1,000 St. Joseph's Health System California,
Series A, 7.02%, 07/01/01................. 1,024,710
--------------
26,773,758
--------------
See Notes to Financial Statements
3
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount/
Contracts Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
Money Market Instruments--9.5%
AAA $ 65,000 AIM Prime Portfolio
Principal Money Market Strip
Zero Coupon, 01/02/01..................... $ 54,947,490
AAA 50,000 Goldman Sachs Money Market,
Zero Coupon, 01/02/01..................... 42,243,250
--------------
97,190,740
--------------
Put Option Purchased--0.0%
300 Over-the-Counter Put,
3-month LIBOR over 6.63%,
Expires 05/15/07**........................ 84,000
--------------
Total investments before
investments sold short--120.4%
(cost $1,225,014,959)..................... 1,224,440,907
--------------
INVESTMENTS SOLD SHORT--(15.1%)
116,000 U.S. Treasury Bonds,
6.625%, 02/15/27.......................... (125,931,920)
27,746 U.S. Treasury Notes,
3.625%, 07/15/02.......................... (27,607,121)
--------------
Total investments sold short
(proceeds $144,219,316)................... (153,539,041)
--------------
Total investments
net of investments
sold short--105.3%......................... 1,070,901,866
Liabilities in excess of other
assets--(5.3%)............................. (53,659,325)
--------------
NET ASSETS--100%............................. $1,017,242,541
==============
- ---------
* Using the higher of Standard & Poor's or Moody's rating.
** Illiquid securities representing 0.1% of portfolio assets.
# Private placements restricted as to resale.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements.
@ Partial principal amount pledged as collateral for futures transactions.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
G.O. -- General Obligation Bond.
I -- Denotes a CMO with Interest only characteristics.
I/O -- Interest Only.
P -- Denotes a CMO with Principal only characteristics.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Statement of Assets and Liabilities
December 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Investments, at value (cost $1,225,014,959)
(Note 1) ............................................... $ 1,224,440,907
Cash ..................................................... 320,194
Deposits with brokers as collateral for
investments sold short (Note 1) ........................ 157,258,687
Unrealized appreciation on interest rate swaps ........... 81,676
Receivable for investments sold .......................... 11,733,049
Interest receivable ...................................... 11,330,774
Due from broker-variation margin ......................... 625,312
---------------
1,405,790,599
---------------
Liabilities
Reverse repurchase agreements (Note 4) ................... 207,542,446
Investments sold short, at value
(proceeds $144,219,316) (Note 1) ....................... 153,539,041
Payable for investments purchased ........................ 19,073,135
Unrealized depreciation on interest rate
swaptions .............................................. 2,932,500
Unrealized depreciation on interest rate caps ............ 64,280
Interest payable ......................................... 3,367,388
Due to Parent (Note 2) ................................... 1,210,768
Excise tax payable ....................................... 818,500
---------------
388,548,058
---------------
Net Assets ............................................... $ 1,017,242,541
===============
Net assets were comprised of:
Common stock, at par (Note 5) .......................... $ 1,420,106
Paid-in capital in excess of par ....................... 1,011,798,414
---------------
1,013,218,520
Undistributed net investment income .................... 10,458,314
Accumulated net realized gain .......................... 5,394,852
Net unrealized depreciation ............................ (11,829,145)
---------------
Net assets, December 31, 1997 .......................... $ 1,017,242,541
===============
Net asset value per share:
($1,017,242,541 / 142,010,583 shares of
common stock issued and outstanding) ................... $ 7.16
===============
- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Statement of Operations
For the period October 17, 1997
(commencement of operations) to
December 31, 1997
(Unaudited)
- --------------------------------------------------------------------------------
Net Investment Income
Income
Interest (net of premium amortization of
$1,367,097 and net of interest expense of
$3,990,297) ............................................. $ 12,487,582
------------
Operating expenses
Investment advisory ...................................... 838,733
Administration ........................................... 209,683
Custodian ................................................ 59,700
Directors ................................................ 21,000
Audit .................................................... 21,000
Legal .................................................... 12,500
Miscellaneous ............................................ 48,152
------------
Total operating expenses ................................ 1,210,768
------------
Net investment income before excise tax .................... 11,276,814
Excise tax ............................................... 818,500
------------
Net investment income ...................................... 10,458,314
------------
Realized and Unrealized Gain (Loss) on
Investments (Note 3)
Net realized gain (loss) on:
Investments .............................................. 5,403,965
Short sales .............................................. (172,975)
Futures .................................................. 163,862
------------
5,394,852
------------
Net unrealized appreciation (depreciation) on:
Investments .............................................. (556,656)
Short sales .............................................. (9,319,725)
Swaptions ................................................ (2,392,500)
Futures .................................................. 979,736
------------
(11,829,145)
------------
Net loss on investments .................................... (6,434,293)
------------
Net Increase In Net Assets Resulting
from Operations ............................................ $ 4,024,021
============
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Statement of Cash Flows
For the period October 17, 1997
(commencement of operations) to
December 31, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
Cash flows used for operating activities:
Interest received, net of interest purchased ........... $ 5,147,105
Interest expense paid .................................. (622,909)
Purchase of long-term portfolio investments ............ (754,735,643)
Proceeds from disposition of long-term
portfolio investments ................................ 542,989,195
---------------
Net cash flows used for operating activities ........... (207,222,252)
---------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements .............. 207,542,446
---------------
Net increase in cash ..................................... 320,194
Cash at beginning of period .............................. --
---------------
Cash at end of period .................................... $ 320,194
===============
Reconciliation of Net Increase in Net Assets
Resulting from Operations to Net Cash Flows
Used for Operating Activities
Net increase in net assets resulting
from operations .......................................... $ 4,024,021
---------------
Increase in investments .................................. (217,656,680)
Net realized gain ........................................ (5,394,852)
Increase in unrealized appreciation ...................... 11,829,145
Increase in interest receivable .......................... (11,330,774)
Increase in deposits with brokers for
short sales ............................................ (157,258,687)
Increase in securities sold short ........................ 153,539,041
Increase in payable for investments purchased ............ 19,073,135
Increase in unrealized depreciation on
interest rate caps ..................................... 64,280
Increase in variation margin receivable .................. (625,312)
Increase in unrealized depreciation on
interest rate swaptions ................................ 2,932,500
Increase in unrealized appreciation on
interest rate swaps .................................... (81,676)
Increase in receivable for investments sold .............. (11,733,049)
Increase in due to parent ................................ 1,210,768
Increase in excise tax payable ........................... 818,500
Increase in interest payable ............................. 3,367,388
---------------
Total adjustments ........................................ (211,246,273)
---------------
Net cash flows used for operating activities ........... $ (207,222,252)
===============
Noncash financing activity:
Transfer of assets from BlackRock 2001 Term
Trust Inc. in exchange for shares issued ............... $ 1,013,218,520
===============
- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Statement of Changes in Net Assets
(Unaudited)
- --------------------------------------------------------------------------------
For the period
October 17, 1997
(commencement
of operations) to
December 31, 1997
-----------------
Increase (Decrease)
in Net Assets
Operations:
Net investment income ............................. $ 10,458,314
Net realized gain on
investments, short
sales, and futures .............................. 5,394,852
Net unrealized
depreciation on
investments, short sales,
swaptions and futures ........................... (11,829,145)
---------------
Net increase in net assets
resulting from
operations ...................................... 4,024,021
Transfer of assets
from BlackRock 2001
Term Trust Inc. in
exchange for
shares issued ..................................... 1,013,218,520
---------------
Total increase ...................................... 1,017,242,541
Net Assets
Beginning of period ................................. --
---------------
End of period ....................................... $ 1,017,242,541
===============
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Financial Highlights
(Unaudited)
- --------------------------------------------------------------------------------
October 17, 1997*
through
December 31, 1997
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .......................... $ 7.13
----------
Net investment income (net of $0.03 of interest expense) .... .07
Net realized and unrealized loss on investments, short
sales, swaptions, and futures ............................... (.04)
----------
Net increase from investment operations ....................... .03
----------
Net asset value, end of period ................................ $ 7.16
==========
TOTAL INVESTMENT RETURN+: ..................................... 0.42%
RATIOS TO AVERAGE NET ASSETS:++
Operating expenses@ ........................................... 0.58%
Net investment income ......................................... 4.99%
SUPPLEMENTAL DATA:
Average net assets (in thousands) ............................. $1,007,032
Portfolio turnover ............................................ 51%
Net assets, end of period (in thousands) ...................... $1,017,243
Reverse repurchase agreements outstanding, end of period (in
thousands) .................................................. $ 207,542
Asset coverage+++ ............................................. $ 5,901
- ----------
* Commencement of operations.
@ The ratio of operating expenses, including interest expense, to average net
assets was 2.48% for the period indicated above. The ratio of operating
expenses, including interest expense and excise tax, to average net assets
was 2.87% for the period indicated above.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the last
day of each period reported. Dividends are assumed, for purposes of this
calculation, to be reinvested. Total investment return for periods of less
than one full year are not annualized.
++ Annualized.
+++ Per $1,000 of reverse repurchase agreement outstanding.
The information above represents the unaudited operating performance data
for a share of common stock outstanding, total investment return, ratios to
average net assets and other supplemental data for the period indicated.
This information has been determined based upon financial information
provided in the financial statements.
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
BLK Subsidiary Inc.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
BLK Subsidiary, Inc. (the "Trust") was incorporated under the laws of the State
of Maryland on October 17, 1997, and is a diversified closed-end management
investment company. The Fund was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of The BlackRock 2001 Term
Trust Inc. (the "2001 Term Trust"), incorporated under the laws of the State of
Maryland and as such, a wholly-owned subsidiary of the 2001 Term Trust. The
Trust's investment objective is to manage a portfolio of investment grade fixed
income securities while providing cash flow definition to the 2001 Term Trust.
No assurance can be given that the Trust's investment objective will be
achieved.
The following is a summary of significant accounting policies followed by
the Trust.
Securities Valuation: The Trust values mortgage-backed, asset-backed, and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on applicable exchanges. In the absence of a last sale, options are valued at
the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determine that such price does not reflect its fair value, in which case it will
be valued at its fair value as determined by the Trust's Board of Directors. Any
securities or other assets for which such current market quotations are not
readily available are valued at fair market value as determined in good faith
under procedures established by and under the general supervision and
responsibility of the Trust's Board of Directors.
Short-term securities which mature in 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase is 60 days or
less. Short-term securities with a term to maturity greater than 60 days from
the date of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
Option Selling/Purchasing: When the Trust sells (or purchases) an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written (or purchased). Premiums received or paid from writing (or
purchasing) options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly. In general, the Trust uses options to hedge a long or
short position or an overall portfolio that is longer or shorter than the
benchmark security. A call option gives the purchaser of the option the right
(but not obligation) to buy, and obligates the seller to sell (when the option
is exercised), the underlying position at the exercise price at any time or at a
specified time during the option period. A put option gives the holder the right
to sell and obligates the writer to buy the underlying position
8
<PAGE>
at the exercise price at any time or at a specified time during the option
period. Put options can be purchased to effectively hedge a position or a
portfolio against price declines if a portfolio is long. In the same sense, call
options can be purchased to hedge a portfolio that is shorter than its benchmark
against price changes. The Trust can also sell (or write) covered call options
and put options to hedge portfolio positions.
The main risk that is associated with purchasing options is that the
option expires without being exercised. In this case, the option expires
worthless and the premium paid for the option is considered the loss. The risk
associated with writing call options is that the Trust may forego the
opportunity for a profit if the market value of the underlying position
increases and the option is exercised. The risk in writing put options is that
the Trust may incur a loss if the market value of the underlying position
decreases and the option is exercised. In addition, as with futures contracts,
the Trust risks not being able to enter into a closing transaction for the
written option as the result of an illiquid market.
Swap Options: Swap options are similar to options on securities except that
instead of selling or purchasing the right to buy or sell a security, the writer
or purchaser of the swap option is granting or buying the right to enter into a
previously agreed upon interest rate swap agreement at any time before the
expiration of the option. Premiums received or paid from writing or purchasing
options are recorded as liabilities or assets and are subsequently adjusted to
the current market value of the option written or purchased. Premiums received
or paid from writing or purchasing options which expire unexercised are treated
by the Trust on the expiration date as realized gains or losses. The difference
between the premium and the amount paid or received on effecting a closing
purchase or sale transaction, including brokerage commission, is also treated as
a realized gain or loss. If an option is exercised, the premium paid or received
is added to the proceeds from the sale or cost of the purchase in determining
whether the Trust has realized a gain or loss on investment transactions.
The main risk that is associated with purchasing swap options is that the
swap option expires without being exercised. In this case, the option expires
worthless and the premium paid for the swap option is considered the loss. The
main risk that is associated with the writing of a swap option is the market
risk of an unfavorable change in the value of the interest rate swap underlying
the written swap option.
Swap options may be used by the Trust to manage the duration of the
Trust's portfolio or as part of an income producing strategy reflecting the view
of the Trust's management in the direction of interest rates.
Financial Futures Contracts: A futures contract is an agreement between two
parties to buy or sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period that a futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
Financial futures contracts, when used by the Trust, help in maintaining a
targeted duration. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. In the same sense, futures contracts can be
purchased to lengthen a portfolio that is shorter than its duration target.
Thus, by buying or selling futures contracts, the Trust can effectively hedge
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the
purpose of hedging its existing portfolio securities or securities the Trust
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates. Should interest rates move unexpectedly, the
Trust may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets. The Trust is also at risk of
not being able to enter into a closing transaction for the futures contract
because of an illiquid secondary market. In addition, since futures are used to
shorten or lengthen a portfolio's duration, there is a risk that the portfolio
may have temporarily performed better without the hedge or that the Trust may
lose the opportunity to realize appreciation in the market price of the
underlying positions.
Short Sales: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
9
<PAGE>
dollar amount, will be recognized upon the termination of a short sale if the
market price is greater or less than the proceeds originally received.
Securities Lending: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust. The Trust did not engage in
securities lending during the period ended December 31, 1997.
Interest Rate Swaps: In an interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Rate swaps were conceived as asset/liability management tools. In more
complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by "marking-to-market" to reflect the
market value of the swap. When the swap is terminated, the Trust will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Trust's basis in the contract, if any.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the swap. However, the Trust does not anticipate non-performance
by any counterparty.
Interest Rate Caps: Interest rate caps are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate over a specified fixed or floating rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changes in short-term rates. Owning interest rate
caps reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
Interest Rate Floors: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of
the portfolio and its exposure to changes in short-term interest rates. Owning
interest rate floors reduces the portfolio's duration, making it less sensitive
to changes in interest rates from a market value perspective. The effect on
income involves protection from falling short term rates, which the Trust
experiences primarily in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate floor. However, the Trust does not anticipate
non-performance by any counterparty.
Securities Transactions and Investment Income: Security transactions are
recorded on the trade date. Realized gains and losses are calculated on the
identified cost basis. Interest income is recorded on the accrual basis and the
Trust amortizes premium and accretes discount on securities purchased using the
interest method.
Taxes: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required. As part of its tax planning
strategy, the Trust intends to retain a portion of its taxable income and pay an
excise tax on the undistributed amount.
Dividends and Distributions: The Trust declares and pays dividends and
distributions monthly, first from net investment income, then from realized
short-term capital gains and other sources, if necessary. Net long-term capital
gains, if any, in excess of loss carryforwards, are distributed annually.
Dividends and distributions are recorded on the ex-dividend date.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2. Agreements
The Trust has an Investment Advisory Agreement with BlackRock Financial
Management, Inc. (the "Adviser") a wholly-owned corporate subsidiary of PNC
Asset Management Group, Inc., the holding company for PNC's asset management
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<PAGE>
business, and an Administration Agreement with Mitchell Hutchins Asset
Management Inc. (the "Administrator"), a wholly-owned subsidiary of PaineWebber
Incorporated. The Trust reimburses the 2001 Term Trust for its pro-rata share of
applicable expenses, including investment advisory and administrative fees, in
an amount equal to the proportionate amount of net assets which are held by the
Trust relative to the net assets of the 2001 Term Trust.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the period ended December 31, 1997 aggregated $807,384,741
and $602,941,930, respectively.
In addition, the Trust received investments valued at $1,013,218,520 in
exchange for common shares of the Trust.
The Trust may invest up to 40% of its total assets in securities which are
not readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). At December 31, 1997, the Trust
held 0.1% of its portfolio assets in illiquid securities all of which were
restricted as to resale.
The portfolio may from time to time purchase in the secondary market
certain mortgage pass-through securities packaged or master serviced by PNC
Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp.
succeeded to rights and duties of Sears) or mortgage related securities
containing loans or mortgages originated by PNC Bank or its affiliates. It is
possible under certain circumstances, PNC Mortgage Securities Corp. or its
affiliates could have interests that are in conflict with the holders of these
mortgage backed securities, and such holders could have rights against PNC
Mortgage Securities Corp. or its affiliates.
The federal income tax basis of the Trust's investments at December 31,
1997 was substantially the same as the basis for financial reporting and
accordingly, net unrealized depreciation for federal income tax purposes was
$11,829,145 (gross unrealized appreciation--$23,639,827; gross unrealized
depreciation--$35,468,972).
During the period ended December 31, 1997, the Trust entered into
financial futures contracts. Details of the open contracts at December 31, 1997
were as follows:
Value at Value at Unrealized
Number of Expiration Trade December 31, Appreciation/
Contracts Type Date Date 1997 (Depreciation)
- -------- ------ ---------- -------- ------------ -------------
Short position:
106 5 Yr. T-Note Mar. 1998 ($11,457,460) ($11,514,250) ($56,790)
Long position:
1095 30 Yr. T-Bond Mar. 1998 130,876,755 131,913,281 1,036,526
---------
$ 979,736
=========
During the period ended December 31, 1997, the Trust entered into swap
option ("swaption")agreements. Details of the open agreements at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Notional Value at
Amount Fixed Floating Termination Cost/ December 31,
(000) Type Rate Rate Date (Premium) 1997
-------- ---- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$200,000 Put 6.50% 3 month LIBOR 06/15/98 $2,540,000 $1,976,600
200,000 Put 6.70% 3 month LIBOR 01/29/98 1,700,000 38,000
200,000 Put 6.90% 3 month LIBOR 10/30/98 3,842,000 1,800,000
160,000 Call 6.20% 3 month LIBOR 08/13/99 2,388,000 4,592,000
Sold:
$480,000 Call 6.10% 3 month LIBOR 02/13/98 ($1,142,400) ($2,256,000)
450,000 Call 5.25% 3 month LIBOR 12/01/98 (1,462,500) (1,638,000)
350,000 Call 5.60% 3 month LIBOR 06/16/98 (1,330,000) (910,000)
</TABLE>
During the six months ended December 31, 1997, the Trust entered into
interest rate cap agreements. Details of the open agreements at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
Notional Value at
Amount Fixed Floating Termination Cost/ December 31,
(000) Type Rate Rate Date (Premium) 1997
-------- ---- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$120,000 Interest 6.00% 3 month LIBOR 02/19/02 $3,199,280 $2,031,329
Rate
Sold:
($300,000) Interest VR 3 month LIBOR 08/08/01 (3,600,000) (2,797,263)
Rate
(200,000) Interest VR 3 month LIBOR 08/12/01 (2,060,000) (1,759,066)
Rate
</TABLE>
During the six months ended December 31, 1997, the Trust entered into interest
rate swapagreements. Details of the open agreements at December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
Notional Value at
Amount Fixed Floating Termination Cost/ December 31,
(000) Type Rate Rate Date (Premium) 1997
-------- ---- ----- -------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$509,250 Interest 6.37% 2 Year Forward 07/27/00 $2,540,000 $2,936,936
Rate
Sold:
($350,000) Interest 6.42% 3 Year Forward 07/27/01 (0) (3,010,154)
Rate
(10,908) Interest VR 10 Year Forward 06/13/11 (154,894) 0
Rate
</TABLE>
Note 4. Borrowings Reverse Repurchase Agreements:
The Trust may enter into reverse repurchase agreements with qualified, third
party broker-dealers as determined by and under the direction of the Trust's
Board of Directors. Interest on the value of the reverse repurchase agreements
issued and outstanding will be based upon competitive market rates at the time
of issuance. At the time the Trust enters into a reverse repurchase agreement,
it will establish and maintain a segregated account with the lender the value of
which at least equals the principal amount of the reverse repurchase
transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding
during the period ended December 31, 1997, was
11
<PAGE>
approximately $150,594,025 at a weighted average interest rate of approximately
5.38%. The maximum amount of reverse repurchase agreements outstanding at any
month-end during the period ended December 31, 1997, was $207,542,446 as of
December 31, 1997, which was 14.76% of total assets.
Dollar Rolls: The Trust may enter into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities.The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date.
Note 5. Capital
There are 200 million shares of $.01 par value common stock authorized. The 2001
Term Trust owned all of the 142,010,583 shares outstanding at December 31, 1997.
12
<PAGE>
- ---------
BlackRock
- ---------
Directors
Laurence D. Fink, Chairman
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
Officers
Ralph L. Schlosstein, President
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Karen H. Sabath, Secretary
Investment Adviser
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
Administrator
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
This report is for shareholder information. This is not a prospectus
intended for use in the purchase or sale of any securities.
The accompanying financial statements as of December 31, 1997 were not
audited and accordingly, no opinion is expressed on them.
BLK Subsidiary, Inc.
c/o Mitchell Hutchins Asset Management Inc.
32nd Floor
1285 Avenue of the Americas
New York, NY 10019
[Logo] Printed on recycled paper 09247T-10-0
BLK Subsidiary, Inc.
- --------------------------------------------------------------------------------
Semi-Annual Report
December 31, 1997
[Graphic omitted]
