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INDEPENDENCE SQUARE INCOME SECURITIES, INC.
One Aldwyn Center
Villanova, Pennsylvania 19085
February 24, 2000
Dear Shareholder:
A special meeting of the shareholders of Independence Square Income
Securities, Inc. (the "Fund") has been called for May 5, 2000 at 11:00 a.m.,
Eastern time. Formal notice of the meeting appears on the next page, followed
by materials regarding the meeting.
Shareholders will be asked at the special meeting to consider and vote upon
the proposed reorganization of the Fund into the High Yield Bond Portfolio of
BlackRock Funds(SM) and related matters. Please see the enclosed Combined
Prospectus/Proxy Statement for detailed information regarding the proposed
reorganization and a comparison of the funds.
THE BOARD OF DIRECTORS OF THE FUND RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSED
REORGANIZATION.
A proxy card is enclosed for your use in the shareholder meeting. This card
represents shares you held as of the record date, February 21, 2000. IT IS
IMPORTANT THAT YOU COMPLETE, SIGN, AND RETURN YOUR PROXY CARD IN THE ENVELOPE
PROVIDED AS SOON AS POSSIBLE. This will ensure that your shares will be
represented at the Special Shareholders Meeting to be held on May 5, 2000.
Sincerely,
/s/ Robert R. Fortune
Robert R. Fortune
Chairman of the Board and President
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INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on May 5, 2000
To the Shareholders of
Independence Square Income Securities, Inc.:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders
("Shareholders") of Independence Square Income Securities, Inc. ("ISIS") will
be held at the offices of BlackRock Institutional Management Corporation,
Bellevue Park Corporate Center, 400 Bellevue Parkway, Fourth Floor Conference
Room, Wilmington, Delaware 19809, on May 5, 2000 at 11:00 a.m., (Eastern time)
for the following purposes:
ITEM 1. To consider and act upon a proposal to approve an Agreement and
Plan of Reorganization (the "Reorganization Agreement") by and
between ISIS and BlackRock Funds(SM) ("BlackRock") and the
transactions contemplated thereby, including (a) the transfer of
all of the assets and liabilities of ISIS to BlackRock's High
Yield Bond Portfolio (the "High Yield Bond Portfolio") in exchange
for Series B Investor Shares of the High Yield Bond Portfolio; (b)
the distribution of such Series B Investor Shares to the
Shareholders of ISIS in connection with its liquidation; (c) the
amendment to ISIS' by-laws and fundamental investment limitation
to provide that ISIS may purchase securities of another investment
company in connection with a merger, consolidation,
reorganization, sale or purchase of assets approved by
stockholders, or as otherwise permitted by the Investment Company
Act of 1940, as amended; and (d) the dissolution under state law
and the de-registration under the Investment Company Act of 1940,
as amended, of ISIS.
ITEM 2. To transact such other business as may properly come before the
Special Meeting or any adjournment(s) thereof.
YOUR DIRECTORS RECOMMEND THAT YOU VOTE IN FAVOR OF ITEM 1.
The proposed reorganization and related matters are described in the
attached Combined Prospectus/Proxy Statement. Attached as Appendix A to the
Combined Prospectus/Proxy Statement is a copy of the Reorganization Agreement.
Shareholders of record as of the close of business on February 21, 2000 are
entitled to notice of, and to vote at, the Special Meeting or any
adjournment(s) thereof.
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SHAREHOLDERS ARE REQUESTED TO EXECUTE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE THE ACCOMPANYING PROXY CARD WHICH IS BEING SOLICITED BY ISIS' BOARD
OF DIRECTORS. THIS IS IMPORTANT TO ENSURE A QUORUM AT THE SPECIAL MEETING.
PROXIES MAY BE REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY SUBMITTING TO
ISIS A WRITTEN NOTICE OF REVOCATION OR A SUBSEQUENTLY EXECUTED PROXY OR BY
ATTENDING THE SPECIAL MEETING AND VOTING IN PERSON.
/s/ Gary M. Gardner
Gary M. Gardner
Secretary
February 12, 2000
2
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COMBINED PROSPECTUS/PROXY STATEMENT
Dated February 12, 2000
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(610) 964-8882
BLACKROCK FUNDS(SM)
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(800) 441-7762
This Combined Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Independence Square
Income Securities, Inc. ("ISIS") in connection with a Special Meeting (the
"Meeting") of Shareholders ("Shareholders") to be held on May 5, 2000 at 11:00
a.m., (Eastern time) at the offices of BlackRock Institutional Management
Corporation, Bellevue Park Corporate Center, 400 Bellevue Parkway, Fourth
Floor Conference Room, Wilmington, Delaware 19809, at which Shareholders will
be asked to consider and approve a proposed Agreement and Plan of
Reorganization dated December 9, 1999 (the "Reorganization Agreement"), by and
between ISIS and BlackRock Funds(SM) ("BlackRock"), and the matters contemplated
therein (the "Reorganization"). A copy of the Reorganization Agreement is
attached as Appendix A.
ISIS is registered as a closed-end management investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). BlackRock is
registered as an open-end management investment company under the 1940 Act.
BlackRock Institutional Management Corporation ("BIMC") currently serves as
investment adviser to ISIS. BlackRock Advisors, Inc. ("BlackRock Advisors")
currently serves as investment adviser for BlackRock and BlackRock Financial
Management, Inc. ("BFM") currently serves as sub-adviser for BlackRock with
respect to its High Yield Bond Portfolio (the "High Yield Bond Portfolio").
BIMC, BlackRock Advisors and BFM are each majority-owned, indirect
subsidiaries of PNC Bank, N.A. ("PNC Bank").
In reviewing the proposed Reorganization, the Board of Directors of ISIS
considered among other things:
. the reasons for the Reorganization;
. the terms of the Reorganization;
. the opportunity to combine ISIS and the High Yield Bond Portfolio to
create a single, larger consolidated asset base;
. the investment objectives and policies of each of the Funds;
. BlackRock's service providers;
. the recommendations of BIMC and BlackRock Advisors with respect to the
Reorganization;
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. the effect of the Reorganization on ISIS;
. the fact that the Reorganization would constitute a tax-free
reorganization; and
. the fact that the interests of Shareholders would not be diluted as a
result of the Reorganization.
The Reorganization Agreement provides that ISIS will transfer all of its
assets and liabilities to the High Yield Bond Portfolio. In exchange for the
transfer of these assets and liabilities, BlackRock will issue Series B
Investor Shares of the High Yield Bond Portfolio to ISIS. The transaction is
expected to occur on May 5, 2000, or as soon thereafter as is practicable.
ISIS offers one class of shares. The High Yield Bond Portfolio offers six
classes of shares. One class of shares offered by the High Yield Bond
Portfolio, Series B Investor Shares, is the class of shares which Shareholders
of ISIS will receive in the Reorganization, as further described in
"Information Relating to the Proposed Reorganization--Description of the
Reorganization Agreement."
ISIS will make a liquidating distribution of Series B Investor Shares to the
Shareholders of ISIS, so that a holder of shares in ISIS will receive Series B
Investor Shares of the High Yield Bond Portfolio with the same aggregate net
asset value as the ISIS shares held by the Shareholder immediately before the
transaction. Following the Reorganization, Shareholders of ISIS will be
shareholders of the High Yield Bond Portfolio, and ISIS will be dissolved
under state law and de-registered under the 1940 Act.
The High Yield Bond Portfolio is currently conducting investment operations
as described in this Combined Prospectus/Proxy Statement.
This Combined Prospectus/Proxy Statement sets forth the information that a
Shareholder of ISIS should know before voting on the Reorganization Agreement
(and related transactions), and should be retained for future reference. The
Prospectus relating to Series B Investor Shares of the High Yield Bond
Portfolio, which describes the High Yield Bond Portfolio, accompanies this
Combined Prospectus/Proxy Statement and is incorporated herein by reference.
Additional information is set forth in the Statements of Additional
Information relating to the Series B Investor Shares of the High Yield Bond
Portfolio and this Combined Prospectus/Proxy Statement, which are dated
January 28, 2000 and February 12, 2000, respectively, each of which is
incorporated herein by reference. Each of these documents is on file with the
Securities and Exchange Commission (the "SEC"), and is available without
charge upon oral or written request by writing or calling either ISIS or
BlackRock at the respective addresses or telephone numbers indicated above.
This Combined Prospectus/Proxy Statement constitutes the Proxy Statement of
ISIS for the meeting of its Shareholders, and BlackRock's Prospectus for
Series B Investor Shares of the High Yield Bond Portfolio that have been
registered with the SEC and are to be issued in connection with the
Reorganization.
This Combined Prospectus/Proxy Statement is expected to first be sent to
Shareholders on or about February 29, 2000.
2
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS COMBINED PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED PROSPECTUS/PROXY
STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED HEREIN BY REFERENCE AND,
IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY ISIS OR BLACKROCK.
SHARES OF THE HIGH YIELD BOND PORTFOLIO ARE SUBJECT TO INVESTMENT RISKS
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL, ARE NOT BANK DEPOSITS AND ARE NOT
ENDORSED BY, INSURED BY, GUARANTEED BY, OBLIGATIONS OF OR OTHERWISE SUPPORTED
BY THE U.S. GOVERNMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, PNC BANK, N.A. OR ANY OF ITS AFFILIATES OR ANY OTHER
GOVERNMENTAL AGENCY OR BANK.
3
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY
Proposed Reorganization................................................ 5
Reasons for the Reorganization......................................... 5
Federal Income Tax Consequences........................................ 5
Overview of ISIS and the High Yield Bond Portfolio..................... 6
Principal Risks of Investing in ISIS and the High Yield Bond
Portfolio............................................................. 6
Certain Arrangements with Service Providers--ISIS...................... 8
Certain Arrangements with Service Providers--the High Yield Bond
Portfolio............................................................. 9
Comparative Fee and Expense Tables..................................... 12
Expense Ratio--ISIS.................................................... 13
Expense Ratio -- Series B Investor Shares of the High Yield Bond
Portfolio............................................................. 13
Organization........................................................... 13
Purchase, Redemption and Exchange Procedures........................... 13
Dividends, Distributions and Pricing................................... 15
Voting Information..................................................... 15
RISK FACTORS............................................................. 16
INFORMATION RELATING TO THE PROPOSED REORGANIZATION...................... 17
Description of the Reorganization Agreement............................ 17
Board Considerations................................................... 19
Federal Income Tax Consequences........................................ 20
Capitalization......................................................... 21
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS....................... 21
General................................................................ 21
Investment Limitations................................................. 24
Other Information...................................................... 26
INFORMATION RELATING TO VOTING MATTERS................................... 26
General Information.................................................... 26
Shareholder and Board Approvals........................................ 27
Appraisal Rights....................................................... 28
Quorum................................................................. 29
Annual Meetings........................................................ 29
ADDITIONAL INFORMATION ABOUT BLACKROCK................................... 29
ADDITIONAL INFORMATION ABOUT ISIS........................................ 30
FINANCIAL STATEMENTS AND EXPERTS......................................... 30
OTHER BUSINESS........................................................... 30
LITIGATION............................................................... 31
SHAREHOLDER INQUIRIES.................................................... 31
APPENDIX A--AGREEMENT AND PLAN OF REORGANIZATION......................... A-1
APPENDIX B--MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE.................. B-1
APPENDIX C--SHARE PRICE DATA FOR ISIS.................................... C-1
APPENDIX D--SECTIONS 3-202 THROUGH 3-213 OF THE MARYLAND GENERAL
CORPORATION LAW......................................................... D-1
</TABLE>
4
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SUMMARY
The following is a summary of certain information relating to the proposed
Reorganization, the parties thereto and the transactions contemplated thereby,
and is qualified by reference to the more complete information contained
elsewhere in this Combined Prospectus/Proxy Statement, the Prospectus and
Statement of Additional Information of the Series B Investor Shares of the High
Yield Bond Portfolio, and the Reorganization Agreement attached to this
Combined Prospectus/Proxy Statement as Appendix A. ISIS' Annual Report to
Shareholders may be obtained free of charge by calling 1-800-852-4750 or
writing c/o Bellevue Park Corporate Center, 400 Bellevue Parkway, Wilmington,
DE 19809. The High Yield Bond Portfolio's Annual Report to Shareholders may be
obtained free of charge by calling 1-800-441-7762 or writing Bellevue Park
Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware 19809.
Proposed Reorganization. Based upon their evaluation of the relevant
information presented to them, and in light of their fiduciary duties under
federal and state law, the Board of Directors of ISIS and the Board of Trustees
of BlackRock, including a majority of their members who are not "interested
persons" within the meaning of the 1940 Act, have approved the proposed
Reorganization, and have determined that the proposed Reorganization is in the
best interests of their Fund's respective shareholders and that the interests
of such shareholders will not be diluted as a result of such Reorganization.
Reasons for the Reorganization. When ISIS was organized in 1971, a closed-end
structure was chosen as most appropriate for ISIS' method of operation because
it was believed that such a structure, among other things, would permit
management of its portfolio consistent with its investment objective and
policies without the pressures and constraints to which open-end investment
companies are subject as a result of cash inflows and redemptions. It has
become increasingly difficult for ISIS to maintain its competitive level of
dividends to Shareholders because of:
. the relatively modest size of ISIS' assets (approximately $31.3 million
as of September 30, 1999),
. changes in the securities markets, and
. changes to the way mutual funds account for certain securities.
Therefore, BIMC and BlackRock Advisors have recommended that ISIS be
reorganized into the High Yield Bond Portfolio as described in this Combined
Prospectus/Proxy Statement. In light of this recommendation, after
consideration of the reasons therefor and the proposed operations of the High
Yield Bond Portfolio after the Reorganization, and in consideration of the fact
that the Reorganization will be tax-free and will not dilute the interests of
Shareholders, the Board of Directors of ISIS has authorized the Reorganization
Agreement and recommended approval of the Reorganization by Shareholders.
Federal Income Tax Consequences. Drinker Biddle & Reath LLP, counsel to ISIS
and to its Board of Directors, will issue an opinion (based on certain
assumptions) as of the effective time of the Reorganization that the
transaction will not give rise to the recognition of income, gain or loss for
5
<PAGE>
federal income tax purposes to ISIS, the High Yield Bond Portfolio or their
respective shareholders. See "Information Relating to the Proposed
Reorganization--Federal Income Tax Consequences."
Overview of ISIS and the High Yield Bond Portfolio. The investment objective
of ISIS is to seek as high a level of current income as is consistent with
prudent investment. The High Yield Bond Portfolio's investment objective is to
seek to provide current income by investing primarily in non-investment grade
bonds. Non-investment grade bonds are commonly referred to as "junk bonds."
Each pursues its investment objective by investing primarily in debt
securities. However, there are differences in each Fund's investment policies.
For example, ISIS must invest at least 60% of its assets in: (1) marketable
straight debt securities which are rated at the time of purchase within the
four highest grades assigned by Moody's Investors Service, Inc. (Aaa, Aa, A or
Baa), Standard & Poor's Ratings Group, Division of McGraw Hill (AAA, AA, A or
BBB) or Fitch IBCA, Inc. (AAA, AA, A or BBB); (2) securities of, or guaranteed
by, the United States government, its agencies or instrumentalities; (3)
securities (payable in U.S. dollars) of, or guaranteed by, the government of
Canada or of a Province of Canada under circumstances that would not subject
the Fund to payment of U.S. Interest Equalization Tax; (4) commercial paper of
companies having, at the time of purchase, an issue of outstanding debt
securities rated as described in (1) above; and (5) cash or cash equivalents.
ISIS may invest up to 40% of its assets in non-investment grade debt securities
(i.e., rated lower than Baa by Moody's Investors Service, Inc. or rated lower
than BBB by Standard & Poor's Ratings Group, Division of McGraw Hill and Fitch-
IBCA, Inc.). At least 25% of ISIS' assets must be invested in the securities of
utility companies.
As stated in its objective, the High Yield Bond Portfolio invests primarily
in non-investment grade bonds. The High Yield Bond Portfolio normally invests
at least 80% of its total assets in bonds or convertible securities and at
least 65% of its total assets in non-investment grade bonds. The High Yield
Bond Portfolio may invest up to 10% of its total assets in bonds of foreign
issuers, including issuers in emerging markets. The High Yield Bond Portfolio
is not permitted to invest 25% or more of its assets in the utility industry or
any one industry. See "Comparison of Investment Policies and Risk Factors"
below and the High Yield Bond Portfolio's Prospectus, which is incorporated by
reference herein, for a more detailed description of the investment objectives
and policies of ISIS and the High Yield Bond Portfolio.
Principal Risks of Investing in ISIS and the High Yield Bond Portfolio. The
following discussion highlights the principal risk factors associated with an
investment in ISIS and the High Yield Bond Portfolio and is qualified in its
entirety by the more extensive discussion of risk factors set forth below under
"Risk Factors" and "Comparison of Investment Policies and Risk Factors" and in
the Prospectus and Statement of Additional Information of the High Yield Bond
Portfolio, which are incorporated herein by reference.
. Interest rate risk--The prices of debt securities generally tend to move
in the opposite direction to interest rates. When rates are rising, the
prices of debt securities tend to fall. When rates are falling, the
prices of debt securities tend to rise. Generally, the longer the time
until maturity, the more sensitive the price of a debt security is to
interest rate changes.
6
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. Credit risk--The value of debt securities also depends on the ability of
issuers to make principal and interest payments. If an issuer can't meet
its payment obligations or if its credit rating is lowered, the value of
its debt securities may fall. Debt securities which have the lowest of
the top four ratings assigned by Moody's Investors Service, Inc.,
Standard & Poor's Ratings Group, Division of McGraw Hill and Fitch-IBCA,
Inc. are considered to have speculative characteristics. Changes in the
economy are more likely to affect the ability of the issuers of these
securities to make payments of principal and interest than is the case
with higher-rated securities.
. Non-investment grade or "junk" bonds--High yield bonds have a greater
risk of default in the payment of interest and principal than higher-
rated securities and are subject to significant changes in price.
Investments by the Funds in such securities involves a high degree of
credit risk and such securities are considered to be speculative by
Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
Division of McGraw Hill and Fitch-IBCA, Inc.
. Prepayment/extension risk--Changes in interest rates may cause certain
debt securities held by the Funds, particularly asset-backed and
mortgage-backed securities, to be paid off much sooner or later than
expected, which could adversely affect a Fund's value. In the event that
a security is paid off sooner than expected because of a decline in
interest rates, a Fund may be unable to recoup all of its initial
investment and may also suffer from having to reinvest in lower-yielding
securities. In the event of a later than expected payment because of a
rise in interest rates, the value of the obligation will decrease and
the Fund may suffer from the inability to invest in higher-yielding
securities.
. Leverage--Reverse repurchase agreements, securities lending transactions
and borrowings may involve leverage risk. Leverage risk is associated
with securities or practices that multiply small market movements into
larger changes in the value of the Fund's investment portfolio.
. Selection of investments--The investment adviser for each Fund evaluates
the risks and rewards presented by all securities purchased by such Fund
and how they advance the Fund's investment objective. It's possible,
however, that these evaluations will prove to be inaccurate.
In addition to the risks listed above, an investment in the High Yield Bond
Portfolio is subject to the following risks.
. Foreign investments--Foreign investments may be riskier than U.S.
investments because of factors such as foreign government restrictions,
changes in currency exchange rates, incomplete financial information
about the issuers of securities, and political or economic instability.
Foreign securities may be more volatile and less liquid than U.S.
securities. The risks associated with foreign investments are heightened
when investing in emerging markets. The governments and economies of
emerging market countries feature greater instability than those of more
developed countries. Such investments tend to fluctuate in price more
widely and to be less liquid than other foreign investments.
7
<PAGE>
. Frequent trading--Frequent trading of investments usually increases the
chance that the Fund will pay investors short-term capital gains. These
gains are taxable at higher rates than long-term capital gains. Frequent
trading could also mean higher brokerage commissions and other
transaction costs, which could reduce the Fund's returns.
The High Yield Bond Portfolio's investments in high yield bonds, its use of
leverage and its investments in securities of foreign issuers subject it to
these risks to a greater extent than ISIS. In addition, an investor in the High
Yield Bond Portfolio will pay higher annual expenses than an investor in ISIS.
See "--Comparative Fee and Expense Tables" below.
Certain Arrangements with Service Providers--ISIS. BIMC serves as the
investment adviser for ISIS. BIMC is an indirect, majority-owned subsidiary of
PNC Bank. Until June 18, 1998, PNC Bank served as sub-adviser to ISIS. On June
18, 1998, BIMC assumed PNC Bank's obligations as described below.
For investment advisory services rendered to ISIS, BIMC is entitled to
receive a quarterly fee of .05% (annually .20%) of ISIS' average net assets and
.50% (annually 2.00%) of ISIS' gross income for such quarter. For the fiscal
year ended December 31, 1999, BIMC received investment advisory fees of
$116,817, which represents .36% of ISIS' average net assets during this period.
Pursuant to the terms of ISIS' investment advisory agreement, and subject to
the general supervision of the Board of Directors, BIMC is responsible for,
makes decisions with respect to, and places orders for, all purchases and sales
of ISIS' portfolio securities, and maintaining records relating to such
purchases and sales. Pursuant to the investment advisory agreement, BIMC also
serves as administrative agent for ISIS. BIMC maintains ISIS' financial
accounts and records, prepares various returns and reports, and performs all
other functions necessary to maintain its corporate existence and its relations
with Shareholders, all at the request and subject to the supervision of ISIS'
Board of Directors. These services are performed without additional cost to
ISIS.
Robert S. Kapito and Dennis M. Schaney are the persons primarily responsible
for the day to day management of ISIS' portfolio since July 13, 1998. Mr.
Kapito is Vice Chairman of BIMC and has been employed by BIMC and its
affiliates since 1988. Mr. Schaney is a Managing Director of BIMC and has been
employed by BIMC and its affiliates since February, 1998. Prior thereto, Mr.
Schaney was a Managing Director and Manager of Corporate and Municipal Bond
Research for Merrill Lynch & Co.
Until June 18, 1998, PNC Bank, as sub-adviser to ISIS, provided investment
research and credit analysis concerning prospective and existing fund
investments, made recommendations with respect to ISIS' continuous investment
program, recommended to BIMC the portion of ISIS' assets to be invested or held
uninvested in cash or cash equivalents, supplied BIMC computer facilities and
operating personnel, and provided certain statistical services. BIMC has
assumed PNC Bank's responsibilities under the sub-advisory agreement; BIMC's
obligation to pay a fee to PNC Bank has been terminated; and the obligation of
PNC Bank to provide facilities, personnel, services and to pay related expenses
under the sub-advisory agreement was transferred to BIMC.
8
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Wilmington Trust Company ("WTC") serves as ISIS' custodian and automatic
dividend investment plan agent. PFPC Inc. ("PFPC") serves as ISIS' transfer
agent, registrar and dividend disbursing agent. Prior to December 31, 1998, PNC
Bank served as ISIS' transfer agent, registrar and dividend disbursing agent.
On December 31, 1998, PNC Bank assigned its rights and delegated its duties as
transfer agent, registrar and dividend disbursing agent to PFPC. PFPC is an
indirect, wholly-owned subsidiary of PNC Bank. For its services as transfer
agent, PFPC is entitled to a fee payable at the rate of $0.4166 per month for
each Shareholder account existing during such month, plus out-of-pocket
expenses.
Certain Arrangements with Service Providers--the High Yield Bond
Portfolio. BlackRock Advisors serves as the investment adviser and BFM serves
as the sub-adviser for the High Yield Bond Portfolio. BlackRock Advisors and
BFM are each indirect, majority-owned subsidiaries of PNC Bank.
For its investment advisory services, BlackRock Advisors is entitled to fees
computed daily and payable monthly at the maximum annual rate of .50% of the
first $1 billion of average daily net assets, .45% of the next $1 billion of
average daily not assets, .425% of the next $1 billion of average daily net
assets, and .40% of average daily net assets over $3 billion. Out of these
fees, BlackRock Advisors pays BFM a sub-advisory fee equal to .35% of the first
$1 billion of average daily net assets, .30% of the next $1 billion of average
daily net assets, .275% of the next $1 billion of average daily net assets, and
.25% of average daily net assets over $3 billion. BlackRock Advisors has
entered into an expense limitation agreement with BlackRock which requires
BlackRock Advisors to waive or reimburse fees and expenses if operating
expenses (which apply to expenses charged on Fund assets as a whole, but not
expenses separately charged to the Series B Investor Shares) exceed .525% of
average daily net assets. This expense limitation agreement continues until
February 1, 2001. However, the High Yield Bond Portfolio may be required to
repay such waived or reimbursed fees and expenses in the following two years if
the repayments can be made within the expense limit noted above. For the fiscal
year ended September 30, 1999, BlackRock Advisors received fees of $3,325,
which represents .01% of the High Yield Bond Portfolio's average daily net
assets during the period.
Pursuant to the terms of the investment advisory agreement with BlackRock,
BlackRock Advisors is responsible for the overall investment management of the
High Yield Bond Portfolio. BFM is responsible for the High Yield Bond
Portfolio's day-to-day management and generally makes all buy and sell
decisions. BFM also provides research and credit analysis.
Dennis M. Schaney and Michael Buchanan are the persons primarily responsible
for the day to day management of the High Yield Bond Portfolio. Mr. Schaney has
co-managed the portfolio since inception and Mr. Buchanan has co-managed the
portfolio since 1999. Mr. Schaney is co-leader of the High Yield Team and a
Managing Director of BFM and has been employed by BFM and its affiliates since
February, 1998. Prior thereto, Mr. Schaney was a Managing Director and Manager
of Corporate and Municipal Bond Research for Merrill Lynch & Co. Mr. Buchanan,
co-leader of the High Yield Team, has served as a Director of BFM since June,
1998. Prior thereto, Mr. Buchanan was Vice President of Investments at Conseco
Capital Management where he was a portfolio manager responsible for high yield
debt, bank loan, and emerging markets debt trading.
9
<PAGE>
BlackRock Advisors and PFPC serve as co-administrators to BlackRock. Under
the Administration Agreement, PFPC has agreed to: (i) maintain office
facilities for BlackRock; (ii) furnish BlackRock with statistical and research
data, clerical, accounting and bookkeeping services; (iii) provide and
supervise the operation of an automated data processing system to process
purchase and redemption orders; (iv) provide information and distribute written
communications to shareholders; (v) handle shareholder problems and calls; (vi)
research issues raised by financial intermediaries relating to investments in
shares of any fund offered by BlackRock; (vii) review and provide advice with
respect to communications for shares of any fund offered by BlackRock; (viii)
monitor the investor programs that are offered in connection with shares of
funds offered by BlackRock; (ix) provide oversight and related support services
that are intended to ensure the delivery of quality services to the holders of
shares of funds offered by BlackRock; and (x) provide certain other services
required by BlackRock. Under the Administration Agreement, BlackRock Advisors
is responsible for: (i) the supervision and coordination of BlackRock's service
providers; (ii) the negotiation of service contracts and arrangements between
BlackRock and its service providers; (iii) acting as a liaison between the
trustees of BlackRock and BlackRock's service providers; and (iv) providing
ongoing business management and support services in connection with BlackRock's
operations. Pursuant to the terms of the Administration Agreement, BlackRock
Advisors has delegated certain of its duties to BlackRock Distributors Inc.
("BDI"), the distributor for BlackRock.
For their services as co-administrators, BlackRock Advisors and PFPC are
entitled to receive fees computed daily and payable monthly at an aggregate
annual rate of (i) .085% of the first $500 million of the High Yield Bond
Portfolio's average daily net assets, .075% of the next $500 million of average
daily net assets and .065% of the High Yield Bond Portfolio's average daily net
assets in excess of $1 billion; and (ii) .145% of the first $500 million of
average daily net assets allocated to the Series B Investor Shares of the High
Yield Bond Portfolio, .135% of the next $500 million of such average daily net
assets and .125% of the average daily net assets of Series B Investor Shares of
the High Yield Bond Portfolio in excess of $1 billion.
PFPC also serves as the transfer agent and dividend disbursing agent for
BlackRock. For its services in this capacity, PFPC is entitled to receive per
account fees plus disbursements, with respect to the Series B Investor Shares.
Until further notice, transfer agency fees for Series B Investor Shares of the
High Yield Bond Portfolio will not exceed the annual rate of .10% of the Series
B Investor Shares' average daily net assets.
PFPC Trust Company serves as the custodian to BlackRock. Prior to January 1,
1999, PNC Bank served as custodian to BlackRock. On January 1, 1999, PNC Bank
assigned its rights and delegated its duties as custodian to PFPC Trust
Company. PFPC Trust Company is an indirect, wholly-owned subsidiary of PNC
Bank. For its services as custodian, PFPC Trust Company is entitled to receive
fees at the rate of .015% of the first $500 million of average daily gross
assets for Series B Investor Shares of the High Yield Bond Portfolio and .01%
of the average daily gross assets in excess of $500 million. PFPC Trust Company
is also entitled to out-of-pocket expenses and certain transaction charges.
BDI serves as the distributor for BlackRock.
10
<PAGE>
BlackRock has adopted a distribution and service plan pursuant to Rule 12b-1
under the 1940 Act which covers its Series B Investor Shares (the "BlackRock
12b-1 Plan"). Under the BlackRock 12b-1 Plan, Series B Investor Shares of the
High Yield Bond Portfolio bear the expense of distribution and service fees
payable to BDI, BlackRock Advisors or any other affiliate of PNC Bank at an
annual rate of 1.15% of the average daily net assets attributable to such
Series B Investor Shares. Of this amount, .75% represents distribution fees
payable under the BlackRock 12b-1 Plan to BDI for distribution and Sales
Support Services and affiliates of PNC Bank for sales support services provided
in connection with the sale of Series B Investor Shares. This distribution fee
may also be used by BDI and affiliates of PNC Bank to pay brokers, dealers,
financial institutions and industry professionals (collectively, "Service
Organizations") for sales support services and other related expenses. The
remaining .40% represents shareholder service and shareholder processing fees.
The service fee is .25% of average daily net assets and is paid to Service
Organizations for the provision of general shareholder liaison services. The
shareholder processing fee is .15% of average daily net assets and is paid to
Service Organizations for providing additional services to their clients who
own Series B Investor Shares. Such additional services are intended to
supplement the services provided to shareholders by the co-administrators or
transfer agent. BlackRock Advisors determines the amount of shareholder service
and shareholder processing fees paid to Service Organizations. BlackRock
Advisors or any other affiliate of PNC Bank may serve as a Service Organization
and receive fees under the BlackRock 12b-1 Plan.
The BlackRock 12b-1 Plan is a "compensation" plan as opposed to a
"reimbursement" plan. Accordingly, payments under the BlackRock 12b-1 Plan are
based on a stated fee rather than on the specific amounts expended by BDI,
BlackRock Advisors and BlackRock Advisors' affiliates for distribution and
shareholder services. BDI, BlackRock Advisors and BlackRock Advisors'
affiliates may be able to recover such amounts or may earn a profit from
payments made by Series B Investor Shares of the High Yield Bond Portfolio
under the BlackRock 12b-1 Plan.
11
<PAGE>
Comparative Fee and Expense Tables. The table below shows (i) information
regarding the fees and expenses paid by ISIS during its most recent fiscal
year, (ii) information regarding the fees and expenses paid by the High Yield
Bond Portfolio's Series B Investor Shares during its most recent fiscal year,
and (iii) estimated fees and expenses on a pro forma basis giving effect to the
proposed Reorganization. The table indicates that total operating expenses for
current ISIS Shareholders are going to significantly increase as a result of
the Reorganization.
<TABLE>
<CAPTION>
The High Yield
Bond Portfolio--
Series B Pro Forma
ISIS Investor Shares Combined
----- ---------------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (fees
paid directly from your investment)...... None None None
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)....
Maximum Sales Load Imposed on Reinvested
Dividends (as a percentage of offering
price)................................. None None None
Contingent Deferred Sales Charge (as a
percentage of original purchase price
or redemption proceeds, as
applicable)............................ None 4.50%(1) 3.00%(2)
Redemption Fee (as a percentage of
amount redeemed, if applicable)........ None None None
Exchange Fee............................ None None None
ANNUAL FUND OPERATING EXPENSES (expenses
that are deducted from Fund assets) (as a
percentage of average net assets)
Management Fees......................... 0.36%(3) 0.50% 0.50%
Distribution and Service (12b-1) Fees... 0.00% 1.15% 1.15%
Interest Expenses(6).................... 0.00% 0.33% 0.33%
Other Expenses.......................... 0.52% 0.42%(4) 0.42%(4)
----- ----- -----
Total Annual Fund Operating Expenses.... 0.88% 2.40% 2.40%
Fee Waivers and Expense Reimbursement... 0.00% 0.15%(5) 0.15%(5)
----- ----- -----
Net Expenses............................ 0.88% 2.25%(5) 2.25%(5)
===== ===== =====
</TABLE>
- --------
(1) The Contingent Deferred Sales Charge ("CDSC") is 4.50% if shares are
redeemed in less than one year. The CDSC for Series B Investor Shares
decreases for redemptions made in subsequent years. After six years there
is no CDSC on Series B Investor Shares.
(2) Shareholders of ISIS will be given credit for a three year holding period
for purposes of calculating the CDSC. See "Purchase, Redemption and
Exchange Procedures."
(3) ISIS pays BIMC a quarterly fee of .05% (annually .20%) of its average net
assets and .50% (annually 2.00%) of the Fund's gross income for such
quarter.
(4) "Other Expenses" have been restated to reflect current expenses.
(5) BlackRock Advisors has contractually agreed to waive or reimburse fees or
expenses in order to limit Fund expenses to 1.92% (excluding interest
expense) of average daily net assets until February 1, 2001. The High
Yield Bond Portfolio may have to repay some of these waivers and
reimbursements to BlackRock Advisors in the following two years.
(6) Interest expense is the cost of borrowing money to buy additional
securities, primarily through reverse repurchase agreements (under which
the Fund sells securities and agrees to buy them back at a particular date
and price).
12
<PAGE>
Because the fees paid by the High Yield Bond Portfolio under the BlackRock
12b-1 Plan are paid out of Fund assets on an ongoing basis, over time these
fees will increase the cost of your investment and may cost you more than
paying other types of sales charges.
Example: This Example assumes that you invest $10,000 in the Funds for the time
periods indicated. The Example also assumes that your investment has a 5%
return each year and that each Fund's operating expenses remain the same.
Although actual costs may be higher or lower, based upon these assumptions your
costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
ISIS...................................... $ 90 $ 281 $ 488 $1,084
The High Yield Bond Portfolio--Series B
Investor Shares
Redemption of shares at the end of the
period(1).............................. $678 $1,084 $1,467 $2,488(3)
No redemption of shares at the end of
the period............................. $228 $ 734 $1,267 $2,488(3)
Pro Forma Combined
Redemption of shares at the end of the
period(2).............................. $528 $ 834 $1,195(4) $2,282(4)
No redemption of shares at the end of
the period............................. $228 $ 734 $1,195(4) $2,282(4)
</TABLE>
- --------
(1) Reflects the deduction of the CDSC of 4.50% after the first year, 3.00%
after the third year and 1.00% after the fifth year.
(2) Reflects the deduction of the CDSC of 3.00% after the first year and 1.00%
after the third year.
(3) Based on the conversion of the Series B Investor Shares to Series A
Investor Shares after seven years.
(4) Based on the conversion of the Series B Investor Shares to Series A
Investor Shares on the fourth anniversary of the Reorganization.
Expense Ratio--ISIS. The ratio of operating expenses to average net assets of
ISIS for the fiscal year ended December 31, 1999 was 0.88%.
Expense Ratio--Series B Investor Shares of the High Yield Bond Portfolio. The
ratio of operating expenses to average net assets of Series B Investor Shares
of the High Yield Bond Portfolio for the fiscal period ended September 30, 1999
was 1.92% (excluding interest expense), after waivers by BlackRock Advisors.
Absent such fee waivers and including interest expense, the ratio of operating
expenses to average net assets of Series B Investor Shares of the High Yield
Bond Portfolio for the fiscal period ended September 30, 1999 would have been
2.40%.
Organization. ISIS is organized as a Maryland corporation and BlackRock is
organized as a Massachusetts business trust.
Purchase, Redemption and Exchange Procedures. ISIS' shares currently trade on
The NASDAQ Small Cap Market(SM) ("NASDAQ") and may only be purchased or sold
through a broker or dealer at the current market price plus a brokerage
commission. ISIS' shares have frequently traded at a discount from its net
asset value. After the Reorganization, ISIS will no longer trade on the NASDAQ.
If the Reorganization is approved by the Shareholders, any premium or discount
existing on the date of such approval might be reduced prior to the date of the
Reorganization to the extent purchasers of ISIS' shares in the open market are
willing to pay less of a premium or accept less of a discount in anticipation
of the Reorganization. There is no exchange privilege for shares of ISIS.
Additional information concerning the trading of ISIS' shares on the NASDAQ is
contained in Appendix C.
13
<PAGE>
Series B Investor Shares of the High Yield Bond Portfolio are offered to the
public on a continuous basis at net asset value per share. There is no sales
charge when you purchase Series B Investor Shares. Shareholders do pay a
contingent deferred sales charge ("CDSC") when they redeem shares. The CDSC is
properly chargeable to sales or promotional expenses incurred by BDI in paying
up-front sales commissions to registered sales professionals for selling Series
B Investor Shares, as well as covering on-going commission payments paid to
such registered sales professionals. BDI, BlackRock Advisors and affiliates of
BlackRock Advisors may receive this CDSC. The CDSC declines over six years from
a high of 4.50% of the net assets redeemed. The CDSC is not charged under
certain circumstances, including share exchanges and redemptions made in
connection with certain retirement plans and in connection with certain
shareholder services offered by BlackRock. After seven years, the Series B
Investor Shares automatically convert to Series A Investor Shares, which have
lower fees and no CDSC, as described more fully below. The High Yield Bond
Portfolio offers other classes of shares, in addition to the Series B Investor
Shares, which may be subject to different fees and expenses.
Series B Investor Shares may be redeemed through a shareholder's registered
investment professional, who may charge for this service, or by sending a
written redemption request to BlackRock Funds, c/o PFPC, P.O. Box 8907,
Wilmington, DE 19899-8907. BlackRock will redeem shares at the next net asset
value calculated after the redemption request is received by PFPC minus any
applicable CDSC.
In connection with the Reorganization, Shareholders of ISIS will receive
three years of holding period credit for purposes of calculating the CDSC and
conversion to Series A Investor Shares with respect to the Series B Investor
Shares received in the Reorganization. Accordingly, shareholders redeeming
within one year of the Reorganization would be subjected to a 3.00% CDSC. After
one year, the CDSC would decrease to 2.00%, and after two years the CDSC would
decrease to 1.00%. BDI, BlackRock Advisors and affiliates of BlackRock Advisors
may receive this CDSC. There would be no CDSC after three years, and the Series
B Investor Shares would automatically convert to Series A Investor Shares on
the fourth anniversary of the Reorganization without any CDSC being charged.
The conversion will take place at net asset value and, as a result, a
shareholder will receive dollar-for-dollar the same value of Series A Investor
Shares as the shareholder had of Series B Investor Shares.
Because of this conversion feature, certain disclosures are necessary about
Series A Investor Shares. Series A Investor Shares and Series B Investor Shares
are both invested in the same portfolio of securities. These two classes differ
in the fees and expenses charged to shareholders. Series A Investor Shares have
no CDSC, but are subject to a front-end sales charge of 5.00%, which is subject
to reduction for certain large purchases. No front-end sales charge will be
charged on the conversion from Series B Investor Shares to Series A Investor
Shares. In addition, the distribution and service fees charged to Series A
Investor Shares are lower than those charged to Series B Investor Shares.
Series A Investor Shares bear distribution and service fees at an annual rate
of .50% of the average daily net assets of such shares. Of this amount, .10%
represents distribution fees payable under the BlackRock 12b-1 Plan. The
remaining .40% represents shareholder service and shareholder processing fees
identical to those paid on Series B Investor Shares.
After the Reorganization, shareholders may exchange their shares received in
the Reorganization for other Series B Investor Shares of funds offered by
BlackRock.
14
<PAGE>
Dividends, Distributions and Pricing. Shareholders of ISIS and the High Yield
Bond Portfolio are entitled to dividends and distributions declared from the
net investment income and net realized gains, if any, earned on investments in
each Fund's investment portfolio. ISIS and the High Yield Bond Portfolio each
distributes its net investment income monthly and distributes its net realized
capital gains, if any, at least annually.
Dividends and distributions are paid to Shareholders of ISIS in cash unless
they have elected to participate in the Automatic Dividend Investment Plan (the
"DRIP"). Pursuant to the DRIP, the reinvestment of dividends and distributions
in additional shares of ISIS are made at the lower of net asset value or market
value (but not less than 95% of market value). Dividends and distributions of
the High Yield Bond Portfolio are automatically reinvested in additional shares
at net asset value unless PFPC, the Fund's transfer agent, is instructed in
writing to pay such dividends and distributions in cash.
The net asset value per share of ISIS is determined once a week, on the last
business day of the week, and on the last business day of the month. The net
asset value per share of the High Yield Bond Portfolio is determined each day
that the New York Stock Exchange is open, at 4:00 p.m. Eastern time.
Voting Information. This Combined Prospectus/Proxy Statement is being
furnished in connection with the solicitation of proxies by ISIS' Board of
Directors for use at the Meeting. Only Shareholders of record at the close of
business on February 21, 2000 will be entitled to vote at the Meeting or any
adjournment thereof. Shares represented by a properly executed proxy will be
voted in accordance with the instructions thereon or if no specification is
made, the persons named as proxies will vote in favor of the proposal set forth
in the Notice of Meeting. Proxies may be revoked at any time before they are
exercised by the subsequent execution and submission of a revised proxy, by
written notice of revocation to ISIS, or by voting in person at the Meeting.
15
<PAGE>
RISK FACTORS
The following discussion highlights the principal risk factors associated
with an investment in ISIS and the High Yield Bond Portfolio and is qualified
in its entirety by the more extensive discussion of risk factors set forth
below under "Comparison of Investment Policies and Risk Factors" and in the
Prospectus and Statement of Additional Information of the High Yield Bond
Portfolio, which are incorporated herein by reference.
In General. Each Fund seeks to achieve its investment objective through
investments in debt securities. The investment adviser for each Fund attempts
to choose debt securities that may provide above average current income,
however, there is no guarantee that shares of each Fund will not lose value.
The market value of securities held by the Funds is expected to vary according
to, among other factors, changes in prevailing interest rates. The variation
tends to be greater for portfolios with longer average weighted maturities. In
general, if interest rates increase from the time a fixed income security is
purchased, the market value of that security will decline. Similarly, if
interest rates decrease from the time a fixed income security is purchased,
the market value of that security is likely to increase. Each Fund is also
subject to call risk, credit risk and event risk. Call risk is the possibility
that during periods of falling interest rates, certain debt securities with
high interest rates may be pre-paid (or "called") by the issuers prior to
maturity. This may cause a Fund's average weighted maturity to fluctuate, and
may require a Fund to invest the resulting proceeds at lower interest rates.
Credit risk refers to the possibility that the issuer of the bond will not be
able to make principal and interest payments. Event risk is the possibility
that securities may suffer declines in credit quality and market value due to
issuer restructuring or other factors.
There is no assurance that either Fund will achieve its investment
objective.
Lower Rated or "Junk" Bond Securities. Each Fund's ability to invest in
debt securities rated below investment grade (i.e., rated lower than Baa by
Moody's Investors Service, Inc. or rated lower than BBB by Standard & Poor's
Ratings Group, Division of McGraw Hill and Fitch-IBCA, Inc.) also involves
risk. Lower-rated securities will usually offer higher yields than investment
grade securities. However, there is more risk associated with these
investments because of reduced creditworthiness and increased risk of default.
In addition, the market values of certain lower-rated debt securities tend to
reflect specific developments with respect to the issuer to a greater extent
then do higher rated securities, which react primarily to fluctuations in the
general level of interest rates, and tend to be more sensitive to economic
conditions than higher rated securities. Issuers of lower-rated debt
securities often are highly leveraged and may not have available to them more
traditional methods of financing.
Securities rated below BBB or Baa by a rating agency are characterized by
the rating agencies as predominantly speculative; the future of the issuers
cannot be considered as well assured, and often the protection of interest and
principal payments may be very moderate and may face major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest and
principal payments. Factors adversely affecting the market price and yield of
lower-rated securities will adversely affect a Fund's net asset value. In
addition, the retail secondary market for these securities may be less liquid
than that for higher rated securities; adverse conditions could make it
difficult at times for a Fund to sell certain securities or could result in
lower prices than those used in calculating its net asset value.
16
<PAGE>
Year 2000. Over the past several years, BIMC, BlackRock Advisors and the
Funds' other major service providers have expended considerable time and money
in addressing the computer and technology problems associated with the
transition to the Year 2000. The Funds did not experience any material
disruptions in their operations as a result of the transition to the 21st
century. BIMC, BlackRock Advisors and the Funds' other major service providers
are continuing to monitor the Year 2000 or Y2K problem, however, and there can
be no assurances that there will be no adverse impact to the Funds as a result
of future computer-related Y2K difficulties.
INFORMATION RELATING TO THE PROPOSED REORGANIZATION
The terms and conditions under which the Reorganization may be consummated
are set forth in the Reorganization Agreement. Significant provisions of the
Reorganization Agreement are summarized below; however, this summary is
qualified in its entirety by reference to the Reorganization Agreement, a copy
of which is attached as Appendix A to this Combined Prospectus/Proxy Statement
and which is incorporated herein by reference.
Description of the Reorganization Agreement. The Reorganization Agreement
provides that at the Effective Time of the Reorganization (as defined in
Article VIII of the Reorganization Agreement), the assets and liabilities of
ISIS will be transferred to and assumed by the High Yield Bond Portfolio. In
exchange for the transfer of the assets of, and the assumption of the
liabilities of ISIS, BlackRock will issue at the Effective Time of the
Reorganization full and fractional Series B Investor Shares of the High Yield
Bond Portfolio equal in aggregate dollar value to the aggregate net asset
value of full and fractional outstanding shares of ISIS as determined at the
valuation time specified in the Reorganization Agreement. The Reorganization
Agreement provides that ISIS will declare a dividend or dividends prior to the
Effective Time of the Reorganization which, together with all previous
dividends, will have the effect of distributing to the Shareholders of ISIS
all undistributed net investment income earned and net capital gains realized
up to and including the Effective Time of the Reorganization.
Following the transfer of assets to, and the assumption of the liabilities
of ISIS by, the High Yield Bond Portfolio, ISIS will distribute the Series B
Investor Shares of the High Yield Bond Portfolio received from BlackRock to
the Shareholders of ISIS in liquidation of ISIS. Each Shareholder of ISIS at
the Effective Time of the Reorganization other than those that have made a
written demand for payment pursuant to the dissenting stockholders provisions
of the Maryland General Corporation Law will receive an amount of Series B
Investor Shares with a total net asset value equal to the net asset value of
their shares of common stock of ISIS, plus the right to receive any dividends
or distributions which were declared before the Effective Time of the
Reorganization but that remained unpaid at that time with respect to the
shares of ISIS. Following the Reorganization, the registration of ISIS as an
investment company under the 1940 Act will be terminated, and ISIS will be
dissolved under state law.
The High Yield Bond Portfolio expects to liquidate a number of holdings of
ISIS in light of the investment policies of the High Yield Bond Portfolio and
the strategies of its investment adviser. These liquidations will occur after
the Reorganization is complete. The transaction costs and tax consequences
resulting from such sales are expected to be minimal.
17
<PAGE>
Approval of the Reorganization Agreement shall constitute the approval of a
change in ISIS' by-laws and its fundamental limitations which may be deemed to
prevent ISIS from taking the actions necessary to effectuate the
Reorganization. The change is:
Current Proposed
The Fund may not purchase securities This limitation/by-law would be
of other investment companies except restated as follows:
by purchase of securities of closed-
end companies in the open market The Fund may not acquire any other
involving only customary broker's investment company or investment
commissions or acquisition of such company security except in
securities as part of a merger, connection with a merger,
consolidation, reorganization or consolidation, reorganization, sale
purchase of assets approved by the or acquisition of assets or where
Fund's shareholders, if required by otherwise permitted by the
law. Investment Company Act of 1940.
After the Reorganization all of the issued and outstanding shares of ISIS
shall be cancelled on the books of ISIS and the stock transfer books of ISIS
will be permanently closed.
The Reorganization is subject to a number of conditions, including without
limitation approval of the Reorganization Agreement and the transactions
contemplated thereby described in this Combined Prospectus/Proxy Statement by
the Shareholders of ISIS; the receipt of certain legal opinions described in
the Reorganization Agreement (which include an opinion of Ropes & Gray that
the shares of the High Yield Bond Portfolio issued to Shareholders of ISIS in
accordance with the terms of the Reorganization Agreement will be validly
issued, fully paid and non-assessable); the receipt of certain certificates
from the parties concerning the continuing accuracy of the representations and
warranties in the Reorganization Agreement and other matters; and the parties'
performance in all material respects of their respective agreements and
undertakings in the Reorganization Agreement. Assuming satisfaction of the
conditions in the Reorganization Agreement, the Effective Time of the
Reorganization will be on May 5, 2000 or such other date as is agreed to by
the parties, provided, however, that unless an officer of BlackRock and ISIS
determine otherwise, the Effective Time of the Reorganization shall not occur
until the period has run for any objecting Shareholder of ISIS to make a
written demand for payment for his or her stock pursuant to the Maryland
General Corporation Law, as described more fully below under "Information
Relating to Voting Matters--Appraisal Rights."
The expenses of ISIS and BlackRock in connection with the Reorganization
will be borne by BIMC.
The Reorganization Agreement and the Reorganization described herein may be
abandoned at any time prior to the Effective Time of the Reorganization by the
mutual consent of the parties to the Reorganization Agreement. The
Reorganization Agreement provides further that at any time prior to or (to the
fullest extent permitted by law) after approval of the Reorganization
Agreement by the Shareholders of ISIS (a) the parties thereto may, by written
agreement authorized by their respective Boards or executive officers, and
with or without the approval of their respective shareholders, amend any of
the provisions of the Reorganization Agreement and (b) any party may waive any
breach by the other party or the failure to satisfy any of the conditions to
its obligations (such waiver to be in writing and authorized by an officer of
the waiving party with or without the approval of such party's shareholders).
18
<PAGE>
Board Considerations. In its consideration and approval of the
Reorganization at meetings held on March 12, 1999, May 20, 1999, June 23,
1999, September 9, 1999 and October 12, 1999, the Board of Directors of ISIS
considered and discussed the future of ISIS and how to best serve the
Shareholders' interests. The directors discussed the size of ISIS' investment
portfolio (approximately $31.3 million as of September 30, 1999) and the
increasing difficulty in maintaining a high current rate of dividend income.
The Board discussed ISIS' concentration in utility securities and changes
affecting the utilities industry. They discussed proposed changes to general
accounting rules which would change the way ISIS amortizes and/or accretes the
premiums and discounts on portfolio securities, and the impact of such changes
on the Fund's dividend income. The Board of Directors employed an independent
consultant to review ISIS' present operations. The directors and the
independent consultant reviewed proposals to: modify the Fund's investment
policies to change it into a non-investment grade portfolio; liquidate the
assets; increase assets through a private placement or a rights offering;
change investment advisers; convert ISIS to an open-end fund; merge ISIS with
other closed-end investment companies; and merge ISIS into a fund of
BlackRock. After discussions, it was decided to pursue the Reorganization with
the High Yield Bond Portfolio.
In considering the High Yield Bond Portfolio as opposed to an investment
grade investment portfolio offered by BlackRock, the Board of Directors
reviewed the history of ISIS, noting that the Fund has traditionally been an
income-producing investment for its Shareholders, and that the High Yield Bond
Portfolio was probably a more likely investment vehicle to sustain the
competitive dividend level. The directors did consider, however, that
investments in high yield securities involve greater risks than investments in
investment grade securities. The directors noted that Shareholders wishing an
investment grade bond fund would be able to exchange into such a fund of
BlackRock without being charged a CDSC. Such an exchange would be, however, a
taxable event. With regard to the CDSC, it was noted that ISIS has frequently
traded on the NASDAQ at a discount to its net asset value. The Board also
considered that as shareholders of the High Yield Bond Portfolio, ISIS'
Shareholders could redeem their Series B Investor Shares at net asset value
and pay a 3.00% CDCS (or less in later years) upon redemption. Currently,
ISIS' Shareholders have to sell shares at current market value, which has
frequently been less than net asset value, and pay brokerage commissions. The
directors also considered the fee structure of the Series B Investor Shares of
the High Yield Bond Portfolio, noting that total operating expenses were
higher than those of ISIS. They also considered the fact that BlackRock
Advisors and its affiliates may benefit from these increased fees.
In its consideration and approval of the Reorganization, the Board of
Directors of ISIS considered, among other things: the terms of the
Reorganization Agreement; a comparison of each Fund's historical and projected
expense ratios; the comparative investment performance of the Funds; the
effect of such Reorganization on ISIS and its Shareholders; the fact that the
day-to-day portfolio management would be unchanged by the Reorganization; the
investment advisory services supplied by BlackRock Advisors; the management
and other fees payable by the High Yield Bond Portfolio; the similarities and
differences of the investment objective and policies of the Funds; the
opportunity to combine ISIS and the High Yield Bond Portfolio into a single,
larger asset base; the recommendations of BIMC and BlackRock Advisors with
respect to the proposed Reorganization; the fact that the Reorganization would
constitute a tax-free reorganization; the determination that the proposed
Reorganization is in the best interests of the shareholders and the fact that
the interests of Shareholders would not be diluted as a result of the
Reorganization.
19
<PAGE>
After considering the foregoing factors, together with such other
information as they believed to be relevant, the Board of Directors of ISIS
approved the Reorganization Agreement and directed that it be submitted to
Shareholders for approval.
THE BOARD OF DIRECTORS OF ISIS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE REORGANIZATION AGREEMENT.
The Board of Directors of ISIS has not determined what action ISIS will take
in the event Shareholders fail to approve the Reorganization Agreement or for
any reason the Reorganization is not consummated. In either such event, the
Board will consider other appropriate courses of action, including the sale of
assets to, or merger with, another investment company, the possible
liquidation of ISIS, or continuing the operations of ISIS in its present form.
Similarly, at meetings held on August 11, 1999 and October 4, 1999, the
Board of Trustees of BlackRock considered the proposed Reorganization. Based
upon its evaluation of the relevant information provided to it, and in light
of its fiduciary duties under federal and state law, the Board of Trustees
determined that (i) the proposed Reorganization is in the best interests of
the shareholders of the High Yield Bond Portfolio and (ii) the interests of
the High Yield Bond Portfolio's shareholders would not be diluted as a result
of the Reorganization.
Federal Income Tax Consequences. Consummation of the Reorganization is
subject to the condition that ISIS and BlackRock receive an opinion from
Drinker Biddle & Reath LLP to the effect that for federal income tax purposes:
(i) the transfer of all of the assets and liabilities of ISIS to the High
Yield Bond Portfolio in exchange for Series B Investor Shares of the High
Yield Bond Portfolio and the liquidating distributions to Shareholders of
Series B Investor Shares of the High Yield Bond Portfolio so received, as
described in the Reorganization Agreement, will constitute a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and with respect to the Reorganization, ISIS and the
High Yield Bond Portfolio will each be considered "a party to a
reorganization" within the meaning of 368(b) of the Code; (ii) no gain or loss
will be recognized by ISIS as a result of such transaction; (iii) no gain or
loss will be recognized by the High Yield Bond Portfolio as a result of such
transaction; (iv) no gain or loss will be recognized by the Shareholders of
ISIS on the distribution to such Shareholders of Series B Investor Shares of
the High Yield Bond Portfolio in exchange for their shares of ISIS; (v) the
aggregate basis of Series B Investor Shares of the High Yield Bond Portfolio
received by a Shareholder of ISIS will be the same as the aggregate basis of
the Shareholder's shares of ISIS immediately prior to the Reorganization; (vi)
the basis of the High Yield Bond Portfolio in the assets of ISIS received
pursuant to such transaction will be the same as the basis of such assets in
the hands of ISIS immediately before such transaction; (vii) a Shareholder's
holding period for Series B Investor Shares of the High Yield Bond Portfolio
will be determined by including the period for which the Shareholder held ISIS
shares exchanged therefor, provided that the Shareholder held such shares in
ISIS as a capital asset; and (viii) the High Yield Bond Portfolio's holding
period with respect to the assets received in the Reorganization will include
the period for which such assets were held by ISIS.
BlackRock and ISIS have not sought a tax ruling from the Internal Revenue
Service ("IRS"), but are acting in reliance upon the opinion of counsel
discussed in the previous paragraph. That opinion is not binding on the IRS
and does not preclude the IRS from adopting a contrary position.
20
<PAGE>
Shareholders should consult their own advisers concerning the potential tax
consequences to them, including state and local income taxes.
Capitalization. Because ISIS will be combined with the High Yield Bond
Portfolio in the Reorganization, the total capitalization of the High Yield
Bond Portfolio after the Reorganization is expected to be greater than the
current capitalization of ISIS. The following table sets forth as of September
30, 1999: (i) the capitalization of ISIS; (ii) the capitalization of the High
Yield Bond Portfolio; and (iii) the pro forma capitalization of the High Yield
Bond Portfolio as adjusted to give effect to the proposed Reorganization.
There is, of course, no assurance that the Reorganization will be consummated.
Moreover, if consummated, the capitalizations of the High Yield Bond Portfolio
and ISIS are likely to be different at the Effective Time of the
Reorganization as a result of fluctuations in the value of portfolio
securities of both Funds and daily share purchase and redemption activity in
the High Yield Bond Portfolio.
<TABLE>
<CAPTION>
The High Yield Bond Pro Forma
ISIS Portfolio Combined
---- ------------------- ---------
<S> <C> <C> <C>
Total Net Assets ($)....... 31,274,404 83,325,011 114,599,415
Shares Outstanding......... 1,822,752 1,274,781 (Series B 4,489,005 (Series B
Investor Shares) Investor Shares)
Net Asset Value Per Share 17.16 9.73 (Series B 9.73 (Series B
($)....................... Investor Shares) Investor Shares)
</TABLE>
COMPARISON OF INVESTMENT POLICIES AND RISK FACTORS
The following discussion summarizes some of the similarities and differences
in the investment policies and risk factors of the Funds, and is qualified in
its entirety by the discussion in the Prospectus and Statement of Additional
Information of the High Yield Bond Portfolio, which are incorporated herein by
reference.
The investment objective of ISIS is to seek as high a level of current
income as is consistent with prudent investment. The investment objective of
the High Yield Bond Portfolio is to seek current income by investing primarily
in non-investment grade bonds. The investment objective of ISIS is
fundamental, meaning that it may not be changed without the affirmative vote
of the holders of a majority of its outstanding shares, as defined in the 1940
Act. The investment objective of the High Yield Bond Portfolio is not
fundamental and may be changed by its Board of Trustees without shareholder
approval, although shareholders will be given 30 days' notice of any such
change.
General. Both Funds invest in debt securities. The High Yield Bond
Portfolio invests primarily in non-investment grade bonds (i.e., rated lower
than Baa by Moody's Investors Service, Inc. or rated lower than BBB by
Standard & Poor's Ratings Group, Division of McGraw Hill and Fitch-IBCA, Inc.)
in the ten to fifteen year maturity range. The High Yield Bond Portfolio
normally invests at least 80% of its total assets in bonds or convertible
securities and at least 65% of its total assets in non-investment grade (i.e.,
junk) bonds. The High Yield Bond Portfolio may invest up to 10% of its total
assets in bonds of foreign issuers, including issuers in emerging markets.
ISIS must invest at least 60% of its assets in: (1) marketable straight
debt securities which are rated at the time of purchase within the four
highest grades assigned by Moody's Investors Service,
21
<PAGE>
Inc. (Aaa, Aa, A or Baa), Standard & Poor's Ratings Group, Division of McGraw
Hill (AAA, AA, A or BBB) or Fitch-IBCA, Inc. (AAA, AA, A or BBB); (2)
securities of, or guaranteed by, the United States government, its agencies or
instrumentalities; (3) securities (payable in U.S. dollars) of, or guaranteed
by, the government of Canada or of a Province of Canada under circumstances
that would not subject the Fund to payment of U.S. Interest Equalization Tax;
(4) commercial paper of companies having, at the time of purchase, an issue of
outstanding debt securities rated as described in (1) above; and (5) cash or
cash equivalents. ISIS is permitted to invest up to 40% of its assets in non-
investment grade securities. ISIS is required to invest at least 25% of its
assets in the securities of utility companies.
A principal difference in investment policies is that ISIS invests
primarily in investment grade securities while the High Yield Bond Portfolio
invests primarily in non-investment grade securities. Another principal
difference is the range of securities and investment techniques available to
the High Yield Bond Portfolio. The following summarizes those investment
policies and compares them to ISIS' policies.
The High Yield Bond Portfolio can invest in a wide range of securities
including mezzanine investments, collateralized bond obligations ("CBOs"),
bank loans, and mortgage-backed and asset-backed securities. ISIS does not
have a stated policy to invest in these types of securities; however, it has
no investment policy or limitation which would prohibit investments in these
securities. Historically, ISIS has not invested in mezzanine investments,
CBOs, bank loans and mortgage-backed and asset-backed securities.
The High Yield Bond Portfolio may invest in mezzanine investments.
Mezzanine investments are subordinated debt securities which receive payments
of interest and principal after other more senior security holders are paid.
They are generally issued in private placements in connection with an equity
security. Mezzanine securities carry the risk that the issuer will not be able
to meet its obligations and that the equity securities purchased with the
mezzanine investments may lose value.
The High Yield Bond Portfolio may invest in CBOs, which are securities
backed by a diversified pool of high yield securities. The pool of high yield
securities underlying CBOs is typically separated into groupings, called
tranches, representing different degrees of credit quality. The higher quality
tranches have greater degrees of protection and pay lower interest rates. The
lower tranches, with greater risk, pay higher interest rates.
The High Yield Bond Portfolio may invest in bank loans. Bank loans are
fixed and floating rate loans arranged through private negotiations between a
company or a foreign government and one or more financial institutions. The
Fund considers such investments to be debt securities. The market for bank
loans may not be highly liquid and the Fund may have difficulty selling them.
These investments expose a fund to the risk of investing in both the financial
institution and the underlying borrower.
The High Yield Bond Portfolio may make investments in residential and
commercial mortgage-backed securities ("CMBS") and other asset-backed
securities. CMBS are bonds that are backed by a mortgage loan or pool of loans
secured by commercial property, not residential mortgages. Asset-backed
securities are bonds that are backed by a pool of assets, usually loans such
as installment sale contracts or credit card receivables. The characteristics
of these mortgage-backed and asset-backed securities differ from traditional
fixed income securities.
22
<PAGE>
A main difference is that the principal on mortgage- or asset-backed
securities may normally be prepaid at any time, which will reduce the yield
and market value of these securities. Asset-backed securities and CMBS
generally experience less prepayment than residential mortgage-backed
securities. In periods of falling interest rates, the rate of prepayments
tends to increase (as does price fluctuation) as borrowers are motivated to
pay off debt and refinance at new lower rates. During such periods,
reinvestment of the prepayment proceeds by the investment adviser will
generally be at lower rates of return than the return on the assets which were
prepaid. Certain commercial mortgage-backed securities are issued in several
classes with different levels of yield and credit protection. The High Yield
Bond Portfolio's investments in commercial mortgage-backed securities with
several classes will normally be in the lower classes that have less credit
protection.
Certain asset-backed securities are based on loans that are unsecured,
which means that there is no collateral to seize if the underlying borrower
defaults. Other asset-backed securities may not have the benefit of as much
collateral as mortgage-backed securities.
The High Yield Bond Portfolio may, when consistent with the Fund's
investment objective, use options or futures (commonly known as derivatives).
The primary purpose of using derivatives is to attempt to reduce risk to the
Fund as a whole (i.e., to hedge) but they also may be used to maintain
liquidity, commit cash pending investment or to increase returns. The High
Yield Bond Portfolio may also enter into interest rate or foreign currency
transactions as a hedging technique. In these transactions, the Fund exchanges
its right to pay or receive interest or currencies with another party for
their right to pay or receive interest or another currency in the future. ISIS
does not have a stated policy to invest in these types of securities; however,
it has no investment policy or limitation which would prohibit investments in
these securities. Historically, ISIS has not used derivatives, interest rate
and/or foreign currency transactions. The High Yield Bond Portfolio's use of
derivatives, interest rate and foreign currency transactions may reduce its
returns and/or increase volatility, which is defined as the characteristic of
a security or a market to fluctuate significantly in price within a short
period of time.
The High Yield Bond Portfolio may invest up to 10% of its total assets in
bonds of foreign issuers, including issuers in emerging markets. ISIS has no
explicit investment policy or limitation concerning investments in foreign
issuers. Historically, ISIS has not invested in such securities. Foreign
securities involve risks not typically associated with investing in U.S.
securities. These risks include but are not limited to: currency risks (the
risk that the value of interest paid on foreign securities, or the value of
the securities themselves, may fall if currency exchange rates change), the
risk that a security's value will be hurt by changes in foreign political or
social conditions, the possibility of heavy taxation or expropriation and more
difficulty obtaining information on foreign securities or companies. In
addition, a portfolio of foreign securities may be harder to sell and may be
subject to wider price movements than comparable investments in U.S.
companies. There is also less government regulation of foreign securities
markets.
In addition, political and economic structures in developing countries may
be undergoing rapid change and these countries may lack the social, political
and economic stability of more developed countries. As a result some of the
risks described above, including the risks of nationalization or expropriation
of assets and the existence of smaller, more volatile and less regulated
markets, may be
23
<PAGE>
increased. The value of many investments in emerging market countries recently
has dropped significantly due to economic and political turmoil in many of
these countries.
On January 1, 1999, eleven European countries implemented a new currency
unit called the "Euro" which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. While it
is impossible to predict the impact of the "Euro," it is possible that it
could increase volatility in financial markets worldwide which could hurt the
value of shares of the High Yield Bond Portfolio.
The High Yield Bond Portfolio may invest in securities rated as low as "C."
These securities are very risky and have uncertainties regarding the issuer's
ability to make interest and principal payments. As stated above, ISIS can
invest up to 40% of its assets in securities rated below investment grade,
including securities rated "C." ISIS has no explicit limitation on what
ratings are acceptable. Accordingly, ISIS could invest in securities rated "C"
or below. However, ISIS typically invests in securities rated no lower than
CCC.
Each Fund can borrow money to buy additional securities. This practice is
known as "leverage." The High Yield Bond Portfolio may borrow from banks or
other financial institutions or through reverse repurchase agreements (under
which the Fund sells securities and agrees to buy them back at a particular
date and price). The High Yield Bond Portfolio currently may borrow up to 33
1/3% of the value of its total assets, and may borrow an additional 5% of its
total assets for temporary purposes. ISIS also may borrow money to purchase
securities. ISIS currently may borrow up to 25% of the value of its total
assets. ISIS also may borrow money from banks for temporary or emergency
purposes. Leverage is a speculative technique which may expose a Fund to
greater risk and increase its costs. Increases and decreases in the value of a
Fund's portfolio will be magnified when the Fund uses leverage. A Fund will
also have to pay interest on its borrowings, reducing return.
The High Yield Bond Portfolio may lend some of its securities on a short-
term basis in order to earn extra income. The High Yield Bond Portfolio will
receive collateral in cash or high quality securities equal to the current
value of the loaned securities. These loans will be limited to 33 1/3% of the
value of the Fund's total assets. Securities loans involve the risk of a delay
in receiving additional collateral if the value of the securities goes up
while they are on loan. There is also the risk of delay in recovering the
loaned securities and of losing rights to the collateral if a borrower goes
bankrupt. ISIS may also lend securities. These loans are limited to 20% of the
value of its total assets.
Based on the foregoing and the fact that the High Yield Bond Portfolio has
higher expenses than ISIS, an investment in the High Yield Bond Portfolio may
expose you to greater risks than an investment in ISIS.
Investment Limitations. Neither ISIS nor the High Yield Bond Portfolio may
change their fundamental investment limitations without the affirmative vote
of a majority of the outstanding shares, as defined in the 1940 Act. The
following discusses the similarities and differences in their fundamental
limitations.
Each Fund is a diversified investment portfolio and, therefore, has a
fundamental policy limiting investments in securities of any one issuer to 5%
of total assets and excludes securities issued or guaranteed by the U.S.
Government, its agencies, enterprises or instrumentalities. This limitation
24
<PAGE>
applies to 100% of ISIS' total assets. This limitation only applies to 75% of
the High Yield Bond Portfolio's total assets. Consequently, up to 25% of the
High Yield Bond Portfolio's total assets may be invested without regard to
this 5% limitation.
Neither Fund will invest more than 25% of its total assets in the
securities of issuers in any one industry, except that, as stated above, ISIS
is required to invest at least 25% of its total assets in the securities of
utility companies.
Neither Fund will make loans, except that: (a) each may purchase or hold
certain debt instruments and engage in repurchase agreements; and (b) each may
lend portfolio securities as described above.
Neither Fund will issue senior securities, except that: (a) each may borrow
money for temporary or emergency purposes up to 5% of total assets; and (b)
each may borrow money to purchase additional securities as described above.
Neither Fund may purchase or sell real estate, except that the Funds may
purchase securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
The High Yield Bond Portfolio may not acquire any other investment company
or investment company security except in connection with a merger,
consolidation, reorganization or acquisition of assets or where otherwise
permitted by the 1940 Act. ISIS is only permitted to purchase shares of other
closed-end funds in the open market involving only customary broker's
commissions or acquire shares of other investment companies in connection with
a merger, consolidation, reorganization or purchase of assets approved by the
Fund's Shareholders, if required by law. However, as described above under
"Information Relating to the Proposed Reorganization--Description of the
Reorganization Agreement," approval of the Reorganization Agreement will
constitute the approval of a change to this limitation which will make it
substantially the same as the High Yield Bond Portfolio's limitation.
Neither Fund will act as an underwriter of securities within the meaning of
the Securities Act of 1933 except to the extent that the purchase of
obligations directly from the issuer thereof, or the disposition of
securities, may be deemed to be an underwriting.
Neither Fund may purchase securities of companies for the purpose of
exercising control.
Neither Fund may purchase or sell commodities or commodity contracts. The
High Yield Bond Portfolio may, however, invest in companies engaging in whole
or in part in such activities. Additionally, the High Yield Bond Portfolio
does not consider currency contracts, futures contracts and related options to
be covered by this limitation.
Neither Fund may purchase securities on margin, make short sales or
maintain a short position. However, the High Yield Bond Portfolio does not
consider futures contracts and related options to be covered by this
limitation. In addition, the High Yield Bond Portfolio would be allowed to
sell a security short-against-the-box.
The following fundamental limitations of the High Yield Bond Portfolio have
no counterpart in ISIS. The High Yield Bond Portfolio may not: write or sell
put options, call options, straddles, spreads,
25
<PAGE>
or any combination thereof, except for transactions in options on securities,
securities indices, futures contracts and options thereon; or invest in oil,
gas or mineral exploration or development programs, but may invest in
companies engaged in whole or in part in such activities.
See "Additional Investment Limitations" in the High Yield Bond Portfolio's
Statement of Additional Information which is incorporated by reference herein
for the complete list of fundamental investment limitations.
Other Information. ISIS is registered as a closed-end management investment
company under the 1940 Act. BlackRock is registered as an open-end management
investment company under the 1940 Act. An investment in an open-end fund
permits an investor to redeem his or her shares at any time at net asset value
(minus any applicable sales charge). However, open-end funds are subject to
the risk that large-scale redemption requests will force the investment
adviser to sell portfolio securities at unattractive prices, therefore
reducing the fund's net asset value and preventing the adviser from attaining
the fund's investment objective. Currently, ISIS offers one investment
portfolio and BlackRock offers 36 investment portfolios.
ISIS is organized as a Maryland corporation and is subject to the provisions
of its Articles of Incorporation and By-laws. BlackRock is organized as a
Massachusetts business trust and is subject to the provisions of its
Declaration of Trust and Amended and Restated Code of Regulations. Shares of
both ISIS and BlackRock: (i) are entitled to one vote for each full share held
and a proportionate fractional vote for each fractional share held; and (ii)
are entitled to participate equally in the dividends and distributions that
are declared with respect to a particular investment portfolio and in the net
distributable assets of such portfolio on liquidation. In addition, shares of
BlackRock will vote in the aggregate and not by class except as otherwise
expressly required by law or when class voting is permitted by the Board of
Trustees. Shares of ISIS have a par value of $0.10 and shares of BlackRock
have a par value of $.001. Shares of both ISIS and BlackRock have no pre-
emptive rights and only such conversion and exchange rights as the respective
Boards of Directors or Trustees may grant in their discretion. When issued for
payment as described in its Prospectus, shares of BlackRock are fully paid and
non-assessable.
The foregoing is only a summary. Shareholders may obtain copies of the
Articles of Incorporation and By-laws of ISIS and the Declaration of Trust and
Amended and Restated Code of Regulations of BlackRock upon written request at
the addresses shown on the cover page of this Combined Prospectus/Proxy
Statement.
INFORMATION RELATING TO VOTING MATTERS
General Information. This Combined Prospectus/Proxy Statement is being
furnished in connection with the solicitation of proxies by the Board of
Directors of ISIS for use at the Meeting. It is expected that the solicitation
of proxies will be primarily by mail. ISIS' officers and service providers may
also solicit proxies by telephone, internet, facsimile machine, telegraph or
personal interview. In addition ISIS has retained the services of Georgeson
Shareholder Communications, Inc. to aid in the solicitation of proxies for a
fee of approximately $8,000. This fee will be paid by BIMC and not by ISIS. It
is anticipated that banks, brokerage houses and other custodians will be
requested on behalf of ISIS to forward solicitation materials to their
principals to obtain authorizations for the
26
<PAGE>
execution of proxies. Any Shareholder giving a proxy may revoke it at any time
before it is exercised by submitting to ISIS a written notice of revocation or
a subsequently executed proxy or by attending the Meeting and electing to vote
in person.
Only Shareholders of record at the close of business on February 21, 2000
will be entitled to vote at the Meeting. On that date, there were outstanding
and entitled to be voted 1,822,752 shares. Each share or fraction thereof is
entitled to one vote or fraction thereof.
If the accompanying proxy is executed and returned in time for the Meeting,
the shares covered thereby will be voted in accordance with the proxy on all
matters that may properly come before the meeting (or any adjournment
thereof).
Shareholder and Board Approvals. Approval of the Reorganization Agreement
(and the transactions contemplated thereby) requires the affirmative vote of
at least a majority of the outstanding shares of ISIS.
In tallying Shareholder votes, abstentions and broker non-votes (i.e.,
proxies sent in by brokers and other nominees that cannot be voted on a
proposal because instructions have not been received from the beneficial
owners) will be counted for purposes of determining whether or not a quorum is
present for purposes of convening the Meeting. On the Reorganization proposal,
abstentions and broker non-votes will be considered to be a vote against the
Reorganization proposal.
The approval of the Reorganization by the shareholders of the High Yield
Bond Portfolio is not being solicited because their approval or consent is not
legally required.
At February 21, 2000, the directors and officers of ISIS as a group owned
less than 1% of the outstanding shares of ISIS.
At February 21, 2000, no person owned beneficially more than 5% of the
outstanding shares of ISIS.
At February 21, 2000, the trustees and officers of BlackRock as a group
owned less than 1% of the outstanding shares of the High Yield Bond Portfolio.
At February 21, 2000, the name, address and share ownership of the persons
who owned beneficially more than 5% of any class of the High Yield Bond
Portfolio and the percentage of shares that would be owned by such person upon
consummation of the Reorganization based upon their holdings at February 21,
2000 were as follows:
<TABLE>
<CAPTION>
Percentage Percentage
of of Fund Percentage
Class Shares of
Owned on Owned on Class Owned
Name and Class and Amount Record Record Upon
Address of Shares Owned Date Date Consummation
----------------------- ------------------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
PNC Bank, Saxon & Co. 7,025,516 (Institutional) 98.95% 71.64% 98.95%
200 Stevens Dr.
Lester, PA 19113
Merrill Lynch 239,787 (Investor B) 14.11% 5.97% 4.90%
Pierce Fenner & Smith 344,757 (Investor C) 61.53% 61.53%
Inc.
Financial Data Services
Sec 97KF3
4800 E. Deer Lake Dr.
3rd Fl
Jacksonville, FL 32246
</TABLE>
27
<PAGE>
Appraisal Rights. Under the Maryland General Corporation Law, certain
relevant sections of which are attached to this Combined Prospectus/Proxy
Statement as Appendix D, each Shareholder of ISIS will be entitled to demand
and receive payment of the "fair value" of his or her shares in cash, if he or
she (i) prior to or at the Meeting, files with ISIS a written objection to the
Reorganization, (ii) does not vote in favor of the Reorganization by person or
by proxy and (iii) within 20 days after the Articles of Transfer with respect
to the Reorganization have been accepted for record by the Maryland State
Department of Assessments and Taxation (the "Maryland SDAT") makes a written
demand on BlackRock for payment of his or her shares (a "Payment Demand"),
stating the number of shares for which payment is demanded. A Payment Demand
should be sent to BlackRock at Bellevue Park Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, Attn: Brian P. Kindelan, Secretary. Any
Shareholder of ISIS who fails to comply with the requirements described above
will be bound by the terms of the Reorganization. Under the Maryland General
Corporation Law, "fair value" would be determined as of the close of business
on the day that the Shareholders vote on the Reorganization and would not
include any appreciation or depreciation that results, directly or indirectly,
from the Reorganization or from its proposal. Moreover, in that regard, a
Shareholder who makes a Payment Demand for his or her shares would not be
entitled to receive any of the dividends or distributions that will be payable
to Shareholders of record of those shares on a record date that is after the
close of business on the day the Shareholders vote on the Reorganization.
BlackRock will promptly deliver or send by certified mail, return receipt
requested, to each Shareholder of ISIS who has filed a written objection to
the proposed Reorganization with BlackRock, written notice of the date of
acceptance of the Articles of Transfer with respect to the Reorganization for
record by the Maryland SDAT and of the Effective Time of the Reorganization.
Such notice may include a written offer by BlackRock to pay the objecting
Shareholder what BlackRock considers to be the fair value of their shares of
common stock of ISIS. Within 50 days after the Reorganization, any Shareholder
who has made a Payment Demand but has not received payment for his or her
shares may petition a court of equity in Baltimore City, Maryland, for an
appraisal to determine the "fair value" of such shares. If the court finds
that a Shareholder is entitled to appraisal of his or her stock, the court
will appoint three disinterested appraisers to determine the "fair value" of
such shares on terms and conditions the court considers proper, and the
appraisers will, within 60 days after appointment (or such longer period as
the court may direct), file with the court and mail to each party to the
proceeding their report stating their conclusion as to the "fair value" of the
shares. Within 15 days after the filing of the report, any party may object to
the report and request a hearing thereon. The court will, upon motion of any
party, enter an order either confirming, modifying or rejecting the report
and, if confirmed or modified, enter judgment directing the time within which
payment must be made. If the appraisers' report is rejected, the court may
determine the "fair value" of the shares of common stock of the Shareholder of
ISIS requesting appraisal or may remit the proceeding to the same or other
appraisers. Any judgment entered pursuant to a court proceeding will include
interest from the date of the Meeting unless the court finds that the
Shareholder's refusal to accept a written offer to purchase the stock which
may previously have been made by BlackRock in accordance with Section 3-207 of
the Maryland General Corporation Law, was arbitrary and vexatious or not in
good faith. BlackRock's costs of the proceeding (not including attorneys'
fees) will be determined by the court and will be assessed against BlackRock
or, under certain circumstances, the Shareholder, or both.
28
<PAGE>
At any time after the filing of a petition for appraisal, the court may
require a Shareholder who has filed such petition to submit his or her
certificates representing shares to the clerk of the court for notation of the
pendency of the appraisal proceedings. In order to receive payment, whether by
agreement with BlackRock or pursuant to a judgment, such Shareholder of ISIS
must surrender the stock certificates endorsed in blank and in proper form for
transfer. A Shareholder who has made a Payment Demand will not have the right
to receive any dividends or distributions payable to holders of record after
the close of business on the date of the Meeting and shall cease to have any
rights as a Shareholder of ISIS with respect to the shares except the right to
receive payment of the "fair value" thereof. The rights of a Shareholder who
has made a Payment Demand may be restored only upon the withdrawal, with the
consent of BlackRock, of the Payment Demand, failure to file a petition for
appraisal within the time required, a determination of the court that the
Shareholder is not entitled to an appraisal, or the abandonment or recession
of the Reorganization.
For information relating to the exercise of appraisal rights, see Appendix D
to this Combined Prospectus/Proxy Statement.
Quorum. In the event that a quorum is not present at the Meeting, or in the
event that a quorum is present at the Meeting but sufficient votes to approve
the Reorganization Agreement are not received, the persons named as proxies,
or their substitutes, may propose one or more adjournments of the Meeting to
permit further solicitation of proxies. Any such adjournment will require the
affirmative vote of a majority of those shares affected by the adjournment
represented at the Meeting in person or by proxy. A quorum is constituted with
respect to ISIS by the presence in person or by proxy of the holders of a
majority of the outstanding shares of ISIS entitled to vote at the Meeting.
Proxies properly executed and marked with a negative vote, broker non-votes or
an abstention will be considered to be present at the Meeting for the purposes
of determining the existence of a quorum for the transaction of business.
Annual Meetings. BlackRock does not presently intend to hold annual
meetings of shareholders for the election of trustees and other business
unless and until such time as required by law. Under certain circumstances,
however, shareholders have the right to call a meeting of shareholders, and
such meetings will be called when requested by the holders of record of 10% or
more of BlackRock's outstanding shares of beneficial interest. To the extent
required by law, BlackRock will assist in shareholder communications in such
matters. In addition, BlackRock will hold special meetings of shareholders
when required under the 1940 Act or in accordance with SEC policy.
ADDITIONAL INFORMATION ABOUT BLACKROCK
Information about the High Yield Bond Portfolio and its Series B Investor
Shares is included in the Prospectus dated January 28, 2000 accompanying this
Combined Prospectus/Proxy Statement, which is incorporated by reference
herein. Additional information about the High Yield Bond Portfolio and its
Series B Investor Shares is included in the Fund's Statement of Additional
Information dated January 28, 2000 which has been filed with the SEC and which
is incorporated herein by reference. Copies of the Statement of Additional
information may be obtained without charge by calling 1-800-441-7762.
BlackRock is subject to the requirements of the 1940 Act and, in accordance
with such
29
<PAGE>
requirements, files reports and other information with the SEC. These
materials can be inspected and copied at the Public Reference Facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's Regional Offices at 7 World Trade Center, Suite 1300, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such material can also be obtained from the Public Reference Branch, Office
of Consumer Affairs and Information Services, Securities and Exchange
Commission, Washington, D.C. 20549, at prescribed rates, and is also available
on the SEC's web site at http://www.sec.gov.
ADDITIONAL INFORMATION ABOUT ISIS
Information about ISIS is included in this Combined Prospectus/Proxy
Statement and the Statement of Additional Information related to this Combined
Prospectus/Proxy Statement. Reports and other information filed by ISIS can be
inspected and copied at the Public Reference Facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, DC 20549, and copies of such materials
can be obtained from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, Washington, DC
20549, at prescribed rates. In addition, the shares of common stock of ISIS
are listed on The NASDAQ SmallCap Market(SM). Reports and other information
concerning ISIS can be inspected by contacting NASDAQ at 1735 K Street NW,
Washington, D.C. 20006.
FINANCIAL STATEMENTS AND EXPERTS
The audited financial statements and notes thereto of ISIS for the fiscal
year ended December 31, 1999, are incorporated by reference into the Statement
of Additional Information related to this Combined Prospectus/Proxy Statement.
The financial statements and financial highlights for ISIS for the fiscal year
ended December 31, 1999 have been incorporated herein by reference in reliance
on the report of PricewaterhouseCoopers LLP, independent auditors, given on
their authority as experts in auditing and accounting.
The audited financial statements and notes thereto of the High Yield Bond
Portfolio for the fiscal period ended September 30, 1999 are incorporated by
reference into the Statement of Additional Information related to this
Combined Prospectus/Proxy Statement. The financial statements and financial
highlights for the High Yield Bond Portfolio for the fiscal period ended
September 30, 1999 have been incorporated herein by reference in reliance on
the report of PricewaterhouseCoopers LLP, independent auditors, given on their
authority as experts in auditing and accounting.
OTHER BUSINESS
The Board of Directors of ISIS knows of no other business to be brought
before the Meeting. However, if any other matters come before the Meeting, it
is the intention of the Board that proxies that do not contain specific
restrictions to the contrary will be voted on such matters in accordance with
the judgment of the persons named in the enclosed form of proxy.
30
<PAGE>
LITIGATION
Neither ISIS nor BlackRock is involved in any litigation which would have
any material adverse effect upon either ISIS or the High Yield Bond Portfolio.
SHAREHOLDER INQUIRIES
Shareholder inquiries may be addressed to ISIS in writing at the address on
the cover page of this Combined Prospectus/Proxy Statement or by telephoning
(610) 964-8882.
* * *
SHAREHOLDERS WHO DO NOT EXPECT TO BE PRESENT AT THE MEETING ARE REQUESTED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
31
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
BY AND BETWEEN
BLACKROCK FUNDS(SM)
on behalf of itself and its
High Yield Bond Portfolio
and
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
Dated December 9, 1999
<PAGE>
CONTENTS
<TABLE>
<C> <S> <C>
I. Transfer of Assets............................................. A-1
II. Liquidating Distribution and Termination of ISIS............... A-2
III. Valuation Time................................................. A-2
IV. Certain Representations, Warranties and Agreements of ISIS..... A-3
Certain Representations, Warranties and Agreements of
V. BlackRock...................................................... A-5
VI. Stockholder Action on Behalf of ISIS........................... A-6
VII. N-14 Registration Statement and Proxy Solicitation Materials... A-6
VIII. Effective Time of the Reorganization........................... A-7
IX. Covenants...................................................... A-7
X. BlackRock Conditions........................................... A-8
XI. ISIS Conditions................................................ A-10
XII. Tax Documents.................................................. A-12
XIII. Finder's Fees.................................................. A-12
XIV. Announcements.................................................. A-12
XV. Further Assurances............................................. A-12
XVI. Termination of Representations and Warranties.................. A-12
XVII. Termination of Agreement....................................... A-13
XVIII. Amendment and Waiver........................................... A-13
XIX. Governing Law.................................................. A-13
XX. Successors and Assigns......................................... A-13
XXI. Beneficiaries.................................................. A-13
XXII. BlackRock Liability............................................ A-14
XXIII. Expenses....................................................... A-14
XXIV. Entire Agreement............................................... A-14
XXV. Counterparts................................................... A-14
XXVI. Notices........................................................ A-15
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") made as of December
9, 1999 between BlackRock FundsSM, a Massachusetts business trust
("BlackRock"), and Independence Square Income Securities, Inc., a Maryland
corporation ("ISIS").
WHEREAS, the parties intend that all of the assets and liabilities of ISIS
be transferred to, and be acquired and assumed by, the BlackRock High Yield
Bond Portfolio (the "Acquiring Fund"), an investment portfolio offered by
BlackRock, in exchange for Series B Investor Shares of the Acquiring Fund (the
"Series B Investor Shares") which shall thereafter be distributed by ISIS to
the holders of its shares, all as described in this Agreement (the
"Reorganization");
WHEREAS, the parties intend that the transfer of assets, assumption of
liabilities, and distribution of the Series B Investor Shares be treated as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"); and
WHEREAS, the parties intend that after the Reorganization, the registration
of ISIS as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act") shall be terminated and ISIS shall be dissolved under
state law as provided in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and subject to the terms and conditions hereof, and
intending to be legally bound hereby, BlackRock and ISIS agree as follows:
I. Transfer of Assets.
1.01 At the Effective Time of the Reorganization (as defined in Article
VIII), all property of every description, and all interests, rights,
privileges and powers of ISIS except (i) cash in an amount necessary to pay
any unpaid dividends and distributions as provided in Article IV(h) and (ii)
corporate records of ISIS (such assets, the "Assets") shall be transferred and
conveyed by ISIS to BlackRock on behalf of the Acquiring Fund, and shall be
acquired by BlackRock on behalf of the Acquiring Fund, and BlackRock, on
behalf of the Acquiring Fund, shall assume all liabilities, whether accrued,
absolute, contingent or otherwise, of ISIS, which liabilities shall also
include without limitation the obligation of ISIS to indemnify the directors
and officers of ISIS to the fullest extent permitted by ISIS' Articles of
Incorporation, as in effect at of the date of this Agreement (the
"Liabilities"), so that at and after the Effective Time of the Reorganization:
(i) the Assets shall become and be the assets of BlackRock on behalf of the
Acquiring Fund; and (ii) the Liabilities shall be assumed by BlackRock on
behalf of the Acquiring Fund. Without limiting the generality of the
foregoing, the Assets shall include all property and assets of any nature
whatsoever, including, without limitation, all cash, cash equivalents,
securities, claims and receivables (including dividend and interest
receivables) owned by ISIS, and all deferred or prepaid expenses shown as
assets on the books of ISIS, at the Effective Time of the Reorganization, and
all good will, all other intangible property and all financial books and
records belonging to ISIS. Recourse by any person for the Liabilities shall,
at and after the Effective Time of the Reorganization, be limited to the
Acquiring Fund.
1.02 In exchange for the transfer of the Assets and the assumption of the
Liabilities, BlackRock shall simultaneously issue at the Effective Time of the
Reorganization to ISIS that number of full and fractional (to the third
decimal place) Series B Investor Shares of the Acquiring Fund that then have
an aggregate net asset value equal to the aggregate net asset value at such
time of the outstanding
A-1
<PAGE>
shares of common stock of ISIS minus the aggregate net asset value of the
common stock of ISIS owned by stockholders of ISIS, if any, that have made a
written demand for payment pursuant to the dissenting stockholders provisions
of the Maryland General Corporation Law.
1.03 The net asset value of the Series B Investor Shares of the Acquiring
Fund shall be computed in the manner set forth in the Acquiring Fund's then
current prospectus under the Securities Act of 1933, as amended (the "1933
Act"). The net asset value of the outstanding shares of common stock of ISIS
shall be computed by the investment adviser of ISIS in accordance with the
policies and procedures of ISIS that are then in effect, shall be reviewed by
the independent auditors of ISIS and shall be subject to adjustment by the
amount, if any, agreed to by BlackRock and ISIS. ISIS shall deliver a copy of
its valuation report to BlackRock at the Valuation Time (as defined in Article
III). In the event that the value of a security in the portfolio of ISIS as
determined in accordance with the policies and procedures of ISIS differs from
the value of such security as determined in accordance with the valuation
procedures of the Acquiring Fund, the Acquiring Fund's accounting agent shall
make a final determination as to the value of such security, except that, if
such valuation differs because of the amortization and/or accretion of
premiums and discounts on such security, then such security shall be valued
using ISIS' current methodology on premiums and discounts.
1.04 ISIS shall file Articles of Transfer for recordation with the
Department of Assessments and Taxation of the State of Maryland, and shall
take, in accordance with the Maryland General Corporation Law, all other steps
as shall be necessary to effect the Reorganization.
II. Liquidating Distribution and Termination of ISIS. Immediately after the
Effective Time of the Reorganization, ISIS shall distribute in complete
liquidation pro rata to its stockholders as of the Effective Time of the
Reorganization (other than those stockholders that have made a written demand
for payment pursuant to the dissenting stockholders provisions of the Maryland
General Corporation Law) the Series B Investor Shares of the Acquiring Fund
received by ISIS in the Reorganization. In addition, the stockholders of ISIS
(other than those stockholders that have made a written demand for payment
pursuant to the dissenting stockholders provisions of the Maryland General
Corporation Law) shall have the right to receive any unpaid dividends or other
distributions payable to them which were declared by ISIS before the Effective
Time of the Reorganization. In accordance with instructions it receives from
ISIS, BlackRock shall record on its books the ownership of Series B Investor
Shares of the Acquiring Fund by the record stockholders of ISIS. All of the
outstanding shares of ISIS shall be cancelled on its books at the Effective
Time of the Reorganization and shall thereafter represent only the right to
receive the Series B Investor Shares of the Acquiring Fund, and the transfer
books of ISIS shall be closed permanently. As soon as practicable after the
Effective Time of the Reorganization, ISIS shall file an application pursuant
to Section 8(f) of the 1940 Act for an order declaring that it has ceased to
be an investment company and, upon receipt of such order, shall make all
filings and take all other steps as shall be necessary and proper to effect
its complete dissolution. After the Effective Time of the Reorganization, ISIS
shall not conduct any business except in connection with its liquidation,
deregistration, and dissolution.
III. Valuation Time. The Valuation Time for the Reorganization shall be 4:00
p.m., Eastern time, on such date as may be agreed in writing by the duly
authorized officers of BlackRock and ISIS.
A-2
<PAGE>
IV. Certain Representations, Warranties and Agreements of ISIS. ISIS
represents and warrants to, and agrees with, BlackRock as follows:
(a) It is a Maryland corporation which was duly organized and is validly
existing and in good standing under the laws of the State of Maryland. It
is registered with the Securities and Exchange Commission (the "SEC") as a
closed-end, management investment company under the 1940 Act and such
registration is in full force and effect.
(b) It has power to own all of its properties and assets and, subject to
the approval of stockholders referred to herein, to carry out and
consummate the transactions contemplated hereby, and has all necessary
federal, state and local authorizations to carry on its business as now
being conducted and to consummate the transactions contemplated by this
Agreement.
(c) This Agreement has been duly authorized, executed and delivered by
ISIS, and is valid and binding on ISIS, enforceable in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, arrangement,
moratorium, and other similar laws of general applicability relating to or
affecting creditor's rights and to general principles of equity. The
execution and delivery of this Agreement does not and will not, and the
consummation of the transactions contemplated by this Agreement will not,
violate the Articles of Incorporation or By-laws of ISIS or any agreement
or arrangement to which it is a party or by which it is bound.
(d) ISIS has elected to qualify and has qualified as a "regulated
investment company" under Subtitle A, Chapter 1, Subchapter M, Part I of
the Code, as of and since its first taxable year; has been a regulated
investment company at all times since the end of its first taxable year
when it so qualified; and qualifies and shall continue to qualify as a
regulated investment company until the Effective Time of the
Reorganization.
(e) All federal, state, local and foreign income, profits, franchise,
sales, withholding, customs, transfer and other taxes, including interest,
additions to tax and penalties (collectively, "Taxes") relating to the
Assets due or properly shown to be due on any return filed by ISIS with
respect to taxable periods ending on or prior to, and the portion of any
interim period up to, the date hereof have been fully and timely paid or
provided for; and there are no levies, liens, or other encumbrances
relating to Taxes existing, threatened or pending with respect to the
Assets. At the Effective Time of the Reorganization, all returns and
reports of ISIS respecting Taxes required by law to have been filed by such
time shall have been filed.
(f) The financial statements of ISIS for its fiscal year ended December 31,
1998, audited by PricewaterhouseCoopers LLP, copies of which have been
previously furnished to BlackRock, present fairly the financial position of
ISIS as of December 31, 1998 and the results of its operations and the
changes in its net assets for the period then ended, in conformity with
generally accepted accounting principles. In addition, the financial
statements of ISIS for its fiscal year ended December 31, 1999, audited by
PricewaterhouseCoopers LLP, will be furnished to BlackRock when available,
and shall present fairly the financial position of ISIS as of December 31,
1999 and the results of its operations and the changes in its net assets
for the period then ended, in conformity with generally accepted accounting
principles.
(g) The unaudited financial statements of ISIS for the six-month period
ended June 30, 1999, copies of which have been previously furnished to
BlackRock, present fairly the financial position of ISIS as of June 30,
1999 and the results of its operations and the changes in its net assets
for the period then ended, in conformity with generally accepted accounting
principles.
A-3
<PAGE>
(h) Prior to the Valuation Time, ISIS shall have declared a dividend or
dividends, with a record date and ex-dividend date prior to the Valuation
Time, which, together with all previous dividends, shall have the effect of
distributing to its stockholders all of its net investment company income,
if any, for the taxable year ended on December 31, 1999 and for the period
from said date to and including the Effective Time of the Reorganization
(computed without regard to any deduction for dividends paid), and all of
its net capital gain, if any, realized in the taxable year ended December
31, 1999 and for the period from said date to and including the Effective
Time of the Reorganization.
(i) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of ISIS, whether
accrued, absolute, contingent or otherwise, not reflected in the net asset
value per share of its outstanding shares.
(j) There are no legal, administrative or other proceedings pending or, to
the knowledge of ISIS, threatened against ISIS which could result in
liability on the part of ISIS.
(k) Subject to the approval of stockholders referred to herein, at both the
Valuation Time and the Effective Time of the Reorganization, ISIS shall
have full right, power and authority to sell, assign, transfer and deliver
the Assets and, upon delivery and payment for the Assets as contemplated
herein, BlackRock on behalf of the Acquiring Fund shall acquire good and
marketable title thereto, free and clear of all liens and encumbrances, and
subject to no restrictions on the ownership or transfer thereof (except as
imposed by federal or state securities laws).
(l) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by ISIS of the
transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the Securities Exchange Act of 1934, as amended (the
"1934 Act"), the 1940 Act, the rules and regulations under those Acts,
state securities laws and the filing of Articles of Transfer under Maryland
law.
(m) Insofar as the following relate to ISIS, the registration statement
filed by BlackRock on Form N-14 relating to the shares of the Acquiring
Fund that will be distributed to ISIS pursuant to this Agreement, which,
without limitation, shall include a proxy statement of ISIS and the
prospectus of BlackRock with respect to the transactions contemplated by
this Agreement, and any supplement or amendment thereto, and the documents
contained or incorporated therein by reference (the "N-14 Registration
Statement"), on the effective date of the N-14 Registration Statement, at
the time of any stockholder's meeting referred to herein and at the
Effective Time of the Reorganization: (i) shall comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940
Act, the rules and regulations thereunder, and state securities laws, and
(ii) shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading.
(n) All of the issued and outstanding shares of ISIS have been duly and
validly issued, are fully paid and non-assessable, and were offered for
sale and sold in conformity with all applicable federal and state
securities laws, and no stockholder of ISIS has any preemptive right of
subscription or purchase in respect of such shares.
(o) ISIS shall not sell or otherwise dispose of any shares of the Acquiring
Fund to be received in the transaction contemplated herein, except in
distribution to its stockholders as contemplated herein.
A-4
<PAGE>
(p) To the best of its knowledge, ISIS' service agreements with BlackRock
Institutional Management Corporation, PNC Bank, N.A. and Wilmington Trust
Company represent all of its material contracts (other than this Agreement
and investment contracts such as options contracts, futures contracts,
forward contracts, repurchase agreements and the like).
V. Certain Representations, Warranties and Agreements of
BlackRock. BlackRock, on behalf of itself and the Acquiring Fund, represents
and warrants to, and agrees with, ISIS as follows:
(a) It is a Massachusetts business trust duly established and validly
existing under the laws of, and duly authorized to transact business in,
the Commonwealth of Massachusetts. It is registered with the SEC as an
open-end management investment company under the 1940 Act and such
registration is in full force and effect.
(b) It has power to own all of its properties and assets and to carry out
and consummate the transactions contemplated herein, and has all necessary
federal, state and local authorizations to carry on its business as now
being conducted and to consummate the transactions contemplated by this
Agreement.
(c) This Agreement has been duly authorized, executed and delivered by
BlackRock, and is valid and binding on BlackRock, enforceable in accordance
with its terms, subject to bankruptcy, insolvency, reorganization,
arrangement, moratorium, and other similar laws of general applicability
relating to or affecting creditor's rights and to general principles of
equity. The execution and delivery of this Agreement does not and will not,
and the consummation of the transactions contemplated by this Agreement
will not, violate BlackRock's Declaration of Trust or Amended and Restated
Code of Regulations or any agreement or arrangement to which it is a party
or by which it is bound.
(d) The Acquiring Fund has elected or will elect to qualify as a "regulated
investment company" under Subtitle A, Chapter 1, Subchapter M, Part I of
the Code, as of and since its first taxable year; has been a regulated
investment company at all times since the end of its first taxable year
when it so qualified and intends to continue to qualify as a regulated
investment company.
(e) The financial statements of the Acquiring Fund for its fiscal year
ended September 30, 1999, audited by PricewaterhouseCoopers LLP, copies of
which have been previously furnished to ISIS, present fairly the financial
position of the Acquiring Fund as of September 30, 1999 and the results of
its operations and the changes in its net assets for the period then ended,
in conformity with generally accepted accounting principles.
(f) At both the Valuation Time and the Effective Time of the
Reorganization, there shall be no known liabilities of the Acquiring Fund,
whether accrued, absolute, contingent or otherwise, not reflected in the
net asset value per share of its Series B Investor Shares to be issued
pursuant to this Agreement.
(g) There are no legal, administrative or other proceedings pending or, to
its knowledge, threatened against BlackRock or the Acquiring Fund which
could result in liability on the part of BlackRock or the Acquiring Fund.
(h) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by BlackRock of the
transactions contemplated by this Agreement, except such as may be required
under the 1933 Act, the 1934 Act, the 1940 Act, the rules and
A-5
<PAGE>
regulations under those Acts, state securities laws and the filing of
Articles of Transfer under Maryland law.
(i) Insofar as the following relate to BlackRock, the N-14 Registration
Statement on its effective date, at the time of any stockholder's meetings
referred to herein and at the Effective Time of the Reorganization: (i)
shall comply in all material respects with the provisions of the 1933 Act,
the 1934 Act and the 1940 Act, the rules and regulations thereunder, and
state securities laws, and (ii) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading.
(j) The Series B Investor Shares of the Acquiring Fund to be issued and
delivered to ISIS for the account of record holders of shares of ISIS,
pursuant to the terms hereof, shall have been duly authorized as of the
Effective Time of the Reorganization and, when so issued and delivered,
shall be registered under the 1933 Act and under applicable state
securities laws, shall be duly and validly issued, fully paid and non-
assessable, and shall have been offered for sale and sold in conformity
with all applicable federal and state securities laws and no shareholder of
BlackRock shall have any preemptive right of subscription or purchase in
respect thereto.
VI. Stockholder Action on Behalf of ISIS. As soon as practicable after the
effective date of the N-14 Registration Statement, but in any event prior to
the Effective Time of the Reorganization and as a condition thereto, ISIS
shall hold a meeting of its stockholders for the purposes of considering and
voting upon:
(a) Approval of this Agreement and the transactions contemplated hereby,
including, without limitation:
(i) The transfer of the Assets to BlackRock on behalf of the Acquiring
Fund, and the assumption by BlackRock on behalf of the Acquiring Fund
of the Liabilities, in exchange for Series B Investor Shares of the
Acquiring Fund.
(ii) The liquidation of ISIS through the distribution to its record
holders of Series B Investor Shares of the Acquiring Fund as described
in this Agreement.
(b) Approval of a change to ISIS' fundamental limitations and Article VII,
Section 1(j) of its By-laws to provide that ISIS may purchase the
securities of another investment company in connection with a merger,
consolidation, reorganization, sale or purchase of assets approved by
stockholders, or as otherwise permitted by the 1940 Act.
(c) Such other matters as may be determined by the parties hereto.
VII. N-14 Registration Statement and Proxy Solicitation Materials. BlackRock
shall file the N-14 Registration Statement under the 1933 Act, which shall
include or incorporate by reference the proxy statement of ISIS and the
prospectus of the Acquiring Fund, and any supplement or amendment thereto or
to the documents contained or incorporated by reference, with the SEC as
promptly as practicable. Each of BlackRock and ISIS has cooperated and shall
continue to cooperate with the other, and has furnished and shall continue to
furnish the other with the information relating to itself that is required by
the 1933 Act, the 1934 Act, the 1940 Act, the rules and regulations under each
of those Acts and state securities laws, to be included in the N-14
Registration Statement.
A-6
<PAGE>
VIII. Effective Time of the Reorganization. Delivery of the Assets and the
Series B Investor Shares of the Acquiring Fund to be issued pursuant to
Article I and the liquidation of ISIS pursuant to Article II shall occur at
the opening of business on the next business day following the Valuation Time,
or on such other date, and at such place and time and date, as may be
determined by an officer of BlackRock and ISIS, provided, however, that unless
an officer of BlackRock and ISIS determine otherwise, the Effective Time of
the Reorganization shall not occur until the period has run for any objecting
stockholder of ISIS to make a written demand for payment for his or her shares
pursuant to the Maryland General Corporation Law. The date and time at which
such actions are taken are referred to herein as the "Effective Time of the
Reorganization." To the extent any Assets are, for any reason, not transferred
at the Effective Time of the Reorganization, ISIS shall cause the Assets to be
transferred in accordance with this Agreement at the earliest practicable date
thereafter.
IX. Covenants.
(a) Each of BlackRock (on behalf of the Acquiring Fund) and ISIS covenants
to operate its respective business in the ordinary course between the date
hereof and the Effective Time of the Reorganization, it being understood that:
(i) such ordinary course will include without limitation declaring and
paying customary dividends and other distributions and changes in
operations contemplated by each of the Acquiring Fund and ISIS' normal
business activities, and
(ii) each of the Acquiring Fund and ISIS will retain exclusive control of
the composition of its portfolio until the Effective Time of the
Reorganization.
(b) ISIS covenants that it will use commercially reasonable efforts to
assist BlackRock in obtaining information BlackRock reasonable requests
concerning the beneficial ownership of any outstanding securities of ISIS.
(c) Each of BlackRock (on behalf of the Acquiring Fund) and ISIS will notify
the other party hereto of any material adverse change in such party's
business, prospects, results of operations or financial condition as soon as
practicable following such change.
(d) ISIS shall terminate its service agreements with each of BlackRock
Institutional Management Corporation, PNC Bank, N.A. and Wilmington Trust
Company by the Effective Time of the Reorganization.
(e) ISIS shall file Articles of Transfer for recordation with the Department
of Assessments and Taxation of the State of Maryland.
(f) BlackRock Institutional Management Corporation ("BIMC") shall obtain
fully pre-paid liability insurance providing coverage to the former and
current directors and officers of ISIS for claims made against them after the
Effective Time of the Reorganization for acts, errors or omissions committed
or attempted, or allegedly committed or attempted, by them in their capacity
as such directors or officers at any time prior to the Effective Time of the
Reorganization, such coverage to be on terms no less favorable to the former
and current directors and officers of ISIS than the terms of coverage in
effect with respect to them immediately prior to the Effective Time of the
Reorganization. BIMC, or its successors or assigns, shall maintain such
insurance or cause such insurance to be maintained in full force and effect
for a period of at least six (6) years after the Effective Time of the
Reorganization. The former and current directors and officers of ISIS are
express third party beneficiaries of this Article IX(f).
A-7
<PAGE>
(g) BIMC shall obtain fully pre-paid liability insurance providing coverage
to BlackRock and its former and current trustees and officers for claims made
against them after the Effective Time of the Reorganization relating to acts,
errors or omissions committed or attempted, or allegedly committed or
attempted, by ISIS or its former and current directors and officers in their
capacity as such directors or officers at any time after the inception of
ISIS, such coverage to be on terms no less favorable to BlackRock and its
former and current trustees and officers than the terms of coverage in effect
with respect to them immediately prior to the Effective Time of the
Reorganization. The former and current trustees and officers of BlackRock are
express third party beneficiaries of this Articles IX(g).
X. BlackRock Conditions. The obligations of BlackRock hereunder shall be
subject to the following conditions precedent:
(a) This Agreement, the transactions contemplated by this Agreement and the
amendment to ISIS' By-laws and fundamental limitation specified in Article
VI hereof shall have been approved by both the Board of Directors and the
stockholders of ISIS, in the manner required by law.
(b) ISIS shall have duly executed and delivered to BlackRock such bills of
sale, assignments, certificates and other instruments of transfer
("Transfer Documents") as may be necessary or desirable to transfer all
right, title and interest of ISIS in and to the Assets. The Assets shall be
accompanied by all necessary state stock transfer stamps or cash for the
appropriate purchase price therefor.
(c) All representations and warranties of ISIS made in this Agreement shall
be true and correct in all material respects as if made at and as of the
Valuation Time and the Effective Time of the Reorganization. As of the
Valuation Time and the Effective Time of the Reorganization there shall
have been no material adverse change in the financial condition of ISIS
since December 31, 1999 other than those changes incurred in the ordinary
course of business as an investment company. No action, suit or other
proceeding involving ISIS shall be threatened or pending before any court
or governmental agency.
(d) BlackRock shall have received an opinion of Drinker Biddle & Reath LLP,
in form reasonably satisfactory to BlackRock and dated the Effective Time
of the Reorganization, substantially to the effect that: (i) ISIS is a
Maryland corporation duly organized and validly existing in good standing
under the laws of the State of Maryland; (ii) this Agreement has been duly
authorized, executed and delivered by ISIS and is a legal, valid and
binding obligation of ISIS, enforceable against ISIS in accordance with its
terms, subject to applicable bankruptcy, insolvency, reorganization,
arrangement, moratorium, fraudulent conveyance and other similar laws
relating to or affecting creditors' rights generally, and court decisions
with respect thereto, and such counsel shall not be required to express an
opinion with respect to the application of equitable principles in any
proceeding, whether at law or in equity, provided, however, that no opinion
need be given as to the enforceability of any provision of the Agreement
relating to indemnification; (iii) the execution and delivery of this
Agreement did not, and the consummation of the transactions contemplated by
this Agreement will not, violate the Articles of Incorporation and a copy
of all agreements and instruments to which ISIS is a party. ISIS shall have
instructed its service contractors to provide BlackRock upon request with
access to and copies of all documents belonging to ISIS.
A-8
<PAGE>
or By-laws of ISIS or any material agreement known to such counsel to which
ISIS is a party or by which ISIS is bound; and (iv) to such counsel's
knowledge, no consent, approval, authorization or order of any federal,
Pennsylvania or Maryland court or governmental authority is required for
the consummation by ISIS of the transactions contemplated by this
Agreement, except such as have been obtained under the 1933 Act, the 1934
Act, the 1940 Act, the rules and regulations under those Acts, such as may
be required under state securities laws, and the filing of Articles of
Transfer under Maryland law. Such opinion may rely on the opinion of
Venable, Baetjer and Howard, LLP with respect to matters governed by
Maryland law.
(e) BlackRock shall have received an opinion of Drinker Biddle & Reath LLP,
in form reasonably satisfactory to BlackRock and dated the Effective Time
of the Reorganization, substantially to the effect that for federal income
tax purposes (i) the transfer of the Assets hereunder, and the assumption
by the Acquiring Fund of the Liabilities, in exchange for Series B Investor
Shares of the Acquiring Fund, and the distribution of said shares to the
stockholders of ISIS, as provided in this Agreement, will constitute a
reorganization within the meaning of Section 368(a) of the Code and with
respect to the reorganization, ISIS and the Acquiring Fund will each be
considered "a party to a reorganization" within the meaning of Section
368(b) of the Code; (ii) in accordance with Sections 361(a), 361(c)(1) and
357(a) of the Code, no gain or loss will be recognized by ISIS as a result
of such transactions; (iii) in accordance with Section 1032(a) of the Code,
no gain or loss will be recognized by the Acquiring Fund as a result of
such transactions; (iv) in accordance with Section 354(a)(1) of the Code,
no gain or loss will be recognized by the stockholders of ISIS on the
distribution to them by ISIS of Series B Investor Shares of the Acquiring
Fund in exchange for their shares of ISIS; (v) in accordance with Section
358(a)(1) of the Code, the aggregate basis of Series B Investor Shares of
the Acquiring Fund received by each holder of shares of ISIS will be the
same as the aggregate basis of the shares of ISIS held by such holder
immediately prior to the Reorganization; (vi) in accordance with Section
362(b) of the Code, the basis of the Assets to the Acquiring Fund will be
the same as the basis of the Assets in the hands of ISIS immediately prior
to the exchange; (vii) in accordance with Section 1223 of the Code, a
stockholder's holding period for Acquiring Fund shares will be determined
by including the period for which the stockholder held the shares of ISIS
exchanged therefor, provided that the stockholder held such shares of ISIS
as a capital asset; and (viii) in accordance with Section 1223(2) of the
Code, the holding period of the Acquiring Fund with respect to the Assets
will include the period for which the Assets were held by ISIS.
(f) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the transaction contemplated by this Agreement under
Section 25(c) of the 1940 Act.
(g) The N-14 Registration Statement shall have become effective under the
1933 Act and no stop order suspending such effectiveness shall have been
instituted or, to the knowledge of BlackRock, contemplated by the SEC and
the parties shall have received all permits and other authorizations
necessary under state securities laws to consummate the transactions
contemplated by this Agreement.
(h) ISIS shall have delivered or caused to be delivered to BlackRock each
account, book, record or other document of ISIS which is required to be
maintained by Section 31(a) of the 1940 Act and Rules 31a-1, 31a-2 and 31a-
3 thereunder (regardless of what person possesses the same),
A-9
<PAGE>
(i) ISIS shall have, and the President or any Vice President of ISIS shall
have provided to BlackRock a certificate that ISIS has, performed and
complied in all material respects with each of its agreements and covenants
required by this Agreement to be performed or complied with by it prior to
or at the Valuation Time and the Effective Time of the Reorganization.
(j) ISIS shall provide to BlackRock a certificate of its President or any
Vice President dated the Effective Time of the Reorganization to the effect
set forth in Article X (a) and (c).
(k) BIMC shall provide BlackRock with evidence in form satisfactory to
BlackRock that BIMC shall have obtained fully pre-paid liability insurance
providing coverage to BlackRock and its former and current trustees and
officers for claims made against them after the Effective Time of the
Reorganization relating to acts, errors or omissions committed or
attempted, or allegedly committed or attempted, by ISIS or its former and
current directors and officers in their capacity as such directors or
officers at any time after the inception of ISIS, such coverage to be on
terms no less favorable to BlackRock and its former and current trustees
and officers than the terms of coverage in effect with respect to them
immediately prior to the Effective Time of the Reorganization.
(l) BIMC shall provide BlackRock with evidence in form satisfactory to
BlackRock that BIMC shall have obtained fully pre-paid liability insurance
providing coverage to the former and current directors and officers of ISIS
for claims made against them after the Effective Time of the Reorganization
for acts, errors or omissions committed or attempted, or allegedly
committed or attempted, by them in their capacity as such directors or
officers at any time prior to the Effective Time of the Reorganization,
such coverage to be on terms no less favorable to the former and current
directors and officers of ISIS than the terms of coverage in effect with
respect to them immediately prior to the Effective Time of the
Reorganization.
XI. ISIS Conditions. The obligations of ISIS hereunder shall be subject to
the following conditions precedent:
(a) This Agreement and the transactions contemplated by this Agreement
shall have been approved by both: (i) the Board of Trustees of BlackRock;
and (ii) the stockholders of ISIS in the manner required by law, and the
amendment to ISIS' By-laws and fundamental limitation specified in Article
VI hereof shall have been approved by the stockholders of ISIS in the
manner required by law.
(b) BlackRock shall have duly executed and delivered to ISIS an assumption
of liabilities certificate and other instruments as ISIS may deem necessary
or desirable dated as of the Effective Time of the Reorganization pursuant
to which the Acquiring Fund will assume all of the Liabilities in
connection with the transactions contemplated by this Agreement.
(c) All representations and warranties of BlackRock made in this Agreement
shall be true and correct in all material respects as if made at and as of
the Valuation Time and the Effective Time of the Reorganization. As of the
Valuation Time and the Effective Time of the Reorganization there shall
have been no material adverse change in the financial condition of
BlackRock or the authorizations necessary under state securities laws to
consummate the transactions contemplated by this Agreement.
A-10
<PAGE>
Acquiring Fund since September 30, 1999 other than those changes incurred
in the ordinary course of business as an investment company. No action,
suit or other proceeding shall be threatened or pending before any court or
governmental agency in which it is sought to restrain or prohibit, or
obtain damages or other relief in connection with, this Agreement or the
transaction contemplated herein.
(d) ISIS shall have received an opinion of Ropes & Gray with respect to
matters governed by Massachusetts law and of Simpson Thacher & Bartlett as
to other matters, in form reasonably satisfactory to ISIS and dated the
Effective Time of the Reorganization, substan-tially to the effect that:
(i) BlackRock is, under the laws of the Commonwealth of Massachusetts, a
duly established and validly existing unincorporated voluntary association
with transferable shares (commonly known as a "Massachusetts business
trust"); (ii) the Series B Investor Shares are duly authorized and, upon
delivery to ISIS following receipt by the Acquiring Fund of the Assets of
ISIS as provided in the Agreement, will be validly issued, fully paid and
non-assessable, and will not be subject to any preemptive rights arising
under the Massachusetts General Laws or under the Declaration of Trust;
(iii) to such counsel's knowledge, no shareholder of the Acquiring Fund has
any option or warrant to subscribe or purchase in respect to the Series B
Investor Shares; (iv) the Agreement has been duly authorized, executed and
delivered by BlackRock and represents the valid and binding obligation of
BlackRock, enforceable in accordance with its terms, subject to the effects
of bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights
generally and to equitable principles, whether such enforceability is
considered in a proceeding in equity or at law, provided, however, that no
opinion need be given as to the enforceability of any provisions of the
Agreement relating to indemnification; (v) the execution and delivery of
the Agreement by BlackRock did not, and the performance by BlackRock of its
obligations under the Agreement will not, violate the Declaration of Trust
or the Amended and Restated Code of Regulations of BlackRock; (vi) the
execution and delivery of the Agreement did not, and the compliance by
BlackRock with all the provisions of the Agreement will not, violate any
contract identified on an annexed schedule furnished to such counsel by
BlackRock and which BlackRock has represented lists all material contracts
to which it is a party or by which it is bound, and which, to the best of
such counsel's knowledge, represents all of the material contracts to which
BlackRock is a party or by which it is bound, or to which any of the
property or assets of BlackRock is subject; (vii) no consent, approval,
authorization, order, registration or qualification of or with any federal,
New York or Massachusetts governmental agency or body, or any federal, New
York or Massachusetts court, is required for BlackRock to enter into the
Agreement or to comply with all of the provisions of the Agreement, except
such as have been obtained under the 1933 Act, the 1934 Act, the 1940 Act,
the rules and regulations thereunder and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or Blue Sky laws.
(e) ISIS shall have received an opinion of Drinker Biddle & Reath LLP, in
form reasonably satisfactory to BlackRock and dated the Effective Time of
the Reorganization, with respect to the matters specified in Article X(e).
(f) The N-14 Registration Statement shall have become effective under the
1933 Act and no stop order suspending such effectiveness shall have been
instituted, or, to the knowledge of BlackRock, contemplated by the SEC and
the parties shall have received all permits and other
A-11
<PAGE>
(g) The SEC shall not have issued any unfavorable advisory report under
Section 25(b) of the 1940 Act nor instituted any proceeding seeking to
enjoin consummation of the transactions contemplated by this Agreement
under Section 25(c) of the 1940 Act.
(h) BlackRock shall have, and the President or any Vice President of
BlackRock shall have provided to ISIS a certificate that BlackRock has,
performed and complied in all material respects with each of its agreements
and covenants required by this Agreement to be performed or complied with
by it prior to or at the Valuation Time and the Effective Time of the
Reorganization.
(i) BlackRock shall have provided to ISIS a certificate of its President or
any Vice President dated the Effective Time of the Reorganization to the
effect set forth in Article XI (a)(i) and (c).
(j) BIMC shall provide ISIS with evidence in form satisfactory to ISIS that
BIMC shall have obtained fully pre-paid liability insurance providing
coverage to the former and current directors and officers of ISIS for
claims made against them after the Effective Time of the Reorganization for
acts, errors or omissions committed or attempted, or allegedly committed or
attempted, by them in their capacity as such directors or officers at any
time prior to the Effective Time of the Reorganization, such coverage to be
on terms no less favorable to the former and current directors and officers
of ISIS than the terms of coverage in effect with respect to them
immediately prior to the Effective Time of the Reorganization.
XII. Tax Documents. ISIS shall deliver to BlackRock at the Effective Time of
the Reorganization confirmations or other adequate evidence as to the adjusted
tax basis of the Assets delivered to the Acquiring Fund in accordance with the
terms of this Agreement.
XIII. Finder's Fees. Each party represents and warrants to each of the other
parties hereto that there is no person who is entitled to any finder's or
other similar fee or commission arising out of the transactions contemplated
by this Agreement.
XIV. Announcements. No announcements or similar publicity with respect to
this Agreement or the transactions contemplated herein shall be made at any
time and in any manner unless specifically agreed upon and approved by each of
ISIS, BlackRock and the investment adviser for BlackRock, BlackRock Advisors,
Inc.; provided, that nothing herein shall prevent either party upon notice to
the other party from making such public announcements as such party's counsel
may consider advisable in order to satisfy the party's legal and contractual
obligations.
XV. Further Assurances. Subject to the terms and conditions herein provided,
each of the parties hereto shall use its best efforts to take, or cause to be
taken, such action, to execute and deliver, or cause to be executed and
delivered, such additional documents and instruments and to do, or cause to be
done, all things necessary, proper or advisable under the provisions of this
Agreement and under applicable law to consummate and make effective the
transactions contemplated by this Agreement.
XVI. Termination of Representations and Warranties. The representations and
warranties of the parties set forth in this Agreement shall terminate upon the
delivery of the Assets to the Acquiring Fund and the issuance of the Series B
Investor Shares of the Acquiring Fund at the Effective Time of
A-12
<PAGE>
the Reorganization. Notwithstanding anything herein to the contrary, Article
IX(f), Article IX(g) and Article XXIII shall not terminate as of, and shall
remain in full force and effect after, the Effective Time of the
Reorganization.
XVII. Termination of Agreement.
17.01 This Agreement may be terminated at any time at or prior to the
Effective Time of the Reorganization by an authorized officer of ISIS or of
BlackRock, as provided below:
a) By BlackRock if any of the conditions set forth in Article X are not
satisfied as specified in said Article;
(b) By ISIS if any of the conditions set forth in Article XI are not
satisfied as specified in said Article; or
(c) By the mutual consent of BlackRock and ISIS.
17.02 If BlackRock or ISIS terminates this Agreement because one or more of
the conditions precedent have not been fulfilled, or if this Agreement is
terminated by mutual consent of BlackRock and ISIS, this Agreement, other than
Article XXIII, will become null and void without any liability of either party
to the other; provided, however, that if such termination is by BlackRock
pursuant to Article XVII, Section 17.01(a) as a result of a breach by ISIS of
any of its representations, warranties or covenants in this Agreement, or such
termination is by ISIS pursuant to Article XVII, Section 17.01(b) as a result
of a breach by BlackRock of any of its representations, warranties or
covenants in this Agreement, nothing herein shall affect the non-breaching
party's right to damages on account of such other party's breach.
XVIII. Amendment and Waiver. At any time prior to or (to the fullest extent
permitted by law) after approval of this Agreement by the stockholders of
ISIS, (a) the parties hereto may, by written agreement authorized by their
respective Boards of Directors or Trustees, as the case may be, or their
respective Presidents or any Vice Presidents, and with or without the approval
of their share-holders, amend any of the provisions of this Agreement, and (b)
either party may waive any breach by the other party or the failure to satisfy
any of the conditions to its obligations (such waiver to be in writing and
authorized by the President or any Vice President of the waiving party with or
without the approval of such party's shareholders).
XIX. Governing Law. This Agreement and the transaction contemplated hereby
shall be governed, construed and enforced in accordance with the laws of the
State of Maryland, without giving effect to the conflicts of law principles
otherwise applicable therein.
XX. Successors and Assigns. This Agreement shall be binding upon the
respective successors and permitted assigns of the parties hereto. This
Agreement and the rights, obligations and liabilities hereunder may not be
assigned by either party without the consent of the other party.
XXI. Beneficiaries. Except as stated herein, nothing contained in this
Agreement shall be deemed to create rights in or eliminate liabilities of
persons not parties hereto, other than the successors and permitted assigns of
the parties.
A-13
<PAGE>
XXII. BlackRock Liability.
22.01 Each party specifically acknowledges and agrees that all obligations
of BlackRock under this Agreement are binding only with respect to the
Acquiring Fund; that any liability of BlackRock under this Agreement with
respect to the Acquiring Fund, or in connection with the transactions
contemplated herein with respect to the Acquiring Fund, shall be discharged
only out of the assets of the Acquiring Fund; and that no other portfolio of
BlackRock shall be liable with respect to this Agreement or in connection with
the transactions contemplated herein.
22.02 "BlackRock Funds" and "Trustees of BlackRock Funds" refer respectively
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under a Declaration of Trust dated
December 22, 1988, as amended, which is hereby referred to and a copy of which
is on file at the office of the State Secretary of the Commonwealth of
Massachusetts and at the principal office of BlackRock. The obligations of
"BlackRock Funds" entered into in the name or on behalf thereof by any of the
Trustees, officers, representatives or agents are made not individually, but
in such capacities, and are not binding upon any of the Trustees,
shareholders, officers, representatives or agents of BlackRock personally, but
bind only the Trust Property (as defined in the Declaration of Trust), and all
persons dealing with any class of shares of BlackRock must look solely to the
Trust Property belonging to such class for the enforcement of any claims
against BlackRock.
XXIII. Expenses. BIMC shall pay all expenses incurred by BlackRock and ISIS
in connection with this Agreement and the transactions contemplated hereby,
including without limitation, all legal, accounting, printing, mailing, proxy
and stockholder solicitation expenses, as well as any expenses incurred by the
Board of Directors of ISIS in evaluating the transactions contemplated by this
Agreement and the future direction of ISIS, including the cost of an
independent consultant retained by the Board of Directors of ISIS, but
excluding expenses customarily incurred in connection with regular meetings of
the Board of Directors of ISIS that would have been held in the absence of the
transactions contemplated by this Agreement.
XXIV. Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supercedes any and all prior agreements, arrangements and understandings
relating to matters provided for herein.
XXV. Counterparts. This Agreement may be executed in any number of
counterparts, each of which, when executed and delivered shall be deemed to be
an original, but all of which together shall constitute one and the same
instrument.
A-14
<PAGE>
XXVI. Notices. All notices required or permitted herein shall be in writing
and shall be deemed to be properly given when delivered personally or by
telecopier to the party entitled to receive the notice or when sent by
certified or registered mail, postage prepaid, or delivered to a nationally
recognized overnight courier service, in each case properly addressed to the
party entitled to receive such notice at the address or telecopier number
stated below or to such other address or telecopier number as may hereafter be
furnished in writing by notice similarly given by one party to the other party
hereto:
If to BlackRock:
Karen H. Sabath
Assistant Secretary
345 Park Avenue
New York, NY 10154
Telecopier Number: (212) 754-8775
With a copy to:
Cynthia G. Cobden, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Telecopier Number: (212) 455-2502
If to ISIS:
Edward J. Roach
Vice President and Treasurer
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
Telecopier Number: (302) 791-4830
With a copy to:
Michael P. Malloy, Esq.
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Streets
Philadelphia, PA 19103
Telecopier Number: (215) 988-2757
A-15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers designated below as of the date
first written above.
Attest: Blackrock Funds/SM/
/s/ David Wohl /s/ Raymond J. Clark
_____________________________________ _____________________________________
Name: Raymond J. Clark
Title: President and Treasurer
Attest: Independence Square Income
/s/ Terrance James Reilly Securities, Inc.
_____________________________________ /s/ Robert R. Fortune
_____________________________________
Name: Robert R. Fortune
Title: President
BlackRock Institutional Management Corporation joins in this Agreement with
respect to, and agrees to be bound by, Article IX(f), Article IX(g), Article
X(k), Article X(l), Article XI(j), Article XVI and Article XXIII.
Attest: Blackrock Institutional Management
/s/ David Wohl Corporation
_____________________________________ /s/ Karen Sabath
_____________________________________
Name: Karen Sabath
Title: Managing Director
A-16
<PAGE>
APPENDIX B
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
BlackRock Funds
HIGH YIELD BOND PORTFOLIO
[LINE GRAPH]
Blackrock Institutional Service Investor A
Class Class Class Class
###### 10000 10000 10000 9500
Dec-98 10110 10128 10106 9616
Jan-99 10378 10395 10370 9866
Feb-99 10363 10380 10351 9847
Mar-99 10451 10466 10435 9926
Apr-99 10840 10853 10819 10289
May-99 10576 10586 10551 10032
June-99 10613 10622 10584 10062
July-99 10630 10637 10597 10072
Aug-99 10593 10599 10557 10032
Sep-99 10587 10592 10548 10022
Lehman
High
Investor B Investor C Yield
Class Class Index
###### 10000 10000 10000
Dec-98 10113 10113 10160
Jan-99 10369 10369 10310
Feb-99 10343 10343 10250
Mar-99 10418 10418 10347
Apr-99 10794 10794 10548
May-99 10517 10517 10405
June-99 10542 10542 10383
July-99 10547 10547 10425
Aug-99 10498 10498 10309
Sep-99 10010 10377 10235
Total Assets (9/30/99):
$91.6 million
Performance Benchmark:
Lehman High Yield Index
Investment Approach:
Seeks current income by investing primarily in non-investment grade
securities (rated C or higher or deemed to be of comparable quality) which
yield a high level of current income.
Recent Portfolio Management Activity:
.Since the Portfolio's inception in November 1998 the high yield market has
performed well as yield spreads have narrowed compared to Treasuries.
Investors continue to emphasize higher quality non-investment grade credits
instead of lower tier credits. The Manager has taken advantage of this during
the period by focusing on B-rated credits, where yield spreads continue to
tighten, while underweighting CCC-rated securities.
.The Portfolio has benefited from being overweight relative to the Index in
the telecom, oil and gas and cable sectors. Particular emphasis has been
placed on these sectors as improving fundamentals and the potential for
consolidation continue to be a major contributor to their strong performance.
The Portfolio has been underweight in the healthcare and textile sectors,
which have been weak performers.
.The Manager believes that the supply and demand technicals of the high
yield market appear to be favorable, as strong money inflows and lower supply
relative to last year may bode well for high yield investors.
Although the portfolio holdings and sectors, listed above were current as of
the end of the annual period ended September 30, 1999, the Portfolio is
actively managed and the composition will vary.
B-1
<PAGE>
For Period Ending September 30, 1999
Total Return
<TABLE>
<CAPTION>
From Inception
--------------
<S> <C>
BlackRock Class 5.87%
Institutional Class 5.93%
Service Class 5.47%
Investor A Class (Load Adjusted) 0.22%
Investor A Class (NAV) 5.50%
Investor B Class (Load Adjusted) 0.06%
Investor B Class (NAV) 4.78%
Investor C Class (Load Adjusted) 3.64%
Investor C Class (NAV) 4.69%
</TABLE>
The performance information above includes information relating to each class
of the Portfolio since the commencement of operations of the Portfolio. The
inception date of all of the Portfolio's share classes was 11/19/98.
Note on Performance Information
Performance information is restated to reflect the current maximum front-end
sales charge (in the case of the Investor A Shares) or the maximum contingent
deferred sales charge (in the case of the Investor B and Investor C Shares),
and assumes the reinvestment of dividends and distributions. The maximum
front-end sales charge for the Investor A Shares of the High Yield Portfolio
is 5%. The maximum contingent deferred sales charge for Investor B Shares and
Investor C Shares of the Portfolio is 4.5% and 1.00% respectively.
The performance information also reflects fee waivers that subsidize and
reduce the total operating expenses of the Portfolio. The Portfolio returns
would have been lower if there were no such waivers. BlackRock Advisors Inc.
and the Portfolio Administrators are under no obligation to waive or continue
waiving their fees. Investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more
or less than the original cost.
B-2
<PAGE>
APPENDIX C
SHARE PRICE DATA FOR ISIS
ISIS' common stock is publicly held and is listed and traded on the NASDAQ
SmallCap Market(SM) under the symbol "ISIS."
The following table sets forth for the periods indicated the high and low
closing sales prices for the shares on the NASDAQ Small Cap Market(SM), the net
asset values per share most recently calculated before the date of the high
and low closing sales prices, and the discount or premium that each sales
price represented as a percentage of the preceding net asset value:
<TABLE>
<CAPTION>
Net
Asset Values Discount (-) or
Quarter or High Sales Low Sales Per Share(2) Premium (+)(3)
Other Price Price ------------- ---------------
Period Ended Per Share(1) Per Share(1) High Low High Low
------------ ------------ ------------ ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C>
March 31, 1997.............................. 17.000 15.750 17.850 17.760 (4.76) (11.32)
June 30, 1997............................... 16.750 15.875 18.050 17.640 (7.20) (10.01)
September 30, 1997.......................... 17.750 15.875 18.340 18.110 (3.22) (12.34)
December 31, 1997........................... 17.625 15.125 18.560 18.380 (5.04) (17.71)
March 31, 1998.............................. 18.000 16.750 18.400 18.300 (2.17) (8.47)
June 30, 1998............................... 18.125 16.750 18.720 18.490 (3.18) (9.41)
September 30, 1998.......................... 18.000 16.750 18.480 18.210 (2.60) (8.02)
December 31, 1998........................... 19.000 17.000 18.850 18.350 2.43 (7.36)
March 31, 1999.............................. 18.000 16.375 18.150 17.900 (0.83) (8.52)
June 30, 1999............................... 17.375 15.500 18.180 17.950 (4.43) (13.65)
September 30, 1999.......................... 16.750 15.125 17.690 17.180 (5.31) (11.96)
December 31, 1999........................... 16.500 13.750 17.090 17.080 (3.45) (19.50)
</TABLE>
- --------
(1) As reported on the NASDAQ SmallCap Market(SM). During periods in which ISIS'
shares traded at the high or low price for more than one day, the
information is provided with respect to the trading day on which the
discount or premium was greatest.
(2) The net asset value per share calculated by ISIS as of the Friday
preceding the date of each high sales price in the first column and each
low sales price in the second column. Thus, this column does not
necessarily show the highest or the lowest net asset value per share
during the period.
(3) This column shows the discount or premium that the high and low sales
prices in the first two columns bore to the respective, preceding net
asset values in the third column. It does not necessarily show the highest
or lowest discount or premium during the period.
The net asset value of ISIS as of December 31, 1999 was $16.89 and the high
and low sales price as of that date were $15.50 and $15.1875, respectively.
ISIS' common stock has frequently traded for an amount less than net asset
value. ISIS has no program to reduce the discount other than the management of
its portfolio.
C-1
<PAGE>
APPENDIX D
SECTIONS 3-202 THROUGH 3-213 OF THE MARYLAND
GENERAL CORPORATION LAW
<PAGE>
(S) 3-202. Right to fair value of stock.
(a) General rule.--Except as provided in subsection (c) of this section, a
stockholder of a Maryland corporation has the right to demand and receive
payment of the fair value of the stockholder's stock from the successor if:
(1) The corporation consolidates or merges with another corporation;
(2) The stockholder's stock is to be acquired in a share exchange;
(3) The corporation transfers its assets in a manner requiring action under
(S) 3-105(e) of this title;
(4) The corporation amends its charter in a way which alters the contract
rights, as expressly set forth in the charter, of any outstanding stock and
substantially adversely affects the stockholder's rights, unless the right
to do so is reserved by the charter of the corporation; or
(5) The transaction is governed by (S) 3-602 of this title or exempted by
(S) 3-603(b) of this title.
(b) Basis of fair value.--(1) Fair value is determined as of the close of
business:
(i) With respect to a merger under (S) 3-106 of this title of a 90 percent
or more owned subsidiary with or into its parent corporation, on the day
notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, on the day the stockholders
voted on the transaction objected to.
(2) Except as provided in paragraph (3) of this subsection, fair value may
not include any appreciation or depreciation which directly or indirectly
results from the transaction objected to or from its proposal.
(3) In any transaction governed by (S) 3-602 of this title or exempted by
(S) 3-603(b) of this title, fair value shall be value determined in accordance
with the requirements of (S) 3-603(b) of this title.
(c) When right to fair value does not apply.--Unless the transaction is
governed by (S) 3-602 of this title or is exempted by (S) 3-603(b) of this
title, a stockholder may not demand the fair value of his stock and is bound
by the terms of the transaction if:
(1) The stock is listed on a national securities exchange or is designated
as a national market system security on an interdealer quotation system by
the National Association of Securities Dealers, Inc.:
(i) With respect to a merger under (S) 3-106 of this title of a 90
percent or more owned subsidiary with or into its parent corporation,
on date notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, on the record date for
determining stockholders entitled to vote on the transaction objected
to;
(2) The stock is that of the successor in a merger, unless:
(i) The merger alters the contract rights of the stock as expressly set
forth in the charter, and the charter does not reserve the right to do
so; or
(ii) The stock is to be changed or converted in whole or in part in the
merger into something other than either stock in the successor or cash,
scrip, or other rights or interests arising out of provisions for the
treatment of fractional shares of stock in the successor; or
D-1
<PAGE>
(3) The stock is that of an open-end investment company registered with the
Securities and Exchange Commission under the Investment Company Act of 1940
and the value placed on the stock in the transaction is its net asset
value.
(S) 3-203. Procedure by stockholder.
(a) Specific duties.--A stockholder of a corporation who desires to receive
payment of the fair value of his stock under his subtitle:
(1) Shall file with the corporation a written objection to the proposed
transaction:
(i) With respect to a merger under (S) 3-106 of this title of a 90
percent or more owned subsidiary with or into its parent corporation,
within 30 days after notice is given or waived under (S) 3-106; or
(ii) With respect to any other transaction, at or before the
stockholders' meeting at which the transaction will be considered;
(2) May not vote in favor of the transaction; and
(3) Within 20 days after the Department accepts the articles for record,
shall make a written demand on the successor for payment for his stock,
stating the number and class of shares for which he demands payment.
(b) Failure to comply with section.--A stockholder who fails to comply with
this section is bound by the terms of the consolidation, merger, share
exchange, transfer of assets, or charter amendment.
(S) 3-204. Effect of demand on dividend and other rights.
A stockholder who demands payment for his stock under this subtitle:
(1) Has no right to receive any dividends or distributions payable to
holders of record of that stock on a record date after the close of
business on the day as at which fair value is to be determined under (S) 3-
202 of this subtitle; and
(2) Ceases to have any rights of a stockholder with respect to that stock,
except the right to receive payment of its fair value.
(S) 3-205. Withdrawal of demand.
A demand for payment may be withdrawn only with the consent of the
successor.
(S) 3-206. Restoration of dividend and other rights.
(a) When rights restored.--The rights of a stockholder who demands payment
are restored in full, if:
(1) The demand for payment is withdrawn;
(2) A petition for an appraisal is not filed within the time required by
this subtitle;
(3) A court determines that the stockholder is not entitled to relief; or
(4) The transaction objected to is abandoned or rescinded.
D-2
<PAGE>
(b) Effect of restoration.--The restoration of a stockholder's rights
entitles him to receive the dividends, distributions, and other rights he
would have received if he had not demanded payment for his stock. However, the
restoration does not prejudice any corporate proceeding taken before the
restoration.
(S) 3-207. Notice and offer to stockholders.
(a) Duty of successor.--(1) The successor promptly shall notify each
objecting stockholder in writing of the date the articles are accepted for
record by the Department.
(2) The successor also may send a written offer to pay the objecting
stockholder what it considers to be the fair value of his stock. Each offer
shall be accompanied by the following information relating to the corporation
which issued the stock:
(i) A balance sheet as of a date not more than six months before the date
of the offer;
(ii) A profit and loss statement for the 12 months ending on the date of
the balance sheet; and
(iii) Any other information the successor considers pertinent.
(b) Manner of sending notice.--The successor shall deliver the notice and
offer to each objecting stockholder personally or mail them to him by
certified mail, return receipt requested, bearing a postmark from the United
States Postal Service, at the address he gives the successor in writing, or,
if none, at his address as it appears on the records of the corporation which
issued the stock.
(S) 3-208. Petition for appraisal; consolidation of proceedings; joinder of
objectors.
(a) Petition for appraisal.--Within 50 days after the Department accepts the
articles for record, the successor or an objecting stockholder who has not
received payment for his stock may petition a court of equity in the county
where the principal office of the successor is located or, if it does not have
a principal office in this State, where the resident agent of the successor is
located, for an appraisal to determine the fair value of the stock.
(b) Consolidation of suits; joinder of objectors.--(1) If more than one
appraisal proceeding is instituted, the court shall direct the consolidation
of the proceedings on terms and conditions it considers proper.
(2) Two or more objecting stockholders may join or be joined in an appraisal
proceeding.
(S) 3-209. Notation on stock certificate.
(a) Submission of certificate.--At any time after a petition for appraisal
is filed, the court may require the objecting stockholders parties to the
proceeding to submit their stock certificates to the clerk of the court for
notation on them that the appraisal proceeding is pending. If a stockholder
fails to comply with the order, the court may dismiss the proceeding as to him
or grant other appropriate relief.
(b) Transfer of stock bearing notation.--If any stock represented by a
certificate which bears a notation is subsequently transferred, the new
certificate issued for the stock shall bear a similar notation and the name of
the original objecting stockholder. The transferee of this stock does not
acquire rights of any character with respect to the stock other than the
rights of the original objecting stockholder.
D-3
<PAGE>
(S) 3-210. Appraisal of fair value.
(a) Court to appoint appraisers.--If the court finds that the objecting
stockholder is entitled to an appraisal of his stock, it shall appoint three
disinterested appraisers to determine the fair value of the stock on terms and
conditions the court considers proper. Each appraiser shall take an oath to
discharge his duties honestly and faithfully.
(b) Report of appraisers--Filing.--Within 60 days after their appointment,
unless the court sets a longer time, the appraisers shall determine the fair
value of the stock as of the appropriate date and file a report stating the
conclusion of the majority as to the fair value of the stock.
(c) Same--Contents.--The report shall state the reasons for the conclusion
and shall include a transcript of all testimony and exhibits offered.
(d) Same--Service; objection.--(1) On the same day that the report is filed,
the appraisers shall mail a copy of it to each party to the proceedings.
(2) Within 15 days after the report is filed, any party may object to it and
request a hearing.
(S) 3-211. Action by court on appraisers' report.
(a) Order of court.--The court shall consider the report and, on motion of
any party to the proceeding, enter an order which:
(1) Confirms, modifies, or rejects it; and
(2) If appropriate, sets the time for payment to the stockholder.
(b) Procedure after order.--(1) If the appraisers' report is confirmed or
modified by the order, judgment shall be entered against the successor and in
favor of each objecting stockholder party to the proceeding for the appraised
fair value of his stock.
(2) If the appraisers' report is rejected, the court may:
(i) Determine the fair value of the stock and enter judgment for the
stockholder; or
(ii) Remit the proceedings to the same or other appraisers on terms and
conditions it considers proper.
(c) Judgment includes interest.--(1) Except as provided in paragraph (2) of
this subsection, a judgment for the stockholder shall award the value of the
stock and interest from the date as at which fair value is to be determined
under (S) 3-202 of this subtitle.
(2) The court may not allow interest if it finds that the failure of the
stockholder to accept an offer for the stock made under (S) 3-207 of this
subtitle was arbitrary and vexatious or not in good faith. In making this
finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
D-4
<PAGE>
(d) Costs of proceedings.--(1) The cost of the proceedings, including
reasonable compensation and expenses of the appraisers, shall be set by the
court and assessed against the successor. However, the court may direct the
costs to be apportioned and assessed against any objecting stockholder if the
court finds that the failure of the stockholder to accept an offer for the
stock made under (S) 3-207 of this subtitle was arbitrary and vexatious or not
in good faith. In making this finding, the court shall consider:
(i) The price which the successor offered for the stock;
(ii) The financial statements and other information furnished to the
stockholder; and
(iii) Any other circumstances it considers relevant.
(2) Costs may not include attorney's fees or expenses. The reasonable fees
and expenses of experts may be included only if:
(i) The successor did not make an offer for the stock under (S) 3-207 of
this subtitle; or
(ii) The value of the stock determined in the proceeding materially exceeds
the amount offered by the successor.
(e) Effect of judgment.--The judgment is final and conclusive on all parties
and has the same force and effect as other decrees in equity. The judgment
constitutes a lien on the assets of the successor with priority over any
mortgage or other lien attaching on or after the effective date of the
consolidation, merger, transfer, or charter amendment.
(S) 3-212. Surrender of stock.
The successor is not required to pay for the stock of an objecting
stockholder or to pay a judgment rendered against it in a proceeding for an
appraisal unless, simultaneously with payment:
(1) The certificates representing the stock are surrendered to it, indorsed
in blank, and in proper form for transfer; or
(2) Satisfactory evidence of the loss or destruction of the certificates
and sufficient indemnity bond are furnished.
(S) 3-213. Rights of successor with respect to stock.
(a) General rule.--A successor which acquires the stock of an objecting
stockholder is entitled to any dividends or distributions payable to holders
of record of that stock on a record date after the close of business on the
day as at which fair value is to be determined under (S) 3-202 of this
subtitle.
(b) Successor in transfer of assets.--After acquiring the stock of an
objecting stockholder, a successor in a transfer of assets may exercise all
the rights of an owner of the stock.
(c) Successor in consolidation, merger, or share exchange.--Unless the
articles provide otherwise, stock in the successor of a consolidation, merger,
or share exchange otherwise deliverable in exchange for the stock of an
objecting stockholder has the status of authorized but unissued stock of the
successor. However, a proceeding for reduction of the capital of the successor
is not necessary to retire the stock or to reduce the capital of the successor
represented by the stock.
D-5
<PAGE>
INDEPENDENCE SQUARE INCOME SECURITIES, INC.
c/o Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, DE 19809
(610) 964-8882
BLACKROCK FUNDS(SM)
Bellevue Park Corporate Center
400 Bellevue Parkway
Wilmington, Delaware 19809
(800) 441-7762
STATEMENT OF ADDITIONAL INFORMATION
(Special Meeting of Shareholders of
Independence Square Income Securities, Inc.)
This Statement of Additional Information is not a prospectus but
should be read in conjunction with the Combined Prospectus/Proxy Statement dated
February 12, 2000 for the Special Meeting of Shareholders of Independence Square
Income Securities, Inc.("ISIS"), to be held on May 5, 2000. Copies of the
Combined Prospectus/Proxy Statement may be obtained at no charge by calling ISIS
at 1-610-964-8882.
Unless otherwise indicated, capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Combined
Prospectus/Proxy Statement.
Further information about Series B Investor Shares of the High Yield
Bond Portfolio is contained in said Fund's Statement of Additional Information
dated January 28, 2000, which is incorporated herein by reference.
The date of this Statement of Additional Information is February 12,
2000.
<PAGE>
GENERAL INFORMATION
The Shareholders of ISIS are being asked to approve or disapprove an
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated as
of December 9, 1999 by and between BlackRock Funds(SM) ("BlackRock") and ISIS
and the transactions contemplated thereby. The Reorganization Agreement
contemplates the transfer of all of the assets and liabilities of ISIS to
BlackRock's High Yield Bond Portfolio in exchange for Series B Investor Shares.
Series B Investor Shares issued by BlackRock will have an aggregate net asset
value equal to the aggregate net asset value of the shares of ISIS that are
outstanding immediately before the Effective Time of the Reorganization.
Following the exchange, ISIS will make a liquidating distribution of
the Series B Investor Shares to its Shareholders, so that a holder of shares in
ISIS will receive Series B Investor Shares of the High Yield Bond Portfolio of
equal value, plus the right to receive any unpaid dividends and distributions
that were declared before the Effective Time of the Reorganization. Upon
completion of the Reorganization, ISIS will be dissolved under state law and
will de-register under the 1940 Act.
A Special Meeting of Shareholders of ISIS to consider the
Reorganization Agreement and the related transaction will be held at the offices
of BlackRock Institutional Management Corporation, Bellevue Park Corporate
Center, 400 Bellevue Parkway, Fourth Floor Conference Room, Wilmington, Delaware
19809, on May 5, 2000 at 11:00 a.m., Eastern time. For further information about
the transaction, see the Combined Prospectus/Proxy Statement.
Expenses of the High Yield Bond Portfolio. Pursuant to its expense
limitation agreement with BlackRock, BlackRock Advisors may not alter its waiver
arrangement regarding the net expenses of the High Yield Bond Portfolio until
February 1, 2001. For more information on this arrangement, see "Summary -
Certain Arrangements with Service Providers-The High Yield Bond Portfolio" and
"- Comparative Fee and Expense Tables" in the Combined Prospectus/Proxy
Statement.
2
<PAGE>
FINANCIAL STATEMENTS
The audited financial statements and notes thereto of ISIS contained
in its Annual Report to Shareholders dated December 31, 1999 are incorporated by
reference into this Statement of Additional Information related to the Combined
Prospectus/Proxy Statement. The financial statements and notes thereto which
appear in ISIS' Annual Report to Shareholders have been audited by
PricewaterhouseCoopers LLP, whose report thereon also appears in such Annual
Report and is also incorporated herein by reference. No other parts of the
Annual Report are incorporated herein by reference. The financial statements and
notes thereto for ISIS for the fiscal year ended December 31, 1999 have been
incorporated herein by reference in reliance on the report of
PricewaterhouseCoopers LLP, independent auditors, given on their authority as
experts in auditing and accounting.
The audited financial statements and notes thereto of the
High Yield Bond Portfolio contained in its Annual Report to Shareholders dated
September 30, 1999 are incorporated by reference into this Statement of
Additional Information related to this Combined Prospectus/Proxy Statement. The
financial statements and notes thereto which appear in the High Yield Bond
Portfolio's Annual Report to Shareholders have been audited by
PricewaterhouseCoopers LLP, whose report thereon also appears in such Annual
Report and is also incorporated herein by reference. No other parts of the
Annual Report are incorporated herein by reference. The financial statements and
notes thereto for the High Yield Bond Portfolio for the fiscal period ended
September 30, 1999 have been incorporated herein by reference in reliance on the
report of PricewaterhouseCoopers LLP, independent auditors, given on their
authority as experts in auditing and accounting.
3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following tables set forth the unaudited Pro Forma Combined Portfolio
of Investments as of September 30, 1999, Pro Forma Combined Statement of Assets
and Liabilities as of September 30, 1999, and Pro Forma Combined Statement of
Operations for the twelve month period ended September 30, 1999, and give effect
to the proposed merger of Independence Square Income Securities, Inc. into
BlackRock Funds High Yield Bond Portfolio. The merger provides for the transfer
of all or substantially all of the assets of Independence Square Income
Securities, Inc. to BlackRock Funds High Yield Bond Portfolio in exchange for
BlackRock Funds High Yield Bond Portfolio Class B shares, the distribution of
such BlackRock Funds High Yield Bond Portfolio Class B shares to shareholders of
Independence Square Income Securities, Inc., and the subsequent liquidation of
Independence Square Income Securities, Inc.
4
<PAGE>
BlackRock Funds High Yield Bond Portfolio and Independence Square Income
Securities, Inc. Reorganization
Pro Forma Combined Portfolio of Investments (Unaudited)
As of September 30, 1999
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
BlackRock Funds Independence Square Proforma
High Yield Bond Portfolio Income Securities, Inc. Combined
-------------------------------------------------------------------------------
Description and Percentage of Portfolio Par(000)/Shares Value Par(000) Value Par(000)/Shares Value
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK
Hyperion Telecommunications, Inc., Series B (PIK),
12.875%, 0.01 3,231 $ 2,876,093 3,231 $ 2,876,093
Key Energy Services, Inc. Warrant 1,000 2,000 1,000 2,000
Nextel Communications, Inc., Series D (PIK), 13.00%,
0.01 1,032 1,083,600 1,032 1,083,600
Nextel Communications, Inc., Series E (PIK),
11.125%, 0.01 1,084 1,051,480 1,084 1,051,480
Nextlink Communications, Inc. (PIK) ,14.00%, 0.01 31,462 1,557,369 31,462 1,557,369
----------- -----------
TOTAL PREFERRED STOCKS 6,570,542 6,570,542
----------- -----------
U.S. TREASURY NOTES
U.S. Treasury Note, 6.125%, 08/15/07 $ 410 $ 410,339 410 410,339
U.S. Treasury Note, 4.75%, 11/15/08 200 181,968 200 181,968
---------- -----------
TOTAL U.S. TREASURY NOTES 592,307 592,307
---------- -----------
U.S. AGENCY OBLIGATIONS
Federal National Mortgage Association, 7.50%,
08/01/06 900 903,600 900 903,600
---------- -----------
COMMERCIAL MORTGAGE BACKED SECURITIES
Donaldson, Lufkin & Jenrette, Inc., Commercial
Mortgage Corp., Series 98-CG1, Class B4, 7.35%,
01/10/13 $ 2,531 1,806,273 2,531 1,806,273
----------- -----------
CORPORATE BONDS
Electronics
Amkor Technologies, Inc., Series 144A, 10.50%,
05/01/09 2,000 1,920,000 2,000 1,920,000
Condor Systems, Inc., Series 144A, 11.87%, 05/01/09 1,000 890,000 1,000 890,000
----------- -----------
2,810,000 2,810,000
----------- -----------
Financial
BGLS, Inc., Series B ,15.75% , 01/31/01 700 700,000 700 700,000
----------- -----------
Industrial
American Plumbing & Mechanical, Inc., Series 144A,
11.62%,10/15/08 1,000 900,000 1,000 900,000
Ameriserve Food Distributor, 8.87%, 10/15/06 750 570,000 750 570,000
Charles River Laboratories, Inc., 13.50%, 10/01/09 1,000 1,010,000 1,000 1,010,000
Concentra Operating Corp., Series 144A, 13.00%,
08/15/09 2,000 2,000,000 2,000 2,000,000
Fountain View, Inc., Series B, 11.25%, 04/15/08 1,000 720,000 1,000 720,000
Golden Northwest Aluminum First Mortgage Notes,
12.00%, 12/15/06 1,750 1,802,500 1,000 1,030,000 2,750 2,832,500
Hudson Respiratory Care, Inc., 9.12%, 04/15/08 2,000 1,560,000 2,000 1,560,000
Huntsman ICI Hldgs., Series 144A (STEP) 13.00%,
12/31/09 (C) 3,500 910,000 3,500 910,000
Kasper A.S.L. Ltd., 12.75% 03/31/04 1,500 1,447,500 1,500 1,447,500
Knology Hldgs., Inc. (STEP) 13.36%,10/15/07 (C) 2,000 1,100,000 2,000 1,100,000
Knowles Electronics, Inc., 13.12%, 10/01/09 1,000 979,540 1,000 979,540
Lyondell Chemical, 10.875%, 05/01/09 2,600 2,613,000 1,000 1,005,000 3,600 3,618,000
National Equipment Services, Series D, 10.00%,
11/30/04 2,000 1,980,000 2,000 1,980,000
Nebco Evans Hldg. Co. (STEP) 17.25%, 07/15/07 (C) 800 296,000 800 296,000
Northeast Optic Network, 12.75%, 08/15/08 2,000 2,040,000 2,000 2,040,000
Pogo Producing Co., Series 144A, 10.37%, 02/15/09 1,000 1,037,500 1,000 1,037,500
Polaroid Corp., 11.50%, 02/15/06 1,000 1,043,750 1,000 1,043,750
Psinet, Inc., Series 144A, 11.00%, 08/01/09 1,000 985,000 1,000 985,000
Repap New Brunswick, 10.62%, 04/15/05 1,000 872,500 1,000 872,500
Republic Tech RTI Capital, Series 144A, 13.75%,
07/15/09 1,000 950,000 1,000 950,000
Revlon Consumer Products, 8.62%, 02/01/08 2,000 1,630,000 2,000 1,630,000
Sinclair Broadcast Group., 9.00%, 07/15/07 2,000 1,895,000 2,000 1,895,000
St. John Knits Intl., Series 144A, 12.50%, 07/01/09 1,000 915,000 1,000 915,000
U.S. Home, 8.87%, 02/15/09 1,000 910,000 1,000 910,000
Veritas DGC Inc., 9.75%, 10/15/03 1,000 1,012,500 1,000 1,012,500 2,000 2,025,000
Waterford Gaming, LLC Sr. Notes, Series 144A, 9.50%,
03/15/10 1,000 972,500 500 486,250 1,500 1,458,750
Wec Co., Series 144A, 12.00%, 07/15/09 1,000 980,000 1,000 980,000
Willis Corroon Corp., 9.00%, 02/01/09 1,000 905,000 1,000 905,000
----------- -----------
34,037,290 34,037,290
----------- -----------
Oil and Gas
Chesapeake Energy Corp., 9.12%, 04/15/06 1,500 1,380,000 1,500 1,380,000
Dual Drilling Co., 9.87%, 01/15/04 100 104,000 100 104,000
Grey Wolf Inc., Series C, 8.87%, 07/01/07 1,500 1,350,000 1,500 1,350,000
Key Energy Services, Inc., Series B, 14.00%,
01/15/09 1,000 1,065,000 1,000 1,065,000
R&B Falcon Corp., 12.25%, 03/15/06 2,000 2,110,000 2,000 2,110,000
Swift Energy Co., 10.25%, 08/01/09 1,550 1,557,750 1,550 1,557,750
Western Gas Resources, Series 144A, 10.00%,
06/15/09 1,500 1,533,750 1,500 1,533,750
----------- -----------
9,100,500 9,100,500
----------- -----------
Retail
Group One Automotive, Inc., 10.87%, 03/01/09 1,000 950,000 1,000 950,000
J. Crew Group, Inc., Series B (STEP) 13.44%,
10/15/08 (C) 1,500 787,500 1,500 787,500
J.H. Heafner Co., Series D, 10.00%, 05/15/08 1,000 940,000 1,000 940,000
Mattress Discounters Corp., 12.62%, 07/15/07 1,000 950,000 1,000 950,000
Sbarro Inc. 144A Sr. Notes, 11.00%, 09/15/09 1,000 988,750 1,000 988,750
Sonic Automotive, Inc., Series B, 11.00%, 08/01/08 2,000 1,910,000 2,000 1,910,000
----------- -----------
6,526,250 6,526,250
----------- -----------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
BlackRock Funds Independence Square Proforma
High Yield Bond Portfolio Income Securities, Inc. Combined
---------------------------------------------------------------------------
Decription and Percentage of Portfolio Par (000) Shares Value Par (000) Shares Value Par (000) Shares
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Special Purpose
Nextel Partners, Inc., (STEP) 13.57%, 02/01/09 (C) $ 4,100 $ 2,439,500 $ 4,100
Penhall Acquisition Corp., 12.00%, 08/01/06 2,000 1,960,000 2,000
Pinnacle Hldgs., (STEP) 12.26%, 03/15/08 (C) 3,000 1,732,500 3,000
Zais Investment Grade Ltd., 9.95%, 09/23/14 1,000 990,000 1,000
-----------
7,122,000
-----------
Telecommunications
Allegiance Telecom Inc. Units 144A (STEP) 12.52%,
02/15/08 (C) 3,000 1,935,000 3,000
Diamond Cable Communications PLC, 12/15/05 1,000 902,500 1,000
Echostar DBS Corp., 9.37%, 02/01/09 2,000 1,975,000 2,000
Echostar DBS Corp. Series 144A Industrial, 9.25%, 02/01/06 1,000 987,500 1,000
Globenet Communications Group Ltd., Series 144A, 13.00%,
07/15/07 1,500 1,485,000 1,500
Hyperion Telecommunications, Series B, 04/15/03 2,000 1,690,000 2,000
IPC Info. Systems (STEP) 11.92%, 05/01/08 (C) 3,000 2,280,000 3,000
James Cable Partners LP, Series B, 10.75%, 08/15/04 1,000 1,005,000 1,000
Spectrasite Holdings Inc., Series 144A (STEP) 11.25%,
04/15/09 (C) 2,000 1,000,000 2,000
Teligent, Inc., 11.50%, 12/01/07 2,000 1,840,000 2,000
United Pan-Europe Communications, Series 144A (STEP)
12.50%, 08/01/09 (C) 4,000 2,240,000 4,000
United Pan-Europe Communications, NV.,
Series 144A, 10.87%, 08/01/09 1,500 1,522,500 1,500
Versatel Telecom BV, Sr. Notes, 11.87%, 07/15/09 1,000 950,000 1,000
Viatel, Inc., (STEP) 11.93%, 04/15/08 (C) 1,600 928,000 1,600
Williams Communications Group, Inc. Sr. Notes,
10.87%, 10/01/09 1,000 992,490 1,000
Worldwide Fiber, Inc., Series 144A, 12.00%, 08/01/09 1,000 975,000 1,000
-----------
22,707,990
-----------
Ahmanson (H.F.) & Company, 9.875%, 11/15/1999 $ 1,000 $ 1,005,014 1,000
BankAmerica, 9.50%, 04/01/01 500 520,757 500
Calpine Corp., 9.250%, 02/01/04 550 555,500 550
CenCall Communications Corp. Sr. Disc. Notes, 10.13%,
01/15/04 1,000 1,002,500 1,000
Cleveland Electric Illuminating, 9.00%, 07/01/23 1,000 1,006,708 1,000
Comerica Bank, 8.375%, 07/15/24 1,000 1,004,585 1,000
Delta Airlines, Inc., 9.25%, 03/15/22 1,000 1,082,078 1,000
Federal Express, 9.625%, 10/15/19 500 520,070 500
First Chicago NBD Corp., 8.875%, 03/15/02 500 524,583 500
First Interstate Bancorp., 9.00%, 11/15/04 1,000 1,003,420 1,000
First Union Corp., 8.00%, 08/15/09 500 511,836 500
Ford Motor Credit Co., 9.14%, 12/30/14 1,000 1,079,177 1,000
GTE California, Inc., 8.07%, 04/15/24 300 299,695 300
Gulf States Utilities 8.70%, 04/01/24 1,000 1,014,420 1,000
Harris Bancorp, 9.375%, 06/01/01 500 520,583 500
Horton (D.R.), Inc. Co. Guarantee Notes, 10.00%,
04/15/06 250 250,000 250
Hydro-Quebec, 8.875%, 03/01/26 1,000 1,153,296 1,000
Jersey Central Power and Light, 8.45%, 03/24/25 1,000 1,051,590 1,000
New York State Electric & Gas Corp., 9.875%, 05/01/20 800 847,000 800
News America Holdings, 9.50%, 07/15/24 1,000 1,116,066 1,000
Nextlink Communications, Inc. Sr. Notes, 12.50%,
04/15/06 1,000 1,060,000 1,000
Participation in Asset Exchange, 7.00%, 12/01/20 (A) 5 5,081 5
Penney (J.C.) & Company, 8.25%, 08/15/22 500 497,805 500
RBF Finance Co., 11.38%, 03/15/09 1,000 1,055,000 1,000
Reynolds (R.J.) Tobacco Holdings, Inc., 7.375%,
05/15/03 1,000 973,864 1,000
Sinclair Broadcast Group Sr. Sub. Notes, 10.00%,
09/30/05 200 200,000 200
Sonic Automotive, Inc., 11.00%, 08/01/08 500 478,750 500
TCI Communications, 8.75%, 02/15/23 1,000 1,042,876 1,000
Time Warner Entertainment, Inc., 8.375%, 07/15/33 1,000 1,065,589 1,000
U.S. West, 8.875%, 06/01/31 1,000 1,037,479 1,000
United Air Lines, 9.210%, 01/21/17 450 490,500 450
Virginia Electric & Power Corp. Series B, 8.625%,
10/01/24 1,000 989,488 1,000
Zurich Capital Trust I, 8.376%, 06/01/37 500 487,478 500
-----------
TOTAL CORPORATE BONDS 83,004,030 $28,986,538
----------- -----------
SHORT TERM INVESTMENTS
Galileo Money Market Fund 194,162 194,162 194,162
-----------
TOTAL SHORT TERM INVESTMENTS 194,162 -
----------- -----------
TOTAL INVESTMENTS
(BlackRock High Yield Bond Portfolio cost -
$94,176,716)
(Independence Square Income Securties, Inc. cost -
$30,525,353(B))
----------- -----------
(Proforma combined cost - $124,702,069) $91,575,007 $30,482,445
=========== ===========
<CAPTION>
Decription and Percentage of Portfolio Value
- ----------------------------------------------------------------------------------
<S> <C>
Special Purpose $ 2,439,500
Nextel Partners, Inc., (STEP) 13.57%, 02/01/09 (C) 1,960,000
Penhall Acquisition Corp., 12.00%, 08/01/06 1,732,500
Pinnacle Hldgs., (STEP) 12.26%, 03/15/08 (C)
------------
990,000
Zais Investment Grade Ltd., 9.95%, 09/23/14 ------------
7,122,000
------------
Telecommunications
Allegiance Telecom Inc. Units 144A (STEP) 12.52%,
02/15/08 (C) 1,935,000
Diamond Cable Communications PLC, 12/15/05 902,500
Echostar DBS Corp., 9.37%, 02/01/09 1,975,000
Echostar DBS Corp. Series 144A Industrial, 9.25%,
02/01/06 987,500
Globenet Communications Group Ltd., Series 144A,
13.00%, 07/15/07 1,485,000
Hyperion Telecommunications, Series B, 04/15/03 1,690,000
IPC Info. Systems (STEP) 11.92%, 05/01/08 (C) 2,280,000
James Cable Partners LP, Series B, 10.75%, 08/15/04 1,005,000
Spectrasite Holdings Inc., Series 144A (STEP) 11.25
04/15/09 (C) 1,000,000
Teligent, Inc., 11.50%, 12/01/07 1,840,000
United Pan-Europe Communications, Series 144A (STEP
12.50%, 08/01/09 (C) 2,240,000
United Pan-Europe Communications, NV.,
Series 144A, 10.87%, 08/01/09 1,522,500
Versatel Telecom BV, Sr. Notes, 11.87%, 07/15/09 950,000
Viatel, Inc., (STEP) 11.93%, 04/15/08 (C) 928,000
Williams Communications Group, Inc. Sr. Notes, 10.87%, 10/01/09 992,490
Worldwide Fiber, Inc., Series 144A, 12.00%, 08/01/0 975,000
------------
22,707,990
------------
Ahmanson (H.F.) & Company, 9.875%, 11/15/1999 1,005,014
BankAmerica, 9.50%, 04/01/01 520,757
Calpine Corp., 9.250%, 02/01/04 555,500
CenCall Communications Corp. Sr. Disc. Notes, 10.13%, 01/15/04 1,002,500
Cleveland Electric Illuminating, 9.00%, 07/01/23 1,006,708
Comerica Bank, 8.375%, 07/15/24 1,004,585
Delta Airlines, Inc., 9.25%, 03/15/22 1,082,078
Federal Express, 9.625%, 10/15/19 520,070
First Chicago NBD Corp., 8.875%, 03/15/02 524,583
First Interstate Bancorp., 9.00%, 11/15/04 1,003,420
First Union Corp., 8.00%, 08/15/09 511,836
Ford Motor Credit Co., 9.14%, 12/30/14 1,079,177
GTE California, Inc., 8.07%, 04/15/24 299,695
Gulf States Utilities 8.70%, 04/01/24 1,014,420
Harris Bancorp, 9.375%, 06/01/01 520,583
Horton (D.R.), Inc. Co. Guarantee Notes, 10.00%, 04/15/06 250,000
Hydro-Quebec, 8.875%, 03/01/26 1,153,296
Jersey Central Power and Light, 8.45% 03/24/25 1,051,590
New York State Electric & Gas Corp., 9.875%, 05/01/20 847,000
News America Holdings, 9.50%, 07/15/24 1,116,066
Nextlink Communications, Inc. Sr. Notes, 12.50%, 04/15/06 1,060,000
Participation in Asset Exchange, 7.00%, 12/01/20 (A) 5,081
Penney (J.C.) & Company, 8.25%, 08/15/22 497,805
RBF Finance Co., 11.38%, 03/15/09 1,055,000
Reynolds (R.J.) Tobacco Holdings, Inc., 7.375%, 05/15/03 973,864
Sinclair Broadcast Group Sr. Sub. Notes, 10.00%, 09/30/05 200,000
Sonic Automotive, Inc., 11.00%, 08/01/08 478,750
TCI Communications, 8.75%, 02/15/23 1,042,876
Time Warner Entertainment, Inc., 8.375%, 07/15/33 1,065,589
U.S. West, 8.875%, 06/01/31 1,037,479
United Air Lines, 9.210%, 01/21/17 490,500
Virginia Electric & Power Corp. Series B, 8.625%, 10/01/24 989,488
Zurich Capital Trust I, 8.376%, 06/01/37 487,478
------------
TOTAL CORPORATE BONDS 111,990,568
------------
SHORT TERM INVESTMENTS
Galileo Money Market Fund 194,162
------------
TOTAL SHORT TERM INVESTMENTS 194,162
------------
TOTAL INVESTMENTS
(BlackRock High Yield Bond Portfolio cost -
$94,176,716)
(Independence Square Income Securties, Inc. cost -
$30,525,353(B))
------------
(Proforma combined cost - $124,702,069) $122,057,452
============
</TABLE>
____________________________________________
(A) Non-income producing security
(B) Reflects amortization of premium and accretion of discount
(C) Rates shown are the effecive yields as of September 30, 1999
See accompanying notes to the Pro Forma Financial Statements.
6
<PAGE>
BlackRock Funds High Yield Bond portfolio and Independence Square Income
Securities, Inc. Reorganization
Combined Statement of Assets and Liabilities (Unaudited)
As of September 30, 1999
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
BlackRock Funds Independence Square Adjustments Pro Forma
High Yield Bond Portfolio Income Securities, Inc. Combined
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments $ 91,575,007 $ 30,482,445 $ 122,057,452
Cash - 39,589 39,589
Receivable - interest 1,593,994 760,428 2,354,422
Receivable - investments sold 3,068,771 - 3,068,771
Receivable - fund shares sold 177,857 - 177,857
Receivable from investment advisor - 27,584 27,584
Other assets 30,644 - 30,644
--------------------------------------------------------------------------------------------
Total assets 96,446,273 31,310,046 127,756,319
--------------------------------------------------------------------------------------------
Payable - investments purchased 5,475,188 - 5,475,188
Payable - fund shares repurchased 5,964 - 5,964
Payable - distributions 696,704 - 696,704
Payable - management fee - 9,666 9,666
Payable - 12b-1 fees - - -
Reverse repurchase agreements payable 6,831,443 - 6,831,443
Accrued Expenses 111,963 25,976 137,939
--------------------------------------------------------------------------------------------
Total liabilities 13,121,262 35,642 13,156,904
--------------------------------------------------------------------------------------------
Net assets $ 83,325,011 $ 31,274,404 $ 114,599,415
============================================================================================
Net Asset Value and Redemption Price
per Blackrock, Institutional, Service
and Investor A Share ($68,271,709
/ 7,014,949) $ 9.73 $ 9.73
Offering price per BlackRock,
Institutional and Service Share $ 9.73 $ 9.73
Maximum offering price per Investor
A Share ($9.73 / 0.950) $ 10.24 $ 10.24
Net Asset Value and Redemption Price
(subject to a maximum contingent
deferred sales charge of 4.5%) per
Investor B Share ($12,408,541 / 1,274,781) $ 9.73
Net Asset Value and Redemption Price
(subject to a maximum contingent
deferred sales charge of 1.0%) per
Investor C Share ($2,646,761 / 271,952) $ 9.73 $ 9.73
Net Asset Value per ISIS Share
($31,274,404 / 1,822,752) $ 17.16
Net Asset Value and Redemption Price
per Pro Forma Combined Investor B
Share ($43,680,945 / 4,489,005) $ 9.73
</TABLE>
See accompanying notes to the Pro Forma Financial Statements.
7
<PAGE>
BlackRock Funds High Yield Bond Portfolio and Independence Square Income
Securities, Inc. Reorganization
Combined Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
BlackRock Funds Independence Square Adjustments Pro Forma
High Yield Bond Portfolio Income Securities, Inc. Combined
for the period ended for the year ended
September 30, 1999* September 30, 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dividend Income $ $ - $ -
Interest Income 6,141,856 2,620,915 (9,594) 8,753,177
-----------------------------------------------------------------------------------------------
Investment Income 6,141,856 2,620,915 (9,594) (a) 8,753,177
-----------------------------------------------------------------------------------------------
Investment advisory services 263,946 117,758 45,588 (b) 427,292
Administrative services fees 94,182 - 75,139 (c) 169,321
Transfer agent fees 26,377 19,913 12,756 (d) 59,046
Custodian fees 17,609 19,729 (14,829) (e) 22,509
Professional fees 146,826 52,546 (50,259) (f) 149,113
Shareholder reports 94,238 12,839 (9,245) (g) 97,832
Trustees' fees 818 32,855 (32,202) (h) 1,471
Shareholder servicing fees 25,179 - 81,673 (i) 106,852
Shareholder processing fees 15,107 - 49,004 (j) 64,111
Distribution fees 57,531 - 245,019 (k) 302,550
Registration fees and expenses 74,621 - 8,694 (l) 83,315
Other 9,175 14,839 (11,395) (m) 12,619
-----------------------------------------------------------------------------------------------
825,609 270,479 399,943 1,496,031
Expenses waived or reimbursed (346,897) - (43,173) (n) (390,070)
-----------------------------------------------------------------------------------------------
Total operating expenses 478,712 270,479 356,770 1,105,961
Interest expense 175,871 - - 175,871
-----------------------------------------------------------------------------------------------
Total expenses 654,583 270,479 356,770 1,281,832
-----------------------------------------------------------------------------------------------
Net investment income $ 5,487,273 $ 2,350,436 $ (366,364) $ 7,471,345
===============================================================================================
</TABLE>
- ---------------------
* Commencement of operations was November 19, 1998
See accompanying notes to the Pro Forma Financial Statements.
8
<PAGE>
BlackRock Funds High Yield Portfolio/Independence Square Income Securities, Inc.
Notes to Pro Forma Financial Statements (Unaudited)
September 30, 1999
1. Basis of Combination
The unaudited Pro Forma Combined Portfolio of Investments, Pro Forma
Combined Statement of Assets and Liabilities and Pro Forma Combined Statement of
Operations give effect to the proposed merger of Independence Square Income
Securities, Inc. into BlackRock Funds High Yield Bond Portfolio. The proposed
merger will be accounted for by the method of accounting for tax-free
reorganizations of investment companies (sometimes referred to as the pooling-
of-interest basis). The reorganization provides for the transfer of all or
substantially all of the assets of Independence Square Income Securities, Inc.
to BlackRock Funds High Yield Bond Portfolio in exchange for BlackRock Funds
High Yield Bond Portfolio Class B shares, the distribution of such BlackRock
Funds High Yield Bond Portfolio Class B shares to shareholders of Independence
Square Income Securities, Inc., and the subsequent liquidation of Independence
Square Income Securities, Inc.
The pro forma combined statements should be read in conjunction with the
historical financial statements of the constituent fund and the notes thereto
incorporated by reference in the Statement of Additional Information.
BlackRock Funds High Yield Bond Portfolio, an open-end, management
investment company, and Independence Square Income Securities, Inc., a closed-
end, management investment company, are both registered under the Investment
Company Act of 1940, as amended.
Pro Forma Adjustments:
The Pro Forma adjustments below reflect the impact of the reorganization between
BlackRock Funds High Yield Portfolio and Independence Square Income Securities,
Inc.
a) to reflect amortization of premium and discount.
b) to increase Independence Square Income Securities, Inc. advisory fee to
BlackRock Funds High Yield Portfolio's rate of 0.50%
c) to record administrative service fee of 0.23%. Independence Square Income
Securities, Inc. does not charge an administrative service fee.
d) to increase Independence Square Income Securities, Inc. transfer agent fees
to BlackRock Funds HighYield Portfolio's rate of 0.10%.
e) to decrease Independence Square Income Securities, Inc. custodian fees to
BlackRock Funds High Yield Portfolio's rate of 0.015%.
f) to decrease Independence Square Income Securities, Inc. professional fees
(consisting of legal and audit fees) to reflect BlackRock Funds High Yield
Portfolio's ending proportionate allocation of BlackRock Funds' professional
fees.
9
<PAGE>
g) to decrease Independence Square Income Securities, Inc. shareholder
reporting fees to reflect BlackRock Funds High Yield Portfolio's ending
proportionate allocation of BlackRock Funds' shareholder reporting fees.
h) to decrease Independence Square Income Securities, Inc. trustees' fees to
reflect BlackRock Funds High Yield Portfolio's ending proportionate
allocation of BlackRock Funds' trustees' fees.
i) to record shareholder servicing fees of 0.25%. Independence Square Income
Securities, Inc. does not charge a shareholder servicing fee.
j) to record shareholder processing fees of 0.15%. Independence Square Income
Securities, Inc. does not charge a shareholder processing fee.
k) to record distribution fees of 0.75%. Independence Square Income Securities,
Inc. does not charge a distribution fee.
l) to record additional SEC registration fees on the value of the shares
increased from the merger.
m) to decrease Independence Square Income Securities, Inc. insurance and other
expenses to reflect BlackRock Funds High Yield Portfolio's ending
proportionate allocation of BlackRock Funds' insurance and other expenses.
n) to limit the operation expenses (excluding interest expense) to 1.92%.
2. Summary of Significant Accounting Policies
Following is a summary of significant accounting policies which are
consistently followed by BlackRock Funds High Yield Bond Portfolio/Independence
Square Income Securities, Inc. in the preparation of its financial statements.
The policies are in conformity with generally accepted accounting principles.
Preparation of the financial statements includes the use of management
estimates. Actual results could differ from those estimates.
Security Valuation - Portfolio securities for which market quotations are
readily available are valued at market value that is currently determined using
the last reported sales price. If no sales are reported, for BlackRock Funds
High Yield Portfolio, portfolio securities are valued at the mean between the
last reported bid and asked prices. For Independence Square Income Securities,
Inc. securities not listed or not traded on that day are valued at their most
recent quoted bid prices or at prices determined by investment bankers or
brokers. Short-term obligations with maturities of 60 days or less are valued at
amortized cost, which approximates market value. For BlackRock Funds High yield
Portfolio discounts and premiums on debt securities are amortized for book and
tax purposes using the effective yield-to-maturity method over the term of the
instrument. Independence Square Income Securities, Inc. does not amortize
premiums or discounts on bonds held for investment for financial reporting or
federal income tax purposes.
Security Transactions and Investment Income - Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
federal income tax purposes. Interest income is recorded on the accrual basis.
Federal Income Taxes - BlackRock Funds High Yield Portfolio/Independence
Square Income
10
<PAGE>
Securities, Inc. intends to qualify for tax treatment applicable to regulated
investment companies under the Internal Revenue Code of 1986 (the "Code"), as
amended, and distribute all of its taxable income to its shareholders.
Therefore, no provision has been recorded for Federal income or excise taxes.
Distributions to Shareholders - Distributions from net investment income
are declared by BlackRock Funds High Yield Bond Portfolio each day and monthly
by Independence Square Income Securities, Inc. on "settled" shares. Both funds
pay the net investment income monthly. Net realized capital gains, if any will
be distributed annually.
11
