- --------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED SEMI-ANNUAL REPORT TO SHAREHOLDERS
REPORT OF INVESTMENT ADVISER
- --------------------------------------------------------------------------------
January 31, 1998
Dear Trust Shareholder:
U.S. fixed income investors have been rewarded with solid total returns
over the past twelve months ended December 31, 1997, as low inflation and
moderate economic growth drove Treasury yields lower.
The economy has shown some signs of slowing, which BlackRock expects may
persist as recessions in the emerging Asian economies and Japan will moderate
U.S. growth. We do not see immediate signs of inflationary pressure nor do we
anticipate an imminent change in monetary policy by the Federal Reserve. Our
longer-term outlook for the bond market remains optimistic, based on the
fundamentally favorable backdrop of slower economic growth, low inflation and
declining Treasury borrowing.
There are exciting developments occurring at BlackRock that we would like
to share with you. As you may know, BlackRock was acquired by PNC Bank, N.A. in
1995. In early 1998 the five investment management firms that comprise the PNC
Asset Management Group were consolidated under the BlackRock umbrella. This will
result in BlackRock Inc. becoming a $100 billion money management firm ranking
it among the 25 largest in the country. We look forward to using our global
investment management expertise to present exciting investment opportunities to
closed-end fund shareholders in the future.
This report contains detailed market and portfolio strategy commentary by
your Trust's managers in addition to the Trust's financial statements and a
detailed portfolio listing. We thank you for your continued investment in the
Trust and wish you a successful new year.
Sincerely,
/s/ Laurence D. Fink /s/ Ralph L. Schlosstein
- -------------------- ------------------------
Laurence D. Fink Ralph L. Schlosstein
Chairman President
1
<PAGE>
January 31, 1998
Dear Shareholder:
We are pleased to present the semi-annual report for The BlackRock 2001
Term Trust Inc. ("the Trust") for the six months ended December 31, 1997. We
would like to take this opportunity to review the Trust's stock price and net
asset value (NAV) performance, summarize market developments and discuss recent
portfolio management activity.
The Trust is a diversified, actively managed closed-end bond fund whose
shares are traded on the New York Stock Exchange under the symbol "BLK". The
Trust's investment objective is to return $10 per share (its initial offering
price) to shareholders on or about June 30, 2001 while providing high current
income. Although there can be no guarantee, BlackRock is confident that the
Trust can achieve its investment objectives. The Trust seeks these objectives by
investing in investment grade fixed income securities, including corporate debt
securities, mortgage-backed securities backed by U.S. Government agencies (such
as Fannie Mae, Freddie Mac or Ginnie Mae), asset-backed securities and
commercial mortgage-backed securities. All of the Trust's assets must be rated
at least "BBB" by Standard & Poor's or "Baa" by Moody's at time of purchase or
be issued or guaranteed by the U.S. Government or its agencies.
The table below summarizes the performance of the Trust's stock price and
NAV over the period:
================================================================================
12/31/97 6/30/97 CHANGE HIGH LOW
- --------------------------------------------------------------------------------
STOCK PRICE $8.563 $8.125 5.39% $8.625 $8.125
- --------------------------------------------------------------------------------
NET ASSET VALUE (NAV) $9.37 $9.10 2.97% $9.39 $9.15
- --------------------------------------------------------------------------------
5-YEAR U.S. TREASURY NOTE 5.71% 6.38% -67 bp 6.38% 5.68%
================================================================================
THE FIXED INCOME MARKETS
The U.S. economy exhibited strong growth and low inflation during the
second half of 1997, pushing bond yields below 6% for the first time since early
1996. Fueled by increased consumer spending and low unemployment, growth was
robust. The primary inflation indicators, consumer and producer prices, remained
dormant throughout the period and unemployment rate remained low. After
increasing the Fed Funds Rate to 5.50% in March, the Federal Reserve left the
rate unchanged for the remainder of the year, as the combination of slowing
domestic growth and the economic turmoil in Asia threatened to exert
deflationary pressures on the U.S. economy.
The positive momentum has continued into the early days of 1998 based, in
part, on the possibility of early elimination of the budget deficit and on
comments by Fed Chairman Greenspan that deflation was an issue. New home sales
recently hit a new cyclical peak, the employment picture remains very strong and
consumer confidence and spending remain high. Despite the strong growth, current
and future inflation both appear to be controlled.
The market for mortgage-backed securities (MBS) underperformed the broader
investment grade bond market for the six months ended December 31, 1997, as
declining interest rates began to ignite prepayment fears and widen yield
spreads. Demand for mortgage securities was largely concentrated in the first
half of 1997, when MBS decisively outperformed Treasuries due to low interest
rate volatility and relatively stable mortgage prepayment activity. However,
mortgage rates fell below the critical 7% threshold toward year-end, causing
concerns that increased refinancing activity would negatively impact the
performance of mortgage securities. For the period, the MBS market as measured
by the LEHMAN BROTHERS MORTGAGE INDEX posted a 5.36% total return versus the
6.38% return of the LEHMAN BROTHERS AGGREGATE INDEX.
2
<PAGE>
A three-year trend of positive performance for investment grade corporates
ended abruptly in the fourth quarter of 1997 due to the Asian crisis. The
financial turmoil in Asia caused a decline in credit quality ratings and created
selling pressure for Asian Yankee bonds. Domestic corporate bonds fared better,
but the potential for lower corporate earnings and a large influx of new issues
into the market caused yields to rise. As a result, corporates underperformed
Treasuries in 1997 for only the second time in the past decade. With the U.S.
economy remaining firm, domestic corporate bond fundamentals remain fairly
positive. At wider spread levels, we see value in higher rated and improving
domestic credits.
THE TRUST'S PORTFOLIO AND INVESTMENT STRATEGY
BlackRock actively manages the Trust's portfolio holdings consistent with
BlackRock's overall market outlook and the Trust's investment objectives. The
following chart compares the Trust's current and June 30, 1997 asset
composition.
================================================================================
THE BLACKROCK 2001 TERM TRUST INC.
================================================================================
COMPOSITION DECEMBER 31, 1997 JUNE 30, 1997
- --------------------------------------------------------------------------------
Corporate Bonds 19% 16%
- --------------------------------------------------------------------------------
U.S. Treasury Securities 18% 27%
- --------------------------------------------------------------------------------
Taxable Zero Coupon Bonds 14% 14%
- --------------------------------------------------------------------------------
Mortgage Pass-Throughs 10% 13%
- --------------------------------------------------------------------------------
Agency Multiple Class Mortgage Pass-Throughs 10% 8%
- --------------------------------------------------------------------------------
Stripped Mortgage-Backed Securities 7% 8%
- --------------------------------------------------------------------------------
Asset-Backed Securities 7% 5%
- --------------------------------------------------------------------------------
Money Market Instruments 6% 2%
- --------------------------------------------------------------------------------
Commercial Mortgage-Backed Securities 5% 4%
- --------------------------------------------------------------------------------
Municipal Bonds 2% 1%
- --------------------------------------------------------------------------------
Adjustable Rate Mortgages 1% 2%
- --------------------------------------------------------------------------------
Inverse Floating Rate Mortgages 1% 0%
- --------------------------------------------------------------------------------
CMO Residuals 0% 0%
================================================================================
================================================================================
RATING % OF CORPORATES
================================================================================
CREDIT RATING DECEMBER 31, 1997 JUNE 30, 1997
- --------------------------------------------------------------------------------
AAA or equivalent 1% 1%
- --------------------------------------------------------------------------------
AA or equivalent 9% 9%
- --------------------------------------------------------------------------------
A or equivalent 56% 55%
- --------------------------------------------------------------------------------
BBB or equivalent 29% 30%
- --------------------------------------------------------------------------------
N/R 5% 5%
================================================================================
We continued to focus on securities with final maturity dates (or "bullet"
maturities) that match the Trust's termination date. Specifically, the Trust has
seen a material increase in its investment grade corporate bond allocation over
the past six months. We believe that the Trust's stake in bullet maturity
securities, particularly corporate bonds, will aid the Trust in
3
<PAGE>
reaching its target termination value of $10.00 per share while
maintaining a relatively stable dividend stream. The Trust has been a net seller
of mortgage-backed securities, whose cash flows and maturity dates can change in
response to interest rate movements. Mortgage bonds tend to prepay when interest
rates fall, which forces the bondholder to reinvest cash flows at lower yields.
Conversely, the average maturities of mortgage bonds can extend when interest
rates rise.
We appreciate your investment in The BlackRock 2001 Term Trust Inc. and
look forward to managing the fund to realize its investment objectives. Please
feel free to contact the mutual fund specialists at BlackRock's marketing center
at (800) 227-7BFM (7236) if you have any questions that weren't answered in this
report. Additionally, you can reach us via e-mail at
[email protected]
Sincerely,
/s/ Robert S. Kapito /s/ Michael p. Lustig
- -------------------- ---------------------
Robert S. Kapito Michael P. Lustig
Vice Chairman and Portfolio Manager Principal and Portfolio Manager
BlackRock Financial Management, Inc. BlackRock Financial Management, Inc.
================================================================================
THE BLACKROCK 2001 TERM TRUST INC.
================================================================================
Symbol on New York Stock Exchange: BLK
- --------------------------------------------------------------------------------
Initial Offering Date: July 23, 1992
- --------------------------------------------------------------------------------
Closing Stock Price as of 12/31/97: $8.563
- --------------------------------------------------------------------------------
Net Asset Value as of 12/31/97: $9.37
- --------------------------------------------------------------------------------
Yield on Closing Stock Price as of 12/31/97 ($8.563)1: 4.67%
- --------------------------------------------------------------------------------
Current Monthly Distribution per Share2: $0.0333
- --------------------------------------------------------------------------------
Current Annualized Distribution per Share2: $0.40
================================================================================
- ---------------
1Yield on Closing Stock Price is calculated by dividing the current annualized
distribution per share by the closing stock price per share.
2Distribution not constant and is subject to change.
4
<PAGE>
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THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--122.5%
MORTGAGE PASS-THROUGHS--13.3%
Federal Home Loan Mortgage
Corporation,
$ 1,916 6.50%, 09/01/25 - 01/01/99 ................... $ 1,893,471
3,024 7.50%, 11/01/23 .............................. 3,096,750
25,224 8.144%, 12/01/01,
7 Year Multifamily ......................... 26,185,569
14,040 8.50%, 06/01/11 - 04/01/19 ................... 14,688,124
10,104 8.60%, 05/01/02,
7 Year Multifamily ......................... 10,640,934
Federal Housing Administration,
6,040 Massachusetts Housing
Finance Agency, Series 1991-B,
Class B, 6.85%, 10/01/20 ..................... 5,928,381
Federal National Mortgage
Association,
22,565 7.00%, 01/01/19 - 10/01/22 ................... 22,729,057
7,719 7.50%, 09/01/07 - 07/01/23 ................... 7,989,905
6,487 7.66%, 01/01/01,
7 Year Multifamily ......................... 6,574,525
10,455 7.695%, 05/01/01,
7 Year Multifamily ......................... 10,595,635
11,277 7.79%, 02/01/01,
7 Year Multifamily ......................... 11,455,195
6,706 8.00%, 10/01/09 - 01/01/23 ................... 6,973,015
3,780 8.00%, 03/01/01,
7 Year Multifamily ......................... 3,848,440
3,700 8.49%, 04/01/01,
7 Year Multifamily ......................... 3,773,807
7,818 8.50%, 11/01/03 - 05/01/10
15 Year .................................... 8,158,011
2,434 8.69%, 04/01/01,
7 Year Multifamily ......................... 2,576,700
Government National
Mortgage Association,
8,556 8.00%, 01/15/23 .............................. 8,868,642
6,275 8.50%, 06/15/21 .............................. 6,591,050
13,365 9.50%, 06/15/17 - 10/15/17 ................... 14,470,400
-----------
177,037,611
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--13.7%
AAA 412 Collateralized Mortgage
Securities Corporation,
Series F, Class F-4A,
11/01/15 ..................................... 447,117
Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates,
2,609 Series G-29, Class G-29-IA,
06/25/20 (I) ................................. 281,183
17,275 Series G-30, Class G-30-J,
02/25/23 (I) ............................... 2,600,549
15,976 Series G-32, Class G-32-PT,
02/25/19 (I) ............................... 1,738,642
4,034 Series G-32, Class G-32-TT,
02/25/19 (I) ............................... 405,332
32,964 Series 1261, Class 1261-H,
08/15/19 ................................... 33,818,706
4,700 Series 1378, Class 1378-DA,
01/15/18 (I) ............................... 1,116,922
38 Series 1388, Class 1388-G,
05/15/06 (I) ............................... 614,447
1,123 Series 1563, Class 1563-SB,
08/15/08 (ARM) ............................. 1,130,156
2,577 Series 1606, Class 1606-SB,
11/15/08 (ARM) ............................. 2,510,830
52,342 Series 1954, Class 1954-MD,
03/15/16 (I) ............................... 6,785,118
Federal National Mortgage
Association, REMIC
Pass-Through Certificates,
7,296 6.125%, Series 1993-ML,
Class M2-H, 11/25/03,
Multifamily ................................ 7,282,446
3,019 Trust 269, Class 269-1,
08/01/22 ................................... 3,224,185
6,633 Trust 1990-144, Class 144-W,
12/25/20 ................................... 7,342,208
15,000 Trust 1992-43, Class 43-E,
04/25/22 ................................... 15,431,259
10,000 Trust 1992-122, Class 122-PJ,
06/25/19 ................................... 10,181,900
1,669 Trust 1992-184, Class 184-SA,
06/25/22 (ARM) ............................. 1,762,318
1,500 Trust G1993-17, Class 17-SH,
04/25/23 (ARM) ............................. 951,645
5,186 Trust 1993-68, Class 68-PJ,
11/25/06 (I) ............................... 479,383
2,050 Trust 1993-71, Class 71-PG,
07/25/07 ................................... 2,050,758
843 Trust 1993-99, Class 99-SB,
07/25/23 (ARM) ............................. 842,110
1,556 Trust 1993-117, Class 117-S,
07/25/08 (ARM) ............................. 1,467,026
15,350 Trust 1993-152, Class 152-D,
08/25/23 (P) ............................... 14,061,828
6,874 Trust 1993-196, Class 196-SM,
10/25/08 (ARM) ............................. 6,027,902
See Notes to Consolidated Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--(CONT'D)
$ 5,904 Trust 1993-214, Class 214-SO,
12/25/08 (ARM) ............................. $ 5,398,040
1,162 Trust 1993-222, Class 222-B,
07/25/22 (P) ............................... 990,917
1,886 Trust 1994-42, Class 42-SM,
01/25/24 (ARM) ............................. 1,823,143
3,833 Trust 1994-46, Class 46-B,
11/25/23 (P) ............................... 3,763,142
2,396 Trust 1994-53, Class 53-DA,
11/25/23 (P) ............................... 2,273,911
12,224 Trust 1996-T6, Class T6-C,
02/26/01 ................................... 12,166,578
3,117 Trust 1996-T6, Class T6-D,
02/26/01 ................................... 3,134,056
23,700 Trust 1997-50, Class 50-HK,
08/25/27 (I) ............................... 9,235,594
7,210 Government National Mortgage
Association, REMIC,
Trust 1994-1, Class 1-PL,
06/16/24 (I) ................................. 1,298,134
AAA 18,949 Residential Asset Securitization,
Trust 1997-A9, Class A1,
11/26/27 ..................................... 19,175,816
-----------
181,813,301
-----------
COMMERCIAL MORTGAGE BACKED
SECURITIES--6.0%
BBB 10,000 CBA Mortgage Corporation,
Series 1993-C1, Class D,
12/25/03 ..................................... 10,067,400
AA+ 3,444 Central Life Assurance Co.,
Series 1994-1, Class A2,
11/01/20 # ................................... 3,579,828
AAA 126,884 CS First Boston Mortgage Corp.,
Series 1997-C1, Class AX,
06/20/29 # ................................... 14,333,962
AAA 5,200 PaineWebber Mortgage Acceptance
Corp., Series 1995-M1,
Class A, 01/15/07 # .......................... 5,263,924
A- 6,000 Phoenix Real Estate Incorporated,
Series 1993-1, Class C,
11/25/23 ..................................... 6,065,625
Resolution Trust Corporation,
AA- 6,151 Series 1992-C6, Class B,
07/25/24 ................................... 6,150,633
AA 8,050 Series 1994-C1, Class C,
06/25/26 ................................... 8,200,938
A 5,563 Series 1994-C2, Class D,
04/25/25 ................................... 5,633,427
BBB 3,000 Series 1995-C1, Class D,
02/25/27 ................................... 2,971,875
AA 4,859 Salomon Brothers,
Series 1997-TZH, Class A1,
03/25/25 ..................................... 4,992,759
AAA 12,800 Structured Asset Securities
Corporation, Series 1996-CFL,
Class B, 02/25/28 12,711,438
------------
79,971,809
------------
CORPORATE BONDS--22.8%
BANKING AND FINANCE--10.1%
A3 1,300@ Amsouth Bancorporation,
6.75%, 11/01/25 .............................. 1,305,551
A- 5,000 Aristar Incorporated,
7.25%, 06/15/01 .............................. 5,151,700
Associates Corporation,
AA- 5,000 6.68%, 07/25/00 .............................. 5,065,850
AA- 5,000 7.46%, 03/28/00 .............................. 5,139,000
A- 15,000 Donaldson, Lufkin & Jenrette,
5.625%, 02/15/16 ............................. 14,725,650
A+ 6,750 Goldman Sachs Group LP,
6.20%, 12/15/00 # ............................ 6,739,470
A3 5,000 Great Western Financial Corporation,
6.375%, 07/01/00 ............................. 5,018,400
A 7,000 Household Finance Corporation,
6.65%, 05/26/98 .............................. 7,020,650
A1 5,700 Meridian Bancorp Incorporated,
6.625%, 06/15/00 ............................. 5,756,158
Merrill Lynch & Co. Incorporated,
AA- 7,200 6.00%, 01/15/01 .............................. 7,169,832
AA- 5,800 6.00%, 03/01/01 .............................. 5,769,956
A+ 3,800 Morgan Stanley Incorporated,
5.75%, 02/15/01 .............................. 3,756,338
A+ 10,000 NationsBank Corporation,
7.00%, 09/15/01 .............................. 10,279,400
BBB 12,500 Salomon Incorporated,
6.625%, 11/30/00 ............................. 12,606,625
Salomon Smith Barney Holdings
Incorporated,
A 13,000 5.875%, 02/01/01 ............................. 12,831,910
A 3,600 7.00%, 05/15/00 .............................. 3,653,784
A 1,925 Security Pacific Corporation,
11.00%, 03/01/01 ............................. 2,184,551
A 15,000 Transamerica Finance Corporation,
6.75%, 06/01/00 .............................. 15,177,150
BBB+ 5,000 Union Planters National Bank,
6.76%, 10/30/01 .............................. 5,069,887
-----------
134,421,862
-----------
INDUSTRIAL--4.7%
BBB 7,500 Erac Usa Finance Company,
7.00%, 06/15/00 # ............................ 7,623,407
A 10,000 Ford Motor Credit,
6.18%, 12/27/01 .............................. 9,995,000
A- 20,600 General Motors Acceptance
Corporation,
6.125%, 09/18/98 ............................. 20,613,997
A- 7,000 Hospital Corporation,
Zero Coupon, 06/01/01 ........................ 5,480,090
See Notes to Consolidated Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS--(CONT'D)
INDUSTRIAL
BBB- $ 6,000 RJR Nabisco Brands Incorporated,
8.00%, 07/15/01 .............................. $ 6,177,600
Sears Roebuck & Company,
A- 4,250 6.50%, 06/15/00 .............................. 4,289,312
A- 5,000 7.29%, 04/24/00 .............................. 5,108,356
BBB 3,500 Tenneco Credit Corporation,
8.075%, 10/01/02 ............................. 3,744,370
-----------
63,032,132
-----------
UTILITIES--1.1%
BBB 9,000 Pacificorp Holdings,
6.75%, 04/01/01 # ............................ 8,964,990
BBB+ 5,000 Potomac Capital Corporation,
6.90%, 08/09/00 # ............................ 5,056,050
-----------
14,021,040
-----------
YANKEE--6.7%
African Development,
Aa1 5,000 7.75%, 12/15/01 .............................. 5,270,293
Aaa 3,350 8.625%, 05/01/01 ............................. 3,594,264
BBB- 15,000 Empresa Electric Guacolda,
7.60%, 04/30/01 # ............................ 15,208,578
A 4,000 Household Finance Corporation,
7.45%, 04/01/00 .............................. 4,111,240
A3 6,500 Slovenia (Republic of),
7.00%, 08/06/01 # ............................ 6,541,287
A+ 18,000 Quebec (Province of),
9.125%, 08/22/01 ............................. 19,560,641
BBB- 6,880 Terra Nova Insurance United
Kingdom Holdings PLC,
10.75%, 07/01/05 ............................ 7,654,000
BBB- 12,000 Transpatadora de Gas
10.25%, 04/25/01 ............................. 12,423,058
NR 15,000 US Remittance Master,
Zero Coupon, 01/01/01 ........................ 15,079,687
-----------
89,443,048
-----------
OTHER--0.2%
BBB- 3,000 Colombia (Republic of),
8.00%, 06/14/01 .............................. 3,031,798
-----------
Total Corporate Bonds 303,949,880
-----------
ASSET-BACKED SECURITIES--9.3%
AAA 6,311 Amresco Securitized Interest,
Series 1996-1, Class A,
8.10%, 04/26/26 # ............................ 6,273,818
AAA 23,718 Chase Manhattan Grantor Trust,
Series 1996-B, Class A,
6.61%, 09/15/02 .............................. 23,858,579
AAA 35,000@ Citibank Credit Card Trust,
Series 1996-1, Class A,
5.79%, 02/07/03 .............................. 29,017,100
AAA 15,000 Keycorp Student Loan Trust,
Series 1997-1, Class A2,
6.00%, 01/27/23 .............................. 14,943,750
AAA 3,051 NationsBank Auto Grantor Trust,
Series 1995-A, Class A,
5.85%, 06/15/02 .............................. 3,046,331
AAA 10,000 SMS Student Loan Trust,
Series 1997-A, Class A,
5.76%, 10/27/25 .............................. 9,846,875
AAA 5,750 Standard Credit Card Master Trust,
Series 1995-3, Class A,
7.85%, 02/07/02 .............................. 5,933,252
Structured Mortgage Asset,
AAA 11,396 Series 1997-2,
8.24%, 03/15/06 ............................ 11,468,666
AAA 11,822 Series 1997-3,
8.72%, 04/15/06 ............................ 12,024,705
AAA 6,784 Series 1997-4,
7.85%, 09/15/01 ............................ 6,825,010
-----------
123,238,086
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--8.1%
Aaa 5,100 CMO Mortgage Investors Trust,
Collateralized Mortgage
Obligations, Trust 7, Class P,
09/22/21 (I/O) ............................... 875,086
Collateralized Mortgage Securities
Corporation,
AAA 1,500 Series 1990-5, Class 5-L,
09/20/20 (I/O) ............................. 38,957
AAA 4,000 Series 1991-9, Class 9-M,
11/20/21 (I/O) ............................. 553,463
Federal Home Loan Mortgage
Corporation,
21,418 Series G-3, Class G-3-S,
04/25/19 (I/O) ............................. 956,533
5,300 Series 113, Class 113-M,
05/15/21 (I/O) ............................. 1,440,540
13,500 Series 181, Class 181-F,
08/15/21 (I/O) ............................. 2,093,364
1,400 Series 1125, Class 1125-F,
08/15/21 (I/O) ............................. 392,824
3,400 Series 1185, Class 1185-C,
12/15/06 (I/O) ............................. 618,879
3,400 Series 1283, Class 1283-X,
06/15/22 (I/O) ............................. 1,019,703
822 Series 1338, Class 1338-Q,
08/15/07 (P/O) ............................. 698,683
4,700 Series 1360, Class 1360-PT,
12/15/17 (I/O) ............................. 1,031,551
4,700 Series 1404, Class 1404-E,
01/15/06 (I/O) ............................. 613,152
6,887 Series 1422, Class 1422-IB,
11/15/07 (I/O) ............................. 1,257,696
20,248 Series 1506, Class 1506-SA,
01/15/05 (I/O) ............................. 333,484
51,497 Series 1546, Class 1546-SF,
12/15/21 (I/O) ............................. 2,397,164
See Notes to Consolidated Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
STRIPPED MORTGAGE-BACKED
SECURITIES--(CONT'D)
$27,661 Series 1605, Class 1605-S,
08/15/06 (I/O) ............................. $ 669,670
18,315 Series 1621, Class 1621-SJ,
10/15/20 (I/O) ............................. 753,308
28,404 Series 1640, Class 1640-SD,
12/15/00 (I/O) ............................. 648,179
7,053 Series 1662, Class 1662-PO,
01/15/09 (P/O) ............................. 5,484,798
1,536 Series 1664, Class 1664-C,
11/15/23 (P/O) ............................. 1,395,118
3,271 Series 1721, Class 1721-OC,
05/15/24 (P/O) ............................. 1,624,066
52,664 Series 1790, Class 1790-D,
11/15/23 (I/O) ............................. 1,283,689
143,000 Series 1809, Class 1809-SC,
12/15/23 (I/O) ............................. 14,836,250
5,416 Series 1849, Class 1849-EL,
12/15/08 (I/O) ............................. 1,130,500
8,150 Series 1870, Class 1870-PA,
08/15/01 (P/O) ............................. 7,008,721
3,706 Series 1900, Class 1900-SD,
01/15/23 (I/O) ............................. 1,155,657
20,378 Series 1950, Class 1950-SA,
10/15/22 (I/O) ............................. 541,286
Federal National Mortgage
Association,
3,323 Trust 3, Class 1,
02/01/17 (P/O) ............................. 2,705,040
2,647 Trust 5, Class 1, 09/01/07 (P/O) ............... 2,155,938
14,016 Trust 25, Class
2, 02/01/13 (I/O) .......................... 1,377,206
1,414 Trust 60, Class 1,
01/01/19 (P/O) ............................. 1,131,955
1,800 Trust 1990-76, Class 76-N,
07/25/20 (I/O) ............................. 47,306
2,300 Trust 1990-106, Class 106-K,
09/25/20 (I/O) ............................. 622,954
694 Trust 1991-G44, Class G44-H,
11/25/21 (P/O) ............................. 594,978
2,300 Trust 1991-G46, Class G46-K,
12/15/09 (I/O) ............................. 582,445
1,000 Trust 1991-29, Class 29-J,
04/25/21 (I/O) ............................. 345,984
3,100 Trust 1991-80, Class 80-Q,
07/25/21 (I/O) ............................. 946,622
924 Trust 1991-167, Class 167-B,
10/25/17 (P/O) ............................. 662,093
1,365 Trust 1991-167, Class 167-E,
10/25/17 (P/O) ............................. 598,058
13,179 Trust 1992-G45, Class G45-2,
08/25/22 (I/O) ............................. 3,611,789
30 Trust G1992-5, Class 5-E,
01/25/22 (I/O) ............................. 1,190,022
9,646 Trust 1992-18, Class 18-JA,
11/25/05 (I/O) ............................. 1,145,021
47,867 Trust G1993-31, Class 31-PS,
08/25/18 (I/O) ............................. 1,703,593
4,475 Trust 1993-48, Class 48-B,
04/25/08 (P/O) ............................. 3,698,782
2,367 Trust 1993-128, Class 128-B,
07/25/23 (P/O) ............................. 2,258,899
4,726 Trust 1993-150, Class 150-B,
09/25/20 (P/O) ............................. 4,595,653
1,682 Trust 1993-151, Class 151-E,
05/25/23 (P/O) ............................. 1,603,067
282 Trust 1993-194, Class 194-C,
09/25/23 (P/O) ............................. 279,659
60,166 Trust 1993-202, Class 202-SL,
11/25/23 (I/O) ............................. 2,875,937
26,767 Trust 1993-240, Class 240-PS,
09/25/12 (I/O) ............................. 757,236
11,812 Trust 1994-8, Class 8-G,
11/25/23 (P/O) ............................. 8,598,794
4,703 Trust 1994-53, Class 53-EA,
11/25/23 (P/O) ............................. 3,420,617
7,300 Trust 1996-24, Class 24-SB,
10/25/08 (I/O) ............................. 1,615,125
9,471 Trust 1996-40, Class 40-SG,
03/25/09 (I/O) ............................. 1,947,396
86,912 Trust 1997-35, Class 35-SB,
03/25/09 (I/O) ............................. 2,512,301
58,879 Trust 1997-37, Class 37-SX,
08/18/18 (I/O) ............................. 1,582,375
8,305 Merrill Lynch Trust,
Series 43, Class F,
08/27/15 (I/O) ............................... 1,527,143
-----------
107,546,309
-----------
COLLATERALIZED MORTGAGE
OBLIGATION RESIDUALS**--0.1%
AAA 10 Fleet Mortgage Securities, Inc.,
Series 1989-3, Class R,
09/01/19 # ................................... 528,918
-----------
U.S. GOVERNMENT SECURITIES--22.1%
270,000+ U.S. Treasury Bonds,
6.125%, 11/15/27 ............................. 277,468,200
U.S. Treasury Notes,
4,180 5.750%, 09/30/99 ............................. 4,185,894
12,500+ 6.125%, 08/15/07 ............................. 12,845,750
-----------
294,499,844
-----------
TAXABLE ZERO COUPON BONDS--17.8%
287,000+ U.S. Treasury Receipt,
05/15/01 ..................................... 237,376,230
-----------
See Notes to Consolidated Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
TAXABLE MUNICIPAL BONDS--2.0%
AAA $ 1,000 Kern County California Pension
Obligation, 6.27%, 08/15/01 .................. $ 1,005,670
AAA 2,035 Long Beach California Pension
Obligation, 6.45%, 09/01/01 .................. 2,057,120
AAA 6,000 Los Angeles County
California Pension Obligation,
Series D, 6.38%, 06/30/01 .................... 6,064,980
BBB+ 5,000 New York City, G.O., Series 1,
6.40%, 03/15/01 .............................. 5,010,800
BBB+ 5,000 New York City, G.O., Series 1,
7.24%, 04/15/01 .............................. 5,132,000
BBB 1,000 New York State Environmental Facility,
Series A, 6.62%, 03/15/01 .................... 1,011,290
BBB 3,345 New York State Housing
Finance Agency, Series B,
7.14%, 09/15/02 .............................. 3,435,148
BBB 2,000 New York State Urban Development,
Series B, 6.90%, 04/01/01 .................... 2,032,040
AA 1,000 St. Joseph's Health System California,
Series A, 7.02%, 07/01/01 1,024,710
--------------
26,773,758
--------------
MONEY MARKET INSTRUMENTS--7.3%
AAA 65,000 AIM Prime Portfolio
Principal Money Market Strip
Zero Coupon, 01/02/01 ........................ 54,947,490
AAA 50,000 Goldman Sachs Money Market,
Zero Coupon, 01/02/01 ........................ 42,243,250
--------------
97,190,740
--------------
PUT OPTION PURCHASED--0.0%
300 Over-the-Counter Put, 3-month
LIBOR over 6.63%, Expires
05/15/07 ................................... 84,000
--------------
Total investments before
investments sold short--122.5%
(cost $1,618,928,768) ...................... 1,630,010,486
--------------
INVESTMENTS SOLD SHORT--(11.5%)
116,000 U.S. Treasury Bonds,
6.625%, 02/15/27 ........................... 125,931,920)
--------------
27,746 U.S. Treasury Notes,
3.625%, 07/15/02 ........................... (27,607,121)
--------------
Total investments sold short
(proceeds $144,219,316) .................... (153,539,041)
--------------
Total investments
net of investments
sold short--111.0% ......................... 1,476,471,445
Liabilities in excess of other
assets--(11.0%) ............................ (145,769,118)
--------------
NET ASSETS--100% $1,330,702,327
==============
- ------------
* Using the higher of Standard & Poor's or Moody's rating.
** Illiquid securities representing 0.04% of portfolio assets.
# Private placements restricted as to resale.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements.
@ Partial principal amount pledged as collateral for futures transactions.
-------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM --Adjustable Rate Mortgage. CMO --Collateralized Mortgage
Obligation.
G.O. --General Obligation.
I --Denotes CMO with Interest Only Characteristics.
I/O --Interest Only.
P --Denotes CMO with Principal Only Characteristics.
P/O --Principal Only.
REMIC --Real Estate Mortgage Investment Conduit.
-------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
9
<PAGE>
----------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED STATEMENT OF ASSETS
AND LIABILITIES
DECEMBER 31, 1997 (UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS
Investments, at value
(cost $1,618,928,768) (Note 1) ............................ $1,630,010,486
Deposits with brokers as collateral
for investments sold short ................................ 175,276,736
Receivable for investments sold ............................. 11,733,049
Interest receivable ......................................... 13,861,113
Unrealized appreciation on interest rate swaps
(Notes 1 &3) .............................................. 81,676
Due from broker-variation margin ............................ 625,312
Other assets ................................................ 81,477
--------------
1,831,669,849
--------------
LIABILITIES
Reverse repurchase agreements (Note 4) ...................... 313,042,446
Investments sold short, at value
(proceeds $144,219,316) (Note 1) .......................... 153,539,041
Payable for investments purchased ........................... 19,073,135
Bank overdraft .............................................. 106,001
Interest payable ............................................ 4,193,805
Unrealized depreciation on interest rate
swaptions ................................................. 2,932,500
Unrealized depreciation on interest rate caps
(Notes 1 & 3) ............................................. 64,280
Dividends payable ........................................... 4,728,952
Advisory fee payable (Note 2) ............................... 453,116
Administration fee payable (Note 2) ......................... 113,279
Other accounts payable and accrued expenses ................. 2,720,968
--------------
500,967,523
--------------
NET ASSETS .................................................. 1,330,702,326
==============
Net assets were comprised of:
Common stock, at par (Note 5) ............................. 1,420,106
Paid-in capital in excess of par .......................... 1,337,370,873
---------------
1,338,790,979
Undistributed net investment income ....................... 59,294,517
Accumulated net realized loss ............................. (67,209,795)
Net unrealized depreciation ............................... (173,375)
--------------
Net assets, December 31, 1997 ............................. $1,330,702,326
==============
Net asset value per share:
($1,330,702,326 / 142,010,583 shares of
common stock issued and outstanding) ...................... $9.37
=====
NET INVESTMENT INCOME
Income
Interest (including net amortization of premium
of $5,007,881 and net of interest expense
of $13,350,965) .......................................... $ 44,124,305
------------
Operating expenses
Investment advisory ........................................ 2,658,345
Administration ............................................. 664,586
Reports to shareholders .................................... 152,545
Custodian .................................................. 144,440
Transfer agent ............................................. 54,280
Audit ...................................................... 50,784
Directors .................................................. 50,840
Legal ...................................................... 30,240
Miscellaneous .............................................. 202,487
------------
Total operating expenses ................................. 4,008,547
------------
Net investment income before excise tax .................... 40,115,758
Excise tax ................................................. 2,000,000
------------
Net investment income ...................................... 38,115,758
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments ................................................ 7,801,381
Short sales ................................................ (1,531,628)
Futures .................................................... (11,286,118)
------------
(5,016,365)
------------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................ 46,502,226
Short sales ................................................ (9,319,725)
Options .................................................... 628,813
Futures .................................................... 862,008
------------
38,673,322
------------
Net gain on investments ...................................... 33,656,957
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................. $ 71,772,715
============
See Notes to Consolidated Financial Statements.
10
<PAGE>
- -------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows used for operating activities:
Interest received, net of interest purchased ............. $ 62,767,112
Operating expenses and excise taxes paid ................. (3,787,157)
Interest expense paid .................................... (10,066,126)
Purchase of long-term portfolio investments .............. (4,770,676,088)
Sale of long-term portfolio investments .................. 5,033,650,056
Other .................................................... 10,950
-------------
Net cash flows used for operating
activities .............................................. 311,898,747
-------------
Cash flows provided by financing activities:
Decrease in reverse repurchase agreements ............... (282,740,929)
Dividends paid .......................................... (29,653,199)
-------------
Net cash flows provided by financing
activities ............................................ (312,394,128)
-------------
Net decrease in cash ...................................... (495,381)
Cash at beginning of period ............................... 389,380
-------------
Cash at end of period ..................................... $ (106,001)
=============
RECONCILIATION OF NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS TO NET
CASH FLOWS USED FOR OPERATING ACTIVITIES
Net increase in net assets resulting from
operations .............................................. $ 71,772,715
-------------
Decrease in investments ................................... 312,038,703
Net realized loss ......................................... 5,016,365
Increase in unrealized depreciation ....................... (38,673,322)
Decrease in unrealized appreciation on
interest rate cap ....................................... 1,798,989
Decrease in unrealized appreciation on
interest rate swaps ..................................... 31,631
Decrease in interest receivable ........................... 5,291,842
Increase in receivable for investments sold ............... (9,917,012)
Decrease in broker-variation margin ....................... 174,773
Increase in deposits with brokers ......................... (175,276,736)
Decrease in deferred and prepaid assets ................... 10,950
Decrease in payable for investments purchased ............. (22,347,921)
Increase in payable for securities
sold short .............................................. 153,539,041
Increase in interest payable .............................. 3,284,839
Increase in unrealized depreciation on
interest rate swaptions ................................. 2,932,500
Increase in accrued expenses and other
liabilities ............................................. 2,221,390
-------------
Total adjustments ....................................... 240,126,032
-------------
Net cash flows used for operating
activities .............................................. $ 311,898,747
=============
- -------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN NET ASSETS
(UNAUDITED)
- -------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1997
---------- ---------
INCREASE (DECREASE)
IN NET ASSETS
Operations:
Net investment income .............. $ 38,115,758 $ 88,871,701
Net realized loss
on investments, short
sales, options and futures ....... (5,016,365) (2,464,524)
Net change in unrealized
appreciation (depreciation)
on investments, short sales,
options and futures .............. 38,673,322 30,422,403
--------------- ---------------
Net increase
in net assets resulting
from operations .................. 71,772,715 116,829,580
Dividends from net
investment income .................. (33,954,834) (56,747,067)
--------------- ---------------
Net increase ......................... 37,817,881 60,082,513
NET ASSETS
Beginning of period .................. 1,292,884,445 1,232,801,932
--------------- ---------------
End of period ........................ $ 1,330,702,326 $ 1,292,884,445
=============== ===============
See Notes to Consolidated Financial Statements
11
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
CONSOLIDATED FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 28,
SIX MONTHS 1992*
ENDED YEAR ENDED JUNE 30, TO
DECEMBER 31, ------------------------------------------- JUNE 30,
1997 1997 1996 1995 1994 1993
--------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........... $ 9.10 $ 8.68 $ 8.72 $ 8.32 $ 9.62 $ 9.45
--------- --------- ---------- ---------- ---------- ----------
Net investment income
(net of $0.09, $0.25, $0.22, $0.27,
$0.12 and $0.04, respectively,
of interest expense) ........................... 0.27 0.62 0.58 0.61 0.64 0.66
Net realized and unrealized gain (loss)
on investments,
short sales, options and futures ........... 0.24 0.20 (0.17) 0.42 (1.23) 0.07
--------- --------- ---------- --------- ---------- ----------
Net increase (decrease) from investment
operations .................................... 0.51 0.82 0.41 1.03 (0.59) 0.73
--------- --------- ---------- --------- ----------- ----------
Dividends from net investment income ........... (0.24) (0.40) (0.45) (0.63) (0.71) (0.54)
--------- --------- ---------- --------- ---------- ----------
Capital charge with respect to issuance of shares -- -- -- -- -- (0.02)
--------- --------- ---------- --------- ---------- ----------
Net asset value, end of period** ............... $ 9.37 $ 9.10 $ 8.68 $ 8.72 $ 8.32 $ 9.62
========= ========= ========== ========= ========== ==========
Market value, end of period** .................. $ 8.563 $ 8.125 $ 7.625 $ 7.50 $ 8.00 $ 9.375#
========= ========= ========== ========= ========== ==========
TOTAL INVESTMENT RETURN+ ....................... 8.30% 12.07% 7.83% 1.61% (7.73)% 4.99%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses+++ 0.60%++ 0.63% 0.64% 0.63% 0.67% 0.60%++
Net investment income 5.75%++ 7.04% 6.57% 7.28% 6.97% 8.41%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) $ 1,314,725 $1,261,766 $1,248,679 $1,181,411 $1,295,131 $1,327,571
Portfolio turnover 207% 110% 216% 107% 91% 210%
Net assets, end of period (in thousands) $ 1,330,702 $1,292,884 $1,232,802 $1,238,389 $1,182,120 $1 366,284
Reverse repurchase agreements outstanding,
end of period
(in thousands) $ 313,042 $ 595,783 $ 352,757 $ 489,335 $ 395,559 $ 498,618
Asset coverage@ $ 5,251 $ 3,170 $ 4,495 $ 3,531 $ 3,988 $ 3,740
</TABLE>
- -------------
* Commencement of investment operations.
** Net asset value and market value are published in THE WALL STREET JOURNAL
each Monday. # Net asset value immediately after the closing of the first
public offering was $9.44.
+ Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day and a sale at the current
market price on the last day of the periods reported. Dividends and
distributions, if any, are assumed, for purposes of this calculation, to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
Total investment return does not reflect brokerage commissions. Total
investment return for periods of less than one full year are not
annualized.
++ Annualized.
+++ The ratios of operating expenses, including interest expense, to average
net assets were 2.62%, 3.47%, 3.17%, 3.89%, 1.98%, and 0.97% for the
periods indicated above, respectively. The ratios of operating expenses,
including interest expense and excise taxes, to average net assets were
2.92%, 3.53%, 3.17%, 3.89%, 1.99% and 1.01% for the periods indicated
above, respectively.
@ Per $1,000 of reverse repurchase agreements outstanding.
The information above represents the unaudited operating performance data for a
share of common stock outstanding, total investment return, ratios to average
net assets and other supplemental data for each of the periods indicated. This
information has been determined based upon financial information provided in the
financial statements and market value data for the Trust's shares.
See Notes to Consolidated Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The BlackRock 2001 Term Trust Inc. (the "Trust"), a Maryland corporation, is a
diversified, closed-end management investment company. The investment objective
of the Trust is to manage a portfolio of investment grade fixed income
securities that will return $10 per share (the initial public offering price per
share) to investors on or about June 30, 2001 while providing high monthly
income. The ability of issuers of debt securities held by the Trust to meet
their obligations may be affected by economic developments in a specific
industry or region. No assurance can be given that the Trust's investment
objective will be achieved.
On October 17, 1997, the Trust transferred a substantial portion of its total
assets to a 100% owned regulated investment company subsidiary called BLK
Subsidiary, Inc. These consolidated financial statements include the operations
of both the Trust and its wholly-owned subsidiary after elimination of all
intercompany transactions and balances.
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 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
determine 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 market 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 posi-
13
<PAGE>
tion or an overall portfolio that is longer or shorter than the benchmark
security. A call option gives the purchaser of the option the right (but not
obligation) to buy, and obligates the seller to sell (when the option is
exercised), the underlying position at the exercise price at any time or at a
specified time during the option period. A put option gives the holder the right
to sell and obligates the writer to buy the underlying position at the exercise
price at any time or at a specified time during the option period. Put options
can be purchased to effectively hedge a position or a portfolio against price
declines if a portfolio is long. In the same sense, call options can be
purchased to hedge a portfolio that is shorter than its benchmark against price
changes. The Trust can also 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.
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 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 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 or as part of an income producing strategy reflecting the view of the
Trust's management in the direction of interest rates.
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 a 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 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
14
<PAGE>
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 greater or less than
the proceeds originally received.
SECURITIES LENDING: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust.
INTEREST RATE 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.
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 "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.
INTEREST RATE CAPS: Interest rate caps are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate over a specified fixed or floating rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changes in short-term rates. Owning interest rate
caps reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of the
portfolio and its exposure to changes in short-term interest rates. 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 INVESTMENT INCOME: Security transactions are
recorded on the trade date. Realized gains and losses are calculated on the
identified cost basis. Interest income is recorded on the accrual basis and the
Trust amortizes premium and accretes discount 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 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 amount.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and
distributions monthly, 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 annually.
Dividends and distributions are recorded on the ex-dividend date.
DEFERRED ORGANIZATION EXPENSES: A total of $75,000 was incurred in connection
with the organization of the Trust. These costs have been deferred and amortized
ratably over a period of sixty months from the date the Trust commenced
operations.
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.
15
<PAGE>
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 $852,363 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 "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 Mitchell Hutchins Asset
Management Inc. (the "Administrator"), a wholly-owned subsidiary of PaineWebber
Incorporated.
The investment advisory fee paid to the Adviser is computed weekly and
payable monthly at an annual rate of 0.40% of the Trust's average weekly net
assets. The administration fee paid to the Administrator is also computed weekly
and payable monthly at an annual rate of 0.10% of the Trust's average weekly net
assets.
Pursuant to the agreements, the Adviser provides continuous supervision of
the investment portfolio and pays the compensation of officers of the Trust who
are affiliated persons of the Adviser. The Administrator pays occupancy and
certain clerical and accounting costs of the Trust. The Trust bears all other
costs and expenses.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the six months ended December 31, 1997 aggregated
$3,452,203,248 and $3,780,092,567, respectively.
The Trust may invest up to 40% 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 December 31, 1997, the Trust held
0.04% of its portfolio assets in illiquid securities all of which were
restricted as to resale.
The portfolio 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
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 December 31, 1997
was substantially the same as the basis for financial reporting and accordingly,
net unrealized depreciation for federal income tax purposes was $173,375 (gross
unrealized appreciation--$37,338,573; gross unrealized depreciation--
$37,511,948).
For federal income tax purposes, the Trust had a capital loss carryforward as
of June 30, 1997 of approximately $61,510,800 of which $582,344 will expire in
2001, $22,753,973 will expire in 2002, $947,956 will expire in 2003, $34,764,750
will expire in 2004 and $2,461,777 will expire in 2005. Accordingly, no capital
gains distribution is expected to be paid to shareholders until net gains have
been realized in excess of such amount.
During the six months ended December 31, 1997, the Trust entered into
financial futures contracts. Details of the open contracts at December 31, 1997
were as follows:
<TABLE>
<CAPTION>
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION TRADE DECEMBER 31 APPRECIATION/
CONTRACTS TYPE DATE DATE 1997 DEPRECIATION
- -------- ----- -------- ------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Long position:
106 5 Yr. T-Note Mar.1998 ($11,457,460) ($11,514,250) ($56,790)
Short position:
1095 30 Yr. T-Bond Mar.199 $130,876,755 $131,913,281 $1,036,526
----------
$ 979,736
==========
</TABLE>
During the six months ended December 31, 1997 the Trust entered into swap
option ("swaption")agreements. Details of the open agreements at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION COST/ DECEMBER 31,
(000) TYPE RATE RATE DATE (PREMIUM) 1997
- -------- --------- ------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$200,000 Put 6.50% 3 month LIBOR 06/15/98 $2,540,000 $1,976,600
200,000 Put 6.70% 3 month LIBOR 01/29/98 1,700,000 38,000
200,000 Put 6.90% 3 month LIBOR 10/30/98 3,842,000 1,800,000
160,000 Call 6.20% 3 month LIBOR 0 8/13/99 2,388,000 4,592,000
Sold:
$480,000 Call 6.10% 3 month LIBOR 02/13/98 $(1,142,400) $(2,256,000)
450,000 Call 5.25% 3 month LIBOR 12/01/98 (1,462,500) (1,638,000)
350,000 Call 5.60% 3 month LIBOR 06/16/98 (1,330,000) (910,000)
</TABLE>
During the six months ended December 31, 1997, the Trust entered into
interest rate cap agreements. Details of the open agreements at December 31,
1997 are as follows:
16
<PAGE>
<TABLE>
<CAPTION>
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION COST/ DECEMBER 31,
(000) TYPE RATE RATE DATE (PREMIUM) 1997
- -------- --------- ------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$120,000 Interest 6.00% 3 month LIBOR 02/19/02 $3,199,280 $2,031,329
Rate
Sold:
($300,000) Interest VR 3 month LIBOR 08/08/01 ($3,600,000) ($2,797,263)
Rate
(200,000) Interest VR 3 month LIBOR 08/12/01 ($2,060,000) ($1,759,066)
Rate
</TABLE>
During the six months ended December 31, 1997, the Trust entered into
interest rate swapagreements. Details of the open agreements at December 31,
1997 are as follows:
<TABLE>
<CAPTION>
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION COST/ DECEMBER 31,
(000) TYPE RATE RATE DATE (PREMIUM) 1997
- -------- --------- ------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$509,25 Interest 6.37% 2 Year Forward 07/27/00 $ 0 $2,936,936
Rate
Sold:
($350,000) Interest 6.42% 3 Year Forward 07/27/01 ($ 0) ($3,010,154)
Rate
(10,908) Interest VR 10 Year Forward 06/13/11 ($ 154,894) $ 0
Rate
</TABLE>
NOTE 4. BORROWINGS REVERSE REPURCHASE AGREEMENTS:
The Trust may enter into reverse repurchase agreements with qualified, third
party broker-dealers as determined by and under the direction of the Trust's
Board of Directors. Interest on the value of the reverse repurchase agreements
issued and outstanding will be based upon competitive market rates at the time
of issuance. At the time the Trust enters into a reverse repurchase agreement,
it will establish and maintain a segregated account with the lender the value of
which at least equals the principal amount of the reverse repurchase
transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding during
the six months ended December 31, 1997, was approximately $338,511,716 at a
weighted average interest rate of approximately 5.30%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during the six months
ended December 31, 1997, was $369,930,373 as of August 31, 1997, which was
16.40% 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.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. Of the
142,010,583 common shares outstanding at December 31, 1997, the Adviser owned
10,583 shares.
17
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
TAX INFORMATION
- -------------------------------------------------------------------------------
We wish to advise you as to the federal tax status of dividends and
distributions paid by the Trust during the calendar year ended December 31,
1997.
During the year ended December 31, 1997, the Trust paid dividends of $0.40
per share from net investment income. For federal income tax purposes, the
aggregate of any dividends and short-term capital gains distributions you
received are reportable on your 1997 federal income tax returns as ordinary
income. Further, we wish to advise you that your income dividends do not qualify
for the dividends received deduction.
For the purpose of preparing your 1997 annual federal income tax return,
however, you should report the amounts as reflected on the appropriate Form 1099
DIV which were mailed to you in January 1998.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
Pursuant to the Trust's Dividend Reinvestment Plan (the "Plan"),
shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested by State Street Bank and Trust Company (the "Plan
Agent") in Trust shares pursuant to the Plan. Shareholders who do not
participate in the Plan will receive all distributions in cash paid by check in
United States dollars mailed directly to the shareholders of record (or if the
shares are held in street or other nominee name, then to the nominee) by the
transfer agent as dividend disbursing agent.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Trust declares a dividend or determines to make a capital gain
distribution, the Plan Agent will, as agent for the participants, receive the
cash payment and use it to buy Trust shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts. The Trust will not
issue shares under the Plan.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent and will receive certificates for whole Trust shares and a cash
payment will be made for any fraction of a Trust share.
The Plan Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Trust. However, each participant will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income taxes that
may be payable on such dividend or distribution.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all shareholders of the Trust at least 90 days before the record
date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent upon at least 90 days' written notice to all
shareholders of the Trust. All correspondence concerning the Plan should be
directed to the Plan Agent at (800) 699-1BFM or BlackRock Financial Management,
Inc. at (800) 227-7BFM. The addresses are on the front of this report.
18
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
THE TRUST'S INVESTMENT OBJECTIVE
The Trust's investment objective is to manage a portfolio of investment grade
fixed income securities that will return $10 per share (the initial public
offering price per share) to investors on or about June 30, 2001 while providing
high monthly income.
WHO MANAGES THE TRUST?
BlackRock Financial Management, Inc. ("BlackRock") is the investment advisor for
the Trust. BlackRock is a registered investment advisor specializing in fixed
income securities. Currently, BlackRock manages approximately $55 billion of
assets across the government, mortgage, corporate and municipal sectors. These
assets are managed on behalf of institutional and individual investors in 21
closed-end funds traded either on the New York Stock Exchange or American Stock
Exchange, several open-end funds and separate accounts for more than 125 clients
in the U.S. and overseas. BlackRock is a subsidiary of PNC Asset Management
Group, Inc. which is a division of PNC Bank, N.A., one of nation's largest
banking organizations.
WHAT CAN THE TRUST INVEST IN?
The Trust may invest in all fixed income securities rated investment grade or
higher ("AAA", "AA", "A" or "BBB") or determined by the Adviser to be of
equivalent credit quality. Examples of securities in which the Trust may invest
include U.S. government and government agency securities, zero coupon
securities, mortgage-backed securities, corporate debt securities, asset-backed
securities, U.S. dollar-denominated foreign debt securities and municipal
securities. Under current market conditions, BlackRock expects that the primary
investments of the Trust will be U.S. government securities, securities backed
by government agencies (such as mortgage-backed securities) and corporate debt
securities.
WHAT IS THE ADVISER'S INVESTMENT STRATEGY?
The Adviser will seek to meet the Trust's investment objective by managing the
assets of the Trust so as to return the initial offering price ($10 per share)
at maturity. The Trust will implement a conservative strategy that will seek to
closely match the maturity of the assets of the portfolio with the future return
of the initial investment at the end of 2001. At the Trust's termination,
BlackRock expects that the value of the securities which have matured, combined
with the value of the securities that are sold, will be sufficient to return the
initial offering price to investors. On a continuous basis, the Trust will seek
its objective by actively managing its assets in relation to market conditions,
interest rate changes and, importantly, the remaining term to maturity of the
Trust.
In addition to seeking the return of the initial offering price, the Adviser
also seeks to provide high monthly income to investors. The portfolio managers
will attempt to achieve this objective by investing in securities that provide
competitive income. In addition, leverage will be used (in an amount up to
331/3% of total assets) to enhance the income of the portfolio. In order to
maintain competitive yields as the Trust approaches maturity and depending on
market conditions, the Adviser will attempt to purchase securities with call
protection or maturities as close to the Trust's maturity date as possible.
Securities with call protection should provide the portfolio with some degree of
protection against reinvestment risk during times of lower prevailing interest
rates. Since the Trust's primary goal is to return the initial offering price at
maturity, any cash that the Trust receives prior to its maturity date (i.e. cash
from early and regularly scheduled payments of principal on mortgage-backed
securities) will be reinvested in securities with maturities which coincide with
the remaining term of the Trust. Since shorter-term securities typically yield
less than longer-term securities, this strategy will likely result in a decline
in the Trust's income over time. However, the Adviser will attempt to maintain a
yield which is competitive with a comparable maturity Treasury at the same point
on the yield curve (i.e. if the Trust has three years left until its maturity,
the Adviser will attempt to maintain a yield at a spread over a 3-year
Treasury). It is important to note that the Trust will be managed so as to
preserve the integrity of the return of the initial offering price.
19
<PAGE>
HOW ARE THE TRUST'S SHARES PURCHASED AND SOLD? DOES THE TRUST PAY DIVIDENDS
REGULARLY?
The Trust's shares are traded on the New York Stock Exchange which provides
investors with liquidity on a daily basis. Orders to buy or sell shares of the
Trust must be placed through a registered broker or financial adviser. The Trust
pays monthly dividends which are typically paid on the last business day of the
month. For shares held in the shareholder's name, dividends may be reinvested in
additional shares of the fund through the Trust's transfer agent, State Street
Bank andTrust Company. Investors who wish to hold shares in a brokerage account
should check with their financial adviser to determine whether their brokerage
firm offers dividend reinvestment services.
LEVERAGE CONSIDERATIONS IN A TERM TRUST
Under current market conditions, leverage increases the income earned by the
Trust. The Trust employs leverage primarily through the use of reverse
repurchase agreements and dollar rolls. Leverage permits the Trust to borrow
money at short-term rates and reinvest that money in longer-term assets which
typically offer higher interest rates. The difference between the cost of the
borrowed funds and the income earned on the proceeds that are invested in longer
term assets is the benefit to the Trust from leverage. In general, the portfolio
is typically leveraged at approximately 331/3% of total assets.
Leverage also increases the duration (or price volatility of the net assets) of
the Trust,which can improve the performance of the fund in a declining rate
environment, but can cause net assets to decline faster than the market in a
rising rate environment. BlackRock's portfolio managers continuously monitor and
regularly review the Trust's use of leverage and the Trust may reduce, or
unwind, the amount of leverage employed should BlackRock consider that reduction
to be in the best interests of the shareholders.
SPECIAL CONSIDERATIONS AND RISK FACTORS RELEVANT TO TERM TRUSTS
THE TRUST IS INTENDED TO BE A LONG-TERM INVESTMENT AND IS NOT A SHORT-TERM
TRADING VEHICLE.
RETURN OF INITIAL INVESTMENT. Although the objective of the Trust is to return
its initial offering price upon termination, there can be no assurance that this
objective will be achieved.
DIVIDEND CONSIDERATIONS. The income and dividends paid by the Trust are likely
to decline to some extent over the term of the Trust due to the anticipated
shortening of the dollar-weighted average maturity of the Trust's assets.
LEVERAGE. The Trust utilizes leverage through reverse repurchase agreements and
dollar rolls, which involves special risks. The Trust's net asset value and
market value may be more volatile due to its use of leverage.
MARKET PRICE OF SHARES. The shares of closed-end investment companies such as
the Trust trade on the New York Stock Exchange (NYSE symbol: BLK) and as such
are subject to supply and demand influences. As a result, shares may trade at a
discount or a premium to their net asset value.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The cash flow and yield
characteristics of these securities differ from traditional debt securities. The
major differences typically include more frequent payments and the possibility
of prepayments which will change the yield to maturity of the security.
CORPORATE DEBT SECURITIES. The value of corporate debt securities generally
varies inversely with changes in prevailing market interest rates. The Trust may
be subject to certain reinvestment risks in environments of declining interest
rates.
ZERO COUPON SECURITIES. Such securities receive no cash flows prior to maturity,
therefore, interim price movement on the securities are generally more sensitive
to interest rate movements than securities that make periodic coupon payments.
These securities appreciate in value over time and can play an important role in
helping the Trust achieve its primary objective.
ILLIQUID SECURITIES. The Trust may invest in securities that are illiquid,
although under current market conditions the Trust expects to do so to only a
limited extent. Investing in these securities involves special risks.
NON-U.S SECURITIES. The Trust may invest less than 10% of its total assets in
non-U.S. dollar-denominated securities which involve special risks such as
currency, political and economic risks, although under current market conditions
does not do so.
ANTITAKEOVER PROVISIONS. Certain antitakeover provisions will make a change in
the Trust's business or management more difficult without the approval of the
Trust's Board of Directors and may have the effect of depriving shareholders of
an opportunity to sell their shares at a premium above the prevailing market
price.
20
<PAGE>
- -------------------------------------------------------------------------------
THE BLACKROCK 2001 TERM TRUST INC.
GLOSSARY
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES (ARMS):
Mortgage instruments with interest rates that adjust at periodic intervals at a
fixed amount relative to the market levels of interest rates as reflected in
specified indexes. ARMs are backed by mortgage loans secured by real property.
ASSET-BACKED SECURITIES:
Securities backed by various types of receivables such as automobile and credit
card receivables.
CLOSED-END FUND:
Investment vehicle which initially offers a fixed number of shares and trades on
a stock exchange. The fund invests in a portfolio of securities in accordance
with its stated investment objectives and policies.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS):
Mortgage-backed securities which separate mortgage pools into short-, medium-,
and long-term securities with different priorities for receipt of principal and
interest. Each class is paid a fixed or floating rate of interest at regular
intervals. Also known as multiple-class mortgage pass-throughs.
DISCOUNT:
When a fund's net asset value is greater than its stock price, the fund is said
to be trading at a discount.
DIVIDEND:
Income generated by securities in a portfolio and distributed to shareholders
after the deduction of expenses. This Trust declares and pays dividends on a
monthly basis.
DIVIDEND REINVESTMENT:
Shareholders may elect to have all dividends and distributions of capital gains
automatically reinvested into additional shares of the Trust.
FHA:
Federal Housing Administration, a government agency that facilitates a secondary
mortgage market by providing an agency that guarantees timely payment of
interest and principal on mortgages.
FHLMC:
Federal Home Loan Mortgage Corporation, a publicly owned, federally chartered
corporation that facilitates a secondary mortgage market by purchasing mortgages
from lenders such as savings institutions and reselling them to investors by
means of mortgage-backed securities. Obligations of FHLMC are not guaranteed by
the U.S. government, however; they are backed by FHLMC's authority to borrow
from the U.S. government. Also known as Freddie Mac.
FNMA:
Federal National Mortgage Association, a publicly owned, federally chartered
corporation that facilitates a secondary mortgage market by purchasing mortgages
from lenders such as savings institutions and reselling them to investors by
means of mortgage-backed securities. Obligations of FNMA are not guaranteed by
the U.S. government, however; they are backed by FNMA's authority to borrow from
the U.S. government. Also known as Fannie Mae.
GNMA:
Government National Mortgage Association, a U.S. government agency that
facilitates a secondary mortgage market by providing an agency that guarantees
timely payment of interest and principal on mortgages. GNMA's obligations are
supported by the full faith and credit of the U.S. Treasury. Also known as
Ginnie Mae.
GOVERNMENT SECURITIES:
Securities issued or guaranteed by the U.S. government, or one of its agencies
or instrumentalities, such as GNMA (Government National Mortgage Association),
FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan
Mortgage Corporation).
INVERSE-FLOATING RATE MORTGAGES:
Mortgage instruments with coupons that adjust at periodic intervals according to
a formula which sets inversely with a market level interest rate index.
21
<PAGE>
INTEREST-ONLY SECURITIES (I/O):
Mortgage securities that receive only the interest cash flows from an underlying
pool of mortgage loans or underlying pass-through securities. Also known as
STRIP.
MARKET PRICE:
Price per share of a security trading in the secondary market. For a closed-end
fund, this is the price at which one share of the fund trades on the stock
exchange. If you were to buy or sell shares, you would pay or receive the market
price.
MORTGAGE DOLLAR ROLLS:
A mortgage dollar roll is a transaction in which the Trust sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (although not the same) securities on a
specified future date. During the "roll" period, the Trust does not receive
principal and interest payments on the securities, but is compensated for giving
up these payments by the difference in the current sales price (for which the
security is sold) and lower price that the Trust pays for the similar security
at the end date as well as the interest earned on the cash proceeds of the
initial sale.
MORTGAGE PASS-THROUGHS:
Mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae.
MULTIPLE-CLASS PASS-THROUGHS:
Collateralized Mortgage Obligations.
NET ASSET VALUE (NAV):
Net asset value is the total market value of all securities and other assets
held by the Trust, plus income accrued on its investments, minus any liabilities
including accrued expenses, divided by the total number of outstanding shares.
It is the underlying value of a single share on a given day. Net asset value for
the Trust is calculated weekly and published in BARRON'S on Saturday and THE
WALL STREET JOURNAL each Monday.
PRINCIPAL-ONLY SECURITIES (P/O):
Mortgage securities that receive only the principal cash flows from an
underlying pool of mortgage loans or underlying pass-through securities. Also
known as STRIP.
PROJECT LOANS:
Mortgages for multi-family, low- to middle- income housing.
PREMIUM:
When a fund's stock price is greater than its net asset value, the fund is said
to be trading at a premium.
REMIC:
A real estate mortgage investment conduit is a multiple-class security backed by
mortgage-backed securities or whole mortgage loans and formed as a trust,
corporation, partnership, or segregated pool of assets that elects to be treated
as a REMIC for federal tax purposes. Generally, Fannie Mae REMICs are formed as
trusts and are backed by mortgage-backed securities.
RESIDUALS:
Securities issued in connection with collateralized mortgage obligations that
generally represent the excess cash flow from the mortgage assets underlying the
CMO after payment of principal and interest on the other CMO securities and
related administrative expenses.
REVERSE REPURCHASE AGREEMENTS:
In a reverse repurchase agreement, the Trust sells securities and agrees to
repurchase them at a mutually agreed date and price. During this time, the Trust
continues to receive the principal and interest payments from that security. At
the end of the term, the Trust receives the same securities that were sold for
the same initial dollar amount plus interest on the cash proceeds of the initial
sale.
STRIPPED MORTGAGE BACKED SECURITIES:
Arrangements in which a pool of assets is separated into two classes that
receive different proportions of the interest and principal distributions from
underlying mortgage-backed securities. IO's and PO's are examples of strips.
22
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BlackRock
==========
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
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
This report is for shareholder information. This is not a prospectus
intended for use in the purchase or sale of Trust shares.
The accompanying financial statements as of December 31, 1997 were not
audited and accordingly, no opinion is expressed on them.
THE BLACKROCK 2001 TERM TRUST INC.
c/o Mitchell Hutchins Asset Management Inc.
32nd Floor
1285 Avenue of the Americas
New York, NY 10019
(800) 227-7BFM
==========
The BlackRock
==========
2001 Term Trust Inc.
====================
Consolidated
Semi-Annual Report
December 31, 1997
