<PAGE>
As filed with the Securities and Exchange Commission on June 11, 1999
Registration No. 33-26305
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. ___ |_|
POST-EFFECTIVE AMENDMENT NO. 42 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. 44 |X|
---------------------------------------------
BLACKROCK FUNDS(SM)
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Bellevue Corporate Center Brian Kindelan, Esq. copy to:
400 Bellevue Parkway BlackRock Advisors, Inc. Gary S. Schpero, Esq.
Suite 100 1600 Market Street, 28th Floor Simpson Thacher & Bartlett
Wilmington, Delaware 19809 Philadelphia, PA 19103 425 Lexington Avenue
(Address of Principal (Name and Address of New York, New York 10017
Executive Offices) Agent for Service)
Registrant's Telephone Number
(302) 792-2555
</TABLE>
--------------------------------------------
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[X] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
EXPLANATORY NOTE
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Low Duration Bond, Intermediate Government Bond,
Intermediate Bond, Core Bond, High Yield Bond, GNMA, Government Income, Managed
Income, International Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, Delaware
Tax-Free Income, Money Market, Municipal Money Market, U.S. Treasury Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market, New Jersey
Municipal Money Market, Large Cap Value Equity, Large Cap Growth Equity, Index
Equity, Small Cap Value Equity, Mid-Cap Value Equity, International Equity,
International Emerging Markets, International Small Cap Equity, Balanced, Small
Cap Growth Equity, Mid-Cap Growth Equity, Micro-Cap Equity and Select Equity
Portfolios, each dated January 28, 1999, are incorporated by reference to the
Registrant's filing of definitive copies under Rule 497 under the Securities Act
on February 3, 1999.
The prospectus for the BlackRock Shares of the Low Duration Bond, Core Bond,
Intermediate Bond and High Yield Bond Portfolios, dated January 28, 1999, is
incorporated by reference to the Registrant's filing of a definitive copy under
Rule 497 under the Securities Act on February 3, 1999.
The prospectus for the shares of the BlackRock Strategic Portfolio I and the
BlackRock Strategic Portfolio II, dated November 25, 1998, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No.
39 to its Registration Statement on Form N-1A on November 25, 1998.
The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
III, dated November 25, 1998, is incorporated by reference to the Registrant's
filing of Post-Effective Amendment No. 39 to its Registration Statement on Form
N-1A on November 25, 1998.
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Low Duration Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, High Yield Bond, Government
Income, Managed Income, International Bond, Tax-Free Income, Pennsylvania
Tax-Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky
Tax-Free Income, Delaware Tax-Free Income, GNMA, Money Market, Municipal Money
Market, U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania
Municipal Money Market, North Carolina Municipal Money Market, Virginia
Municipal Money Market, New Jersey Municipal Money Market, Large Cap Value
Equity, Large Cap Growth Equity, Index Equity, Small Cap Value Equity, Mid-Cap
Value Equity, International Equity, International Emerging Markets,
International Small Cap Equity, Balanced, Small Cap Growth Equity, Mid-Cap
Growth Equity, Select Equity and Micro-Cap Equity Portfolios, and the BlackRock
Shares of the Low Duration Bond, Core Bond, Intermediate Bond and High Yield
Bond Portfolios, dated January 28, 1999, is incorporated by
<PAGE>
reference to the Registrant's filing of a definitive copy under Rule 497
under the Securities Act on February 3, 1999.
The statement of additional information for the shares of the BlackRock
Strategic Portfolio I and the BlackRock Strategic Portfolio II, dated November
25, 1998, is incorporated by reference to the Registrant's filing of
Post-Effective Amendment No. 39 to its Registration Statement on Form N-1A on
November 25, 1998.
The statement of additional information for the shares of the Multi-Sector
Mortgage Securities Portfolio III, dated November 25, 1998, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No.
39 to its Registration Statement on Form N-1A on November 25, 1998.
<PAGE>
BLACKROCK FUNDS(SM)
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO IV
CROSS REFERENCE SHEET
Item Number Form N-1A, Prospectus
Part A Caption
- ------ -------
1(a) Cover Page
1(b) Back Cover Page
2 Risk/Return Summary: Investments and Risks
3 Risk/Return Summary: Fee Table
4 Risk/Return Summary: Investments and Risks
5 Not Applicable
6 Management
7(a) Purchase and Redemption of Shares; Net Asset Value
7(b),(c) Purchase and Redemption of Shares
7(d) Dividends and Distributions
7(e) Taxes
7(f) Not Applicable
8(a) Not Applicable
8(b) Purchase and Redemption of Shares
8(c) Not Applicable
9 Not Applicable
<PAGE>
Item Number Form N-1A, Statement of Additional
Part B Information Caption
- ------ -------------------
10 Cover Page
11 The Fund
12 The Fund; Investment Objective and Policies; Investment
Restrictions
13 Trustees and Officers
14 Miscellaneous; Trustees and Officers
15 Investment Advisory, Administration, Distribution and
Servicing Arrangements
16 Investment Advisory, Administration, Distribution and
Servicing Arrangements; Portfolio Transactions
17 Trustees and Officers; Purchases and Redemption
Information; Additional Information Concerning Shares;
Miscellaneous
18 Purchase and Redemption Information: Valuation of
Portfolio Securities
19 Taxes
20 Investment Advisory, Administration, Distribution and
Servicing Arrangements
21 Performance Information
22 Not Applicable
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
Subject to Completion, Dated June 11, 1999
BLACKROCK FUNDS(SM)
THE
MULTI-SECTOR MORTGAGE SECURITIES
PORTFOLIO IV
This Prospectus relates to shares of the Multi-Sector Mortgage Securities
Portfolio IV (the Portfolio) of BlackRock Funds(SM) (the Fund).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTUS
TABLE OF CONTENTS
Page
----
Risk/Return Summary: Investments and Risks ............................... 2
Risk/Return Summary: Fee Table ........................................... 9
Management ................................................................ 10
Purchase and Redemption of Shares ......................................... 11
Net Asset Value ........................................................... 12
Dividends and Distributions ............................................... 13
Taxes ..................................................................... 13
August [__], 1999
<PAGE>
RISK/RETURN SUMMARY: INVESTMENTS AND RISKS
Investment Objective of the Portfolio
The Portfolio's investment objective is to seek the highest total return by
investing primarily in Commercial Mortgage-Backed Securities. The investment
objective may be changed by the Fund's Board of Trustees without shareholder
approval.
Main Investment Strategies of the Portfolio
Mortgage-Backed Securities. The Portfolio seeks the highest total return by
investing in a variety of debt securities whose principal and interest payments
are tied to payments on underlying mortgage loans (Mortgage-Backed Securities).
The Portfolio will invest primarily in Mortgage-Backed Securities related to
mortgage loans on income producing commercial and multi-family properties
(Commercial Mortgage-Backed Securities or CMBS).
Commercial Mortgage-Backed Securities come in different classes that have
different risks. The Portfolio may invest in lower, or junior, classes of CMBS
which may have a rating below investment grade and therefore are riskier
investments than higher rated securities. The Portfolio intends to invest in
CMBS issued by private issuers as well as governmental agencies.
The Portfolio also may invest up to 5% of its total assets in
Mortgage-Backed Securities which are related to mortgage loans on residential
properties (Residential Mortgage-Backed Securities).
Project Loans. The Portfolio may invest up to 15% of its total assets in
project loans (Project Loans), which are fixed income securities of issuers
whose revenues are primarily derived from mortgage loans to multi-family,
nursing home and other real estate development projects. The principal payments
on these mortgage loans will be insured by agencies and authorities of the U.S.
Government.
U.S. Government and Money Market Securities. In addition to investing in
Mortgage-Backed Securities issued or guaranteed by the U.S. Treasury or agencies
and authorities of the U.S. Government, the Portfolio may invest in U.S.
Treasury and agency securities that are not Mortgage-Backed Securities (U.S.
Government Securities). The Portfolio also may invest in money market securities
during temporary defensive periods and in order to keep cash on hand fully
invested. Except during such temporary defensive periods, the Portfolio will
invest no more than a total of 20% of its total assets in U.S. Government
Securities and money market securities.
REITs and REOCs. The Portfolio may invest up to 20% of its total assets in
debt securities of (i) real estate investment trusts (REITs), which are pooled
investment vehicles that invest mainly in income producing real estate, and (ii)
real estate operating companies (REOCs), which are companies that develop and/or
manage real estate in which they have an ownership
2
<PAGE>
interest. The Portfolio may only purchase REIT and REOC securities if they are
rated investment grade at the time of investment by at least two of Duff &
Phelps, Fitch, Standard & Poor's or Moody's (Rating Agencies).
================================================================================
IMPORTANT DEFINITIONS
================================================================================
Portfolio Collateral Pool: The Portfolio relies on monthly reports prepared by
the trustee for each of its CMBS which break out each mortgage loan remaining in
the collateral pool for each CMBS issue by property type. The percentage for
each property type is calculated by using scheduled principal balances of the
mortgage loans. The Portfolio then multiplies the value of each of its CMBS as
most recently determined by these percentages reported for each property type to
produce a picture of the total collateral pool (the Portfolio Collateral Pool)
by property type. Note that the percentages used by the Portfolio in these
calculations:
* are produced by another party and not independently verified by the Portfolio;
* are only updated once a month; and
* are based on the outstanding principal amounts, rather than the market values,
of the underlying mortgage loans.
Property Type: The collateral underlying each CMBS is classified from
descriptions of each mortgage loan provided by the underwriter or trustee by
property type and reported to the Portfolio. These property types currently are
broken out as follows:
* multi-family properties and cooperative apartments;
* industrial and warehouse properties;
* office buildings;
* retail space and shopping malls;
* hotels and motels;
* nursing homes and senior living centers;
* restaurants and other franchise businesses;
* hospitals;
* mobile home parks;
* self-storage centers;
* mixed retail and office properties; and
* agricultural properties.
================================================================================
Diversification. The Portfolio will seek to diversify its holdings of CMBS
among different types of industries, properties and geographic regions in order
to seek to reduce risk. Therefore, the Portfolio will not buy a CMBS if:
(a) The purchase would cause the Portfolio to own more than 25% of any one CMBS
issue.
(b) The purchase would cause more than 25% of the Portfolio's net assets to be
invested in CMBS relating to obligations of a single borrower regarding a
single asset.
(c) The purchase would cause more than 10% of the Portfolio's net assets to be
invested in any one CMBS issue.
(d) The purchase would cause more than 50% of the Portfolio Collateral Pool to
consist of a single property type.
(e) More than 5% of the collateral underlying that issue consists of
agricultural properties.
(f) The purchase would cause more than 25% of the Portfolio Collateral Pool to
consist of properties located in any one state of the United States, except
that up to 30% of the Portfolio Collateral Pool may consist of properties
located in California.
(g) Immediately after that purchase, for any one property type constituting
collateral underlying that issue:
3
<PAGE>
(i) If that property type represents more than 25% of the Portfolio
Collateral Pool, more than 25% of that property type (as a percentage
of the total amount of that property type in the Portfolio Collateral
Pool) would be located in any one state of the United States;
(ii) If that property type represents more than 20% up to and including 25%
of the Portfolio Collateral Pool, more than 30% of that property type
(as a percentage of the total amount of that property type in the
Portfolio Collateral Pool) would be located in any one state of the
United States;
(iii) If that property type represents more than 15% up to and including
20% of the Portfolio Collateral Pool, more than 35% of that property
type (as a percentage of the total amount of that property type in the
Portfolio Collateral Pool) would be located in any one state of the
United States;
(iv) If that property type represents more than 10% up to and including 15%
of the Portfolio Collateral Pool, more than 45% of that property type
(as a percentage of the total amount of that property type in the
Portfolio Collateral Pool) would be located in any one state of the
United States; and
(v) If that property type represents 10% or less of the Portfolio
Collateral Pool, more than 50% of that property type (as a percentage
of the total amount of that property type in the Portfolio Collateral
Pool) would be
4
<PAGE>
located in any one state of the United States.
In applying the above diversification limits, securities that are
backed by the same collateral pool are treated as a single issue.
Ratings of Portfolio Securities. The weighted average credit quality of the
Portfolio will not be less than BBB+. U.S. Government Securities are assigned an
AAA (or Aaa) rating.
To be eligible for purchase by the Portfolio, securities must be U.S.
Government Securities or rated by at least two Rating Agencies. In addition:
1. Except as otherwise provided in 2 and 3 below, the Portfolio will
invest only in securities that are rated BBB (or Baa) or higher at the
time of investment by at least two Rating Agencies. All investments in
"interest only" securities (which are debt securities that receive
only the interest payments on an underlying debt) that are components
of CMBS must meet these ratings requirements. Securities rated BBB (or
Baa) are generally considered investment grade, but they also are
considered speculative and do carry some risks.
2. The Portfolio may invest up to 10% of its total assets in split rated
securities. The Portfolio will consider a security to be split rated
if it is rated BBB (or Baa) (or higher) by at least one Rating Agency
and BB (or Ba) by at least one other Rating Agency at the time of
investment. The Portfolio may not invest in split rated "interest
only" securities. Split rated securities will not be considered to be
rated BB (or Ba) for the purposes of the limitation referred to in 3
below.
3. The Portfolio may invest up to an aggregate of 10% of its total assets
in (i) securities (other than "interest only" securities) rated BB (or
Ba) at the time of investment by at least two Rating Agencies and (ii)
"interest only" securities.
4. The Portfolio may not invest in securities rated lower than BB (or Ba)
by any Rating Agency nor in any money market instruments which are not
rated at least A-2 or P-2 by at least two Rating Agencies.
If any security held by the Portfolio is downgraded by one or more Rating
Agencies such that the Portfolio would not be able at that time to make an
investment in such security, then the Portfolio will sell such security within
60 days after such downgrade.
Other Main Strategies. The Portfolio will try to maintain a duration for
its investments of between four and eight years. Duration is a mathematical
calculation of the average life of a debt security that serves as a measure of
its price risk. Each year of duration represents an expected 1% change in the
price of a security for every 1% change in interest rates. Duration,
5
<PAGE>
which measures price sensitivity to interest rate changes, is not necessarily
equal to average maturity.
The Portfolio may invest in futures, options and interest rate swaps,
commonly known as derivatives. The Portfolio will use derivatives only for
hedging and to help maintain the interest rate risk of the Portfolio within the
target duration range.
The Portfolio may purchase securities offered in private placements and
under Rule 144A of the Securities Act of 1933. These securities may be illiquid.
The Portfolio will invest no more than 15% of its net assets in illiquid
securities.
In determining which Mortgage-Backed Securities the Portfolio will purchase
and when it will sell those securities, the Portfolio's investment adviser will
consider, among other factors, the following: characteristics of the underlying
mortgage loans; characteristics of the underlying properties; terms of the
securities; and structural participants such as administrators and servicers. In
addition, the adviser will interact with rating agencies, review due diligence
done by underwriters and rating agencies, and do its own analysis of the
relative value of the securities and general economic conditions.
Percentage Limitations. For the purposes of the foregoing investment
strategies and related percentage limitations, if the Portfolio's asset
composition exceeds 110% of a percentage limitation for any reason, the
Portfolio will take such actions as may be necessary so that within 60 days
after the occurrence of such excess the relevant percentage limitation is again
satisfied.
Main Risks of Investing in the Portfolio
As with all mutual funds, the loss of money is a risk of investing in the
Portfolio. The following are also some of the risks of investing in the
Portfolio.
Interest Rate Risk. All fixed income securities are subject to the risk
that as interest rates increase, the value of the securities decrease, and as
interest rates decrease, the value of the securities increase. Changes in
interest rates generally affect the values of securities with longer maturities
more than the values of securities with shorter maturities. Mortgage-Backed
Securities in general, and "interest only" securities in particular, may be
particularly volatile if interest rates change. Volatility is defined as the
characteristic of a security or a market to fluctuate significantly in price
within a short period of time.
Commercial Mortgage-Backed Securities. Investments in CMBS, especially
lower rated securities, involve the risks of interruptions in the payment of
interest and principal (delinquency) and the potential for loss of principal if
the property underlying the security is sold as a result of foreclosure on the
mortgage (default). These risks include the risks associated with direct
ownership of real estate. These risks are heightened in the case of CMBS related
to a relatively small pool of commercial mortgage loans. In addition, the
underlying commercial properties may not be able to continue to generate cash to
meet their expenses due to a variety of
6
<PAGE>
economic conditions. If the underlying borrowers cannot pay their mortgage
loans, they may default and the lenders may foreclose on the property. Finally,
the ability of borrowers to repay the commercial mortgage loans underlying CMBS
will typically depend upon the future availability of financing and the
stability of real estate values.
For most commercial mortgage loans, the only remedy of the lender in the
event of a default is to foreclose upon the property. If borrowers are not able
or willing to pay the principal balance on the loans, there is a good chance
that payments on the related CMBS will not be made. Certain borrowers on
underlying mortgages may become subject to bankruptcy proceedings, in which case
the value of the related CMBS may be hurt.
Junior classes of Mortgage-Backed Securities protect the senior class
investors against losses on the underlying mortgage loans by taking the first
loss if there are liquidations among the underlying loans. Junior classes
generally receive principal and interest payments only after all required
payments have been made to more senior classes. Because the Portfolio intends to
invest in junior classes of CMBS, it may not be able to recover all of its
investment in the securities it purchases. In addition, if the underlying
mortgage portfolio has been overvalued, or if mortgage values subsequently
decline, the Portfolio may suffer significant losses.
Investments in Mortgage-Backed Securities also carry the risk that
borrowers generally may prepay the principal on the underlying loans at any time
without penalty. To the extent that borrowers prepay their loans, the length of
the loan will be reduced, and the Mortgage-Backed Security related to the loan
will have a lower yield. Prepayment rates are influenced by changes in current
interest rates and a variety of economic, geographic, social and other factors.
Prepayments have increased significantly in recent years as borrowers have
refinanced higher interest rate mortgages into lower interest rate mortgages
available in the marketplace.
Residential Mortgage-Backed Securities. Investments in Residential
Mortgage-Backed Securities involve the same risks that affect CMBS discussed
above. The prepayment risk may be heightened for Residential Mortgage-Backed
Securities.
Project Loans. The ability of issuers of Project Loans to make interest and
principal payments will be affected by events and conditions affecting financed
projects generally. These include, among other things, the achievement and
maintenance of sufficient occupancy levels and adequate rental income, tax
increases, the costs of labor, utility and other operating expenses, the
managerial ability of project managers, changes of laws and governmental
regulations and general economic conditions in the locality where the project is
being built.
Lower Rated Securities. Generally, lower rated securities, which are
commonly referred to as "junk bonds," offer a higher return potential than
higher rated securities but involve greater risks. The Portfolio may invest in
securities with a BB (or Ba) rating. Securities rated BB (or Ba) have lower
short-term prospects of default than lower rated securities, but they face major
uncertainties regarding payment of principal and interest in times of economic
difficulty and have higher prospects of default than investment grade
securities. Lower rated securities may be less
7
<PAGE>
liquid than higher rated securities and carry substantial risks with respect to
their capacity to pay interest and repay principal. An economic downturn could
cause a decline in the price of these securities because such a downturn could
hurt the ability of borrowers underlying the Mortgage-Backed Securities to make
principal and interest payments. Issuers of lower rated securities are often
less financially stable than issuers of investment grade securities. The markets
for these securities may move up and down significantly and may react strongly
to legislative and regulatory developments. The costs attributable to investing
in lower rated securities are usually higher for several reasons, such as higher
investment research costs and higher transaction costs.
REITs and REOCs. The value of the Portfolio's investments in REITs will be
affected by the value of the underlying properties. The value of REIT securities
may decline when interest rates rise. REOCs are subject to the general risks of
real estate ownership, including losses due to a downturn in the real estate
market and uninsured casualty losses.
Illiquid Securities. Liquidity of a security refers to the ability to
easily dispose of it and the price to be obtained, and does not necessarily
refer to the likelihood of receipt of principal or interest payments. Illiquid
securities may be worth less than comparable, more liquid investments. The
Portfolio intends to acquire Mortgage-Backed Securities which may be considered
illiquid because they are not registered under the federal securities laws,
contractual restrictions on transfer apply or they are part of a small issue.
The Portfolio may purchase securities offered in private placements or under
Rule 144A of the Securities Act of 1933, which may also be illiquid. If a
security is illiquid, the Portfolio may not be able to dispose of it at the time
or price which it would like.
Derivatives. The Portfolio's use of derivatives may reduce returns and/or
increase volatility.
General. An investment in the Portfolio is not a deposit of PNC Bank,
National Association or any other bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency.
The Portfolio is a "non-diversified" fund, which allows it to invest more
than 5% of its assets in the obligations of any single issuer, subject only to
certain requirements under tax laws. Because it can concentrate its investments
in the obligations of a smaller number of issuers, the Portfolio may be more at
risk than a more widely diversified fund to any single economic, political or
regulatory event which harms one or more of those issuers.
8
<PAGE>
RISK/RETURN SUMMARY: FEE TABLE
Fees and Expenses of the Portfolio
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Portfolio.
Annual Portfolio Operating Expenses (expenses that are deducted from Portfolio
assets)
<TABLE>
<S> <C>
Advisory fees.............................................................25%
Other expenses(a)........................................................[_]%
Total annual Portfolio operating expenses(a).............................[_]%
</TABLE>
- ----------
(a) BlackRock has agreed to cap the "Other expenses" for the Portfolio at
.12% of average daily net assets and "Total annual Portfolio operating
expenses" at .37% for the current fiscal year. "Other expenses" are
based on estimated amounts for the current fiscal year.
Example: This Example is intended to help you compare the cost of investing
in the Portfolio with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Portfolio for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three
Year Years
---- -----
<S> <C> <C>
Multi-Sector Mortgage Securities
Portfolio IV..................................... $[__] $[__]
</TABLE>
The Expense Table and Example do not reflect any charges that may be
imposed by financial institutions directly on their customer accounts in
connection with investments in the Portfolio.
9
<PAGE>
MANAGEMENT
Adviser
BlackRock Financial Management, Inc. (BlackRock or the Adviser) serves as
investment adviser to the Portfolio. BlackRock is an indirect majority-owned
subsidiary of PNC Bank Corp. BlackRock (formerly BlackRock Financial Management
L.P.) was organized in 1988. The principal business address of BlackRock is 345
Park Avenue, New York, New York 10154. BlackRock provides asset management
services with respect to U.S. and foreign fixed income instruments. As adviser,
BlackRock is responsible for the day-to-day management of the Portfolio, and
generally makes all purchase and sale decisions regarding the investments made
by the Portfolio. BlackRock also provides research and credit analysis as well
as certain other services.
Keith Anderson and Mark S. Warner are the persons primarily responsible for
the day-to-day management of the Portfolio's investments.
Keith Anderson is a Managing Director at BlackRock and co-head of the
Portfolio Management Group. In addition, Mr. Anderson co-chairs the Investment
Strategy Committee and he is a member of the firm's Management Committee. Mr.
Anderson has primary responsibility for managing client portfolios and for
acting as a specialist in the government and mortgage sectors. His areas of
expertise include Treasuries, agencies, futures, options, swaps and a wide range
of traditional and non-traditional mortgage securities. Mr. Anderson founded
BlackRock in 1988 and has been a co-manager of the Portfolio since its
inception.
Mark S. Warner, CFA, is a Director of BlackRock with primary responsibility
for managing client portfolios. Mr. Warner specializes in investing in the
commercial mortgage and non-agency residential mortgage sectors. Mr. Warner has
been a co-manager of the Portfolio since its inception. Prior to joining
BlackRock in 1993, Mr. Warner was a director in the Capital Markets Unit of the
Prudential Insurance Company of America. Mr. Warner joined the Prudential
Insurance Company of America in 1987.
For the services provided and expenses assumed by it, BlackRock is entitled
to receive from the Portfolio a fee computed daily and payable monthly at an
annualized rate of .25% of the Portfolio's average daily net assets. BlackRock
may waive a portion of its advisory fee.
The Fund, like any business, could be affected if the computer systems on
which it relies do not properly process information beginning on January 1,
2000. While Year 2000 issues could have a negative effect on the Fund, BlackRock
is currently working to avoid such problems. BlackRock is also working with
other service providers and vendors to determine their systems' ability to
handle Year 2000 problems. There is no guarantee, however, that systems will
work properly on January 1, 2000. Year 2000 problems may also hurt issuers whose
securities the Portfolio holds or securities markets generally.
10
<PAGE>
Administrators
BlackRock Advisors, Inc., whose principal business address is 345 Park
Avenue, New York, New York 10154, and PFPC Inc. (PFPC), whose principal business
address is 400 Bellevue Parkway, Wilmington, Delaware 19809, serve as the Fund's
administrators. BlackRock Advisors, Inc. is an indirect majority-owned
subsidiary, and PFPC is an indirect wholly-owned subsidiary, of PNC Bank Corp.
The administrators generally assist the Fund in all aspects of its
administration and operation, including matters relating to the maintenance of
financial records and fund accounting.
Transfer Agent, Dividend Disbursing Agent and Custodian
PFPC Trust Company, whose principal business address is 1600 Market Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's custodian and PFPC serves
as the Fund's transfer agent and dividend disbursing agent.
PURCHASE AND REDEMPTION OF SHARES
Distributor
Shares of the Portfolio are offered on a continuous basis for the Fund by
its distributor, BlackRock Distributors, Inc. (BDI or the Distributor). The
Distributor is a registered broker/dealer with principal offices at Four Falls
Corporate Center, 6th Floor, West Conshohocken, PA 19428-2961.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 (the Plan)
under the Investment Company Act of 1940 (the 1940 Act). The Fund is not
required or permitted under the Plan to make distribution payments with respect
to the Portfolio's Shares. However, the Plan permits BDI, BlackRock, PFPC and
other companies that receive fees from the Fund to make payments relating to
distribution and sales support activities out of their past profits or other
sources available to them which, subject to applicable NASD regulations, may
include contributions to various non-cash and cash incentive arrangements to
promote the sale of shares, as well as sponsorship of various educational
programs, sales contests and promotions in which participants may receive
reimbursement of expenses, entertainment and prizes such as travel awards,
merchandise and cash.
Purchase of Shares
Shares of the Portfolio are offered without a sales load on a continuous
basis to institutional buyers at the net asset value per share of the Portfolio
next determined after an order and payment are received in proper form by PFPC.
Dividends will commence accruing on Shares once they are "settled" (i.e., once
the Portfolio has received payment in Federal funds or has received securities
or other property for the Shares). Shares may be purchased on any Business Day.
A "Business Day" is any weekday that the New York Stock Exchange (the
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NYSE) is open for business. Purchase orders may be made by telephoning PFPC at
(800) 441-7379. The Fund may in its discretion reject any order for Shares.
Payment for Shares normally must be made in Federal funds or other funds
immediately available to the Fund's custodian. In addition, BlackRock in its
sole discretion may accept securities or other property as payment for Shares.
Such securities or other property will be valued in accordance with the
procedures described below under "Net Asset Value." Normally, payments for
Shares should be received by PFPC no later than 12:00 Noon (Eastern Time).
Redemption of Shares
Redemption orders may be made by telephoning PFPC at (800) 441-7379. Shares
are redeemed at the net asset value per share of the Portfolio next determined
after PFPC's receipt of the redemption request in proper order, and dividends
will not accrue on Shares after the day on which a redemption order for the
Shares settles (i.e., the day the shareholder receives the redemption proceeds
for the Shares). The Fund, PFPC, BlackRock and the Distributor will use
reasonable procedures to confirm that telephone instructions are genuine. The
Fund and its service providers will not be liable for any loss or expense for
acting upon telephone instructions that they reasonably believed to be genuine.
The date on which a redemption request is received will be the redemption
date unless the redemption request specifies a particular date in the future for
its effectiveness. The Fund will pay all redemption requests made with at least
30 days' advance notice in cash. If a shareholder is unable to contact PFPC by
telephone, it may also deliver the redemption request to PFPC by mail at 400
Bellevue Parkway, Wilmington, DE 19809.
The Fund may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
Shares) for such periods as are permitted under the 1940 Act. The Fund may also
redeem Shares involuntarily or make payment for redemption in securities or
other property if it appears appropriate to do so in light of the Fund's
responsibilities under the 1940 Act, provided that all involuntary redemptions
will be paid in cash and the Fund's right to redeem Shares in securities or
other property will only apply to those redemption requests not made with at
least 30 days' advance notice.
NET ASSET VALUE
The net asset value for the Portfolio is calculated as of the close of
trading on the NYSE (currently 4:00 p.m. Eastern Time) on (i) Thursday of each
week (to the extent such day is a Business Day) and (ii) each Business Day on
which a purchase or redemption order is received. Net asset value is calculated
by adding the value of all its securities, cash and other assets, subtracting
the liabilities and dividing by the total number of Shares outstanding. The net
asset value per Share of the Portfolio is determined independently of the Fund's
other portfolios. Net asset value will not be calculated on days when the NYSE
is not open for business.
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The value of securities held by the Portfolio is based upon market
quotations or, if market quotations are not readily available, the securities
are valued at fair value as determined in good faith by or under the direction
of the Fund's Board of Trustees. The Portfolio may use a pricing service, bank
or broker/dealer experienced in such matters to value the Portfolio's
securities.
DIVIDENDS AND DISTRIBUTIONS
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. For dividend
purposes, the Portfolio's investment income available for distribution to
shareholders is reduced by expenses directly attributable to the Portfolio and
the general expenses of the Fund prorated to the Portfolio on the basis of its
relative net assets. All distributions are paid in cash unless a shareholder
elects to have its distributions reinvested at net asset value in the form of
additional full and fractional Shares of the Portfolio. Such election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to dividends paid after its receipt by PFPC. The net investment
income of the Portfolio is declared daily. All such dividends are paid not later
than ten days after the end of each month and at the time of redemption of all
of a shareholder's Shares in the Portfolio. Net realized capital gains, if any,
will be distributed by the Portfolio at least annually.
TAXES
The following discussion is only a brief summary of some of the important
tax considerations generally affecting the Portfolio and its shareholders and is
not intended as a substitute for careful tax planning. Accordingly, investors in
the Portfolio should consult their tax advisers with specific reference to their
own tax situation.
The Portfolio intends to make distributions that may be taxed as ordinary
income and capital gains (which may be taxable at different rates depending on
the length of time the Portfolio holds its assets). The Portfolio's
distributions, whether received in cash or reinvested in additional shares of
the Portfolio, may be subject to Federal income tax.
Distributions paid out of the "net capital gain" (the excess of net
long-term capital gain over net short-term capital loss), if any, of the
Portfolio will be taxed to shareholders as long-term capital gain, regardless of
the length of time a shareholder has held his Shares and whether such gain was
reflected in the price paid for the Shares. All other distributions, to the
extent they are taxable, are taxed to shareholders as ordinary income.
The Fund will send written notices to shareholders annually regarding the
tax status of distributions made by the Portfolio. Dividends declared in
October, November or December of any year payable to shareholders of record on a
specified date in those months will be deemed to have been received by the
shareholders on December 31 of such year, provided the dividends are paid during
January of the following year.
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A taxable gain or loss may be realized by a shareholder upon the
redemption, transfer or exchange of Portfolio Shares.
Future legal developments may affect the tax consequences of investing in
the Portfolio. Shareholders are urged to consult their tax advisers concerning
the application of state and local income taxes to investments in the Fund which
may differ from the Federal income tax consequences described above.
Shareholders who are nonresident alien individuals, foreign trusts or estates,
foreign corporations or foreign partnerships may be subject to different U.S.
Federal income tax treatment and should consult their tax advisers.
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A Statement of Additional Information (SAI) includes additional information
about the Portfolio. Additional information about the Portfolio's investments is
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Portfolio's performance
during its last fiscal year. The current SAI and the Fund's annual and
semi-annual reports to shareholders may be obtained free of charge from the Fund
by calling (800) 422-6538. Shareholder inquiries also may be made at this
number. The SAI, as it may be supplemented from time to time, is incorporated by
reference in this Prospectus. Information about the Fund (including the SAI) can
be reviewed and copied at the SEC's Public Reference Room in Washington, D.C.
Information on the operation of the public reference room may be obtained by
calling the SEC at 1-800-SEC-0330. Reports and other information about the Fund
are available on the SEC's Internet site at http://www.sec.gov and copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the SEC, Washington, D.C. 20549-6009.
Investment Adviser
BlackRock Financial Management, Inc.
New York, New York
Administrator
BlackRock Advisors, Inc.
New York, New York
Administrator and Transfer Agent
PFPC Inc.
Wilmington, Delaware
Distributor
BlackRock Distributors, Inc.
West Conshohocken, Pennsylvania
Counsel
Simpson Thacher & Bartlett
New York, New York
Independent Accountants
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
Investment Company Act File
No. 811-05742.
The Multi-Sector
Mortgage
Securities
Portfolio IV
Institutional
Class
Prospectus
August [__], 1999
<PAGE>
The information in this Statement of Additional Information is not complete and
may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
Statement of Additional Information is not an offer to sell these securities and
is not soliciting an offer to buy these securities in any state where the offer
or sale is not permitted.
Subject to Completion, Dated June 11, 1999
BLACKROCK FUNDS(SM)
STATEMENT OF ADDITIONAL INFORMATION
MULTI-SECTOR MORTGAGE SECURITIES PORTFOLIO IV
This Statement of Additional Information provides supplementary information
pertaining to Institutional Shares ("Shares") representing interests in the
Multi-Sector Mortgage Securities Portfolio IV (the "Portfolio") of BlackRock
Funds(SM) (the "Fund"). This Statement of Additional Information is not a
prospectus, and should be read only in conjunction with the Prospectus of the
Fund relating to the Portfolio dated August [__], 1999, as amended from time to
time (the "Prospectus"). The Prospectus may be obtained from the Fund's
distributor by calling toll-free (800) 441-7379. This Statement of Additional
Information is dated August [__], 1999. Terms used herein and not otherwise
defined have the same meanings as are given to them in the Prospectus.
CONTENTS
Page
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THE FUND.................................................................. 2
INVESTMENT OBJECTIVE AND POLICIES......................................... 2
INVESTMENT RESTRICTIONS................................................... 23
TRUSTEES AND OFFICERS..................................................... 24
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS................................... 32
PORTFOLIO TRANSACTIONS.................................................... 35
PURCHASE AND REDEMPTION INFORMATION....................................... 37
VALUATION OF PORTFOLIO SECURITIES......................................... 37
PERFORMANCE INFORMATION................................................... 38
TAXES..................................................................... 42
ADDITIONAL INFORMATION CONCERNING SHARES.................................. 45
MISCELLANEOUS............................................................. 46
APPENDIX A................................................................ A-1
APPENDIX B................................................................ B-1
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or the
Prospectus in connection with the offering made by the Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Fund or its distributor. The Prospectus does not
constitute an offering by the Fund or by the Fund's distributor in any
jurisdiction in which such offering may not lawfully be made.
<PAGE>
THE FUND
The Fund was organized as a Massachusetts business trust on December 22,
1988 and is registered under the Investment Company Act of 1940 (the "1940 Act")
as an open-end management investment company. Effective January 31, 1998, the
Fund changed its name from Compass Capital FundsSM to BlackRock Funds(SM). The
Declaration of Trust authorizes the Board of Trustees to classify and reclassify
any unissued shares into one or more classes of shares. Pursuant to such
authority, the Board of Trustees has authorized the issuance of an unlimited
number of shares in 40 investment portfolios. For information regarding other
portfolios of the Fund, contact the Distributor by phone at (800) 998-7633.
INVESTMENT OBJECTIVE AND POLICIES
For a description of the objective and policies of the Portfolio, see
"Risk/Return Summary: Investments and Risks" in the Prospectus. In accordance
with the applicable provisions of the 1940 Act the Portfolio will maintain with
its custodian a segregated account of liquid assets to the extent the
Portfolio's obligations require segregation from the use of investment practices
listed below. The following information is provided for those investors desiring
information in addition to that contained in the Prospectus.
Mortgage-Backed Securities
Commercial Mortgage-Backed Securities. Commercial Mortgage-Backed
Securities are generally multi-class debt or pass-through securities backed by a
mortgage loan or pool of mortgage loans secured by commercial property, such as
industrial and warehouse properties, office buildings, retail space and shopping
malls, multi-family properties and cooperative apartments, hotels and motels,
nursing homes, hospitals, senior living centers, restaurants, mobile home parks
and self-storage centers. The commercial mortgage loans that underlie Commercial
Mortgage-Backed Securities have certain distinct characteristics. Commercial
mortgage loans are generally not amortizing or not fully amortizing. At their
maturity date, repayment of the remaining principal balance or "balloon" is due
and is repaid through the attainment of an additional loan or sale of the
property. Unlike most single family residential mortgages, commercial real
property loans often contain provisions which substantially reduce the
likelihood that such securities will be prepaid. The provisions generally impose
significant prepayment penalties on loans and, in some cases, there may be
prohibitions on principal prepayments for several years following origination.
This difference in prepayment exposure is significant due to extraordinarily
high levels of refinancing of traditional residential mortgages experienced over
the past years as mortgage rates reached 25 year lows. Assets underlying
Commercial Mortgage-Backed Securities may relate to only a few properties or to
a single property. See "Risk Factors Relating to Mortgage-Backed Securities."
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Commercial Mortgage-Backed Securities have been issued in public and
private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored Commercial
Mortgage-Backed Securities offerings include owners of commercial properties,
originators of and investors in mortgage loans, savings and loan associations,
mortgage banks, commercial banks, insurance companies, investment banks and
special purpose subsidiaries of the foregoing. The Portfolio may from time to
time purchase Commercial Mortgage-Backed Securities directly from issuers in
negotiated transactions or from a holder of such Commercial Mortgage-Backed
Securities in the secondary market.
Commercial Mortgage-Backed Securities generally are structured to protect
the senior class investors against potential losses on the underlying mortgage
loans. This is generally provided by the subordinated class investors, which may
be included in the Portfolio, by taking the first loss if there are defaults on
the underlying commercial mortgage loans. Other protection, which may benefit
all of the classes, including the subordinated classes in which the Portfolio
intends to invest, may include issuer guarantees, reserve funds, additional
subordinated securities, cross-collateralization, over-collateralization and the
equity investors in the underlying properties.
By adjusting the priority of interest and principal payments on each class
of a given Commercial Mortgage-Backed Security, issuers are able to issue senior
investment grade securities and lower rated or non-rated subordinated securities
tailored to meet the needs of sophisticated institutional investors. In general,
subordinated classes of Commercial Mortgage-Backed Securities are entitled to
receive repayment of principal only after all required principal payments have
been made to more senior classes and have subordinate rights as to receipt of
interest distributions. Such subordinated classes are subject to a substantially
greater risk of nonpayment than are senior classes of Commercial Mortgage-Backed
Securities. Even within a class of subordinate securities, most Commercial
Mortgage-Backed Securities are structured with a hierarchy of levels (or "loss
positions"). Loss positions are the order in which non-recoverable losses of
principal are applied to the securities within a given structure. For instance,
a first loss subordinate security will absorb any principal losses before any
higher loss position subordinate security. This type of structure allows a
number of classes of securities to be created with varying degrees of credit
exposure, prepayment exposure and potential total return.
Subordinated classes of Commercial Mortgage-Backed Securities have more
recently been structured to meet specific investor preferences and issuer
constraints and have different priorities for cash flow and loss absorption. As
previously discussed, from a credit perspective, they are structured to absorb
any credit-related losses prior to the senior class. The principal cash flow
characteristics of subordinated classes are designed to be among the most stable
in the Mortgage-Backed Securities market, the probability of prepayment being
much lower than with traditional Residential Mortgage-Backed Securities. This
characteristic is primarily due to the structural feature that directs the
application of principal payments first to the senior classes until they are
retired before the subordinated classes receive any prepayments. While this
serves to
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enhance the credit protection of the senior classes, it produces subordinated
classes with more stable average lives. Subject to the applicable provisions of
the 1940 Act and to the terms of the Prospectus, there are no limitations on the
classes of Commercial Mortgage-Backed Securities in which the Portfolio may
invest. Accordingly, in certain circumstances, the Portfolio may recover
proportionally less of its investment in a Commercial Mortgage-Backed Security
than the holders of more senior classes of the same Commercial Mortgage-Backed
Security.
The rating assigned to a given issue and class of Commercial
Mortgage-Backed Securities is a product of many factors, including the structure
of the security, the level of subordination, the quality and adequacy of the
collateral, and the past performance of the originators and servicing companies.
The rating of any Commercial Mortgage-Backed Security is determined to a
substantial degree by the debt service coverage ratio (i.e., the ratio of
current net operating income from the commercial properties, in the aggregate,
to the current debt service obligations on the properties) and the LTV ratio of
the pooled properties. The amount of the securities issued in any one rating
category is determined by the rating agencies after a rigorous credit rating
process which includes analysis of the issuer, servicer and property manager, as
well as verification of the LTV and debt service coverage ratios. LTV ratios may
be particularly important in the case of commercial mortgages because most
commercial mortgage loans provide that the lender's sole remedy in the event of
a default is against the mortgaged property, and the lender is not permitted to
pursue remedies with respect to other assets of the borrower. Accordingly,
loan-to-value ratios may, in certain circumstances, determine the amount
realized by the holder of the Commercial Mortgaged-Backed Security.
Residential Mortgage-Backed Securities. The Portfolio also expects to
invest in Residential Mortgage-Backed Securities that are Mortgage-Backed
Securities representing participation interests in pools of single-family
residential mortgage loans originated by private mortgage originators.
Traditionally, Residential Mortgage-Backed Securities were issued by
governmental agencies such as Fannie Mae, Freddie Mac and Ginnie Mae. The
Portfolio intends to invest in those securities issued by nongovernmental
agencies as well as governmental agencies. Nongovernmental entities that have
issued or sponsored Residential Mortgage-Backed Securities offerings include
savings and loan associations, mortgage banks, insurance companies, investment
banks and special purpose subsidiaries of the foregoing. Residential
Mortgage-Backed Securities, similar to Commercial Mortgage-Backed Securities,
have been issued using a variety of structures, including multi-class structures
featuring senior and subordinated classes.
While single-family residential loans do not typically have prepayment
penalties or restrictions, as commercial mortgage loans often do, Residential
Mortgage-Backed Securities are often structured so that subordinated classes may
be locked out of prepayments for a period of time. However, in a period of
extremely rapid prepayments, during which senior classes may be retired faster
than expected, the subordinated classes may receive unscheduled payments of
principal and would have average lives that, while longer than the average lives
of the senior classes, would be shorter than originally expected.
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The types of agency and non-agency Commercial and Residential
Mortgage-Backed Securities in which the Portfolio may invest shall include, but
not be limited to, the following securities:
Adjustable Rate Mortgage Securities. Adjustable rate mortgage securities
are pass-through mortgage securities collateralized by mortgages with adjustable
rather than fixed rates ("ARMs"). ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate for either the
first three, six, twelve, thirteen, thirty-six or sixty scheduled monthly
payments. Thereafter, the interest rates are subject to periodic adjustment
based on changes to a designated benchmark index.
ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the mortgage. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities. Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities
(collectively, "Mortgage Assets"). Multi-class pass-through securities are
equity interests in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class
pass-through certificates. Payments of principal of and interest on the Mortgage
Assets, and any reinvestment income thereon, provide the funds to pay debt
service on the CMOs or make scheduled distributions on the multi-class
pass-through securities. CMOs may be issued by agencies or instrumentalities of
the U.S. Government, or by private originators of, or investors in, mortgage
loans, including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. The issuer of CMOs or multi-class
pass-through securities may elect to be treated as a Real Estate Mortgage
Investment Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
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distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
Mortgage Assets may be allocated among the several classes of a CMO series in a
number of different ways. Generally, the purpose of the allocation of the cash
flow of a CMO to the various classes is to obtain a more predictable cash flow
to the individual tranches than exists with the underlying collateral of the
CMO. As a general rule, the more predictable the cash flow is on a CMO tranche,
the lower the anticipated yield will be on that tranche at the time of issuance
relative to prevailing market yields on Mortgage-Backed Securities.
The Portfolio also may invest in, among other things, parallel-pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds are parallel-pay
CMOs with the required principal payment on such securities having the highest
priority after interest has been paid to all classes.
The Portfolio may invest in CMO residuals to the extent the Adviser
identifies any which satisfy the rating criteria in the Prospectus. The residual
in a CMO structure generally represents the interest in any excess cash flow
remaining after making required payments of principal of and interest on the
CMOs and related administrative expenses of the issuer.
Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities. The Portfolio may invest in Mortgage-Backed Securities issued
by agencies or instrumentalities of the U.S. Government including GNMA, FNMA and
FHLMC. The U.S. Government or the issuing agency guarantees the payment of
interest and principal on these securities. However, the guarantees do not
extend to the securities' yield or value, nor do the guarantees extend to the
yield or value of the Portfolio's shares. These securities are in most cases
"pass-through" instruments, through which the holder receives a share of all
interest and principal payments from the mortgages underlying the security, net
of certain fees.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities are structured similarly to GNMA, FNMA and FHLMC mortgage
pass-through securities and are issued by originators of and investors in
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. These securities
usually are backed either by GNMA, FNMA or FHLMC certificates or by a pool of
fixed rate or adjustable rate mortgage loans. Securities which are backed by a
pool of fixed rate or adjustable rate mortgage loans generally are structured
with one or more types of credit enhancement.
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GNMA Certificates. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veterans' Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under the guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA certificates will represent a pro-rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multi-family residential
properties under construction; (vi) mortgage loans on completed multi-family
projects; (vii) fixed rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (viii) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (ix) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on one-to
four-family housing units.
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro-rata interest in scheduled principal
payments and interest payments (at such FNMA certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and
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timely payment of principal of and interest on each FNMA certificate will be
guaranteed by FNMA, which guarantee is not backed by the full faith and credit
of the U.S. Government.
Each FNMA certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
graduated payment mortgage loans; and (iii) adjustable rate mortgage loans.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily FHLMC certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government.
FHLMC certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC certificate
group.
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Interest Only Securities. The Portfolio may purchase stripped mortgage or
"interest only" securities which are derivative multiclass mortgage securities.
Stripped mortgage securities may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing. These
securities have greater volatility than other types of mortgage securities.
Although these securities are purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers, the
market for such securities has not yet been fully developed. Accordingly,
stripped mortgage securities are generally illiquid.
Stripped mortgage securities are structured with two or more classes of
securities that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of stripped mortgage
security will have at least one class receiving only a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other class will receive primarily interest and only a small portion of the
principal. In the most extreme case, one class will receive all of the interest
("IO" or interest-only), while the other class will receive all of the principal
("PO" or principal-only class). The yield to maturity on IOs, POs and other
Mortgage-Backed Securities that are purchased at a substantial premium or
discount generally are extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on such securities' yield
to maturity. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, the Portfolio may fail to fully recoup its
initial investment in these securities even if the securities have received the
highest rating by a nationally recognized statistical rating organizations.
Miscellaneous. The Portfolio may from time to time purchase in the
secondary market certain mortgage pass-through securities packaged and master
serviced by PNC Mortgage Securities Corp. ("PNC Mortgage") or Midland Loan
Services, Inc. ("Midland") (or Sears Mortgage if PNC Mortgage succeeded to
rights and duties of Sears Mortgage) or mortgage-related securities containing
loans or mortgages originated by PNC Bank or its affiliates. It is possible that
under some circumstances, PNC Mortgage, Midland or their affiliates could have
interests that are in conflict with the holders of these Mortgage-Backed
Securities, and such holders could have rights against PNC Mortgage, Midland or
their affiliates.
The Portfolio will not purchase Mortgage-Backed Securities in the secondary
market from broker-dealers who are affiliated with PNC Bank. In addition, the
Portfolio will not purchase Mortgage-Backed Securities in the primary market
containing loans or mortgages originated by PNC Bank or its affiliates.
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Lower Rated Securities
The Mortgage-Backed Securities in which the Portfolio may invest may be
lower rated (i.e., have a credit quality below investment grade) subordinated
classes. Investments in such lower rated securities are subject to special
risks, including a greater risk of loss of principal and non-payment of
interest. An investor should carefully consider the following factors before
purchasing shares of the Portfolio. The Portfolio will maintain a
dollar-weighted average credit quality of no less than BBB+. In order to
calculate the average credit quality of the Portfolio, the Portfolio will assign
sequential numbers to each of the rating categories, multiply the value of each
instrument by the rating equivalent number assigned to its lowest rating, sum
all of such products, divide the aggregate by the net asset value of the
Portfolio and convert the number back to its equivalent rating symbol.
Generally, lower rated securities offer a higher return potential than
higher rated securities but involve greater volatility of price and greater risk
of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower rated securities will likely
have large uncertainties or major risk exposure to adverse conditions and are
predominately speculative. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by the Portfolio,
with a commensurate effect on the value of the Portfolio's shares. While the
market values of lower rated securities tend to react less to fluctuations in
interest rate levels than do those of higher rated securities, the market values
of certain of these securities also tend to be more sensitive to changes in
economic conditions than higher rated securities. In addition, lower rated
securities generally present a higher degree of credit risk. The Portfolio may
incur additional expenses to the extent that it is required to seek recovery
upon a default in the payment of principal or interest on its portfolio
holdings.
Securities which are rated BB by Standard & Poor's Ratings Group ("S&P"),
Duff & Phelps Inc. ("D&P") and Fitch Investors Service ("Fitch") and Ba by
Moody's Investors Service, Inc. ("Moody's") have speculative characteristics
with respect to capacity to pay interest and repay principal. A general
description of the bond ratings of Moody's, S&P, D&P and Fitch is set forth in
Appendix A hereto.
The rating assigned by a rating agency evaluates the safety of a
non-investment grade security's principal and interest payments, but does not
address market value risk. Ratings may from time to time change, positively or
negatively, to reflect developments regarding the issuer's financial condition.
Because such ratings of the ratings agencies may not always reflect current
conditions and events, in addition to using recognized rating agencies and other
sources, the Adviser performs its own analysis of the issuers whose
non-investment grade securities the Portfolio holds. Because of this, the
Portfolio's performance may depend more on the Adviser's own credit analysis
than in the case of mutual funds investing in higher-rated securities.
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Types of Credit Enhancement
Mortgage-Backed Securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligors on underlying assets to make payments, those
securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of payments
on the underlying pool occurs in a timely fashion. Protection against losses
resulting from default ensures ultimate payment of the obligations on at least a
portion of the assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring other more
subordinate securities in the transaction or through a combination of such
approaches. The Portfolio will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against future losses)
and "overcollateralization" (where the scheduled payments on, or the principal
amount of, the underlying assets exceeds that required to make payment of the
securities and pay any servicing or other fees). The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquencies or
losses in excess of those anticipated could adversely affect the return on an
investment in such issue.
Risk Factors Relating to Mortgage-Backed Securities
The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal payments are made more frequently, usually monthly, and that principal
may be prepaid at any time because the underlying mortgage loans or other assets
generally may be prepaid at any time. As a result, if the Portfolio purchases
such a security at a premium, a prepayment rate that is faster than expected
will reduce yield to maturity, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Portfolio purchases these securities at a discount, faster
than expected prepayments will increase, while slower than expected prepayments
will reduce, yield to maturity.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will
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increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, amounts available for reinvestment by the
Portfolio are likely to be greater during a period of declining interest rates
and, as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-Backed Securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed income securities from declining interest rates because of the risk of
prepayment. The markets for Mortgage-Backed Securities may be more illiquid than
those of other securities.
Investments in Commercial Mortgage-Backed Securities involve the credit
risks of delinquency and default. Delinquency refers to interruptions in the
payment of interest and principal. Default refers to the potential for
unrecoverable principal loss from the sale of foreclosed property. These risks
include the risks inherent in the commercial mortgage loans which support such
Commercial Mortgage-Backed Securities and the risks associated with direct
ownership of real estate. This may be especially true in the case of Commercial
Mortgage-Backed Securities secured by, or evidencing an interest in, a
relatively small or less diverse pool of commercial mortgage loans. The factors
contributing to these risks include the effects of general and local economic
conditions on real estate values, the conditions of specific industry segments,
the ability of tenants to make lease payments and the ability of a property to
attract and retain tenants, which in turn may be affected by local conditions
such as oversupply of space or a reduction of available space, the ability of
the owner to provide adequate maintenance and insurance, energy costs,
government regulations with respect to environmental, zoning, rent control and
other matters, and real estate and other taxes.
While the credit quality of the Commercial Mortgage-Backed Securities in
which the Portfolio may invest will reflect the perceived likelihood of future
cash flows to meet operating expenses and cash flow requirements, the underlying
commercial properties may not be able to continue to generate income to meet
their operating expenses and cash flow requirements (mainly debt service, lease
payments, capital expenditures, taxes, maintenance, insurance and tenant
improvements) as a result of any of the factors mentioned above. Consequently,
the obligors under commercial mortgages may be unable to make payments of
interest in a timely fashion, increasing the risk of default on a related
Commercial Mortgage-Backed Security. In addition, the repayment of the
commercial mortgage loans underlying Commercial Mortgage-Backed Securities will
typically depend upon the future availability of financing and the stability of
real estate property values.
The commercial mortgage loans that underlie Commercial Mortgage-Backed
Securities have certain distinct characteristics. Commercial mortgage loans are
generally not amortizing or not fully amortizing. At their maturity date,
repayment of the remaining principal balance or "balloon" is due and is repaid
through the attainment of an additional loan or sale of the property. Most
commercial mortgage loans are nonrecourse obligations of the borrower, meaning
that the sole remedy of the lender in the event of a default is to foreclose
upon the collateral. As a result, in the event of default by a borrower,
recourse may be had only against the specified property
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pledged to secure the loan and not against the borrower's other assets. If
borrowers are not able or willing to refinance or dispose of the property to pay
the principal balance due at maturity, payments on the subordinated classes of
the related Commercial Mortgage-Backed Security are likely to be adversely
affected. The ultimate extent of the loss, if any, to the subordinated classes
may only be determined after the foreclosure of the mortgage encumbering the
property and, if the mortgagee takes title to the property, upon liquidation of
the property. Factors such as the title of the property, its physical condition
and financial performance, as well as governmental disclosure requirements with
respect to the condition of the property, may make a third party unwilling to
purchase the property at a foreclosure sale or for a price sufficient to satisfy
the obligations with respect to the related Commercial Mortgage-Backed
Securities. The condition of a property may deteriorate during foreclosure
proceedings. Certain obligors on underlying mortgages may become subject to
bankruptcy proceedings, in which case the amount and timing of amounts due under
the related Commercial Mortgage-Backed Securities may be materially adversely
affected.
In general, any losses on a given Commercial Mortgage-Backed Security will
be absorbed first by the equity holder, then by a cash reserve fund or letter of
credit, if any, and then by the "first loss" subordinated security to the extent
of its principal balance. Because the Portfolio intends to invest in
subordinated classes of Commercial Mortgage-Backed Securities, there can be no
assurances that in the event of default and the exhaustion of equity support,
the reserve fund and any debt classes junior to those in which the Portfolio
invests, the Portfolio will be able to recover all of its investment in the
securities it purchases. In addition, if the underlying mortgage portfolio has
been overvalued by the originator, or if mortgage values subsequently decline,
the Portfolio may hold the "first loss" position in certain Commercial
Mortgage-Backed Securities ahead of the more senior debt holders, which may
result in significant losses. Many of the lower-rated Commercial Mortgage-Backed
Securities are subject to less prepayment risk than in the case of Residential
Mortgage-Backed Securities because of structural features of the underlying
mortgage loans and the fact that they are entitled to repayment only after more
senior classes are paid.
Investments in Residential Mortgage-Backed Securities involve the credit
risks that affect interest and principal cash flows similar to the credit risks
of Commercial Mortgage-Backed Securities discussed above, as well as the
prepayment risks associated with the possibility that prepayments of principal
generally may be made at any time without penalty. Prepayment rates are
influenced by changes in current interest rates and a variety of economic,
geographic, social and other factors. Changes in the rate of prepayments on a
Residential Mortgage-Backed Security may change the yield to maturity of the
security and amounts available for reinvestment from such securities by the
Portfolio are likely to be greater during periods of relatively low or declining
interest rates and therefore are likely to be reinvested at lower interest rates
than during a period of relatively high interest rates. This prepayment effect
has been particularly pronounced in recent years as borrowers have refinanced
higher interest rate mortgages into lower interest rate mortgages available in
the marketplace. Because the Portfolio expects to
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invest in subordinated Residential Mortgage-Backed Securities, the
prioritization of cash flows from mortgages under the Residential
Mortgage-Backed Securities in favor of the senior classes generally reduces this
prepayment risk.
Risk Factors Relating to Lower Rated Securities
An investor should recognize that the lower-rated Commercial and
Residential Mortgage-Backed Securities in which the Portfolio may invest have
speculative characteristics. The prices of lower credit quality securities,
which are commonly referred to as "junk bonds," have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual issuer developments.
Securities rated BB/Ba can be regarded as speculative. A projection of an
economic downturn or the advent of a recession, for example, could cause a
decline in the price of lower credit quality securities because the advent of a
recession could lessen the ability of obligors of mortgages underlying
Commercial Mortgage-Backed Securities and Residential Mortgage-Backed Securities
to make principal and interest payments. In such event, existing credit supports
and any first loss positions may be insufficient to protect against loss of
principal.
Issuers of lower rated securities are often in the growth stage of their
development and/or involved in a reorganization or takeover. The companies are
often highly leveraged (have a significant amount of debt relative to
shareholders' equity) and may not have available to them more traditional
financing methods, thereby increasing the risk associated with acquiring these
types of securities. In some cases, obligations with respect to lower rated
securities are subordinated to the prior repayment of senior indebtedness, which
will potentially limit a Portfolio's ability to fully recover principal or to
receive interest payments when senior securities are in default.
The secondary markets for lower rated securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for lower
rated securities are concentrated in relatively few market makers and
participants in the markets are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for these securities is generally lower than that
for higher rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. Under certain economic and/or
market conditions, the Portfolio may have difficulty disposing of certain lower
rated securities due to the limited number of investors in that sector of the
market. An illiquid secondary market may adversely affect the market price of
the security, which may result in increased difficulty selling the particular
issue and obtaining accurate market quotations on the issue when valuing a
Portfolio's assets. Market quotations on lower rated securities are available
only from a limited number of dealers, and such quotations may not be the actual
prices available for a purchase or sale.
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The markets for lower rated securities may react strongly to adverse news
about an issuer or the economy, or to the perception or expectation of adverse
news, whether or not it is based on fundamental analysis. Additionally, prices
for these securities may be affected by legislative and regulatory developments.
These developments could adversely affect the Portfolio's net asset value and
investment practices, the secondary market, the financial condition of issuers
of these securities and the value and liquidity of outstanding securities,
especially in a thinly traded market. For example, federal legislation requiring
the divestiture by federally insured savings and loan associations of their
investments in lower rated bonds and limiting the deductibility of interest by
certain corporate issuers of these bonds adversely affected the market in recent
years.
When the secondary market for lower rated securities becomes more illiquid,
or in the absence of readily available market quotations for such securities,
the relative lack of reliable objective data makes it more difficult to value
the Portfolio's securities, and judgment plays a more important role in
determining such valuations. Increased illiquidity, in combination with the
relative youth and growth of the market for such securities, also may affect the
ability of the Portfolio to dispose of such securities at a desirable price.
Additionally, if the secondary markets for lower rated securities contract due
to adverse economic conditions or for other reasons, certain of the Portfolio's
liquid securities may become illiquid and the proportion of the Portfolio's
assets invested in illiquid securities may significantly increase.
The costs attributable to investing in lower rated securities are usually
higher for several reasons, such as higher investment research costs and higher
commission costs.
Other Investment Practices
Duration. The Portfolio will try to maintain a duration for its investments
of between four and eight years. Duration is a mathematical calculation of the
average life of a debt security that serves as a measure of its price risk. Each
year of duration represents an expected 1% change in the price of a security for
every 1% change in interest rates. Duration, which measures price sensitivity to
interest rate changes, is not necessarily equal to average maturity.
Certain Management Techniques. The Portfolio may purchase and sell futures
contracts, enter into various interest rate transactions such as swaps, caps and
floors and may purchase and sell exchange-listed and over-the-counter put and
call options on securities, financial indices and futures contracts
(collectively, "Additional Investment Management Techniques"). These Additional
Investment Management Techniques may be used for duration management and other
risk management to attempt to protect against possible changes in the market
value of the Portfolio resulting from trends in the debt securities markets and
changes in interest rates, to protect the Portfolio's unrealized gains in the
value of its securities holdings, to facilitate the sale of such securities for
investment purposes and to establish a position in the securities markets as a
temporary substitute for purchasing particular securities. There is no
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particular strategy that requires use of one technique rather than another as
the decision to use any particular strategy or instrument is a function of
market conditions and the composition of the portfolio. See Appendix B "General
Characteristics and Risks of Additional Investment Management Techniques."
Additional Investment Management Techniques present certain risks. With
respect to hedging and risk management, the variable degree of correlation
between price movements of hedging instruments and price movements in the
position being hedged creates the possibility that losses on the hedge may be
greater than gains in the value of the Portfolio's position. In addition,
certain instruments and markets may not be liquid in all circumstances. As a
result, in volatile markets, the Portfolio may not be able to close out a
transaction without incurring losses substantially greater than the initial
deposit. Although the contemplated use of these instruments predominantly for
hedging should tend to minimize the risk of loss due to a decline in the value
of the position, at the same time they tend to limit any potential gain which
might result from an increase in the value of such position. The ability of the
Portfolio to successfully utilize Additional Investment Management Techniques
will depend on the ability of BlackRock Financial Management, Inc. ("BlackRock"
or the "Adviser") to predict pertinent market movements and sufficient
correlations, which cannot be assured. Finally, the daily deposit requirements
in futures contracts that the Portfolio has sold create an ongoing greater
potential financial risk than do options transactions, where the exposure is
limited to the cost of the initial premium. Losses due to the use of Additional
Investment Management Techniques will reduce net asset value.
In selecting counterparties for OTC hedging and risk management
transactions, the Portfolio will adhere to the following minimum ratings: (i)
with respect to an OTC derivative instrument with a remaining nominal maturity
of six months or less, a Moody's Derivative Counterparty Rating of A3; (ii) with
respect to an OTC derivative instrument with a remaining maturity of more than
six months, a Moody's Derivative Counterparty Rating of AA3. If the counterparty
does not have a Moody's counterparty rating, then either the Moody's or S&P
long-term securities rating of A3/A- (with respect to category (i) above) or
Aa3/AA- (with respect to category (ii) above) may be used as a substitute. In
addition, all such counterparties must have a minimum short-term rating of A-1
by Moody's and P-1 by S&P. If a counterparty drops below the minimum ratings,
then the Portfolio will seek to unwind existing agreements with such
counterparty in a cost-effective manner and will be prohibited from entering
into new agreements with the counterparty so long as the counterparty's rating
is below the relevant minimum.
The principal risks relating to the use of futures contracts and other
Additional Investment Management Techniques are: (a) less than perfect
correlation between the prices of the instrument and the market value of the
securities in the Portfolio's holdings; (b) possible lack of a liquid secondary
market for closing out a position in such instruments; (c) losses resulting from
interest rate or other market movements not anticipated by the Adviser; and (d)
the obligation to meet additional variation margin or other payment
requirements, all of which could result in the
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Portfolio being in a worse position than if such techniques had not been used.
See Appendix B "General Characteristics and Risks of Additional Investment
Management Techniques" for further information.
The Portfolio may also purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment," including "TBA" (to be
announced) basis. When such transactions are negotiated, the price, which is
generally expressed in yield terms, is fixed at the time the commitment is made,
but delivery and payment for the securities take place at a later date outside
the normal course of settlement for securities of that type. When-issued and
forward commitment transactions involve the risk that the price or yield
obtained in a transaction may be less favorable than the price or yield
available in the market when the securities delivery takes place. When-issued
securities and forward commitments may be illiquid. If the Portfolio disposes of
the right to acquire a when-issued security prior to its acquisition or disposes
of its right to deliver or receive against a forward commitment, it can incur a
gain or loss. At the time the Portfolio enters into a transaction on a
when-issued or forward commitment basis, it will segregate with its custodian
cash or other liquid debt securities with a value not less than the value of the
when-issued or forward commitment securities. The value of these assets will be
monitored daily to ensure that their marked to market value will at all times
equal or exceed the corresponding obligations of the Portfolio. If deemed
advisable as a matter of investment strategy, the Portfolio may dispose of or
renegotiate a commitment after it has been entered into, and may sell securities
it has committed to purchase before those securities are delivered to the
Portfolio on the settlement date. In these cases the Portfolio may realize a
taxable capital gain or loss. When the Portfolio engages in when-issued, TBA or
forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Portfolio's incurring a
loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of the Portfolio starting on the day
the Portfolio agrees to purchase the securities. The Portfolio does not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date. Settlements in the ordinary course, which
typically occur monthly for mortgage-related securities, are not treated by the
Portfolio as when-issued or forward commitment transactions and accordingly are
not subject to the foregoing restrictions.
Interest Rate Transactions. The Portfolio may enter into interest rate
swaps and the purchase or sale of interest rate caps and floors. The Portfolio
expects to enter into these transactions primarily to preserve a return or
spread on a particular investment or portion of its portfolio as a duration
management technique or to protect against any increase in the price of
securities that the Portfolio anticipates purchasing at a later date. The
Portfolio will use these transactions as a hedge or for duration or risk
management. The Portfolio will not sell interest rate caps or floors that it
does not own. Interest rate swaps involve the exchange by the Portfolio with
another party of their respective commitments to pay or receive interest e.g.,
an exchange of
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floating rate payments for fixed rate payments with respect to a notional amount
of principal. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate floor.
The Portfolio may enter into interest rate swaps, caps and floors on either
an asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments on the payment dates. The Portfolio will accrue the net amount
of the excess, if any, of the Portfolio's obligations over its entitlements with
respect to each interest rate swap on a daily basis and will segregate with a
custodian an amount of cash or liquid securities having an aggregate net asset
value at all times at least equal to the accrued excess. If there is a default
by the other party to such a transaction, the Portfolio will have contractual
remedies pursuant to the agreements related to the transaction.
Futures Contracts and Options on Futures Contracts. The Portfolio may also
enter into contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of debt securities or indices or
prices thereof, other financial indices and U.S. government debt securities or
options on the above. Futures contracts will not, however, relate to
Mortgage-Backed Securities unless they are Commercial Mortgage-Backed
Securities. The Portfolio will ordinarily engage in such transactions only for
bona fide hedging, risk management (including duration management) and other
portfolio management purposes.
Calls on Securities, Indices and Futures Contracts. The Portfolio may sell
or purchase call options ("calls") on U.S. Treasury securities, Mortgage-Backed
Securities, other debt securities, indices, and Eurodollar instruments that are
traded on U.S. and foreign securities exchanges and in the over-the-counter
markets, and futures contracts. Calls will not relate to Mortgage-Backed
Securities unless they are Commercial Mortgage-Backed Securities. A call gives
the purchaser of the option the right to buy, and obligates the seller to sell,
the underlying security, futures contract or index at the exercise price at any
time or at a specified time during the option period. All such calls sold by the
Portfolio must be "covered" as long as the call is outstanding (i.e., the
Portfolio must own the securities or futures contract subject to the call or
other securities acceptable for applicable segregation requirements). A call
sold by the Portfolio exposes the Portfolio during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security, index or futures contract and may require the Portfolio to
hold a security or futures contract which it might otherwise have sold. The
purchase of a call gives the Portfolio the right to buy a security, futures
contract or index at a fixed price. Calls on futures on U.S. Treasury
securities, Commercial Mortgage-Backed Securities, other debt securities and
Eurodollar instruments must also be covered by deliverable
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securities or the futures contract or by liquid debt securities segregated to
satisfy the Portfolio's obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. The Portfolio may
purchase put options ("puts") that relate to U.S. Treasury securities,
Commercial Mortgage-Backed Securities, other debt securities and Eurodollar
instruments (whether or not it holds such securities in its portfolio), indices
or futures contracts. The Portfolio may also sell puts on U.S. Treasury
securities, Commercial Mortgage-Backed Securities, other debt securities,
Eurodollar instruments, indices or futures contracts on such securities if the
Portfolio's contingent obligations on such puts are secured by segregated assets
consisting of cash or liquid debt securities having a value not less than the
exercise price. No puts referred to in the preceding two sentences will relate
to Mortgage-Backed Securities unless they are Commercial Mortgage-Backed
Securities. The Portfolio will not sell puts if, as a result, more than 50% of
the Portfolio's assets would be required to cover its potential obligations
under its hedging and other investment transactions. In selling puts, there is a
risk that the Portfolio may be required to buy the underlying instrument at a
price higher than the current market price.
Repurchase Agreements. The Portfolio may invest temporarily in repurchase
agreements, which are agreements pursuant to which securities are acquired by
the Portfolio from a third party with the understanding that they will be
repurchased by the seller at a fixed price on an agreed date. These agreements
may be made with respect to any of the portfolio securities in which the
Portfolio is authorized to invest. Repurchase agreements may be characterized as
loans secured by the underlying securities and will be entered into in
accordance with the requirements of the SEC. The Portfolio will not enter into
any repurchase agreement with respect to securities other than U.S. Government
Securities (as defined in the Prospectus) and Commercial Mortgage-Backed
Securities. The value of the collateral for such repurchase agreement
marked-to-market at the end of each business day will be at least equal to the
amount of the repurchase agreement. The Portfolio will not enter into any
repurchase agreement the term of which exceeds 90 days.
The repurchase price under the repurchase agreements generally equals the
price paid by the Portfolio plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on securities
underlying the repurchase agreement). The financial institutions with which the
Portfolio may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government Securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the Adviser. The Adviser will continue to monitor
creditworthiness of the seller under a repurchase agreement, and will require
the seller to maintain during the term of the agreement the value of the
securities subject to the agreement to equal at least the repurchase price
(including accrued interest). In addition, the Adviser will require that the
value of this collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be equal to or greater than the
repurchase price (including accrued premium) provided in the
-19-
<PAGE>
repurchase agreement. The accrued premium is the amount specified in the
repurchase agreement or the daily amortization of the difference between the
purchase price and the repurchase price specified in the repurchase agreement.
The Portfolio's Adviser will mark-to-market daily the value of the securities.
Securities subject to repurchase agreements will be held by the Fund's custodian
(or sub-custodian) in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by the Portfolio under the 1940 Act.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Portfolio may suffer a
loss to the extent proceeds from the sale of the underlying securities are less
than the repurchase price.
Bank and Corporate Debt Securities. The Portfolio may not invest in bank or
corporate debt securities except that it may invest in (i) debt securities of
REITs and REOCs as described herein and in the Prospectus and (ii) money market
instruments for temporary defensive purposes and in order to keep cash on hand
fully invested. Investing in money market instruments for temporary defensive
purposes may prevent the Portfolio from achieving its investment objective.
Money market instruments include, but are not limited to notes, certificates of
deposit, bankers' acceptances, commercial paper and repurchase agreements.
Floating Rate and Index Obligations. The Portfolio may invest in debt
securities with interest payments or maturity values that are not fixed, but
float in conjunction with an underlying index or price. These securities may be
backed by U.S. Government or corporate issuers, or by collateral such as
commercial (but not residential) mortgages. In certain cases, a change in the
underlying index or price may have a leveraging effect on the periodic coupon
payments, creating larger possible swings in the prices of such securities than
would be expected when taking into account their maturities alone. The indices
and prices upon which such securities can be based include interest rates,
currency rates and commodities prices. However, the Portfolio will not invest in
any instrument whose value is computed based on a multiple of the change in
price or value of an asset or an index of or relating to assets in which the
Portfolio could not invest.
Floating rate securities pay interest according to a coupon which is reset
periodically. This reset mechanism may be formula based, or reflect the passing
through of floating interest
-20-
<PAGE>
payments on an underlying collateral pool. The coupon is usually reset daily,
weekly, monthly, quarterly or semi-annually, but other schedules are possible.
Floating rate obligations generally exhibit a low price volatility for a given
stated maturity or average life because their coupons adjust with changes in
interest rates. If their underlying index is not an interest rate, or the reset
mechanism lags the movement of rates in the current market, greater price
volatility may be experienced.
Index securities pay a fixed rate of interest, but have a maturity value
that varies by formula, so that when the obligation matures a gain or loss is
realized. The risk of index obligations depends on the volatility of the
underlying index, the coupon payment and the maturity of the obligation.
REITs. The Portfolio may invest in the corporate debt of real estate
investment trusts ("REITs"), which are pooled investment vehicles which invest
primarily in income producing real estate ("Equity REITs"). Equity REITs invest
the majority of their assets directly in real property and derive income
primarily from the collection of rents. Equity REITs can also realize capital
gains by selling properties that have appreciated in value. The Portfolio may
not invest in REITs which invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments. REITs are
not taxed on income distributed to shareholders provided they comply with
certain requirements of the Internal Revenue Code of 1986, as amended (the
"Code"). The Portfolio will indirectly bear its proportionate share of any
expenses paid by Equity REITs in which it invests.
Investing in Equity REITs involves certain unique risks in addition to
those risks associated with investing in the real estate industry in general.
Equity REITs may be affected by changes in the value of the underlying property
they own. Equity REITs are dependent on management skills, are not diversified,
and are subject to the risks of financing projects. Equity REITs are subject to
heavy cash flow dependency and the possibilities of failing to qualify for the
exemption from tax for distributed income under the Code and failing to maintain
their exemptions from the 1940 Act. Equity REITs whose underlying assets include
long-term health care properties, such as nursing, retirement and assisted
living homes may be impacted by federal regulations concerning the health care
industry.
Equity REITs may have limited financial resources, may trade less
frequently and in a limited volume and may be subject to more abrupt or erratic
price movements than larger company securities. Historically, Equity REIT's have
been more volatile in price than larger capitalization stocks.
Restricted and Illiquid Securities. Illiquid securities are subject to
legal or contractual restrictions on disposition or lack an established
secondary trading market. The sale of restricted and illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on
-21-
<PAGE>
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. The Portfolio may purchase certain restricted
securities ("Rule 144A securities") eligible for sale to qualified institutional
buyers as contemplated by Rule 144A under the Securities Act of 1933. Rule 144A
provides an exemption from the registration requirements of the Securities Act
of 1933 for the resale of certain restricted securities to qualified
institutional buyers. One effect of Rule 144A is that certain restricted
securities may now be liquid, though no assurance can be given that a liquid
market for Rule 144A securities will develop or be maintained. The Portfolio's
holdings of Rule 144A securities which are liquid securities will not be subject
to its limitation on investment in illiquid securities. The Fund's Board of
Trustees has adopted policies and procedures for the purpose of determining
whether securities that are eligible for resale under Rule 144A are liquid or
illiquid. The Board of Trustees will periodically review the Portfolio's
purchases and sales of Rule 144A securities.
Other Investments
U.S. Government Securities
U.S. Government Securities (as defined in the Prospectus) include:
1. U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury
bonds (generally maturities of greater than ten years), all of which
are direct obligations of the U.S. Government and, as such, are backed
by the "full faith and credit" of the United States.
2. Securities issued by agencies and instrumentalities of the
U.S. Government which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities issuing such
obligations are the Department of Housing and Urban Development, the
Export-Import Bank, the Farmers Home Administration ("FHA"), the
General Services Administration, the Maritime Administration and the
Small Business Administration. The maturities of such obligations
range from three months to 30 years.
3. Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but
whose issuing agency or instrumentalities may borrow, to meet its
obligations, from the U.S. Treasury. Among the agencies and
instrumentalities issuing such obligations are the Tennessee Valley
Authority and the U.S. Postal Service.
4. Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but
which are backed by
-22-
<PAGE>
the credit of the issuing agency or instrumentality. Among the
agencies and instrumentalities issuing such obligations is the Federal
Farm Credit System.
Neither the value nor the yield of the Portfolio's shares or of the U.S.
Government Securities which may be invested in by the Portfolio are guaranteed
by the U.S. Government. Such values and yield will fluctuate with changes in
prevailing interest rates and other factors. Generally, as prevailing interest
rates rise, the value of any U.S. Government Securities held by the Portfolio
will fall. Such securities with longer maturities generally tend to produce
higher yields and are subject to greater market fluctuation, as a result of
changes in interest rates, than debt securities with shorter maturities.
INVESTMENT RESTRICTIONS
With the exception of the investment limitations enumerated in this
section, the investment policies and limitations enumerated in this Statement of
Additional Information and in the Prospectus may be changed by the Fund's Board
of Trustees. The investment limitations enumerated in this section, however, may
be changed only by a vote of the holders of a majority of the Portfolio's
outstanding shares (as defined below under "Miscellaneous").
The Portfolio may not:
(1) invest 25% or more of the value of its total assets in any one
industry (Mortgage-Backed Securities and other securities issued
or guaranteed by the U.S. government or any agency or
instrumentality thereof are not treated as industries); provided,
however, that the Portfolio will, except for temporary defensive
purposes, invest at least 65% of the value of its total assets in
Commercial Mortgage-Backed Securities;
(2) issue senior securities (including borrowing money, including on
margin if margin securities are owned) in excess of 33 1/3% of
its total assets (including the amount of senior securities
issued but excluding any liabilities and indebtedness not
constituting senior securities) except that the Portfolio may
borrow up to an additional 5% of its total assets for temporary
purposes; or pledge its assets other than to secure such
issuances or in connection with hedging transactions, short
sales, when-issued and forward commitment transactions and
similar investment strategies. The Portfolio's obligations under
interest rate swaps are not treated as senior securities;
(3) make loans of money or property to any person, except through
loans of portfolio securities, the purchase of fixed income
securities consistent with
-23-
<PAGE>
the Portfolio's investment objective and policies or the
acquisition of securities subject to repurchase agreements;
(4) underwrite the securities of other issuers, except to the extent
that in connection with the disposition of portfolio securities
or the sale of its own shares the Portfolio may be deemed to be
an underwriter;
(5) invest for the purpose of exercising control over management of
any company other than issuers of collateralized mortgage
obligations;
(6) purchase real estate or interests therein other than Commercial
and Residential Mortgage-Backed Securities and similar
instruments;
(7) purchase or sell commodities or commodity contracts for any
purposes except as, and to the extent, permitted by applicable
law without the Portfolio becoming subject to registration with
the Commodity Futures Trading Commission as a commodity pool;
(8) make any short sale of securities except in conformity with
applicable laws, rules and regulations and unless, giving effect
to such sale, the market value of all securities sold short does
not exceed 25% of the value of the Portfolio's total assets and
the Portfolio's aggregate short sales of a particular class of
securities does not exceed 25% of the then outstanding securities
of that class;
(9) invest in non-U.S. dollar denominated securities or other
instruments; or
(10) hold Additional Investment Management Techniques to the extent
that the aggregate notional value thereof exceeds 50% of the
Portfolio's total assets (determined after excluding all such
Additional Investment Management Techniques).
Notwithstanding restriction 2 above, the Portfolio has no present intention
to issue senior securities.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Board of Trustees. The trustees and executive officers of the Fund, and their
business addresses and principal occupations during the past five years, are:
-24-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee Executive Vice President and
Bell Atlantic Global Wireless Chief Financial Officer since
1717 Arch Street August 1997, Bell Atlantic
29th Floor East Global Wireless (Global
Philadelphia, PA 19103 Wireless Communications);
Age: 55 Director, Executive Vice
President and Chief Financial
Officer from February 1995 -
August 1997, Vice President and
Chief Financial Officer from
January 1991 - February 1995,
Bell Atlantic Corporation (a
diversified telecommunications
company); Director, Groupo
Iusacell, S.A. de C.V. (cellular
communications company) since
June 1994; Director, American
Waterworks, Inc. (water utility)
since May 1990; Trustee, The
Carl E. & Emily I. Weller
Foundation since October 1991.
Raymond J. Clark(1) Trustee, President and Treasurer of Princeton
Office of the Treasurer Treasurer University since 1987; Trustee,
Princeton University The Compass Capital Group of
3 New South Building Funds from 1987 to 1996;
P.O. Box 35 Trustee, Chemical Bank, New
Princeton, New Jersey 08540 Jersey Advisory Board from 1994
Age: 63 until 1995; Trustee, American
Red Cross - Mercer County
Chapter since 1995; Trustee,
Medical Center of Princeton;
and Trustee, United
Way-Greater Mercer County from
1996-1997.
Robert M. Hernandez Trustee Director since 1991, Vice
USX Corporation Chairman and Chief Financial
600 Grant Street Officer since 1994, Executive
6105 USX Tower Vice President - Accounting &
Pittsburgh, PA 15219 Finance and Chief Financial
Age: 54 Officer from 1991 to 1994, USX
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------
(1) This trustee may be deemed an "interested person" of the Fund as defined in
the 1940 Act.
-25-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Corporation (a diversified
company principally engaged in
energy and steel businesses);
Director and Chairman of the
Executive Committee, ACE
Limited (insurance company);
Trustee, Allegheny University
Hospitals, Allegheny General;
and Allegheny University
Hospitals-West; Director,
Marinette Marine Corporation;
Director, Transtar, Inc.
(transportation company) since
1996; and Director and
Chairman of the Board, RTI
International Metals, Inc.
Anthony M. Santomero Vice Chairman Deputy Dean from 1990 to 1994,
The Wharton School of the Board Richard K. Mellon Professor
University of Pennsylvania of Finance since April 1984,
Room 2344 Director, Wharton Financial
Steinberg Hall-Dietrich Hall Institutions Center since July
Philadelphia, PA 19104-6367 1995, and Dean's Advisory
Age: 52 Council Member since July 1984,
The Wharton School, University
of Pennsylvania; Associate
Editor, Journal of Banking and
Finance since June 1978;
Associate Editor, Journal of
Economics and Business since
October 1979; Associate
Editor, Journal of Money,
Credit and Banking since
January 1980; Research
Associate, New York University
Center for Japan-U.S. Business
and Economic Studies since
July 1989; Editorial Advisory
Board, Open Economics Review
since November 1990; Director,
The Zweig Fund and The Zweig
Total Return Fund; Director of
Municipal Fund for California
Investors, Inc., and Municipal
Fund for New York Investors,
Inc.
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-26-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
David R. Wilmerding, Jr. Chairman Chairman, Gee, Wilmerding &
One Aldwyn Center of the Board Associates, Inc. (investment
Villanova, PA 19085 advisers) since February 1989;
Age: 63 Director, Beaver Management
Corporation (land management
corporation); Managing General
Partner, Chestnut Street
Exchange Fund; Director,
Independence Square Income
Securities, Inc.; Director,
The Mutual Fire, Marine and
Inland Insurance Company;
Director, U.S. Retirement
Communities, Inc.; Director,
Trustee or Managing General
Partner of a number of
investment companies advised
by BIMC and its affiliates.
Karen H. Sabath Assistant Secretary Managing Director, BlackRock
BlackRock Advisors, Inc. Advisors, Inc. since February
345 Park Avenue 1998; President, Compass
New York, NY 10154 Capital Group, Inc. from 1995 to
Age: 33 March 1998; Managing Director of
BlackRock Financial Management,
Inc. since 1993.
Ellen L. Corson Assistant Treasurer Vice President and Director of
PFPC Inc. Mutual Fund Accounting and
103 Bellevue Parkway Administration, PFPC Inc. since
Wilmington, DE 19809 November 1997; Assistant Vice
Age: 34 President, PFPC Inc. from March
1997 to November 1997; Senior
Accounting Officer, PFPC Inc.
from March 1993 to March 1997.
Brian P. Kindelan Secretary Vice President and Senior
BlackRock Financial Counsel, BlackRock Financial
Management, Inc.
1600 Market Street, 28th Floor
Philadelphia, PA 19103
Age: 39
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
-27-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
- ---------------- ------------------ ----------------------
<S> <C> <C>
Management, Inc. since April
1998; Senior Counsel, PNC Bank
Corp. from May 1995 to April
1998; Associate, Stradley,
Ronan, Stevens & Young from
March 1990 to May 1995.
</TABLE>
-28-
<PAGE>
The Fund pays trustees who are not affiliated with BlackRock, BlackRock
Advisors, Inc. ("BAI") or BlackRock Distributors, Inc. ("BDI" or the
"Distributor") $20,000 annually ($30,000 annually in the event that the assets
of the Fund exceed $40 billion) and $350 per portfolio of the Fund for each full
in-person meeting of the Board that they attend. The Fund pays the Chairman and
Vice Chairman an additional $10,000 and $5,000, respectively, for their services
in such capacities. Trustees who are not affiliated with BAI or the Distributor
are reimbursed for any expenses incurred in attending meetings of the Board of
Trustees or any committee thereof. The term of office of each trustee will
automatically terminate when such trustee reaches 72 years of age. No officer,
director or employee of BAI, BlackRock Institutional Management Corporation
("BIMC"), BlackRock, BlackRock International, Ltd. ("BIL"), PFPC Inc. ("PFPC"),
BDI, PNC Bank, National Association ("PNC Bank") or PFPC Trust Company ("PTC")
currently receives any compensation from the Fund. As of the date of this
Statement of Additional Information, the trustees and officers of the Fund, as a
group, owned less than 1% of the outstanding shares of each class of each
investment portfolio of the Fund.
-29-
<PAGE>
The table below sets forth the compensation actually received from the Fund
Complex of which the Fund is a part by the trustees for the fiscal year ended
September 30, 1998:
<TABLE>
<CAPTION>
==============================================================================================================================
Pension or Total Compensation from
Aggregate Retirement Benefits Estimated Annual Registrant and Fund
Compensation from Accrued as Part of Benefits upon Complex(1) Paid to
Name of Person, Position Registrant Fund Expenses Retirement Trustees
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anthony M. Santomero, Vice $57,675 N/A N/A (3)(2) $70,175
Chairman of the Board
- -------------------------------------------------------------------------------------------------------------------------------
David R. Wilmerding, Jr., $62,675 N/A N/A (3)(2) $76,675
Chairman of the Board
- -------------------------------------------------------------------------------------------------------------------------------
William O. Albertini, Trustee $52,675 N/A N/A (1)(2) $52,675
- -------------------------------------------------------------------------------------------------------------------------------
Raymond J. Clark, Trustee,
President and Treasurer $52,675 N/A N/A (1)(2) $52,675
- -------------------------------------------------------------------------------------------------------------------------------
Robert M. Hernandez, Trustee $52,675 N/A N/A (1)(2) $52,675
===============================================================================================================================
</TABLE>
Shareholder and Trustee Liability. Under Massachusetts law, shareholders of
a business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the trust. However, the Fund's Declaration of
Trust provides that shareholders shall not be subject to any personal liability
in connection with the assets of the Fund for the acts or obligations of the
Fund, and that every note, bond, contract, order or other undertaking made by
the Fund shall contain a provision to the effect that the shareholders are not
personally liable thereunder. The Declaration of Trust provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his being or having been a shareholder and not
because of his acts or omissions or some other reason. The Declaration of Trust
also
- ----------
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investor services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser
of any of the other investment companies.
2. Total number of investment company boards trustees served on within the
Fund Complex.
-30-
<PAGE>
provides that the Fund shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Fund, and shall satisfy
any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.
-31-
<PAGE>
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory Agreement. The advisory services provided by BlackRock, an
indirect majority-owned subsidiary of PNC Bank Corp., are described in the
Prospectus. For its services as adviser, BlackRock is entitled to an annual fee
equal to .25% of the Portfolio's average daily net assets. BlackRock may from
time to time voluntarily waive its advisory fees with respect to the Portfolio
and may voluntarily reimburse the Portfolio for expenses.
BlackRock renders advisory services to the Portfolio pursuant to an
Investment Advisory Agreement (the "Advisory Contract"). Under the Advisory
Contract, BlackRock is not liable for any error of judgment or mistake of law or
for any loss suffered by the Fund or the Portfolio in connection with the
performance of the Advisory Contract, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of BlackRock in the
performance of its duties or from reckless disregard of its duties and
obligations thereunder. The Advisory Contract is terminable as to the Portfolio
by vote of the Board of Trustees or by the holders of a majority of the
outstanding voting securities of the Portfolio, at any time without penalty, on
60 days' written notice to BlackRock. BlackRock may also terminate its advisory
relationship with respect to the Portfolio, on 60 days' written notice to the
Fund. The Advisory Contract terminates automatically in the event of its
assignment.
Administration Agreement. The Fund has entered into an Administration
Agreement with BAI, whose principal business address is 345 Park Avenue, New
York, New York 10154, and PFPC, whose principal business address is 400 Bellevue
Parkway, Wilmington, DE 19809 (the "Administration Agreement"). PFPC has agreed
to maintain office facilities for the Fund; furnish the Fund with statistical
and research data, clerical, accounting, and bookkeeping services; provide and
supervise the operation of an automated data processing system to process
purchase and redemption orders; provide information and distribute written
communications to shareholders; handle shareholder problems and calls; research
issues raised by financial intermediaries relating to investments in a
Portfolio's shares; review and provide advice with respect to communications for
a Portfolio's shares; monitor the investor programs that are offered in
connection with a Portfolio's shares; provide oversight and related support
services that are intended to ensure the delivery of quality service to the
holders of the Portfolio's shares; and provide certain other services required
by the Fund.
Under the Administration Agreement, BAI is responsible for: the supervision
and coordination of the performance of the Fund's service providers; the
negotiation of service contracts and arrangements between the Fund and its
service providers; acting as liaison between the trustees of the Fund and the
Fund's service providers; and providing ongoing business management and support
services in connection with the Fund's operations.
-32-
<PAGE>
Under the Administration Agreement, the Fund pays to BAI and PFPC on behalf
of the Portfolio a fee, computed daily and payable monthly, at an aggregate
annual rate of .23% of the first $500 million of the Portfolio's average daily
net assets, .21% of the next $500 million of the Portfolio's average daily net
assets and .19% of the average daily net assets of the Portfolio in excess of $1
billion. From time to time, BAI and PFPC may waive some or all of their
administration fees from the Portfolio.
The Administration Agreement provides that BAI and PFPC will not be liable
for any error of judgment or mistake of law or for any loss suffered by the Fund
or the Portfolio in connection with the performance of the Administration
Agreement, except a loss resulting from willful misfeasance, bad faith or gross
negligence in the performance of their respective duties or from reckless
disregard of their respective duties and obligations thereunder. In addition,
the Fund will indemnify each of BAI and PFPC and their affiliates against any
loss arising in connection with their provision of services under the
Administration Agreement, except that neither BAI nor PFPC nor their affiliates
shall be indemnified against any loss arising out of willful misfeasance, bad
faith, gross negligence or reckless disregard of their duties under the
Administration Agreement.
Pursuant to the terms of the Administration Agreement, BAI has delegated
certain of its duties thereunder to BDI.
Custodian and Transfer Agency Agreements. PTC, an affiliate of PNC Bank,
whose principal business address is 1600 Market Street, Philadelphia,
Pennsylvania 19103, is custodian of the Fund's assets pursuant to a custodian
agreement (the "Custodian Agreement"). Under the Custodian Agreement, PTC or a
sub-custodian (i) maintains a separate account or accounts in the name of the
Portfolio, (ii) holds and transfers portfolio securities on account of the
Portfolio, (iii) accepts receipts and makes disbursements of money on behalf of
the Portfolio, (iv) collects and receives all income and other payments and
distributions on account of the Portfolio's securities and (v) makes periodic
reports to the Board of Trustees concerning the Portfolio's operations. PTC is
authorized to select one or more banks or trust companies to serve as
sub-custodian on behalf of the Fund, provided that, with respect to
sub-custodians other than sub-custodians for foreign securities, PTC remains
responsible for the performance of all its duties under the Custodian Agreement
and holds the Fund harmless from the acts and omissions of any sub-custodian.
Citibank, N.A. serve as the international sub-custodians for various portfolios
of the Fund.
For its services to the Fund under the Custodian Agreement, PTC receives a
fee which is calculated based upon the Portfolio's average gross assets, with a
minimum monthly fee of $1,000 per investment portfolio. PTC is also entitled to
out-of pocket expenses and certain transaction charges.
-33-
<PAGE>
PFPC, an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems shares in
the Portfolio, (ii) addresses and mails all communications by the Portfolio to
record owners of its shares, including reports to shareholders, dividend and
distribution notices and proxy materials for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board of Trustees concerning the operations of the
Portfolio. PFPC may, on 30 days' notice to the Fund, assign its duties as
transfer and dividend disbursing agent to any other affiliate of PNC Bank Corp.
For its services with respect to the Fund's Institutional Shares under the
Transfer Agency Agreement, PFPC is entitled to receive fees at the annual rate
of .03% of the average net asset value of outstanding Institutional Shares in
the Portfolio, plus per account fees and disbursements.
Distributor and Distribution Plan. The Fund has entered into a distribution
agreement with the Distributor under which the Distributor, as agent, offers
shares of the Portfolio on a continuous basis. The Distributor has agreed to use
appropriate efforts to effect sales of the shares, but it is not obligated to
sell any particular amount of shares. The Distributor is a registered
broker/dealer with principal offices at Four Falls Corporate Center, 6th Floor,
West Conshohocken, PA 19428-2961. The Distributor is a wholly-owned subsidiary
of Provident Distributors, Inc. ("PDI"). A majority of the outstanding stock of
PDI is owned by its officers.
The Fund has adopted an Amended and Restated Distribution and Service Plan
(the "Plan") pursuant to Rule 12b-1 under the 1940 Act on behalf of its
Institutional Shares. The Plan was approved by a majority of (i) the trustees of
the Fund and (ii) the trustees of the Fund who are not interested persons of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan or in any agreement related to the Plan (the "Rule 12b-1 Trustees").
The Fund is not required or permitted under the Plan to make distribution
payments with respect to its Institutional Shares. However, the Plan permits
BDI, BAI, PFPC and other companies that receive fees from the Fund to make
payments relating to distribution and sales support activities out of their past
profits or other sources available to them. The Distributor, BAI and their
affiliates may pay financial institutions, broker/dealers and/or their
salespersons certain compensation for the sale and distribution of shares of the
Fund or for services to the Fund. These payments ("Additional Payments") may
take the form of "due diligence" payments for a dealer's examination of the
Portfolio and payments for providing extra employee training and information
relating to the Portfolio; "listing" fees for the placement of the Portfolio on
a dealer's list of mutual funds available for purchase by its customers;
"finders" or "referral" fees for directing investors to the Fund; "marketing
support" fees for providing assistance in promoting the sale of the Funds'
shares; and payments for the sale of shares and/or the maintenance of share
balances. In addition, the Distributor, BAI and their affiliates may make
Additional Payments for subaccounting, administrative and/or shareholder
processing services. The Additional Payments made by the Distributor, BAI and
their affiliates may be a fixed dollar
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amount, may be based on the number of customer accounts maintained by a
financial institution or broker/dealer, or may be based on a percentage of the
value of shares sold to, or held by, customers of the financial institutions or
dealers involved, and may be different for different institutions and dealers.
Furthermore, the Distributor, BAI and their affiliates may contribute to various
non-cash and cash incentive arrangements to promote the sale of shares, and may
sponsor various contests and promotions subject to applicable NASD regulations
in which participants may receive prizes such as travel awards, merchandise and
cash. The Distributor, BAI and their affiliates may also pay for the travel
expenses, meals, lodging and entertainment of broker/dealers, financial
institutions and their salespersons in connection with educational and sales
promotional programs subject to applicable NASD regulations.
The Plan will continue from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated with respect to the Portfolio at any time, without penalty, by the
vote of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of the Portfolio. The Plan may not be amended
materially without the approval of the Board of Trustees, including a majority
of the Rule 12b-1 Trustees, cast in person at a meeting called for that purpose.
Any modification to the Plan which would materially increase the costs borne by
the Portfolio for distribution purposes pursuant to the Plan must also be
submitted to the stockholders of the Portfolio for approval. In addition, while
the Plan remains in effect, the selection and nomination of the Fund's trustees
who are not "interested persons" of the Fund shall be committed to the
discretion of the Fund's non-interested trustees.
PORTFOLIO TRANSACTIONS
The Adviser is responsible for decisions to buy and sell securities for the
Portfolio, the selection of brokers and dealers to effect the transactions and
the negotiation of prices and any brokerage commissions. The securities in which
the Portfolio invests are traded principally in the over-the-counter market. In
the over-the-counter market, securities are generally traded on a "net" basis
with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a mark-up to the
dealer. Securities purchased in underwritten offerings generally include, in the
price, a fixed amount of compensation for the manager(s), underwriter(s) and
dealer(s). The Portfolio may also purchase certain money market instruments
directly from an issuer, in which case no commissions or discounts are paid.
Purchases and sales of debt securities on a stock exchange are effected through
brokers who charge a commission for their services.
The Adviser's primary considerations in selecting the manner of executing
securities transactions for the Portfolio will be prompt execution of orders,
the size and breadth of the market for the security, the reliability, integrity
and financial condition and execution capability of the firm, the size of and
difficulty in executing the order, and the best net price. There are
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many instances when, in the judgment of the Adviser, more than one firm can
offer comparable execution services. In selecting among such firms,
consideration is given to those firms which supply research and other services
in addition to execution services. However, it is not the policy of the Adviser,
absent special circumstances, to pay higher commissions to a firm because it has
supplied such services.
The Adviser is able to fulfill its obligations to furnish a continuous
investment program to the Portfolio without receiving such information from
brokers; however, it considers access to such information to be an important
element of financial management. Although such information is considered useful,
its value is not determinable, as it must be reviewed and assimilated by the
Adviser, and does not reduce the Adviser's normal research activities in
rendering investment advice under the Advisory Contract. It is possible that the
Adviser's expenses could be materially increased if it attempted to purchase
this type of information or generate it through its own staff.
One or more of the other accounts which the Adviser manages may own from
time to time the same investments as the Portfolio. Investment decisions for the
Portfolio are made independently from those of such other accounts; however,
from time to time, the same investment decision may be made for more than one
company or account. When two or more companies or accounts seek to purchase or
sell the same securities, the securities actually purchased or sold will be
allocated among the companies and accounts on a good faith equitable basis by
the Adviser in its discretion in accordance with the accounts' various
investment objectives. In some cases, this system may adversely affect the price
or size of the position obtainable for the Portfolio. In other cases, however,
the ability of the Portfolio to participate in volume transactions may produce
better execution for the Portfolio.
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the policy of the Portfolio to engage in transactions with
the objective of seeking profits from short-term trading. It is expected that
the annual portfolio turnover rate of the Portfolio will not exceed 250%,
excluding securities having a maturity of one year or less. Because it is
difficult to predict accurately portfolio turnover rate, actual turnover may be
higher or lower. Higher portfolio turnover results in increased Portfolio
expenses, including brokerage commissions, dealer mark-ups and other transaction
costs on the sale of securities and on reinvestment in other securities. The
Adviser will monitor the tax status of the Portfolio under the Internal Revenue
Code during periods in which the annual turnover rate of the Portfolio exceeds
100%. The portfolio turnover rate of the Portfolio is calculated by dividing the
lesser of the Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year.
The Portfolio will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which BAI, BIMC,
BlackRock, PNC Bank, BIL,
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PFPC, the Distributor or any affiliated person (as defined in the 1940 Act)
thereof is a member except pursuant to procedures adopted by the Board of
Trustees in accordance with Rule 10f-3 under the 1940 Act. In no instance will
portfolio securities be purchased from or sold to BAI, BIMC, BlackRock, PNC
Bank, BIL, PFPC, the Distributor or any affiliated person of the foregoing
entities except as permitted by SEC exemptive order or by applicable law.
PURCHASE AND REDEMPTION INFORMATION
Institutional Shares of the Portfolio are sold at the net asset value per
share next determined after a purchase order is received.
The Fund has elected to be governed by Rule 18f-1 under the 1940 Act so
that the Portfolio is obligated to redeem its shares solely in cash up to the
lesser of $250,000 or 1% of its net asset value during any 90-day period for any
one shareholder of the Portfolio.
Under the 1940 Act, the Portfolio may suspend the right to redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange (the "NYSE") is closed (other than customary weekend and
holiday closings), or during which trading on the NYSE is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Portfolio may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Fund may
redeem shares involuntarily to reimburse the Portfolio for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any charge relating to a transaction effected
for the benefit of a shareholder as provided in the Prospectus from time to
time.
VALUATION OF PORTFOLIO SECURITIES
In determining the approximate market value of portfolio investments, the
Fund may employ outside organizations, which may use, without limitation, a
matrix or formula method that takes into consideration market indexes, matrices,
yield curves and other specific adjustments. This may result in the securities
being valued at a price different from the price that would have been determined
had the matrix or formula method not been used. All cash, receivables and
current payables are carried on the Fund's books at their face value. Other
assets, if any, are valued at fair value as determined in good faith under the
supervision of the Board of Trustees.
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PERFORMANCE INFORMATION
From time to time, total return and yield data for Shares of the Portfolio
may be quoted in advertisements or in communications to Institutions. Total
return will be calculated on an average annual total return basis for various
periods. Average annual total return reflects the average annual percentage
change in value of an investment in Shares of the Portfolio over the measuring
period. Total return may also be calculated on an aggregate total return basis.
Aggregate total return reflects the total percentage change in value over the
measuring period. Both methods of calculating total return assume that dividends
and capital gain distributions made by the Portfolio during the period relating
to Shares are reinvested in Shares.
The yield of Shares of the Portfolio is computed based on the net income of
the Portfolio allocated to such Shares during a 30-day (or one month) period,
which period will be identified in connection with the particular yield
quotation. More specifically, the yield of Shares of the Portfolio is computed
by dividing the Portfolio's net income per share allocated to such Shares during
a 30-day (or one month) period by the net asset value per share on the last day
of the period and annualizing the result on a semi-annual basis.
Performance data of Shares of the Portfolio may be compared to those of
other mutual funds with similar investment objectives and to other relevant
indexes or to ratings or rankings prepared by independent services or other
financial or industry publications that monitor the performance of mutual funds.
In addition, certain indexes may be used to illustrate historic performance of
select asset classes. For example, the total return and/or yield of Shares of
the Portfolio may be compared to data prepared by Lipper Analytical Services,
Inc., CDA Investment Technologies, Inc. and Weisenberger Investment Company
Service, and with the performance of the Salomon Broad Investment Grade Index,
the T-Bill Index and the "stocks, bonds and inflation index" published annually
by Ibbotson Associates. Performance information may also include evaluations of
the Portfolio and their Shares published by nationally recognized ranking
services and information as reported by financial publications such as Business
Week, Fortune, Institutional Investor, Money Magazine, Forbes, Barron's, The
Wall Street Journal and The New York Times, or in publications of a local or
regional nature.
In addition to providing performance information that demonstrates the
actual yield or returns of Shares of the Portfolio over a particular period of
time, the Portfolio may provide certain other information demonstrating
hypothetical investment returns. Such information may include, but is not
limited to, illustrating the compounding effects of a dividend in a dividend
reinvestment plan.
Performance quotations of Shares of the Portfolio represent past
performance and should not be considered as representative of future results.
The investment return and principal value of an investment in Shares of the
Portfolio will fluctuate so that a shareholder's Shares, when redeemed, may be
worth more or less than their original cost. Since performance will fluctuate,
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performance data for Shares of the Portfolio cannot necessarily be used to
compare an investment in such Shares with bank deposits, savings accounts and
similar investment alternatives which often provide an agreed or guaranteed
fixed yield for a stated period of time. Shareholders should remember that
performance is generally a function of the kind and quality of the instruments
held in the portfolio, portfolio maturity, operating expenses and market
conditions. Any fees charged by brokers or other institutions directly to their
customer accounts in connection with investments in Shares will not be included
in the Portfolio's calculations of yield and total return.
Total Return. For purposes of quoting and comparing the performance of
shares of the Portfolio to the performance of other mutual funds and to stock or
other relevant indexes in advertisements, sales literature, communications to
shareholders and other materials, performance may be stated in terms of total
return. Under the rules of the SEC, funds advertising performance must include
total return quotes calculated according to the following formula:
T = [(ERV1/n) - 1]
-------
P
Where: T = average annual total return.
ERV = ending redeemable value at the end
of the period covered by the
computation of a hypothetical $1,000
payment made at the beginning of the
period.
P = hypothetical initial payment of
$1,000.
n = period covered by the computation,
expressed in terms of years.
Total return, or "T" in the formula above, is computed by finding the
average annual compounded rates of return over the specified periods that would
equate the initial amount invested to the ending redeemable value.
The Portfolio may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of the Portfolio's shares with other
performance measures. For example, in comparing the total return of the
Portfolio's shares with data published by Lipper Analytical Services, Inc., CDA
Investment Technologies, Inc. or Weisenberger Investment Company Service, or
with the performance of the Salomon Broad Investment Grade Index, as
appropriate, the Portfolio may calculate the aggregate total return for its
shares for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in the Portfolio's shares and assuming the
reinvestment of each dividend or other distribution at net asset value on the
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reinvestment date. Percentage increases are determined by subtracting the
initial value of the investment from the ending value and by dividing the
remainder by the beginning value.
In addition to average annual total returns, the Portfolio may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted on a before-tax or after-tax basis. Total
returns, yields, and other performance information may be quoted numerically or
in a table, graph or similar illustration.
Yield. The Portfolio may advertise its yield on its Institutional Shares.
Under the rules of the SEC, the Portfolio must calculate yield using the
following formula:
YIELD = 2[( a-b +1)6 - 1]
---
cd
Where: a = dividends and interest earned during
the period.
b = expenses accrued for the period (net
of reimbursements).
c = the average daily number of shares
outstanding during the period that
were entitled to receive dividends.
d = the maximum offering price per share
on the last day of the period.
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Portfolio is recognized by accruing 1/360th of the stated dividend rate
of the security each day that the security is in the Portfolio. Except as noted
below, interest earned on any debt obligations held by the Portfolio is
calculated by computing the yield to maturity of each obligation held by the
Portfolio based on the market value of the obligation (including actual accrued
interest) at the close of business on the last business day of each month, or,
with respect to obligations purchased during the month, the purchase price (plus
actual accrued interest) and dividing the result by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for each
day of the subsequent month that the obligation is held by the Portfolio. For
purposes of this calculation, it is assumed that each
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month contains 30 days. The maturity of an obligation with a call provision is
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date.
With respect to debt obligations purchased at a discount or premium, the
formula generally calls for amortization of the discount or premium.
With respect to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest ("pay
downs"), (a) gain or loss attributable to actual monthly pay downs are accounted
for as an increase or decrease to interest income during the period; and (b) the
Portfolio may elect either (i) to amortize the discount and premium on the
remaining security, based on the cost of the security, to the weighted-average
maturity date, if such information is available, or to the remaining term of the
security, if any, if the weighted-average maturity date is not available, or
(ii) not to amortize discount or premium on the remaining security. The
amortization schedule will be adjusted monthly to reflect changes in the market
values of debt obligations.
Undeclared earned income will be subtracted from the maximum offering price
per share (variable "d" in the formula). Undeclared earned income is the net
investment income which, at the end of the base period, has not been declared as
a dividend, but is reasonably expected to be and is declared and paid as a
dividend shortly thereafter.
Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of
Institutional Shares of the Portfolio over a specified period of time, the Fund
may provide certain other information demonstrating hypothetical investment
returns. Such information may include, but is not limited to, illustrating the
compounding effects of a dividend in a dividend reinvestment plan.
Miscellaneous. Performance information for the Portfolio assumes the
reinvestment of dividends and distributions. Performance information may reflect
fee waivers that subsidize and reduce the total operating expenses of the
Portfolio. In these cases, the Portfolio's return would be lower if there were
not such waivers.
Yield on shares of the Portfolio will fluctuate daily and does not provide
a basis for determining future yield. Because yield will fluctuate, it cannot be
compared with yields on savings account or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time. In
comparing the yield of one fund to another, consideration should be given to
each fund's investment policies, including the types of investments made,
lengths of maturities of the portfolio securities, and whether there are any
special account charges which may reduce the effective yield. The fees which may
be imposed by authorized dealers and other institutions on their customers are
not reflected in the calculations of total returns or yields for the Portfolio.
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As stated above, the Fund may also from time to time include discussions or
illustrations of the effects of compounding in advertisements. "Compounding"
refers to the fact that, if dividends or other distributions on an investment in
the Portfolio are reinvested by being paid in additional Portfolio shares, any
future income or capital appreciation of the Portfolio would increase the value,
not only of the original investment in the Portfolio, but also of the additional
Portfolio shares received through reinvestment. The Fund may also include
discussions or illustrations of the potential investment goals of a prospective
investor, investment management techniques, policies or investment suitability
of the Portfolio, economic conditions, the effects of inflation and historical
performance of various asset classes, including but not limited to, stocks,
bonds and Treasury bills. From time to time advertisements or communications to
shareholders may summarize the substance of information contained in shareholder
reports (including the investment composition of the Portfolio), as well as the
views of BlackRock as to current market, economy, trade and interest rate
trends, legislative, regulatory and monetary developments, investment strategies
and related matters believed to be of relevance to the Portfolio. The Fund may
also include in advertisements charts, graphs or drawings which illustrate the
potential risks and rewards of investment in various investment vehicles,
including but not limited to, stocks, bonds, treasury bills and shares of the
Portfolio. In addition, advertisements or shareholder communications may include
a discussion of certain attributes or benefits to be derived by an investment in
the Portfolio. Such advertisements or communications may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail therein.
TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders. No attempt is made to
present a detailed explanation of the tax treatment of the Portfolio or its
shareholders, and the discussion here and in the Prospectuses is not intended as
a substitute for careful tax planning. Investors are urged to consult their tax
advisers with specific reference to their own tax situation.
The Portfolio will elect to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Portfolio generally is exempt
from federal income tax on its net investment income (i.e., its investment
company taxable income as that term is defined in the Code without regard to the
deduction for dividends paid) and net capital gain (i.e., the excess of net
long-term capital gain over net short-term capital loss) that it distributes to
shareholders, provided that it distributes an amount equal to at least 90% of
its net investment income (the "Distribution Requirement") and satisfies certain
other requirements of the Code that are described below. Distributions of net
investment income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
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In addition to satisfaction of the Distribution Requirement, the Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investment in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
Distributions of net investment income will be taxable to shareholders as
ordinary income, regardless of whether such distributions are paid in cash or
are reinvested in shares. Shareholders receiving any taxable distribution from
the Portfolio in the form of additional shares will be treated as receiving a
taxable distribution in an amount equal to the fair market value of the shares
received, determined as of the reinvestment date.
The Portfolio intends to distribute to shareholders all of its net capital
gain for each taxable year. Net capital gain is distributed as a capital gain
dividend and is taxable to shareholders as long-term capital gain, regardless of
the length of time the shareholder has held his shares, whether net capital gain
was recognized by the Portfolio prior to the date on which a shareholder
acquired shares of the Portfolio and whether the distribution was paid in cash
or reinvested in shares.
It is expected that distributions from the Portfolio will generally not
qualify for the "dividends received" deduction for corporate shareholders.
Ordinary income of individuals will be taxable at a maximum marginal rate
of 39.6%, but because of limitations on itemized deductions otherwise allowable
and the phase-out of personal exemptions, the maximum effective marginal rate of
tax for some taxpayers may be higher. Long-term capital gains of individuals are
taxed at a maximum rate of 28%. Capital gains and ordinary income of corporate
taxpayers are both taxed at a maximum rate of 35%. Investors should be aware
that any loss realized upon the sale, exchange or redemption of shares held for
six months or less will be treated as a long-term capital loss to the extent any
capital gain dividends have been paid with respect to such shares.
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The Portfolio may engage in hedging or derivatives transactions involving
forward contracts, options and futures contracts and short sales. Such
transactions will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Portfolio
(that is, may affect whether gains or losses are ordinary or capital),
accelerate recognition of income of the Portfolio and defer recognition of
certain of the Portfolio's losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require the Portfolio to "mark-to-market" certain
types of positions in its portfolio (that is, treat them as if they were closed
out) and (2) may cause the Portfolio to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to
satisfy the Distribution Requirement and avoid the 4% excise tax (described
below). The Portfolio intends to monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its books and
records when it acquires any option, futures contract, forward contract or
hedged investment in order to mitigate the effect of these rules.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of the
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund that he is not subject
to backup withholding or that he is an "exempt recipient."
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Portfolio each year.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
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Although the Portfolio expects to qualify as a regulated investment company
and to be relieved of all or substantially all Federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Portfolio may be
subject to the tax laws of such states or localities. Shareholders should
consult their tax advisors about state and local tax consequences, which may
differ from the federal income tax consequences described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Each share of the Portfolio has a par value of $.001, represents an equal
proportionate interest in the Portfolio and is entitled to such dividends and
distributions earned on the Portfolio's assets as are declared in the discretion
of the Board of Trustees. The Fund's shareholders are entitled to one vote for
each full share held and proportionate fractional votes for fractional shares
held, and will vote in the aggregate and not by class, except where otherwise
required by law or as determined by the Board of Trustees. The Fund does not
currently intend to hold annual meetings of shareholders for the election of
trustees (except as required under the 1940 Act).
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
Portfolio or class) may elect all of the trustees. Shares have no preemptive
rights and only such conversion and exchange rights as the Board may grant in
its discretion. When issued for payment as described in the Prospectus, shares
will be fully paid and non-assessable by the Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees will continue to hold office and may
appoint successor trustees. The Fund's Declaration of Trust provides that
meetings of the shareholders of the Fund will be called by the trustees upon the
written request of shareholders owning at least 10% of the outstanding shares
entitled to vote.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
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portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
The proceeds received by the Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of the Portfolio. The underlying assets
of the Portfolio will be segregated on the books of account, and will be charged
with the liabilities in respect to the Portfolio and with a share of the general
liabilities of the Fund.
The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i) sell
and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the termination of
any class of shares after the assets belonging to such class have been
distributed to its shareholders.
MISCELLANEOUS
Counsel. The law firm of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York 10017 serves as the Fund's counsel.
Independent Accountants. PricewaterhouseCoopers LLP, 2400 Eleven Penn
Center, Philadelphia, Pennsylvania 19103, which provides accounting and auditing
services, serves as the Fund's independent accountants.
Control. On May [__], 1999, PNC Bank held of record approximately [__]% of
the Fund's outstanding shares, and may be deemed a controlling person of the
Fund under the 1940 Act. PNC Bank is a national bank organized under the laws of
the United States. All of the
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<PAGE>
capital stock of PNC Bank is owned by PNC Bancorp, Inc. All of the capital stock
of PNC Bancorp, Inc. is owned by PNC Bank Corp., a publicly-held bank holding
company.
Banking Laws. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment adviser, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers. BlackRock, BAI, PFPC and PNC Bank are subject to
such banking laws and regulations. In addition, state securities laws on this
issue may differ from the interpretations of Federal law expressed herein and
banks and financial institutions may be required to register as dealers pursuant
to state law.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Fund and the holders of its Shares, the Fund might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operations with respect to its Shares. It is not
anticipated, however, that any change in the Fund's method of operations would
affect its net asset value per share or result in a financial loss to any
investor.
BlackRock, BAI, PFPC and PTC believe they may perform the services for the
Fund contemplated by their respective agreements with the Fund without violation
of applicable banking laws or regulations. It should be noted, however, that
there have been no cases deciding whether bank and non-bank subsidiaries of a
registered bank holding company may perform services comparable to those that
are to be performed by these companies, and future changes in either Federal or
state statutes and regulations relating to permissible activities of banks and
their subsidiaries or affiliates, as well as further judicial or administrative
decisions or interpretations of present and future statutes and regulations,
could prevent these companies from continuing to perform such services for the
Fund. If such were to occur, it is expected that the Board of Trustees would
recommend that the Fund enter into new agreements or would consider the possible
termination of the Fund. Any new advisory or sub-advisory agreement would be
subject to shareholder approval.
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" means, with
respect to the approval of the Portfolio's investment advisory agreement, a
distribution plan or a change in a fundamental investment policy, the lesser of
(1) 67% of the shares of the Portfolio represented at a meeting at which the
holders of more than 50% of the outstanding shares of the Portfolio are present
in person or by proxy, or (2) more than 50% of the outstanding shares of the
Portfolio.
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<PAGE>
APPENDIX A
The following summarizes the ratings used for debt securities:
DESCRIPTION OF MOODY'S BOND RATINGS:
Aaa - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds are judged to be of high quality by all standards. Together with
the "Aa" group they comprise what are generally known as high grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large as in "Aa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
A - Bonds possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds that possess this rating provide questionable protection of
interest and principal and indicate some speculative elements.
Note: Those bonds in the Aa, A, Baa and Ba groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa1,
A1, Baa1 and Ba1.
DESCRIPTION OF S&P BOND RATINGS:
AAA - This designation represents the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
A-1
<PAGE>
AA - Debt is considered to have a very strong capacity to pay interest and
repay principal and differs from AA issues only in small degree.
A - Debt is considered to have a strong capacity to pay interest and repay
principal although such issues are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
BBB - Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB - Debt is regarded, on balance, as predominantly speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. Debt has less near-term vulnerability to
default than other speculative issues. However, it faces 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. The "BB" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BBB-" rating.
Standard & Poor's letter ratings may be modified by the addition of a plus
or minus sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
DESCRIPTION OF DUFF & PHELPS' BOND RATINGS:
AAA - Bonds rated AAA are of the highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
AA - Bonds rated AA have high credit quality with strong protection
factors. Risk is modest.
A - Bonds rated A have average but adequate protection factors. Risk
factors are greater and more variable in times of economic stress than AA or AA.
BBB - Bonds rated BBB exhibit below average protection factors, but still
considered sufficient for prudent investment. Considerable variability in risk
is present during economic cycles.
BB - Bonds rated BB are below investment grade, but deemed likely to meet
obligations when due.
A-2
<PAGE>
Duff & Phelps' letter ratings may be modified by the addition of a plus or minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
DESCRIPTION OF FITCH BOND RATINGS:
AAA - Bonds rated AAA are considered investment grade and of the highest
quality. The ability to pay interest and principal is exceptionally strong and
unlikely to be affected by reasonably foreseeable events.
AA - Bonds rated AA are considered investment grade and very high credit
quality.
A - Bonds rated A are considered investment grade and of high credit
quality. The ability to pay interest and principal is strong, but may be
vulnerable to adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB - Bonds rated BBB are considered investment grade and satisfactory
credit quality. The likelihood that these bonds will fall below investment
grade, however, is higher than for bonds with higher ratings.
BB - Bonds rated BB are considered speculative. The ability to pay interest
and principal may be affected over time by adverse economic changes.
Fitch's letter ratings may be modified by the addition of a plus or minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
A-3
<PAGE>
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF
ADDITIONAL INVESTMENT MANAGEMENT TECHNIQUES
In order to manage the risk of its securities portfolio, including duration
management, or to enhance income or gain as described above, the Portfolio will
engage in Additional Investment Management Techniques. The Portfolio will engage
in such activities in the Adviser's discretion, and may not necessarily be
engaging in such activities when movements in interest rates that could affect
the value of the assets of the Portfolio occur. The Portfolio's ability to
pursue certain of these strategies may be limited by applicable regulations of
the CFTC and the federal income tax requirements applicable to regulated
investment companies.
Put and Call Options on Securities and Indices
The Portfolio may purchase and sell put and call options on securities and
indices. A put option gives the purchaser of the option the right to sell and
the writer the obligation to buy the underlying security at the exercise price
during the option period. The Portfolio may also purchase and sell options on
stock indices ("index options"). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option gives
the holder the right to receive cash upon exercise of the option if the level of
the stock index upon which the option is based is greater, in the case of a
call, or less, in the case of a put, than the exercise price of the option. The
purchase of a put option on a debt security could protect the Portfolio's
holdings in a security or a number of securities against a substantial decline
in the market value. A call option gives the purchaser of the option the right
to buy and the seller the obligation to sell the underlying security or index at
the exercise price during the option period or for a specified period prior to a
fixed date. The purchase of a call option on a security could protect the
Portfolio against an increase in the price of a security that it intended to
purchase in the future. In the case of either put or call options that it has
purchased, if the option expires without being sold or exercised, the Portfolio
will experience a loss in the amount of the option premium plus any related
commissions. When the Portfolio sells put and call options, it receives a
premium as the seller of the option. The premium that the Portfolio receives for
selling the option will serve as a partial hedge, in the amount of the option
premium, against changes in the value of the securities in its portfolio. During
the term of the option, however, a covered call seller has, in return for the
premium on the option, given up the opportunity for capital appreciation above
the exercise price of the option if the value of the underlying security
increases, but has retained the risk of loss should the price of the underlying
security decline. Conversely, a secured put seller retains the risk of loss
should the market value of the underlying security decline below the exercise
price of the option, less the premium received on the sale of the option. The
Portfolio is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC Options") which are privately negotiated with the
counterparty. Listed options are issued by the Options Clearing Corporation
("OCC") which guarantees the performance of the obligations of the parties to
such options.
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<PAGE>
The Portfolio's ability to close out its position as a purchaser or seller
of an exchange-listed put or call option is dependent upon the existence of a
liquid secondary market on option exchanges. Among the possible reasons for the
absence of a liquid secondary market on an exchange are: (i) insufficient
trading interest in certain options; (ii) restrictions on transactions imposed
by an exchange; (iii) trading halts, suspensions or other restrictions imposed
with respect to particular classes or series of options or underlying
securities; (iv) interruption of the normal operations on an exchange; (v)
inadequacy of the facilities of an exchange or OCC to handle current trading
volume; or (vi) a decision by one or more exchanges to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options on that exchange that had been
listed by the OCC as a result of trades on that exchange would generally
continue to be exercisable in accordance with their terms. OTC Options are
purchased from or sold to dealers, financial institutions or other
counterparties which have entered into direct agreements with the Portfolio.
With OTC Options, such variables as expiration date, exercise price and premium
will be agreed upon between the Portfolio and the counterparty, without the
intermediation of a third party such as the OCC. If the counterparty fails to
make or take delivery of the securities underlying an option it has written, or
otherwise settle the transaction in accordance with the terms of that option as
written, the Portfolio would lose the premium paid for the option as well as any
anticipated benefit of the transaction. As the Portfolio must rely on the credit
quality of the counterparty rather than the guarantee of the OCC, it will only
enter into OTC Options with counterparties with the highest long-term credit
ratings, and with primary United States government securities dealers recognized
by the Federal Reserve Bank of New York.
The hours of trading for options on debt securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
Futures Contracts and Related Options
Characteristics. The Portfolio may sell financial futures contracts or
purchase put and call options on such futures as a hedge against anticipated
interest rate changes or other market movements. The sale of a futures contract
creates an obligation by the Portfolio, as seller, to deliver the specific type
of financial instrument called for in the contract at a specified future time
for a specified price. Options on futures contracts are similar to options on
securities except that an option on a futures contract gives the purchaser the
right in return for the premium paid to assume a position in a futures contract
(a long position if the option is a call and a short position if the option is a
put).
Margin Requirements. At the time a futures contract is purchased or sold,
the Portfolio must allocate cash or securities as a deposit payment ("initial
margin"). It is expected
B-2
<PAGE>
that the initial margin that the Portfolio will pay may range from approximately
1% to approximately 5% of the value of the securities or commodities underlying
the contract. In certain circumstances, however, such as periods of high
volatility, the Portfolio may be required by an exchange to increase the level
of its initial margin payment. Additionally, initial margin requirements may be
increased generally in the future by regulatory action. An outstanding futures
contract is valued daily and the payment in cash of "variation margin" may be
required, a process known as "marking to the market." Transactions in listed
options and futures are usually settled by entering into an offsetting
transaction, and are subject to the risk that the position may not be able to be
closed if no offsetting transaction can be arranged.
Limitations on Use of Futures and Options on Futures. The Portfolio's use
of futures and options on futures will in all cases be consistent with
applicable regulatory requirements and in particular the rules and regulations
of the CFTC. Under such regulations the Portfolio currently may enter into such
transactions without limit for bona fide hedging purposes, including risk
management and duration management and other portfolio strategies.
The Portfolio will not enter into a futures contract or related option if,
immediately thereafter, the sum of the amount of its initial deposits and
premiums on open contracts and options would exceed 5% of the Portfolio's
liquidation value, i.e. net assets (taken at current value); provided, however,
that in the case of an option that is in-the-money at the time of the purchase,
the in-the-money amount may be excluded in calculating the 5% limitation. Also,
when required, a segregated account of cash or cash equivalents will be
maintained and marked to market in an amount equal to the market value of the
contract. The Portfolio reserves the right to comply with such different
standard as may be established from time to time by CFTC rules and regulations
with respect to the purchase or sale of futures contracts or options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars and listed options on securities, indices and futures
contracts sold by the Portfolio are subject to segregation and coverage
requirements of either the CFTC or the SEC, with the result that, if the
Portfolio does not hold the security or futures contract underlying the
instrument, the Portfolio will be required to segregate on an ongoing basis with
its custodian, cash, U.S. government securities, or other liquid debt
obligations in an amount at least equal to the Portfolio's obligations with
respect to such instruments. Such amounts fluctuate as the obligations increase
or decrease. The segregation requirement can result in the Portfolio maintaining
securities positions it would otherwise liquidate, segregating assets at a time
when it might be disadvantageous to do so or otherwise restrict portfolio
management.
B-3
<PAGE>
BLACKROCK FUNDS(SM)
PART C
OTHER INFORMATION
Item 23. 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
filed on January 27, 1998.
(b) Amendment No. 1 to Declaration of Trust dated May 4, 1989 is
incorporated herein by reference to Exhibit (1)(b) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(c) Amendment No. 2 to the Declaration of Trust dated December 23, 1993 is
incorporated herein by reference to Exhibit (1)(c) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(d) Amendment No. 3 to the Declaration of Trust dated January 5, 1996 is
incorporated by reference to Exhibit 1(d) of Post-Effective Amendment
No. 23 to Registrant's Registration Statement on Form N-1A (No.
33-26305) 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 Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(2) By-laws
(a) Amended and Restated Code of Regulations.
(3) 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 Post-Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998; Article II of
<PAGE>
Registrant's Code of Regulations is incorporated herein by reference
to Exhibit (2) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(4) 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 filed on May 30, 1996.
(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 Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(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 filed on January 28,
1997.
(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
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 filed on August 19,
1997.
(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
C-2
<PAGE>
and Core Bond Portfolios is incorporated herein by reference to
Exhibit (5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(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 Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-1A
filed on May 30, 1996.
(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 Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on May 30,
1996.
(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 Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed on May
30, 1996.
(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 Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-1A
filed on May 30, 1996.
(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 Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on May 30,
1996.
(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)
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<PAGE>
of Post-Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.
(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
Post-Effective Amendment No. 27 to Registrant's Registration Statement
on Form N-1A filed on January 28, 1997.
(n) Sub-Advisory Agreement between PNC Asset Management Group, Inc. and
BlackRock Financial Management, Inc. with respect to the International
Bond Portfolio is incorporated herein by reference to Exhibit 5(m) of
Post-Effective Amendment No. 27 to Registrant's Registration Statement
on Form N-1A filed on January 28, 1997.
(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 Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A filed on August 19,
1997.
(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 Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(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 filed on January 27, 1998.
(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 filed on February 13,
1998.
(s) Form of Addendum No. 4 to Investment Advisory Agreement between
Registrant and BlackRock Advisors, Inc. with respect to the High Yield
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<PAGE>
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 filed on August 7, 1998.
(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
Post-Effective Amendment No. 37 to Registrant's Registration Statement
on Form N-1A filed on August 7, 1998.
(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.
(5) Underwriting Contracts
(a) Distribution Agreement between Registrant and Provident Distributors,
Inc. dated January 31, 1994 is incorporated herein by reference to
Exhibit (6)(a) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(b) Form of Appendix A to Distribution Agreement between Registrant and
BlackRock Distributors, Inc.
(c) Amendment No. 2 to the Distribution Agreement between Registrant and
Provident Distributors, Inc. dated October 18, 1994 is incorporated
herein by reference to Exhibit (6)(c) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(d) Amendment No. 3 to the Distribution Agreement between Registrant and
Provident Distributors, Inc. is incorporated herein by reference to
Exhibit (6)(d) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(6) Bonus or Profit Sharing Contracts
None.
(7) Custodian Agreements
(a) Custodian Agreement dated October 4, 1989 between Registrant and
PNC Bank, National Association is incorporated herein by
reference to Exhibit
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<PAGE>
(8)(a) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(b) Amendment No. 1 to Custodian Agreement between Registrant and PNC
Bank, National Association is incorporated herein by reference to
Exhibit (8)(b) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(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 Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27, 1998.
(d) Form of Appendix B to Custodian Agreement between Registrant and
PFPC Trust Company.
(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 Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13, 1998.
(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 Post-Effective Amendment
No. 33 to Registrant's Registration Statement on Form N-1A filed
on January 27, 1998.
(g) Custodian Agreement between State Street Bank and Trust Company
and PNC Bank, National Association dated June 13, 1983 is
incorporated herein by reference to Exhibit (8)(g) of
Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A filed on February 13, 1998.
(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 Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13, 1998.
C-6
<PAGE>
(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 Post-Effective Amendment
No. 27 to Registrant's Registration Statement on Form N-1A filed
on January 28, 1997.
(8) Other Material Contracts
(a) Form of Administration Agreement among Registrant, BlackRock Advisors,
Inc. and PFPC Inc.
(b) Forms of Appendix A and Appendix B to Administration Agreement among
Registrant, BlackRock Advisors, Inc. and PFPC Inc.
(c) Transfer Agency Agreement dated October 4, 1989 between Registrant and
PFPC Inc. is incorporated herein by reference to Exhibit (9)(e) of
Post-Effective Amendment No. 33 to Registrant's Registration Statement
on Form N-1A filed on January 27, 1998.
(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
Post-Effective Amendment No. 33 to Registrant's Registration Statement
on Form N-1A filed on January 27, 1998.
(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
Post-Effective Amendment No. 33 to Registrant's Registration Statement
on Form N-1A filed on January 27, 1998.
(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 Post-Effective Amendment No. 33 to
C-7
<PAGE>
Registrant's Registration Statement on Form N-1A filed on January 27,
1998.
(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 Post-Effective
Amendment No. 33 to Registrant's Registration Statement on Form N-1A
filed on January 27, 1998.
(h) Form of Appendix C to Transfer Agency Agreement between Registrant and
PFPC Inc.
(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 Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28, 1997.
(j) Share Acquisition Agreement dated April 29, 1998 by and among
Registrant and PNC Bank, National Association and PNC Bank, Delaware,
respectively, each as 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 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 filed on January 28,
1999.
(9) Legal Opinion
(a) To be filed by amendment.
(10) Other Opinions
C-8
<PAGE>
(a) Opinion and Consent of PricewaterhouseCoopers LLP to be filed by
amendment.
(11) Omitted Financial Statements
(a) None.
(12) Initial Capital Agreements
(a) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes A-1, B-1, C-1, D-2, E-2, F-2, G-2,
H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2, N-2, O-2, P-2, D-1, E-1, F-1,
G-1, H-1, K-1, L-1, M-1, N-1, O-1, P-1, A-2, B-2, C-2, I-2, J-2, A-3,
B-3, C-3, D-3, E-3, F-3, G-3, H-3, I-3, J-3, K-3, L-3, M-3, N-3, O-3,
P-3, Q-1, Q-2, Q-3, R-1, R-2, R-3, S-1, S-2, S-3, T-1, T-2, T-3, U-1,
U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4, K-4, L-4, M-4, N-4, O-4, P-4,
R-4, S-4, T-4, U-4, W-4, X-4, Y-4, V-1, V-2, V-3, W-1, W-2, W-3, X-1,
X-2, X-3, Y-1, Y-2, Y-3, Z-1, Z-2, Z-3, AA-1, AA-2, AA-3, AA-4, AA-5,
BB-1, BB-2, BB-3, BB-4, BB-5, CC-3, A-5, B-4, B-5, C-4, C-5, I-4, I-5,
J-4, J-5, Q-4, Q-5, V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5, G-5,
H-5, K-5, L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5, Y-5,
DD-1, DD-2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5, R-6, BB-6,
FF-3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1, II-2, II-3, II-4,
II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5, KK-1, KK-2, KK-3, KK-4, KK-5,
LL-1, LL-2, LL-3, LL-4 and LL-5 is incorporated herein by reference to
Exhibit (13)(a) of Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13, 1998.
(b) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Classes MM-1, MM-2, MM-3, MM-4, MM-5 and MM-6
is incorporated herein by reference to Exhibit 13(b) of Post-Effective
Amendment No. 37 to Registrant's Registration Statement on Form N-1A
filed on August 7, 1998.
(c) Form of Purchase Agreement between Registrant and Registrant's
distributor relating to Class NN-3.
(13) Rule 12b-1 Plan
(a) Amended and Restated Distribution and Service Plan for Service, Series
A Investor, Series B Investor, Series C Investor, Institutional and
BlackRock Shares is incorporated herein by reference to Exhibit (15)
of Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
C-9
<PAGE>
(b) Form of Appendix A to Amended and Restated Distribution and Service
Plan.
C-10
<PAGE>
(14) Financial Data Schedule
(a) None.
(15) Rule 18f-3 Plan
(a) 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 Post-Effective Amendment No.40 to Registrant's
Registration Statement on form N-1A filed on November 25, 1998.
(99) (a) Power of Attorney of David R. Wilmerding dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath
as attorneys and agents is incorporated herein by reference to such
Power of Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed on February 18,
1997.
(b) Power of Attorney of William O. Albertini dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath
as attorneys and agents is incorporated herein by reference to such
Power of Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed on February 18,
1997.
(c) Power of Attorney of Raymond J. Clark dated March 5, 1996 appointing
David R. Wilmerding, Raymond J. Clark and Karen H. Sabath as attorneys
and agents is incorporated herein by reference to such Power of
Attorney filed in Post-Effective Amendment No. 28 to Registrant's
Registration Statement on form N-1A filed on February 18, 1997.
(d) Power of Attorney of Robert M. Hernandez dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath
as attorneys and agents is incorporated herein by reference to such
Power of Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed on February 18,
1997.
(e) Power of Attorney of Anthony M. Santomero dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen H. Sabath
as attorneys and agents is incorporated herein by reference to such
Power of Attorney filed in Post-Effective Amendment No. 28 to
Registrant's Registration Statement on form N-1A filed on February 18,
1997.
C-11
<PAGE>
Item 24. Persons Controlled by or under Common Control with the Fund.
None.
Item 25. 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-12
<PAGE>
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 26. Business and Other Connections of Investment Advisers
(a) BlackRock Advisors, Inc. is an indirect majority-owned subsidiary of
PNC Bank Corp. BlackRock Advisors, Inc. was organized in 1994 for the purpose of
providing advisory services to investment companies. The list required by this
Item 26 of officers and directors of BlackRock Advisors, Inc., together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of Form ADV, filed by
BlackRock Advisors, Inc. pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-47710).
(b) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation) ("BIMC") is an indirect majority-owned
subsidiary of PNC Bank Corp. The list required by this Item 26 of officers and
directors of BIMC, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by
C-13
<PAGE>
reference to Schedules A and D of Form ADV, filed by BIMC pursuant to the
Investment Advisers Act of 1940 (SEC File No. 801-13304).
(c) BlackRock Financial Management, Inc. ("BlackRock") is an indirect
majority-owned subsidiary of PNC Bank Corp. BlackRock currently offers
investment advisory services to institutional investors such as pension and
profit-sharing plans or trusts, insurance companies and banks. The list required
by this Item 26 of officers and directors of BlackRock, together with
information as to any other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past two
years, is incorporated by reference to Schedules A and D of Form ADV, filed by
BlackRock pursuant to the Investment Advisers Act of 1940 (SEC File No.
801-48433).
(d) BlackRock International, Ltd. (formerly CastleInternational Asset
Management Limited) ("BIL") is an indirect majority-owned subsidiary of PNC Bank
Corp. The list required by this Item 26 of officers and directors of BIL,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to Schedules A and D of
Form ADV, filed by BIL pursuant to the Investment Advisers Act of 1940 (SEC File
No. 801-51087).
Item 27. Principal Underwriters
(a) Not applicable.
(b) The information required by this Item 27 with respect to each director,
officer or partner of BlackRock Distributors, Inc. (formerly Compass
Distributors, Inc.) is incorporated by reference to Schedule A of FORM BD filed
by BlackRock Distributors, Inc. with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 (File No. 8-48775).
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) PFPC Trust Company, Broad and Chestnut Streets, Philadelphia,
Pennsylvania 19102 (records relating to its functions as
custodian).
(2) BlackRock Distributors, Inc., Four Falls Corporate Center, 6th
Floor, West Conshohocken, PA 19428-2961 (records relating to its
functions as distributor).
(3) BlackRock Advisors, Inc. (formerly BlackRock, Inc.), 345 Park
Avenue, New York, New York 10154 (records relating to its
functions as investment adviser and co-administrator).
C-14
<PAGE>
(4) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation), Bellevue Corporate Center,
103 Bellevue Parkway, Wilmington, Delaware 19809 (records
relating to its functions as investment sub-adviser).
(5) BlackRock Financial Management, Inc., 345 Park Avenue, New York,
New York 10154; 30 South 17th Street, Philadelphia, Pennsylvania
19103; and 1600 Market Street, 29th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its functions as
investment adviser and sub-adviser).
(6) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its functions as
co-administrator, transfer agent and dividend disbursing agent).
(7) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas, New
York, New York 10019 (records relating to its function as
sub-custodian).
(8) State Street Bank and Trust Company, P.O. Box 1631, Boston,
Massachusetts (records relating to its function as
sub-custodian).
(9) Barclays Bank PLC, 75 Wall Street, New York, New York 10265
(records relating to its function as sub-custodian).
(10) BlackRock International, Ltd. (formerly CastleInternational Asset
Management Limited), 7 Castle Street, Edinburgh, Scotland, EH2
3AH (records relating to its functions as investment
sub-adviser).
(11) Citibank, N.A., 111 Wall Street, 23rd Floor, Zone 6, New York, NY
10043 (records relating to its functions as sub-custodian).
(12) PNC Bank Corp., 1600 Market Street, 28th Floor, Philadelphia, PA
19103 (Registrant's declaration of trust, code of regulations and
minute books).
Item 29. Management Services
None.
Item 30. Undertakings
None.
C-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, duly authorized, in the City of New York and the State of New York
on the 11th day of June, 1999.
BLACKROCK FUNDS(SM)
Fund
By /s/ Raymond J. Clark
-------------------------------------
Raymond J. Clark,
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the 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
- ------------------------- Treasurer June 11, 1999
(Raymond J. Clark)
*David R. Wilmerding, Jr. Chairman of the Board June 11, 1999
- -------------------------
(David R. Wilmerding, Jr.)
*Anthony M. Santomero Vice-Chairman of the Board June 11, 1999
- -------------------------
(Anthony M. Santomero)
*William O. Albertini Trustee June 11, 1999
- -------------------------
(William O. Albertini)
*Robert M. Hernandez Trustee June 11, 1999
- -------------------------
(Robert M. Hernandez)
*By: /s/ Karen H. Sabath
---------------------------------------
Karen H. Sabath, Attorney-in-fact
C-16
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2(a) Amended and Restated Code of Regulations.
4(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.
5(b) Form of Appendix A to the Distribution Agreement
between Registrant and BlackRock Distributors, Inc.
7(d) Form of Appendix B to the Custodian Agreement between
Registrant and PNC Bank, National Association.
8(a) Form of Administration Agreement among Registrant, BlackRock
Advisors, Inc. and PFPC Inc.
8(b) Forms of Appendix A and Appendix B to the Administration
Agreement among Registrant, BlackRock Advisors, Inc. and
PFPC Inc.
8(h) Form of Appendix C to the Transfer Agency Agreement
between Registrant and PFPC Inc.
12(c) Form of Purchase Agreement between Registrant and BlackRock
Distributors, Inc. relating to shares of Class NN-3.
13(b) Form of Appendix A to Amended and Restated Distribution and
Service Plan.
<PAGE>
Exhibit 99.2(a)
AMENDED AND RESTATED CODE OF REGULATIONS
OF
BLACKROCK FUNDS(SM)
ARTICLE I
TRUSTEES
1.1 Number and Term of Office. The number of Trustees shall be such number,
not more than twenty (20), as may be fixed from time to time by the Trustee(s).
Each Trustee shall hold office until the next meeting of the Shareholders
following his election or appointment as a Trustee at which trustees are elected
and until his successor shall have been elected and qualified.
1.2 Place of Meetings; Telephone Meetings. Meetings of the Trustees,
regular or special, shall be held at the principal office of the Trust or at
such other place as the Trustees may from time to time determine. The Trustees
or any committee thereof may participate in a meeting of the Trustees or of such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting may hear each other
at the same time and participation by such means shall constitute presence in
person at the meeting except for the purpose of voting on any investment
advisory agreement or distribution plan of the Trust.
1.3 Regular Meetings. Regular meetings of the Trustees may be held without
notice at such time and at the principal office of the Trust or at such other
place as the Trustees may from time to time determine.
<PAGE>
2
1.4 Special Meetings. Special meetings of the Trustees may be called by the
President on one day's notice to each Trustee; special meetings of the Trustees
shall be called by the President or Secretary in like manner and on like notice
on the written request of three Trustees.
1.5 Committees. The Trustees may by resolution passed by a majority of the
Trustees appoint from among its members an executive committee and other
committees composed of two or more Trustees, and may delegate to such
committees, in the intervals between meetings of the Trustees, any or all of the
powers of the Trustees in the management of the business and affairs of the
Trust, except the power to issue Shares in the Trust or to recommend to
Shareholders any action requiring Shareholder approval.
1.6 Chairman of the Board. The Trustees may at any time appoint one of
their number as Chairman of the Board, who shall serve at the pleasure of the
Trustees and shall perform and execute such duties as the Trustees may from time
to time provide but who shall not by reason of performing or executing these
duties be deemed an officer or employee of the Trust.
1.7 Compensation. Any Trustee, whether or not a salaried officer, employee,
or agent of the Trust, may be compensated for his services as a Trustee or as a
member of a committee, or as Chairman of the Trustees or Chairman of a
committee, by fixed periodic payments or by fees for attendance at meetings or
by both, and in addition may be reimbursed for transportation and other
expenses, all in such manner and amounts as the Trustees may from time to time
determine.
<PAGE>
3
ARTICLE II
SHAREHOLDERS
2.1 Meetings. Meetings of the Shareholders of the Trust may be called by
the Trustees and shall be called by the Trustees whenever required by law or
upon the written request of the holders of at least ten percent (10%) of the
outstanding Shares entitled to vote.
2.2 Notice. Written notice, stating the place, day and hour of each meeting
of the Shareholders and the general nature of the business to be transacted
shall be given by, or at the direction of, the person calling the meeting to
each Shareholder of record entitled to vote at the meeting at least ten days
prior to the day named for the meeting, unless in a particular case a longer
period of notice is required by law.
2.3 Shareholders' List. The officer or agent having charge of the transfer
books for Shares of the Trust shall make, at least five days before each meeting
of the Shareholders, a complete list of the Shareholders entitled to vote at the
meeting, arranged in alphabetical order and including the address of and the
number of Shares held by each such Shareholder. The list shall be kept on file
at the office of the Trust and shall be subject to inspection by any Shareholder
at any time during usual business hours and shall also be produced and kept open
at the time and place of each meeting of Shareholders and shall be subject to
inspection by any Shareholder during each meeting of Shareholders.
2.4 Record Date. The Trustees may fix a time (during which they may close
the Share transfer books of the Trust) not more than ninety (90) days prior to
the date of any meeting of the Shareholders, or the date fixed for the payment
of any dividend, or the date of the allotment of rights or the date when any
change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, or to vote
<PAGE>
4
at, any such meeting, or entitled to receive payment of any such dividend, or to
receive any such allotment of rights, or to exercise such rights, as the case
may be. In such case, only such Shareholders as shall be Shareholders of record
at the close of business on the date so fixed shall be entitled to notice of, or
to vote at, such meeting or to receive payment of such dividend, or to receive
such allotment of rights, or to exercise such rights, as the case may be,
notwithstanding any transfer of any Shares on the books of the Trust after any
record date fixed, as aforesaid.
ARTICLE III
NOTICES
3.1 Form. Notices to the Trustees shall be oral or by telephone or telegram
or in writing delivered personally or mailed to the Trustees at their addresses
appearing on the books of the Trust. Notices to the Shareholders shall be in
writing and delivered personally or mailed to the Shareholders at their
addresses appearing on the books of the Trust. Oral notice shall be deemed to be
given when given directly to the person required to be notified and notice by
mail shall be deemed to be given when deposited in the United States mail or
with a telegraph office for transmission. Notice to the Trustees need not state
the purpose of a regular or special meeting of the Trustees or committee.
3.2 Waiver. Whenever any notice of the time, place or purpose of any
meeting of the Shareholders, the Trustees or a committee is required to be given
under the provisions of Massachusetts law or under the provisions of the
Declaration of Trust or these Regulations, a waiver thereof in writing, signed
by the person or persons entitled to such notice and filed with the records of
the meeting, whether before or after the holding thereof, or actual attendance
at the meeting of the Shareholders in person or by proxy, or at the meeting of
the Trustees or the committee in person, shall be deemed equivalent to the
giving of such notice to such persons.
<PAGE>
5
ARTICLE IV
OFFICERS
4.1 Number. The officers of the Trust shall be chosen by the Trustees and
shall include a President, a Secretary and a Treasurer. The Board of Trustees
may from time to time elect or appoint one or more Vice Presidents, Assistant
Secretaries and Assistant Treasurers.
4.2 Other Officers. The Trustees from time to time may appoint such other
officers and agents as they shall deem advisable, who shall hold their offices
for such terms and shall exercise such powers and perform such duties as the
Trustees may from time to time prescribe. The Trustees may delegate to one or
more officers or agents the power to appoint any such subordinate officers or
agents and to prescribe the respective rights, terms of office, authorities and
duties.
4.3 Election and Tenure. The officers of the Trust shall be chosen by the
Trustees. Two or more offices may be held by the same person but no officer
shall execute, acknowledge or verify any instrument in more than one capacity if
such instrument is required by law, the Declaration of Trust or these
Regulations to be executed, acknowledged or verified by two or more officers.
Any officer or agent may be removed by the Trustees. An officer of the Trust may
resign by filing a written resignation with the President or with the Trustees
or with the Secretary. Any vacancy occurring in any office of the Trust by
death, resignation, removal or otherwise may be filled by the Trustees.
4.4 Compensation. The salaries or other compensation of all officers and
agents of the Trust shall be fixed by the Trustees, except that the Trustees may
delegate to any committee the power to fix the salary or other compensation of
any officer or agent of the Trust.
<PAGE>
6
4.5 President. The President shall be the chief executive officer of the
Trust; unless a Chairman has been designated, he shall preside at all meetings
of the Trustees and of the Shareholders; he shall be, ex officio, a member of
all standing committees. He, or such person as he may designate, shall have the
power to sign, execute and acknowledge, in the name of the Trust, deeds,
mortgages, bonds, contracts and other instruments authorized by the Trustees.
The President shall also be the chief administrative officer of the Trust and
shall perform such other duties and shall have such other powers as the Trustees
may from time to time prescribe.
4.6 Vice Presidents. The Vice Presidents, in the order of their seniority,
shall, in the absence or disability of the President, perform the duties and
exercise the powers of the President, and shall perform such other duties as the
Trustees may from time to time prescribe.
4.7 Secretary. The Secretary shall keep the minutes of all meetings of the
Trustees and of the Shareholders and shall record all the proceedings thereof
and shall perform like duties for any committee when required. He shall give, or
cause to be given, notice of meetings of the Trustees and of the Shareholders,
and shall perform such other duties as may be prescribed by the Trustees or the
President, under whose supervision he shall be. He shall keep in safe custody
the seal of the Trust and, when authorized by the Trustees, affix and attest the
same to any instrument requiring it, provided that, it shall be sufficient to
meet the requirements of any law, rule or regulation relating to a seal to affix
the word "(SEAL)" adjacent to the signature of the authorized officer of the
Trust. The Trustees may give general authority to any other officer to affix the
seal of the Trust and to attest the affixing by his signature.
4.8 Assistant Secretaries. The Assistant Secretaries, in order of their
seniority, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of
<PAGE>
7
the Secretary and shall perform such other duties as the Trustees may from time
to time prescribe.
4.9 Treasurer. The Treasurer shall be the chief financial officer of the
Trust. He shall render to the Trustees when the Trustees so require an account
of all the Trust's financial transactions and a report of the financial
condition of the Trust and shall perform such other duties as the Trustees may
from time to time prescribe.
4.10 Assistant Treasurers. The Assistant Treasurers, in the order of their
seniority, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer and shall perform such other
duties as the Trustees may from time to time prescribe.
ARTICLE V
INVESTMENT RESTRICTIONS
The Trustees may from time to time adopt such restrictions upon the
investment of the assets of the Trust, or amendments thereto, as they may
consider necessary or desirable, provided that any such restriction or amendment
shall be approved by a majority of the outstanding Shares of the Trust entitled
to vote thereon if required by the Investment Company Act of 1940, as amended.
ARTICLE VI
GENERAL PROVISIONS
6.1 Inspection of Books. The Trustees may from time to time determine
whether and to what extent, and at what times and places, and under what
conditions and regulations the accounts and books of the Trust or any of them
shall be open to inspection by the Shareholders;
<PAGE>
8
and no Shareholder shall have any right to inspect any account or book or
document of the Trust except as conferred by law or authorized by the Trustees
or by resolution of the Shareholders.
6.2 Reports. The Trust shall transmit to the Shareholders and/or file with
federal and state regulatory agencies such reports of its operations as the
Trustees shall consider necessary or desirable or as may be required by law.
6.3 Bonding of Officers and Employees. All officers and employees of the
Trust shall be bonded to such extent, and in such manner, as may be required by
law.
6.4 Transfer of Shares. Transfer of Shares shall be made on the books of
the Trust at the direction of the person named on the Trust's books or named in
the certificates for such Shares (if issued), or by his attorney lawfully
constituted in writing, and upon surrender of the certificate or certificates
for such Shares (if issued) properly endorsed, together with a proper request
for redemption, to the Trust's transfer agent, with such evidence of the
authenticity of such transfer, authorization and other matters as the Trust or
its agents may reasonably require, and subject to such other reasonable
conditions and requirements as may be required by the Trust or its agents; or if
the Trustees shall by resolution so provide, transfer of Shares may be made in
any other manner provided by law.
ARTICLE VII
AMENDMENTS
This Code of Regulations may be altered or repealed by the Trustees at any
regular or special meeting of the Trustees.
<PAGE>
Exhibit 99.4(u)
BLACKROCK FUNDS(SM)
Addendum No. 2 to the Investment Advisory Agreement
This Addendum dated as of the _____ day of June, 1999 is entered into by
and between BLACKROCK FUNDS(SM), a Massachusetts business trust (the "Fund"),
and BLACKROCK FINANCIAL MANAGEMENT, INC., a Delaware corporation (the
"Adviser").
WHEREAS, the Fund and the Adviser have entered into an Investment Advisory
Agreement dated as of January 10, 1996 (the "Advisory Agreement") pursuant to
which the Fund appointed the Adviser to act as investment adviser to certain
investment portfolios of the Fund;
WHEREAS, Section 1(b) of the Advisory Agreement provides that in the event
the Fund establishes one or more additional investment portfolios with respect
to which it desires to retain the Adviser to act as investment adviser under the
Advisory Agreement, the Fund shall so notify the Adviser in writing and if the
Adviser is willing to render such services it shall so notify the Fund in
writing; and
WHEREAS, pursuant to Section 1(b) of the Advisory Agreement, the Fund has
notified the Adviser that it is establishing Multi-Sector Mortgage Securities
Portfolio IV (the "Portfolio"), and that it desires to retain the Adviser to act
as the investment adviser therefor, and the Adviser has notified the Fund that
it is willing to serve as investment adviser to the Portfolio;
NOW, THEREFORE, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Appointment. The Trust hereby appoints the Adviser to act as
investment adviser to the Portfolio for the period and on the
terms set forth in the Advisory Agreement. The Adviser hereby
accepts such appointment and agrees to render the services set
forth in the Advisory Agreement with respect to the Portfolio for
the compensation herein provided.
2. Compensation. For the services provided and the expenses assumed
pursuant to the Advisory Agreement, the Fund will pay the
Adviser, and the Adviser will accept as full compensation
therefor from the Fund, a fee, computed daily and payable
monthly, at the annual rate of .25% of the average daily net
assets of the Portfolio.
1
<PAGE>
3. Capitalized Terms. From and after the date hereof, the term
"Portfolio" as used in the Advisory Agreement shall be deemed to
include the Portfolio.
4. Miscellaneous. Except to the extent supplemented hereby, the
Advisory Agreement shall remain unchanged and in full force and
effect, and is hereby ratified and confirmed in all respects as
supplemented hereby.
5. Release. "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 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 the Fund. 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 the Fund personally, but bind only
the Trust Property (as defined in the Declaration of Trust), and
all persons dealing with any class of shares of the Fund must
look solely to the Trust Property belonging to such class for the
enforcement of any claims against the Fund.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Addendum No. 2 to
the Advisory Agreement to be executed by their officers designated below as of
the day and year first above written.
BLACKROCK FUNDS(SM)
By: ________________________________
Name:
Title:
BLACKROCK FINANCIAL MANAGEMENT,
INC.
By: ________________________________
Name:
Title:
3
<PAGE>
Exhibit 99.5(b)
APPENDIX A
to the
DISTRIBUTION AGREEMENT
BETWEEN
BlackRock Funds(SM)
and
BlackRock Distributors, Inc.
-------------------------------------------------------------------------------
Money Market Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
Municipal Money Market Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
U.S. Treasury Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series Investor C Shares)
New Jersey Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Pennsylvania Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
North Carolina Municipal Money Market Portfolio (Institutional Shares, Service
Shares, Series A Investor Shares, Series B Investor Shares and Series C Investor
Shares)
Virginia Municipal Money Market Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Managed Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Intermediate Government Bond Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
<PAGE>
New Jersey Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Ohio Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Pennsylvania Tax-Free Income Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Core Bond Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares, Series C Investor Shares and BlackRock Shares)
Low Duration Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)
Intermediate Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)
Government Income Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Multi-Sector Mortgage Securities Portfolio III (Institutional Shares)
Large Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Large Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Index Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
S
Small Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
International Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Balanced Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
-2-
<PAGE>
Small-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Select Equity Portfolio (Institutional Shares, Service Shares, Series A Investor
Shares, Series B Investor Shares and Series C Investor Shares)
International Emerging Markets Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Growth Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
Mid-Cap Value Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
BlackRock Strategic Portfolio I (Institutional Shares)
BlackRock Strategic Portfolio II (Institutional Shares)
International Small Cap Equity Portfolio (Institutional Shares, Service Shares,
Series A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Micro-Cap Equity Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares and Series C Investor Shares)
GNMA Portfolio (Institutional Shares, Service Shares, Series A Investor Shares,
Series B Investor Shares and Series C Investor Shares)
Delaware Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
Kentucky Tax-Free Income Portfolio (Institutional Shares, Service Shares, Series
A Investor Shares, Series B Investor Shares and Series C Investor Shares)
High Yield Bond Portfolio (Institutional Shares, Service Shares, Series A
Investor Shares, Series B Investor Shares, Series C Investor Shares and
BlackRock Shares)
Multi-Sector Mortgage Securities Portfolio IV (Institutional Shares)
Release. "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 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
-3-
<PAGE>
the principal office of the Company. 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 the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Company must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.
[End of Text]
-4-
<PAGE>
Agreed to and accepted as of June __, 1999.
BLACKROCK FUNDS(SM)
By: ______________________________
Name:
Title:
BLACKROCK DISTRIBUTORS, INC.
By: ______________________________
Name:
Title:
-5-
<PAGE>
Exhibit 99.7(d)
BlackRock Funds(SM)
Appendix B to Custodian
Agreement dated as of October 4, 1989
The Fund hereby appoints Bank to act as custodian of the securities, cash
and other property belonging to the additional Portfolios listed below
("Additional Portfolios") for the period and on the terms set forth in this
Agreement. Bank accepts such appointment and agrees to furnish the services
herein set forth in return for the compensation as provided in Paragraph 21 of
this Agreement. Bank agrees to comply with all relevant provisions of the 1940
Act and applicable rules and regulations thereunder.
The additional Portfolios are as follows:
o Government Income Portfolio
o International Emerging Markets Portfolio
o International Bond Portfolio
o Virginia Municipal Money Market Portfolio
o New Jersey Municipal Money Market Portfolio
o New Jersey Tax-Free Income Portfolio
o Core Bond Portfolio
o Multi-Sector Mortgage Securities Portfolio III
o Mid-Cap Value Equity Portfolio
o Mid-Cap Growth Equity Portfolio
o BlackRock Strategic Portfolio I
o BlackRock Strategic Portfolio II
o International Small Cap Equity Portfolio
o Micro-Cap Equity Portfolio
o GNMA Portfolio
o Delaware Tax-Free Income Portfolio
o Kentucky Tax-Free Income Portfolio
o High Yield Bond Portfolio
o Multi-Sector Mortgage Securities Portfolio IV
Release. "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 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 the Fund. 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 the Fund personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Fund must look solely to the Trust Property belonging
to such class for the enforcement of any claims against the Fund.
<PAGE>
2
Agreed to and accepted as of June __, 1999:
BlackRock Funds(SM)
By:_________________________
Name:
Title:
PFPC Trust Company
By:__________________________
Name:
Title:
<PAGE>
Exhibit 99.8(a)
BLACKROCK FUNDS(SM)
ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 13, 1998 by and among BLACKROCK FUNDS(SM), a
Massachusetts business trust (the "Company"), BLACKROCK ADVISORS, INC., a
Delaware corporation ("BlackRock"), and PFPC INC., a Delaware corporation
("PFPC") (BlackRock and PFPC are hereinafter collectively referred to as the
"Administrators").
WHEREAS, the Company is registered as an open-end, management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company desires to retain separately the Administrators to
provide certain administration services as set forth herein and to retain PFPC
to provide certain accounting services as set forth herein for each class of
units of beneficial interest ("shares") in each of the Company's investment
portfolios (individually, a "Fund," and collectively, the "Funds") as listed on
Appendix A hereto (as such Appendix may, from time to time, be supplemented (or
amended)), and the Administrators are willing to furnish such administration
services, and PFPC is willing to furnish such accounting services; and
WHEREAS, certain of the services to be provided under this Agreement relate
to particular classes of shares of a Fund and the holders thereof, while other
services to be provided hereunder relate to all share classes of a Fund as set
forth herein; and
WHEREAS, pursuant to Rule 18f-3 under the 1940 Act the Board of Trustees of
the Company, including a majority of its "non-interested" members as defined in
the 1940 Act, has found that it is in the best interests of each Fund and its
individual share classes that those administrative expenses that relate to a
particular class of shares be charged to the share class for which such expenses
are incurred;
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, it is agreed between the
parties hereto as follows:
1. Appointment of Administrators. The Company hereby appoints BlackRock to
provide the administration services as specified below that have been designated
to it, PFPC to provide the administration services as specified below that have
been designated to it, and PFPC to provide accounting services as specified
below that have been designated to it, for the particular class(es) of shares as
specified below in each of the Company's Funds, on the terms and for the period
set forth in this Agreement. Each of BlackRock and PFPC accepts such respective
appointments and agrees to perform the services and duties set forth in Section
5 below that have been designated to it in return for the compensation provided
in Section 7 below. In the event that the Company establishes an additional
class of shares or investment portfolio other than the classes and investment
portfolios listed on Appendix A with respect to which it desires to retain
BlackRock and PFPC to provide the respective administration services specified
<PAGE>
2
below and PFPC to provide the accounting services specified below, the Company
shall notify BlackRock and PFPC, whereupon with the consent of BlackRock and
PFPC such Appendix A shall be supplemented (or amended) and such class or
portfolio shall be subject to the provisions of this Agreement to the same
extent as the classes and investment portfolios currently listed on Appendix A
(except to the extent that said provisions, including the compensation payable
on behalf of such new class or investment portfolio, may be modified in writing
by the Company and Administrators at the time).
2. Delivery of Documents. The Company has furnished each of the
Administrators with copies, properly certified or authenticated, of each of the
following documents and will deliver to each of them all future amendments and
supplements, if any:
a. The Company's Declaration of Trust, filed with the Secretary of
State of the Commonwealth of Massachusetts on December 22, 1988, as amended
(the "Charter");
b. The Company's Code of Regulations, as amended (the "Code");
c. Resolutions of the Company's Board of Trustees authorizing the
execution and delivery of this Agreement;
d. The Company's most recent amendment to its Registration Statement
under the Securities Act of 1933, as amended, and under the 1940 Act on
Form N-1A as filed with the Securities and Exchange Commission (the
"Commission") relating to its Funds (the Registration Statement, as
presently in effect and as amended or supplemented from time to time, is
herein called the "Registration Statement");
e. The Company's most recent Prospectuses and Statements of Additional
Information and all amendments and supplements thereto (such Prospectuses
and Statements of Additional Information and supplements thereto, as
presently in effect and as from time to time amended and supplemented, are
herein called the "Prospectuses");
f. The Company's Amended and Restated Distribution and Service Plan
relating to the respective classes of shares of the Company's investment
portfolios and any amended or successor plan (the "Plan"); and
g. The Investment Advisory Agreements relating to the Funds.
3. Instructions. Each Administrator shall be entitled to rely upon any Oral
Instruction or Written Instruction it receives from an Authorized Person (or a
person believed by the Administrator to be an Authorized Person). For purposes
of this Agreement: (1) "Authorized Persons" shall be any officer of the Company
and any other person authorized by the Company to provide instructions on behalf
of the Company; (2) "Oral Instructions" mean oral instructions received by the
Administrator to whom the instruction is addressed from an Authorized Person or
a person reasonably believed by the Administrator to be an Authorized Person;
and (3) "Written Instructions" mean written instructions received by the
Administrator to
<PAGE>
3
whom the instruction is addressed and signed by an Authorized Person or a person
reasonably believed by the Administrator to be an Authorized Person. The
Administrators shall be entitled to assume that any Oral Instruction or Written
Instruction they receive is not in any way inconsistent with the provisions of
the Company's organizational documents or this Agreement or any vote, resolution
or proceeding of the Company's Board of Trustees or its shareholders.
4. Right to Receive Advice. If an Administrator is in doubt as to any
action it should or should not take, it may request directions or advice,
including Oral Instructions or Written Instructions, from the Company. If an
Administrator shall be in doubt as to any question of law pertaining to any
action it should or should not take, it may request advice at its own cost from
such counsel of its own choosing (who may be counsel for the Company, the
Company's investment adviser or the Administrator, at the option of the
Administrator). In the event of a conflict between directions, advice or Oral
Instructions or Written Instructions an Administrator receives from the Company
and the advice it receives from counsel, the Administrator may rely upon and
follow the advice of counsel. Each Administrator shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Company or from
counsel and which the Administrator believes, in good faith, to be consistent
with those directions, advice or Oral Instructions or Written Instructions.
Nothing in this Section shall be construed so as to impose an obligation upon an
Administrator (i) to seek such directions, advice or Oral Instructions or
Written Instructions or (ii) to act in accordance with such directions, advice
or Oral Instructions or Written Instructions.
5. Services and Duties. BlackRock will perform the services set forth below
that are designated to it, and PFPC will perform the services set forth below
that are designated to it. Each Administrator will be responsible only for the
services it has agreed to provide herein, and not for the services provided by
the other Administrator or any other services.
a. Subject to the supervision and control of the Company's Board of
Trustees, BlackRock shall assist in supervising all aspects of the Funds'
operations, other than (i) those investment advisory functions which are to
be performed by the Company's investment advisers pursuant to the Company's
Investment Advisory Agreements, as amended from time to time, (ii) those
advisory and other services to be performed by any sub-adviser pursuant to
the Company's Sub-Advisory Agreements, as amended from time to time, (iii)
those services to be performed by the custodian pursuant to the Company's
Custodian Agreement, as amended from time to time, (iv) those services to
be performed by the distributor pursuant to the Company's Distribution
Agreement, as amended from time to time, (v) those services to be performed
by the transfer agent pursuant to the Company's Transfer Agency Agreement,
as amended from time to time, and (vi) those services provided under the
Plan.
b. Without limiting the generality of Section 5.a, PFPC shall provide
the following services with respect to each individual class of shares of
the Funds and the shareholders thereof (the "Class-Specific Administration
Services") as indicated below:
<PAGE>
4
(1) With respect to the Investor, Service and Institutional share
classes of each Fund, providing personnel and supervising a facility
in Wilmington, Delaware (or in such other location as the Company
shall reasonably request) to receive purchase and redemption orders
via the Company's toll-free in-WATS telephone lines and transmitting
such requests to the Company's transfer agent as promptly as
practicable;
(2) With respect to all share classes of each Fund, providing for
the preparation, supervision and mailing of confirmations for all
purchase and redemption orders to shareholders of record;
(3) With respect to all share classes of each Fund, providing and
supervising the operation of an automated data processing system to
process purchase and redemption orders (PFPC assumes responsibility in
accordance with the standard of care provided for herein for the
accuracy of the data transmitted for processing or storage, provided
such data is received by PFPC in good form and in a format acceptable
to it);
(4) With respect to all share classes of each Fund, maintaining a
procedure external to the transfer agent's system to reconstruct lost
purchase and redemption data;
(5) With respect to the Investor and Service share classes of
each Fund, calculating the amount of fees payable with respect to the
Plan with respect to such class of shares on a daily basis and upon
instruction from the Company remitting such fees pursuant to the Plan;
and
(6) With respect to various share classes of each Fund,
calculating and reporting to third party industry data services (e.g.,
NASDAQ, Lipper Analytical Services, Inc.) certain performance and
other information.
c. Without limiting the generality of Section 5.a, BlackRock shall
provide the following Class-Specific Administration Services with respect
to each individual class of shares of the Funds and the shareholders
thereof as indicated below:
(1) With respect to all share classes of each Fund, providing
information and distributing written communications concerning the
particular class of shares to their shareholders of record; handling
shareholder problems and calls;
(2) With respect to the Investor, Service and Institutional share
classes of each Fund, supervising the services of individuals
("shareholder representatives") whose principal responsibility and
function shall be to preserve and strengthen the Company's
relationships with the shareholders of such class;
<PAGE>
5
(3) With respect to the Investor and Service share classes of
each Fund, monitoring the Company's arrangements with respect to
services provided by certain institutional shareholders ("Service
Organizations") under the Plan, including monitoring and reviewing the
services rendered by Service Organizations to their customers who
beneficially own shares of such class, pursuant to agreements between
the Company and such Service Organizations ("Servicing Agreements");
reviewing the qualifications of Service Organizations wishing to enter
into Servicing Agreements with the Company; assisting in the execution
and delivery of Servicing Agreements; monitoring the operations of the
Plan; monitoring the activities of the Company's transfer agent
relating to the calculation of front-end sales charges and contingent
deferred sales charges payable in connection with the purchase and
redemption of shares, and the payment of all such sales charges to the
Company's distributor or others (subject to the applicable limitations
of the National Association of Securities Dealers, Inc. on asset-based
sales charges); reporting to the Company's Board of Trustees with
respect to the amounts paid or payable by the Company from time to
time under the Plan and the nature of the services provided by Service
Organizations; and maintaining appropriate records in connection with
such duties;
(4) With respect to the Institutional share class of each Fund,
monitoring the Company's arrangements with respect to institutional
investors and financial intermediaries ("Participating Institutions")
purchasing shares on behalf of their customers and program
participants, including monitoring and reviewing services rendered by
Participating Institutions to their customers; providing and
supporting customized purchase and redemption procedures; providing
specialized performance reporting as required by Participating
Institutions; and monitoring the percentage investment by
Participating Institutions which are investment companies for purposes
of compliance with 1940 Act limitations;
(5) With respect to the Investor, Service and Institutional share
classes of each Fund, maintaining the Company's relationships with
third-party industry data services, such as NASDAQ and Lipper
Analytical Services, Inc. and reporting to such services with respect
to ticker symbols, performance information and other information
regarding the Funds, as appropriate;
(6) With respect to the Investor, Service and Institutional share
classes of each Fund, monitoring the investor programs that are
offered from time to time in connection with such class of shares;
(7) With respect to all share classes of each Fund, providing
oversight and related support services that are intended to ensure the
delivery of quality service to the shareholders of such class; and
<PAGE>
6
(8) With respect to all share classes of each Fund, providing
such other similar services as the Company may reasonably request.
d. Without limiting the generality of Section 5.a, BlackRock shall
provide the following services which are intended to benefit all the
classes of shares of a Fund (the "Fund-General Administration Services"):
(1) The oversight and coordination of the performance of each of
the service providers to the Company, including without limitation,
its investment advisers, sub-advisers, other administrators and
sub-administrators (if any), transfer agent, custodian, distributor,
shareholder servicing agents, legal counsel and independent auditors;
(2) The negotiation of service contracts and arrangements between
the Company and each of its service providers;
(3) Acting as liaison between the Company's Board of Trustees and
its service providers;
(4) Assisting in the preparation of materials for meetings of the
Company's Board of Trustees and shareholders;
(5) Providing general ongoing business management and support
services in connection with the Company's operations;
(6) After consultation with the distributor and counsel for the
Company, determining the jurisdictions in which the Funds' shares
shall be registered or qualified for sale;
(7) Assisting in monitoring of regulatory and legislative
developments which may affect the Funds; assisting in counseling the
Funds with respect to regulatory examinations or investigations; and
working with the Company's counsel in connection with regulatory
matters or litigation;
(8) Participating to the extent reasonably requested by the
Company and its counsel in the periodic updating of the Company's
Registration Statement;
(9) Compiling data and accumulating information for and
coordinating with the Company's Treasurer or Assistant Treasurer the
preparation of reports to shareholders of record and the Commission
(other than those reports required to be prepared and filed by PFPC
hereunder);
(10) Filing with the Commission and other federal and state
agencies, subject to the approval of the Company's Treasurer or
Assistant Treasurer, reports and documents other than those reports
and documents required to be filed by
<PAGE>
7
PFPC hereunder and those reports and documents required to be filed by
the Company's custodian or transfer agent;
(11) Monitoring, and assisting in developing, compliance
procedures for each of the Funds, which will include without
limitation, procedures to monitor compliance with each Fund's
investment objective, policies and limitations, tax matters, and
applicable laws and regulations; and
(12) Monitoring the Funds' expenses.
e. Without limiting the generality of Section 5.a, PFPC shall provide
the following Fund-General Administration Services:
(1) Maintaining required financial accounts, records, journals,
ledgers and schedules for each Fund (other than those maintained or
required to be maintained by the Company's custodian or transfer
agent), and installing and maintaining a system of internal accounting
controls appropriate for entities of the size and complexity of each
Fund;
(2) Participating to the extent reasonably requested by the
Company and its counsel in the periodic updating of the Company's
Registration Statement;
(3) In coordination with the Company's Treasurer or Assistant
Treasurer and with assistance of Company counsel, preparing and filing
the Company's Annual and Semi-Annual Reports on Form N-SAR;
(4) In coordination with the Company's Treasurer or Assistant
Treasurer, preparing and filing with the Commission the Funds' annual
and semi-annual shareholder reports;
(5) In coordination with the Company's Treasurer or Assistant
Treasurer, preparing for execution and filing the Company's Form
24F-2;
(6) Preparing for execution and (subject to the approval of the
Company's Treasurer or Assistant Treasurer) filing the Company's
federal and state tax returns;
(7) Pursuant to the instruction of the Company, preparing and
filing documentation with applicable states relating to the initial
registration or qualification of shares in such states as the Company
shall direct. Payment of applicable fees shall be made by the Company
or Fund involved;
(8) Maintaining the registration or qualification of shares for
sale under the securities laws of such states as PFPC shall be
initially instructed by the Company and preparing compliance filings
pursuant to the securities laws of such
<PAGE>
8
states. Payment of applicable fees shall be made by the Company or
Fund involved;
(9) Preparing and filing name change applications pursuant to the
securities laws of various states, as instructed by the Company.
Payment of applicable fees shall be made by the Company or Fund
involved;
(10) Providing reports, financial statements and other
statistical data as reasonably requested from time to time by the
Company;
(11) Assisting in the preparation of materials for meetings of
the Company's Board of Trustees and shareholders;
(12) Monitoring each Fund's status as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986 (as
amended);
(13) Preparing and providing to the Company a standard quarterly
brokerage commission summary, showing the commissions paid per broker;
(14) Verifying investment buy/sell trade tickets when received
from a Fund's investment adviser (the "Adviser") and transmitting
trades to the Fund's custodian (the "Custodian") for settlement;
(15) Reconciling cash and investment balances of a Fund with the
Custodian, and providing the Adviser with the beginning cash balance
available for investment purposes;
(16) Calculating various contractual expenses (e.g., advisory
fees);
(17) Upon receipt of necessary information from the Company,
assisting in the monitoring and budgeting of expense accruals;
(18) Obtaining security market quotes from independent sources
approved by the Adviser, or if such quotes are unavailable, then
obtaining such prices from the Adviser, in connection with valuing a
Fund's assets;
(19) Computing each Fund's net asset value, net income and net
capital gain (loss) in accordance with the Fund's Prospectus and the
resolutions of the Company's Board of Trustees;
(20) Reporting the net asset value of each Fund on a daily basis
to NASDAQ with respect to each share class that qualifies under NASDAQ
reporting requirements;
<PAGE>
9
(21) Providing periodic reports to the Company regarding
"investment company taxable income" and "net capital gain"
distributions in connection with certain tax-related distribution
requirements applicable to the Company;
(22) Providing periodic reports to the specified Adviser
regarding a Fund's unrealized and realized capital gains, containing
such standard information and employing such form of report as PFPC
may from time to time determine;
(23) Together with the Company's Treasurer or Assistant
Treasurer, acting as liaison with the Company's independent public
accountants, and providing account analyses, fiscal year summaries and
other audit related schedules. PFPC shall take all reasonable action
in the performance of its obligations under this Agreement to assure
that the necessary information is made available to such accountants
for the expression of their opinion, as such may be required by the
Company from time to time.
f. Without limiting any other provision of this Section 5, each of the
Administrators separately agrees to provide the following services (and
neither Administrator shall be responsible for the provision of such
services by the other Administrator):
(1) In compliance with the requirements of Rule 31a-3 under the
1940 Act, each Administrator agrees that all records which it
maintains for the Company are the property of the Company and further
agrees to surrender promptly to the Company any of such records upon
the Company's request. Copies of any such records maintained by an
Administrator will be provided by such Administrator to the Company at
the Company's expense. Each Administrator further agrees to preserve
for the periods prescribed by Rule 31a-2 under the 1940 Act the
records required to be maintained by Rule 31a-1 under said Act that
relate to the services it provides hereunder.
(2) With respect only to the services designated to it hereunder,
(i) in the event of equipment failures beyond PFPC's control, PFPC
shall, at no additional expense to the Company, take reasonable steps
to minimize service interruptions but shall have no liability with
respect thereto and (ii) PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making
reasonable provision for emergency use of electronic data processing
equipment to the extent appropriate equipment is available.
(3) In performing their respective services and duties hereunder,
each of the Administrators will act in conformity with the Charter,
Code, Prospectuses and resolutions and other instructions of the
Company's Board of Trustees and will comply with the requirements of
the 1940 Act and other applicable federal or state law, but neither
Administrator shall be responsible for compliance by the Company or
the other Administrator with any of the foregoing items.
<PAGE>
10
6. Expenses Assumed as Administrators. Each Administrator will bear all
expenses incurred by it in performing the services and duties designated to it
under this Agreement, except as otherwise expressly provided herein. Other
expenses to be incurred in the operation of the Funds, including taxes,
interest, brokerage fees and commissions, if any, salaries and fees of officers
and trustees who are not officers, directors, shareholders or employees of the
Administrators, or the Company's investment adviser or the distributor for the
Funds, Commission fees and state Blue Sky qualification fees, advisory and
administration fees, charges of custodians, transfer and dividend disbursing
agents' fees, certain insurance premiums, outside auditing and legal expenses,
costs of outside pricing services, costs of maintaining corporate existence,
typesetting and printing of prospectuses for regulatory purposes and for
distribution to current shareholders of the Funds, costs of shareholders'
reports and corporate meetings and any extraordinary expenses, will be borne by
the Company, provided, however, that the Company will not bear, directly or
indirectly, the cost of any activity which is primarily intended to result in
the sale of shares of the Funds otherwise than pursuant to the Plan.
7. Compensation.
a. For the Class-Specific Administration Services provided pursuant to
Sections 5.b and 5.c above and the related expenses assumed with respect to
those services, the Company will pay to BlackRock and PFPC an aggregate monthly
fee based on the net assets allocated to the respective classes of shares of
each Fund, initially in the amounts or at rates set forth on Appendix B hereto,
and as modified by agreement of the Administrators and the Company from time to
time, together with out-of-pocket expenses (the "Class-Specific Administration
Fees"). The Class-Specific Administration Fee attributable to each class of
shares shall be borne solely by the shares of that class.
b. For the Fund-General Administration Services and other services provided
pursuant to Sections 5.a, 5.d, 5.e, and 5.f above and the related expenses
assumed with respect to those services, the Company will pay to BlackRock and
PFPC an aggregate monthly fee based on the net assets of each Fund, initially in
the amounts or at rates set forth on Appendix B hereto, and as modified by
agreement of the Administrators and the Company from time to time, together with
out-of-pocket expenses (the "Fund-Based Administration Fees"). The Fund-Based
Administration Fee attributable to each Fund shall be borne solely by the shares
of that Fund.
c. The Class-Specific Administration Fees and the Fund-Based Administration
Fees shall be allocated between the Administrators as agreed to by BlackRock and
PFPC from time to time. For the purpose of determining fees payable to the
Administrators under this Agreement, the value of net assets shall be computed
and allocated as required by the Funds' Prospectuses, generally accepted
accounting principles and resolutions of the Company's Board of Trustees.
d. Each Administrator will from time to time employ or associate with
itself such person or persons as it may believe to be fit to assist it in the
performance of this Agreement. Such person or persons may be officers and
employees who are employed by both the Company and the applicable Administrator.
The compensation of such person or persons
<PAGE>
11
shall be paid by the Administrator utilizing the services of such person, and no
obligation shall be incurred on behalf of the Company in such respect.
8. Sub-Contracting. BlackRock and PFPC are hereby separately authorized to
retain third parties and are hereby separately authorized to delegate some or
all of their respective duties and obligations hereunder to such person or
persons, provided that BlackRock or PFPC, as the case may be, shall remain
responsible for the performance of such duties and obligations to the extent
provided for under this Agreement. The compensation of such person or persons
shall be paid by BlackRock or PFPC, as applicable, and no obligation shall be
incurred on behalf of the Company in such respect.
9. Proprietary and Confidential Information. Each Administrator agrees on
behalf of itself and its employees to treat confidentially and as proprietary
information of the Company all records and other information relative to the
Company and its Funds and prior, present or potential shareholders, and not to
use such records and information for any purpose other than performance of its
responsibilities and duties hereunder, except after prior notification to and
approval in writing by the Company, which approval shall not be unreasonably
withheld and may not be withheld where the Administrator may be exposed to civil
or criminal contempt proceedings for failure to comply, when requested to
divulge such information by duly constituted authorities, or when so requested
by the Company.
10. Limitations of Liability. Each Administrator shall exercise care and
diligence in rendering its services listed in Section 5 above. Neither
Administrator shall be liable for any error of judgment or mistake of law, for
any loss of data or service interruptions caused by equipment failure, or for
any loss suffered by the Company in connection with the matters to which this
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement. Any
person, even though also an officer, director, employee or agent of a particular
Administrator, who may be or become an officer, employee or agent of the
Company, shall be deemed, when rendering services to the Company or acting on
any business of the Company (other than services or business in connection with
such Administrator's duties hereunder) to be rendering such services to or
acting solely for the Company and not as an officer, director, employee or agent
or one under the control or direction of such Administrator even though paid by
it.
Neither Administrator will be responsible for losses beyond its control.
Notwithstanding anything in this Agreement to the contrary, neither
Administrator (nor its affiliates) shall be liable for any consequential,
special or indirect losses or damages, regardless of whether the likelihood of
such losses or damages was known by the Administrator.
11. Indemnification. The Company agrees to separately indemnify and hold
harmless each Administrator (and its affiliates) from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
attorneys' fees and disbursements) arising directly or indirectly from any
action or omission to act which the Administrator takes (i) in connection with
its provision of services hereunder; (ii) at the request or on the direction of
or in
<PAGE>
12
reliance on the advice of the Company; or (iii) upon Oral Instructions or
Written Instructions; provided, however, that neither Administrator (nor any of
its affiliates (not, in the case of BlackRock to include PFPC, or in the case of
PFPC to include BlackRock)) shall be indemnified against any liability (or any
expenses incident to such liability) arising out of its (or its affiliates'
(not, in the case of BlackRock to include PFPC, or in the case of PFPC to
include BlackRock)) own willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties and obligations under this Agreement.
12. Duration and Termination. (a) Unless sooner terminated as provided in
this Section 12.a, this Agreement shall continue in effect as between the
Company and BlackRock until one year after the date first written above.
Thereafter, if not terminated, this Agreement shall continue automatically as
between the Company and BlackRock for successive terms of one year, provided
that such continuance is specifically approved at least annually (a) by a vote
of a majority of those members of the Company's Board of Trustees who are not
parties to this Agreement or "interested persons" of such party, cast in person
at a meeting called for the purpose of voting on such approval, and (b) by the
Company's Board of Trustees or by vote of a "majority of the outstanding voting
securities" of the Company; provided, however, that this Agreement may be
terminated by the Company at any time, without the payment of any penalty, by
vote of a majority of the entire Board of Trustees or a vote of a "majority of
the outstanding voting securities" of the Company, on sixty (60) days prior
written notice to BlackRock or by BlackRock at any time, without the payment of
any penalty, on sixty (60) days prior written notice to the Company. (As used in
this Agreement, the terms "majority of the outstanding voting securities" and
"interested person" shall have the same meaning as such terms have in the 1940
Act.)
(b) Unless sooner terminated as provided in this Section 12.b, this
Agreement shall continue in effect as between the Company and PFPC until one
year after the date first written above. Thereafter, if not terminated, this
Agreement shall continue automatically as between the Company and PFPC for
successive terms of one year, provided that such continuance is specifically
approved at least annually (a) by a vote of a majority of those members of the
Company's Board of Trustees who are not parties to this Agreement or "interested
persons" of any such party, cast in person at a meeting called for the purpose
of voting on such approval, and (b) by the Company's Board of Trustees or by
vote of a "majority of the outstanding voting securities" of the Company,
provided, however, that this Agreement may be terminated by the Company at any
time, without the payment of any penalty, by vote of a majority of the entire
Board of Trustees or a vote of a "majority of the outstanding voting securities"
of the Company, on sixty (60) days prior written notice to PFPC or by PFPC at
any time, without the payment of any penalty, on sixty (60) days prior written
notice to the Company.
13. Amendment of this Agreement. No provision of this Agreement may be
changed, discharged or terminated orally, but only by an instrument in writing
signed by the party against which enforcement of the change, discharge or
termination is sought.
14. Assignment; Delegation. Separate and apart from and without requiring
compliance with the provisions of Section 8 hereof, PFPC and BlackRock may each
assign its
<PAGE>
13
respective rights and delegate its respective duties hereunder to any affiliate
(as defined in the 1940 Act) of or any majority-owned direct or indirect
subsidiary of itself or of PNC Bank Corp., provided that (i) the
assigning/delegating party gives the Company 15 days prior written notice of
such assignment or delegation, (ii) the assignee or delegate agrees to comply
with the relevant provisions of the 1940 Act, and (iii) the assigning/delegating
party and its assignee or delegate promptly provide such information as the
Company may reasonably request, and respond to such questions as the Company may
reasonably ask, relative to the assignment or delegation (including, without
limitation, the capabilities of the assignee or delegate).
15. Notices. Notices of any kind to be given to the Company hereunder by
the Administrators shall be in writing and shall be duly given if mailed or
delivered to the Company at 400 Bellevue Parkway, Wilmington, Delaware 19809,
with a copy to BlackRock Advisors, Inc., 1600 Market Street, 28th Floor,
Philadelphia, Pennsylvania 19103, Attention: Brian P. Kindelan, Esq., Secretary,
or at such other address or to such other individual as shall be so specified by
the Company to the Administrators. Notices of any kind to be given to the
Administrators hereunder by the Company shall be in writing and shall be duly
given if mailed or delivered to: BlackRock Advisors, Inc., 345 Park Avenue, New
York, New York 10154, Attention: Robert Connolly, Esq. with a copy to Karen H.
Sabath, 345 Park Avenue, New York, New York 10154; and PFPC Inc., 400 Bellevue
Parkway, Wilmington, Delaware 19809, Attention: Vincent J. Ciavardini with a
copy to 400 Bellevue Parkway, Wilmington, Delaware 19809, Attention: Gary M.
Gardner, Esq., or at such other address or to such other individual as shall be
so specified by an Administrator to the Company.
16. Miscellaneous.
a. The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. This Agreement shall
be binding upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns.
b. The names "BlackRock Funds" and "Trustees of BlackRock Funds" refer
specifically 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, 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 the Company. The obligations of
"BlackRock Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are not made individually, but in
such capacities, and are not binding upon any of the Trustees, shareholders,
representatives or agents of the Company personally, but bind only the Trust
property (as defined in the Declaration of Trust), and all persons dealing with
any Fund or class of shares of the Company must look solely to the Trust
property belonging to such Fund or class for the enforcement of any claims
against the Company.
<PAGE>
14
c. The Company represents and warrants that its allocation of services and
expenses as described herein is in compliance with Rule 18f-3 under the 1940
Act, the Company's plan that has been adopted pursuant to Rule 18f-3, and other
applicable rules and requirements. The Company will separately indemnify and
hold harmless each Administrator (and its affiliates) from any claim that the
allocation of services and expenses is improper or inappropriate.
17. Counterparts. This Agreement may be executed in counterparts, all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
BLACKROCK FUNDS(SM)
By:___________________________
BLACKROCK ADVISORS, INC.
By:___________________________
PFPC INC.
By:___________________________
<PAGE>
APPENDIX A
to the
Administration Agreement
Among BlackRock Funds(SM),
BlackRock Advisors, Inc. and PFPC Inc.
Class of
Name of Portfolio Shares
- ----------------- ------
Small Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Small Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Select Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
A-1
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Index Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Emerging
Markets Portfolio Institutional
Service
Investor A
Investor B
Investor C
Balanced Portfolio Institutional
Service
Investor A
Investor B
Investor C
Low Duration Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Intermediate Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
A-2
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Intermediate Government
Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
Government Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Core Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Managed Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
A-3
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Pennsylvania Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Ohio Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Municipal Money Market
Portfolio Institutional
Service
Investor A
Investor B
Investor C
U.S. Treasury Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
A-4
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Ohio Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Pennsylvania Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
North Carolina Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Virginia Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
A-5
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Multi-Sector Mortgage
Securities Portfolio III Institutional
Mid-Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Mid-Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock Strategic
Portfolio I Institutional
BlackRock Strategic
Portfolio II Institutional
International Small Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
Micro-Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
GNMA Portfolio Institutional
Service
Investor A
Investor B
Investor C
A-6
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Delaware Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Kentucky Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
High Yield
Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Multi-Sector Mortgage
Securities Portfolio IV Institutional
A-7
<PAGE>
APPENDIX B
Administration Fees Payable
With Respect to BlackRock Funds(SM)
<TABLE>
<S> <C>
I. Portfolios Fund-Based Administration Fees
All Portfolios. Administrators are entitled to receive a combined
fee, computed daily and payable monthly, at an
annual rate of .085% of the first $500 million of
each Portfolio's average daily net assets; .075% of
the next $500 million of each Portfolio's average
daily net assets; and .065% of each Portfolio's
average daily net assets in excess of $1 billion.
II. Portfolios Class-Specific Administration Fee
Managed Income, Core Bond*, Intermediate Government Administrators are entitled to receive a combined
Bond, Tax-Free Income, New Jersey Tax-Free Income, fee, computed daily and payable monthly, at the
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, following maximum annual rates based on the average
Low Duration Bond*, Intermediate Bond*, daily net assets allocated to each respective class
International Bond, Government Income, Multi-Sector of shares: .145% of the first $500 million of
Mortgage Securities Portfolio III, Multi-Sector average daily net assets allocated to each
Mortgage Securities Portfolio IV, BlackRock respective class of shares, .135% of the next $500
Strategic Portfolio I, BlackRock Strategic Portfolio million of such average daily net assets, and .125%
II, GNMA, Delaware Tax-Free Income, Kentucky of all average daily net assets allocated to a class
Tax-Free Income and High Yield Bond* Portfolios. of shares in excess of $1 billion.
</TABLE>
* With respect to BlackRock Shares of each of the Core Bond, Low Duration Bond,
Intermediate Bond and High Yield Bond Portfolios, the Administrators are
entitled to receive a combined fee, computed daily and payable monthly, at the
following maximum annual rates based on the average daily net assets allocated
to BlackRock Shares of each of those Portfolios: .035% of the first $500 million
of average daily net assets allocated to BlackRock Shares, .025% of the next
$500 million of such average daily net assets, and .015% of all average daily
net assets allocated to BlackRock Shares in excess of $1 billion.
B-2
<PAGE>
<TABLE>
<S> <C>
Money Market, Municipal Money Market, U.S. Treasury Administrators are entitled to receive a combined
Money Market, Ohio Municipal Money Market, New fee, computed daily and payable monthly, at the
Jersey Municipal Money Market, Pennsylvania following maximum annual rates based on the average
Municipal Money Market, North Carolina Municipal daily net assets allocated to each respective class
Money Market and Virginia Municipal Money Market of shares: .095% of the first $500 million of
Portfolios. average daily net assets allocated to a
class of shares, .085% of the next $500 million of
such average daily net assets, and .075% of all
average daily net assets allocated to a class of
shares in excess of $1 billion.
Large Cap Value Equity, Large Cap Growth Equity, Administrators are entitled to receive a combined
Small Cap Value Equity, International Equity, Index fee, computed daily and payable monthly, at the
Equity, Balanced, Small Cap Growth Equity, Select following maximum annual rates based on the average
Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, daily assets allocated to each class of shares:
International Emerging Markets, International Small .145% of the first $500 million of average daily net
Cap Equity and Micro-Cap Equity Portfolios. assets allocated to a class of shares, .135% of the
next $500 million of such average daily net assets
and .125% of all average daily net assets allocated
to a class of shares in excess of $1 billion.
</TABLE>
B-3
<PAGE>
Exhibit 99.8(b)
APPENDIX A
to the
Administration Agreement
Among BlackRock Funds(SM),
BlackRock Advisors, Inc. and PFPC Inc.
Class of
Name of Portfolio Shares
- ----------------- ------
Small Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Small Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Large Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Select Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Index Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Emerging
Markets Portfolio Institutional
Service
Investor A
Investor B
Investor C
Balanced Portfolio Institutional
Service
Investor A
Investor B
Investor C
Low Duration Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Intermediate Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Intermediate Government
Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
Government Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Core Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Managed Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
International Bond
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Pennsylvania Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Ohio Tax-Free Income
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Municipal Money Market
Portfolio Institutional
Service
Investor A
Investor B
Investor C
U.S. Treasury Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Ohio Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Pennsylvania Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
North Carolina Municipal
Money Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
New Jersey Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Virginia Municipal Money
Market Portfolio Institutional
Service
Investor A
Investor B
Investor C
Multi-Sector Mortgage
Securities Portfolio III Institutional
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Mid-Cap Growth Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
Mid-Cap Value Equity
Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock Strategic
Portfolio I Institutional
BlackRock Strategic
Portfolio II Institutional
International Small Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
Micro-Cap
Equity Portfolio Institutional
Service
Investor A
Investor B
Investor C
GNMA Portfolio Institutional
Service
Investor A
Investor B
Investor C
<PAGE>
Class of
Name of Portfolio Shares
- ----------------- ------
Delaware Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
Kentucky Tax-Free
Income Portfolio Institutional
Service
Investor A
Investor B
Investor C
High Yield
Bond Portfolio Institutional
Service
Investor A
Investor B
Investor C
BlackRock
Multi-Sector Mortgage
Securities Portfolio IV Institutional
<PAGE>
Release. "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 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 the Company. 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 the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Customer must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.
Agreed to and accepted as of June __, 1999.
BLACKROCK FUNDS(SM)
By: ___________________________
Name:
Title:
BLACKROCK ADVISORS, INC.
By: ___________________________
Name:
Title:
PFPC INC.
By: ___________________________
Name:
Title:
<PAGE>
APPENDIX B
Administration Fees Payable
With Respect to BlackRock Funds(SM)
<TABLE>
<S> <C>
I. Portfolios Fund-Based Administration Fees
All Portfolios. Administrators are entitled to receive a combined
fee, computed daily and payable monthly, at an
annual rate of .085% of the first $500 million of
each Portfolio's average daily net assets; .075% of
the next $500 million of each Portfolio's average
daily net assets; and .065% of each Portfolio's
average daily net assets in excess of $1 billion.
II. Portfolios Class-Specific Administration Fee
Managed Income, Core Bond*, Intermediate Government Administrators are entitled to receive a combined
Bond, Tax-Free Income, New Jersey Tax-Free Income, fee, computed daily and payable monthly, at the
Ohio Tax-Free Income, Pennsylvania Tax-Free Income, following maximum annual rates based on the average
Low Duration Bond*, Intermediate Bond*, daily net assets allocated to each respective class
International Bond, Government Income, Multi-Sector of shares: .145% of the first $500 million of
Mortgage Securities Portfolio III, Multi-Sector average daily net assets allocated to each
Mortgage Securities Portfolio IV, BlackRock respective class of shares, .135% of the next $500
Strategic Portfolio I, BlackRock Strategic Portfolio million of such average daily net assets, and .125%
II, GNMA, Delaware Tax-Free Income, Kentucky of all average daily net assets allocated to a class
Tax-Free Income and High Yield Bond* Portfolios. of shares in excess of $1 billion.
</TABLE>
* With respect to BlackRock Shares of each of the Core Bond, Low Duration Bond,
Intermediate Bond and High Yield Bond Portfolios, the Administrators are
entitled to receive a combined fee, computed daily and payable monthly, at the
following maximum annual rates based on the average daily net assets allocated
to BlackRock Shares of each of those Portfolios: .035% of the first $500 million
of average daily net assets allocated to BlackRock Shares, .025% of the next
$500 million of such average daily net assets, and .015% of all average daily
net assets allocated to BlackRock Shares in excess of $1 billion.
<PAGE>
<TABLE>
<S> <C>
Money Market, Municipal Money Market, U.S. Treasury Administrators are entitled to receive a combined
Money Market, Ohio Municipal Money Market, New fee, computed daily and payable monthly, at the
Jersey Municipal Money Market, Pennsylvania following maximum annual rates based on the average
Municipal Money Market, North Carolina Municipal daily net assets allocated to each respective class
Money Market and Virginia Municipal Money Market of shares: .095% of the first $500 million of
Portfolios. average daily net assets allocated to a
class of shares, .085% of the next $500 million of
such average daily net assets, and .075% of all
average daily net assets allocated to a class of
shares in excess of $1 billion.
Large Cap Value Equity, Large Cap Growth Equity, Administrators are entitled to receive a combined
Small Cap Value Equity, International Equity, Index fee, computed daily and payable monthly, at the
Equity, Balanced, Small Cap Growth Equity, Select following maximum annual rates based on the average
Equity, Mid-Cap Value Equity, Mid-Cap Growth Equity, daily assets allocated to each class of shares:
International Emerging Markets, International Small .145% of the first $500 million of average daily net
Cap Equity and Micro-Cap Equity Portfolios. assets allocated to a class of shares, .135% of the
next $500 million of such average daily net assets
and .125% of all average daily net assets allocated
to a class of shares in excess of $1 billion.
</TABLE>
B-4
<PAGE>
Release. "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 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 the Company. 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 the Company personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Customer must look solely to the Trust Property
belonging to such class for the enforcement of any claims against the Company.
Agreed to and accepted as of June __, 1999.
BLACKROCK FUNDS(SM)
By: _____________________
Name:
Title:
BLACKROCK ADVISORS, INC.
By: _____________________
Name:
Title:
PFPC INC.
By: _____________________
Name:
Title:
<PAGE>
Exhibit 99.8(h)
BlackRock Funds(SM)
Appendix C to the
Transfer Agency Agreement dated
as of October 4, 1989
The Fund desires to retain the Transfer Agent to serve as the Fund's
transfer agent, registrar and dividend disbursing agent with respect to Shares,
par value $.001 per Share, of the Portfolios listed below and the Transfer Agent
is willing to furnish such services.
The Portfolios are as follows:
o Money Market Portfolio
o U.S Treasury Money Market Portfolio
o Municipal Money Market Portfolio
o Large Cap Growth Equity Portfolio
o Balanced Portfolio
o Managed Income Portfolio
o International Equity Portfolio
o Tax-Free Income Portfolio
o Ohio Municipal Money Market Portfolio
o Pennsylvania Municipal Money Market Portfolio
o Intermediate Government Bond Portfolio
o Ohio Tax-Free Income Portfolio
o Pennsylvania Tax-Free Income Portfolio
o Large Cap Value Equity Portfolio
o Index Equity Portfolio
o Small Cap Value Equity Portfolio
o North Carolina Municipal Money Market Portfolio
o Low Duration Bond Portfolio
o Intermediate Bond Portfolio
o Small Cap Growth Equity Portfolio
o Select Equity Portfolio
o Government Income Portfolio
o International Emerging Markets Portfolio
o International Bond Portfolio
o Virginia Municipal Money Market Portfolio
o New Jersey Municipal Money Market Portfolio
o New Jersey Tax-Free Income Portfolio
o Core Bond Portfolio
o Multi-Sector Mortgage Securities Portfolio III
o Mid-Cap Value Equity Portfolio
o Mid-Cap Growth Equity Portfolio
o BlackRock Strategic Portfolio I
o BlackRock Strategic Portfolio II
o International Small Cap Equity Portfolio
o Micro-Cap Equity Portfolio
o GNMA Portfolio
<PAGE>
2
o Delaware Tax-Free Income Portfolio
o Kentucky Tax-Free Income Portfolio
o High Yield Bond Portfolio
o Multi-Sector Mortgage Securities Portfolio IV
The Fund and the Transfer Agent agree that the Transfer Agent shall provide
the services contemplated by the Transfer Agency Agreement with respect to (i)
the Institutional Class of Shares of each of the BlackRock Strategic Portfolio
I, BlackRock Strategic Portfolio II, Multi-Sector Mortgage Securities Portfolio
III and Multi-Sector Mortgage Securities Portfolio IV, (ii) the Institutional,
Service, Investor A, Investor B and Investor C Classes of Shares of each other
Portfolio listed above and (iii) the BlackRock Class of Shares of each of the
Core Bond, Low Duration Bond, Intermediate Bond and High Yield Bond Portfolios.
Release. "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 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 the Fund. 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 the Fund personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Fund must look solely to the Trust Property belonging
to such class for the enforcement of any claims against the Fund.
Agreed to and accepted as of June ___, 1999.
BlackRock Funds(SM)
By: _______________________
PFPC Inc.
By: _______________________
<PAGE>
Exhibit 99.12(c)
PURCHASE AGREEMENT
BlackRock Funds(SM) (the "Fund"), a Massachusetts business trust, and
BlackRock Distributors, Inc. ("BDI"), a Delaware corporation, hereby agree as
follows:
1. The Fund hereby offers BDI and BDI hereby purchases ten shares of the
Institutional Class of shares of the Fund's Multi-Sector Mortgage Securities
Portfolio IV (the "Shares") for $10 per Share. The Fund hereby acknowledges
receipt from BDI of funds in full payment for the foregoing Shares.
2. BDI represents and warrants to the Fund that the foregoing Shares are
being acquired for investment purposes and not with a view to the distribution
thereof.
3. "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 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 the Fund. 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 the Fund personally, but bind only the Trust
Property (as defined in the Declaration of Trust), and all persons dealing with
any class of shares of the Fund must look solely to the Trust Property belonging
to such class for the enforcement of any claims against the Fund.
IN AGREEMENT WHEREOF, and intending to be legally bound hereby, the parties
hereto have executed this Purchase Agreement as of _________ __, 1999.
BLACKROCK FUNDS(SM)
By:__________________________
Name:
Title:
BLACKROCK DISTRIBUTORS, INC.
By:__________________________
Name:
Title:
<PAGE>
Exhibit 99.13(b)
APPENDIX A
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Small Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Small Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Growth Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Value Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Select Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Index Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Emerging Service 0% .15% .15%
Markets Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Balanced Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Low Duration Institutional 0% 0% 0%
Bond Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Bond Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Intermediate Institutional 0% 0% 0%
Government Bond Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Core Bond Institutional 0% 0% 0%
Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Managed Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Bond Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Tax-Free Income Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Pennsylvania Institutional 0% 0% 0%
Tax-Free Service 0% .15% .15%
Income Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Tax- Institutional 0% 0% 0%
Free Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Tax-Free Institutional 0% 0% 0%
Income Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Money Market Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Municipal Money Institutional 0% 0% 0%
Market Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Government Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Ohio Municipal Institutional 0% 0% 0%
Money Market Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-3
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Pennsylvania Institutional 0% 0% 0%
Municipal Money Service 0% .15% .15%
Market Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
North Carolina Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
New Jersey Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Virginia Institutional 0% 0% 0%
Municipal Service 0% .15% .15%
Money Market Investor A .10% .25% .15%
Portfolio Investor B .75% .25% .15%
Investor C .75% .25% .15%
Multi-Sector Institutional 0% 0% 0%
Mortgage
Securities
Portfolio III
Mid-Cap Growth Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Mid-Cap Value Institutional 0% 0% 0%
Equity Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
International Institutional 0% 0% 0%
Small Cap Service 0% .15% .15%
Equity Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Micro-Cap Equity Institutional 0% 0% 0%
Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
GNMA Portfolio Institutional 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
Delaware Tax-Free Institutional 0% 0% 0%
Income Service 0% .15% .15%
Portfolio Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
</TABLE>
A-4
<PAGE>
<TABLE>
<CAPTION>
Shareholder
Distribution Fee Service Fee Processing Fee
(expressed as (expressed as (expressed as
a percentage a percentage a percentage
of average daily of average daily of average daily
net assets of net assets of net assets of
the Portfolio the Portfolio the Portfolio
attributable to attributable to attributable to
Name of Portfolio Class of Shares the specified Class) the specified Class) the specified Class)
- ----------------- --------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Kentucky Tax-Free Institutional 0% 0% 0%
Income Portfolio Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
High Yield Institutional 0% 0% 0%
Bond Portfolio BlackRock 0% 0% 0%
Service 0% .15% .15%
Investor A .10% .25% .15%
Investor B .75% .25% .15%
Investor C .75% .25% .15%
BlackRock Institutional 0% 0% 0%
Strategic Portfolio I
BlackRock Institutional 0% 0% 0%
Strategic
Portfolio II
Multi-Sector Mortgage Institutional 0% 0% 0%
Securities Portfolio IV
</TABLE>
"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
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 the Fund. 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 the Fund
personally, but bind only the Trust Property (as defined in the Declaration of
Trust), and all persons dealing with any class of shares of the Fund must look
solely to the Trust Property belonging to such class for the enforcement of any
claims against the Fund.
Agreed to and accepted as
of June __, 1999.
BLACKROCK FUNDS
By: ____________________________
Name:
Title:
A-5
