- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED)(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--130.2%
MORTGAGE PASS-THROUGHS--11.9%
$15,451 Federal Home Loan Mortgage Corp.,
6.50%, 01/01/26-01/01/28 ................. $14,571,758
Federal National Mortgage Association,
41,938@ 6.50%, 05/01/26-07/01/29 ................. 39,521,059
5,494 7.25%, 01/01/23, Project 797 ............. 5,402,632
2,799 7.50%, 06/01/08, 15 Year ................. 2,816,270
-----------
62,311,719
-----------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--13.5%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
8,169@ Series 90, Class 90-G,
10/15/20 ............................. 8,279,567
2,883 Series 1488, Class 1488-F,
09/15/06 ............................. 2,853,911
1,625 Series 1488, Class 1488-PF,
09/15/06 ............................. 1,628,071
1,400 Series 1601, Class 1601-PG,
12/15/06 ............................. 1,379,549
6,310 Series 1613, Class 1613-G,
05/15/06 ............................. 6,161,980
10,000 Series 1686, Class 1686-PG,
11/15/23 ............................. 9,718,700
5,765@ Series 1797, Class 1797-A,
07/15/08 ............................. 5,643,972
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
13,414@ Trust 1992-43, Class 43-E,
04/25/22 ............................. 13,339,777
8,895@ Trust 1992-145, Class 145-K,
07/25/02 ............................. 8,792,393
9,854@ Trust 1992-156, Class 156-H,
04/25/06 ............................. 9,639,837
2,205 Trust 1994-40, Class 40-H,
10/25/20 ............................. 2,159,533
1,162 Government National Mortgage
Association, Trust 1996-3, Class 3-C,
09/20/20 ............................. 1,186,924
-----------
70,784,214
-----------
ADJUSTABLE & INVERSE FLOATING
RATE MORTGAGES--3.7%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
468 Series 1603, Class 1603-MB,
10/15/23 .......................... 459,665
1,525 Series 1619, Class 1619-FH,
11/15/23 .......................... 1,536,728
1,290 Series 1637, Class 1637-LF,
12/15/23 .......................... 1,247,356
1,206 Series 1684, Class 1684-OB,
03/15/24 .......................... 1,162,006
2,118 Series 1712, Class 1712-S,
08/15/08 .......................... 2,068,695
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,469 Trust G93-17, Class 17-SH,
04/25/23 .......................... 892,198
2,000 Trust 1992-155, Class 155-SB,
12/25/06 .......................... 1,836,960
10,000@ Trust 1993-61, Class 61-FC,
11/25/18 .......................... 9,200,000
890 Trust 1993-225, Class 225-SB,
07/25/23 ......................... 807,961
-----------
19,211,569
-----------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--10.1%
AAA 90,777 CS First Boston Mortgage Securities,
Series 1997-C1, Class AX,
04/20/22** ........................ 7,482,834
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
8,718 Series G4, Class 4-S,
11/25/22. ......................... 356,886
8,475 Series G25, Class 25-S,
08/25/06 .......................... 136,023
15,962 Series 1386, Class 1386-S,
10/15/07 .......................... 1,496,411
14,378 Series 1496, Class 1496-GA,
03/15/19 .......................... 1,220,871
68,049 Series 1954, Class 1954-BA,
04/15/21 .......................... 778,478
15,766 Series 1954, Class 1954-MD,
03/15/16 .......................... 1,313,464
12,525 Series 2049, Class 2049-PK,
06/15/14 .......................... 758,108
22,670 Series 2054, Class 2054-PL,
10/15/19 .......................... 2,998,400
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
7,016 Trust G93-26, Class 26-PT,
12/25/17 .......................... 540,212
1,322 Trust 1992-208, Class 208-S,
11/25/07 .......................... 166,864
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED)(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES (CONTINUED)
$13,521 Trust 1993-121, Class 121-PH,
01/25/19 ............................ $ 999,891
7,982 Trust 1993-141, Class 141-PJ,
06/25/19 ............................ 557,399
20,598 Trust 1996-15, Class 15-SG,
08/25/08 ............................ 1,694,393
12,937 Trust 1996-20, Class 20-SB,
10/25/08 ............................ 3,179,586
8,499 Trust 1996-24, Class 24-SJ,
01/25/22 ............................ 2,276,471
543 Trust 1996-54, Class 54-SM,
09/25/23 ............................ 103,012
30,736 Trust 1997-35, Class 35-SB,
03/25/09 ............................ 442,116
17,813 Trust 1997-50, Class 50-HJ,
12/25/17 ............................ 938,753
37,370 Trust 1997-90, Class 90-L,
10/25/19 ............................ 2,989,576
2,891 Trust 1998-44, Class 44-IC,
01/18/14 ............................ 323,946
AAA 115,827 First Union Lehman Brothers
Bank of America Series 1998-C2,
Class IO, 05/18/28 .................. 4,464,331
Merrill Lynch Mortgage Investors Inc.,
AAA 104,523 Series 1997-C2, Class IO,
12/10/29 ............................ 6,786,104
AAA 72,507 Series 1998-C2, Class IO,
02/15/30 ............................ 5,191,204
AAA 96,176 Morgan Stanley Capital I,
Series 1998-HF1, Class X,
02/15/18 ............................ 5,168,184
N/R 816 Salomon Brothers Mortgage Securities,
Series 1987-3, Class B,
10/23/17 ............................ 214,947
----------
52,578,464
----------
PRINCIPAL ONLY MORTGAGE-
BACKED SECURITIES--6.7%
AAA 1,580@ Collateralized Mortgage Obligation,
Trust 26, Class A,
04/23/17 ............................ 1,303,055
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
2,269 Series 1597, Class 1597-H,
07/15/23 ............................ 1,280,079
2,425 Series 1662, Class 1662-PO,
01/15/09 ............................ 1,923,498
1,096 Series 1813, Class 1813-K,
02/15/24 ............................ 975,842
2,933 Series 1844, Class 1844-PC,
03/15/24 ............................ 2,581,069
971 Series 2009, Class 2009-A,
12/15/22 ............................ 687,378
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
3,629@ Trust 1993-67, Class 67-B,
12/25/21 ............................ 3,434,710
2,617 Trust 1993-92, Class 92-G,
05/25/23 ............................ 1,450,302
2,926 Trust 1993-113, Class 113-B,
07/25/23 ............................ 2,540,458
13,602 Trust 1993-205, Class 205-EB,
09/25/23 ............................ 12,590,183
392 Trust 1993-213, Class 213-H,
09/25/23 ............................ 369,699
1,225 Trust 1993-237, Class 237-C,
11/25/23 ............................ 1,117,531
2,318 Trust 1994-87, Class 87-E,
03/25/09 ............................ 1,754,086
1,523 Trust 1997-19, Class 19-C,
09/25/23 ............................ 1,094,432
706 Trust 1997-19, Class 19-H,
10/25/22 ............................ 487,671
AAA 1,743 Prudential Bache CMO Trust,
Series 10, Class H,
04/01/19 ............................ 1,514,387
----------
35,104,380
----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--5.0%
AAA 2,178 Aetna Commercial Mortgage Trust,
Series 1995-C5, Class B,
6.74%, 12/26/30 ..................... 2,168,714
Aa1 4,000 FDIC Trust,
Series 1994-C1, Class IIF,
8.70%, 09/25/25 .................... 4,135,143
AA- 2,290 Merrill Lynch Mortgage Investors, Inc.,
Series 1995-C1, Class C,
7.513%, 05/25/15 .................... 2,260,249
AAA 2,644 Mortgage Capital Funding Inc.,
Series 1998-MC3, Class A1,
6.00%, 11/18/31 ..................... 2,498,192
Paine Webber Mortgage
Acceptance Corp.,**
AAA 2,000 Series 1995-M1, Class A,
6.70%, 01/15/07 ..................... 1,962,500
A- 1,656 Series 1995-M1, Class D,
7.30%, 01/15/07 ..................... 1,638,157
A 3,095 Resolution Trust Corp.,
Series 1994-C1, Class C,
8.00%, 06/25/26 ..................... 3,091,584
AAA 3,925 Structured Asset Securities Corp.,
Series 1996-CFL, Class B,
6.30%, 02/25/28 ..................... 3,905,375
A 4,500 TVO Southwest,
Series 1994-MFI, Class A2,
9.37%, 11/18/04 ** .................. 4,574,832
----------
26,234,746
----------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED)(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--9.4%
AAA $ 7,091 Brazos Student Loan Financial Corp.,
Series 1998-A, Class A1,
5.89%, 06/01/06 ..................... $ 7,067,872
Broad Index Secured Trust Offering,**
Baa2 5,000 Series 1998-1A, Class A,
6.58%, 03/26/01 ..................... 4,892,066
Baa2 5,000 Series 1998-4A, Class B2,
7.64%, 09/09/01 ..................... 4,990,625
AAA 20,545 Chase Credit Card Master Trust,
Series 1997-5, Class 5-A,
6.194%, 08/15/05 .................... 20,103,154
N/R 2,946 Global Rated Eligible Asset Trust,
Series 1998-A,
7.33%, 09/15/07**/*** ............... 883,777
AAA 3,400 NPFTrust VI, Inc.,
Series 1999-1, Class A,
6.25%, 02/01/03** ................... 3,324,031
AA 1,809 Pegasus Aviation Lease Securitization,
Series 1999-1A, Class A1,
6.30%, 03/25/29** ................... 1,741,072
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,
8.724%, 04/15/06 .................... 989,210
4,500 Student Loan Marketing Association,
Trust 1995-1, Class CTFS,
10/25/09 ............................ 4,412,109
-----------
49,300,912
-----------
UNITED STATES GOVERNMENT
SECURITIES--0.9%
4,800 United States Treasury Note,
5.50%, 05/15/09 ......................... 4,472,256
-----------
ZERO COUPON BONDS--36.3%
Financing Corp (FICO Strips),
18,000 03/07/02 ................................ 15,372,720
29,300 12/27/02 ................................ 23,772,262
Government Trust Certificates (Israel),
19,432 05/15/02 ................................ 16,610,752
25,000 11/15/02 ................................ 20,652,500
10,000 Government Trust Certificates (Jordan),
05/15/02 ................................ 8,588,700
U.S. Treasury Strips,
51,200@ 10/31/02 ................................ 42,761,216
74,550@ 11/30/02 ................................ 61,873,518
-----------
189,631,668
-----------
TAXABLE MUNICIPAL BONDS--7.0%
AAA 1,000 Kern County California,
Pension Obligation,
6.39%, 08/15/02 ..................... 983,950
AAA 3,510 Long Beach California,
Pension Obligation,
6.56%, 09/01/02 ..................... 3,466,897
AAA 5,000 Los Angeles County California,
Pension Obligation,
6.54%, 06/30/02 ......................... 4,940,450
AAA 10,000 New Jersey Economic
Development Auth., Zero Coupon,
02/15/03 ................................ 8,034,300
New York City G.O.,
A- 5,000 6.54%, 03/15/02 ......................... 4,938,350
A- 5,000 7.125%, 08/15/02 ........................ 4,996,550
A- 5,000 7.34%, 04/15/02 ......................... 5,018,850
BBB 1,235 New York St. Environ. Fac. Auth.,
6.73%, 09/15/02 ......................... 1,215,228
AAA 1,950 San Francisco California
International Airport,
6.35%, 05/01/02 ......................... 1,920,165
AA 1,000 St. Josephs Health System California,
G.O., 7.13%, 07/01/02 ................... 998,420
----------
36,513,160
----------
CORPORATE BONDS--25.7%
FINANCE & BANKING--11.7%
A3 4,900 Ahmanson HF & Co.,
8.25%, 10/01/02 ......................... 4,985,260
A3 1,700 Amsouth Bancorp.,
6.75%, 11/01/25 ......................... 1,626,288
A+ 5,000 Goldman Sachs Group L P,
6.25%, 02/01/03 ** ...................... 4,854,370
Lehman Brothers Holdings Inc.,
A 5,000 6.625%, 12/27/02 ........................ 4,895,100
A 875 6.75%, 09/24/01 ......................... 868,479
A 5,000 7.25%, 04/15/03 ......................... 4,950,800
AA- 1,665 Merrill Lynch & Co. Inc.,
5.75%, 11/04/02 ......................... 1,608,207
Nationsbank Corp.,
Aa2 5,000 6.65%, 04/09/02 ......................... 4,957,350
Aa2 5,000 7.00%, 09/15/01 ......................... 5,003,500
Paine Webber Group Inc.,
BBB+ 2,190 7.875%, 02/15/03 ........................ 2,203,250
BBB+ 7,790 8.25%, 05/01/02 ......................... 7,930,220
Salomon Smith Barney Holdings Inc.,
Aa3 3,000 5.875%, 02/01/01 ........................ 2,966,550
Aa3 1,500 7.00%, 05/15/00 ......................... 1,502,130
Aa3 4,500 7.98%, 03/01/00 ......................... 4,510,710
A- 8,500 Transamerica Finance Corp.,
6.75%, 06/01/00 ......................... 8,509,520
----------
61,371,734
----------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED)(000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
INDUSTRIALS--4.1%
A $ 1,000 Bass America Inc.,
8.125%, 03/31/02 ........................ $ 1,017,940
A+ 1,000 Ford Motor Credit Co.,
8.00%, 06/15/02 . ....................... 1,020,254
Baa2 5,425 Jones Apparel Group Inc.,
6.25%, 10/01/01 ......................... 5,280,468
BBB+ 5,000 Norfolk Southern Corp.,
6.95%, 05/01/02 ......................... 4,978,400
Baa2 5,265 Raytheon Co.,
6.45%, 08/15/02 ......................... 5,129,479
AA- 4,000 TCI Communications Inc.,
9.25%, 04/15/02 ......................... 4,186,360
-----------
21,612,901
-----------
UTILITIES--1.7%
A3 5,000@ Columbia Energy Group,
6.610%, 11/28/02 ........................ 4,883,550
A 4,000 360 Communications,
7.125%, 03/01/03 ........................ 3,979,640
-----------
8,863,190
-----------
YANKEE BONDS--8.2%
Aa1 5,000@ African Development Bank,
7.75%, 12/15/01 ......................... 5,067,000
AAA 4,203 Banamex Remittance Master Trust,
Ser. 1996-1, 7.57%, 01/01/01** .......... 4,181,635
A 5,000 Corporacion Andina de Fomento,
7.10%, 02/01/03 ......................... 4,914,400
BBB- 3,500 Empresa Elec. Guacolda SA,
7.95%, 04/30/03 ** ...................... 3,325,000
BBB+ 1,650 Empresa Elec. Pehuenche,
7.30%, 05/01/03 ......................... 1,590,050
BBB 2,000 Korea Development Bank,
6.50%, 11/15/02 ......................... 1,940,180
BBB+ 10,000 Republic of Argentina,
Zero Coupon, 04/15/01 ................... 8,870,000
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 ........................ 5,037,500
Baa1 2,811 YPF Sociedad Anonima,
7.50%, 10/26/02 ......................... 2,805,956
-----------
42,731,721
-----------
Total corporate bonds ...................... 134,579,546
-----------
NOTIONAL
AMOUNT
(000)
--------
CALL OPTIONS PURCHASED
$85,000 Interest Rate Swap,
3 Month LIBOR over 5.60%,
expires 08/07/00 ....................... 26,159
-----------
Total long-term investments
(cost $695,687,146) ..................... 680,748,793
-----------
-----------
PRINCIPAL
AMOUNT
(000)
-----------
SHORT-TERM INVESTMENTS--1.4%
DISCOUNT NOTE
$ 7,451 Federal Home Loan Bank,
1.50%, due 01/03/00
(amortized cost $7,451,379) ............. 7,451,379
------------
Total investments before
investments sold short--131.6%
(cost $703,138,525) ..................... 688,200,172
INVESTMENTS SOLD SHORT--(1.4%)
(7,500) U.S. Treasury Note,
6.00%, 08/15/09
(proceeds received $7,355,859) .......... (7,265,625)
------------
Total investments net of
investments sold
short--130.2%
(cost $695,782,666) ..................... 680,934,547
Liabilities in excess of cash and other
assets--(30.2%) ......................... (158,092,080)
------------
NET ASSETS--100% ........................... $522,842,467
============
- --------------------
* 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 0.53% of portfolio 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 $3,011,959.
- --------------------------------------------------------------------------------
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
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $703,138,525)
(Note 1) ............................................ $688,200,172
Cash .................................................. 512,268
Deposit with broker for investments
sold short (Note 1) ................................. 7,481,250
Interest receivable ................................... 5,643,931
------------
701,837,621
------------
LIABILITIES
Reverse repurchase agreement (Note 4) ................. 165,314,125
Investment sold short, at value
(proceeds $7,355,859) (Note 1) ...................... 7,265,625
Interest payable ...................................... 634,849
Due to broker-variation margin ........................ 250,008
Due to parent (Note 2) ................................ 5,530,547
------------
178,995,154
------------
NET ASSETS ............................................ $522,842,467
============
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 ............... 16,205,202
Accumulated net realized gain ..................... 4,836,238
Net unrealized depreciation ....................... (15,044,119)
------------
Net assets, December 31, 1999 ..................... $522,842,467
============
Net asset value per share:
($522,842,467 O 57,510,639 shares of
common stock issued and outstanding) .............. $9.09
=====
- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of net premium amortization
of $1,124,951 and interest expense
of $6,068,532) ....................................... $37,637,969
-----------
Expenses
Investment advisory ..................................... 2,412,827
Administration .......................................... 533,722
Custodian ............................................... 167,000
Independent accountants ................................. 131,000
Directors ............................................... 80,000
Legal ................................................... 77,000
Miscellaneous ........................................... 178,182
-----------
Total operating expenses ............................. 3,579,731
-----------
Net investment income before excise tax ................. 34,058,238
Excise tax ........................................... 1,952,745
-----------
Net investment income ................................... 32,105,493
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments ............................................. (2,840,731)
Futures ................................................. (6,879,611)
Short sales ............................................. 5,421,557
Swaps ................................................... 1,830,903
Options written ......................................... 833,000
-----------
(1,634,882)
-----------
Change in net unrealized appreciation (depreciation) on:
Investments ............................................. (32,108,048)
Options written ......................................... 2,186,744
Futures ................................................. (418,694)
Short sales ............................................. 85,082
Swaps ................................................... (465,938)
-----------
(30,720,854)
-----------
Net loss on investments ..................................... (32,355,736)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS ........................................... $ (250,243)
===========
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN
NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH FLOWS
USED FOR OPERATING ACTIVITIES
Net decrease in net assets resulting
from operations ..................................... $ (250,243)
--------------
Increase in investments ................................. (35,484,166)
Net realized loss ....................................... 1,634,882
Decrease in unrealized appreciation ..................... 30,720,854
Decrease in unrealized appreciation on interest
rate swap ........................................... 465,937
Decrease in receivable for investments sold ............. 38,141,709
Decrease in receivable for variation margin ............. 385,351
Decrease in interest receivable ......................... 158,549
Decrease in payable for investments purchased ........... (83,828,030)
Decrease in swap option written ........................ (3,019,744)
Increase in deposits with broker for short sales ........ (5,753,625)
Increase in payable for investments sold short .......... 5,552,348
Decrease in interest payable ............................ (26,271)
Increase in accrued expenses and other
liabilities ......................................... 4,747,287
--------------
Total adjustments ..................................... (46,304,919)
--------------
Net cash flows used for operating activities .......... $ (46,555,162)
==============
INCREASE (DECREASE) IN CASH
Net cash flows used for operating activities ............ $ (46,555,162)
--------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements ........... 71,601,775
Cash dividends and distributions paid ............... (24,704,333)
--------------
Net cash flows provided by financing activities ......... 46,897,442
--------------
Net increase in cash ................................ 342,280
Cash at beginning of year ........................... 169,988
--------------
Cash at end of year ..................................... $ 512,268
==============
- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
STATEMENTS OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 1998*
DECEMBER 31, TO DECEMBER 31,
1999 1998
----------- -----------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment income .................. $32,105,493 $ 4,146,964
Net realized gain (loss)
on investments ...................... (1,634,882) 9,175,453
Net change in unrealized
appreciation ........................ (30,720,854) 15,676,735
------------ ------------
Net increase (decrease) in net
assets resulting from
operations .......................... (250,243) 28,999,152
Dividends and distributions:
Net investment income ............... (22,000,000) --
Net realized gain ................... (2,704,333) --
------------ ------------
Total dividends and
distributions ....................... (24,704,333) --
Transfer of assets from
BlackRock Strategic Term Trust
in exchange for shares issued ....... -- 518,797,891
------------ ------------
Total increase (decrease) .............. (24,954,576) 547,797,043
NET ASSETS
Beginning of period ........................ 547,797,043 --
------------ ------------
End of period (including
undistributed net investment
income of $16,205,202 and
$4,146,964 respectively) ................... $522,842,467 $547,797,043
=========== ============
- -----------------
*Commencement of investment operations.
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED OCTOBER 31, 1998*
DECEMBER 31, TO DECEMBER 31,
1999 1998
----------- -----------
PER SHARE OPERATING PERFORMANCE:
<S> <C> <C>
Net asset value, beginning of period ........................................................ $ 9.53 $ 9.02
-------- --------
Net investment income (net of interest expense of $0.11 and $0.01, respectively) .......... 0.56 0.07
Net realized and unrealized gain (loss) ................................................... (0.57) 0.44
-------- --------
Net increase (decrease) from investment operations .......................................... (0.01) 0.51
-------- --------
Dividends and distributions:
Dividends from net investment income ...................................................... (0.38) --
Distributions from net realized gain ...................................................... (0.05) --
-------- --------
Total dividends and distributions ........................................................... (0.43) --
-------- --------
Net asset value, end of period .............................................................. $ 9.09 $ 9.53
======== ========
TOTAL INVESTMENT RETURN ..................................................................... (0.10)% 5.65%
======== ========
RATIOS TO AVERAGE NET ASSETS:
Operating expenses .......................................................................... 0.67% 0.66%++
Operating expenses and Interest Expense ..................................................... 1.80% 1.55%++
Operating expenses, Interest Expense and Excise Taxes ....................................... 2.16% 1.72%++
Net Investment Income ....................................................................... 5.99% 4.37%++
SUPPLEMENTAL DATA:
Average net assets (000) .................................................................... $536,231 $543,706
Portfolio turnover rate ..................................................................... 57% 2%
Net assets, end of period (000) ............................................................. $522,842 $547,797
Reverse repurchase agreements
outstanding, end of period (000) .......................................................... $165,314 $ 93,712
Asset coverage+++ ........................................................................... $ 4,163 $ 6,846
</TABLE>
- -----------------------
* Commencement of investment operations.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the last
day of each period reported. Total investment 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 audited 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
- --------------------------------------------------------------------------------
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 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 having a remaining maturity of 60 days or less are
value at amortized cost which approximates market value.
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
8
<PAGE>
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
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
9
<PAGE>
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 TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis, and the Trust accretes discount and amortizes premium on
securities purchased using the interest method.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all 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 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.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Trust accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect caused by
applying this statement was to decrease paid-in capital and increase
undistributed net investment income by $1,952,745 due to certain expenses not
being deductible for tax purposes. Net investment income, net realized gains and
net assets were not affected by this change.
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with BlackRock Financial
Management Inc. (the "Advisor"), a wholly-owned subsidiary of BlackRockAdvisors,
Inc., which is a wholly-owned subsidiary of BlackRock, Inc., which in turn is an
indirect majority-owned subsidiary of PNC Bank Corp. The Trust has an
Administration Agreement with 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 year ended December 31, 1999 aggregated $448,765,802
and $266,689,779 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 December 31,
1999, the Trust held 10.0% 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 December 31, 1999
was substantially the same as the basis for financial reporting, and,
accordingly, net unrealized depreciation for federal income tax purposes was
$14,938,353 (gross unrealized appreciation--$8,907,002; gross unrealized
depreciation--$23,845,355).
Details of open financial futures contracts at December 31, 1999 were as
follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE DECEMBER 31, UNREALIZED
CONTRACTS TYPE DATE DATE 1998 (DEPRECIATION)
-------- ----- -------- ------- ----------- ------------
Long positions: 30 Yr.
500 T-Bond Mar. 2000 $45,664,750 $45,468,750 ($196,000)
=========
10
<PAGE>
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 year ended December 31, 1999 was $118,995,006 at a weighted average
interest rate of approximately 5.10%. The maximum amount of reverse repurchase
agreements outstanding at any month-end during the year was $159,515,500 as of
November 30, 1999 which was 22.8% 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 during the year
ended December 31, 1999 was approximately $3,750,000. The maximum amount of
dollar rolls outstanding at any month-end during the year 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 December 31, 1999.
11
<PAGE>
- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholder and Board of Directors of
BGT Subsidiary, Inc.:
We have audited the accompanying statement of assets and liabilities of BGT
Subsidiary, Inc. (the "Trust"), a wholly-owned subsidiary of the Blackrock
Strategic Term Trust, Inc., including the portfolio of investments, as of
December 31, 1999, and the related statements of operations and of cash flows
for the year then ended and statement of changes in net assets and financial
highlights for the period from October 31, 1998 (commencement of operations) to
December 31, 1998 and for the year ended December 31, 1999. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1999, by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of BGT
Subsidiary, Inc. as of December 31, 1999, and the results of its operations, its
cash flows, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
/S/ DELOITTE & TOUCHE, LLP
- --------------------------
Deloitte & Touche, LLP
New York, New York
February 11, 2000
12
<PAGE>
BLACKROCK
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISOR
BlackRock Advisors, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
ADMINISTRATOR
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
Four Times Square
New York, NY 10036
This report is for shareholder information. This is not a prospectus
intended for use in the purchase or sale of 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
[GRAPHIC] Printed on recycled paper
BLACKROCK
BGT SUBSIDIARY, INC.
- --------------------------------------------------------------------------------
ANNUAL REPORT
DECEMBER 31, 1999
