- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--128.4%
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--0.4%
AAA $ 5 American Housing Trust VIII,
Mortgage Pass-Through
Certificates, Series 8, Class M,
1/25/21 (I) ............................ $ 1,159
AAA 575 American Southwest Financial Corp.,
Series 48, Class 48-E,
9/01/17 ................................ 585,921
1,103 Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates, Series 172,
Class 172-H, 5/15/20 ................... 1,302,894
-----------
1,889,974
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--2.1%
CBA Mortgage Corp.,
AA 5,489 Series 1993-C1, Class B,
7.76%, 12/01/03 ....................... 5,579,335
AAA 4,951 Series 1993-C1, Class A2,
7.76%, 12/25/03 ........................ 5,033,942
-----------
10,613,277
-----------
CORPORATE BONDS--72.1%
FINANCE & BANKING--34.3%
Baa3 10,000 A T & T Capital Corp.,
5.81%, 12/04/98 ........................ 9,929,300
A2 5,000 Allstate Corp.,
5.875%, 6/15/98 ........................ 4,997,050
Baa1 11,100 Aristar, Inc.,
8.875%, 8/15/98 ........................ 11,436,441
Associates Corp. of North America,
Aa3 6,150 5.58%, 12/14/98 ........................ 6,110,025
Aa3 1,500 7.30%, 3/15/98 ......................... 1,512,360
A1 7,769 Bank of Montreal,
10.00%, 9/01/98 ........................ 8,099,338
A3 3,000 Comerica, Inc.,
10.125%, 6/01/98 ....................... 3,105,720
A1 3,000 First Chicago Corp.,
8.50%, 6/01/98 ......................... 3,062,130
A2 6,000 Fleet Financial Group, Inc.,
6.00%, 10/26/98 ........................ 5,983,260
A1 4,000 Ford Capital B.V.,
9.00%, 8/15/98 ......................... 4,117,480
A+ 10,000 Goldman Sachs Group,
6.10%, 4/15/98 ......................... 10,001,101
A3 5,000 Huntington Bancshares, Inc.,
5.68%, 12/08/98 ........................ 4,968,350
A2 6,000 ITT Hartford Group,
8.20%, 10/15/98 ........................ 6,142,505
A1 6,000 Kemper Corp.,
8.80%, 11/01/98 ........................ 6,190,920
Baa1 9,960 Lehman Brothers, Inc.,
5.75%, 11/15/98 ........................ 9,892,471
A3 4,300 Northern Trust Corp.,
9.00%, 5/15/98 ......................... 4,409,822
Norwest Corp.,
Aa3 10,000 5.75%, 11/16/98 ........................ 9,957,700
Aa3 5,000 6.00%, 10/13/98 ........................ 4,997,500
Aa3 1,000 7.70%, 11/15/97 ........................ 1,006,240
Baa1 13,897 PaineWebber Group, Inc.,
6.25%, 6/15/98 ......................... 13,907,145
A3 5,000 Ryder System, Inc.,
5.78%, 4/27/98 ......................... 4,977,450
Salomon, Inc.,
Baa1 5,000 6.70%, 12/01/98 ........................ 5,018,750
Baa1 10,000 7.43%, 12/30/98 ........................ 10,148,500
A2 11,300 Sears Overseas Finance,
Zero Coupon, 7/12/98 ................... 10,607,579
Smith Barney Holdings, Inc.,
A2 1,000 5.50%, 1/15/99 ......................... 990,070
A2 9,000 5.625%, 11/15/98 ....................... 8,941,860
-----------
170,511,067
-----------
CORPORATE BONDS
INDUSTRIALS--20.3%
A2 10,000 Atlantic Richfield,
10.25%, 7/02/00 ........................ 10,150,000
Caterpillar Financial Services,
A2 5,000 5.18%, 10/01/98 ........................ 4,947,000
A2 1,500 5.93%, 12/15/98 ........................ 1,495,410
A3 10,000 Chrysler Financial Corp.,
6.04%, 12/07/98 ........................ 9,986,000
Aa3 3,000 Du Pont De Nemours,
8.50%, 6/25/98 ......................... 3,070,745
Baa2 10,500 Enterprise Rental,
7.875%, 3/15/98 ........................ 10,632,278
A1 8,000 Ford Motor Credit Co.,
8.00%, 1/15/99 ......................... 8,206,480
AAA 1,000 General Electric Capital Corp.,
6.65%, 4/14/08 ......................... 1,005,500
General Motors Acceptance Corp.,
A3 8,000 6.125%, 9/18/98 ........................ 7,990,429
A3 3,600 7.30%, 2/02/98 ......................... 3,623,940
A2 3,000 John Deere Capital Corp.,
7.14%, 9/15/98 ......................... 3,035,160
A3 5,000 Lockheed Martin Corp.,
6.625%, 6/15/98 ........................ 5,024,650
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS
INDUSTRIALS (CONTINUED)
AAA $ 8,225 Outlet Broadcasting, Inc.,
10.875%, 7/15/03 ....................... $ 8,937,779
A1 2,000 Pepsico, Inc.,
6.125%, 1/15/98 ........................ 2,005,200
BBB 7,000 Textron Financial Services,
6.10%, 6/24/98 ......................... 6,993,651
Union Oil Co.,
Baa1 7,500 8.40%, 1/15/99 ......................... 7,709,325
Baa1 5,000 8.81%, 5/18/98 ......................... 5,112,900
Baa1 1,000 8.84%, 5/18/98 ......................... 1,022,830
-----------
100,949,277
-----------
CORPORATE BONDS
UTILITIES--13.5%
Baa2 12,500 Commonwealth Edison,
6.00%, 3/15/98 ......................... 12,486,242
Baa1 5,000 Duquesne Light Co.,
5.85%, 6/01/98 ......................... 4,981,250
A3 5,000 GTE Corp.,
8.85%, 3/01/98 ......................... 5,092,908
Baa3 2,000 Gulf States Utilities Co.,
7.35%, 11/01/98 ........................ 2,021,580
National Rural Utilities,
A1 10,000 5.20%, 1/15/99 ......................... 9,841,891
A1 1,000 7.93%, 1/15/99 ......................... 1,024,535
A2 5,000 PacifiCorp,
8.95%, 6/30/98 ......................... 5,128,500
Baa1 7,000 Philadelphia Electric Co.,
5.375%, 8/15/98 ........................ 6,936,061
A2 5,000 Portland General Electric Co.,
5.65%, 5/15/98 ......................... 4,985,000
Texas Utilities Electric Co.,
Baa1 6,600 5.50%, 10/01/98 ........................ 6,545,616
Baa1 1,400 5.75%, 7/01/98 ......................... 1,395,646
Baa1 7,050 5.875%, 4/01/98 ........................ 7,049,506
-----------
67,488,735
-----------
CORPORATE BONDS
SOVEREIGN & PROVINCIAL--4.0%
Baa2 8,000 Corporacion Andina De Fomento,
6.625%, 10/14/98 ....................... 8,032,051
Hydro Quebec,
A2 3,000 9.30%, 10/28/98 ........................ 3,111,627
A2 7,000 9.55%, 1/06/98 ......................... 7,130,739
Aaa 1,400 International Bank For
Reconstruction & Development
8.85%, 2/16/98 ......................... 1,424,168
-----------
19,698,585
----------
ASSET-BACKED SECURITIES--19.0%
AA2 8,023 Airplanes Pass-through Trust
Certificates, Series 1, Class A-5,
6.04%, 3/15/19 ......................... 8,027,969
AAA 27,630 Banc One Credit Card Master Trust, Series
1994-C, class 7.80%, 12/15/00 ......... 28,238,716
AAA 14,600++ Dayton Hudson Credit Card Trust,
Series 1995-1, Class A,
6.10%, 2/25/02 ......................... 14,606,847
Discover Card Master Trust,
AAA 27,295+ Series 1991-D, Class A,
8.00%, 10/16/00 ........................ 27,815,325
AAA 12,441+ Series 1991-F, Class A,
7.85%, 11/21/00 ........................ 12,654,736
AAA 3,346 Premier Auto Trust, Series 1994- 2,
Class A4, 6.00%, 5/02/00 ............... 3,348,273
-----------
94,691,866
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--0.8%
3,866 Federal National Mortgage
Association, REMIC Pass-Through
Certificates, Trust 1993-158,
Class 158-C, 5/25/14 (P/O) ............. 3,805,132
-----------
U.S. GOVERNMENT SECURITIES--27.9%
United States Treasury Notes,
7,000++ 5.125%, 12/31/98 ....................... 6,916,840
86,200++ 5.625%, 11/30/98 ....................... 85,809,514
50,000+ United States Treasury Strips,
Zero Coupon, 11/15/98 .................. 46,131,500
-----------
138,857,854
-----------
MUNICIPAL BONDS--4.9%
AAA 7,800 Alameda County California Pension
Obligation, Taxable Bonds,
Series A, 7.25%, 12/01/98 .............. 7,922,070
AAA 1,415 Long Beach California Pension
Obligation, Taxable Refunding,
6.13%, 9/01/98 ......................... 1,413,755
Baa1 6,000 New York, Taxable Bonds, Series G,
6.10%, 2/01/98 ......................... 5,993,950
Baa1 2,125 New York State Enviromental
Facilities, Taxable Series A,
6.08%, 9/15/98 ......................... 2,118,455
A3 5,250 Sacramento California Utility District
Electric, Refunding Series F,
5.90%, 11/15/98 ........................ 5,232,570
AAA 1,540 Western Minnesota Municipal Power
Agency Supply, Taxable Refunding
Series A, 5.88%, 1/01/98 ............... 1,539,538
-----------
24,220,338
-----------
MUNICIPAL ZERO COUPON
BONDS--1.2%
AAA 6,375 Essex County, Taxable Refunding,
Zero Coupon, Series N, 11/15/98 .......... 5,860,729
-----------
Total long-term investments
(cost $643,961,851) .................... 638,586,834
-----------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--2.8%
Certificate Of Deposit--2.6%
$ 13,000 MBNA, 6.15%, 6/19/98 .................... $ 13,000,000
REPURCHASE AGREEMENT--0.2%
1,040 State Street Bank & Trust Co.,
maturity & collateral 5.60%,
dated 6/30/97, due
7/1/97 in the amount of
$1,040,162 (cost $1,040,000:
value of collateral including
accrued interest $1,068,097) ............ 1,040,000
Total short-term investments
(cost $14,040,000) ..................... 14,040,000
------------
Total investments before
investment sold short--131.2%
(cost $658,001,851) .................... 652,626,834
------------
INVESTMENT SOLD SHORT--(6.6%)
(33,000) United States Treasury Notes,
6.125%, 8/31/98
(proceeds $32,912,344) ................. (33,082,500)
------------
Total investments net of
short sales--124.6%
(cost $625,089,507) .................... 619,544,334
Liabilities in excess of other--
assets--(24.6%) ........................ (122,200,306)
------------
NET ASSETS--100% ......................... $ 497,344,028
=============
- -------------------------
*Using the higher of Standard & Poor's or Moody's rating.
+In aggregate, $60,096,095 of principal amount pledged as collateral for
reverse repurchase agreements.
++Entire principal amount pledged as collateral for reverse repurchase
agreements.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
I -- Denotes a CMO with Interest only characteristics.
P -- Denotes a CMO with principal only characteristics.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $658,001,851)
(Note 1) ..................................................... $652,626,834
Cash ........................................................... 4,915
Deposit with broker as collateral for
investments sold short (Note 1) .............................. 33,701,250
Interest receivable ............................................ 9,477,908
Unrealized appreciation on interest rate swaps ................. 556,838
------------
696,367,745
------------
LIABILITIES
Reverse repurchase agreements (Note 4) ......................... 161,617,375
Investment sold short at value
(proceeds $32,912,344) (Note 1) .............................. 33,082,500
Due to Parent (Note 2) ......................................... 2,953,476
Interest payable ............................................... 1,370,366
------------
199,023,717
------------
NET ASSETS ..................................................... $497,344,028
============
Net assets were comprised of:
Common stock, at par (Note 5) ................................ $ 586,605
Paid-in capital in excess of par ............................. 479,111,252
------------
479,697,857
Undistributed net investment income .......................... 23,622,141
Accumulated net realized loss ................................ (987,635)
Net unrealized depreciation .................................. (4,988,335)
------------
Net assets, June 30, 1997 .................................... $497,344,028
============
Net asset value per share:
($497,344,028 divided by 58,660,527 shares of
common stock issued and outstanding) ......................... $8.48
=====
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of
$1,258,483 and interest expense
of $5,630,005) ............................................. $15,662,601
-----------
Operating Expenses
Investment advisory .......................................... 963,054
Administration ............................................... 254,029
Custodian .................................................... 50,000
Directors .................................................... 30,000
Audit ........................................................ 20,000
Legal ........................................................ 8,000
Miscellaneous ................................................ 176,305
-----------
Total operating expenses ................................... 1,501,388
-----------
Net investment income .......................................... 14,161,213
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized loss:
Investments .................................................. (244,630)
Futures ...................................................... 18,336
Short sales .................................................. (15,312)
-----------
(241,606)
-----------
Net unrealized appreciation (depreciation):
Investments .................................................. (1,240,967)
Short sales .................................................. 75,763
Futures ...................................................... (9,482)
-----------
(1,174,686)
-----------
Net loss on investments ........................................ (1,416,292)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ...................................... $12,744,921
===========
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows provided by operating activities:
Interest received ............................................ $ 21,797,137
Interest expense paid ........................................ (6,213,681)
Proceeds from disposition of short-term
portfolio investments, net ................................. 5,648,792
Purchase of long-term portfolio investments .................. (204,751,997)
Proceeds from disposition of long-term
portfolio investments ...................................... 219,858,733
Variation margin on futures 3,853
Other (53,491)
------------
Net cash flows provided by
operating activities 36,289,346
------------
Cash flows used for financing activities:
Decrease in reverse repurchase agreements .................... (36,289,875)
============
Net decrease in cash ........................................... (529)
Cash at beginning of period 5,444
------------
Cash at end of period $ 4,915
============
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 ................................................... $12,744,921
-----------
Decrease in investments ........................................ 27,455,298
Net realized loss .............................................. 241,606
Increase unrealized depreciation ............................... 1,174,686
Decrease in deposits with broker for
investments sold short ....................................... 2,173,750
Increase in interest receivable ................................ (753,952)
Decrease in interest rate swap ................................. 93,789
Increase in variation margin receivable ........................ 5,001
Decrease in other assets ....................................... 47,546
Decrease in payable for investments purchased .................. (5,693,130)
Decrease in interest payable ................................... (583,676)
Decrease in payable for securities sold short .................. (2,070,450)
Increase in due to parent ...................................... 1,883,607
Decrease in excise tax payable ................................. (429,650)
-----------
Total adjustments ............................................ 23,544,425
-----------
Net cash provided by operating activities ...................... $36,289,346
===========
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS (UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE PERIOD
SIX MONTHS ENDED AUGUST 19, 1996*
JUNE 30, TO
1997 DECEMBER 31, 1996
-------------- -----------------
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income ..... $ 14,161,213 $ 9,460,928
------------ ------------
Net realized loss
on investments,
short sales and futures . (241,606) (746,029)
Net unrealized appreciation
(depreciation) on
investments, short
sales and futures ....... (1,174,686) (3,813,649)
------------ ------------
Net increase
in net assets
resulting from operations 12,744,921 4,901,250
Transfer of assets from
BlackRock 1998 Term
Trust, Inc. in exchange
for shares issued ....... -- 479,697,857
------------ ------------
Total increase ............ 12,744,921 484,599,107
NET ASSETS
Beginning of period ......... 484,599,107 --
------------ ------------
End of period ............... $497,344,028 $484,599,107
============ ============
- -------------
*Commencement of operations.
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS
ENDED AUGUST 19, 1996*
JUNE 30, THROUGH
1997 DECEMBER 31, 1996
---------- ----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................................ $ 8.26 $ 8.18
-------- --------
Net investment income (net of $.10 and $.06 of interest expense) .......... .24 .16
Net realized and unrealized loss on investments, short sales and futures .. (.02) (.08)
-------- --------
Net increase from investment operations ..................................... .22 .08
-------- --------
Net asset value, end of period $ 8.48 $ 8.26
======== ========
TOTAL INVESTMENT RETURN+: ................................................... 2.66% 2.22%
RATIOS TO AVERAGE NET ASSETS:**
Operating expenses@ ......................................................... .62% .60%
Net investment income ....................................................... 5.81% 5.33%
SUPPLEMENTAL DATA:
Average net assets (in thousands) ........................................... 491,360 $479,728
Portfolio turnover .......................................................... 30% 9%
Net assets, end of period (in thousands) .................................... $497,344 $484,599
Reverse repurchase agreements outstanding, end of period (in thousands) ..... $161,617 $197,907
Asset coverage++ ............................................................ $ 4,077 $3,449
</TABLE>
- ----------------
* Commencement of investment operations.
** Annualized.
@ The ratio of operating expenses, including interest expenses, to average
net assets was 2.93%** and 1.05% for the periods indicated above. The ratio
of operating expenses, including interest expense and excise tax, to
average net assets was 2.93%** and 1.14% for the periods indicated above.
+ 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. Dividends and distributions are assumed,
for purposes of this calculation, to be reinvested. This calculation does
not reflect brokerage commissions. Total investment returns for periods of
less than one full year are not annualized.
++ Per $1,000 of reverse repurchase agreement outstanding.
The information above represents the unaudited operating performance data
for a share of common stock outstanding, total investment return, ratios to
average net assets and other supplemental data for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data for
the Trust's shares.
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING BBT Subsidiary, Inc. (the "Trust") was incorporated
POLICIES under the laws of the State of Maryland on May 15,
1996, and is a diversified closed-end management
investment company. The Fund was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of The BlackRock 1998 Term
Trust Inc., incorporated under the laws of the State of Maryland on February 21,
1991 (the "1998 Term Trust") and as such, a wholly-owned subsidiary of the 1998
Term Trust. The Trust's investment objective is to manage a portfolio of
investment grade fixed income securities while providing cash flow definition to
the 1998 Term Trust. 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 on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determines that such price does not reflect its fair value, in which case it
will be valued at its fair value as determined by the Trust's Board of
Directors. Any securities or other assets for which such current market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Trust's Board of Directors.
Short-term securities which mature in 60 days or less are valued at amortized
cost, if their term to maturity from date of purchase is 60 days or less.
Short-term securities with a term to maturity greater than 60 days from the date
of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively hedge
positions 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
7
<PAGE>
declines if a portfolio is long. In the same sense, call options can be
purchased to hedge a portfolio that is shorter than its benchmark against price
changes. The Trust can also sell (or write) covered call options and put options
to hedge portfolio positions.
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
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.
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 inrecovery of, or even loss of rights in, the securities loaned should the
borrower of the securities fail financially. The Trust receives compensation for
lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust. The Trust did not engage in
securities lending during the six months ended June 30, 1997.
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 rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changesin 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.
INTEREST RATE SWAPS: In an 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.
8
<PAGE>
Alternatively, an investor may pay a fixed rate and receive a floating rate.
Rate swaps were conceived as asset/liability management tools. In more complex
swaps, the notional principal amount may decline (or amortize) over time.
During the term of the swap, changes in the value of the swap are recognized
as unrealized gains or losses by "marketing-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 part to the swap. However, the Trust does not anticipate non-performance
by any counterparty.
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
excess, if any, of a floating rate under a specified fixed 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. Owning
interest rate floors 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 falling 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 floor. However, the Trust does not anticipate
non-performance by any counterparty.
SECURITIES TRANSACTIONS AND NET 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. Expenses are recorded on the
accrual basis which may require the use of certain estimates by management.
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 shareholders. Therefore,
no federal income tax provision is required. As part of its tax planning
strategy, the Trust intends to retain a portion of its taxable income and pay an
excise tax on the undistributed amounts.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and
distributions, first from net investment income, then from realized short-term
capital gains and other sources, if necessary. Net long-term capital gains, if
any, in excess of loss carryforwards are distributed at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. AGREEMENTS The Trust has an Investment Advisory Agreement with
BlackRock Financial Management Inc. (the "Adviser"),
a wholly-owned corporate subsidiary of PNC Asset Management Group, Inc., the
holding company for PNC's asset management business, and an Administration
Agreement with Prudential Investments Fund Management LLC, ("PIFM"), an
indirect, wholly-owned subsidiary of The Prudential Insurance Co. of America.
The Trust reimburses the 1998 Term Trust for its pro-rata share of applicable
expenses, including investment advisory and administrative fees, in an amount
equal to the proportionate amount of net assets which are held by the Trust
relative to the net assets of the 1998 Term Trust.
NOTE 3. PORTFOLIO Purchases and sales of investment securities, other
SECURITIES than short-term investments, and dollar rolls
for the six months ended June 30, 1997 aggregated
$210,445,127 and $201,251,417 respectively.
The Trust may invest up to 60% of its total assets in securities which are
not readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). At June 30, 1997, the Trust did
not hold any illiquid securities.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears) or mortgage related securities containing loans
or mortgages originated by PNC Bank or its affiliates. It is possible under
certain circumstances, PNC Mortgage Securities Corp. or its affiliates could
have interests that are in conflict with the holders of these mortgage backed
9
<PAGE>
securities, and such holders could have rights against PNC Mortgage Securities
Corp. or its affiliates.
The federal income tax basis of the Trust's investments at June 30, 1997 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized depreciation for federal income tax purposes was $5,375,017 (gross
unrealized appreciation-$2,143,016; gross unrealized depreciation-$7,518,033).
The Trust entered into interest rate swaps with original notional amounts as
stated below. Under this agreement, the Trust receives a fixed rate and pays a
floating rate.
CURRENT UNREALIZED
NOTIONAL APPRECIATION
AMOUNT FIXED TERMINATION AT JUNE 30,
(000) TYPE RATE FLOATING RATE DATE 1997
----- ---- ---- ------------- ---- ----
$44,000 Interest Rate Swap 7.25% 3-mo. LIBOR Dec. `98 $153,744
16,000 Interest Rate Swap 7.27% 3-mo. LIBOR Dec. `98 66,166
32,000 Interest Rate Swap 6.991% 3-mo. LIBOR Dec. `98 107,858
23,000 Interest Rate Swap 7.00% 3-mo. LIBOR Dec. `98 67,528
16,000 Interest Rate Swap 7.00% 3-mo. LIBOR Dec. `98 77,625
10,000 Interest Rate Swap 6.988% 3-mo. LIBOR Dec. `98 40,041
10,000 Interest Rate Swap 6.975% 3-mo. LIBOR Dec. `98 43,876
--------
$556,838
========
NOTE 4. BORROWINGS REVERSE REPURCHASE AGREEMENTS: The Trust may enter
into reverse repurchase agreements with qualified,
third party broker-dealers as determined by and under the direction of the
Trust's Board of Directors. Interest on the value of reverse repurchase
agreements issued and out standing 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, 1997 was approximately $244,729,402 at a weighted
average interest rate of approximately 5.66%. The maximum amount of reverse
repurchase agreements outstanding at any month-end was $223,372,125 on March 31,
1997 which was 29.95% of total assets.
DOLLAR ROLLS: The Trust may enter into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities. The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date. The Trust did not enter into dollar rolls during the
six months ended June 30, 1997.
NOTE 5. CAPITAL There are 200 million shares of $.01 par value
common stock authorized. The 1998 Term Trust
owned all of the 58,660,527 shares outstanding at June 30, 1997.
10
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
There have been no other material changes in the Trust's investment
objectives or policies that have not been approved by the shareholders, or to
its charter or by-laws, or in the principal risk factors associated with
investment in the Trust. There have been no changes in the persons who are
primarily responsible for the day-to-day management of the Trust's portfolio.
11
<PAGE>
BBT Subsidiary, Inc.
================================================================================
Semi-Annual Report
June 30, 1997
BlackRock
DIRECTORS
Laurence D. Fink, Chairman
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, President
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Frank Smith, Assistant Treasurer
Karen H. Sabath, Secretary
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 10702-4077
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
The accompanying financial statements as of June 30, 1997 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.
BBT SUBSIDIARY INC.
c/o Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 10702-4077
(800) 227-7BFM
Printed on recycled paper 09247N-10-3