BBT SUBSIDIARY, INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--136.2%
MULTIPLE CLASS MORTGAGE PASS-THROUGHS--2.3%
AAA $ 575 American Southwest Financial Corp.,
Series 48, Class 48-M,
9/01/17 ....................... $ 583,864
CBA Mortgage Corp.,
AA 5,489 Series 1993-C1, Class B,
12/01/03 ...................... 5,582,765
AAA 5,000 Series 1993-C1, Class A2,
12/25/03 ...................... 5,108,047
------------
11,274,676
------------
CORPORATE BONDS--77.1%
FINANCE & BANKING--38.3%
Baa3 10,000 AT&T Capital Corp.,
5.81%, 12/04/98 ............... 9,888,456
A2 5,000 Allstate Corp.,
5.875%, 6/15/98 ............... 4,983,750
Baa1 11,100 Aristar, Inc.,
8.875%, 8/15/98 ............... 11,548,387
Associates Corp. of North America,
Aa3 6,150 5.58%, 12/14/98 ............... 6,085,775
Aa3 1,500@ 7.30%, 3/15/98 ................ 1,520,430
A1 7,769 Bank Montreal Quebec,
10.00%, 9/01/98 ............... 8,240,129
A3 3,000 Comerica, Inc.,
10.125%, 6/01/98 .............. 3,146,070
Baa2 10,500 Enterprise Rental,
7.875%, 3/15/98 ............... 10,717,279
A1 3,000 First Chicago Corp.,
8.50%, 6/01/98 ................ 3,097,620
A2 6,000 Fleet Financial Group, Inc.,
6.00%, 10/26/98 ............... 5,988,360
A1 10,000 Goldman Sachs Group,
6.10%, 4/15/98 ................ 10,001,485
A3 5,000 Huntington Bancshares, Inc.,
5.68%, 12/08/98 ............... 4,953,050
A1 6,000 ITT Hartford Group,
8.20%, 10/15/98 ............... 6,200,236
A1 6,000 Kemper Corp.,
8.80%, 11/01/98 ............... 6,262,801
Baa1 9,960 Lehman Brothers, Inc.,
5.75%, 11/15/98 ............... 9,846,954
Baa3 8,800 New American Capital, Inc.,
6.9375%, 4/12/00 .............. 8,849,500
A3 4,300 Northern Trust Corp.,
9.00%, 5/15/98 ................ 4,460,605
Norwest Corp.,
Aa3 10,000 5.75%, 11/16/98 ............... 9,931,854
Aa3 5,000 6.00%, 10/13/98 ............... 4,995,400
Aa3 1,000 7.70%, 11/15/97 ............... 1,014,650
Baa1 13,897 PaineWebber Group, Inc.,
6.25%, 6/15/98 ................ 13,898,854
A3 5,000 Ryder System, Inc.,
5.78%, 4/27/98 ................ 4,994,700
Salomon, Inc.,
Baa1 5,000 6.70%, 12/01/98 ............... 5,018,900
Baa1 10,000 7.43%, 12/30/98 ............... 10,162,856
A2 11,300 Sears Overseas Finance,
Zero Coupon, 7/12/98 .......... 10,295,893
Smith Barney Holdings, Inc.,
A2 1,000 5.50%, 1/15/99 ................ 986,560
A2 9,000++ 5.625%, 11/15/98 .............. 8,913,420
------------
186,003,974
------------
CORPORATE BONDS INDUSTRIALS--18.9%
A2 10,000 Atlantic Richfield,
10.25%, 7/02/00 ............... 10,344,394
Caterpillar Financial Services,
A2 5,000 5.18%, 10/01/98 ............... 4,917,245
A2 1,500 5.93%, 12/15/98 ............... 1,493,019
A3 10,000 Chrysler Financial Corp.,
6.04%, 12/07/98 ............... 9,970,161
Aa3 3,000 Du Pont De Nemours,
8.50%, 6/25/98 ................ 3,098,364
A1 8,000 Ford Motor Credit Co.,
8.00%, 1/15/99 ................ 8,265,272
AAA 1,000 General Electric Capital Corp.,
6.65%, 4/14/08 ................ 1,008,500
General Motors Acceptance Corp.,
A3 8,000 6.125%, 9/18/98 ............... 7,996,525
A3 3,600 7.30%, 2/02/98 ................ 3,654,108
A2 3,000 John Deere Capital Corp.,
7.14%, 9/15/98 ................ 3,048,360
A3 5,000 Lockheed Martin Corp.,
6.625%, 6/15/98 ............... 5,038,550
AAA 8,225 Outlet Broadcasting, Inc.,
10.875%, 7/15/03 .............. 9,085,233
A1 2,000 Pepsico, Inc.,
6.125%, 1/15/98 ............... 2,002,916
A1 1,000 Texaco Capital, Inc.,
8.26%, 9/15/98 ................ 1,034,880
BBB 7,000 Textron Financial Services,
6.10%, 6/24/98 ................ 6,988,494
Union Oil Co.,
Baa2 7,500 8.40%, 1/15/99 ................ 7,797,050
Baa2 5,000 8.81%, 5/18/98 ................ 5,169,050
Baa2 1,000 8.84%, 5/18/98 ................ 1,034,200
------------
91,946,321
------------
1
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS UTILITIES--14.1%
Baa2 $12,500++ Commonwealth Edison,
6.00%, 3/15/98 ................ $ 12,484,493
Baa3 868 Connecticut Light & Power Co.,
7.625%, 4/01/97 ............... 868,000
Baa1 5,000 Duquesne Light Co.,
5.85%, 6/01/98 ................ 4,977,300
A3 5,000 GTE Corp.,
8.85%, 3/01/98 ................ 5,157,598
Baa3 2,000 Gulf States Utilities Co.,
7.35%, 11/01/98 ............... 2,026,160
National Rural Utilities,
A1 10,000 5.20%, 1/15/99 ................ 9,807,158
A1 1,000 7.93%, 1/15/99 ................ 1,032,901
A2 5,000 PacifiCorp,
8.95%, 6/30/98 ................ 5,203,306
Baa1 7,000 Philadelphia Electric Co.,
5.375%, 8/15/98 ............... 6,904,510
A2 5,000 Portland General Electric Co.,
5.65%, 5/15/98 ................ 4,971,950
Texas Utilities Electric Co.,
Baa2 6,600 5.50%, 10/01/98 ............... 6,526,410
Baa2 1,400 5.75%, 7/01/98 ................ 1,393,336
Baa2 7,050 5.875%, 4/01/98 ............... 7,039,143
------------
68,392,265
------------
CORPORATE BONDS
SOVEREIGN & PROVINCIAL--5.8%
Baa3 2,000 Colombia Republic,
7.125%, 5/11/98 ............... 2,010,407
Corporacion Andina De Fomento,
Baa2 6,000 6.625%, 10/14/98 .............. 6,009,780
Baa2 2,000 6.625%, 10/14/98 .............. 2,003,332
A1 4,000 Ford Capital B.V.,
9.00%, 8/15/98 ................ 4,172,920
Hydro Quebec,
A2 3,000 9.30%, 10/28/98 ............... 3,155,412
A2 1,000 7.67%, 11/30/98 ............... 1,025,254
A2 7,000 9.55%, 1/06/98 ................ 7,240,793
Aaa 1,400 International Bank For
Reconstruction &
Development Colts,
8.85%, 2/16/98 ................ 1,442,687
Aa3 1,000 Ontario Province,
15.75%, 3/15/12 ............... 1,080,900
------------
28,141,485
------------
ASSET-BACKED SECURITIES--38.5%
Aa2 10,862+ Airplanes Passthru Trust
Certificates, Series 1-A5,
Class A 5, 5.9555%, 3/15/19 ... 10,869,093
Banc One Auto Grantor Trust,
AAA 17,025++ Series 1996- A, Class A,
16.10%, 10/15/02 .............. 17,052,086
AAA 8,315 Series 1996-B, Class A,
6.55%, 2/15/03 ................ 8,360,284
AAA 27,630++ Banc One Credit Card Master Trust,
Series 1994- C, Class A,
7.80%, 12/15/00 ............... 28,493,437
AAA 15,090++ Chase Manhattan Grantor Trust,
Automobile Loan Pass-Through,
Series 1996-B, Class A, 6.61%,
9/15/02 ....................... 15,193,373
AAA 9,965++ Chevy Chase Auto Receivables,
Series 1996-1, Class A,
6.60%, 12/15/02 ............... 10,037,879
AAA 14,600++ Dayton Hudson Credit Card Trust,
Series 1995-1, Class A,
6.10%, 2/25/02 ................ 14,620,531
Discover Card Master Trust,
Series 1991-D, Class A,
AAA 27,295++ 8.00%, 10/16/00 ............... 28,079,731
Series 1991-F, Class A,
AAA 12,380+ 7.85%, 11/21/00 ............... 12,708,844
AAA 5,176 Fifth Third Bank Auto Trust,
Series 1996- B, Class A,
6.45%, 3/15/02 ................ 5,200,716
AAA 14,752++ Ford Credit Grantor Trust,
Series 1995-B, Class A,
5.90%, 10/15/00 ............... 14,742,831
AAA 13,924++ Nationsbank Auto Grantor Trust,
Series 1995-A, Class A,
5.85%, 6/15/02 ................ 13,898,106
AAA 5,803++ Premier Auto Trust, Series 1994- 2,
Class A4, 6.00%, 5/02/00 ...... 5,808,094
AAA 944+ SPNB Home Equity Loan,
Series 1991-A, Class A2,
8.90%, 3/10/06 ................ 944,867
AAA 1,278 Telmex Trust,
6.50224%, 4/01/97 ............. 1,277,982
------------
187,287,854
------------
STRIPPED MORTGAGE-BACKED
SECURITIES--1.8%
AAA 5 American Housing Trust VIII,
Mortgage Pass-Through
Certificates Class M,
1/25/21 (I/O) ................. 1,277,586
7,496 Federal National Mortgage
Association, REMIC Pass-Through
Certificates, Trust 1993-158,
Class 158-C, Zero Coupon,
5/25/14 (P/O) ................. 7,256,059
------------
8,533,645
------------
See Notes to Financial Statements
2
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--10.6%
$ 7,000++ United States Treasury Notes,
5.125%, 12/31/98 .............. $ 6,902,630
50,000++ United States Treasury Strips,
Zero Coupon, 11/15/98 ......... 44,867,500
------------
51,770,130
------------
MUNICIPAL BONDS--4.6%
AAA 7,800 Alameda County California Pension
Obligation, Taxable, Series A,
7.25%, 12/01/98 ............... 7,982,052
AAA 1,415 Long Beach California Pension
Obligation, Taxable Refunding,
6.13%, 9/01/98 ................ 1,419,245
Baa1 6,000 New York, Taxable Bonds, Series G,
6.10%, 2/01/98 ................ 5,993,520
A 5,250 Sacramento California Utility District
Electric, Refunding Series F,
5.90%, 11/15/98 ............... 5,225,850
AAA 1,540 Western Minnesota Municipal Power
Agency Supply, Taxable Refunding
Series A, 5.88%, 1/01/98 ...... 1,539,245
------------
22,159,912
------------
MUNICIPAL ZERO COUPON BONDS--1.2%
Baa1 6,375 Essex County, Taxable Refunding
Zero Coupon, Series N,
11/15/98 ...................... 5,693,130
------------
CONTRACTS # PUT OPTIONS PURCHASED--0.1%
-----------
400 U.S. Treasury Note, 7.00%, 7/15/06
@ $102 Expiring 7/02/97 ....... 606,240
------------
Total Long-Term Investments
(cost $666,037,471) ........... 661,809,632
------------
SHORT-TERM INVESTMENTS--4.0%
CERTIFICATE OF DEPOSIT--2.6%
13,000 MBNA,
6.15%, 6/19/98 ................ 13,000,000
DISCOUNT NOTES--1.4%
6,690 Federal Home Loan Bank,
6.50%, 1/02/97 ................ 6,688,792
------------
Total short-term investments
(cost $19,688,792) ............ 19,688,792
------------
Total Investments before
investments sold short--140.3%
(cost $685,726,263) ........... 681,498,424
------------
SECURITIES SOLD SHORT--(7.2%)
(35,000) United States Treasury Notes,
6.125%, 8/31/98
(proceeds $34,907,031) ........ (35,152,950)
------------
Total investments net of
short sales--133.0%
(cost $650,819,232) ........... 646,345,474
Liabilities in excess of other
assets--(33.0%) ............... (161,746,367)
------------
NET ASSETS--100% ................ $484,599,107
============
- ----------
#One contract equals 100,000 face value.
*Using the higher of Standard & Poor's or Moody's rating.
+In aggregate, $15,614,603 of principal amount pledged as collateral for
reverse repurchase agreements.
++Entire principal amount pledged as collateral for reverse repurchase
agreements.
@ $760,215 principal amount pledged as collateral for futures transactions.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
CMO -- Collateralized Mortgage Obligation.
ARM -- Adjustable Rate Mortgage.
G.O. -- General Obligation Bond.
I/O -- Interest Only.
P -- Denotes a CMOwith principal only characteristics.
P/O -- Principal only.
I -- Denotes a CMO with Interest only characteristics.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $685,726,263)
(Note 1) ................................................ $ 681,498,424
Cash ...................................................... 5,444
Deposit with broker as collateral for
investments sold short (Note 1) ......................... 35,875,000
Interest receivable ....................................... 8,723,956
Unrealized appreciation on interest rate swaps ............ 650,627
Due from broker-variation margin .......................... 5,001
Other assets .............................................. 47,546
-------------
726,805,998
-------------
LIABILITIES
Reverse repurchase agreements (Note 4) .................... 197,907,250
Investment sold short at value
(proceeds $34,907,031) (Note 1) ......................... 35,152,950
Payable for investments purchased ......................... 5,693,130
Due to Parent (Note 2) .................................... 1,069,869
Excise tax payable ........................................ 429,650
Interest payable .......................................... 1,954,042
-------------
242,206,891
-------------
NET ASSETS ................................................ $ 484,599,107
=============
Net assets were comprised of:
Common stock, at par (Note 5) ........................... $ 586,605
Paid-in capital in excess of par ........................ 479,111,252
-------------
479,697,857
Undistributed net investment income ..................... 9,460,928
Accumulated net realized loss ........................... (746,029)
Net unrealized depreciation ............................. (3,813,649)
-------------
Net assets, December 31, 1996 ........................... $ 484,599,107
=============
Net asset value per share:
($484,599,107 / 58,660,527 shares of
common stock issued and outstanding) .................... $ 8.26
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD AUGUST 19, 1996
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
INCOME
Interest (net of premium amortization of
$1,216,658 and interest expense
of $3,956,828) ........................................ $ 10,962,086
------------
Operating Expenses
Investment advisory ..................................... 713,868
Administration .......................................... 179,928
Custodian ............................................... 46,300
Directors ............................................... 22,200
Audit ................................................... 9,000
Legal ................................................... 11,000
Miscellaneous ........................................... 89,212
------------
Total operating expenses .............................. 1,071,508
------------
Net investment income before excise tax ................... 9,890,578
Excise tax .............................................. 429,650
------------
Net investment income ..................................... 9,460,928
------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized loss
Investments ............................................. (235,155)
Futures ................................................. (510,874)
------------
(746,029)
------------
Net unrealized appreciation (depreciation)
Investments ............................................. (3,577,212)
Futures ................................................. 9,482
Short sales ............................................. (245,919)
------------
(3,813,649)
------------
Net loss on investments ................................... (4,559,678)
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. $ 4,901,250
============
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD AUGUST 19, 1996
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH CASH FLOWS USED FOR OPERATING ACTIVITIES:
Interest received ......................................... $ 7,411,116
Interest expense paid ..................................... (2,002,786)
Proceeds from disposition of short-term
portfolio investments, net .............................. (19,688,792)
Purchase of long-term portfolio investments ............... (268,034,291)
Proceeds from disposition of long-term
portfolio investments ................................... 84,863,428
Variation margin on futures ............................... (496,391)
Other ..................................................... 45,910
-------------
Net cash flows used for
operating activities .................................... (197,901,806)
-------------
Cash flows provided by financing activities:
Increase in reverse repurchase agreements ................. 197,907,250
-------------
Net increase in cash ........................................ 5,444
Cash at beginning of period ................................. --
-------------
Cash at end of period ....................................... $ 5,444
=============
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 ................................................ $ 4,901,250
-------------
Increase in investments ..................................... (206,360,245)
Net realized gain ........................................... 746,029
Increase in unrealized appreciation ......................... 3,813,649
Increase in deposits with broker for
investments sold short .................................... (35,875,000)
Increase in interest receivable ............................. (8,723,956)
Increase in interest rate swap .............................. (650,627)
Increase in variation margin receivable ..................... (5,001)
Increase in other assets .................................... (47,546)
Increase in payable for investments purchased ............... 5,693,130
Increase in interest payable ................................ 1,954,042
Increase in payable for securities sold short ............... 35,152,950
Increase in due to parent ................................... 1,069,869
Increase in excise tax payable .............................. 429,650
-------------
Total adjustments ......................................... (202,803,056)
-------------
Net cash used for operating activities ...................... $(197,901,806)
=============
Noncash financing activity:
Transfer of assets from BlackRock 1998 Term Trust Inc.
in exchange for shares issued ............................. $ 479,697,857
=============
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
STATEMENT OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
FOR THE PERIOD
AUGUST 19, 1996*
TO
DECEMBER 31, 1996
----------------
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income ...................................... $ 9,460,928
Net realized gain (loss)
on investments,
short sales and futures .................................. (746,029)
Net unrealized appreciation
(depreciation) on
investments, short
sales and futures ........................................ (3,813,649)
-------------
Net increase
in net assets
resulting from operations ................................ 4,901,250
Transfer of assets from BlackRock 1998 Term Trust, Inc. ....
in exchange for shares issued ............................ 479,697,857
-------------
Total increase ........................................... 484,599,107
NET ASSETS
Beginning of period .......................................... --
-------------
End of period ................................................ $ 484,599,107
=============
- ----------
*Commencement of operations.
5
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
AUGUST 19, 1996*
THROUGH
DECEMBER 31, 1996
-----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period .......................... $ 8.18
-----------
Net investment income (net of $.06 of interest expense) ..... .16
Net realized and unrealized loss
on investments, short sales and futures .................. (.08)
-----------
Net increase from investment operations ....................... .08
-----------
Net asset value, end of period ................................ $ 8.26
===========
TOTAL INVESTMENT RETURN+: ..................................... 2.22%
RATIOS TO AVERAGE NET ASSETS:**
Operating expenses@ ........................................... .60%
Net investment income ......................................... 5.33%
SUPPLEMENTAL DATA:
Average net assets (in thousands) ............................. $ 479,728
Portfolio turnover ............................................ 9%
Net assets, end of period (in thousands) ...................... $ 484,599
Reverse repurchase agreements outstanding,
end of period (in thousands) ............................. $ 197,907
Asset coverage++ .............................................. $ 3,449
- --------------------------------------------------------------------------------
* Commencement of investment operations.
** Annualized.
@ The ratio of operating expenses, including interest expenses, to average
net assets was 1.05% for the period indicated above. The ratio of operating
expenses, including interest expense and excise tax, to average net assets
was 1.14% for the period indicated above.
+ This entity is not publicly traded and therefore total investment return is
calculated assuming a purchase of common stock at the current net asset
value on the first day and a sale at the current net asset value on the
last day of each period reported. Dividends and distributions are assumed,
for purposes of this calculation, to be reinvested. This calculation does
not reflect brokerage commissions. Total investment returns for periods of
less than one full year are not annualized.
++ Per $1,000 of reverse repurchase agreement outstanding.
The information above represents the audited operating performance data for
a share of common stock outstanding, total investment return, ratios to
average net assets and other supplemental data for each of the periods
indicated. This information has been determined based upon financial
information provided in the financial statements and market value data for
the Trust's shares.
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
BBT Subsidiary, Inc. (the "Trust") was incorporated under the laws of the State
of Maryland on May 15, 1996, and is a diversified closed-end management
investment company. The Fund was incorporated solely for the purpose of
receiving all or a substantial portion of the assets of The Blackrock 1998 Term
Trust Inc., incorporated under the laws of the State of Maryland on February 21,
1991 (the "1998 Term Trust") and as such, a wholly-owned subsidiary of the 1998
TermTrust. The Trust's investment objective is to manage a portfolio of
investment grade fixed income securities while providing cash flow definition to
the 1998 Term Trust. No assurance can be given that the Trust's investment
objective will be achieved.
The following is a summary of significant accounting policies followed by the
Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships observed in the
market between securities, and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
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 more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost, if their term to maturity from date of purchase was 60
days or less, or by amortizing their value on the 61st day prior to maturity, if
their original term to maturity from date of purchase exceeded 60 days.
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 the option period. Put options
can be purchased to effectively
7
<PAGE>
hedge a position or a portfolio against price declines if a portfolio is long.
In the same sense, call options can be purchased to hedge a portfolio that is
shorter than its benchmark against price changes. The Trust can also sell (or
write) covered call options and put options to hedge portfolio positions.
The main risk that is associated with purchasing options is that the option
expires without being exercised. In this case, the option expires worthless and
the premium paid for the option is considered the loss. The risk associated with
writing call options is that the Trust may forego the opportunity for a profit
if the market value of the underlying position increases and the option is
exercised. The risk in writing put options is that the Trust may incur a loss if
the market value of the underlying position decreases and the option is
exercised. In addition, as with futures contracts, the Trust risks not being
able to enter into a closing transaction for the written option as the result of
an illiquid market.
FINANCIAL FUTURES CONTRACTS: A futures contract is an agreement between two
parties to buy 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. 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. 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 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 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 inrecovery of, or even loss of rights in, the securities loaned should the
borrower of the securities fail financially. The Trust receives compensation for
lending its securities in the form of interest on the loan. The Trust also
continues to receive interest on the securities loaned, and any gain or loss in
the market price of the securities loaned that may occur during the term of the
loan will be for the account of the Trust. The Trust did not engage in
securities lending during the period ended December 31, 1996.
INTEREST RATE CAPS: Interest rate caps are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate over a specified fixed rate.
Interest rate caps are intended to both manage the duration of the Trust's
portfolio and its exposure to changesin short term rates. 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
8
<PAGE>
in interest rates. Owning interest rate caps reduces the portfolio's duration,
making it less sensitive to changes in interest rates from a market value
perspective. The effect on income involves protection from rising short term
rates, which the Trust experiences primarily in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate cap. However, the Trust does not anticipate
non-performance by any counterparty.
INTEREST RATE SWAPS: In an interest rate swap, one investor pays a floating rate
of interest on a notional principal amount and receives a fixed rate of interest
on the same notional principal amount for a specified period of time.
Alternatively, an investor may pay a fixed rate and receive a floating rate.
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 "marketing-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 part to the swap. However, the Trust does not anticipate non-performance
by any counterparty.
INTEREST RATE FLOORS: Interest rate floors are similar to interest rate swaps,
except that one party agrees to pay a fee, while the other party pays the
excess, if any, of a floating rate under a specified fixed rate.
Interest rate floors are used by the Trust to both manage the duration of the
portfolio and its exposure to changes in short-term interest rates. 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. Owning interest rate floors
reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from falling short term rates, which the Trust experiences primarily
in the form of leverage.
The Trust is exposed to credit loss in the event of non-performance by the
other party to the interest rate floor. However, the Trust does not anticipate
non-performance by any counterparty.
SECURITIES TRANSACTIONS AND NET 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. Expenses are recorded on the
accrual basis which may require the use of certain estimates by management.
TAXES: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required. As part of its tax planning
strategy, the Trust intends to retain a portion of its taxable income and pay an
excise tax on the undistributed amounts.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and
distributions, first from net investment income, then from realized short-term
capital gains and other sources, if necessary. Net long-term capital gains, if
any, in excess of loss carryforwards are distributed at least annually.
Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
DEFERRED ORGANIZATION EXPENSES: A total of $50,000 was incurred in connection
with the organization of the Trust. These costs have been deferred and are being
amortized ratably over a period beginning the date the Trust commenced
investment operations and ending at the Trust's termination date.
ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2. AGREEMENTS
The Trust has an Investment Advisory Agreement with BlackRock Financial
Management Inc. (the "Adviser"), a wholly-owned corporate subsidiary of PNC
Asset Management Group, Inc., the holding company for PNC's asset management
business, and an Administration Agreement with Prudential Mutual Fund Management
LLC, ("PMF"), an indirect, wholly-owned subsidiary of The Prudential Insurance
Co. of America.
9
<PAGE>
The Trust reimburses the 1998 Term Trust for its pro-rata share of applicable
expenses, including investment advisory and administrative fees, in an amount
equal to the proportionate amount of net assets which are held by the Trust
relative to the net assets of the 1998 Term Trust.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
and dollar rolls for the period ended December 31, 1996 aggregated $273,727,421
and $53,711,945 respectively. In addition, the Trust received investments valued
at $479,697,857 in exchange for common shares of the Trust.
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, 1996, the Trust
did not hold any illiquid securities.
The Trust may from time to time purchase in the secondary market certain
mortgage pass-through securities packaged or master serviced by PNC Mortgage
Securities Corp. (or Sears Mortgage if PNC Mortgage Securities Corp. succeeded
to rights and duties of Sears) or mortgage related securities containing loans
or mortgages originated by PNC Bank or its affiliates. It is possible under
certain circumstances, PNC Mortgage Securities Corp. or its affiliates could
have interests that are in conflict with the holders of these mortgage backed
securities, and such holders could have rights against PNC Mortgage Securities
Corp. or its affiliates.
The federal income tax basis of the Trust's investments at December 31, 1996
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized depreciation for federal income tax purposes was $4,227,839
(gross unrealized appreciation - $2,006,239; gross unrealized depreciation -
$6,234,078).
During the year ended December 31, 1996, the Trust entered into financial
futures contracts. Details of open condtracts ad December 31, 1996 were as
follows:
VALUE AT VALUE AT
NUMBER OF EXPIRATION TRADE DECEMBER 31, UNREALIZED
CONTRACTS TYPE DATE DATE 1996 APPRECIATION
- --------- ---- ---- ---- ---- ------------
Short
position:
30 Yr. March
4 T-Bond 1997 $459,982 $450,500 $9,482
=======
The Trust entered into interest rate swaps with original notional amounts as
stated below. Under this agreement, the Trust receives a fixed rate and pays a
floating rate.
CURRENT
NOTIONAL
AMOUNT FIXED TERMINATION UNREALIZED
(000) TYPE RATE FLOATING RATE DATE APPRECIATION
------- ------------------ ------- ------------- ----------- ------------
$44,000 Interest Rate Swap 7.25% 3-mo. LIBOR Dec. `98 $213,268
16,000 Interest Rate Swap 7.27% 3-mo. LIBOR Dec. `98 82,318
32,000 Interest Rate Swap 6.991% 3-mo. LIBOR Dec. `98 121,459
23,000 Interest Rate Swap 7.00% 3-mo. LIBOR Dec. `98 77,165
16,000 Interest Rate Swap 7.00% 3-mo. LIBOR Dec. `98 65,730
10,000 Interest Rate Swap 6.988% 3-mo. LIBOR Dec. `98 47,143
10,000 Interest Rate Swap 6.975% 3-mo. LIBOR Dec. `98 43,544
--------
$650,627
========
NOTE 4. BORROWINGS
Reverse Repurchase Agreements: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and out standing 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 year ended December 31, 1996 was approximately $159,302,197 at a weighted
average interest rate of approximately 5.64%. The maximum amount of reverse
repurchase agreements outstanding at any month-end was $197,907,250 on December
31, 1996 which was 27.23% 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
period ended December 31, 1996.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. The 1998
Term Trust owned all of the 58,660,527 shares outstanding at December 31, 1996.
10
<PAGE>
NOTE 6. QUARTERLY DATA
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED NET INCREASE (DECREASE)
GAINS (LOSSES) IN NET ASSETS PERIOD
NET INVESTMENT ON INVESTMENTS, RESULTING FROM END
QUARTERLY TOTAL INCOME SHORT SALES AND FUTURES OPERATIONS NET ASSET
PERIOD INCOME AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE VALUE
------ ------ ------ --------- ------ --------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
August 19, 1996* to
September 30, 1996 $3,357,619 $3,446,448 $.06 $(6,874,385) $(.12) $(3,427,937) $(.06) $8.12
October 1, 1996 to
December 31, 1996 $7,604,467 $6,014,480 .10 2,314,707 .04 8,329,187 .14 8.26
- --------------------------------------------------------------------------------
*Commencement of operations
</TABLE>
11
<PAGE>
- --------------------------------------------------------------------------------
BBT SUBSIDIARY, INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholder and Board of Directors of
BBT Subsidiary, Inc.
We have audited the accompanying statement of assets and liabilities of BBT
Subsidiary, Inc. (a wholly-owned subsidiary of The Blackrock 1998 Term Trust
Inc.), including the portfolio of investments, as of December 31, 1996, and the
related statements of operations, cash flows, changes in net assets and the
financial highlights for the period August 19, 1996 (commencement of operations)
to December 31, 1996. 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, 1996, 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 BBT Subsidiary, Inc.
as of December 31, 1996, the results of its operations, its cash flows, the
changes in its net assets and the financial highlights for the period August 19,
1996 to December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
New York, New York
February 3, 1997
12
<PAGE>
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
There have been no other material changes in the Trust's investment
objectives or policies that have not been approved by the shareholders, or to
its charter or by-laws, or in the principal risk factors associated with
investment in the Trust. There have been no changes in the persons who are
primarily responsible for the day-to-day management of the Trust's portfolio.
13
<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.
Ralph L. Schlosstein
OFFICERS
Ralph L. Schlosstein, President
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Karen H. Sabath, Secretary
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 10702-4077
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
(800) 699-1BFM
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281-1434
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of any securities.
BBT SUBSIDIARY INC.
c/o Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 10702-4077
(800) 227-7BFM
[Logo] Printed on recycled paper 09247N-10-3
BBT Subsidiary, Inc.
====================
Annual Report
December 31, 1996
[Logo]
