Blackrock Inc Quarterly Report dated June 30 2005

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2005

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the transition period from              to             .

 

(Commission file number 001-15305)

 


 

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   51-0380803

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

40 East 52nd Street, New York, NY 10022

(Address of principal executive offices)

(Zip Code)

 

(212) 810-5300

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)    Yes  x    No  ¨

 

As of July 31, 2005, there were 19,767,663 shares of the registrant’s class A common stock outstanding and 44,502,957 shares of the registrant’s class B common stock outstanding.

 



BlackRock, Inc.

Index to Form 10-Q

 

PART I

 

FINANCIAL INFORMATION

 

          Page

Item 1.

   Financial Statements     
    

Consolidated Statements of Financial Condition

   1
    

Consolidated Statements of Income

   2
    

Consolidated Statements of Cash Flows

   3
    

Notes to Consolidated Financial Statements

   4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    32

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    66

Item 4.

   Controls and Procedures    69

PART II

 

OTHER INFORMATION

Item 1.

   Legal Proceedings    70

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    71

Item 4.

   Submission of Matters to a Vote of Security Holders    72

Item 6.

   Exhibits    73

 

-ii-


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

BlackRock, Inc.

Consolidated Statements of Financial Condition

(Dollar amounts in thousands)

 

    

June 30,

2005


   

December 31,

2004


 
     (unaudited)        
Assets                 

Cash and cash equivalents

   $ 367,386     $ 457,673  

Accounts receivable

     210,431       153,152  

Investments

     282,807       227,497  

Property and equipment, net

     115,323       93,701  

Intangible assets, net

     499,991       184,110  

Receivable from affiliates

     33,365       12,190  

Deferred mutual fund commissions

     15,398       —    

Other assets

     37,843       16,912  
    


 


Total assets

   $ 1,562,544     $ 1,145,235  
    


 


Liabilities                 

Accrued compensation

   $ 317,201     $ 311,351  

Long term borrowings

     250,000       —    

Purchase price contingencies

     55,332       —    

Accounts payable and accrued liabilities

                

Affiliate

     10,722       3,632  

Other

     38,616       27,185  

Acquired management contract obligation

     3,791       4,810  

Other liabilities

     22,690       12,736  
    


 


Total liabilities

     698,352       359,714  
    


 


Minority interest

     10,577       17,169  
Stockholders’ equity                 

Common stock, class A, 19,965,305 and 19,243,878 shares issued, respectively

     200       192  

Common stock, class B, 45,447,417 and 45,499,510 shares issued, respectively

     455       455  

Additional paid-in capital

     210,998       165,377  

Retained earnings

     711,244       650,016  

Unearned compensation

     (14,716 )     (4,588 )

Accumulated other comprehensive gain

     4,680       8,254  

Treasury stock, class A, at cost, 338,241 and 270,998 shares held, respectively

     (25,436 )     (17,545 )

Treasury stock, class B, at cost, 806,667 shares held

     (33,810 )     (33,809 )
    


 


Total stockholders’ equity

     853,615       768,352  
    


 


Total liabilities and stockholders’ equity

   $ 1,562,544     $ 1,145,235  
    


 


 

See accompanying notes to consolidated financial statements.

 

- 1 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Consolidated Statements of Income

(Dollar amounts in thousands, except share data)

(unaudited)

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 
     2005

    2004

    2005

    2004

 
Revenue                                 

Investment advisory and administration fees

                                

Mutual funds

   $ 77,247     $ 54,981     $ 147,618     $ 111,427  

Separate accounts

     154,224       107,032       296,109       210,904  

Other income

                                

Affiliate

     1,250       1,378       2,500       2,636  

Other

     38,668       20,421       75,244       40,668  
    


 


 


 


Total revenue

     271,389       183,812       521,471       365,635  
    


 


 


 


Expense                                 

Employee compensation and benefits

     131,015       81,618       257,959       147,687  

Fund administration and servicing costs

                                

Affiliate

     4,096       4,948       8,113       10,016  

Other

     6,330       3,070       11,422       6,362  

General and administration

                                

Affiliate

     1,678       1,411       4,795       5,336  

Other

     44,719       29,952       87,769       57,326  

Amortization of intangible assets

     1,656       232       2,937       463  

Impairment of intangible assets

     —         —         —         6,097  
    


 


 


 


Total expense

     189,494       121,231       372,995       233,287  
    


 


 


 


Operating income

     81,895       62,581       148,476       132,348  
Non-operating income (expense)                                 

Investment income

     6,027       16,038       15,814       22,935  

Interest expense

     (2,063 )     (550 )     (4,077 )     (1,634 )
    


 


 


 


Total net non-operating income

     3,964       15,488       11,737       21,301  
    


 


 


 


Income before income taxes and minority interest

     85,859       78,069       160,213       153,649  

Income taxes

     31,324       26,521       58,655       46,610  
    


 


 


 


Income before minority interest

     54,535       51,548       101,558       107,039  

Minority interest

     1,200       3,552       1,687       3,836  
    


 


 


 


Net income

   $ 53,335     $ 47,996     $ 99,871     $ 103,203  
    


 


 


 


Earnings per share                                 

Basic

   $ 0.83     $ 0.75     $ 1.55     $ 1.62  

Diluted

   $ 0.80     $ 0.73     $ 1.49     $ 1.57  

Dividends paid per share

   $ 0.30     $ 0.25     $ 0.60     $ 0.50  
Weighted-average shares outstanding                                 

Basic

     64,354,069       63,647,316       64,322,465       63,701,625  

Diluted

     66,796,087       65,766,979       66,844,720       65,776,975  

 

See accompanying notes to consolidated financial statements.

 

- 2 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

(unaudited)

 

    

Year to Date

June 30,


 
     2005

    2004

 
Cash flows from operating activities                 

Net income

   $ 99,871     $ 103,203  

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

                

Depreciation and amortization

     14,468       10,105  

Impairment of intangible assets

     —         6,097  

Minority interest

     1,687       3,836  

Stock-based compensation

     35,251       6,942  

Deferred income taxes

     (8,312 )     7,210  

Tax benefit from stock-based compensation

     2,503       1,761  

Net gain on investments

     (3,856 )     (11,889 )

Amortization of bond issuance costs

     403       —    

Amortization of deferred mutual commissions

     5,426       —    

Changes in operating assets and liabilities:

                

Increase in accounts receivable

     (20,575 )     (19,783 )

Increase in investments, trading

     (7,159 )     (9,156 )

Increase in receivable from affiliates

     (12,863 )     (209 )

Increase in other assets

     (4,906 )     (914 )

Decrease in accrued compensation

     (132,071 )     (36,870 )

Increase (decrease) in accounts payable and accrued liabilities

     11,734       (18,069 )

Increase (decrease) in other liabilities

     8,152       (2,489 )
    


 


Cash (used in) provided by operating activities

     (10,247 )     39,775  
    


 


Cash flows from investing activities                 

Purchase of property and equipment

     (29,138 )     (9,892 )

Purchase of investments

     (13,572 )     (36,006 )

Sale of investments

     28,129       89,742  

Sale of real estate held for sale

     112,184       —    

Deemed cash contribution upon consolidation of VIE

     —         6,412  

Consolidation of sponsored investment funds

     —         (41,193 )

Acquisitions, net of cash acquired and purchase price contingencies

     (249,535 )     (73 )
    


 


Cash (used in) provided by investing activities

     (151,932 )     8,990  
    


 


Cash flows from financing activities                 

Borrowings, received, net of issuance costs

     395,000       —    

Principal repayment of borrowings

     (150,000 )     —    

Repayment of short term borrowings

     (111,840 )     —    

Subscriptions to consolidated sponsored investment funds

     9,891       5,000  

Decrease in cash due to deconsolidated sponsored investment fund

     (5,509 )     —    

Distributions paid to minority interest holders

     —         (3,975 )

Dividends paid

     (38,434 )     (31,757 )

Reissuance of treasury stock

     8,315       10,049  

Purchase of treasury stock

     (32,606 )     (47,429 )

Issuance of class A common stock

     706       —    

Acquired management contract obligation payment

     (1,019 )     (926 )
    


 


Cash provided by (used in) financing activities

     74,504       (69,038 )
    


 


Effect of exchange rate changes on cash and cash equivalents

     (2,612 )     1,028  

Net decrease in cash and cash equivalents

     (90,287 )     (19,245 )

Cash and cash equivalents, beginning of period

     457,673       315,941  
    


 


Cash and cash equivalents, end of period

   $ 367,386     $ 296,696  
    


 


 

See accompanying notes to consolidated financial statements.

 

- 3 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except share data)

(unaudited)

 

1. Significant Accounting Policies

 

Basis of Presentation

 

BlackRock, Inc., a Delaware Corporation (together with its subsidiaries, “BlackRock” or the “Company”) is majority-owned indirectly by the PNC financial services group, Inc. (“PNC”). The consolidated financial statements of BlackRock include the assets, liabilities and earnings of its wholly-owned subsidiaries BlackRock Advisors, Inc., BlackRock Institutional Management Corporation, BlackRock Financial Management, Inc., BlackRock Investments, Inc., BlackRock Funding, Inc., BlackRock Overseas Investment Corp. and BlackRock Portfolio Holdings, Inc. and each of their subsidiaries. The Company also consolidates entities in which it holds a majority of the outstanding equity or has been deemed primary beneficiary. Intercompany accounts and transactions between the consolidated entities have been eliminated. The consolidated interim financial statements of BlackRock. Included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The Company follows the same accounting policies in the preparation of interim reports as set forth in the annual report. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the financial position, results of operations and cash flows of BlackRock for the interim periods presented and are not necessarily indicative of a full year’s results.

 

Use of Estimates

 

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.

 

Investments

 

Readily Marketable Securities

 

The accounting method used for the Company’s readily marketable securities is dependent upon the Company’s ownership level. If the Company does not possess significant influence over the issuer’s operations, the securities are classified as trading or available for sale, depending on the Company’s intent to hold the security. Investments, trading, primarily represent investments made by the Company in certain of the BlackRock Funds which are held in a Rabbi trust with respect to senior employee elections under BlackRock deferred compensation plans and securities held by Company-sponsored investment funds which have been consolidated due to the Company’s majority ownership. These securities are recorded at fair market value with unrealized gains and losses included in the accompanying consolidated statements of income as investment income (expense). Investments, available for sale, consist primarily of corporate investments in BlackRock funds and collateralized debt obligations. The resulting unrealized gains and losses on investments, available for sale, are included in the accumulated other comprehensive income or loss component of stockholders’ equity, net of tax. If the Company holds significant influence over the issuer of a readily marketable equity security, the investment is accounted for under the equity method of accounting and included in investments, other. The Company’s share of the investee’s net income is included in investment income (expense) on the consolidated statements of income.

 

- 4 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Investments (continued)

 

Nonmarketable Equity Securities

 

Items classified as investments, other, consist primarily of certain institutional and private placement portfolios (“alternative investment products”) and are accounted for using the cost or equity methods of accounting. If the Company has significant influence over the investee’s operations, the equity method of accounting is used and the Company’s share of the investee’s net income is recorded as investment income (expense). If the Company does not maintain significant influence over the investee’s operations, the cost method of accounting is used.

 

Occasionally, the Company will acquire a controlling equity interest in a sponsored investment fund as a seed investment. The cash flows originating from consolidation of sponsored investment funds, as presented in the consolidated statements of cash flows, primarily represents the purchases of securities by such funds using proceeds from the Company’s initial seed investments to establish such funds. When the Company’s interests in any of these funds falls below 50%, those funds will be deconsolidated and accounted for under the equity method or other methods as appropriate. This deconsolidation will result in a decrease in the Company’s cash and cash equivalents in an amount equal to the amount of the funds’ cash and cash equivalents at that time.

 

These funds are organized as investment companies, as defined in the American Institute of Certified Public Accountants Audit and Accounting Guide, Audits of Investment Companies (the “IC Guide”). As required by the IC Guide, all of the fund’s investments are carried at value, regardless of the Company’s ownership and the availability of a readily determinable market value for the investments, with the corresponding changes in the securities’ fair values reflected in investment income in the Company’s consolidated statement of income. In the absence of a publicly-available market value, fair value for an investment is estimated in good faith by the Company’s management based on such factors as the liquidity, financial condition and current and projected operating performance of the investment and, in the case of private investment fund investments, the net asset value provided by the fund’s investment manager. At June 30, 2005, these investments represent 19%, or approximately $54,000, of total investments.

 

Realized gains and losses on trading, available for sale and other investments are calculated on a specific identification basis and, along with interest and dividend income, are included in investment income (expense), in the accompanying consolidated statements of income. The Company’s management periodically assesses impairment on investments to determine if it is other than temporary. Several of the Company’s available for sale investments represent interests in collateralized debt obligations in which the Company acts in the capacity of collateral manager. The Company reviews cash flow estimates throughout the life of each collateralized debt obligation to determine if an impairment charge is required to be taken through current period’s earnings. If the updated estimate of future cash flows (taking into account both timing and amount) is less than the last revised estimate, an impairment is recognized based on the excess of the carrying amount of the investment over its fair value. In evaluating impairments on all other available for sale and other securities, the Company considers the length of time and the extent to which the security’s market value, if determinable, has been less than its cost, the financial condition and near-term prospects of the security’s issuer and the Company’s intended holding period for the security. Any impairment on investments that is deemed other than temporary is recorded in non-operating income (expense) on the consolidated statements of income as a realized loss.

 

- 5 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Stock-Based Compensation

 

Prior to 2003, the Company accounted for all awards issued under its 1999 Stock Award and Incentive Plan (the “Award Plan”) and shares issued under the BlackRock, Inc. 2001 Employee Stock Purchase Plan (“ESPP”) under the intrinsic method of accounting.

 

Effective January 1, 2003, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards Statement (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company’s plans vest over periods ranging from two to four years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the periods ending June 30, 2005 and June 30, 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the effective date of SFAS No. 123.

 

The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

 

     Three months ended
June 30,


   

Six months ended

June 30,


 
     2005

    2004

    2005

    2004

 

Net income, as reported

   $ 53,335     $ 47,996     $ 99,871     $ 103,203  

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects

     2,117       1,075       3,834       2,336  

Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

     (4,120 )     (3,746 )     (7,840 )     (8,056 )
    


 


 


 


Pro forma net income

   $ 51,332     $ 45,325     $ 95,865     $ 97,483  
    


 


 


 


Earnings per share:

                                

Basic - as reported

   $ 0.83     $ 0.75     $ 1.55     $ 1.62  

Basic - pro forma

   $ 0.80     $ 0.71     $ 1.49     $ 1.53  

Diluted - as reported

   $ 0.80     $ 0.73     $ 1.49     $ 1.57  

Diluted - pro forma

   $ 0.77     $ 0.69     $ 1.43     $ 1.48  

 

- 6 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Deferred Mutual Fund Commissions

 

Currently, an indirect wholly-owned subsidiary of PNC acts as a financial intermediary associated with the sale of back-end loaded shares of certain BlackRock Funds. This entity finances certain broker sales commissions and receives associated sales charges. Upon the closing of the Company’s acquisition of SSRM Holdings, Inc. (“SSR”) (see note 2), the Company acquired approximately $20,800 in deferred mutual fund commissions, representing broker sales commissions related to certain shares of SSR’s mutual fund family. Concurrent with the closing of the SSR acquisition, these mutual funds were merged into the BlackRock Funds. All commissions incurred subsequent to that date will be financed by the indirect wholly-owned subsidiary of PNC.

 

Deferred mutual fund commissions are amortized over an estimated useful life of six years, based on the estimated recoverability of the asset through distribution fee payments or contingent deferred sales charges. Contingent deferred sales charges received from early shareholder withdrawals reduce the unamortized deferred commissions balance.

 

The Company will periodically evaluate the recoverability of deferred mutual fund commissions by assessing whether the unamortized asset can be recovered over its remaining life through an analysis of net undiscounted future cash flows related to the asset. If such an assessment indicates that the undiscounted cash flows are not sufficient to recover the recorded carrying value, the assets will be adjusted to fair value with a corresponding impairment charge reflected in the consolidated statements of income. No such impairments were recorded in the periods presented.

 

Revenue Recognition

 

Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on predetermined percentages of the market values of the assets under management or, in the case of certain real estate separate accounts, net operating income generated by the underlying properties, and are affected by changes in assets under management, including market appreciation or depreciation and net subscriptions or redemptions. Investment advisory and administration fees for mutual funds are shown net of fees waived pursuant to expense limitations. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are recognized at the closing of the respective real estate transactions.

 

The Company also receives performance fees or an incentive allocation from alternative investment products and certain separate accounts. These performance fees are earned upon attaining specified investment return thresholds. Such fees are recorded as earned. Should the alternative investment products and separate accounts subject to performance fees not continue to meet specified investment return thresholds, performance fees and related employee compensation expense previously recorded may be subject to reversal. At June 30, 2005, no performance fees recorded by the Company are subject to reversal.

 

BlackRock provides a variety of risk management, investment analytics and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, REITs, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand name BlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions services are either based on predetermined percentages of the market value of assets subject to the services or on fixed monthly or quarterly payments. Certain client accounts can also be subject to discretionary performance fees. The fees earned on risk management, investment analytics and investment system assignments are recorded as other income on the consolidated statements of income.

 

- 7 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Recent Accounting Developments

 

In December 2004, the FASB issued Statement of Financial Accounting Standards Statement (“SFAS”) No. 123R, “Share-Based Payment.” This statement is a revision to SFAS No. 123, “Accounting for Stock-Based Compensation” and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the award. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. As amended by Rule 4-01(a) of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”), this statement is effective as of the beginning of the first interim or annual reporting period of the Company’s first fiscal year beginning on or after June 15, 2005. In accordance with the SFAS No. 123R, as amended, the Company will adopt SFAS No. 123R effective January 1, 2006.

 

Upon adoption, the Company has two application methods from which to choose: the modified-prospective transition approach or the modified-retrospective transition approach. Under the modified-prospective transition method, the Company would be required to recognize compensation cost for share-based awards to employees based on their grant-date fair value from the beginning of the fiscal period in which the recognition provisions are first applied as well as compensation cost for awards that were granted prior to, but not vested as of, the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. Under the modified-retrospective transition method, the Company would restate prior periods by recognizing compensation cost in the amounts previously reported in the pro forma footnote disclosure under SFAS No. 123. Under this method, the Company is permitted to apply this presentation to all periods presented or to the start of the fiscal year in which SFAS No. 123R is adopted. The Company would follow the same guidelines as in the modified-prospective transition method for awards granted subsequent to adoption and those that were granted and not yet vested. The Company will adopt the modified-prospective transition approach, which will reduce the Company’s net income by the grant-date fair value of all unvested stock options as of the date of adoption, January 1, 2006. In addition, diluted shares outstanding will be reduced for all shares reserved for unvested stock options expensed under SFAS No. 123R (approximately 1.8 million shares at June 30, 2005). The adoption of SFAS No. 123R is expected to reduce diluted earnings per share by approximately $0.01 per quarter through December 31, 2006.

 

- 8 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Recent Accounting Developments (continued)

 

In March 2005, the staff of the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of Share-Based Payments. This interpretation expresses the views of the staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the staff’s views regarding the valuation of share-based payment arrangements for public companies. In particular, this SAB provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entity status, valuation methods, the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first time adoption of SFAS No. 123R in an interim period, capitalization of compensation cost related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Management’s Discussion and Analysis subsequent to adoption of SFAS No. 123R. The Company adopted the disclosure provisions of SAB No. 107 during the first quarter of 2005. Upon adoption of these provisions, the Company discontinued separate disclosure of expenses, and the corresponding accrued amounts, related to the vesting of awards under the BlackRock, Inc. 2002 Long Term Retention and Incentive Plan (“LTIP”) in the Company’s financial statements. The Company will adopt the remaining provisions of SAB 107 in connection with its adoption of SFAS No. 123R on January 1, 2006. The adoption of these provisions is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”). FIN 47 establishes a framework for liability recognition related to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. In addition, FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005 and will be adopted by the Company on December 31, 2005. The adoption of FIN 47 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

In March 2005, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-5, “Implicit Variable Interests Under FIN 46.” FSP FIN 46(R)-5 states that a reporting entity should consider whether it holds an implicit variable interest in a variable interest entity (“VIE”) or in a potential VIE. If the aggregate of the explicit and implicit variable interests held by the reporting entity and its related parties would, if held by a single party, identify that party as the primary beneficiary, the party within the group most closely associated with the VIE should be deemed the primary beneficiary. The effective date of FSP FIN 46(R)-5 is the first reporting period beginning after March 31, 2005, with early application permitted for periods for which financial statements have not been issued. The adoption of FSP FIN 46(R)-5 is not expected to have a significant impact on the Company’s consolidated financial statements.

 

- 9 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

 

Recent Accounting Developments (continued)

 

FSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP No. 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, as provided in FSP No. 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act. The expected impact of the Company’s repatriation of its foreign subsidiaries’ undistributed earnings is discussed in note 12 to the consolidated financial statements.

 

In June 2005, the FASB issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“FAS 154”). FAS 154 replaces APB Opinion No. 20, “Accounting Changes” and FAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” FAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle. FAS 154 also requires that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a “restatement.” FAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The implementation of FAS 154 is not expected to have a material impact on the Company’s consolidated financial statements.

 

Reclassification of Prior Period’s Financial Statements

 

Certain items previously reported may have been reclassified to conform with the current period presentation.

 

- 10 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

2. Acquisition

 

In January 2005, the Company closed the acquisition of SSR, the holding company of State Street Research & Management Company and BlackRock Realty Advisors, Inc. (formerly known as SSR Realty Advisors, Inc. “Realty”), from MetLife, Inc. (“MetLife”) for an adjusted purchase price of $233,115 in cash and approximately 550,000 shares of BlackRock restricted class A common stock. MetLife is precluded from selling these shares until the third anniversary of closing, except in very limited circumstances. In deriving a fair value for this common stock, the Company referred to a valuation discount recommendation that was compiled by an independent third party valuation services firm on the Company’s behalf. This firm based its recommended discount range of 15% to 20% on Black Scholes and Longstaff valuations of the embedded put option on the Company’s restricted shares and historical differentials between restricted stock and freely-marketable stock of publicly-traded companies.

 

The stock purchase agreement for the SSR transaction provides for an additional payment to MetLife on the first anniversary of the closing of the SSR transaction (January 31, 2006) of up to $75,000 based on the Company achieving specified retention levels of AUM and run rate revenue as of the signing date of the stock purchase agreement. The first anniversary contingent payment has two components: directly-sourced revenue and MetLife-sourced revenue. The directly-sourced revenue payment is subject to a maximum of $30,000, provided one year anniversary revenue exceeds 120% of signing date revenue. The MetLife-sourced revenue payment is subject to a maximum of $45,000, provided one year anniversary revenue exceeds 120% of signing date revenue. These payments decline to $20,000 and $30,000, respectively, if one year anniversary revenue approximates 100% of signing date levels. No contingent payment is required if directly-sourced and MetLife-sourced revenue fall below 80% and 95%, respectively, of revenue on the signing date of the stock purchase agreement. In addition, the stock purchase agreement provides for two other contingent payments. On December 31, 2006, MetLife will receive 32.5% of any performance fees earned on a large institutional real estate client. In addition, on the fifth anniversary of the closing of the SSR transaction, MetLife could receive an additional payment up to a maximum of $10,000 based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans.

 

At closing, the Company recorded the excess of assets acquired and liabilities assumed over the cost of the acquired entity as a pro rata reduction of the amounts assigned to relevant fixed and intangible acquired assets. Subsequent to this determination, the Company recognized a contingent liability of $55,332 for the excess due to potential additional payments to MetLife and recorded the net assets acquired at fair value. Any additional contingencies in excess of the amount recorded as a liability will be reflected as additional purchase price and recorded as goodwill when the contingency is resolved and additional consideration is distributable.

 

In addition to the potential contingent payments described above, the stock purchase agreement provided for a hold-back of the initial purchase price payable to MetLife primarily associated with the value of customer accounts which, as of the closing date, had not committed to maintaining their accounts with the Company. The amount of the payment due to MetLife will be based on the status of these accounts as of July 31, 2005. The Company has estimated the amount of the true-up payment to be approximately $20,000. The true-up payment will be recorded as a reduction in the contingent liability to MetLife.

 

- 11 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

2. Acquisition (continued)

 

The Company initially financed $150,000 of the purchase price with a bridge promissory note at an annual rate of 2.875%. SSR, through its subsidiaries, actively managed approximately $49,700,000 in stock, bond, balanced and real estate portfolios for both institutional and individual investors at January 31, 2005. SSR’s results have been included in the Company’s results since February 1, 2005.

 

In preparation for a commingled fund launch, Realty acquired, during the fourth quarter of 2004 and January 2005, six properties having a total purchase price of $112,200 and assumed a $19,000 mortgage on one of these properties. Exclusive of the assumed mortgage, Realty financed the purchase price under a line of credit with an affiliated company. The closing of the fund occurred in March 2005 at which time the commingled fund purchased the six properties at Realty’s cost in accordance with its contract with Realty. Accordingly, no gain or loss was recognized by Realty on these sales. Each property, prior to the launch of the aforementioned commingled fund, was carried at cost, which management concluded approximated fair value due to the length of Realty’s holding period for each property.

 

Realty accumulated these properties prior to closing to provide potential investors with a better understanding of the type and quality of assets to be purchased by the fund.

 

In February 2005, the Company issued $250,000 of convertible debentures (see note 15). The Company used a portion of the net proceeds from this issuance to retire the bridge promissory note.

 

A summary of the fair values of the net assets acquired in this acquisition is as follows:

 

Accounts receivable

   $ 36,704  

Assets held for sale

     112,184  

Investments

     74,077  

Property and equipment

     4,015  

Deferred mutual fund commissions

     20,824  

Other assets

     4,172  

Goodwill

     12,966  

Management contracts acquired

     300,979  

Liabilities assumed

     (295,594 )
    


Total purchase price, including acquisition costs

   $ 270,327  
    


Summary of consideration, net of cash acquired

        

Cash

   $ 233,115  

Restricted class A common stock, at fair value

     37,212  
    


     $ 270,327  
    


 

- 12 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

2. Acquisition (continued)

 

The following unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the combined results of operations for future periods or the results of operations that actually would have been realized had BlackRock and SSR been a combined company during the specified periods prior to the closing. The pro forma combined financial information is based on the respective historical unaudited interim financial statements of BlackRock and SSR and does not reflect acquisition-related compensation incurred by SSR during 2005 and is adjusted for benefits associated with the termination of a lease held by SSR in January 2005. In addition, the pro forma combined financial information has been adjusted to reflect a full quarter’s recognition of amortization expense of intangible assets related to SSR management contracts acquired, recognition of interest expense related to borrowings used to finance the acquisition, and depreciation benefits associated with the write-off of SSR property and equipment that will not be used in the Company’s ongoing operations. Management expects to and has realized net operating synergies from this transaction due to the related product expansion and scale benefits. The pro forma combined financial information does not reflect the potential impact of these net operating synergies.

 

     Three months ended
June 30,


  

Six months ended

June 30,


     2005

   2004

   2005

   2004

Total revenue

   $ 271,389    $ 270,474    $ 543,259    $ 507,741

Operating income

   $ 81,895    $ 85,940    $ 154,751    $ 165,553

Net income

   $ 53,335    $ 61,257    $ 101,866    $ 121,421

Earnings per share:

                           

Basic

   $ 0.83    $ 0.95    $ 1.58    $ 1.89

Diluted

   $ 0.80    $ 0.92    $ 1.52    $ 1.83

 

3. Investments

 

A summary of the cost and carrying value of investments, available for sale, is as follows:

 

    

Cost


   Gross Unrealized

   

Carrying
Value


      Gains

   Losses

   

June 30, 2005

                            

Mutual funds

   $ 11,920    $ 108    $ (59 )   $ 11,969

Collateralized debt obligations

     28,676      686      (2 )     29,360
    

  

  


 

Total investments, available for sale

   $ 40,596    $ 794    $ (61 )   $ 41,329
    

  

  


 

December 31, 2004

                            

Mutual funds

   $ 6,226    $ 70    $ (17 )   $ 6,279

Collateralized debt obligations

     10,576      2,184      —         12,760
    

  

  


 

Total investments, available for sale

   $ 16,802    $ 2,254    $ (17 )   $ 19,039
    

  

  


 

 

 

- 13 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

3. Investments (continued)

 

A summary of the cost and carrying value of investments, trading and other, is as follows:

 

     Cost

   Carrying
Value


June 30, 2005

             

Mutual funds

   $ 20,368    $ 21,668

Equity securities

     15,964      19,935

Mortgage backed securities

     14,232      14,112

Corporate notes and bonds

     8,668      8,662

Municipal debt securities

     119      130
    

  

Total investments, trading

     59,351      64,507
    

  

Equity method

     72,011      79,276

Cost method

     62,294      63,532

Fair value

     33,453      34,163
    

  

Total investments, other

     167,758      176,971
    

  

Total investments, trading and other

   $ 227,109    $ 241,478
    

  

December 31, 2004

             

U.S. government securities

   $ 22,276    $ 22,275

Mutual funds

     13,869      15,688

Mortgage backed securities

     12,435      12,388

Equity securities

     5,976      9,384

Corporate notes and bonds

     9,373      9,371

Municipal debt securities

     119      120
    

  

Total investments, trading

     64,048      69,226
    

  

Equity method

     70,873      74,248

Cost method

     33,885      34,605

Fair value

     30,688      30,379
    

  

Total investments, other

     135,446      139,232
    

  

Total investments, trading and other

   $ 199,494    $ 208,458
    

  

 

- 14 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

3. Investments (continued)

 

The carrying value of investments in debt securities by contractual maturity at June 30, 2005 is as follows:

 

Maturity Date


   Carrying Value

1-5 years

   $ 11,857

5-10 years

     3,036

After 10 years

     8,011
    

Total

   $ 22,904
    

 

4. Other Income

 

Other income consists of the following:

 

     Three months ended
June 30,


   Six months ended
June 30,


     2005

   2004

   2005

   2004

BlackRock Solutions

   $ 23,927    $ 18,220    $ 50,562    $ 37,260

Real estate property management fees

     8,742      —        14,340      —  

Other

     7,249      3,579      12,842      6,044
    

  

  

  

     $ 39,918    $ 21,799    $ 77,744    $ 43,304
    

  

  

  

 

Real estate property management fees for the three and six months ended June 30, 2005 include $6,239 and $10,298, respectively, for reimbursement of the cost of compensation and benefits related to certain Realty employees. The related compensation and benefits of these employees are included in the Company’s employee compensation and benefits expense in the consolidated financial statements.

 

- 15 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

5. Derivative Instruments Held For Trading

 

SSR acts as investment manager for a synthetic collateralized credit default swap obligation. A synthetic collateralized credit default swap obligation occurs when a counterparty provides credit protection through a series of credit default swaps to third parties. The counterparty further securitizes this credit protection by obtaining a super senior insurance policy and issuing several classes of credit default swaps to third parties. Losses in the counterparty’s reference pool (i.e., asset backed securities and corporate bonds) are first absorbed by the most subordinated class of the credit default swaps issued by the structure. As collateral manager for this specific synthetic collateralized credit default swap obligation (“Pillars”), the Company bears no risk beyond reputational risk contingent on the performance of the structure. In addition, the Company has entered into a credit default swap with Pillars affording the structure credit protection of approximately $16,700, representing the Company’s maximum risk of loss. This swap represents seed capital invested by the Company in a new product and facilitated the issuance of credit default swaps to third parties. Under the terms of its credit default swap with Pillars, the Company is entitled to an annual coupon of 4% of its notional balance ($16,700) and ¼ of the structure’s residual balance at its scheduled termination, December 23, 2009. The Company’s management has performed a control assessment of its variable interests in Pillars (a collateral management agreement and the credit default swap) under FIN 46R and has concluded the Company is not Pillar’s primary beneficiary. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. At June 30, 2005, the fair value of the Pillars credit default swap was $2,913.

 

- 16 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

6. Intangible Assets

 

    

Weighted-avg.

estimated

useful life


   June 30, 2005

        Gross Carrying
Amount


   Accumulated
Amortization


   Intangible
Assets, Net


Goodwill

   N/A    $ 255,732    $ 65,842    $ 189,890

Management contracts acquired:

                         

Mutual funds

   N/A      197,963      —        197,963

Private investment funds

   N/A      46,423      —        46,423

Other

   N/A      23      —        23
         

  

  

Total goodwill and unamortized intangible assets

          500,141      65,842      434,299
         

  

  

Management contracts acquired:

                         

Institutional separate accounts

   10.7      57,915      2,143      55,772

Collateralized debt obligations

   9.0      6,309      279      6,030

Private investment funds

   5.0      8,124      4,234      3,890
    
  

  

  

Total amortized intangible assets

   10.5      72,348      6,656      65,692
         

  

  

Total intangible assets

        $ 572,489    $ 72,498    $ 499,991
         

  

  

    

Weighted-avg.

estimated

useful life


   December 31, 2004

        Gross Carrying
Amount


   Accumulated
Amortization


   Intangible
Assets, Net


Goodwill

   N/A    $ 242,766    $ 65,842    $ 176,924

Management contracts acquired:

                         

Private investment funds

   N/A      2,842      —        2,842

Other

   N/A      23      —        23
         

  

  

Total goodwill and unamortized intangible assets

          245,631      65,842      179,789
         

  

  

Management contract acquired:

                         

Private investment funds

   10.0      8,040      3,719      4,321
    
  

  

  

Total amortized intangible assets

   10.0      8,040      3,719      4,321
         

  

  

Total intangible assets

        $ 253,671    $ 69,561    $ 184,110
         

  

  

 

 

- 17 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

6. Intangible Assets (continued)

 

The $12,966 increase in goodwill and the $305,829 increase in management contracts acquired during the six months ended June 30, 2005 relates to the SSR acquisition.

 

Future expected amortization of intangible assets expense for each of the five succeeding years is as follows:

 

2005

   $ 4,568

2006

     8,114

2007

     8,114

2008

     8,114

2009

     8,114

 

7. BlackRock, Inc. 2002 Long Term Retention and Incentive Plan (“LTIP”)

 

The LTIP permits the grant of up to $240,000 in deferred compensation awards (the “LTIP Awards”), which were previously subject to the achievement of certain performance hurdles by the Company. Under the terms of the LTIP, grants of awards fully vest if BlackRock’s average closing stock price is at least $62 for any 3-month period beginning on or after January 1, 2005 and ending on or prior to March 30, 2007. During the first quarter of 2005, the Company’s average closing stock price exceeded the $62 threshold. In addition to the stock price threshold, the vesting of awards is contingent on the participants’ continued employment with the Company for periods ranging from two to five years. The Company has granted approximately $232,100 in LTIP awards, net of forfeitures. Quarterly expense attributable to LTIP awards during the period from July 1, 2005 through December 31, 2006 will be approximately $15,400 based on awards granted.

 

Up to $200,000 of the LTIP Awards will result in no economic cost to the Company as this amount will be funded with up to 4 million shares of BlackRock Class A common stock to be surrendered by The PNC Financial Services Group, Inc. (“PNC”) and distributed to LTIP participants, less income tax withholding. Shares attributable to value in excess of PNC’s $200,000 LTIP funding requirement will be available to support future long-term retention and incentive programs but are not subject to surrender by PNC until the programs are approved by the Compensation Committee of the Company’s Board of Directors. In addition, shares distributed to LTIP participants will include an option to put such distributed shares back to BlackRock at fair market value. The remaining $40 million of awards are payable in cash by the Company with the corresponding expense fully reflected in both reported and adjusted earnings. On the payment date, the Company will record a $200 million capital contribution from PNC. Since the stock based awards payable under the plan will consist of previously issued and outstanding shares of Class A common stock currently owned by PNC, dilution would not result from the stock based awards. The put option was provided to LTIP participants for liquidity purposes due to the Company’s small public float (over 80% of outstanding shares are owned by PNC and employees). The Company’s average daily trading volume for the past four quarters approximated 70,000 shares of Class A common stock as compared to approximately 2.5 million shares of Class A common stock that will be distributed to employees in early 2007. Put elections made by employees will be accounted for as treasury stock repurchases and will be accretive to the Company’s earnings per share.

 

- 18 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

8. Employee Benefit and Incentive Compensation Plans

 

In addition to the employee benefit plans described in the Company’s annual report, the Company assumed certain employee benefit plans from SSR as a result of the acquisition.

 

Deferred Compensation Plans

 

SSR’s deferred compensation plan (the “SSR New Plan”) allowed participants to elect to defer a portion of their annual incentive compensation for either a fixed term or until retirement. SSR has funded a portion of the obligation through the purchase of life insurance policies to the benefit of SSR. At June 30, 2005, obligations under the SSR New Plan totaled $15,168. Changes in the Company’s obligations under the SSR New Plan, as a result of appreciation or depreciation of the underlying life insurance policies’ cash surrender value, are recorded as compensation and benefits in the consolidated statements of income.

 

Prior to 2003, SSR sponsored a deferred compensation plan (the “SSR Old Plan”) under which eligible participants could defer annual incentive compensation and commissions for a fixed term or upon retirement. Obligations under this plan are funded through insurance policies acquired by SSR to the benefit of the respective participant. SSR is entitled to the return of any premium paid and, as such, premiums paid are recorded by SSR as a receivable from the participant. At the end of a participant’s deferral period, all amounts advanced by SSR will be applied against SSR’s obligation under the SSR Old Plan. All obligations under the SSR Old Plan are convertible to obligations under the SSR New Plan at the election of the participant at the respective insurance policy’s cash surrender value. At June 30, 2005, SSR advances to employees and obligations under the SSR Old Plan are each $3,700.

 

401(k) and Retirement Savings Plans

 

The Company assumed two 401(k) and Retirement Savings Plans, covering employees of State Street Research & Management Company and BlackRock Realty Advisors, Inc. (the “Research Plan” and “Realty Plan,” respectively) as a result of the SSR acquisition.

 

Effective with the closing of the SSR acquisition, accrued benefits for all participants in the Research Plan and selected participants in the Realty Plan were frozen and the Research Plan was closed to new participants. All participants whose accrued benefits were frozen will participate in the PNC Incentive Savings Plan (“ISP”). The terms of the ISP are included in note 10 to the Company’s consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. For all employees who remain active participants in the Realty Plan, employee contributions of up to 3%, as well as an additional 50% of the next 2% of eligible compensation, subject to Internal Revenue Code limitations, are matched by the Company with cash.

 

Defined Benefit Pension Plan

 

Through the SSR acquisition, the Company assumed a defined benefit pension plan. All accrued benefits under the defined benefit pension plan are currently frozen and the plan is closed to new participants. Participant benefits under the plan will not change with salary increases or additional years of service.

 

SSR pension benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in its pension benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants and changes in plan asset levels.

 

- 19 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

8. Employee Benefit and Incentive Compensation Plans (continued)

 

Defined Benefit Pension Plan (continued)

 

The measurement date used to determine pension benefit measures for the defined pension benefit plan is January 31, 2005, the closing date of the SSR acquisition. It should be noted that the measurement date on a going forward basis will be December 31 of each year.

 

Accrued pension costs are included in accrued compensation in the consolidated statement of financial condition. The following table presents the funded status of the plan:

 

     January 31,
2005


 

Funded status:

        

Benefit obligation at measurement date

   $ (3,732 )

Fair value of plan assets

     2,339  
    


Funded status at measurement date

   $ (1,393 )
    


 

There are no reconciling items between the pension plan’s funded status and accrued pension costs reflected in the Company’s consolidated statement of financial condition at the measurement date. Pension costs incurred from the measurement date through June 30, 2005 consist of the following:

 

Interest cost

   $ 80  

Expected return on plan assets

     (81 )
    


Total period net pension income

   $ (1 )
    


 

Weighted-average assumptions used to determine benefit obligations at January 31, 2005:

 

Discount rate

   5.25 %

Expected long-term return on plan assets

   8.50 %

Rate of compensation increase

   N/A  

 

 

- 20 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

8. Employee Benefit and Incentive Compensation Plans (continued)

 

Defined Benefit Pension Plan (continued)

 

The weighted-average allocation of pension plan assets is as follows:

 

     January 31,
2005


 

Asset Category

      

Equity

   54.0 %

Debt

   41.0  

Other

   5.0  
    

Total

   100.0 %
    

 

Plan assets consist primarily of listed domestic equity securities and U.S. government, agency and corporate debt securities held in two BlackRock Funds. Plan assets do not include common stock or any debt of BlackRock.

 

Target allocations of pension assets and investment options are currently being evaluated by the Company’s Retirement Committee and will be revised from historical levels. The Company’s Retirement Committee anticipates finalizing the pension plan’s revised target allocations by December 31, 2005 and does not expect this revision to have a material impact on the Company’s consolidated financial statements. Once finalized, the weighted average target allocation of pension plan assets will be included in the notes to the Company’s consolidated financial statements.

 

The Company does not expect to make a contribution into the pension plan during 2005. The following benefit payments are expected to be paid:

 

Periods

      

July 1, 2005 - December 31, 2005

   $ 49

January 1, 2006 - December 31, 2006

     100

January 1, 2007 - December 31, 2007

     112

January 1, 2008 - December 31, 2008

     127

January 1, 2009 - December 31, 2009

     142

January 1, 2010 - December 31, 2014

     843

 

- 21 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

9. Common Stock

 

BlackRock’s class A common stock, $0.01 par value, authorized was 250,000,000 shares as of June 30, 2005 and December 31, 2004. BlackRock’s class B common stock, $0.01 par value, authorized was 100,000,000 shares as of June 30, 2005 and December 31, 2004.

 

The Company’s common stock issued and outstanding and related activity during the six month period ended June 30, 2005 consists of the following:

 

     Shares issued

             
    

Common shares

Class


   

Treasury shares

Class


    Shares outstanding

 
         Class

 
     A

   B

    A

    B

    A

    B

 

December 31, 2004

   19,243,878    45,499,510     (270,998 )   (806,667 )   18,972,880     44,692,843  

Conversion of class B stock to class A stock

   52,093    (52,093 )               52,093     (52,093 )

Issuance of class A common stock

   690,780    —       345,655     —       1,036,435     —    

Treasury stock transactions

   —      —       (434,344 )   —       (434,344 )   —    
    
  

 

 

 

 

June 30, 2005

   19,986,751    45,447,417     (359,687 )   (806,667 )   19,627,064     44,640,750  
    
  

 

 

 

 

 

10. Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

    

Three months ended

June 30,


  

Six months ended

June 30,


     2005

   2004

   2005

   2004

Net income

   $ 53,335    $ 47,996    $ 99,871    $ 103,203
    

  

  

  

Basic weighted-average shares outstanding

     64,354,069      63,647,316      64,322,465      63,701,625

Dilutive potential shares from stock options

     2,442,018      2,119,663      2,522,255      2,075,350
    

  

  

  

Dilutive weighted-average shares outstanding

     66,796,087      65,766,979      66,844,720      65,776,975
    

  

  

  

Basic earnings per share

   $ 0.83    $ 0.75    $ 1.55    $ 1.62
    

  

  

  

Diluted earnings per share

   $ 0.80    $ 0.73    $ 1.49    $ 1.57
    

  

  

  

 

- 22 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

11. Supplemental Statements of Cash Flow Information

 

Supplemental disclosure of cash flow information:

 

    

Six months ended

June 30,


     2005

   2004

Cash paid for interest

   $ 484    $ 574
    

  

Cash paid for income taxes

   $ 67,034    $ 57,479
    

  

 

Supplemental schedule of noncash transactions:

 

    

Six months ended

June 30,


     2005

   2004

Reissuance of treasury stock, class A, at a discount to its cost basis

   $ 774    $ 14,765
    

  

Convertible debt issuance costs

   $ 5,000    $ —  
    

  

Decrease in investment due to deconsolidation of sponsored investment fund

   $ 13,758    $ —  
    

  

Decrease in minority interest due to deconsolidation of sponsored investment fund

   $ 18,170    $ —  
    

  

Stock issued in SSR acquisition

   $ 37,212    $ —  
    

  

Short term borrowings assumed in SSR acquisition

   $ 111,840    $ —  
    

  

 

12. Income Taxes

 

PNC and BlackRock have entered into a tax disaffiliation agreement that sets forth each party’s rights and obligations with respect to income tax payments and refunds and addresses related matters such as the filing of tax returns and the conduct of audits or other proceedings involving claims made by taxing authorities.

 

- 23 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

12. Income Taxes (continued)

 

For the calendar year that includes the three months and six months ended June 30, 2005, BlackRock will file its own consolidated federal income tax return and will file selected state and municipal income tax returns separately and selected state and municipal income tax returns with one or more PNC subsidiaries on a combined or unitary basis. When BlackRock is included in a group’s combined or unitary state or municipal income tax filing with PNC subsidiaries, BlackRock’s share of the liability generally will be based upon an allocation to BlackRock of a percentage of the total tax liability based upon BlackRock’s level of activity in such state or municipality.

 

The Jobs Act created a one-time opportunity for U.S. companies to repatriate undistributed earnings from foreign subsidiaries at a substantially reduced federal tax rate. The reduced rate is achieved via an 85% dividends received deduction. In the Company’s case, foreign earnings must be repatriated by December 31, 2005 in order to qualify for this benefit. The Company has foreign subsidiaries with approximately $15,000 in undistributed earnings that may be available for repatriation. There are a variety of additional technical requirements, related to such factors as the use of the repatriated earnings, which must be considered to take advantage of the reduced tax rate. The Company’s management has begun to evaluate the feasibility of repatriating the undistributed earnings of the Company’s foreign subsidiaries and expects to complete its evaluation by the end of the third quarter of 2005. Under the provisions of Accounting Principles Board Opinion No. 23, “Accounting for Income Taxes – Special Areas,” the Company has not recorded income taxes on the earnings of the foreign subsidiaries. The repatriation of undistributed earnings of foreign subsidiaries could increase the Company’s income tax expense by up to approximately $1,000 during the year ending December 31, 2005.

 

The provision (benefit) for income taxes consists of the following:

 

     Three months ended
June 30,


   Six months ended
June 30,


 
     2005

    2004

   2005

    2004

 

Current:

                               

Federal

   $ 31,531     $ 21,599    $ 58,644     $ 40,033  

State and local

     2,733       3,210      6,348       5,888  

Foreign

     1,011       831      1,975       2,000  

Release of reserves related to New York State tax audits

     —         140      —         (8,519 )
    


 

  


 


Total current

     35,275       25,780      66,967       39,402  
    


 

  


 


Deferred:

                               

Federal

     (3,810 )     632      (6,838 )     7,450  

State and local

     (141 )     109      (1,474 )     (242 )
    


 

  


 


Total deferred

     (3,951 )     741      (8,312 )     7,208  
    


 

  


 


Total

   $ 31,324     $ 26,521    $ 58,655     $ 46,610  
    


 

  


 


 

 

- 24 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

12. Income Taxes (continued)

 

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities, which are shown net in receivable from affiliates in the consolidated statements of financial condition, consist of the following:

 

     June 30,
2005


   December 31,
2004


Deferred tax assets:

             

Compensation and benefits

   $ 82,961    $ 71,804

Deferred revenue

     1,745      1,321

Other

     7,157      5,165
    

  

Gross deferred tax asset

     91,863      78,290
    

  

Deferred tax liabilities:

             

Goodwill

     42,483      39,370

Depreciation

     9,548      8,369

Other

     4,335      4,311
    

  

Gross deferred tax liability

     56,366      52,050
    

  

Net deferred tax asset

   $ 35,497    $ 26,240
    

  

 

A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 
     2005

    %

    2004

    %

    2005

    %

    2004

    %

 

Expected income tax expense

   $ 30,051     35.0 %   $ 27,324     35.0 %   $ 56,074     35.0 %   $ 53,777     35.0 %

Increase (decrease) in income taxes resulting from:

                                                        

Release of reserves related to New York State tax audits

     —       —         140     0.2       —       —         (8,519 )   (5.5 )

Tax-exempt interest income

     (326 )   (0.4 )     (321 )   (0.4 )     (559 )   (0.3 )     (713 )   (0.5 )

State and local taxes

     1,683     2.0       2,507     3.2       3,168     2.0       4,159     2.7  

Foreign taxes

     390     0.5       174     0.2       376     0.2       473     0.3  

Other

     (474 )   (0.6 )     (3,303 )   (4.2 )     (404 )   (0.3 )     (2,567 )   (1.7 )
    


 

 


 

 


 

 


 

Income tax expense

   $ 31,324     36.5 %   $ 26,521     34.0 %   $ 58,655     36.6 %   $ 46,610     30.3 %
    


 

 


 

 


 

 


 

 

- 25 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

13. Variable Interest Entities Not Subject to Consolidation

 

The Company is involved with various entities in the normal course of business that may be deemed to be VIEs and the Company may hold interests therein, including investment advisory agreements and equity securities, which may be considered variable interests. The Company engages in these transactions principally to address client needs through the launch of collateralized debt obligations and private investment funds. At June 30, 2005 and December 31, 2004, the aggregate assets and debt and BlackRock’s risk of loss in VIEs in which BlackRock has not been deemed primary beneficiary are as follows:

 

     Assets

   Debt

   BlackRock Risk of
Loss


June 30, 2005

                    

Collaterized debt obligations

   $ 5,691,300    $ 5,210,500    $ 46,000

Private investment funds

     4,530,000      1,351,000      18,300
    

  

  

Total

   $ 10,221,300    $ 6,561,500    $ 64,300
    

  

  

December 31, 2004

                    

Collaterized debt obligations

   $ 3,152,000    $ 2,700,000    $ 13,800

Private investment funds

     1,872,000      125,000      33,000
    

  

  

Total

   $ 5,024,000    $ 2,825,000    $ 46,800
    

  

  

 

14. Comprehensive Income

 

     Three months ended
June 30,


   

Six months ended

June 30,


 
     2005

    2004

    2005

    2004

 

Net income

   $ 53,335     $ 47,996     $ 99,871     $ 103,203  

Other comprehensive income (loss):

                                

Unrealized gain (loss) on investments, available for sale, net

     41       (1,149 )     (962 )     (1,852 )

Foreign currency translation gain (loss)

     (1,984 )     62       (2,612 )     1,028  
    


 


 


 


Comprehensive income

   $ 51,392     $ 46,909     $ 96,297     $ 102,379  
    


 


 


 


 

 

- 26 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

15. Borrowings

 

Convertible Debt

 

In February 2005, the Company issued $250,000 aggregate principal amount of convertible debentures (the “Debentures”), which will be due in 2035 and bear interest at a rate of 2.625% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, commencing August 15, 2005. The Company used a portion of the net proceeds from this issuance to retire a $150,000 bridge promissory note, the proceeds of which were used to fund a portion of the purchase price for the SSR acquisition.

 

Prior to February 15, 2009, the Debentures will be convertible at the option of the holder at an initial conversion rate of 9.7282 shares of Common Stock per $1 principal amount of Debentures. The Debentures will be convertible into cash and, in some situations as described below, additional shares of the Company’s class A common stock, if during the five business day period after any five consecutive trading day period in which the trading price per debenture for each day of such period was less than 103% of the product of the last reported sale price of the class A common stock of the Company and the conversion rate of the Debentures on each such day or upon the occurrence of certain other corporate events, such as a distribution to the holders of class A common stock of certain rights, assets or debt securities, if the Company becomes party to a merger, consolidation or transfer of all or substantially all of its assets or a change of control of the Company. On and after February 15, 2009, the Debentures will be convertible at any time prior to maturity at the option of the holder into cash and, in some situations as described below, additional shares of the Company’s class A common stock at the above initial conversion rate, subject to adjustments.

 

At the time Debentures are tendered for conversion, for each $1 principal amount of Debentures converted, a holder will be entitled to receive cash and shares of class A common stock, if any, the aggregate value of which (the “conversion value”) will be determined by multiplying the applicable conversion rate by the average of the daily volume weighted average price of class A common stock for each of the ten consecutive trading days beginning on the second trading day immediately following the day the Debentures are tendered for conversion (the “ten day weighted average price”). The Company will deliver the conversion value to holders as follows: (1) an amount in cash (the “principal return”) equal to the lesser of (a) the aggregate conversion value of the Debentures to be converted and (b) the aggregate principal amount of the Debentures to be converted, and (2) if the aggregate conversion value of the Debentures to be converted is greater than the principal return, an amount in shares (the “net shares”), determined as set forth below, equal to such aggregate conversion value less the principal return (the “net share amount”). The number of net shares to be paid will be determined by dividing the net share amount by the ten day weighted average price. In lieu of delivering fractional shares, the Company will deliver cash based on the ten day weighted average price.

 

The conversion rate for the Debentures is subject to adjustments upon the occurrence of certain corporate events, such as a change of control of the Company, an increase in the Company’s quarterly dividend greater than $0.30 per share, the issuance of certain rights or warrants to holders of, or subdivisions on, the class A common stock, a distribution of assets or indebtedness to holders of class A common stock or a tender offer on the class A common stock. The conversion rate adjustments vary depending upon the specific corporate event necessitating the adjustment and serve to ensure that any economic gains realized by the Company’s stockholders are shared with the holders of the Debentures. The initial conversion rate of 9.7282 was determined by the underwriters based on market conditions. Management does not currently anticipate any such corporate events. However, the declaration and payment of dividends by the Company are subject to the discretion of the Board of Directors. The Board of Directors will determine future dividend policy based on the Company’s results of operations, financial condition, capital requirements and other circumstances.

 

- 27 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

15. Borrowings (continued)

 

If the effective date or anticipated effective date of certain transactions that constitute a change of control occurs on or prior to February 15, 2010, under certain circumstances, the Company will provide for a make whole amount by increasing, for a certain time period, the conversion rate by a number of additional shares of class A common stock for any conversion of Debentures in connection with such transactions. The amount of additional shares will be determined based on the price paid per share of class A common stock in the transaction constituting a change of control and the effective date of such transaction. However, if such transaction constitutes a public acquirer change of control, in lieu of increasing the conversion rate, the Company may elect to adjust its conversion obligation.

 

Beginning February 20, 2010, the Company may redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any. Holders of Debentures have the right to require the Company to repurchase the Debentures for cash on February 15, 2010, 2015, 2020, 2025 and 2030. In addition, holders of the Debentures may require the Company to repurchase the Debentures for cash at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any (i) upon a change of control of the Company or (ii) if the class A common stock is neither listed for trading on the New York Stock Exchange nor approved for trading on the Nasdaq.

 

The Company is obligated to pay contingent interest, which is the amount of interest payable to holders of Debentures for any six month period from February 15 to August 15 or from August 15 to February 15, with the initial six month period commencing February 15, 2010, if the trading price of the Debentures for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Debentures. During any period when contingent interest is payable, the contingent interest payable per Debenture will equal 0.25% of the average trading price of the Debentures during the ten trading days immediately preceding the first day of the applicable six-month interest period.

 

The Company will pay liquidated damages to holders of the Debentures if the registration statement is not declared effective by the SEC by August 22, 2005 or if the Company suspends the use of the registration statement pursuant to which holders of Debentures may resell their Debentures and thereby prevents such holders from reselling their Debentures for a period that exceeds (i) 45 days in any three month period or (ii) an aggregate of 120 days in any 12 month period. During any period when liquidated damages are payable, the liquidated damages payable per Debenture will equal 0.25% of the outstanding principal amount of the Debentures for the first 90 days after the occurrence of the offending event and 0.50% of the outstanding principal amount of the Debentures after the first 90 days.

 

The Company does not currently anticipate that any of the put and call rights, conversion rights, adjustments to the conversion rate, contingent interest and liquidated damages features will affect the Company’s liquidity and capital resources.

 

Line of Credit

 

A wholly owned subsidiary of the Company has a $200,000 line of credit with a related party. Borrowings under the affiliated line of credit bear interest at LIBOR plus 1.5%. The borrowing has a scheduled maturity date of January 31, 2006. The Company had no outstanding advances under the line of credit at June 30, 2005.

 

- 28 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

16. Lease Commitments

 

Future minimum commitments under BlackRock’s operating leases, including leases assumed in the SSR acquisition and net of rental reimbursements of $854 through 2006 from sublease arrangements, are as follows:

 

2005

   $ 9,364

2006

     20,611

2007

     20,471

2008

     20,300

2009

     20,577

Thereafter

     155,396
    

     $ 246,719
    

 

17. Related Party Transactions

 

The Company provides investment advisory and administration services to the BlackRock Funds, the BlackRock Liquidity Funds, the BlackRock Closed-end Funds and other commingled funds.

 

Revenues for services provided to these mutual funds are as follows:

 

     Three months ended
June 30,


  

Six months ended

June 30,


     2005

   2004

   2005

   2004

Investment advisory and administration fees:

                           

BlackRock Open-end Funds:

                           

PNC

   $ 6,927    $ 8,866    $ 13,456    $ 18,162

Other

     27,929      9,192      50,440      18,678

BlackRock Closed-end Funds - Other

     21,095      17,484      40,993      34,274

BlackRock Liquidity Funds

                           

PNC

     4,027      3,107      7,940      6,208

Other*

     16,488      16,053      33,595      33,565

STIF - PNC

     230      270      438      531
    

  

  

  

     $ 76,696    $ 54,972    $ 146,862    $ 111,418
    

  

  

  


* Includes the International Dollar Reserve Fund I, Ltd., a Cayman Islands open-ended limited liability company.

 

The Company provides investment advisory and administration services to certain PNC subsidiaries, MetLife-sponsored variable annuities and separate accounts, Nomura Asset Management Co., Ltd. (“Nomura”), a strategic joint venture partner, and affiliates of Nomura for a fee, based on assets under management. In addition, the Company provides risk management and private client services to PNC.

 

- 29 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

17. Related Party Transactions (continued)

 

Revenues for such services are as follows:

 

    

Three months ended

June 30,


  

Six months ended

June 30,


     2005

   2004

   2005

   2004

Separate accounts:

                           

MetLife

   $ 14,063    $ 0    $ 23,367    $ 0

Nomura

     2,318      2,021      4,505      4,293

PNC

     1,511      1,484      3,009      3,232

Private client services - PNC

     1,383      1,383      2,766      2,769

Alternative investments - PNC

     100      80      324      205

Other income-risk management - PNC

     1,251      1,250      2,502      2,500
    

  

  

  

     $ 20,626    $ 6,218    $ 36,473    $ 12,999
    

  

  

  

 

Total revenue earned by BlackRock for providing asset management and other services to PNC subsidiaries or PNC-related accounts for the three month periods ended June 30, 2005 and 2004 totaled $15,429 and $16,440, respectively, and, for the six months ended June 30, 2005 and 2004 totaled approximately $30,435 and $33,607, respectively.

 

The Company has entered into various memoranda of understanding and co-administration agreements with affiliates of PNC pursuant to which the Company pays service fees for PNC Advisors’ (PNC’s wealth management business) clients invested in the BlackRock Funds. PNC also provides general and administration services to the Company. Charges for such services were based on actual usage or on defined formulas which, in management’s view, resulted in reasonable allocations.

 

MetLife provided general and administration services to the Company, during a transition period, in support of SSR and its consolidated subsidiaries. These services ceased during the second quarter of 2005. In addition, SSR leases a portion of its office space under formal sublease agreements with MetLife.

 

Additionally, the Company has entered into subadvisory and consulting agreements with Nomura and an entity whose President and Chief Executive Officer serves on the Company’s Board of Directors.

 

Realty maintains a $200,000 line of credit with a subsidiary of MetLife, which expires on January 31, 2006. Realty uses the line of credit to finance the acquisition of real estate prior to the closing of sponsored investment funds. During the quarter ended March 31, 2005, the Company repaid outstanding advances under the line of credit, which totaled $92,500, following the sale of related real estate to a newly formed investment fund. Borrowings under the affiliated line of credit bear interest at LIBOR plus 1.5%. At June 30, 2005, Realty had no advances outstanding under the line of credit.

 

- 30 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

17. Related Party Transactions (continued)

 

Aggregate expenses included in the consolidated financial statements for transactions with related parties are as follows:

 

     Three months ended
June 30,


  

Six months ended

June 30,


     2005

   2004

   2005

   2004

Fund administration and servicing costs

   $ 4,096    $ 4,948    $ 8,113    $ 10,016

General and administration

     2,630      1,011      4,277      2,250

General and administration-consulting

     450      400      2,508      3,086
    

  

  

  

     $ 7,176    $ 6,359    $ 14,898    $ 15,352
    

  

  

  

 

Additionally, an indirect wholly owned subsidiary of PNC acts as a financial intermediary associated with the sale of back-end loaded shares of certain BlackRock funds. This entity finances broker sales commissions and receives all associated sales charges.

 

Included in accounts receivable was $14,653 and $2,983 at June 30, 2005 and December 31, 2004, respectively, which primarily represent investment and administration services provided to MetLife, Nomura, PNC subsidiaries and affiliates.

 

Receivable from affiliates was $33,365 and $12,190 at June 30, 2005 and December 31, 2004, respectively. These amounts primarily represent deferred income taxes receivable.

 

Included in other assets are advances to employees under the SSR Old Plan and Company-owned life insurance policies, underwritten by MetLife, which are used to fund obligations under the SSR New Plan totaling $3,700 and $13,207, respectively.

 

Accounts payable and accrued liabilities-affiliates were $10,722 and $3,632 at June 30, 2005 and December 31, 2004, respectively. These amounts primarily represent income taxes payable and accrued fund administration and servicing costs affiliates payable to PNC and do not bear interest.

 

- 31 -


PART I - FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

BlackRock, Inc., a Delaware corporation (together, with its subsidiaries, “BlackRock” or the “Company”), is one of the largest publicly traded investment management firms in the United States with approximately $414 billion of assets under management at June 30, 2005. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, cash management and alternative investment separate accounts and mutual funds, including the BlackRock Funds and the BlackRock Liquidity Funds. In addition, BlackRock provides risk management, investment system outsourcing and financial advisory services to institutional investors. BlackRock is a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc. (“PNC”), one of the nation’s largest diversified financial services organizations providing regional community banking, wholesale banking, wealth management, asset management and global fund processing services. As of June 30, 2005, PNC indirectly owned approximately 70% of BlackRock.

 

The following table summarizes BlackRock’s operating performance for the three months ended June 30, 2005, March 31, 2005 and June 30, 2004 and the six months ended June 30, 2005 and June 30, 2004.

 

BlackRock, Inc.

Financial Highlights

(Dollar amounts in thousands, except share data)

(unaudited)

 

     Three months ended

    Variance vs.

 
     June 30,

   

March 31,

2005


    June 30, 2004

    March 31, 2005

 
     2005

    2004

      Amount

   %

    Amount

    %

 

Total revenue

   $ 271,389     $ 183,812     $ 250,083     $ 87,577    48 %   $ 21,306     9 %

Total expense

   $ 189,494     $ 121,231     $ 183,501     $ 68,263    56 %   $ 5,993     3 %

Operating income

   $ 81,895     $ 62,581     $ 66,582     $ 19,314    31 %   $ 15,313     23 %

Operating income, as adjusted (b)

   $ 94,175     $ 70,651     $ 89,289     $ 23,524    33 %   $ 4,886     5 %

Net income

   $ 53,335     $ 47,996     $ 46,536     $ 5,339    11 %   $ 6,799     15 %

Net income, as adjusted (a)

   $ 60,565     $ 46,424     $ 59,520     $ 14,141    30 %   $ 1,045     2 %

Diluted earnings per share

   $ 0.80     $ 0.73     $ 0.70     $ 0.07    10 %   $ 0.10     14 %

Diluted earnings per share, as adjusted (a)

   $ 0.91     $ 0.71     $ 0.89     $ 0.20    28 %   $ 0.02     2 %

Average diluted shares outstanding

     66,796,087       65,766,979       66,880,713       1,029,108    2 %     (84,626 )   0 %

Operating margin

     30.2 %     34.0 %     26.6 %                           

Operating margin, as adjusted (b)

     37.0 %     40.2 %     37.7 %                           

Assets under management ($ in millions)

   $ 414,411     $ 309,654     $ 391,328     $ 104,757    34 %   $ 23,083     6 %

 

    

Six months ended

June 30,


    Variance

 
     2005

    2004

    Amount

    %

 

Total revenue

   $ 521,471     $ 365,635     $ 155,836     43 %

Total expense

   $ 372,995     $ 233,287     $ 139,708     60 %

Operating income

   $ 148,476     $ 132,348     $ 16,128     12 %

Operating income, as adjusted (b)

   $ 183,463     $ 141,484     $ 41,979     41 %

Net income

   $ 99,871     $ 103,203     $ (3,332 )   -3 %

Net income, as adjusted (a)

   $ 120,085     $ 92,972     $ 27,113     29 %

Diluted earnings per share

   $ 1.49     $ 1.57     $ (0.08 )   -5 %

Diluted earnings per share, as adjusted (a)

   $ 1.80     $ 1.41     $ 0.39     28 %

Average diluted shares outstanding

     66,844,720       65,776,975       1,067,745     2 %

Operating margin

     28.5 %     36.2 %              

Operating margin, as adjusted (b)

     37.3 %     40.5 %              

Assets under management ($ in millions)

   $ 414,411     $ 309,654     $ 104,757     34 %

 

- 32 -


PART I - FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

BlackRock, Inc.

 

Financial Highlights (continued)

 

(a) Net income, as adjusted, and diluted earnings per share, as adjusted, have been derived from the Company’s consolidated financial statements, as follows:

 

     Three months ended

  

Six months ended

June 30,


 
     June 30,

    March 31,
2005


  
     2005

    2004

       2005

    2004

 

Net income, GAAP basis

   $ 53,335     $ 47,996     $ 46,536    $ 99,871     $ 103,203  

Add back: PNC’s LTIP funding requirement

     7,716       —         7,394      15,110       —    

SSR acquisition costs

     —         —         5,590      5,590       —    

Release of reserves related to the New York State tax audit

     —         —         —        —         (8,659 )

Impact of Trepp sale

     (486 )     (1,572 )     —        (486 )     (1,572 )
    


 


 

  


 


Net income, as adjusted

     60,565       46,424       59,520      120,085       92,972  
    


 


 

  


 


Diluted earnings per share, GAAP basis

   $ 0.80     $ 0.73     $ 0.70    $ 1.49     $ 1.57  
    


 


 

  


 


Diluted earnings per share, as adjusted

   $ 0.91     $ 0.71     $ 0.89    $ 1.80     $ 1.41  
    


 


 

  


 


 

Management believes net income, as adjusted, and diluted earnings per share, as adjusted, are effective indicators of BlackRock’s profitability and financial performance over time. The LTIP expense associated with awards to be met by PNC’s funding requirement has been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because these changes do not result in an economic cost to the Company and, exclusive of the impact related to LTIP participants’ put options, these charges will not impact BlackRock’s book value. SSR acquisition costs consist of certain compensation costs and professional fees. Compensation reflected in this amount represents direct incentives related to alternative product performance fees generated in 2004 by SSR employees, assumed by BlackRock in conjunction with the acquisition and settled by BlackRock with no future service requirement. Net income, as adjusted, and diluted earnings per share, as adjusted, exclude this amount because it does not relate to current period’s operation. Professional fees reflected in this amount, which have been deemed non-recurring by management, have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, to help ensure the comparability of this information to prior reporting periods.

 

- 33 -


PART I - FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

BlackRock, Inc.

 

Financial Highlights (continued)

 

(b) Operating margin, as adjusted, equals operating income, as adjusted, divided by revenue used for operating margin measurement, as indicated in the table below. Computations for all periods presented include affiliated and non-affiliated fund administration and servicing expense reported as a separate income statement line item and are derived from the Company’s consolidated financial statements, as follows:

 

     Three months ended

   

Six months ended

June 30,


 
     June 30,

    March 31,
2005


   
     2005

    2004

      2005

    2004

 

Operating income, GAAP basis

   $ 81,895     $ 62,581     $ 66,582     $ 148,476     $ 132,348  

Add back: PNC LTIP funding obligation

     12,247       —         11,736       23,983       —    

Appreciation on assets related to deferred compensation plans

     33       1,066       2,098       2,131       2,132  

Trepp bonus

     —         7,004       —         —         7,004  

SSR acquisition costs

     —         —         8,873       8,873       —    
    


 


 


 


 


Operating income, as adjusted

     94,175       70,651       89,289       183,463       141,484  

Revenue, as reported

     271,389       183,812       250,083       521,471       365,635  

Less: fund administration and servicing costs

     (10,426 )     (8,018 )     (9,109 )     (19,535 )     (16,378 )

Reimbursable property management compensation

     (6,239 )     —         (4,059 )     (10,298 )     —    
    


 


 


 


 


Revenue used for operating margin measurement

     254,724       175,794       236,915       491,638       349,257  
    


 


 


 


 


Operating margin, GAAP basis

     30.2 %     34.0 %     26.6 %     28.5 %     36.2 %
    


 


 


 


 


Operating margin, as adjusted

     37.0 %     40.2 %     37.7 %     37.3 %     40.5 %
    


 


 


 


 


 

We believe that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of managment’s ability to, and useful to management in deciding how to, effectively employ BlackRock’s resources. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors. Appreciation on assets related to BlackRock’s deferred compensation plans has been excluded because investment performance of these assets has a nominal impact on net income. Reimbursable property management compensation represents compensation and benefits paid to certain BlackRock Realty Advisors, Inc. (“Realty”) personnel. These employees are retained on Realty’s payroll when properties are acquired by Realty’s clients. The related compensation and benefits are fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin measurement, as adjusted, because they bear no economic cost to BlackRock. Fund administration and servicing costs have been excluded from revenue used for operating margin measurement, as adjusted, because these costs fluctuate based on the discretion of a third party.

 

- 34 -


PART I - FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

General

 

BlackRock derives a substantial portion of its revenue from investment advisory and administration fees which are recognized as the services are performed. Such fees are primarily based on predetermined percentages of the market value of assets under management or, in the case of certain real estate separate accounts, net operating income generated by the underlying properties, and are affected by changes in assets under management, including market appreciation or depreciation and net subscriptions or redemptions. Net subscriptions or redemptions represent the sum of new client assets, additional fundings from existing clients, withdrawals of assets from and termination of client accounts and purchases and redemptions of mutual fund shares. Market appreciation or depreciation typically includes current income earned on and changes in the fair value of securities held in client accounts.

 

Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products provide for performance fees in addition to fees based on assets under management. Performance fees generally are earned when investment performance exceeds a contractual threshold and, accordingly, may increase the volatility of BlackRock’s revenue and earnings.

 

BlackRock provides a variety of risk management, investment analytics and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, REITs, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand name BlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions services are based on a number of factors including predetermined percentages of the market value of assets subject to the services and the number of individual investment accounts, or on fixed monthly or quarterly payments. Certain client accounts can also be subject to discretionary performance fees. The fees earned on risk management, investment analytics and investment system assignments are recorded as other income. A subsidiary of BlackRock Realty Advisors, Inc. earns fees for property management services associated with properties included in BlackRock Realty’s real estate equity portfolios.

 

Operating expense consists of employee compensation and benefits, fund administration and servicing costs, general and administration expense, amortization of intangible assets, and impairment of intangible assets. Employee compensation and benefits expense reflects salaries, deferred and incentive compensation, vesting of awards granted under the BlackRock, Inc. 2002 Long Term Retention and Incentive Plan (“LTIP”) and related benefit costs. Fund administration and servicing costs reflects payments made to PNC affiliated entities and third parties, primarily associated with the administration and servicing of client investments in the BlackRock Funds and BlackRock Closed-end Funds. Intangible assets at June 30, 2005 and December 31, 2004 were approximately $500.0 million and approximately $184.1 million, respectively, with amortization expense of approximately $1.7 million and $0.2 million for the three months ended June 30, 2005 and 2004 and approximately $2.9 million and $0.5 million for the six months ended June 30, 2005 and 2004, respectively. Impairment of intangible assets represents a write-off of an acquired management contract during the six months ended June 30, 2004 due to liquidation of long-short equity hedge funds during the first quarter of 2004. Intangible assets primarily reflect the Company’s acquisition of SSR during the first quarter of 2005 and PNC’s acquisition of BlackRock Financial Management, L.P. on February 28, 1995.

 

- 35 -


PART I - FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management

 

Assets under management (“AUM”) increased approximately $104.7 billion, or 34%, to $414.4 billion at June 30, 2005, compared with $309.7 billion at June 30, 2004. The growth in assets under management was attributable to $49.7 billion of AUM acquired in the Company’s acquisition of SSRM Holdings, Inc. (SSR), the holding company of State Street Research & Management Company and SSR Realty Advisors, Inc., in combination with an increase of $44.2 billion, or 19%, in separate accounts and $10.6 billion, or 13%, in mutual fund assets from operations.

 

Separate accounts at June 30, 2005, increased $84.4 billion, or 37%, to $315.2 billion as compared with $230.8 billion at June 30, 2004, as a result of AUM acquired of $40.2 billion, net subscriptions of $26.3 billion and market appreciation of $17.9 billion. Acquisitions primarily represented the transition of $23.1 billion in MetLife-sponsored variable annuity products and separate accounts to the Company and $10.6 billion in alternative investment product AUM consisting of real estate products, collateralized debt obligations and energy hedge funds of $6.3 billion, $3.4 billion and $0.8 billion, respectively. Net subscriptions, exclusive of the SSR acquisition, were primarily attributable to fixed income new client sales and increased fundings from existing fixed income clients of $24.1 billion. Market appreciation of $17.9 billion in separate accounts largely reflected appreciation earned on fixed income assets of $14.6 billion due to current income and changes in market interest rates, market appreciation in equity assets of $1.9 billion as equity markets improved during the period and $1.4 billion of market appreciation on alternative investment products.

 

The $20.4 billion increase in mutual fund assets to $99.2 billion at June 30, 2005, compared with $78.8 billion at June 30, 2004, primarily reflected acquisitions of $9.7 billion and net subscriptions of $9.4 billion. Acquisitions primarily reflect the merger of the SSR mutual funds into the BlackRock Funds, representing an increase of $9.5 billion in AUM. During the year, net subscriptions in other commingled funds, BlackRock Closed-end Funds and the BlackRock Liquidity Funds totaled $2.3 billion, $1.4 billion and $7.4 billion, respectively, all of which were partially offset by net redemptions in the BlackRock Funds, exclusive of the SSR fund mergers, of $1.3 billion. Net subscriptions in other commingled funds resulted from the successful launch of BlackRock Cash Strategies, LLC, an enhanced-yield cash management product, during 2004. The increase in AUM of the BlackRock Closed-end Funds reflects new funds launched since June 30, 2004 of $1.9 billion, partially offset by term trust maturities of $0.4 billion. Net new business in the BlackRock Liquidity Funds is primarily due to $11.4 billion of net subscriptions during the fourth quarter of 2004 driven by strong relative investment performance, partially offset by outflows attributable to increases in the Federal Funds rate during the first quarter of 2005, which resulted in a temporary yield advantage for direct investments in the money markets versus mutual funds during those periods.

 

AUM at June 30, 2005 increased $23.1 billion, or 6%, as compared to March 31, 2005, representing $15.6 billion in net subscriptions including $8.8 billion for international clients, and $7.4 billion in market appreciation. The $15.6 billion in net subscriptions during the second quarter of 2005 reflected separate account net subscriptions of $16.1 billion, of which $12.9 billion was attributable to fixed income new client sales and increased fundings from existing fixed income clients, partially offset by mutual fund net redemptions of $0.5 billion. Mutual fund net redemptions primarily consisted of outflows in cash management and equity funds of $0.3 billion and $0.2 billion, respectively. Market appreciation during the second quarter of 2005 was primarily attributable to appreciation on fixed income assets of $5.6 billion and alternative products of $1.0 billion due to current income and changes in market interest rates.

 

 

- 36 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management (continued)

 

BlackRock, Inc.

Assets Under Management

(Dollar amounts in millions)

(unaudited)

 

     June 30,

  

December 31,

2004


     2005

   2004

  

All Accounts

                    

Fixed income

   $ 284,082    $ 223,542    $ 240,709

Cash Management

     75,183      65,943      78,057

Equity

     32,378      13,543      14,792

Alternative investment products

     22,768      6,626      8,202
    

  

  

Total

   $ 414,411    $ 309,654    $ 341,760
    

  

  

Separate Accounts

                    

Fixed income

   $ 258,411    $ 199,762    $ 216,070

Cash Management

     8,164      6,896      7,360

Cash Management-Securities lending

     7,368      8,771      6,898

Equity

     18,525      8,790      9,397

Alternative investment products

     22,768      6,626      8,202
    

  

  

Subtotal

     315,236      230,845      247,927
    

  

  

Mutual Funds

                    

Fixed income

     25,671      23,780      24,639

Cash Management

     59,651      50,276      63,799

Equity

     13,853      4,753      5,395
    

  

  

Subtotal

     99,175      78,809      93,833
    

  

  

Total

   $ 414,411    $ 309,654    $ 341,760
    

  

  

 

- 37 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management (continued)

 

The following tables present the component changes in BlackRock’s assets under management for the three and six months ended June 30, 2005 and 2004, respectively. The data reflect certain reclassifications to conform with the current period’s presentation.

 

BlackRock, Inc.

Component Changes in Assets Under Management

(Dollar amounts in millions)

(unaudited)

 

    

Three months ended

June 30,


   

Six months ended

June 30,


 
     2005

    2004

    2005

    2004

 
All Accounts                                 

Beginning assets under management

   $ 391,328     $ 320,672     $ 341,760     $ 309,356  

Net subscriptions (redemptions)

     15,559       (6,697 )     15,664       (357 )

Acquisitions

     89       —         49,966       —    

Market appreciation (depreciation)

     7,435       (4,321 )     7,021       655  
    


 


 


 


Ending assets under management

   $ 414,411     $ 309,654     $ 414,411     $ 309,654  
    


 


 


 


% of change in AUM from net subscriptions and acquisitions

     67.8 %     60.8 %     90.3 %     -119.8 %
Separate Accounts                                 

Beginning assets under management

   $ 292,186     $ 232,183     $ 247,927     $ 222,589  

Net subscriptions

     16,069       2,273       20,591       7,244  

Acquisitions

     —         —         40,181       —    

Market appreciation (depreciation)

     6,981       (3,611 )     6,537       1,012  
    


 


 


 


Ending assets under management

     315,236       230,845       315,236       230,845  
    


 


 


 


Mutual Funds                                 

Beginning assets under management

     99,142       88,489       93,833       86,767  

Net redemptions

     (510 )     (8,970 )     (4,927 )     (7,601 )

Acquisitions

     89       —         9,785       —    

Market appreciation (depreciation)

     454       (710 )     484       (357 )
    


 


 


 


Ending assets under management

     99,175       78,809       99,175       78,809  
    


 


 


 


Total    $ 414,411     $ 309,654     $ 414,411     $ 309,654  
    


 


 


 


 

- 38 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management (continued)

 

BlackRock, Inc.

Assets Under Management

Quarterly Trend

(Dollar amounts in millions)

(unaudited)

 

     Quarter Ended

   

Six months
ended

June 30, 2005


 
     2004

    2005

   
     June 30

    September 30

    December 31

    March 31

    June 30

   

Separate Accounts

                                                

Fixed Income

                                                

Beginning assets under management

   $ 202,055     $ 199,762     $ 211,075     $ 216,070     $ 239,912     $ 216,070  

Net subscriptions

     1,365       5,201       1,121       4,906       12,855       17,761  

Acquisitions

     —         —         —         20,005       —         20,005  

Market appreciation (depreciation)

     (3,658 )     6,112       3,874       (1,069 )     5,644       4,575  
    


 


 


 


 


 


Ending assets under management

     199,762       211,075       216,070       239,912       258,411       258,411  
    


 


 


 


 


 


Cash Management

                                                

Beginning assets under management

     6,304       6,896       7,703       7,360       7,307       7,360  

Net subscriptions (redemptions)

     591       787       (362 )     (632 )     809       177  

Acquisitions

     —         —         —         558       —         558  

Market appreciation

     1       20       19       21       48       69  
    


 


 


 


 


 


Ending assets under management

     6,896       7,703       7,360       7,307       8,164       8,164  
    


 


 


 


 


 


Cash Management-Securities lending

                                                

Beginning assets under management

     8,479       8,771       8,636       6,898       6,791       6,898  

Net subscriptions (redemptions)

     292       (135 )     (1,738 )     (107 )     577       470  
    


 


 


 


 


 


Ending assets under management

     8,771       8,636       6,898       6,791       7,368       7,368  
    


 


 


 


 


 


Equity

                                                

Beginning assets under management

     9,003       8,790       8,129       9,397       18,610       9,397  

Net subscriptions (redemptions)

     (195 )     (748 )     31       (107 )     (376 )     (483 )

Acquisitions

     —         —         —         9,061       —         9,061  

Market appreciation (depreciation)

     (18 )     87       1,237       259       291       550  
    


 


 


 


 


 


Ending assets under management

     8,790       8,129       9,397       18,610       18,525       18,525  
    


 


 


 


 


 


Alternative investment products

                                                

Beginning assets under management

     6,342       6,626       7,418       8,202       19,566       8,202  

Net subscriptions

     220       851       666       462       2,204       2,666  

Acquisitions

     —         —         —         10,557       —         10,557  

Market appreciation (depreciation)

     64       (59 )     118       345       998       1,343  
    


 


 


 


 


 


Ending assets under management

     6,626       7,418       8,202       19,566       22,768       22,768  
    


 


 


 


 


 


Total Separate Accounts

                                                

Beginning assets under management

     232,183       230,845       242,961       247,927       292,186       247,927  

Net subscriptions (redemptions)

     2,273       5,956       (282 )     4,522       16,069       20,591  

Acquisitions

     —         —         —         40,181       —         40,181  

Market appreciation (depreciation)

     (3,611 )     6,160       5,248       (444 )     6,981       6,537  
    


 


 


 


 


 


Ending assets under management

   $ 230,845     $ 242,961     $ 247,927     $ 292,186     $ 315,236     $ 315,236  
    


 


 


 


 


 


 

- 39 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management (continued)

 

BlackRock, Inc.

Assets Under Management

Quarterly Trend

(Dollar amounts in millions)

(unaudited)

 

     Quarter Ended

   

Six months
ended

June 30, 2005


 
     2004

    2005

   
     June 30

    September 30

    December 31

    March 31

    June 30

   

Mutual Funds

                                                

Fixed Income

                                                

Beginning assets under management

   $ 24,742     $ 23,780     $ 24,460     $ 24,639     $ 25,379     $ 24,639  

Net subscriptions (redemptions)

     (264 )     270       197       (139 )     68       (71 )

Acquisitions

     —         —         —         989       89       1,078  

Market appreciation (depreciation)

     (698 )     410       (18 )     (110 )     135       25  
    


 


 


 


 


 


Ending assets under management

     23,780       24,460       24,639       25,379       25,671       25,671  
    


 


 


 


 


 


Cash Management

                                                

Beginning assets under management

     58,986       50,276       51,498       63,799       59,985       63,799  

Net subscriptions (redemptions)

     (8,710 )     1,222       12,309       (4,023 )     (334 )     (4,357 )

Acquisitions

     —         —         —         210       —         210  

Market depreciation

     —         —         (8 )     (1 )     —         (1 )
    


 


 


 


 


 


Ending assets under management

     50,276       51,498       63,799       59,985       59,651       59,651  
    


 


 


 


 


 


Equity

                                                

Beginning assets under management

     4,761       4,753       4,546       5,395       13,778       5,395  

Net subscriptions (redemptions)

     4       (146 )     455       (255 )     (244 )     (499 )

Acquisitions

     —         —         —         8,497       —         8,497  

Market appreciation (depreciation)

     (12 )     (61 )     394       141       319       460  
    


 


 


 


 


 


Ending assets under management

     4,753       4,546       5,395       13,778       13,853       13,853  
    


 


 


 


 


 


Total Mutual Funds

                                                

Beginning assets under management

     88,489       78,809       80,504       93,833       99,142       93,833  

Net subscriptions (redemptions)

     (8,970 )     1,346       12,961       (4,417 )     (510 )     (4,927 )

Acquisitions

     —         —         —         9,696       89       9,785  

Market appreciation (depreciation)

     (710 )     349       368       30       454       484  
    


 


 


 


 


 


Ending assets under management

   $ 78,809     $ 80,504     $ 93,833     $ 99,142     $ 99,175     $ 99,175  
    


 


 


 


 


 


 

 

- 40 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Assets Under Management (continued)

 

BlackRock, Inc.

Assets Under Management

Quarterly Trend

(Dollar amounts in millions)

(unaudited)

 

     Quarter Ended

   

Six months

ended
June 30, 2005


 
     2004

    2005

   
     June 30

    September 30

    December 31

    March 31

    June 30

   
Mutual Funds                                                 
BlackRock Funds                                                 

Beginning assets under management

   $ 18,985     $ 16,603     $ 16,305     $ 16,705     $ 25,755     $ 16,705  

Net subscriptions (redemptions)

     (2,110 )     (391 )     60       (430 )     (549 )     (979 )

Acquisitions

     —         —         —         9,476       89       9,565  

Market appreciation (depreciation)

     (272 )     93       340       4       303       307  
    


 


 


 


 


 


Ending assets under management

     16,603       16,305       16,705       25,755       25,598       25,598  
    


 


 


 


 


 


BlackRock Global Series                                                 

Beginning assets under management

     1,026       1,293       1,299       1,223       1,115       1,223  

Net subscriptions (redemptions)

     275       (21 )     (117 )     (104 )     (92 )     (196 )

Market appreciation (depreciation)

     (8 )     27       41       (4 )     —         (4 )
    


 


 


 


 


 


Ending assets under management

     1,293       1,299       1,223       1,115       1,023       1,023  
    


 


 


 


 


 


BlackRock Liquidity Funds                                                 

Beginning assets under management

     53,159       45,854       47,087       58,453       53,864       58,453  

Net subscriptions (redemptions)

     (7,305 )     1,233       11,374       (4,589 )     (635 )     (5,224 )

Market depreciation

     —         —         (8 )     —         —         —    
    


 


 


 


 


 


Ending assets under management

     45,854       47,087       58,453       53,864       53,229       53,229  
    


 


 


 


 


 


Closed-End Funds                                                 

Beginning assets under management

     14,552       14,233       14,895       15,410       15,835       15,410  

Net subscriptions

     111       433       520       175       284       459  

Acquisitions

     —         —         —         220       —         220  

Market appreciation (depreciation)

     (430 )     229       (5 )     30       151       181  
    


 


 


 


 


 


Ending assets under management

     14,233       14,895       15,410       15,835       16,270       16,270  
    


 


 


 


 


 


Other Commingled Funds                                                 

Beginning assets under management

     767       826       918       2,042       2,573       2,042  

Net subscriptions

     59       92       1,124       531       482       1,013  
    


 


 


 


 


 


Ending assets under management

     826       918       2,042       2,573       3,055       3,055  
    


 


 


 


 


 


Total Mutual Funds                                                 

Beginning assets under management

     88,489       78,809       80,504       93,833       99,142       93,833  

Net subscriptions (redemptions)

     (8,970 )     1,346       12,961       (4,417 )     (510 )     (4,927 )

Acquisitions

     —         —         —         9,696       89       9,785  

Market appreciation (depreciation)

     (710 )     349       368       30       454       484  
    


 


 


 


 


 


Ending assets under management

   $ 78,809     $ 80,504     $ 93,833     $ 99,142     $ 99,175     $ 99,175  
    


 


 


 


 


 


 

- 41 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Operating results for the three months ended June 30, 2005 as compared with the three months ended June 30, 2004.

 

Revenue

 

Total revenue for the three months ended June 30, 2005 increased $87.6 million, or 48%, to $271.4 million, compared with $183.8 million for the three months ended June 30, 2004. Investment advisory and administration fees increased $69.5 million, or 43%, to $231.5 million for the three months ended June 30, 2005, compared with $162.0 million for the three months ended June 30, 2004. The increase in investment advisory and administration fees was due to increases in fees earned across all asset classes. Other income of $39.9 million increased $18.1 million, or 83%, for the three months ended June 30, 2005, compared with $21.8 million for the three months ended June 30, 2004, primarily due to increased sales of BlackRock Solutions products and services and property management fees earned on real estate accounts assumed in the SSR acquisition and higher distribution fees earned on the BlackRock Funds.

 

    

Three months ended

June 30,


   Variance

 
Dollar amounts in thousands    2005

   2004

   Amount

   %

 
     (unaudited)            

Investment advisory and administration fees:

                           

Mutual funds

   $ 77,247    $ 54,981    $ 22,266    40.5 %

Separate accounts

     154,224      107,032      47,192    44.1  
    

  

  

  

Total investment advisory and administration fees

     231,471      162,013      69,458    42.9  

Other income

     39,918      21,799      18,119    83.1  
    

  

  

  

Total revenue

   $ 271,389    $ 183,812    $ 87,577    47.6 %
    

  

  

  

 

Mutual fund advisory and administration fees increased $22.3 million, or 41%, to $77.2 million for the three months ended June 30, 2005, compared with $55.0 million for the three months ended June 30, 2004. The increase in mutual fund revenue was primarily the result of increases in BlackRock Funds revenue and closed-end fund revenue of $16.8 million and $3.6 million, respectively. The rise in BlackRock Funds revenue was primarily due to the merger of SSR’s mutual funds into the BlackRock Funds contributing to an increase of approximately $7.3 billion, or 40%, in average AUM in the BlackRock Funds during the period as compared to the prior year. Closed-end fund revenue increased during the period due to closed-end fund launches since June 30, 2004, resulting in a $1.9 billion increase in assets under management.

 

Separate account revenue increased $47.2 million, or 44%, to $154.2 million for the three months ended June 30, 2005, compared with $107.0 million for the three months ended June 30, 2004. Separate account base fees increased $43.4 million, or 49%, to $132.8 million for the three months ended June 30, 2005, compared with $89.4 million for the three months ended June 30, 2004. Separate account base fees increased during the second quarter of 2005 primarily due to a $40.2 billion increase in AUM related to the SSR acquisition and an increase in AUM, exclusive of the SSR acquisition, of $44.2 billion, or 19%. Performance fees of $21.4 million for the three months ended June 30, 2005 increased $3.8 million compared with $17.6 million for the three months ended June 30, 2004. The increase in separate accounts performance fees reflected increased fees earned on the Company’s equity and real estate alternative investment products, which were partially offset by decreased performance fees earned on the Company’s fixed income hedge fund.

 

- 42 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Operating results for the three months ended June 30, 2005 as compared with the three months ended June 30, 2004.

 

Revenue (continued)

 

Other income of $39.9 million for the three months ended June 30, 2005 primarily represents fees earned on BlackRock Solutions products and services of $23.9 million, property management fees of $8.7 million earned on real estate assets under management and distribution fees earned on the BlackRock Funds of $2.9 million.

 

    

Three months ended

June 30,


   Variance

 
Dollar amounts in thousands    2005

   2004

   Amount

   %

 
     (unaudited)            
Mutual funds revenue                            

BlackRock Funds

   $ 34,856    $ 18,058    $ 16,798    93.0 %

Closed-End Funds

     21,095      17,484      3,611    20.7  

BlackRock Liquidity Funds

     20,515      19,160      1,355    7.1  

Other commingled funds

     781      279      502    179.9  
    

  

  

  

Total mutual funds revenue

     77,247      54,981      22,266    40.5  
    

  

  

  

Separate accounts revenue                            

Separate account base fees

     132,786      89,436      43,350    48.5  

Separate account performance fees

     21,438      17,596      3,842    21.8  
    

  

  

  

Total separate accounts revenue

     154,224      107,032      47,192    44.1  
    

  

  

  

Total investment advisory and administration fees

     231,471      162,013      69,458    42.9  
    

  

  

  

Other income

     39,918      21,799      18,119    83.1  
    

  

  

  

Total revenue

   $ 271,389    $ 183,812    $ 87,577    47.6 %
    

  

  

  

 

- 43 -


PART I — FINANCIAL INFORMATION (continued)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

 

Operating results for the three months ended June 30, 2005 as compared with the three months ended June 30, 2004. (continued)

 

Expense

 

Total expense increased $68.3 million, or 56%, to $189.5 million in the second quarter of 2005, compared with $121.2 million during the second quarter of 2004. The increase was attributable to increases in employee compensation and benefits, general and administration expense, fund administration and servicing expense paid to third parties and amortization of intangible assets.

 

    

Three months ended

June 30,


   Variance

 
Dollar amounts in thousands    2005

   2004

   Amount

    %

 
     (unaudited)             

Employee compensation and benefits

   $