- -------------------------------
BAT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--118.5%
MORTGAGE PASS-THROUGHS
$ 7 Federal National Mortgage Association,
9.50%, 7/1/20 .................................. $ 7,379
----------
AGENCY MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--8.7%
1,671 Federal Home Loan Mortgage Corp.,
Multiclass Mortgage Participation
Certificates, Series 1601,
Class 1601-SD, 10/15/08 ........................ 1,674,219
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,341@ Trust 1992-43, Class 43-E,
4/25/22 ...................................... 1,333,978
3,328@ Trust 1992-129, Class 129-J,
7/25/20 ...................................... 3,159,765
1,444 Trust 1993-193, Class 193-E,
9/25/23 ...................................... 668,312
728 Trust 1994-72, Class 72-L,
4/25/24 ...................................... 719,497
----------
7,555,771
----------
ADJUSTABLE & INVERSE FLOATING RATE
MORTGAGES--6.3%
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
2,305 Trust 1993-209, Class 209-SG,
8/25/08 ...................................... 2,106,154
704 Trust 1993-212, Class 212-SA,
11/25/08 ..................................... 600,648
256 Trust 1994-37, Class 37-SC,
3/25/24 ...................................... 248,487
AAA 2,635 Sears Mortgage Securities Corp.,
Series 1993-7, Class 7-S3,
4/25/08 ...................................... 2,532,879
----------
5,488,168
----------
INTEREST ONLY MORTGAGE-BACKED
SECURITIES--18.6%
A+ 28,125 Credit Suisse First Boston
Mortgage Securities Corp.,
Series 1997-C1, Class AX,
6/20/29** .................................... 2,318,373
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage Participation
Certificates,
1,500 Series 1543, Class 1543-VU,
4/15/23 ...................................... 323,049
3,643 Series 1588, Class 1588-PM,
9/15/22 ...................................... 441,343
4,082 Series 2154, Class 2154-PF,
4/15/21 ...................................... 803,653
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
2,500 Trust 1993-163, Class 163-PH,
3/25/22 ...................................... 424,400
6,497 Trust 1993-194, Class 194-PV,
6/25/08 ...................................... 625,377
1,934@ Trust 1993-214, Class 214-SL,
12/25/08 ..................................... 1,702,102
2,032 Trust 1993-223, Class 223-PT,
10/25/23 ..................................... 251,505
2,500 Trust 1997-50, Class 50-HK,
8/25/27 ...................................... 786,790
6,755 Trust 1997-84, Class 84-PJ,
1/25/08 ...................................... 1,420,590
3,082 Trust 1998-44, Class 44-JI,
8/20/17 ...................................... 341,853
3,342 Trust 1998-62, Class 62-EI,
11/25/28 ..................................... 546,423
AAA 19,632 First Union-Lehman Brothers-Bank
of America, Series 1998-C2,
Class IO, 5/18/28 ............................ 756,666
Government National Mortgage
Association,
2,307 Trust 1998-24, Class 24-IB,
5/20/23 ...................................... 530,637
2,974 Trust 1999-17, Class 17-PF,
10/16/25 ..................................... 644,068
AAA 11,722 Merrill Lynch Mortgage Investors, Inc.,
Series 1997-C2, Class IO,
12/10/29 ..................................... 761,058
AAA 15,509 Morgan (J.P.) Commercial Mortgage
Finance Corp.,
Series 1997-C5, Class X,
9/15/29 ** ................................... 1,091,965
AAA 3,468 Morgan Stanley Capital 1, Inc.,
Series 1997-HF1, Class HF1-X,
6/15/17 ** ................................... 256,848
Residential Funding Mortgage
Securities, Inc.,
AAA 33,835 Series 1998-S19,
Class A8, 8/25/28 ............................ 269,619
AAA 135,000 Series 1999-S14, Class A5B,
7/25/29 ...................................... 1,919,531
----------
16,215,850
----------
See Notes to Financial Statements.
1
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
PRINCIPAL ONLY MORTGAGE-BACKED
SECURITIES--1.4%
COLLATERALIZED MORTGAGE OBLIGATION TRUST,
AAA $ 529 Trust 26, Class A, 4/23/17 ..................... $ 436,242
AAA 44 Trust 29, Class A, 5/23/17 ..................... 34,110
230 Federal Home Loan Mortgage Corp.,
Multiclass Mortgage Participation
Certificates,
Series 1946, Class 1946-N,
10/15/08 ..................................... 171,586
Federal National Mortgage Association,
REMIC Pass-Through Certificates,
1,406 Trust 1993-225, Class 225-ME,
11/25/23 ..................................... 492,100
102 Trust 1997-85, Class 85-LE,
10/25/23 ..................................... 63,359
----------
1,197,397
----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--8.5%
Aaa 1,000 Deutsche Mortgage and Asset
Receiving Corp.,
Series 1998-C1, Class A2,
6.54%, 2/15/08 ............................... 932,015
BBB 1,000 DLJ Mortgage Acceptance Corp.,
Series 1997-CF1,
7.91%, 4/15/07 ** ............................ 917,860
AAA 1,000 Goldman Sachs Mortgage Securities
Corp., Series 1996-PL, Class A2,
7.41%, 2/15/27 ............................... 981,450
Merrill Lynch Mortgage Investors, Inc.,
BBB 1,000 Series 1995-C1, Class D,
7.92%, 5/25/15 ............................... 982,211
BBB 500 Series 1996-C1, Class D,
7.42%,4/25/28 ................................ 473,001
AAA 350 Mortgage Capital Funding, Inc.,
Series 1998-MC2, Class A2,
6.42%, 5/18/08 ............................... 326,001
AAA 441 Series 1998-MC3, Class A1,
6.00%,11/18/31 ............................... 416,366
AAA 2,000 New York City Mortgage Loan Trust,
Multifamily,
Series 1996, Class A-2,
6.75%, 6/25/11 ** ............................ 1,876,875
AAA 500 Structured Asset Securities Corp.,
Series 1996-CFL, Class B,
6.30%, 2/25/28 ............................... 497,500
----------
7,403,279
----------
ASSET-BACKED SECURITIES--2.3%
AAA 800 Chase Credit Card Master Trust,
Series 1997-5, Class A,
6.19%, 8/15/05 ............................... 782,795
NR 421 Global Rated Eligible Asset Trust,
Series 1998-A, Class A-1,
7.33%, 3/15/06**/*** ......................... 126,265
AAA 904 Pegasus Aviation Lease Securitization,
Series 1999-1, Class A-1,
6.30%, 3/25/29 ** ............................ 870,536
NR 899 Structured Mortgage Asset
Residential Trust,
Series 1997-3,
8.57%, 4/15/06@@/*** ......................... 197,842
----------
1,977,438
----------
U.S GOVERNMENT AND AGENCY
SECURITIES--2.4%
1,081 Small Business Administration,
Series 1998-P10, Class 10-A, 6.12%,
2/1/08 ....................................... 1,018,093
United States Treasury Notes,
620@ 5.88%, 11/15/04 ................................ 607,891
500 6.00%, 8/15/04 ................................. 492,185
----------
2,118,169
----------
ZERO COUPON BOND--38.9%
Aid to Israel,
12,407 2/15/05 - 8/15/05 .............................. 8,620,695
Government Trust Certificates,
5,220 Class 2-F, 5/15/05 ............................. 3,637,192
13,760 Class T-1, 5/15/05 ............................. 9,461,238
18,000@ United States Treasury Strip,
11/15/05 ....................................... 12,277,980
----------
33,997,105
----------
TAXABLE MUNICIPAL BONDS--6.7%
AAA 1,000 Alameda County California
Pension Obligation,
Zero Coupon, 12/1/05 ........................... 647,240
AAA 1,000 Alaska Energy Power Authority Revenue,
Zero Coupon, 7/1/05 ............................ 754,000
AAA 1,400 Kern County California Pension Obligation,
Zero Coupon, 2/15/00 - 8/15/05 ................. 990,636
Long Beach California Pension Obligation,
AAA 1,407 Zero Coupon, 3/1/00 - 9/1/05 ................... 993,869
AAA 500 7.09%, 9/1/09 .................................. 483,070
Los Angeles County California
Pension Obligation,
AAA 1,372 Zero Coupon, 6/30/00 - 6/30/05 ................. 969,679
AAA 1,000 8.62%, 6/30/06 ................................. 1,059,110
----------
5,897,604
----------
See Notes to Financial Statements.
2
<PAGE>
================================================================================
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS--16.6%
FINANCE & BANKING--10.3%
A3 $ 1,000@ American Savings Bank,
6.63%, 2/15/06 ** .............................. $ 941,355
A 1,417 Equitable Life Assurance Society USA,
Zero Coupon, 6/1/00 - 12/1/05 ** ............ 966,746
A 1,000 Lehman Brothers Holdings, Inc.,
6.75%, 9/24/01 ................................. 992,548
BB- 500 Macsaver Financial Services, Inc.,
7.88%, 8/1/03 .................................. 295,000
BBB+ 1,900 PaineWebber Group, Inc.,
7.88%, 2/15/03 ................................. 1,911,495
Salomon Smith Barney Holdings, Inc.,
Aa3 1,000 6.75%, 1/15/06 ................................. 959,500
Aa3 1,425 7.98%, 3/1/00 .................................. 1,428,392
A- 1,485 Transamerica Finance Corp.,
6.75%, 6/1/00 .................................. 1,484,881
----------
8,979,917
----------
INDUSTRIALS--2.8%
AA- 1,000@ TCI Communications, Inc.,
8.25%, 1/15/03 ................................. 1,031,470
Baa2 1,985 Union Pacific Corp.,
Zero Coupon, 5/1/00 - 5/1/05 ** ................ 1,414,924
----------
2,446,394
----------
UTILITIES--1.1%
A 1,000 Alltel Corp.,
7.50%, 3/1/06 .................................. 998,430
----------
YANKEE--2.4%
BBB- 1,000 Empresa Electric Guacolda SA,
7.95%, 4/30/03 ** .............................. 950,000
BBB+ 200 Empresa Electric Pehuenche,
7.30%, 5/1/03 .................................. 192,733
A- 1,000 Israel Electric Corp., Ltd.,
7.25%, 12/15/06 ** ............................. 945,630
----------
2,088,363
-----------
Total corporate bonds ............................ 14,513,104
-----------
STRIPPED MONEY MARKET
INSTRUMENTS--8.1%
10,000 Vanguard Prime Money Market Portfolio
Zero Coupon, 12/31/04 .......................... 7,028,000
-----------
NOTIONAL
AMOUNT
(000)
----------
CALL OPTIONS PURCHASED
$15,000 Interest Rate Swap,
5.60% over 3 month LIBOR,
expires 8/7/00
(cost $206,250) ................................ 4,616
-----------
Total long-term investments
(cost $101,599,800) .............................. 103,403,880
-----------
PRINCIPAL
AMOUNT
(000)
----------
SHORT-TERM INVESTMENTS--0.7%
DISCOUNT NOTE
$ 552 Federal Home Loan Bank,
1.50%, 1/3/00
(amortized cost $551,954) ...................... 551,954
-----------
Total investments--119.2%
(cost $102,151,754) .............................. 103,955,834
Liabilities in excess of other
assets--(19.2)% .................................. (16,709,240)
-----------
NET ASSETS--100% ................................. $87,246,594
===========
- ----------------------
* 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.
*** Illiquid securities representing 0.4% of portfolio assets.
@ Entire or partial principal amount pledged as collateral for reverse
repurchase agreements or financial futures contracts.
@@ Security is restricted as to public resale. The security was acquired in
1997 and has a current cost of $314,748.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
LIBOR-- London InterBank Offer Rate.
REMIC-- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $102,151,754)
(Note 1) .............................. $103,955,834
Cash .................................... 51,296
Interest receivable ..................... 850,140
------------
104,857,270
------------
LIABILITIES
Reverse repurchase agreements (Note 4) .. 16,683,875
Due to parent (Note 2) .................. 885,875
Interest payable ........................ 40,926
------------
17,610,676
------------
NET ASSETS .............................. $ 87,246,594
============
Net assets were comprised of:
Common stock, at par (Note 5) ......... $ 95,107
Paid-in capital in excess of par ...... 82,026,697
------------
82,121,804
Undistributed net investment income ... 3,499,769
Accumulated net realized loss ......... (179,059)
Net unrealized appreciation ........... 1,804,080
------------
Net assets, December 31, 1999 ......... $ 87,246,594
============
Net asset value per share:
($87,246,594 O 9,510,667 shares of
common stock issued and outstanding) .. $ 9.17
======
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest earned (including net discount accretion
of $829,808 and net of interest expense
of $840,250) ......................... $ 5,702,255
-----------
Operating expenses
Investment advisory .................... 455,825
Administration ......................... 91,165
Custodian .............................. 66,000
Legal .................................. 41,000
Independent accountants ................ 36,000
Directors .............................. 23,000
Miscellaneous .......................... 26,885
-----------
Total operating expenses ............. 739,875
-----------
Net investment income before excise tax .. 4,962,380
Excise tax ........................... 146,000
-----------
Net investment income .................... 4,816,380
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on:
Investments ............................ (52,279)
Options written ........................ 147,000
Futures ................................ 281,483
Short sales ............................ 211,914
Interest rate swaps .................... (50,708)
-----------
537,410
-----------
Net change in unrealized appreciation
(depreciation) on:
Investments ............................ (7,285,296)
Options written ........................ 385,896
Futures ................................ 7,136
Short sales ............................ 333,514
Interest rateswaps ..................... (81,656)
-----------
(6,640,406)
-----------
Net loss on investments .................. (6,102,996)
-----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS .............. $(1,286,616)
===========
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS TO NET CASH FLOWS
PROVIDED BY OPERATING ACTIVITIES
Net decrease in net assets resulting
from operations .......................... $ (1,286,616)
------------
Increase in investments .................... (779,303)
Net realized gain .......................... (537,410)
Decrease in unrealized appreciation ........ 6,640,406
Increase in interest receivable ............ (157,028)
Decrease in deposits with brokers for
investments sold short ................... 9,203,750
Decrease in unrealized appreciation of
interest rate swap ....................... 81,656
Decrease in due to broker-variation margin . (6,593)
Decrease in payable for investments
sold short ............................... (9,044,960)
Decrease in call options written ........... (532,896)
Decrease in interest payable ............... (195,735)
Increase in accrued expenses and
other liabilities ........................ 721,056
------------
Total adjustments .......................... 5,392,943
------------
Net cash flows provided by
operating activities ..................... $ 4,106,327
============
INCREASE (DECREASE) IN CASH
Net cash flows provided by
operating activities ....................... $ 4,106,327
------------
Cash flows used for financing activities:
Decrease in reverse
repurchase agreements ...................... (506,125)
Cash dividends and distributions paid ...... (3,600,000)
------------
Net cash flows used for financing activities . (4,106,125)
------------
Net increase in cash ....................... 202
Cash at beginning of year .................. 51,094
------------
Cash at end of year ....................... $ 51,296
============
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
YEAR OCTOBER 31, 1998*
ENDED TO
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income .... $ 4,816,380 $ 531,542
Net realized gain on
investments ............ 537,410 860,503
Net change in unrealized
appreciation/depreciation
on investments ............ (6,640,406) 8,444,486
----------- -----------
Net increase (decrease) in net
assets resulting from
operations ................ (1,286,616) 9,836,531
----------- ----------
Dividends and distributions:
Dividends from net
investment income ......... (2,023,028) --
Distributions from net
REALIZED GAINS ............ (1,576,972) --
----------- ----------
Total dividends and
distributions ........... (3,600,000) --
----------- ----------
Transfer of assets from BAT
in exchange for
shares issued -- 82,296,679
. ----------- -----------
Total increase (decrease) . (4,886,616) 92,133,210
NET ASSETS
Beginning of period ....... 92,133,210 --
----------- -----------
End of period (including
undistributed net investment
income of $3,499,769 and
$531,542, respectively) .. $87,246,594 $ 92,133,210
=========== ===========
- -----------------
* Commencement of investment operations.
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BAT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR OCTOBER 31, 1998*
ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................. $ 9.69 $ 8.65
------- -------
Net investment income (net of interest expense of $0.09 and $0.05, respectively) .. 0.51 0.06
Net realized and unrealized gain (loss) ........................................... (0.65) 0.98
------- -------
Net increase (decrease) from investment operations ................................... (0.14) 1.04
------- -------
DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income ................................................. (0.21) --
Distributions from net capital gains ................................................. (0.17) --
------- -------
Total dividends and distributions .................................................... (0.38) --
------- -------
Net asset value, end of period ....................................................... $ 9.17 $ 9.69
======= =======
TOTAL INVESTMENT RETURN+.............................................................. (1.44)% 12.02%
======= =======
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ................................................................... 0.81% 0.89%++
Operating expenses and interest expense .............................................. 1.73% 1.75%++
Operating expenses, interest expense and excise taxes ................................ 1.89% 1.75%++
Net investment income ................................................................ 5.28% 3.50%++
SUPPLEMENTAL DATA:
Average net assets (in thousands) .................................................... $91,165 $90,986
Portfolio turnover ................................................................... 11% 3%
Net assets, end of period (in thousands) ............................................. $87,247 $92,133
Reverse repurchase agreements outstanding,
end of period (in thousands) ...................................................... $16,684 $17,190
Asset coverage+++ .................................................................... $ 6,229 $ 6,369
</TABLE>
- -----------------
* 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 net asset value on the last day of
each period reported. Dividends were assumed for purpose of this
calculation, to be reinvested. Total investment return for periods of less
than one full year are not annualized.
++ Annualized
+++ Per $1,000 of reverse repurchase agreements 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 each of the periods 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 & ACCOUNTING
BAT Subsidiary, Inc. (the "Trust") was 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, interest rate swaps, caps, floors and non-exchange traded
options 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. 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 having a remaining maturity of 60 days or less are
valued at amortized cost which approximates market value.
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
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, 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
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
7
<PAGE>
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. Interest 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.
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 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.
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.
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
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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.
The Trust did not engage in securities lending during the year ended December
31, 1999.
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 shareholder. 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.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Trust accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect caused by
applying this statement was to decrease paid-in capital and increase
undistributed net investment income by $174,875 due to certain expenses not
being deductible for tax purposes. Net investment income, net realized gains and
net assets were not affected by this change.
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 "Advisor"), is a wholly-owned subsidiary of BlackRock
Advisors, Inc. which is a wholly-owned subsidiary of BlackRock, Inc., which in
turn is an indirect majority-owned subsidiary of PNC Bank Corp. The Trust has an
Administration Agreement with Prudential Investments Fund Management, LLC
("PIFM"), a wholly-owned subsidiary of The Prudential Insurance Co. of America.
The Trust reimburses 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 BAT.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of invest- ment securities, other than short-term
investments and dollar rolls, for the year ended December 31, 1999 aggregated
$23,575,939 and $11,629,164, 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, 1999, the Trust
held 13.2% 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 affiliates such
as 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, 1999
was substantially the same as the basis for financial reporting and accordingly,
net unrealized appreciation for federal income tax purposes was $1,804,080
(gross unrealized appreciation--$4,574,558; gross unrealized
depreciation--$2,770,478).
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified, third
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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 year ended December 31, 1999 was approximately $15,068,042 at a weighted
average interest rate of approximately 5.09%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the year ended
December 31, 1999 was $20,163,500 as of January 31, 1999 which was 16.4% 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,
1999.
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, 1999.
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BAT SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
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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, 1999, and the related statements of operations and of cash flows
for the year then ended and statement of changes in net assets and financial
highlights for the period from October 31, 1998 (commencement of operations) to
December 31, 1998 and for the year ended December 31, 1999. 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 audits.
We conducted our audits 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, 1999, 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of BAT
Subsidiary, Inc. as of December 31, 1999, and the results of its operations, its
cash flows, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE, LLP
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Deloitte & Touche, LLP
New York, New York
February 11, 2000
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BLACKROCK
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
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 ADVISOR
BlackRock Advisors, Inc.
400 Bellevue Parkway
Wilmington, DE 19809
(800) 227-7BFM
ADMINISTRATOR
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
CUSTODIAN
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
Four Times Square
New York, NY 10036
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, 1999
