- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
ANNUAL REPORT TO SHAREHOLDERS
REPORT OF INVESTMENT ADVISER
- --------------------------------------------------------------------------------
January 31, 1998
Dear Trust Shareholder:
U.S. fixed income investors have been rewarded with solid total returns
over the past twelve months ended December 31, 1997, as low inflation despite
strong economic growth drove Treasury yields lower.
The economy has shown some signs of slowing, which BlackRock expects may
persist as recessions in the emerging Asian economies and Japan will moderate
U.S. growth. We do not see immediate signs of inflationary pressure nor do we
anticipate an imminent change in monetary policy by the Federal Reserve. Our
longer-term outlook for the bond market remains optimistic, based on the
fundamentally favorable backdrop of slower economic growth, low inflation and
declining Treasury borrowing.
There are exciting developments occurring at BlackRock that we would like
to share with you. As you may know, BlackRock was acquired by PNC Bank, N.A. in
1995. In early 1998 the five investment management firms that comprise the PNC
Asset Management Group were consolidated under the BlackRock umbrella. This will
result in BlackRock Inc. becoming a $100 billion money management firm ranking
it among the 25 largest in the country. We look forward to using our global
investment management expertise to present exciting investment opportunities to
closed-end fund shareholders in the future.
This report contains detailed market and portfolio strategy commentary by
your Trust's managers in addition to the Trust's audited financial statements
and a detailed portfolio listing. We thank you for your continued investment in
the Trust and wish you a successful new year.
Sincerely,
/s/Laurence D. Fink /s/Ralph L. Schlosstein
- ------------------- -----------------------
Laurence D. Fink Ralph L. Schlosstein
Chairman President
1
<PAGE>
January 31, 1998
Dear Shareholder:
We are pleased to present the annual report for The BlackRock 1998 Term
Trust Inc. ("the Trust") for the year ended December 31, 1997. We would like to
take this opportunity to review the Trust's stock price and net asset value
(NAV) performance, summarize market developments and discuss recent portfolio
management activity.
The Trust is a diversified, actively managed closed-end bond fund whose
shares are traded on the New York Stock Exchange under the symbol "BBT". The
Trust's investment objective is to return at least $10 per share (its initial
offering price) to shareholders on or about December 31, 1998 while providing
high current income. Although there can be no guarantee, BlackRock is confident
that the Trust can achieve its investment objectives. The Trust seeks these
objectives by investing in investment grade fixed income securities, including
corporate debt securities, mortgage-backed securities backed by U.S. Government
agencies (such as Fannie Mae, Freddie Mac or Ginnie Mae), asset-backed
securities and commercial mortgage-backed securities. All of the Trust's assets
must be rated at least "BBB" by Standard & Poor's or "Baa" by Moody's at time of
purchase or be issued or guaranteed by the U.S. Government or its agencies.
The table below summarizes the performance of the Trust's stock price and
NAV over the period:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
12/31/97 12/31/96 CHANGE HIGH LOW
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STOCK PRICE $9.75 $9.375 4.00% $9.75 $9.25
NET ASSET VALUE (NAV) $9.97 $9.86 1.12% $9.97 $9.81
5-YEAR U.S. TREASURY NOTE $5.71 6.21% -50 bp 6.86% 5.68%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
THE FIXED INCOME MARKETS
The U.S. economy exhibited strong growth and low inflation during 1997,
pushing bond yields below 6% for the first time since early 1996. Fueled by
increased consumer spending and low unemployment, growth was robust. The primary
inflation indicators, consumer and producer prices, remained dormant throughout
the period and unemployment rate remained low. After increasing the Fed Funds
Rate to 5.50% in March, the Federal Reserve left the rate unchanged for the
remainder of the year, as the combination of slowing domestic growth and the
economic turmoil in Asia threatened to exert deflationary pressures on the U.S.
economy.
The positive momentum has continued into the early days of 1998 based, in
part, on the possibility of early elimination of the budget deficit and on
comments by Fed Chairman Greenspan that deflation was an issue. New home sales
recently hit a new cyclical peak, the employment picture remains very strong and
consumer confidence and spending remain high. Despite the strong growth, current
and future inflation both appear to be controlled.
The market for mortgage-backed securities (MBS) outperformed U.S.
Treasuries for the twelve months ended December 31, 1997. For the period, the
MBS market as measured by the Lehman Brothers Mortgage Index posted a 9.48%
total return versus the 9.20% return of the Merrill Lynch 5-7 Year Treasury
Index. Demand for mortgage securities was largely concentrated in the first half
of 1997, when MBS decisively outperformed Treasuries due to low interest rate
volatility and relatively stable mortgage prepayment activity. However, mortgage
rates fell below the critical 7% threshold toward year-end, causing concerns
that increased refinancing activity would negatively impact the performance of
mortgage securities.
2
<PAGE>
A three-year trend of positive performance for investment grade corporates
ended abruptly in the fourth quarter of 1997 due to the Asian crisis. The
financial turmoil in Asia caused a decline in credit quality ratings and created
selling pressure for Asian Yankee bonds. Domestic corporate bonds fared better,
but the potential for lower corporate earnings and a large influx of new issues
into the market caused yields to rise. As a result, corporates underperformed
Treasuries in 1997 for only the second time in the past decade. With the U.S.
economy remaining firm, domestic corporate bond fundamentals remain fairly
positive. At wider spread levels, we see value in higher rated and improving
domestic credits.
THE TRUST'S PORTFOLIO AND INVESTMENT STRATEGY
BlackRock actively manages the Trust's portfolio holdings consistent with
BlackRock's overall market strategy and the Trust's investment objectives. The
following chart compares the Trust's current and December 31, 1996 asset
composition.
THE BLACKROCK 1998 TERM TRUST INC.
COMPOSITION DECEMBER 31, 1997 DECEMBER 31, 1996
----------- ----------------- -----------------
Corporate Bonds 63% 49%
Asset-Backed Securities 18% 24%
U.S. Government Securities 8% 14%
Municipal Bonds 4% 3%
Agency Multiple Class Mortgage Pass-Throughs 2% 1%
Mortgage Pass-Throughs 2% 3%
Inverse Floating Rate Mortgages 1% 0%
Stripped Mortgage-Backed Securities 1% 2%
Taxable Zero Coupon Bonds 1% 1%
Adjustable Rate Mortgages 0% 2%
Non-Agency Multiple Class Mortgage Pass-Throughs 0% 1%
RATING %OF CORPORATES
CREDIT RATING DECEMBER 31, 1997 DECEMBER 31, 1996
------------- ----------------- -----------------
AAAor equivalent 3% 3%
AAor equivalent 7% 7%
Aor equivalent 51% 50%
BBBor equivalent 39% 40%
We continued to focus on securities with final maturity dates (or "bullet"
maturities) that match the Trust's termination date. Specifically, the Trust has
seen a material increase in its investment grade corporate bond allocation over
the past year. We believe that the Trust's stake in bullet maturity securities,
particularly corporate bonds, will aid the Trust in reaching its target
termination value of $10.00 per share while maintaining a relatively stable
dividend stream. As of year-end, 63% of the Trust's assets were invested in
investment grade and above corporates, which represents an increase of 29% over
the Trust's December 31, 1996 level of 49%. The Trust has been a net seller of
mortgage-backed securities, whose cash flows and maturity dates can change in
response to interest rate movements. Mortgage bonds tend to prepay when interest
rates fall, which forces the bondholder to reinvest cash flows at lower yields.
Conversely, the average maturities of mortgage bonds can extend when interest
rates rise.
Lastly, as The BlackRock 1998 Term Trust approaches maturity, we are proud
to announce that the Trust is extremely
3
<PAGE>
well positioned to achieve its primary investment objective of returning at
least $10 per share to shareholders upon termination at the end of December
1998. Although we are almost a full year away from termination, we have already
initiated the operational and administrative processes necessary for a
successful and smooth termination of the Trust. In preparing for December 1998,
we have included a short questionnaire with this report. We would appreciate
your taking the time to complete and return the survey to further help us plan
for the Trust's termination.
We appreciate your investment in The BlackRock 1998 Term Trust Inc. and
look forward to managing the fund to realize its investment objectives. Please
feel free to contact the mutual fund specialists at BlackRock's marketing center
at (800) 227-7BFM (7236) if you have any questions that weren't answered in this
report. Additionally, you can reach us via e-mail at
[email protected]
Sincerely,
/s/Robert S. Kapito /s/Michael P. Lustig
- ------------------- --------------------
Robert S. Kapito Michael P. Lustig
Vice Chairman and Portfolio Manager Principal and Portfolio Manager
BlackRock Financial Management, Inc. BlackRock Financial Management, Inc.
THE BLACKROCK 1998 TERM TRUST INC.
Symbol on New York Stock Exchange: BBT
- ---------------------------------- ---
Initial Offering Date: April 19, 1991
Closing Stock Price as of 12/31/97: $9.75
Net Asset Value as of 12/31/97: $9.97
Yield on Closing Stock Price as of 12/31/97 ($9.75)1: 4.87%
Current Monthly Distribution per Share2: $0.039583
Current Annualized Distribution per Share2: $0.474996
1 Yield on Closing Stock Price is calculated by dividing the current annualized
distribution per share by the closing stock price per share.
2 Distribution not constant and is subject to change.
4
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--94.3%
MORTGAGE PASS-THROUGHS--1.9%
Federal Home Loan Mortgage
Corporation,
$ 7,982 4.50%, 12/01/98, 5 Year .$ 7,888,545
2,991 8.50%, 5/01/99, 7 Year .. 3,001,778
-----------
10,890,323
-----------
MULTIPLE CLASS MORTGAGE
PASS-THROUGHS--1.0%
AAA 4 American Housing Trust VIII,
Mortgage Pass-Through
Certificates, Series 8,
Class M, 1/25/21, (I) ... 1,271
AAA 575 American Southwest Financial
Corp.,
Series 48, Class 48-E,
9/01/17 ............... 600,977
Federal Home Loan Mortgage
Corporation
Multiclass Mortgage
Participation Certificates,
223 Series 68, Class 68-G,
5/15/19 ............... 222,845
273 Series 172, Class 172-H,
5/15/20 ............... 271,473
492 Series 1534, Class 1534-D,
3/15/15 ............... 488,439
462 Series 1557, Class 1557-S,
8/15/98 ............... 456,241
Federal National Mortgage
Association, REMIC
Pass-Through Certificates,
2,361 Trust 1992-3, Class 3-S,
1/25/99, (ARM) ........ 2,505,286
987 Trust 1992-119, Class 119-S,
8/25/99, (ARM) ........ 977,230
1,012 Trust G1993-26, Class 26-PH,
11/25/11, (I) ......... 15,141
2,378 Trust 1993-82, Class 82-J,
11/25/10, (I) ......... 42,093
1,415 Trust 1993-129, Class 129-J,
2/25/07, (I) .......... 133,506
-----------
5,714,502
-----------
COMMERCIAL MORTGAGE-BACKED
SECURITIES--1.8%
CBA Mortgage Corp.,
AAA 4,941 Series 1993-C1, Class A2,
7.76%, 12/25/03 ....... 4,997,756
AA 5,489 Series 1993-C1, Class B,
7.76%, 12/01/03 ....... 5,543,311
-----------
10,541,067
-----------
CORPORATE BONDS--59.1%
FINANCE & BANKING--30.4%
Baa3 $10,000 AT&T Capital Corp.,
5.81%, 12/04/98 ......... 9,972,300
A1 5,000 Allstate Corp.,
5.875%, 6/15/98 ......... 4,996,850
Baa1 11,100 Aristar, Inc.,
8.875%, 8/15/98 ......... 11,296,581
Associates Corp.
of North America,
Aa3 6,150 5.58%, 12/14/98 ......... 6,137,515
Aa3 1,500 7.30%, 3/15/98 .......... 1,503,090
A1 7,769 Bank of Montreal,
10.00%, 9/01/98 ......... 7,966,100
A3 3,000 Comerica, Inc.,
10.125%, 6/01/98 ........ 3,048,930
A1 3,000 First Chicago NBD., Corp.,
8.50%, 6/01/98 .......... 3,030,720
A2 6,000 Fleet Financial Group, Inc.,
6.00%, 10/26/98 ......... 6,011,520
A1 4,000 Ford Capital B.V.,
9.00%, 8/15/98 .......... 4,068,520
A1 8,000 Ford Motor Credit Co.,
8.00%, 1/15/99 .......... 8,162,480
A1 10,000 Goldman Sachs Group,
6.10%, 4/15/98 .......... 9,991,800
A3 5,000 Huntington Bankshares,
Inc.,
5.68%, 12/08/98 ......... 4,993,050
A2 6,000 ITT Hartford Group,
8.20%, 10/15/98 ......... 6,097,226
A1 6,000 Kemper Corp.,
8.80%, 11/01/98 ......... 6,137,760
Baa1 9,960 Lehman Brothers, Inc.,
5.75%, 11/15/98 ......... 9,932,510
A2 4,300 Northern Trust Corp.,
9.00%, 5/15/98 .......... 4,348,074
Norwest Corp.,
Aa3 10,000 5.75%, 11/16/98 ......... 9,988,800
Aa3 5,000 6.00%, 10/13/98 ......... 5,004,400
Baa1 13,897 PaineWebber Group, Inc.,
6.25%, 6/15/98 .......... 13,919,652
A3 5,000 Ryder Systems, Inc.,
5.78%, 4/27/98 .......... 4,994,450
Salomon, Inc.,
A2 1,000 5.50%, 1/15/99 .......... 992,940
A2 9,000 5.625%, 11/15/98 ........ 8,960,130
A2 5,000 6.70%, 12/01/98 ......... 5,028,267
Baa1 10,000 Salomon, Inc. MTN.,
A2 11,300 7.43%, 12/30/98 ......... 10,135,600
Sears Overseas Finance,
Zero Coupon, 7/12/98 .... 10,949,446
-----------
177,668,711
-----------
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
CORPORATE BONDS
INDUSTRIALS--13.9%
Caterpillar Financial Services,
A2 $ 5,000 5.18%, 10/01/98 .........$ 4,978,800
A2 1,500 5.93%, 12/15/98 ......... 1,501,980
A3 10,000 Chrysler Financial Corp.,
6.04%, 12/07/98 ......... 10,014,100
Aa3 3,000 Du Pont De Nemours,
8.50%, 6/25/98 .......... 3,035,042
Baa2 10,500 Enterprise Rental,
7.875%, 3/15/98 ......... 10,537,098
General Motors Acceptance
Corp.,
A3 8,000 6.125%, 9/18/98 ......... 8,005,436
A3 3,600 7.30%, 2/02/98 .......... 3,603,096
A2 3,000 John Deere Capital Corp.,
7.14%, 9/15/98 .......... 3,026,340
A3 5,000 Lockheed Martin Corp.,
6.625%, 6/15/98 ......... 5,016,500
AAA 8,225 Outlet Broadcasting, Inc.,
10.875%, 7/15/03 ........ 8,770,153
A1 2,000 Pepsico, Inc.,
6.125%, 1/15/98 ......... 2,000,020
A2 7,000 Textron Financal Services,
6.10%, 6/24/98 .......... 7,004,888
Union Oil Co.,
Baa2 7,500 8.40%, 1/15/99 .......... 7,679,550
Baa2 5,000 8.81%, 5/18/98 .......... 5,054,000
Baa2 1,000 8.84%, 5/18/98 .......... 1,010,900
-----------
81,237,903
-----------
CORPORATE BONDS
UTILITIES--11.5%
Baa2 12,500 Commonwealth Edison,
6.00%, 3/15/98 .......... 12,496,996
Baa1 5,000 Duquesne Light Co.,
5.85%, 6/01/98 .......... 4,999,600
Baa1 5,000 GTE Corp.,
8.85%, 3/01/98 .......... 5,022,138
Baa3 2,000 Gulf States Utilities Co.,
7.35%, 11/01/98 ......... 2,019,900
National Rural Utilities,
A1 10,000 5.20%, 1/15/99 .......... 9,943,300
A1 1,000 7.93%, 1/15/99 .......... 1,018,784
A2 5,000 PacifiCorp,
8.95%, 6/30/98 .......... 5,073,400
Baa1 7,000 Philadelphia Electric Co.,
5.375%, 8/15/98 ......... 6,977,810
A2 5,000 Portland General Electric Co.,
5.65%, 5/15/98 .......... 4,971,585
Texas Utilities Electric Co.,
Baa1 6,600 5.50%, 10/01/98 ......... 6,578,550
Baa1 1,400 5.75%, 7/01/98 .......... 1,400,420
Baa1 7,050 5.875%, 4/01/98 ......... 7,049,224
-----------
67,551,707
-----------
CORPORATE BONDS
SOVEREIGN & PROVINCIAL--3.3%
Corporacion Andina De Fomento,
Baa2 $ 8,000 6.625%, 10/14/98 ........ 8,029,113
Hydro Quebec,
A2 3,000 9.30%, 10/28/98 ......... 3,076,222
A2 7,000 9.55%, 1/06/98 .......... 7,002,835
AAA 1,400 International Bank For
Reconstruction &
Development,
8.85%, 2/16/98 .......... 1,404,984
-----------
19,513,154
-----------
Total Corporate Bonds .....345,971,475
-----------
ASSET-BACKED SECURITIES--17.2%
Aa2 5,311 Airplanes Pass-Through Trust
Certificates, Series 1-A5,
Class A-5, 6.33%,
3/15/19 ............... 5,311,159
AAA 27,630 Banc One Credit Card
Master Trust,
Series 1994-C, Class A,
7.80%, 12/15/00 ....... 28,045,548
AAA 14,600 Dayton Hudson Credit
Card Trust,
Series 1995-1, Class A,
6.10%, 2/25/02 ........ 14,620,124
Discover Card Master Trust,
AAA 27,295 Series 1991-D, Class A,
8.00%, 10/16/00 ....... 27,610,189
AAA 18,071 Series 1991-F, Class A,
7.85%, 11/21/00 ....... 18,251,710
AAA 5,000 First Deposit Master Trust,
Series 1993-2, Class A,
5.75%, 6/15/01 .......... 4,995,300
AAA 1,620 Premier Auto Trust,
Series 1994-2, Class A4,
6.00%, 5/02/00 .......... 1,619,572
-----------
100,453,602
-----------
STRIPPED MORTGAGE-BACKED
SECURITIES--0.9%
1,067 Federal Home Loan Mortgage
Corporation,
Series 1700, Class 1700-B,
7/15/23, (P/O) ........ 1,029,273
Federal National Mortgage
Association,
4,288 Trust 1991-121,
Class 121-B,
9/25/98, (P/O) ........ 4,151,390
32 Trust 1992-192,
Class 192-G,
5/25/04, (I/O) ........ 300,916
-----------
5,481,579
-----------
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
PRINCIPAL
RATING* AMOUNT VALUE
(UNAUDITED) (000) DESCRIPTION (NOTE 1)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES--7.2%
United States Treasury Notes,
$ 7,000 5.125%, 12/31/98 ....... $ 6,968,290
10,200 5.625%, 11/30/98 ....... 10,200,000
25,000 5.75%, 12/31/98 ........ 25,035,250
-----------
42,203,540
-----------
TAXABLE MUNICIPAL BONDS--5.2%
AAA 7,800 Alameda County California Pension
Obligation, Series A,
7.25%, 12/01/98 ........ 7,914,582
AAA 6,375 Essex County, Series N, Zero Coupon,
11/15/98 ............... 6,062,561
AAA 1,415 Long Beach California Pension
Obligation,
6.13%, 9/01/98 ......... 1,419,429
New York City, GO,
Baa1 6,000 Series G, 6.10%, 2/01/98 5,999,770
Baa1 2,125 New York State Enviromental
Facilities, Series A,
6.08%, 9/15/98 ......... 2,128,464
A 5,250 Sacramento California Utility District
Electric, Series F,
5.90%, 11/15/98 ........ 5,261,235
AAA 1,540 Western Minnesota Municipal Power
Agency Supply, Series A,
5.88%, 1/01/98 ......... 1,540,000
-----------
30,326,041
-----------
Total long-term investments
(cost $553,785,215) .... 551,582,129
-----------
SHORT-TERM INVESTMENTS--3.9%
CERTIFICATE OF DEPOSIT--2.2%
A3 13,000 MBNA, 6.15%, 6/19/98 ..... 13,000,000
DISCOUNT NOTE--1.7%
10,000 Federal Home Loan Mortgage Corp.,
6.00%, 1/02/98 ........ 9,998,333
-----------
Total short-term investments
(cost $22,998,333) .... 22,998,333
-----------
Total investments--98.3%
(cost $576,783,548) ... 574,580,462
Other assets in excess of
liabilities--1.7% ..... 10,033,481
-----------
NET ASSETS--100% ........ $584,613,943
============
- ----------
* Using the higher of Standard & Poor's or Moody's rating.
- --------------------------------------------------------------------------------
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage.
CMO -- Collateralized Mortgage Obligation.
GO -- General Obligation.
I -- Denotes a CMO with Interest only characteristics.
I/O -- Interest Only.
P/O -- Principal Only.
REMIC -- Real Estate Mortgage Investment Conduit.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $576,783,548)
(Note 1) ................................ $574,580,462
Cash ...................................... 974,642
Interest receivable ....................... 8,562,185
Unrealized appreciation on
interest rate swaps (Notes 1 & 3) ....... 1,012,806
------------
585,130,095
------------
LIABILITIES
Advisory fee payable (Note 2) ............. 198,408
Administration fee payable (Note 2) ....... 39,696
Other accrued expenses .................... 278,048
------------
516,152
------------
NET ASSETS ................................ $584,613,943
============
Net assets were comprised of:
Common stock, at par (Note 5) ........... $ 586,605
Paid-in capital in excess of par ........ 552,328,394
------------
552,914,999
Undistributed net investment income ..... 32,963,566
Accumulated net realized loss ........... (74,342)
Net unrealized depreciation ............. (1,190,280)
------------
Net assets, December 31, 1997 ........... $584,613,943
============
Net asset value per share:
($584,613,943/ 58,660,527 shares of
common stock issued and outstanding) .... $9.97
=====
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest (net of premium amortization of
$3,609,537 and interest expense
of $9,299,453) ........................ $37,309,847
-----------
Operating Expenses
Investment advisory ..................... 2,325,634
Administration .......................... 465,127
Reports to shareholders ................. 330,000
Custodian ............................... 135,000
Directors ............................... 84,000
Audit ................................... 65,000
Transfer agent .......................... 48,000
Legal ................................... 10,000
Miscellaneous ........................... 207,012
-----------
Total operating expenses .............. 3,669,773
-----------
Net investment income ..................... 33,640,074
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3)
Net realized gain (loss)
Investments ............................. (2,018,916)
Futures ................................. 18,336
Short sales ............................. (255,407)
-----------
(2,255,987)
-----------
Net change in unrealized appreciation (depreciation)
Investments ............................. 1,377,787
Interest rate swaps ..................... 362,179
Short sales ............................. 245,919
Futures ................................. (9,482)
-----------
1,976,403
-----------
Net loss on investments ................... (279,584)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................. $33,360,490
===========
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH Cash flows
provided by operating activities:
Interest received ..................... $ 51,710,524
Operating expenses taxes paid ......... (4,504,941)
Interest expense paid ................. (11,297,894)
Proceeds from disposition of short-term
portfolio investments, net .......... 832,949
Purchase of long-term portfolio
investments ......................... (219,105,892)
Proceeds from disposition of long-term
portfolio investments ............... 426,019,748
Variation margin on futures ........... 13,336
Other ................................. (47,549)
--------------
Net cash flows provided by
operating activities ................ 243,620,281
--------------
Cash flows used for financing activities:
Decrease in reverse repurchase
agreements .......................... (213,466,000)
Cash dividends paid ................... (29,332,308)
--------------
Net cash flows used for financing
activities .......................... (242,798,308)
--------------
Net increase in cash .................... 821,973
Cash at beginning of year ............... 152,669
--------------
Cash at end of year .....................$ 974,642
==============
RECONCILIATION OF NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS TO
NET CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES
Net increase in net assets resulting from
operations ............................ $ 33,360,490
--------------
Decrease in investments ................. 216,602,841
Net realized loss ....................... 2,255,987
Decrease in unrealized depreciation ..... (1,976,403)
Decrease in interest receivable ......... 1,491,687
Increase in appreciation of interest
rate swap ............................. (362,179)
Decrease in variation margin receivable . 5,001
Decrease in deposits with broker for
investments sold short ................ 35,875,000
Decrease in other assets ................ 47,546
Decrease in payable for investments
purchased ............................. (5,693,130)
Decrease in interest payable ............ (1,998,441)
Decrease in payable for securities
sold short ............................. (35,152,950)
Decrease in accrued expenses and other
liabilities ........................... (835,168)
--------------
Total adjustments ..................... 210,259,791
--------------
Net cash provided by operating
activities ............................ $ 243,620,281
==============
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
STATEMENT OF CHANGES
IN NET ASSETS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996
------ ------
INCREASE (DECREASE) IN
NET ASSETS
Operations:
Net investment income ............. $ 33,640,074 $32,497,462
Net realized gain (loss)
on investments,
short sales, and futures ........ (2,255,987) 1,382,770
Net change in net
unrealized appreciation
(depreciation) on
investments, short sales,
interest rate swaps and
futures ......................... 1,976,403 (826,919)
----------- ----------
Net increase
in net asset
resulting from operations ....... 33,360,490 33,053,313
Dividends from net
investment income ............... (26,887,924) (29,332,354)
----------- -----------
Total increase .................... 6,472,566 3,720,959
NET ASSETS
Beginning of year ................... 578,141,377 574,420,418
----------- -----------
End of year ......................... $584,613,943 $578,141,377
============ ============
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 9.86 $ 9.79 $ 8.97 $ 9.91 $ 10.22
-------- -------- -------- -------- --------
Net investment income (net of $.16, $.27,
$.29, $.13 and $.14
respectively, of interest expense) .58 .55 .68 .58 .81
Net realized and unrealized gain (loss) on investments,
short sales, interest rate swaps and futures (.01) .02 .67 (.89) (.40)
-------- -------- -------- -------- --------
Net increase (decrease) from investment operations .57 .57 1.35 (.31) .41
-------- -------- -------- -------- --------
Dividends from net investment income (.46) (.50) (.53) (.63) (.72)
-------- -------- -------- -------- --------
Net asset value, end of year* $ 9.97 $ 9.86 $ 9.79 $ 8.97 $ 9.91
======== ======== ======== ======== ========
Market value, end of year* $ 9.75 $ 9.375 $ 8.875 $ 8.00 $ 10.125
======== ======== ======== ======== ========
TOTAL INVESTMENT RETURN+: 9.07% 11.46% 17.73% (15.15%) 10.13%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses @ 0.63% 0.67% 0 .67% 0.81% 0.81%
Net investment income 5.79% 5.65% 7.21% 6.21% 7.95%
SUPPLEMENTAL DATA:
Average net assets (in thousands) $580,776 $574,738 $555,561 $546,853 $600,058
Portfolio turnover 30% 225% 136% 193% 55%
Net assets, end of year (in thousands) $584,614 $578,141 $574,420 $526,373 $581,169
Reverse repurchase agreements outstanding, end of year
(in thousands) $ -- $213,466 $240,871 $175,091 $272,866
Asset coverage++ $ -- $ 3,708 $ 3,385 $ 4,006 $ 3,130
</TABLE>
- ----------
* Net asset value and market value are published in The Wall Street Journal
each Monday.
@ The ratios of operating expenses, including interest expense, to average
net assets were 2.23%, 3.44%, 3.76%, 2.19%, and 2.14% for the years
indicated above, respectively. The ratios of operating expenses, including
interest expense and excise tax, to average net assets were 2.23%, 3.65%,
3.85%, 2.28% and 2.15% for the years indicated above, respectively.
+ Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day and a sale at the current
market price on the last day of each year reported. Dividends and
distributions are assumed, for purposes of this calculation, to be
reinvested at prices obtained under the Trust's dividend reinvestment plan.
This calculation does not reflect brokerage commissions.
++ 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 years 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.
10
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERMTRUST INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The BlackRock 1998 Term Trust Inc. (the "Trust"), a Maryland corporation, is a
diversified closed-end management investment company. The investment objective
of the Trust is to manage a portfolio of investment grade fixed income
securities that will return at least $10 per share (the initial public offering
price per share) to investors on or shortly before December 31, 1998 while
providing high monthly income. The ability of issuers of debt securities held by
the Trust to meet their obligations may be affected by economic developments in
a specific industry or region. No assurance can be given that the Trust's
investment objective will be achieved.
The following is a summary of significant accounting policies followed by the
Trust.
SECURITIES VALUATION: The Trust values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Trust's Board of Directors. In determining the
value of a particular security, pricing services may use certain information
with respect to transactions in such securities, quotations from dealers, market
transactions in comparable securities, various relationships between securities
observed in the market and calculated yield measures based on valuation
technology commonly employed in the market for such securities. Exchange-traded
options are valued at their last sales price as of the close of options trading
on the applicable exchanges. In the absence of a last sale, options are valued
at the average of the quoted bid and asked prices as of the close of business. A
futures contract is valued at the last sale price as of the close of the
commodities exchange on which it trades unless the Trust's Board of Directors
determines that such price does not reflect its fair value, in which case it
will be valued at its fair value as determined by the Trust's Board of
Directors. Any securities or other assets for which such current market
quotations are not readily available are valued at fair value as determined in
good faith under procedures established by and under the general supervision and
responsibility of the Trust's Board of Directors.
Short-term securities which mature in 60 days or less are valued at amortized
cost, if their term to maturity from date of purchase is 60 days or less.
Short-term securities with a term to maturity greater than 60 days from the date
of purchase are valued at current market quotations until maturity.
In connection with transactions in repurchase agreements, the Trust's
custodian takes possession of the underlying collateral securities, the value of
which at least equals the principal amount of the repurchase transaction,
including accrued interest. To the extent that any repurchase transaction
exceeds one business day, the value of the collateral is marked-to-market on a
daily basis to ensure the adequacy of the collateral. If the seller defaults and
the value of the collateral declines or if bankruptcy proceedings commence with
respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
OPTION SELLING/PURCHASING: When the Trust sells or purchases an option, an
amount equal to the premium received or paid by the Trust is recorded as a
liability or an asset and is subsequently adjusted to the current market value
of the option written or purchased. Premiums received or paid from writing or
purchasing options which expire unexercised are treated by the Trust on the
expiration date as realized gains or losses. The difference between the premium
and the amount paid or received on effecting a closing purchase or sale
transaction, including brokerage commissions, is also treated as a realized gain
or loss. If an option is exercised, the premium paid or received is added to the
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 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,
11
<PAGE>
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. Futures contracts can be sold to effectively shorten an
otherwise longer duration portfolio. In the same sense, futures contracts can be
purchased to lengthen a portfolio that is shorter than its duration target.
Thus, by buying or selling futures contracts, the Trust can effectively "hedge"
more volatile positions so that changes in interest rates do not change the
duration of the portfolio unexpectedly.
The Trust may invest in financial futures contracts primarily for the purpose
of hedging its existing portfolio securities or securities the Trust intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Trust may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets. The Trust is also at risk of not being able to
enter into a closing transaction for the futures contract because of an illiquid
secondary market. In addition, since futures are used to shorten or lengthen a
portfolio's duration, there is a risk that the portfolio may have temporarily
performed better without the hedge or that the Trust may lose the opportunity to
realize appreciation in the market price of the underlying positions.
SHORT SALES: The Trust may make short sales of securities as a method of hedging
potential price declines in similar securities owned. When the Trust makes a
short sale, it may borrow the security sold short and deliver it to the
broker/dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Trust may
have to pay a fee to borrow the particular securities and may be obligated to
pay over any payments received on such borrowed securities. A gain, limited to
the price at which the Trust sold the security short, or a loss, unlimited as to
dollar amount will be recognized upon the termination of a short sale if the
market price is less or greater than the proceeds originally received.
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.
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 "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 mortgage swap. However, the Trust does not anticipate
non-performance by any counterparty.
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 changes in short term rates. Owning interest rate
caps reduces the portfolio's duration, making it less sensitive to changes in
interest rates from a market value perspective. The effect on income involves
protection from rising short term rates, which the Trust experiences primarily
in the form of leverage.
12
<PAGE>
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 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. 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.
DIVIDENDS AND DISTRIBUTIONS: The Trust declares and pays dividends and
distributions monthly, 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.
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 Investments Fund
Management LLC, ("PIFM") an indirect wholly-owned subsidiary of The Prudential
Insurance Co. of America.
The investment advisory fee paid to the Adviser is computed weekly and
payable monthly at an annual rate of 0.40% of the Trust's average weekly net
assets. The administration fee paid to PIFM is also computed weekly and payable
monthly at an annual rate of 0.10% of the Trust's average weekly net assets from
January 1, 1995 to December 31, 1996 and 0.08% of the Trust's weekly net assets.
Pursuant to the agreements, the Adviser provides continuous supervision of
the investment portfolio and pays the compensation of officers of the Trust who
are affiliated persons of the Adviser. PIFM pays occupancy and certain clerical
and accounting costs of the Trust. The Trust bears all other costs and expenses.
NOTE 3. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments,
and dollar rolls for the year ended December 31, 1997 aggregated $213,412,762
and $433,718,506 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, 1997, 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,
1997 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized depreciation for federal income tax purposes was
$2,203,086 (gross unrealized appreciation-$2,308,207; gross unrealized
depreciation-$4,511,293).
13
<PAGE>
For federal income tax purposes, the Trust has a capital loss carryforward
at December 31, 1997 of approximately $3,784,874 which will expire at the
termination of the Trust. Accordingly, no capital gains distribution is expected
to be paid to shareholders until net gains have been realized in excess of such
amounts.
The Trust entered into interest rate swaps with original notional amounts as
stated below. Under these agreements, the Trust receives a fixed rate and pays a
floating rate. Details of open interest rate swaps at December 31, 1997 are as
follows:
NOTIONAL
AMOUNT FIXED TERMINATION UNREALIZED
(000) TYPE RATE FLOATING RATE DATE APPRECIATION
-------------------------------------------------------------------------
$16,000 Interest Rate 7.27% 3-mo. LIBOR Dec. '98 $ 95,808
44,000 Interest Rate 7.25% 3-mo. LIBOR Dec. '98 254,751
23,000 Interest Rate 7.00% 3-mo. LIBOR Dec. '98 156,037
16,000 Interest Rate 7.00% 3-mo. LIBOR Dec. '98 136,464
32,000 Interest Rate 6.99% 3-mo. LIBOR Dec. '98 213,856
10,000 Interest Rate 6.99% 3-mo. LIBOR Dec. '98 80,820
10,000 Interest Rate 6.975% 3-mo. LIBOR Dec. '98 75,070
----------
$1,012,806
==========
NOTE 4. BORROWINGS
REVERSE REPURCHASE AGREEMENTS: The Trust may enter into reverse repurchase
agreements with qualified, third party broker-dealers as determined by and under
the direction of the Trust's Board of Directors. Interest on the value of
reverse repurchase agreements issued and outstanding will be based upon
competitive market rates at the time of issuance. At the time the Trust enters
into a reverse repurchase agreement, it will establish and maintain a segregated
account with the lender, the value of which at least equals the principal amount
of the reverse repurchase transaction, including accrued interest.
The average daily balance of reverse repurchase agreements outstanding during
the year ended December 31, 1997 was approximately $165,638,441 at a weighted
average interest rate of approximately 5.63%. The maximum amount of reverse
repurchase agreements outstanding at any month-end during the year ended
December 31, 1997 was $236,482,875 on March 31, 1997 which was 30.12% 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 did not enter into dollar rolls during the
year ended December 31, 1997.
NOTE 5. CAPITAL
There are 200 million shares of $.01 par value common stock authorized. Of the
58,660,527 shares outstanding at December 31, 1997, the Adviser owned 10,527
shares.
On August 19, 1996 the Trust transferred a substantial portion of its total
assets to a 100% owned regulated investment company subsidiary called
BBTSubsidiary, Inc. These financial statements include the operations of both
the Trust and its wholly-owned subsidiary, after elimination of all intercompany
transactions and balances. The subsidiary was liquidated onDecember 12, 1997 and
100% of the subsidiary's assets were transferred back into the Trust.
NOTE 6. DIVIDENDS
Subsequent to December 31, 1997, the Board of Directors of the Trust declared a
dividend from undistributed earnings of $.039583 per share payable January 30,
1998 to shareholders of record on January 14, 1998.
14
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
The BlackRock 1998 Term Trust Inc.:
We have audited the accompanying statement of assets and liabilities of The
BlackRock 1998 Term Trust Inc. and its portfolio of investments, as of December
31, 1997, and the related statements of operations and of cash flows for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1997, by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The BlackRock 1998
Term Trust Inc. as of December 31, 1997, the results of their operations, their
cash flows, the changes in their net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
- ------------------------
DELOITTE & TOUCHE LLP
New York, New York
February 13, 1998
15
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
TAX INFORMATION
- --------------------------------------------------------------------------------
We wish to advise you as to the federal tax status of dividends and
distributions paid by the Trust during the fiscal year ended December 31, 1997.
During the fiscal year ended December 31, 1997, the Trust paid dividends
of $0.45837 per share from net investment income. For federal income tax
purposes, the aggregate of any dividends and short-term capital gains
distributions you received are reportable in your 1997 federal income tax
returns as ordinary income. Further, we wish to advise you that your income
dividends do not qualify for the dividends received deduction.
For the purpose of preparing your 1997 annual federal income tax return,
however, you should report the amounts as reflected on the appropriate Form 1099
DIV which was mailed to you in January 1998.
- --------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------------
Pursuant to the Trust's Dividend Reinvestment Plan (the "Plan"),
shareholders may elect to have all distributions of dividends and capital gains
automatically reinvested by State Street Bank & Trust Company (the "Plan Agent")
in Trust shares pursuant to the Plan. Shareholders who do not participate in the
Plan will receive all distributions in cash paid by check in United States
dollars mailed directly to the shareholders of record (or if the shares are held
in street or other nominee name, then to the nominee) by the transfer agent as
dividend disbursing agent.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Trust declares a dividend or determines to make a capital gain
distribution, the Plan Agent will, as agent for the participants, receive the
cash payment and use it to buy Trust shares in the open market, on the New York
Stock Exchange or elsewhere, for the participants' accounts. The Trust will not
issue shares under the Plan.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent and will receive certificates for whole Trust shares and a cash
payment will be made for any fraction of a Trust share.
The Plan Agent's fees for the handling of the reinvestment of dividends
and distributions will be paid by the Trust. However, each participant will pay
a pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income taxes that
may be payable on such dividend or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to written notice of the
change sent to all shareholders of the Trust at least 90 days before the record
date for the dividend or distribution. The Plan also may be amended or
terminated by the Plan Agent upon at least 90 days' written notice to all
shareholders of the Trust. All correspondence concerning the Plan should be
directed to the Plan Agent at (800) 699-1BFM. The addresses are on the front of
this report.
- --------------------------------------------------------------------------------
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.
16
<PAGE>
- --------------------------------------------------------------------------------
THE BLACKROCK 1998 TERM TRUST INC.
INVESTMENT SUMMARY
- --------------------------------------------------------------------------------
THE TRUST'S INVESTMENT OBJECTIVE
The Trust's investment objective is to manage a portfolio of invesment grade
fixed income securities that will return $10 per share (the initial public
offering price per share) to investors on or shortly before December 31, 1998
while providing high monthly income.
WHO MANAGES THE TRUST?
BlackRock Financial Management, Inc. ("BlackRock") is the investment advisor for
the Trust. BlackRock is a registered investment advisor specializing in fixed
income securities. Currently, BlackRock manages approximately $55 billion of
assets across the government, mortgage, corporate and municipal sectors. These
assets are managed on behalf of institutional and individual investors in 21
closed-end funds traded either on the New York Stock Exchange or American Stock
Exchange, several open-end funds and separate accounts for more than 125 clients
in the U.S. and overseas. BlackRock is a subsidiary of PNC Asset Management
Group, Inc. which is a division of PNC Bank, one of the nation's largest banking
organizations.
WHAT CAN THE TRUST INVEST IN?
The Trust may invest in all fixed income securities rated investment grade or
higher ("AAA", "AA", "A" or "BBB"). Examples of securities in which the Trust
may invest include U.S. government and government agency securities, zero coupon
securities, mortgage-backed securities, corporate debt securities, asset-backed
securities, U.S. dollar-denominated foreign debt securities and municipal
securities. Under current market conditions, BlackRock expects that the primary
investments of the Trust will be U.S. government securities, securities backed
by government agencies (such as mortgage-backed securities) and corporate debt
securities.
WHAT IS THE ADVISER'S INVESTMENT STRATEGY?
The Adviser will seek to meet the Trust's investment objective by managing the
assets of the Trust so as to return the initial offering price ($10 per share)
at maturity. The Trust will implement a conservative strategy that will seek to
closely match the maturity of the assets of the portfolio with the future return
of the initial investment at the end of 1998. At the Trust's termination,
BlackRock expects that the value of the securities which have matured, combined
with the value of the securities that are sold, will be sufficient to return the
initial offering price to investors. On a continuous basis, the Trust will seek
its objective by actively managing its assets in relation to market conditions,
interest rate changes and, importantly, the remaining term to maturity of the
Trust.
In addition to seeking the return of the initial offering price, the Advisor
also seeks to provide high monthly income to investors. The portfolio managers
will attempt to achieve this objective by investing in securities that provide
competitive income. In addition, leverage will be used (in an amount up to
331/3% of total assets) to enhance the income of the portfolio. In order to
maintain competitive yields as the Trust approaches maturity and depending on
market conditions, the Adviser will attempt to purchase securities with call
protection or maturities as close to the Trust's maturity date as possible.
Securities with call protection should provide the portfolio with some degree of
protection against reinvestment risk during times of lower prevailing interest
rates. Since the Trust's primary goal is to return the initial offering price at
maturity, any cash that the Trust receives prior to its maturity date (i.e. cash
from early and regularly scheduled payments of principal on mortgage-backed
securities) will be reinvested in securities with maturities which coincide with
the remaining term of the Trust. Since shorter-term securities typically yield
less than longer-term securities, this strategy will likely result in a decline
in the Trust's income over time. However, the Adviser will attempt to maintain a
yield which is competitive with a comparable maturity Treasury at the same point
on the yield curve (i.e. if the Trust has three years left until its maturity,
the Adviser will attempt to maintain a yield at a spread over a 3-year
Treasury). It is important to note that the Trust will be managed so as to
preserve the integrity of the return of the initial offering price.
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<PAGE>
HOW ARE THE TRUST'S SHARES PURCHASED AND SOLD? DOES THE TRUST PAY DIVIDENDS
REGULARLY?
The Trust's shares are traded on the New York Stock Exchange which provides
investors with liquidity on a daily basis. Orders to buy or sell shares of the
Trust must be placed through a registered broker or financial advisor. The Trust
pays monthly dividends which are typically paid on the last business day of the
month. For shares held in the shareholder's name, dividends may be reinvested in
additional shares of the fund through the Trust's transfer agent, State Street
Bank &Trust Company. Investors who wish to hold shares in a brokerage account
should check with their financial advisor to determine whether their brokerage
firm offers dividend reinvestment services.
LEVERAGE CONSIDERATIONS IN A TERM TRUST
Under current market conditions, leverage increases the income earned by the
Trust. The Trust employs leverage primarily through the use of reverse
repurchase agreements and dollar rolls. Leverage permits the Trust to borrow
money at short-term rates and reinvest that money in longer-term assets which
typically offer higher interest rates. The difference between the cost of the
borrowed funds and the income earned on the proceeds that are invested in longer
term assets is the benefit to the Trust from leverage. In general, the portfolio
is typically leveraged at approximately 331/3% of total assets.
Leverage also increases the duration (or price volatility of the net assets) of
the Trust,which can improve the performance of the fund in a declining rate
environment, but can cause net assets to decline faster than the market in a
rising rate environment. BlackRock's portfolio managers continuously monitor and
regularly review the Trust's use of leverage and the Trust may reduce, or
unwind, the amount of leverage employed should BlackRock consider that reduction
to be in the best interests of the shareholders.
SPECIAL CONSIDERATIONS AND RISK FACTORS RELEVANT TO TERM TRUSTS
The Trust is intended to be a long-term investment and is not a short-term
trading vehicle.
RETURN OF INITIAL INVESTMENT. Although the objective of the Trust is to return
its initial offering price upon termination, there can be no assurance that this
objective will be achieved.
DIVIDEND CONSIDERATIONS. The income and dividends paid by the Trust are likely
to decline to some extent over the term of the Trust due to the anticipated
shortening of the dollar-weighted average maturity of the Trust's assets.
LEVERAGE. The Trust utilizes leverage through reverse repurchase agreements and
dollar rolls, which involves special risks. The Trust's net asset value and
market value may be more volatile due to its use of leverage.
MARKET PRICE OF SHARES. The shares of closed-end investment companies such as
the Trust trade on the New York Stock Exchange (NYSE symbol: BBT) and as such
are subject to supply and demand influences. As a result, shares may trade at a
discount or a premium to their net asset value.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The cash flow and yield
characteristics of these securities differ from traditional debt securities. The
major differences typically include more frequent payments and the possibility
of prepayments which will change the yield to maturity of the security.
CORPORATE DEBT SECURITIES. The value of corporate debt securities generally
varies inversely with changes in prevailing market interest rates. The Trust may
be subject to certain reinvestment risks in environments of declining interest
rates.
ZERO COUPON SECURITIES. Such securities receive no cash flows prior to maturity,
therefore, interim price movement on the securities are generally more sensitive
to interest rate movements than securities that make periodic coupon payments.
These securities appreciate in value over time and can play an important role in
helping the Trust achieve its primary objective.
ILLIQUID SECURITIES. The Trust may invest in securities that are illiquid,
although under current market conditions the Trust expects to do so to only a
limited extent. These securities involve special risks.
NON-U.S SECURITIES. The Trust may invest less than 10% of its total assets in
non-U.S. dollar-denominated securities which involve special risks such as
currency, political and economic risks, although under current market conditions
does not do so.
ANTITAKEOVER PROVISIONS. Certain antitakeover provisions will make a change in
the Trust's business or management more difficult without the approval of the
Trust's Board of Directors and may have the effect of depriving shareholders of
an opportunity to sell their shares at a premium above the prevailing market
price.
18
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THE BLACKROCK 1998 TERM TRUST INC.
GLOSSARY
- --------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES (ARMS):
Mortgage instruments with interest rates that adjust at periodic intervals at a
fixed amount relative to the market levels of interest rates as reflected in
specified indexes. ARMs are backed by mortgage loans secured by real property.
ASSET-BACKED SECURITIES:
Securities backed by various types of receivables such as automobile and credit
card receivables.
CLOSED-END FUND:
Investment vehicle which initially offers a fixed number of shares and trades on
a stock exchange. The fund invests in a portfolio of securities in accordance
with its stated investment objectives and policies. One of the advantages of a
closed-end fund is the diversification it provides through its multiple
holdings.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS):
Mortgage-backed securities which separate mortgage pools into short-, medium-,
and long-term securities with different priorities for receipt of principal and
interest. Each class is paid a fixed or floating rate of interest at regular
intervals. Also known as multiple-class mortgage pass-throughs.
DISCOUNT:
When a fund's net asset value is greater than its stock price the fund is said
to be trading at a discount.
DIVIDEND:
This is income generated by securities in a portfolio and distributed to
shareholders after the deduction of expenses. This Trust declares and pays
dividends on a monthly basis.
DIVIDEND REINVESTMENT:
Shareholders may elect to have all dividends and distributions of capital gains
automatically reinvested into additional shares of the Trust.
FHA:
Federal Housing Administration, a government agency that facilitates a secondary
mortgage market by providing an agency that guarantees timely payment of
interest and principal on mortgages.
FHLMC:
Federal Home Loan Mortgage Corporation, a publicly owned, federally chartered
corporation that facilitates a secondary mortgage market by purchasing mortgages
from lenders such as savings institutions and reselling them to investors by
means of mortgage-backed securities. Obligations of FHLMC are not guaranteed by
the U.S. government, however; they are backed by FHLMC's authority to borrow
from the U.S. government. Also known as Freddie Mac.
FNMA:
Federal National Mortgage Association, a publicly owned, federally chartered
corporation that facilitates a secondary mortgage market by purchasing mortgages
from lenders such as savings institutions and reselling them to investors by
means of mortgage-backed securities. Obligations of FNMA are not guaranteed by
the U.S. government, however; they are backed by FNMA's authority to borrow from
the U.S. government. Also known as Fannie Mae.
GNMA:
Government National Mortgage Association, a U.S. government agency that
facilitates a secondary mortgage market by providing an agency that guarantees
timely payment of interest and principal on mortgages. GNMA's obligations are
supported by the full faith and credit of the U.S. Treasury. Also known as
Ginnie Mae.
GOVERNMENT SECURITIES:
Securities issued or guaranteed by the U.S. government, or one of its agencies
or instrumentalities, such as GNMA (Government National Mortgage Association),
FNMA (Federal National Mortgage Association) and FHLMC (Federal Home Loan
Mortgage Corporation).
INVERSE-FLOATING RATE MORTGAGES:
Mortgage instruments with coupons that adjust at periodic intervals according to
a formula which sets inversely with a market level interest rate index.
19
<PAGE>
INTEREST-ONLY SECURITIES (I/O):
Mortgage securities that receive only the interest cash flows from an underlying
pool of mortgage loans or underlying pass-through securities. Also known as
STRIP.
MARKET PRICE:
Price per share of a security trading in the secondary market. For a closed-end
fund, this is the price at which one share of the fund trades on the stock
exchange. If you were to buy or sell shares, you would pay or receive the market
price.
MORTGAGE DOLLAR ROLLS:
A mortgage dollar roll is a transaction in which the Trust sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (although not the same) securities on a
specified future date. During the "roll" period, the Trust does not receive
principal and interest payments on the securities, but is compensated for giving
up these payments by the difference in the current sales price (for which the
security is sold) and lower price that the Trust pays for the similar security
at the end date aswell as the interest earned on the cash proceeds of the
initial sale.
MORTGAGE PASS-THROUGHS:
Mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae.
MULTIPLE-CLASS PASS-THROUGHS:
Collateralized Mortgage Obligations.
NET ASSET VALUE (NAV):
Net asset value is the total market value of all securities and other assets
held by the Trust, plus income accrued on its investments, minus any liabilities
including accrued expenses, divided by the total number of outstanding shares.
It is the underlying value of a single share on a given day. Net asset value for
the Trust is calculated weekly and published in Barron's on Saturday and The
Wall Street Journal each Monday.
PRINCIPAL-ONLY SECURITIES (P/O):
Mortgage securities that receive only the principal cash flows from an
underlying pool of mortgage loans or underlying pass-through securities. Also
known as STRIP.
PROJECT LOANS:
Mortgages for multi-family, low- to middle-income housing.
PREMIUM:
When a fund's stock price is greater than its net asset value, the fund is said
to be trading at a premium.
REMIC:
A real estate mortgage investment conduit is a multiple-class security backed by
mortgage-backed securities or whole mortgage loans and formed as a trust,
corporation, partnership, or segregated pool of assets that elects to be treated
as a REMIC for federal tax purposes. Generally, Fannie Mae REMICs are formed as
trusts and are backed by mortgage-backed securities.
RESIDUALS:
Securities issued in connection with collateralized mortgage obligations that
generally represent the excess cash flow from the mortgage assets underlying the
CMO after payment of principal and interest on the other CMO securities and
related administrative expenses.
REVERSE REPURCHASE AGREEMENTS:
In a reverse repurchase agreement, the Trust sells securities and agrees to
repurchase them at a mutually agreed date and price. During this time, the Trust
continues to receive the principal and interest payments from that security. At
the end of the term, the Trust receives the same securities that were sold for
the same initial dollar amount plus interest on the cash proceeds of the initial
sale.
STRIPPED MORTGAGE BACKED SECURITIES:
Arrangements in which a pool of assets is separated into two classes that
receive different proportions of the interest and principal distributions from
underlying mortgage-backed securities. IO's and PO's are examples of strips.
20
<PAGE>
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BLACKROCK FINANCIAL MANAGEMENT, INC.
SUMMARY OF CLOSED-END FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TAXABLE TRUSTS
- --------------------------------------------------------------------------------------------------------------------
STOCK MATURITY
PERPETUAL TRUSTS SYMBOL DATE
------ ------
<S> <C> <C>
The BlackRock Income Trust Inc. ........................................................... BKT N/A
The BlackRock North American Government Income Trust Inc. ................................. BNA N/A
TERM TRUSTS
The BlackRock 1998 Term Trust Inc. ........................................................ BBT 12/98
The BlackRock 1999 Term Trust Inc. ........................................................ BNN 12/99
The BlackRock Target Term Trust Inc. ...................................................... BTT 12/00
The BlackRock 2001 Term Trust Inc. ........................................................ BLK 06/01
The BlackRock Strategic Term Trust Inc. ................................................... BGT 12/02
The BlackRock Investment Quality Term Trust Inc. .......................................... BQT 12/04
The BlackRock Advantage Term Trust Inc. ................................................... BAT 12/05
The BlackRock Broad Investment Grade 2009 Term Trust Inc. ................................. BCT 12/09
TAX-EXEMPT TRUSTS
- --------------------------------------------------------------------------------------------------------------------
STOCK MATURITY
PERPETUAL TRUSTS SYMBOL DATE
------ ------
The BlackRock Investment Quality Municipal Trust Inc. ..................................... BKN N/A
The BlackRock California Investment Quality Municipal Trust Inc. .......................... RAA N/A
The BlackRock Florida Investment Quality Municipal Trust .................................. RFA N/A
The BlackRock New Jersey Investment Quality Municipal Trust Inc. .......................... RNJ N/A
The BlackRock New York Investment Quality Municipal Trust Inc. ............................ RNY N/A
TERM TRUSTS
The BlackRock Municipal Target Term Trust Inc. ............................................ BMN 12/06
The BlackRock Insured Municipal 2008 Term Trust Inc. ...................................... BRM 12/08
The BlackRock California Insured Municipal 2008 Term Trust Inc. ........................... BFC 12/08
The BlackRock Florida Insured Municipal 2008 Term Trust ................................... BRF 12/08
The BlackRock New York Insured Municipal 2008 Term Trust Inc. ............................. BLN 12/08
The BlackRock Insured Municipal Term Trust Inc. ........................................... BMT 12/10
</TABLE>
If you would like further information please call BlackRock at (800)
227-7BFM (7236) or consult with your financial advisor.
21
<PAGE>
- --------------------------------------------------------------------------------
BLACKROCKFINANCIAL MANAGMENT, INC.
AN OVERVIEW
- --------------------------------------------------------------------------------
BlackRock Financial Management Inc. (BlackRock) is a registered investment
adviser which specializes in managing high quality fixed income securities, both
taxable and tax exempt. BlackRock currently manages approximately $55 billion of
assets across the government, mortgage, corporate and municipal sectors. These
assets are managed on behalf of institutional and individual investors in 21
closed-end funds traded either on the New York Stock Exchange or the American
Stock Exchange, several open-end funds and over 125 institutional clients in the
United States and overseas.
BlackRock was formed in April 1988 by fixed income professionals who
sought to create an asset management firm specializing in managing fixed income
securities for individuals and institutional investors. The professionals at
BlackRock have extensive experience creating, analyzing and trading a variety of
fixed income instruments, including the most complex structured securities. In
fact, individuals at BlackRock are responsible for many of the major innovations
in the mortgage-backed and asset-backed securities market, including the
creation of the CMO, the floating rate CMO, the senior/subordinated pass-through
and the multi-class asset-backed security.
BlackRock is unique among asset management and advisory firms in the
significant emphasis it places on the development of propriety analytical
capabilities. A quarter of the professionals at BlackRock work full-time in the
design, maintenance and use of such systems which are otherwise not generally
available to investors. BlackRock's propriety analytical tools are used for
evaluating, investing in and designing investment strategies and portfolio of
fixed income securities, including mortgage securities, corporate debt
securities or tax-exempt securities and a variety of hedging instruments.
BlackRock has developed investment products which respond to investors'
needs and has been responsible for several major innovations in closed-end
funds. BlackRock introduced the first closed-end mortgage fund, the first
taxable and tax-exempt closed-end funds to offer a finite term, the first
closed-end fund to achieve a AAAf rating by Standard & Poor's, and the first
closed-end fund to invest primarily in North American Government securities.
BlackRock's closed-end funds currently have dividend reinvestment plans which
are designed to provide an ongoing source of demand for the stock in the
secondary market. BlackRock manages a ladder of alternative investment vehicles,
with each fund having specific investment objectives and policies.
In view of our continued desire to provide a high level of service to all
our shareholders, BlackRock maintains a toll-free number for your questions. The
number is (800) 227-7BFM (7236). We encourage you to call us with any questions
you may have about your BlackRock funds and thank you for the continued trust
you place in our abilities.
22
<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
Scott Amero, Vice President
Keith T. Anderson, Vice President
Michael C. Huebsch, Vice President
Robert S. Kapito, Vice President
Richard M. Shea, Vice President/Tax
Henry Gabbay, Treasurer
James Kong, Assistant Treasurer
Karen H. Sabath, Secretary
INVESTMENT ADVISER
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
(800) 227-7BFM
ADMINISTRATOR
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 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.
THE BLACKROCK 1998 TERM TRUST INC.
c/o Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 10702-4077
(800) 227-7BFM
[LOGO] Printed on recycled paper 09247N-10-3
The BLACKROCK
1998 Term
Trust Inc.
==============
Annual Report
December 31, 1997