As filed with the Securities and Exchange Commission on January 13, 2000
Registration No.__
================================================================================
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[_]Pre-Effective Amendment No. ___ [_]Post-Effective Amendment No. ___
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter:
BLACKROCK FUNDS(SM)
Area Code and Telephone Number:
(800) 441-7762
Address of Principal Executive Offices:
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Name and Address of Agent for Service:
BRIAN P. KINDELAN, ESQ.
BlackRock Advisors, Inc.
1600 Market Street, 28/th/ Floor
Philadelphia, PA 19103
Copies to:
MICHAEL P. MALLOY, ESQ. CYNTHIA G. COBDEN, ESQ.
Drinker Biddle & Reath LLP Simpson Thacher & Bartlett
One Logan Square 425 Lexington Avenue
18/th/ and Cherry Streets New York, NY 10017-3954
Philadelphia, PA 19103-6996
Approximate Date of Proposed Public Offering: As soon as practicable after
the Registration Statement becomes effective under the Securities Act of
1933.
It is proposed that this filing will become effective on February 12, 2000
pursuant to Rule 488 under the Securities Act of 1933.
Calculation of Registration Fee under the Securities Act of 1933: No filing
fee is required because an indefinite number of shares have previously been
registered on Form N-1A (Registration No. 33-26305/811-5742) pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended. The
Registrant's Form 24f-2 for the fiscal year ended September 30, 1999 was
filed on December 8, 1999. Pursuant to Rule 429, this Registration
Statement relates to the aforesaid Registration Statement on Form N-1A.
BLACKROCK FUNDS(SM)
FORM N-14
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a)
Item No. Heading
- ------- -------
Part A
- ------
1. Beginning of Registration Statement
and Outside Front Cover Page
of Prospectus............................ Cover Page
2. Beginning and Outside
Back Cover Page of Prospectus............ Table of Contents
3. Synopsis and Risk Factors................ Summary; Risk Factors
4. Information About the Transaction........ Summary; Information Relating
to the Proposed Reorganization;
5. Information About the Registrant......... Summary;Information Relating
to the Proposed Reorganization;
Comparison of Investment Policies
and Risk Factors; Additional
Information About BlackRock
6. Information About the Company
Being Acquired........................... Summary; Information Relating
to the Proposed Reorganization;
Comparison of Investment
Policies and Risk Factors;
Additional Information About ISIS
7. Voting Information....................... Summary; Information Relating to
Voting Matters
8. Interest of Certain Persons
and Experts.............................. Information Relating to Voting
Matters
9. Additional Information Required
for Reoffering by Persons Deemed
to be Underwriters....................... Inapplicable
Part B
- ------
10. Cover Page............................... Statement of Additional
Information Cover Page
11. Table of Contents........................ Table of Contents
12. Additional Information
About the Registrant.................... Statement of Additional
Information of the Series B
Investor Shares of the High
Yield Bond Portfolio of
BlackRock Funds dated
January 28, 1999*
13. Additional Information
About the Company Being
Acquired................................ Inapplicable
14. Financial Statements..................... Financial Statements; Pro Forma
Financial Statements
Part C
- ------
Items 15-17. Information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C of this Registration Statement.
* Incorporated herein by reference thereto.
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
One Aldwyn Center
Villanova, Pennsylvania 19085
February __, 2000
Dear Shareholder:
A special meeting of the shareholders of Independence Square Income
Securities, Inc. (the "Fund") has been called for March __, 2000 at _____
a.m./p.m., Eastern time. Formal notice of the meeting appears on the next page,
followed by materials regarding the meeting.
Shareholders will be asked at the special meeting to consider and vote upon
the proposed reorganization of the Fund into the High Yield Bond Portfolio of
BlackRock Funds(SM) and related matters. Please see the enclosed Combined
Prospectus/Proxy Statement for detailed information regarding the proposed
reorganization and a comparison of the funds.
THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT YOU VOTE "FOR" THE
PROPOSED REORGANIZATION.
A proxy card is enclosed for your use in the shareholder meeting. This
card represents shares you held as of the record date, February __, 2000. IT IS
IMPORTANT THAT YOU COMPLETE, SIGN, AND RETURN YOUR PROXY CARD IN THE ENVELOPE
PROVIDED AS SOON AS POSSIBLE. This will ensure that your shares will be
represented at the Special Shareholders Meeting to be held on March __, 2000.
Sincerely,
Robert R. Fortune
Chairman of the Board and
President
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on March __, 2000
To the Shareholders of
Independence Square Income Securities, Inc.:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders
("Shareholders") of Independence Square Income Securities, Inc. ("ISIS") will be
held at the offices of BlackRock Institutional Management Corporation, Bellevue
Park Corporate Center, 400 Bellevue Parkway, Fourth Floor Conference Room,
Wilmington, Delaware 19809, on March __, 2000 at __:__ a.m./p.m. (Eastern time)
for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement and
Plan of Reorganization (the "Reorganization Agreement") by and
between ISIS and BlackRock Funds(SM) ("BlackRock") and the
transactions contemplated thereby, including (a) the transfer of
all of the assets and liabilities of ISIS to BlackRock's High
Yield Bond Portfolio (the "High Yield Bond Portfolio") in
exchange for Series B Investor Shares of the High Yield Bond
Portfolio; (b) the distribution of such Series B Investor Shares
to the Shareholders of ISIS in connection with its liquidation;
(c) the amendment to ISIS' by-laws and fundamental investment
limitation to provide that ISIS may purchase securities of
another investment company in connection with a merger,
consolidation, reorganization, sale or purchase of assets
approved by stockholders, or as otherwise permitted by the
Investment Company Act of 1940, as amended; and (d) the
dissolution under state law and the de-registration under the
Investment Company Act of 1940, as amended, of ISIS.
ITEM 2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
YOUR DIRECTORS RECOMMEND THAT YOU VOTE IN FAVOR OF ITEM 1.
The proposed reorganization and related matters are described in the
attached Combined Prospectus/Proxy Statement. Attached as Appendix A to the
Combined Prospectus/Proxy Statement is a copy of the Reorganization Agreement.
Shareholders of record as of the close of business on February __, 2000 are
entitled to notice of, and to vote at, the Special Meeting or any adjournment(s)
thereof.
SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY ISIS' BOARD OF
DIRECTORS. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE SPECIAL MEETING.
PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY SUBMITTING TO
ISIS A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY EXECUTED PROXY OR BY
ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
Gary M. Gardner
Secretary
February __, 2000
COMBINED PROSPECTUS/PROXY STATEMENT
Dated February __, 2000
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(610) 964-8882
BLACKROCK FUNDS(SM)
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(800) 441-7762
This Combined Prospectus/Proxy Statement is furnished in connection with
the solicitation of proxies by the Board of Directors of Independence Square
Income Securities, Inc. ("ISIS") in connection with a Special Meeting (the
"Meeting") of Shareholders ("Shareholders") to be held on March __, 2000 at
__:__ a.m./p.m. (Eastern time) at the offices of BlackRock Institutional
Management Corporation, Bellevue Park Corporate Center, 400 Bellevue Parkway,
Fourth Floor Conference Room, Wilmington, Delaware 19809, at which Shareholders
will be asked to consider and approve a proposed Agreement and Plan of
Reorganization dated December __, 1999 (the "Reorganization Agreement"), by and
between ISIS and BlackRock Funds(SM) ("BlackRock"), and the matters contemplated
therein (the "Reorganization"). A copy of the Reorganization Agreement is
attached as Appendix A.
ISIS is registered as a closed-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). BlackRock is
registered as an open-end management investment company under the 1940 Act.
BlackRock Institutional Management Corporation ("BIMC") currently serves as
investment adviser to ISIS. BlackRock Advisors, Inc. ("BlackRock Advisors")
currently serves as investment adviser for BlackRock and BlackRock Financial
Management, Inc. ("BFM") currently serves as sub-adviser for BlackRock with
respect to its High Yield Bond Portfolio (the "High Yield Bond Portfolio").
BIMC, BlackRock Advisors and BFM are each majority-owned, indirect subsidiaries
of PNC Bank, N.A. ("PNC Bank"). In reviewing the proposed Reorganization, the
Board of Directors of ISIS considered among other things: the reasons for the
Reorganization; the terms of the Reorganization; the opportunity to combine ISIS
and the High Yield Bond Portfolio to create a single, larger consolidated asset
base; the investment objectives and policies of each of the Funds; BlackRock's
service providers; the recommendations of BIMC and BlackRock Advisors with
respect to the Reorganization; the effect of the Reorganization on ISIS; the
fact that the Reorganization would constitute a tax-free reorganization; and the
fact that the interests of Shareholders would not be diluted as a result of the
Reorganization.
The Reorganization Agreement provides that ISIS will transfer all of its
assets and liabilities to the High Yield Bond Portfolio. In exchange for the
transfer of these assets and liabilities, BlackRock will issue Series B Investor
Shares of the High Yield Bond Portfolio to ISIS. The transaction is expected to
occur on March ___, 2000, or as soon thereafter as is practicable.
ISIS offers one class of shares. The High Yield Bond Portfolio offers six
classes of shares. One class of shares offered by the High Yield Bond
Portfolio, Series B Investor Shares, is the class of shares which Shareholders
of ISIS will receive in the Reorganization, as further described in "Information
Relating to the Proposed Reorganization -- Description of the Reorganization
Agreement."
ISIS will make a liquidating distribution of Series B Investor Shares to
the Shareholders of ISIS, so that a holder of shares in ISIS will receive Series
B Investor Shares of the High Yield Bond Portfolio with the same aggregate net
asset value as the ISIS shares held by the Shareholder immediately before the
transaction. Following the Reorganization, Shareholders of ISIS will be
shareholders of the High Yield Bond Portfolio, and ISIS will be dissolved under
state law and de-registered under the 1940 Act.
The High Yield Bond Portfolio is currently conducting investment operations
as described in this Combined Prospectus/Proxy Statement.
This Combined Prospectus/Proxy Statement sets forth the information that a
Shareholder of ISIS should know before voting on the Reorganization Agreement
(and related transactions), and should be retained for future reference. The
Prospectus relating to Series B Investor Shares of the High Yield Bond
Portfolio, which describes the High Yield Bond Portfolio,
2
accompanies this Combined Prospectus/Proxy Statement and is incorporated herein
by reference. Additional information is set forth in the Statements of
Additional Information relating to the Series B Investor Shares of the High
Yield Bond Portfolio and this Combined Prospectus/Proxy Statement, which are
dated January 28, 1999 and February __, 2000, respectively, each of which is
incorporated herein by reference. Each of these documents is on file with the
Securities and Exchange Commission (the "SEC"), and is available without charge
upon oral or written request by writing or calling either ISIS or BlackRock at
the respective addresses or telephone numbers indicated above.
This Combined Prospectus/Proxy Statement constitutes the Proxy Statement of
ISIS for the meeting of its Shareholders, and BlackRock's Prospectus for Series
B Investor Shares of the High Yield Bond Portfolio that have been registered
with the SEC and are to be issued in connection with the Reorganization.
This Combined Prospectus/Proxy Statement is expected to first be sent to
Shareholders on or about February __, 2000.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS COMBINED PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROSPECTUS/PROXY
STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ISIS OR BLACKROCK.
SHARES OF THE HIGH YIELD BOND PORTFOLIO ARE SUBJECT TO INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL, ARE NOT BANK DEPOSITS AND ARE NOT
ENDORSED BY, INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED BY
THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, PNC BANK, N.A. OR ANY OF ITS AFFILIATES OR ANY OTHER GOVERNMENTAL
AGENCY OR BANK.
3
TABLE OF CONTENTS
Page
----
SUMMARY..........................................................................................
Proposed Reorganization.....................................................................
Reasons for the Reorganization..............................................................
Federal Income Tax Consequences.............................................................
Overview of ISIS and the High Yield Bond Portfolio..........................................
Certain Arrangements with Service Providers - ISIS..........................................
Certain Arrangements with Service Providers - The High Yield Bond Portfolio.................
Comparative Fee and Expense Tables..........................................................
Expense Ratio - ISIS........................................................................
Expense Ratio - Series B Investor Shares of the High Yield Bond Portfolio...................
Organization................................................................................
Purchase, Redemption and Exchange Procedures................................................
Dividends, Distributions and Pricing........................................................
Voting Information..........................................................................
RISK FACTORS.....................................................................................
INFORMATION RELATING TO THE PROPOSED REORGANIZATION..............................................
Description of the Reorganization Agreement.................................................
Board Considerations........................................................................
Federal Income Tax Consequences.............................................................
Capitalization..............................................................................
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS...............................................
General.....................................................................................
Investment Limitations......................................................................
Other Information...........................................................................
INFORMATION RELATING TO VOTING MATTERS...........................................................
General Information.........................................................................
Shareholder and Board Approvals.............................................................
Appraisal Rights............................................................................
Quorum......................................................................................
Annual Meetings.............................................................................
ADDITIONAL INFORMATION ABOUT BLACKROCK...........................................................
ADDITIONAL INFORMATION ABOUT ISIS................................................................
FINANCIAL STATEMENTS AND EXPERTS.................................................................
OTHER BUSINESS...................................................................................
LITIGATION.......................................................................................
SHAREHOLDER INQUIRIES............................................................................
Appendix A--Agreement and Plan of Reorganization................................................. A-1
Appendix B--Management's Discussion of Fund Performance.......................................... B-1
Appendix C--Share Price Data for ISIS............................................................ C-1
Appendix D---Sections 3-202 through 3-213 of the Maryland General Corporation Law................ D-1
4
SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the transactions contemplated thereby,
and is qualified by reference to the more complete information contained
elsewhere in this Combined Prospectus/Proxy Statement, the Prospectus and
Statement of Additional Information of the Series B Investor Shares of the High
Yield Bond Portfolio, and the Reorganization Agreement attached to this Combined
Prospectus/Proxy Statement as Appendix A. ISIS' Semi-Annual Report to
Shareholders and its Annual Report to Shareholders may be obtained free of
charge by calling 1-800-852-4750 or writing c/o Bellevue Park Corporate Center,
400 Bellevue Parkway, Wilmington, DE 19809. The High Yield Bond Portfolio's
Annual Report to Shareholders may be obtained free of charge by calling 1-800-
441-7762 or writing Bellevue Park Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809.
Proposed Reorganization. Based upon their evaluation of the relevant
information presented to them, and in light of their fiduciary duties under
federal and state law, the Board of Directors of ISIS and the Board of Trustees
of BlackRock, including a majority of their members who are not "interested
persons" within the meaning of the 1940 Act, have determined that the proposed
Reorganization is in the best interests of their Fund's respective shareholders
and that the interests of such shareholders will not be diluted as a result of
such Reorganization.
Reasons for the Reorganization. When ISIS was organized in 1971, a closed-
end structure was chosen as most appropriate for ISIS' method of operation
because it was believed that such a structure, among other things, would permit
management of its portfolio consistent with its investment objective and
policies without the pressures and constraints to which open-end investment
companies are subject as a result of cash inflows and redemptions. However, as a
result of the relatively modest size of ISIS' assets (approximately $31.3
million as of September 30, 1999), changes in the securities markets, and
changes to the way mutual funds account for certain securities, it has become
increasingly difficult for ISIS to maintain its competitive level of dividends
to Shareholders. BIMC and BlackRock Advisors have recommended that ISIS be
reorganized into the High Yield Bond Portfolio as described in this Combined
Prospectus/Proxy Statement. In light of this recommendation, after consideration
of the reasons therefor and the proposed operations of the High
5
Yield Bond Portfolio after the Reorganization, and in consideration of the fact
that the Reorganization will be tax-free and will not dilute the interests of
Shareholders, the Board of Directors of ISIS has authorized the Reorganization
Agreement and recommended approval of the Reorganization by Shareholders.
Federal Income Tax Consequences. Drinker Biddle & Reath LLP, counsel to
ISIS and to its Board of Directors, will issue an opinion (based on certain
assumptions) as of the effective time of the Reorganization that the transaction
will not give rise to the recognition of income, gain or loss for federal income
tax purposes to ISIS, the High Yield Bond Portfolio or their respective
shareholders. See "Information Relating to the Proposed Reorganization -
Federal Income Tax Consequences."
Overview of ISIS and the High Yield Bond Portfolio. The investment
objective of ISIS is to seek as high a level of current income as is consistent
with prudent investment. The High Yield Bond Portfolio's investment objective is
to seek to provide current income by investing primarily in non-investment grade
bonds. Each pursues its investment objective by investing primarily in debt
securities. However, there are differences in each Fund's investment policies.
For example, ISIS must invest at least 60% of its assets in: (1) marketable
straight debt securities which are rated at the time of purchase within the four
highest grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A or Baa),
Standard & Poor's Ratings Group, Division of McGraw Hill (AAA, AA, A or BBB) or
Fitch IBCA, Inc. (AAA, AA, A or BBB); (2) securities of, or guaranteed by, the
United States government, its agencies or instrumentalities; (3) securities
(payable in U.S. dollars) of, or guaranteed by, the government of Canada or of a
Province of Canada under circumstances that would not subject the Fund to
payment of U.S. Interest Equalization Tax; (4) commercial paper of companies
having, at the time of purchase, an issue of outstanding debt securities rated
as described in (1) above; and (5) cash or cash equivalents. ISIS may invest up
to 40% of its assets in non-investment grade debt securities (i.e., rated lower
than Baa by Moody's Investor Services, Inc. or rated lower than BBB by Standard
& Poor's Ratings Group and Fitch-IBCA, Inc.). At least 25% of ISIS' assets must
be invested in the securities of utility companies.
As stated in its objective, the High Yield Bond Portfolio invests primarily
in non-investment grade bonds. The High Yield Bond Portfolio normally invests
at least 80% of its total assets
6
in bonds or convertible securities and at least 65% of its total assets in non-
investment grade bonds. Non-investment grade bonds are commonly referred to as
"junk bonds." The High Yield Bond Portfolio is not permitted to invest 25% or
more of its assets in the utility industry or any one industry. See "Comparison
of Investment Policies and Risk Factors" below and the High Yield Bond
Portfolio's Prospectus, which is incorporated by reference herein, for a more
detailed description of the investment objectives and policies of ISIS and the
High Yield Bond Portfolio.
Certain Arrangements with Service Providers -- ISIS. BIMC serves as the
investment adviser for ISIS. BIMC is an indirect, majority-owned subsidiary of
PNC Bank. Until June 18, 1998, PNC Bank served as sub-adviser to ISIS. On June
18, 1998, BIMC assumed PNC Bank's obligations as described below.
For investment advisory services rendered to ISIS, BIMC is entitled to
receive a quarterly fee of .05% (annually .20%) of ISIS' average net assets and
.50% (annually 2.00%) of ISIS' gross income for such quarter. For the fiscal
year ended December 31, 1998, BIMC received investment advisory fees of
$119,712, which represents .36% of ISIS' average net assets during this period.
Pursuant to the terms of ISIS' investment advisory agreement, and subject
to the general supervision of the Board of Directors, BIMC is responsible for,
makes decisions with respect to, and places orders for, all purchases and sales
of ISIS' portfolio securities, and maintaining records relating to such
purchases and sales. Pursuant to the investment advisory agreement, BIMC also
serves as administrative agent for ISIS. BIMC maintains ISIS' financial
accounts and records, prepares various returns and reports, and performs all
other functions necessary to maintain its corporate existence and its relations
with Shareholders, all at the request and subject to the supervision of ISIS'
Board of Directors. These services are performed without additional cost to
ISIS.
Until June 18, 1998, PNC Bank, as sub-adviser to ISIS, provided investment
research and credit analysis concerning prospective and existing fund
investments, made recommendations with respect to ISIS' continuous investment
program, recommended to BIMC the portion of ISIS' assets to be invested or held
uninvested in cash or cash equivalents, supplied BIMC computer facilities and
operating personnel, and provided certain statistical services. BIMC has assumed
PNC Bank's
7
responsibilities under the sub-advisory agreement; BIMC's obligation to pay a
fee to PNC Bank has been terminated; and the obligation of PNC Bank to provide
facilities, personnel, services and to pay related expenses under the sub-
advisory agreement were transferred to BIMC.
Wilmington Trust Company ("WTC") serves as ISIS' custodian and automatic
dividend investment plan agent. PFPC Inc. ("PFPC") serves as ISIS' transfer
agent, registrar and dividend disbursing agent. Prior to December 31, 1998, PNC
Bank served as ISIS' transfer agent, registrar and dividend disbursing agent. On
December 31, 1998, PNC Bank assigned its rights and delegated its duties as
transfer agent, registrar and dividend disbursing agent to PFPC. PFPC is an
indirect, wholly-owned subsidiary of PNC Bank. For its services as transfer
agent, PFPC is entitled to a fee payable at the rate of $0.4166 per month for
each Shareholder account existing during such month, plus out-of-pocket
expenses.
Certain Arrangements with Service Providers -- the High Yield Bond
Portfolio. BlackRock Advisors serves as the investment adviser and BFM serves
as the sub-adviser for the High Yield Bond Portfolio. BlackRock Advisors and
BFM are each indirect, majority-owned subsidiaries of PNC Bank.
For its investment advisory services, BlackRock Advisors is entitled to
fees computed daily and payable monthly at the maximum annual rate of .50% of
the first $1 billion of average daily net assets, .45% of the next $1 billion of
average daily not assets, .425% of the next $1 billion of average daily net
assets, and .40% of average daily net assets over $3 billion. Out of these
fees, BlackRock Advisors pays BFM a sub-advisory fee equal to .35% of the first
$1 billion of average daily net assets, .30% of the next $1 billion of average
daily net assets, .275% of the next $1 billion of average daily net assets, and
.25% of average daily net assets over $3 billion. BlackRock Advisors has
entered into an expense limitation agreement with BlackRock which requires
BlackRock Advisors to waive or reimburse fees and expenses if operating expenses
(which apply to expenses charged on Fund assets as a whole, but not expenses
separately charged to the Series B Investor Shares) exceed .525% of average
daily net assets. This expense limitation agreement continues until January 28,
2001. However, the High Yield Bond Portfolio may be required to repay such
waived or reimbursed fees and expenses in the following two years if the
repayments can be made within the expense limit noted above. For the fiscal
year ended September 30, 1999, BlackRock Advisors received fees of $3,325, which
represents .01% of the High Yield Bond Portfolio's average daily net assets
during the period.
Pursuant to the terms of the investment advisory agreement with BlackRock,
BlackRock Advisors is responsible for the
8
overall investment management of the High Yield Bond Portfolio. BFM is
responsible for the High Yield Bond Portfolio's day-to-day management and
generally makes all buy and sell decisions. BFM also provides research and
credit analysis.
BlackRock Advisors and PFPC serve as co-administrators to BlackRock. Under
the Administration Agreement, PFPC has agreed to: (i) maintain office facilities
for BlackRock; (ii)furnish BlackRock with statistical and research data,
clerical, accounting and bookkeeping services; (iii) provide and supervise the
operation of an automated data processing system to process purchase and
redemption orders; (iv) provide information and distribute written
communications to shareholders; (v) handle shareholder problems and calls; (vi)
research issues raised by financial intermediaries relating to investments in
shares of any fund offered by BlackRock; (vii) review and provide advice with
respect to communications for shares of any fund offered by BlackRock; (viii)
monitor the investor programs that are offered in connection with shares of
funds offered by BlackRock; (ix) provide oversight and related support services
that are intended to ensure the delivery of quality services to the holders of
shares of funds offered by BlackRock; and (x) provide certain other services
required by BlackRock. Under the Administration Agreement, BlackRock Advisors is
responsible for: (i) the supervision and coordination of BlackRock's service
providers; (ii) the negotiation of service contracts and arrangements between
BlackRock and its service providers; (iii) acting as a liaison between the
trustees of BlackRock and BlackRock's service providers; and (iv) providing
ongoing business management and support services in connection with BlackRock's
operations. Pursuant to the terms of the Administration Agreement, BlackRock
Advisors has delegated certain of its duties to BlackRock Distributors Inc.
("BDI"), the distributor for BlackRock.
For their services as co-administrators, BlackRock Advisors and PFPC are
entitled to receive fees computed daily and payable monthly at an aggregate
annual rate of (i) .085% of the first $500 million of the High Yield Bond
Portfolio's average daily net assets, .075% of the next $500 million of average
daily net assets and .065% of the High Yield Bond Portfolio's average daily net
assets in excess of $1 billion; and (ii) .145% of the first $500 million of
average daily net assets allocated to the Series B Investor Shares of the High
Yield Bond Portfolio, .135% of the next $500 million of such average daily net
assets and
9
.125% of the average daily net assets of Series B Investor Shares of the High
Yield Bond Portfolio in excess of $1 billion.
PFPC also serves as the transfer agent and dividend disbursing agent for
BlackRock. For its services in this capacity, PFPC is entitled to receive per
account fees, with minimum annual fees of $24,000, plus disbursements, with
respect to the Series B Investor Shares. Until further notice, transfer agency
fees for Series B Investor Shares of the High Yield Bond Portfolio will not
exceed the annual rate of .10% of the Series B Investor Shares' average daily
net assets.
PFPC Trust Company serves as the custodian to BlackRock. Prior to January
1, 1999, PNC Bank served as custodian to BlackRock. On January 1, 1999, PNC
Bank assigned its rights and delegated its duties as custodian to PFPC Trust
Company. PFPC Trust Company is an indirect, wholly-owned subsidiary of PNC
Bank. For its services as custodian, PFPC Trust Company is entitled to receive
fees at the rate of .015% of the first $500 million of average daily gross
assets for Series B Investor Shares of the High Yield Bond Portfolio and .01% of
the average daily gross assets in excess of $500 million. PFPC Trust Company is
also entitled to out-of-pocket expenses and certain transaction charges.
BDI serves as the distributor for BlackRock.
BlackRock has adopted a distribution and service plan pursuant to Rule 12b-
1 under the 1940 Act which covers its Series B Investor Shares (the "BlackRock
12b-1 Plan"). Under the BlackRock 12b-1 Plan, Series B Investor Shares of the
High Yield Bond Portfolio bear the expense of distribution and service fees
payable to BDI, BlackRock Advisors or any other affiliate of PNC Bank at an
annual rate of 1.15% of the average daily net assets attributable to such Series
B Investor Shares. Of this amount, .75% represents distribution fees payable
under the BlackRock 12b-1 Plan to BDI for distribution and Sales Support
Services and affiliates of PNC Bank for sales support services provided in
connection with the sale of Series B Investor Shares. This distribution fee may
also be used by BDI and affiliates of PNC Bank to pay brokers, dealers,
financial institutions and industry professionals (collectively, "Service
Organizations") for sales support services and other related expenses. The
remaining .40% represents shareholder service and shareholder processing fees.
The service fee is .25% of average daily net assets and is paid to Service
Organizations for the provision of general shareholder liaison services. The
10
shareholder processing fee is .15% of average daily net assets and is paid to
Service Organizations for providing additional services to their clients who own
Series B Investor Shares. Such additional services are intended to supplement
the services provided to shareholders by the co-administrators or transfer
agent. BlackRock Advisors determines the amount of shareholder service and
shareholder processing fees paid to Service Organizations. BlackRock Advisors
or any other affiliate of PNC Bank may serve as a Service Organization and
receive fees under the BlackRock 12b-1 Plan.
The BlackRock 12b-1 Plan is a "compensation" plan as opposed to a
"reimbursement" plan. Accordingly, payments under the BlackRock 12b-1 Plan are
based on a stated fee rather than on the specific amounts expended by BDI,
BlackRock Advisors and BlackRock Advisors' affiliates for distribution and
shareholder services. BDI, BlackRock Advisors and BlackRock Advisors'
affiliates may be able to recover such amounts or may earn a profit from
payments made by Series B Investor Shares of the High Yield Bond Portfolio under
the BlackRock 12b-1 Plan.
Comparative Fee and Expense Tables. The table below shows (i) information
regarding the fees and expenses paid by ISIS during its most recent fiscal year,
(ii) information regarding the fees and expenses paid by the High Yield Bond
Portfolio's Series B Investor Shares during its most recent fiscal year, and
(iii) estimated fees and expenses on a pro forma basis giving effect to the
proposed Reorganization. The table indicates that total operating expenses for
current ISIS Shareholders are going to significantly increase as a result of the
Reorganization.
11
------------------------------------------------------------------
The High Yield
Bond Portfolio --
Series B Pro Forma
ISIS Investor Shares Combined
---- ------------------ ---------
SHAREHOLDER TRANSACTION EXPENSES
(fees paid directly from your None None None
investment)
Maximum Sales Load Imposed on
Purchases (as a percentage
of offering price)
Maximum Sales Load Imposed on None None None
Reinvested Dividends (as a
percentage of offering
price)
Contingent Deferred Sales None 4.50%/(1)/ 3.00%/(2)/
Charge (as a percentage of
original purchase price or
redemption proceeds, as
applicable)
Redemption Fee (as a None None None
percentage of amount
redeemed, if applicable)
Exchange Fee None None None
------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from
Fund assets)
(as a percentage of average
net assets)
Management Fees 0.36%/(3)/ 0.50% 0.50%
Distribution and Service
(12b-1) Fees 0.00% 1.15% 1.15%
Interest Expenses 0.00% 0.39% 0.39%
Other Expenses 0.40% 0.90%/(4)/ 0.90%/(4)/
---- ---- ----
Total Annual Fund Operating
Expenses 0.76% 2.94% 2.94%
Fee Waivers and Expense
Reimbursement 0.00% 0.63%/(5)/ 0.63%/(5)/
Net Expenses 0.76% 2.31%/(5)/ 2.31%/(5)/
==== ==== ====
-----------------------------------------------------------------
_____________________________
(1) The Contingent Deferred Sales Charge ("CDSC") is 4.50% if shares are
redeemed in less than one year. The CDSC for Series B Investor Shares
decreases for redemptions made in subsequent years. After six years there
is no CDSC on Series B Investor Shares.
(2) Shareholders of ISIS will be given credit for a three year holding period
for purposes of calculating the CDSC. See "Purchase, Redemption and
Exchange Procedures."
(3) ISIS pays BIMC a quarterly fee of .05% (annually .20%) of its average net
assets and .50% (annually 2.00%) of the Fund's gross income for such
quarter.
(4) "Other Expenses" are based on estimated amounts for the current fiscal
year.
(5) BlackRock Advisors has contractually agreed to waive or reimburse fees or
expenses in order to limit Fund expenses to 1.92% (excluding interest
expense) of average daily net assets until January 28, 2001. The High Yield
Bond Portfolio may have to repay some of these waivers and reimbursements
to BlackRock Advisors in the following two years.
12
Example: This Example assumes that you invest $10,000 in the Funds for the time
periods indicated. The Example also assumes that your investment has a 5% return
each year and that each Fund's operating expenses remain the same. Although
actual costs may be higher or lower, based upon these assumptions your costs
would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
ISIS $ 78 $ 243 $ 422 $ 942
The High Yield Bond Portfolio --
Series B Investor Shares
Redemption of shares at the end
of the period/(1)/ $684 $1,300 $1,792 $2,991/(3)/
No redemption of shares at the
end of the period $234 $ 850 $1,492 $2,991/(3)/
Pro Forma Combined
Redemption of shares at the end
of the period/(2)/ $534 $ 950 $1,422/(4)/ $2,795/(4)/
No redemption of shares at the
end of the period $234 $ 850 $1,422/(4)/ $2,795/(4)/
_____________________________
(1) Reflects the deduction of the CDSC of 4.50% after the first year, 3.00%
after the third year and 1.00% after the fifth year.
(2) Reflects the deduction of the CDSC of 3.00% after the first year and 1.00%
after the third year.
(3) Based on the conversion of the Series B Investor Shares to Series A
Investor Shares after seven years.
(4) Based on the conversion of the Series B Investor Shares to Series A
Investor Shares on the fourth anniversary of the Reorganization.
13
Expense Ratio -- ISIS. The ratio of operating expenses to average net
assets of ISIS for the fiscal year ended December 31, 1998 was 0.76%.
Expense Ratio -- Series B Investor Shares of The High Yield Bond Portfolio.
The ratio of operating expenses to average net assets of Series B Investor
Shares of the High Yield Bond Portfolio for the fiscal period ended
September 30, 1999 was 1.92% (excluding interest expense), after waivers by
BlackRock Advisors.
Organization. ISIS is organized as a Maryland corporation and BlackRock is
organized as a Massachusetts business trust.
Purchase, Redemption and Exchange Procedures. ISIS' shares currently trade
on The NASDAQ Small Cap Market/(SM)/ ("NASDAQ") and may only be purchased or
sold through a broker or dealer at the current market price plus a brokerage
commission. ISIS' shares have frequently traded at a discount from its net asset
value. After the Reorganization, ISIS will no longer trade on the NASDAQ. If the
Reorganization is approved by the Shareholders, any premium or discount existing
on the date of such approval might be reduced prior to the date of the
Reorganization to the extent purchasers of ISIS' shares in the open market are
willing to pay less of a premium or accept less of a discount in anticipation of
the Reorganization. There is no exchange privilege for shares of ISIS.
Additional information concerning the trading of ISIS' shares on the NASDAQ is
contained in Appendix C.
Series B Investor Shares of the High Yield Bond Portfolio are offered to
the public on a continuous basis at net asset value per share. There is no sales
charge when you purchase Series B Investor Shares. Shareholders do pay a
contingent deferred sales charge ("CDSC") when they redeem shares. The CDSC
declines over six years from a high of 4.50% of the net assets redeemed. The
CDSC is not charged under certain circumstances, including share exchanges and
redemptions made in connection with certain retirement plans and in connection
with certain shareholder services offered by BlackRock. After seven years, the
Series B Investor Shares automatically convert to Series A Investor Shares,
which have lower fees and no CDSC, as described more fully below.
Series B Investor Shares may be redeemed through a shareholder's registered
investment professional, who may charge for this service, or by sending a
written redemption request to BlackRock Funds, c/o PFPC, P.O. Box 8907,
Wilmington, DE 19899-
14
8907. BlackRock will redeem shares at the next net asset value calculated after
the redemption request is received by PFPC minus any applicable CDSC.
In connection with the Reorganization, Shareholders of ISIS will receive
three years of holding period credit for purposes of calculating the CDSC and
conversion to Series A Investor Shares with respect to the Series B Investor
Shares received in the Reorganization. Accordingly, shareholders redeeming
within one year of the Reorganization would be subjected to a 3.00% CDSC. After
one year, the CDSC would decrease to 2.00%, and after two years the CDSC would
decrease to 1.00%. There would be no CDSC after three years, and the Series B
Investor Shares would automatically convert to Series A Investor Shares on the
fourth anniversary of the Reorganization without any CDSC being charged. The
conversion will take place at net asset value and, as a result, a shareholder
will receive dollar-for-dollar the same value of Series A Investor Shares as the
shareholder had of Series B Investor Shares.
Because of this conversion feature, certain disclosures are necessary about
Series A Investor Shares. Series A Investor Shares and Series B Investor Shares
are both invested in the same portfolio of securities. These two classes differ
in the fees and expenses charged to shareholders. Series A Investor Shares have
no CDSC, but are subject to a front-end sales charge of 5.00%, which is subject
to reduction for certain large purchases. No front-end sales charge will be
charged on the conversion from Series B Investor Shares to Series A Investor
Shares. In addition, the distribution and service fees charged to Series A
Investor Shares are lower than those charged to Series B Investor Shares. Series
A Investor Shares bear distribution and service fees at an annual rate of .50%
of the average daily net assets of such shares. Of this amount, .10% represents
distribution fees payable under the BlackRock 12b-1 Plan. The remaining .40%
represents shareholder service and shareholder processing fees identical to
those paid on Series B Investor Shares.
After the Reorganization, shareholders may exchange their shares received
in the Reorganization for other Series B Investor Shares of funds offered by
BlackRock.
15
Dividends, Distributions and Pricing. Shareholders of ISIS and the High
Yield Bond Portfolio are entitled to dividends and distributions declared from
the net investment income and net realized gains, if any, earned on investments
in each Fund's investment portfolio. ISIS and the High Yield Bond Portfolio each
distributes its net investment income monthly and distributes its net realized
capital gains, if any, at least annually.
Dividends and distributions are paid to Shareholders of ISIS in cash unless
they have elected to participate in the Automatic Dividend Investment Plan (the
"DRIP"). Pursuant to the DRIP, the reinvestment of dividends and distributions
in additional shares of ISIS are made at the lower of net asset value or market
value (but not less than 95% of market value). Dividends and distributions of
the High Yield Bond Portfolio are automatically reinvested in additional shares
at net asset value unless PFPC, the Fund's transfer agent, is instructed in
writing to pay such dividends and distributions in cash.
The net asset value per share of ISIS is determined once a week, on the
last business day of the week, and on the last business day of the month. The
net asset value per share of the High Yield Bond Portfolio is determined each
day that the New York Stock Exchange is open, at 4:00 p.m. Eastern time.
Voting Information. This Combined Prospectus/Proxy Statement is being
furnished in connection with the solicitation of proxies by ISIS' Board of
Directors for use at the Meeting. Only Shareholders of record at the close of
business on February _____, 2000 will be entitled to vote at the Meeting or any
adjournment thereof. Shares represented by a properly executed proxy will be
voted in accordance with the instructions thereon or if no specification is
made, the persons named as proxies will vote in favor of the proposal set forth
in the Notice of Meeting. Proxies may be revoked at any time before they are
exercised by the subsequent execution and submission of a revised proxy, by
written notice of revocation to ISIS, or by voting in person at the Meeting.
RISK FACTORS
The following discussion highlights the principal risk factors associated
with an investment in ISIS and the High Yield Bond Portfolio and is qualified in
its entirety by the more extensive discussion of risk factors set forth below
under
16
"Comparison of Investment Policies and Risk Factors" and in the Prospectus and
Statement of Additional Information of the High Yield Bond Portfolio, which are
incorporated herein by reference.
Each Fund seeks to achieve its investment objective through investments in
debt securities. The investment adviser for each Fund attempts to choose debt
securities that may provide above average current income, however, there is no
guarantee that shares of each Fund will not lose value. The market value of
securities held by the Funds is expected to vary according to, among other
factors, changes in prevailing interest rates. The variation tends to be greater
for portfolios with longer average weighted maturities. In general, if interest
rates increase from the time a fixed income security is purchased, the market
value of that security will decline. Similarly, if interest rates decrease from
the time a fixed income security is purchased, the market value of that security
is likely to increase. Each Fund is also subject to call risk, credit risk and
event risk. Call risk is the possibility that during periods of falling interest
rates, certain debt securities with high interest rates may be pre-paid (or
"called") by the issuers prior to maturity. This may cause a Fund's average
weighted maturity to fluctuate, and may require a Fund to invest the resulting
proceeds at lower interest rates. Credit risk refers to the possibility that the
issuer of the bond will not be able to make principal and interest payments.
Event risk is the possibility that securities may suffer declines in credit
quality and market value due to issuer restructuring or other factors.
Each Fund's ability to invest in debt securities rated below investment
grade (i.e., rated lower than Baa by Moody's Investor Services, Inc. or rated
lower than BBB by Standard & Poor's Ratings Group and Fitch-IBCA, Inc.) also
involves risk. Lower-rated securities will usually offer higher yields than
investment grade securities. However, there is more risk associated with these
investments because of reduced creditworthiness and increased risk of default.
In addition, the market values of certain lower-rated debt securities tend to
reflect specific developments with respect to the issuer to a greater extent
then do higher rated securities, which react primarily to fluctuations in the
general level of interest rates, and tend to be more sensitive to economic
conditions than higher rated securities. Issuers of lower-rated debt securities
often are highly leveraged and may not have available to them more traditional
methods of financing.
17
Securities rated below BBB or Baa by a rating agency are characterized by
the rating agencies as predominantly speculative; the future of the issuers
cannot be considered as well assured, and often the protection of interest and
principal payments may be very moderate and may face major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payments.
Factors adversely affecting the market price and yield of lower-rated
securities, will adversely affect a Fund's net asset value. In addition, the
retail secondary market for these securities may be less liquid than that for
higher rated securities; adverse conditions could make it difficult at times for
a Fund to sell certain securities or could result in lower prices than those
used in calculating its net asset value.
Like other investment companies, financial and business organizations and
individuals around the world, the Funds could be adversely affected if the
computer systems used by BIMC, BlackRock Advisors and the Funds' other service
providers, and by persons with whom they have transactions, do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." BIMC and BlackRock
Advisors are taking steps to solve the Year 2000 Problem with respect to the
computer systems that they use before January 1, 2000 and are working with the
Funds' other major service providers to determine their systems' ability to
handle Year 2000 problems. At this time, however, there can be no assurance that
these steps will be sufficient to avoid any adverse impact on a Fund as a result
of the Year 2000 Problem. Year 2000 problems may also hurt issuers whose
securities the Funds hold or security markets in general
There is no assurance that either Fund will achieve its investment
objective.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Reorganization Agreement. Significant provisions of the
Reorganization Agreement are summarized below; however, this summary is
qualified in its entirety by reference to the Reorganization Agreement, a copy
of which is attached as Appendix A to this Combined Prospectus/Proxy Statement
and which is incorporated herein by reference.
18
Description of the Reorganization Agreement. The Reorganization Agreement
provides that at the Effective Time of the Reorganization (as defined in Article
VIII of the Reorganization Agreement), the assets and liabilities of ISIS will
be transferred to and assumed by the High Yield Bond Portfolio. In exchange for
the transfer of the assets of, and the assumption of the liabilities of ISIS,
BlackRock will issue at the Effective Time of the Reorganization full and
fractional Series B Investor Shares of the High Yield Bond Portfolio equal in
aggregate dollar value to the aggregate net assest value of full and fractional
outstanding shares of ISIS as determined at the valuation time specified in the
Reorganization Agreement. The Reorganization Agreement provides that ISIS will
declare a dividend or dividends prior to the Effective Time of the
Reorganization which, together with all previous dividends, will have the effect
of distributing to the Shareholders of ISIS all undistributed net investment
income earned and net capital gains realized up to and including the Effective
Time of the Reorganization.
Following the transfer of assets to, and the assumption of the liabilities
of ISIS by, the High Yield Bond Portfolio, ISIS will distribute the Series B
Investor Shares of the High Yield Bond Portfolio received from BlackRock to the
Shareholders of ISIS in liquidation of ISIS. Each Shareholder of ISIS at the
Effective Time of the Reorganization will receive an amount of Series B Investor
Shares with a total net asset value equal to the net asset value of their shares
of common stock of ISIS, plus the right to receive any dividends or
distributions which were declared before the Effective Time of the
Reorganization but that remained unpaid at that time with respect to the shares
of ISIS. Following the Reorganization, the registration of ISIS as an investment
company under the 1940 Act will be terminated, and ISIS will be dissolved under
state law.
Approval of the Reorganization Agreement shall constitute the approval of a
change in ISIS' by-laws and its fundamental limitations which may be deemed to
prevent ISIS from taking the actions necessary to effectuate the Reorganization.
The change is:
Current Proposed
------- --------
The Fund may not purchase This limitation/by-law would be
securities of other investment restated as follows:
companies except by purchase of
19
Current Proposed
------- --------
securities of closed-end The Fund may not acquire any
companies in the open market other investment company or
involving only customary investment company security
broker's commissions or except in connection with a
acquisition of such securities merger, consolidation,
as part of a merger, reorganization, sale or acquisition
consolidation, reorganization of assets or where otherwise
or purchase of assets approved permitted by the Investment
by the Fund's shareholders, if Company Act of 1940.
required by law.
After the Reorganization all of the issued and outstanding shares of ISIS
shall be cancelled on the books of ISIS and the stock transfer books of ISIS
will be permanently closed.
The Reorganization is subject to a number of conditions, including without
limitation approval of the Reorganization Agreement and the transactions
contemplated thereby described in this Combined Prospectus/Proxy Statement by
the Shareholders of ISIS; the receipt of certain legal opinions described in the
Reorganization Agreement (which include an opinion of Ropes & Gray that the
shares of the High Yield Bond Portfolio issued to Shareholders of ISIS in
accordance with the terms of the Reorganization Agreement will be validly
issued, fully paid and non-assessable); the receipt of certain certificates from
the parties concerning the continuing accuracy of the representations and
warranties in the Reorganization Agreement and other matters; and the parties'
performance in all material respects of their respective agreements and
undertakings in the Reorganization Agreement. Assuming satisfaction of the
conditions in the Reorganization Agreement, the Effective Time of the
Reorganization will be on March _______, 2000 or such other date as is agreed to
by the parties, provided, however, that unless an officer of BlackRock and ISIS
determine otherwise, the Effective Time of the Reorganization shall not occur
until the period has run for any objecting Shareholder of ISIS to make a written
demand for payment for his or her stock pursuant to the Maryland General
Corporation Law, as described more fully below under "Information Relating to
Voting Matters - Appraisal Rights."
The expenses of ISIS and BlackRock in connection with the Reorganization
will be borne by BIMC.
20
The Reorganization Agreement and the Reorganization described herein may be
abandoned at any time prior to the Effective Time of the Reorganization by the
mutual consent of the parties to the Reorganization Agreement. The
Reorganization Agreement provides further that at any time prior to or (to the
fullest extent permitted by law) after approval of the Reorganization Agreement
by the Shareholders of ISIS (a) the parties thereto may, by written agreement
authorized by their respective Boards or executive officers, and with or without
the approval of their respective shareholders, amend any of the provisions of
the Reorganization Agreement and (b) any party may waive any breach by the other
party or the failure to satisfy any of the conditions to its obligations (such
waiver to be in writing and authorized by an officer of the waiving party with
or without the approval of such party's shareholders).
Board Considerations. In its consideration and approval of the
Reorganization at meetings held on March 12, 1999, May 20, 1999, June 23, 1999,
September 9, 1999 and October 12, 1999, the Board of Directors of ISIS
considered and discussed the future of ISIS and how to best serve the
Shareholders' interests. The directors discussed the size of ISIS' investment
portfolio (approximately $31.3 million as of September 30, 1999) and the
increasing difficulty in maintaining a high current rate of dividend income. The
Board discussed ISIS' concentration in utility securities and changes affecting
the utilities industry. They discussed proposed changes to general accounting
rules which would change the way ISIS amortizes and/or accretes the premiums and
discounts on portfolio securities, and the impact of such changes on the Fund's
dividend income. The Board of Directors employed an independent consultant to
review ISIS' present operations. The directors and the independent consultant
reviewed proposals to: modify the Fund's investment policies to change it into a
non-investment grade portfolio; liquidate the assets; increase assets through a
private placement or a rights offering; change investment advisers; convert ISIS
to an open-end fund; merge ISIS with other closed-end investment companies; and
merge ISIS into a fund of BlackRock. After discussions, it was decided to pursue
the Reorganization with the High Yield Bond Portfolio.
In considering the High Yield Bond Portfolio as opposed to an investment
grade investment portfolio offered by BlackRock, the Board of Directors reviewed
the history of ISIS, noting that the Fund has traditionally been an
income-producing investment for its Shareholders, and that the High Yield Bond
Portfolio was probably a more likely investment vehicle to sustain the
21
competitive dividend level. The directors did consider, however, that
investments in high yield securities involve greater risks than investments in
investment grade securities. The directors noted that Shareholders wishing an
investment grade bond fund would be able to exchange into such a fund of
BlackRock without being charged a CDSC. Such an exchange would be, however, a
taxable event. With regard to the CDSC, it was noted that ISIS has frequently
traded on the NASDAQ at a discount to its net asset value. The Board also
considered that as shareholders of the High Yield Bond Portfolio, ISIS'
Shareholders could redeem their Series B Investor Shares at net asset value and
pay a 3.00% CDCS (or less in later years) upon redemption. Currently, ISIS'
Shareholders have to sell shares at current market value, which has frequently
been less than net asset value, and pay brokerage commissions. The directors
also considered the fee structure of the Series B Investor Shares of the High
Yield Bond Portfolio, noting that total operating expenses were higher than
those of ISIS. They also considered the fact that BlackRock Advisors and its
affiliates may benefit from these increased fees.
In its consideration and approval of the Reorganization, the Board of
Directors of ISIS considered, among other things: the terms of the
Reorganization Agreement; a comparison of each Fund's historical and projected
expense ratios; the comparative investment performance of the Funds; the effect
of such Reorganization on ISIS and its Shareholders; the fact that the
day-to-day portfolio management would be unchanged by the Reorganization; the
investment advisory services supplied by BlackRock Advisors; the management and
other fees payable by the High Yield Bond Portfolio; the similarities and
differences of the investment objective and policies of the Funds; the
opportunity to combine ISIS and the High Yield Bond Portfolio into a single,
larger asset base; the recommendations of BIMC and BlackRock Advisors with
respect to the proposed Reorganization; the fact that the Reorganization would
constitute a tax-free reorganization; the determination that the proposed
Reorganization is in the best interests of the shareholders and the fact that
the interests of Shareholders would not be diluted as a result of the
Reorganization.
After considering the foregoing factors, together with such other
information as they believed to be relevant, the Board of Directors of ISIS
approved the Reorganization Agreement and directed that it be submitted to
Shareholders for approval.
22
THE BOARD OF DIRECTORS OF ISIS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE REORGANIZATION AGREEMENT.
The Board of Directors of ISIS has not determined what action ISIS will
take in the event Shareholders fail to approve the Reorganization Agreement or
for any reason the Reorganization is not consummated. In either such event, the
Board will consider other appropriate courses of action, including the sale of
assets to, or merger with, another investment company, the possible liquidation
of ISIS, or continuing the operations of ISIS in its present form.
Similarly, at meetings held on August 11, 1999 and October 4, 1999, the
Board of Trustees of BlackRock considered the proposed Reorganization. Based
upon its evaluation of the relevant information provided to it, and in light of
its fiduciary duties under federal and state law, the Board of Trustees
determined that (i) the proposed Reorganization is in the best interests of the
shareholders of the High Yield Bond Portfolio and (ii) the interests of the High
Yield Bond Portfolio's shareholders would not be diluted as a result of the
Reorganization.
Federal Income Tax Consequences. Consummation of the Reorganization is
subject to the condition that ISIS and BlackRock receive an opinion from Drinker
Biddle & Reath LLP to the effect that for federal income tax purposes: (i) the
transfer of all of the assets and liabilities of ISIS to the High Yield Bond
Portfolio in exchange for Series B Investor Shares of the High Yield Bond
Portfolio and the liquidating distributions to Shareholders of Series B Investor
Shares of the High Yield Bond Portfolio so received, as described in the
Reorganization Agreement, will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"),
and with respect to the Reorganization, ISIS and the High Yield Bond Portfolio
will each be considered "a party to a reorganization" within the meaning of
368(b) of the Code; (ii) no gain or loss will be recognized by ISIS as a result
of such transaction; (iii) no gain or loss will be recognized by the High Yield
Bond Portfolio as a result of such transaction; (iv) no gain or loss will be
recognized by the Shareholders of ISIS on the distribution to such Shareholders
of Series B Investor Shares of the High Yield Bond Portfolio in exchange for
their shares of ISIS; (v) the aggregate basis of Series B Investor Shares of the
High Yield Bond Portfolio received by a Shareholder of ISIS will be the
23
same as the aggregate basis of the Shareholder's shares of ISIS immediately
prior to the Reorganization; (vi) the basis of the High Yield Bond Portfolio in
the assets of ISIS received pursuant to such transaction will be the same as the
basis of such assets in the hands of ISIS immediately before such transaction;
(vii) a Shareholder's holding period for Series B Investor Shares of the High
Yield Bond Portfolio will be determined by including the period for which the
Shareholder held ISIS shares exchanged therefor, provided that the Shareholder
held such shares in ISIS as a capital asset; and (viii) the High Yield Bond
Portfolio's holding period with respect to the assets received in the
Reorganization will include the period for which such assets were held by ISIS.
BlackRock and ISIS have not sought a tax ruling from the Internal Revenue
Service ("IRS"), but are acting in reliance upon the opinion of counsel
discussed in the previous paragraph. That opinion is not binding on the IRS and
does not preclude the IRS from adopting a contrary position. Shareholders should
consult their own advisers concerning the potential tax consequences to them,
including state and local income taxes.
Capitalization. Because ISIS will be combined with the High Yield Bond
Portfolio in the Reorganization, the total capitalization of the High Yield Bond
Portfolio after the Reorganization is expected to be greater than the current
capitalization of ISIS. The following table sets forth as of September 30, 1999:
(i) the capitalization of ISIS; (ii) the capitalization of the High Yield Bond
Portfolio; and (iii) the pro forma capitalization of the High Yield Bond
Portfolio as adjusted to give effect to the proposed Reorganization. There is,
of course, no assurance that the Reorganization will be consummated. Moreover,
if consummated, the capitalizations of the High Yield Bond Portfolio and ISIS
are likely to be different at the Effective Time of the Reorganization as a
result of fluctuations in the value of portfolio securities of both Funds and
daily share purchase and redemption activity in the High Yield Bond Portfolio.
24
================================================================================
The High Yield Bond Pro Forma
-------------------
ISIS Portfolio Combined
---- --------- --------
- --------------------------------------------------------------------------------
Total Net Assets ($) 31,274,404 83,325,011 114,599,415
- --------------------------------------------------------------------------------
Shares Outstanding 1,822,752 1,274,781 (Series B 4,489,005 (Series B
Investor shares) Investor Shares)
- --------------------------------------------------------------------------------
Net Asset Value Per 17.16 9.73 (Series B 9.73 (Series B
Share ($) Investor Shares) Investor Shares)
================================================================================
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The following discussion summarizes some of the similarities and
differences in the investment policies and risk factors of the Funds, and is
qualified in its entirety by the discussion in the Prospectus and Statement of
Additional Information of the High Yield Bond Portfolio, which are incorporated
herein by reference.
The investment objective of ISIS is to seek as high a level of current
income as is consistent with prudent investment. The investment objective of the
High Yield Bond Portfolio is to seek current income by investing primarily in
non-investment grade bonds. The investment objective of ISIS is fundamental,
meaning that it may not be changed without the affirmative vote of the holders
of a majority of its outstanding shares, as defined in the 1940 Act. The
investment objective of the High Yield Bond Portfolio is not fundamental and may
be changed by its Board of Trustees without shareholder approval, although
shareholders will be given 30 days' notice of any such change.
General. Both Funds invest in debt securities. The High Yield Bond
Portfolio invests primarily in non-investment grade bonds (i.e., rated lower
than Baa by Moody's Investor Services, Inc. or rated lower than BBB by Standard
& Poor's Ratings Group and Fitch-IBCA, Inc.) in the ten to fifteen year maturity
range. The High Yield Bond Portfolio normally invests at least 80% of its total
assets in bonds or convertible securities and at least 65% of its total assets
in non-investment grade (i.e., junk) bonds. The High Yield Bond Portfolio may
invest up to 10% of its total assets in bonds of foreign issuers.
25
ISIS must invest at least 60% of its assets in: (1) marketable straight
debt securities which are rated at the time of purchase within the four highest
grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A or Baa), Standard
& Poor's Ratings Group, Division of McGraw Hill (AAA, AA, A or BBB) or Fitch
IBCA, Inc. (AAA, AA, A or BBB); (2) securities of, or guaranteed by, the United
States government, its agencies or instrumentalities; (3) securities (payable in
U.S. dollars) of, or guaranteed by, the government of Canada or of a Province of
Canada under circumstances that would not subject the Fund to payment of U.S.
Interest Equalization Tax; (4) commercial paper of companies having, at the time
of purchase, an issue of outstanding debt securities rated as described in (1)
above; and (5) cash or cash equivalents. ISIS is permitted to invest up to 40%
of its assets in non-investment grade securities. ISIS is required to invest at
least 25% of its assets in the securities of utility companies.
A principal difference in investment policies is that ISIS invests
primarily in investment grade securities while the High Yield Bond Portfolio
invests primarily in non-investment grade securities. Another principal
difference is the range of securities and investment techniques available to the
High Yield Bond Portfolio. The following summarizes those investment policies
and compares them to ISIS' policies.
The High Yield Bond Portfolio can invest in a wide range of securities
including mezzanine investments, collateralized bond obligations ("CBOs"), bank
loans, and mortgage-backed and asset-backed securities. ISIS does not have a
stated policy to invest in these types of securities; however, it has no
investment policy or limitation which would prohibit investments in these
securities.
The High Yield Bond Portfolio may invest in mezzanine investments.
Mezzanine investments are subordinated debt securities which receive payments of
interest and principal after other more senior security holders are paid. They
are generally issued in private placements in connection with an equity
security. Mezzanine securities carry the risk that the issuer will not be able
to meet its obligations and that the equity securities purchased with the
mezzanine investments may lose value.
The High Yield Bond Portfolio may invest in CBOs, which are securities
backed by a diversified pool of high yield securities. The pool of high yield
securities underlying CBOs
26
is typically separated into groupings, called tranches, representing different
degrees of credit quality. The higher quality tranches have greater degrees of
protection and pay lower interest rates. The lower tranches, with greater risk,
pay higher interest rates.
The High Yield Bond Portfolio may invest in bank loans. Bank loans are
fixed and floating rate loans arranged through private negotiations between a
company or a foreign government and one or more financial institutions. The Fund
considers such investments to be debt securities. The market for bank loans may
not be highly liquid and the Fund may have difficulty selling them. These
investments expose a fund to the risk of investing in both the financial
institution and the underlying borrower.
The High Yield Bond Portfolio may make investments in residential and
commercial mortgage-backed securities ("CMBS")and other asset-backed securities.
CMBS are bonds that are backed by a mortgage loan or pool of loans secured by
commercial property, not residential mortgages. Asset-backed securities are
bonds that are backed by a pool of assets, usually loans such as installment
sale contracts or credit card receivables. The characteristics of these
mortgage-backed and asset-backed securities differ from traditional fixed income
securities.
A main difference is that the principal on mortgage- or asset-backed
securities may normally be prepaid at any time, which will reduce the yield and
market value of these securities. Asset-backed securities and CMBS generally
experience less prepayment than residential mortgage-backed securities. In
periods of falling interest rates, the rate of prepayments tends to increase (as
does price fluctuation) as borrowers are motivated to pay off debt and refinance
at new lower rates. During such periods, reinvestment of the prepayment proceeds
by the investment adviser will generally be at lower rates of return than the
return on the assets which were prepaid. Certain commercial mortgage-backed
securities are issued in several classes with different levels of yield and
credit protection. The High Yield Bond Portfolio's investments in commercial
mortgage-backed securities with several classes will normally be in the lower
classes that have less credit protection.
Certain asset-backed securities are based on loans that are unsecured,
which means that there is no collateral to seize if
27
the underlying borrower defaults. Other asset-backed securities may not have the
benefit of as much collateral as mortgage-backed securities.
The High Yield Bond Portfolio may, when consistent with the Fund's
investment objective, use options or futures (commonly known as derivatives).
The primary purpose of using derivatives is to attempt to reduce risk to the
Fund as a whole (i.e., to hedge) but they also may be used to maintain
liquidity, commit cash pending investment or to increase returns. The High Yield
Bond Portfolio may also enter into interest rate or foreign currency
transactions as a hedging technique. In these transactions, the Fund exchanges
its right to pay or receive interest or currencies with another party for their
right to pay or receive interest or another currency in the future. ISIS does
not have a stated policy to invest in these types of securities; however, it has
no investment policy or limitation which would prohibit investments in these
securities. The High Yield Bond Portfolio's use of derivatives, interest rate
and foreign currency transactions may reduce its returns and/or increase
volatility, which is defined as the characteristic of a security or a market to
fluctuate significantly in price within a short period of time.
The High Yield Bond Portfolio may invest up to 10% of its total assets in
bonds of foreign issuers. ISIS has no explicit investment policy or limitation
concerning investments in foreign issuers. Foreign securities involve risks not
typically associated with investing in U.S. securities. These risks include but
are not limited to: currency risks (the risk that the value of interest paid on
foreign securities, or the value of the securities themselves, may fall if
currency exchange rates change), the risk that a security's value will be hurt
by changes in foreign political or social conditions, the possibility of heavy
taxation or expropriation and more difficulty obtaining information on foreign
securities or companies. In addition, a portfolio of foreign securities may be
harder to sell and may be subject to wider price movements than comparable
investments in U.S. companies. There is also less government regulation of
foreign securities markets.
In addition, political and economic structures in developing countries may
be undergoing rapid change and these countries may lack the social, political
and economic stability of more developed countries. As a result some of the
risks described above, including the risks of nationalization or expropriation
of assets and the existence of smaller, more
28
volatile and less regulated markets, may be increased. The value of many
investments in emerging market countries recently has dropped significantly due
to economic and political turmoil in many of these countries.
On January 1, 1999, eleven European countries implemented a new currency
unit called the "Euro" which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. While it
is impossible to predict the impact of the "Euro," it is possible that it could
increase volatility in financial markets worldwide which could hurt the value of
shares of the High Yield Bond Portfolio.
The High Yield Bond Portfolio may invest in securities rated as low as "C."
These securities are very risky and have uncertainties regarding the issuer's
ability to make interest and principal payments. As stated above, ISIS can
invest up to 40% of its assets in securities rated below investment grade,
including securities rated "C." ISIS has no explicit limitation on what ratings
are acceptable. Accordingly, ISIS could invest in securities rated "C" or below.
Each Fund can borrow money to buy additional securities. This practice is
known as "leverage." The High Yield Bond Portfolio may borrow from banks or
other financial institutions or through reverse repurchase agreements (under
which the Fund sells securities and agrees to buy them back at a particular date
and price). The High Yield Bond Portfolio currently may borrow up to 33-1/3% of
the value of its total assets, and may borrow an additional 5% of its total
assets for temporary purposes. ISIS also may borrow money to purchase
securities. ISIS currently may borrow up to 25% of the value of its total
assets. ISIS also may borrow money from banks for temporary or emergency
purposes. Leverage is a speculative technique which may expose a Fund to greater
risk and increase its costs. Increases and decreases in the value of a Fund's
portfolio will be magnified when the Fund uses leverage. A Fund will also have
to pay interest on its borrowings, reducing return.
The High Yield Bond Portfolio may lend some of its securities on a short-
term basis in order to earn extra income. The High Yield Bond Portfolio will
receive collateral in cash or high quality securities equal to the current value
of the loaned securities. These loans will be limited to 33-1/3% of the value of
the Fund's total assets. Securities loans involve the risk of a delay in
receiving additional collateral if the value of the securities goes up while
they are on loan. There is also
29
the risk of delay in recovering the loaned securities and of losing rights to
the collateral if a borrower goes bankrupt. ISIS may also lend securities. These
loans are limited to 20% of the value of its total assets.
Investment Limitations. Neither ISIS nor the High Yield Bond Portfolio may
change their fundamental investment limitations without the affirmative vote of
a majority of the outstanding shares, as defined in the 1940 Act. The following
discusses the similarities and differences in their fundamental limitations.
Each Fund is a diversified investment portfolio and, therefore, has a
fundamental policy limiting investments in securities of any one issuer to 5% of
total assets and excludes securities issued or guaranteed by the U.S.
Government, its agencies, enterprises or instrumentalities. This limitation
applies to 100% of ISIS' total assets. This limitation only applies to 75% of
the High Yield Bond Portfolio's total assets. Consequently, up to 25% of the
High Yield Bond Portfolio's total assets may be invested without regard to this
5% limitation.
Neither Fund will invest more than 25% of its total assets in the
securities of issuers in any one industry, except that, as stated above, ISIS is
required to invest at least 25% of its total assets in securities of utility
companies.
Neither Fund will make loans, except that: (a) each may purchase or hold
certain debt instruments and engage in repurchase agreements; and (b) each may
lend portfolio securities as described above.
Neither Fund will issue senior securities, except that: (a) each may borrow
money for temporary or emergency purposes up to 5% of total assets; and (b) each
may borrow money to purchase additional securities as described above.
Neither Fund may purchase or sell real estate, except that the Funds may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
The High Yield Bond Portfolio may not acquire any other investment company
or investment company security except in connection with a merger,
consolidation, reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act. ISIS is only permitted to purchase shares of other
closed-
30
end funds in the open market involving only customary broker's commissions or
acquire shares of other investment companies in connection with a merger,
consolidation, reorganization or purchase of assets approved by the Fund's
Shareholders, if required by law. However, as described above under "Information
Relating to the Proposed Reorganization - Description of the Reorganization
Agreement," approval of the Reorganization Agreement will constitute the
approval of a change to this limitation which will make it substantially the
same as the High Yield Bond Portfolio's limitation.
Neither Fund will act as an underwriter of securities within the meaning of
the Securities Act of 1933 except to the extent that the purchase of obligations
directly from the issuer thereof, or the disposition of securities, may be
deemed to be an underwriting.
Neither Fund may purchase securities of companies for the purpose of
exercising control.
Neither Fund may purchase or sell commodities or commodity contracts. The
High Yield Bond Portfolio may, however, invest in companies engaging in whole or
in part in such activities. Additionally, the High Yield Bond Portfolio does not
consider currency contracts, futures contracts and related options to be covered
by this limitation.
Neither Fund may purchase securities on margin, make short sales or
maintain a short position. However, the High Yield Bond Portfolio does not
consider futures contracts and related options to be covered by this limitation.
In addition, the High Yield Bond Portfolio would be allowed to sell a security
short-against-the-box.
The following fundamental limitations of the High Yield Bond Portfolio have
no counterpart in ISIS. The High Yield Bond Portfolio may not: write or sell put
options, call options, straddles, spreads, or any combination thereof, except
for transactions in options on securities, securities indices, futures contracts
and options thereon; or invest in oil, gas or mineral exploration or development
programs, but may invest in companies engaged in whole or in part in such
activities.
See "Additional Investment Limitations" in the High Yield Bond Portfolio's
Statement of Additional Information which is incorporated by reference herein
for the complete list of fundamental investment limitations.
31
Other Information. ISIS is registered as a closed-end management investment
company under the 1940 Act. BlackRock is registered as an open-end management
investment company under the 1940 Act. Currently, ISIS offers one investment
portfolio and BlackRock offers 36 investment portfolios.
ISIS is organized as a Maryland corporation and is subject to the
provisions of its Articles of Incorporation and By-laws. BlackRock is organized
as a Massachusetts business trust and is subject to the provisions of its
Declaration of Trust and Amended and Restated Code of Regulations. Shares of
both ISIS and BlackRock: (i) are entitled to one vote for each full share held
and a proportionate fractional vote for each fractional share held; and (ii) are
entitled to participate equally in the dividends and distributions that are
declared with respect to a particular investment portfolio and in the net
distributable assets of such portfolio on liquidation. In addition, shares of
BlackRock will vote in the aggregate and not by class except as otherwise
expressly required by law or when class voting is permitted by the Board of
Trustees. Shares of ISIS have a par value of $0.10 and shares of BlackRock have
a par value of $.001. Shares of both ISIS and BlackRock have no preemptive
rights and only such conversion and exchange rights as the respective Boards of
Directors or Trustees may grant in their discretion. When issued for payment as
described in its Prospectus, shares of BlackRock are fully paid and
non-assessable.
The foregoing is only a summary. Shareholders may obtain copies of the
Articles of Incorporation and By-laws of ISIS and the Declaration of Trust and
Amended and Restated Code of Regulations of BlackRock upon written request at
the addresses shown on the cover page of this Combined Prospectus/Proxy
Statement.
32
INFORMATION RELATING TO VOTING MATTERS
General Information. This Combined Prospectus/Proxy Statement is being
furnished in connection with the solicitation of proxies by the Board of
Directors of ISIS for use at the Meeting. It is expected that the solicitation
of proxies will be primarily by mail. ISIS' officers and service providers may
also solicit proxies by telephone, facsimile machine, telegraph or personal
interview. In addition, although it has not done so to date, ISIS may retain the
services of one or more outside organizations to aid in the solicitation of
proxies. Such organizations normally charge a fee plus out-of-pocket expenses.
Any Shareholder giving a proxy may revoke it at any time before it is exercised
by submitting to ISIS a written notice of revocation or a subsequently executed
proxy or by attending the Meeting and electing to vote in person.
Only Shareholders of record at the close of business on February __, 2000
will be entitled to vote at the Meeting. On that date, there were outstanding
and entitled to be voted _________ shares. Each share or fraction thereof is
entitled to one vote or fraction thereof.
If the accompanying proxy is executed and returned in time for the Meeting,
the shares covered thereby will be voted in accordance with the proxy on all
matters that may properly come before the meeting (or any adjournment thereof).
Shareholder and Board Approvals. Approval of the Reorganization Agreement
(and the transactions contemplated thereby) requires the affirmative vote of at
least a majority of the outstanding shares of ISIS.
In tallying Shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a proposal
because instructions have not been received from the beneficial owners) will be
counted for purposes of determining whether or not a quorum is present for
purposes of convening the Meeting. On the Reorganization proposal, abstentions
and broker non-votes will be considered to be a vote against the Reorganization
proposal.
The approval of the Reorganization by the shareholders of the High Yield
Bond Portfolio is not being solicited because their approval or consent is not
legally required.
33
At February __, 2000, the directors and officers of ISIS as a group owned
____% of the outstanding shares of ISIS.
At February __, 2000, the name, address and percentage ownership of the
persons who owned beneficially more than 5% of the outstanding shares of ISIS
and the percentage of Series B Investor Shares of the High Yield Bond Portfolio
that would be owned by such persons upon consummation of the Reorganization
based upon their holdings at February __, 2000 are as follows:
================================================================================
Percentage of ISIS Percentage of Series B
Name and Amount of Shares Shares Owned on Investor Shares of the
Address Owned Record Date High Yield Bond
------- ----- ----------- Portfolio Owned Upon
Consummation
------------
- --------------------------------------------------------------------------------
ISIS
================================================================================
At February __, 2000, the trustees and officers of BlackRock as a group
owned less than 1% of the outstanding shares of the High Yield Bond Portfolio.
At February __, 2000, the name, address and share ownership of the persons
who owned beneficially more than 5% of any class of the High Yield Bond
Portfolio and the percentage of shares that would be owned by such person upon
consummation of the Reorganization based upon their holdings at February __,
2000 were as follows:
===================================================================================================================
Percentage
of Fund Percentage of
Percentage of Shares Class Owned
The High Yield Name and Class and Amount Class Owned on Owned on Upon
Bond Portfolio Address of Shares Owned Record Date Record Date Consummation
- -------------- ------- --------------- ----------- ----------- ------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
===================================================================================================================
Appraisal Rights. Under the Maryland General Corporation Law, certain
relevant sections of which are attached to this Combined Prospectus/Proxy
Statement as Appendix D, each Shareholder of ISIS will be entitled to demand and
receive payment of the "fair value" of his or her shares in cash, if he or she
(i) prior to or at the Meeting, files with ISIS a written objection to the
Reorganization, (ii) does not vote in favor of the Reorganization by person or
by proxy and (iii) within 20 days after the Articles of Transfer with respect to
the Reorganization have been accepted for record by the Maryland State
Department of Assessments and Taxation (the "Maryland
34
SDAT") makes a written demand on BlackRock for payment of his or her shares (a
"Payment Demand"), stating the number of shares for which payment is demanded. A
Payment Demand should be sent to BlackRock at Bellevue Park Corporate Center,
400 Bellevue Parkway, Wilmington, Delaware 19809, Attn: Brian P. Kindelan,
Secretary. Any Shareholder of ISIS who fails to comply with the requirements
described above will be bound by the terms of the Reorganization. Under the
Maryland General Corporation Law, "fair value" would be determined as of the
close of business on the day that the Shareholders vote on the Reorganization
and would not include any appreciation or depreciation that results, directly or
indirectly, from the Reorganization or from its proposal. Moreover, in that
regard, a Shareholder who makes a Payment Demand for his or her shares would not
be entitled to receive any of the dividends or distributions that will be
payable to Shareholders of record of those shares on a record date that is after
the close of business on the day the Shareholders vote on the Reorganization.
BlackRock will promptly deliver or send by certified mail, return receipt
requested, to each Shareholder of ISIS who has filed a written objection to the
proposed Reorganization with BlackRock, written notice of the date of acceptance
of the Articles of Transfer with respect to the Reorganization for record by the
Maryland SDAT and of the Effective Time of the Reorganization. Such notice may
include a written offer by BlackRock to pay the objecting Shareholder what
BlackRock considers to be the fair value of their shares of common stock of
ISIS. Within 50 days after the Reorganization, any Shareholder who has made a
Payment Demand but has not received payment for his or her shares may petition a
court of equity in Baltimore City, Maryland, for an appraisal to determine the
"fair value" of such shares. If the court finds that a Shareholder is entitled
to appraisal of his or her stock, the court will appoint three disinterested
appraisers to determine the "fair value" of such shares on terms and conditions
the court considers proper, and the appraisers will, within 60 days after
appointment (or such longer period as the court may direct), file with the court
and mail to each party to the proceeding their report stating their conclusion
as to the "fair value" of the shares. Within 15 days after the filing of the
report, any party may object to the report and request a hearing thereon. The
court will, upon motion of any party, enter an order either confirming,
modifying or rejecting the report and, if confirmed or modified, enter judgment
directing the time within which payment must be made. If the appraisers' report
is rejected, the court may determine the "fair value" of the shares of common
stock of the Shareholder of ISIS requesting appraisal or may remit the
proceeding to the same or other appraisers. Any judgment entered pursuant to a
court proceeding will include interest from the date of the Meeting unless the
court finds that the Shareholder's refusal to accept a written offer to
35
purchase the stock which may previously have been made by BlackRock in
accordance with Section 3-207 of the Maryland General Corporation Law, was
arbitrary and vexatious or not in good faith. BlackRock's costs of the
proceeding (not including attorneys' fees) will be determined by the court and
will be assessed against BlackRock or, under certain circumstances, the
Shareholder, or both.
At any time after the filing of a petition for appraisal, the court may
require a Shareholder who has filed such petition to submit his or her
certificates representing shares to the clerk of the court for notation of the
pendency of the appraisal proceedings. In order to receive payment, whether by
agreement with BlackRock or pursuant to a judgment, such Shareholder of ISIS
must surrender the stock certificates endorsed in blank and in proper form for
transfer. A Shareholder who has made a Payment Demand will not have the right to
receive any dividends or distributions payable to holders of record after the
close of business on the date of the Meeting and shall cease to have any rights
as a Shareholder of ISIS with respect to the shares except the right to receive
payment of the "fair value" thereof. The rights of a Shareholder who has made a
Payment Demand may be restored only upon the withdrawal, with the consent of
BlackRock, of the Payment Demand, failure to file a petition for appraisal
within the time required, a determination of the court that the Shareholder is
not entitled to an appraisal, or the abandonment or recession of the
Reorganization.
For information relating to the exercise of appraisal rights, see Appendix
D to this Combined Prospectus/Proxy Statement.
36
Quorum. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement are not received, the persons named as proxies, or
their substitutes, may propose one or more adjournments of the Meeting to permit
further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares affected by the adjournment
represented at the Meeting in person or by proxy. If a quorum is present, the
persons named as proxies will vote those proxies which they are entitled to vote
FOR the Reorganization Agreement in favor of such adjournment, and will vote
those proxies required to be voted AGAINST such proposal, against any
adjournment. A quorum is constituted with respect to ISIS by the presence in
person or by proxy of the holders of a majority of the outstanding shares of
ISIS entitled to vote at the Meeting. Proxies properly executed and marked with
a negative vote, broker non-votes or an abstention will be considered to be
present at the Meeting for the purposes of determining the existence of a quorum
for the transaction of business.
Annual Meetings. BlackRock does not presently intend to hold annual
meetings of shareholders for the election of trustees and other business unless
and until such time as required by law. Under certain circumstances, however,
shareholders have the right to call a meeting of shareholders, and such meetings
will be called when requested by the holders of record of 10% or more of
BlackRock's outstanding shares of beneficial interest. To the extent required by
law, BlackRock will assist in shareholder communications in such matters. In
addition, BlackRock will hold special meetings of shareholders when required
under the 1940 Act or in accordance with SEC policy.
37
ADDITIONAL INFORMATION ABOUT BLACKROCK
Information about the High Yield Bond Portfolio and its Series B Investor
Shares is included in the Prospectus dated January 28, 1999 accompanying this
Combined Prospectus/Proxy Statement, which is incorporated by reference herein.
Additional information about the High Yield Bond Portfolio and its Series B
Investor Shares is included in the Fund's Statement of Additional Information
dated January 28, 1999 which has been filed with the SEC and which is
incorporated herein by reference. Copies of the Statement of Additional
information may be obtained without charge by calling 1-800-441-7762. BlackRock
is subject to the requirements of the 1940 Act and, in accordance with such
requirements, files reports and other information with the SEC. These materials
can be inspected and copied at the Public Reference Facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices at 7 World Trade Center, Suite 1300, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, D.C.
20549, at prescribed rates, and is also available on the SEC's web site at
http://www.sec.gov.
ADDITIONAL INFORMATION ABOUT ISIS
Information about ISIS is included in this Combined Prospectus/Proxy
Statement and the Statement of Additional Information related to this Combined
Prospectus/Proxy Statement. Reports and other information filed by ISIS can be
inspected and copied at the Public Reference Facilities maintained by the SEC at
450 Fifth Street, N.W., Washington, DC 20549, and copies of such materials can
be obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission, Washington, DC 20549,
at prescribed rates. In addition, the shares of common stock of ISIS are listed
on The NASDAQ SmallCap MarketSM. Reports and other information concerning ISIS
can be inspected by contacting NASDAQ at 1735 K Street NW, Washington, D.C.
20006.
38
FINANCIAL STATEMENTS AND EXPERTS
The unaudited financial statements and notes thereto of ISIS for the six
month period ended June 30, 1999, and the audited financial statements and notes
thereto of ISIS for the fiscal year ended December 31, 1998, are incorporated by
reference into the Statement of Additional Information related to this Combined
Prospectus/Proxy Statement. The financial statements and financial highlights
for ISIS for the fiscal year ended December 31, 1998 have been incorporated
herein by reference in reliance on the report of PricewaterhouseCoopers LLP,
independent auditors, given on their authority as experts in auditing and
accounting.
The audited financial statements and notes thereto of the High Yield Bond
Portfolio for the fiscal period ended September 30, 1999 are incorporated by
reference into the Statement of Additional Information related to this Combined
Prospectus/Proxy Statement. The financial statements and financial highlights
for the High Yield Bond Portfolio for the fiscal period ended September 30, 1999
have been incorporated herein by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent auditors, given on their authority as
experts in auditing and accounting.
39
OTHER BUSINESS
The Board of Directors of ISIS knows of no other business to be brought
before the Meeting. However, if any other matters come before the Meeting, it is
the intention of the Board that proxies that do not contain specific
restrictions to the contrary will be voted on such matters in accordance with
the judgment of the persons named in the enclosed form of proxy.
LITIGATION
Neither ISIS nor BlackRock is involved in any litigation which would have
any material adverse effect upon either ISIS or the High Yield Bond Portfolio.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to ISIS in writing at the address on
the cover page of this Combined Prospectus/Proxy Statement or by telephoning
(610) 964-8882.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED
TO DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
40
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
BLACKROCK FUNDS(SM)
on behalf of itself and its
High Yield Bond Portfolio
and
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Dated December __, 1999
CONTENTS
I. Transfer of Assets ................................................ 2
II. Liquidating Distribution and Termination of
ISIS............................................................... 4
III. Valuation Time..................................................... 5
IV. Certain Representations, Warranties and Agreements of ISIS......... 5
V. Certain Representations, Warranties and Agreements of BlackRock.... 12
VI. Stockholder Action on Behalf of ISIS............................... 16
VII. N-14 Registration Statement and Proxy Solicitation
Materials.......................................................... 18
VIII. Effective Time of the Reorganization............................... 18
IX. Covenants.......................................................... 19
X. BlackRock Conditions............................................... 22
XI. ISIS Conditions.................................................... 30
XII. Tax Documents...................................................... 35
XIII. Finder's Fees...................................................... 36
XIV. Announcements...................................................... 36
XV. Further Assurances................................................. 36
XVI. Termination of Representations and Warranties...................... 37
XVII. Termination of Agreement........................................... 37
XVIII. Amendment and Waiver............................................... 38
XIX. Governing Law...................................................... 39
XX. Successors and Assigns............................................. 39
XXI. Beneficiaries...................................................... 39
XXII. BlackRock Liability................................................ 39
XXIII. Expenses........................................................... 40
XXIV. Entire Agreement................................................... 41
XXV. Counterparts....................................................... 41
XXVI. Notices............................................................ 41
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of December
___, 1999 between BlackRock Funds(SM), a Massachusetts business trust
("BlackRock"), and Independence Square Income Securities, Inc., a Maryland
corporation ("ISIS").
WHEREAS, the parties intend that all of the assets and liabilities of ISIS be
transferred to, and be acquired and assumed by, the BlackRock High Yield Bond
Portfolio (the "Acquiring Fund"), an investment portfolio offered by BlackRock,
in exchange for Series B Investor Shares of the Acquiring Fund (the "Series B
Investor Shares") which shall thereafter be distributed by ISIS to the holders
of its shares, all as described in this Agreement (the "Reorganization");
WHEREAS, the parties intend that the transfer of assets, assumption of
liabilities, and distribution of the Series B Investor Shares be treated as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"); and
WHEREAS, the parties intend that after the Reorganization, the registration of
ISIS as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act") shall be terminated and ISIS shall be dissolved under
state law as provided in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, and
intending to be legally bound hereby, BlackRock and ISIS agree as follows:
I. Transfer of Assets.
------------------
1.01 At the Effective Time of the Reorganization (as defined in Article
VIII), all property of every description, and all interests, rights, privileges
and powers of ISIS except (i) cash in an amount necessary to pay any unpaid
dividends and distributions as provided in Article IV(h) and (ii) corporate
records of ISIS (such assets, the "Assets") shall be transferred and conveyed by
ISIS to BlackRock on behalf of the Acquiring Fund, and shall be acquired by
BlackRock on behalf of the Acquiring Fund, and BlackRock, on behalf of the
Acquiring Fund, shall assume all liabilities, whether accrued, absolute,
contingent or otherwise, of ISIS, which liabilities shall also include without
limitation the obligation of ISIS to indemnify the directors and officers of
ISIS to the fullest extent permitted by ISIS' Articles of Incorporation, as in
effect at of the date of this Agreement (the "Liabilities"), so that at and
after the Effective Time of the Reorganization: (i) the Assets shall become and
be the assets of BlackRock on behalf of the Acquiring Fund; and (ii) the
Liabilities shall be assumed by BlackRock on behalf of the Acquiring Fund.
Without limiting the generality of the foregoing, the Assets shall include all
property and assets of any nature whatsoever, including, without
2
limitation, all cash, cash equivalents, securities, claims and receivables
(including dividend and interest receivables) owned by ISIS, and all deferred or
prepaid expenses shown as assets on the books of ISIS, at the Effective Time of
the Reorganization, and all good will, all other intangible property and all
financial books and records belonging to ISIS. Recourse by any person for the
Liabilities shall, at and after the Effective Time of the Reorganization, be
limited to the Acquiring Fund.
1.02 In exchange for the transfer of the Assets and the assumption of the
Liabilities, BlackRock shall simultaneously issue at the Effective Time of the
Reorganization to ISIS that number of full and fractional (to the third decimal
place) Series B Investor Shares of the Acquiring Fund that then have an
aggregate net asset value equal to the aggregate net asset value at such time of
the outstanding shares of common stock of ISIS.
1.03 The net asset value of the Series B Investor Shares of the Acquiring
Fund shall be computed in the manner set forth in the Acquiring Fund's then
current prospectus under the Securities Act of 1933, as amended (the "1933
Act"). The net asset value of the outstanding shares of common stock of ISIS
shall be computed by the investment adviser of ISIS in accordance with the
policies and procedures of ISIS that are then in effect, shall be reviewed by
the independent auditors of ISIS and shall be subject to adjustment by the
amount, if any, agreed to by BlackRock and
3
ISIS. ISIS shall deliver a copy of its valuation report to BlackRock at the
Valuation Time (as defined in Article III). In the event that the value of a
security in the portfolio of ISIS as determined in accordance with the policies
and procedures of ISIS differs from the value of such security as determined in
accordance with the valuation procedures of the Acquiring Fund, the Acquiring
Fund's accounting agent shall make a final determination as to the value of such
security, except that, if such valuation differs because of the amortization
and/or accretion of premiums and discounts on such security, then such security
shall be valued using ISIS' current methodology on premiums and discounts.
1.04 ISIS shall file Articles of Transfer for recordation with the Department
of Assessments and Taxation of the State of Maryland, and shall take, in
accordance with the Maryland General Corporation Law, all other steps as shall
be necessary to effect the Reorganization.
II. Liquidating Distribution and Termination of ISIS. Immediately after
------------------------------------------------
the Effective Time of the Reorganization, ISIS shall distribute in complete
liquidation pro rata to its stockholders as of the Effective Time of the
Reorganization the Series B Investor Shares of the Acquiring Fund received by
ISIS in the Reorganization. In addition, the stockholders of ISIS shall have the
right to receive any unpaid dividends or other distributions payable to them
which were declared by ISIS before
4
the Effective Time of the Reorganization. In accordance with instructions it
receives from ISIS, BlackRock shall record on its books the ownership of Series
B Investor Shares of the Acquiring Fund by the record stockholders of ISIS. All
of the outstanding shares of ISIS shall be cancelled on its books at the
Effective Time of the Reorganization and shall thereafter represent only the
right to receive the Series B Investor Shares of the Acquiring Fund, and the
transfer books of ISIS shall be closed permanently. As soon as practicable after
the Effective Time of the Reorganization, ISIS shall file an application
pursuant to Section 8(f) of the 1940 Act for an order declaring that it has
ceased to be an investment company and, upon receipt of such order, shall make
all filings and take all other steps as shall be necessary and proper to effect
its complete dissolution. After the Effective Time of the Reorganization, ISIS
shall not conduct any business except in connection with its liquidation,
deregistration, and dissolution.
III. Valuation Time. The Valuation Time for the Reorganization shall be
--------------
4:00 p.m., Eastern time, on such date as may be agreed in writing by the duly
authorized officers of BlackRock and ISIS.
IV. Certain Representations, Warranties and Agreements of ISIS. ISIS
----------------------------------------------------------
represents and warrants to, and agrees with, BlackRock as follows:
5
(a) It is a Maryland corporation which was duly organized and is
validly existing and in good standing under the laws of the State
of Maryland. It is registered with the Securities and Exchange
Commission (the "SEC") as a closed-end, management investment
company under the 1940 Act and such registration is in full force
and effect.
(b) It has power to own all of its properties and assets and, subject
to the approval of stockholders referred to herein, to carry out
and consummate the transactions contemplated hereby, and has all
necessary federal, state and local authorizations to carry on its
business as now being conducted and to consummate the
transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and delivered
by ISIS, and is valid and binding on ISIS, enforceable in
accordance with its terms, subject to bankruptcy, insolvency,
reorganization, arrangement, moratorium, and other similar laws
of general applicability relating to or affecting creditor's
rights and to general principles of equity. The execution and
delivery of this Agreement does not and will not, and the
consummation of the transactions contemplated by
6
this Agreement will not, violate the Articles of Incorporation or
By-laws of ISIS or any agreement or arrangement to which it is a
party or by which it is bound.
(d) ISIS has elected to qualify and has qualified as a "regulated
investment company" under Subtitle A, Chapter 1, Subchapter M,
Part I of the Code, as of and since its first taxable year; has
been a regulated investment company at all times since the end of
its first taxable year when it so qualified; and qualifies and
shall continue to qualify as a regulated investment company until
the Effective Time of the Reorganization.
(e) All federal, state, local and foreign income, profits, franchise,
sales, withholding, customs, transfer and other taxes, including
interest, additions to tax and penalties (collectively, "Taxes")
relating to the Assets due or properly shown to be due on any
return filed by ISIS with respect to taxable periods ending on or
prior to, and the portion of any interim period up to, the date
hereof have been fully and timely paid or provided for; and there
are no levies, liens, or other encumbrances relating to Taxes
existing, threatened or pending with respect to the Assets.
7
At the Effective Time of the Reorganization, all returns and
reports of ISIS respecting Taxes required by law to have been
filed by such time shall have been filed.
(f) The financial statements of ISIS for its fiscal year ended
December 31, 1998, audited by PricewaterhouseCoopers LLP, copies
of which have been previously furnished to BlackRock, present
fairly the financial position of ISIS as of December 31, 1998 and
the results of its operations and the changes in its net assets
for the period then ended, in conformity with generally accepted
accounting principles. In addition, the financial statements of
ISIS for its fiscal year ended December 31, 1999, audited by
PricewaterhouseCoopers LLP, will be furnished to BlackRock when
available, and shall present fairly the financial position of
ISIS as of December 31, 1999 and the results of its operations
and the changes in its net assets for the period then ended, in
conformity with generally accepted accounting principles.
(g) The unaudited financial statements of ISIS for the six-month
period ended June 30, 1999, copies of which have been previously
furnished to BlackRock, present fairly the financial position of
ISIS as
8
of June 30, 1999 and the results of its operations for the period
then ended, in conformity with generally accepted accounting
principles.
(h) Prior to the Valuation Time, ISIS shall have declared a dividend
or dividends, with a record date and ex-dividend date prior to
the Valuation Time, which, together with all previous dividends,
shall have the effect of distributing to its stockholders all of
its net investment company income, if any, for the taxable year
ended on December 31, 1999 and for the period from said date to
and including the Effective Time of the Reorganization (computed
without regard to any deduction for dividends paid), and all of
its net capital gain, if any, realized in the taxable year ended
December 31, 1999 and for the period from said date to and
including the Effective Time of the Reorganization.
(i) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of ISIS,
whether accrued, absolute, contingent or otherwise, not reflected
in the net asset value per share of its outstanding shares.
9
(j) There are no legal, administrative or other proceedings pending
or, to the knowledge of ISIS, threatened against ISIS which could
result in liability on the part of ISIS.
(k) Subject to the approval of stockholders referred to herein, at
both the Valuation Time and the Effective Time of the
Reorganization, ISIS shall have full right, power and authority
to sell, assign, transfer and deliver the Assets and, upon
delivery and payment for the Assets as contemplated herein,
BlackRock on behalf of the Acquiring Fund shall acquire good and
marketable title thereto, free and clear of all liens and
encumbrances, and subject to no restrictions on the ownership or
transfer thereof (except as imposed by federal or state
securities laws).
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by ISIS
of the transactions contemplated by this Agreement, except such
as may be required under the 1933 Act, the Securities Exchange
Act of 1934, as amended (the "1934 Act"), the 1940 Act, the rules
and regulations under those Acts, state securities laws and the
filing of Articles of Transfer under Maryland law.
10
(m) Insofar as the following relate to ISIS, the registration
statement filed by BlackRock on Form N-14 relating to the shares
of the Acquiring Fund that will be distributed to ISIS pursuant
to this Agreement, which, without limitation, shall include a
proxy statement of ISIS and the prospectus of BlackRock with
respect to the transactions contemplated by this Agreement, and
any supplement or amendment thereto, and the documents contained
or incorporated therein by reference (the "N-14 Registration
Statement"), on the effective date of the N-14 Registration
Statement, at the time of any stockholder's meeting referred to
herein and at the Effective Time of the Reorganization: (i) shall
comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the 1940 Act, the rules and regulations
thereunder, and state securities laws, and (ii) shall not contain
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make
the statements therein not misleading.
(n) All of the issued and outstanding shares of ISIS have been duly
and validly issued, are fully paid
11
and non-assessable, and were offered for sale and sold in
conformity with all applicable federal and state securities laws,
and no stockholder of ISIS has any preemptive right of
subscription or purchase in respect of such shares.
(o) ISIS shall not sell or otherwise dispose of any shares of the
Acquiring Fund to be received in the transaction contemplated
herein, except in distribution to its stockholders as
contemplated herein.
(p) To the best of its knowledge, ISIS' service agreements with
BlackRock Institutional Management Corporation, PNC Bank, N.A.
and Wilmington Trust Company represent all of its material
contracts (other than this Agreement and investment contracts
such as options contracts, futures contracts, forward contracts,
repurchase agreements and the like).
V. Certain Representations, Warranties and Agreements of BlackRock.
---------------------------------------------------------------
BlackRock, on behalf of itself and the Acquiring Fund, represents and
warrants to, and agrees with, ISIS as follows:
12
(a) It is a Massachusetts business trust duly established and validly
existing under the laws of, and duly authorized to transact
business in, the Commonwealth of Massachusetts. It is registered
with the SEC as an open-end management investment company under
the 1940 Act and such registration is in full force and effect.
(b) It has power to own all of its properties and assets and to carry
out and consummate the transactions contemplated herein, and has
all necessary federal, state and local authorizations to carry on
its business as now being conducted and to consummate the
transactions contemplated by this Agreement.
(c) This Agreement has been duly authorized, executed and delivered
by BlackRock, and is valid and binding on BlackRock, enforceable
in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, arrangement, moratorium, and other similar laws
of general applicability relating to or affecting creditor's
rights and to general principles of equity. The execution and
delivery of this Agreement does not and will not, and the
consummation of the transactions contemplated by this Agreement
will not, violate BlackRock's
13
Declaration of Trust or Amended and Restated Code of Regulations
or any agreement or arrangement to which it is a party or by
which it is bound.
(d) The Acquiring Fund has elected or will elect to qualify as a
"regulated investment company" under Subtitle A, Chapter 1,
Subchapter M, Part I of the Code, as of and since its first
taxable year; has been a regulated investment company at all
times since the end of its first taxable year when it so
qualified and intends to continue to qualify as a regulated
investment company.
(e) The financial statements of the Acquiring Fund for its fiscal
year ended September 30, 1999, audited by PricewaterhouseCoopers
LLP, copies of which have been previously furnished to ISIS,
present fairly the financial position of the Acquiring Fund as of
September 30, 1999 and the results of its operations and changes
in its net assets for the period then ended, in conformity with
generally accepted accounting principles.
(f) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of the
Acquiring Fund, whether accrued, absolute, contingent or
otherwise, not
14
reflected in the net asset value per share of its Series B
Investor Shares to be issued pursuant to this Agreement.
(g) There are no legal, administrative or other proceedings pending
or, to its knowledge, threatened against BlackRock or the
Acquiring Fund which could result in liability on the part of
BlackRock or the Acquiring Fund.
(h) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by
BlackRock of the transactions contemplated by this Agreement,
except such as may be required under the 1933 Act, the 1934 Act,
the 1940 Act, the rules and regulations under those Acts, state
securities laws and the filing of Articles of Transfer under
Maryland law.
(i) Insofar as the following relate to BlackRock, the N-14
Registration Statement on its effective date, at the time of any
stockholder's meetings referred to herein and at the Effective
Time of the Reorganization: (i) shall comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act, the rules and
15
regulations thereunder, and state securities laws, and (ii) shall
not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary
to make the statements therein not misleading.
(j) The Series B Investor Shares of the Acquiring Fund to be issued
and delivered to ISIS for the account of record holders of shares
of ISIS, pursuant to the terms hereof, shall have been duly
authorized as of the Effective Time of the Reorganization and,
when so issued and delivered, shall be registered under the 1933
Act and under applicable state securities laws, shall be duly and
validly issued, fully paid and non-assessable, and shall have
been offered for sale and sold in conformity with all applicable
federal and state securities laws and no shareholder of BlackRock
shall have any preemptive right of subscription or purchase in
respect thereto.
VI. Stockholder Action on Behalf of ISIS. As soon as practicable
------------------------------------
after the effective date of the N-14 Registration Statement, but in any event
prior to the Effective Time of the Reorganization and as a condition thereto,
ISIS shall hold a meeting of its stockholders for the purposes of considering
and voting upon:
16
(a) Approval of this Agreement and the transactions contemplated
hereby, including, without limitation:
(i) The transfer of the Assets to BlackRock on behalf of
the Acquiring Fund, and the assumption by BlackRock on
behalf of the Acquiring Fund of the Liabilities, in
exchange for Series B Investor Shares of the Acquiring
Fund.
(ii) The liquidation of ISIS through the distribution to its
record holders of Series B Investor Shares of the
Acquiring Fund as described in this Agreement.
(b) Approval of a change to ISIS' fundamental limitations and Article
VII, Section 1(j) of its By-laws to provide that ISIS may
purchase the securities of another investment company in
connection with a merger, consolidation, reorganization, sale or
purchase of assets approved by stockholders, or as otherwise
permitted by the 1940 Act.
17
(c) Such other matters as may be determined by the parties hereto.
VII. N-14 Registration Statement and Proxy Solicitation Materials.
------------------------------------------------------------
BlackRock shall file the N-14 Registration Statement under the 1933 Act, which
shall include or incorporate by reference the proxy statement of ISIS and the
prospectus of the Acquiring Fund, and any supplement or amendment thereto or to
the documents contained or incorporated by reference, with the SEC as promptly
as practicable. Each of BlackRock and ISIS has cooperated and shall continue to
cooperate with the other, and has furnished and shall continue to furnish the
other with the information relating to itself that is required by the 1933 Act,
the 1934 Act, the 1940 Act, the rules and regulations under each of those Acts
and state securities laws, to be included in the N-14 Registration Statement.
VIII. Effective Time of the Reorganization. Delivery of the Assets and the
------------------------------------
Series B Investor Shares of the Acquiring Fund to be issued pursuant to Article
I and the liquidation of ISIS pursuant to Article II shall occur at the opening
of business on the next business day following the Valuation Time, or on such
other date, and at such place and time and date, as may be determined by an
officer of BlackRock and ISIS, provided, however, that unless an officer of
BlackRock and ISIS determine otherwise, the Effective Time of the Reorganization
shall not occur until the period has run for any objecting stockholder of
18
ISIS to make a written demand for payment for his or her shares pursuant to the
Maryland General Corporation Law. The date and time at which such actions are
taken are referred to herein as the "Effective Time of the Reorganization." To
the extent any Assets are, for any reason, not transferred at the Effective Time
of the Reorganization, ISIS shall cause the Assets to be transferred in
accordance with this Agreement at the earliest practicable date thereafter.
IX. Covenants.
---------
(a) Each of BlackRock (on behalf of the Acquiring Fund) and ISIS
covenants to operate its respective business in the ordinary
course between the date hereof and the Effective Time of the
Reorganization, it being understood that:
(i) such ordinary course will include without limitation
declaring and paying customary dividends and other
distributions and changes in operations contemplated by each
of the Acquiring Fund and ISIS' normal business activities,
and
(ii) each of the Acquiring Fund and ISIS will retain exclusive
control of the
19
composition of its portfolio until the Effective Time of the
Reorganization.
(b) ISIS covenants that it will use commercially reasonable efforts
to assist BlackRock in obtaining information BlackRock reasonable
requests concerning the beneficial ownership of any outstanding
securities of ISIS.
(c) Each of BlackRock (on behalf of the Acquiring Fund) and ISIS will
notify the other party hereto of any material adverse change in
such party's business, prospects, results of operations or
financial condition as soon as practicable following such change.
(d) ISIS shall terminate its service agreements with each of
BlackRock Institutional Management Corporation, PNC Bank, N.A.
and Wilmington Trust Company by the Effective Time of the
Reorganization.
(e) ISIS shall file Articles of Transfer for recordation with the
Department of Assessments and Taxation of the State of Maryland.
20
(f) BlackRock Institutional Management Corporation ("BIMC") shall
obtain fully pre-paid liability insurance providing coverage to
the former and current directors and officers of ISIS for claims
made against them after the Effective Time of the Reorganization
for acts, errors or omissions committed or attempted, or
allegedly committed or attempted, by them in their capacity as
such directors or officers at any time prior to the Effective
Time of the Reorganization, such coverage to be on terms no less
favorable to the former and current directors and officers of
ISIS than the terms of coverage in effect with respect to them
immediately prior to the Effective Time of the Reorganization.
BIMC, or its successors or assigns, shall maintain such insurance
or cause such insurance to be maintained in full force and effect
for a period of at least six (6) years after the Effective Time
of the Reorganization. The former and current directors and
officers of ISIS are express third party beneficiaries of this
Article IX(f).
(g) BIMC shall obtain fully pre-paid liability insurance providing
coverage to BlackRock and its former and current trustees and
officers for claims made against them after the Effective Time
21
of the Reorganization relating to acts, errors or omissions
committed or attempted, or allegedly committed or attempted, by
ISIS or its former and current directors and officers in their
capacity as such directors or officers at any time after the
inception of ISIS, such coverage to be on terms no less favorable
to BlackRock and its former and current trustees and officers
than the terms of coverage in effect with respect to them
immediately prior to the Effective Time of the Reorganization.
The former and current trustees and officers of BlackRock are
express third party beneficiaries of this Articles IX(g).
X. BlackRock Conditions. The obligations of BlackRock hereunder
--------------------
shall be subject to the following conditions precedent:
(a) This Agreement, the transactions contemplated by this Agreement
and the amendment to ISIS' By-laws and fundamental limitation
specified in Article VI hereof shall have been approved by both
the Board of Directors and the stockholders of ISIS, in the
manner required by law.
(b) ISIS shall have duly executed and delivered to BlackRock such
bills of sale, assignments, certificates and other instruments of
transfer
22
("Transfer Documents") as may be necessary or desirable to
transfer all right, title and interest of ISIS in and to the
Assets. The Assets shall be accompanied by all necessary state
stock transfer stamps or cash for the appropriate purchase price
therefor.
(c) All representations and warranties of ISIS made in this Agreement
shall be true and correct in all material respects as if made at
and as of the Valuation Time and the Effective Time of the
Reorganization. As of the Valuation Time and the Effective Time
of the Reorganization there shall have been no material adverse
change in the financial condition of ISIS since December 31, 1999
other than those changes incurred in the ordinary course of
business as an investment company. No action, suit or other
proceeding involving ISIS shall be threatened or pending before
any court or governmental agency.
(d) BlackRock shall have received an opinion of Drinker Biddle &
Reath LLP, in form reasonably satisfactory to BlackRock and dated
the Effective Time of the Reorganization, substantially to the
effect that: (i) ISIS is a Maryland corporation duly organized
and validly existing in good
23
standing under the laws of the State of Maryland; (ii) this
Agreement has been duly authorized, executed and delivered by
ISIS and is a legal, valid and binding obligation of ISIS,
enforceable against ISIS in accordance with its terms, subject to
applicable bankruptcy, insolvency, reorganization, arrangement,
moratorium, fraudulent conveyance and other similar laws relating
to or affecting creditors' rights generally, and court decisions
with respect thereto, and such counsel shall not be required to
express an opinion with respect to the application of equitable
principles in any proceeding, whether at law or in equity,
provided, however, that no opinion need be given as to the
enforceability of any provision of the Agreement relating to
indemnification; (iii) the execution and delivery of this
Agreement did not, and the consummation of the transactions
contemplated by this Agreement will not, violate the Articles of
Incorporation or By-laws of ISIS or any material agreement known
to such counsel to which ISIS is a party or by which ISIS is
bound; and (iv) to such counsel's knowledge, no consent,
approval, authorization or order of any federal, Pennsylvania or
Maryland court or governmental authority is required for the
consummation by ISIS of the transactions
24
contemplated by this Agreement, except such as have been obtained
under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
regulations under those Acts, such as may be required under state
securities laws, and the filing of Articles of Transfer under
Maryland law. Such opinion may rely on the opinion of Venable,
Baetjer and Howard, LLP with respect to matters governed by
Maryland law.
(e) BlackRock shall have received an opinion of Drinker Biddle &
Reath LLP, in form reasonably satisfactory to BlackRock and dated
the Effective Time of the Reorganization, substantially to the
effect that for federal income tax purposes (i) the transfer of
the Assets hereunder, and the assumption by the Acquiring Fund of
the Liabilities, in exchange for Series B Investor Shares of the
Acquiring Fund, and the distribution of said shares to the
stockholders of ISIS, as provided in this Agreement, will
constitute a reorganization within the meaning of Section 368(a)
of the Code and with respect to the reorganization, ISIS and the
Acquiring Fund will each be considered "a party to a
reorganization" within the meaning of Section 368(b) of the Code;
(ii) in accordance with Sections 361(a), 361(c)(1) and 357(a) of
the Code, no gain or loss will be recognized by ISIS
25
as a result of such transactions; (iii) in accordance with
Section 1032(a) of the Code, no gain or loss will be recognized
by the Acquiring Fund as a result of such transactions; (iv) in
accordance with Section 354(a)(1) of the Code, no gain or loss
will be recognized by the stockholders of ISIS on the
distribution to them by ISIS of Series B Investor Shares of the
Acquiring Fund in exchange for their shares of ISIS; (v) in
accordance with Section 358(a)(1) of the Code, the aggregate
basis of Series B Investor Shares of the Acquiring Fund received
by each holder of shares of ISIS will be the same as the
aggregate basis of the shares of ISIS held by such holder
immediately prior to the Reorganization; (vi) in accordance with
Section 362(b) of the Code, the basis of the Assets to the
Acquiring Fund will be the same as the basis of the Assets in the
hands of ISIS immediately prior to the exchange; (vii) in
accordance with Section 1223 of the Code, a stockholder's holding
period for Acquiring Fund shares will be determined by including
the period for which the stockholder held the shares of ISIS
exchanged therefor, provided that the stockholder held such
shares of ISIS as a capital asset; and (viii) in accordance with
Section 1223(2) of the Code, the holding
26
period of the Acquiring Fund with respect to the Assets will
include the period for which the Assets were held by ISIS.
(f) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding
seeking to enjoin consummation of the transaction contemplated by
this Agreement under Section 25(c) of the 1940 Act.
(g) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness
shall have been instituted or, to the knowledge of BlackRock,
contemplated by the SEC and the parties shall have received all
permits and other authorizations necessary under state securities
laws to consummate the transactions contemplated by this
Agreement.
(h) ISIS shall have delivered or caused to be delivered to BlackRock
each account, book, record or other document of ISIS which is
required to be maintained by Section 31(a) of the 1940 Act and
Rules 31a-1, 31a-2 and 31a-3 thereunder (regardless of what
person possesses the same),
27
and a copy of all agreements and instruments to which ISIS is a
party. ISIS shall have instructed its service contractors to
provide BlackRock upon request with access to and copies of all
documents belonging to ISIS.
(i) ISIS shall have, and the President or any Vice President of ISIS
shall have provided to BlackRock a certificate that ISIS has,
performed and complied in all material respects with each of its
agreements and covenants required by this Agreement to be
performed or complied with by it prior to or at the Valuation
Time and the Effective Time of the Reorganization.
(j) ISIS shall provide to BlackRock a certificate of its President or
any Vice President dated the Effective Time of the Reorganization
to the effect set forth in Article X (a) and (c).
(k) BIMC shall provide BlackRock with evidence in form satisfactory
to BlackRock that BIMC shall have obtained fully pre-paid
liability insurance providing coverage to BlackRock and its
former and current trustees and officers for claims made against
them after the Effective Time of the Reorganization relating to
acts, errors or
28
omissions committed or attempted, or allegedly committed or
attempted, by ISIS or its former and current directors and
officers in their capacity as such directors or officers at any
time after the inception of ISIS, such coverage to be on terms no
less favorable to BlackRock and its former and current trustees
and officers than the terms of coverage in effect with respect to
them immediately prior to the Effective Time of the
Reorganization.
(l) BIMC shall provide BlackRock with evidence in form satisfactory
to BlackRock that BIMC shall have obtained fully pre-paid
liability insurance providing coverage to the former and current
directors and officers of ISIS for claims made against them after
the Effective Time of the Reorganization for acts, errors or
omissions committed or attempted, or allegedly committed or
attempted, by them in their capacity as such directors or
officers at any time prior to the Effective Time of the
Reorganization, such coverage to be on terms no less favorable to
the former and current directors and officers of ISIS than the
terms of coverage in effect with respect to them immediately
prior to the Effective Time of the Reorganization.
29
XI. ISIS Conditions. The obligations of ISIS hereunder shall be
---------------
subject to the following conditions precedent:
(a) This Agreement and the transactions contemplated by this
Agreement shall have been approved by both: (i) the Board of
Trustees of BlackRock; and (ii) the stockholders of ISIS in the
manner required by law, and the amendment to ISIS' By-laws and
fundamental limitation specified in Article VI hereof shall have
been approved by the stockholders of ISIS in the manner required
by law.
(b) BlackRock shall have duly executed and delivered to ISIS an
assumption of liabilities certificate and other instruments as
ISIS may deem necessary or desirable dated as of the Effective
Time of the Reorganization pursuant to which the Acquiring Fund
will assume all of the Liabilities in connection with the
transactions contemplated by this Agreement.
(c) All representations and warranties of BlackRock made in this
Agreement shall be true and correct in all material respects as
if made at and as of the Valuation Time and the Effective Time of
the Reorganization. As of the Valuation Time and the
30
Effective Time of the Reorganization. As of the Valuation Time
and the Effective Time of the Reorganization there shall have
been no material adverse change in the financial condition of
BlackRock or the Acquiring Fund since September 30, 1999 other
than those changes incurred in the ordinary course of business as
an investment company. No action, suit or other proceeding shall
be threatened or pending before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain damages
or other relief in connection with, this Agreement or the
transaction contemplated herein.
(d) ISIS shall have received an opinion of Ropes & Gray with respect
to matters governed by Massachusetts law and of Simpson Thacher &
Bartlett as to other matters, in form reasonably satisfactory to
ISIS and dated the Effective Time of the Reorganization,
substantially to the effect that: (i) BlackRock is, under the
laws of the Commonwealth of Massachusetts, a duly established and
validly existing unincorporated voluntary association with
transferable shares (commonly known as a "Massachusetts business
trust"); (ii) the Series B Investor Shares are duly authorized
and, upon delivery to ISIS following receipt by the Acquiring
Fund of the Assets of ISIS as
31
provided in the Agreement, will be validly issued, fully paid and
non-assessable, and will not be subject to any preemptive rights
arising under the Massachusetts General Laws or under the
Declaration of Trust; (iii) to such counsel's knowledge, no
shareholder of the Acquiring Fund has any option or warrant to
subscribe or purchase in respect to the Series B Investor Shares;
(iv) the Agreement has been duly authorized, executed and
delivered by BlackRock and represents the valid and binding
obligation of BlackRock, enforceable in accordance with its
terms, subject to the effects of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and to
equitable principles, whether such enforceability is considered
in a proceeding in equity or at law, provided, however, that no
opinion need be given as to the enforceability of any provisions
of the Agreement relating to indemnification; (v) the execution
and delivery of the Agreement by BlackRock did not, and the
performance by BlackRock of its obligations under the Agreement
will not, violate the Declaration of Trust or the Amended and
Restated Code of Regulations of BlackRock; (vi) the execution and
delivery of the
32
Agreement did not, and the compliance by BlackRock with all the
provisions of the Agreement will not, violate any contract
identified on an annexed schedule furnished to such counsel by
BlackRock and which BlackRock has represented lists all material
contracts to which it is a party or by which it is bound, and
which, to the best of such counsel's knowledge, represents all of
the material contracts to which BlackRock is a party or by which
it is bound, or to which any of the property or assets of
BlackRock is subject; (vii) no consent, approval, authorization,
order, registration or qualification of or with any federal, New
York or Massachusetts governmental agency or body, or any
federal, New York or Massachusetts court, is required for
BlackRock to enter into the Agreement or to comply with all of
the provisions of the Agreement, except such as have been
obtained under the 1933 Act, the 1934 Act, the 1940 Act, the
rules and regulations thereunder and such consents, approvals,
authorizations, registrations or qualifications as may be
required under state securities or Blue Sky laws.
(e) ISIS shall have received an opinion of Drinker Biddle & Reath
LLP, in form reasonably
33
satisfactory to BlackRock and dated the Effective Time of the
Reorganization, with respect to the matters specified in Article
X(e).
(f) The N-14 Registration Statement shall have become effective under
the 1933 Act and no stop order suspending such effectiveness
shall have been instituted, or, to the knowledge of BlackRock,
contemplated by the SEC and the parties shall have received all
permits and other authorizations necessary under state securities
laws to consummate the transactions contemplated by this
Agreement.
(g) The SEC shall not have issued any unfavorable advisory report
under Section 25(b) of the 1940 Act nor instituted any proceeding
seeking to enjoin consummation of the transactions contemplated
by this Agreement under Section 25(c) of the 1940 Act.
(h) BlackRock shall have, and the President or any Vice President of
BlackRock shall have provided to ISIS a certificate that
BlackRock has, performed and complied in all material respects
with each of its agreements and covenants required by this
Agreement to be performed or complied with by it
34
prior to or at the Valuation Time and the Effective Time of the
Reorganization.
(i) BlackRock shall have provided to ISIS a certificate of its
President or any Vice President dated the Effective Time of the
Reorganization to the effect set forth in Article XI (a)(i) and
(c).
(j) BIMC shall provide ISIS with evidence in form satisfactory to
ISIS that BIMC shall have obtained fully pre-paid liability
insurance providing coverage to the former and current directors
and officers of ISIS for claims made against them after the
Effective Time of the Reorganization for acts, errors or
omissions committed or attempted, or allegedly committed or
attempted, by them in their capacity as such directors or
officers at any time prior to the Effective Time of the
Reorganization, such coverage to be on terms no less favorable to
the former and current directors and officers of ISIS than the
terms of coverage in effect with respect to them immediately
prior to the Effective Time of the Reorganization.
XII. Tax Documents. ISIS shall deliver to BlackRock at the Effective Time
-------------
of the Reorganization confirmations or other adequate evidence as to the
adjusted tax basis of the Assets
35
delivered to the Acquiring Fund in accordance with the terms of this Agreement.
XIII. Finder's Fees. Each party represents and warrants to each of the
-------------
other parties hereto that there is no person who is entitled to any finder's or
other similar fee or commission arising out of the transactions contemplated by
this Agreement.
XIV. Announcements. No announcements or similar publicity with respect to
-------------
this Agreement or the transactions contemplated herein shall be made at any time
and in any manner unless specifically agreed upon and approved by each of ISIS,
BlackRock and the investment adviser for BlackRock, BlackRock Advisors, Inc.;
provided, that nothing herein shall prevent either party upon notice to the
- --------
other party from making such public announcements as such party's counsel may
consider advisable in order to satisfy the party's legal and contractual
obligations.
XV. Further Assurances. Subject to the terms and conditions herein
------------------
provided, each of the parties hereto shall use its best efforts to take, or
cause to be taken, such action, to execute and deliver, or cause to be executed
and delivered, such additional documents and instruments and to do, or cause to
be done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
36
XVI. Termination of Representations and Warranties. The representations
---------------------------------------------
and warranties of the parties set forth in this Agreement shall terminate upon
the delivery of the Assets to the Acquiring Fund and the issuance of the Series
B Investor Shares of the Acquiring Fund at the Effective Time of the
Reorganization. Notwithstanding anything herein to the contrary, Article IX(f),
Article IX(g) and Article XXIII shall not terminate as of, and shall remain in
full force and effect after, the Effective Time of the Reorganization.
XVII. Termination of Agreement.
------------------------
17.01 This Agreement may be terminated at any time at or prior to the
Effective Time of the Reorganization by an authorized officer of ISIS or of
BlackRock, as provided below:
(a) By BlackRock if any of the conditions set forth in Article X are
not satisfied as specified in said Article;
(b) By ISIS if any of the conditions set forth in Article XI are not
satisfied as specified in said Article; or
(c) By the mutual consent of BlackRock and ISIS.
37
17.02 If BlackRock or ISIS terminates this Agreement because one or more of
the conditions precedent have not been fulfilled, or if this Agreement is
terminated by mutual consent of BlackRock and ISIS, this Agreement, other than
Article XXIII, will become null and void without any liability of either party
to the other; provided, however, that if such termination is by BlackRock
pursuant to Article XVII, Section 17.01(a) as a result of a breach by ISIS of
any of its representations, warranties or covenants in this Agreement, or such
termination is by ISIS pursuant to Article XVII, Section 17.01(b) as a result of
a breach by BlackRock of any of its representations, warranties or covenants in
this Agreement, nothing herein shall affect the non-breaching party's right to
damages on account of such other party's breach.
XVIII. Amendment and Waiver. At any time prior to or (to the fullest extent
--------------------
permitted by law) after approval of this Agreement by the stockholders of ISIS,
(a) the parties hereto may, by written agreement authorized by their respective
Boards of Directors or Trustees, as the case may be, or their respective
Presidents or any Vice Presidents, and with or without the approval of their
shareholders, amend any of the provisions of this Agreement, and (b) either
party may waive any breach by the other party or the failure to satisfy any of
the conditions to its obligations (such waiver to be in writing and authorized
by the President or any Vice President of the waiving party with or without the
approval of such party's shareholders).
38
XIX. Governing Law. This Agreement and the transaction contemplated
-------------
hereby shall be governed, construed and enforced in accordance with the laws of
the State of Maryland, without giving effect to the conflicts of law principles
otherwise applicable therein.
XX. Successors and Assigns. This Agreement shall be binding upon the
----------------------
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
XXI. Beneficiaries. Except as stated herein, nothing contained in this
-------------
Agreement shall be deemed to create rights in or eliminate liabilities of
persons not parties hereto, other than the successors and permitted assigns of
the parties.
XXII. BlackRock Liability.
-------------------
22.01 Each party specifically acknowledges and agrees that all obligations
of BlackRock under this Agreement are binding only with respect to the Acquiring
Fund; that any liability of BlackRock under this Agreement with respect to the
Acquiring Fund, or in connection with the transactions contemplated herein with
respect to the Acquiring Fund, shall be discharged only out of the assets of the
Acquiring Fund; and that no other portfolio
39
of BlackRock shall be liable with respect to this Agreement or in connection
with the transactions contemplated herein.
22.02 "BlackRock Funds" and "Trustees of BlackRock Funds" refer
respectively to the trust created and the Trustees, as trustees but not
individually or personally, acting from time to time under a Declaration of
Trust dated December 22, 1988, as amended, which is hereby referred to and a
copy of which is on file at the office of the State Secretary of the
Commonwealth of Massachusetts and at the principal office of BlackRock. The
obligations of "BlackRock Funds" entered into in the name or on behalf thereof
by any of the Trustees, officers, representatives or agents are made not
individually, but in such capacities, and are not binding upon any of the
Trustees, shareholders, officers, representatives or agents of BlackRock
personally, but bind only the Trust Property (as defined in the Declaration of
Trust), and all persons dealing with any class of shares of BlackRock must look
solely to the Trust Property belonging to such class for the enforcement of any
claims against BlackRock.
XXIII. Expenses. BIMC shall pay all expenses incurred by BlackRock and
--------
ISIS in connection with this Agreement and the transactions contemplated hereby,
including without limitation, all legal, accounting, printing, mailing, proxy
and stockholder solicitation expenses, as well as any expenses incurred by the
Board of Directors of ISIS in evaluating the transactions contemplated by this
Agreement and the future direction of ISIS,
40
including the cost of an independent consultant retained by the Board of
Directors of ISIS, but excluding expenses customarily incurred in connection
with regular meetings of the Board of Directors of ISIS that would have been
held in the absence of the transactions contemplated by this Agreement.
XXIV. Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto with respect to the subject matter hereof
and supercedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXV. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
XXVI. Notices. All notices required or permitted herein shall be in
-------
writing and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by certified
or registered mail, postage prepaid, or delivered to a nationally recognized
overnight courier service, in each case properly addressed to the party entitled
to receive such notice at the address or telecopier number stated below or to
such other address or telecopier number as may hereafter be furnished in writing
by notice similarly given by one party to the other party hereto:
41
If to BlackRock:
Karen H. Sabath
Assistant Secretary
345 Park Avenue
New York, NY 10154
Telecopier Number: (212) 754-8775
With a copy to:
Cynthia G. Cobden, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
If to ISIS:
Edward J. Roach
Vice President and Treasurer
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Telecopier Number: (302) 791-4830
With a copy to:
Michael P. Malloy, Esq.
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103
Telecopier Number: (215) 988-2757
42
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date first
written above.
ATTEST: BLACKROCK FUNDS(SM)
___________________________ _____________________________
Name: Name:
Title: Title:
ATTEST: INDEPENDENCE SQUARE INCOME
SECURITIES, INC.
___________________________ ______________________________
Name: Name:
Title: Title:
BlackRock Institutional Management Corporation joins in this Agreement with
respect to, and agrees to be bound by, Article IX(f), Article IX(g), Article
X(k), Article X(1) Article XI(j), Article XVI and Article XXIII.
ATTEST: BLACKROCK INSTITUTIONAL
MANAGEMENT CORPORATION
___________________________ _________________________
Name: Name:
Title: Title:
43
APPENDIX B
HIGH YIELD BOND PORTFOLIO
TOTAL ASSETS (9/30/99):
$91.6 MILLION
PERFORMANCE BENCHMARK:
LEHMAN HIGH YIELD INDEX
INVESTMENT APPROACH:
SEEKS CURRENT INCOME BY INVESTING PRIMARILY IN NON-INVESTMENT GRADE
SECURITIES (RATED C OR HIGHER OR DEEMED TO BE OF COMPARABLE QUALITY) WHICH YIELD
A HIGH LEVEL OF CURRENT INCOME.
RECENT PORTFOLIO MANAGEMENT ACTIVITY:
. SINCE THE PORTFOLIO'S INCEPTION IN NOVEMBER 1998 THE HIGH YIELD MARKET
HAS PERFORMED WELL AS YIELD SPREADS HAVE NARROWED COMPARED TO TREASURIES.
INVESTORS CONTINUE TO EMPHAZISE HIGHER QUALITY NON-INVESTMENT GRADE CREDITS
INSTEAD OF LOWER TIER CREDITS. THE MANAGER HAS TAKEN ADVANTAGE OF THIS DURING
THE PERIOD BY FOCUSING ON B-RATED CREDITS, WHERE YIELD SPREADS CONTINUE TO
TIGHTEN, WHILE UNDERWEIGHTING CCC-RATED SECURITIES.
. THE PORTFOLIO HAS BENEFITED FROM BEING OVERWEIGHT RELATIVE TO THE INDEX
IN THE TELECOM, OIL AND GAS AND CABLE SECTORS. PARTICULAR EMPHASIS HAS BEEN
PLACED ON THESE SECTORS AS IMPROVING FUNDAMENTALS AND THE POTENTIAL FOR
CONSOLIDATION CONTINUE TO BE A MAJOR CONTRIBUTOR TO THEIR STRONG PERFORMANCE.
THE PORTFOLIO HAS BEEN UNDERWEIGHT THE HEALTHCARE AND TEXTILE SECTORS, WHICH
HAVE BEEN WEAK PERFORMERS.
. THE MANAGER BELIEVES THAT THE SUPPLY AND DEMAND TECHNICALS OF THE HIGH
YIELD MARKET APPEAR TO BE FAVORABLE, AS STRONG MONEY INFLOWS AND LOWER SUPPLY
RELATIVE TO LAST YEAR MAY BODE WELL FOR HIGH YIELD INVESTORS.
Although the portfolio holdings and sectors listed above were current as of the
end of the annual period ended September 30, 1999, the Portfolio is
actively managed and the composition will vary.
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE HIGH YIELD BOND
PORTFOLIO AND THE LEHMAN HIGH YIELD INDEX FROM INCEPTION AND AT EACH MONTH-END.
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Institutional Service Investor A Investor B Investor C BlackRock Lehman High
Class Class Class Class Class Class Yield Index
11/19/98 $10,000 $10,000 $9,500 $10,000 $10,000 $10,000 $10,000
12/31/98 10,128 10,106 9,616 10,113 10,113 10,110 10,160
1/31/99 10,395 10,370 9,866 10,369 10,369 10,378 10,310
2/28/99 10,380 10,351 9,847 10,343 10,343 10,363 10,250
3/31/99 10,466 10,435 9,926 10,418 10,418 10,451 10,347
4/30/99 10,853 10,819 10,289 10,794 10,794 10,840 10,548
5/31/99 10,586 10,551 10,032 10,517 10,517 10,576 10,405
6/30/99 10,622 10,584 10,062 10,542 10,542 10,613 10,383
7/31/99 10,637 10,597 10,072 10,547 10,547 10,630 10,425
8/31/99 10,599 10,557 10,032 10,498 10,498 10,593 10,309
9/30/99 10,592 10,548 10,022 10,010 10,377 10,587 10,235
For period ending September 30, 1999
- --------------------------------------------------------------------------------
TOTAL RETURN
From Inception
BlackRock Class 5.87%
Institutional Class 5.93%
Service Class 5.47%
Investor A Class (Load Adjusted) 0.22%
Investor A Class (NAV) 5.50%
Investor B Class (Load Adjusted) 0.06%
Investor B Class (NAV) 4.78%
Investor C Class (Load Adjusted) 3.64%
Investor C Class (NAV) 4.69%
- --------------------------------------------------------------------------------
The performance information above includes information relating to each class of
the Portfolio since the commencement of operations of the Portfolio, rather than
the date such class was introduced. The inception dates of the Portfolio's share
classes were as follows: BlackRock Shares; Institutional Shares; Service Shares;
Investor A Shares; Investor B Shares; and Investor C Shares, 11/19/98. See "Note
on Performance Information" on page 12 for further information on how
performance data was calculated.
Past performance is not predictive of future results.
1
APPENDIX C
SHARE PRICE DATA FOR ISIS
ISIS' common stock is publicly held and is listed and traded on the NASDAQ
SmallCap Market(SM) under the symbol "ISIS."
The following table sets forth for the periods indicated the high and low
closing sales prices for the shares on the NASDAQ Small Cap Market(SM), the net
asset values per share most recently calculated before the date of the high and
low closing sales prices, and the discount or premium that each sales price
represented as a percentage of the preceding net asset value:
Net
High Sales Low Sales Asset Values Discount (-) or
Quarter or Other Price Price Per Share/2/ Premium (+)/3/
----------------- -----------------
Period Ended Per Share/1/ Per Share/1/ High Low High Low
- -------------------- ----------- ----------- ------- -------- ------- -------
March 31, 1997 17.000 15.750 17.850 17.760 (4.76) (11.32)
June 30, 1997 16.750 15.875 18.050 17.640 (7.20) (10.01)
September 30, 1997 17.750 15.875 18.340 18.110 (3.22) (12.34)
December 31, 1997 17.625 15.125 18.560 18.380 (5.04) (17.71)
March 31, 1998 18.000 16.750 18.400 18.300 (2.17) (8.47)
June 30, 1998 18.125 16.750 18.720 18.490 (3.18) (9.41)
September 30, 1998 18.000 16.750 18.480 18.210 (2.60) (8.02)
December 31, 1998 19.000 17.000 18.850 18.350 2.43 (7.36)
March 31, 1999 18.000 16.375 18.150 17.900 (0.83) (8.52)
June 30, 1999 17.375 15.500 18.180 17.950 (4.43) (13.65)
September 30, 1999 16.750 15.125 17.690 17.180 (5.31) (11.96)
December 31, 1999 16.500 13.750 17.090 17.080 (3.45) (19.50)
_________________________________________
1. As reported on the NASDAQ SmallCap Market(SM). During periods in which
ISIS' shares traded at the high or low price for more than one day, the
information is provided with respect to the trading day on which the
discount or premium was greatest.
2. The net asset value per share calculated by ISIS as of the Friday preceding
the date of each high sales price in the first column and each low sales
price in the second column. Thus, this column does not necessarily show
the highest or the lowest net asset value per share during the period.
3. This column shows the discount or premium that the high and low sales
prices in the first two columns bore to the respective, preceding net asset
values in the third column. It does not necessarily show the highest or
lowest discount or premium during the period.
1
The net asset value of ISIS as of December 31, 1999 was $16.89 and the high
and low sales price were $15.50 and $15.1875, respectively.
ISIS' common stock has frequently traded for an amount less than net asset
value. ISIS has no program to reduce the discount other than the management of
its portfolio.
2
APPENDIX D
SECTIONS 3-202 THROUGH 3-213 OF THE MARYLAND
GENERAL CORPORATION LAW
(S) 3-202. Right to fair value of stock.
(a) General rule. - Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action
under (S) 3-105(e) of this title;
(4) The corporation amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholder's rights, unless the right to do
so is reserved by the charter of the corporation; or
(5) The transaction is governed by (S) 3-602 of this title or exempted by
(S) 3-603(b) of this title.
(b) Basis of fair value. - (1) Fair value is determined as of the close of
business:
(i) With respect to a merger under (S) 3-106 of this title of a 90
percent or more owned subsidiary with or into its parent corporation, on the
day notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, on the day the
stockholders voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value may
not include any appreciation or depreciation which directly or indirectly
results from the transaction objected to or from its proposal.
(3) In any transaction governed by (S) 3-602 of this title or exempted by
(S) 3-603(b) of this title, fair value shall
D-1
be value determined in accordance with the requirements of (S) 3-603(b) of this
title.
(c) When right to fair value does not apply. - Unless the transaction is
governed by (S) 3-602 of this title or is exempted by (S) 3-603(b) of this
title, a stockholder may not demand the fair value of his stock and is bound by
the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. :
(i) With respect to a merger under (S) 3-106 of this title of a
90 percent or more owned subsidiary with or into its parent corporation, on
date notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, on the record date
for determining stockholders entitled to vote on the transaction objected
to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as
expressly set forth in the charter, and the charter does not reserve the
right to do so; or
(ii) The stock is to be changed or converted in whole or in part
in the merger into something other than either stock in the successor or
cash, scrip, or other rights or interests arising out of provisions for the
treatment of fractional shares of stock in the successor; or
(3) The stock is that of an open-end investment company registered
with the Securities and Exchange Commission under the Investment Company Act of
1940 and the value placed on the stock in the transaction is its net asset
value.
(S) 3-203. Procedure by stockholder.
(a) Specific duties. - A stockholder of a corporation who desires to
receive payment of the fair value of his stock under his subtitle:
D-2
(1) Shall file with the corporation a written objection to the
proposed transaction:
(i) With respect to a merger under (S) 3-106 of this title
of a 90 percent or more owned subsidiary with or into its parent
corporation, within 30 days after notice is given or waived under (S) 3-
106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for
record, shall make a written demand on the successor for payment for his stock,
stating the number and class of shares for which he demands payment.
(b) Failure to comply with section. - A stockholder who fails to comply
with this section is bound by the terms of the consolidation, merger, share
exchange, transfer of assets, or charter amendment.
(S) 3-204. Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of business on
the day as at which fair value is to be determined under (S) 3-202 of this
subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that
stock, except the right to receive payment of its fair value.
(S) 3-205. Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the
successor.
D-3
(S) 3-206. Restoration of dividend and other rights.
(a) When rights restored. - The rights of a stockholder who demands
payment are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required
by this subtitle;
(3) A court determines that the stockholder is not entitled to relief;
or
(4) The transaction objected to is abandoned or rescinded.
(b) Effect of restoration. - The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he would
have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceeding taken before the
restoration.
(S) 3-207. Notice and offer to stockholders.
(a) Duty of successor. - (1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:
(i) A balance sheet as of a date not more than six months before
the date of the offer;
(ii) A profit and loss statement for the 12 months ending on the
date of the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice. - The successor shall deliver the notice and
offer to each objecting stockholder
D-4
personally or mail them to him by certified mail, return receipt requested,
bearing a postmark from the United States Postal Service, at the address he
gives the successor in writing, or, if none, at his address as it appears on the
records of the corporation which issued the stock.
(S) 3-208. Petition for appraisal; consolidation of proceedings; jointer of
objectors.
(a) Petition for appraisal. - Within 50 days after the Department accepts
the articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have a
principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors. - (1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation of
the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an
appraisal proceeding.
(S) 3-209. Notation on stock certificate.
(a) Submission of certificate. - At any time after a petition for
appraisal is filed, the court may require the objecting stockholders parties to
the proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation. - If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the rights
of the original objecting stockholder.
D-5
(S) 3-210. Appraisal of fair value.
(a) Court to appoint appraisers. - If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers - Filing. - Within 60 days after their
appointment, unless the court sets a longer time, the appraisers shall determine
the fair value of the stock as of the appropriate date and file a report stating
the conclusion of the majority as to the fair value of the stock.
(c) Same - Contents. - The report shall state the reasons for the
conclusion and shall include a transcript of all testimony and exhibits offered.
(d) Same - Service; objection. - (1) On the same day that the report is
filed, the appraisers shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to
it and request a hearing.
(S) 3-211. Action by court on appraisers' report.
(a) Order of court. - The court shall consider the report and, on motion
of any party to the proceeding, enter an order which :
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order. - (1) If the appraisers' report is confirmed or
modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock.
(2) If the appraisers; report is rejected, the court may:
D-6
(i) Determine the fair value of the stock and enter judgment for
the stockholder; or
(ii) Remit the proceedings to the same or other appraisers on
terms and conditions it considers proper.
(c) Judgment includes interest. - (1) Except as provided in paragraph (2)
of this subsection, a judgment for the stockholder shall award the value of the
stock and interest from the date as at which fair value is to be determined
under (S) 3-202 of this subtitle.
(2) The court may not allow interest if it finds that the failure of
the stockholder to accept an offer for the stock made under (S) 3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to
the stockholder; and
(iii) Any other circumstances it considers relevant.
(d) Costs of proceedings. - (1) The cost of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the stock
made under (S) 3-207 of this subtitle was arbitrary and vexatious or not in good
faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to
the stockholder; and
(iii) Any other circumstances it considers relevant.
D-7
(2) Costs may not include attorney's fees or expenses. The reasonable
fees and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under
(S) 3-207 of this subtitle; or
(ii) The value of the stock determined in the proceeding
materially exceeds the amount offered by the successor.
(e) Effect of judgment. - The judgment is final and conclusive on all
parties and has the same force and effect as other decrees in equity. The
judgment constitutes a lien on the assets of the successor with priority over
any mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
(S) 3-212 Surrender of stock.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing he stock are surrendered to it, indorsed
in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
(S) 3-213. Rights of successor with respect to stock.
(a) General rule. - A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders of
record of that stock on a record date after the close of business on the day as
at which fair value is to be determined under (S) 3-202 of this subtitle.
(b) Successor in transfer of assets. - After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all
the rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange. - Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting
D-8
stockholder has the status of authorized but unissued stock of the successor.
However, a proceeding for reduction of the capital of the successor is not
necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
D-9
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(610) 964-8882
BLACKROCK FUNDS(SM)
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
(800) 441-7762
STATEMENT OF ADDITIONAL INFORMATION
(Special Meeting of Shareholders of
Independence Square Income Securities, Inc.)
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Combined Prospectus/Proxy Statement dated February
__, 2000 for the Special Meeting of Shareholders of Independence Square Income
Securities, Inc.("ISIS"), to be held on March __, 2000. Copies of the Combined
Prospectus/Proxy Statement may be obtained at no charge by calling ISIS at 1-
610-964-8882.
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Combined
Prospectus/Proxy Statement.
Further information about Series B Investor Shares of the High Yield Bond
Portfolio is contained in said Fund's Statement of Additional Information dated
January 28, 1999, which is incorporated herein by reference.
The date of this Statement of Additional Information is February __, 2000.
TABLE OF CONTENTS
Page
----
General Information...................................................
Financial Statements..................................................
Pro Forma Financial Statements........................................
GENERAL INFORMATION
The Shareholders of ISIS are being asked to approve or disapprove an
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as
of December __, 1999 by and between BlackRock FundsSM ("BlackRock") and ISIS and
the transactions contemplated thereby. The Reorganization Agreement
contemplates the transfer of all of the assets and liabilities of ISIS to
BlackRock's High Yield Bond Portfolio in exchange for Series B Investor Shares.
Series B Investor Shares issued by BlackRock will have an aggregate net asset
value equal to the aggregate net asset value of the shares of ISIS that are
outstanding immediately before the Effective Time of the Reorganization.
Following the exchange, ISIS will make a liquidating distribution of the
Series B Investor Shares to its Shareholders, so that a holder of shares in ISIS
will receive Series B Investor Shares of the High Yield Bond Portfolio of equal
value, plus the right to receive any unpaid dividends and distributions that
were declared before the Effective Time of the Reorganization. Upon completion
of the Reorganization, ISIS will be dissolved under state law and will de-
register under the 1940 Act.
A Special Meeting of Shareholders of ISIS to consider the Reorganization
Agreement and the related transaction will be held at the offices of BlackRock
Institutional Management Corporation, Bellevue Park Corporate Center, 400
Bellevue Parkway, Fourth Floor Conference Room, Wilmington, Delaware 19809, on
March __, 2000 at __:__ a.m./p.m. Eastern time. For further information about
the transaction, see the Combined Prospectus/Proxy Statement.
SAI-1
FINANCIAL STATEMENTS
The unaudited financial statements and notes thereto of ISIS contained in
its Semi-Annual Report to Shareholders dated June 30, 1999, and the audited
financial statements and notes thereto of ISIS contained in its Annual Report to
Shareholders dated December 31, 1998, are incorporated by reference into this
Statement of Additional Information related to this Combined Prospectus/Proxy
Statement. The financial statements and notes thereto which appear in ISIS'
Annual Report to Shareholders have been audited by PricewaterhouseCoopers LLP,
whose report thereon also appears in such Annual Report and is also incorporated
herein by reference. No other parts of the Semi-Annual or Annual Reports are
incorporated herein by reference. The financial statements and notes thereto
for ISIS for the fiscal year ended December 31, 1998 have been incorporated
herein by reference in reliance on the report of PricewaterhouseCoopers LLP,
independent auditors, given on their authority as experts in auditing and
accounting.
The audited financial statements and notes thereto of the High Yield Bond
Portfolio contained in its Annual Report to Shareholders dated September 30,
1999 are incorporated by reference into this Statement of Additional Information
related to this Combined Prospectus/Proxy Statement. The financial statements
and notes thereto which appear in the High Yield Bond Portfolio's Annual Report
to Shareholders have been audited by PricewaterhouseCoopers LLP, whose report
thereon also appears in such Annual Report and is also incorporated herein by
reference. No other parts of the Annual Report are incorporated herein by
reference. The financial statements and notes thereto for the High Yield Bond
Portfolio for the fiscal period ended September 30, 1999 have been incorporated
herein by reference in reliance on the report of PricewaterhouseCoopers LLP,
independent auditors, given on their authority as experts in auditing and
accounting.
SAI-2
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following tables set forth the unaudited Pro Forma Combined Portfolio
of Investments as of September 30, 1999, Pro Forma Combined Statement of Assets
and Liabilities as of September 30, 1999, and Pro Forma Combined Statement of
Operations for the twelve month period ended September 30, 1999, and give effect
to the proposed merger of Independence Square Income Securities, Inc. into
BlackRock Funds High Yield Bond Portfolio. The merger provides for the transfer
of all or substantially all of the assets of Independence Square Income
Securities, Inc. to BlackRock Funds High Yield Bond Portfolio in exchange for
BlackRock Funds High Yield Bond Portfolio Class B shares, the distribution of
such BlackRock Funds High Yield Bond Portfolio Class B shares to shareholders of
Independence Square Income Securities, Inc., and the subsequent liquidation of
Independence Square Income Securities, Inc.
SAI-3
BlackRock Funds High Yield Bond Portfolio and Independence Square Income
Securities, Inc. Reorganization
Pro Forma Combined Portfolio of Investments (Unaudited)
As of September 30, 1999
-------------------------------------------------------------------------------
BlackRock Funds Independence Square Proforma
High Yield Bond Portfolio Income Securities, Inc. Combined
-------------------------------------------------------------------------------
Description and Percentage of Portfolio Par(000)/Shares Value Par(000) Value Par(000)/Shares Value
- -----------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK
Hyperion Telecommunications, Inc., Series B (PIK),
12.875%, 0.01 3,231 $ 2,876,093 3,231 $ 2,876,093
Key Energy Services, Inc. Warrant 1,000 2,000 1,000 2,000
Nextel Communications, Inc., Series D (PIK), 13.00%,
0.01 1,032 1,083,600 1,032 1,083,600
Nextel Communications, Inc., Series E (PIK),
11.125%, 0.01 1,084 1,051,480 1,084 1,051,480
Nextlink Communications, Inc. (PIK) ,14.00%, 0.01 31,462 1,557,369 31,462 1,557,369
----------- -----------
TOTAL PREFERRED STOCKS 6,570,542 6,570,542
----------- -----------
U.S. TREASURY NOTES
U.S. Treasury Note, 6.125%, 08/15/07 $ 410 $ 410,339 410 410,339
U.S. Treasury Note, 4.75%, 11/15/08 200 181,968 200 181,968
---------- -----------
TOTAL U.S. TREASURY NOTES 592,307 592,307
---------- -----------
U.S. AGENCY OBLIGATIONS
Federal National Mortgage Association, 7.50%,
08/01/06 900 903,600 900 903,600
---------- -----------
COMMERCIAL MORTGAGE BACKED SECURITIES
Donaldson, Lufkin & Jenrette, Inc., Commercial
Mortgage Corp., Series 98-CG1, Class B4, 7.35%,
01/10/13 $ 2,531 1,806,273 2,531 1,806,273
----------- -----------
CORPORATE BONDS
Electronics
Amkor Technologies, Inc., Series 144A, 10.50%,
05/01/09 2,000 1,920,000 2,000 1,920,000
Condor Systems, Inc., Series 144A, 11.87%, 05/01/09 1,000 890,000 1,000 890,000
----------- -----------
2,810,000 2,810,000
----------- -----------
Financial
BGLS, Inc., Series B ,15.75% , 01/31/01 700 700,000 700 700,000
----------- -----------
Industrial
American Plumbing & Mechanical, Inc., Series 144A,
11.62%,10/15/08 1,000 900,000 1,000 900,000
Ameriserve Food Distributor, 8.87%, 10/15/06 750 570,000 750 570,000
Charles River Laboratories, Inc., 13.50%, 10/01/09 1,000 1,010,000 1,000 1,010,000
Concentra Operating Corp., Series 144A, 13.00%,
08/15/09 2,000 2,000,000 2,000 2,000,000
Fountain View, Inc., Series B, 11.25%, 04/15/08 1,000 720,000 1,000 720,000
Golden Northwest Aluminum First Mortgage Notes,
12.00%, 12/15/06 1,750 1,802,500 1,000 1,030,000 2,750 2,832,500
Hudson Respiratory Care, Inc., 9.12%, 04/15/08 2,000 1,560,000 2,000 1,560,000
Huntsman ICI Hldgs., Series 144A (STEP) 13.00%,
12/31/09 (C) 3,500 910,000 3,500 910,000
Kasper A.S.L. Ltd., 12.75% 03/31/04 1,500 1,447,500 1,500 1,447,500
Knology Hldgs., Inc. (STEP) 13.36%,10/15/07 (C) 2,000 1,100,000 2,000 1,100,000
Knowles Electronics, Inc., 13.12%, 10/01/09 1,000 979,540 1,000 979,540
Lyondell Chemical, 10.875%, 05/01/09 2,600 2,613,000 1,000 1,005,000 3,600 3,618,000
National Equipment Services, Series D, 10.00%,
11/30/04 2,000 1,980,000 2,000 1,980,000
Nebco Evans Hldg. Co. (STEP) 17.25%, 07/15/07 (C) 800 296,000 800 296,000
Northeast Optic Network, 12.75%, 08/15/08 2,000 2,040,000 2,000 2,040,000
Pogo Producing Co., Series 144A, 10.37%, 02/15/09 1,000 1,037,500 1,000 1,037,500
Polaroid Corp., 11.50%, 02/15/06 1,000 1,043,750 1,000 1,043,750
Psinet, Inc., Series 144A, 11.00%, 08/01/09 1,000 985,000 1,000 985,000
Repap New Brunswick, 10.62%, 04/15/05 1,000 872,500 1,000 872,500
Republic Tech RTI Capital, Series 144A, 13.75%,
07/15/09 1,000 950,000 1,000 950,000
Revlon Consumer Products, 8.62%, 02/01/08 2,000 1,630,000 2,000 1,630,000
Sinclair Broadcast Group., 9.00%, 07/15/07 2,000 1,895,000 2,000 1,895,000
St. John Knits Intl., Series 144A, 12.50%, 07/01/09 1,000 915,000 1,000 915,000
U.S. Home, 8.87%, 02/15/09 1,000 910,000 1,000 910,000
Veritas DGC Inc., 9.75%, 10/15/03 1,000 1,012,500 1,000 1,012,500 2,000 2,025,000
Waterford Gaming, LLC Sr. Notes, Series 144A, 9.50%,
03/15/10 1,000 972,500 500 486,250 1,500 1,458,750
Wec Co., Series 144A, 12.00%, 07/15/09 1,000 980,000 1,000 980,000
Willis Corroon Corp., 9.00%, 02/01/09 1,000 905,000 1,000 905,000
----------- -----------
34,037,290 34,037,290
----------- -----------
Oil and Gas
Chesapeake Energy Corp., 9.12%, 04/15/06 1,500 1,380,000 1,500 1,380,000
Dual Drilling Co., 9.87%, 01/15/04 100 104,000 100 104,000
Grey Wolf Inc., Series C, 8.87%, 07/01/07 1,500 1,350,000 1,500 1,350,000
Key Energy Services, Inc., Series B, 14.00%,
01/15/09 1,000 1,065,000 1,000 1,065,000
R&B Falcon Corp., 12.25%, 03/15/06 2,000 2,110,000 2,000 2,110,000
Swift Energy Co., 10.25%, 08/01/09 1,550 1,557,750 1,550 1,557,750
Western Gas Resources, Series 144A, 10.00%,
06/15/09 1,500 1,533,750 1,500 1,533,750
----------- -----------
9,100,500 9,100,500
----------- -----------
Retail
Group One Automotive, Inc., 10.87%, 03/01/09 1,000 950,000 1,000 950,000
J. Crew Group, Inc., Series B (STEP) 13.44%,
10/15/08 (C) 1,500 787,500 1,500 787,500
J.H. Heafner Co., Series D, 10.00%, 05/15/08 1,000 940,000 1,000 940,000
Mattress Discounters Corp., 12.62%, 07/15/07 1,000 950,000 1,000 950,000
Sbarro Inc. 144A Sr. Notes, 11.00%, 09/15/09 1,000 988,750 1,000 988,750
Sonic Automotive, Inc., Series B, 11.00%, 08/01/08 2,000 1,910,000 2,000 1,910,000
----------- -----------
6,526,250 6,526,250
----------- -----------
----------------------------------------------------------------------------
BlackRock Funds Independence Square Proforma
High Yield Bond Portfolio Income Securities, Inc. Combined
---------------------------------------------------------------------------
Decription and Percentage of Portfolio Par (000) Shares Value Par (000) Shares Value Par (000) Shares
- ---------------------------------------------------------------------------------------------------------------------------------
Special Purpose
Nextel Partners, Inc., (STEP) 13.57%, 02/01/09 (C) $ 4,100 $ 2,439,500 $ 4,100
Penhall Acquisition Corp., 12.00%, 08/01/06 2,000 1,960,000 2,000
Pinnacle Hldgs., (STEP) 12.26%, 03/15/08 (C) 3,000 1,732,500 3,000
Zais Investment Grade Ltd., 9.95%, 09/23/14 1,000 990,000 1,000
-----------
7,122,000
-----------
Telecommunications
Allegiance Telecom Inc. Units 144A (STEP) 12.52%,
02/15/08 (C) 3,000 1,935,000 3,000
Diamond Cable Communications PLC, 12/15/05 1,000 902,500 1,000
Echostar DBS Corp., 9.37%, 02/01/09 2,000 1,975,000 2,000
Echostar DBS Corp. Series 144A Industrial, 9.25%, 02/01/06 1,000 987,500 1,000
Globenet Communications Group Ltd., Series 144A, 13.00%,
07/15/07 1,500 1,485,000 1,500
Hyperion Telecommunications, Series B, 04/15/03 2,000 1,690,000 2,000
IPC Info. Systems (STEP) 11.92%, 05/01/08 (C) 3,000 2,280,000 3,000
James Cable Partners LP, Series B, 10.75%, 08/15/04 1,000 1,005,000 1,000
Spectrasite Holdings Inc., Series 144A (STEP) 11.25%,
04/15/09 (C) 2,000 1,000,000 2,000
Teligent, Inc., 11.50%, 12/01/07 2,000 1,840,000 2,000
United Pan-Europe Communications, Series 144A (STEP)
12.50%, 08/01/09 (C) 4,000 2,240,000 4,000
United Pan-Europe Communications, NV.,
Series 144A, 10.87%, 08/01/09 1,500 1,522,500 1,500
Versatel Telecom BV, Sr. Notes, 11.87%, 07/15/09 1,000 950,000 1,000
Viatel, Inc., (STEP) 11.93%, 04/15/08 (C) 1,600 928,000 1,600
Williams Communications Group, Inc. Sr. Notes,
10.87%, 10/01/09 1,000 992,490 1,000
Worldwide Fiber, Inc., Series 144A, 12.00%, 08/01/09 1,000 975,000 1,000
-----------
22,707,990
-----------
Ahmanson (H.F.) & Company, 9.875%, 11/15/1999 $ 1,000 $ 1,005,014 1,000
BankAmerica, 9.50%, 04/01/01 500 520,757 500
Calpine Corp., 9.250%, 02/01/04 550 555,500 550
CenCall Communications Corp. Sr. Disc. Notes, 10.13%,
01/15/04 1,000 1,002,500 1,000
Cleveland Electric Illuminating, 9.00%, 07/01/23 1,000 1,006,708 1,000
Comerica Bank, 8.375%, 07/15/24 1,000 1,004,585 1,000
Delta Airlines, Inc., 9.25%, 03/15/22 1,000 1,082,078 1,000
Federal Express, 9.625%, 10/15/19 500 520,070 500
First Chicago NBD Corp., 8.875%, 03/15/02 500 524,583 500
First Interstate Bancorp., 9.00%, 11/15/04 1,000 1,003,420 1,000
First Union Corp., 8.00%, 08/15/09 500 511,836 500
Ford Motor Credit Co., 9.14%, 12/30/14 1,000 1,079,177 1,000
GTE California, Inc., 8.07%, 04/15/24 300 299,695 300
Gulf States Utilities 8.70%, 04/01/24 1,000 1,014,420 1,000
Harris Bancorp, 9.375%, 06/01/01 500 520,583 500
Horton (D.R.), Inc. Co. Guarantee Notes, 10.00%,
04/15/06 250 250,000 250
Hydro-Quebec, 8.875%, 03/01/26 1,000 1,153,296 1,000
Jersey Central Power and Light, 8.45%, 03/24/25 1,000 1,051,590 1,000
New York State Electric & Gas Corp., 9.875%, 05/01/20 800 847,000 800
News America Holdings, 9.50%, 07/15/24 1,000 1,116,066 1,000
Nextlink Communications, Inc. Sr. Notes, 12.50%,
04/15/06 1,000 1,060,000 1,000
Participation in Asset Exchange, 7.00%, 12/01/20 (A) 5 5,081 5
Penney (J.C.) & Company, 8.25%, 08/15/22 500 497,805 500
RBF Finance Co., 11.38%, 03/15/09 1,000 1,055,000 1,000
Reynolds (R.J.) Tobacco Holdings, Inc., 7.375%,
05/15/03 1,000 973,864 1,000
Sinclair Broadcast Group Sr. Sub. Notes, 10.00%,
09/30/05 200 200,000 200
Sonic Automotive, Inc., 11.00%, 08/01/08 500 478,750 500
TCI Communications, 8.75%, 02/15/23 1,000 1,042,876 1,000
Time Warner Entertainment, Inc., 8.375%, 07/15/33 1,000 1,065,589 1,000
U.S. West, 8.875%, 06/01/31 1,000 1,037,479 1,000
United Air Lines, 9.210%, 01/21/17 450 490,500 450
Virginia Electric & Power Corp. Series B, 8.625%,
10/01/24 1,000 989,488 1,000
Zurich Capital Trust I, 8.376%, 06/01/37 500 487,478 500
-----------
TOTAL CORPORATE BONDS 83,004,030 $28,986,538
----------- -----------
SHORT TERM INVESTMENTS
Galileo Money Market Fund 194,162 194,162 194,162
-----------
TOTAL SHORT TERM INVESTMENTS 194,162 -
----------- -----------
TOTAL INVESTMENTS
(BlackRock High Yield Bond Portfolio cost -
$94,176,716)
(Independence Square Income Securties, Inc. cost -
$30,525,353(B))
----------- -----------
(Proforma combined cost - $124,702,069) $91,575,007 $30,482,445
=========== ===========
Decription and Percentage of Portfolio Value
- ----------------------------------------------------------------------------------
Special Purpose $ 2,439,500
Nextel Partners, Inc., (STEP) 13.57%, 02/01/09 (C) 1,960,000
Penhall Acquisition Corp., 12.00%, 08/01/06 1,732,500
Pinnacle Hldgs., (STEP) 12.26%, 03/15/08 (C)
------------
990,000
Zais Investment Grade Ltd., 9.95%, 09/23/14 ------------
7,122,000
------------
Telecommunications
Allegiance Telecom Inc. Units 144A (STEP) 12.52%,
02/15/08 (C) 1,935,000
Diamond Cable Communications PLC, 12/15/05 902,500
Echostar DBS Corp., 9.37%, 02/01/09 1,975,000
Echostar DBS Corp. Series 144A Industrial, 9.25%,
02/01/06 987,500
Globenet Communications Group Ltd., Series 144A,
13.00%, 07/15/07 1,485,000
Hyperion Telecommunications, Series B, 04/15/03 1,690,000
IPC Info. Systems (STEP) 11.92%, 05/01/08 (C) 2,280,000
James Cable Partners LP, Series B, 10.75%, 08/15/04 1,005,000
Spectrasite Holdings Inc., Series 144A (STEP) 11.25
04/15/09 (C) 1,000,000
Teligent, Inc., 11.50%, 12/01/07 1,840,000
United Pan-Europe Communications, Series 144A (STEP
12.50%, 08/01/09 (C) 2,240,000
United Pan-Europe Communications, NV.,
Series 144A, 10.87%, 08/01/09 1,522,500
Versatel Telecom BV, Sr. Notes, 11.87%, 07/15/09 950,000
Viatel, Inc., (STEP) 11.93%, 04/15/08 (C) 928,000
Williams Communications Group, Inc. Sr. Notes, 10.87%, 10/01/09 992,490
Worldwide Fiber, Inc., Series 144A, 12.00%, 08/01/0 975,000
------------
22,707,990
------------
Ahmanson (H.F.) & Company, 9.875%, 11/15/1999 1,005,014
BankAmerica, 9.50%, 04/01/01 520,757
Calpine Corp., 9.250%, 02/01/04 555,500
CenCall Communications Corp. Sr. Disc. Notes, 10.13%, 01/15/04 1,002,500
Cleveland Electric Illuminating, 9.00%, 07/01/23 1,006,708
Comerica Bank, 8.375%, 07/15/24 1,004,585
Delta Airlines, Inc., 9.25%, 03/15/22 1,082,078
Federal Express, 9.625%, 10/15/19 520,070
First Chicago NBD Corp., 8.875%, 03/15/02 524,583
First Interstate Bancorp., 9.00%, 11/15/04 1,003,420
First Union Corp., 8.00%, 08/15/09 511,836
Ford Motor Credit Co., 9.14%, 12/30/14 1,079,177
GTE California, Inc., 8.07%, 04/15/24 299,695
Gulf States Utilities 8.70%, 04/01/24 1,014,420
Harris Bancorp, 9.375%, 06/01/01 520,583
Horton (D.R.), Inc. Co. Guarantee Notes, 10.00%, 04/15/06 250,000
Hydro-Quebec, 8.875%, 03/01/26 1,153,296
Jersey Central Power and Light, 8.45% 03/24/25 1,051,590
New York State Electric & Gas Corp., 9.875%, 05/01/20 847,000
News America Holdings, 9.50%, 07/15/24 1,116,066
Nextlink Communications, Inc. Sr. Notes, 12.50%, 04/15/06 1,060,000
Participation in Asset Exchange, 7.00%, 12/01/20 (A) 5,081
Penney (J.C.) & Company, 8.25%, 08/15/22 497,805
RBF Finance Co., 11.38%, 03/15/09 1,055,000
Reynolds (R.J.) Tobacco Holdings, Inc., 7.375%, 05/15/03 973,864
Sinclair Broadcast Group Sr. Sub. Notes, 10.00%, 09/30/05 200,000
Sonic Automotive, Inc., 11.00%, 08/01/08 478,750
TCI Communications, 8.75%, 02/15/23 1,042,876
Time Warner Entertainment, Inc., 8.375%, 07/15/33 1,065,589
U.S. West, 8.875%, 06/01/31 1,037,479
United Air Lines, 9.210%, 01/21/17 490,500
Virginia Electric & Power Corp. Series B, 8.625%, 10/01/24 989,488
Zurich Capital Trust I, 8.376%, 06/01/37 487,478
------------
TOTAL CORPORATE BONDS 111,990,568
------------
SHORT TERM INVESTMENTS
Galileo Money Market Fund 194,162
------------
TOTAL SHORT TERM INVESTMENTS 194,162
------------
TOTAL INVESTMENTS
(BlackRock High Yield Bond Portfolio cost -
$94,176,716)
(Independence Square Income Securties, Inc. cost -
$30,525,353(B))
------------
(Proforma combined cost - $124,702,069) $122,057,452
============
____________________________________________
(A) Non-income producing security
(B) Reflects amortization of premium and accretion of discount
(C) Rates shown are the effecive yields as of September 30, 1999
See accompanying notes to the Pro Forma Financial Statements.
BlackRock Funds High Yield Bond portfolio and Independence Square Income
Securities, Inc. Reorganization
Combined Statement of Assets and Liabilities (Unaudited)
As of September 30, 1999
--------------------------------------------------------------------------------------------
BlackRock Funds Independence Square Adjustments Pro Forma
High Yield Bond Portfolio Income Securities, Inc. Combined
--------------------------------------------------------------------------------------------
Investments $ 91,575,007 $ 30,482,445 $ 122,057,452
Cash - 39,589 39,589
Receivable - interest 1,593,994 760,428 2,354,422
Receivable - investments sold 3,068,771 - 3,068,771
Receivable - fund shares sold 177,857 - 177,857
Receivable from investment advisor - 27,584 27,584
Other assets 30,644 - 30,644
--------------------------------------------------------------------------------------------
Total assets 96,446,273 31,310,046 127,756,319
--------------------------------------------------------------------------------------------
Payable - investments purchased 5,475,188 - 5,475,188
Payable - fund shares repurchased 5,964 - 5,964
Payable - distributions 696,704 - 696,704
Payable - management fee - 9,666 9,666
Payable - 12b-1 fees - - -
Reverse repurchase agreements payable 6,831,443 - 6,831,443
Accrued Expenses 111,963 25,976 137,939
--------------------------------------------------------------------------------------------
Total liabilities 13,121,262 35,642 13,156,904
--------------------------------------------------------------------------------------------
Net assets $ 83,325,011 $ 31,274,404 $ 114,599,415
============================================================================================
Net Asset Value and Redemption Price
per Blackrock, Institutional, Service
and Investor A Share ($68,271,709
/ 7,014,949) $ 9.73 $ 9.73
Offering price per BlackRock,
Institutional and Service Share $ 9.73 $ 9.73
Maximum offering price per Investor
A Share ($9.73 / 0.950) $ 10.24 $ 10.24
Net Asset Value and Redemption Price
(subject to a maximum contingent
deferred sales charge of 4.5%) per
Investor B Share ($12,408,541 / 1,274,781) $ 9.73
Net Asset Value and Redemption Price
(subject to a maximum contingent
deferred sales charge of 1.0%) per
Investor C Share ($2,646,761 / 271,952) $ 9.73 $ 9.73
Net Asset Value per ISIS Share
($31,274,404 / 1,822,752) $ 17.16
Net Asset Value and Redemption Price
per Pro Forma Combined Investor B
Share ($43,680,945 / 4,489,005) $ 9.73
See accompanying notes to the Pro Forma Financial Statements.
BlackRock Funds High Yield Bond Portfolio and Independence Square Income
Securities, Inc. Reorganization
Combined Statement of Operations (Unaudited)
-----------------------------------------------------------------------------------------------
BlackRock Funds Independence Square Adjustments Pro Forma
High Yield Bond Portfolio Income Securities, Inc. Combined
for the period ended for the year ended
September 30, 1999* September 30, 1999
-----------------------------------------------------------------------------------------------
Dividend Income $ $ - $ -
Interest Income 6,141,856 2,620,915 (9,594) 8,753,177
-----------------------------------------------------------------------------------------------
Investment Income 6,141,856 2,620,915 (9,594) (a) 8,753,177
-----------------------------------------------------------------------------------------------
Investment advisory services 263,946 117,758 45,588 (b) 427,292
Administrative services fees 94,182 - 75,139 (c) 169,321
Transfer agent fees 26,377 19,913 12,756 (d) 59,046
Custodian fees 17,609 19,729 (14,829) (e) 22,509
Professional fees 146,826 52,546 (50,259) (f) 149,113
Shareholder reports 94,238 12,839 (9,245) (g) 97,832
Trustees' fees 818 32,855 (32,202) (h) 1,471
Shareholder servicing fees 25,179 - 81,673 (i) 106,852
Shareholder processing fees 15,107 - 49,004 (j) 64,111
Distribution fees 57,531 - 245,019 (k) 302,550
Registration fees and expenses 74,621 - 8,694 (l) 83,315
Other 9,175 14,839 (11,395) (m) 12,619
-----------------------------------------------------------------------------------------------
825,609 270,479 399,943 1,496,031
Expenses waived or reimbursed (346,897) - (43,173) (n) (390,070)
-----------------------------------------------------------------------------------------------
Total operating expenses 478,712 270,479 356,770 1,105,961
Interest expense 175,871 - - 175,871
-----------------------------------------------------------------------------------------------
Total expenses 654,583 270,479 356,770 1,281,832
-----------------------------------------------------------------------------------------------
Net investment income $ 5,487,273 $ 2,350,436 $ (366,364) $ 7,471,345
===============================================================================================
- ---------------------
* Commencement of operations was November 19, 1998
See accompanying notes to the Pro Forma Financial Statements.
BlackRock Funds High Yield Portfolio/Independence Square Income Securities, Inc.
Notes to Pro Forma Financial Statements (Unaudited)
September 30, 1999
1. Basis of Combination
The unaudited Pro Forma Combined Portfolio of Investments, Pro Forma
Combined Statement of Assets and Liabilities and Pro Forma Combined Statement of
Operations give effect to the proposed merger of Independence Square Income
Securities, Inc. into BlackRock Funds High Yield Bond Portfolio. The proposed
merger will be accounted for by the method of accounting for tax-free
reorganizations of investment companies (sometimes referred to as the pooling-
of-interest basis). The reorganization provides for the transfer of all or
substantially all of the assets of Independence Square Income Securities, Inc.
to BlackRock Funds High Yield Bond Portfolio in exchange for BlackRock Funds
High Yield Bond Portfolio Class B shares, the distribution of such BlackRock
Funds High Yield Bond Portfolio Class B shares to shareholders of Independence
Square Income Securities, Inc., and the subsequent liquidation of Independence
Square Income Securities, Inc.
The pro forma combined statements should be read in conjunction with the
historical financial statements of the constituent fund and the notes thereto
incorporated by reference in the Statement of Additional Information.
BlackRock Funds High Yield Bond Portfolio, an open-end, management
investment company, and Independence Square Income Securities, Inc., a closed-
end, management investment company, are both registered under the Investment
Company Act of 1940, as amended.
Pro Forma Adjustments:
The Pro Forma adjustments below reflect the impact of the reorganization between
BlackRock Funds High Yield Portfolio and Independence Square Income Securities,
Inc.
a) to reflect amortization of premium and discount.
b) to increase Independence Square Income Securities, Inc. advisory fee to
BlackRock Funds High Yield Portfolio's rate of 0.50%
c) to record administrative service fee of 0.23%. Independence Square Income
Securities, Inc. does not charge an administrative service fee.
d) to increase Independence Square Income Securities, Inc. transfer agent fees
to BlackRock Funds HighYield Portfolio's rate of 0.10%.
e) to decrease Independence Square Income Securities, Inc. custodian fees to
BlackRock Funds High Yield Portfolio's rate of 0.015%.
f) to decrease Independence Square Income Securities, Inc. professional fees
(consisting of legal and audit fees) to reflect BlackRock Funds High Yield
Portfolio's ending proportionate allocation of BlackRock Funds' professional
fees.
10
g) to decrease Independence Square Income Securities, Inc. shareholder
reporting fees to reflect BlackRock Funds High Yield Portfolio's ending
proportionate allocation of BlackRock Funds' shareholder reporting fees.
h) to decrease Independence Square Income Securities, Inc. trustees' fees to
reflect BlackRock Funds High Yield Portfolio's ending proportionate
allocation of BlackRock Funds' trustees' fees.
i) to record shareholder servicing fees of 0.25%. Independence Square Income
Securities, Inc. does not charge a shareholder servicing fee.
j) to record shareholder processing fees of 0.15%. Independence Square Income
Securities, Inc. does not charge a shareholder processing fee.
k) to record distribution fees of 0.75%. Independence Square Income Securities,
Inc. does not charge a distribution fee.
l) to record additional SEC registration fees on the value of the shares
increased from the merger.
m) to decrease Independence Square Income Securities, Inc. insurance and other
expenses to reflect BlackRock Funds High Yield Portfolio's ending
proportionate allocation of BlackRock Funds' insurance and other expenses.
n) to limit the operation expenses (excluding interest expense) to 1.92%.
2. Summary of Significant Accounting Policies
Following is a summary of significant accounting policies which are
consistently followed by BlackRock Funds High Yield Bond Portfolio/Independence
Square Income Securities, Inc. in the preparation of its financial statements.
The policies are in conformity with generally accepted accounting principles.
Preparation of the financial statements includes the use of management
estimates. Actual results could differ from those estimates.
Security Valuation - Portfolio securities for which market quotations are
readily available are valued at market value that is currently determined using
the last reported sales price. If no sales are reported, for BlackRock Funds
High Yield Portfolio, portfolio securities are valued at the mean between the
last reported bid and asked prices. For Independence Square Income Securities,
Inc. securities not listed or not traded on that day are valued at their most
recent quoted bid prices or at prices determined by investment bankers or
brokers. Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which approximates market value. For BlackRock Funds High yield
Portfolio discounts and premiums on debt securities are amortized for book and
tax purposes using the effective yield-to-maturity method over the term of the
instrument. Independence Square Income Securities, Inc. does not amortize
premiums or discounts on bonds held for investment for financial reporting or
federal income tax purposes.
Security Transactions and Investment Income - Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
federal income tax purposes. Interest income is recorded on the accrual basis.
Federal Income Taxes - BlackRock Funds High Yield Portfolio/Independence
Square Income
Securities, Inc. intends to qualify for tax treatment applicable to regulated
investment companies under the Internal Revenue Code of 1986 (the "Code"), as
amended, and distribute all of its taxable income to its shareholders.
Therefore, no provision has been recorded for Federal income or excise taxes.
Distributions to Shareholders - Distributions from net investment income
are declared by BlackRock Funds High Yield Bond Portfolio each day and monthly
by Independence Square Income Securities, Inc. on "settled" shares. Both funds
pay the net investment income monthly. Net realized capital gains, if any will
be distributed annually.
12
FORM N-14
---------
Part C - Other Information
--------------------------
Item 15. Indemnification.
---------------
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit 5(a). Indemnification of Registrant's Custodian,
Transfer Agent and Administrators is provided for, respectively, in Section 22
of the Custodian Agreement incorporated by reference herein as Exhibit 7(a),
Section 17 of the Transfer Agency Agreement incorporated by reference herein as
Exhibit 8(c) and Section 11 of the Administration Agreement which is Exhibit
8(a) hereof. Registrant intends to obtain from a major insurance carrier a
trustees and officers liability policy covering certain types of errors and
omissions. In addition, Section 9.3 of the Registrant's Declaration of Trust
incorporated by reference herein as Exhibit 1(a) provides as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
--------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee except
------
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter disposed of by a
--------
compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross negligence
or reckless disregard of duty, or the matter of bad faith had been
adjudicated, it would in the opinion of such counsel have been adjudicated
in favor of such person. The rights accruing to any person under these
provisions shall not exclude any other right to which he may be lawfully
entitled, provided that no person may satisfy any right of indemnity or
--------
reimbursement hereunder except out of the property of the Trust. The
Trustees may make advance payments in connection with the indemnification
under this Section 9.3, provided that the indemnified person shall have
--------
given a written undertaking to reimburse the Trust in the event it is
subsequently determined that he is not entitled to such indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
C-1
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned
by such shareholder to be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust shall, upon
request by the Shareholder, assume the defense of any claim made against
any Shareholder for any act or obligations of the Trust and satisfy any
judgment thereon from such assets.
Item 16. Exhibits.
--------
(1) Articles of Incorporation
(a) Declaration of Trust of the Registrant dated December 22,
1988 is incorporated herein by reference to Exhibit (1)(a)
of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A (File Nos. 33-26305/811-
05742) filed on January 27, 1998 ("PEA No. 33").
C-2
(b) Amendment No. 1 to Declaration of Trust dated May 4, 1989 is
incorporated herein by reference to Exhibit (1)(b) of PEA
No. 33.
(c) Amendment No. 2 to the Declaration of Trust dated December
23, 1993 is incorporated herein by reference to Exhibit
(1)(c) of PEA No. 33.
(d) Amendment No. 3 to the Declaration of Trust dated January 5,
1996 is incorporated herein by reference to Exhibit (1)(d)
of Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-1A (File Nos. 33-26305/811-
05742 filed on October 18, 1996.
(e) Amendment No. 4 to the Declaration of Trust dated December
23, 1997 is incorporated herein by reference to Exhibit
(1)(e) of PEA No. 33.
(2) By-laws
(a) Amended and Restated Code of Regulations is incorporated
herein by reference to Exhibit 2(a) of Post-Effective
Amendment No. 42 to Registrant's Registration Statement on
Form N-1A (File Nos. 33-26305/ 811-05742) filed on June 11,
1999 ("PEA No. 42").
(3) Voting Trust Agreement(s)
None.
(4) Plan of Reorganization filed herewith as Appendix A to the Combined
Prospectus/Proxy Statement.
(5) Instruments Defining Rights of Security Holders.
(a) Sections V, VIII and IX of Registrant's Declaration of Trust
dated December 22, 1988 are incorporated herein by reference to
Exhibit (1)(a) of PEA No. 33; Article II of Registrant's Code of
Regulations is incorporated herein by reference to Exhibit (2) of
PEA No. 33.
C-3
(6) Investment Advisory Contracts.
(a) Investment Advisory Agreement between Registrant and PNC Asset
Management Group, Inc. relating to all Portfolios except the
Multi-Sector Mortgage Securities Portfolio III and Index Equity
Portfolio is incorporated herein by reference to Exhibit (5)(a) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A (File Nos. 33-26305/811-05742) filed on May
30, 1996 ("PEA No. 21").
(b) Investment Advisory Agreement between Registrant and BlackRock
Financial Management, Inc. with respect to the Multi-Sector
Mortgage Securities Portfolio III is incorporated herein by
reference to Exhibit (5)(b) of PEA No. 21.
(c) Addendum No. 1 to Investment Advisory Agreement between Registrant
and PNC Asset Management Group, Inc. with respect to the Mid-Cap
Value Equity and Mid-Cap Growth Equity Portfolios is incorporated
herein by reference to Exhibit (5)(c) of Post-Effective Amendment
No. 27 to Registrant's Registration Statement on Form N-1A (File
Nos. 33-26305/811-05742) filed on January 28, 1997 ("PEA No. 27").
(d) Form of Addendum No. 1 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect
to BlackRock Strategic Portfolio I and BlackRock Strategic
Portfolio II is incorporated herein by reference to Exhibit (5)(d)
of Post-Effective Amendment No. 26 to Registrant's Registration
Statement on Form N-1A (File Nos. 33-26305/811-05742) filed on
December 18, 1996.
(e) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to
the International Small Cap Equity Portfolio is incorporated
herein by reference to Exhibit (5)(e) of Post-Effective Amendment
No. 30 to Registrant's Registration Statement on Form N-1A (File
Nos. 33-26305/811-05742) filed on August 19, 1997 ("PEA No. 30").
(f) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and BlackRock Financial Management, Inc. with respect to the
Managed Income, Tax-Free Income, Intermediate Government Bond,
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, Low Duration
Bond, Intermediate Bond, Government Income, New Jersey Tax-Free
Income and Core Bond Portfolios is incorporated herein by
reference to Exhibit (5)(c) of PEA No. 21.
C-4
(g) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and Provident Capital Management, Inc. with respect to the Large
Cap Value Equity, Small Cap Value Equity and Select Equity
Portfolios is incorporated herein by reference to Exhibit (5)(c)
of PEA No. 21.
(h) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Equity Advisors Company with respect to the Large Cap
Growth Equity and Small Cap Growth Equity Portfolios is
incorporated herein by reference to Exhibit (5)(c) of PEA No. 21.
(i) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Institutional Management Corporation with respect to the
Money Market, U.S. Treasury Money Market, Municipal Money Market,
Pennsylvania Municipal Money Market, Ohio Municipal Money Market,
North Carolina Municipal Money Market, Virginia Municipal Money
Market and New Jersey Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (5)(c) of PEA No. 21.
(j) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and CastleInternational Asset Management Limited with respect to
the International Equity and International Emerging Markets
Portfolios is incorporated herein by reference to Exhibit (5)(c)
of PEA No. 21.
(k) Sub-Advisory Agreement among PNC Asset Management Group, Inc.,
Provident Capital Management, Inc. and BlackRock Financial
Management, Inc. with respect to the Balanced Portfolio is
incorporated herein by reference to exhibit (5)(c) of PEA No. 21.
(l) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and Provident Capital Management, Inc. with respect to the Mid
Cap Value Equity Portfolio is incorporated herein by reference to
Exhibit (5)(k) of PEA No. 27.
(m) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and PNC Equity Advisors Company with respect to the Mid Cap
Growth Equity Portfolio is incorporated herein by reference to
Exhibit (5)(l) of PEA No. 27.
(n) Sub-Advisory Agreement between PNC Asset Management Group, Inc.
and BlackRock Financial Management, Inc. with
C-5
respect to the International Bond Portfolio is incorporated
herein by reference to Exhibit (5)(m) of PEA No. 27.
(o) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management Limited with
respect to the International Small Cap Equity Portfolio is
incorporated herein by reference to Exhibit (5)(o) of PEA No. 30.
(p) Form of Addendum No. 3 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect to
the Micro-Cap Equity Portfolio, GNMA Portfolio, Delaware Tax-Free
Income Portfolio and Kentucky Tax-Free Income Portfolio is
incorporated herein by reference to Exhibit (5)(p) of PEA No. 33.
(q) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with respect to the
Micro-Cap Equity Portfolio is incorporated herein by reference
to Exhibit (5)(q) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A (File Nos.
33-26305/811-05742) filed January 27, 1998 ("PEA No. 33").
(r) Form of Sub-Advisory Agreement between BlackRock, Inc. and
BlackRock Financial Management, Inc. with respect to the GNMA,
Delaware Tax-Free Income and Kentucky Tax-Free Income Portfolios
is incorporated herein by reference to Exhibit (5)(r) of Post-
Effective Amendment No. 34 to Registrant's Registration Statement
on Form N-1A (File Nos. 33-26305/811-05742) filed on February 13,
1998 ("PEA No. 34").
(s) Form of Addendum No. 4 to Investment Advisory Agreement between
Registrant and BlackRock Advisors, Inc. with respect to the High
Yield Bond Portfolio is incorporated herein by reference to
Exhibit (5)(s) of Post-Effective Amendment No. 37 to Registrant's
Registration Statement on Form N-1A (File Nos. 33-26305/811-
05742) filed on August 7, 1998 ("PEA No. 37").
(t) Form of Sub-Advisory Agreement between BlackRock Advisors, Inc.
and BlackRock Financial Management, Inc. with respect to the High
Yield Bond Portfolio is incorporated herein by reference to
Exhibit (5)(t) of PEA No. 37.
(u) Form of Addendum No. 2 to Investment Advisory Agreement between
Registrant and BlackRock Financial Management, Inc. with respect
to the Multi-Sector Mortgage Securities Portfolio IV is
incorporated herein by reference to Exhibit (4)(u) of PEA No. 42.
C-6
(7) Underwriting Contracts.
(a) Distribution Agreement between Registrant and BlackRock
Distributors Inc. dated as of June 25, 1999 is incorporated
herein by reference to Exhibit 5(a) of Post-Effective Amendment
No. 45 to Registrant's Registration Statement on Form N-1A filed
on August 24, 1999.
(b) Form of Appendix A to Distribution Agreement between
Registrant and BlackRock Distributors, Inc. is incorporated
herein by reference to Exhibit 5(b) of Post-Effective Amendment
No. 45 to Registrant's Registration Statement on Form N-1A filed
on August 24, 1999 ("PEA No. 45").
(8) Bonus or Profit Sharing Contracts.
None.
(9) Custodian Agreements.
(a) Custodian Agreement dated October 4, 1989 between Registrant
and PNC Bank, National Association is incorporated herein by
reference to Exhibit (8)(a) of PEA No. 33.
(b) Amendment No. 1 to Custodian Agreement between Registrant and PNC
Bank, National Association is incorporated herein by reference to
Exhibit (8)(b) of PEA No. 33.
(c) Amendment No. 2 dated March 1, 1993 to Custodian Agreement
between Registrant and PNC Bank National Association with respect
to the Short-Term Bond, Intermediate-Term Bond, Core Equity,
Small Cap Growth Equity and North Carolina Municipal Money Market
Portfolios is incorporated herein by reference to Exhibit (8)(c)
of PEA No. 33.
C-7
(d) Form of Appendix B to Custodian Agreement between Registrant and
PFPC Trust Company is incorporated herein by reference to Exhibit
(7)(d) of PEA No. 42.
(e) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The Chase
Manhattan Bank is incorporated herein by reference to Exhibit
(8)(e) of PEA No. 34.
(f) Global Custody Agreement between Barclays Bank PLC and PNC Bank,
National Association dated October 28, 1992 is incorporated
herein by reference to Exhibit (8)(f) of PEA No. 33.
(g) Custodian Agreement between State Street Bank and Trust Company
and PNC Bank, National Association dated June 13, 1993 is
incorporated herein by reference to Exhibit (8)(g) of PEA No. 34.
(h) Amendment No. 1 to Custodian Agreement between State Street Bank
and Trust Company and PNC Bank, National Association dated
November 21, 1989 is incorporated herein by reference to Exhibit
(8)(h) of PEA No. 34.
(i) Subcustodial Services Agreement dated January 10, 1996 between
PNC Bank, National Association and Citibank, N.A. is incorporated
herein by reference to Exhibit (8)(j) of PEA No. 27.
(10) Rule 12b-1 and Rule 18f-3 Plans.
(a) Amended and Restated Distribution and Service Plan for Service,
Series A Investor, Series B Investor, Series C Investor,
Institutional BlackRock and HL Shares is incorporated herein by
reference to Exhibit 15 of PEA No. 21.
(b) Form of Appendix A to Amended and Restated Distribution and
Service Plan is incorporated herein by reference to Exhibit 13(b)
to Post-Effective Amendment No. 44 to Registrant's Registration
Statement on Form N-1A filed on August 11, 1999.
(c) Amended and Restated Plan Pursuant to Rule 18f-3 for Operation of
a Multi-Class Distribution System is incorporated herein by
reference to Exhibit 15(a) of PEA No. 45.
(11) Legal Opinion.
None.
(12) Opinion as to Tax Consequences.
Opinion and Consent of Drinker Biddle & Reath LLP
as to Tax Consequences.
C-8
(13) Other Material Contracts.
(a) Form of Administration Agreement among Registrant, BlackRock
Advisors, Inc. and PFPC Inc. is incorporated herein by reference
to Exhibit 8(a) to PEA No. 42.
(b) Forms of Appendix A and Appendix B to Administration Agreement
among Registrant, BlackRock Advisors, Inc. and PFPC Inc. are
incorporated herein by reference to Exhibit 8(b) to PEA No. 44.
(c) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC, Inc. is incorporated herein by reference to
Exhibit (9)(e) of PEA No. 33.
(d) Amendment No. 1 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC, Inc. relating to the Tax-Free
Income Portfolio is incorporated herein by reference to Exhibit
(9)(f) of PEA No. 33.
(e) Amendment No. 2 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC, Inc. relating to the
Pennsylvania Municipal Money Market, Ohio Municipal Money Market,
Intermediate Government, Ohio Tax-Free Income, Pennsylvania Tax-
Free Income, Large Cap Value Equity, Index Equity and Small Cap
Value Equity Portfolios is incorporated herein by reference to
Exhibit (9)(g) of PEA No. 33.
(f) Amendment No. 3 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC, Inc. relating to the Short Term
Bond, Intermediate Term Bond, Core Equity, Small Cap Growth
Equity and North Carolina Municipal Money Market Portfolios is
incorporated herein by reference to Exhibit (9)(h) of PEA No. 33.
(g) Amendment No. 4 to Transfer Agency Agreement dated October 4,
1989 between Registrant and PFPC, Inc. relating to Series B
Investor Shares of the Money Market, Managed Income, Tax-Free
Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Large Cap Value Equity, Large Cap
Growth Equity, Index Equity, Small Cap Value Equity, Intermediate
Term Bond, Small Cap Growth Equity, Core Equity, International
Fixed Income, Government Income, International Emerging Markets,
International Equity and Balanced Portfolios is incorporated
herein by reference to Exhibit (9)(i) of PEA No. 33.
C-9
(h) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC, Inc. is incorporated herein by reference to
Exhibit 8(h) of PEA No. 42.
(i) License Agreement dated as of December 1, 1995 between the
Registrant and Compass Capital Group, Inc. is incorporated herein
by reference to Exhibit (9)(q) of PEA No. 27.
(j) Share Acquisition Agreement dated April 29, 1998 by and among
Registrant and PNC Bank National Association and PNC Bank
Delaware, respectively; each as a trustee for certain of the
common trust funds listed therein is incorporated herein by
reference to Exhibit (9)(l) of Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A (File Nos. 33-
26305/811-05742) filed on April 29, 1998.
(k) Form of Expense Limitation Agreement dated as of January 28, 1999
between Registrant and BlackRock Advisors, Inc. is incorporated
herein by reference to Exhibit (8)(k) of Post-Effective Amendment
No. 41 to Registrant's Registration Statement on Form N-1A (File
Nos. 33-26305/811-05742) filed on January 28, 1999.
(14) Other Opinions.
Consent of PriceWaterhouseCoopers LLP.
(15) Financial Statements Omitted Pursuant to Item 14(a)(1).
None.
(16) Powers of Attorney.
None.
(17) Additional Exhibits.
(a) Form of Proxy Card.
(b) Prospectus for Investor Shares of the Bond Portfolios of
BlackRock Funds(SM) dated January 28, 1999 as supplemented
through November 22, 1999.
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(c) Statement of Additional Information of BlackRock Funds(SM) dated
January 28, 1999 as supplemented through November 22, 1999.
(d) Annual Report to Shareholders for Investor Shares of the Bond
Portfolios of BlackRock Funds(SM) dated September 30, 1999.
(e) Annual Report to Shareholders of ISIS dated December 31, 1998.
(f) Semi-Annual Report to Shareholders of ISIS dated June 30, 1999.
Item 17. Undertakings.
------------
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through the use of a prospectus which is
part of this registration statement by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c) of the
Securities Act of 1933, as amended (the "1933 Act"), the reoffering
prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1), above, will be filed as part of an amendment to
the registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act,
each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
C-11
SIGNATURES
----------
As required by the Securities Act of 1933, this registration statement has
been signed on behalf of the registrant, in the City of New York and the State
of New York, on the 13th day of January, 2000.
BLACKROCK FUNDS
Registrant
By: /s/ Raymond J. Clark
--------------------
Raymond J. Clark
President and Treasurer
(Principal Executive Officer)
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Raymond J. Clark Trustee, President and January 13, 2000
- ------------------------------
Raymond J. Clark Treasurer
/s/ David R. Wilmerding, Jr. Chairman of the Board January 13, 2000
- ------------------------------
David R. Wilmerding, Jr.
/s/ Anthony M. Santomero Vice-Chairman of the Board January 13, 2000
- ------------------------------
Anthony M. Santomero
/s/ William C. Albertini Trustee January 13, 2000
- ------------------------------
William C. Albertini
/s/ Robert M. Hernandez Trustee January 13, 2000
- ------------------------------
Robert M. Hernandez
C-12
Exhibits
Item Description
- ---- -----------
(12) Opinion and Consent of Drinker Biddle & Reath LLP
as to Tax Consequences.
(14) Consent of PriceWaterhouseCoopers LLP.
(17) (a) Form of Proxy Card.
(b) Prospectus for Investor Shares of the Bond Portfolios of
BlackRock Funds(SM) dated January 28, 1999 as supplemented
through November 22, 1999.
(c) Statement of Additional Information of BlackRock Funds(SM) dated
January 28, 1999 as supplemented through November 22, 1999.
(d) Annual Report to Shareholders for Investor Shares of the Bond
Portfolios of BlackRock Funds(SM) dated September 30, 1999.
(e) Annual Report to Shareholders of ISIS dated December 31, 1998.
(f) Semi-Annual Report to Shareholders of ISIS dated June 30, 1999.