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As filed with the Securities and Exchange Commission on October 27, 2000
Registration No. 33-26305
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. ___ [_]
POST-EFFECTIVE AMENDMENT NO. 57 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
AMENDMENT NO. 59 [X]
_____________________________________________
BLACKROCK FUNDS(SM)
(Exact Name of Registrant as Specified in Charter)
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Bellevue Corporate Center Brian Kindelan, Esq. copy to:
400 Bellevue Parkway BlackRock Advisors, Inc. Sarah E. Cogan, Esq.
Suite 100 1600 Market Street, 28th Floor Simpson Thacher & Bartlett
Wilmington, Delaware 19809 Philadelphia, PA 19103 425 Lexington Avenue
(Address of Principal (Name and Address of New York, New York 10017
Executive Offices) Agent for Service)
Registrant's Telephone Number
(800) 441-7762
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_____________________________________________
It is proposed that this filing will become effective (check appropriate box)
[_] immediately upon filing pursuant to paragraph (b)
[X] on October 30, 2000 pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(i)
[_] on (date) pursuant to paragraph (a)(i)
[_] 75 days after filing pursuant to paragraph (a)(ii)
[_] on (date) pursuant to paragraph (a)(ii) of rule 485.
If appropriate, check the following box:
[_] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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EXPLANATORY NOTE
----------------
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Low Duration Bond, Intermediate Government Bond,
Intermediate Bond, Core Bond, High Yield Bond, GNMA, Government Income, Managed
Income, International Bond, Tax-Free Income, Pennsylvania Tax-Free Income, New
Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free Income, Delaware
Tax-Free Income, Money Market, Municipal Money Market, U.S. Treasury Money
Market, Ohio Municipal Money Market, Pennsylvania Municipal Money Market, North
Carolina Municipal Money Market, Virginia Municipal Money Market, New Jersey
Municipal Money Market, Large Cap Value Equity, Large Cap Growth Equity, Index
Equity, Small Cap Value Equity, Mid-Cap Value Equity, International Equity,
International Emerging Markets, International Small Cap Equity, Balanced, Small
Cap Growth Equity, Mid-Cap Growth Equity, Micro-Cap Equity and Select Equity
Portfolios, each dated January 28, 2000, are incorporated by reference to the
Registrant's filing of Post-Effective Amendment No. 50 to its Registration
Statement on Form N-1A on January 28, 2000.
The prospectus for the BlackRock Shares of the Low Duration Bond, Core Bond,
Intermediate Bond and High Yield Bond Portfolios, dated January 28, 2000, is
incorporated by reference to the Registrant's filing of Post-Effective Amendment
No. 50 to its Registration Statement on Form N-1A on January 28, 2000.
The prospectuses for the shares of the BlackRock Strategic Portfolio I,
BlackRock Strategic Portfolio II and the Multi-Sector Mortgage Securities
Portfolio III, each dated December 6, 1999, are incorporated by reference to the
Registrant's filing of Post-Effective Amendment No. 49 to its Registration
Statement on Form N-1A on December 6, 1999.
The prospectus for the shares of the Multi-Sector Mortgage Securities Portfolio
IV, dated January 28, 2000, is incorporated by reference to the Registrant's
filing of Post-Effective Amendment No. 50 to its Registration Statement on Form
N-1A on January 28, 2000.
The prospectus for the Hilliard Lyons Shares of the Money Market Portfolio and
the Municipal Money Market Portfolio, dated October 5, 1999, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 47 to its
Registration Statement on Form N-1A on October 5, 1999.
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the Global Science & Technology Portfolio are
incorporated by reference to the Registrant's filing of Post-Effective Amendment
No. 54 to its Registration Statement on Form N-1A on May 10, 2000.
The prospectuses for the Service, Investor A, Investor B, Investor C and
Institutional Shares of the European Equity and Asia Pacific Equity Portfolios
and BlackRock Shares of the Select Equity Portfolio are incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 55 to its
Registration Statement on Form N-1A on June 6, 2000.
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2
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Low Duration Bond, Intermediate
Government Bond, Intermediate Bond, Core Bond, High Yield Bond, Government
Income, Managed Income, International Bond, Tax-Free Income, Pennsylvania Tax-
Free Income, New Jersey Tax-Free Income, Ohio Tax-Free Income, Kentucky Tax-Free
Income, Delaware Tax-Free Income, GNMA, Money Market, Municipal Money Market,
U.S. Treasury Money Market, Ohio Municipal Money Market, Pennsylvania Municipal
Money Market, North Carolina Municipal Money Market, Virginia Municipal Money
Market, New Jersey Municipal Money Market, Large Cap Value Equity, Large Cap
Growth Equity, Index Equity, Small Cap Value Equity, Mid-Cap Value Equity,
International Equity, International Emerging Markets, International Small Cap
Equity, Balanced, Small Cap Growth Equity, Mid-Cap Growth Equity, Select Equity
and Micro-Cap Equity Portfolios, and the BlackRock Shares of the Low Duration
Bond, Core Bond, Intermediate Bond and High Yield Bond Portfolios, dated January
28, 2000, is incorporated by reference to the Registrant's filing of Post-
Effective Amendment No. 50 to its Registration Statement on Form N-1A on January
28, 2000.
The statements of additional information for the shares of the BlackRock
Strategic Portfolio I, the BlackRock Strategic Portfolio II and the Multi-Sector
Mortgage Securities Portfolio III, dated December 6, 1999, are incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 49 to its
Registration Statement on Form N-1A on December 6, 1999.
The statement of additional information for the shares of the Multi-Sector
Mortgage Securities Portfolio IV, dated January 28, 2000, is incorporated by
reference to the Registrant's filing of Post-Effective Amendment No. 50 to its
Registration Statement on Form N-1A on January 28, 2000.
The statement of additional information for Hilliard Lyons Shares of the Money
Market Portfolio and the Municipal Money Market Portfolio, dated October 5,
1999, is incorporated by reference to the Registrant's filing of Post-Effective
Amendment No. 47 to its Registration Statement on Form N-1A on October 5, 1999.
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the Global Science & Technology Portfolio
is incorporated by reference to the Registrant's filing of Post-Effective
Amendment No. 54 to its Registration Statement on Form N-1A on May 10, 2000.
The statement of additional information for the Service, Investor A, Investor B,
Investor C and Institutional Shares of the European Equity and Asia Pacific
Equity Portfolios is incorporated by reference to the Registrant's filing of
Post-Effective Amendment No. 55 to its Registration Statement on Form N-1A on
June 6, 2000.
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BLACKROCK FUNDS(SM)
CORE EQUITY PORTFOLIO
This Prospectus relates to shares of the Core Equity Portfolio (the fund)
of BlackRock Funds(SM) (the Company).
PROSPECTUS
TABLE OF CONTENTS
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INVESTMENT OBJECTIVE AND STRATEGIES........................................... 2
KEY RISKS..................................................................... 3
EXPENSES AND FEES............................................................. 4
PORTFOLIO MANAGERS............................................................ 5
PURCHASE AND REDEMPTION OF SHARES............................................. 5
MANAGEMENT.................................................................... 7
DIVIDENDS AND DISTRIBUTIONS................................................... 8
TAXATION OF DISTRIBUTIONS..................................................... 8
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Prospectus
October 30, 2000
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>
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INVESTMENT OBJECTIVE AND STRATEGIES
Investment Goal
The fund seeks long-term capital appreciation - current income is the secondary
objective.
Primary Investment Strategies
In pursuit of this goal, the fund manager uses the S&P 500 Index as a benchmark.
The fund generally will invest in market sectors in similar proportions to the
S&P 500 Index, although the manager may overweight or underweight sectors by as
much as 5% as he identifies market opportunities. This means that if technology
stocks make up 20% of the index, the fund generally can invest between 15% and
25% of its assets in technology companies. Furthermore, the fund generally will
seek to invest in individual stocks in similar proportions to their weighting on
the index, although the fund manager again may overweight or underweight
particular stocks as he identifies market opportunities. The fund normally
invests at least 80% of its total assets in equity securities. The fund
primarily buys common stock but can also invest in preferred stock and
securities convertible into common and preferred stock.
The investment style of this fund is a blend of value stocks and growth stocks.
The manager initially screens for "value" and "growth" stocks from the universe
of companies with market capitalization above $1 billion. Whether screening
value or growth stocks, the manager is seeking companies that are currently
undervalued or that have above-average earnings growth potential. The manager
uses fundamental analysis to examine each company for financial strength before
deciding to purchase the stock.
IMPORTANT DEFINITIONS
Equity Security: A security, such as stock, representing ownership of a company.
Bonds, in comparison, are referred to as fixed income or debt securities because
they represent indebtedness to the bondholders, not ownership (although
convertible bonds are fixed income securities that are convertible to equity
according to their terms).
Fundamental Analysis: A method of stock market analysis that concentrates on
"fundamental" information about the company (such as its income statement,
balance sheet, earnings and sales history, products and management) to attempt
to forecast future stock value.
Investment Style: Refers to the guiding principles of a mutual fund's investment
choices. The investment style of this fund is a blend of growth stocks and value
stocks, referring to the type of securities the managers will choose for this
fund.
Market Capitalization: Refers to the market value of a company and is calculated
by multiplying the number of shares outstanding by the current price per share.
Sector: All stocks are classified into a category or sector such as utilities,
consumer services, basic materials, capital equipment, consumer cyclicals,
energy, consumer non-cyclicals, healthcare, technology, transportation, finance
and cash.
S&P 500 Index: The Standard & Poor's Composite Stock Price Index, an unmanaged
index of 500 stocks, most of which are listed on the New York Stock Exchange.
The index is heavily weighted toward stocks with large market capitalization and
represents approximately two-thirds of the total market value of all domestic
common stocks.
Value and Growth Companies: All stocks are generally divided into the categories
of "growth" or "value," although there are times when a growth fund and value
fund may own the same stock. Value stocks are companies that appear to the
manager to be undervalued by the market as measured by certain financial
formulas. Growth stocks are companies whose earnings growth potential appears to
the manager to be greater than the market in general, and whose growth in
revenue is expected to continue for an extended period.
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The fund generally will sell a stock when it reaches a target price, which is
when the manager believes it is fully valued or when, in the manager's opinion,
conditions change such that the risk of continuing to hold the stock is
unacceptable when compared to its growth potential.
It is possible that in extreme market conditions the fund temporarily may invest
some or all of its assets in high quality money market securities. The reason
for acquiring money market securities would be to avoid market losses. However,
if market conditions improve, this strategy could result in reducing the
potential gain from the market upswing, thus reducing the fund's opportunity to
achieve its investment objective. As part of its normal operations, the fund
may hold these securities pending investments or when it expects to need cash to
pay redeeming shareholders. The fund will not deviate from its normal
strategies if it holds high quality money market securities pending investments.
The fund manager may, when consistent with the fund's investment objective, use
options or futures (commonly known as derivatives). An option is the right to
buy or sell a security at a specific price on or before a specific date. A
future is an agreement to buy or sell a security at a specific price on a
specific date. The primary purpose of using derivatives is to attempt to reduce
risk to the fund as a whole (hedge) but they may also be used to maintain
liquidity and commit cash pending investment. The fund manager also may, but
under normal market conditions generally does not intend to, use derivatives for
speculation to increase returns.
The fund may lend some of its securities on a short-term basis in order to earn
income. The fund will receive collateral in cash or high quality securities
equal to the current value of the loaned securities. The fund earns interest on
the securities it lends and income when it invests the collateral for the loaned
securities. These loans will be limited to 33-1/3% of the value of the fund's
total assets.
Should the Company's Board of Trustees determine that the investment objective
of the fund should be changed, shareholders will be given at least 30 days
notice before any such change is made.
KEY RISKS
The main risk of any investment in stocks is that values fluctuate in price.
The value of your investment can go up or down depending upon market conditions,
which means you could lose money.
Because different kinds of stocks go in and out of favor depending on market
conditions, this fund's performance may be better or worse than other funds with
different investment styles. For example, in some markets a fund holding small
cap stocks may outperform this fund.
While the fund manager chooses stocks he believes to be undervalued, or which
have above average growth potential, there is no guarantee that prices will
increase in value.
The fund's use of derivatives may reduce returns and/or increase volatility.
Volatility is the characteristic of a security or a market to fluctuate
significantly in price within a short time period.
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Securities loans involve the risk of a delay in receiving additional collateral
from the borrower 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.
When you invest in this fund you are not making a bank deposit. Your investment
is not insured or guaranteed by the Federal Deposit Insurance Corporation or by
any bank or governmental agency.
EXPENSES AND FEES
The table below describes the fees and expenses that you may pay if you buy and
hold Institutional Shares of the fund.
Annual Fund Operating Expenses
(Expenses that are deducted from fund assets)
Advisory fees/1/ 0.35%
Other expenses/2/ 0.33%
Total annual fund operating
expenses 0.68%
Fee waivers and expense
reimbursements 0.23%
Net expenses* 0.45%
Example:
This example is intended to help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. We are assuming an initial
investment of $10,000, 5% total return each year with no changes in operating
expenses and redemption at the end of each time period. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years
Institutional Shares $46 $194
___________________
/1/ Advisory Fees: Fees paid to the investment adviser for portfolio management
services.
/2/ Other Expenses: Fees paid by the fund for other expenses such as
administration, transfer agency, custody, professional fees and
registration fees. "Other expenses" are based on estimated amounts for the
current fiscal year.
* BlackRock has contractually agreed to waive or reimburse fees or expenses
in order to limit fund expenses to 0.45% of average daily net assets until
October 30, 2001. The fund may have to repay some of these waivers and
reimbursements to BlackRock in the following two years. See the
"Management" section on pages 7 and 8 for a discussion of these waivers and
reimbursements.
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PORTFOLIO MANAGERS
The fund is managed by a team of investment professionals at BlackRock Financial
Management, Inc. (BFM), the fund's sub-adviser, including the following
individuals who have day-to-day responsibility: R. Andrew Damm, Managing
Director at BFM since 1997 and Matthew Considine, Vice President and investment
manager at BFM since 1998. Prior to joining BFM, Mr. Damm served as senior
investment manager with BlackRock Advisors, Inc. since 1995 and Mr. Considine
served as portfolio manager and equity analyst at Phoenix Duff & Phelps from
1995 to 1998. Mr. Damm and Mr. Considine have been portfolio co-managers since
the fund's inception.
PURCHASE AND REDEMPTION OF SHARES
Buying Shares
Institutional Shares are offered to investors with a minimum investment of $10
million.
Purchase orders may be placed through PFPC, the Company's transfer agent, by
telephoning (800) 441-7450.
What Price Per Share Will You Pay?
The price of mutual fund shares generally changes every business day. A mutual
fund is a pool of investors' money that is used to purchase a portfolio of
securities, which in turn is owned in common by the investors. Investors put
money into a mutual fund by buying shares. If a mutual fund has a portfolio
worth $50 million and has 5 million shares outstanding, the net asset value
(NAV) per share is $10.
The fund's investments are valued based on market value, or where market
quotations are not readily available, based on fair value as determined in good
faith by or under the direction of the Company's Board of Trustees. Under some
circumstances certain short-term debt securities will be valued using the
amortized cost method.
Since the NAV changes daily, the price you pay for your shares depends on the
time that your order is received by the BlackRock Funds' transfer agent, whose
job it is to keep track of shareholder records.
Purchase orders received by the transfer agent before the close of regular
trading on the New York Stock Exchange (NYSE) (currently 4 p.m. (Eastern time))
on each day the NYSE is open will be priced based on the NAV calculated at the
close of trading on that day. NAV is calculated at 4 p.m. (Eastern time) each
day the NYSE is open. Shares will not be priced on days the NYSE is closed.
Purchase orders received after the close of trading will be priced based on the
next calculation of NAV. Foreign securities and certain other securities held
by the fund may trade on days when the NYSE is closed. In these cases, net
asset value of shares may change when fund shares cannot be bought or sold.
Paying for Shares
Payment for Institutional Shares must normally be made in Federal funds or other
funds immediately available by 4 p.m. (Eastern time) on the first business day
following PFPC's
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receipt of the order. Payment may also, at the discretion of the Company, be
made in the form of securities that are permissible investments for the fund.
How Much is the Minimum Investment?
The minimum investment for the initial purchase of Institutional Shares is $10
million.
There is no minimum requirement for later investments. The fund does not accept
third party checks as payment for shares.
The fund may reject any purchase order, modify or waive the minimum initial or
subsequent investment requirements and suspend and resume the sale of any share
class of the fund at any time.
Selling Shares
Shareholders may place redemption orders by telephoning PFPC at (800) 441-7450.
Shares are redeemed at their net asset value per share next determined after
PFPC's receipt of the redemption order. The fund, its administrators and
distributor will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The fund and its service providers will
not be liable for any loss, liability, cost or expense for acting upon telephone
instructions that are reasonably believed to be genuine in accordance with such
procedures.
Payment for redeemed shares for which a redemption order is received by PFPC
before 4 p.m. (Eastern time) on a business day is normally made in Federal
funds wired to the redeeming shareholder on the next business day, provided that
the fund's custodian is also open for business. Payment for redemption orders
received after 4 p.m. (Eastern time) or on a day when the fund's custodian is
closed is normally wired in Federal funds on the next business day following
redemption on which the fund's custodian is open for business. The fund
reserves the right to wire redemption proceeds within seven days after receiving
a redemption order if, in the judgement of BlackRock Advisors, Inc., an earlier
payment could adversely affect the fund. No charge for wiring redemption
payments is imposed by the Company.
During periods of substantial economic market change, telephone redemptions may
be difficult to complete. Redemption requests may also be mailed to PFPC at P.O.
Box 8950, Wilmington, DE 19899-8950.
The Company may refuse a telephone redemption request if it believes it is
advisable to do so.
The Company's Rights
The Company may:
. Suspend the right of redemption if trading is halted or restricted on the
NYSE or under other emergency conditions described in the Investment Company
Act of 1940,
. Postpone date of payment upon redemption if trading is halted or restricted
on the NYSE or under other emergency conditions described in the Investment
Company Act of 1940 or as described in the second paragraph in the section
"Selling Shares" above,
. Redeem shares involuntarily in certain cases, such as when the value of a
shareholder account falls below a specified level, as described below,
and
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. Redeem shares for property other than cash if conditions exist which make
cash payments undesirable in accordance with its rights under the Investment
Company Act of 1940.
Accounts with Low Balances
The Company may redeem a shareholder's account in the fund at any time the net
asset value of the account falls below $10 million as the result of a
redemption. The shareholder will be notified in writing that the value of the
account is less than the required amount and the shareholder will be allowed 30
days to make additional investments before the redemption is processed.
Market Timing
The fund is not designed for market timing organizations or other entities using
programmed or frequent purchases or redemptions. The Company reserves the right
to reject any specific purchase order, including an order made by a market
timer.
MANAGEMENT
BlackRock Funds' Adviser is BlackRock Advisors, Inc. (BlackRock). The Adviser of
a mutual fund is responsible for the overall investment management of the fund.
BlackRock was organized in 1994 to perform advisory services for investment
companies and is located at 345 Park Avenue, New York, NY 10154. BlackRock is a
wholly-owned subsidiary of BlackRock, Inc., one of the largest publicly traded
investment management firms in the United States with $190.8 billion of assets
under management as of September 30, 2000. BlackRock, Inc. is a majority-owned
indirect subsidiary of The PNC Financial Services Group, Inc., one of the
largest diversified financial services companies in the United States. BlackRock
Financial Management, Inc. (BFM), an affiliate of BlackRock located at 345 Park
Avenue, New York, New York 10154, acts as sub-adviser to the fund. The sub-
adviser of a fund is responsible for its day-to-day management and will
generally make all buy and sell decisions. The sub-adviser also provides
research and credit analysis.
For their investment advisory and sub-advisory services, BlackRock and BFM are
entitled to fees computed daily and payable monthly. BlackRock will pay BFM a
sub-advisory fee at no additional cost to the fund.
The maximum annual advisory fee that can be paid to BlackRock (as a percentage
of average daily net assets) are as follows:
Average Daily Net Assets Investment
Advisory
Fee
First $1 billion .350%
$1 billion-$2 billion .325%
$2 billion - $3 billion .300%
More than $3 billion .275%
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As discussed above, BlackRock has agreed to cap the fund's net expenses at the
level shown in the fund's expense table.
To achieve this cap, BlackRock and the Company have entered into an expense
limitation agreement. The agreement sets a limit on certain (but not all) of
the operating expenses of the fund through October 30, 2001 and requires
BlackRock to waive or reimburse fees or expenses if these operating expenses
exceed that limit. The expense limit as a percentage of average daily net
assets is 0.275%.
If within two years following a waiver or reimbursement the operating expenses
of the fund are less than the expense limit for the fund, the fund is required
to repay BlackRock up to the amount of fees waived or expenses reimbursed under
the agreement if: (1) the fund has more than $50 million in assets, (2)
BlackRock continues to be the fund's investment adviser and (3) the Board of
Trustees of the Company has approved in advance the payments to BlackRock at the
previous quarterly meeting of the Board.
DIVIDENDS AND DISTRIBUTIONS
BlackRock Funds makes two kinds of distributions to shareholders: dividends and
net capital gain.
Dividends are the net investment income derived by the fund and are paid within
10 days after the end of each quarter. The Company's Board of Trustees may
change the timing of dividend payments.
Net capital gain occurs when the fund manager sells securities at a profit. Net
capital gain (if any) is distributed to shareholders at least annually at a date
determined by the Company's Board of Trustees.
Your distributions will be reinvested at net asset value in new shares of the
fund unless you instruct PFPC in writing to pay them in cash. There are no
sales charges on these reinvestments.
TAXATION OF DISTRIBUTIONS
Distributions paid out of the fund's "net capital gain" will be taxed to
shareholders as long-term capital gain regardless of how long a shareholder has
owned shares. All other distributions will be taxed to shareholders as
ordinary income.
Your annual tax statement from the Company will present in detail the tax status
of your distributions for each year.
Distributions paid by the fund with respect to certain qualifying dividends
received by the fund from domestic corporations may be eligible for the
corporate dividends received deduction.
Because every investor has an individual tax situation, and also because the tax
laws are subject to periodic changes, you should always consult your tax
professional about federal, state and local tax consequences of owning shares of
the Company.
<PAGE>
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For more information:
This prospectus contains important information you should know before you
invest. Read it carefully and keep it for future reference. More information
about the BlackRock Funds is available free, upon request, including:
Annual/Semi-Annual Reports
These reports contain additional information about the fund's investments. The
annual report describes the fund's performance, lists portfolio holdings and
discusses recent market conditions, economic trends and fund investment
strategies that significantly affected the fund's performance during the last
fiscal year.
Statement of Additional Information (SAI)
A Statement of Additional Information dated October 30, 2000 has been filed with
the Securities and Exchange Commission (SEC). The SAI, which includes
additional information about the BlackRock Funds, may be obtained free of
charge, along with the Company's annual and semi-annual reports, by calling
(800) 441-7450. The SAI, as supplemented from time to time, is incorporated by
reference into this Prospectus.
Shareholder Account Service Representatives
Representatives are available to discuss account balance information, mutual
fund prospectuses, literature, programs and services available. Hours: 9:00
a.m. to 6:00 p.m. (Eastern time), Monday-Friday. Call: (800) 441-7450
Purchases and Redemptions
Call (800) 441-7450.
World Wide Web
Access general fund information and specific fund performance. Request mutual
fund prospectuses and literature. Forward mutual fund inquiries. Available 24
hours a day, 7 days a week. http://www.blackrock.com.
Email
Request prospectuses, SAI, Annual or Semi-Annual Reports and literature.
Forward mutual fund inquiries. Available 24 hours a day, 7 days a week.
Mail to: [email protected].
Written Correspondence
Post Office Address: BlackRock Funds, c/o PFPC Inc., P.O. Box 8950, Wilmington,
DE 19899-8950 Street Address: BlackRock Funds, c/o PFPC Inc., 400 Bellevue
Parkway, Wilmington, DE 19809
Internal Wholesalers/Broker Dealer Support
Available to support investment professionals 9 a.m. to 6 p.m. (Eastern time),
Monday-Friday. Call (888) 8-BLACKROCK
Securities and Exchange Commission (SEC)
You may also view and copy information about the BlackRock Funds, including the
SAI, by visiting the EDGAR database on the SEC Web site (http://www.sec.gov) or
the SEC's Public Reference Room in Washington, D.C. Information about the
operation of the public reference room can be obtained by calling the SEC
directly at 1-202-942-8090. Copies of this information can be obtained, for a
duplicating fee, by electronic request at the following E-mail address:
[email protected], or by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-0102.
Investment Company Act File No. 811-05742.
<PAGE>
BLACKROCK FUNDS(SM)
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in the Core Equity Portfolio (the
"Portfolio") of BlackRock Funds(SM) (the "Fund"). This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Prospectus of the Portfolio dated October 30, 2000, as amended from time to time
(the "Prospectus"). The Prospectus of the Portfolio may be obtained from the
Fund's distributor at no charge by calling toll-free (800) 441-7379. This
Statement of Additional Information is dated October 30, 2000.
<PAGE>
TABLE OF CONTENTS
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INVESTMENT POLICIES........................................................... 1
ADDITIONAL INVESTMENT LIMITATIONS............................................. 9
TRUSTEES AND OFFICERS......................................................... 1
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND................................. 4
INVESTMENT ADVISORY, ADMINISTRATION, DISTRIBUTION AND SERVICING ARRANGEMENTS.. 5
EXPENSES...................................................................... 7
PORTFOLIO TRANSACTIONS........................................................ 8
PURCHASE AND REDEMPTION INFORMATION........................................... 9
VALUATION OF PORTFOLIO SECURITIES............................................. 10
PERFORMANCE INFORMATION....................................................... 11
TAXES......................................................................... 16
ADDITIONAL INFORMATION CONCERNING SHARES...................................... 18
MISCELLANEOUS................................................................. 19
APPENDIX A.................................................................... A-1
APPENDIX B.................................................................... B-1
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INVESTMENT POLICIES
The following supplements information contained in the Prospectus
concerning the Portfolio's investment policies. To the extent that an investment
strategy is discussed in this Statement of Additional Information but not in the
Prospectus, such strategy is not a principal strategy of the Portfolio.
Additional Information on Investment Strategy
Equity securities include common stock and preferred stock (including
convertible preferred stock); bonds, notes and debentures convertible into
common or preferred stock; stock purchase warrants and rights; equity interests
in trusts and partnerships; and depositary receipts.
From time to time the Portfolio may invest in shares of companies through
initial public offerings (IPOs). IPOs have the potential to produce, and have in
fact produced, substantial gains. There is no assurance that the Portfolio will
have access to profitable IPOs and therefore investors should not rely on these
past gains as an indication of future performance. Stocks of some newly-public
companies may decline shortly after the initial public offering.
The Portfolio may, but under normal market conditions does not expect to,
engage in active and frequent trading of its securities to achieve its principal
investment strategies.
Additional Information on Portfolio Investments
Foreign Investments. Investing in foreign securities involves risks not
typically associated with investing in securities of companies organized and
operated in the United States. Because foreign securities generally are
denominated and pay dividends or interest in foreign currencies, the value of a
portfolio that invests in foreign securities as measured in U.S. dollars will be
affected favorably or unfavorably by changes in exchange rates.
The Portfolio's investments in foreign securities may also be adversely
affected by changes in foreign political or social conditions, diplomatic
relations, confiscatory taxation, expropriation, limitation on the removal of
funds or assets, or imposition of (or change in) exchange control regulations.
In addition, changes in government administrations or economic or monetary
policies in the U.S. or abroad could result in appreciation or depreciation of
portfolio securities and could favorably or adversely affect the Portfolio's
operations.
In general, less information is publicly available with respect to foreign
issuers than is available with respect to U.S. companies. Most foreign companies
are also not subject to the uniform accounting and financial reporting
requirements applicable to issuers in the United States. While the volume of
transactions effected on foreign stock exchanges has increased in recent years,
it remains appreciably below that of the New York Stock Exchange. Accordingly,
the Portfolio's foreign investments may be less liquid and their prices may be
more volatile than comparable investments in securities in U.S. companies. In
addition, there is generally less government supervision and regulation of
securities exchanges, brokers and issuers in foreign countries than in the
United States.
The Portfolio may invest its assets in countries with emerging economies or
securities markets. Political and economic structures in many of these countries
may be undergoing significant evolution and rapid development, and these
countries may lack the social, political and economic stability characteristic
of more developed countries. Some of these countries may have in the past failed
to recognize private property rights and have at times nationalized or
expropriated the assets of private companies. As a result the risks described
above, including the risks of nationalization or expropriation of assets, may be
heightened. In addition, unanticipated political or social developments may
affect the value of investments in these countries and the availability to the
Portfolio of additional investments in emerging market countries. The small size
and inexperience of the securities markets in certain of these countries and the
limited volume of trading in securities in these countries may make investments
in the countries illiquid and more volatile than investments in Japan or most
Western European countries. There may be little financial or accounting
information available with respect to issuers located in certain emerging market
countries, and it may be difficult to assess the value or prospects of an
investment in such issuers.
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ADRs, EDRs and GDRs. The Portfolio may invest in both sponsored and
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs") and other similar global
instruments. ADRs typically are issued by an American bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts, are
receipts issued in Europe, typically by foreign banks and trust companies, that
evidence ownership of either foreign or domestic underlying securities. GDRs are
depository receipts structured like global debt issues to facilitate trading on
an international basis. Unsponsored ADR, EDR and GDR programs are organized
independently and without the cooperation of the issuer of the underlying
securities. As a result, available information concerning the issuer may not be
as current as for sponsored ADRs, EDRs and GDRs, and the prices of unsponsored
ADRs, EDRs and GDRs may be more volatile than if such instruments were sponsored
by the issuer. Investments in ADRs, EDRs and GDRs present additional investment
considerations as described under "Foreign Investments."
The Euro. On January 1, 1999, 11 European countries implemented a new
currency unit, the Euro, which is expected to replace the existing national
currencies of these countries by July 1, 2002, and to reshape financial markets,
banking systems and monetary policies in Europe and other parts of the world.
The countries that initially converted or tied their currencies to the Euro are
Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan means that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Participating governments will issue their bonds in Euros, and monetary policy
for participating countries will be uniformly managed by a new central bank, the
European Central Bank.
Although it is not possible to predict the impact of the Euro
implementation plan on the Portfolio, the transition to the Euro may change the
economic environments and behavior of investors, particularly in European
markets. For example, investors may begin to view those countries using the Euro
as a single entity, and the Portfolio's adviser or sub-adviser may need to adapt
its investment strategy accordingly. The process of implementing the Euro also
may adversely affect financial markets world-wide and may result in changes in
the relative strength and value of the U.S. dollar or other major currencies, as
well as possible adverse tax consequences. The transition to the Euro is likely
to have a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce generally.
These resulting uncertainties could create increased volatility in financial
markets world-wide.
Reverse Repurchase Agreements and Other Borrowings. The Portfolio is
authorized to borrow money. If the securities held by the Portfolio should
decline in value while borrowings are outstanding, the net asset value of the
Portfolio's outstanding shares will decline in value by proportionately more
than the decline in value suffered by the Portfolio's securities. Borrowings may
be made by the Portfolio through reverse repurchase agreements under which the
Portfolio sells portfolio securities to financial institutions such as banks and
broker-dealers and agrees to repurchase them at a particular date and price.
Such Agreements are considered to be borrowings under the Investment Company Act
of 1940 (the "1940 Act"). The Portfolio will use the proceeds of reverse
repurchase agreements to purchase other securities either maturing, or under an
agreement to resell, on a date simultaneous with or prior to the expiration of
the reverse repurchase agreement. This use of reverse repurchase agreements may
be regarded as leveraging and, therefore, speculative. Reverse repurchase
agreements involve the risks that the interest income earned in the investment
of the proceeds will be less than the interest expense, that the market value of
the securities sold by the Portfolio may decline below the price of the
securities the Portfolio is obligated to repurchase and that the securities may
not be returned to the Portfolio. During the time a reverse repurchase agreement
is outstanding, the Portfolio will maintain a segregated account with the Fund's
custodian containing cash, U.S. Government or other appropriate liquid
securities having a value at least equal to the repurchase price. The
Portfolio's reverse repurchase agreements, together with any other borrowings,
will not exceed, in the aggregate, 33 1/3% of the value of its total assets.
Whenever borrowings exceed 5% of the Portfolio's total assets, it will not make
any investments.
Money Market Obligations of Domestic Banks, Foreign Banks and Foreign
Branches of U.S. Banks. The Portfolio may purchase bank obligations, such as
certificates of deposit, notes, bankers' acceptances and time deposits,
including instruments issued or supported by the credit of U.S. or foreign banks
or savings institutions having total assets at the time of purchase in excess of
$1 billion. These obligations may be general obligations of the parent bank or
may be limited to the issuing branch or subsidiary by the terms of a specific
obligation or by
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government regulation. The assets of a bank or savings institution will be
deemed to include the assets of its domestic and foreign branches for purposes
of the Portfolio's investment policies. Investments in short-term bank
obligations may include obligations of foreign banks and domestic branches of
foreign banks, and also foreign branches of domestic banks.
Supranational Organization Obligations. The Portfolio may purchase debt
securities of supranational organizations such as the European Coal and Steel
Community, the European Economic Community and the World Bank, which are
chartered to promote economic development.
Lease Obligations. The Portfolio may hold participation certificates in a
lease, an installment purchase contract, or a conditional sales contract ("lease
obligations").
The adviser or sub-adviser will monitor the credit standing of each
municipal borrower and each entity providing credit support and/or a put option
relating to lease obligations. In determining whether a lease obligation is
liquid, the adviser or sub-adviser will consider, among other factors, the
following: (i) whether the lease can be cancelled; (ii) the degree of assurance
that assets represented by the lease could be sold; (iii) the strength of the
lessee's general credit (e.g., its debt, administrative, economic, and financial
characteristics); (iv) the likelihood that the municipality would discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an "event of nonappropriation"); (v) legal recourse in the event of failure to
appropriate; (vi) whether the security is backed by a credit enhancement such as
insurance; and (vii) any limitations which are imposed on the lease obligor's
ability to utilize substitute property or services other than those covered by
the lease obligation.
Municipal leases, like other municipal debt obligations, are subject to the
risk of non-payment. The ability of issuers of municipal leases to make timely
lease payments may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Portfolio, and could result in a reduction in the value of the
municipal lease experiencing non-payment and a potential decrease in the net
asset value of the Portfolio. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Portfolio could experience delays and limitations with respect to
the collection of principal and interest on such municipal leases and the
Portfolio may not, in all circumstances, be able to collect all principal and
interest to which it is entitled. To enforce its rights in the event of a
default in lease payments, the Portfolio might take possession of and manage the
assets securing the issuer's obligations on such securities, which may increase
the Portfolio's operating expenses and adversely affect the net asset value of
the Portfolio. When the lease contains a non-appropriation clause, however, the
failure to pay would not be a default and the Portfolio would not have the right
to take possession of the assets. Any income derived from the Portfolio's
ownership or operation of such assets may not be tax-exempt. In addition, the
Portfolio's intention to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended, may limit the extent to which the
Portfolio may exercise its rights by taking possession of such assets, because
as a regulated investment company the Portfolio is subject to certain
limitations on its investments and on the nature of its income.
Commercial Paper. The Portfolio may purchase commercial paper rated (at the
time of purchase) "A-1" by S&P or "Prime-1" by Moody's or, when deemed advisable
by the Portfolio's adviser or sub-adviser, "high quality" issues rated "A-2" or
"Prime-2" by S&P or Moody's, respectively. These ratings symbols are described
in Appendix A.
Commercial paper purchasable by the Portfolio includes "Section 4(2)
paper," a term that includes debt obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) paper is restricted as to disposition under
the Federal securities laws, and is frequently sold (and resold) to
institutional investors such as the Fund through or with the assistance of
investment dealers who make a market in the Section 4(2) paper, thereby
providing liquidity. Certain transactions in Section 4(2) paper may qualify for
the registration exemption provided in Rule 144A under the Securities Act of
1933.
Repurchase Agreements. The Portfolio may agree to purchase securities from
financial institutions subject to the seller's agreement to repurchase them at
an agreed upon time and price ("repurchase agreements"). Repurchase agreements
are, in substance, loans. Default by or bankruptcy of a seller would expose the
Portfolio to
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possible loss because of adverse market action, expenses and/or delays in
connection with the disposition of the underlying obligations.
The repurchase price under the repurchase agreements generally equals the
price paid by the Portfolio involved plus interest negotiated on the basis of
current short-term rates (which may be more or less than the rate on securities
underlying the repurchase agreement). The financial institutions with which the
Portfolio may enter into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities that are listed on the Federal Reserve
Bank of New York's list of reporting dealers, if such banks and non-bank dealers
are deemed creditworthy by the Portfolio's adviser or sub-adviser. The
Portfolio's adviser or sub-adviser will continue to monitor creditworthiness of
the seller under a repurchase agreement, and will require the seller to maintain
during the term of the agreement the value of the securities subject to the
agreement to equal at least the repurchase price (including accrued interest).
In addition, the Portfolio's adviser or sub- adviser will require that the value
of this collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be equal to or greater than the
repurchase price (including accrued premium) provided in the repurchase
agreement. The accrued premium is the amount specified in the repurchase
agreement or the daily amortization of the difference between the purchase price
and the repurchase price specified in the repurchase agreement. The Portfolio's
adviser or sub-adviser will mark-to-market daily the value of the securities.
Securities subject to repurchase agreements will be held by the Fund's custodian
(or sub-custodian) in the Federal Reserve/Treasury book-entry system or by
another authorized securities depository. Repurchase agreements are considered
to be loans by the Portfolio under the 1940 Act.
The use of repurchase agreements involves certain risks. For example, if
the seller of securities under a repurchase agreement defaults on its obligation
to repurchase the underlying securities, as a result of its bankruptcy or
otherwise, the Portfolio will seek to dispose of such securities, which action
could involve costs or delays. If the seller becomes insolvent and subject to
liquidation or reorganization under applicable bankruptcy or other laws, the
Portfolio's ability to dispose of the underlying securities may be restricted.
Finally, it is possible that the Portfolio may not be able to substantiate its
interest in the underlying securities. To minimize this risk, the securities
underlying the repurchase agreement will be held by the custodian at all times
in an amount at least equal to the repurchase price, including accrued interest.
If the seller fails to repurchase the securities, the Portfolio may suffer a
loss to the extent proceeds from the sale of the underlying securities are less
than the repurchase price.
Investment Grade Debt Obligations. The Portfolio may invest in "investment
grade securities," which are securities rated in the four highest rating
categories of an NRSRO or deemed to be of equivalent quality by the Portfolio's
adviser or sub-adviser. It should be noted that debt obligations rated in the
lowest of the top four ratings (i.e., "Baa" by Moody's or "BBB" by S&P) are
considered to have some speculative characteristics and are more sensitive to
economic change than higher rated securities. If an investment grade security of
the Portfolio is subsequently downgraded below investment grade, the Portfolio's
adviser or sub-adviser will consider such an event in determining whether the
Portfolio should continue to hold the security. Subject to its other investment
strategies, there is no limit on the amount of such downgraded securities the
Portfolio may hold, although under normal market conditions the adviser and sub-
adviser do not expect to hold these securities to a material extent.
See Appendix A to this Statement of Additional Information for a
description of applicable securities ratings.
When-Issued Purchases and Forward Commitments. The Portfolio may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment," including "TBA" (to be announced) basis. These
transactions involve a commitment by the Portfolio to purchase or sell
particular securities with payment and delivery taking place at a future date
(perhaps one or two months later), and permit the Portfolio to lock in a price
or yield on a security it owns or intends to purchase, regardless of future
changes in interest rates or market action. When-issued and forward commitment
transactions involve the risk, however, that the price or yield obtained in a
transaction may be less favorable than the price or yield available in the
market when the securities delivery takes place.
When the Portfolio agrees to purchase securities on this basis, the
custodian will set aside liquid assets equal to the amount of the commitment in
a separate account. Normally, the custodian will set aside portfolio securities
to satisfy a purchase commitment, and in such a case the Portfolio may be
required subsequently to place
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additional assets in the separate account in order to ensure that the value of
the account remains equal to the amount of the Portfolio's commitments. It may
be expected that the market value of the Portfolio's net assets will fluctuate
to a greater degree when it sets aside portfolio securities to cover such
purchase commitments than when it sets aside cash. Because the Portfolio's
liquidity and ability to manage its portfolio might be affected when it sets
aside cash or portfolio securities to cover such purchase commitments, the
Portfolio expects that its forward commitments and commitments to purchase when-
issued or TBA securities will not exceed 25% of the value of its total assets
absent unusual market conditions.
If deemed advisable as a matter of investment strategy, the Portfolio may
dispose of or renegotiate a commitment after it has been entered into, and may
sell securities it has committed to purchase before those securities are
delivered to the Portfolio on the settlement date. In these cases the Portfolio
may realize a taxable capital gain or loss.
When the Portfolio engages in when-issued, TBA or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Portfolio's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of the Portfolio starting on the day
the Portfolio agrees to purchase the securities. The Portfolio do not earn
interest on the securities it has committed to purchase until they are paid for
and delivered on the settlement date.
Rights Offerings and Warrants to Purchase. The Portfolio may participate in
rights offerings and may purchase warrants, which are privileges issued by
corporations enabling the owners to subscribe to and purchase a specified number
of shares of the corporation at a specified price during a specified period of
time. Subscription rights normally have a short life span to expiration. The
purchase of rights or warrants involves the risk that the Portfolio could lose
the purchase value of a right or warrant if the right to subscribe to additional
shares is not exercised prior to the rights' and warrants' expiration. Also, the
purchase of rights and/or warrants involves the risk that the effective price
paid for the right and/or warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. The Portfolio
will not invest more than 5% of its net assets, taken at market value, in
warrants, or more than 2% of its net assets, taken at market value, in warrants
not listed on the New York or American Stock Exchanges. Warrants acquired by the
Portfolio in units or attached to other securities are not subject to this
restriction.
Options and Futures Contracts. To the extent consistent with its investment
objective, the Portfolio may write (i.e. sell) covered call options, buy put
options, buy call options and write secured put options for the purpose of
hedging or earning additional income, which may be deemed speculative or cross-
hedging. For the payment of a premium, the purchaser of an option obtains the
right to buy (in the case of a call option) or to sell (in the case of a put
option) the item which is the subject of the option at a stated exercise price
for a specific period of time. These options may relate to particular securities
or securities indices, and may or may not be listed on a securities exchange and
may or may not be issued by the Options Clearing Corporation. While the
Portfolio will not purchase put and call options when the aggregate premiums on
outstanding options exceed 5% of its net assets at the time of purchase, and
will not write options on more than 25% of the value of its net assets (measured
at the time an option is written), there is no limit on the amount of the
Portfolio's assets that can be put at risk through the use of options. Options
trading is a highly specialized activity that entails greater than ordinary
investment risks. In addition, unlisted options are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
To the extent consistent with its investment objective, the Portfolio may
also invest in futures contracts and options on futures contracts (interest rate
futures contracts or index futures contracts, as applicable) to commit funds
awaiting investment or maintain cash liquidity or for other hedging purposes.
These instruments are described in Appendix B to this Statement of Additional
Information. The value of the Portfolio's contracts may equal or exceed 100% of
its total assets, although the Portfolio will not purchase or sell a futures
contract unless immediately afterwards the aggregate amount of margin deposits
on its existing futures positions plus the amount of premiums
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paid for related futures options entered into for other than bona fide hedging
purposes is 5% or less of its net assets. There is no limit on the amount of the
Portfolio's assets that can be put at risk through the use of futures contracts.
Futures contracts obligate the Portfolio, at maturity, to take or make
delivery of securities, the cash value of a securities index or a stated
quantity of a foreign currency. The Portfolio may sell a futures contract in
order to offset an expected decrease in the value of its portfolio positions
that might otherwise result from a market decline or currency exchange
fluctuation. The Portfolio may do so either to hedge the value of their
securities portfolios as a whole, or to protect against declines occurring prior
to sales of securities in the value of the securities to be sold. In addition,
the Portfolio may utilize futures contracts in anticipation of changes in the
composition of its holdings or in currency exchange rates.
The Portfolio may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When the Portfolio purchases
an option on a futures contract, it has the right to assume a position as a
purchaser or a seller of a futures contract at a specified exercise price during
the option period. When the Portfolio sells an option on a futures contract, it
becomes obligated to sell or buy a futures contract if the option is exercised.
In connection with the Portfolio's position in a futures contract or related
option, the Fund will create a segregated account of liquid assets or will
otherwise cover its position in accordance with applicable SEC requirements.
The primary risks associated with the use of futures contracts and options
are (a) the imperfect correlation between the change in market value of the
instruments held by the Portfolio and the price of the futures contract or
option; (b) possible lack of a liquid secondary market for a futures contract
and the resulting inability to close a futures contract when desired; (c) losses
caused by unanticipated market movements, which are potentially unlimited; (d)
the sub-adviser's inability to predict correctly the direction of securities
prices, interest rates, currency exchange rates and other economic factors; and
(e) the possibility that the counterparty will default in the performance of its
obligations.
The Fund intends to comply with the regulations of the Commodity Futures
Trading Commission exempting the Portfolio from registration as a "commodity
pool operator."
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in the underlying securities themselves. The Portfolio will write
call options only if they are "covered." In the case of a call option on a
security, the option is "covered" if the Portfolio owns the security underlying
the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
liquid assets in such amount as are held in a segregated account by its
custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the Portfolio maintains with
its custodian liquid assets equal to the contract value. A call option is also
covered if the Portfolio holds a call on the same security or index as the call
written where the exercise price of the call held is (i) equal to or less than
the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the difference is maintained by the Portfolio in
liquid assets in a segregated account with its custodian.
When the Portfolio purchases a put option, the premium paid by it is
recorded as an asset of the Portfolio. When the Portfolio writes an option, an
amount equal to the net premium (the premium less the commission) received by
the Portfolio is included in the liability section of the Portfolio's statement
of assets and liabilities as a deferred credit. The amount of this asset or
deferred credit will be subsequently marked-to-market to reflect the current
value of the option purchased or written. The current value of the traded option
is the last sale price or, in the absence of a sale, the mean between the last
bid and asked prices. If an option purchased by the Portfolio expires
unexercised the Portfolio realizes a loss equal to the premium paid. If the
Portfolio enters into a closing sale transaction on an option purchased by it,
the Portfolio will realize a gain if the premium received by the Portfolio on
the closing transaction is more than the premium paid to purchase the option, or
a loss if it is less. If an option written by the Portfolio expires on the
stipulated expiration date or if the Portfolio enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase
transaction exceeds the net premium received when the option is sold) and the
deferred credit related to such option will be eliminated. If an option written
by the Portfolio is exercised, the proceeds of the sale will be increased by the
net premium originally received and the Portfolio will realize a gain or loss.
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There are several risks associated with transactions in options on
securities and indexes. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. In addition, a liquid secondary market for particular options,
whether traded over-the-counter or on a national securities exchange
("Exchange") may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
Securities Lending. The Portfolio may seek additional income by lending
securities on a short-term basis. The securities lending agreements will require
that the loans be secured by collateral in cash, U.S. Government securities or
irrevocable bank letters of credit maintained on a current basis equal in value
to at least the market value of the loaned securities. The Portfolio may not
make such loans in excess of 33 1/3% of the value of its total assets.
Securities loans involve risks of delay in receiving additional collateral or in
recovering the loaned securities, or possibly loss of rights in the collateral
if the borrower of the securities becomes insolvent.
The Portfolio would continue to accrue interest on loaned securities and
would also earn income on investment collateral for such loans. Any cash
collateral received by the Portfolio in connection with such loans may be
invested in a broad range of high quality, U.S. dollar-denominated money market
instruments that meet Rule 2a-7 restrictions for money market funds.
Specifically, cash collateral may be invested in any of the following
instruments: (a) securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities and related
custodial receipts; (b) "first tier" quality commercial paper and other
obligations issued or guaranteed by U.S. and foreign corporations and other
issuers rated (at the time of purchase) in the highest rating category by at
least two NRSRO's, or one if only rated by one NRSRO; (c) U.S. dollar-
denominated obligations issued or supported by the credit of U.S. or foreign
banks or savings institutions with total assets in excess of $1 billion
(including obligations of foreign branches of such banks) (i.e. CD's, BA's and
time deposits); (d) repurchase agreements relating to the above instruments, as
well as corporate debt; and (e) unaffiliated money market funds. Any such
investments must be rated "first tier" and must have a maturity of 397 days or
less from the date of purchase.
Yields and Ratings. The yields on certain obligations are dependent on a
variety of factors, including general market conditions, conditions in the
particular market for the obligation, the financial condition of the issuer, the
size of the offering, the maturity of the obligation and the ratings of the
issue. The ratings of Moody's, Duff & Phelps Credit Co. ("Duff & Phelps"), Fitch
Investor Services, Inc. ("Fitch") and S&P represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices. Subsequent to its purchase by the Portfolio, a rated security may cease
to be rated. The Portfolio's adviser or sub-adviser will consider such an event
in determining whether the Portfolio should continue to hold the security.
Subject to its other investment strategies, there is no limit on the amount of
unrated securities the Portfolio may hold, although under normal market
conditions the adviser and sub-adviser do not expect to hold these securities to
a material extent.
Investment Companies. In connection with the management of its daily cash
positions, the Portfolio may invest in securities issued by other investment
companies which invest in short-term debt securities and which seek to maintain
a $1.00 net asset value per share. The Portfolio may also invest in securities
issued by other investment companies with similar investment objectives.
Securities of other investment companies will be acquired within limits
prescribed by the 1940 Act. As a shareholder of another investment company, the
Portfolio would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory fees and other expenses the Portfolio bears
directly in connection with their own operations.
7
<PAGE>
The Portfolio currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (i) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (ii) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of investment companies as a group;
and (iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Portfolio or by the Fund as a whole.
Liquidity Management. As a temporary defensive measure if its sub-adviser
determines that market conditions warrant, the Portfolio may invest without
limitation in high quality money market instruments. During the course of its
normal operations, the Portfolio may also invest in high quality money market
instruments pending investment or to meet anticipated redemption requests. High
quality money market instruments include U.S. government obligations, U.S.
government agency obligations, dollar denominated obligations of foreign
issuers, bank obligations, including U.S. subsidiaries and branches of foreign
banks, corporate obligations, commercial paper, repurchase agreements and
obligations of supranational organizations. Generally, such obligations will
mature within one year from the date of settlement, but may mature within two
years from the date of settlement.
Illiquid Securities. The Portfolio will not invest more than 15% of the
value of its net assets in securities that are illiquid. Repurchase agreements
and time deposits that do not provide for payment within seven days after
notice, without taking a reduced price, are subject to these limits. The
Portfolio may purchase securities which are not registered under the Securities
Act of 1933 (the "1933 Act") but which can be sold to "qualified institutional
buyers" in accordance with Rule 144A under the 1933 Act. These securities will
not be considered illiquid so long as it is determined by the adviser or sub-
adviser that an adequate trading market exists for the securities. This
investment practice could have the effect of increasing the level of illiquidity
in the Portfolio during any period that qualified institutional buyers become
uninterested in purchasing these restricted securities.
Guarantees. The Portfolio may purchase securities which contain guarantees
issued by an entity separate from the issuer of the security. Generally, the
guarantor of a security (often an affiliate of the issuer) will fulfill an
issuer's payment obligations under a security if the issuer is unable to do so.
Portfolio Turnover Rates. The Portfolio's annual portfolio turnover rate
will not be a factor preventing a sale or purchase when the adviser or sub-
adviser believes investment considerations warrant such sale or purchase.
Portfolio turnover may vary greatly from year to year as well as within a
particular year. Higher than normal portfolio turnover (i.e., 100% or more) may
result in increased transaction costs to the Portfolio, including brokerage
commissions, dealer mark-ups and other transaction costs on the sale of the
securities and on reinvestment in other securities. The sale of the Portfolio's
securities may result in the recognition of capital gain or loss. Given the
frequency of sales, such gain or loss will likely be short-term capital gain or
loss. Unlike long-term capital gain, short-term capital gain of individuals is
taxable at the same rates as ordinary income. These effects of higher than
normal portfolio turnover may adversely affect the Portfolio's performance.
ADDITIONAL INVESTMENT LIMITATIONS
The Portfolio is subject to the investment limitations enumerated in this
subsection which may be changed only by a vote of the holders of a majority of
the Portfolio's outstanding shares (as defined below under "Miscellaneous").
The Portfolio may not:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities or
certificates of deposit for any such securities) if more than 5% of the value of
the Portfolio's total assets would (taken at current value) be invested in the
securities of such issuer, or more than 10% of the issuer's outstanding voting
securities would be owned by the Portfolio or the Fund, except that up to 25% of
the value of the Portfolio's total assets may (taken at current value) be
invested without regard to these limitations. For purposes of this limitation, a
security is considered to be issued by the entity (or entities) whose assets and
revenues back the security. A guarantee of a security shall not be deemed to be
a security issued by the guarantors when the value of all securities issued and
guaranteed by the guarantor, and owned by the Portfolio, does not exceed 10% of
the value of the Portfolio's total assets.
8
<PAGE>
2. Purchase any securities which would cause 25% or more of the value of
the Portfolio's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) instruments issued or guaranteed by the United States, any state, territory
or possession of the United States, the District of Columbia or any of their
authorities, agencies, instrumentalities or political subdivisions, and (ii)
repurchase agreements secured by the instruments described in clause (i); (b)
wholly-owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing the
activities of the parents; and (c) utilities will be divided according to their
services; for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry.
3. Borrow money or issue senior securities, except that the Portfolio may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes in amounts up to one-third of the value of its total assets at the time
of such borrowing; or mortgage, pledge or hypothecate any assets, except in
connection with any such borrowing and then in amounts not in excess of one-
third of the value of the Portfolio's total assets at the time of such
borrowing. No Portfolio will purchase securities while its aggregate borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of its total assets are outstanding. Securities held in escrow or separate
accounts in connection with the Portfolio's investment practices are not deemed
to be pledged for purposes of this limitation.
4. Purchase or sell real estate, except that the Portfolio may purchase
securities of issuers which deal in real estate and may purchase securities
which are secured by interests in real estate.
5. 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.
6. 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, in
accordance with the Portfolio's investment objective, policies and limitations
may be deemed to be underwriting.
7. Write or sell put options, call options, straddles, spreads, or any
combination thereof, except for transactions in options on securities and
securities indices, futures contracts and options on futures contracts.
8. Purchase securities of companies for the purpose of exercising
control.
9. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation shall not
apply to the Portfolio's transactions in futures contracts and related options
or the Portfolio's sale of securities short against the box, and (b) the
Portfolio may obtain short-term credit as may be necessary for the clearance of
purchases and sales of portfolio securities.
10. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that the Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities and may enter into futures
contracts and related options.
11. Make loans, except that the Portfolio may purchase and hold debt
instruments and enter into repurchase agreements in accordance with its
investment objective and policies and may lend portfolio securities.
12. Purchase or sell commodities except that the Portfolio may, to the
extent appropriate to its investment policies, purchase securities of companies
engaging in whole or in part in such activities, may engage in currency
transactions and may enter into futures contracts and related options.
9
<PAGE>
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of its
Board of Trustees. The trustees and executive officers of the Fund, and their
business addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
---------------- ------------------ ----------------------
<S> <C> <C>
William O. Albertini Trustee and Chairman of Retired; Executive Vice President and Chief Financial
698 Strafford Circle the Audit Committee Officer from August 1997 - April 1999, Bell Atlantic Global
Strafford, PA 19087 Wireless (global wireless communications); Executive Vice
Age: 56 President, Chief Financial Officer and Director from
February 1995 - August 1997, Vice President and Chief
Financial Officer from January 1991 - February 1995, Bell
Atlantic Corporation (a diversified telecommunications
company); Director, American Water Works, Inc. (water
utility) since May 1990; Director, Triumph Group, Inc.
(aviation manufacturing, repair and maintenance services)
since May 1999; Director, Midwest Independent Transmission
Operator, Inc. (electrical transmission operator) since
December 1998; Trustee, The Carl E. & Emily I. Weller
Foundation since October 1991.
Raymond J. Clark/1/ Trustee, President and Treasurer of Princeton University since 1987; Trustee, The
Office of the Treasurer Treasurer Compass Capital Group of Funds from 1987 to 1996; Trustee,
Princeton University Chemical Bank, New Jersey Advisory Board from 1994 until
3 New South Building 1995; Chairman of the Board of Trustees, American Red Cross
P.O. Box 35 - Central N.J. Chapter; Trustee, Medical Center of
Princeton, NJ 08540 Princeton; and Trustee, United Way-Greater Mercer County
Age: 64 from 1996-1997.
Robert M. Hernandez Trustee and Chairman of Director since 1991, Vice Chairman and Chief Financial
USX Corporation the Nominating Committee Officer since 1994, Executive Vice President - Accounting
600 Grant Street and Finance and Chief Financial Officer from 1991 to 1994,
6105 USX Tower USX Corporation (a diversified company principally engaged
Pittsburgh, PA 15219 in energy and steel businesses); Director and Chairman of
Age: 55 the Executive Committee, ACE Limited (insurance company);
Director, Transtar, Inc. (transportation company) since
1996; and Director and Chairman of the Board, RTI
International Metals, Inc. since 1990.
David R. Wilmerding, Jr. Chairman of the Board Chairman, Gee, Wilmerding & Associates, Inc. (investment
One Aldwyn Center advisers) since February 1989; Director, Beaver Management
Villanova, PA 19085 Corporation (land management corporation); Managing General
Age: 64 Partner, Chestnut Street Exchange Fund; Director,
Independence Square Income Securities, Inc.; Director, The
Mutual Fire, Marine and Inland Insurance Company; Director,
U.S. Retirement Communities, Inc.; Director, Trustee or
Managing General Partner of a number of investment companies
advised by BIMC and its affiliates.
</TABLE>
--------------------------------
/1/ This trustee may be deemed an "interested person" of the Fund as defined
in the 1940 Act.
10
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation
Name and Address Position with Fund During Past Five Years
---------------- ------------------ ----------------------
<S> <C> <C>
Karen H. Sabath Assistant Secretary Managing Director, BlackRock Advisors, Inc. since February
BlackRock Advisors, Inc. 1998; President, Compass Capital Group, Inc. from 1995 to
345 Park Avenue March 1998; Managing Director of BlackRock Financial
New York, NY 10154 Management, Inc. since 1993; prior to 1993, Vice President
Age: 34 of BlackRock Financial Management, Inc.
Ellen L. Corson Assistant Treasurer Vice President and Director of Mutual Fund Accounting and
PFPC Inc. Administration, PFPC Inc. since November 1997; Assistant
103 Bellevue Parkway Vice President, PFPC Inc. from March 1997 to November 1997;
Wilmington, DE 19809 Senior Accounting Officer, PFPC Inc. from March 1993 to
Age: 35 March 1997.
Brian P. Kindelan Secretary Vice President and Senior Counsel, BlackRock Advisors, Inc.
BlackRock Advisors, Inc. since April 1998; Senior Counsel, PNC Bank Corp. from May
1600 Market Street 1995 to April 1998; Associate, Stradley, Ronon, Stevens &
28th Fl. Young, LLP from March 1990 to May 1995.
Philadelphia, PA 19103
Age: 40
</TABLE>
The Fund pays trustees who are not affiliated with BlackRock Advisors, Inc.
("BlackRock") or BlackRock Distributors, Inc. ("BDI" or the "Distributor")
$20,000 annually ($30,000 annually in the event that the assets of the Fund
exceed $40 billion) and $350 per portfolio for each full in-person meeting of
the Board that they attend. The Fund pays the Chairman and Vice Chairman of the
Board an additional $10,000 and $5,000 per year, respectively, for their service
in such capacities. Trustees who are not affiliated with BlackRock or the
Distributor are reimbursed for any expenses incurred in attending meetings of
the Board of Trustees or any committee thereof. The term of office of each
trustee will automatically terminate when such trustee reaches 72 years of age.
No officer, director or employee of BlackRock, BlackRock Institutional
Management Corporation ("BIMC"), BlackRock Financial Management, Inc. ("BFM"),
BlackRock International, Ltd. ("BIL"), PFPC Inc. ("PFPC") (with BlackRock, the
"Administrators"), BDI, PFPC Trust Company ("PTC") or PNC Bank, National
Association ("PNC Bank") currently receives any compensation from the Fund. As
of the date of this Statement of Additional Information, the trustees and
officers of the Fund, as a group, owned less than 1% of the outstanding shares
of each class of each Portfolio.
The table below sets forth the compensation actually received from the Fund
and the Fund Complex of which the Fund is a part by the trustees for the fiscal
year ended September 30, 1999:
<TABLE>
<CAPTION>
Pension or
Retirement Total Compensation
Aggregate Benefits Accrued Estimated from Registrant and
Name of Person, Compensation as Part of Fund Annual benefits Fund Complex/1/ Paid
Position from Registrant Expenses upon Retirement to Trustees
---------------------------- ----------------- ------------------ ----------------- -----------------------
<S> <C> <C> <C> <C>
David R. Wilmerding, Jr., $82,850 N/A N/A (3)2 $98,850
Chairman of the Board
William O. Albertini, $72,850 N/A N/A (1)2 $72,850
Trustee and Chair of the
Audit Committee
Raymond J. Clark, Trustee $72,850 N/A N/A (1)2 $72,850
Robert M. Hernandez, $72,850 N/A N/A (1)2 $72,850
Trustee and Chair of the
Nominating Committee
</TABLE>
11
<PAGE>
____________________
1. A Fund Complex means two or more investment companies that hold themselves
out to investors as related companies for purposes of investment and
investment services, or have a common investment adviser or have an
investment adviser that is an affiliated person of the investment adviser of
any of the other investment companies.
2. Total number of investment company boards trustees served on within the Fund
Complex.
SHAREHOLDER AND TRUSTEE LIABILITY OF THE FUND
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable as partners for the obligations
of the trust. However, the Fund's Declaration of Trust provides that
shareholders shall not be subject to any personal liability in connection with
the assets of the Fund for the acts or obligations of the Fund, and that every
note, bond, contract, order or other undertaking made by the Fund shall contain
a provision to the effect that the shareholders are not personally liable
thereunder. The Declaration of Trust provides for indemnification out of the
trust property of any shareholder held personally liable solely by reason of his
being or having been a shareholder and not because of his acts or omissions or
some other reason. The Declaration of Trust also provides that the Fund shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Fund, and shall satisfy any judgment thereon.
The Declaration of Trust further provides that all persons having any claim
against the trustees or Fund shall look solely to the trust property for
payment; that no trustee of the Fund shall be personally liable for or on
account of any contract, debt, tort, claim, damage, judgment or decree arising
out of or connected with the administration or preservation of the trust
property or the conduct of any business of the Fund; and that no trustee shall
be personally liable to any person for any action or failure to act except by
reason of his own bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties as a trustee. With the exception stated, the Declaration
of Trust provides that a trustee is entitled to be indemnified against all
liabilities and expenses reasonably incurred by him in connection with the
defense or disposition of any proceeding in which he may be involved or with
which he may be threatened by reason of his being or having been a trustee, and
that the Fund will indemnify officers, representatives and employees of the Fund
to the same extent that trustees are entitled to indemnification.
INVESTMENT ADVISORY, ADMINISTRATION,
DISTRIBUTION AND SERVICING ARRANGEMENTS
Advisory Agreement. The advisory and sub-advisory services provided by
BlackRock and BFM pursuant to the Investment Advisory Agreement and the Sub-
Advisory Agreement (collectively, the "Advisory Contracts") are described in the
Prospectus.
For their advisory and subadvisory services, BlackRock and BFM are entitled
to fees, computed daily and payable monthly, at the maximum annual rates set
forth below.
Maximum Annual Contractual Fee Rate
(Before Waivers)
Investment Sub-Advisory
Average Daily Net Assets Advisory Fee Fee to BFM
first $1 billion .350% .22750%
$1 billion -- $2 billion .325% .21125%
$2 billion -- $3 billion .300% .19500%
greater than $3 billion .275% .17875%
12
<PAGE>
Under the Advisory Contracts, BlackRock and BFM are not liable for any
error of judgment or mistake of law or for any loss suffered by the Fund or the
Portfolio in connection with the performance of the Advisory Contracts. Under
the Advisory Contracts, BlackRock and BFM are liable for a loss resulting from
willful misfeasance, bad faith or gross negligence in the performance of their
respective duties or from reckless disregard of their respective duties and
obligations thereunder. Each of the Advisory Contracts is terminable as to the
Portfolio by vote of the Fund's Board of Trustees or by the holders of a
majority of the outstanding voting securities of the relevant Portfolio, at any
time without penalty, on 60 days' written notice to BlackRock and BFM as the
case may be. BlackRock and BFM may also terminate their advisory relationship
with respect to the Portfolio on 60 days' written notice to the Fund.
Administration Agreement. BlackRock and PFPC serve as the Fund's co-
administrators pursuant to an administration agreement (the "Administration
Agreement"). PFPC has agreed to maintain office facilities for the Fund; furnish
the Fund with statistical and research data, clerical, accounting, and
bookkeeping services; provide and supervise the operation of an automated data
processing system to process purchase and redemption orders; prepare and file
certain reports required by regulatory authorities; prepare and file federal and
state tax returns; prepare and file material requested by state securities
regulators; calculate various contractual expenses; compute the Portfolio' net
asset value, net income and net capital gain or loss; and serve as a liaison
with the Fund's independent public accountants. The Administrators may from time
to time voluntarily waive administration fees with respect to the Portfolio and
may voluntarily reimburse the Portfolio for expenses.
Under the Administration Agreement, the Fund pays to BlackRock and PFPC on
behalf of the Portfolio a fee, computed daily and payable monthly, at an
aggregate annual rate of (i) .085% of the first $500 million of the Portfolio's
average daily net assets, .075% of the next $500 million of the Portfolio's
average daily net assets and .065% of the average daily net assets of the
Portfolio in excess of $1 billion and (ii) .145% of the first $500 million of
average daily net assets allocated to each class of shares of the Portfolio,
.135% of the next $500 million of such average daily net assets and .125% of the
average daily net assets allocated to each class of shares of the Portfolio in
excess of $1 billion.
Under the Administration Agreement, BlackRock is responsible for: (i) the
supervision and coordination of the performance of the Fund's service providers;
(ii) the negotiation of service contracts and arrangements between the Fund and
its service providers; (iii) acting as liaison between the trustees of the Fund
and the Fund's service providers; and (iv) providing ongoing business management
and support services in connection with the Fund's operations. Pursuant to the
terms of the Administration Agreement, BlackRock has delegated certain of its
duties thereunder to BDI.
The Administration Agreement provides that BlackRock and PFPC will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund or the Portfolio in connection with the performance of the
Administration Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence in the performance of their respective duties or from
reckless disregard of their respective duties and obligations thereunder. In
addition, the Fund will indemnify each of BlackRock and PFPC and their
affiliates against any loss arising in connection with their provision of
services under the Administration Agreement, except that neither BlackRock nor
PFPC nor their affiliates shall be indemnified against any loss arising out of
willful misfeasance, bad faith, gross negligence or reckless disregard of their
respective duties under the Administration Agreement.
The Fund and its service providers may engage third party plan
administrators who provide trustee, administrative and recordkeeping services
for certain employee benefit, profit-sharing and retirement plans as agent for
the Fund with respect to such plans, for the purpose of accepting orders for the
purchase and redemption of shares of the Fund.
Custodian and Transfer Agency Agreements. Pursuant to the terms of a
custodian agreement (the "Custodian Agreement") between the Fund and PNC Bank,
as of January 1, 1999 PNC Bank has assigned its rights and delegated its duties
as the Fund's custodian to its affiliate, PFPC Trust Company. Under the
Custodian Agreement, PTC or a sub-custodian (i) maintains a separate account or
accounts in the name of the Portfolio, (ii) holds and transfers portfolio
securities on account of the Portfolio, (iii) accepts receipts and makes
disbursements of money on behalf of the Portfolio, (iv) collects and receives
all income and other payments and distributions on account of the Portfolio's
securities and (v) makes periodic reports to the Board of Trustees concerning
the
13
<PAGE>
Portfolio's operations. PTC is authorized to select one or more banks or trust
companies to serve as sub-custodian on behalf of the Fund, provided that, with
respect to sub-custodians other than sub-custodians for foreign securities, PTC
remains responsible for the performance of all its duties under the Custodian
Agreement and holds the Fund harmless from the acts and omissions of any sub-
custodian. Citibank, N.A. serves as the international sub-custodian for various
portfolios of the Fund.
For its services to the Fund under the Custodian Agreement, PTC receives a
fee which is calculated based upon each investment portfolio's average gross
assets. PTC is also entitled to out-of-pocket expenses and certain transaction
charges.
PFPC, which has its principal offices at 400 Bellevue Parkway, Wilmington,
DE 19809 and is an affiliate of PNC Bank, serves as the transfer and dividend
disbursing agent for the Fund pursuant to a Transfer Agency Agreement (the
"Transfer Agency Agreement"), under which PFPC (i) issues and redeems shares in
the Portfolio, (ii) addresses and mails all communications by the Portfolio to
record owners of its shares, including reports to shareholders, dividend and
distribution notices and proxy materials for its meetings of shareholders, (iii)
maintains shareholder accounts and, if requested, sub-accounts and (iv) makes
periodic reports to the Board of Trustees concerning the operations of the
Portfolio. PFPC may, on 30 days' notice to the Fund, assign its duties as
transfer and dividend disbursing agent to any other affiliate of PNC Bank Corp.
For its services with respect to the Fund's Institutional Shares under the
Transfer Agency Agreement, PFPC receives fees at the annual rate of .03% of the
average net asset value of outstanding Institutional Shares in the Portfolio,
plus per account fees and disbursements.
Distributor and Distribution and Service Plan. The Fund has entered into a
distribution agreement with the Distributor under which the Distributor, as
agent, offers shares of the Portfolio on a continuous basis. The Distributor has
agreed to use appropriate efforts to effect sales of the shares, but it is not
obligated to sell any particular amount of shares. The Distributor's principal
business address is 3200 Horizon Drive, King of Prussia, PA 19406.
Pursuant to the Fund's Amended and Restated Distribution and Service Plan
(the "Plan"), the Fund may pay the Distributor and/or BlackRock or any other
affiliate of PNC Bank fees for distribution and sales support services.
Currently, only Investor A Shares, Investor B Shares and Investor C Shares bear
the expense of distribution fees under the Plan. The Plan provides, among other
things, that: (i) the Board of Trustees shall receive quarterly reports
regarding the amounts expended under the Plan and the purposes for which such
expenditures were made; (ii) the Plan will continue in effect for so long as its
continuance is approved at least annually by the Board of Trustees in accordance
with Rule 12b-1 under the 1940 Act; (iii) any material amendment thereto must be
approved by the Board of Trustees, including the trustees who are not
"interested persons" of the Fund (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Plan or any
agreement entered into in connection with the Plan (the "12b-1 Trustees"),
acting in person at a meeting called for said purpose; (iv) any amendment to
increase materially the costs which any class of shares may bear for
distribution services pursuant to the Plan shall be effective only upon approval
by a vote of a majority of the outstanding shares of such class and by a
majority of the 12b-1 Trustees; and (v) while the Plan remains in effect, the
selection and nomination of the Fund's trustees who are not "interested persons"
of the Fund shall be committed to the discretion of the Fund's non-interested
trustees.
The Plan is terminable as to any class of shares without penalty at any
time by a vote of a majority of the 12b-1 Trustees, or by vote of the holders of
a majority of the shares of such class.
The Fund is not required or permitted under the Plan to make distribution
payments with respect to Institutional Shares. However, the Plan permits BDI,
BlackRock, PFPC and other companies that receive fees from the Fund to make
payments relating to distribution and sales support activities out of their past
profits or other sources available to them. The Distributor, BlackRock and their
affiliates may pay affiliated and unaffiliated financial institutions,
broker/dealers and/or their salespersons certain compensation for the sale and
distribution of shares of the Fund or for services to the Fund. These additional
payments may take the form of "due diligence" payments for a dealer's
examination of the Portfolio and payments for providing extra employee training
and information relating to the Portfolio; "listing" fees for the placement of
the Portfolio on a dealer's list of mutual funds available for purchase by its
customers; "finders" or "referral" fees for directing investors to the Fund;
"marketing support" fees for providing assistance in promoting the sale of the
Fund's shares; and payments for the
14
<PAGE>
sale of shares and/or the maintenance of share balances. In addition, the
Distributor, BlackRock and their affiliates may make payments to affiliated and
unaffiliated entities for subaccounting, administrative and/or shareholder
processing services that are in addition to the shareholder servicing and
processing fees paid by the Fund. The payments made by the Distributor,
BlackRock and their affiliates may be a fixed dollar amount, may be based on the
number of customer accounts maintained by a financial institution or
broker/dealer, or may be based on a percentage of the value of shares sold to,
or held by, customers of the affiliated and unaffiliated financial institutions
or dealers involved, and may be different for different institutions and
dealers. Furthermore, the Distributor, BlackRock and their affiliates may
contribute to various non-cash and cash incentive arrangements to promote the
sale of shares, and may sponsor various contests and promotions subject to
applicable NASD regulations in which participants may receive prizes such as
travel awards, merchandise and cash. The Distributor, BlackRock and their
affiliates may also pay for the travel expenses, meals, lodging and
entertainment of broker/dealers, financial institutions and their salespersons
in connection with educational and sales promotional programs subject to
applicable NASD regulations.
Code of Ethics. The Fund, BlackRock, BFM and the Distributor have adopted
codes of ethics under Rule 17j-1 of the 1940 Act. These codes of ethics permit
personnel subject to the codes to invest in securities, including securities
that may be purchased or held by the Fund.
EXPENSES
Expenses are deducted from the total income of the Portfolio before
dividends and distributions are paid. These expenses include, but are not
limited to, fees paid to BlackRock, PFPC, transfer agency fees, fees and
expenses of officers and trustees who are not affiliated with BlackRock, the
Distributor or any of their affiliates, taxes, interest, legal fees, custodian
fees, auditing fees, distribution fees, shareholder processing fees, shareholder
servicing fees, fees and expenses in registering and qualifying the Portfolio
and their shares for distribution under federal and state securities laws,
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders, expenses relating to shareholder reports,
shareholder meetings and proxy solicitations, fidelity bond and trustees and
officers liability insurance premiums, the expense of independent pricing
services and other expenses which are not expressly assumed by BlackRock or the
Fund's service providers under their agreements with the Fund. Any general
expenses of the Fund that do not belong to a particular investment portfolios
will be allocated among all investment portfolios by or under the direction of
the Board of Trustees in a manner the Board determines to be fair and equitable.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the adviser and sub-adviser seek to
obtain the best price and most favorable execution for the Portfolio, taking
into account such factors as the price (including the applicable brokerage
commission or dealer spread), size of the order, difficulty of execution and
operational facilities of the firm involved. While the adviser and sub-adviser
generally seek reasonably competitive commission rates, payment of the lowest
commission or spread is not necessarily consistent with obtaining the best price
and execution in particular transactions. Payments of commissions to brokers who
are affiliated persons of the Fund (or affiliated persons of such persons) will
be made in accordance with Rule 17e-1 under the 1940 Act.
The Portfolio does not have any obligation to deal with any broker or group
of brokers in the execution of portfolio transactions. The adviser or sub-
adviser may, consistent with the interests of the Portfolio, select brokers on
the basis of the research, statistical and pricing services they provide to the
Portfolio and the adviser's or sub-adviser's other clients. Information and
research received from such brokers will be in addition to, and not in lieu of,
the services required to be performed by the adviser or sub-adviser under their
contracts. A commission paid to such brokers may be higher than that which
another qualified broker would have charged for effecting the same transaction,
provided that the adviser or sub-adviser determines in good faith that such
commission is reasonable in terms either of the transaction or the overall
responsibility of the adviser or sub-adviser to the Portfolio and its other
clients and that the total commissions paid by the Portfolio will be reasonable
in relation to the benefits to the Portfolio over the long-term. The advisory
fees that the Portfolio pays to the adviser will not be reduced as a consequence
of the adviser's receipt of brokerage and research services. To the extent the
Portfolio's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Portfolio will exceed those that
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might otherwise be paid by an amount which cannot be presently determined. Such
services generally would be useful and of value to the adviser in serving one or
more of their other clients and, conversely, such services obtained by the
placement of brokerage business of other clients generally would be useful to
the adviser in carrying out their obligations to the Portfolio. While such
services are not expected to reduce the expenses of the adviser, the adviser
would, through use of the services, avoid the additional expenses which would be
incurred if they should attempt to develop comparable information through their
own staffs.
Commission rates for brokerage transactions on foreign stock exchanges are
generally fixed. In addition, the adviser or sub-adviser may take into account
the sale of shares of the Fund in allocating purchase and sale orders for
portfolio securities to brokers (including brokers that are affiliated with them
or Distributor).
Over-the-counter issues, including corporate debt and U.S. Government
securities, are normally traded on a "net" basis without a stated commission,
through dealers acting for their own account and not as brokers. The Portfolio
will primarily engage in transactions with these dealers or deal directly with
the issuer unless a better price or execution could be obtained by using a
broker. Prices paid to a dealer with respect to both foreign and domestic
securities will generally include a "spread," which is the difference between
the prices at which the dealer is willing to purchase and sell the specific
security at the time, and includes the dealer's normal profit.
Purchases of money market instruments by the Portfolio are made from
dealers, underwriters and issuers. The Portfolio does not currently expect to
incur any brokerage commission expense on such transactions because money market
instruments are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission. The price of the
security, however, usually includes a profit to the dealer.
Securities purchased in underwritten offerings include a fixed amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. When securities are purchased or sold directly from or
to an issuer, no commissions or discounts are paid.
The adviser or sub-adviser may seek to obtain an undertaking from issuers
of commercial paper or dealers selling commercial paper to consider the
repurchase of such securities from the Portfolio prior to maturity at their
original cost plus interest (sometimes adjusted to reflect the actual maturity
of the securities), if it believes that the Portfolio's anticipated need for
liquidity makes such action desirable. Any such repurchase prior to maturity
reduces the possibility that the Portfolio would incur a capital loss in
liquidating commercial paper, especially if interest rates have risen since
acquisition of such commercial paper.
Investment decisions for the Portfolio and for other investment accounts
managed by the adviser or sub-adviser are made independently of each other in
light of differing conditions. However, the same investment decision may be made
for two or more such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect upon the price or value of the
security as far as the Portfolio is concerned, in other cases it could be
beneficial to the Portfolio. The Portfolio will not purchase securities during
the existence of any underwriting or selling group relating to such securities
of which BlackRock, BFM, PTC, the Administrators, the Distributor or any
affiliated person (as defined in the 1940 Act) thereof is a member except
pursuant to procedures adopted by the Board of Trustees in accordance with Rule
10f-3 under the 1940 Act. In no instance will portfolio securities be purchased
from or sold to BlackRock, BFM, PNC Bank, PTC, PFPC, the Distributor or any
affiliated person of the foregoing entities except as permitted by SEC exemptive
order or by applicable law.
The portfolio turnover rate of the Portfolio is calculated by dividing the
lesser of the Portfolio's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Portfolio during the year.
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PURCHASE AND REDEMPTION INFORMATION
Institutional Shares
Purchase of Shares. Institutional Shares are offered to investors with a
minimum investment of $10 million. There is no minimum subsequent investment
requirement.
Payment for Institutional Shares must normally be made in Federal funds or
other funds immediately available to the Fund's custodian. Payment may also, in
the discretion of the Fund, be made in the form of securities that are
permissible investments for the Portfolio. The Fund does not accept third party
checks for initial or subsequent investments.
The Fund may in its discretion waive or modify the minimum investment
amount, may reject any order for Institutional Shares and may suspend and resume
the sale of shares of the Portfolio at any time.
Redemption of Shares. Payment for redeemed shares for which a redemption
order is received by PFPC before 4:00 p.m. (Eastern Time) on a Business Day is
normally made in Federal funds wired to the redeeming Institution on the next
Business Day, provided that the Fund's custodian is also open for business.
Payment for redemption orders received after 4:00 p.m. (Eastern Time) or on a
day when the Fund's custodian is closed is normally wired in Federal funds on
the next Business Day following redemption on which the Fund's custodian is open
for business. The Fund reserves the right to wire redemption proceeds within
seven days after receiving a redemption order if, in the judgment of BlackRock,
an earlier payment could adversely affect the Portfolio. No charge for wiring
redemption payments is imposed by the Fund.
During periods of substantial economic or market change, telephone
redemptions may be difficult to complete. Redemption requests may also be mailed
to PFPC at P.O. Box 8907, Wilmington, Delaware 19899-8907.
The Fund may also suspend the right of redemption or postpone the date of
payment upon redemption for such periods as are permitted under the 1940 Act,
and may redeem shares involuntarily or make payment for redemption in securities
or other property when determined appropriate in light of the Fund's
responsibilities under the 1940 Act.
Institutional Shares of the Portfolio may be purchased by customers of
broker-dealers and agents which have established a servicing relationship with
the Fund on behalf of their customers. These broker-dealers and agents may
impose additional or different conditions on the purchase or redemption of
Portfolio shares by their customers and may charge their customers transaction,
account or other fees on the purchase and redemption of Portfolio shares. Each
broker-dealer or agent is responsible for transmitting to its customers a
schedule of any such fees and information regarding any additional or different
conditions regarding purchases and redemptions. Shareholders who are customers
of such broker-dealers or agents should consult them for information regarding
these fees and conditions.
Dividends and Distributions
The Portfolio will distribute substantially all of its net investment
income and net realized capital gains, if any, to shareholders. The net
investment income of the Portfolio is declared quarterly as a dividend to
investors who are shareholders of the Portfolio at the close of business on the
day of declaration. All dividends are paid not later than ten days after the end
of each quarter. Any net realized capital gains (including net short-term
capital gains) will be distributed by the Portfolio at least annually. The
period for which dividends are payable and the time for payment are subject to
change by the Fund's Board of Trustees.
Distributions are reinvested at net asset value in additional full and
fractional shares of the same class on which the distributions are paid, unless
a shareholder elects to receive distributions in cash. This election, or any
revocation thereof, must be made in writing to PFPC, and will become effective
with respect to distributions paid after its receipt by PFPC.
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VALUATION OF PORTFOLIO SECURITIES
In determining the market value of portfolio investments, the Fund may
employ outside organizations, which may use, without limitation, a matrix or
formula method that takes into consideration market indexes, matrices, yield
curves and other specific adjustments. This may result in the securities being
valued at a price different from the price that would have been determined had
the matrix or formula method not been used. All cash, receivables and current
payables are carried on the Fund's books at their face value. Other assets, if
any, are valued at fair value as determined in good faith under the supervision
of the Board of Trustees.
Net asset value is calculated separately for each class of shares of the
Portfolio as of the close of regular trading hours on the NYSE (currently 4:00
p.m. Eastern Time) on each Business Day by dividing the value of all securities,
cash and other assets owned by the Portfolio that are allocated to a particular
class of shares, less the liabilities charged to that class, by the total number
of outstanding shares of the class.
Valuation of securities held by the Portfolio is as follows: securities
traded on a national securities exchange or on the NASDAQ National Market System
are valued at the last reported sale price that day; securities traded on a
national securities exchange or on the NASDAQ National Market System for which
there were no sales on that day and securities traded on other over-the-counter
markets for which market quotations are readily available are valued at the mean
of the bid and asked prices; an option or futures contract is valued at the last
sales price prior to 4:00 p.m. (Eastern Time), as quoted on the principal
exchange or board of trade on which such option or contract is traded, or in the
absence of a sale, the mean between the last bid and asked prices prior to 4:00
p.m. (Eastern Time); and securities for which market quotations are not readily
available are valued at fair market value as determined in good faith by or
under the direction of the Fund's Board of Trustees. The amortized cost method
of valuation will also be used with respect to debt obligations with sixty days
or less remaining to maturity unless the investment adviser under the
supervision of the Board of Trustees determines such method does not represent
fair value.
Valuation of securities of foreign issuers is as follows: to the extent
sale prices are available, securities which are traded on a recognized stock
exchange, whether U.S. or foreign, are valued at the latest sale price on that
exchange prior to the time when assets are valued or prior to the close of
regular trading hours on the NYSE. In the event that there are no sales, the
mean between the last available bid and asked prices will be used. If a security
is traded on more than one exchange, the latest sale price on the exchange where
the stock is primarily traded is used. An option or futures contract is valued
at the last sales price prior to 4:00 p.m. (Eastern Time), as quoted on the
principal exchange or board of trade on which such option or contract is traded,
or in the absence of a sale, the mean between the last bid and asked prices
prior to 4:00 p.m. (Eastern Time). In the event that application of these
methods of valuation results in a price for a security which is deemed not to be
representative of the market value of such security, the security will be valued
by, under the direction of or in accordance with a method specified by the Board
of Trustees as reflecting fair value. The amortized cost method of valuation
will be used with respect to debt obligations with sixty days or less remaining
to maturity unless the investment adviser under the supervision of the Board of
Trustees determines such method does not represent fair value. All other assets
and securities held by the Portfolio (including restricted securities) are
valued at fair value as determined in good faith by the Board of Trustees or by
someone under its direction. Any assets which are denominated in a foreign
currency are translated into U.S. dollars at the prevailing market rates.
Certain of the securities acquired by the Portfolio may be traded on
foreign exchanges or over-the-counter markets on days on which the Portfolio's
net asset value is not calculated. In such cases, the net asset value of the
Portfolio's shares may be significantly affected on days when investors can
neither purchase nor redeem shares of the Portfolio.
The Portfolio may use a pricing service, bank or broker/dealer experienced
in such matters to value the Portfolio's securities.
PERFORMANCE INFORMATION
The Portfolio may quote performance in various ways. All performance
information supplied by the Portfolio in advertising is historical and is not
intended to indicate future returns.
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Total Return. For purposes of quoting and comparing the performance of
shares of the Portfolio to the performance of other mutual funds and to stock or
other relevant indexes in advertisements, sales literature, communications to
shareholders and other materials, performance may be stated in terms of total
return. The total return for each class of the Portfolio will be calculated
independently of the other classes within that Portfolio. Under the rules of the
SEC, funds advertising performance must include total return quotes calculated
according to the following formula:
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ERV /1/n/
T = [(-----) - 1]
P
Where:
T = average annual total return.
ERV = ending redeemable value at the end of the period covered by the
computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in terms of years.
The Portfolio may also from time to time include in advertisements, sales
literature, communications to shareholders and other materials a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of each class of shares with other
performance measures. For example, in comparing the total return of shares with
data published by Lipper Analytical Services, Inc., CDA Investment Technologies,
Inc. or Weisenberger Investment Company Service, or with the performance of the
Standard & Poor's 500 Stock Index, EAFE, the Dow Jones Industrial Average or the
Shearson Lehman Hutton Government Corporate Bond Index, as appropriate, the
Portfolio may calculate the aggregate total return for its shares of a certain
class for the period of time specified in the advertisement or communication by
assuming the investment of $10,000 in such shares and assuming the reinvestment
of each dividend or other distribution at net asset value on the reinvestment
date. Percentage increases are determined by subtracting the initial value of
the investment from the ending value and by dividing the remainder by the
beginning value.
In addition to average annual total returns, the Portfolio may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Average annual and cumulative total returns
may be quoted as a percentage or as a dollar amount, and may be calculated for a
single investment, a series of investments, or a series of redemptions, over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted on a before-tax or after-tax basis and may
be quoted with or without taking sales charges into account. Total returns,
yields, and other performance information may be quoted numerically or in a
table, graph or similar illustration.
Performance information for each class of shares may be quoted in
advertisements and communications to shareholders. Total return will be
calculated on an average annual total return basis for various periods. Average
annual total return reflects the average annual percentage change in value of an
investment in shares of the Portfolio over the measuring period. Total return
may also be calculated on an aggregate total return basis. Aggregate total
return reflects the total percentage change in value over the measuring period.
Both methods of calculating total return assume that dividend and capital gain
distributions made by the Portfolio with respect to a class of shares are
reinvested in shares of the same class.
The performance of a class of the Portfolio's shares may be compared to the
performance of other mutual funds with similar investment objectives and to
relevant indices, as well as to ratings or rankings prepared by independent
services or other financial or industry publications that monitor the
performance of mutual funds. The performance of a class of each of the
Portfolio's shares may be compared to data prepared by Lipper Analytical
Services, Inc., CDA Investment Technologies, Inc. and Weisenberger Investment
Company Service, and to the performance of the Dow Jones Industrial Average, the
"stocks bonds and inflation Index" published annually by Ibbotson Associates,
the Lipper International Fund Index, the Lipper Small Cap International Fund
Index, the Lehman Corporate Bond Index and the Financial Times World Stock
Index. Performance information may also include evaluations of the Portfolio
published by nationally recognized ranking services, and information as reported
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in financial publications such as Business Week, Fortune, Institutional
Investor, Money Magazine, Forbes, Barron's, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature.
In addition to providing performance information that demonstrates the
actual return of a class of shares, the Portfolio may provide other information
demonstrating hypothetical investment returns. This information may include, but
is not limited to, illustrating the compounding effects of dividends in a
dividend investment plan or the impact on tax-deferring investing.
Performance quotations for shares of the Portfolio represent past
performance and should not be considered representative of future results. The
investment return and principal value of an investment in the Portfolio will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Since performance will fluctuate, performance data for
shares of the Portfolio cannot necessarily be used to compare an investment in
such shares with bank deposits, savings accounts and similar investment
alternatives which often provide an agreed or guaranteed fixed yield for a
stated period of time. Performance is generally a function of the kind and
quality of the instruments held in the Portfolio, portfolio maturity, operating
expenses and market conditions. Any fees charged by brokers or other
institutions directly to their customer accounts in connection with investments
in shares will not be included in the Portfolio's performance calculations.
Other Information Regarding Investment Returns. In addition to providing
performance information that demonstrates the total return or yield of shares of
a particular class of the Portfolio over a specified period of time, the Fund
may provide certain other information demonstrating hypothetical investment
returns. Such information may include, but is not limited to, illustrating the
compounding effects of dividends in a dividend reinvestment plan or the impact
of tax-free investing. The Fund may demonstrate, using certain specified
hypothetical data, the compounding effect of dividend reinvestment on
investments in the Portfolio.
Miscellaneous. When comparing the Portfolio's performance to stock mutual
fund performance indices prepared by Lipper or other organizations, it is
important to remember the risk and return characteristics of each type of
investment. For example, while stock mutual funds may offer higher potential
returns, they also carry the highest degree of share price volatility.
From time to time, the Portfolio's performance may also be compared to
other mutual funds tracked by financial or business publications and
periodicals. For example the Portfolio may quote Morningstar, Inc. in its
advertising materials. Morningstar, Inc. is a mutual fund rating service that
rates mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of the Portfolio to another fund in appropriate
categories over specific periods of time may also be quoted in advertising.
Ibbotson Associates of Chicago, Illinois ("Ibbotson") provides historical
returns of the capital markets in the United States, including common stocks,
small capitalization stocks, long-term corporate bonds, intermediate-term
government bonds, long-term government bonds, Treasury bills, the U.S. rate of
inflation (based on the Consumer Price Index), and combinations of various
capital markets. The performance of these capital markets is based on the
returns of different indices. The Portfolio may use the performance of these
capital markets in order to demonstrate general risk-versus-reward investment
scenarios. Performance comparisons may also include the value of a hypothetical
investment in any of these capital markets. The risks associated with the
security types in any capital market may or may not correspond directly to those
of the Portfolio. The Portfolio may also compare performance to that of other
compilations or indices that may be developed and made available in the future.
The Fund may also from time to time include discussions or illustrations of
the effects of compounding in advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Portfolio's investment are
reinvested by being paid in additional Portfolio shares, any future income or
capital appreciation of the Portfolio would increase the value, not only of the
original investment in the Portfolio, but also of the additional shares received
through reinvestment. The Fund may also include discussions or illustrations of
the potential investment goals of a prospective investor, (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, and goal setting, questionnaires designed to
help create a personal financial profile, worksheets used to project savings
needs based on assumed rates of inflation and hypothetical rates of return and
action plans offering investment alternatives) investment management techniques,
policies or investment suitability of the Portfolio (such as value investing,
market timing, dollar cost averaging, asset allocation,
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<PAGE>
constant ratio transfer, automatic account rebalancing, the advantages and
disadvantages of investing in tax-deferred and taxable investments), economic
and political conditions and the relationship between sectors of the economy and
the economy as a whole, the effects of inflation and historical performance of
various asset classes, including but not limited to, stocks, bonds and Treasury
bills. From time to time advertisements, sales literature, communications to
shareholders or other materials may summarize the substance of information
contained in shareholder reports (including the investment composition of the
Portfolio), as well as the views of the Portfolio's adviser as to current
market, economy, trade and interest rate trends, legislative, regulatory and
monetary developments, investment strategies and related matters believed to be
of relevance to the Portfolio. In addition, selected indices may be used to
illustrate historic performance of select asset classes. The Fund may also
include in advertisements, sales literature, communications to shareholders or
other materials, charts, graphs or drawings which illustrate the potential risks
and rewards of investment in various investment vehicles, including but not
limited to, stocks, bonds, Treasury bills and shares of the Portfolio. In
addition, advertisements, sales literature, shareholder communications or other
materials may include a discussion of certain attributes or benefits to be
derived by an investment in the Portfolio and/or other mutual funds, benefits,
characteristics or services associated with a particular class of shares,
shareholder profiles and hypothetical investor scenarios, timely information on
financial management, tax and retirement planning and investment alternative to
certificates of deposit and other financial instruments. Such advertisements or
communicators may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail therein. Materials may
include lists of representative clients of the Portfolio's investment adviser.
Materials may refer to the CUSIP numbers of the various classes of the Portfolio
and may illustrate how to find the listings of the Portfolio in newspapers and
periodicals. Materials may also include discussions of other funds, products,
and services.
Charts and graphs using net asset values, adjusted net asset values, and
benchmark indices may be used to exhibit performance. An adjusted NAV includes
any distributions paid and reflects all elements of return. Unless otherwise
indicated, the adjusted NAVs are not adjusted for sales charges, if any.
The Portfolio may illustrate performance using moving averages. A long-term
moving average is the average of each week's adjusted closing NAV for a
specified period. A short-term moving average is the average of each day's
adjusted closing NAV for a specified period. Moving Average Activity Indicators
combine adjusted closing NAVs from the last business day of each week with
moving averages for a specified period to produce indicators showing when an NAV
has crossed, stayed above, or stayed below its moving average.
The Portfolio may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Portfolio may compare these
measures to those of other funds. Measures of volatility seek to compare the
historical share price fluctuations or total returns to those of a benchmark.
Measures of benchmark correlation indicate how valid a comparative benchmark may
be. All measures of volatility and correlation are calculated using averages of
historical data.
Momentum indicators indicate the Portfolio's price movements over specific
periods of time. Each point on the momentum indicator represents the Portfolio's
percentage change in price movements over that period.
The Portfolio may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels. The Portfolio may be available for purchase
through retirement plans or other programs offering deferral of, or exemption
from, income taxes, which may produce superior after-tax returns over time.
The Portfolio may advertise its current interest rate sensitivity,
duration, weighted average maturity or similar maturity characteristics.
Advertisements and sales materials relating to the Portfolio may include
information regarding the background, experience and expertise of the investment
adviser and/or portfolio manager for the Portfolio.
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TAXES
The following is only a summary of certain additional tax considerations
generally affecting the Portfolio and its shareholders that are not described in
the Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Portfolio or its shareholders, and the discussion here and in
the Prospectus is not intended as a substitute for careful tax planning.
Investors are urged to consult their tax advisers with specific reference to
their own tax situation.
The Portfolio has elected and intends to qualify for taxation as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, the Portfolio
generally is exempt from federal income tax on its net investment income (i.e.,
its investment company taxable income as that term is defined in the Code
without regard to the deduction for dividends paid) and net capital gain (i.e.,
the excess of its net long-term capital gain over its net short-term capital
loss) that it distributes to shareholders, provided that it distributes an
amount equal to at least the sum of (a) 90% of its net investment income and (b)
90% of its net tax-exempt interest income, if any, for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
that are described below. Distributions of net investment income and net tax-
exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, the Portfolio
must derive at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities or foreign currencies (including, but not
limited to, gains from forward foreign currency exchange contacts), or from
other income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of the Portfolio's assets must
consist of cash and cash items, U.S. government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Portfolio has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Portfolio does not hold more than
10% of the outstanding voting securities of such issuer), and no more than 25%
of the value of the Portfolio's total assets may be invested in the securities
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which such Portfolio
controls and which are engaged in the same or similar trades or businesses.
The Portfolio intends to distribute to shareholders any of its net capital
gain for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held his shares, whether such gain was
recognized by the Portfolio prior to the date on which a shareholder acquired
shares of the Portfolio and whether the distribution was paid in cash or
reinvested in shares.
Under current law, ordinary income of individuals will be taxable at a
maximum marginal rate of 39.6%, but because of limitations on itemized
deductions otherwise allowable and the phase-out of personal exemptions, the
maximum effective marginal rate of tax for some taxpayers may be higher. Under
recently enacted legislation, long-term capital gains of individuals are taxed
at a maximum rate of 20% with respect to capital assets held for more than one
year (10% for gains otherwise taxed at 15%). Capital gains and ordinary income
of corporate taxpayers are both taxed at a maximum nominal rate of 35%.
Investors should be aware that any loss realized upon the sale, exchange or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent any capital gain dividends have been paid with
respect to such shares. Any loss incurred on the sale or exchange of the
Portfolio's shares, held six months or less, will be disallowed to the extent of
exempt interest dividends paid with respect to such shares, and any loss not so
disallowed will be treated as a long-term capital loss to the extent of capital
gain dividends received with respect to such shares.
The Portfolio may engage in hedging or derivatives transactions involving
forward contracts, options and futures contracts. Such transactions will be
subject to special provisions of the Code that, among other things, may
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<PAGE>
affect the character of gains and losses realized by the Portfolio (that is, may
affect whether gains or losses are ordinary or capital), accelerate recognition
of income of the Portfolio and defer recognition of certain of the Portfolio's
losses. These rules could therefore affect the character, amount and timing of
distributions to shareholders. In addition, these provisions (1) will require
the Portfolio to "mark-to-market" certain types of positions in its portfolio
(that is, treat them as if they were closed out) and (2) may cause the Portfolio
to recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the Distribution Requirement and
avoid the 4% excise tax (described below). The Portfolio intends to monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.
If the Portfolio purchases shares in a "passive foreign investment company"
(a "PFIC"), such Portfolio may be subject to U.S. federal income tax on a
portion of any "excess distribution" or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the Portfolio to its
shareholders. Additional charges in the nature of interest may be imposed on the
Portfolio in respect of deferred taxes arising from such distributions or gains.
If the Portfolio were to invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code (a "QEF"), in lieu of the foregoing
requirements, the Portfolio would be required to include in income each year a
portion of the ordinary earnings and net capital gain of the qualified electing
fund, even if not distributed to the Portfolio. Alternatively, the Portfolio can
elect to mark-to-market at the end of each taxable year its shares in a PFIC; in
this case, the Portfolio would recognize as ordinary income any increase in the
value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Portfolio might be required to recognize in a year income in
excess of its distributions from PFICs and its proceeds from dispositions of
PFIC stock during that year, and such income would nevertheless be subject to
the Distribution Requirement and would be taken into account for purposes of the
4% excise tax (described below).
Investment income that may be received by the Portfolio from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle the Portfolio to a reduced rate of, or exemption from, taxes on such
income. If more than 50% of the value of the total assets at the close of the
taxable year of the Portfolio consists of stock or securities of foreign
corporations, such Portfolio may elect to "pass through" to the Portfolio's
shareholders the amount of foreign taxes paid by such Portfolio. If the
Portfolio so elects, each shareholder would be required to include in gross
income, even though not actually received, his pro rata share of the foreign
taxes paid by the Portfolio, but would be treated as having paid his pro rata
share of such foreign taxes and would therefore be allowed to either deduct such
amount in computing taxable income or use such amount (subject to various Code
limitations) as a foreign tax credit against federal income tax (but not both).
For purposes of the foreign tax credit limitation rules of the Code, each
shareholder would treat as foreign source income his pro rata share of such
foreign taxes plus the portion of dividends received from the Portfolio
representing income derived from foreign sources. No deduction for foreign taxes
could be claimed by an individual shareholder who does not itemize deductions.
In certain circumstances, a shareholder that (i) has held shares of the
Portfolio for less than a specified minimum period during which it is not
protected from risk of loss or (ii) is obligated to make payments related to the
dividends, will not be allowed a foreign tax credit for foreign taxes deemed
imposed on dividends paid on such shares. Additionally, such Portfolio must also
meet this holding period requirement with respect to its foreign stocks and
securities in order for "creditable" taxes to flow-through. Each shareholder
should consult his own tax adviser regarding the potential application of
foreign tax credits.
Ordinary income dividends paid by the Portfolio will qualify for the 70%
dividends-received deduction generally available to corporations to the extent
of the amount of "qualifying dividends" received by the Portfolio from domestic
corporations for the taxable year. A dividend received by the Portfolio will not
be treated as a qualifying dividend (i) if it has been received with respect to
any share of stock that the Portfolio has held for less than 46 days (91 days in
the case of certain preferred stock) during the 90 day period beginning on the
date which is 45 days before the date on which such share becomes ex-dividend
with respect to such dividend (during the 180 day period beginning 90 days
before such date in the case of certain preferred stock), (ii) to the extent
that the Portfolio is under an obligation to make related payments with respect
to positions in substantially similar or related property or (iii) to the extent
the stock on which the dividend is paid is treated as debt-financed. Moreover,
the dividends-
24
<PAGE>
received deduction for a corporate shareholder may be disallowed if the
corporate shareholder fails to satisfy the foregoing requirements with respect
to its shares of the Portfolio.
If for any taxable year the Portfolio does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders, and all
distributions will be taxable as ordinary dividends to the extent of such
Portfolio's current and accumulated earnings and profits. Such distributions
will be eligible for the dividends received deduction in the case of corporate
shareholders.
A 4% non-deductible excise tax is imposed on regulated investment companies
that fail to currently distribute specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital
losses). The Portfolio intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and any capital gain net income
prior to the end of each calendar year to avoid liability for this excise tax.
The Fund will be required in certain cases to withhold and remit to the
United States Treasury 31% of dividends and gross sale proceeds paid to any
shareholder (i) who has provided either an incorrect tax identification number
or no number at all, (ii) who is subject to backup withholding by the Internal
Revenue Service for failure to report the receipt of interest or dividend income
properly, or (iii) who has failed to certify to the Fund when required to do so
that he is not subject to backup withholding or that he is an "exempt
recipient."
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Portfolio each year.
The foregoing general discussion of federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although the Portfolio expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the
Portfolio may be subject to the tax laws of such states or localities.
Shareholders should consult their tax advisors about state and local tax
consequences, which may differ from the federal income tax consequences
described above.
ADDITIONAL INFORMATION CONCERNING SHARES
Shares of each class of the Portfolio bear their pro rata portion of all
operating expenses paid by the Portfolio, except transfer agency fees, certain
administrative/servicing fees and amounts payable under the Fund's Amended and
Restated Distribution and Service Plan. Each share of the portfolios of the Fund
has a par value of $.001, represents an interest in that portfolio and is
entitled to the dividends and distributions earned on that portfolio's assets
that are declared in the discretion of the Board of Trustees. The Fund's
shareholders are entitled to one vote for each full share held and proportionate
fractional votes for fractional shares held, and will vote in the aggregate and
not by class, except where otherwise required by law or as determined by the
Board of Trustees.
Shares of the Fund have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Fund's outstanding shares (irrespective of
class) may elect all of the trustees. Shares have no preemptive rights and only
such conversion and exchange rights as the Board may grant in its discretion.
When issued for payment, shares will be fully paid and non-assessable by the
Fund.
There will normally be no meetings of shareholders for the purpose of
electing trustees unless and until such time as required by law. At that time,
the trustees then in office will call a shareholders meeting to elect trustees.
Except as set forth above, the trustees shall continue to hold office and may
appoint successor trustees.
25
<PAGE>
The Fund's Declaration of Trust provides that meetings of the shareholders of
the Fund shall be called by the trustees upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Fund shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
investment portfolio affected by such matter. Rule 18f-2 further provides that
an investment portfolio shall be deemed to be affected by a matter unless the
interests of each investment portfolio in the matter are substantially identical
or the matter does not affect any interest of the investment portfolio. Under
the Rule, the approval of an investment advisory agreement, a distribution plan
subject to Rule 12b-1 under the 1940 Act or any change in a fundamental
investment policy would be effectively acted upon with respect to an investment
portfolio only if approved by a majority of the outstanding shares of such
investment portfolio. However, the Rule also provides that the ratification of
the appointment of independent accountants, the approval of principal
underwriting contracts and the election of Trustees may be effectively acted
upon by shareholders of the Fund voting together in the aggregate without regard
to a particular investment portfolio.
The proceeds received by the Portfolio for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to and constitute the underlying assets of that Portfolio. The underlying assets
of the Portfolio will be segregated on the books of account, and will be charged
with the liabilities in respect to that Portfolio and with a share of the
general liabilities of the Fund. As stated herein, certain expenses of the
Portfolio may be charged to a specific class of shares representing interests in
that Portfolio.
The Funds' Declaration of Trust authorizes the Board of Trustees, without
shareholder approval (unless otherwise required by applicable law), to: (i) sell
and convey the assets belonging to a class of shares to another management
investment company for consideration which may include securities issued by the
purchaser and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at a price which is equal to their net asset value and
which may be paid in cash or by distribution of the securities or other
consideration received from the sale and conveyance; (ii) sell and convert the
assets belonging to one or more classes of shares into money and, in connection
therewith, to cause all outstanding shares of such class to be redeemed at their
net asset value; or (iii) combine the assets belonging to a class of shares with
the assets belonging to one or more other classes of shares if the Board of
Trustees reasonably determines that such combination will not have a material
adverse effect on the shareholders of any class participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such class to be redeemed or converted into shares of another class of shares at
their net asset value. The Board of Trustees may authorize the liquidation and
termination of any Portfolio or class of shares. Upon any liquidation of the
Portfolio, Shareholders of each class of the Portfolio are entitled to share pro
rata in the net assets belonging to that class available for distribution.
MISCELLANEOUS
The Fund. The Fund was organized as a Massachusetts business trust on
December 22, 1988 and is registered under the 1940 Act as an open end,
diversified management investment company. Effective January 31, 1998, the Fund
changed its name from Compass Capital Funds(SM) to BlackRock Funds(SM).
Counsel. The law firm of Simpson Thacher & Bartlett, 425 Lexington Avenue,
New York, New York 10017, serves as the Fund's counsel.
Independent Accountants. PricewaterhouseCoopers LLP, with offices located
at 2400 Eleven Penn Center, Philadelphia, Pennsylvania, serves as the Fund's
independent accountants.
On October 20, 2000, PNC Bank, which has its principal offices at 1600
Market Street, Philadelphia, Pennsylvania 19103, held of record approximately
72% of the Fund's outstanding shares, and may be deemed a controlling person of
the Fund under the 1940 Act. PNC Bank is a national bank organized under the
laws of the United States. All of the capital stock of PNC Bank is owned by PNC
Bancorp, Inc. All of the capital stock of PNC Bancorp, Inc. is owned by The PNC
Financial Services Group, Inc., a publicly-held bank holding company.
26
<PAGE>
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" of a class, series
or Portfolio means, with respect to the approval of an investment advisory
agreement, a distribution plan or a change in a fundamental investment policy,
the lesser of (1) 67% of the shares of the particular class, series or Portfolio
represented at a meeting at which the holders of more than 50% of the
outstanding shares of such class, series or Portfolio are present in person or
by proxy, or (2) more than 50% of the outstanding shares of such class, series
or Portfolio.
27
<PAGE>
APPENDIX A
----------
Commercial Paper Ratings
------------------------
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. The following summarizes the rating categories used by Standard and
Poor's for commercial paper:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
"A-3" - Issue has an adequate capacity for timely payment. It is, however,
somewhat more vulnerable to the adverse effects of changes in circumstances than
an obligation carrying a higher designation.
"B" - Issue has only a speculative capacity for timely payment.
"C" - Issue has a doubtful capacity for payment.
"D" - Issue is in payment default.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics: leading market positions in well established industries; high
rates of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and well
established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
"Prime-3" - Issuer or related supporting institutions have an acceptable
capacity for repayment of short-term promissory obligations. The effects of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
"Not Prime" - Issuer does not fall within any of the Prime rating
categories.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
A-1
<PAGE>
"D-1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"D-1-" - Debt possesses high certainty of timely payment. Liquidity factors
are strong and supported by good fundamental protection factors. Risk factors
are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity factors
and company fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk factors
are small.
"D-3" - Debt possesses satisfactory liquidity, and other protection factors
qualify issue as investment grade. Risk factors are larger and subject to more
variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics. Liquidity is
not sufficient to ensure against disruption in debt service. Operating factors
and market access may be subject to a high degree of variation.
"D-5" - Issuer has failed to meet scheduled principal and/or interest
payments.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years. The following
summarizes the rating categories used by Fitch for short-term obligations:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
"F-2" - Securities possess good credit quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as the "F-1+" and "F-1" categories.
"F-3" - Securities possess fair credit quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance for timely payment
is adequate; however, near-term adverse changes could cause these securities to
be rated below investment grade.
"F-S" - Securities possess weak credit quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance for timely payment
and are vulnerable to near-term adverse changes in financial and economic
conditions.
"D" - Securities are in actual or imminent payment default.
Fitch may also use the symbol "LOC" with its short-term ratings to indicate
that the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by United States
commercial banks, thrifts and non-bank banks; non-United States banks; and
broker-dealers. The following summarizes the ratings used by Thomson BankWatch:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - This designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
A-2
<PAGE>
"TBW-3" - This designation represents the lowest investment grade category
and indicates that while the debt is more susceptible to adverse developments
(both internal and external) than obligations with higher ratings, capacity to
service principal and interest in a timely fashion is considered adequate.
"TBW-4" - This designation indicates that the debt is regarded as non-
investment grade and therefore speculative.
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings:
"A1+" - Obligations which posses a particularly strong credit feature are
supported by the highest capacity for timely repayment.
"A1" - Obligations are supported by the highest capacity for timely
repayment.
"A2" - Obligations are supported by a satisfactory capacity for timely
repayment.
"A3" - Obligations are supported by a satisfactory capacity for timely
repayment.
"B" - Obligations for which there is an uncertainty as to the capacity to
ensure timely repayment.
"C" - Obligations for which there is a high risk of default or which are
currently in default.
Corporate and Municipal Long-Term Debt Ratings
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - This designation represents the highest rating assigned by Standard
& Poor's to a debt obligation and indicates an extremely strong capacity to pay
interest and repay principal.
"AA" - Debt is considered to have a very strong capacity to pay interest
and repay principal and differs from AAA issues only in small degree.
"A" - Debt is considered to have a strong capacity to pay interest and
repay principal although such issues are somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than debt in
higher-rated categories.
"BBB" - Debt is regarded as having an adequate capacity to pay interest and
repay principal. Whereas such issues normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
"BB," "B," "CCC," "CC" and "C" - Debt is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "C" the highest degree of speculation. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
"BB" - Debt has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
A-3
<PAGE>
"B" - Debt has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
"CCC" - Debt has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
"CC" - This rating is typically applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" rating.
"C" - This rating is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
"CI" - This rating is reserved for income bonds on which no interest is
being paid.
"D" - Debt is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S & P believes that such
payments will be made during such grace period. "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
"r" - This rating is attached to highlight derivative, hybrid, and certain
other obligations that S & P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities. The absence of an "r" symbol should
not be taken as an indication that an obligation will exhibit no volatility or
variability in total return.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the long-
term risks appear somewhat larger than in "Aaa" securities.
"A" - Bonds possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds considered medium-grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
A-4
<PAGE>
"Ba," "B," "Caa," "Ca," and "C" - Bonds that possess one of these ratings
provide questionable protection of interest and principal ("Ba" indicates some
speculative elements; "B" indicates a general lack of characteristics of
desirable investment; "Caa" represents a poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (---) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
(P) - When applied to forward delivery bonds, indicates that the rating is
provisional pending delivery of the bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols, Aa1, A1, Ba1 and B1.
The following summarizes the long-term debt ratings used by Duff & Phelps
for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered of high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A" - Debt possesses protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB" - Debt possesses below average protection factors but such protection
factors are still considered sufficient for prudent investment. Considerable
variability in risk is present during economic cycles.
"BB," "B," "CCC," "DD," and "DP" - Debt that possesses one of these ratings
is considered to be below investment grade. Although below investment grade,
debt rated "BB" is deemed likely to meet obligations when due. Debt rated "B"
possesses the risk that obligations will not be met when due. Debt rated "CCC"
is well below investment grade and has considerable uncertainty as to timely
payment of principal, interest or preferred dividends. Debt rated "DD" is a
defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the highest four ratings used by Fitch for
corporate and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay interest and
repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated "AAA." Because bonds rated
in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable
future developments, short-term debt of these issuers is generally rated "F-1+."
A-5
<PAGE>
"A" - Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
"BBB" - Bonds considered to be investment grade and of satisfactory credit
quality. The obligor's ability to pay interest and repay principal is considered
to be adequate. Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these bonds, and
therefore, impair timely payment. The likelihood that the ratings of these bonds
will fall below investment grade is higher than for bonds with higher ratings.
"BB," "B," "CCC," "CC," "C," "DDD," "DD," and "D" - Bonds that possess one
of these ratings are considered by Fitch to be speculative investments. The
ratings "BB" to "C" represent Fitch's assessment of the likelihood of timely
payment of principal and interest in accordance with the terms of obligation for
bond issues not in default. For defaulted bonds, the rating "DDD" to "D" is an
assessment of the ultimate recovery value through reorganization or liquidation.
To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "BBB" may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within these major rating
categories.
IBCA assesses the investment quality of unsecured debt with an original
maturity of more than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for long-term debt ratings:
"AAA" - Obligations for which there is the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk substantially.
"AA" - Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions may
increase investment risk, albeit not very significantly.
"A" - Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong, although
adverse changes in business, economic or financial conditions may lead to
increased investment risk.
"BBB" - Obligations for which there is currently a low expectation of
investment risk. Capacity for timely repayment of principal and interest is
adequate, although adverse changes in business, economic or financial conditions
are more likely to lead to increased investment risk than for obligations in
other categories.
"BB," "B," "CCC," "CC," and "C" - Obligations are assigned one of these
ratings where it is considered that speculative characteristics are present.
"BB" represents the lowest degree of speculation and indicates a possibility of
investment risk developing. "C" represents the highest degree of speculation and
indicates that the obligations are currently in default.
IBCA may append a rating of plus (+) or minus (-) to a rating to denote
relative status within major rating categories.
Thomson BankWatch assesses the likelihood of an untimely repayment of
principal or interest over the term to maturity of long term debt and preferred
stock which are issued by United States commercial banks, thrifts and non-bank
banks; non-United States banks; and broker-dealers. The following summarizes the
rating categories used by Thomson BankWatch for long-term debt ratings:
"AAA" - This designation represents the highest category assigned by
Thomson BankWatch to long-term debt and indicates that the ability to repay
principal and interest on a timely basis is extremely high.
A-6
<PAGE>
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents Thomson BankWatch's lowest investment
grade category and indicates an acceptable capacity to repay principal and
interest. Issues rated "BBB" are, however, more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BB," "B," "CCC," and "CC," - These designations are assigned by Thomson
BankWatch to non-investment grade long-term debt. Such issues are regarded as
having speculative characteristics regarding the likelihood of timely payment of
principal and interest. "BB" indicates the lowest degree of speculation and "CC"
the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
Municipal Note Ratings
----------------------
A Standard and Poor's rating reflects the liquidity concerns and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's Ratings Group for municipal
notes:
"SP-1" - The issuers of these municipal notes exhibit very strong or strong
capacity to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - Loans bearing this designation are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - Loans bearing this designation are of high quality, with
margins of protection ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - Loans bearing this designation are of favorable quality,
with all security elements accounted for but lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - Loans bearing this designation are of adequate quality,
carrying specific risk but having protection commonly regarded as required of an
investment security and not distinctly or predominantly speculative.
"SG" - Loans bearing this designation are of speculative quality and lack
margins of protection.
A-7
<PAGE>
Fitch and Duff & Phelps use the short-term ratings described under
Commercial Paper Ratings for municipal notes.
A-8
<PAGE>
APPENDIX B
----------
The Portfolio may enter into certain futures transactions. Such
transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
--------------------------------------
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Portfolio may use interest rate
futures contracts as a defense, or hedge, against anticipated interest rate
changes and not for speculation. As described below, this would include the use
of futures contract sales to protect against expected increases in interest
rates and futures contract purchases to offset the impact of interest rate
declines.
The Portfolio could accomplish a similar result to that which it hopes to
achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Portfolio, by using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
----------------------------------------------
contract sale would create an obligation by the Portfolio, as seller, to deliver
the specific type of financial instrument called for in the contract at a
specific future time for a specified price. A futures contract purchase would
create an obligation by the Portfolio, as purchaser, to take delivery of the
specific type of financial instrument at a specific future time at a specific
price. The specific securities delivered or taken, respectively, at settlement
date, would not be determined until at or near that date. The determination
would be in accordance with the rules of the exchange on which the futures
contract sale or purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without the making or taking of delivery of
securities. Closing out a futures contract sale is effected by the Portfolio
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
of the sale exceeds the price of the offsetting purchase, the Portfolio is
immediately paid the difference and thus realizes a gain. If the offsetting
purchase price exceeds the sale price, the Portfolio pays the difference and
realizes a loss. Similarly, the closing out of a futures contract purchase is
effected by the Portfolio entering into a futures contract sale. If the
offsetting sale price exceeds the purchase price, the Portfolio realizes a gain,
and if the purchase price exceeds the offsetting sale price, the Portfolio
realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term U.S. Treasury Bonds and Notes; Government
National Mortgage Association (GNMA) modified pass-through mortgage backed
securities; three-month U.S. Treasury Bills; and ninety-day commercial paper.
The Portfolio may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
With regard to the Portfolio, the adviser also anticipates engaging in
transactions, from time to time, in foreign stock index futures such as the ALL-
ORDS (Australia), CAC-40 (France), TOPIX (Japan) and the FTSE-100 (United
Kingdom).
B-1
<PAGE>
II. Index Futures Contracts
-----------------------
General. A stock or bond index assigns relative values to the stocks or
-------
bonds included in the index, which fluctuates with changes in the market values
of the stocks or bonds included. Some stock index futures contracts are based on
broad market indexes, such as Standard & Poor's 500 or the New York Stock
Exchange Composite Index. In contrast, certain exchanges offer futures contracts
on narrower market indexes, such as the Standard & Poor's 100 or indexes based
on an industry or market indexes, such as Standard & Poor's 100 or indexes based
on an industry or market segment, such as oil and gas stocks. Futures contracts
are traded on organized exchanges regulated by the Commodity Futures Trading
Commission. Transactions on such exchanges are cleared through a clearing
corporation, which guarantees the performance of the parties to each contract.
With regard to the Portfolio, to the extent consistent with its investment
objective, the adviser anticipates engaging in transactions, from time to time,
in foreign stock index futures such as the ALL-ORDS (Australia), CAC-40
(France), TOPIX (Japan) and the FTSE-100 (United Kingdom).
The Portfolio may sell index futures contracts in order to offset a
decrease in market value of its portfolio securities that might otherwise result
from a market decline. The Portfolio may do so either to hedge the value of its
portfolio as a whole, or to protect against declines, occurring prior to sales
of securities, in the value of the securities to be sold. Conversely, the
Portfolio may purchase index futures contracts in anticipation of purchases of
securities. A long futures position may be terminated without a corresponding
purchase of securities.
In addition, the Portfolio may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the Portfolio expects to narrow the range of industry
groups represented in its holdings it may, prior to making purchases of the
actual securities, establish a long futures position based on a more restricted
index, such as an index comprised of securities of a particular industry group.
The Portfolio may also sell futures contracts in connection with this strategy,
in order to protect against the possibility that the value of the securities to
be sold as part of the restructuring of the Portfolio will decline prior to the
time of sale.
III. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by the Portfolio upon the purchase or sale of a futures contract.
Initially, the Portfolio will be required to deposit with the broker or in a
segregated account with a custodian an amount of liquid assets known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Portfolio upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when the Portfolio has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the
Portfolio will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Portfolio has purchased a
futures contract and the price of the future contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Portfolio would be required to make a variation margin payment to the
broker. Prior to expiration of the futures contract, the adviser may elect to
close the position by taking an opposite position, subject to the availability
of a secondary market, which will operate to terminate the Portfolio's position
in the futures contract. A final determination of variation margin is then made,
additional cash is required to be paid by or released to the Portfolio, and the
Portfolio realizes a loss or gain.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by the
Portfolio as a hedging device. One risk arises because of the imperfect
correlation between movements in the price of the futures and movements in the
price of the instruments which are the subject of a hedge. The price of the
future may move more than or less than the price of the instruments being
hedged. If the price of the futures moves less than the price of the instruments
B-2
<PAGE>
which are the subject of the hedge, the hedge will not be fully effective but,
if the price of the instruments being hedged has moved in an unfavorable
direction, the Portfolio would be in a better position than if it had not hedged
at all. If the price of the instruments being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the futures.
If the price of the futures moves more than the price of the hedged instruments,
the Portfolio involved will experience either a loss or gain on the futures
which will not be completely offset by movements in the price of the instruments
which are the subject of the hedge. To compensate for the imperfect correlation
of movements in the price of instruments being hedged and movements in the price
of futures contracts, the Portfolio may buy or sell futures contracts in a
greater dollar amount than the dollar amount of instruments being hedged if the
volatility over a particular time period of the prices of such instruments has
been greater than the volatility over such time period of the futures, or if
otherwise deemed to be appropriate by the adviser. Conversely, the Portfolio may
buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the volatility
over such time period of the futures contract being used, or if otherwise deemed
to be appropriate by the adviser. It is also possible that, where the Portfolio
has sold futures to hedge its portfolio against a decline in the market, the
market may advance and the value of instruments held in the Portfolio may
decline. If this occurred, the Portfolio would lose money on the futures and
also experience a decline in value in its portfolio securities.
When futures are purchased to hedge against a possible increase in the
price of securities or a currency before the Portfolio is able to invest its
cash (or cash equivalents) in an orderly fashion, it is possible that the market
may decline instead; if the Portfolio then concludes not to invest its cash at
that time because of concern as to possible further market decline or for other
reasons, the Portfolio will realize a loss on the futures contract that is not
offset by a reduction in the price of the instruments that were to be purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the adviser may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Portfolio
intends to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge Portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or
B-3
<PAGE>
other disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Portfolio is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if the Portfolio has hedged against the possibility of a decline in the
market adversely affecting securities held by it and securities prices increase
instead, the Portfolio will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the
Portfolio has insufficient cash, it may have to sell securities to meet daily
variation margin requirements. Such sales of securities may be, but will not
necessarily be, at increased prices which reflect the rising market. The
Portfolio may have to sell securities at a time when it may be disadvantageous
to do so.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit, before any deduction for the
transaction costs, if the contract were closed out. Thus, a purchase or sale of
a futures contract may result in losses in excess of the amount invested in the
contract.
V. Options on Futures Contracts
----------------------------
The Portfolio may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. The Portfolio will be required to deposit initial margin and
variation margin with respect to put and call options on futures contracts
written by it pursuant to brokers' requirements similar to those described
above. Net option premiums received will be included as initial margin deposits.
As an example, in anticipation of a decline in interest rates, the Portfolio may
purchase call options on futures contracts as a substitute for the purchase of
futures contracts to hedge against a possible increase in the price of
securities which the Portfolio intends to purchase. Similarly, if the value of
the securities held by the Portfolio is expected to decline as a result of an
increase in interest rates, the Portfolio might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in futures contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the futures
contract upon which it is based, or upon the price of the securities or
currencies being hedged, an option may or may not be less risky than ownership
of the futures contract or such securities or currencies. In general, the market
prices of options can be expected to be more volatile than the market prices on
the underlying futures contract. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Portfolio because the maximum
amount at risk is the premium paid for the options (plus transaction costs). The
writing of an option on a futures contract involves risks similar to those risks
relating to the sale of futures contracts.
VI. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-4
<PAGE>
BLACKROCK FUNDS(SM)
PART C
OTHER INFORMATION
Item 23. Exhibits
(1) Articles of Incorporation
(a) Declaration of Trust of the Registrant dated December 22,
1988 is incorporated herein by reference to Exhibit (1)(a)
of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27,
1998.
(b) Amendment No. 1 to Declaration of Trust dated May 4, 1989 is
incorporated herein by reference to Exhibit (1)(b) of Post-
Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.
(c) Amendment No. 2 to the Declaration of Trust dated December
23, 1993 is incorporated herein by reference to Exhibit
(1)(c) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27,
1998.
(d) Amendment No. 3 to the Declaration of Trust dated January 5,
1996 is incorporated by reference to Exhibit 1(d) of Post-
Effective Amendment No. 23 to Registrant's Registration
Statement on Form N-1A (No. 33-26305) filed on October 18,
1996.
(e) Amendment No. 4 to the Declaration of Trust dated December
23, 1997 is incorporated herein by reference to Exhibit
(1)(e) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27,
1998.
(2) By-laws
(a) Amended and Restated Code of Regulations of the Registrant
is incorporated herein by reference to Exhibit 2(a) of Post-
Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A filed on June 11, 1999.
(3) Instruments Defining Rights of Security Holders
(a) Sections V, VIII and IX of Registrant's Declaration of Trust
dated December 22, 1988 are incorporated herein by reference
to Exhibit (1)(a) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998;
<PAGE>
2
Article II of Registrant's Code of Regulations is
incorporated herein by reference to Exhibit (2) of Post-
Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.
(4) Investment Advisory Contracts
(a) Investment Advisory Agreement between Registrant and PNC
Asset Management Group, Inc. relating to all Portfolios
except the Multi-Sector Mortgage Securities Portfolio III
and Index Equity Portfolio is incorporated herein by
reference to Exhibit (5)(a) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(b) Investment Advisory Agreement between Registrant and
BlackRock Financial Management, Inc. with respect to the
Multi-Sector Mortgage Securities Portfolio III is
incorporated herein by reference to Exhibit (5)(b) of Post-
Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(c) Addendum No. 1 to Investment Advisory Agreement between
Registrant and PNC Asset Management Group, Inc. with respect
to the Mid-Cap Value Equity and Mid-Cap Growth Equity
Portfolios is incorporated herein by reference to Exhibit
5(c) of Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed on January 28,
1997.
(d) Form of Addendum No. 1 to Investment Advisory Agreement
between Registrant and BlackRock Financial Management, Inc.
with respect to BlackRock Strategic Portfolio I and
BlackRock Strategic Portfolio II is incorporated herein by
reference to Exhibit 5(d) of Post-Effective Amendment No. 26
to Registrant's Registration Statement on Form N-1A filed on
December 18, 1996.
(e) Form of Addendum No. 2 to Investment Advisory Agreement
between Registrant and PNC Asset Management Group, Inc. with
respect to the International Small Cap Equity Portfolio is
incorporated herein by reference to Exhibit 5(e) of Post-
Effective Amendment No. 30 to Registrant's Registration
Statement on Form N-1A filed on August 19, 1997.
(f) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and BlackRock Financial Management, Inc. with respect
to the Managed Income, Tax-Free Income, Intermediate
Government Bond, Ohio Tax-Free Income, Pennsylvania Tax-Free
Income, Low Duration Bond, Intermediate Bond, Government
Income, New Jersey Tax-Free Income and Core Bond Portfolios
is
<PAGE>
3
incorporated herein by reference to Exhibit (5)(c) of
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-1A filed on May 30, 1996.
(g) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and Provident Capital Management, Inc. with respect to
the Large Cap Value Equity, Small Cap Value Equity and
Select Equity Portfolios is incorporated herein by reference
to Exhibit (5)(c) of Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed on
May 30, 1996.
(h) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Equity Advisors Company with respect to the
Large Cap Growth Equity and Small Cap Growth Equity
Portfolios is incorporated herein by reference to Exhibit
(5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(i) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Institutional Management Corporation with
respect to the Money Market, U.S. Treasury Money Market,
Municipal Money Market, Pennsylvania Municipal Money Market,
Ohio Municipal Money Market, North Carolina Municipal Money
Market, Virginia Municipal Money Market and New Jersey
Municipal Money Market Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(j) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and CastleInternational Asset Management Limited with
respect to the International Equity and International
Emerging Markets Portfolios is incorporated herein by
reference to Exhibit (5)(c) of Post-Effective Amendment No.
21 to Registrant's Registration Statement on Form N-1A filed
on May 30, 1996.
(k) Sub-Advisory Agreement among PNC Asset Management Group,
Inc., Provident Capital Management, Inc. and BlackRock
Financial Management, Inc. with respect to the Balanced
Portfolio is incorporated herein by reference to Exhibit
(5)(c) of Post-Effective Amendment No. 21 to Registrant's
Registration Statement on Form N-1A filed on May 30, 1996.
(l) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and Provident Capital Management, Inc. with respect to
the Mid-Cap Value Equity Portfolio is incorporated herein by
reference to Exhibit 5(k) of Post-Effective Amendment No. 27
to
<PAGE>
4
Registrant's Registration Statement on Form N-1A filed on
January 28, 1997.
(m) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and PNC Equity Advisors Company with respect to the
Mid-Cap Growth Equity Portfolio is incorporated herein by
reference to Exhibit 5(l) of Post-Effective Amendment No. 27
to Registrant's Registration Statement on Form N-1A filed on
January 28, 1997.
(n) Sub-Advisory Agreement between PNC Asset Management Group,
Inc. and BlackRock Financial Management, Inc. with respect
to the International Bond Portfolio is incorporated herein
by reference to Exhibit 5(m) of Post-Effective Amendment No.
27 to Registrant's Registration Statement on Form N-1A filed
on January 28, 1997.
(o) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and CastleInternational Asset Management Limited
with respect to the International Small Cap Equity Portfolio
is incorporated herein by reference to Exhibit 5(o) of Post-
Effective Amendment No. 30 to Registrant's Registration
Statement on Form N-1A filed on August 19, 1997.
(p) Form of Addendum No. 3 to Investment Advisory Agreement
between Registrant and PNC Asset Management Group, Inc. with
respect to the Micro-Cap Equity Portfolio, GNMA Portfolio,
Delaware Tax-Free Income Portfolio and Kentucky Tax-Free
Income Portfolio is incorporated herein by reference to
Exhibit (5)(p) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(q) Form of Sub-Advisory Agreement between PNC Asset Management
Group, Inc. and PNC Equity Advisors Company with respect to
the Micro-Cap Equity Portfolio is incorporated herein by
reference to Exhibit (5)(q) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed
on January 27, 1998.
(r) Form of Sub-Advisory Agreement between BlackRock, Inc. and
BlackRock Financial Management, Inc. with respect to the
GNMA, Delaware Tax-Free Income and Kentucky Tax-Free Income
Portfolios is incorporated herein by reference to Exhibit
(5)(r) of Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13,
1998.
(s) Form of Addendum No. 4 to Investment Advisory Agreement
between Registrant and BlackRock Advisors, Inc. with respect
to the High Yield Bond Portfolio is incorporated herein by
reference
<PAGE>
5
to Exhibit 5(s) of Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A filed on
August 7, 1998.
(t) Form of Sub-Advisory Agreement between BlackRock Advisors,
Inc. and BlackRock Financial Management, Inc. with respect
to the High Yield Bond Portfolio is incorporated herein by
reference to Exhibit 5(t) of Post-Effective Amendment No. 37
to Registrant's Registration Statement on Form N-1A filed on
August 7, 1998.
(u) Form of Addendum No. 2 to Investment Advisory Agreement
between Registrant and BlackRock Financial Management, Inc.
with respect to the Multi-Sector Mortgage Securities
Portfolio IV is incorporated herein by reference to Exhibit
4(u) of Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-1A filed on June 11, 1999.
(v) Form of Addendum No. 5 to Investment Advisory Agreement
between Registrant and BlackRock Advisors, Inc. with respect
to the Global Science & Technology Portfolio is incorporated
herein by reference to Exhibit 4(v) of Post-Effective
Amendment No. 54 to Registrant's Registration Statement on
Form N-1A filed on May 10, 2000.
(w) Form of Sub-Advisory Agreement between BlackRock Advisors,
Inc. and BlackRock Financial Management, Inc. with respect
to the Global Science & Technology Portfolio is incorporated
herein by reference to Exhibit 4(w) of Post-Effective
Amendment No. 54 to Registrant's Registration Statement on
Form N-1A filed on May 10, 2000.
(x) Form of Advisory Agreement between Registrant and BlackRock
International, Ltd. with respect to the European Equity and
Asia Pacific Equity Portfolios is incorporated herein by
reference to Exhibit 4(x) of Post-Effective Amendment No. 55
to Registrant's Registration Statement on Form N-1A filed on
June 6, 2000.
(y) Form of Addendum No. 6 to Investment Advisory Agreement
between Registrant and BlackRock Advisors, Inc. with respect
to the Core Equity Portfolio is incorporated herein by
reference to Exhibit 4(y) of Post-Effective Amendment No. 56
to the Registrant's Registration Statement on Form N-1A
filed on August 16, 2000.
(z) Form of Sub-Advisory Agreement between BlackRock Advisors,
Inc. and BlackRock Financial Management, Inc. with respect
to the Core Equity Portfolio is incorporated herein by
reference to Exhibit 4(z) of Post-Effective Amendment No. 56
to the
<PAGE>
6
Registrant's Registration Statement on Form N-1A filed on
August 16, 2000.
(5) Underwriting Contracts
(a) Distribution Agreement between Registrant and BlackRock
Distributors, Inc. dated as of June 25, 1999 is incorporated
herein by reference to Exhibit 5(a) of Post-Effective
Amendment No. 45 to Registrant's Registration Statement on
Form N-1A filed on August 24, 1999.
(b) Form of Appendix A to Distribution Agreement between
Registrant and BlackRock Distributors, Inc. is incorporated
herein by reference to Exhibit 5(b) of Post-Effective
Amendment No. 56 to the Registrant's Registration Statement
on Form N-1A filed on August 16, 2000.
(6) Bonus or Profit Sharing Contracts
None.
(7) Custodian Agreements
(a) Custodian Agreement dated October 4, 1989 between Registrant
and PNC Bank, National Association is incorporated herein by
reference to Exhibit (8)(a) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed
on January 27, 1998.
(b) Amendment No. 1 to Custodian Agreement between Registrant
and PNC Bank, National Association is incorporated herein by
reference to Exhibit (8)(b) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed
on January 27, 1998.
(c) Amendment No. 2 dated March 1, 1993 to Custodian Agreement
between Registrant and PNC Bank, National Association with
respect to the Short-Term Bond, Intermediate-Term Bond, Core
Equity, Small Cap Growth Equity and North Carolina Municipal
Money Market Portfolios is incorporated herein by reference
to Exhibit (8)(c) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(d) Form of Appendix B to Custodian Agreement between Registrant
and PFPC Trust Company is incorporated herein by reference
to Exhibit 7(d) of Post-Effective Amendment No. 56 to the
Registrant's Registration Statement on Form N-1A filed on
August 16, 2000.
<PAGE>
7
(e) Sub-Custodian Agreement dated April 27, 1992 among the
Registrant, PNC Bank, National Association and The Chase
Manhattan Bank is incorporated herein by reference to
Exhibit (8)(e) of Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A filed on
February 13, 1998.
(f) Global Custody Agreement between Barclays Bank PLC and PNC
Bank, National Association dated October 28, 1992 is
incorporated herein by reference to Exhibit (8)(f) of Post-
Effective Amendment No. 33 to Registrant's Registration
Statement on Form N-1A filed on January 27, 1998.
(g) Custodian Agreement between State Street Bank and Trust
Company and PNC Bank, National Association dated June 13,
1983 is incorporated herein by reference to Exhibit (8)(g)
of Post-Effective Amendment No. 34 to Registrant's
Registration Statement on Form N-1A filed on February 13,
1998.
(h) Amendment No. 1 to Custodian Agreement between State Street
Bank and Trust Company and PNC Bank, National Association
dated November 21, 1989 is incorporated herein by reference
to Exhibit (8)(h) of Post-Effective Amendment No. 34 to
Registrant's Registration Statement on Form N-1A filed on
February 13, 1998.
(i) Subcustodial Services Agreement dated January 10, 1996
between PNC Bank, National Association and Citibank, N.A. is
incorporated herein by reference to Exhibit 8(j) of Post-
Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1997.
(8) Other Material Contracts
(a) Form of Administration Agreement among Registrant, BlackRock
Advisors, Inc. and PFPC Inc. is incorporated herein by
reference to Exhibit 8(a) of Post-Effective Amendment No. 42
to Registrant's Registration Statement on Form N-1A filed on
June 11, 1999.
(b) Forms of Appendix A and Appendix B to Administration
Agreement among Registrant, BlackRock Advisors, Inc. and
PFPC Inc. are incorporated herein by reference to Exhibit
8(b) of Post-Effective Amendment No. 56 to Registrant's
Registration Statement on Form N-1A filed on August 16,
2000.
(c) Transfer Agency Agreement dated October 4, 1989 between
Registrant and PFPC Inc. is incorporated herein by reference
to Exhibit (9)(e) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
<PAGE>
8
(d) Amendment No. 1 to Transfer Agency Agreement dated October
4, 1989 between Registrant and PFPC Inc. relating to the
Tax-Free Income Portfolio is incorporated herein by
reference to Exhibit (9)(f) of Post-Effective Amendment No.
33 to Registrant's Registration Statement on Form N-1A filed
on January 27, 1998.
(e) Amendment No. 2 to Transfer Agency Agreement dated October
4, 1989 between Registrant and PFPC Inc. relating to the
Pennsylvania Municipal Money Market, Ohio Municipal Money
Market, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Large Cap Value Equity, Index
Equity and Small Cap Value Equity Portfolios is incorporated
herein by reference to Exhibit (9)(g) of Post-Effective
Amendment No. 33 to Registrant's Registration Statement on
Form N-1A filed on January 27, 1998.
(f) Amendment No. 3 to Transfer Agency Agreement dated October
4, 1989 between Registrant and PFPC Inc. relating to the
Short-Term Bond, Intermediate-Term Bond, Core Equity, Small
Cap Growth Equity and North Carolina Municipal Money Market
Portfolios is incorporated herein by reference to Exhibit
(9)(h) of Post-Effective Amendment No. 33 to Registrant's
Registration Statement on Form N-1A filed on January 27,
1998.
(g) Amendment No. 4 to Transfer Agency Agreement dated October
4, 1989 between Registrant and PFPC Inc. relating to Series
B Investor Shares of the Money Market, Managed Income, Tax-
Free Income, Intermediate Government, Ohio Tax-Free Income,
Pennsylvania Tax-Free Income, Large Cap Value Equity, Large
Cap Growth Equity, Index Equity, Small Cap Value Equity,
Intermediate-Term Bond, Small Cap Growth Equity, Core
Equity, International Fixed Income, Government Income,
International Emerging Markets, International Equity and
Balanced Portfolios is incorporated herein by reference to
Exhibit (9)(i) of Post-Effective Amendment No. 33 to
Registrant's Registration Statement on Form N-1A filed on
January 27, 1998.
(h) Form of Appendix C to Transfer Agency Agreement between
Registrant and PFPC Inc. is incorporated herein by reference
to Exhibit 8(h) of Post-Effective Amendment No. 56 to
Registrant's Registration Statement on Form N-1A filed on
August 16, 2000.
(i) License Agreement dated as of December 1, 1995 between the
Registrant and Compass Capital Group, Inc. is incorporated
herein by reference to Exhibit 9(q) of Post-Effective
Amendment No. 27 to Registrant's Registration Statement on
Form N-1A filed on January 28, 1997.
<PAGE>
9
(j) Share Acquisition Agreement dated April 29, 1998 by and
among Registrant and PNC Bank, National Association and PNC
Bank, Delaware, respectively, each as trustee for certain of
the common trust funds listed therein is incorporated herein
by reference to Exhibit 9(l) of Post-Effective Amendment No.
36 to Registrant's Registration Statement on Form N-1A filed
on April 29, 1998.
(k) Form of Expense Limitation Agreement dated as of January 28,
1999 between Registrant and BlackRock Advisors, Inc. is
incorporated herein by reference to Exhibit 8(k) of Post-
Effective Amendment No. 41 to Registrant's Registration
Statement on Form N-1A filed on January 28, 1999.
(l) Form of Expense Limitation Agreement dated as of June 6,
2000 between Registrant and BlackRock International, Ltd. is
incorporated herein by reference to Exhibit 8(l) of Post-
Effective Amendment No. 55 to Registrant's Registration
Statement on Form N-1A filed on June 6, 2000.
(m) Form of Amendment Agreement to Transfer Agency Agreement
dated October 4, 1989 between Registrant and PFPC Inc.
relating to internet services is incorporated herein by
reference to Exhibit 8(m) of Post-Effective Amendment No. 56
to Registrant's Registration Statement on Form N-1A filed on
August 16, 2000.
(9) Legal Opinion
(a) Opinion of Ropes and Gray.
(10) Other Opinions
(a) None.
(11) Omitted Financial Statements
(a) None.
(12) Initial Capital Agreements
(a) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Classes A-1, B-1, C-1,
D-2, E-2, F-2, G-2, H-2, I-1, I-2, J-1, J-2, K-2, L-2, M-2,
N-2, O-2, P-2, D-1, E-1, F-1, G-1, H-1, K-1, L-1, M-1, N-1,
O-1, P-1, A-2, B-2, C-2, I-2, J-2, A-3, B-3, C-3, D-3, E-3,
F-3, G-3, H-3, I-3, J-3, K-3, L-3, M-3, N-3, O-3, P-3, Q-1,
Q-2, Q-3, R-1, R-2, R-3, S-1, S-2, S-3, T-1, T-2, T-3, U-1,
U-2, U-3, A-4, D-4, E-4, F-4, G-4, H-4, K-4, L-4, M-4, N-4,
O-4, P-4, R-4, S-4, T-4, U-4, W-4, X-4, Y-4, V-1, V-2, V-3,
W-1, W-2, W-3, X-1, X-2, X-3, Y-1, Y-2, Y-3, Z-1, Z-2, Z-3,
AA-1, AA-2, AA-3, AA-4, AA-5, BB-1, BB-2, BB-3, BB-4, BB-5,
<PAGE>
10
CC-3, A-5, B-4, B-5, C-4, C-5, I-4, I-5, J-4, J-5, Q-4, Q-5,
V-4, V-5, Z-4, Z-5, X-1, X-3, D-5, E-5, F-5, G-5, H-5, K-5,
L-5, M-5, N-5, O-5, P-5, R-5, S-5, T-5, U-5, W-5, X-5, Y-5,
DD-1, DD-2, DD-3, DD-4, DD-5, EE-1, EE-2, EE-3, EE-4, EE-5,
R-6, BB-6, FF-3, GG-3, HH-1, HH-2, HH-3, HH-4, HH-5, II-1,
II-2, II-3, II-4, II-5, S-6, JJ-1, JJ-2, JJ-3, JJ-4, JJ-5,
KK-1, KK-2, KK-3, KK-4, KK-5, LL-1, LL-2, LL-3, LL-4 and LL-
5 is incorporated herein by reference to Exhibit (13)(a) of
Post-Effective Amendment No. 34 to Registrant's Registration
Statement on Form N-1A filed on February 13, 1998.
(b) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Classes MM-1, MM-2, MM-
3, MM-4, MM-5 and MM-6 is incorporated herein by reference
to Exhibit 13(b) of Post-Effective Amendment No. 37 to
Registrant's Registration Statement on Form N-1A filed on
August 7, 1998.
(c) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Class NN-3 is
incorporated herein by reference to Exhibit 12(c) of Post-
Effective Amendment No. 42 to Registrant's Registration
Statement on Form N-1A filed on June 11, 1999.
(d) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Classes A-7 and C-7 is
incorporated herein by reference to Exhibit 12(d) of Post-
Effective Amendment No. 43 to Registrant's Registration
Statement on Form N-1A filed on August 6, 1999.
(e) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Classes OO-1, OO-2, OO-
3, OO-4 and OO-5 is incorporated herein by reference to
Exhibit 12(e) of Post-Effective Amendment No. 54 to
Registrant's Registration Statement on Form N-1A filed on
May 10, 2000.
(f) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Classes PP-1, PP-2, PP-
3, PP-4 and PP-5, QQ-1, QQ-2, QQ-3, QQ-4, QQ-5 and U-6 is
incorporated herein by reference to Exhibit 12(f) of Post-
Effective Amendment No. 55 to Registrant's Registration
Statement on Form N-1A filed on June 6, 2000.
(g) Form of Purchase Agreement between Registrant and
Registrant's distributor relating to Class RR-3 is
incorporated herein by reference to Exhibit 12(g) of Post-
Effective Amendment No. 56 to Registrant's Registration
Statement on Form N-1A filed on August 16, 2000.
(13) Rule 12b-1 Plan
<PAGE>
11
(a) Amended and Restated Distribution and Service Plan for
Service, Series A Investor, Series B Investor, Series C
Investor, Institutional and BlackRock Shares is incorporated
herein by reference to Exhibit (15) of Post-Effective
Amendment No. 21 to Registrant's Registration Statement on
Form N-1A filed on May 30, 1996.
(b) Form of Appendix A to Amended and Restated Distribution and
Service Plan is incorporated herein by reference to Exhibit
13(b) of Post-Effective Amendment No. 56 to Registrant's
Registration Statement on Form N-1A filed on August 16,
2000.
(14) Intentionally Omitted.
(15) Rule 18f-3 Plan
(a) Amended and Restated Plan Pursuant to Rule 18f-3 for
Operation of a Multi-Class Distribution System is
incorporated herein by reference to Exhibit 15(a) of Post-
Effective Amendment No. 45 to Registrant's Registration
Statement on Form N-1A filed on August 24, 1999.
(16) Codes of Ethics
(a) Code of Ethics of BlackRock Funds is incorporated herein by
reference to Exhibit 16(a) of Post-Effective Amendment No.
55 to Registrant's Registration Statement on Form N-1A filed
on June 6, 2000.
(b) Code of Ethics of BlackRock, Inc. is incorporated herein by
reference to Exhibit 16(b) of Post-Effective Amendment No.
52 to Registrant's Registration Statement on Form N-1A filed
on March 23, 2000.
(c) Code of Ethics of BlackRock Distributors, Inc. is
incorporated herein by reference to Exhibit 16(c) of Post-
Effective Amendment No. 52 to Registrant's Registration
Statement on Form N-1A filed on March 23, 2000.
(99) (a) Power of Attorney of David R. Wilmerding dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen
H. Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on
form N-1A filed on February 18, 1997.
(b) Power of Attorney of William O. Albertini dated March 5,
1996 appointing David R. Wilmerding, Raymond J. Clark and
Karen H. Sabath as attorneys and agents is incorporated
herein by reference
<PAGE>
12
to such Power of Attorney filed in Post-Effective Amendment
No. 28 to Registrant's Registration Statement on form N-1A
filed on February 18, 1997.
(c) Power of Attorney of Raymond J. Clark dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen
H. Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on
form N-1A filed on February 18, 1997.
(d) Power of Attorney of Robert M. Hernandez dated March 5, 1996
appointing David R. Wilmerding, Raymond J. Clark and Karen
H. Sabath as attorneys and agents is incorporated herein by
reference to such Power of Attorney filed in Post-Effective
Amendment No. 28 to Registrant's Registration Statement on
form N-1A filed on February 18, 1997.
Item 24. Persons Controlled by or under Common Control with the Fund.
None.
Item 25. Indemnification
Indemnification of Registrant's principal underwriter against certain
losses is provided for in Section 7 of the Distribution Agreement incorporated
by reference herein as Exhibit 5(a). Indemnification of Registrant's Custodian,
Transfer Agent and Administrators is provided for, respectively, in Section 22
of the Custodian Agreement incorporated by reference herein as Exhibit 7(a),
Section 17 of the Transfer Agency Agreement incorporated by reference herein as
Exhibit 8(c) and Section 11 of the Administration Agreement incorporated by
reference herein as Exhibit 8(a). Registrant intends to obtain from a major
insurance carrier a trustees' and officers' liability policy covering certain
types of errors and omissions. In addition, Section 9.3 of the Registrant's
Declaration of Trust incorporated by reference herein as Exhibit 1(a) provides
as follows:
Indemnification of Trustees, Officers, Representatives and Employees.
--------------------------------------------------------------------
The Trust shall indemnify each of its Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in
compromise, as fines and penalties, and as counsel fees) reasonably
incurred by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in which he
may be involved or with which he may be threatened, while as a Trustee or
thereafter, by reason of his being or having been such a Trustee except
------
with respect to any matter as to which he shall have been adjudicated to
have acted in bad faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter disposed of by a
--------
compromise payment by such person, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other
expenses shall be provided unless the Trust shall have received a written
opinion from independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance,
<PAGE>
13
gross negligence or reckless disregard of duty, or the matter of bad faith
had been adjudicated, it would in the opinion of such counsel have been
adjudicated in favor of such person. The rights accruing to any person
under these provisions shall not exclude any other right to which he may be
lawfully entitled, provided that no person may satisfy any right of
--------
indemnity or reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection with the
indemnification under this Section 9.3, provided that the indemnified
--------
person shall have given a written undertaking to reimburse the Trust in the
event it is subsequently determined that he is not entitled to such
indemnification.
The Trustee shall indemnify officers, representatives and employees of
the Trust to the same extent that Trustees are entitled to indemnification
pursuant to this Section 9.3.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by Registrant of expenses incurred or
paid by a trustee, officer or controlling person of Registrant in the successful
defense of any action, suit or proceeding) is asserted by such trustee, officer
or controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
Section 9.6 of the Registrant's Declaration of Trust, filed herein as
Exhibit 1(a), also provides for the indemnification of shareholders of the
Registrant. Section 9.6 states as follows:
Indemnification of Shareholders. In case any Shareholder or former
-------------------------------
Shareholder shall be held to be personally liable solely by reason of his
being or having been a Shareholder and not because of his acts or omissions
or for some other reason, the Shareholder or former Shareholder (or his
heirs, executors, administrators or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general
successor) shall be entitled out of the assets belonging to the classes of
Shares with the same alphabetical designation as that of the Shares owned
by such Shareholder to be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust shall, upon
request by the Shareholder, assume the defense of any claim made against
any Shareholder for any act or obligations of the Trust and satisfy any
judgment thereon from such assets.
Item 26. Business and Other Connections of Investment Advisers
(a) BlackRock Advisors, Inc. is an indirect majority-owned
subsidiary of PNC Bank Corp. BlackRock Advisors, Inc. was
organized in 1994 for the purpose of providing advisory
services to investment
<PAGE>
14
companies. The list required by this Item 26 of officers and
directors of BlackRock Advisors, Inc., together with
information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such
officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV,
filed by BlackRock Advisors, Inc. pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-47710).
(b) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation) ("BIMC") is an
indirect majority-owned subsidiary of PNC Bank Corp. The
list required by this Item 26 of officers and directors of
BIMC, together with information as to any other business,
profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past
two years, is incorporated by reference to Schedules A and D
of Form ADV, filed by BIMC pursuant to the Investment
Advisers Act of 1940 (SEC File No. 801-13304).
(c) BlackRock Financial Management, Inc. ("BlackRock") is an
indirect majority-owned subsidiary of PNC Bank Corp.
BlackRock currently offers investment advisory services to
institutional investors such as pension and profit-sharing
plans or trusts, insurance companies and banks. The list
required by this Item 26 of officers and directors of
BlackRock, together with information as to any other
business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to
Schedules A and D of Form ADV, filed by BlackRock pursuant
to the Investment Advisers Act of 1940 (SEC File No. 801-
48433).
(d) BlackRock International, Ltd. (formerly CastleInternational
Asset Management Limited) ("BIL") is an indirect majority-
owned subsidiary of PNC Bank Corp. The list required by this
Item 26 of officers and directors of BIL, together with
information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such
officers and directors during the past two years, is
incorporated by reference to Schedules A and D of Form ADV,
filed by BIL pursuant to the Investment Advisers Act of 1940
(SEC File No. 801-51087).
Item 27. Principal Underwriters
(a) Not applicable.
(b) The information required by this Item 27 with respect to
each director, officer or partner of BlackRock Distributors,
Inc. (formerly Compass Distributors, Inc.) is incorporated
by reference to Schedule A of FORM BD filed by BlackRock
Distributors, Inc.
<PAGE>
15
with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 (File No. 8-48775).
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) PFPC Trust Company, 200 Stevens Drive, Lester, PA 19113 (records
relating to its functions as custodian).
(2) BlackRock Distributors, Inc., Four Falls Corporate Center, 6th
Floor, West Conshohocken, PA 19428-2961 (records relating to its
functions as distributor).
(3) BlackRock Advisors, Inc. (formerly BlackRock, Inc.), 345 Park
Avenue, New York, New York 10154 (records relating to its
functions as investment adviser and co-administrator).
(4) BlackRock Institutional Management Corporation (formerly PNC
Institutional Management Corporation), Bellevue Corporate Center,
400 Bellevue Parkway, Wilmington, Delaware 19809 (records
relating to its functions as investment sub-adviser).
(5) BlackRock Financial Management, Inc., 345 Park Avenue, New York,
New York 10154; and 1600 Market Street, 27th Floor, Philadelphia,
Pennsylvania 19103 (records relating to its functions as
investment adviser and sub-adviser).
(6) PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809 (records relating to its functions as
co-administrator, transfer agent and dividend disbursing agent).
(7) The Chase Manhattan Bank, N.A., 1285 Avenue of the Americas, New
York, New York 10019 (records relating to its function as sub-
custodian).
(8) BlackRock International, Ltd. (formerly CastleInternational Asset
Management Limited), 7 Castle Street, Edinburgh, Scotland, EH2
3AM (records relating to its functions as investment sub-
adviser).
(9) Citibank, N.A., 111 Wall Street, 23rd Floor, Zone 6, New York, NY
10043 (records relating to its functions as sub-custodian).
(10) BlackRock Financial Management, Inc., 1600 Market Street, 28th
Floor, Philadelphia, PA 19103 (Registrant's declaration of trust,
code of regulations and minute books).
<PAGE>
16
Item 29. Management Services
None.
Item 30. Undertakings
None.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Fund certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to its
Registration Statement under Rule 485(b) under the Securities Act of 1933 and
has duly caused this Post-Effective Amendment to its Registration Statement to
be signed on its behalf by the undersigned, duly authorized, in the City of New
York and the State of New York on the 27/th/ day of October, 2000.
BLACKROCK FUNDS(SM)
Fund
By /s/ Raymond J. Clark
--------------------------
Raymond J. Clark
President and Treasurer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Raymond J. Clark Trustee, President and
--------------------
(Raymond J. Clark) Treasurer October 27, 2000
*David R. Wilmerding, Jr. Chairman of the Board October 27, 2000
-------------------------
(David R. Wilmerding, Jr.)
*William O. Albertini Trustee October 27, 2000
---------------------
(William O. Albertini)
*Robert M. Hernandez Trustee October 27, 2000
--------------------
(Robert M. Hernandez)
*By: /s/ Karen H. Sabath
---------------------------------
Karen H. Sabath, Attorney-in-fact
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
9(a) Opinion of Ropes and Gray.
