- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--115.5%
MORTGAGE PASS-THROUGHS
$ 11 Federal National Mortgage
Association, 9.50%, 7/01/20 ............ $ 11,553
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--14.9%
Federal National Mortgage
Association, REMIC Pass-
Through Certificates,
3,683 Trust 1992-129, Class 129-J,
7/25/20 ................................ 3,526,473
1,444 Trust 1993-193, Class 193-E,
9/25/23 (I) ............................ 768,425
111 Trust 1993-193, Class 193-PC,
9/25/23 ................................ 107,394
1,177 Trust 1993-212, Class 212-SA,
11/25/08 (ARM) ......................... 1,182,452
2,599 Trust 1993-223, Class 223-PT
10/25/23 (I) ........................... 381,416
1,000 Trust 1994-13, Class 13-SM,
2/25/09 (ARM) .......................... 1,022,390
1,012 Trust 1994-37, Class 37-SC,
3/25/24 (ARM) .......................... 993,430
2,828++ Trust 1994-72, Class 72-L,
4/25/24 ................................ 2,839,285
2,500 Trust 1997-50, Class 50-HK,
8/25/27 (I) ............................ 771,276
AAA 2,000 New York City Mortgage Loan Trust,***
Series 1996, Class A2,
6/25/11 .................................. 2,108,750
-----------
13,701,291
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--19.2%
Credit Suisse First Boston
Mortgage Securities Corp.,
A- 1,000 Series 1995-AEW 1, Class C,
7.46%, 11/25/27 ........................ 1,005,625
AAA 28,505 Series 1997-C1, Class AX,
6/20/29 (I/O)*** ....................... 2,834,467
BBB 1,000 DLJ Mortgage Acceptance Corp.,
Series 1997-CF, Class B1,
7.91%, 4/15/07*** ...................... 1,037,328
AAA 19,873 First Union-Lehman Brothers--
Bank of America,
Series 1998-C2, Class IO,
5/18/28 (I/O) .......................... 816,079
AAA 1,000++ GMAC Commercial Mortgages
Securities Inc., Series 1998-C2,
Class A2, 6.42%, 8/15/08 ................. 1,039,223
AAA 1,000 Goldman Sachs Mortgage
Securities Corp.,
Series 1996-PL, Class A2,
7.41%, 2/15/27 ......................... 1,068,661
AAA 809 LTC Commercial Mortgage Corp.,***
Series 1996-1, Class A,
7.06%, 4/15/28 ......................... 828,860
Merrill Lynch Mortgage Investors Inc.,
Multiclass Mortgage
Pass-Through Certificates,
BBB 1,000 Series 1995-C1, Class D,
8.08%, 5/25/15 ......................... 1,031,265
BBB 500 Series 1996-C1, Class D,
7.42%, 4/25/28 ......................... 494,525
AAA 11,867 Series 1997-C2, Class IO,
12/10/29 (I/O) ......................... 868,644
AAA 20,591 Morgan (J.P.) Commercial
Mortgage Finance Corp.,***
Commercial Mortgage
Pass-Through Certificates,
Series 1997-C5, Class X,
9/15/29 (I/O) ............................ 1,712,981
Morgan Stanley Capital 1 Inc.,
Commercial Mortgage
Pass-Through Certificates,
BBB 1,000 Series 1995-GAL1,*** Class D,
8.25%, 8/15/27 .......................... 1,025,405
AAA 3,562 Series 1997-HF1,*** Class X,
6/15/17 (I/O) ........................... 321,565
AA 450 Salomon Brothers Mortgage
Securities Corp.,***
Multiclass Mortgage
Pass-Through Certificates,
Series 1997-TZH, Class A1,
7.15%, 3/25/25 .......................... 465,972
AAA 2,635 Sears Mortgage Securities Corp.,
Series 1993-7, Class S3,
9.91%, 4/25/08 (ARM) .................... 2,672,863
AAA 500 Structured Asset Securities Corp.,
Series 1996-CFL, Class B,
6.30%, 2/25/28 ............................ 503,532
-----------
17,726,995
-----------
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS--18.2%
FINANCE & BANKING--10.7%
A3 $ 1,000@ American Savings Bank,***
6.63%, 2/15/06 .......................... $ 1,017,803
A 1,487 Equitable Life Assurance
Society USA, Zero Coupon,
6/01/99-12/01/05*** ..................... 1,049,474
A 1,000 Lehman Brothers Holdings, Inc.,
6.75%, 9/24/01 .......................... 1,008,624
BB+ 1,000 Macsaver Financial Services Inc.,
7.88%, 8/01/03 .......................... 790,000
BBB+ 1,900 PaineWebber Group Inc.,
7.88%, 2/15/03 .......................... 2,008,148
Salomon Smith Barney, Inc.,
Aa3 1,000 6.75%, 1/15/06 ........................... 1,032,260
Aa3 1,425 7.98%, 3/01/00 ........................... 1,464,359
A- 1,485 Transamerica Finance Corp.,
6.75%, 6/01/00 ........................... 1,504,424
-----------
9,875,092
-----------
INDUSTRIALS--2.9%
AA 1,000@@ TCI Communications, Inc.,
8.25%, 1/15/03 ........................... 1,097,400
Baa2 2,092 Union Pacific Corp.,***
Zero Coupon,
5/01/99 - 5/01/05 ........................ 1,531,297
-----------
2,628,697
-----------
UTILITIES--2.3%
A 1,000 AlltelCorp.,
7.50%, 3/01/06 ............................ 1,099,700
BBB- 1,000 NRG Energy, Inc,***
7.63%, 2/01/06 ............................ 1,031,000
-----------
2,130,700
-----------
YANKEE--2.3%
BBB- 1,000 Empresa Electric Guacolda SA,***
7.95%, 4/30/03 ............................ 917,674
BBB+ 200 Empresa Electric Pehuhuenche,
7.30%, 5/01/03 ............................ 184,252
A- 1,000++ Israel Electric Corp. Ltd.,***
7.25%, 12/15/06 ............................. 1,005,930
2,107,856
-----------
Total corporate bonds ....................... 16,742,345
-----------
ASSET-BACKED SECURITIES--1.8%
AAA 800 Chase Credit Card Master Trust,
Series 1997-5, 6.19%, 8/15/05 ............. 817,361
N/R 431 Global Rated Eligible Asset Trust,
Series 1998-A, Class A-1,
7.33%, 3/15/06**/*** ...................... 298,943
N/R 899 Structured Mortgage Asset
Residential Trust,
Series 1997-3,
8.57%, 4/15/06**/*** ...................... 497,595
-----------
1,613,899
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--5.9%
Collateralized Mortgage Obligation Trust,
AAA 753 Trust 26, Class A, 4/23/17 (P/O)655,771
AAA 61 Trust 29, Class A, 5/23/17 (P/O)49,914
Federal Home Loan Mortgage Corp.,
1,500 Series 1543, Class 1543-VU,
4/15/23 (I/O) ........................... 469,338
1,179 Series 1946, Class 1946-N,
10/15/08 (P/O) .......................... 1,051,422
Federal National Mortgage
Association,
1,406 Trust 1993-225, Class 225-ME,
11/25/23 (P/O) .......................... 664,335
6,755 Trust 1997-84, Class 84-PJ
1/25/08 (I/O) ........................... 1,726,068
524 Trust 1997-85, Class 85-LE,
10/25/23 (P/O) .......................... 492,404
3,486 Trust 1998-62, Class EI,
11/25/28 (I/O) .......................... 346,416
-----------
5,455,668
-----------
U.S. GOVERNMENT
SECURITIES--1.2%
1,095 Small Business Administration,
Series 1998-P10, Class 10A,
6.12%, 2/01/08 .......................... 1,113,219
-----------
ZERO COUPON BONDS--46.8%
12,407 Aid to Israel,
2/15/05 - 8/15/05 ....................... 9,065,730
Government Trust Certificates,
5,220 Class 2F, 5/15/05 ....................... 3,796,871
13,760 Class T-1, 5/15/05 ...................... 10,051,818
18,000+ U.S. Treasury Strips,
11/15/05 ................................ 12,986,280
10,000 Vanguard Prime Money Market Strip,
12/31/04 ................................ 7,243,000
-----------
43,143,699
-----------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
TAXABLE MUNICIPAL BONDS--6.9%
AAA $ 1,000 Alameda County California
Pension Obligation,
Zero Coupon, 12/01/05 ................... $ 673,110
AAA 1,000 Alaska Energy Power
Authority Revenue,
Zero Coupon, 7/01/05 .................... 766,820
AAA 1,466 Kern County California
Pension Obligation,
Zero Coupon, 2/15/99 - 8/15/05 .......... 1,075,025
Long Beach California
Pension Obligation,
AAA 1,475 Zero Coupon, 3/01/99 - 9/01/05 .......... 1,079,816
AAA 500 7.09%, 9/01/09 547,960
Los Angeles County California
Pension Obligation,
AAA 440 Zero Coupon, 6/30/99 - 6/30/05 .......... 361,315
AAA 1,000 6.77%, 6/30/05 .......................... 678,630
AAA 1,000 8.62%, 6/30/06 .......................... 1,178,620
-----------
6,361,296
-----------
NOTIONAL
AMOUNT
(000)
_________
CALL OPTIONS PURCHASED--0.6%
$15,000 Interest Rate Swap,
5.60% over 3 month LIBOR,
expires 8/07/00
(cost $206,250) ....................... 510,602
-----------
Total long-term investments
(cost $97,291,191) .................... 106,380,567
-----------
PRINCIPAL
AMOUNT
(000)
_________
SHORT TERM INVESTMENT--3.1%
Discount Notes
$2,900 Federal Home Loan Bank,
4.60%, 1/4/99
(Cost $2,898,960) 2,898,960
-----------
Total investments before
outstanding call options
written and investments
sold short
(cost $100,190,151) 109,279,527
-----------
CALL OPTIONS WRITTEN--(0.6%)
$24,000 Interest Rate Swap,
3 month LIBOR over 5.50%,
expires 8/10/99
(premium received $147,000) $ (532,896)
-----------
PRINCIPAL
AMOUNT
(000)
_________
INVESTMENTS SOLD SHORT--(9.8%)
U.S. Treasury Bonds,
$5,000 6.13%, 11/15/27 (5,596,850)
3,000 6.38%, 8/15/27 (3,448,110)
----------
Total investments sold short
(proceeds $8,711,446) (9,044,960)
----------
Total investments, net of
outstanding call options
written and investments
sold short--108.2%
(cost $$91,331,705) 99,701,671
Liabilities in excess of other
assets--(8.2%) (7,568,461)
----------
NET ASSETS--100% $92,133,210
===========
- ---------------
* Using the higher of Standard & Poor's or Moody's rating.
** Illiquid securities representing 0.7% of portfolio assets.
*** Security restricted as to resale.
+ Partial principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
++ Entire principal amount pledged as collateral for reverse repurchase
agreements. See Note 4.
@ Partial principal amount pledged as collateral for financial futures
transactions.
@@ Entire principal amount pledged as collateral for financial futures
transactions.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
I -- Denotes a CMO with Interest only characteristics.
I/O -- Interest Only. LIBOR -- London InterBank Offer Rate.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value
(cost $100,190,151) (Note 1) .................................. $109,279,527
Cash ............................................................ 51,094
Deposits with brokers as
collateral for investment sold short (Note 1) ................. 9,203,750
Interest receivable ............................................. 693,112
Unrealized appreciation on interest rate swaps
(Notes 1 and 3) ............................................... 81,656
------------
119,309,139
------------
LIABILITIES
Reverse repurchase agreements (Note 4) .......................... 17,190,000
Investment sold short, at value
(proceeds $8,711,446) (Note 1) ................................ 9,044,960
Call option written, at value
(premium received $147,000) (Notes 1 and 3) ................... 532,896
Interest payable ................................................ 236,661
Due to broker-variation margin .................................. 6,593
Due to parent (Note 2) .......................................... 164,819
------------
27,175,929
------------
NET ASSETS ...................................................... $ 92,133,210
============
Net assets were comprised of:
Common stock, at par (Note 5) ................................. $ 95,107
Paid-in capital in excess of par .............................. 82,201,572
------------
82,296,679
Undistributed net investment income ........................... 531,542
Accumulated net realized gain ................................. 860,503
Net unrealized appreciation ................................... 8,444,486
------------
Net assets, December 31, 1998 ................................. $ 92,133,210
============
Net asset value per share:
($92,133,210 / 9,510,667 shares of
common stock issued and outstanding) .......................... $ 9.69
======
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 31, 1998
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest earned (net of premium amortization
of $13,625 and net of interest
expense of $254,256) ........................................ $ 696,361
-----------
Operating expenses
Investment advisory ........................................... 76,284
Administration ................................................ 15,257
Custodian ..................................................... 7,000
Audit ......................................................... 5,000
Directors ..................................................... 3,000
Miscellaneous ................................................. 29,403
-----------
Total operating expenses .................................... 135,944
-----------
Net investment income before excise tax ......................... 560,417
Excise tax .................................................... 28,875
-----------
Net investment income ........................................... 531,542
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain on:
Investments and ............................................... 267,399
Futures ....................................................... 593,104
-----------
860,503
-----------
Net change in unrealized appreciation (depreciation) on:
Investments ................................................... 9,089,376
Options written ............................................... (385,896)
Futures ....................................................... (7,136)
Short sales ................................................... (333,514)
Interest rateswaps ............................................ 81,656
-----------
................................................................ 8,444,486
-----------
Net gain on investments ......................................... 9,304,989
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ..................................... $ 9,836,531
===========
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 31, 1998
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
Cash flows used for operating activities:
Interest received ............................................. $ 271,130
Interest expense paid ......................................... (17,595)
Purchases of short-term
portfolio investments, net .................................. (3,105,210)
Purchases of long-term portfolio investments .................. (102,159,040)
Proceeds from disposition of long-term
portfolio investments ....................................... 87,279,248
Variation margin on futures ................................... 592,561
------------
Net cash flows used for operating
activities .................................................. (17,138,906)
------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements ....................... 17,190,000
------------
Net increase in cash .......................................... 51,094
Cash at beginning of period ................................... --
------------
Cash at end of period ......................................... $ 51,094
============
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 ............................................... $ 9,836,531
------------
Increase in investments ......................................... (17,677,859)
Net realized gain ............................................... (860,503)
Increase in unrealized appreciation ............................. (8,444,486)
Increase in interest receivable ................................. (693,112)
Increase in deposits with brokers for
investments sold short ........................................ (9,203,750)
Increase in unrealized appreciation of
interest rate swap ............................................ (81,656)
Increase in due to broker-variation
margin ........................................................ 6,593
Increase in payable for investments sold short .................. 9,044,960
Increase in call option written ................................. 532,896
Increase in interest payable .................................... 236,661
Increase in due to parent ....................................... 164,819
------------
Total adjustments ............................................. (26,975,437)
------------
Net cash flows used for operating activities .................... $(17,138,906)
============
Non-cash funding activity:
Transfer of assets from
BAT in exchange for shares issued ........................... $ 82,296,679
============
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
OCTOBER 31, 1998
(COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations:
Net investment income .................. $ 531,542
Net realized gain ...................... 860,503
Net change in unrealized
appreciation ......................... 8,444,486
-----------
Net increase in net assets
resulting from operations ............ 9,836,531
Transfer of assets from BAT in exchange
for shares issued ...................... 82,296,679
-----------
Total increase ........................... 92,133,210
NET ASSETS
Beginning of period ...................... --
-----------
End of period ............................ $92,133,210
===========
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
OCTOBER 31, 1998*
THROUGH
DECEMBER 31, 1998
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................... $ 8.65
------
Net investment income (net of $0.03 of interest expense) ..... 0.06
Net realized and unrealized gain ............................. 0.98
------
Net increase from investment operations ........................ 1.04
------
Net asset value, end of period ................................. $ 9.69
======
TOTAL INVESTMENT RETURN+: ...................................... 12.02%
======
RATIOS TO AVERAGE NET ASSETS:
Operating expenses** ........................................... 0.89%++
Net investment income .......................................... 3.50%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) .............................. $90,986
Portfolio turnover ............................................. 3%
Net assets, end of period (in thousands) ....................... $92,133
Reverse repurchase agreements outstanding,
end of period (in thousands) ................................. $17,190
Asset coverage++ ............................................... $ 6,369
- --------------------
* Commencement of investment operations.
** The ratios of operating expenses, including interest expense, to average
net assets was 2.57%++ for the period indicated above. The ratios of
operating expenses, including interest expense and excise tax, to average
net assets was 2.76%++ 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 net asset value on the last day of
the period reported. 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.
6
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION & BAT Subsidiary, Inc. (the Accounting "Trust") was
POLICIES incorporated under the laws of the state of
Maryland on August 10, 1998, 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 Advantage Term Trust Inc., ("BAT") incorporated
under the laws of the state of Maryland and as such, is a wholly-owned
subsidiary of BAT. The Trust's investment objective is to manage a portfolio of
investment grade fixed income securities while providing cash flow definition to
BAT. 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 between securities,
observed in the market and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determines that such price does not reflect its fair value, in which case it
will be valued at its fair value as determined by the Trust's Board of
Directors. Any securities or other assets for which such current market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Trust's Board of Directors.
Short-term securities which mature in 60 days or less are valued at amortized
cost, if their term to maturity from date of purchase is 60 days or less.
Short-term securities with a term to maturity greater than 60 days from the date
of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings commence 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
cost of the purchase or proceeds from the sale 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
7
<PAGE>
exercise price at anytime 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.
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 interest rate swap. However, the Trust does not anticipate
non-performance by any counterparty.
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 less or greater than the proceeds originally received.
SWAP OPTIONS: Swap options are similar to options on securities except that
instead of purchasing the right to buy a security, the purchaser of the swap
option has 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 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
8
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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, bears the market risk of an unfavorable change in the value of the
swap contract underlying the written option. Interest rate swap options may be
used as part of an income producing strategy reflecting the view of the Trust's
management on the direction of interest rates.
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 year ended December 31, 1998.
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 taxable income to shareholders. Therefore, no
federal income tax provision is required. As part of its tax planning strategy,
the Trust intends to retain a portion of its taxable income and pay an excise
tax on the undistributed amounts.
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 BlackRock Advisors, Inc.,
which is an indirect majority-owned subsidiary of PNC Bank, N.A., and an
Administration Agreement with Prudential Investments Fund Management, LLC
("PIFM"), an indirect, wholly-owned subsidiary of The Prudential Insurance Co.
of America.
The Trust reimburses the BAT 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 the BAT.
NOTE 3. PORTFOLIO Purchases and sales of invest- ment securities,
SECURITIES other than short-term investments and dollar
rolls, for the period ended December 31, 1998
aggregated $102,159,040 and $3,263,175, respectively.
The Trust may invest up to 85% of its total assets in securities which are
not readily marketable, including those which are restricted as to disposition
under securities law ("restricted securities"). At December 31, 1998, the Trust
held 15.5% of its portfolio assets in restricted 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 Services, Inc.
The federal income tax basis of the Trust's investments at December 31, 1998
was $100,192,943 and, accordingly, net unrealized appreciation for federal
income tax purposes was $9,086,584 (gross unrealized appreciation--$10,345,400;
gross unrealized depreciation--$1,258,816).
Details of open financial futures contracts at December 31, 1998 are as
follows:
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION TRADE DECEMBER 31, APPRECIATION
CONTRACTS TYPE DATE DATE 1998 (DEPRECIATION)
- -------- --------------- -------- ----------- ----------- --------------
Long Position:
110 30-yr. T-bond Mar 1999 $14,340,026 $14,055,937 $(284,089)
Short Position:
(229) 10-yr. T-note Mar 1999 27,563,734 27,286,781 276,953
---------
$ (7,136)
=========
9
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Details of open interest rate swaps at December 31, 1998 are as follows:
NOTIONAL FIXED/ UNREALIZED
AMOUNT FLOATING FLOATING TERMINATION APPRECIATION
(000) TYPE RATE RATE DATE (DEPRECIATION)
- -------- -------------- ------------- ----------- ------------ -------------
$36,375 Interest Rate 6.365% 3 Mo. LIBOR 7/27/00 $1,322,846
5,000 Floating Rate 3 Mo. T-Bill
+ 80.25 bps 3 Mo. LIBOR 9/10/03 (24,000)
5,000 Floating Rate 3 Mo. T-Bill
+ 81.75 bps 3 Mo. LIBOR 9/10/03 (19,166)
(25,000) Interest Rate 6.421% 3 Mo. LIBOR 7/27/01 (1,198,024)
-----------
$ 81,656
===========
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 transactions including accrued interest.
The average daily balance of reverse repurchase agreements outstanding during
the period ended December 31, 1998 was approximately $3,111,770 at a weighted
average interest rate of approximately 5.42%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the period ended
December 31, 1998 was $20,270,407 as of November 30, 1998 which was 16.7% 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 year ended December 31,
1998.
NOTE 5. CAPITAL There are 200 million shares of $.01 par value
common stock authorized. BAT owned all of the
9,510,667 shares outstanding at December 31, 1998.
10
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BAT SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholder and Board of Directors of
BAT Subsidiary, Inc.:
We have audited the accompanying statement of assets and liabilities of BAT
Subsidiary, Inc. (the "Trust"), a wholly-owned subsidiary of the Blackrock
Advantage Term Trust Inc., including the portfolio of investments, as of
December 31, 1998, and the related statements of operations and of cash flows
and financial highlights for the period October 31, 1998 (commencement of
operations) to December 31, 1998. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at December 31, 1998, by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of BAT Subsidiary, Inc.
as of December 31, 1998, and the results of its operations, its cash flows, the
changes in its net assets and the financial highlights for the respective stated
period, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche, LLP
New York, New York
February 12, 1999
11
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BLACKROCK
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Scott Amero, VICE PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Robert S. Kapito, VICE PRESIDENT
Richard M. Shea, VICE PRESIDENT/TAX
Henry Gabbay, TREASURER
James Kong, ASSISTANT TREASURER
Karen H. Sabath, SECRETARY
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
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
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of any securities.
BAT SUBSIDIARY, INC.
c/o Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 227-7BFM
[graphic] Printed on recycled paper
BAT SUBSIDIARY, INC.
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ANNUAL REPORT
DECEMBER 31, 1998
