- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--130.0%
MORTGAGE PASS-THROUGHS--17.7%
$ 21,967 Federal Home Loan Mortgage Corp.,
6.50%, 4/01/28 - 7/01/29 ............... $ 20,710,608
--------------
326 Federal Housing Administration,
Ponds at Punaluu,
7.625%, 4/01/37 ........................ 325,841
Federal National Mortgage
Association,
147,662@ 6.50%, 6/01/23 - 6/01/29 ............... 139,007,648
20,563@ 7.00%, 2/01/24 - 9/01/29 ............... 19,922,269
--------------
179,966,366
--------------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--2.6%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
2,139 Series 1454, Class 1454-FB,
4/15/20 .............................. 2,041,138
93 Series 1563, Class 1563-S,
10/15/07 ............................. 87,425
95 Series 1663, Class 1663-A,
7/15/23 .............................. 92,122
389 Series 1686, Class 1686-PK,
4/15/23 .............................. 384,376
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
10,061 Trust 1992-43, Class 43-E,
4/25/22 .............................. 10,004,833
6,375 Trust 1994-81, Class 81-PE,
6/25/18 .............................. 6,368,843
6,162 Trust 1996-T6, Class T6-C,
2/26/01 .............................. 6,093,662
1,541 Trust 1996-T6, Class T6-D,
2/26/01 .............................. 1,518,856
--------------
26,591,255
--------------
NON-AGENCY MULTIPLE CLASS
MORTGAGE PASS-THROUGHS--0.0%
AA 190 Collateralized Mortgage
Securities Corp.,
Series F, Class F4-A, 11/01/15 ......... 194,558
--------------
ADJUSTABLE & INVERSE FLOATING
RATE MORTGAGES--1.6%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage Participation
Certificates,
356 Series 1563, Class 1563-SB,
8/15/08 .............................. 347,922
603 Series 1592, Class 1592-NE,
12/15/22 ............................. 554,732
1,066 Series 1606, Class 1606-SB,
11/15/08 ............................. 1,036,684
2,229 Series 1671, Class 1671-KB,
2/15/24 .............................. 2,181,561
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
3,717 Trust 1992-155, Class 155-SA,
10/25/05 ............................. 3,759,285
230 Trust 1993-117, Class 117-S,
7/25/08 .............................. 220,624
1,719 Trust 1993-178, Class 178-SC,
9/25/23 .............................. 1,643,465
2,247 Trust 1993-196, Class 196-SM,
10/25/08 ............................. 1,938,944
1,544 Trust 1993-214, Class 214-SO,
12/25/08 ............................. 1,494,963
1,500 Trust 1993-G17, Class G17-SH,
4/25/23 .............................. 911,250
2,406 Trust 1998-38, Class 38-S,
1/18/12 .............................. 2,416,713
--------------
16,506,143
--------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--3.2%
AAA 123,720 Credit Suisse First Boston Mortgage
Securities Corp., Series 1997-C1,
Class AX, 6/20/29** .................. 10,198,406
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
5,257 Series G3, Class G3-S,
4/25/19 .............................. 133,637
5,725 Series G32, Class G32-PT,
2/25/19 .............................. 282,627
30 Series 113, Class 113-N,
5/15/21 .............................. 897,006
3 Series 1378, Class 1378-DA,
1/15/18 .............................. 3,080
13 Series 1388, Class 1388-G,
5/15/06 .............................. 145,152
7 Series 1404, Class 1404-E,
1/15/06 .............................. 54,605
1,647 Series 1617, Class 1617-EB,
9/15/23 .............................. 1,618,873
8,289 Series 1621, Class 1621-SJ,
10/15/20 ............................. 169,753
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
4 Trust 1991-29, Class 29-J,
4/25/21 .............................. 134,372
12 Trust 1991-80, Class 80-Q,
7/25/21 .............................. 329,783
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES(CONTINUED)
$ 3,253 Trust 1993-141, Class 141-PW,
6/25/18 .............................. $ 148,217
12,720 Trust 1998-3, Class 3-SC,
2/18/28 .............................. 178,879
Merrill Lynch Mortgage Investors, Inc.,
AAA 66,932 Series 1997-C2, Class IO,
12/10/29 ............................. 4,345,512
AAA 47,653 Series 1998-C2, Class IO,
2/15/30 .............................. 3,411,739
AAA 26 Merrill Lynch Trust,
Series 43, Class 43-F, 8/27/15 ....... 121,136
Morgan Stanley Capital Inc.,
AAA 112,525 Series 1998-HF1, Class HF1-X,
2/15/18 .............................. 6,046,776
AAA 98,995 Series 1998-WF2, Class WF2-X,
4/15/23 .............................. 3,870,200
--------------
32,089,753
--------------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--1.8%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
383 Series 1338, Class 1338-Q,
8/15/07 .............................. 323,903
4,714 Series 1662, Class 1662-PO,
1/15/09 .............................. 3,739,054
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,602 Trust 5, Class 1, 9/01/07 .............. 1,334,710
637 Trust 60, Class 1, 1/01/19 ............. 506,341
179 Trust 1991-G44, Class G44-H,
11/25/21 ............................. 174,402
9,734 Trust 1993-257, Class 257-A,
6/25/23 .............................. 9,246,274
3,453 Trust 1994-54, Class 54-B,
11/25/23 ............................. 3,304,283
--------------
18,628,967
--------------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--3.6%
BBB 4,148 CBA Mortgage Corp.,
Series 1993-C1, Class D,
6.67%, 12/25/03 ........................ 4,010,950
AAA 3,526 Mortgage Capital Funding, Inc.,
Series 1998-MC3, Class A1,
6.001%, 11/18/31 ....................... 3,330,923
AAA 5,200 PaineWebber Mortgage Acceptance
Corp. IV, Series 1995-M1, Class A,
6.70%, 1/15/07** ....................... 5,102,500
Resolution Trust Corp.,
AA 6,230 Series 1994-C1, Class C,
8.00%, 6/25/26 ......................... 6,221,812
A 5,435 Series 1994-C2, Class D,
8.00%, 4/25/25 ......................... 5,343,357
AAA 12,800 Structured Asset Securities Corp.,
Series 1996-CFL, Class B,
6.303%, 2/25/28 ........................ 12,736,000
--------------
36,745,542
--------------
ASSET-BACKED SECURITIES--14.0%
BBB 2,183 Amresco Securitized Interest,
Series 1996-1, Class A,
8.10%, 4/26/26** ....................... 1,570,978
Aaa 21,096 Brazos Student Loan Financial Corp.,
Series 1998-A, Class A1,
6.46%, 6/01/06 ......................... 21,026,919
Broad Index Secured Trust Offering,
Baa2 10,000 6.58%, 3/26/01 ......................... 9,784,131
Baa2 10,000 7.149%, 9/09/01** ...................... 9,981,250
AA 6,000 Chase Credit Card Master Trust,
Series 1997-2, Class A,
6.30%, 4/15/03 ......................... 5,992,500
AA 5,723 Chase Manhattan Grantor Trust,
Series 1996-B, Class A,
6.61%, 9/15/02 ......................... 5,717,646
AA 35,000@ Citibank Credit Card Trust,
Series 1996-1, Class A,
Zero Coupon, 2/07/03 ................... 32,527,950
NR 5,892 Global Rated Eligible Asset Trust,
Series 1998-A, Class A-1,
7.33%, 3/15/06**/*** ................... 1,767,548
AA 35,000 Honda Auto Lease Trust,
Series 1999-A, Class A3,
6.10%, 1/15/02 ......................... 34,732,031
AA 7,000 IMC Home Equity Loan Trust,
Series 1998-3, Class A-9,
5.35%, 6/20/01 ......................... 476,321
A 8,150 Newcourt Equipment Trust,
Series 1998-1, Class B,
5.97%, 4/20/05 ......................... 8,030,243
AA 5,750@ Standard Credit Card Master Trust,
Series 1995-3, Class A,
7.85%, 2/07/02 ......................... 5,758,984
Structured Mortgage Asset
Residential Trust,@@/***
NR 9,989 Series 1997-2, 8.724%, 3/15/06 ......... 2,197,641
NR 11,016 Series 1997-3, 8.57%, 4/15/06 .......... 2,423,565
--------------
141,987,707
--------------
U.S. GOVERNMENT AND AGENCY
SECURITIES--30.9%
U.S. Treasury Bonds,
73,833@ 3.625%, 4/15/28 (TIPS) ................. 65,941,407
11,000 5.25%, 11/15/28 - 2/15/29 .............. 9,064,370
35,000@ 6.125%, 11/15/27 ....................... 32,571,700
U.S. Treasury Notes,
108,000@ 4.50%, 9/30/00 ......................... 106,767,720
100,000@ 5.50%, 7/31/01 ......................... 98,922,000
--------------
313,267,197
--------------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
ZERO COUPON BONDS--6.6%
Government Trust Certificates,
$35,925 Series 1-D, 11/15/00 ................... $ 34,001,468
34,630 Series 2-F, 11/15/00 ................... 32,775,806
--------------
66,777,274
--------------
TAXABLE MUNICIPAL BONDS--3.1%
AAA 1,000 Kern County California Pension
Obligation, 6.27%, 8/15/01 ............. 990,750
AAA 2,035 Long Beach California Pension
Obligation, 6.45%, 9/01/01 ............. 2,021,284
AAA 6,000 Los Angeles County California
Pension Obligation,
Series D, 6.38%, 6/30/01 ............... 5,958,240
NR 5,630 Massachusetts Housing Fin. Agency,
Series 1991-B,
6.85%, 10/01/20 ........................ 5,151,957
New York City G.O.,
A- 5,000 Series I, 6.40%, 3/15/01 ............... 4,964,950
A- 5,000 Series I, 7.24%, 4/15/01 ............... 5,012,901
Baa1 1,000 New York State Environmental
Facility Auth., Series A,
6.62%, 3/15/01 ......................... 992,660
Baa1 3,345 New York State Housing Fin. Agency,
Series B, 7.14%, 3/15/02 ............... 3,324,395
BBB 2,000 New York State Urban
Development Corp., Series B,
6.90%, 4/01/01 ......................... 1,991,300
AA 1,000 St. Josephs Health Systems California,
Series A, 7.02%, 7/01/01 ............... 1,000,130
--------------
31,408,567
--------------
CORPORATE BONDS--34.2%
FINANCE & BANKING--20.7%
A3 1,300@ Amsouth Bancorp.,
6.75%, 11/01/25 ........................ 1,243,632
A- 5,000 Aristar, Inc., 7.25%, 6/15/01 .......... 5,001,950
Associates Corp.,
AA- 5,000 6.68%, 7/25/00 ......................... 5,005,600
AA- 5,000 7.46%, 3/28/00 ......................... 5,014,400
A+ 10,000 AT&T Corp., 5.74%, 6/30/01 ............. 9,829,500
Baa2 9,000 Capital One Bank,
6.26%, 5/07/01 ......................... 8,849,790
A- 15,000 Donaldson, Lufkin & Jenrette,
5.625%, 2/15/16 ........................ 14,769,300
BBB- 10,000 Franchise Finance Corp.,
7.00%, 11/30/00 ........................ 9,882,400
A+ 6,750 Goldman Sachs Group,
6.20%, 12/15/00** ...................... 6,701,603
A3 5,000 Great Western Financial Corp.,
6.375%, 7/01/00 ........................ 4,990,450
A 4,000 Household Financial Corp.,
7.45%, 4/01/00 ......................... 4,005,440
Lehman Brothers Holdings, Inc.,
A 8,000 6.75%, 9/24/01 ......................... 7,940,384
A 10,000 7.25%, 4/15/03 ......................... 9,924,052
A1 5,700 Meridian Bancorp Inc.,
6.625%, 6/15/00 ........................ 5,700,904
AA- 10,715 Merrill Lynch & Co., Inc.,
5.75%, 11/02/02 ........................ 10,342,518
Aa3 3,800 Morgan Stanley Dean Witter
Discover, Inc.,
5.75%, 2/15/01 ......................... 3,760,404
Aa2 10,000 Nations Bank Corp.,
7.00%, 9/15/01 ......................... 10,007,000
BBB+ 10,000 PaineWebber Group Inc.,
5.81%, 6/08/01 ......................... 9,789,440
A3 10,000 Popular Inc., 6.20%, 4/30/01 ............. 9,855,100
A+ 5,000 Prudential Funding Corp.,
6.00%, 5/11/01** ....................... 4,944,250
BBB+ 6,590 Ryder Systems Inc.,
9.25%, 5/15/01 ......................... 6,718,813
Salomon Smith Barney Holdings Inc.,
Aa3 13,000 5.875%, 2/01/01 ........................ 12,855,050
Aa3 12,500 6.625%, 11/30/00 ....................... 12,466,500
Aa3 3,600 7.00%, 5/15/00 ......................... 3,605,112
Aa3 1,925 Security Pacific Corp.,
11.00%, 3/01/01 ........................ 2,011,125
A- 15,000 Transamerica Finance Corp.,
6.75%, 6/01/00 ......................... 15,016,800
BB 5,500 Trinet Corporate Realty Trust,
7.30%, 5/15/01 ......................... 5,318,170
A2 5000 Union Planters National Bank,
6.76%, 10/30/01 ........................ 4,972,050
--------------
210,521,737
--------------
INDUSTRIALS--4.4%
BBB 10,000 Amerco Inc., 7.49%, 9/18/01 ............ 10,073,500
BBB+ 7,500 Erac USA Finance Co.,
7.00%, 6/15/00** ....................... 7,510,441
A+ 10,000 Ford Motor Credit Co.,
6.18%, 12/27/01 ........................ 9,869,300
A- 2,505 ICI Wilmington Inc.,
8.75%, 5/01/01 ......................... 2,543,577
A2 702 Kern River Funding Corp.,
6.42%, 3/31/01** ....................... 698,555
Sears Roebuck & Co.,
A- 4,250 6.50%, 6/15/00 ......................... 4,240,693
A- 5,000 7.29%, 4/24/00 ......................... 5,009,150
BBB 4,550 WMX TECHNOLOGIES INC.,
7.125%, 6/15/01 ........................ 4,409,769
--------------
44,354,985
--------------
UTILITIES--1.4%
BBB 9,000 Pacificorp Holdings Inc.,
6.75%, 4/01/01** ....................... 8,960,310
BBB+ 5,000 Potomac Capital Investment Corp.,
6.73%, 8/09/00** ....................... 5,000,000
--------------
13,960,310
--------------
YANKEE--7.7%
African Development Bank,
Aa1 5,000 7.75%, 12/15/01 5,067,000
Aaa 3,350 8.625%, 5/01/01 3,433,985
NR 8,405 Banamex Remittance Master Trust,
Series 1996, 7.57%, 1/01/01** .......... 8,363,271
BBB- 15,000 Empresa Electric Guacolda,
7.60%, 4/30/01** ....................... 14,700,000
A+ 18,000 Province of Quebec,
9.125%, 8/22/01 ........................ 18,525,356
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
YANKEE (CONTINUED)
BBB $15,000 Republic of Argentina,
Zero Coupon, 4/15/01 ................... $ 13,305,000
Ba+ 3,000 Republic of Colombia,
8.00%, 6/14/01 ......................... 2,970,000
BBB- 12,000 Transpatadora de Gas,
10.25%, 4/25/01 ........................ 12,090,000
--------------
78,454,612
--------------
Total corporate bonds .................... 347,291,644
--------------
STRIPPED MONEY MARKET
INSTRUMENTS--10.7%
AAA 65,000 Aim Prime Money Market Portfolio,
Zero Coupon, 1/02/01 ................... 61,193,730
AAA 50,000 Goldman Sachs Money Market
Portfolio, Zero Coupon, 1/02/01 ........ 47,063,150
--------------
108,256,880
--------------
NOTIONAL
AMOUNT
(000)
-------
CALL OPTIONS PURCHASED--0.0%
$200,000 Interest Rate Swap,
5.6% over 3 month LIBOR,
expires 8/7/00 ....................... 61,550
--------------
Total long-term investments before
call options written and investment
sold short
(cost $1,350,726,324) .................. 1,319,773,403
--------------
CALL OPTIONS WRITTEN--(0.2%)
Interest Rate Swap,
$(300,000) 3 month LIBOR over 3 Year CMT,
expires 8/8/01 ....................... (1,457,841)
(200,000) 3 month LIBOR over 5 Year CMT,
expires 8/12/01 ...................... (863,734)
--------------
(premiums received $1,914,957) ......... (2,321,575)
--------------
PRINCIPAL
AMOUNT
(000)
-------
INVESTMENT SOLD SHORT--(4.5%)
$ (47,500) U.S. Treasury Bonds,
6.125%, 8/15/29
(proceeds received $46,282,812) ........ (45,280,800)
--------------
Total investments, net of call options
written and investment sold
short--125.3%
(cost $1,302,528,555) .................. 1,272,171,028
Liabilities in excess of other
assets--(25.3)% ........................ (256,935,727)
--------------
NET ASSETS--100% ......................... $1,015,235,301
==============
- ----------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
*** Illiquid securities representing 0.50% of portfolio assets.
@ Entire or partial principal amount pledged as collateral for reverse
repurchase agreements or financial futures contracts.
@@ Security is restricted as to public resale. The securities were acquired
in 1997 and have an aggregate current cost of $7,351,917.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
CMT -- Constant Maturity Treasury.
G.O. -- General Obligation.
LIBOR -- London InterBank Offer Rate.
REMIC -- Real Estate Mortgage Investment Conduit.
TIPS -- Treasury Inflation Protection Security.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments at value
(cost $1,350,726,324) (Note 1) .......................... $ 1,319,773,403
Cash ...................................................... 608,757
Deposits with brokers as collateral
for investments sold short (Note 1) ..................... 46,659,011
Receivable for investments sold ........................... 34,647,673
Interest receivable ....................................... 13,223,584
Interest rate caps, at value
(amortized cost $1,652,609) (Note 1) .................... 1,848,504
---------------
1,416,760,932
---------------
LIABILITIES
Reverse repurchase agreements (Note 4) .................... 332,985,250
Investments sold short, at value
(proceeds $46,282,812) (Note 1) ......................... 45,280,800
Due to parent (Note 2) .................................... 17,719,969
Payable for investments purchased ......................... 2,831,989
Call options written, at value
(premium received $1,914,957) (Note 1) .................. 2,321,575
Due to broker-variation margin ............................ 375,006
Unrealized depreciation on credit default swaps
(Notes 1 & 3) ........................................... 11,042
---------------
401,525,631
---------------
NET ASSETS ................................................ $ 1,015,235,301
===============
Net assets were comprised of:
Common stock, at par (Note 5) ........................... $ 1,420,106
Paid-in capital in excess of par ........................ 1,010,883,105
---------------
1,012,303,211
Undistributed net investment income ..................... 45,018,391
Accumulated net realized loss ........................... (11,619,627)
Net unrealized depreciation ............................. (30,466,674)
---------------
Net assets, December 31, 1999 ........................... $ 1,015,235,301
===============
Net asset value per share:
($1,015,235,301 divided by 142,010,583 shares of
common stock issued and outstanding) .................... $ 7.15
===============
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED
DECEMBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization
of $2,554,416 and interest expense
of $14,018,113) ....................................... $ 10,842,222
---------------
Operating expenses
Investment advisory ..................................... 2,056,362
Administration .......................................... 514,091
Custodian ............................................... 126,000
Legal ................................................... 123,000
Independent accountants ................................. 39,500
Directors ............................................... 30,500
Miscellaneous ........................................... 100,247
---------------
Total operating expenses .............................. 2,989,700
---------------
Net investment income before excise tax ................. 7,852,522
Excise tax ............................................ 2,172,405
---------------
Net investment income ................................... 5,680,117
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments ............................................. (8,333,287)
Short sales ............................................. 2,169,862
Options written ......................................... 306,850
Swaps ................................................... 3,261,750
Futures ................................................. (4,461,249)
---------------
(7,056,074)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments ............................................. 4,133,807
Short sales ............................................. 1,952,509
Options written ......................................... (2,164,373)
Interest rate caps ...................................... 924,499
Swaps ................................................... (98,495)
Futures ................................................. 1,453,960
---------------
6,201,907
---------------
Net loss on investments ................................... (854,167)
---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............................... $ 4,825,950
===============
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED
DECEMBER 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from
operations .............................................. $ 4,825,950
---------------
Decrease in investments ................................... 191,992,271
Net realized loss ......................................... 7,056,074
Decrease in unrealized depreciation ....................... (6,201,907)
Increase in unrealized depreciation on
credit default swaps .................................... 11,042
Decrease in unrealized appreciation
on interest rate swaps .................................. 87,453
Decrease in interest receivable ........................... 383,759
Increase in receivable for
investments sold ........................................ (34,355,162)
Decrease in deposits with brokers
for investments sold short .............................. 20,403,489
Decrease in payable
for investments purchased ............................... (16,762,555)
Increase in call options written .......................... 2,320,871
Decrease in interest rate caps ............................ (2,651,151)
Decrease in payable for investments
sold short .............................................. (21,203,760)
Decrease in broker-variation margin ....................... (845,165)
Increase in due to Parent ................................. 5,153,947
---------------
Total adjustments ....................................... $ 145,389,206
---------------
Net cash flows provided by operating
activities .............................................. $ 150,215,156
===============
INCREASE (DECREASE) IN CASH
Net cash flows provided by operating activities ........... $ 150,215,156
---------------
Cash flows used for financing activity:
Decrease in reverse repurchase agreements ............... (149,609,096)
---------------
Net increase in cash ...................................... 606,060
Cash at beginning of period ............................... 2,697
---------------
Cash at end of period ..................................... $ 608,757
===============
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENTS OF CHANGES
IN NET ASSETS
(UNAUDITED)
- --------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1999 1999
-------------- --------------
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income ............... $ 5,680,117 $ 58,274,471
Net realized loss on
investments ....................... (7,056,074) (3,150,890)
Net change in unrealized
appreciation/depreciation
on investments .................... 6,201,907 (34,561,917)
-------------- --------------
Net increase
in net assets resulting
from operations ................... 4,825,950 20,561,664
Dividends from net
investment income ................... -- (60,815,696)
-------------- --------------
Total increase (decrease) ............ 4,825,950 (40,254,032)
NET ASSETS
Beginning of period .................. 1,010,409,351 1,050,663,383
-------------- --------------
End of period (including
undistributed net
investment income
of $45,018,391 and
$37,414,069, respectively) .......... $1,015,235,301 $1,010,409,351
============== ==============
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS FOR THE PERIOD
ENDED OCTOBER 17, 1997*
DECEMBER 31, YEAR ENDED THROUGH
1999 JUNE 30, 1999 JUNE 30, 1998
---------- ---------- ----------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................................... $ 7.12 $ 7.40 $ 7.14
---------- ---------- ----------
Net investment income (net of interest expense of
$0.10, $0.14 and $0.12, respectively) .............................. 0.04 0.41 0.28
Net realized and unrealized loss ..................................... (0.01) (0.26) (0.02)
---------- ---------- ----------
Net increase from investment operations ................................. 0.03 0.15 0.26
---------- ---------- ----------
Dividends from net investment income .................................... -- (0.43) --
---------- ---------- ----------
Net asset value, end of period .......................................... $ 7.15 $ 7.12 $ 7.40
========== ========== ==========
TOTAL INVESTMENT RETURN+................................................. 0.42% 2.03% 3.64%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ...................................................... 0.58%++ 0.56% 0.56%++
Operating expenses and interest expense ................................. 3.33%++ 2.38% 3.01%++
Operating expenses, interest expense and excise taxes ................... 3.75%++ 2.56% 3.10%++
Net investment income ................................................... 2.77%++ 5.47% 5.54%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) ....................................... $1,017,005 $1,065,302 $1,024,887
Portfolio turnover ...................................................... 50% 148% 182%
Net assets, end of period (in thousands) ................................ $1,015,235 $1,010,409 $1,050,663
Reverse repurchase agreements outstanding,
end of period (in thousands) ......................................... $ 332,985 $ 482,594 $ 51,665
Asset coverage+++........................................................ $ 4,049 $ 3,094 $ 21,336
</TABLE>
- -------------
* Commencement of investment operations.
+ 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. 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 each of the periods 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
(UNAUDITED)
- --------------------------------------------------------------------------------
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. ("BTM"), incorporated under the laws of the State of Maryland and as
such, a wholly-owned subsidiary of BTM. The Trust's investment objective is to
manage a portfolio of investment grade fixed income securities while providing
cash flow definition to BTM. 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, 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. Any securities or other assets for which such current market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervisionand
responsibility of the Trust's Board of Directors.
Short-term securities having a remaining maturity of 60 days or less are valued
at amortized cost which approximates market value.
REPURCHASE AGREEMENT: 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 the underlying position
at the exercise price at any time or at a specified time during the option
period. Put options can be
8
<PAGE>
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.
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) over
time.
Credit default swaps involve the receipt or payment of fixed amounts at a
specified rate times the notional amount in exchange for the payment or receipt
of an amount only upon a credit event of the underlying security. See note 3 for
a summary of open swap agreements as of December 31, 1999.
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 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 swap 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. 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
9
<PAGE>
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. The Trust did not engage in security
lending during the period ended December 31, 1999.
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 subsequentlyadjusted 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.
SECURITIES TRANSACTIONS AND NET 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.
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 shareholder. 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.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Trust accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect caused by
applying this statement was to decrease paid-in capital and increase
undistributed net investment income by $1,924,205 due to certain expenses not
being deductible for tax purposes. Net investment income, net realized gains and
net assets were not affected by this change.
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 "Advisor"), a wholly-owned subsidiary of BlackRockAdvisors
Inc., which is a wholly-owned subsidiary of BlackRock, Inc., which in turn is an
indirect majority-owned subsidiary of PNC Bank Corp. The Trust has 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 proportion-
10
<PAGE>
ate 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 six months ended December 31, 1999 aggregated
$733,322,037 and $911,919,886, respectively.
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, 1999, the Trust
held 6.8% of its portfolio assets in restricted securities.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by affiliates such
as 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 December 31, 1999
was substantially the same as the basis for financial reporting and accordingly,
net unrealized depreciation for federal income tax purposes was $30,466,674
(gross unrealized appreciation--$18,997,367; gross unrealized
depreciation--$49,464,041).
Details of open financial futures contracts at December 31, 1999 are as
follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE DECEMBER 31, UNREALIZED
CONTRACTS TYPE DATE DATE 1999 DEPRECIATION
- --------- ----- ---------- ------- ------------ ----------
Long position:
750 30 Yr.T-Bond 3/2000 $68,497,125 $68,203,125 $(294,000)
=========
Details of the interest rate cap held at December 31, 1999 are as follows:
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION AMORTIZED DECEMBER 31, UNREALIZED
(000) RATE RATE DATE COST 1999 APPRECIATION
- -------- ----- -------- ----------- --------- ----------- ------------
120,000 6.00% 3-month 2/19/02 $1,652,609 $1,848,504 $195,895
LIBOR ========
Details of open credit default swaps at December 31, 1999 are as follows:
NOTIONAL
AMOUNT UNREALIZED
(000) TERMS DEPRECIATION
------- ----- ------------
Sold:
$(15,000) An agreement with Salomon Brothers International $(10,920)
Limited dated July 16, 1999 (trade date) to receive
1.68% per year times the notional amount. The fund
makes a payment only upon a credit event with respect
to News America Holdings, the referenced security in
the contract, of the notional amount. The scheduled
termination date is June 15, 2001.
(15,000) An agreement with Salomon Brothers International (122)
Limited dated July 20, 1999 (trade date) to receive
1% per year times the notional amount. The fund makes
a payment only upon a credit event with respect to
MCI Worldcom Inc., the referenced security in the
contract, of the notional amount. The scheduled
termination date is June 15, 2001.
--------
$(11,042)
========
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust enters 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 establishes and maintains 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 six months ended December 31, 1999, was approximately $439,558,194 at a
weighted average interest rate of approximately 4.96%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during the year, was
$613,051,938 as of August 31, 1999 which was 32.62% 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.
11
<PAGE>
#
The Trust did not enter into dollar rolls during the six months ended
December 31, 1999.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. BTM
owned all of the 142,010,583 shares outstanding at December 31, 1999.
12
<PAGE>
BLACKROCK
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
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 ADVISOR
BlackRock Advisors, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
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
Four Times Square
New York, NY 10036
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
The accompanying financial statements as of December 31, 1999 were not
audited and accordingly, no opinion is expressed on them.
BLK SUBSIDIARY, INC.
c/o Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, NY 10019
(800) 227-7BFM
BLK SUBSIDIARY, INC.
==========================
SEMI-ANNUAL REPORT
DECEMBER 31, 1999
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