================================================================================
BLK SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1999
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--149.6%
MORTGAGE PASS-THROUGHS--18.9%
Federal Home Loan Mortgage Corp.,
$ 22,438 6.50%, 4/1/28 - 7/1/29 .............. $ 21,659,998
Federal National Mortgage
Association,
152,870+ 6.50%, 6/1/23 - 6/1/29 .............. 147,315,647
7,000 7.00%, (TBA) ........................ 6,949,687
15,243++ 7.00%, 2/1/24 - 11/1/28 ............. 15,070,625
------------
190,995,957
------------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--4.2%
AAA 233 Collateralized Mortgage
Securities Corp.,
Ser. F, Class F-4-A, 11/1/15 ........ 241,908
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
314 Ser. 1563, Class 1563-S,
10/15/07, (ARM) ................... 319,389
396 Ser. 1563, Class 1563-SB,
8/15/08, (ARM) .................... 392,330
1,471 Ser. 1592, Class 1592-NE
12/15/22, (ARM) ................... 1,419,023
1,066 Ser. 1606, Class 1606-SB,
11/15/08, (ARM) ................... 1,079,271
2,800 Ser. 1617, Class 1617-EB,
9/15/23, (ARM) .................... 2,662,334
142 Ser. 1663, Class 1663-A,
7/15/23, (ARM) .................... 138,802
3,342 Ser. 1671, Class 1671-KB,
2/15/24, (ARM) .................... 3,334,359
485 Ser. 1686, Class 1686-PK,
4/15/23 ........................... 478,915
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
11,850 Trust 1992-43, Class 43-E,
4/25/22 ........................... 11,956,829
1,500 Trust 1993-G17, Class G17-SH,
4/25/23, (ARM) .................... 1,280,280
266 Trust 1993-117, Class 117-S,
7/25/08, (ARM) .................... 257,940
2,361 Trust 1993-178, Class 178-SC,
9/25/23, (ARM) .................... 2,354,306
2,752 Trust 1993-196, Class 196-SM,
10/25/08, (ARM) ................... 2,457,162
1,831 Trust 1993-214, Class 214-SO,
12/25/08, (ARM) ................... 1,797,261
7,081 Trust 1996-T6,
Class T6-C, 2/26/01 ............... 7,087,502
1,902 Trust 1996-T6,
Class T6-D, 2/26/01 ............... 1,904,252
3,220 Trust 1998-38, Class 38-S,
1/8/12 (ARM) ...................... 3,333,189
------------
42,495,052
------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--4.2%
AAA 22 Collateralized Mortgage Securities Corp.,
Ser. 1991-9, Class M,
11/20/21 ............................ 324,253
AAA 124,576 Credit Suisse First Boston Mortgage
Securities Corp., Ser. 1997-C1,
Class AX, 6/20/29** ................. 11,314,263
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificate,
9,369 Ser. G-3, Class G-3-S,
4/25/19 ........................... 260,446
10,373 Ser. G-30, Class G-30-J,
2/25/23 ........................... 1,453,133
7,813 Ser. G-32, Class G-32-PT,
2/25/19 ........................... 761,547
37 Ser. 113, Class 113-N,
5/15/21 ........................... 1,100,583
7 Ser. 1125, Class 1125-F,
8/15/21 ........................... 182,932
3 Ser. 1360, Class 1360-PT
12/15/17 .......................... 305
27 Ser. 1378, Class 1378-DA,
1/15/18 ........................... 94,404
16 Ser. 1388, Class 1388-G,
5/15/06 ........................... 221,005
16 Ser. 1404, Class 1404-E,
1/15/06 ........................... 126,399
10,507 Ser. 1621, Class 1621-SJ,
10/15/20 .......................... 298,618
313 Ser. 1970, Class 1970-PN,
6/15/15 ........................... 2,225
30,859 Ser. 2056, Class 2056-IB,
4/15/21 ........................... 3,490,924
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
9 Trust 1990-76, Class 76-N,
7/25/20 ........................... 22,784
5 Trust 1991-29, Class 29-J,
4/25/21 ........................... 170,458
See Notes to Financial Statements.
1
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--(CONT'D)
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
$ 15 Trust 1991-80, Class 80-Q,
7/25/21 ........................... $ 426,656
8,160 Trust 1992-G45, Class G45-2,
8/25/22 ........................... 1,347,662
4,657 Trust 1993-141, Class 141-PW,
6/25/18 ........................... 306,810
5,705 Trust 1997-37, Class 37-SX,
8/18/18 ........................... 20,848
5,031 Government National Mortgage
Association, Trust 1994-1,
Class 1-PL, 6/16/24 ................. 830,130
Merrill Lynch Mortgage Investments, Inc.,
AAA 67,350 Ser. 1997-2, Class 2-C,
12/10/29 .......................... 4,604,850
Aaa 48,039 Ser. 1998-2, Class 2-C,
2/15/30 ........................... 3,627,779
AAA 3,346 Merrill Lynch Trust,
Ser. 43, Class 43-F, 8/27/15 ........ 217,510
Morgan Stanley Capital Inc.,
AAA 113,661 Ser. 1998-HF1, Class HF1-X,
2/15/18 ........................... 6,813,427
AAA 99,687 Ser. 1998-WF2, Class WF2-X,
4/15/23 ........................... 4,302,854
-----------
42,322,805
-----------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--2.4%
Federal Home Loan Mortgage Corp.,
447 Ser. 1338, Class 1338-Q,
8/15/07 ........................... 389,298
5,232 Ser. 1662, Class 1662-PO,
1/15/09 ........................... 4,200,021
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,823 Trust 5, Class 5-1, 9/25/07 ......... 1,533,763
767 Trust 60, Class 60-1, 1/1/19 ........ 621,543
257 Trust 1991-G44, Class G44-H,
11/25/21 .......................... 246,150
13,272 Trust 1993-257, Class 257-A,
6/25/23 ........................... 12,514,264
5,027 Trust 1994-54, Class 54-B,
11/25/23 .......................... 4,777,555
19,261 Trust 1998-3, Class 3-SC,
2/18/28 ........................... 261,826
-----------
24,544,420
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--4.2%
BBB $ 4,150 CBA Mortgage Corp.
Ser. 1993-C1, Class D, 6.67%,
12/25/03 ............................ 4,053,621
AA+ 2,256 Central Life Assurance Co.,
Ser. 1994-1, Class A2,
8.90%, 12/13/20 .................... 2,285,066
AAA 5,200 PaineWebber Mortgage Acceptance
Corp. IV, Ser. 1995-M1,
Class A, 6.70%, 1/15/07** ........... 5,215,561
Resolution Trust Corp.,
AA 8,050 Ser. 1994-C1, Class C,
8.00%, 6/25/26 .............,....... 8,050,000
A 5,462 Ser. 1994-C2, Class D,
8.00%, 4/25/25 ..................... 5,432,749
AA 4,315 Salomon Brothers Mortgage
Acceptance Corp.,
Ser. 1997-TZH, Class A1,
7.15%, 3/25/25** .................... 4,383,619
AAA 12,800 Structured Asset Securities Corp.,
Ser. 1996-CFL, Class B,
6.30%, 2/25/28 ...................... 12,883,944
-----------
42,304,560
-----------
ASSET-BACKED SECURITIES--12.7%
NR 2,208 Amresco Securitized Interest,
Ser. 1996-1, Class A,
8.10%, 4/26/26** .................... 2,119,548
Aaa 22,286 Brazos Student Finance Corp.,
Ser. 1998-A, Class A1,
5.78%, 6/1/06 ....................... 22,233,908
Broad Index Secured Trust Offering,
NR 10,000 Ser. 1998-4, Class 9,
6.924%, 9/9/01 .................... 9,957,000
Baa2 10,000 Ser. 1998-101, Class 10,
6.58%, 3/26/01** .................. 9,834,687
AAA 9,036 Chase Manhattan Grantor Trust,
Ser. 1996-B, Class A,
6.61%, 9/15/06 ...................... 9,075,792
AAA 35,000@ Citibank Credit Card Trust,
Ser. 1996-1, CLASS A,
5.79%, 2/7/03 ....................... 31,806,250
NR 5,905 Global Rated Eligible Asset Trust,
Ser. 1998-1, Class A,
7.33%, 9/15/07**/*** ................ 3,217,522
AAA 787 NationsBank Auto Grantor Trust,
Ser. 1995-A, Class A,
5.85%, 6/15/02 ...................... 787,640
A 10,000 Newcourt Equipment Trust,
Ser. 1998-1, Class B,
5.97%, 4/20/05 ...................... 9,946,559
See Notes to Financial Statements.
2
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--(CONT'D)
AA $ 14,426 Pegasus Aviation Lease Securitization,
Ser. 1999-1A, Class A1,
6.30%, 3/25/29** .................... $ 14,101,794
AAA 5,750 Standard Credit Card Master Trust,
Ser. 1995-3, Class A,
7.85%, 2/7/02 ....................... 5,852,556
Structured Mortgage Asset
Residential Trust,**/***
NR 9,989 Ser. 1997-2, 8.24%, 3/15/06 ......... 4,779,870
NR 11,016 Ser. 1997-3, 8.57%, 4/15/06 ......... 4,900,007
------------
128,613,133
------------
U.S. GOVERNMENT AND
AGENCY SECURITIES--38.2%
U.S. Treasury Bonds,
72,835 3.63%, 4/15/28 (TIPS) ............... 68,726,038
10,000 5.25%, 11/15/28 - 2/15/29 ........... 8,864,100
35,000 6.13%, 11/15/27 ..................... 34,764,800
U.S. Treasury Notes,
100,000++ 4.25%, 11/15/03 ..................... 94,422,000
150,000++ 4.50%, 9/30/00 ...................... 148,359,000
30,000+ 6.50%, 10/15/06 ..................... 30,975,000
------------
386,110,938
------------
TAXABLE ZERO
COUPON BONDS--15.9%
Government Trust Certificates,
35,925 Ser. 1-D, 11/15/00 .................. 33,301,397
34,630 Ser. 2-F, 11/15/00 .................. 32,100,971
105,000++ U.S. Treasury Receipt,
5/15/01 ............................. 94,805,550
------------
160,207,918
------------
TAXABLE MUNICIPAL BONDS--3.2%
AAA 1,000 Kern County California
Pension Obligation,
6.27%, 8/15/01** .................... 1,005,000
AAA 2,035 Long Beach California
Pension Obligation,
6.45%, 9/1/01 ....................... 2,052,623
AAA 6,000 Los Angeles County California
Pension Obligation,
Ser. D, 6.38%, 6/30/01 .............. 6,040,860
NR 5,735 Massachusetts Housing Fin. Agency,
Ser. 1991-B, 6.85%, 10/1/20 ......... 5,192,698
New York City G.O., Ser 1,
A- 5,000 6.40%, 3/15/01 ...................... 5,012,100
A- 5,000 7.24%, 4/15/01 ...................... 5,082,100
Baa1 1,000 New York State Environmental
Facility Auth., Ser. A,
6.62%, 3/15/01 ...................... 1,003,510
BBB+ 3,345 New York State Housing
Finance Agency,
Ser. B, 7.14%, 3/15/02 .............. 3,406,314
BBB+ 2,000 New York State Urban
Developement Corp.,
Ser. B, 6.90%, 4/1/01 ............... 2,016,240
AA 1,000 St. Josephs Health Systems California,
Ser. A, 7.02%, 7/1/01 ............... 1,016,210
------------
31,827,655
------------
CORPORATE BONDS--35.0%
FINANCE & BANKING--21.0%
BBB+ 10,000 AT&T Corporation,
5.74%, 6/30/01 ...................... 9,769,500
A3 1,300@ Amsouth Bancorporation,
6.75%, 11/1/25 ...................... 1,285,999
A- 5,000 Aristar Inc.,
7.25%, 6/15/01 ...................... 5,071,300
Associates Corp.,
AA- 5,000 6.68%, 7/25/00 ...................... 5,036,450
AA- 5,000 7.46%, 3/28/00 ...................... 5,058,100
Baa2 9,000 Capital One Bank Medium Term,
6.26%, 5/7/01 ....................... 8,933,760
A- 15,000 Donaldson, Lufkin & Jenrette,
5.63%, 2/15/16 ...................... 14,861,850
A1 5,700 First Union Corp.
6.63%, 6/15/00 ...................... 5,742,655
BBB- 10,000 Franchise Finance Corp.,
7.00%, 11/30/00 ..................... 9,955,200
A+ 6,750 Goldman Sachs Group LP,
6.20%, 12/15/00** ................... 6,737,310
A3 5,000 Great Western Finance Corp.,
6.38%, 7/1/00 ....................... 5,015,450
A 4,000 Household Financial Corp.,
7.45%, 4/1/00 ....................... 4,030,520
Lehman Brothers Holdings Inc.,
A 8,000 6.75%, 9/24/01 ...................... 7,986,962
A 10,000 7.25%, 4/15/03 ...................... 10,035,752
AA- 10,715 Merrill Lynch & Company,. Inc.,
5.75%, 11/02/02 ..................... 10,496,317
Aa3 3,800 Morgan Stanley Inc.,
5.75%, 2/15/01 ...................... 3,777,846
Nations Bank Corp.,
Aa2 10,000 7.00%, 9/15/01 ...................... 10,152,500
BBB+ 10,000 PaineWebber Group Inc.,
5.81%, 6/8/01 ....................... 9,831,250
A3 10,000 Popular Inc.,
6.20%, 4/30/01 ...................... 9,905,300
A+ 5,000 Prudential Funding Corp.,
6.00%, 5/11/01** .................... 4,963,450
BBB+ 6,590 Ryder Systems Inc.,
9.25%, 5/15/01 ...................... 6,891,209
See Notes to Financial Statements.
3
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
FINANCE & BANKING--(CONT'D)
Salomon Smith Barney Holdings Inc.,
Aa3 $13,000 5.88%, 2/1/01 ...................... $ 12,930,190
Aa3 12,500 6.63%, 11/30/00 .................... 12,586,625
Aa3 3,600 7.00%, 5/15/00 ..................... 3,636,216
Security Pacific Corp.,
Aa3 1,925 11.00%, 3/1/01 ..................... 2,068,855
A- 15,000 Transamerica Finance Corp.,
6.75%, 6/1/00 ...................... 15,099,150
Baa2 5,500 Trinet Corporate Realty Trust,
7.30%, 5/15/01 ..................... 5,453,195
A2 5,000 Union Planters National Bank,
6.76%, 10/30/01 .................... 5,028,750
--------------
212,341,661
--------------
INDUSTRIALS--4.8%
BBB 10,000 Amerco Inc.,
7.49%, 9/18/01 ..................... 10,166,800
BBB+ 7,500 Erac Usa Finance Co.,
7.00%, 6/15/00** ................... 7,548,612
A1 10,000 Ford Motor Credit Co.,
6.18%, 12/27/01 .................... 9,980,400
A- 2,505 ICI Wilmington Inc.,
8.75%, 5/1/01 ...................... 2,591,798
A2 911 Kern River Funding Corp.,
6.42%, 3/31/01 ..................... 911,787
Sears Roebuck & Co.,
A2 4,250 6.50%, 6/15/00 ..................... 4,271,675
A2 5,000 7.29%, 4/24/00 ..................... 5,049,200
Baa1 3,500 Tenneco Credit Corp.,
8.08%, 10/1/02 ..................... 3,599,995
BBB+ 4,550 WMX Technologies Inc.,
7.13%, 6/15/01 ..................... 4,605,373
--------------
48,725,640
--------------
UTILITIES--1.4%
BBB 9,000 Pacificorp Holdings Inc.,
6.75%, 4/1/01** .................... 9,047,700
BBB+ 5,000 Potomac Capital Investment Corp.,
6.73%, 8/9/00** .................... 5,003,550
--------------
14,051,250
--------------
YANKEE--7.8%
African Development Bank,
Aa1 5,000 7.75%, 12/15/01 .................... 5,182,400
Aaa 3,350 8.63%, 5/1/01 ...................... 3,478,235
NR 12,059 Banamex Remittance Master Trust,
Ser. 1996, 7.57%, 1/1/01** ......... 12,036,284
BBB- 15,000 Empresa Electric Guacolda,
7.60%, 4/30/01** ................... 14,250,450
A+ 18,000 Quebec (Province of),
9.13%, 8/22/01 ..................... 18,922,500
BBB- 3,000 Republic of Colombia,
8.00%, 6/14/01 ..................... 2,910,000
BBB- 10,000 Telecom Argentina Structure France,
9.75%, 7/12/01** ................... 9,987,500
BBB- 12,000 Transpatadora de Gas,
10.25%, 4/25/01 .................... 12,060,000
--------------
78,827,369
--------------
Total corporate bonds ................ 353,945,920
--------------
STRIPPED MONEY MARKET
INSTRUMENTS--10.5%
AAA 65,000 Aim Prime Money Market Portfolio,
zero coupon, 1/2/01 ................ 59,923,370
A 50,000 Goldman Sachs Money Market,
zero coupon, 1/2/01 ................ 46,081,700
--------------
106,005,070
--------------
NOTIONAL
AMOUNT
(000)
-------
CALL OPTIONS PURCHASED--0.2%
Interest Rate Swap,
200,000 5.60% over 3 month LIBOR,
expires 8/7/00 ................... 1,072,620
103,000 5.85% over 3 month LIBOR,
expires 8/7/00 ................... 853,793
--------------
1,926,413
--------------
Total long-term investments
(cost $1,546,386,569) .............. 1,511,299,841
--------------
PRINCIPAL
AMOUNT
(000)
-------
SHORT-TERM INVESTMENT--0.1%
DISCOUNT NOTE--0.1%
1,320 Federal Home Loan Mortgage Corp.,
4.60%, 7/1/99 (cost 1,320,000) ..... 1,320,000
---------
Total investments before call
option written and investment
sold short--149.7%
(cost $1,547,706,569) .............. 1,512,619,841
--------------
NOTIONAL
AMOUNT
(000)
-------
CALL OPTION WRITTEN--0.0%
(320,000) Interest Rate Swap,
3 month LIBOR over 5.25%,
expires 8/10/99
(premium received $1,960,000) ....... (704)
-------------
See Notes to Financial Statements.
4
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
INVESTMENT SOLD SHORT--(6.6%)
$ (74,000) U.S. Treasury Bonds,
5.25%, 2/15/29
(proceeds $65,534,063) ............. $ (66,484,560)
-------------
Total investments, net of call option
written and investment sold
short--143.1% ...................... 1,446,134,577
Liabilities in excess of
other assets--(43.1)% .............. (435,725,226)
--------------
NET ASSETS--100% ..................... $1,010,409,351
==============
- ---------------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** Security restricted as to resale.
*** Illiquid securities representing .89% of portfolio assets.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
++ Full principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
@ Partial principal amount pledged as collateral for financial futures
transactions.
- -----------------------------------------------------------------------
ARM -- ADJUSTABLE RATE MORTGAGE.
G.O. -- General Obligation Bond.
LIBOR -- London InterBank Offer Rate.
REMIC -- Real Estate Mortgage Investment Conduit.
TBA -- To Be Allocated.
TIPS -- Treasury Inflation Protected Security.
- -----------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
================================================================================
BLK SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
================================================================================
ASSETS
Investments, at value (cost $1,547,706,569)
(Note 1) ........................................... $1,512,619,841
Cash .................................................. 2,697
Deposits with brokers as collateral for
investments sold short (Note 1) .................... 67,062,500
Interest receivable ................................... 13,607,343
Receivable for investments sold ....................... 292,511
Unrealized appreciation on interest rate swaps
(Notes 1 & 3) ...................................... 87,453
--------------
1,593,672,345
--------------
LIABILITIES
Reverse repurchase agreements (Note 4) ................ 482,594,346
Payable for investments purchased ..................... 19,594,544
Investments sold short, at value
(proceeds $65,534,063) (Note 1) .................... 66,484,560
Interest rate caps, at value
(amortized premium $127,498) (Note 1) .............. 802,647
Call option written, at value
(premium received $1,960,000) (Note 1) ............. 704
Due to broker-variation margin ........................ 1,220,171
Due to Parent (Note 2) ................................ 12,566,022
--------------
583,262,994
--------------
NET ASSETS ............................................ $1,010,409,351
==============
Net assets were comprised of:
Common stock, at par (Note 5) ...................... $ 1,420,106
Paid-in capital in excess of par ................... 1,012,807,310
--------------
1,014,227,416
Undistributed net investment income ................ 37,414,069
Accumulated net realized loss ...................... (4,563,553)
Net unrealized depreciation ........................ (36,668,581)
--------------
Net assets, June 30, 1999 .......................... $1,010,409,351
==============
Net asset value per share:
($1,010,409,351 / 142,010,583 shares of
common stock issued and outstanding) ............... $ 7.12
======
================================================================================
BLK SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
================================================================================
NET INVESTMENT INCOME
Income
Interest (net of premium amortization
of $2,159,055 and interest expense of
$19,323,548) ..................................... $ 66,179,209
------------
Operating expenses
Investment advisory ................................ 4,272,916
Administration ..................................... 1,068,229
Custodian .......................................... 243,500
Audit .............................................. 106,500
Directors .......................................... 58,000
Legal .............................................. 10,000
Miscellaneous ...................................... 221,388
------------
Total operating expenses ......................... 5,980,533
------------
Net investment income before excise tax ............... 60,198,676
Excise tax ......................................... 1,924,205
------------
Net investment income ................................. 58,274,471
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments ......................................... 1,008,879
Short sales ......................................... (3,222,490)
Options ............................................. 3,764,175
Swaps ............................................... 191,185
Futures ............................................. (4,892,639)
------------
(3,150,890)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ......................................... (35,738,231)
Options written ..................................... 766,760
Short sales ......................................... (950,497)
Swaps ............................................... 978,236
Interest rate caps .................................. 1,181,103
Futures ............................................. (799,288)
------------
(34,561,917)
------------
Net loss on investments ............................... (37,712,807)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .......................... $ 20,561,664
============
See Notes to Financial Statements.
6
<PAGE>
================================================================================
BLK SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
================================================================================
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 ....................................... $ 20,561,664
-------------
Increase in investments ................................. (427,677,231)
Net realized loss ....................................... 3,150,890
Increase in unrealized depreciation ..................... 34,561,917
Increase in interest receivable ......................... (3,189,031)
Increase in deposits with brokers ....................... (65,697,500)
Increase in unrealized appreciation on
interest rate swaps ................................... (978,236)
Decrease in receivable for investments sold ............. 1,890,958
Decrease in options written ............................. (2,908,017)
Decrease in payable for investments purchased ........... (2,809,040)
Decrease in interest rate caps .......................... (2,344,013)
Increase in broker-variation margin ..................... 783,397
Increase in payable for investments sold short .......... 66,484,560
Increase in due to Parent ............................... 7,850,543
--------------
Total adjustments ....................................... (390,880,803)
--------------
Net cash flows used for operating activities ............ $ (370,319,139)
==============
INCREASE (DECREASE) IN CASH
Net cash flows used for operating activities ............ $ (370,319,139)
--------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements ............. 430,929,846
Cash dividends paid ................................... (60,815,696)
--------------
Net cash flows provided by financing activities ......... 370,114,150
--------------
Net decrease in cash .................................... (204,989)
Cash at beginning of year ............................... 207,686
--------------
Cash at end of year ..................................... $ 2,697
==============
================================================================================
BLK SUBSIDIARY, INC.
STATEMENTS OF CHANGES
IN NET ASSETS
================================================================================
FOR THE FOR THE PERIOD
YEAR ENDED OCTOBER 17, 1997*
JUNE 30, 1999 TO JUNE 30, 1998
---------------- --------------------
INCREASE (DECREASE) IN
IN NET ASSETS
Operations:
Net investment income .................. $ 58,274,471$ $ 39,955,294
Net realized loss on
investments ......................... (3,150,890) (1,412,663)
Net change in unrealized
appreciation/
(depreciation) on
investments ......................... (34,561,917) (2,106,664)
-------------- --------------
Net increase in net assets
resulting from
operations ......................... 20,561,664 36,435,967
Dividends from Net Investment
Income ................................ (60,815,696) --
Transfer of assets
from BlackRock 2001
Term Trust Inc. in
exchange for
shares issued .......................... -- 1,014,227,416
-------------- --------------
Total increase (decrease) ................ (40,254,032) 1,050,663,383
NET ASSETS
Beginning of period ...................... 1,050,663,383 --
-------------- --------------
End of period ............................ $1,010,409,351 $1,050,663,383
============== ==============
- ---------------
*Commencement of investment operations.
See Notes to Financial Statements.
7
<PAGE>
================================================================================
BLK SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
================================================================================
<TABLE>
<CAPTION>
FOR THE PERIOD
OCTOBER 17, 1997*
YEAR ENDED THROUGH
JUNE 30, 1999 JUNE 30, 1998
---------------- ----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year .......................................... $ 7.40 $ 7.14
---------- ----------
Net investment income (net of interest expense of $0.14
and $0.12, respectively) ................................................. 0.41 0.28
Net realized and unrealized gain (loss) ..................................... (0.26) (0.02)
---------- ----------
Net increase from investment operations ....................................... 0.15 0.26
---------- ----------
Dividends from net investment income .......................................... (0.43) --
---------- ----------
Net asset value, end of year .................................................. $ 7.12 $ 7.40
========== ==========
TOTAL INVESTMENT RETURN:+ ..................................................... 2.03% 3.64%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses** .......................................................... 0.56% 0.56%++
Net investment income ......................................................... 5.47% 5.54%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) ............................................. $1,065,302 $1,024,887
Portfolio turnover ............................................................ 148% 182%
Net assets, end of period (in thousands) ...................................... $1,010,409 $1,050,663
Reverse repurchase agreements outstanding, end of year (in thousands) ......... $ 482,594 $ 51,665
Asset coverage+++ ............................................................. $ 3,094 $ 21,336
</TABLE>
- -------------
* Commencement of investment operations.
** The ratios of operating expenses, including interest expense, to average
net assets were 2.38% and 3.01%++, respectively, for the years indicated
above. The ratios of operating expenses, including interest expense and
excise tax, to average net assets were 2.56% and 3.10%++, respectively, for
the years 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 audited operating performance data for a
share of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data for the periods indicated. This
information has been determined based upon financial information provided in the
financial statements.
See Notes to Financial Statements.
8
<PAGE>
================================================================================
BLK SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NOTE 1. ORGANIZATION & 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 Trust was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of The BlackRock 2001 Term
Trust Inc. ("BLK"), incorporated under the laws of the State of Maryland and as
such, a wholly-owned subsidiary of BLK. The Trust's investment objective is to
manage a portfolio of investment grade fixed income securities while providing
cash flow definition to BLK. 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, interest rate swaps, caps, floors and non-exchange traded
options 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 the 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, or collections of 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
9
<PAGE>
the underlying position 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.
INTEREST RATE SWAPS: In a simple 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. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize)
overtime.
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.
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 expires 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 in a manner similar to more generic options described above.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy and 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 the 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.
10
<PAGE>
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 the 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
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.
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.
Transaction fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate cap. The asset or liability is subsequently adjusted
to the current market value of the interest rate cap purchased or sold. Changes
in the value of the interest rate cap are recognized as unrealized gains and
losses.
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. Selling
interest rate floors reduces the portfolio's duration, making it less sensitive
to changes in interest rates from a market value perspective. The Trust's
leverage provides extra income in a period of falling rates. Selling floors
reduces some of that advantage by partially monetizing it as an up front payment
which the Trust receives.
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.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate floor. The asset or liability is subsequently adjusted
to the current market value of the interest rate floor purchased or sold.
Changes in the value of the interest rate floor are recognized as unrealized
gains and losses.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
recorded on the trade date. Realized and unrealized 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. Expenses are
11
<PAGE>
recorded on the accrued basis which may require the use of certain estimates by
management.
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.
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
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 year ended June 30, 1999 aggregated $2,525,071,146 and
$2,100,609,321, respectively.
During the period ended June 30, 1998, the Trust received investments valued
at $1,014,227,416 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 June 30, 1999, the Trust held
.89% of its portfolio assets in illiquid securities all of which were restricted
as to resale.
The Trust 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, including Midland Loan
Services,Inc. It is possible under certain circumstances, PNC Mortgage
Securities Corp. or its affiliates, including Midland Loan Services, Inc. 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, including Midland Loan Securities, Inc.
The federal income tax basis of the Trust's investments at June 30, 1999
was substantially the same as the basis for financial reporting and accordingly,
net unrealized depreciation for federal income tax purposes was $36,668,581;
(gross unrealized appreciation--$24,634,691; gross unrealized depreciation
- --$61,303,272).
Details of open financial futures contracts at June 30, 1999 are as follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE JUNE 30, UNREALIZED
CONTRACTS TYPE DATE DATE 1999 DEPRECIATION
- -------- ----- ---------- --------- ---------- --------------
Short position:
(1,750) 30-Yr. T-Bond Sept. 1999 $(201,087,976) $(202,835,936) $(1,747,960)
===========
Details of open interest rate caps at June 30, 1999 are as follows:
NOTIONAL FIXED/ VALUE AT
AMOUNT FLOATING FLOATING TERMINATION AMORTIZED JUNE 30, UNREALIZED
(000) RATE RATE DATE COST 1999 DEPRECIATION
------- ----- --------- ----------- ----------- --------- ------------
Purchased:
$120,000 6.00% 3 month LIBOR 2/19/02 $2,042,455 $1,313,851 $(728,604)
Sold:
(300,000) 3 Yr. CMT 3 month LIBOR 6/08/01 (1,218,602) (1,353,288) (134,686)
(200,000)3 Yr. CMT 3 month LIBOR 8/12/01 (696,355) (763,210) (66,855)
---------- ---------
$ (802,647) $(930,145)
========== =========
Details of open interest rate swaps at June 30, 1999 are as follows:
NOTIONAL FIXED/
AMOUNT FLOATING FLOATING TERMINATION UNREALIZED
(000) TYPE RATE RATE DATE APPRECIATION
------- ----- ----- ------- ---------- -----------
Purchased:
$85,000 Floating Rate 3 Mo. T-Bill 3 month LIBOR 9/10/03 $ 3,553
+80.25bps
80,000 Floating Rate 3 MO. T-BILL 3 MONTH LIBOR 9/10/03 2,880
+81.75BPS
50,000 Basis 3 Mo. T-Bill 3 month LIBOR 9/18/03 81,020
-------
$87,453
=======
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified,
12
<PAGE>
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
containing liquid high-grade securities having a value not less than the
repurchase price, including accrued interest, of the reverse repurchase
agreement.
The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1999, was approximately $405,263,731 at a weighted
average interest rate of approximately 4.54%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the year ended June
30, 1999, was $583,263,179 as of February 28, 1999, which was 30.56% of total
assets.
DOLLAR ROLLS: The Trust enters 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 is compensated by the interest earned
on the cash proceeds of the initial sale and by the lower repurchase price at
the future date.
The average monthly balance of dollar rolls outstanding during the year ended
June 30, 1999, was approximately $16,867,399. For the year ended June 30, 1999,
the maximum amount of dollar rolls outstanding at any month end was $72,475,313
as of the close of February 28, 1999, which was 3.80% of total assets.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. BLK
owned all of the 142,010,583 shares outstanding at June 30, 1999.
13
<PAGE>
================================================================================
BLK SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
================================================================================
The Shareholder and Board of Directors of
BLK Subsidiary, Inc.
We have audited the accompanying statement of assets and liabilities of BLK
Subsidiary, Inc. (the "Trust"), a wholly-owned subsidiary of The BlackRock 2001
TermTrust Inc., including the portfolio of investments, as of June 30, 1999, and
the related statements of operations and of cash flows for the year then ended
and the statements of changes in net assets and financial highlights for the
period October 17, 1997 (commencement of investment operations) to June 30, 1998
and for the year ended June 30, 1999. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1999, by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of BLK Subsidiary, Inc.
as of June 30, 1999, and the results of its operations, its cash flows, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
/s/Deloitte & Touche, LLP
- -----------------------------------
Deloitte & Touche, LLP
New York, New York
August 6, 1999
14
<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.
BLK SUBSIDIARY, INC.
c/o Mitchell Hutchins Asset Management Inc.
37th Floor
1285 Avenue of the Americas
New York, NY 10019
[PHOTO OMITTED]Printed on recycled paper 09247T-10-0
BLK SUBSIDIARY, INC.
=================================================
ANNUAL REPORT
JUNE 30, 1999
