- --------------------------------------------------------------------------------
BGT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--117.0%
MORTGAGE PASS-THROUGHS--13.3%
Federal Home Loan Mortgage Corp.,
$ 17,554+ 6.50%, 01/01/26-09/01/28 .............. $17,679,541
Federal National Mortgage Association,
45,000 6.50%, (TBA) .......................... 45,295,313
5,590 7.25%, 01/01/23, Project 797 .......... 5,724,398
3,908 7.50%, 06/01/08, 15 Year .............. 4,019,514
-----------
72,718,766
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--14.6%
Federal Home Loan Mortgage Corp.,
Multiclass Mortgage
Participation Certificates,
12,811+ Series 90, Class 90-G,
10/15/20 .............................. 13,526,719
672 Series 1218, Class 1218-G,
05/15/14 .............................. 668,148
1,883 Series 1488, Class 1488-F,
09/15/06 .............................. 1,886,163
1,625 Series 1488, Class 1488-PF,
09/15/06 .............................. 1,651,520
908 Series 1602, Class 1602-Y,
07/15/22 .............................. 905,574
1,032 Series 1603, Class 1603-MB,
10/15/23 (ARM) ........................ 1,049,827
Federal National Mortgage
Association, REMIC
Pass-Through Certificates,
1,469 Trust G93-17, Class 17-SH,
04/25/23 (ARM) ........................ 1,372,502
10,000+ Trust 1992-43, Class 43-E,
04/15/22 .............................. 10,387,800
12,976 Trust 1992-129, Class 129-G,
06/25/18. ............................. 12,843,424
2,000 Trust 1992-155, Class 155-SB,
12/25/06 (ARM) ........................ 2,171,200
27,725++ Trust 1992-156, Class 156-H,
04/15/06 .............................. 27,142,578
1,899 Trust 1993-225, Class SB,
07/25/23 .............................. 1,882,626
2,205 Trust 1994-40, Class 40-H,
10/25/20 .............................. 2,214,261
Government National Mortgage
Association,
2,019 Trust 1996-3, Class 3-C,
09/20/20 .............................. 2,070,488
-----------
79,772,830
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--13.4%
AAA 2,600 Aetna Commercial Mortgage
Trust, Series 1995-C5, Class B,
6.74%, 12/26/30 ....................... 2,677,656
AAA 92,105 CS First Boston Mortgage Securities,
Series 1997-C1, Class AX,
04/20/22 (I/O) # ...................... 9,158,753
BBB 3,000 DLJ Mortgage Acceptance Corp.,
Series 1993-MF7, Class B,
9.40%, 06/18/03 ....................... 3,175,425
BBB 4,000 FDIC Trust,
Series 1994-C1, Class IIF,
8.70%, 09/25/25 ....................... 4,167,680
AAA 117,367 First Union Lehman Brothers
Bank Of America,
Series 1998-C2, Class IO,
05/18/28 (I/O) ........................ 4,819,737
LTC Commercial Mortgage
Pass-Through Certificates,
AAA 4,043 Series 1996-1, Class A,
7.06%, 04/15/28 # ..................... 4,144,297
BBB 1,000 Series 1993-1, Class D,
9.20%, 11/28/12 ...................... 1,036,563
A Merrill Lynch Mortgage Investors, Inc.,
2,290 Series 1995-C1, Class C,
7.678%, 05/25/15 ...................... 2,326,653
AAA 105,811 Series 1997-C2, Class IO,
12/10/29 (I/O) ........................ 7,745,406
AAA 73,708 Series 1998-C2, Class IO,
02/15/30 (I/O) ........................ 6,001,484
AAA Morgan Stanley Capital Trust I,
1,360 Series 1995-GAL1, Class A1,
7.00%, 08/15/27 #. .................... 1,378,190
AAA 99,225 Series 1998-HF1, Class X,
02/15/18 (I/O) ........................ 6,259,398
Paine Webber Mortgage
Acceptance Corp.,
AAA 2,000 Series 1995-M1, Class M1-A,
6.70%, 01/15/07 # ..................... 2,040,562
BBB 1,656 Series 1995-M1, Class M1-D,
7.30%, 01/15/07 # ..................... 1,656,322
Resolution Trust Corp.,
A 1,415 Series 1993-C3, Class C3-D,
7.10%, 12/25/24 ....................... 1,412,968
AA 4,000 Series 1994-C1, Class C1-C,
8.00%, 06/25/26 ....................... 4,032,500
AA 2,702 Salomon Brothers Mortgage
Securities Trust VII,
Series 1997-TZH, Class TZH-A1,
7.15%, 03/25/22 # ..................... 2,795,830
See Notes to Financial Statements.
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
AAA $ 3,925 Structured Asset Securities Corp.,
Series 1996-CFL, Class B,
6.30%, 02/25/28 ....................... $ 3,952,728
A 4,500 TVO Southwest,
Series 1994-MFI, Class A2,
9.37%, 11/18/04 # ..................... 4,832,247
------------
73,614,399
------------
STRIPPED MORTGAGE-BACKED
SECURITIES--13.6%
AAA 502 Bear Stearns Secured Investors Trust,
Series 1988-8, Class C,
12/01/18 (P/O) ........................ 497,818
AAA 2,251@ Collateralized Mortgage Obligation,
Trust 26, Class A,
04/23/17 (P/O) ........................ 1,958,789
Federal Home Loan Mortgage Corp.,
13,458 Series 4, Class S,
11/25/22 (I/O) ........................ 723,376
5,106 Series 1055, Class 1055-I,
03/15/21 (I/O) ........................ 1,008,501
2,269 Series 1597, Class 1597-H,
07/15/23 (P/O) ........................ 1,502,117
3,019 Series 1662, Class 1662-PO,
01/15/09 (P/O) ........................ 2,501,015
96,914 Series 1954, Class 1954-BA,
04/15/21 (I/O) ........................ 2,826,988
21,162 Series 1954, Class 1954-MD,
03/15/16 (I/O) ........................ 2,261,359
1,584 Series 2009, Class 2009-A
12/15/22 (P/O) ........................ 1,455,296
15,351 Series 2049, Class 2049-PK,
06/15/14 (I/O) ........................ 1,611,387
22,670 Series 2054, Class 2054-PL,
10/15/19 (I/O) ........................ 2,153,616
Federal National Mortgage Association,
10,000 Trust G93-22, Class P,
06/25/23 (I/O) ........................ 3,955,370
11,094 Trust G93-26, Class PT,
12/25/17 (I/O) ........................ 1,030,785
2,312 Trust 1992-208, Class S,
11/25/07 (I/O) ........................ 575,122
7,763 Trust 1993-67, Class B,
12/25/21 (P/O) ........................ 7,407,609
2,617 Trust 1993-92, Class G,
05/25/23 (P/O) ........................ 1,733,612
6,488 Trust 1993-213, Class H,
09/25/23 (P/O) ........................ 6,291,303
1,225 Trust 1993-237, Class C,
11/25/23 (P/O) ........................ 1,061,203
281 Trust 1994-54, Class C,
11/25/23 (P/O) ........................ 279,084
3,445++ Trust 1994-87, Class E,
03/25/09 (P/O) ........................ 2,818,271
20,598 Trust 1996-15, Class SG,
08/25/08 (I/O) ........................ 2,937,277
12,937 Trust 1996-20, Class SB,
10/25/08 (I/O) ........................ 3,042,134
8,499 Trust 1996-24, Class SJ,
01/25/22 (I/O) ........................ 2,531,868
2,104 Trust 1996-54, Class SM,
09/25/23 (I/O) ........................ 106,501
2,482 Trust 1997-19, Class C,
09/25/23 (P/O) ........................ 2,259,050
3,433 Trust 1997-19, Class H,
10/25/22 (P/O) ........................ 3,266,821
815 Trust 1997-32, Class ML,
02/25/27 (P/O) ........................ 791,085
41,406 Trust 1997-35, Class SB,
03/25/09 (I/O) ........................ 1,215,915
27,219 Trust 1997-50, Class HJ,
12/25/17 (I/O) ........................ 2,095,020
50,441 Trust 1997-90, Class L,
10/25/19 (I/O) ........................ 5,067,738
51,375 Trust 1998-27, Class L,
03/25/20 (I/O) ........................ 5,029,392
AAA 2,463 Prudential Bache CMO Trust,
Series 10, Class H,
04/01/19 (P/O) ........................ 2,243,313
N/R 1,082 Salomon Brothers Mortgage Securities,
Series 1987-3, Class B,
10/23/17 (I/O) ........................ 296,122
-----------
74,534,857
-----------
ASSET-BACKED SECURITIES--9.4%
AAA 1,928 Barnett Auto Receivables Trust,
Class A2, 5.92%, 07/15/00 .............. 1,929,124
AAA 7,626 Brazos Student Loan Financial Corp.,
Series 1998-A, Class A1,
5.399%, 06/01/06 ...................... 7,548,344
Broad Index Secured Trust Offering,
Baa2 5,000 Series 1998-1A, Class A,
6.58%, 03/26/01, # .................... 4,944,759
Baa2 5,000 Series 1998-4A, Class B2,
7.14%, 09/09/01, # .................... 4,942,500
AAA 20,545 Chase Credit Card Master Trust,
Series 1997-5, Class 5-A,
6.194%, 08/15/05 ...................... 20,990,860
N/R 3,014 Global Rated Eligible Asset Trust,
Series 1998-A,
7.33%, 09/15/07, #/** ................. 2,092,470
Structured Mortgage Asset
Residential Trust, #/**
N/R 4,106 Series 1997-2, Class 2,
8.24%, 03/15/06 ....................... 2,483,922
N/R 4,497 Series 1997-3,
8.724%, 04/15/06 ...................... 2,487,977
A1 4,500 Student Loan Marketing Association,
Trust 1995-1, Class 1,
10/25/09 .............................. 4,289,063
-----------
51,709,019
-----------
See Notes to Financial Statements.
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
TAXABLE ZERO COUPON
BONDS--18.8%
Financing Corp (FICO Strips),
$18,000 03/07/02 .............................. $15,434,820
29,300 12/27/02 .............................. 24,129,136
25,000 Government Trust Certificates (Israel),
11/15/02 .............................. 20,729,000
51,200++ U.S. Treasury Strips,
10/31/02 .............................. 42,873,344
------------
103,166,300
------------
TAXABLE MUNICIPAL BONDS--6.9%
AAA 1,000 Kern County California,
Pension Obligation,
6.39%, 08/15/02 ....................... 1,031,990
AAA 3,510 Long Beach California,
Pension Obligation,
6.56%, 09/01/02 ....................... 3,643,029
AAA 5,000 Los Angeles County California,
Pension Obligation,
6.54%, 06/30/02 ....................... 5,178,750
AAA 10,000 New Jersey Economic
Development Auth., Zero Coupon,
02/15/03 .............................. 8,040,400
New York City G.O.,
A- 5,000 6.54%, 03/15/02 ....................... 5,127,750
A- 5,000 7.125%, 08/15/02 ...................... 5,237,300
A- 5,000 7.34%, 04/15/02 ....................... 5,248,800
BBB+ 1,235 New York St. Environ. Fac. Auth.,
6.73%, 09/15/02 ....................... 1,280,411
AAA 1,950 San Francisco California
International Airport,
6.35%, 05/01/02 ....................... 2,005,419
AA 1,000 St. Josephs Health System California,
G.O., 7.13%, 07/01/02 .................. 1,050,090
-----------
37,843,939
-----------
CORPORATE BONDS--25.8%
BANKING & FINANCE--11.6%
A3 4,900 Ahmanson HF & Co.,
8.25%, 10/01/02 ....................... 5,254,400
A3 1,700 Amsouth Bankcorp.,
6.75%, 11/01/25 ....................... 1,752,381
A+ 5,000 Goldman Sachs Group L P,
6.25%, 02/01/03 # ..................... 5,007,872
Lehman Brothers Hldgs Inc.,
A 5,000 6.625%, 12/27/02 ...................... 5,011,969
A 875 6.75%, 09/24/01 ....................... 882,546
A 5,000 7.25%, 04/15/03 ....................... 5,138,950
AA- 1,665 Merrill Lynch & Co. Inc.,
5.75% 11/04/02 ........................ 1,669,612
Nationsbank Corp.,
Aa2 5,000 6.65%, 04/09/02 ....................... 5,151,200
Aa2 5,000 7.00%, 09/15/01 ....................... 5,195,200
Paine Webber Group Inc.,
BBB+ 2,190 7.875%, 02/15/03 ...................... 2,314,655
BBB+ 7,790 8.25%, 05/01/02 ....................... 8,254,596
Salomon Inc.,
Aa3 3,000 5.875%, 02/01/01 ...................... 3,021,600
Aa3 1,500 7.00%, 05/15/00 ....................... 1,529,385
Aa3 4,500 7.98%, 03/01/00 ....................... 4,624,290
A- 8,500 Transamerica Finance Corp.,
6.75%, 06/01/00 ....................... 8,608,885
-----------
63,417,541
-----------
INDUSTRIAL--5.6%
A 1,000 Bass America Inc.,
8.125%, 03/31/02 ...................... 1,065,810
A1 1,000 Ford Motor Credit Co.,
8.00%, 06/15/02 ....................... 1,075,430
BBB+ 5,425 Jones Apparel Group, Inc.,
6.25% 10/01/01 # ...................... 5,391,051
BBB+ 5,000 Norfolk Southern Corp.,
6.95%, 05/01/02 ....................... 5,196,400
Baa1 5,265 Raytheon Co.,
6.45%, 08/15/02 ....................... 5,399,889
BBB- 5,000 RJR Nabisco Inc.,
8.625%, 12/01/02 ...................... 5,079,800
AA- 4,000 TCI Communications Inc.,
9.25%, 04/15/02 ....................... 4,447,800
Baa1 2,700 Tenneco Inc.,
8.075%, 10/01/02 ...................... 2,815,263
-----------
30,471,443
-----------
UTILITY--2.6 %
A3 5,000@ Columbia Energy Group, Inc.,
6.61%, 11/28/02 ....................... 5,162,000
BBB+ 5,000 MCI Worldcom Inc. Communications,
6.125%, 04/15/02 ...................... 5,076,100
A 4,000 360 Communications,
7.125%, 03/01/03 ...................... 4,231,040
-----------
14,469,140
-----------
YANKEE BONDS--6.0%
Aa1 5,000@ African Development Bank,
7.75%, 12/15/01 ....................... 5,302,048
A3 5,000 Corporacion Andina De Fome,
7.10%, 02/01/03 ....................... 4,850,950
BBB- 3,500 Empresa Elec. Guacolda SA,
7.95%, 04/30/03 (Chile) # ............. 3,211,862
BBB+ 1,650 Empresa Elec. Pehuence,
7.30%, 05/01/03 (Chile) ............... 1,520,077
BBB- 2,000 Korea Development Bank,
6.50%, 11/15/02 ....................... 1,816,580
BBB- 5,000 Transpatadora de Gas Tragas,
10.25%, 04/25/01 (Argentina) ......... 5,100,000
AAA 7,500 U.S. Remittance Master,
Series 1996-1, 01/01/01 # ............. 7,478,906
Baa1 3,669 YPF Sociedad Anonima,
7.50%, 10/26/02 (Argentina) .......... 3,674,790
-----------
32,955,213
-----------
Total corporate bonds 141,313,337
-----------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
UNITED STATES GOVERNMENT
SECURITIES--0.1%
$ 535 United States Treasury Note,
6.125%, 08/15/07 ...................... $ 584,322
------------
NOTIONAL
AMOUNT
(000)
----------
CALL OPTIONSPURCHASED--1.1%
$85,000 INTEREST RATE SWAP,
3 Month LIBOR over 5.60%,
expires 08/07/00 ...................... 2,893,409
68,000 Interest Rate Swap,
3 Month LIBOR over 5.85%,
expires 08/09/10 ...................... 2,966,493
------------
5,859,902
------------
Total long-term investments
(cost $623,947,976) ................... 641,117,671
------------
PRINCIPAL
AMOUNT
(000)
----------
SHORT-TERM INVESTMENTS--8.1%
DISCOUNT NOTES
Federal Home Loan Bank,
$33,600 4.30%, 01/04/99 ....................... 33,587,960
10,370 4.50%, 01/04/99 ....................... 10,366,111
------------
Total short-term investments
(cost $43,954,071) .................... 43,954,071
------------
Total investments before
outstanding call options
written and investments
sold short--125.1%
(cost $667,902,047) ................... 685,071,742
------------
CALL OPTION WRITTEN--(0.6%)
$136,000 Interest Rate Swap,
3 Month LIBOR over 5.50%,
expires 08/10/99
(premium received $833,000) ........... $(3,019,744)
------------
PRINCIPAL
AMOUNT
(000)
-----------
INVESTMENTS SOLD SHORT--(0.3%)
$ 1,700 U.S. Treasury Note,
4.75%, 11/15/08
(proceeds $1,718,429) ................. (1,713,277)
------------
Total call options written
and investments sold
short --(0.9%) ........................ (4,733,021)
------------
Total investments net of
call options written and
investments sold
short--124.2%
(cost $665,350,618) ................... 680,338,721
------------
Liabilities in excess of other
assets--(24.2%) ....................... (132,541,678)
------------
NET ASSETS--100% $547,797,043
============
- --------------------
* Using the higher of Standard & Poor's or Moody's rating.
** Illiquid securities representing 1.29% 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.
@ Entire principal amount pledged as collateral for financial futures
contracts.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage
CMO -- Collateralized Mortgage Obligation
G.O. -- General Obligation
I/O -- Interest Only Class
LIBOR -- London InterBank Offer Rate
P/O -- Principal Only Class
REMIC -- Real Estate Mortgage Investment Conduit
TBA -- To be Allocated
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BGTSUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $667,902,047)
(Note 1) ..................................................... $685,071,742
Cash ........................................................... 169,988
Receivable for investments sold ................................ 38,141,709
Interest receivable ............................................ 5,802,480
Deposit with broker for investments
sold short (Note 1) .......................................... 1,727,625
Unrealized appreciation on interest rate swap
(Note 1 & 3)) ................................................ 465,937
Due from broker-variation margin ............................... 135,343
------------
731,514,824
------------
LIABILITIES
Reverse repurchase agreement (Note 4) .......................... 93,712,350
Payable for investments purchased .............................. 83,828,030
Swap option written, at value
(proceeds $833,000) (Note 1) ................................. 3,019,744
Investment sold short, at value
(proceeds $1,718,429) (Note 1) ............................... 1,713,277
Interest payable ............................................... 661,120
Due to parent (Note 2) ......................................... 783,260
------------
183,717,781
------------
NET ASSETS $547,797,043
============
Net assets were comprised of:
Common stock, at par (Note 5) ................................ $ 575,106
Paid-in capital in excess of par ............................. 518,385,785
------------
518,960,891
------------
Undistributed net investment income .......................... 3,983,964
Accumulated net realized gain ................................ 9,175,453
Net unrealized appreciation .................................. 15,676,735
------------
Net assets, December 31, 1998 $547,797,043
============
Net asset value per share:
($547,797,043 / 57,510,639 shares of
common stock issued and outstanding) $9.53
======
- --------------------------------------------------------------------------------
BGTSUBSIDIARY, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD OCTOBER 31, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (including net reduction of discount of
$2,506,096, and net of interest expense of
$841,429) .................................................. $ 4,767,224
------------
Expenses
Investment advisory .......................................... 408,870
Administration ............................................... 113,575
Custodian .................................................... 22,000
Audit ........................................................ 19,000
Directors .................................................... 14,000
Legal ........................................................ 9,000
Miscellaneous ................................................ 33,815
------------
Total operating expenses ................................... 620,260
------------
Net investment income before excise tax ...................... 4,146,964
Excise tax ................................................. 163,000
------------
Net investment income ........................................ 3,983,964
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3)
Net realized gain (loss) on:
Investments .................................................. 1,261,300
Options written .............................................. 808,711
Futures ...................................................... 5,128,035
Short sales .................................................. 2,973,001
Swaps ........................................................ (995,594)
------------
9,175,453
------------
Change in net unrealized appreciation (depreciation) on:
Investments .................................................. 17,169,695
Options written .............................................. (2,186,744)
Futures ...................................................... 222,694
Short sales .................................................. 5,152
Swaps ........................................................ 465,938
------------
15,676,735
------------
Net gain on investments ........................................ 24,852,188
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS .............................................. $28,836,152
============
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
BGTSUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD OCTOBER 31, 1998
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
INCREASE IN CASH
Cash flows used for operating activities:
Interest received ........................................ $ 2,312,269
Interest expense paid .................................... (180,309)
Cash paid for purchase of short-term
portfolio investments, net ............................. (43,954,071)
Variation margin on futures .............................. 4,992,692
Purchase of long-term portfolio investments .............. (125,004,668)
Proceeds from disposition of long-term
portfolio investments .................................. 68,291,725
-------------
Net cash flows used for operating activities ............. (93,542,362)
-------------
Cash flows provided by financing activities:
Net proceeds from issuance of
reverse repurchase agreements .......................... 93,712,350
-------------
Net cash provided by financing activities ................ 93,712,350
-------------
Net increase in cash ....................................... 169,988
Cash at beginning of period ................................ -
-------------
Cash at end of period ...................................... $ 169,988
=============
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 .......................................... $ 28,836,152
-------------
Increase in investments .................................... (141,258,663)
Net realized gain .......................................... (9,175,453)
Increase in unrealized appreciation ........................ (15,676,735)
Increase in unrealized appreciation on interest
rate swap ................................................ (465,937)
Increase in receivable for investments sold ................ (38,141,709)
Increase in receivable for variation margin ................ (135,343)
Increase in interest receivable ............................ (5,802,480)
Increase in payable for investments purchased. ............. 83,828,030
Increase in swap options written ........................... 3,019,744
Increase in deposits with broker
for short sales .......................................... (1,727,625)
Increase in payable for securities sold short .............. 1,713,277
Increase in interest payable ............................... 661,120
Increase in accrued expenses and other
liabilities ............................................. 783,260
-------------
Total adjustments ........................................ (122,378,514)
-------------
Net cash flows used for operating activities ............... $ (93,542,362)
=============
Non-cash funding activity:
Transfer of assets from BGT in exchange
for shares issued ........................................ $ 518,960,891
=============
- --------------------------------------------------------------------------------
BGTSUBSIDIARY, 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 .................................... $ 3,983,964
Net realized gain ........................................ 9,175,453
Net change in unrealized
appreciation ........................................... 15,676,735
-----------
Net increase in net assets
resulting from operations .............................. 28,836,152
Transfer of assets from BGT in
exchange for shares issued ............................. 518,960,891
------------
Total increase ........................................... 547,797,043
NET ASSETS
Beginning of period -
------------
End of period .............................................. $547,797,043
============
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BGTSUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
OCTOBER 31, 1998*
THROUGH
DECEMBER 31, 1998
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ........................ $ 9.02
-------
Net investment income (net of $0.01 interest expense) ..... 0.07
Net realized and unrealized gain .......................... 0.44
-------
Net increase from investment operations ..................... 0.51
-------
Net asset value, end of period .............................. $ 9.53
=======
TOTAL INVESTMENT RETURN+: ................................... 5.65%
=======
RATIOS TO AVERAGE NET ASSETS:
Operating Expenses** ........................................ 0.66%++
Net Investment Income ....................................... 4.37%++
SUPPLEMENTAL DATA:
Average net assets (000) .................................... $543,706
Portfolio turnover rate ..................................... 2%
Net assets, end of period (000) ............................. $547,797
Reverse repurchase agreements
outstanding, end of period (000) .......................... $ 93,712
Asset coverage+++ ........................................... $ 6,846
- ------------
* Commencement of operations.
** The ratio of operating expenses, including interest expense, to
average net assets was 1.55%++ for the period indicated above.
The ratio of operating expenses, including interest expense & excise tax,
to average net assets was 1.72%++ for the period indicated above.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the
last day of each period reported. 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 period indicated. This
information has been determined based upon financial information provided in the
financial statements.
See Notes to Financial Statements.
7
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BGTSUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION & BGT Subsidiary, Inc, (the "Trust") was incorporated
ACCOUNTING under the laws of the State of Maryland on
POLICIES 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 Strategic Term Trust Inc. ("BGT"), incorporated
under the laws of the State of Maryland and as such, is a wholly-owned
subsidiary of BGT. The Trust's investment objective is to manage a portfolio of
investment grade fixed income securities while providing cash flow definition to
BGT. 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, municipal
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 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 are commenced with respect to the seller of the security,
realization of the collateral by the Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
proceeds from the sale or cost of the purchase in determining whether the Trust
has realized a gain or a loss on investment transactions. The Trust, as writer
of an option, may have no control over whether the underlying securities may be
sold (call) or purchased (put) and as a result bears the market risk of an
unfavorable change in the price of the security underlying the written option.
Options, when used by the Trust, help in maintaining a targeted
duration. Duration is a measure of the price sensitivity of a security or a
portfolio to relative changes in interest rates. For instance, a duration of
"one" means that a portfolio's or a security's price would be expected to change
by approximately one percent with a one percent change in interest rates, while
a duration of five would imply that the price would move approximately five
percent in relation to a one percent change in interest rates.
Option selling and purchasing is used by the Trust to effectively
"hedge" positions so that changes in interest rates do not change the duration
of the portfolio unexpectedly. In general, the Trust uses options to hedge a
long or short position or an overall portfolio that is longer or shorter than
the benchmark security. A call option gives the purchaser of the option the
right (but not obligation) to buy, and obligates the seller to sell (when the
option is exercised), the underlying position at the exercise price at any time
or at a specified time during the option period. A put option gives the holder
the right to sell and obligates the writer to buy the underlying position at the
exercise price at any time or at a specified time during
8
<PAGE>
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) overtime.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by "marking-to-market" to reflect the
market value of the swap. When the swap is terminated, the Trust will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Trust's basis in the contract, if any.
The Trust is exposed to credit loss in the event of non-performance
by the other party to the swap. However, the Trust does not anticipate
non-performance by any counterparty. 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.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy or 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 that the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
Financial futures contracts, when used by the Trust, help in
maintaining a targeted duration. Futures contracts can be sold to effectively
shorten an otherwise longer duration portfolio. In the same sense, futures
contracts can be purchased to lengthen a portfolio that is shorter than its
duration target. Thus, by buying or selling futures contracts, the Trust can
effectively hedge positions so that changes in interest rates do not change the
duration of the portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for
the purpose of hedging its existing portfolio securities or securities the Trust
intends to purchase against fluctuations in value caused by changes in
prevailing market interest rates. Should interest rates move unexpectedly, the
Trust may not achieve the anticipated benefits of the financial futures
contracts and may realize a loss. The use of futures transactions involves the
risk of imperfect correlation in movements in the price of futures contracts,
interest rates and the underlying hedged assets. The Trust is also at the risk
of not being able to enter into a closing transaction for the futures contract
because of an illiquid secondary market. In addition, since futures are used to
shorten or lengthen a portfolio's duration, there is a risk that the portfolio
may have temporarily performed better without the hedge or that the Trust may
lose the opportunity to realize appreciation in the market price of the
underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The
9
<PAGE>
Trust may have to pay a fee to borrow the particular securities and may be
obligated to pay over any payments received on such borrowed securities. A gain,
limited to the price at which the Trust sold the security short, or a loss,
unlimited as to dollar amount will be recognized upon the termination of a short
sale if the market price is less or greater than the proceeds originally
received.
SECURITIES LENDING: The Trust may lend its portfolio securities to qualified
institutions. The loans are secured by collateral at least equal, at all times,
to the market value of the securities loaned. The Trust may bear the risk of
delay in recovery of, or even loss of rights in, the securities loaned should
the borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust.
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 meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to shareholders. Therefore, no federal
income tax provision is required. As part of the tax planning strategy, the
Trust may 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 BlackRockAdvisors, Inc., which is an
indirect majority-owned subsidiary of PNC Bank, N.A., and an Administration
Agreement with MorganStanley Dean Witter Advisors Inc. ("MSDWA"), formerly
DeanWitter InterCapital, Inc.
The Trust reimburses BGT 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 BGT.
NOTE 3. PORTFOLIO Purchases and sales of SECURITIES investment securities,
other than short-term investments, and dollar rolls for
the year ended December 31, 1998 aggregated $124,740,581 and $42,767,027
respectively.
The Trust may invest up to 60% 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 12% of its portfolio assets in securities restricted as to
resale.
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 substantially the same as the basis for financial reporting, and,
accordingly, net unrealized appreciation for federal income tax purposes was
$17,169,695 (gross unrealized appreciation--$30,286,072; gross unrealized
depreciation--$13,116,397).
During the period ended December 31, 1998 the Trust entered into
financial futures contracts. Details of open contracts at December 31, 1998 were
as follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE DECEMBER 31, UNREALIZED
CONTRACTS TYPE DATE DATE 1998 APPRECIATION
- --------- ---- ---------- -------- ------------ ------------
Long position:
500 30 Yr. T-Bond Mar. 1999 $63,756,531 $63,890,625 $ 134,094
Short position:
(80) 5 Yr. T-Note Mar. 1999 (9,156,100) (9,067,500) 88,600
--------
$222,694
========
The Trust has no open interest rate caps as of December 31, 1998.
10
<PAGE>
Details of open interest rate swaps at December 31, 1998 are as
follows:
NOTIONAL FLOATING/ UNREALIZED
AMOUNT FIXED FLOATING TERMINATION APPRECIATION
(000) TYPE RATE RATE DATE (DEPRECIATION)
-------- ---- -------- -------- ----------- ------------
$(150,000) Interest Rate 6.421% 3 Mo. LIBOR 07/27/01 $(7,188,141)
218,250 Interest Rate 6.365% 3 Mo. LIBOR 07/27/00 7,937,076
35,000 Floating Rate 3 Mo. T-Bill 3 Mo. LIBOR 09/10/03 (168,000)
+80.25 bps
30,000 Floating Rate 3 Mo. T-Bill 3 Mo. LIBOR 09/10/03 (114,998)
+81.75 bps -----------
$ 465,937
===========
NOTE 4. BORROWINGS REVERSE REPURCHASE AGREEMENTS: The Trust may enter
into reverse repurchase agreements with qualified,
third party broker-dealers as determined by and under the direction of the
Trust's board of directors. Interest on the value of the reverse repurchase
agreements issued and outstanding will be based upon competitive market rates at
the time of issuance. At the time the Trust enters into a reverse repurchase
agreement, it will establish and maintain a segregated account with the lender
the value of which at least equals the principal amount of the reverse
repurchase transaction, including accrued interest.
The average daily balance of reverse repurchase agreements
outstanding during the period ended December 31, 1998 was $20,973,302 at a
weighted average interest rate of approximately 5.05%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during the period
ended December 31, 1998 was $95,620,207 as of November 30, 1998 which was 11.12%
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 has not entered into any dollar rolls for the period
ended December 31, 1998.
NOTE 5. CAPITAL There are 200 million shares of $.01 par value
common stock authorized. BGT owned all of the
57,510,639 shares outstanding at December 31, 1998.
11
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BGT SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholder and Board of Directors of
BGT Subsidiary, Inc.
We have audited the accompanying statement of assets and liabilities of BGT
Subsidiary, Inc. (the "Trust"), a wholly-owned subsidiary of The BlackRock
Strategic TermTrust Inc., including the portfolio of investments, as of December
31, 1998, and the related statement 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 provides 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 BGT 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
12
<PAGE>
BlackRock
DIRECTORS
Laurence D. Fink, CHAIRMAN
Andrew F. Brimmer
Richard E. Cavanagh
Kent Dixon
Frank J. Fabozzi
James Grosfeld
James Clayburn La Force, Jr.
Walter F. Mondale
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, PRESIDENT
Keith T. Anderson, VICE PRESIDENT
Michael C. Huebsch, VICE PRESIDENT
Scott Amero, 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
Morgan Stanley Dean Witter Advisors Inc.
Two World Trade Center
New York, NY 10048
(800) 729-8855
CUSTODIAN
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
TRANSFER AGENT
Morgan Stanley Dean Witter FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311-3977
(800) 526-3143
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.
BGTSUBSIDIARY, INC.
c/o Morgan Stanley Dean Witter Advisors Inc.
71st Floor
Two World Trade Center
New York, NY 10048
Call toll free (800) 227-7BFM
Logo Printed on recycled paper 9247P-10-8
BGT SUBSIDIARY, INC.
- -------------------------------------
ANNUAL REPORT
DECEMBER 31, 1998
