- --------------------------------------------------------------------------------
BLK Subsidiary, Inc.
Portfolio of Investments
June 30, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Principal
Rating* Amount Value
(Unaudited) (000) Description (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--106.2%
MORTGAGE PASS-THROUGHS--2.7%
$ 1,500++ Federal Home Loan Mortgage Corp.,
6.50%, 01/01/99 ....................... $ 1,495,313
5,940 Federal Housing Administration,
Massachusetts St. Housing
Finance Agency, Series A,
6.85%, 10/01/20 ....................... 5,925,684
Federal National Mortgage
Association,
30,000 6.50%, 03/25/27 ...................... 6,825,000
14,160++ 7.00%, 10/01/22 - 06/01/26 ........... 14,359,524
----------
28,605,521
----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--9.0%
AAA 346 Collateralized Mortgage
Securities Corp.,
Series F, Class F-4A,
11/01/15 .............................. 349,819
Federal Home Loan Mortgage
Corp., Multiclass
Mortgage Participation
Certificates,
14,389 Series G-30, Class G-30-J,
02/25/23 (I) ......................... 2,142,646
12,576 Series G-32, Class G-32-PT,
02/25/19 (I) ......................... 1,228,546
34,304 Series 1261, Class 1261-H,
08/15/19 ............................. 34,593,875
614 Series 1563, Class 1563-SB,
08/15/08 (ARM) ....................... 621,838
1,758 Series 1606, Class 1606-SB,
11/15/08 (ARM) ....................... 1,730,046
5,295 Series 1671, Class 1671-KD,
02/15/24 (ARM) ....................... 5,202,456
5,471 Series 1970, Class 1970-PN,
06/15/15 (I) ......................... 574,461
Federal National Mortgage
Association, REMIC
Pass-Through Certificates,
15,000 Trust 1992-43,
Class 43-E, 04/25/22 ................... 15,530,850
1,500 Trust 1993-G17, Class 17-SH,
04/25/23 (ARM) ....................... 1,044,735
822 Trust 1993-117, Class 117-S,
07/25/08 (ARM) ....................... 791,387
7,605 Trust 1993-141, Class 141-PW,
06/25/18 (I) ......................... 651,283
4,722 Trust 1993-196, Class 196-SM,
10/25/08 (ARM) ....................... 4,213,621
4,706 Trust 1993-214, Class 214-SO,
12/25/08 (ARM) ....................... 4,442,291
7,700 Trust 1994-54, Class 54-B,
11/25/23 (P) ......................... 7,063,441
11,066 Trust 1996-T6, Class T6-C,
02/26/01 ............................. 11,062,701
2,735 Trust 1996-T6, Class T6-D,
02/26/01 ............................. 2,758,201
6,465 Government National Mortgage
Association, REMIC,
Trust 1994-1, Class 1-PL,
06/16/24 (I) .......................... 1,125,415
----------
95,127,612
----------
COMMERCIAL MORTGAGE BACKED
SECURITIES--6.5%
BBB 10,000 CBA Mortgage Corp.,
Series 1993-C1, Class D,
7.76%, 12/25/03 ....................... 10,020,914
AA+ 3,444 Central Life Assurance Co.,
Series 1994-1, Class A2,
8.90%, 11/01/20 ....................... 3,558,873
AAA 1 26,145 Credit Suisse First Boston Mortgage,
Series 1997, Class C-1,
06/20/29, (I/O) ....................... 13,946,336
AAA 5,200 PaineWebber Mortgage
Acceptance Corp.,
Series 1995-M1, Class A,
6.70%, 01/15/07 ...................... 5,282,827
Resolution Trust Corp.,
AA- 3,963 Series 1992-C6, Class B,
7.70%, 07/25/24 ...................... 3,943,225
AA 8,050 Series 1994-C1, Class C,
8.00%, 06/25/26 ...................... 8,160,688
A 5,521 Series 1994-C2, Class D,
8.00%, 04/25/25 ...................... 5,588,110
AA 4,684 Salomon Brothers Mortgage
Acceptance Corp.,
Series 1997-TZH,
Class A1, 7.15%, 03/25/25 ............. 4,889,207
AAA 12,800 Structured Asset Securities
Corp., Series 1996-CFL,
Class B, 6.30%, 02/25/28 ................ 12,778,166
----------
68,168,346
----------
CORPORATE BONDS--26.4%
BANKING AND FINANCE--12.2%
A3 1,300@ Amsouth Bancorporation,
6.75%, 11/01/25 ........................ 1,336,066
A- 5,000 Aristar Inc.,
7.25%, 06/15/01 ........................ 5,153,350
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
Principal
Rating* Amount Value
(Unaudited) (000) Description (Note 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS
BANKING AND FINANCE--(CONT'D)
Associates Corp.,
AA- $ 5,000 6.68%, 07/25/00 ........................ $ 5,068,700
AA- 5,000 7.46%, 03/28/00 ........................ 5,127,000
A- 15,000 Donaldson, Lufkin & Jenrette,
5.625%, 02/15/16 ....................... 14,830,050
A+ 6,750 Goldman Sachs Group LP,
6.20%, 12/15/00 ........................ 6,785,437
A3 5,000 Great Western Financial Corp.,
6.375%, 07/01/00 ....................... 5,037,900
A1 5,700 Meridian Bancorp Inc.,
6.625%, 06/15/00 ....................... 5,768,362
Merrill Lynch & Co. Inc.,
AA- 7,200 6.00%, 01/15/01 ........................ 7,203,888
AA- 5,800 6.00%, 03/01/01 ........................ 5,806,902
A+ 3,800 Morgan Stanley Inc.,
5.75%, 02/15/01 ........................ 3,778,720
Aa3 10,000 NationsBank Corp.,
7.00%, 09/15/01 ........................ 10,278,700
A 12,500 Salomon Inc.,
6.625%, 11/30/00 ....................... 12,658,875
Salomon Smith Barney Holdings Inc.,
A 13,000 5.875%, 02/01/01 ....................... 12,937,600
A 3,600 7.00%, 05/15/00 ........................ 3,661,704
A 1,925 Security Pacific Corp.,
11.00%, 03/01/01 ....................... 2,157,176
A- 15,000 Transamerica Finance Corp.,
6.75%, 06/01/00 ........................ 15,208,350
A2 5,000 Union Planters National Bank,
6.76%, 10/30/01 ........................ 5,100,892
----------
127,899,672
----------
INDUSTRIAL--5.5%
BBB 7,500 Erac Usa Finance Co.,
7.00%, 06/15/00 ........................ 7,610,137
A 10,000 Ford Motor Credit Co.,
6.18%, 12/27/01 ........................ 10,058,200
A 20,600 General Motors Acceptance Corp.,
6.125%, 09/18/98 ....................... 20,617,620
BBB- 6,000 RJR Nabisco Brands Inc.,
8.00%, 07/15/01 ........................ 6,040,260
Sears Roebuck & Co.,
A- 4,250 6.50%, 06/15/00 ........................ 4,293,095
A- 5,000 7.29%, 04/24/00 ........................ 5,100,716
BBB 3,500 Tenneco Credit Corp.,
8.075%, 10/01/02 ....................... 3,728,025
----------
57,448,053
----------
UTILITIES--1.3%
BBB 9,000 Pacificorp Holdings, Inc.,
6.75%, 04/01/01 ......................... 9,010,530
BBB+ 5,000 Potomac Capital Corp.,
6.90%, 08/09/00 ......................... 5,049,350
----------
14,059,880
----------
YANKEE--7.4%
African Development Bank,
Aa1 5,000 7.75%, 12/15/01 ......................... 5,254,816
Aaa 3,350 8.625%, 05/01/01 ........................ 3,569,431
BBB- 3,000 Colombia (Republic of),
8.00%, 06/14/01 ......................... 3,000,000
BBB- 15,000 Empresa Electric Guacolda,
7.60%, 04/30/01 ......................... 14,893,484
A 4,000 Household Finance Corp.,
7.45%, 04/01/00 ......................... 4,093,040
A+ 18,000 Quebec (Province of),
9.125%, 08/22/01 ........................ 19,452,848
BBB- 12,000 Transpatadora de Gas,
10.25%, 04/25/01 ........................ 12,241,972
A- 15,000 US Remittance Master Trust,
7.57%, 01/01/01 ......................... 15,079,687
----------
77,585,278
----------
ASSET-BACKED SECURITIES--11.8%
BBB+ 5,290 Amresco Securitized Interest,
Series 1996-1, Class A, 8.10%,
04/26/26 ................................ 5,210,206
AAA 23,715 Brazos Student Finance Corp.,
Series 1998-A, Class A,
06/01/06 ................................ 23,707,968
BaA2 10,000 Broad Index Secured Trust Offering,
6.58%, 03/26/01 ......................... 10,019,239
AAA 18,205 Chase Manhattan Grantor Trust,
Series 1996-B, Class A, 6.61%,
09/15/02 ............................... 18,341,462
AAA 35,000@ Citibank Credit Card Trust,
Series 1996-1, Class A, 5.79%,
02/07/03 ............................... 30,045,050
AAA 2,222 NationsBank Auto Grantor Trust,
Series 1995-A, Class A, 5.85%,
06/15/02 ................................ 2,223,049
AAA 5,750 Standard Credit Card Master Trust,
Series 1995-3, Class A, 7.85%,
02/07/02 ................................ 5,915,313
Structured Mortgage Asset
Residential Trust,
A 10,563 Series 1997-2, 8.24%,
03/15/06 ................................ 10,650,958
A 11,268 Series 1997-3, 8.57%,
04/15/06 ................................ 11,452,408
A 6,378 Series 1997-4, Class A, 7.85%,
09/15/01 ................................ 6,423,555
----------
123,989,208
----------
STRIPPED MORTGAGE-BACKED
SECURITIES--6.2%
AAA 6,404 Bear Stearns Secured Investments,
12/01/18 (P/O) .......................... 6,228,234
Aaa 4,265 CMO Mortgage Investors Trust,
Trust 7, Class P,
09/22/21 (I/O) .......................... 1,071,756
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
Principal
Rating* Amount Value
(Unaudited) (000) Description (Note 1)
- --------------------------------------------------------------------------------
STRIPPED MORTGAGE-BACKED
SECURITIES--(CONT'D)
Collateralized Mortgage Securities Corp.,
AAA $ 1,267 Series 1990-5, Class 5-L,
09/20/20 (I/O) .......................... $ 32,849
AAA 3,320 Series 1991-9, Class M,
11/20/21 (I/O) .......................... 501,642
Federal Home Loan Mortgage Corp.,
17,650 Series G-3, Class G-3-S,
04/25/19 (I/O) .......................... 749,964
4,482 Series 113, Class 113-M,
05/15/21 (I/O) .......................... 1,093,122
13,205 Series 181, Class 181-F,
08/15/21 (I/O) .......................... 1,764,025
1,127 Series 1125, Class 1125-F,
08/15/21 (I/O) .......................... 303,780
691 Series 1338, Class 1338-Q,
08/15/07 (P/O) .......................... 594,054
4,700 Series 1360, Class 1360-PT,
12/15/17 (I/O) .......................... 696,319
4,700 Series 1378, Class 1378-DA,
01/15/18 (I/O) .......................... 938,567
2,941 Series 1388, Class 1388-G,
05/15/06 (I/O) .......................... 447,010
3,646 Series 1404, Class 1404-E,
01/15/06 (I/O) .......................... 408,813
15,456 Series 1621, Class 1621-SJ,
10/15/20 (I/O) .......................... 661,377
6,506 Series 1662, Class 1662-PO,
01/15/09 (P/O) .......................... 5,134,307
Federal National Mortgage Association,
2,370 Trust 5, Class 1, 09/01/07 (P/O) ......... 1,967,716
1,675 Trust 25, Class 2,
02/01/13 (P/O) .......................... 160,604
1,196 Trust 60, Class 1,
01/01/19 (P/O) .......................... 970,255
1,400 Trust 1990-76, Class 76-N,
07/25/20 (I/O) .......................... 36,216
1,900 Trust 1990-106, Class 106-K,
09/25/20 (I/O) .......................... 435,146
532 Trust 1991-G44, Class G44-H,
11/25/21 (P/O) .......................... 488,547
839 Trust 1991-29, Class 29-J,
04/25/21 (I/O) .......................... 273,260
2,400 Trust 1991-80, Class 80-Q,
07/25/21 (I/O) .......................... 726,870
11,523 Trust 1992-G45, Class G45-2,
08/25/22 (I/O) .......................... 2,886,515
14,744 Trust 1993-152, Class 152-D,
08/25/23 (P/O) .......................... 14,292,060
1,162 Trust 1993-222, Class 222-B,
07/25/22 (P/O) .......................... 1,072,387
20,874 Trust 1993-257, Class 257-A,
06/25/23 (P/O) .......................... 19,052,723
47,180 Trust 1997-37, Class 37-SX,
08/18/18 (I/O) .......................... 855,140
AAA 6,148 Merrill Lynch Trust,
Series 43, Class F, 08/27/15 (I/O) ....... 879,093
------------
64,722,351
------------
U.S. GOVERNMENT SECURITIES--20.7%
U.S. Treasury Bonds,
125,000+ 6.125%, 11/15/27 ....................... 133,945,000
71,329 3.625%, 04/15/28 (CPI) ................. 70,459,934
U.S. Treasury Notes,
12,500 6.125%, 08/15/07 ....................... 13,005,875
------------
217,410,809
------------
TAXABLE ZERO COUPON BONDS--10.8%
133,000+ U.S. Treasury Receipt,
05/15/01 ............................... 113,790,810
------------
TAXABLE MUNICIPAL BONDS--2.6%
AAA 1,000 Kern County California Pension
Obligation, 6.27%, 08/15/01 ............. 1,009,440
AAA 2,035 Long Beach California Pension
Obligation, 6.45%, 09/01/01 ............. 2,064,813
AAA 6,000 Los Angeles County
California Pension Obligation,
Series D, 6.38%, 06/30/01 ............... 6,072,720
New York City, G.O., Series 1,
BBB+ 5,000 6.40%, 03/15/01 ......................... 5,044,750
BBB+ 5,000 7.24%, 04/15/01 ......................... 5,151,800
BBB 1,000 New York State Environmental
Facility Auth., Series A,
6.62%, 03/15/01 ......................... 1,013,100
BBB 3,345 New York State Housing
Finance Agency, Series B,
7.14%, 09/15/02 ........................ 3,469,869
BBB 2,000 New York State Urban Development
Corp., Series B,
6.90%, 04/01/01 ......................... 2,040,500
A 1,000 St. Joseph's Health System
California, Series A,
7.02%, 07/01/01 ......................... 1,027,220
------------
26,894,212
------------
STRIPPED MONEY MARKET INSTRUMENTS--9.5%
AAA 65,000 Aim Prime Money Market Portfolio,
Zero Coupon, 01/02/01 ................... 56,697,680
AAA 50,000 Goldman Sachs Money Market,
Zero Coupon, 01/02/01 ................... 43,592,850
-------------
100,290,530
-------------
Total long-term investments
(cost $1,112,537,739) .............. $1,115,992,282
--------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount Value
(000) Description (Note 1)
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--0.6%
CALL OPTIONS PURCHASED--0.6%
Interest Rate Swap,
$ 80,000 6.20%, over 3 month LIBOR,
expires 08/13/99 $ 2,292,800
103,000 5.85%, over 3 month LIBOR,
expires 08/07/00 2,147,550
235,000 5.82%, over 3 month LIBOR,
expires 01/11/99 1,076,535
235,000 5.92%, over 3 month LIBOR,
expires 08/21/98 1,022,250
-------------
6,539,135
-------------
Put Options Purchased--0.0%
200,000 Interest Rate Swap, 6.90% over
3 month LIBOR, expires 10/30/98 124,000
-------------
Total short-term investments
(cost $9,466,175) 6,663,135
-------------
Total investments before
call options written--106.8%
(cost $1,122,003,914) 1,122,655,417
-------------
Call Options Written--(0.3%)
Interest Rate Swap,
(450,000) 3 month LIBOR over 5.25%,
expires 12/01/98 (380,250)
(152,750) 3 month LIBOR over 5.80%,
expires 01/11/99 (1,439,822)
(152,750) 3 month LIBOR over 5.90%,
expires 09/21/98 (1,088,649)
--------------
Total call options written
(premium received $4,101,257) (2,908,721)
--------------
Total investments net of
call options written--106.5% $1,119,746,696
Liabilities in excess of other
assets--(6.5%) (69,083,313)
--------------
NET ASSETS--100% $1,050,663,383
==============
- ------------
* Using the higher of Standard & Poor's or Moody's rating.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
++ Includes mortgage dollar roll of $12,903,516. See Note 4.
@ Entire principal amount pledged as collateral for futures transactions.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
CPI -- Consumer Price Index.
G.O. -- General Obligation Bond.
I -- Denotes a CMOwith Interest only characteristics.
I/O -- Interest Only. LIBOR -- London InterBank Offer Rate.
P -- Denotes a CMO with Principal only characteristics.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $1,122,003,914)
(Note 1) .................................................. $1,122,655,417
Cash ......................................................... 207,686
Deposits with brokers as collateral for
investments sold short (Note 1) ........................... 1,365,000
Receivable for investments sold .............................. 2,183,469
Interest receivable .......................................... 10,418,312
--------------
1,136,829,884
--------------
LIABILITIES
Reverse repurchase agreements (Note 4) ....................... 51,664,500
Interest rate caps written, at value
(unamortized premium $1,035,412) (Note 1) ................. 3,146,660
Call options written, at value
(premium received $4,101,257) (Note 1) .................... 2,908,721
Payable for investments purchased ............................ 22,403,584
Unrealized depreciation on interest rate swaps ............... 890,783
Due to broker-variation margin ............................... 436,774
Due to Parent (Note 2) ....................................... 4,715,479
--------------
86,166,501
--------------
NET ASSETS ................................................... $1,050,663,383
==============
Net assets were comprised of:
Common stock, at par (Note 5) ............................. $ 1,420,106
Paid-in capital in excess of par .......................... 1,012,807,310
--------------
1,014,227,416
Undistributed net investment income ....................... 39,955,294
Accumulated net realized loss ............................. (1,412,663)
Net unrealized depreciation ............................... (2,106,664)
---------------
Net assets, June 30, 1998 ................................. $1,050,663,383
===============
Net asset value per share:
($1,050,663,383 / 142,010,583 shares of
common stock issued and outstanding) ...................... $7.40
=====
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 17, 1997
(COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1998
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of
$3,618,033 and net of interest expense of
$17,662,221) .............................................. $44,670,773
-----------
Expenses
Investment advisory ......................................... 2,886,658
Administration .............................................. 721,665
Custodian ................................................... 163,000
Audit ....................................................... 61,000
Directors ................................................... 54,000
Legal ....................................................... 51,000
Miscellaneous ............................................... 120,226
-----------
Total Expenses ............................................ 4,057,549
-----------
Net investment income before excise tax ........................ 40,613,224
Excise tax .................................................. 657,930
-----------
Net investment income .......................................... 39,955,294
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments ................................................. 24,735,810
Short sales ................................................. (12,354,016)
Options .................................................... (6,508,663)
Swaps ...................................................... (1,430,596)
Futures ..................................................... (5,855,198)
-----------
(1,412,663)
-----------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................. 651,503
Options written ............................................. 1,192,536
Swaps ...................................................... (890,783)
Interest Rate Caps ......................................... (2,111,248)
Futures .................................................... (948,672)
-----------
(2,106,664)
-----------
Net loss on investments ....................................... (3,519,327)
-----------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS ............................................ $36,435,967
===========
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 17, 1997
(COMMENCEMENT OF OPERATIONS)
TO JUNE 30, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows used for operating activities:
Interest received, net of interest purchased ............... $ 51,914,682
Interest expense paid ...................................... (17,662,221)
Purchase of long-term portfolio investments ................ (2,697,269,164)
Proceeds from disposition of long-term
portfolio investments .................................... 2,611,559,889
--------------
Net cash flows used for operating activities ............... (51,456,814)
--------------
Cash flows provided by financing activities--
Increase in reverse repurchase agreements .................. 51,664,500
--------------
Net increase in cash .......................................... 207,686
Cash at beginning of period ................................... --
--------------
Cash at end of period ......................................... $ 207,686
==============
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 ............................................... $ 36,435,967
--------------
Increase in investments ....................................... (111,947,328)
Net realized loss ............................................. 1,412,663
Increase in unrealized depreciation .......................... 2,106,664
Increase in interest receivable ............................... (10,418,312)
Increase in deposits with brokers .......................... (1,365,000)
Increase in options written ................................. 2,908,721
Increase in payable for investments purchased ................ 22,403,584
Increase in interest rate caps ................................ 3,146,660
Increase in variation margin receivable ..................... 436,774
Increase in unrealized depreciation on
interest rate swaps ........................................ 890,783
Increase in receivable for investments sold ................... (2,183,469)
Increase in due to Parent ..................................... 4,715,479
--------------
Total adjustments ............................................. (87,892,781)
--------------
Net cash flows used for operating activities ............... $ (51,456,814)
==============
Noncash Financing Activity:
Transfer of assets from BlackRock 2001 Term
Trust Inc. in exchange for shares issued ................... $1,014,227,416
==============
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
OCTOBER 17, 1997
(COMMENCEMENT
OF OPERATIONS) TO
JUNE 30, 1998
---------------------
INCREASE (DeCREASE) IN
IN NET ASSETS
Operations:
Net investment income ................................ $ 39,955,294
Net realized loss ................................. (1,412,663)
Net change in unrealized
depreciation (2,106,664)
--------------
Net increase in net assets
resulting from
operations ..................................... 36,435,967
Transfer of assets
from BlackRock 2001
Term Trust Inc. in
exchange for
shares issued ...................................... 1,014,227,416
--------------
Total increase ....................................... 1,050,663,383
NET ASSETS
Beginning of period --
--------------
End of period ........................................ $1,050,663,383
==============
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OCTOBER 17, 1997*
THROUGH
JUNE 30, 1998
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .............................................. $ 7.14
---------
Net investment income (net of $0.12 of interest expense) ....................... 0.28
Net realized and unrealized loss ............................................... (0.02)
---------
Net increase from investment operations ........................................... 0.26
---------
NET ASSET VALUE, END OF PERIOD .................................................... $ 7.40
=========
TOTAL INVESTMENT RETURN+: ......................................................... 3.64%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses@ ............................................................... 0.56%++
Net investment income ............................................................. 5.54%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) ................................................. $1,024,887
Portfolio turnover ................................................................ 182%
Net assets, end of period (in thousands) .......................................... $1,050,663
Reverse repurchase agreements outstanding, end of period (in thousands) ........... $ 51,665
Asset coverage+++ ................................................................. $ 21,336
- -------------
</TABLE>
* Commencement of operations.
@ The ratio of operating expenses, including interest expense, to average net
assets was 3.01%++ for the period indicated above. The ratio of operating
expenses, including interest expense and excise tax, to average net assets
was 3.10%++ for the period indicated above.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the
last day of each period reported. Dividends are assumed, for purposes of
this calculation, to be reinvested. Total investment return for periods of
less than one full year are not annualized.
++ Annualized.
+++ Per $1,000 of reverse repurchase agreement outstanding.
The information above represents the audited operating performance data for
a share of common stock outstanding, total investment return, ratios to
average net assets and other supplemental data for the period indicated.
This information has been determined based upon financial information
provided in the financial statements.
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
BLK SUBSIDIARY INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION & BLK Subsidiary, Inc. (the
ACCOUNTING "Trust") was incorporated
POLICIES under the laws of the State
of Maryland on October 17, 1997, and is a diversified closed-end management
investment company. The Fund was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of The BlackRock 2001 Term
Trust Inc. (the "2001 Term Trust"), incorporated under the laws of the State of
Maryland and as such, a wholly-owned subsidiary of the 2001 Term Trust. The
Trust's investment objective is to manage a portfolio of investment grade fixed
income securities while providing cash flow definition to the 2001 Term Trust.
No assurance can be given that the Trust's investment objective will be
achieved.
The following is a summary of significant accounting policies followed by the
Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
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 position or an overall portfolio that is longer or shorter than the
benchmark security. A call option gives the purchaser of the option the right
(but not obligation) to buy, and obligates the seller to sell (when the option
is exercised), the underlying position at the exercise price at any time or at a
specified time during the option period. A put option gives the holder the right
to sell and obligates the writer to buy the underlying position
8
<PAGE>
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 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 and 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 the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
Financial futures contracts, when used by the Trust, help in maintaining a
targeted duration. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. In the same sense, futures contracts can be
purchased to lengthen a portfolio that is shorter than its duration target.
Thus, by buying or selling futures contracts, the Trust can effectively "hedge"
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the purpose
of hedging its existing portfolio securities or securities the Trust intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Trust may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets. The Trust is also at the risk of not being able to
enter into a closing transaction for the futures contract because of an illiquid
secondary market. In addition, since futures are used to shorten or lengthen a
portfolio's duration, there is a risk that the portfolio may have temporarily
performed better without the hedge or that the Trust may lose the opportunity to
realize appreciation in the market price of the underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
9
<PAGE>
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. The Trust did not engage in
securities lending during the period ended June 30, 1998.
INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays a
floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. 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.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate cap. The asset or liability is subsequently adjusted
to the current market value of the interest rate cap purchased or sold. Changes
in the value of the interest rate cap are recognized as unrealized gains and
losses.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
deficiency, if any, of a floating rate under a specified fixed or floating rate.
Interest rate floors are used by the Trust to both manage the duration of the
portfolio and its exposure to changes in short-term interest rates. 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.
Transactions fees paid or received by the Trust are recognized as assets or
liabilities and amortized or accreted into interest expense or income over the
life of the interest rate floor. The asset or liability is subsequently adjusted
to the current market value of the interest rate floor purchased or sold.
Changes in the value of the interest rate floor are recognized as unrealized
gains and losses.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: 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. Expenses are recorded on the accrued basis which may require
the use of certain estimates by management.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required. As part of its tax planning
strategy, the Trust intends to retain a portion of its taxable income and pay an
excise tax on the undistributed amount.
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
10
<PAGE>
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2. AGREEMENTS The Trust has an Investment
Advisory Agreement with
BlackRock Financial Management, Inc. (the "Adviser") a wholly-owned corporate
subsidiary of PNC Asset Management Group, Inc., the holding company for PNC's
asset management business, and an Administration Agreement with Mitchell
Hutchins Asset Management Inc. (the "Administrator"), a wholly-owned subsidiary
of PaineWebber Incorporated.
The Trust reimburses the 2001 Term Trust for its pro-rata share of applicable
expenses, including investment advisory and administrative fees, in an amount
equal to the proportionate amount of net assets which are held by the Trust
relative to the net assets of the 2001 Term Trust.
NOTE 3. PORTFOLIO Purchases and sales of
SECURITIES investment securities, other
than short-term investments
and dollar rolls, for the period ended June 30, 1998 aggregated $2,584,056,285
and $2,451,550,552, respectively.
In addition, the Trust received investments valued at $1,014,227,416 in
exchange for common shares of the Trust.
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 June 30, 1998, the Trust did
not hold any illiquid securities.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears) or mortgage related securities containing loans
or mortgages originated by PNC Bank or its affiliates, including Midland Loan
Services,Inc. It is possible under certain circumstances, PNC Mortgage
Securities Corp. or its affiliates, including Midland Loan Services, Inc. could
have interests that are in conflict with the holders of these mortgage backed
securities, and such holders could have rights against PNC Mortgage Securities
Corp. or its affiliates, including Midland Loan Securities, Inc.
The federal income tax basis of the Trust's investments at June 30, 1998 was
substantially the same as the basis for financial reporting and accordingly, net
unrealized depreciation for federal income tax purposes was $2,106,664 (gross
unrealized appreciation -- $24,812,964; gross unrealized depreciation --
$26,919,628).
Details of open financial futures contracts at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE JUNE 30, UNREALIZED
CONTRACTS TYPE DATE DATE 1998 DEPRECIATION
- -------- ----- ---------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Short position:
106 5 Yr. T-Note Sept. $(11,570,914) $ (11,626,875) $ (55,961)
1,500 30 Yr. T-Bond Sept. (184,497,914) (185,390,625) (892,711)
----------
$ (948,672)
==========
</TABLE>
The Trust has entered into three interest rate caps. Under the first agreement,
the Trust paid a transaction fee and will receive the excess, if any, of a
floating rate over a fixed rate. Under the second and third agreements, the
trust received transaction fees and will pay the excess, if any, of a floating
rate over a fixed rate. Details of the caps at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
NOTIONAL VALUE AT
AMOUNT FIXED FLOATING TERMINATION UNAMORTIZED JUNE 30, UNREALIZED
(000) RATE RATE DATE COST 1998 DEPRECIATION
------- ----- ------------ ------------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Purchased:
$120,000 6.00% 3 month LIBOR 02/19/02 $2,044,567 $1,060,800 $(983,767)
Sold:
(300,000) 3 Yr. CMT 3 month LIBOR 08/08/01 (1,959,301) (2,490,000) (530,699)
(200,000) 5 Yr. CMT 3 month LIBOR 08/12/01 (1,120,678) (1,717,460) (596,782)
------------ -----------
$(3,146,660) $(2,111,248)
============ ===========
</TABLE>
Details of open interest rate swaps at June 30, 1998 are as follows:
<TABLE>
<CAPTION>
NOTIONAL UNREALIZED
AMOUNT FIXED FLOATING TERMINATION APPRECIATION
(000) TYPE RATE RATE DATE (DEPRECIATION)
------- ----- ----- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Purchased:
$509,250 Interest Rate 6.37% 2 Yr. Forward 07/27/00 $ 4,669,823
280,000 Basis 10 Yr. CMT 3 month LIBOR 05/28/03 (610,400)
10,908 Interest Rate 7.23% 10 Yr. Forward 06/15/11 (756,939)
Sold:
(350,000) Interest rate 6.42% 3 Yr. Forward 07/27/01 (5,105,100)
(10,908) Interest Rate 7.23% 10 Yr. Forward 06/15/11 911,833
-----------
$ (890,783)
===========
</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.
11
<PAGE>
The average daily balance of reverse repurchase agreements outstanding during
the period ended June 30, 1998, was approximately $362,072,549 at a weighted
average interest rate of approximately 4.87%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the period ended June
30, 1998, was $628,262,813 as of February 28, 1998, which was 31.61% of total
assets.
DOLLAR ROLLS: The Trust may enter into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities.The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date.
The average monthly balance of dollar rolls outstanding during the period
ended June 30, 1998, was approximately $13,137,612. For the period ended June
30, 1998, the maximum amount of dollar rolls outstanding at any month end was
$15,421,094 as of the close of October 31, 1997, which was 1.52% of total
assets.
NOTE 5. CAPITAL There are 200 million shares
of $.01 par value common stock
authorized. The 2001 Term Trust owned all of the 142,010,583 shares outstanding
at June 30, 1998.
12
<PAGE>
BlackRock
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
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 any securities.
BLK SUBSIDIARY, INC.
c/o Mitchell Hutchins Asset Management Inc.
32nd Floor
1285 Avenue of the Americas
New York, NY 10019
09247T-10-0
[LOGO] Printed on recycled paper
BLK Subsidiary, Inc.
========================
Annual Report
June 30, 1998
[GRAPHIC]