--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
APRIL 30, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--141.0%
MORTGAGE PASS-THROUGHS--3.7%
Federal National Mortgage Association,
$1,294 5.50%, 1/01/17 - 2/01/17 ..................... $1,285,308
217 6.50%, 7/01/29 ............................... 219,839
----------
1,505,147
----------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--18.9%
400 Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
Series 1534, Class 1534-IG,
2/15/10 .................................... 385,872
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
319 Trust 1992-43, Class 43-E,
4/25/22 .................................... 332,942
3,053+ Trust 1993-79, Class 79-PK,
4/25/22 .................................... 3,161,407
3,146+ Trust 1993-87, Class 87-J,
4/25/22 .................................... 3,114,005
643 Trust 1994-13, Class 13-SJ,
2/25/09 .................................... 662,398
----------
7,656,624
----------
INVERSE FLOATING RATE
MORTGAGES--32.0%
AAA 462 Citicorp Mortgage Securities, Inc.,
Series 1993-14, Class A-4,
11/25/23 ................................... 467,299
Aaa 550 Countrywide Funding Corp.,
Series 1994-2, Class A-12S,
2/25/09 .................................... 582,302
Aaa 866 Countrywide Mortgage-Backed
Securities, Inc.,
Series 1993-D, Class A-15,
1/25/09 .................................... 896,529
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
336 Series 1425, Class 1425-SB,
12/15/07 ................................... 386,097
87 Series 1506, Class 1506-S,
5/15/08 .................................... 98,742
465 Series 1515, Class 1515-S,
5/15/08 .................................... 507,026
193 Series 1580, Class 1580-SD,
9/15/08 .................................... 199,809
647 Series 1606, Class 1606-SC,
11/15/08 ................................... 712,338
423 Series 1618, Class 1618-SA,
11/15/08 ................................... 435,543
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
$ 1,023 Series 1626, Class 1626-SA,
12/15/08 ................................... $ 977,324
555 Series 1661, Class 1661-SB,
1/15/09 .................................... 602,350
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
608 Trust 1992-187, Class 187-SB,
10/25/07 ................................... 703,465
645 Trust 1992-190, Class 190-S,
11/25/07 ................................... 794,005
1,515 Trust 1993-156, Class 156-SE,
10/25/19 ................................... 1,566,525
605 Trust 1993-173, Class 173-SA,
9/25/08 .................................... 580,258
166 Trust 1993-209, Class 209-SG,
8/25/08 .................................... 167,445
498 Trust 1993-214, Class 214-SH,
12/25/08 ................................... 520,798
544 Trust 1993-224, Class 224-SE,
11/25/23 ................................... 552,486
Aaa 600 PaineWebber Mortgage
Acceptance Corp.,
Series 1994-6, Class A-9,
4/25/09 .................................... 607,781
Residential Funding Mortgage
Securities, Inc.,
AAA 751 Series 1993-S23, Class A-12,
6/25/08 .................................... 784,111
AAA 776 Series 1993-S23, Class A-16,
6/25/08 .................................... 821,737
----------
12,963,970
----------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--18.3%
18,416 Chase Mortgage Finance Corp.,
Series 1999-S4, Class A-14,
4/25/29 .................................... 54,672
8,846 Credit Suisse First Boston Mortgage
Securities Corp.,
Series 1998-1, Class A-7,
9/25/28 .................................... 9,675
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
2,698 Series 194, Class 194-IO,
4/01/28 .................................... 613,582
6 Series 1114, Class 1114-J,
7/15/06 .................................... 78,550
7 Series 1285, Class 1285-M,
5/15/07 .................................... 52,531
See Notes to Financial Statements.
1
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES (CONT'D)
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates, (cont'd)
$1,842 Series 1645, Class 1645-IB,
9/15/08 .................................... $ 197,078
259 Series 1747, Class 1747-I,
6/15/23 .................................... 5,330
1,317 Series 2039, Class 2039-PI,
2/15/12 .................................... 117,675
443 Series 2049, Class 2049-LC,
10/15/23 ................................... 28,493
2,266 Series 2063, Class 2063-PU,
10/15/26 ................................... 507,043
1,134 Series 2075, Class 2075-IB,
12/15/21 ................................... 45,366
9,410 Series 2081, Class 2081-S,
5/15/25 .................................... 623,424
3,024 Series 2306, Class 2306-PM,
5/15/26 .................................... 476,359
6,909 Series 2376, Class 2376-MI,
7/15/11 .................................... 788,068
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1 Trust G-21, Class 21-L,
7/25/21 .................................... 31,839
4 Trust 1991-72, Class 72-H,
7/25/06 .................................... 80,992
39 Trust 1992-51, Class 51-K,
4/25/07 .................................... 592,612
25 Trust 1992-174, Class 174-S,
9/25/22 .................................... 67,014
14 Trust 1993-8, Class 8-HA,
1/25/08 .................................... 316,798
30 Trust 1993-49, Class 49-L,
4/25/13 .................................... 300,000
930 Trust 1993-223, Class 223-PT,
10/25/23 ................................... 98,984
443 Trust 1994-39, Class 39-PE,
1/25/23 .................................... 44,496
7,358 Trust 1997-81, Class 81-SD,
12/18/27 ................................... 1,150
1,223 Trust 1998-30, Class 30-QG,
12/18/25 ................................... 189,559
400 Trust 1998-43, Class 43-YI,
7/18/28 .................................... 7,746
3,206 Trust 2001-9, Class 9-IB,
5/25/27 .................................... 547,024
2,069 Trust 2001-29, Class 29-BE,
5/25/28 .................................... 234,682
4,895 Trust 2001-80, Class 80-PI,
9/25/23 .................................... 569,099
1,351 Norwest Asset Securities Corp.,
Series 1998-5, Class A-5,
3/25/28 .................................... 94,584
$ 692 PNC Mortgage Securities Corp.,
Series 1998-8, Class 4-X,
10/25/13 ................................... $ 117,635
Residential Funding Mortgage
Securities, Inc.,
3,772 Series 1993-S44, Class A-4,
11/25/23 ................................... 254,624
5,799 Series 1998-S19, Class A-8,
8/25/28 .................................... 15,403
86 Salomon Brothers Mortgage
Securities Inc. VI,
Series 1987-3, Class B,
10/23/17 ................................... 15,713
20,166 Structured Asset Securities Corp.,
Series 1999-ALS1, Class ALS1-3AX,
5/25/29 .................................... 138,642
33,049 Vendee Mortgage Trust,
Series 2002-1, Class 1-1IO,
10/15/31 ................................... 72,295
----------
7,388,737
----------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--0.7%
98 Federal National Mortgage Association,
REMIC Pass-Through Certificates,
Trust 1996-54, Class 54-A,
4/25/21 .................................... 96,791
AAA 104 PaineWebber Mortgage
Acceptance Corp. IV,
Series 1993-5, Class A-14,
6/25/08 .................................... 92,454
AAA 86 Salomon Brothers Mortgage
Securities Inc. VI,
Series 1987-3, Class A,
10/23/17 ................................... 74,714
----------
263,959
----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--4.7%
AAA 79 Citicorp Mortgage Securities, Inc.,
Series 1998-3, Class A-6,
6.75%, 5/25/28 ............................. 80,363
AAA 750 NYC Mortgage Loan Trust, Multifamily,
Series 1996, Class A-2,
6.75%, 6/25/11** ........................... 770,625
AAA 1,000 Prudential Securities Secured
Financing Corp.,
Series 1998-C1, Class A1-B,
6.506%, 7/15/08 ............................ 1,048,709
----------
1,899,697
----------
ASSET-BACKED SECURITIES--3.3%
AAA 1,230+ Chase Credit Card Master Trust,
Series 1997-5, Class A,
6.194%, 8/15/05 ............................ 1,259,405
See Notes to Financial Statements.
2
--------------------------------------------------------------------------------
PRINCIPAL
AMOUNT VALUE
RATING* (000) DESCRIPTION (NOTE 1)
--------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (CONT'D)
NR $ 240++ Global Rated Eligible Asset Trust,
Series 1998-A, Class A-1,
7.33%, 3/15/06 @/** ....................... $ 22,181
Structured Mortgage Asset
Residential Trust,
NR 579++ Series 1997-2,
8.24%, 3/15/06 @/@@ ....................... 33,291
NR 642++ Series 1997-3,
8.724%, 4/15/06 @/@@ ...................... 36,904
------------
1,351,781
------------
U.S. GOVERNMENT AND AGENCY
SECURITIES--33.2%
268 Small Business Administration,
Series 1998-10, Class 10-A,
6.12%, 2/01/08 ............................ 270,602
11,000+ U.S. Treasury Bond Strip,
Zero Coupon, 11/15/09 ....................... 7,328,750
U.S. Treasury Notes,
1,450+ 3.50%, 11/15/06 ............................. 1,396,075
100 4.25%, 5/31/03 .............................. 102,016
500+ 5.00%, 8/15/11 .............................. 496,015
2,700+ 5.75%, 11/15/05 ............................. 2,846,799
550+ 6.00%, 8/15/09 .............................. 585,321
385+ 6.625%, 5/15/07 ............................. 420,551
------------
13,446,129
------------
TAXABLE MUNICIPAL BONDS--8.2%
AAA 500 Fresno California
Pension Obligation,
Series 1994, 7.80%, 6/01/14 ................. 568,775
AAA 500 Kern County California
Pension Obligation,
6.98%, 8/15/09 ............................ 538,570
Los Angeles County California
Pension Obligation,
AAA 1,000 Series A, 8.62%, 6/30/06 .................... 1,129,790
AAA 500 Series D, 6.97%, 6/30/08 .................... 541,545
AAA 500 Orleans Parish Louisiana
School Board,
Series A, 6.60%, 2/01/08 .................... 524,970
------------
3,303,650
------------
CORPORATE BONDS--18.0%
FINANCE & BANKING--7.1%
A+ 600 Equitable Life Assured Society,
6.95%, 12/01/05** ........................... 623,858
A+ 500 Metropolitan Life Insurance Co.,
6.30%, 11/01/03** ........................... 515,460
AA- 1,000 Morgan Stanley Group, Inc.,
10.00%, 6/15/08 ............................. 1,175,060
AAA 500 PaineWebber Group, Inc.,
8.875%, 3/15/05 ............................. 554,905
------------
2,869,283
------------
INDUSTRIALS--5.7%
BBB- 100 American Airlines, Inc.,
Secured Equipment Trust,
Series 1990-M,
10.44%, 3/04/07 ............................. 106,086
A 1,000 Dow Capital BV,
9.20%, 6/01/10 .............................. 1,172,390
BBB+ $ 500 Ralcorp Holdings, Inc.,
8.75%, 9/15/04 .............................. $ 546,205
BBB+ 500 TCI Communications, Inc.,
8.25%, 1/15/03 512,860
------------
2,337,541
------------
UTILITIES--2.6%
A 500 Alltel Corp.,
7.50%, 3/01/06 .............................. 524,485
Baa1 500 Ohio Edison Co.,
8.625%, 9/15/03 ............................. 523,505
------------
1,047,990
------------
YANKEE--2.6%
BBB 500 Empresa Electric Guacolda SA,
7.95%, 4/30/03** ............................ 518,943
A- 500 Israel Electric Corp., Ltd.,
7.25%, 12/15/06** ........................... 528,765
------------
1,047,708
------------
Total corporate bonds ......................... 7,302,522
------------
Total long-term investments
(cost $55,115,341) .......................... 57,082,216
------------
SHORT-TERM INVESTMENT--3.0%
DISCOUNT NOTE
1,200 Federal Home Loan Bank,
1.79%, 5/01/02
(cost $1,200,000) ........................... 1,200,000
------------
Total investments before outstanding
put options written--144.0%
(cost $56,315,341) .......................... 58,282,216
------------
NOTIONAL
AMOUNT
(000)
--------
OUTSTANDING PUT OPTION WRITTEN--(0.1%)
25,000 Interest Rate Swap,
3 month LIBOR over 3.98%
expires 6/05/02
(premium received $118,750) ................. (38,802)
------------
Total investments, net of outstanding
put option written--143.9% .................. 58,243,414
Liabilities in excess of other
assets--(43.9)% ............................. (17,764,197)
------------
NET ASSETS--100% ..............................$ 40,479,217
============
----------
* Using the higher of Standard & Poor's, Moody's or Fitch's rating.
** Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. As of April 30, 2002, the
Trust held 7.4% of its net assets in securities restricted as to resale.
+ Entire or partial principal amount pledged as collateral for reverse
repurchase agreements or financial futures contracts.
++ Security is fair valued. (Note 1)
@ Illiquid securities representing 0.23% of net assets.
@@ Security is restricted as to public resale. The securities were acquired in
1997 and have an aggregate current cost of $107,729.
--------------------------------------------------------------------------------
KEY TO ABBREVIATION:
REMIC -- Real Estate Mortgage Investment Conduit.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
3
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $56,315,341) (Note 1) .......... $58,282,216
Cash ....................................................... 20,652
Interest receivable ........................................ 874,027
Due from broker-- variation margin (Notes 1 & 3) ........... 9,113
Receivable for investment sold ............................. 4,027
-----------
59,190,035
-----------
LIABILITIES
Reverse repurchase agreements (Note 4) ..................... 18,347,931
Due to parent (Note 2) ..................................... 305,180
Outstanding option written, at value
(premium received $118,750) (Note 1 & 3) ................. 38,802
Interest payable ........................................... 18,905
-----------
18,710,818
-----------
NET ASSETS ................................................. $40,479,217
===========
Net assets were comprised of:
Common stock at par (Note 5) ............................. $ 29,571
Paid-in capital in excess of par ......................... 34,067,292
-----------
34,096,863
Undistributed net investment income ...................... 4,809,443
Accumulated net realized loss ............................ (705,146)
Net unrealized appreciation .............................. 2,278,057
-----------
Net assets, April 30, 2002 ................................. $40,479,217
===========
NET ASSET VALUE PER SHARE:
($40,479,217 / $2,957,093 shares of
common stock issued and outstanding) ..................... $ 13.69
=======
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest earned (net of discount/premium
accretion/amortization of $1,124,458 and
interest expense of $127,641) ............................ $ 2,667,520
-----------
Operating expenses
Investment advisory ...................................... 107,704
Administration ........................................... 29,374
Custodian ................................................ 25,000
Independent accountants .................................. 20,000
Legal .................................................... 5,000
Reports to Shareholders .................................. 4,000
Miscellaneous ............................................ 9,743
-----------
Total operating expenses ............................... 200,821
-----------
Net investment income before excise tax .................... 2,466,699
Excise tax ............................................... 104,500
-----------
Net investment income ...................................... 2,362,199
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) on:
Investments .............................................. (12,961)
Option written ........................................... 89,077
Futures .................................................. (507,127)
-----------
(431,011)
-----------
Net change in unrealized appreciation on:
Investments .............................................. (1,162,906)
Option written ........................................... 79,948
Futures .................................................. 208,863
Interest rate cap ........................................ 9,803
-----------
(864,292)
-----------
Net loss on investments .................................... (1,295,303)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................ $ 1,066,896
===========
See Notes to Financial Statements.
4
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED APRIL 30, 2002 (UNAUDITED)
--------------------------------------------------------------------------------
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 ............................................. $ 1,066,896
------------
Increase in investments .................................. (10,503,166)
Decrease in receivable for securities sold ............... 1,510
Decrease in payable for securities purchased ............. (872,656)
Net realized loss ........................................ 431,011
Decrease in unrealized appreciation ...................... 864,292
Increase in interest rate cap ............................ (71,419)
Increase in interest receivable .......................... (42,455)
Decrease in due from broker--variation margin ............ 66,203
Increase in interest payable ............................. 15,296
Increase in net options written .......................... 207,827
Decrease in due to parent ................................ (536,203)
------------
Total adjustments ...................................... (10,439,760)
------------
Net cash flows used for operating activities ............. $ (9,372,864)
============
INCREASE (DECREASE) IN CASH
Net cash flows used for operating activities ............. $ (9,372,864)
------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements .............. 9,342,294
------------
Net cash provided by financing activities ................ 9,342,294
------------
Net decrease in cash ................................... (30,570)
Cash at beginning of period ............................ 51,222
------------
Cash at end of period .................................. $ 20,652
============
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
STATEMENTS OF CHANGES IN
NET ASSETS (UNAUDITED)
--------------------------------------------------------------------------------
SIX MONTHS YEAR
ENDED ENDED
APRIL 30, OCTOBER 31,
2002 2001
----------- -----------
INCREASE (DECREASE) IN
NET ASSETS
OPERATIONS:
Net investment income ................... $ 2,362,199 $ 2,634,090
Net realized loss ....................... (431,011) (133,301)
Net change in unrealized
appreciation (depreciation) ........... (864,292) 4,211,098
----------- -----------
Net increase in net assets
resulting from operations ............. 1,066,896 6,711,887
Dividends from
net investment income ................. -- (2,092,314)
----------- -----------
Total increase .......................... 1,066,896 4,619,573
NET ASSETS
Beginning of period ....................... 39,412,321 34,792,748
----------- -----------
End of period (including
undistributed net investment
income of $4,809,443 and
$2,447,244, respectively) ............... $40,479,217 $39,412,321
=========== ===========
See Notes to Financial Statements.
5
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS (UNAUDITED)
--------------------------------------------------------------------------------
SIX MONTHS YEAR FOR THE PERIOD
ENDED ENDED DECEMBER 3, 1999*
APRIL 30, OCTOBER 31, THROUGH
2002 2001 OCTOBER 31, 2000
---------- ----------- -----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .................... $ 13.33 $ 11.77 $ 11.51
------- ------- -------
Net investment income (net of interest expense of
$0.04, $0.21 and $0.21, respectively) ............... .80 .89 .62
Net realized and unrealized gain (loss) ................. (.44) 1.38 (.36)
------- ------- -------
Net increase from investment operations ................. .36 2.27 .26
------- ------- -------
Dividends from net investment income .................... -- (.71) --
------- ------- -------
Net asset value, end of period .......................... $ 13.69 $ 13.33 $ 11.77
======= ======= =======
TOTAL INVESTMENT RETURN+ ................................ 2.70% 19.27% 2.26%
======= ======= =======
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ...................................... 1.02%+++ 1.03% 1.12%+++
Operating expenses and interest expense ................. 1.67%+++ 2.69% 3.20%+++
Operating expenses, interest expense and excise taxes ... 2.20%+++ 2.84% 3.40%+++
Net investment income ................................... 12.06%+++ 7.08% 6.11%+++
SUPPLEMENTAL DATA:
Average net assets (000) ................................ $39,490 $37,193 $33,067
Portfolio turnover ...................................... 13% 20% 36%
Net assets, end of period (000) ......................... $40,479 $39,412 $34,793
Reverse repurchase agreements outstanding,
end of period (000) ................................... $18,348 $ 9,006 $12,154
Asset coverage++ ........................................ $ 3,206 $ 5,376 $ 3,863
----------
* Commencement of investment operations.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the last
day of the periods reported. Total investment returns for periods less than
one full year are not annualized. Past performance is no guarantee of future
results.
++ Per $1,000 of reverse repurchase agreements outstanding.
+++ Annualized.
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 the periods indicated. This
information has been determined based upon financial information provided in the
financial statements and market value data for the Trust's shares.
See Notes to Financial Statements.
6
--------------------------------------------------------------------------------
BCT SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1. ORGANIZATION & ACCOUNTING POLICIES
BCT Subsidiary, Inc., (the "Trust") was incorporated under the laws of the State
of Maryland on November 12, 1999, and is a diversified closed-end management
investment company. The Trust was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of the BlackRock Broad
Investment Grade 2009 Term Trust Inc. ("BCT"), incorporated under the laws of
the State of Maryland and as such, is a wholly-owned subsidiary of BCT. The
Trust's investment objective is to manage a portfolio of fixed income securities
while providing cash flow definitions to BCT. 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 and asset-backed
securities, interest rate swaps, caps, floors and non-exchange traded options
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. Short-term securities are
valued at amortized cost. Any securities or other assets for which such current
market quotations are not readily available may be 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. On April 30,
2002, the Trust held two positions that were valued at fair value, which is
significantly lower than their purchase cost.
REPURCHASE AGREEMENTS: In connection with transactions in repurchase agreements,
the Trust's custodian takes possession of the underlying collateral securities,
the value of which at least equals the principal amount of the repurchase
transaction, including accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted duration.
Duration is a measure of the price sensitivity of a security or a portfolio to
relative changes in interest rates. For instance, a duration of "one" means that
a portfolio's or a security's price would be expected to change by approximately
one percent with a one percent change in interest rates, while a duration of
five would imply that the price would move approximately five percent in
relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively "hedge"
positions, or collections of positions, so that changes in interest rates do not
change the duration of the portfolio unexpectedly. In general, the Trust uses
options to hedge a long or short position or an overall portfolio that is longer
or shorter than the benchmark security. A call option gives the purchaser of the
option the right (but not obligation) to buy, and obligates the seller to sell
(when the option is exercised), the underlying position at the exercise price at
any time or at a specified time during the option period. A put option gives the
holder the right to sell and obligates the writer to buy the underlying position
at the exercise price at any time or at a specified time during the option
period. Put options can be purchased to effectively hedge a position or a
portfolio against price declines if a portfolio is long. In the same sense, call
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.
7
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
INTEREST RATE SWAPS: In 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.
Interest rate swaps are efficient 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 closely monitors swaps and does not
anticipate non-performance by any counterparty.
SWAP OPTIONS: Swap options are similar to options on securities except that
instead of selling or purchasing the right to buy or sell a security, the writer
or purchaser of the swap option is granting or buying the right to enter into a
previously agreed upon interest rate swap agreement at any time before the
expiration of the option. Premiums received or paid from writing or purchasing
options are recorded as liabilities or assets and are subsequently adjusted to
the current market value of the option written or purchased. Premiums received
or paid from writing or purchasing options which 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 in a manner similar to more generic options described above.
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. Selling
interest rate floors reduces the portfolio's duration, making it less sensitive
to changes in interest rates from a market value perspective. The Trust's
leverage provides extra income in a period of falling rates. Selling floors
reduces some of that advantage by partially monetizing it as an up front payment
which the Trust receives.
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.
8
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.
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 the underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
dollar amount, will be recognized upon the termination of a short sale if the
market price is 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.
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 or amortizes premium on securities
purchased using the interest method.
SEGREGATION: In cases in which the Investment Company Act of 1940, as amended
and the interpretive positions of the Securities and Exchange Commission ("SEC")
require that the Trust segregate assets in connection with certain Trust
investments (e.g., when issued securities, reverse repurchase agreements or
futures contracts), the Trust will, consistent with certain interpretive letters
issued by the SEC, designate on its books and records cash or other liquid debt
securities having a market value at least equal to the amount that would
otherwise be required to be physically segregated.
FEDERAL INCOME 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 sufficient amounts of its taxable income to
shareholders. Therefore, no Federal income tax provision is required. As part of
a tax planning strategy, the Trust intends to retain a portion of its taxable
income and pay an excise tax on the undistributed amounts.
ESTIMATES: The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
9
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 Advisors, Inc.
(the "Advisor"), which is a wholly-owned subsidiary of BlackRock, Inc., which in
turn is an indirect, majority-owned subsidiary of PNC Financial Services Group,
Inc. The Trust has an Administration Agreement with Princeton Administrators,
L.P. (the "Administrator"), an indirect wholly-owned affiliate of Merrill Lynch
& Co., Inc.
The Trust reimburses BCT for its pro-rata share of applicable expenses,
including investment advisory and administrative fees, in an amount equal to the
proportionate amount of average net assets which are held by the Trust relative
to the average net assets of BCT.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the six months ended April 30, 2002 aggregated $16,971,888
and $6,608,723, respectively.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by affiliates 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, an affiliate of PNC 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
an affiliate of PNC or its affiliates, including Midland Loan Services, Inc.
The Federal income tax basis of the Trust's investments at April 30, 2002 was
$56,342,187, and accordingly, net unrealized appreciation was $1,940,029 (gross
unrealized appreciation--$3,485,783, gross unrealized depreciation--$1,545,754).
For Federal income tax purposes, the Trust had a capital loss carryforward at
October 31, 2001 of approximately $139,000 and expires in 2008. Accordingly, no
capital gain distribution is expected to be paid to shareholders until net gains
have been realized in excess of such amount.
Details of open financial futures contracts at April 30, 2002 were as
follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE APRIL 30, UNREALIZED
CONTRACTS TYPE DATE DATE 2002 APPRECIATION
---------- ---------- ---------- ---------- ---------- ------------
Long Position:
83 10 yr U.S.
T-Note June '02 $8,530,453 $8,761,687 $231,234
========== ========== ========
Transactions in options written during the period ended April 30, 2002, were
as follows:
NATIONAL
AMOUNT PREMIUM
(000) RECEIVED
------- ---------
Options outstanding at October 31, 2001 -- --
Options written $56,700 $ 243,014
Options terminated in closing purchase transactions (31,700) (124,264)
------- ---------
Options outstanding at April 30, 2002 $25,000 $ 118,750
======= =========
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 is based upon competitive
market rates at the time of issuance. At the time the Trust enters into a
reverse repurchase agreement, it establishes and maintains a segregated account
with the lender, containing liquid investment grade securities having a value
not less than the repurchase price, including accrued interest of the reverse
repurchase agreement.
The average daily balance of reverse repurchase agreements outstanding for
the six months ended April 30, 2002 was approximately $13,967,000 at a weighted
average interest rate of approximately 1.85%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the period was
$18,594,625 as of March 31, 2002 which was 27.9% 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 any dollar roll transactions during the six
months ended April 30, 2002.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. BCT
owned all of the 2,957,093 shares outstanding at April 30, 2002.
10
BLACKROCK
[LOGO]
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Anne Ackerley, SECRETARY
INVESTMENT ADVISOR
BlackRock Advisors, Inc.
100 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
ADMINISTRATOR
Princeton Administrators, L.P.
P.O. Box 9095
Princeton, NJ 08543-9095
(800) 543-6217
CUSTODIAN
State Street Bank and Trust Company
1 Heritage Drive
North Quincy, MA 02171
TRANSFER AGENT
EquiServe Trust Company, N.A.
150 Royall Street
Canton, MA 020201
(800) 699-1BFM
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
200 Berkeley Street
Boston, MA 02116
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
4 Times Square
New York, NY 10036
LEGAL COUNSEL - INDEPENDENT DIRECTORS
Debevoise & Plimpton
919 Third Avenue
New York, NY 10022
The accompanying financial statements as of April 30, 2002 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.
Statements and other information contained in this report are as dated and
are subject to change.
BCT SUBSIDIARY, INC.
c/o Princeton Administrators, L.P.
P.O. Box 9095
Princeton, NJ 08543-9095
(800) 543-6217
[LOGO] Printed on recycled paper 09247Q-10-6
BCT SUBSIDIARY, INC.
--------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
APRIL 30, 2002
[LOGO](SM) BLACKROCK