--------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--126.1%
MORTGAGE PASS-THROUGHS--11.8%
$14,769@ Federal Home Loan Mortgage Corp.,
6.50%, 01/01/26-01/01/28 ................... $ 13,941,648
Federal National Mortgage Association,
40,646@ 6.50%, 05/01/26-02/01/30 ................... 38,364,579
5,443 7.25%, 01/01/23, Proj. 797 ................. 5,348,312
2,486 7.50%, 06/01/08, 15 Year ................... 2,477,943
------------
60,132,482
------------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--9.3%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
7,327@ Series 90, Class 90-G,
10/15/20 ................................. 7,411,313
2,519 Series 1488, Class 1488-F,
09/15/06 ................................. 2,490,191
1,419 Series 1488, Class 1488-PF,
09/15/06 ................................. 1,416,481
2,000 Series 1601, Class 1601-PG,
12/15/06 ................................. 1,973,620
3,033 Series 1613, Class 1613-G,
05/15/06 ................................. 2,990,574
10,000 Series 1686, Class 1686-PG,
11/15/23 ................................. 9,771,800
5,765 Series 1797, Class 1797-A,
07/15/08 ................................. 5,638,553
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
7,313 Trust 1992-145, Class 145-K,
07/25/02 ................................. 7,244,348
5,492@ Trust 1992-156, Class 156-H,
04/25/06 ................................. 5,405,869
2,205 Trust 1994-40, Class 40-H,
10/25/20 ................................. 2,158,100
Government National Mortgage
Association,
958 Trust 1996-3, Class 3-C,
09/20/20 ................................. 975,535
------------
47,476,384
------------
ADJUSTABLE & INVERSE FLOATING
RATE MORTGAGES--7.3%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
5,149 Series 1594, Class 1594-S,
10/15/08 ................................. 4,710,885
404 Series 1603, Class 1603-MB,
10/15/23 ................................. 395,515
1,478 Series 1619, Class 1619-FH,
11/15/23 ................................. 1,477,209
1,290 Series 1637, Class 1637-LF,
12/15/23 ................................. 1,248,917
7,540 Series 1640, Class 1640-SE,
10/15/07 ................................. 7,151,373
1,206 Series 1684, Class 1684-OB,
03/15/24 ................................. 1,191,389
2,118 Series 1712, Class 1712-S,
08/15/08 ................................. 2,070,686
1,061 Series 2020, Class 2020-SB,
09/15/23 ................................. 1,034,009
1,860 Series 2068, Class 2068-SE,
06/15/27 ................................. 1,815,936
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,469 Trust G93-17, Class 17-SH,
04/25/23 ................................. 612,246
2,000 Trust 1992-155, Class 155-SB,
12/25/06 ................................. 1,793,760
9,318 Trust 1993-61, Class 61-FC,
11/25/18 ................................. 9,239,162
735 Trust 1993-179, Class 179-SG,
10/25/23 ................................. 699,508
3,001 Trust 1993-185, Class 185-SG,
04/25/19 ................................. 2,769,340
890 Trust 1993-225, Class 225-SB,
07/25/23 ................................. 798,199
------------
37,008,134
------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--8.0%
AAA 89,939 CS First Boston Mortgage Securities,
Series 1997-C1, Class AX,
04/20/22** ............................... 7,229,590
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
7,341 Series G4, Class 4-S,
11/25/22 ................................. 247,773
6,414 Series G25, Class 25-S,
08/25/06 ................................. 72,347
14,196 Series 1386, Class 1386-S,
10/15/07 ................................. 1,126,803
11,867 Series 1496, Class 1496-GA,
03/15/19 ................................. 882,336
54,484 Series 1954, Class 1954-BA,
04/15/21 ................................. 165,085
13,186 Series 1954, Class 1954-MD,
03/15/16 ................................. 944,769
9,400 Series 2049, Class 2049-PK,
06/15/14 ................................. 414,183
See Notes to Financial Statements.
1
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES (CONTINUED)
$ 21,712 Series 2054, Class 2054-PL,
10/15/19 ................................. $ 2,444,111
3,009 Series 2075, Class 2075-ID,
11/15/14 ................................. 113,773
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
5,060 Trust G93-26, Class 26-PT,
12/25/17 ................................. 374,404
989 Trust 1992-208, Class 208-S,
11/25/07 ................................. 102,155
10,076 Trust 1993-121, Class 121-PH,
01/25/19 ................................. 657,252
5,631 Trust 1993-141, Class 141-PJ,
06/25/19 ................................. 377,055
6,317 Trust 1993-154, Class 154-EA,
10/25/06 ................................. 338,107
20,598 Trust 1996-15, Class 15-SG,
08/25/08 ................................. 1,142,572
12,937 Trust 1996-20, Class 20-SB,
10/25/08 ................................. 2,506,476
8,499 Trust 1996-24, Class 24-SJ,
01/25/22 ................................. 1,827,296
543 Trust 1996-54, Class 54-SM,
09/25/23 ................................. 115,475
26,744 Trust 1997-35, Class 35-SB,
03/25/09 ................................. 303,403
13,141 Trust 1997-50, Class 50-HJ,
12/25/17 ................................. 553,102
31,192 Trust 1997-90, Class 90-L,
10/25/19 ................................. 2,238,832
2,891 Trust 1998-44, Class 44-IC,
01/18/14 ................................. 268,148
Merrill Lynch Mortgage Investors Inc.,
AAA 103,843 Series 1997-C2, Class IO,
12/10/29 ................................. 6,557,555
AAA 71,661 Series 1998-C2, Class IO,
02/15/30 ................................. 4,890,815
AAA 93,834 Morgan Stanley Capital I,
Series 1998-HF1, Class X,
02/15/18 ................................. 4,787,959
N/R 717 Salomon Brothers
Mortgage Securities, VI
Series 1987-3, Class B,
10/23/17 ................................. 179,467
------------
40,860,843
------------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--6.7%
AAA 1,390@ Collateralized Mortgage Obligation,
Trust 26, Class A,
04/23/17 ................................. 1,146,371
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
2,269 Series 1597, Class 1597-H,
07/15/23 ................................. 1,275,812
2,229 Series 1662, Class 1662-PO,
01/15/09 ................................. 1,789,499
1,047 Series 1813, Class 1813-K,
02/15/24 ................................. 956,739
2,933 Series 1844, Class 1844-PC,
03/15/24 ................................. 2,478,413
971 Series 2009, Class 2009-A,
12/15/22 ................................. 687,766
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
2,584 Trust 1992-40, Class 40-C,
02/25/19 ................................. 2,451,460
2,594 Trust 1993-67, Class 67-B,
12/25/21 ................................. 2,477,630
2,617 Trust 1993-92, Class 92-G,
05/25/23 ................................. 1,387,266
2,926 Trust 1993-113, Class 113-B,
07/25/23 ................................. 2,550,525
13,602 Trust 1993-205, Class 205-EB,
09/25/23 ................................. 12,305,360
386 Trust 1993-213, Class 213-H,
09/25/23 ................................. 381,930
1,133 Trust 1993-237, Class 237-C,
11/25/23 ................................. 1,057,931
2,245 Trust 1994-87, Class 87-E,
03/25/09 ................................. 1,732,667
1,523 Trust 1997-19, Class 19-C,
09/25/23 ................................. 1,047,779
706 Trust 1997-19, Class 19-H,
10/25/22 ................................. 485,661
------------
34,212,809
------------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--2.2%
AA 2,290 Merrill Lynch Mortgage Investors, Inc.,
Series 1995-C1, Class C,
7.52%, 05/25/15 .......................... 2,280,045
AAA 2,000 Paine Webber Mortgage
Acceptance Corp.,
Series 1995-M1, Class A,
6.70%, 01/15/07** ........................ 1,958,740
AA 1,574 Resolution Trust Corp.,
Series 1994-C1, Class C,
8.00%, 06/25/26 .......................... 1,572,393
A+ 4,500 TVO Southwest,
Series 1994-MF1, Class A2,
9.37%, 11/18/04** ........................ 4,585,464
N/R 699 Vendee Mortgage Trust,
Series 1995-1C, Class 3E,
8.00%, 07/15/18 .......................... 702,824
------------
11,099,466
------------
ASSET-BACKED SECURITIES--8.0%
Broad Index Secured Trust Offering,**
Baa2 5,000 Series 1998-1A, Class A,
6.58%, 03/26/01 .......................... 4,940,933
See Notes to Financial Statements.
2
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (CONTINUED)
Baa2 $ 5,000 Series 1998-4A, Class B2,
8.42%, 09/09/01 .......................... $ 4,982,813
AAA 20,545 Chase Credit Card Master Trust,
Series 1997-5, Class 5-A,
6.194%, 08/15/05 ......................... 20,180,788
N/R 2,937 Global Rated Eligible Asset Trust,
Series 1998-A,
7.33%, 09/15/07**/*** .................... 881,069
AAA 3,400 NPF Trust VI, Inc.,
Series 1999-1, Class A,
6.25%, 02/01/03** ........................ 3,317,125
Structured Mortgage Asset
Residential Trust, @@/***
N/R 4,077 Series 1997-2, Class 2,
8.24%, 03/15/06 .......................... 896,996
N/R 4,496 Series 1997-3,
8.57%, 04/15/06 .......................... 989,210
A1 4,500 Student Loan Marketing Association,
Trust 1995-1, Class CTFS,
10/25/09 ................................. 4,421,250
------------
40,610,184
------------
U.S.GOVERNMENT SECURITIES--2.9%
4,800@ United States Treasury Note,
5.50%, 05/15/09 ............................ 4,592,976
10,000@ United States Treasury Bond,
6.125%, 08/15/29 ........................... 10,100,000
------------
14,692,976
------------
ZERO COUPON BONDS--38.4%
Financing Corp (FICO Strips),
18,000 03/07/02 ................................... 15,530,040
29,300 12/27/02 ................................... 24,109,505
Government Trust Certificates (Israel),
19,432 05/15/02 ................................... 17,161,747
25,000 11/15/02 ................................... 21,425,750
10,000 Government Trust Certificates (Jordan),
05/15/02 ................................... 8,880,100
U.S.Treasury Strips,
51,200@ 10/31/02 ................................... 44,186,112
74,550@ 11/30/02 ................................... 63,997,448
------------
195,290,702
------------
TAXABLE MUNICIPAL BONDS--6.9%
AAA 1,000 Kern County California,
Pension Obligation,
6.39%, 08/15/02 .......................... 984,090
AAA 3,510 Long Beach California,
Pension Obligation,
6.56%, 09/01/02 .......................... 3,464,686
AAA 5,000 Los Angeles County California,
Pension Obligation,
6.54%, 06/30/02 .......................... 4,938,900
AAA 8,000 New Jersey Economic Development
Auth., Zero Coupon,
02/15/03 ................................. 6,622,080
New York City G.O.,
A- 5,000 6.54%, 03/15/02 ............................ 4,944,500
A- 5,000 7.125%, 08/15/02 ........................... 4,988,400
A- 5,000 7.34%, 04/15/02 ............................ 5,007,400
A 1,235 New York St. Environ. Fac. Auth.,
6.73%, 09/15/02 ............................ 1,215,117
AAA 1,950 San Francisco California
International Airport,
6.35%, 05/01/02 ............................ 1,921,628
AA- 1,000 St. Josephs Health System California,
Rev., 7.13%, 07/01/02 ...................... 996,150
------------
35,082,951
------------
CORPORATE BONDS--24.6%
FINANCE & BANKING--10.2%
A3 4,900 Ahmanson HF & Co.,
8.25%, 10/01/02 ............................ 4,927,097
A3 1,700 Amsouth Bancorp.,
6.75%, 11/01/25 ............................ 1,601,842
A- 5,000 Bombardier Capital Inc.,
7.30%, 12/15/02** .......................... 4,955,000
A+ 5,000 Goldman Sachs Group,
6.25%, 02/01/03** .......................... 4,806,135
Lehman Brothers Holdings Inc.,
A 5,000 6.625%, 12/27/02 ........................... 4,871,450
A 875 6.75%, 09/24/01 ............................ 865,417
A 5,000 7.25%, 04/15/03 ............................ 4,911,331
AA- 1,665 Merrill Lynch & Co.Inc.,
5.75%, 11/04/02 ............................ 1,611,911
Nationsbank Corp.,
Aa2 5,000 6.65%, 04/09/02 ............................ 4,938,450
Aa2 5,000 7.00%, 09/15/01 ............................ 4,981,100
Paine Webber Group Inc.,
BBB+ 2,190 7.875%, 02/15/03 ........................... 2,172,830
BBB+ 7,790 8.25%, 05/01/02 ............................ 7,825,912
Aa3 3,000 Salomon Smith Barney Holdings Inc.,
5.875%, 02/01/01 ........................... 2,976,930
------------
51,445,405
------------
INDUSTRIALS--4.2%
A 1,000 Bass America Inc.,
8.125%, 03/31/02 ........................... 1,006,270
A+ 1,000 Ford Motor Credit Co.,
8.00%, 06/15/02 ............................ 1,010,310
Baa2 5,425 Jones Apparel Group Inc.,
6.25%, 10/01/01 ............................ 5,284,018
Baa1 5,000 Norfolk Southern Corp.,
6.95%, 05/01/02 ............................ 4,930,750
Baa2 5,265 Raytheon Co.,
6.45%, 08/15/02 ............................ 5,138,008
AA- 4,000 TCI Communications Inc.,
9.25%, 04/15/02 ............................ 4,140,280
------------
21,509,636
------------
UTILITIES--3.2%
A3 5,000@ Columbia Energy Group,
6.61%, 11/28/02 ............................ 4,861,650
See Notes to Financial Statements.
3
<PAGE>
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
UTILITIES (CONTINUED)
BBB $ 2,850 Telecom de Puerto Rico,
6.15%, 05/15/02 ............................ $2,766,469
BBB- 5,000 Valero Energy,
6.75%, 12/15/02** ......................... 4,839,528
A 4,000 360 Communications,
7.125%, 03/01/03 ........................... 3,952,520
------------
16,420,167
------------
YANKEE--7.0%
N/R 2,310 Banamex Remittance Master Trust,
Ser. 1996-1, 7.57%, 01/01/01** ............. 2,300,934
A 5,000 Corporacion Andina de Fomento,
7.10%, 02/01/03 ............................ 4,883,250
BBB- 3,500 Empresa Elec. Guacolda SA,
7.95%, 04/30/03** .......................... 3,353,041
BBB+ 1,650 Empresa Elec. Pehuenche,
7.30%, 05/01/03 ............................ 1,597,776
BBB 2,000 Korea Development Bank,
6.50%, 11/15/02 ........................... 1,934,020
BBB+ 10,000 Republic of Argentina,
Zero Coupon, 04/15/01 ..................... 9,275,000
BBB- 5,000 Telecom Argentina,
9.75%, 07/12/01** ......................... 5,000,000
BBB- 5,000 Transpatadora de Gas Tragas,
10.25%, 04/25/01 ........................... 5,025,000
BBB+ 2,357 YPF Sociedad Anonima,
7.50%, 10/26/02 ............................ 2,321,863
------------
35,690,884
------------
Total corporate bonds ........................ 125,066,092
------------
NOTIONAL
AMOUNT
(000)
--------
CALL OPTIONS PURCHASED
$85,000 Interest Rate Swap,
5.60% over 3 Month LIBOR,
expires 08/07/00 .......................... 9
------------
Total long-term investments
(cost $653,446,821) ........................ 641,533,032
------------
PRINCIPAL
AMOUNT
(000)
--------
SHORT-TERM INVESTMENTS--0.1%
DISCOUNT NOTE
480 Student Loan Marketing Association,
6.57%, 07/03/00
(amortized cost $479,825) ................. 479,825
------------
Total investments before
investments sold short--126.2%
(cost $653,926,646) ........................ 642,012,857
------------
INVESTMENTS SOLD SHORT--(1.5%)
(7,500) U.S.Treasury Note,
6.00%, 08/15/09
(proceeds received $7,355,859) ............. (7,440,225)
------------
Total investments net of
investments sold
short--124.7%
(cost $646,570,787) ........................ 634,572,632
------------
Liabilities in excess of other
assets--(24.7%) ............................ (125,536,156)
------------
NET ASSETS -- 100% ........................... $509,036,476
============
----------
* 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 0.54% of net assets.
@ Entire or partial principal amount pledged as collateral for reverse
repurchase agreements or financial futures contracts.
@@ Security restricted as to public resale. The securities were acquired in
1997 and have an aggregate current cost of $2,771,263.
--------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
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, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $653,926,646)
(Note 1) ................................................. $ 642,012,857
Cash ....................................................... 2,827
Deposit with broker as collateral for investments
sold short (Note 1) ...................................... 7,612,500
Interest receivable ........................................ 5,578,783
-------------
655,206,967
-------------
LIABILITIES
Reverse repurchase agreements (Note 4) ..................... 130,574,125
Investment sold short, at value
(proceeds $7,355,859) (Note 1) ........................... 7,440,225
Interest payable ........................................... 474,766
Due to parent (Note 2) ..................................... 7,681,375
-------------
146,170,491
-------------
NET ASSETS ................................................. $ 509,036,476
=============
Net assets were comprised of:
Common stock, at par (Note 5) ............................ $ 575,106
Paid-in capital in excess of par ......................... 516,270,040
-------------
516,845,146
Undistributed net investment income ...................... 8,554,659
Accumulated net realized loss ............................ (4,141,001)
Net unrealized depreciation .............................. (12,222,328)
-------------
Net assets, June 30, 2000 ................................ $ 509,036,476
=============
Net asset value per share:
($509,036,476 / 57,510,639 shares of
common stock issued and outstanding) ..................... $8.85
=====
--------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
--------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest earned (net of premium amortization
of $3,362,152 and interest expense
of $4,224,483) ......................................... $ 15,039,930
-------------
Operating expenses
Investment advisory ...................................... 1,171,612
Administration ........................................... 260,358
Legal .................................................... 97,000
Custodian ................................................ 80,000
Independent accountants .................................. 21,000
Miscellaneous ............................................ 71,016
-------------
Total operating expenses ............................... 1,700,986
-------------
Net investment income before excise tax .................. 13,338,944
Excise tax ............................................. 451,405
-------------
Net investment income .................................... 12,887,539
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized loss on:
Investments .............................................. (1,034,077)
Futures .................................................. (7,943,162)
-------------
(8,977,239)
-------------
Change in net unrealized appreciation (depreciation) on:
Investments .............................................. 3,024,567
Futures .................................................. (28,176)
Short sales .............................................. (174,600)
-------------
2,821,791
-------------
Net loss on investments .................................... (6,155,448)
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................ $ 6,732,091
=============
See Notes to Financial Statements.
5
<PAGE>
--------------------------------------------------------------------------------
BGT 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 .......................................... $ 6,732,091
-----------
Decrease in investments .................................... 40,031,867
Net realized loss .......................................... 8,977,239
Decrease in unrealized depreciation ........................ (2,821,791)
Increase in receivable for variation margin ................ (250,008)
Decrease in interest receivable ............................ 65,147
Increase in deposits with broker for short sales ........... (131,250)
Increase in payable for investments sold short ............. 174,600
Decrease in interest payable ............................... (160,083)
Increase in accrued expenses and other
liabilities .............................................. 2,150,829
-----------
Total adjustments ........................................ 48,036,550
-----------
Net cash flows provided by operating activities ............ $54,768,641
===========
INCREASE (DECREASE) IN CASH
Net cash flows provided by operating activities ............ $54,768,641
-----------
Cash flows used for financing activities:
Decrease in reverse repurchase agreements ................ (34,740,000)
Cash dividends paid ...................................... (20,538,082)
-----------
Net cash flows used for financing activities ............... (55,278,082)
-----------
Net decrease in cash ....................................... (509,441)
Cash at beginning of period ................................ 512,268
-----------
Cash at end of period ...................................... $ 2,827
===========
--------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
STATEMENTS 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 .......................... $ 12,887,539 $ 32,105,493
Net realized loss .............................. (8,977,239) (1,634,882)
Net change in unrealized
appreciation (depreciation) .................. 2,821,791 (30,720,854)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations ................................... 6,732,091 (250,243)
Dividends and distributions:
Net investment income ........................ (20,538,082) (22,000,000)
Net realized gain ............................ -- (2,704,333)
------------ ------------
Total dividends and
distributions ................................ (20,538,082) (24,704,333)
------------ ------------
Total decrease ................................. (13,805,991) (24,954,576)
NET ASSETS
Beginning of period .............................. 522,842,467 547,797,043
------------ ------------
End of period (including
undistributed net investment
income of $8,554,659 and
$16,205,202, respectively) ..................... $509,036,476 $522,842,467
============ ============
See Notes to Financial Statements.
6
<PAGE>
--------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
--------------------------------------------------------------------------------
FOR THE
PERIOD
OCTOBER 31,
SIX MONTHS 1998*
ENDED YEAR ENDED TO DECEM-
JUNE 30, DECEMBER 31, BER 31,
2000 1999 1998
-------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ....... $ 9.09 $ 9.53 $ 9.02
-------- -------- --------
Net investment income (net of
interest expense of $0.07,
$0.11 and $0.01, respectively) ......... 0.25 0.56 0.07
Net realized and unrealized gain
(loss) on investments .................. (0.13) (0.57) 0.44
-------- -------- --------
Net increase (decrease) from
investment operations .................. 0.12 (0.01) 0.51
-------- -------- --------
Dividends and distributions:
Dividends from net investment income ..... (0.36) (0.38) --
Distributions from net realized gain ..... -- (0.05) --
-------- -------- --------
Total dividends and distributions .......... (0.36) (0.43) --
-------- -------- --------
Net asset value, end of period ............. $ 8.85 $ 9.09 $ 9.53
======== ======== ========
TOTAL INVESTMENT RETURN+ ................... 1.32% (0.10)% 5.65%
======== ======== ========
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ......................... 0.66%++ 0.67% 0.66%++
Operating expenses and interest expense .... 2.28%++ 1.80% 1.55%++
Operating expenses, interest expense
and excise taxes ......................... 2.46%++ 2.16% 1.72%++
Net investment income ...................... 4.96%++ 5.99% 4.37%++
SUPPLEMENTAL DATA:
Average net assets (000) ................... $520,716 $536,231 $543.706
Portfolio turnover rate .................... 10% 57% 2%
Net assets, end of period (000) ............ $509,036 $522,842 $547,797
Reverse repurchase agreements outstanding,
end of period (000) ...................... $130,574 $165,314 $ 93,712
Asset coverage+++ .......................... $ 4,898 $ 4,163 $ 6,846
----------
* Commencement of investment operations.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the
last day of each period reported. Total investment 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
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--------------------------------------------------------------------------------
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. 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
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
positions, or collections of positions, so that changes in interest rates do not
change the duration of the portfolio unexpectedly. In general, the Trust uses
options to hedge a long or short position or an overall portfolio that is longer
or shorter than the benchmark security. A call option gives the purchaser of the
option the right (but not obligation) to buy, and obligates the seller to sell
(when the option is exercised), the underlying position at the exercise price at
any time or at a specified time during the option period. A put option gives the
holder the right to sell and obligates the writer to buy the underlying position
at the exercise price at any time or at a specified time during the option
period. Put options can be 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
8
<PAGE>
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
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.
9
<PAGE>
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 period ended June
30, 2000.
INTEREST RATE CAPS: Interest rate caps are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate over a specified fixed or floating rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changes in short term rates. Owning interest rate
caps reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
Transaction fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate cap. The asset or liability is subsequently adjusted
to the current market value of the interest rate cap purchased or sold. Changes
in the value of the interest rate cap are recognized as unrealized gains and
losses.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of
the portfolio and its exposure to changes in short-term interest rates. Selling
interest rate floors reduces the portfolio's duration, making it less sensitive
to changes in interest rates from a market value perspective. The Trust's
leverage provides extra income in a period of falling rates. Selling floors
reduces some of the 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.
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 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.
FEDERAL INCOME TAXES: It is the Trust's intention to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to
shareholder. Therefore, no federal income tax provision is required. As part of
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 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.
10
<PAGE>
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 Morgan Stanley Dean Witter
Advisors Inc. ("MSDWA"), formerly Dean Witter 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 period ended June 30, 2000 aggregated $64,261,394 and
$71,983,972 respectively.
The Trust may invest up to 60% of its portfolio 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 10.8% of its portfolio assets in restricted securities.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by affiliates such
as PNC Mortgage Securities Corp. (or Sears Mortgage if PNC Mortgage Securities
Corp. succeeded to rights and duties of Sears) or mortgage related securities
containing loans or mortgages originated by PNC Bank or its affiliates,
including Midland Loan Services, Inc. It is possible under certain
circumstances, PNC Mortgage Securities Corp. or its affiliates, including
Midland Loan Services, Inc., could have interests that are in conflict with the
holders of these mortgage backed securities, and such holders could have rights
against PNC Mortgage Securities Corp. or its affiliates, including Midland Loan
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 depreciation for federal income tax purposes was
$11,913,789 (gross unrealized appreciation--$12,002,263; gross unrealized
depreciation--$23,916,052).
Details of open financial futures contract at June 30, 2000, were as
follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE JUNE 30, UNREALIZED
CONTRACTS TYPE DATE DATE 2000 DEPRECIATION
--------- ---- ---------- ------------- ------------- -----------
Short positions:
30 Yr.
500 T-Bond Sept. 2000 $(36,825,824) $(37,050,000) $ (224,176)
==========
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's board of directors. Interest on the value of the
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender the value of which at least equals the principal amount
of the reverse repurchase transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended June 30, 2000 was $141,562,065 at a weighted average
interest rate of approximately 5.96%. The maximum amount of reverse repurchase
agreements outstanding at any month-end during the period was $156,185,625 as of
February 29, 2000 which was 22.6% 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 engage in dollar rolls during the period ending June 30,
2000.
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, 2000.
11
<PAGE>
---------
BLACKROCK
---------
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISOR
BlackRock Advisors, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
ADMINISTRATOR
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, NY 10048
(800) 869-6397
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
INDEPENDENT ACCOUNTANTS
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.
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
9247P-10-8
[RECYCLE LOGO] Printed on recycled paper
BGT SUBSIDIARY, INC.
-----------------------------
SEMI-ANNUAL REPORT
JUNE 30, 2000
[GRAPHIC OMITTED]
