- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Portfolio of Investments
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--130.6%
Mortgage Pass-Throughs--5.4%
$8,352+ Federal Home Loan Mortgage
Corporation, 5.50%, 9/01/99 ........... $ 8,261,438
AAA 2,580 Federal Housing Administration
Massachusetts St. Hsg. Fin. Agcy.,
Series C, 6.85%, 4/01/19 .............. 2,366,918
------------
10,628,356
------------
Multiple Class Mortgage
Pass-Throughs--3.8%
AAA 497 Capstead Securities Corporation IV,
Series 1992-4, Class H,
12/25/20 (ARM) ...................... 569,535
AAA 3,267 CBA Mortgage Corporation,
Series 1993-C1, Class A-2,
12/25/03 ............................ 3,322,402
Federal Home Loan Mortgage Corporation,
Multiclass Mortgage Participation
Certificates,
1,231 Series 172, Class 172-H, 5/15/20 ...... 1,233,718
1,183 Series 1330, Class 1330-M,
9/15/99, (ARM) ...................... 711,649
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,030 Trust 1992 -176, Class 176-FA,
10/25/99 .......................... 1,007,690
6,065 Trust 1994-8, Class 8-TA,
9/17/13 (I) ....................... 451,177
AAA 60 Structured Asset Securities Corporation,
Series 1996, Class A, 2/25/28 ......... 59,679
------------
7,355,850
------------
Corporate Bonds--73.6%
Finance & Banking--34.6%
Aa3 3,350 Associates Corporation of
North America,
6.75%, 10/15/99 ....................... 3,375,962
Aa3 5,000 CIT Group Holdings Incorporated,
5.875%, 12/09/99 ...................... 4,935,650
A2 4,200 Citicorp, 9.75%, 8/01/99 ................ 4,470,144
A1 2,500++ Goldman Sachs Group LP,
6.875%, 9/15/99 ....................... 2,518,000
A3 3,000 Hartford National Corporation,
9.85%, 6/01/99 ........................ 3,183,600
International Lease Finance
Corporation,
A1 1,100 6.09%, 11/08/99 ....................... 1,090,540
A1 4,000 6.30%, 11/01/99 ....................... 3,981,630
Baa1 5,000 Lehman Brothers Holdings
Incorporated, 6.71%, 10/12/99 ......... 5,008,850
Baa3 2,000 Meditrust, 7.25%, 8/16/99 ............... 2,021,320
A1 2,000 Morgan Stanley Group Incorporated,
5.625%, 3/01/99 ....................... 1,978,725
A1 5,000++ Paccar Financial Corporation,
5.84%, 6/15/99 ........................ 4,948,800
Baa1 3,500 PaineWebber Group Incorporated,
6.31%, 7/22/99 ........................ 3,476,630
Baa1 2,000 Salomon, Inc. 7.43%, 12/30/98 ........... 2,029,700
A2 4,000 Security Pacific Corporation,
9.75%, 5/15/99 ........................ 4,234,139
A3 5,000 Shawmut National Corporation,
8.625%, 12/15/99 ...................... 5,232,404
Smith Barney Holdings Incorporated,
A2 1,500 7.875%, 10/01/99 ...................... 1,544,685
A2 529 7.98%, 3/01/00 ........................ 546,513
A3 5,000++ Transamerica Finance Corporation,
5.97%, 12/09/99 ....................... 4,935,392
Aa3 3,000 Travelers Group Incorporated,
7.75%, 6/15/99 ........................ 3,077,250
A2 5,000 Union Planters National Bank,
6.47%, 10/29/99 ....................... 4,995,862
------------
67,585,796
------------
Corporate Bonds
Industrials--31.7%
Baa1 4,400 Alco Capital Resource Incorporated,
6.83%, 5/10/99 ........................ 4,431,023
A1 1,895 Anheuser Busch Companies
Incorporated, 8.75%, 12/01/99 ......... 1,996,743
A1 5,000 Bass America Incorporated,
6.75%, 8/01/99 ........................ 5,035,000
A3 5,000 Chrysler Financial Corporation,
9.50%, 12/15/99 ....................... 5,339,550
A2 1,612 Kern River Funding, 144A,
Series A, 6.42%, 3/31/01 .............. 1,600,856
Baa2 5,000 McDonnell Douglas Finance
Corporation, 6.30%, 12/23/99 .......... 4,970,750
Baa2 3,000 MCN Investment Corporation,
5.84%, 2/01/99 ........................ 2,974,770
Baa2 4,000 Nabisco Brands Incorporated,
8.30%, 4/15/99 ........................ 4,104,320
A2 2,000 National Fuel Gas Company,
5.58%, 3/01/99 ........................ 1,977,960
BBB- 7,000 NWCG Holding Corporation,
Series B, Zero Coupon, 6/15/99 ........ 6,101,776
Baa2 2,000 Occidental Petroleum Corporation,
6.08%, 11/26/99 ....................... 1,971,020
BBB- 2,750 Pulte Home Corporation,
10.125%, 7/15/99 ...................... 2,894,623
A2 5,000 Sears Roebuck & Company,
7.75%, 10/25/99 ....................... 5,131,550
A1 3,000 Texaco Capital Incorporated,
9.00%, 12/15/99 ....................... 3,178,290
A3 1,000 Textron Financial Corporation, 144A,
7.125%, 10/05/99 ...................... 1,009,562
A+ 3,000 TTX Company,
6.28%, 6/28/99 ........................ 2,986,650
Baa2 2,500 Union Oil Company,
8.40%, 1/15/99 ........................ 2,569,775
A2 4,000 Walt Disney Corporation,144A,
1.50%, 10/20/99 ....................... 3,582,241
------------
61,856,459
------------
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
Corporate Bonds
Utilities--6.6%
A1 $4,750 Alabama Power Company,
6.375%, 8/01/99 ....................... $ 4,744,443
A2 4,000 Atlanta Gas Light Company,
7.30%, 12/10/99 ....................... 4,074,304
AA 2,000 California Petroleum Transport
Corporation, 7.30%, 4/01/99 ........... 2,028,983
BBB+ 2,000 Potomac Capital Investment
Corporation, 6.73%, 8/09/99 ........... 2,007,203
------------
12,854,933
------------
Corporate Bonds
Yankee--0.7%
A3 1,272 Nova Corporation of Alberta,
7.25%, 7/06/99 ........................ 1,291,067
------------
Asset-Backed Securities--13.2%
AAA 1,871 Banc One Auto Grantor Trust,
Series 1996-A, Class A,
6.10%, 10/15/02 ....................... 1,872,127
AAA 3,536 Chevy Chase Auto Receivables,
Series 1997-1, Class A,
6.50%, 10/15/03 ....................... 3,546,609
AAA 5,000 Dayton Hudson Credit Card Trust,
Series 1995-1, Class A,
6.10%, 2/25/02 ........................ 5,002,345
AAA 2,391 Fifth Third Bank Auto Trust,
Series 1996-B, Class A,
6.45%, 3/15/02 ........................ 2,397,555
AAA 2,403 Ford Credit Grantor Trust,
Series 1995-B, Class A,
5.90%, 10/15/00 ....................... 2,397,982
AAA 8,225++ Prime Credit Card Trust,
Series 1992-2, Class A,
7.45%, 11/15/02 ....................... 8,413,920
AAA 2,000 Standard Credit Card Master Trust,
Series 1995-3, Class A,
7.85%, 2/07/02 ........................ 2,063,438
------------
25,693,976
------------
Stripped Mortgage-Backed
Securities--13.9%
Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates,
5,773+ Series 1359, Class 1359-C,
9/15/99, (P/O) ...................... 5,224,901
1,452 Series 1719, Class 1719-C,
4/15/99, (P/O) ...................... 1,351,565
9,269+ Series 1887, Class 1887-J,
7/15/99, (P/O) ...................... 8,144,851
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,443 Trust 1992-62, Class 62-H,
5/25/99, (P/O) ...................... 1,298,348
3,798+ Trust 1993-111, Class 111-A,
11/25/17, (P/O) ..................... 3,595,074
898 Trust 1993-176, Class 176-B,
6/25/18 (P/O) ....................... 872,490
6,862+ Trust 1994-47, Class 47-B,
9/25/22, (I/O) ...................... 6,358,003
AAA 35,703 Sears Mortgage Corporation,
Series 1992-7, Class 7-X,
5/25/22, (I/O) ...................... 357,034
------------
27,202,266
------------
U.S Government Securities--5.3%
United States Treasury Notes,
6,095+ 5.875%, 11/15/99 ...................... 6,055,931
3,000+ 6.00%, 8/15/99 ........................ 2,992,500
1,315 6.625%, 3/31/02 ....................... 1,326,914
------------
10,375,345
------------
Municipal Bonds--12.8%
AAA 2,000 Alameda County California Pension,
Series A, 7.35%, 12/01/99 ............. 2,043,900
AAA 2,295 Essex County,
Zero Coupon, 11/15/99 ................. 1,979,828
AAA 1,500 Long Beach California Pension,
6.26%, 9/01/99 ........................ 1,496,550
Baa1 500 Los Angeles County California Pension,
Series A, 7.81%, 6/30/99 .............. 511,860
Baa1 3,000 New York St. Dormitory Authority
Revenues, 6.32%, 4/01/99 .............. 2,991,330
Baa1 1,550 New York St. Dormitory Authority
Revenues Pension Oblig.,
6.45%, 10/01/99 ....................... 1,548,512
Baa1 5,000 New York, New York, Series G,
6.23%, 2/01/99 ........................ 4,981,900
AAA 497 North Slope Borough Alaska,
Series A, Zero Coupon, 6/30/99 ........ 437,919
AAA 5,000 Oakland California Pension,
Series A, 6.20%, 12/15/99 ............. 4,983,000
AAA 3,000 Ventura County California
Pension Oblig., 5.92%, 11/01/99 ....... 2,972,160
AAA 1,000 Western Minnesota Muni.
Pwr. Agcy. Supply, Series A,
6.05%, 1/01/99 ........................ 997,740
------------
24,944,699
------------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
Principal
Amount Value
Rating* (000) Description (Note 1)
- --------------------------------------------------------------------------------
Certificate of Deposit--2.6%
$ 5,000 MBNA America Bank, N. A.,
6.15%, 6/19/98 ........................ $ 5,000,000
------------
Total Long-Term Investments
(cost $255,076,514) ................... 254,788,747
SHORT-TERM INVESTMENTS--0.2%
Repurchase Agreement--0.2%
400 State Street Bank, &Trust Co.
Repo, 5.6% dated 6/30/97,
due 7/1/97 in the amount of
$400,062 (cost $400,000
collateralized by $405,000
U.S. Treasury Note, 6.25% due
3/31/99, Value including
accrued interest $412,920 ........... 400,000
------------
Total Investments Before Security
Sold Short--130.8%
(Cost $255,476,514) ................... 255,188,747
SECURITY SOLD SHORT--(7.7%)
(15,000) United States Treasury Notes,
6.125%, 8/31/98 ....................... (15,037,500)
(Proceeds $14,960,156) ------------
Total Investments net of security
sold short--123.1%
(cost $240,516,358) ................... 240,151,247
Liabilities in excess of other
assets--(23.1%) ....................... (45,096,218)
------------
NET ASSETS--100% ........................ $195,055,029
============
* Using the higher of Standard & Poor's or Moody's rating.
# One contract equals 100,000 face value.
+ (Partial) principal amount pledged as collateral for reverse repurchase
agreements.
++ Entire principal amount pledged as collateral for reverse repurchase
agreements.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
I/O -- Interest Only.
I -- Denotes a CMO with Interest only characteristics.
P -- Denotes a CMO with Principal only characteristics.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Statement of Assets and Liabilities
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets
Investments, at value (cost $255,476,514)
(Note 1) .............................................. $ 255,188,747
Cash ..................................................... 109,648
Deposits with brokers as collateral for
investments sold short (Note 1) ....................... 15,318,750
Interest receivable ...................................... 3,454,709
Receivable for Investments sold .......................... 179,401
-------------
274,251,255
-------------
Liabilities
Reverse repurchase agreements (Note 4) ................... 62,465,875
Investments sold short, at value
(proceeds $14,960,156) (Note 1) ....................... 15,037,500
Due to Parent (Note 2) ................................... 1,208,497
Interest payable ......................................... 484,354
-------------
79,196,226
-------------
Net Assets ............................................... $ 195,055,029
=============
Net assets were comprised of:
Common stock, at par (Note 5) ......................... $ 216,106
Paid-in capital in excess of par ...................... 185,144,525
-------------
185,360,631
Undistributed net investment income ................... 10,289,599
Accumulated net realized loss ......................... (230,090)
Net unrealized depreciation ........................... (365,111)
-------------
Net assets, June 30, 1997 ............................. $ 195,055,029
=============
Net asset value per share:
($195,055,029/ 21,610,583 shares of
common stock issued and outstanding) .................. $ 9.03
======
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Statement of Operations
Six Months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Net Investment Income
Income
Interest (net of premium amortization of
$512,247 and net of interest expense of
$2,046,509 kudfh ................................... $ 6,001,612
-----------
Operating expenses
Investment advisory ................................... 402,000
Administration ........................................ 95,000
Reports to Shareholders ............................... 34,000
Custodian ............................................. 27,000
Directors ............................................. 18,000
Audit ................................................. 7,000
Miscellaneous ......................................... 64,448
-----------
Total operating expenses ........................... 647,448
-----------
Net investment income .................................... 5,354,164
-----------
Realized and Unrealized Gain (Loss) on
Investments (Note 3)
Net realized loss on Investments ......................... (288,114)
-----------
Net change in unrealized depreciation on
Investments ........................................... 542,287
Short sales ........................................... 28,050
-----------
570,337
-----------
Net gain on investments .................................. 282,223
-----------
Net Increase In Net Assets Resulting
from Operations ....................................... $ 5,636,387
===========
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Statement of Cash Flows
Six months Ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash
Cash flows used for operating activities:
Interest received ....................................... $ 8,338,724
Operating expenses paid ................................. (966,635)
Interest expense paid ................................... (1,866,713)
Purchase of short-term portfolio
investments, net ...................................... 3,714,257
Purchase of long-term portfolio investments ............. (110,969,077)
Proceeds from disposition of long-term
portfolio investments ................................. 88,175,560
Other ................................................... 47,431
-------------
Net cash flows used for operating activities ............ (13,526,453)
-------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements ............... 13,612,875
Cash dividends paid ..................................... --
-------------
Net cash flows provided by financing activities ......... 13,612,875
-------------
Net increase in cash ....................................... 86,422
Cash at beginning of period ................................ 23,226
-------------
Cash at end of period ...................................... $ 109,648
=============
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 .......................................... $ 5,636,387
-------------
Increase in investments .................................... (17,945,926)
Net realized loss .......................................... 288,115
Increase in unrealized depreciation ........................ (570,337)
Decrease in receivable for investments sold ................ 668,372
Increase in interest receivable ............................ (221,644)
Decrease in deposits with brokers for
short sales ............................................. 56,250
Increase in other assets ................................... 47,432
Decrease in securities sold short .......................... (28,050)
Decrease in payable for investments
purchased ............................................... (1,917,679)
Increase in due to Parent .................................. 600,018
Decrease in accrued expenses and other liabilities ......... (139,391)
-------------
Total adjustments .......................................... (19,162,840)
-------------
Net cash flows used for operating activities ............ $ (13,526,453)
=============
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Statement of Changes
in Net Assets (Unaudited)
- --------------------------------------------------------------------------------
For the period
Six Months July 19, 1996
Ended (commencement
June 30, of operations) to
1997 December 31, 1996
------------- ----------------
Increase (Decrease)
in Net Assets
Operations:
Net investment income .............. $ 5,354,164 $ 4,935,435
Net realized gain/loss on
investments ...................... (288,114) 58,024
Net change in unrealized
(depreciation) on
investments ...................... 570,337 (935,448)
------------- -------------
Net increase in net assets
resulting from operations ........ 5,636,387 4,058,011
Transfer of assets
from BlackRock 1999
Term Trust Inc. in exchange
for shares issued .................. -- 185,360,631
------------- -------------
Total increase ....................... 5,636,387 189,418,642
Net Assets
Beginning of period .................. 189,418,642 --
------------- -------------
End of period ........................ $ 195,055,029 $ 189,418,642
============= =============
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Financial Highlights (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 19,
Six Months 1996*
Ended through
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............................... $ 8.76 $ 8.57
------ ------
Net investment income (net of $0.09 and $0.05 of interest expense,
respectively) .................................................... .25 .23
Net realized and unrealized gain (loss) on investments ........... .02 (.04)
------ ------
Net increase from investment operations ............................ .27 .19
------ ------
Dividends from net investment income ............................... -- --
------ ------
Net asset value, end of period ..................................... $ 9.03 $ 8.76
====== ======
TOTAL INVESTMENT RETURN+: .......................................... 3.31% 2.22%
RATIOS TO AVERAGE NET ASSETS:++
Operating expenses@ ................................................ .67%++ .61%
Net investment income .............................................. 5.52%++ 5.82%
SUPPLEMENTAL DATA:
Average net assets (in thousands) .................................. $195,520 $186,426
Portfolio turnover ................................................. 31% 12%
Net assets, end of period (in thousands) ........................... $195,055 $189,419
Reverse repurchase agreements outstanding, end of
period (in thousands) ............................................ $ 62,466 $ 48,853
Asset coverage+++ .................................................. $ 4,123 $ 4,877
</TABLE>
- ----------
* Commencement of investment operations.
@ The ratio of operating expenses, including interest expense, to average net
assets was 2.78%++ and 1.02% for the period indicated above. The ratio of
operating expenses, including interest expense and excise tax, to average
net assets was 2.78%++ and 1.07% 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. This calculation does not reflect
brokerage commissions. 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 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.
6
<PAGE>
- --------------------------------------------------------------------------------
BNN Subsidiary, Inc.
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
Note 1. Accounting Policies
BNN Subsidiary, Inc. was incorporated under the laws of the State of Maryland on
May 15, 1996, and is a diversified closed-end management investment company. The
Fund was incorporated solely for the purpose of receiving all or a substantial
portion of the assets of The BlackRock 1999 Term Trust Inc., incorporated under
the laws of the State of Maryland on October 22, 1992 (the "1999 Term Trust")
and as such, a wholly-owned subsidiary of the 1999 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 1999 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 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.
7
<PAGE>
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively hedge
positions so that changes in interest rates do not change the duration of the
portfolio unexpectedly. In general, the Trust uses options to hedge a long or
short position or an overall portfolio that is longer or shorter than the
benchmark security. A call option gives the purchaser of the option the right
(but not obligation) to buy, and obligates the seller to sell (when the option
is exercised), the underlying position at the exercise price at any time or at a
specified time during the option period. A put option gives the holder the right
to sell and obligates the writer to buy the underlying position at the exercise
price at any time or at a specified time during the option period. Put options
can be purchased to effectively hedge a position or a portfolio against price
declines if a portfolio is long. In the same sense, call options can be
purchased to hedge a portfolio that is shorter than its benchmark against price
changes. The Trust can also sell (or write) covered call options and put options
to hedge portfolio positions.
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
Financial Futures Contracts: A futures contract is an agreement between two
parties to buy 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
more volatile 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 underlying
positions.
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Short Sales: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
dollar amount, will be recognized upon the termination of a short sale if the
market price is less or greater than the proceeds originally received.
Securities Lending: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust. The Trust did not engage in
securities lending during the six months ended June 30, 1997.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis and the Trust accretes discount and amortizes premium on
securities purchased using the interest method.
Taxes: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required. As part of its tax planning
strategy, the Trust may retain a portion of its taxable income and pay an excise
tax on the undistributed amounts.
Dividends and Distributions: The Trust declares and pays dividends and
distributions, first from net investment income then from net realized
short-term capital gains and other sources, if necessary. Net long-term capital
gains, if any, in excess of loss carryforwards are distributed at least
annually. Dividends and distributions are recorded on the ex-dividend date.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Note 2. Agreements
The Trust has an Investment Advisory Agreement with BlackRock Financial
Management, Inc. (the "Adviser") a wholly-owned corporate subsidiary of PNC
Asset Management Group, Inc., the holding company for PNC's asset management
business, and an Administration Agreement with Prudential Investments Fund
Management, Inc. ("PIFM"), an indirect, wholly-owned subsidiary of The
Prudential Insurance Co. of America.
The Trust reimburses the 1999 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 1999 Term Trust.
Note 3. Portfolio Securities
Purchases and sales of investment securities, other than short-term invesments
and dollar rolls, for the six months ended June 30, 1997 aggregated $109,651,415
and $77,310,578, 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 June 30, 1997, the Trust did not
hold any illiquid securities.
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The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears) or mortgage related securities containing loans
or mortgages originated by PNC Bank or its affiliates. It is possible under
certain circumstances PNC Mortgage Securities Corp. or its affiliates could have
interests that are in conflict with the holders of these mortgage backed
securities and such holders could have rights against PNC Mortgage Securities
Corp. or its affiliates.
The federal income tax basis of the Trust's investments at June 30, 1997
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$365,111 (gross unrealized appreciation -- $921,170; gross unrealized
depreciation -- $1,286,281).
Note 4. Borrowings
Reverse Repurchase Agreements: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender the value of which at least equals the principal amount
of the reverse repurchase transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding
during the six months ended June 30, 1997 was approximately $70,993,999 at a
weighted average interest rate of approximately 5.77%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during the six months
ended June 30, 1997 was $77,962,750 as of March 31, 1997 which was 29% of total
assets. The amount of reverse repurchase agreements outstanding at June 30, 1997
was $62,465,875, which was 22.8% of total assets.
Dollar Rolls: The Trust may enter into dollar rolls in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date. During the roll period the Trust forgoes principal and
interest paid on the securities. The Trust will be compensated by the interest
earned on the cash proceeds of the initial sale and by the lower repurchase
price at the future date. The Trust did not enter into dollar rolls during the
six months ended June 30, 1997.
Note 5. Capital
There are 200 million shares of $.01 par value common stock authorized. The 1999
Term Trust owned all of the 21,610,583 shares outstanding at June 30, 1997.
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BNN SUBSIDIARY, INC.
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
There have been no material changes in the Trust's investment objectives or
policies that have not been approved by the shareholders, or to its charter or
by-laws, or in the principal risk factors associated with investment in the
Trust. There have been no changes in the persons who are primarily responsible
for the day-to-day management of the Trust's portfolio.
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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 BNN Subsidiary, Inc.
Ralph L. Schlosstein ====================
Semi-Annual Report
Officers June 30, 1997
Ralph L. Schlosstein, President
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Frank Smith, Assistant Treasurer
Karen H. Sabath, Secretary
Investment Adviser
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
Administrator
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian and Transfer Agent
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
Legal Counsel
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
The accompanying financial statements
as of June 30, 1997 were not audited, and,
accordingly, no opinion is expressed on them.
This report is for shareholder
information. This is not a prospectus
intended for use in the purchase or
sale of any securities.
BNN Subsidiary, Inc.
c/o Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 227-7BFM
Printed on recycled paper 09247T-10-0
