--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--116.2%
MORTGAGE PASS-THROUGHS
$ 6 Federal National Mortgage Association,
9.50%, 7/01/20 .............................. $ 6,400
------------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--8.4%
1,671@ Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
Series 1601, Class 1601-SD,
10/15/08 .................................. 1,656,464
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,240 Trust 1992-43, Class 43-E,
4/25/22 ................................... 1,231,717
2,837@ Trust 1992-129, Class 129-J,
7/25/20 ................................... 2,695,318
1,444 Trust 1993-193, Class 193-E,
9/25/23 ................................... 647,143
1,758 Trust 1993-223, Class 223-PT,
10/25/23 .................................. 201,523
553 Trust 1994-72, Class 72-L,
4/25/24 ................................... 547,457
2,757 Trust 1998-43, Class 43-YJ,
7/18/28 ................................... 413,507
------------
7,393,129
------------
NON-AGENCY MULTIPLE CLASS
MORTGAGE PASS THROUGHS--0.7%
AAA 609 Citicorp Mortgage Securties,
Trust 1998-3, Class 3-A6,
5/25/28 ................................... 592,824
------------
ADJUSTABLE & INVERSE FLOATING RATE
MORTGAGES--8.3%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
1,079 Series 1635, Class 1635-P,
12/15/00 .................................. 914,186
817 Series 1727, Class 1727-LB,
5/15/24 ................................... 694,550
498 Series 1862, Class 1862-SJ,
11/15/23 .................................. 439,904
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
2,305 Trust 1993-209, Class 209-SG,
8/25/08 ................................... 2,080,223
704 Trust 1993-212, Class 212-SA,
11/25/08 .................................. 582,818
256 Trust 1994-37, Class 37-SC,
3/25/24 ................................... 250,421
AAA 2,635 Sears Mortgage Securities Corp.,
Series 1993-7, Class 7-S3,
4/25/08 ................................. 2,414,305
------------
7,376,407
------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--21.5%
AAA 27,865 Credit Suisse First Boston
Mortgage Securities Corp.,
Series 1997-C1, Class AX,
4/20/22 ** ................................ 2,239,911
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
1,354 Series 1543, Class 1543-VU,
4/15/23 ................................... 263,305
3,498 Series 1588, Class 1588-PM,
9/15/22 ................................... 348,608
946 Series 1880, Class 1880-DA,
3/15/08 ................................... 230,647
4,061 Series 2154, Class 2154-PF,
4/15/21 ................................... 747,493
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
8,837 Trust 299, Class 2, 5/01/28 ................. 2,780,910
2,500 Trust 1993-163, Class 163-PH,
3/25/22 ................................... 434,250
3,423 Trust 1993-188, Class188-VA,
3/25/13 ................................... 288,795
4,632 Trust 1993-194, Class 194-PV,
6/25/08 ................................... 495,036
1,934@ Trust 1993-214, Class 214-SL,
12/25/08 .................................. 1,705,120
2,500 Trust 1997-50, Class 50-HK,
8/25/27 ................................... 707,378
6,755 Trust 1997-84, Class 84-PJ,
1/25/08 ................................... 1,293,115
2,660 Trust 1998-44, Class 44-JI,
8/20/17 ................................... 298,169
15,235 Trust 1998-51, Class 51-SP,
9/25/28 ................................... 176,149
19,879 Trust 1999-35, Class 35-LS,
7/25/00 ................................... 481,451
13,281 Trust 1999-52, Class 52-TS,
7/25/00 ................................... 433,699
3,691 Trust 1999-64, Class 64-IA,
5/25/21 ................................... 531,738
See Notes to Financial Statements.
1
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES (CONTINUED)
Government National Mortgage
Association,
$ 2,156 Trust 1998-24, Class 24-IB,
5/20/23 ................................... $ 479,733
2,974 Trust 1999-17, Class 17-PF,
10/16/25 .................................. 596,661
656 Trust 2000-7, Class 7-LB,
6/16/25 ................................... 167,562
Aaa 11,646 Merrill Lynch Mortgage Investors, Inc.,
Series 1997-C2, Class IO,
12/10/29 .................................. 735,427
Aaa 15,162 Morgan (J.P.) Commercial Mortgage
Finance Corp.,
Series 1997-C5, Class X,
9/15/29 ** ................................ 1,014,513
Aaa 3,331 Morgan Stanley Capital 1 Inc.,
Series 1997-HF1, Class HF1-X,
6/15/17 ** ................................ 218,679
Residential Funding Mortgage
Securities, Inc.
AAA 31,682 Series 1998-S19, Class A8,
8/25/28 ................................... 252,469
AAA 135,000 Series 1999-S14, Class A5B,
6/25/29 ................................... 2,046,094
------------
18,966,912
------------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--2.0%
Collateralized Mortgage Obligation Trust,
AAA 465 Trust 26, Class A, 4/23/17 .................. 383,787
AAA 39 Trust 29, Class A, 5/23/17 .................. 30,257
230 Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
Series 1946, Class 1946-N,
10/15/08 .................................. 164,723
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,406 Trust 1993-225, Class 225-ME,
11/25/23 .................................. 506,160
836 Trust 1994-25, Class 25-C,
11/25/23 .................................. 649,112
102 Trust 1997-85, Class 85-LE,
10/25/23 .................................. 73,616
------------
1,807,655
------------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--4.8%
BB 1,000 DLJ Mortgage Acceptance Corp.,
Series 1997-CF1,
7.91%, 4/15/07** .......................... 920,335
Merrill Lynch Mortgage Investors, Inc.,
BBB 1,000 Series 1995-C1, Class D,
7.913%, 5/25/15 ........................... 998,504
BBB 500 Series 1996-C1, Class D,
7.42%, 4/25/28 ............................ 475,780
AAA $ 2,000 New York City Mortgage Loan Trust,
Multifamily, Series 1996, Class A-2,
6.75%, 6/25/11** .......................... $ 1,857,187
------------
4,251,806
------------
ASSET-BACKED SECURITIES--1.3%
AAA 800 Chase Credit Card Master Trust,
Series 1997-5, Class A,
6.19%, 8/15/05 ............................ 785,818
NR 420 Global Rated Eligible Asset Trust,
Series 1998-A, Class A-1,
7.33%, 3/15/06**/*** ...................... 125,878
NR 899 Structured Mortgage Asset
Residential Trust, Series 1997-3,
8.57%, 4/15/06@@/*** ...................... 197,842
------------
1,109,538
------------
U.S GOVERNMENT AND AGENCY
SECURITIES--1.0%
921 Small Business Administration,
Series 1998-IO, Class 10-A,
6.12%, 2/01/08 ............................ 849,913
------------
ZERO COUPON BONDS--40.5%
12,407 2/15/05 - 8/15/05 ........................... 9,061,360
Government Trust Certificates,
5,220 Class 2-F, 5/15/05 .......................... 3,782,517
13,760 Class T-1, 5/15/05 .......................... 9,822,576
18,000@ United States Treasury Strip,
8/15/05 ..................................... 13,058,460
----------
35,724,913
----------
TAXABLE MUNICIPAL BONDS--6.7%
AAA 1,000 Alameda County California Pension
Obligation, Zero coupon, 12/01/05 669,500
AAA 1,000 Alaska Energy Power Authority Rev.
Zero coupon, 7/01/05 ........................ 775,180
Kern County California
Pension Obligation,
AAA 1,366 Zero coupon, 8/15/00 - 8/15/05 .............. 988,095
Long Beach California
Pension Obligation,
AAA 1,373 Zero coupon, 9/01/00 - 9/01/05 .............. 990,802
AAA 500 7.09%, 9/01/09 .............................. 484,315
Los Angeles County California
AAA 1,339 Pension Obligation,
Zero coupon, 12/31/00 - 6/30/05 ............. 968,777
AAA 1,000 8.62%, 6/30/06 .............................. 1,053,630
------------
5,930,299
------------
CORPORATE BONDS--12.8%
FINANCE & BANKING--6.5%
A3 1,000@ American Savings Bank,
6.63%, 2/15/06** ............................ 939,440
NR 1,382 Equitable Life Assurance
Society USA, Zero coupon,
12/01/00 - 12/01/05** ....................... 987,325
See Notes to Financial Statements.
2
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
FINANCE & BANKING (CONTINUED)
A $ 1,000 Lehman Brothers Holdings, Inc.,
6.75%, 9/24/01 .............................. $ 989,048
BBB+ 1,900 PaineWebber Group, Inc.,
7.875%, 2/15/03 ............................. 1,885,104
Aa3 1,000 Salomon Smith Barney Holdings, Inc.,
6.75%, 1/15/06 .............................. 958,600
------------
5,759,517
------------
INDUSTRIALS--2.8%
AA- 1,000@ TCI Communications, Inc.,
8.25%, 1/15/03 .............................. 1,019,500
NR 1,932 Union Pacific Corp.,
Zero coupon,
11/01/00 - 5/01/05** ...................... 1,405,895
------------
2,425,395
------------
UTILITIES--1.1%
A 1,000 Alltel Corp.,
7.50%, 3/01/06 .............................. 986,210
------------
YANKEE--2.4%
BBB- 1,000 Empresa Electric Guacolda SA,
7.95%, 4/30/03** ............................ 958,011
BBB+ 200@ Empresa Electric Pehuenche,
7.30%, 5/01/03 .............................. 193,670
A- 1,000 Israel Electric Corp., Ltd.,
7.25%, 12/15/06** ........................... 969,030
------------
2,120,711
------------
Total corporate bonds ......................... 11,291,833
------------
STRIPPED MONEY MARKET
INSTRUMENTS--8.2%
10,000 Vanguard Prime Money
Market Portfolio, 12/31/04 .................. 7,239,000
------------
NOTIONAL
AMOUNT
(000)
--------
CALL OPTIONS PURCHASED--0.0%
15,000 Interest Rate Swap,
5.60% over 3 month LIBOR
expires 8/7/00 (cost $206,250) .............. 2
------------
Total long-term investments
(cost $99,734,158) .......................... 102,540,631
------------
PRINCIPAL
AMOUNT
(000)
--------
SHORT-TERM INVESTMENTS--6.0%
DISCOUNT NOTES
3,300 Federal Home Loan Bank,
6.40%, 7/14/00 .............................. 3,292,373
2,025 Student Loan Marketing Association,
6.57%, 7/03/00 .............................. 2,024,261
------------
Total short-term investments
(amortized cost $5,316,634) ................. 5,316,634
------------
Total investments, BEFORE
investments sold short--122.2%
(cost $105,050,792) ....................... 107,857,265
INVESTMENT SOLD SHORT--(2.6%)
(2,370)@ United States Treasury Notes,
5.88%, 11/15/04
(proceeds $2,287,143) ....................... (2,335,564)
------------
Total investments, net of
investments sold short--119.6%
(cost $102,763,649) ....................... 105,521,701
Liabilities in excess of
other assets--(19.6)% ....................... (17,281,894)
------------
NET ASSETS--100% ............................ $ 88,239,807
============
----------
* 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 0.3% 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 security was acquired in
1997 and has a current cost of $289,242.
--------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
LIBOR-- London InterBank Offer Rate.
REMIC-- Real Estate Mortgage Investment Conduit.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $105,050,792)
(Note 1) .................................................... $107,857,265
Deposits with brokers for securities
sold short (Note 1) ......................................... 2,856,600
Interest receivable ........................................... 877,630
------------
111,591,495
------------
LIABILITIES
Reverse repurchase agreements (Note 4) ........................ 16,809,125
Investments sold short, at value
(proceeds 2,287,143) (Note 1) ............................... 2,335,564
Dividends payable ............................................. 2,017,028
Due to parent (Note 2) ........................................ 1,367,515
Due to custodian .............................................. 770,592
Interest payable .............................................. 51,864
------------
23,351,688
------------
NET ASSETS .................................................... $ 88,239,807
============
Net assets were comprised of:
Common stock, at par (Note 5) ............................... $ 95,107
Paid-in capital in excess of par ............................ 82,026,697
------------
82,121,804
Undistributed net investment income ......................... 3,158,654
Accumulated net realized gain ............................... 276,065
Net unrealized appreciation ................................. 2,683,284
------------
Net assets, June 30, 2000 ................................... $ 88,239,807
============
Net asset value per share:
($88,239,807 O 9,510,667 shares of
common stock issued and outstanding) ........................ $ 9.28
============
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest earned (including net discount accretion
of $98,255 and net of interest expense
of $457,991) .............................................. $ 3,241,563
------------
Operating expenses
Investment advisory ......................................... 230,947
Administration .............................................. 46,190
Custodian ................................................... 32,000
Independent accountants ..................................... 17,000
Legal ....................................................... 14,000
Miscellaneous ............................................... 1,776
------------
Total operating expenses .................................. 341,913
------------
Net investment income before excise tax ....................... 2,899,650
Excise tax ................................................ 140,000
------------
Net investment income ......................................... 2,759,650
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments ................................................. 688,757
Futures ..................................................... (233,633)
------------
455,124
------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................. 1,002,393
Future ...................................................... (74,768)
Short sales ................................................. (48,421)
------------
879,204
------------
Net gain on investments ....................................... 1,334,328
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................... $ 4,093,978
============
See Notes to Financial Statements.
4
<PAGE>
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 (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 ............................................. $ 4,093,978
------------
Increase in investments ....................................... (2,567,103)
Net realized gain ............................................. (455,124)
Increase in unrealized appreciation ........................... (879,204)
Increase in interest receivable ............................... (27,490)
Increase in deposits with brokers for
investments sold short ...................................... (2,856,600)
Increase in payable for investments sold short ................ 2,335,564
Increase in due to custodian .................................. 770,592
Increase in interest payable .................................. 10,938
Decrease in accrued expenses and
other liabilities ........................................... 481,640
------------
Total adjustments ............................................. (3,186,787)
------------
Net cash flows provided by operating activities ............... $ 907,191
============
INCREASE (DECREASE) IN CASH
Net cash flows provided by operating activities ............... $ 907,191
------------
Cash flows used for financing activities:
Increase in reverse repurchase agreements ................... 125,250
Cash dividends paid ......................................... (1,083,737)
------------
Net cash flows used for financing activities .................. (958,487)
------------
Net decrease in cash ........................................ (51,296)
Cash at beginning of period ................................. 51,296
------------
Cash at end of period ....................................... $ --
============
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS (UNAUDITED)
--------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income .......................... $ 2,759,650 $ 4,816,380
Net realized gain on
investments .................................. 455,124 537,410
Net change in unrealized
appreciation/depreciation
on investments .................................. 879,204 (6,640,406)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations ...................................... 4,093,978 (1,286,616)
------------ ------------
Dividends and distributions:
Dividends from net
investment income ............................... (3,100,765) (2,023,028)
Distributions from net
realized gains .................................. -- (1,576,972)
------------ ------------
Total dividends and distributions ................ (3,100,765) (3,600,000)
------------ ------------
Total increase (decrease) ........................ 993,213 (4,886,616)
NET ASSETS
Beginning of period .............................. 87,246,594 92,133,210
------------ ------------
End of period (including
undistributed net investment
income of $3,158,654 and
$3,499,769, respectively) ...................... $ 88,239,807 $ 87,246,594
============ ============
----------
* Commencement of investment operations.
See Notes to Financial Statements.
5
<PAGE>
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
--------------------------------------------------------------------------------
FOR THE
PERIOD
OCTOBER 31,
1998
SIX MONTHS THROUGH
ENDED YEAR ENDED DECEM-
JUNE 30, DECEMBER 31, BER 31,
2000 1999 1998
------- ------- -------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....... $ 9.17 $ 9.69 $ 8.65
------- ------- -------
Net investment income
(net of interest expense of $0.05,
$0.09 and $0.05, respectively) ......... 0.29 0.51 0.06
Net realized and unrealized
gain (loss) ........................... 0.15 (0.65) 0.98
------- ------- -------
Net increase (decrease) from
investment operations .................... 0.44 (0.14) 1.04
------- ------- -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ....... (0.33) (0.21) --
Distributions from net capital gains ....... -- (0.17) --
------- ------- -------
Total dividends and distributions .......... (0.33) (0.38) --
======= =======
Net asset value, end of period ............. $ 9.28 $ 9.17 $ 9.69
======= ======= =======
TOTAL INVESTMENT RETURN .................... 4.80% (1.44)% 12.02%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ......................... 0.77% 0.81% 0.89%++
Operating expenses and interest expense .... 1.81% 1.73% 1.75%++
Operating expenses, interest expense
and excise taxes ......................... 2.12% 1.89% 1.75%++
Net investment income ...................... 6.24% 5.28% 3.50%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) .......... $88,957 $91,165 $90,986
Portfolio turnover ......................... 46% 11% 3%
Net assets, end of period (in thousands) ... $88,240 $87,247 $92,133
Reverse repurchase agreements outstanding,
end of period (in thousands) ............ $16,809 $16,684 $17,190
Asset coverage+++ .......................... $ 6,250 $ 6,229 $ 6,369
----------
* 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 net asset value on the last day of
each period reported. Dividends were assumed for purpose 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 agreements 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.
6
<PAGE>
--------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1. ORGANIZATION & POLICIES
BAT Subsidiary, Inc. (the ACCOUNTING "Trust") was incorporated under the laws of
the state of Maryland on August 10, 1998, 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
Advantage Term Trust Inc., ("BAT") incorporated under the laws of the state of
Maryland and as such, is a wholly-owned subsidiary of BAT. The Trust's
investment objective is to manage a portfolio of investment grade fixed income
securities while providing cash flow definition to BAT. 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. Short-term securities are valued at amortized cost. 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 supervision and responsibility
of the Trust's Board of Directors.
REPURCHASE AGREEMENTS: 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
cost of the purchase or proceeds from the sale 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
anytime 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 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.
7
<PAGE>
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) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by "marking-to-market" to reflect the
market value of the swap. When the swap is terminated, the Trust will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Trust's basis in the contract, if any.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate 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 purchasing the right to buy a security, the purchaser of the swap
option has 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 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, bears the market risk of an
unfavorable change in the value of the swap contract underlying the written
option. Interest rate swap options may be used as part of an income producing
strategy reflecting the view of the Trust's management on the direction of
interest rates.
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"
more volatile positions so that changes in interest rates do not change the
duration of the portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the
purpose of hedging its existing portfolio securities or securities the Trust
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates. Should interest rates move unexpectedly, the
Trust may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets. The Trust is also at risk of
not being able to enter into a closing transaction for the futures contract
because of an illiquid secondary market. In addition, since futures are used to
shorten or lengthen a portfolio's duration, there is a risk that the portfolio
may have temporarily performed better without the hedge or that the Trust may
lose the opportunity to realize appreciation in the market price of the
underlying positions.
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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 less or greater than the proceeds originally received.
SECURITIES LENDING: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust.
The Trust did not engage in securities lending during the six months ended
June 30, 2000.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities 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 accretes discount and amortizes premium 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 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 amounts.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 Advisors, Inc.,
(the "Advisor"), which is a wholly-owned subsidiary of BlackRock, Inc., which in
turn is an indirect majority-owned subsidiary of PNC Financial Services Group,
Inc. The Trust has an Administration Agreement with Prudential Investments Fund
Management, LLC ("PIFM"), a wholly-owned subsidiary of The Prudential Insurance
Co. of America.
The Trust reimburses BAT for its pro-rata share of applicable expenses,
including investment advisory and administrative fees, in an amount equal to the
proportionate amount of average net assets which are held by the Trust relative
to the average net assets of BAT.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of invest- ment securities, other than short-term
investments and dollar rolls, for the six months ended June 30, 2000 aggregated
$25,177,492 and $25,577,199, respectively.
The Trust may invest up to 85% 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, 2000, the Trust held
10.6% 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
Services, Inc.
The federal income tax basis of the Trust's investments at June 30, 2000
was substantially the same as the basis for financial reporting and accordingly,
net unrealized appreciation for federal income tax purposes was $2,806,473
(gross unrealized appreciation--$5,420,328; gross unrealized
depreciation--$2,613,855).
Details of open financial futures contracts at June 30, 2000 are as
follows:
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VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE JUNE 30, UNREALIZED
CONTRACTS TYPE DATE DATE 2000 DEPRECIATION
--------- ------ ---- --------- ----------- -------- --------
Short positions:
10 Eurodollar March 2002 $(2,311,960) $(2,322,250) $(10,290)
10 Eurodollar Dec. 2001 (2,310,460) (2,320,875) (10,415)
10 Eurodollar Sept. 2001 (2,311,210) (2,322,000) (10,790)
70 10 yr. T-Note July 2000 (6,842,477) (6,886,250) (43,273)
--------
$(74.768)
========
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender, the value of which at least equals the principal amount
of the reverse repurchase transactions including accrued interest.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended June 30, 2000 was approximately $14,869,823 at a
weighted average interest rate of approximately 5.96%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during the six months
ended June 30, 2000 was $16,809,125 as of June 30, 2000 which was 15.1% of total
assets.
DOLLAR ROLLS: The Trust may enter into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities. The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date.
The Trust did not enter into dollar rolls during the six months ended June
30, 2000.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. BAT
owned all of the 9,510,667 shares outstanding at June 30, 2000.
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---------
BLACKROCK
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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
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
CUSTODIAN
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
LEGAL COUNSEL -- INDEPENDENT DIRECTORS
Debevoise & Plimpton
875 Third Avenue
New York, NY 10022
The accompanying financial statements as of June 30, 2000 were not audited
and accordingly, no opinion is expressed on them.
This report is for shareholder information. This is not a prospectus
intended for use in the purchase or sale of any securities.
BAT SUBSIDIARY, INC.
c/o Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 227-7BFM
[RECYCLE LOGO] Printed on recycled paper
BAT SUBSIDIARY, INC.
--------------------------
SEMI-ANNUAL REPORT
JUNE 30, 2000
[GRAPHIC OMITTED]
