BGT Subsidiary, Inc.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--115.8%
MORTGAGE PASS-THROUGHS--12.7%
AAA $16,367 Federal Home Loan Mortgage Corp.,
6.50%, 01/01/26-01/01/28 .................... $15,800,139
Federal National Mortgage Association,
43,609 6.50%, 05/01/26-07/01/29 .................... 42,068,745
5,543 7.25%, 01/01/23, Project 797 ............... 5,551,302
3,179 7.50%, 06/01/08, 15 Year .................... 3,235,184
-----------
66,655,370
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--11.9%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
10,526+ Ser. 90, Class 90-G,
10/15/20 .................................. 10,905,318
1,883 Ser. 1488, Class 1488-F,
09/15/06 .................................. 1,882,510
1,625 Ser. 1488, Class 1488-PF,
09/15/06 .................................. 1,639,268
1,400 Ser. 1601, Class 1601-PG,
12/15/06 .................................. 1,396,150
723 Ser. 1603, Class 1603-MB,
10/15/23 (ARM) ............................ 730,328
1,498 Ser. 1637, Class 1637-LF,
12/15/23 .................................. 1,507,222
2,327 Ser. 1684, Class 1684-OB,
03/15/24 .................................. 2,345,173
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,469 Trust G93-17, Class 17-SH,
04/25/23 (ARM) ............................ 1,253,513
15,801+ Trust 1992-43, Class 43-E,
04/25/22 .................................. 15,942,439
2,275 Trust 1992-129, Class 129-G,
06/25/18 .................................. 2,263,131
2,000 Trust 1992-155, Class 155-SB,
12/25/06 (ARM) ............................ 1,936,560
16,288++ Trust 1992-156, Class 156-H,
04/25/06 .................................. 16,048,688
1,223 Trust 1993-225, Class 225-SB,
07/25/23 .................................. 1,132,632
2,205 Trust 1994-40, Class 40-H,
10/25/20 .................................. 2,170,999
1,429 Government National Mortgage
Association,
Trust 1996-3, Class 3-C,
09/20/20 .................................. 1,448,227
-----------
62,602,158
-----------
INTEREST ONLY MORTGAGE-
BACKED SECURITIES--12.2%
AAA 91,405 CS First Boston Mortgage Securities,
Ser. 1997-C1, Class AX,
04/20/22** ................................ $ 8,301,567
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
11,301 Ser. G25, Class 25-S,
08/25/06 .................................. 264,100
10,815 Ser. 4, Class 4-S,
11/25/22 .................................. 510,317
4,007 Ser. 1055, Class 1055-I,
03/15/21 .................................. 941,646
14,606 Ser. 1496, Class 1496-GA,
03/15/19 .................................. 1,597,500
82,282 Ser. 1954, Class 1954-BA,
04/15/21 .................................. 1,741,910
18,431 Ser. 1954, Class 1954-MD,
03/15/16 .................................. 1,748,736
14,815 Ser. 2049, Class 2049-PK,
06/15/14 .................................. 1,171,748
22,670 Ser. 2054, Class 2054-PL,
10/15/19 .................................. 3,761,800
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
10,000 Trust G93-22, Class 22-P,
06/25/23 .................................. 3,217,160
9,027 Trust G93-26, Class 26-PT,
12/25/17 .................................. 766,288
1,752 Trust 1992-208, Class 208-S,
11/25/07 .................................. 324,185
17,128 Trust 1993-121, Class 121-PH,
01/25/19 .................................. 1,498,706
20,598 Trust 1996-15, Class 15-SG,
08/25/08 .................................. 2,185,861
12,937 Trust 1996-20, Class 20-SB,
10/25/08 .................................. 3,612,155
8,499 Trust 1996-24, Class 24-SJ,
01/25/22 .................................. 2,592,976
733 Trust 1996-54, Class 54-SM,
09/25/23 .................................. 143,468
35,469 Trust 1997-35, Class 35-SB,
03/25/09 .................................. 872,882
22,411 Trust 1997-50, Class 50-HJ,
12/25/17 .................................. 1,452,474
43,826 Trust 1997-90, Class 90-L,
10/25/19 .................................. 3,992,253
See Notes to Financial Statements.
1
<PAGE>
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-
BACKED SECURITIES--(CONTINUED)
AAA $116,537 First Union Lehman Brothers
Bank of America,
Ser. 1998-C2, Class IO,
05/18/28 ................................. $ 4,487,571
Merrill Lynch Mortgage Investors Inc.,
AAA 105,166 Ser. 1997-C2, Class IO,
12/10/29 .................................. 7,189,470
AAA 73,094 Ser. 1998-C2, Class IO,
02/15/30 .................................. 5,519,925
AAA 97,146 Morgan Stanley Capital I,
Ser. 1998-HF1, Class X,
02/15/18 .................................. 5,823,442
N/R 930 Salomon Brothers Mortgage Securities,
Ser. 1987-3, Class B,
10/23/17 .................................. 240,940
-----------
63,959,080
-----------
PRINCIPAL ONLY MORTGAGE-
BACKED SECURITIES--4.2%
AAA 1,882@ Collateralized Mortgage Obligation,
Trust 26, Class A,
04/23/17 .................................. 1,568,828
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
2,269 Ser. 1597, Class 1597-H,
07/15/23 .................................. 1,444,452
2,691 Ser. 1662, Class 1662-PO,
01/15/09 .................................. 2,160,635
1,234 Ser. 2009, Class 2009-A,
12/15/22 .................................. 882,463
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
5,432++ Trust 1993-67, Class 67-B,
12/25/21 .................................. 5,144,828
2,617 Trust 1993-92, Class 92-G,
05/25/23 .................................. 1,847,019
1,684 Trust 1993-213, Class 213-H,
09/25/23 .................................. 1,663,816
1,225 Trust 1993-237, Class 237-C,
11/25/23 .................................. 1,070,349
2,659 Trust 1994-87, Class 87-E,
03/25/09 .................................. 2,067,095
1,879 Trust 1997-19, Class 19-C,
09/25/23 .................................. 1,541,153
1,127 Trust 1997-19, Class 19-H,
10/25/22 .................................. 747,993
AAA 2,102 Prudential Bache CMO Trust,
Ser. 10, Class H,
04/01/19 .................................. 1,912,810
-----------
22,051,441
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--6.5%
AAA $2,600 Aetna Commercial Mortgage
Trust, Ser. 1995-C5, Class B,
6.74%, 12/26/30 ........................... $ 2,623,210
Aa1 4,000 FDIC Trust,
Ser. 1994-C1, Class 2F,
8.70%, 09/25/25 ........................... 4,102,900
LTC Commercial Mortgage
Pass-Through Certificates,
BBB+ 1,000 Ser. 1993-1, Class D,
9.20%, 11/28/12 ........................... 1,020,625
AAA 3,998 Ser. 1996-1, Class A,
7.06%, 04/15/28** ......................... 3,993,099
A 2,290 Merrill Lynch Mortgage Investors Inc.,
Ser. 1995-C1, Class C,
7.597%, 05/25/15 .......................... 2,276,074
AAA 1,170 Morgan Stanley Capital Trust I,
Ser. 1995-GAL1, Class A1,
7.00%, 02/15/02** ......................... 1,178,710
Paine Webber Mortgage
Acceptance Corp.,
AAA 2,000 Ser. 1995-M1, Class A,
6.70%, 01/15/07** ......................... 2,005,985
BBB 1,656 Ser. 1995-M1, Class D,
7.30%, 01/15/07** ......................... 1,660,492
A 4,000 Resolution Trust Corp.,
Ser. 1994-C1, Class C,
8.00%, 06/25/26 ........................... 4,000,000
Aa2 2,589 Salomon Brothers Mortgage
Securities Trust VII,
Ser. 1997-TZH, Class A1,
7.15%, 03/25/22** ......................... 2,630,171
AAA 3,925 Structured Asset Securities Corp.,
Ser. 1996-CFL, Class B,
6.30%, 02/25/28 ........................... 3,950,741
A 4,500 TVO Southwest,
Ser. 1994-MF1, Class A2,
9.37%, 11/18/04** ......................... 4,705,789
-----------
34,147,796
-----------
ASSET-BACKED SECURITIES--11.0%
AAA 7,491 Brazos Student Loan Financial Corp.,
Ser. 1998-A, Class A1,
5.425%, 06/01/06 .......................... 7,473,582
Broad Index Secured Trust Offering,**
Baa2 5,000 Ser. 1998-1A, Class A,
6.58%, 03/26/01 ........................... 4,917,344
Baa2 5,000 Ser. 1998-4A, Class B2,
6.97%, 09/09/01 ........................... 4,978,500
AAA 20,545 Chase Credit Card Master Trust,
Ser. 1997-5, Class 5-A,
6.194%, 08/15/05 .......................... 20,332,659
N/R 2,952 Global Rated Eligible Asset Trust,
Ser. 1998-A,
7.33%, 09/15/07**/*** ..................... 1,608,767
See Notes to Financial Statements.
2
<PAGE>
- -------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--(CONTINUED)
AAA $ 3,400 Health Care Rec. Securitization Program,
Ser. 1999-1, Class A,
6.25%, 02/01/03** ......................... $ 3,360,688
AA 6,732 Pegasus Aviation Lease Securitization,
Ser. 1999-1A, Class A1,
6.30%, 03/25/29** ......................... 6,580,837
Structured Mortgage Asset
Residential Trust,**/***
N/R 4,077 Ser. 1997-2, Class 2,
8.24%, 03/15/06 ........................... 1,950,967
N/R 4,496 Ser. 1997-3,
8.724%, 04/15/06 .......................... 2,000,003
A1 4,500 Student Loan Marketing Association,
Trust 1995-1, Class CTFS,
10/25/09 .................................. 4,440,234
-----------
57,643,581
-----------
ZERO COUPON BONDS--23.9%
Financing Corp (FICO Strips),
18,000 03/07/02 .................................... 15,152,940
29,300 12/27/02 .................................... 23,350,049
Government Trust Certificates (Israel),
19,432+ 05/15/02 .................................... 16,211,864
25,000 11/15/02 .................................... 20,158,750
10,000 Government Trust Certificates (Jordan),
05/15/02 .................................... 8,459,400
51,200++ U.S. Treasury Strips,
10/31/02 .................................... 42,470,912
-----------
125,803,915
-----------
TAXABLE MUNICIPAL BONDS--7.0%
AAA 1,000 Kern County California,
Pension Obligation,
6.39%, 08/15/02 ............................. 1,006,050
AAA 3,510 Long Beach California,
Pension Obligation,
6.56%, 09/01/02 ............................. 3,548,294
AAA 5,000 Los Angeles County California,
Pension Obligation,
6.54%, 06/30/02 ............................. 5,049,650
AAA 10,000 New Jersey Economic
Development Auth., Zero Coupon,
02/15/03 .................................... 7,919,500
New York City G.O.,
A- 5,000 6.54%, 03/15/02 ............................. 5,017,650
A- 5,000 7.125%, 08/15/02 ............................ 5,101,650
A- 5,000 7.34%, 04/15/02 ............................. 5,118,350
BBB+ 1,235 New York St. Environ. Fac. Auth.,
6.73%, 09/15/02 ............................. 1,243,262
AAA 1,950 San Francisco California
International Airport,
6.35%, 05/01/02 ............................. 1,958,736
AA 1,000 St. Josephs Health System California,
G.O., 7.13%, 07/01/02 ....................... 1,022,260
-----------
36,985,402
-----------
CORPORATE BONDS--26.1%
BANKING & FINANCE--11.8%
A3 $ 4,900 Ahmanson HF & Co.,
8.25%, 10/01/02 ............................. $ 5,114,571
A3 1,700 Amsouth Bancorp.,
6.75%, 11/01/25 ............................. 1,681,691
A+ 5,000 Goldman Sachs Group L P,
6.25%, 02/01/03** ........................... 4,935,808
Lehman Brothers Holdings Inc.,
A 5,000 6.625%, 12/27/02 ............................ 4,944,850
A 875 6.75%, 09/24/01 ............................. 873,574
A 5,000 7.25%, 04/15/03 ............................. 5,034,300
AA- 1,665 Merrill Lynch & Co. Inc.,
5.75%, 11/04/02 ............................. 1,631,783
Nationsbank Corp.,
Aa2 5,000 6.65%, 04/09/02 ............................. 5,027,450
Aa2 5,000 7.00%, 09/15/01 ............................. 5,076,250
Paine Webber Group Inc.,
BBB+ 2,190 7.875%, 02/15/03 ............................ 2,256,269
BBB+ 7,790 8.25%, 05/01/02 ............................. 8,088,669
Salomon Smith Barney Holdings Inc.,
Aa3 3,000 5.875%, 02/01/01 ............................ 2,983,890
Aa3 1,500 7.00%, 05/15/00 ............................. 1,515,090
Aa3 4,500 7.98%, 03/01/00 ............................. 4,564,620
A- 8,500 Transamerica Finance Corp.,
6.75%, 06/01/00 ............................. 8,556,185
-----------
62,285,000
-----------
INDUSTRIAL--4.7%
A 1,000 Bass America Inc.,
8.125%, 03/31/02 ............................ 1,041,040
A1 1,000 Ford Motor Credit Co.,
8.00%, 06/15/02 ............................. 1,040,870
Baa2 5,425 Jones Apparel Group Inc.,
6.25%, 10/01/01 ............................. 5,336,735
BBB+ 5,000 Norfolk Southern Corp.,
6.95%, 05/01/02 ............................. 5,063,600
Baa1 5,265 Raytheon Co.,
6.45%, 08/15/02 ............................. 5,264,052
AA- 4,000 TCI Communications Inc.,
9.25%, 04/15/02 ............................. 4,295,040
Baa1 2,700 Tenneco Inc.,
8.075%, 10/01/02 ............................ 2,777,139
-----------
24,818,476
-----------
UTILITY--2.7%
A3 5,000@@ Columbia Energy Group.,
6.610%, 11/28/02 ............................ 4,994,750
A3 5,000 MCI Worldcom Inc.,
6.125%, 04/15/02 ............................ 4,951,950
A 4,000 360 Communications,
7.125%, 03/01/03 ............................ 4,077,920
-----------
14,024,620
-----------
See Notes to Financial Statements.
3
<PAGE>
- -------------------------------------------------------------------------------
PRINCIPAL
MOUNT VALUE
RATING (000) DESCRIPTION (NOTE 1)
- -------------------------------------------------------------------------------
YANKEE--6.9%
Aa1 $5,000@@ African Development Bank,
7.75%, 12/15/01 ............................. $ 5,182,400
N/R 6,029 Banamex Remittance Master Trust,
Ser. 1996-1, 7.57%, 01/01/01**. ............. 6,018,142
A3 5,000 Corporacion Andina De Fome,
7.10%, 02/01/03 ............................. 4,890,350
BBB- 3,500 Empresa Elec. Guacolda SA,
7.95%, 04/30/03 (Chile)** ................... 3,179,930
BBB+ 1,650 Empresa Elec. Pehuenche,
7.30%, 05/01/03 (Chile) ..................... 1,594,054
BBB- 2,000 Korea Development Bank,
6.50%, 11/15/02 ............................. 1,947,400
BBB- 5,000 Telecom Argentina,
9.75%, 07/12/01** ........................... 4,993,750
BBB- 5,000 Transpatadora de Gas Tragas,
10.25%, 04/25/01 (Argentina) ................ 5,025,000
A- 3,248 YPF Sociedad Anonima,
7.50%, 10/26/02 (Argentina) ................. 3,266,811
-----------
36,097,837
-----------
Total corporate bonds ......................... 137,225,933
-----------
UNITED STATES GOVERNMENT
SECURITIES--0.1%
535 United States Treasury Note
6.125%, 08/15/07 ............................ 540,767
-----------
NOTIONAL
AMOUNT
(000)
-------
CALL OPTIONS PURCHASED--0.2%
$68,000 Interest Rate Swap,
3 Month LIBOR over 5.85%,
expires 08/07/00 ............................ 563,669
85,000 Interest Rate Swap,
3 Month LIBOR over 5.60%,
expires 08/07/00 ............................ 455,864
-----------
1,019,533
-----------
Total long-term investments
(cost $616,914,158) ......................... 608,634,976
-----------
PRINCIPAL
AMOUNT
(000)
-------
SHORT-TERMINVESTMENTS--4.8%
UNITED STATES GOVERNMENT AGENCY
$25,160 Federal Home Loan Mortgage Corp.,
4.60%, due 07/01/99
(amortized cost $25,160,000) ................. 25,160,000
-----------
Total investments before
outstanding call option written
and investments sold short--120.6%
(cost $642,074,158) .......................... 633,794,976
-----------
Call Option Written--(0.0%)
$(136,000) Interest Rate Swap,
3 Month LIBOR over 5.50%,
expires 08/10/99
(premium received $833,000) ................. $ (299)
-----------
Principal
Amount
(000)
-------
Investments Sold Short--(13.1%)
$(75,000) U.S. Treasury Bond,
5.25%, 02/15/29 ............................. (67,383,000)
(1,700) U.S. Treasury Note,
4.75%, 11/15/08 ............................. (1,561,076)
-----------
(proceeds received
$67,894,210) ................................ (68,944,076)
-----------
Total investments net of
call option written and
investments sold
short--107.5%
(cost $573,346,948) 564,850,601
Liabilities in excess of other
assets--(7.5%) (39,186,205)
------------
NET ASSETS--100% $525,664,396
============
- -------------------------------------------------------------------------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** Securities restricted as to resale.
*** Illiquid securities representing 1.1% of portfolio assets.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
++ Entire principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
@ Partial principal amount pledged as collateral for financial futures
contracts.
@@ Entire principal amount pledged as collateral for financial futures
contracts.
- -------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage
CMO -- Collateralized Mortgage Obligation
G.O. -- General Obligation
LIBOR -- London InterBank Offer Rate
REMIC -- Real Estate Mortgage Investment Conduit
- -------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
- -------------------------------------------------------------------------------
BGT Subsidiary, Inc.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $642,074,158)
(Note 1) ....................................................... $633,794,976
Deposit with broker for investments
sold short (Note 1) ............................................ 69,524,250
Interest receivable 6,108,992
Receivable for investments sold .................................. 5,172,732
Unrealized appreciation on interest rate swap
(Note 1 & 3) ................................................... 2,543
------------
714,603,493
------------
LIABILITIES
Reverse repurchase agreement (Note 4) ............................ 108,289,500
Investments sold short, at value
(proceeds $67,894,210) (Note 1) ................................ 68,944,076
Interest payable ................................................. 2,174,037
Payable for investments purchased ................................ 6,495,786
Due to custodian ................................................. 559,925
Due to broker-variation margin ................................... 539,607
Swap option written, at value
(proceeds $833,000) (Note 1) ................................... 299
Due to parent (Note 2) ........................................... 1,935,867
------------
188,939,097
------------
NET ASSETS ....................................................... $525,664,396
============
Net assets were comprised of:
Common stock, at par (Note 5) .................................. $ 575,106
Paid-in capital in excess of par ............................... 518,385,785
------------
518,960,891
Undistributed net investment income ............................ 10,470,827
Accumulated net realized gain .................................. 5,529,972
Net unrealized depreciation .................................... (9,297,294)
------------
Net assets, June 30, 1999 ...................................... $525,664,396
============
Net asset value per share:
($525,664,396 / 57,510,639 shares of
common stock issued and outstanding) ........................... $9.14
=====
- -------------------------------------------------------------------------------
BGT Subsidiary, Inc.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of
$585,517, and interest expense of
$2,640,949) .................................................. $28,422,729
-----------
Operating expenses
Investment advisory ............................................ 1,216,703
Administration ................................................. 337,973
Directors ...................................................... 59,000
Audit .......................................................... 52,000
Custodian ...................................................... 40,000
Legal .......................................................... 14,000
Miscellaneous .................................................. 96,190
-----------
Total operating expenses ..................................... 1,815,866
-----------
Net investment income before excise tax ........................ 26,606,863
Excise tax ................................................... 120,000
-----------
Net investment income .......................................... 26,486,863
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments .................................................... (621,855)
Futures ........................................................ (3,177,875)
Short sales .................................................... 458,496
Swaps .......................................................... (304,247)
-----------
(3,645,481)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments .................................................... (25,448,877)
Options written .................................................. 3,019,445
Futures ........................................................ (1,026,185)
Short sales .................................................... (1,055,018)
Swaps .......................................................... (463,394)
-----------
(24,974,029)
-----------
Net loss on investments .......................................... (28,619,510)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ................................................ $(2,132,647)
===========
See Notes to Financial Statements.
5
<PAGE>
- -------------------------------------------------------------------------------
BGT Subsidiary, Inc.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN
NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES
Net decrease in net assets resulting from operations ............. $ (2,132,647)
------------
Decrease in investments .......................................... 22,657,256
Net realized loss ................................................ 3,645,481
Decrease in unrealized appreciation ............................. 24,974,029
Decrease in unrealized appreciation on interest
rate swap ...................................................... 463,394
Decrease in receivable for investments sold ...................... 32,968,977
Decrease in receivable for variation margin ...................... 674,950
Increase in interest receivable (306,512)
Decrease in payable for investments purchased .................... (77,332,244)
Decrease in swap option written ................................. (3,019,445)
Increase in deposits with broker for short sales ................. (67,796,625)
Increase in payable for securities sold short .................... 67,230,799
Increase in interest payable ..................................... 1,512,917
Increase in accrued expenses and other
liabilities .................................................... 1,712,532
-------------
Total adjustments .............................................. 7,385,509
-------------
Net cash flows provided by operating activities .................. $ 5,252,862
=============
Increase (Decrease) in Cash
Net cash flows provided by operating activities .................. $ 5,252,862
-------------
Cash flows used for financing activities:
Increase in reverse repurchase agreements ...................... 14,577,150
Cash dividends paid ............................................ (20,000,000)
-------------
Net cash flows used for financing activities ..................... (5,422,850)
-------------
Net decrease in cash ........................................... (169,988)
Cash at beginning of period ...................................... 169,988
-------------
Cash at end of period ............................................ $ --
=============
- -------------------------------------------------------------------------------
BGT Subsidiary, Inc.
STATEMENT OF CHANGES
IN NET ASSETS (UNAUDITED)
- -------------------------------------------------------------------------------
For the period
October 31,
Six Months Ended 1998*, to
June 30, December 31,
1999 1998
-------------- -----------
Increase (Decrease) in Net Assets
Operations:
Net investment income .......................... $26,486,863 $ 3,983,964
Net realized gain (loss)
on investments ............................... (3,645,481) 9,175,453
Net change in unrealized
appreciation ................................. (24,974,029) 15,676,735
----------- -----------
Net increase (decrease) in net
assets resulting from
operations ................................... (2,132,647) 28,836,152
Dividends from
net investment income ........................ (20,000,000) --
Transfer of assets from
BlackRock Strategic Term Trust
in exchange for shares issued ................ -- 518,960,891
----------- -----------
Total increase (decrease) ...................... (22,132,647) 547,797,043
Net Assets
Beginning of period .............................. 547,797,043 --
----------- -----------
End of period .................................... $525,664,396 $547,797,043
=========== ===========
- ---------------------------------------
*Commencement of investment operations.
See Notes to Financial Statements.
6
<PAGE>
- -------------------------------------------------------------------------------
BGTSubsidiary, Inc.
Financial Highlights (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Period
October 31,
Six Months Ended 1998* to
June 30, December 31,
1999 1998
--------------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................ $ 9.53 $ 9.02
------- ------
Net investment income (net of interest expense of $0.05 and $0.01, respectively) .. 0.46 0.07
Net realized and unrealized gain (loss) ........................................... (0.50) 0.44
------- ------
Net increase (decrease) from investment operations .................................. (0.04) 0.51
------- ------
Dividends from net investment income ................................................ (0.35) --
------- ------
Net asset value, end of period ...................................................... $ 9.14 $ 9.53
======= ======
TOTAL INVESTMENT RETURN:+ ........................................................... (0.42%) 5.65%
======= ======
RATIOS TO AVERAGE NET ASSETS:
Operating Expenses** ................................................................ 0.67%++ 0.66%++
Net Investment Income ............................................................... 9.80%++ 4.37%++
SUPPLEMENTAL DATA:
Average net assets (000) ............................................................ $543,744 $543,706
Portfolio turnover rate ............................................................. 11% 2%
Net assets, end of period (000) ..................................................... $525,664 $547,797
Reverse repurchase agreements
outstanding, end of period (000) .................................................. $108,290 $ 93,712
Asset coverage+++ ................................................................... $ 5,854 $ 6,846
</TABLE>
- ----------
* Commencement of investment operations.
** The ratio of operating expenses, including interest expense, to average net
assets was 1.65%++ and 1.55%++ for the periods indicated above,
respectively. The ratio of operating expenses, including interest expense &
excise tax, to average net assets was 1.69%++ and 1.72%++ for the periods
indicated above, respectively.
+ 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 returns 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.
7
<PAGE>
- -------------------------------------------------------------------------------
BGT Subsidiary, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION &
ACCOUNTING
POLICIES
BGT Subsidiary, Inc, (the "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 Strategic
Term Trust Inc. ("BGT"), incorporated under the laws of the State of Maryland
and as such, is a wholly-owned subsidiary of BGT. The Trust's investment
objective is to manage a portfolio of investment grade fixed income securities
while providing cash flow definition to BGT. No assurance can be given that the
Trust's investment objective will be achieved.
The following is a summary of significant accounting policies followed by the
Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities, interest rate swaps, caps, floors and non-exchange traded
options on the basis of current market quotations provided by dealers or pricing
services approved by the Trust's Board of Directors. In determining the value of
a particular security, pricing services may use certain information with respect
to transactions in such securities, quotations from dealers, market transactions
in comparable securities, various relationships observed in the market between
securities, and calculated yield measures based on valuation technology commonly
employed in the market for such securities. Exchange-traded options are valued
at their last sales price as of the close of options trading on the applicable
exchanges. In the absence of a last sale, options are valued at the average of
the quoted bid and asked prices as of the close of business. A futures contract
is valued at the last sale price as of the close of the commodities exchange on
which it trades unless the Trust's Board of Directors determines that such price
does not reflect its fair value, in which case it will be valued at its fair
value as determined by the Trust's Board of Directors. Any securities or other
assets for which such current market quotations are not readily available are
valued at fair value as determined in good faith under procedures established by
and under the general supervision and responsibility of the Trust's Board of
Directors.
Short-term securities which mature in 60 days or less are valued at amortized
cost, if their term to maturity from date of purchase is 60 days or less.
Short-term securities with a term to maturity greater than 60 days from the date
of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
positions, or collections of positions, so that changes in interest rates do not
change the duration of the portfolio unexpectedly. In general, the Trust uses
options to hedge a long or short position or an overall portfolio that is longer
or shorter than the benchmark security. A call option gives the purchaser of the
option the right (but not obligation) to buy, and obligates the seller to sell
(when the option is exercised), the underlying position at the exercise price at
any time or at a specified time during the option period. A put option gives the
holder the right to sell and obligates the writer to buy the underlying position
at the exercise price at any time or at a
8
<PAGE>
specified time during the option period. Put options can be purchased to
effectively hedge a position or a portfolio against price declines if a
portfolio is long. In the same sense, call options can be purchased to hedge a
portfolio that is shorter than its benchmark against price changes. The Trust
can also sell (or write) covered call options and put options to hedge portfolio
positions.
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize)
overtime.
During the term of the swap, changes in the value of the swap are recognized
as unrealized gains or losses by "marking-to-market" to reflect the market value
of the swap. When the swap is terminated, the Trust will record a realized gain
or loss equal to the difference between the proceeds from (or cost of) the
closing transaction and the Trust's basis in the contract, if any.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the swap. However, the Trust does not anticipate non-performance
by any counterparty.
SWAP OPTIONS: Swap options are similar to options on securities except that
instead of selling or purchasing the right to buy or sell a security, the writer
or purchaser of the swap option is granting or buying the right to enter into a
previously agreed upon interest rate swap agreement at any time before the
expiration of the option. Premiums received or paid from writing or purchasing
options are recorded as liabilities or assets and are subsequently adjusted to
the current market value of the option written or purchased. Premiums received
or paid from writing or purchasing options which expires unexercised are treated
by the Trust on the expiration date as realized gains or losses. The difference
between the premium and the amount paid or received on effecting a closing
purchase or sale transaction, including brokerage commission, is also treated as
a realized gain or loss. If an option is exercised, the premium paid or received
is added to the proceeds from the sale or cost of the purchase in determining
whether the Trust has realized a gain or loss on investment transactions
The main risk that is associated with purchasing swap options is that the
swap option expires without being exercised. In this case, the option expires
worthless and the premium paid for the swap option is considered the loss. The
main risk that is associated with the writing of a swap option is the market
risk of an unfavorable change in the value of the interest rate swap underlying
the written swap option.
Swap options may be used by the Trust to manage the duration of the Trust's
portfolio in a manner similar to more generic options described above.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy or sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period that 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 hedged assets. The Trust is also at the risk of not being able to
enter into a closing transaction for the futures contract
9
<PAGE>
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 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.
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 invokes
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
Transaction fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate cap. The asset or liability is subsequently adjusted
to the current market value of the interest rate cap purchased or sold. Changes
in the value of the interest rate cap are recognized as unrealized gains and
losses.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of the
portfolio and its exposure to changes in short-term interest rates. Selling
interest rate floors reduces the portfolios duration, making it less sensitive
to changes in interest rates from a market value perspective. The Trust's
leverage provides extra income in a period of falling rates. Selling floors
reduces some of that advantage by partially monetizing it as an up front payment
which the Trust receives.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate floor. However, the Trust does not anticipate
non-performance by any counterparty.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate floor. The asset or liability is subsequently adjusted
to the current market value of the interest rate floor purchased or sold.
Changes in the value of the interest rate floor are recognized as unrealized
gains and losses.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: 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 meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no federal
income tax provision is required. As part of the tax planning strategy, the
Trust may 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 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.
10
<PAGE>
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with BlackRock Financial
Management Inc. (the "Adviser"), a wholly-owned corporate subsidiary of
BlackRockAdvisors, Inc., which is an indirect majority-owned subsidiary of PNC
Bank, N.A., and an Administration Agreement with MorganStanley Dean Witter
Advisors Inc. ("MSDWA"), formerly DeanWitter InterCapital, Inc.
The Trust reimburses BGT 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 BGT.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
and dollar rolls for the six months ended June 30, 1999 aggregated $67,410,881
and $8,830,941 respectively.
The Trust may invest up to 60% of its total assets in securities which are
not readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). At June 30, 1999, the Trust held
13% of its portfolio assets in securities restricted as to resale.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears) or mortgage related securities containing loans
or mortgages originated by PNC Bank or its affiliates, including Midland Loan
Services, Inc. It is possible under certain circumstances, PNC Mortgage
Securities Corp. or its affiliates, including Midland Loan Services, Inc. could
have interests that are in conflict with the holders of these mortgage-backed
securities, and such holders could have rights against PNC Mortgage Securities
Corp. or its affiliates, including Midland Loan Services, Inc.
The federal income tax basis of the Trust's investments at December 31, 1998
was substantially the same as the basis for financial reporting, and,
accordingly, net unrealized depreciation for federal income tax purposes was
$8,279,182 (gross unrealized appreciation--$15,413,221; gross unrealized
depreciation--$23,692,403).
Details of open financial futures contracts at June 30, 1999 is as follows:
Value at Value at
Number of Expiration Trade June 30, Unrealized
Contracts Type Date Date 1999 Depreciation
- -------- ----- ---------- -------- -------- ------------
Short position:
(750) 30 Yr. T-Bond Sep. 1999 $(86,126,197) $(86,929,688) $(803,491)
The Trust has no open interest rate caps as of June 30, 1999.
Details of open interest rate swaps at June 30, 1999 are as follows:
Notional Floating/
Amount Fixed Floating Termination Unrealized
(000) Type Rate Rate Date Appreciation
- -------- -------------- ------------ ------------ ---------- ------------
35,000 Floating Rate 3 Mo. T-Bill 3 Mo. LIBOR 9/10/03 $1,463
+80.25 bps
30,000 Floating Rate 3 Mo. T-Bill 3 Mo. LIBOR 9/10/03 1,080
+81.75 bps ------
$2,543
======
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's board of directors. Interest on the value of the
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender the value of which at least equals the principal amount
of the reverse repurchase transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding for
the six months ended June 30, 1999 was $106,951,884 at a weighted average
interest rate of approximately 4.91%. The maximum amount of reverse repurchase
agreements outstanding at any month-end during the period ended June 30, 1999
was $116,749,000 as of March 31, 1999 which was 17.5% 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 average monthly balance of dollar rolls outstanding for the six months
ended June 30, 1999 was approximately $7,500,000. The maximum amount of dollar
rolls outstanding at any month end during the period was $45,393,750 as of
January 31, 1999 which was 6.52% of total assets.
Note 5. Capital
There are 200 million shares of $.01 par value common stock authorized. BGT
owned all of the 57,510,639 shares outstanding at June 30, 1999.
11
<PAGE>
BlackRock
Directors
Laurence D. Fink, Chairman
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
Officers
Ralph L. Schlosstein, President
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Karen H. Sabath, Secretary
Investment Adviser
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
Administrator
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, NY 10048
(800) 729-8855
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
Transfer Agent
Morgan Stanley Dean Witter FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311-3977
(800) 526-3143
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
The accompanying financial statements as of June 30, 1999 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.
BGT Subsidiary, Inc.
c/o Morgan Stanley Dean Witter Advisors Inc.
71st Floor
Two World Trade Center
New York, NY 10048
Call toll free (800) 227-7BFM
[Recycle Logo]Printed on recycled paper 9247P-10-8
BGT Subsidiary, Inc.
- --------------------
Semi-Annual Report
June 30, 1999
