UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


FORM 10-Q

 


(Mark One)

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

For the quarterly period ended September 30, 2005March 31, 2006

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)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 a large accelerated filer, an accelerated filer (as definedor a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act).    YesAct. (Check one)

Large accelerated filer  x                                          NoAccelerated filer  ¨

                                         Non-accelerated filer  ¨

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

As of October 31, 2005,April 30, 2006, there were 19,683,42820,023,771 shares of the registrant’s class A common stock outstanding and 44,310,61744,111,479 shares of the registrant’s class B common stock outstanding.

 



BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

      Page

PART I
FINANCIAL INFORMATION

Item 1.

  

Financial Statements (unaudited)

  
  

Condensed Consolidated Statements of Financial Condition

  1
  

Condensed Consolidated Statements of OperationsIncome

  2
  

Condensed Consolidated Statements of Cash Flows

  3
  

Notes to Condensed Consolidated Financial Statements

  4

Item 2.

  

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

  3213

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

  6630

Item 4.

  

Controls and Procedures

  6932
  

PART II

OTHER INFORMATION

  
OTHER INFORMATION

Item 1.

  

Legal Proceedings

  7032

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

  7133

Item 6.

  

Exhibits

  7234

- ii -


PART I - FINANCIAL INFORMATION

Item 1.Financial1. Financial Statements

BlackRock, Inc.

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in thousands)

(unaudited)

   September 30,
2005


  December 31,
2004


 
   (unaudited)    

Assets

         

Cash and cash equivalents

  $396,514  $457,673 

Accounts receivable

   269,408   153,152 

Receivable from affiliates

   5,264   4,692 

Investments

   292,267   227,497 

Property and equipment, net

   123,687   93,701 

Intangible assets, net

   491,710   184,110 

Deferred mutual fund commissions

   12,555   —   

Other assets

   81,699   24,410 
   


 


Total assets

  $1,673,104  $1,145,235 
   


 


Liabilities

         

Accrued compensation

  $409,992  $311,351 

Accounts payable and accrued liabilities

         

Unaffiliated

   50,709   27,185 

Affiliated

   29,769   3,632 

Purchase price contingencies

   29,775   —   

Acquired management contract obligations

   3,791   4,810 

Long-term borrowings

   250,000   —   

Other liabilities

   22,292   12,736 
   


 


Total liabilities

   796,328   359,714 
   


 


Minority interest

   9,586   17,169 
   


 


Stockholders’ equity

         

Common stock, class A, 19,975,305 and 19,243,878 shares issued, respectively

   200   192 

Common stock, class B, 45,117,284 and 45,499,510 shares issued, respectively

   453   455 

Additional paid-in capital

   184,427   165,377 

Retained earnings

   753,179   650,016 

Unearned compensation

   (12,772)  (4,588)

Accumulated other comprehensive income

   4,490   8,254 

Treasury stock, class A, at cost, 343,727 and 270,998 shares held, respectively

   (28,978)  (17,545)

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

   (33,809)  (33,809)
   


 


Total stockholders’ equity

   867,190   768,352 
   


 


Total liabilities and stockholders’ equity

  $1,673,104  $1,145,235 
   


 


 

   March 31,
2006
  December 31,
2005
 

Assets

   

Cash and cash equivalents

  $368,098  $484,223 

Accounts receivable

   359,096   310,423 

Receivable from affiliates

   28,183   29,155 

Investments

   338,361   298,668 

Intangible assets, net

   292,139   294,168 

Goodwill

   200,352   189,814 

Property and equipment, net

   136,972   129,451 

Deferred taxes

   48,615   43,498 

Deferred mutual fund commissions

   13,528   16,025 

Other assets

   55,708   52,575 
         

Total assets

  $1,841,052  $1,848,000 
         

Liabilities

   

Accrued compensation

  $384,974  $522,637 

Accounts payable and accrued liabilities

   174,626   75,779 

Purchase price contingencies

   —     39,463 

Long-term borrowings

   253,791   253,791 

Other liabilities

   22,351   24,473 
         

Total liabilities

   835,742   916,143 
         

Minority interest

   16,368   9,614 
         

Stockholders’ equity

   

Common stock, class A, 19,975,305 shares issued

   200   200 

Common stock, class B, 45,058,149 and 45,117,284 shares issued, respectively

   452   453 

Additional paid-in capital

   187,954   183,797 

Retained earnings

   840,033   794,177 

Accumulated other comprehensive income

   3,460   2,673 

Treasury stock, class A, at cost, 97,354 and 285,104 shares held, respectively

   (9,348)  (25,248)

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

   (33,809)  (33,809)
         

Total stockholders’ equity

   988,942   922,243 
         

Total liabilities, minority interest and stockholders’ equity

  $1,841,052  $1,848,000 
         

See accompanying notes to condensed consolidated financial statements.

 

- 1 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of OperationsIncome

(Dollar amounts in thousands, except share data)

(unaudited)

 

   

Three months ended

September 30,


  

Nine months ended

September 30,


 
   2005

  2004

  2005

  2004

 

Revenue

                 

Investment advisory and administration fees

                 

Separate accounts

  $172,818  $93,482  $468,927  $304,386 

Mutual funds

   81,823   54,073   229,441   165,500 

Other income

                 

Unaffiliated

   41,153   22,106   111,969   62,773 

Affiliated

   5,013   1,338   11,941   3,975 
   


 


 


 


Total revenue

   300,807   170,999   822,278   536,634 
   


 


 


 


Expense

                 

Employee compensation and benefits

   155,077   155,556   413,036   303,243 

Fund administration and servicing costs

                 

Unaffiliated

   7,747   4,050   19,169   10,412 

Affiliated

   4,250   4,227   12,362   14,243 

General and administration

                 

Unaffiliated

   49,859   27,778   137,629   85,104 

Affiliated

   1,665   1,481   6,460   6,817 

Amortization of intangible assets

   2,540   283   5,477   746 

Impairment of intangible assets

   —     —     —     6,097 
   


 


 


 


Total expense

   221,138   193,375   594,133   426,662 
   


 


 


 


Operating income (loss)

   79,669   (22,376)  228,145   109,972 

Non-operating income (expense)

                 

Investment income

   21,439   4,717   37,252   27,652 

Interest expense

   (2,008)  965   (6,084)  (669)
   


 


 


 


Total non-operating income

   19,431   5,682   31,168   26,983 
   


 


 


 


Income (loss) before income taxes and minority interest

   99,100   (16,694)  259,313   136,955 

Income taxes

   37,077   (7,265)  95,732   39,345 
   


 


 


 


Income (loss) before minority interest

   62,023   (9,429)  163,581   97,610 

Minority interest

   904   385   2,591   4,221 
   


 


 


 


Net income (loss)

  $61,119  $(9,814) $160,990  $93,389 
   


 


 


 


Earnings (loss) per share

                 

Basic

  $0.95  $(0.15) $2.51  $1.47 

Diluted

  $0.92  $(0.15) $2.41  $1.42 

Dividends paid per share

  $0.30  $0.25  $0.90  $0.75 

Weighted-average shares outstanding

                 

Basic

   64,087,871   63,676,776   64,243,408   63,693,281 

Diluted

   66,714,797   63,676,776   66,809,706   65,858,552 

   

Three months ended

March 31,

 
   2006  2005 

Revenue

   

Investment advisory and administration fees

   

Separate accounts

  $262,208  $141,885 

Mutual funds

   87,500   70,371 

Other income

   45,952   37,827 
         

Total revenue

   395,660   250,083 
         

Expense

   

Employee compensation and benefits

   191,796   126,944 

Fund administration and servicing costs

   10,374   9,109 

General and administration

   56,984   46,167 

Fee sharing payment

   34,450   —   

Amortization of intangible assets

   2,029   1,281 
         

Total expense

   295,633   183,501 
         

Operating income

   100,027   66,582 
         

Non-operating income (expense)

   

Investment income

   15,064   9,786 

Interest expense

   (1,969)  (2,014)
         

Total non-operating income

   13,095   7,772 
         

Income before income taxes and minority interest

   113,122   74,354 

Income taxes

   41,618   27,331 
         

Income before minority interest

   71,504   47,023 

Minority interest

   642   487 
         

Net income

  $70,862  $46,536 
         

Earnings per share

   

Basic

  $1.11  $0.72 

Diluted

  $1.06  $0.70 

Dividends paid per share

  $0.42  $0.30 

Weighted-average shares outstanding

   

Basic

   64,074,888   64,290,510 

Diluted

   66,731,560   66,880,713 

See accompanying notes to condensed consolidated financial statements.

 

- 2 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

(unaudited)

 

   Year to Date
September 30,


 
   2005

  2004

 

Cash flows from operating activities

         

Net income

  $160,990  $93,389 

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

   22,414   15,462 

Impairment of intangible assets

   —     6,097 

Minority interest

   2,591   4,221 

Stock-based compensation

   52,963   9,518 

Deferred income taxes

   (2,609)  (20,908)

Tax benefit from stock-based compensation

   4,040   1,690 

Net gain on investments

   (15,580)  (13,142)

Amortization of bond issuance costs

   700   —   

Deferred mutual fund commissions

   8,269   —   

Changes in operating assets and liabilities:

         

Increase in accounts receivable

   (78,326)  (22,998)

Increase in receivable from affiliates

   (572)  (608)

Increase in investments, trading

   (7,927)  (10,600)

Increase in other assets

   (39,676)  (952)

(Decrease) increase in accrued compensation

   (48,520)  85,620 

Increase (decrease) in accounts payable and accrued liabilities

   18,307   (4,387)

Increase in other liabilities

   7,756   1,060 
   


 


Cash provided by operating activities

   84,820   143,462 
   


 


Cash flows from investing activities

         

Purchase of property and equipment

   (42,930)  (15,245)

Purchase of investments

   (27,730)  (90,121)

Sale of investments

   44,464   145,737 

Sale of real estate held for sale

   112,184   —   

Deemed cash contribution upon consolidation of VIE

   —     6,412 

Consolidation of sponsored investment funds

   —     (43,169)

Acquisitions, net of cash acquired and purchase price contingencies

   (247,220)  (74)
   


 


Cash (used in) provided by investing activities

   (161,232)  3,540 
   


 


Cash flows from financing activities

         

Borrowings, 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

   7,996   5,152 

Decrease in cash due to deconsolidated sponsored investment fund

   (5,509)  —   

Distributions paid to minority interest holders

   —     (5,794)

Dividends paid

   (57,507)  (47,685)

Reissuance of treasury stock

   13,268   13,325 

Purchase of treasury stock

   (72,775)  (48,539)

Issuance of class A common stock

   706   —   

Acquired management contract obligation payment

   (1,019)  (926)
   


 


Cash provided by (used in) financing activities

   18,320   (84,467)
   


 


Effect of exchange rate changes on cash and cash equivalents

   (3,067)  955 
   


 


Net (decrease) increase in cash and cash equivalents

   (61,159)  63,490 

Cash and cash equivalents, beginning of period

   457,673   315,941 
   


 


Cash and cash equivalents, end of period

  $396,514  $379,431 
   


 


   Three months ended
March 31,
 
   2006  2005 

Cash flows from operating activities

   

Net income

  $70,862  $46,536 

Adjustments to reconcile net income to cash from operating activities:

   

Depreciation and amortization

   9,109   7,006 

Minority interest

   642   487 

Stock-based compensation

   26,542   18,147 

Deferred income taxes

   (5,117)  (4,361)

Net gain on investments

   (4,029)  (3,879)

Amortization of bond issuance costs

   302   125 

Amortization of deferred mutual fund commissions

   2,497   1,826 

Accrued Merrill Lynch Investment Managers transaction costs

   6,362   —   

Other non-cash adjustments

   (2,864)  —   

Changes in operating assets and liabilities:

   

Increase in accounts receivable

   (48,673)  (27,338)

Increase (decrease) in receivable from affiliates

   972   (11,355)

Increase in investments, trading

   (7,511)  (30,585)

Increase in other assets

   (1,955)  (7,201)

Decrease in accrued compensation

   (152,464)  (172,294)

Increase in accounts payable and accrued liabilities

   45,407   46,932 

(Decrease) increase in other liabilities

   (2,122)  226 
         

Cash flows from operating activities

   (62,040)  (135,728)
         

Cash flows from investing activities

   

Purchase of property and equipment

   (14,602)  (16,684)

Purchase of investments

   (41,372)  (9,093)

Proceeds from sale of investments

   16,083   18,221 

Proceeds from sale of real estate held for sale

   —     112,184 

Acquisitions, net of cash acquired and purchase price contingencies

   —     (242,707)
         

Cash flows from investing activities

   (39,891)  (138,079)
         

Cash flows from financing activities

   

Borrowings, net of issuance costs

   —     395,000 

Principal repayment of borrowings

   —     (150,000)

Repayment of short-term borrowings

   —     (111,840)

Tax benefit from stock-based compensation

   1,773   1,536 

Additions to minority interest

   6,111   6,374 

Dividends paid

   (26,891)  (19,274)

Reissuance of treasury stock

   4,441   7,133 

Purchase of treasury stock

   (39)  (84)

Issuance of class A common stock

   —     202 
         

Cash flows from financing activities

   (14,605)  129,047 
         

Effect of exchange rate changes on cash and cash equivalents

   411   (627)
         

Net decrease in cash and cash equivalents

   (116,125)  (145,387)

Cash and cash equivalents, beginning of period

   484,223   457,673 
         

Cash and cash equivalents, end of period

  $368,098  $312,286 
         

See accompanying notes to condensed consolidated financial statements.

 

- 3 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

BlackRock, Inc.

Notes to Condensed 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”). TheBlackRock provides diversified investment management services to institutional clients, including certain subsidiaries of PNC and certain PNC-related accounts, and to individual investors through various investment vehicles. Institutional investment management services primarily consist of the active management of fixed income, equity and cash management client accounts, the management of theBlackRock Liquidity Funds, a money market mutual fund family serving the institutional market, and the management of alternative funds developed to serve various customer needs. BlackRock also offers risk management, investment system outsourcing and financial advisory services to institutional investors under the BlackRock Solutions® brand name. Individual investor services primarily consist of the management of the Company’s sponsored open-end (“BlackRock Funds”) and closed-end mutual funds.

1.Significant Accounting Policies

Basis of Presentation

These condensed 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 the primary beneficiary. Intercompany accounts and transactions between 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 (“GAAP”) for interim financial information and Rule 10-01include the accounts of Regulation S-X. Accordingly, they do not include all the informationCompany and footnotes required by GAAP for complete financial statements. Theseits controlled subsidiaries. All material accounts and transactions between consolidated entities have been eliminated.

The preparation of condensed consolidated financial statements are unauditedin conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates and assumptions. Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These condensed consolidated financial statements should be read in conjunction with the auditedCompany’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. 2005, which was filed with the Securities and Exchange Commission (“SEC”) on March 8, 2006.

The Company followsinterim financial data as of March 31, 2006 and for each of the same accounting policiesthree months ended March 31, 2006 and 2005 is unaudited. However, in the preparation of interim reports as set forth in the annual report. In the opinion of management, the consolidated financial statements reflectinterim data includes all adjustments, which areconsisting of a normal recurring nature andadjustments, necessary for a fair presentationstatement of the financial position,Company’s results for the periods presented. The results of operations and cash flows of BlackRock for the interim periods presented, and are not necessarily indicative of aresults to be expected for the full year’s results.

Use of Estimates

In preparingyear. Certain amounts in the Company’s prior year condensed 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 theBlackRock Fundswhich 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 duereclassified to conform 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 operations 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 on the consolidated statements of operations.2006 presentation.

 

- 4 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1.Significant Accounting Policies (continued)

1. Significant Accounting Policies (continued)

Investments (continued)

Non-marketable 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 hold 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 represent the purchase of securities by such funds using proceeds from the Company’s initial seed investments. All of the consolidated funds’ investments are carried at fair value, with corresponding changes in the securities’ fair values reflected in investment income (expense) in the Company’s consolidated statement of operations. 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 as provided by the private investment fund’s investment manager. When the Company’s interest in any of these funds falls below 50%, the funds will be deconsolidated and accounted for under the equity method or other methods, as appropriate. At September 30, 2005, investments subject to fair value accounting represented 19%, or approximately $54,100, 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 operations. 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. If the estimate of future cash flows (taking into account both timing and amount) is lower than the last 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) in the consolidated statements of operations as a realized loss.

- 5 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

1. Significant Accounting Policies (continued)

Stock-BasedStock-based Compensation

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. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the periods ending September 30, 2005 and 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards issued prior to the effective date of SFAS No. 123. Awards under the Company’s plans vest over periods ranging from two to four years.

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

   Three months ended
September 30,


  Nine months ended
September 30,


 
   2005

  2004

  2005

  2004

 

Net income (loss), as reported

  $61,119  $(9,814) $160,990  $93,389 

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

   2,339   1,041   6,173   3,372 

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

   (4,342)  (3,497)  (12,182)  (11,162)
   


 


 


 


Pro forma net income (loss)

  $59,116  $(12,270) $154,981  $85,599 
   


 


 


 


Earnings (loss) per share:

                 

Basic - as reported

  $0.95  $(0.15) $2.51  $1.47 

Basic - pro forma

  $0.92  $(0.19) $2.41  $1.34 

Diluted - as reported

  $0.92  $(0.15) $2.41  $1.42 

Diluted - pro forma

  $0.89  $(0.19) $2.32  $1.30 

- 6 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

1. Significant Accounting Policies (continued)

Deferred Mutual Fund Commissions

Prior to the Company’s acquisition of SSRM Holdings, Inc. (“SSR”) (see note 2), an indirect wholly-owned subsidiary of PNC paid the sales commissions and received the sales charges on back-end loaded shares of certainBlackRock Funds. Upon the closing of the SSR acquisition, the Company acquired approximately $20,800 in deferred mutual fund commissions, representing broker sales commissions related to SSR’s mutual fund family. Concurrent with the closing of the SSR acquisition, these mutual funds were merged intoBlackRock Funds. All commissions incurred subsequent to that date have been financed by the indirect wholly-owned subsidiary of PNC.

Deferred mutual fund commissions are amortized over an estimated useful life of six years from the date of issuance, 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 mutual fund commissions balance.

The Company periodically will 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 operations. 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 pre-determined percentages of the market values of the assets under management or, in the case of certain real estate clients, 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 generally 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 upon completion of the measurement period.

BlackRock provides a variety of risk management, investment analytic and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned forBlackRock 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 performance fees at the client’s discretion. The fees earned on risk management, investment analytics and investment system assignments are recorded as other income on the consolidated statements of operations.

- 7 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

1. Significant Accounting Policies (continued)

Recent Accounting Developments

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFASStatement of Financial Accounting Standards (“SFAS”) No. 123R,123(R),Share-Based Payment. This statement is a revision toof SFAS No. 123Accounting for Stock-Based Compensation, and supercededsupersedes Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees. ThisThe 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 beare 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 beis 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 estimatedis measured using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost will beis 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 December 15, 2005.

The Company will adoptadopted SFAS No. 123R, as amended, effective January 1, 2006.

Upon adoption, the Company has two application methods from which to choose:123(R), using the modified-prospective transition approach, or the modified-retrospective transition approach.effective January 1, 2006, with no cumulative effect on net income. Under the modified-prospective transition method, the Company would be required to recognizeis recognizing 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,January 1, 2006, 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 in the year of adoption. In addition, upon the adoptionimpact of SFAS No. 123R,123(R) was to reduce net income and basic and fully diluted shares outstanding will be reducedearnings per share for all shares reservedthe three months ended March 31, 2006 by $1,978, $0.03 per share and $0.01 per share, respectively.

Pro forma basic and fully diluted earnings per share for unvestedthe three months ended March 31, 2005, including the impact of stock options not expensed under SFAS No. 123R (approximately 1.9 million shares at September 30, 2005)123 would have been $0.69 and $0.67, respectively, and net income for the period ended March 31, 2005 would have been reduced by approximately $1,978.

Consolidation

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 04-5,Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights (“EITF 04-5”). EITF 04-5 presumes that a general partner controls a limited partnership (including certain limited liability companies), and should therefore consolidate a limited partnership, unless the limited partners have the substantive ability to remove the general partner without cause based on a simple majority vote or can otherwise dissolve the limited partnership, or unless the limited partners have substantive participating rights over decision making. The guidance in EITF 04-5 was effective immediately for all newly formed partnerships and any modified limited partnership agreements. The guidance was effective for existing partnership agreements for financial reporting periods beginning after December 15, 2005. The adoption of SFAS No. 123R is expected to reduce diluted earnings per share by approximately $0.02 in 2006.EITF 04-5 on January 1, 2006 had no impact on the Company’s condensed consolidated financial statements.

 

- 85 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1.Significant Accounting Policies (continued)

1. Significant Accounting Policies (continued)

Recent Accounting Developments (continued)

In March 2005, the StaffImpairment of the Securities and Exchange Commission (“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 No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R and disclosures in Management’s Discussion and Analysis subsequent to the 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 No. 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.

Investments

In March 2005, the FASB issued FASB Interpretation (“FIN”) No. 47,Accounting for Conditional Asset Retirement Obligations. FIN No. 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 No. 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 No. 47 is not expected to have a significant impact on the Company’s consolidated financial statements.

In MarchNovember 2005, the FASB issued FASB Staff Position (“FSP”) FIN 46(R)-5,FAS 115-1/124-1, Implicit Variable Interests Under FIN 46The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments., which provides guidance for determining when impairment charges should be taken on certain debt and equity securities. FSP FIN 46(R)-5 statesFAS 115-1/124-1 requires that debt and equity securities subject to the provisions of SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, and equity securities subject to the provisions of APB No. 18,The Equity Method of Accounting for Investments in Common Stock, but which are not accounted for under the equity method (i.e., securities accounted for under the cost method) shall be reviewed for impairment when circumstances warrant. For securities subject to SFAS No. 115, a reporting entity should consider whether it holds an implicit variable interestreview for other-than-temporary impairments shall occur in a variable interest entity (“VIE”) or in a potential VIE. Ifeach accounting period where the aggregatefair value of the explicitsecurity is less than its cost. For securities subject to APB No. 18, a review for other-than-temporary impairments shall occur in each accounting period where a) circumstances indicate that impairment may exist and implicit variable interests held byb) the fair value of the security is less than its carrying value. The provisions of the FSP were required to be applied to 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 was the first reporting periodperiods beginning after March 31,December 15, 2005. The adoption of FSP FIN 46(R)-5 did not have a significantFAS 115-1/124-1 on January 1, 2006 had no material impact on the Company’s condensed 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,AccountingChanges 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. Management has concluded that it is not in the Company’s best interests to repatriate any earnings under the Jobs Act. Accordingly, the Company does not expect the adoption of FSP No. 109-2 to have a significant impact on the consolidated financial statements.Corrections

In June 2005, the FASB issued SFAS No. 154,Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20,Accounting Changes, and SFAS No. 3,Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented onunder the new accounting principle. SFAS No. 154 also requires that a change in the method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed “restatements.”“restatements”. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The implementationadoption of SFAS No. 154 is not expected to have a significanton January 1, 2006 had no impact on the Company’s condensed consolidated financial statements.

Disclosure of Fair Value

ReclassificationSFAS No. 107,Disclosure about Fair Value of Prior Period’s Financial StatementsInstruments, requires disclosure of estimated fair values of certain financial instruments, both on and off the balance sheet. The Company’s methods and assumptions regarding the value of its financial instruments are set forth below:

 

Cash and cash equivalents, receivables, other assets, accounts payable and accrued liabilities are carried at cost which approximates fair value due to their short maturities.

The fair value of readily marketable investments is based on quoted market prices. If securities are not readily marketable, fair values are determined by the Company’s management. At March 31, 2006, the carrying value of investments approximates their fair value.

At March 31, 2006, the estimated fair value of the Company’s $250,000 aggregate principal amount of debentures is $356,175 compared with $288,125 at December 31, 2005.

At March 31, 2006, the estimated fair value of the acquired management contract obligation based on current rates offered to the Company for debt, assuming an investment rating of “AAA” or its equivalent, with a similar remaining maturity was approximately $4,385. The book value of this contract at March 31, 2006 was $3,791.

- 6 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

1.Significant Accounting Policies (continued)

Disclosure of Fair Value (continued)

The Company acts as the portfolio manager in a series of credit swap transactions, referred to collectively as the Pillars Synthetic Collateralized Debt Obligation (“Pillars”) transaction. The Company has entered into a credit default swap with a major multi-national financial institution (the “Counterparty”), affording the Counterparty credit protection of approximately $16,667, representing the Company’s maximum possible risk of loss. Pursuant to SFAS No. 133,Accounting for Derivative Instruments and HedgingActivities, as amended, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. For the three months ended March 31, 2006, the Company recorded gains of $1,315 in non-operating income in the Condensed Consolidated Statement of Income related to changes in the fair value of the Pillars credit default swap. The fair value of the Pillars credit default swap was approximately $6,027 as of March 31, 2006, and is included in other assets on the Condensed Consolidated Statements of Financial Condition.

Recent Accounting Developments

In February 2006, the FASB issued SFAS No. 155,Accounting for Certain items previously reportedHybrid Financial Instruments, which amends SFAS No. 133 and SFAS No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Statement provides, among other things, that:

Companies that have embedded derivatives which would otherwise be required to be bifurcated from their host contracts and accounted for at fair value in accordance with SFAS No. 133 may make an irrevocable election, on an instrument-by-instrument basis, to measure the hybrid financial instrument at fair value in its entirety, with changes in fair value recognized in earnings.

Clarifies that concentrations of credit risk in the form of subordination are not considered embedded derivatives.

SFAS No. 155 is effective for all financial instruments acquired, issued or subject to remeasurement after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Upon adoption, differences between the total carrying amount of the individual components of an existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument should be recognized as a cumulative effect adjustment to beginning retained earnings. Prior periods should not be restated. The Company is currently evaluating the potential impact of SFAS No. 155 and intends to adopt the Statement on January 1, 2007.

2.Pending Acquisition

On February 15, 2006, BlackRock and two of its wholly-owned subsidiaries, New Boise, Inc. (“New BlackRock”) and Boise Merger Sub, Inc. (“Merger Sub”) entered into a Transaction Agreement and Plan of Merger (the “Transaction Agreement”) with Merrill Lynch & Co., Inc. (“Merrill Lynch”). Pursuant to the terms of the Transaction Agreement, New BlackRock will become the public holding company for BlackRock’s businesses and Merrill Lynch will contribute its investment management business, Merrill Lynch Investment Managers (“MLIM”), via a capital contribution to New BlackRock (the “Transaction”). Upon closing of the Transaction, Merrill Lynch would own approximately 65 million shares or 49% (but in any event, not more than 49.8%) of the combined company, including a 45% voting interest, PNC would maintain approximately 34% ownership in the combined company and the remainder would be held by employees and public shareholders. The Transaction, which has been approved by the boards of directors of BlackRock and Merrill Lynch, is subject to various regulatory approvals, client consents, approval by BlackRock shareholders and other customary closing conditions, and is expected to close on or around September 30, 2006.

- 7 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

3.Investments

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

      Gross Unrealized  

Carrying
Value

March 31, 2006

  Cost  Gains  Losses  

Available-for-sale investments:

       

Collateralized debt obligations

  $24,753  $1,382  $(708) $25,427

Mutual funds

   4,588   63   (138)  4,513

Other

   1,287   —     —     1,287
                

Total available-for-sale investments

  $30,628  $1,445  $(846) $31,227
                

December 31, 2005

            

Available-for-sale investments:

       

Collateralized debt obligations

  $25,750  $773  $(806) $25,717

Mutual funds

   4,442   20   (153)  4,309
                

Total available-for-sale investments

  $30,192  $793  $(959) $30,026
                

At March 31, 2006 and 2005, the Company’s available-for-sale investments had an aggregate cost basis of $30,628 and 30,192 and an aggregate fair value of $31,227 and 30,026, respectively. During the three months ended March 31, 2006, the Company recorded impairments of $998 to certain collateralized debt obligations. Gross unrealized losses of $138 on mutual fund investments at March 31, 2006 includes unrealized losses from two mutual fund investments totaling $109, that have been reclassified to conform within a loss position for greater than 12 consecutive months, and unrealized losses from five additional mutual funds that have been in a loss position for less than 12 months. Management has reviewed the Company’s portfolio of available-for-sale mutual fund investments at March 31, 2006 and has concluded that the $138 gross unrealized loss in fair value is not other-than-temporary as defined by FSP FAS 115-1/124-1. Management’s review considered such factors as the current period presentation.and expected future economic environment as it relates to the mutual funds, historical fund performance, stage of growth of the fund, materiality of the loss in proportion to the cost value of the securities, dividend payments being received on the investments and the Company’s ability and intent to hold the securities until the loss is recovered.

- 8 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

3.Investments (continued)

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

March 31, 2006

  Cost  Carrying
Value

Trading investments:

    

Mutual funds

  $19,000  $21,394

Equity securities

   15,964   19,731

Mortgage-backed securities

   18,785   18,430

Corporate notes and bonds

   9,622   9,300

Municipal debt securities

   119   117
        

Total trading investments

   63,490   68,972
        

Other investments:

    

Other fund investments

   195,279   212,067

Deferred compensation plans

   20,972   24,917

Other

   193   1,178
        

Total other investments

   216,444   238,162
        

Total trading and other investments

  $279,934  $307,134
        

December 31, 2005

      

Trading investments:

    

Mutual funds

  $19,699  $22,319

Equity securities

   15,964   18,425

Mortgage-backed securities

   13,345   13,069

Corporate notes and bonds

   8,146   7,946

Municipal debt securities

   119   123
        

Total trading investments

   57,273   61,882
        

Other investments:

    

Other fund investments

   167,593   181,292

Deferred compensation plans

   20,976   24,495

Other

   193   973
        

Total other investments

   188,762   206,760
        

Total trading and other investments

  $246,035  $268,642
        

Included in other investments is $83,790 of investments accounted for using the cost method. FSP FAS 115-1/124-1 requires that a company review cost method investments for other-than-temporary impairments whenever management estimates a fair value for such investments or when events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment. At March 31, 2006, management reviewed $45,943 in carrying value of other investments and estimated an aggregate fair value of $49,520. One such security had a gross loss of $107, which was approximately 2.0% of its total carrying value. Management reviewed this security and concluded that this impairment is not other-than-temporary. Management’s review considered such factors as the current and expected future economic environment as it relates to the investment, historical fund performance, stage of growth of the fund, materiality of the loss in proportion to its carrying value and the Company’s ability and intent to hold the investment until the loss is recovered.

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PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

3.Investments (continued)

In addition, $37,847 in cost basis investments were not reviewed for other-than-temporary impairment because management’s review concluded that no events had occurred that indicated a potentially significant adverse impact on the fair value of the investment.

4.Goodwill

In January 2005, the Company closed its acquisition of SSRM Holdings Inc. and subsidiaries (“SSR”) from MetLife Inc. (“MetLife”) for adjusted consideration of approximately $265,089, including cash and 550,000 restricted shares of BlackRock restricted class A common stock, but excluding certain additional contingent payments. The Company has recorded the assets acquired and liabilities assumed in the acquisition at fair value and, in the second quarter of 2005, recognized a contingent liability for additional payments to MetLife in the amount of $55,332, which represented the excess of the fair value of net assets acquired over the cost of the acquired entity. Contingent payments settled subsequent to January 31, 2005 but prior to December 31, 2005 reduced this contingent liability to $39,463 at December 31, 2005.

The SSR stock purchase agreement provides for an additional payment to MetLife of up to $75,000 based on the Company achieving specified assets under management (“AUM”) retention levels and run-rate revenue levels for the 12 months ended January 31, 2006. Based on AUM levels and run-rate revenue as of January 31, 2006, the Company’s additional liability on this contingency was approximately $50,000. This $50,000 additional purchase price eliminated the contingent liability balance. As of March 31, 2006, the excess of the additional purchase price over the fair value of net assets acquired has been recorded as goodwill in the Condensed Consolidated Statement of Financial Condition.

5.Fee Sharing Payment

The SSR stock purchase agreement provides that BlackRock will pay a fee sharing payment to MetLife equal to 32.5% of any performance fees earned, as of March 31, 2006, on a large institutional real estate client. At March 31, 2006, the Company estimated this liability to be $34,450, which is recorded as a fee sharing expense in the Condensed Consolidated Statement of Income.

At March 31, 2006, BlackRock had a liability of $84,351 due to MetLife related to the SSR acquisition, primarily representing the contingent acquisition price payment and the fee sharing payment. This amount is included in accounts payable and accrued liabilities in the Condensed Consolidated Statement of Financial Condition.

 

- 10 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

6.Variable Interest Entities

2. Acquisition

In January 2005, the Company closed the acquisition of SSR, the holding company of State Street Research & Management Company (“SSRM”) and SSR Realty Advisors, Inc. (renamed BlackRock Realty Advisors, Inc., “Realty”), from MetLife, Inc. (“MetLife”) for an adjusted purchase price of $237,356 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 the closing, except in 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 assets under management (“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. As of September 30, 2005, no performance fees had been earned on this 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. The Company is unableinvolved with various entities in the normal course of business that are considered to estimatebe variable interest entities (“VIEs”) and holds interests therein, including investment advisory agreements and equity securities, which are considered variable interests. The Company engages in these transactions principally to address client needs through the potentiallaunch of collateralized debt obligations under(“CDOs”) and private investment funds. At March 31, 2006 and December 31, 2005, the contingent payments because itaggregate assets, debt and BlackRock’s maximum risk of loss in VIEs in which BlackRock is unable to predict at this time what specific retention levels of run-rate revenue will be onnot the first anniversary of closing the SSR transaction, what the Company’s retained AUM will be on the fifth anniversary of the closing date of the SSR transaction, or what performance fees will be earned on the institutional real estate client.primary beneficiary were as follows:

 

March 31, 2006

  Assets  Debt  BlackRock’s
Maximum
Risk of Loss

Collateralized debt obligations

  $6,669,044  $6,090,585  $42,094

Private investment funds

   5,162,996   925,838   18,944
            

Total

  $11,832,040  $7,016,423  $61,038
            

December 31, 2005

         

Collateralized debt obligations

  $6,289,500  $5,491,200  $42,383

Private investment funds

   5,185,500   1,051,400   18,944
            

Total

  $11,475,000  $6,542,600  $61,327
            

At closing,

7.Earnings Per Share

The following table sets forth the Company recorded the excesscomputation of assets acquiredbasic 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 potential additional payments to MetLife and increased the carrying value of acquired assets. 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 is based on the status of these accounts as of July 31, 2005. The Company has estimated the amount of the payment to be approximately $20,000. The estimated payment has been recorded as a reduction in the contingent liability to MetLife. 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.diluted earnings per share:

   

Three months ended

March 31,

   2006  2005

Net income

  $70,862  $46,536
        

Basic weighted-average shares outstanding

   64,074,888   64,290,510

Dilutive potential shares from stock options and stock units

   2,230,015   2,590,203

Other dilutive potential shares

   426,657   —  
        

Dilutive weighted-average shares outstanding

   66,731,560   66,880,713
        

Basic earnings per share

  $1.11  $0.72
        

Diluted earnings per share

  $1.06  $0.70
        

 

- 11 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

8.Other Comprehensive Income (Loss)

2. Acquisition (continued)

   Three months ended
March 31,
 
   2006  2005 

Net Income

  $70,862  $46,536 

Unrealized gain (loss) from investments, net of tax

   376   (1,004)

Foreign currency gain (loss), net of tax

   412   (627)
         

Comprehensive income (loss)

  $71,560  $44,905 
         

9.Supplemental Statements of Cash Flow Information

Supplemental disclosure of cash flow information:

 

   Three months ended
March 31,
   2006  2005

Cash paid for interest

  $3,281  $315
        

Cash paid for income taxes

  $29,305  $8,839
        

The Company initially financed $150,000Supplemental schedule 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.non-cash transactions:

 

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 $112,184 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 estimated fair values of the net assets acquired in this acquisition is as follows:

Accounts receivable

  $37,930 

Real estate assets held for sale

   112,184 

Investments

   72,775 

Property and equipment

   3,993 

Deferred mutual fund commissions

   20,824 

Other assets

   3,447 

Assembled workforce

   12,891 

Management contracts acquired

   298,365 

Purchase price contingencies

   (29,775)

Liabilities assumed

   (258,066)
   


Total purchase price, including acquisition costs

  $274,568 
   


Summary of consideration, net of cash acquired

     

Cash

  $237,356 

Restricted class A common stock, at fair value

   37,212 
   


   $274,568 
   


The Company is completing its evaluation of the fair value of the assets and liabilities of SSR as of the acquisition date. As such, certain adjustments may be made to the fair value estimates presented above.

   Three months ended
March 31,
 
   2006  2005 

Accrued fee-sharing payment

  $50,000  $—   

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

  $6,601  $858 

Mark-to-market on available-for-sale securities

  $376  $(1,003)

Dividend reinvestment

  $160  $101 

Stock issued in SSR acquisition

  $—    $37,212 

Convertible debt issuance costs

  $—    $5,000 

 

- 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 reduced depreciation associated with the write-off of SSR property and equipment that will not be used in the Company’s ongoing operations. Management has realized, and expects to continue to realize, 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
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

Total revenue

  $300,807  $235,508  $844,066  $743,249

Operating income (loss)

  $79,669  $(12,700) $234,420  $152,853

Net income (loss)

  $61,119  $(5,198) $162,985  $116,223

Earnings (loss) per share:

                

Basic

  $0.95  $(0.08) $2.53  $1.81

Diluted

  $0.92  $(0.08) $2.44  $1.75

3. Investments

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

      Gross Unrealized

  Carrying
Value


September 30, 2005


  Cost

  Gains

  Losses

  

Mutual funds

  $11,427  $403  $(97) $11,733

Collateralized debt obligations

   25,979   928   (505)  26,402
   

  

  


 

Total investments, available for sale

  $37,406  $1,331  $(602) $38,135
   

  

  


 

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:

September 30, 2005


  Cost

  Carrying
Value


Mutual funds

  $19,596  $21,789

Equity securities

   15,964   19,819

Mortgage-backed securities

   14,018   13,790

Corporate notes and bonds

   8,354   8,215

Municipal debt securities

   119   124
   

  

Total investments, trading

   58,051   63,737
   

  

Other funds

        

Equity method

   59,640   75,816

Cost method

   53,335   54,573

Fair value

   31,967   31,967
   

  

Total other funds

   144,942   162,356

Deferred compensation plans

   20,976   24,379

Other

   2,693   3,660
   

  

Total investments, other

   168,611   190,395
   

  

Total investments, trading and other

  $226,662  $254,132
   

  

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

   48,725   49,528

Cost method

   33,885   34,605

Fair value

   30,321   30,321
   

  

Total other funds

   112,931   114,454

Deferred compensation plans

   22,148   24,720

Other

   367   58
   

  

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 September 30, 2005 is as follows:

Maturity Date


  Carrying
Value


1-5 years

  $11,342

5-10 years

   2,512

After 10 years

   8,275
   

Total

  $22,129
   

4. Other Income

Other income consists of the following:

   Three months ended
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

BlackRock Solutions

  $28,883  $21,488  $79,446  $59,165

Real estate property management fees

   8,910   —     23,250   —  

Distribution fees

   3,533   —     7,882   —  

Investment accounting

   1,797   1,510   5,427   4,448

Other

   3,043   446   7,905   3,135
   

  

  

  

   $46,166  $23,444  $123,910  $66,748
   

  

  

  

Real estate property management fees for the three and nine months ended September 30, 2005 include $6,485 and $16,783, 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

SSRM 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 of $16,700 and 25% of the structure’s residual balance at its scheduled termination date of 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,Consolidation of Variable Interest Entities-an Interpretation of ARB 51, 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 September 30, 2005, the fair value of the Pillars credit default swap was $3,138.

- 16 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

6. Intangible Assets

Intangible assets at September 30, 2005 and December 31, 2004 are summarized as follows:

   Weighted-avg.
estimated
useful life


  September 30, 2005

    Gross Carrying
Amount


  Accumulated
Amortization


  Intangible
Assets, Net


Goodwill and indefinite-life intangible assets

               

Goodwill

  N/A  $255,656  $65,842  $189,814

Management contracts acquired:

               

Mutual funds

  N/A   195,586   —     195,586

Private investment funds

  N/A   44,242   —     44,242

Other

  N/A   23   —     23
      

  

  

Total goodwill and indefinite-life intangible assets

      495,507   65,842   429,665
      

  

  

Definite-life intangible assets

               

Management contracts acquired:

               

Institutional separate accounts

  10.7   56,900   4,314   52,586

Collateralized debt obligations

  9.0   6,200   546   5,654

Private investment funds

  9.9   8,140   4,335   3,805
   
  

  

  

Total definite-life intangible assets

  10.5   71,240   9,195   62,045
      

  

  

Total intangible assets

     $566,747  $75,037  $491,710
      

  

  

   Weighted-avg.
estimated
useful life


  December 31, 2004

    Gross Carrying
Amount


  Accumulated
Amortization


  Intangible
Assets, Net


Goodwill and indefinite-life intangible assets

               

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 indefinite-life intangible assets

      245,631   65,842   179,789
      

  

  

Definite-life intangible assets

               

Management contract acquired:

               

Private investment funds

  10.0   8,040   3,719   4,321
   
  

  

  

Total definite-life 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)

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

2005

  $2,029

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. For the first nine months 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 $230,800 in LTIP awards, net of forfeitures. Quarterly expense attributable to LTIP awards during the period from October 1, 2005 through December 31, 2006 will be approximately $15,300 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 in 2007, 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 and PNC. In addition, shares distributed to LTIP participants in 2007 will include an option to put such distributed shares back to BlackRock at fair market value. The remaining $40,000 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 $200,000 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 September 30, 2005, obligations under the SSR New Plan totaled $15,215. 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 operations.

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 either a fixed term or upon retirement. Obligations under this plan were 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 September 30, 2005, SSR advances to employees and obligations under the SSR Old Plan are each $3,124.

401(k) and Retirement Savings Plans

The Company assumed two 401(k) and Retirement Savings Plans covering employees of SSRM and Realty (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 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.

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 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. 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 September 30, 2005 consist of the following:

Interest cost

  $129 

Expected return on plan assets

   (130)
   


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 twoBlackRock Funds. Plan assets do not include any common stock or 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.

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

    

October 1, 2005 - December 31, 2005

  $24

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

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

   Shares issued

       
   Common shares  Treasury shares  Shares outstanding

 
   Class

  Class

  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

  30,647  (382,226) 351,579     382,226  (382,226)

Issuance of class A common stock

  700,780  —    487,031  —    1,187,811  —   

Treasury stock transactions

  —    —    (911,339) —    (911,339) —   
   
  

 

 

 

 

September 30, 2005

  19,975,305  45,117,284  (343,727) (806,667) 19,631,578  44,310,617 
   
  

 

 

 

 

10. Earnings Per Share

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

   Three months ended
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

Net income (loss)

  $61,119  $(9,814) $160,990  $93,389
   

  


 

  

Basic weighted-average shares outstanding

   64,087,871   63,676,776   64,243,408   63,693,281

Dilutive potential shares from stock options

   2,626,926   —     2,566,298   2,165,271
   

  


 

  

Dilutive weighted-average shares outstanding

   66,714,797   63,676,776   66,809,706   65,858,552
   

  


 

  

Basic earnings (loss) per share

  $0.95  $(0.15) $2.51  $1.47
   

  


 

  

Diluted earnings (loss) per share

  $0.92  $(0.15) $2.41  $1.42
   

  


 

  

- 22 -


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

11. Supplemental Statements of Cash Flow Information

Supplemental disclosure of cash flow information:

   Nine months ended
September 30,


   2005

  2004

Cash paid for interest

  $3,936  $926
   

  

Cash paid for income taxes

  $103,282  $65,856
   

  

Supplemental schedule of noncash transactions:

   Nine months ended
September 30,


   2005

  2004

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

  $27,741  $16,596
   

  

Convertible debt issuance costs

  $5,000  $—  
   

  

Decrease in investments 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 nine months ended September 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’s management has concluded that it is not in the Company’s best interest to repatriate any earnings under the Jobs Act. Under the provisions of Accounting Principles Board Opinion No. 23,Accounting for Income Taxes – Special Areas, the Company has not recorded a provision for income taxes that would occur upon repatriation of foreign earnings.

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

   Three months ended
September 30,


  Nine months ended
September 30,


 
   2005

  2004

  2005

  2004

 

Current:

                 

Federal

  $26,187  $20,105  $84,831  $60,138 

State and local

   3,946   (292)  10,294   5,596 

Foreign

   1,241   1,038   3,216   3,038 

Release of reserves related to New

                 

York State tax audits

   —     —     —     (8,519)
   

  


 


 


Total current

   31,374   20,851   98,341   60,253 
   

  


 


 


Deferred:

                 

Federal

   5,397   (23,724)  (1,441)  (16,274)

State and local

   306   (4,392)  (1,168)  (4,634)
   

  


 


 


Total deferred

   5,703   (28,116)  (2,609)  (20,908)
   

  


 


 


Total

  $37,077  $(7,265) $95,732  $39,345 
   

  


 


 


- 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 presented net in other assets in the consolidated statements of financial condition, consist of the following:

   September 30,
2005


  December 31,
2004


Deferred tax assets:

        

Compensation and benefits

  $86,942  $71,804

Deferred revenue

   1,422   1,321

Other

   4,394   5,165
   

  

Gross deferred tax asset

   92,758   78,290
   

  

Deferred tax liabilities:

        

Goodwill

   44,839   39,370

Depreciation

   10,401   8,369

Other

   7,705   4,311
   

  

Gross deferred tax liability

   62,945   52,050
   

  

Net deferred tax asset

  $29,813  $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

September 30,


  

Nine months ended

September 30,


 
   2005

  %

  2004

  %

  2005

  %

  2004

  %

 

Expected income tax expense (benefit)

  $34,685  35.0% $(5,843) 35.0% $90,759  35.0% $47,934  35.0%

Increase (decrease) in income taxes resulting from:

                             

State and local taxes

   2,764  2.8   (2,892) 17.3   5,932  2.3   1,267  0.9 

Foreign taxes

   35  —     1,780  (10.7)  411  0.2   2,253  1.6 

Tax-exempt interest income

   (526) (0.5)  (380) 2.3   (1,085) (0.4)  (1,093) (0.8)

Minority interest

   (316) (0.3)  (134) 0.8   (907) (0.4)  (1,477) (1.1)

Release of reserves related to New York State Tax audits

   —    —     —    —     —    —     (8,519) (6.2)

Other

   435  0.4   204  (1.2)  622  0.2   (1,020) (0.7)
   


 

 


 

 


 

 


 

Income tax expense (benefit)

  $37,077  37.4% $(7,265) 43.5% $95,732  36.9% $39,345  28.7%
   


 

 


 

 


 

 


 

- 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 have 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 September 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


September 30, 2005

            

Collaterized debt obligations

  $5,787,600  $5,190,600  $43,068

Private investment funds

   4,486,600   1,284,500   8,950
   

  

  

Total

  $10,274,200  $6,475,100  $52,018
   

  

  

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
September 30,


  Nine months ended
September 30,


 
   2005

  2004

  2005

  2004

 

Net income (loss)

  $61,119  $(9,814) $160,990  $93,389 

Other comprehensive income (loss):

                 

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

   265   840   (697)  (1,013)

Foreign currency translation gain (loss)

   (456)  (76)  (3,068)  953 
   


 


 


 


Comprehensive income (loss)

  $60,928  $(9,050) $157,225  $93,329 
   


 


 


 


- 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 is 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)

Convertible Debt (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 Company suspends the use of the SEC 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 has not suspended the use of the registration statement.

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. Since both the Company’s call option and the holders put option are primarily based on the current interest rate environment, management concluded that this option is clearly and closely related to the debt host and did not require bifurcation under SFAS 133.

Line of Credit

Realty, a wholly owned subsidiary of the Company, has a $200,000 line of credit with MetLife (see note 17).

- 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 $433 through 2006 from sublease arrangements, are as follows:

2005

  $5,141

2006

   20,657

2007

   20,525

2008

   20,370

2009

   20,651

Thereafter

   155,865
   

   $243,209
   

17. Related Party Transactions

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

Revenues for services provided to these are as follows:

   Three months ended
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

Investment advisory and administration fees:

                

BlackRock Open-end Funds:

                

PNC

  $7,333  $7,185  $20,789  $25,347

Other

   29,451   9,104   79,890   27,781

BlackRock Closed-end Funds - Other

   23,127   17,978   64,120   52,252

BlackRock Liquidity Funds

                

PNC

   4,598   3,817   12,536   10,025

Other*

   16,573   15,691   50,171   49,256

STIF - PNC

   222   264   660   796

Other

   519   34   1,275   43
   

  

  

  

   $81,823  $54,073  $229,441  $165,500
   

  

  

  


*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
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

Separate accounts:

                

MetLife

  $14,160  $—    $37,527  $—  

Nomura

   2,194   2,237   6,699   6,542

PNC

   1,468   1,588   4,508   5,026

Private client services - PNC

   1,383   1,387   4,149   4,271

Alternative investments - PNC

   664   124   988   330

Other income-risk management - PNC

   1,456   1,250   3,941   3,750
   

  

  

  

   $21,325  $6,586  $57,812  $19,919
   

  

  

  

Total revenue earned by BlackRock for providing asset management and other services to PNC subsidiaries or PNC-related accounts for the three months ended September 30, 2005 and 2004 totaled $17,124 and $15,615, respectively, and for the nine months ended September 30, 2005 and 2004 totaled approximately $47,571 and $49,545, 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 inBlackRock 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, BlackRock 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 September 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
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

Fund administration and servicing costs

  $4,250  $4,227  $12,362  $14,243

General and administration

   2,300   1,082   6,577   3,332

General and administration-consulting

   450   399   2,958   3,485
   

  

  

  

   $7,000  $5,708  $21,897  $21,060
   

  

  

  

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 $15,423 and $2,983 at September 30, 2005 and December 31, 2004, respectively, primarily representing investment and administration services provided to MetLife, Nomura and PNC subsidiaries and affiliates.

Other assets include 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 $3,124 and $12,920, respectively.

Accounts payable and accrued liabilities-affiliate were $29,769 and $3,632 at September 30, 2005 and December 31, 2004, respectively. These amounts primarily represent settlements due on SSR acquisition-related costs and settlements due on income taxes 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 $427.8 billion of assets under management at September 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 account and mutual fund products, includingBlackRock Funds and theBlackRock 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 consumer banking, institutional banking, asset management and global fund processing services. As of September 30, 2005, PNC indirectly owned approximately 70% of BlackRock.

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

BlackRock, Inc.

Financial Highlights

(Dollar amounts in thousands, except share data)

(unaudited)

   Three months ended

  Variance vs.

 
   September 30,

  

June 30,

2005


  September 30, 2004

  June 30, 2005

 
   2005

  2004

   Amount

  %

  Amount

  %

 

Total revenue

  $300,807  $170,999  $271,389  $129,808  76% $29,418  11%

Total expense

  $221,138  $193,375  $189,494  $27,763  14% $31,644  17%

Operating income (loss)

  $79,669  $(22,376) $81,895  $102,045  NM  $(2,226) -3%

Operating income, as adjusted(b)

  $100,160  $52,016   94,333  $48,144  93% $5,827  6%

Net income (loss)

  $61,119  $(9,814) $53,335  $70,933  NM  $7,784  15%

Net income, as adjusted(a)

  $68,876  $36,885  $60,565  $31,991  87% $8,311  14%

Diluted earnings (loss) per share

  $0.92  $(0.15) $0.80  $1.07  NM  $0.12  15%

Diluted earnings per share, as adjusted(a)

  $1.03  $0.56  $0.91  $0.47  84% $0.12  13%

Average diluted shares outstanding

   66,714,797   63,676,776   66,796,087   3,038,021  5%  (81,290) 0%

Operating margin

   26.5%  -13.1%  30.2%              

Operating margin, as adjusted(b)

   35.5%  32.0%  37.0%              

Assets under management ($ in millions)

  $427,837  $323,465  $414,411  $104,372  32% $13,426  3%
   

Nine months ended

September 30,


  Variance

          
   2005

  2004

  Amount

  %

          

Total revenue

  $822,278  $536,634  $285,644   53%          

Total expense

  $594,133  $426,662  $167,471   39%          

Operating income

  $228,145  $109,972  $118,173   107%          

Operating income, as adjusted(b)

  $283,781  $193,500  $90,281   47%          

Net income

  $160,990  $93,389  $67,601   72%          

Net income, as adjusted(a)

  $188,960  $129,997  $58,963   45%          

Diluted earnings per share

  $2.41  $1.42  $0.99   70%          

Diluted earnings per share, as adjusted(a)

  $2.83  $1.98  $0.85   43%          

Average diluted shares outstanding

   66,809,706   65,858,552   951,154   1%          

Operating margin

   27.7%  20.5%                  

Operating margin, as adjusted(b)

   36.7%  37.8%                  

Assets under management ($ in millions)

  $427,837  $323,465  $104,372   32%          

- 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)While BlackRock reports its financial results using accounting principles generally accepted in the United States of America (“GAAP”), management believes that evaluating its ongoing operating results may not be as useful if investors are limited to reviewing only GAAP financial measures. Management reviews non-GAAP financial measures to assess on-going operations, and for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s profitability and financial performance over time. Nevertheless, BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

Net income, as adjusted, and diluted earnings per share, as adjusted, have been derived from BlackRock’s consolidated financial statements, as follows:

   Three months ended

  Nine months ended 
   September 30,

  

June 30,

2005


  September 30,

 
   2005

  2004

   2005

  2004

 

Net income, GAAP basis

  $61,119  $(9,814) $53,335  $160,990  $93,389 

Add back: PNC’s LTIP funding requirement

   7,757   46,699   7,716   22,866   46,699 

SSR acquisition costs

   —     —     —     5,590   —   

Release of reserves related to the New York State tax audit

   —     —     —     —     (8,519)

Impact of Trepp sale

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

  


 


 


 


Net income, as adjusted

   68,876   36,885   60,565   188,960   129,997 
   

  


 


 


 


Diluted earnings per share, GAAP basis

  $0.92  $(0.15) $0.80  $2.41  $1.42 
   

  


 


 


 


Diluted earnings per share, as adjusted

  $1.03  $0.56  $0.91  $2.83  $1.98 
   

  


 


 


 


Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRock’s historical profitability and financial performance. 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, 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 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 the current period’s operations. 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

  Nine months ended 
   September 30,

  

June 30,

2005


  September 30,

 
   2005

  2004

   2005

  2004

 

Operating income, GAAP basis

  $79,669  $(22,376) $81,895  $228,145  $109,972 

Add back: PNC LTIP funding obligation

   12,313   74,125   12,247   36,296   74,125 

Appreciation on assets related to deferred compensation plans

   8,178   267   191   10,467   2,399 

Trepp bonus

   —     —     —     —     7,004 

SSR acquisition costs

   —     —     —     8,873   —   
   


 


 


 


 


Operating income, as adjusted

   100,160   52,016   94,333   283,781   193,500 
   


 


 


 


 


Revenue, as reported

   300,807   170,999   271,389   822,278   536,634 

Less: fund administration and servicing costs

   (11,997)  (8,277)  (10,426)  (31,531)  (24,655)

Reimbursable property management compensation

   (6,485)  —     (6,239)  (16,783)  —   
   


 


 


 


 


Revenue used for operating margin measurement

   282,325   162,722   254,724   773,964   511,979 
   


 


 


 


 


Operating margin, GAAP basis

   26.5%  -13.1%  30.2%  27.7%  20.5%
   


 


 


 


 


Operating margin, as adjusted

   35.5%  32.0%  37.0%  36.7%  37.8%
   


 


 


 


 


Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of management’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. Compensation expense associated with appreciation on assets related to BlackRock’s deferred compensation plans has been excluded because investment returns on these assets reported in non-operating income results in 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 clients, 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 are generally earned based on investment performance in excess of a contractual threshold and, accordingly, may increase the volatility of BlackRock’s revenue and earnings.

BlackRock provides a variety of risk management, investment analytic and investment system services to its customers, which include insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned forBlackRock Solutions services are based on a number of factors including pre-determined 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 analytic and investment system assignments are recorded as other income in the consolidated statements of operations. A subsidiary of BlackRock Realty Advisors, Inc. (“Realty”) earns management and performance fees for property management services associated with properties included in 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, if any. Employee compensation and benefits expense includes 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 includes payments made to PNC affiliated entities and third parties, primarily associated with the administration and servicing of client investments inBlackRock Fundsand BlackRock Closed-end Funds. Intangible assets at September 30, 2005 and December 31, 2004 were approximately $491.7 million and $184.1 million, respectively, with amortization expense of approximately $2.5 million and $0.3 million for the three months ended September 30, 2005 and 2004, respectively, and approximately $5.5 million and $0.7 million for the nine months ended September 30, 2005 and 2004, respectively. Impairment of intangible assets represents a write-off of an acquired management contract due to liquidation of long-short equity hedge funds during the first quarter of 2004. Intangible assets primarily include management contracts and goodwill acquired in conjunction with the Company’s acquisition of SSRM Holdings, Inc. (“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 $104.4 billion, or 32%, to $427.8 billion at September 30, 2005, compared with $323.4 billion at September 30, 2004. The growth in assets under management was attributable to $50.0 billion of AUM acquired primarily in the Company’s acquisition of SSR in combination with an increase of $39.1 billion, or 12%, in net subscriptions and $15.3 billion, or 5%, in market appreciation.

Separate accounts at September 30, 2005, increased $81.0 billion, or 33%, to $324.0 billion as compared with $243.0 billion at September 30, 2004, as a result of AUM acquired in the SSR acquisition of $40.2 billion, net subscriptions of $27.1 billion and market appreciation of $13.7 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 products 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 $25.8 billion. Market appreciation of $13.7 billion in separate accounts largely reflected appreciation earned on fixed income assets of $7.9 billion due to current income and changes in market interest rates, market appreciation in equity assets of $3.3 billion as equity markets improved during the period and $2.5 billion of market appreciation on alternative investment products.

The $23.3 billion increase in mutual fund assets to $103.8 billion at September 30, 2005, compared with $80.5 billion at September 30, 2004, primarily reflected acquired assets of $9.8 billion and net subscriptions of $12.0 billion. Acquisitions primarily reflect the merger of the SSR mutual funds intoBlackRock Funds, representing an increase of $9.5 billion in AUM. During the year, net subscriptions inBlackRock Liquidity Funds, other commingled funds and BlackRock Closed-end Funds totaled $9.1 billion, $2.2 billion and $2.0 billion, respectively, all of which was partially offset by net redemptions inBlackRock Funds, exclusive of the SSR fund mergers, of $1.0 billion. Net new business in theBlackRock Liquidity Fundswas primarily due to $11.4 billion of net subscriptions during the fourth quarter of 2004, driven by strong relative investment performance and partially offset by outflows attributable to increases in the Federal Funds rate during the first quarter of 2005, resulting in a temporary yield advantage for direct investments in money market investments versus mutual funds during those periods. 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 September 30, 2004 of $2.4 billion, partially offset by term trust maturities of $0.4 billion.

AUM at September 30, 2005 increased $13.4 billion, or 3%, as compared to June 30, 2005, representing $10.7 billion in net subscriptions, including $3.6 billion for international clients and $2.7 billion in market appreciation. The $10.7 billion in net subscriptions during the third quarter of 2005 reflected separate account net subscriptions of $6.8 billion attributable to new fixed income clients and increased fundings from existing fixed income clients, as well as net mutual fund subscriptions of $3.9 billion. Net mutual fund subscriptions primarily consisted of inflows in cash management and equity funds of $3.1 billion and $1.0 billion, respectively. Market appreciation during the third quarter of 2005 of $2.7 billion was primarily attributable to appreciation on equity assets of $2.5 billion as equity markets strengthened during the period and alternative products of $1.0 billion, partially offset by market depreciation of $0.9 billion on fixed income assets primarily due to increases 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)

AUM as of September 30, 2005 and 2004 and December 31, 2004 are summarized below:

BlackRock, Inc.

Assets Under Management

(Dollar amounts in millions)

(unaudited)

   September 30,

  

December 31,

2004


   2005

  2004

  

All Accounts

            

Fixed income

  $290,041  $235,535  $240,709

Cash Management

   76,713   67,837   78,057

Equity

   35,600   12,675   14,792

Alternative investment products

   25,483   7,418   8,202
   

  

  

Total

  $427,837  $323,465  $341,760
   

  

  

Separate Accounts

            

Fixed income

  $264,704  $211,075  $216,070

Cash Management

   8,357   7,703   7,360

Cash Management-Securities lending

   5,653   8,636   6,898

Equity

   19,789   8,129   9,397

Alternative investment products

   25,483   7,418   8,202
   

  

  

Subtotal

   323,986   242,961   247,927
   

  

  

Mutual Funds

            

Fixed income

   25,337   24,460   24,639

Cash Management

   62,703   51,498   63,799

Equity

   15,811   4,546   5,395
   

  

  

Subtotal

   103,851   80,504   93,833
   

  

  

Total

  $427,837  $323,465  $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 AUM for the three and nine months ended September 30, 2005 and 2004, respectively. Prior period data reflects 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
September 30,


  Nine months ended
September 30,


 
   2005

  2004

  2005

  2004

 

All Accounts

                 

Beginning assets under management

  $414,411  $309,654  $341,760  $309,356 

Net subscriptions

   10,747   7,302   26,411   6,945 

Acquisitions

   —     —     49,966   —   

Market appreciation

   2,679   6,509   9,700   7,164 
   

  

  


 


Ending assets under management

  $427,837  $323,465  $427,837  $323,465 
   

  

  


 


Separate Accounts

                 

Beginning assets under management

  $315,236  $230,845  $247,927  $222,589 

Net subscriptions

   6,818   5,956   27,409   13,200 

Acquisitions

   —     —     40,181   —   

Market appreciation

   1,932   6,160   8,469   7,172 
   

  

  


 


Ending assets under management

   323,986   242,961   323,986   242,961 
   

  

  


 


Mutual Funds

                 

Beginning assets under management

   99,175   78,809   93,833   86,767 

Net subscriptions (redemptions)

   3,929   1,346   (998)  (6,255)

Acquisitions

   —     —     9,785   —   

Market appreciation (depreciation)

   747   349   1,231   (8)
   

  

  


 


Ending assets under management

   103,851   80,504   103,851   80,504 
   

  

  


 


Total

  $427,837  $323,465  $427,837  $323,465 
   

  

  


 


- 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)

   Three Months Ended

  

Nine months
ended

September 30,
2005


 
   2004

  2005

  
   September 30

  December 31

  March 31

  June 30

  September 30

  

Separate Accounts

                         

Fixed Income

                         

Beginning assets under management

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

Net subscriptions

   5,201   1,121   4,906   12,855   6,891   24,652 

Acquisitions

   —     —     20,005   —     —     20,005 

Market appreciation (depreciation)

   6,112   3,874   (1,069)  5,644   (598)  3,977 
   


 


 


 


 


 


Ending assets under management

   211,075   216,070   239,912   258,411   264,704   264,704 
   


 


 


 


 


 


Cash Management

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   787   (362)  (632)  809   153   330 

Acquisitions

   —     —     558   —     —     558 

Market appreciation

   20   19   21   48   40   109 
   


 


 


 


 


 


Ending assets under management

   7,703   7,360   7,307   8,164   8,357   8,357 
   


 


 


 


 


 


Cash Management-Securities lending

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   (135)  (1,738)  (107)  577   (1,715)  (1,245)
   


 


 


 


 


 


Ending assets under management

   8,636   6,898   6,791   7,368   5,653   5,653 
   


 


 


 


 


 


Equity

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   (748)  31   (107)  (376)  (203)  (686)

Acquisitions

   —     —     9,061   —     —     9,061 

Market appreciation

   87   1,237   259   291   1,467   2,017 
   


 


 


 


 


 


Ending assets under management

   8,129   9,397   18,610   18,525   19,789   19,789 
   


 


 


 


 


 


Alternative investment products

                         

Beginning assets under management

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

Net subscriptions

   851   666   462   2,204   1,692   4,358 

Acquisitions

   —     —     10,557   —     —     10,557 

Market appreciation (depreciation)

   (59)  118   345   998   1,023   2,366 
   


 


 


 


 


 


Ending assets under management

   7,418   8,202   19,566   22,768   25,483   25,483 
   


 


 


 


 


 


Total Separate Accounts

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   5,956   (282)  4,522   16,069   6,818   27,409 

Acquisitions

   —     —     40,181   —     —     40,181 

Market appreciation (depreciation)

   6,160   5,248   (444)  6,981   1,932   8,469 
   


 


 


 


 


 


Ending assets under management

  $242,961  $247,927  $292,186  $315,236  $323,986  $323,986 
   


 


 


 


 


 


- 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 (continued)

(Dollar amounts in millions)

(unaudited)

   Three Months Ended

  

Nine months
ended

September 30,
2005


 
   2004

  2005

  
   September 30

  December 31

  March 31

  June 30

  September 30

  

Mutual Funds

                         

Fixed Income

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   270   197   (139)  68   (82)  (153)

Acquisitions

   —     —     989   89   —     1,078 

Market appreciation (depreciation)

   410   (18)  (110)  135   (252)  (227)
   


 


 


 


 


 


Ending assets under management

   24,460   24,639   25,379   25,671   25,337   25,337 
   


 


 


 


 


 


Cash Management

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   1,222   12,309   (4,023)  (334)  3,052   (1,305)

Acquisitions

   —     —     210   —     —     210 

Market depreciation

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


 


 


 


 


 


Ending assets under management

   51,498   63,799   59,985   59,651   62,703   62,703 
   


 


 


 


 


 


Equity

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   (146)  455   (255)  (244)  959   460 

Acquisitions

   —     —     8,497   —     —     8,497 

Market appreciation (depreciation)

   (61)  394   141   319   999   1,459 
   


 


 


 


 


 


Ending assets under management

   4,546   5,395   13,778   13,853   15,811   15,811 
   


 


 


 


 


 


Total Mutual Funds

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   1,346   12,961   (4,417)  (510)  3,929   (998)

Acquisitions

   —     —     9,696   89   —     9,785 

Market appreciation

   349   368   30   454   747   1,231 
   


 


 


 


 


 


Ending assets under management

  $80,504  $93,833  $99,142  $99,175  $103,851  $103,851 
   


 


 


 


 


 


- 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)

   Three Months Ended

  

Nine months
ended

September 30,
2005


 
   2004

  2005

  
   September 30

  December 31

  March 31

  June 30

  September 30

  

Mutual Funds

                         

BlackRock Funds

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   (391)  60   (430)  (549)  (122)  (1,101)

Acquisitions

   —     —     9,476   89   —     9,565 

Market appreciation

   93   340   4   303   728   1,035 
   


 


 


 


 


 


Ending assets under management

   16,305   16,705   25,755   25,598   26,204   26,204 
   


 


 


 


 


 


BlackRock Global Series

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   (21)  (117)  (104)  (92)  69   (127)

Market appreciation (depreciation)

   27   41   (4)  —     1   (3)
   


 


 


 


 


 


Ending assets under management

   1,299   1,223   1,115   1,023   1,093   1,093 
   


 


 


 


 


 


BlackRock Liquidity Funds

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   1,233   11,374   (4,589)  (635)  2,921   (2,303)

Market depreciation

   —     (8)  —     —     —     —   
   


 


 


 


 


 


Ending assets under management

   47,087   58,453   53,864   53,229   56,150   56,150 
   


 


 


 


 


 


Closed End

                         

Beginning assets under management

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

Net subscriptions

   433   520   175   284   993   1,452 

Acquisitions

   —     —     220   —     —     220 

Market appreciation (depreciation)

   229   (5)  30   151   18   199 
   


 


 


 


 


 


Ending assets under management

   14,895   15,410   15,835   16,270   17,281   17,281 
   


 


 


 


 


 


Other Commingled Funds

                         

Beginning assets under management

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

Net subscriptions

   92   1,124   531   482   68   1,081 
   


 


 


 


 


 


Ending assets under management

   918   2,042   2,573   3,055   3,123   3,123 
   


 


 


 


 


 


Total Mutual Funds

                         

Beginning assets under management

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

Net subscriptions (redemptions)

   1,346   12,961   (4,417)  (510)  3,929   (998)

Acquisitions

   —     —     9,696   89   —     9,785 

Market appreciation

   349   368   30   454   747   1,231 
   


 


 


 


 


 


Ending assets under management

  $80,504  $93,833  $99,142  $99,175  $103,851  $103,851 
   


 


 


 


 


 


- 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 September 30, 2005 as compared with the three months ended September 30, 2004.

Revenue

Total revenue for the three months ended September 30, 2005 increased $129.8 million, or 76%, to $300.8 million, compared with $171.0 million for the three months ended September 30, 2004. Investment advisory and administration fees increased $107.1 million, or 73%,to $254.6 million for the three months ended September 30, 2005, compared with $147.5 million for the three months ended September 30, 2004. The increase in investment advisory and administration fees was the result of increases in fees earned across all asset classes. Other income of $46.1 million increased $22.7 million, or 97%, for the three months ended September 30, 2005, compared with $23.4 million for the three months ended September 30, 2004, primarily due to property management fees earned on real estate accounts assumed in the SSR acquisition, increased sales ofBlackRock Solutionsproducts and services and higher distribution fees earned onBlackRock Funds.

   Three months ended
September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Investment advisory and administration fees:

                

Mutual funds

  $81,823  $54,073  $27,750  51.3%

Separate accounts

   172,818   93,482   79,336  84.9 
   

  

  

  

Total investment advisory and administration fees

   254,641   147,555   107,086  72.6 

Other income

   46,166   23,444   22,722  96.9 
   

  

  

  

Total revenue

  $300,807  $170,999  $129,808  75.9%
   

  

  

  

Mutual fund advisory and administration fees increased $27.7 million, or 51%, to $81.8 million for the three months ended September 30, 2005, compared with $54.1 million for the three months ended September 30, 2004. The increase in mutual fund revenue was primarily the result of increases inBlackRock Funds revenue and closed-end fund revenue of $20.5 million and $5.2 million, respectively. The increase inBlackRock Fundsrevenue was primarily due to the merger of SSR’s mutual funds intoBlackRock Funds, contributing to an increase of approximately $9.6 billion, or 59%, in average AUM inBlackRock Fundsduring the period as compared to the prior year. Closed-end fund revenue increased during the period as the result of a $2.4 billion increase in assets under management, which was primarily the result of closed-end fund launches since September 30, 2004.

Separate account revenue increased $79.3 million, or 85%, to $172.8 million for the three months ended September 30, 2005, compared with $93.5 million for the three months ended September 30, 2004. Separate account base fees increased $47.2 million, or 51%, to $140.1 million for the three months ended September 30, 2005, compared with $92.9 million for the three months ended September 30, 2004. Separate account base fees increased during the third 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 $40.8 billion, or 17%. Performance fees of $32.7 million for the three months ended September 30, 2005 increased $32.2 million compared with $0.5 million for the three months ended September 30, 2004. The increase in separate accounts performance fees reflected increased fees earned on the Company’s equity and fixed income hedge funds and real estate alternative investment products.

- 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 September 30, 2005 as compared with the three months ended September 30, 2004. (continued)

Revenue (continued)

Other income of $46.2 million for the three months ended September 30, 2005 primarily represents fees earned onBlackRock Solutions products and services of $28.9 million, property management fees of $8.9 million earned on real estate assets under management and distribution fees earned onBlackRock Funds of $3.5 million.

   Three months ended
September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Mutual fund revenue

                

BlackRock Funds

  $36,784  $16,289  $20,495  125.8%

Closed-End Funds

   23,128   17,978   5,150  28.6 

BlackRock Liquidity Funds

   21,171   19,508   1,663  8.5 

Other commingled funds

   740   298   442  148.3 
   

  

  

  

Total mutual fund revenue

   81,823   54,073   27,750  51.3 
   

  

  

  

Separate account revenue

                

Separate account base fees

   140,148   92,943   47,205  50.8 

Separate account performance fees

   32,670   539   32,131  NM 
   

  

  

  

Total separate account revenue

   172,818   93,482   79,336  84.9 
   

  

  

  

Total investment advisory and administration fees

   254,641   147,555   107,086  72.6 
   

  

  

  

Other income

   46,166   23,444   22,722  96.9 
   

  

  

  

Total revenue

  $300,807  $170,999  $129,808  75.9%
   

  

  

  


NM = Not meaningful

- 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 September 30, 2005 as compared with the three months ended September 30, 2004. (continued)

Expense

Total expense increased $27.8 million, or 14%, to $221.1 million in the third quarter of 2005, compared with $193.4 million during the third quarter of 2004. The increase was attributable to increases in compensation and benefits expense, exclusive of LTIP expense, general and administration expense, fund administration and servicing expense paid to third parties and amortization of intangible assets of $75.1 million, $22.3 million, $3.7 million and $2.3 million, respectively, partially offset by a decrease in LTIP expense of $75.6 million.

   Three months ended
September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Employee compensation and benefits

  $155,077  $155,556  $(479) (0.3)%

Fund administration and servicing costs

                

Affiliated

   4,250   4,227   23  0.5 

Unaffiliated

   7,747   4,050   3,697  91.3 

General and administration

   51,524   29,259   22,265  76.1 

Amortization of intangible assets

   2,540   283   2,257  NM 
   

  

  


 

Total expense

  $221,138  $193,375  $27,763  14.4%
   

  

  


 


NM = Not meaningful

Compensation and benefits expense decreased by $0.5 million for the quarter ended September 30, 2005 including a $75.6 million decline in LTIP expense. During the third quarter of 2004, management determined that full vesting of LTIP awards was probable and recorded a charge of $90.6 million reflecting LTIP expense from the beginning of the LTIP’s service period, January 1, 2002 through September 30, 2004, including related payroll taxes. Offsetting the decrease in LTIP expense was higher base compensation and benefits of $33.1 million due to increased staffing levels resulting from the SSR acquisition and business growth and increased incentive compensation of $34.4 million associated with higher performance fees and increased operating profits.

- 44 -


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 September 30, 2005 as compared with the three months ended September 30, 2004. (continued)

Expense (continued)

General and administration expense increased $22.3 million, or 76%, in the three months ended September 30, 2005 to $51.5 million, compared to $29.2 million for the three months ended September 30, 2004. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $12.3 million, occupancy expense of $3.6 million and other general and administration of $5.6 million. Marketing and promotional expense increased $12.3 million, or 157%, to $20.1 million, compared to $7.8 million for the three months ended September 30, 2004 primarily due to the Company’s mutual fund businesses and expanded institutional marketing efforts, particularly overseas. Occupancy costs for the three months ended September 30, 2005 totaled $9.6 million, representing a $3.5 million, or 59%, increase, from $6.1 million for the three months ended September 30, 2004. The increase in occupancy costs during the three months ended September 30, 2005 primarily reflected costs related to occupying 85,000 square feet of additional office space in New York during the first quarter of 2005 and costs related to properties assumed in the SSR acquisition. The $5.6 million, or 53%, increase in other general administration expense to $16.2 million for the three months ended September 30, 2005 compared to $10.6 million for the three months ended September 30, 2004 is primarily attributable to a $2.4 million increase in market data costs to support higher AUM levels and increased trading activities, $0.8 million in office related expenses and $0.7 million in increased professional fees primarily related to Sarbanes-Oxley Act compliance activities.

Fund administration and servicing expense paid to third parties increased $3.7 million in the third quarter to $7.7 million compared to $4.0 million for the third quarter 2004. The rise was due to increases in shareholder servicing fees related to new closed-end funds and additional assets associated with BlackRock Funds.

The $2.2 million increase in amortization of intangible assets to $2.5 million for the three months ended September 30, 2005, compared to $0.3 million for the three months ended September 30, 2004 reflects amortization of finite-lived management contracts acquired in the SSR acquisition.

   Three months ended
September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

General and administration expense:

                

Marketing and promotional

  $20,097  $7,823  $12,274  156.9%

Occupancy expense

   9,631   6,066   3,565  58.8 

Technology

   5,591   4,771   820  17.2 

Other general and administration

   16,205   10,599   5,606  52.9 
   

  

  

  

Total general and administration expense

  $51,524  $29,259  $22,265  76.1%
   

  

  

  

- 45 -


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 September 30, 2005 as compared with the three months ended September 30, 2004. (continued)

Operating Income and Net Income

Operating income was $79.7 million for the three months ended September 30, 2005, representing a $102.0 million increase compared with the three months ended September 30, 2004.

Non-operating income increased $13.7 million, or 242%, to $19.4 million for the three months ended September 30, 2005, as compared with the three months ended September 30, 2004. The increase was primarily due to increased investment related income from Company investments of $14.5 and employee deferred compensation of $2.2 in 2005, partially offset by interest expense associated with borrowings used to finance the cash portion of the SSR acquisition in 2005.

Income tax expense for the three months ended September 30, 2005 was $37.1 million, representing an effective tax rate of 37.4%, compared to an income tax benefit of $7.3 million for the third quarter of 2004.

Net income totaled $61.1 million for the three months ended September 30, 2005, compared with a net loss of $9.8 million for the three months ended September 30, 2004, representing an increase of $70.9 million.

- 46 -


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the nine months ended September 30, 2005 as compared with the nine months ended September 30, 2004.

Revenue

Total revenue for the nine months ended September 30, 2005 increased $285.6 million, or 53%, to $822.3 million, compared with $536.6 million for the nine months ended September 30, 2004. Investment advisory and administration fees increased $228.5 million, or 49%,to $698.4 million for the nine months ended September 30, 2005, compared with $469.9 million for the nine months ended September 30, 2004. The increase in investment advisory and administration fees was due to increases in fees earned on separate accounts of $164.5 million, or 54%, and fees earned on mutual funds of $63.9 million, or 39%. Other income of $123.9 million increased $57.2 million, or 86%, for the nine months ended September 30, 2005, compared with $66.7 million for the nine months ended September 30, 2004 primarily due to property management fees earned on real estate accounts assumed in the SSR acquisition, increased sales ofBlackRock Solutionsproducts and services and higher distribution fees earned onBlackRock Funds.

   Nine months ended
September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Investment advisory and administration fees:

                

Mutual funds

  $229,441  $165,500  $63,941  38.6%

Separate accounts

   468,927   304,386   164,541  54.1 
   

  

  

  

Total investment advisory and administration fees

   698,368   469,886   228,482  48.6 

Other income

   123,910   66,748   57,162  85.6 
   

  

  

  

Total revenue

  $822,278  $536,634  $285,644  53.2%
   

  

  

  

Mutual fund advisory and administration fees increased $63.9 million, or 39%, to $229.4 million for the nine months ended September 30, 2005, compared with $165.5 million for the nine months ended September 30, 2004. The increase in mutual fund revenue was primarily the result of increases inBlackRock Funds revenue and closed-end fund revenue of $47.6 million and $11.9 million, respectively. The increase inBlackRock Fundsrevenue was primarily due to the merger of SSR’s mutual funds into theBlackRock Funds,which contributed an increase of approximately $7.2 billion, or 40%, to average AUM in theBlackRock Fundsduring the period as compared to the prior year. Closed-end fund revenue increased during the period as a result of a $2.4 billion increase in AUM, which was primarily the result of closed-end fund launches since September 30, 2004.

Separate account revenue increased $164.5 million, or 54%, to $468.9 million for the nine months ended September 30, 2005, compared with $304.4 million for the nine months ended September 30, 2004. Separate account base fees increased $117.8 million, or 43%, to $388.2 million for the nine months ended September 30, 2005, compared with $270.4 million for the nine months ended September 30, 2004. The growth in separate account base fees was 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 $40.8 billion, or 17%, since September 30, 2004. Performance fees of $80.8 million for the nine months ended September 30, 2005 increased $46.8 million, compared with $34.0 million for the nine months ended September 30, 2004. The increase in separate account performance fees primarily reflects positive performance in equity and fixed income hedge funds.

- 47 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Revenue (continued)

Other income of $123.9 million for the nine months ended September 30, 2005 primarily representsBlackRock Solutions products and services of $79.4 million, property management fees of $23.3 million earned on real estate equity accounts assumed in the SSR acquisition and distribution fees earned on theBlackRock Funds of $14.2 million.

The increase in other income of $57.2 million for the nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004 was primarily the result of real estate property management fees of $23.3 million, increased revenues of $20.3 million fromBlackRock Solutions products and services driven by new clients and distribution fees of $7.9 million earned on funds obtained in the SSR acquisition.

   

Nine months ended

September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Mutual fund revenue

                

BlackRock Funds

  $100,680  $53,128  $47,552  89.5%

Closed-End Funds

   64,120   52,252   11,868  22.7 

BlackRock Liquidity Funds

   62,707   59,281   3,426  5.8 

Other commingled funds

   1,934   839   1,095  130.5 
   

  

  

  

Total mutual fund revenue

   229,441   165,500   63,941  38.6 
   

  

  

  

Separate account revenue

                

Separate account base fees

   388,163   270,427   117,736  43.5 

Separate account performance fees

   80,764   33,959   46,805  137.8 
   

  

  

  

Total separate account revenue

   468,927   304,386   164,541  54.1 
   

  

  

  

Total investment advisory and administration fees

   698,368   469,886   228,482  48.6 
   

  

  

  

Other income

   123,910   66,748   57,162  85.6 
   

  

  

  

Total revenue

  $822,278  $536,634  $285,644  53.2%
   

  

  

  

- 48 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Expense

Total expense increased $167.5 million, or 39%, to $594.1 million in the nine months ended September 30, 2005, compared with $426.7 million in the nine months ended September 30, 2004. The increase was primarily attributable to increases in employee compensation and benefits of $109.8 million, or 36%, general and administration expense of $52.2 million, or 57%, fund administration and servicing expense paid to third parties of $8.8 million, or 84%, and amortization of intangible assets of $4.7 million, partially offset by the recognition of an impairment of the Company’s intangible assets of $6.1 million during the first quarter of 2004.

   

Nine months ended

September 30,


  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

Employee compensation and benefits

  $413,036  $303,243  $109,793  36.2%

Fund administration and servicing costs

                

Affiliated

   12,362   14,243   (1,881) (13.2)

Unaffiliated

   19,169   10,412   8,757  84.1 

General and administration

   144,089   91,921   52,168  56.8 

Amortization of intangible assets

   5,477   746   4,731  NM 

Impairment of intangible assets

   —     6,097   (6,097) (100.0)
   

  

  


 

Total expense

  $594,133  $426,662  $167,471  39.3%
   

  

  


 


NM= Not meaningful

- 49 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Expense (continued)

During the nine months ended September 30, 2005, employee compensation and benefits increased $109.8 million, or 36%, to $413.0 million, compared to $303.2 million for the nine months ended September 30, 2004. The increase in employee compensation and benefits was primarily attributable to increases in salaries and benefits and incentive compensation of $90.0 million and $59.0 million, respectively, partially offset by a $46.3 million decrease in LTIP costs, for which the Company initiated expense recognition during the third quarter of 2004. The increase of $90.0 million in salaries and benefits was primarily attributable to higher staffing levels associated with the SSR acquisition and business growth. The $59.0 million, or 55%, increase in incentive compensation is primarily attributable to operating income growth, higher performance fees earned on the Company’s alternative investment products and a $6.5 million acquisition-related bonus payment to continuing employees of BlackRock.

General and administration expense increased $52.2 million, or 57%, in the nine months ended September 30, 2005 to $144.1 million, compared to $91.9 million for the nine months ended September 30, 2004. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $24.3 million, occupancy expense of $8.7 million, technology related expense of $2.9 million and other general and administration of $16.2 million. Marketing and promotional expense increased $24.3 million to $50.0 million compared to $25.7 million for the period ended September 30, 2004 primarily due to increased marketing activities of $16.0 million associated with the Company’s institutional products and expanded international calling efforts, $5.4 million in amortization of deferred mutual fund commissions assumed in the SSR acquisition and increased institutional service fees of $2.8 million. Occupancy expense for the period ended September 30, 2005 totaled $26.3 million, representing an $8.7 million, or 49%, increase, from $17.6 million for the period ended September 30, 2004. The increase in occupancy expense during the period ended September 30, 2005 primarily reflects costs related to additional office space leased in New York during the first quarter of 2005 and space assumed in the SSR acquisition. During the period ended September 30, 2005, technology expense increased by $2.9 million, or 21%, to $16.9 million, compared to $13.9 million for the period ended September 30, 2004, primarily due to increased consulting expenses and additional depreciation on assets assumed in the SSR acquisition to support business growth. The $16.2 million, or 47%, increase in other general administration expense to $50.9 million in the period ended September 30, 2005, compared to $34.7 million for the period ended September 30, 2004 is primarily attributable to a $5.4 million increase in market data costs resulting from higher AUM levels and increased trading activities, $4.6 in office related expenses and $2.3 million in increased professional fees primarily related to SSR integration costs and Sarbanes-Oxley Act compliance activities.

The $4.7 million increase in amortization of intangible assets reflects amortization of management contracts acquired in the SSR acquisition. During the first quarter of 2004, in connection with the liquidation of several of the Company’s long-short equity hedge funds, the Company recognized a $6.1 million impairment charge representing the carrying value of the funds’ acquired management contract.

- 50 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Expense (continued)

   Nine months ended       
   September 30,

  Variance

 
   2005

  2004

  Amount

  %

 
(Dollar amounts in thousands)  (unaudited)       

General and administration expense:

                

Marketing and promotional

  $49,978  $25,663  $24,315  94.7%

Occupancy expense

   26,312   17,633   8,679  49.2 

Technology

   16,874   13,933   2,941  21.1 

Other general and administration

   50,924   34,692   16,232  46.8 
   

  

  

  

Total general and administration expense

  $144,088  $91,921  $52,167  56.8%
   

  

  

  

Operating Income and Net Income

Operating income increased $118.1 million, or 107%, to $228.1 million for the period ended September 30, 2005 as compared to $110.0 million for the period ended September 30, 2004. Non-operating income increased $4.2 million, or 16%, to $31.2 million for the period ended September 30, 2005, as compared to $27.0 million for the period September 30, 2004 as a result of a $9.6 million, or 35%, increase in investment income, partially offset by a $5.4 million increase in interest expense. The increase in investment income was primarily due to market appreciation on Company and deferred compensation investments and increased security gains in 2005, partially offset by the Company��s $12.2 million gain on the sale of Trepp LLC in April 2004 and $4.7 million of additional interest expense in 2005 associated with borrowings used to finance the SSR acquisition. Income tax expense was $95.7 million and $39.3 million, representing effective tax rates of 36.9% and 28.7%, for the periods ended September 30, 2005 and 2004, respectively. The increase in the Company’s effective tax rate was primarily attributable to a benefit of approximately $8.5 million recognized in the first quarter of 2004, associated with the resolution of an audit performed by New York State on the Company’s state income tax returns filed from 1998 through 2001.

Net income totaled $161.0 million for the nine months ended September 30, 2005 and includes the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of stock by PNC and expenses related to the SSR acquisition, of $22.9 million and $5.6 million, respectively. SSR acquisition costs consisted of certain compensation costs and professional fees. Compensation reflected in SSR acquisition costs represents acquisition-related bonus payments to continuing employees of BlackRock. In addition, net income of $93.4 million during the period ended September 30, 2004 included the after tax impact of the portion of LTIP awards to be funded by a capital contribution of stock by PNC of $46.7 million, New York State tax benefits and the impact of sale of Trepp LLC, discussed previously. Exclusive of these items, net income for the period ended September 30, 2005, as adjusted, increased $59.0 million, or 45%, compared to the period ended September 30, 2004.

- 51 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Liquidity and Capital Resources

BlackRock meets its working capital requirements primarily through cash generated by its operating activities. Net cash provided by the Company’s operating activities totaled $84.8 million for the period ended September 30, 2005, including a $149.5 million net settlement of the Company’s 2004 incentive compensation programs. BlackRock management expects that cash flows provided by operating activities will continue to serve as the principal source of working capital for the near future.

In January 2005, the Company closed its acquisition of SSR from MetLife, Inc. (“MetLife”) for approximately $237.4 million in cash and approximately 550,000 shares of BlackRock restricted class A common stock. Additional cash consideration, which, contingent on certain measures, could increase the purchase price by up to 25% may be paid over the next five years. The Company financed $150.0 million of the contingent purchase price with a bridge promissory note from Morgan Stanley Senior Funding, Inc. at an annual rate of 2.875%. The stock purchase agreement provides for an additional payment to MetLife on the first anniversary of closing of the SSR transaction (January 31, 2006) of up to $75 million contingent upon achieving specified AUM retention levels and run-rate revenue levels. 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 million, provided that one year anniversary revenue exceeds 120% of signing date revenue. The MetLife-sourced revenue payment is subject to a maximum of $45 million, provided that one year anniversary revenue exceeds 120% of signing date revenue. These payments decline to $20 million and $30 million, respectively, if one year anniversary revenue approximates 100% of signing date revenue levels. 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’s assignment. In addition, on the fifth anniversary of the closing of the transaction, MetLife could receive an additional payment up to a maximum of $10 million based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans. The Company currently maintains and generates sufficient cash flow to fully support payment of these contingent liabilities.

In February 2005, the Company issued $250.0 million aggregate principal amount of convertible debentures, due in 2035 and bearing interest at a rate of 2.625% per annum. The Company used a portion of the net proceeds from this issuance to retire the bridge promissory note and used the remainder of the net proceeds for general corporate purposes.

A wholly-owned subsidiary of the Company has a $200.0 million line of credit with a related party. Borrowings under the affiliated line of credit, if any, 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 September 30, 2005.

- 52 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Liquidity and Capital Resources (continued)

In connection with the SSR acquisition, the Company assumed approximately $287.8 million in liabilities, which consisted of $113.2 million related to SSR’s 2004 incentive compensation programs and severance and retention costs and secured borrowings of approximately $111.8 million. During 2004 and in January 2005, a subsidiary of SSR acquired approximately $112.2 million in real estate holdings, in preparation for a commingled fund launch, using advances under a line of credit and the assumption of a mortgage on one of the properties. During March 2005, the Company sold the properties to a sponsored investment fund, upon the fund’s closing, and retired all related borrowings.

Net cash used in investing activities was $161.2 million for the period ended September 30, 2005, primarily consisting of $247.2 million in cash consideration paid in the SSR acquisition and $42.9 million in capital expenditures primarily representing build-out costs associated with Company’s new office space in New York partially offset by the sale of real estate held for sale for $112.2 million.

Net cash provided by financing activities was $18.3 million for the period ended September 30, 2005 and primarily represented $245.0 million in net proceeds from the offering of convertible debentures during the quarter, $14.0 million resulting from the exercise of employee stock options during the first nine months of 2005 and $8.0 million in subscriptions to sponsored investment funds consolidated by the Company. These amounts were partially offset by the payment of $57.5 million in dividends and $72.8 million in share repurchases. In January 2004, BlackRock’s Board of Directors approved a two million share repurchase program. Pursuant to the repurchase program, the Company may make repurchases from time to time, as market conditions warrant, in the open market or in privately negotiated transactions at the discretion of the Company’s management. The Company repurchased 472,000 shares under the program in open market transactions for approximately $39.8 million during the three months ended September 30, 2005 and is authorized to purchase an additional 181,000 shares under the program.

For the nine months ended September 30, 2005, free cash flow, defined as cash provided by operating activities ($84.8 million) less purchases of property and equipment ($42.9 million), decreased by $86.3 million to $41.9 million as compared to $128.2 million for the period ended September 30, 2004. The decrease in the Company’s free cash flow for the period ended September 30, 2005, compared to the same period in 2004, is primarily attributable to the settlement of compensation liabilities assumed in the SSR acquisition and an increased level of capital expenditures during 2005 primarily related to the build out of the Company’s new office space. These amounts were partially offset by increased cash basis net income for the period ended September 30, 2005 as compared to the period ended September 30, 2004.

Total capital at September 30, 2005 was $1.1 billion and was primarily comprised of stockholders’ equity and borrowings of $250 million.

- 53 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Contractual Obligations and Commercial Commitments

In February 2005, the Company issued $250 million aggregate principal amount of convertible debentures, due in 2035 and bearing interest at a rate of 2.625% per annum. The Company can first redeem the debentures, at par, in February 2010.

The Company leases its primary office space under agreements that expire through 2017. In connection with certain lease agreements, the Company is responsible for escalation payments.

In the ordinary course of business, BlackRock enters into contracts (purchase obligations) with third parties pursuant to which the third parties provide services to or on behalf of BlackRock. Purchase obligations represent executory contracts that are either noncancelable or cancelable with penalty. At September 30, 2005, the Company’s obligations primarily reflected shareholder servicing arrangements related to client investments in the BlackRock Closed-End Funds, subadvisory agreements and standard service contracts with third parties for portfolio, market data and office services.

In many of the contracts, BlackRock agrees to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.

In connection with the management contract acquired on May 15, 2000 associated with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc. (“Anthracite”), a BlackRock managed real estate investment trust, the Company recorded an $8.0 million liability using an imputed interest rate of 10%, the prevailing interest rate on the date of acquisition. For the three months and nine months ended September 30, 2005, the related expense was $0.1 million and $0.3 million, respectively. At September 30, 2005, the future commitment under the agreement is $5.0 million. If Anthracite’s management contract with BlackRock is terminated, not renewed or not extended for any reason other than cause, Anthracite would remit to the Company all future payments due under this obligation.

The Company has entered into a commitment to invest $15.1 million in Carbon Capital II, Inc., an alternative investment fund sponsored by BlackRock, of which $8.2 million remained unfunded at September 30, 2005.

On April 30, 2003, the Company purchased an investment manager of a hedge fund of funds for approximately $4.1 million in cash. Additionally, the Company has committed to purchase the remaining equity of the investment manager on March 31, 2008, subject to certain acceleration provisions. The purchase price of this remaining interest is performance-based and is not subject to a maximum, minimum or the continued employment of former employees of the investment manager with the Company. Based on the current performance of the investment manager, the Company’s obligation, if settled at September 30, 2005, would be approximately $5.2 million.

- 54 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Contractual Obligations and Commercial Commitments (continued)

Summary of Commitments (unaudited):

(Dollar amounts in thousands)

 

  Total

  2005

  2006

  2007

  2008

  2009

  Thereafter

Convertible Debentures

  $250,000  $—    $—    $—    $—    $—    $250,000

Lease Commitments

   243,209   5,141   20,657   20,525   20,370   20,651   155,865

Purchase Obligations

   18,105   5,472   7,511   4,387   735   —     —  

Investment Commitments

   8,230   8,230   —     —     —     —     —  

Acquired Management Contract

   5,000   —     1,000   1,000   1,000   1,000   1,000

Acquisition Forward Commitment

   5,244   —     —     —     5,244   —     —  
   

  

  

  

  

  

  

Total Commitments

  $529,788  $18,843  $29,168  $25,912  $27,349  $21,651  $406,865
   

  

  

  

  

  

  

In January 2005, the Company closed its previously announced acquisition of SSR from MetLife. Under the terms of the transaction, MetLife received at closing $237.4 million in cash and approximately 550,000 shares of BlackRock restricted class A common stock. Additional cash consideration could be paid over five years contingent upon certain measures. 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 million contingent upon the Company achieving specified AUM retention levels and run-rate revenue levels 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 million, provided that one year anniversary revenue exceeds 120% of signing date revenue. The MetLife-sourced revenue payment is subject to a maximum of $45 million, provided that one year anniversary revenue exceeds 120% of signing date revenue. These payments decline to $20 million and $30 million, respectively, if one year anniversary revenue approximates 100% of signing date levels. 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 million based upon the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans. These provisions were negotiated independently of the initial purchase price that was less than SSR’s enterprise value, as determined by the Company’s management in conjunction with an independent third party valuation services firm. The Company is unable to estimate the potential obligations under the contingent payments because it is unable to predict at this time what specific retention levels of run-rate revenue will be on the first anniversary of closing the SSR transaction, or what the Company’s retained AUM will be on the fifth anniversary of the closing date of the SSR transaction. As of September 30, 2005, no performance fees had been earned on the large institutional client account subject to a 32.5% contingent payment to MetLife.

SSR acted as investment manager for a synthetic collateralized credit default swap obligation. In connection with this transaction, SSR entered into a junior swap arrangement with a notional amount of approximately $16.7 million, providing credit protection to a portfolio of highly-rated asset-backed securities and corporate bonds. The fair value of the swap arrangement at September 30, 2005 was $3.1 million and is included in investments, other on the consolidated statement of financial condition.

- 55 -


PART I - FINANCIAL INFORMATION (continued)

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

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

Off Balance Sheet Arrangement

A synthetic collateralized credit default swap obligation is created 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 swap 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 credit default swap issued in the structure. As collateral manager for this specific synthetic collateralized credit default swap obligation (“Pillars”), the Company bears no risk beyond reputational risk contingent upon 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 $16.7 million, 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 ($16.7 million) and 25% of the structure’s residual balance at its scheduled termination date of December 23, 2009. The Company’s management has performed an 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, as amended, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. There was no income or loss recorded in the Company’s income statement related to this arrangement during the three or nine months ended September 30, 2005. Pursuant to SFAS No. 133, as amended, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. At September 30, 2005, the fair value of the Pillars credit default swap was $3.1 million.

- 56 -


PART I - FINANCIAL INFORMATION (continued)

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

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Management considers the following accounting policies and estimates as critical to an understanding of BlackRock’s consolidated financial statements. A summary of additional accounting policies is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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 on holding the security. If BlackRock 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. Management’s conclusion that the Company holds significant influence over an issuer whose security was previously classified as an available for sale security has a significant impact on the Company’s net income due to the related accounting treatment. Under the equity method, the Company’s share of the investee’s net income is recorded in investment income (loss), while unrealized gains and losses on available for sale securities are recorded in the accumulated other comprehensive income or loss component of stockholders’ equity until the securities are sold.

Nonmarketable Equity Securities

Investments, other, 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) for alternative investment products and other income for operating joint ventures. If the Company does not hold significant influence over the investee’s operations, the cost method of accounting is used. Under the cost method of accounting, investment income is recognized as received or upon the sale of the security. Therefore, management’s conclusion that BlackRock holds significant influence over an issuer has a significant impact on the Company’s net income.

- 57 -


PART I - FINANCIAL INFORMATION (continued)

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

Critical Accounting Policies (continued)

Investments (continued)

Management periodically assesses impairment on investments to determine if market losses are other than temporary.

Several of the Company’s available for sale investments represent interests in collateralized debt obligations for which the Company acts as collateral manager. Management reviews cash flow estimates throughout the life of each collateralized debt obligation to determine if an impairment charge should be taken through current earnings. If the current estimate of future cash flows (taking into account both timing and amount) is less than the last estimate, an impairment is recognized as the excess of the carrying amount over the fair value of the investment.

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.

Income Taxes

The Company accounts for income taxes under the liability method prescribed by Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the carrying amount of existing assets and liabilities and their respective tax bases.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation generally is provided on the straight-line method over the estimated useful lives of the various classes of property and equipment. Accelerated methods are used for income tax purposes. Leasehold improvements are amortized using the straight-line method over their estimated useful lives or lease terms, whichever is shorter. A change in the estimated useful life could have a significant impact on the Company’s depreciation expense (approximately $5.4 million and $16.9 million for the three and nine months ended September 30, 2005) due to the concentration of the Company’s property and equipment in relatively short-lived assets (generally with useful lives of three to five years). A summary of the estimated useful lives used, by asset class, is included in note 4 in the Notes to the Consolidated Financial Statements included in the Company’s 2004 Annual Report on Form 10-K.

- 58 -


PART I - FINANCIAL INFORMATION (continued)

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

Critical Accounting Policies (continued)

Revenue Recognition

Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value 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 incentive allocations from alternative investment products and certain separate accounts. These performance fees are earned upon attaining specified investment return thresholds. Such fees are recorded upon completion of measurement period.

BlackRock provides a variety of risk management, investment analytic and investment system services to customers, which include insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, Real Estate Investment Trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand nameBlackRock Solutions and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned forBlackRock Solutions services are either based on pre-determined percentages of the market value of assets subject to the services or on fixed monthly or quarterly payments. The fees earned on risk management, investment analytic and investment system assignments are recorded as other income in the consolidated statements of operations.

- 59 -


PART I - FINANCIAL INFORMATION (continued)

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

Critical Accounting Policies (continued)

Intangible Assets

At September 30, 2005, the carrying amounts of the Company’s intangible assets are as follows:

Goodwill

  $189,814

Management contracts acquired:

    

Indefinite life

   239,828

Definite life

   62,045

Other

   23
   

Total goodwill and intangible assets

  $491,710
   

Definite-lived management contracts are amortized over their expected useful lives, which, at September 30, 2005, ranged from one to twenty years. Management reassesses these lives each quarter based on historical attrition rates and other events and circumstances that may influence these rates in the future. Significant judgment is required to estimate the period that these assets will contribute to the Company’s cash flows and the pattern over which these assets will be consumed. A change in the remaining useful life of any of these assets could have a significant impact on the amount of the Company’s amortization expense ($2.5 million and $5.5 million for the three and nine months ended September 30, 2005). The Company assesses each of its indefinite-lived management contracts for impairment at least annually by comparing its carrying value to its projected undiscounted cash flows. If a contract’s carrying value exceeds its projected undiscounted cash flows, an impairment charge, measured on a discounted cash flow basis, is recorded in the Company’s consolidated statement of operations.

- 60 -


PART I - FINANCIAL INFORMATION (continued)

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

Critical Accounting Policies (continued)

Intangible Assets (continued)

Indefinite-lived management contracts are not amortized because management has concluded that these contracts will contribute to the Company’s future cash flows for an indefinite period of time. Each quarter, management assesses whether events and circumstances have occurred that indicate these contracts might have a definite life. The carrying amount of each indefinite-lived management contract is tested at least annually, or at such time that management concludes the assets no longer have an indefinite life, by comparing the carrying amount of each asset to its fair value. Fair value of indefinite-lived management contracts is primarily based on discounted cash flow analysis. Management’s valuation analysis reflects assumptions of the growth of the assets, discount rates and other factors. Changes in the estimates used in these valuations could materially affect the impairment conclusion. Impairment would be recognized for indefinite lived management contracts if the asset’s carrying value exceeds its fair value.

Related Party Transactions

The Company provides investment advisory and administration services toBlackRock Funds, theBlackRock Liquidity Funds, the BlackRock Closed-End Funds and other funds.

Revenues for services provided to these are as follows:

   Three months ended
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

(Dollar amounts in thousands)  (unaudited)

Investment advisory and administration fees:

                

BlackRock Open-End Funds:

                

PNC

  $7,333  $7,185  $20,789  $25,347

Other

   29,451   9,104   79,890   27,781

BlackRock Closed-End Funds - Other

   23,127   17,978   64,120   52,252

BlackRock Liquidity Funds

                

PNC

   4,598   3,817   12,536   10,025

Other*

   16,573   15,691   50,171   49,256

STIF - PNC

   222   264   660   796

Other

   519   34   1,275   43
   

  

  

  

   $81,823  $54,073  $229,441  $165,500
   

  

  

  


*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.

- 61 -


PART I - FINANCIAL INFORMATION (continued)

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

Related Party Transactions (continued)

Revenues for such services are as follows:

   Three months ended
September 30,


  Nine months ended
September 30,


   2005

  2004

  2005

  2004

(Dollar amounts in thousands)  (unaudited)

Separate accounts:

                

MetLife

  $14,160  $—    $37,527  $—  

Nomura

   2,194   2,237   6,699   6,542

PNC

   1,468   1,588   4,508   5,026

Private client services - PNC

   1,383   1,387   4,149   4,271

Alternative investments - PNC

   664   124   988   330

Other income-risk management - PNC

   1,456   1,250   3,941   3,750
   

  

  

  

   $21,325  $6,586  $57,812  $19,919
   

  

  

  

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 September 30, 2005 and 2004 totaled approximately $17.1 million and $15.6 million, respectively, and, for the nine months ended September 30, 2005 and 2004 totaled approximately $47.6 million and $49.5 million, respectively.

PNC subsidiaries and PNC-related accounts had the following investments in BlackRock sponsored mutual funds or separate accounts.

   September 30,

   2005

  2004

(Dollar amounts in millions)  (unaudited)

BlackRock Open-End Funds

  $7,053  $7,396

BlackRock Liquidity Funds

   11,845   10,234

STIF

   644   748

Separate accounts

   10,307   11,541
   

  

   $29,849  $29,919
   

  

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 inBlackRock 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.

- 62 -


PART I - FINANCIAL INFORMATION (continued)

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

Related Party Transactions (continued)

MetLife provided general and administrative 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, BlackRock 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 $200.0 million 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 $92.5 million, following the sale of related real estate to a newly formed investment fund. Borrowings under the affiliated line of credit, if any, bear interest at LIBOR plus 1.5%. At September 30, 2005, Realty had no advances outstanding under the line of credit.

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

   

Three months ended

September 30,


  

Nine months ended

September 30,


   2005

  2004

  2005

  2004

(Dollar amounts in thousands)  (unaudited)

Fund administration and servicing costs

  $4,250  $4,227  $12,362  $14,243

General and administration

   2,300   1,082   6,577   3,332

General and administration-consulting

   450   399   2,958   3,485
   

  

  

  

   $7,000  $5,708  $21,897  $21,060
   

  

  

  

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 approximately $15.4 million and $3.0 million at September 30, 2005 and December 31, 2004, respectively, which primarily reflects investment and administration services provided to MetLife, Nomura, PNC subsidiaries and affiliates.

Receivable from affiliates was approximately $5.3 million and $4.7 million at September 30, 2005 and December 31, 2004, respectively. These amounts primarily represent additional payments to MetLife on the acquisition of SSR and deferred income taxes receivable.

- 63 -


PART I - FINANCIAL INFORMATION (continued)

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

Related Party Transactions (continued)

Included in other assets are advances to employees under the deferred compensation plan sponsored by SSR prior to 2003 (“SSR Old Plan”) and Company-owned life insurance policies, underwritten by MetLife, which are used to fund obligations under the SSR deferred compensation plan (“SSR New Plan”) totaling $3.1 million and $12.9 million, respectively. The terms of the SSR Old Plan and the SSR New Plan are included in note 8 to the consolidated financial statements in this Quarterly Report on Form 10-Q.

Accounts payable and accrued liabilities-affiliates were approximately $29.8 million and $3.6 million at September 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.

Interest Rates

The value of assets under management is affected by changes in interest rates. Since BlackRock derives the majority of its revenues from investment advisory fees based on the value of assets under management, BlackRock’s revenues may be adversely affected by changing interest rates. In a period of rising interest rates, BlackRock’s assets under management would likely be negatively affected by reduced asset values and increased redemptions.

Inflation

The majority of BlackRock’s revenues are based on the value of assets under management. There is no predictable relationship between the rate of inflation and the value of assets under management by BlackRock, except as inflation may affect interest rates. BlackRock does not believe inflation will significantly affect its compensation costs, as they are substantially variable in nature. However, the rate of inflation may affect BlackRock’s expenses such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect BlackRock’s results of operations by reducing BlackRock’s assets under management, revenues or otherwise.

Forward LookingForward-looking Statements

This report, and other statements that BlackRock may make, including statements about the benefits of the transaction with Merrill Lynch, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, with respect to BlackRock’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “intend,“current,” “intention,” “estimate,” “position,” “target,” “mission,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “objective,” “plan,” “aspiration,” “outlook,” “outcome,” “continue,” “remain,” “maintain,” “strive,“sustain,“trend” and variations of such words“seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

BlackRock cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and BlackRock assumes no duty to, and does not undertake to, update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

- 64 -


PART I - FINANCIAL INFORMATION (continued)

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

Forward Looking Statements (continued)

In addition to factors previously disclosed in BlackRock’s Securities and Exchange Commission (the “SEC”)SEC reports and those identified elsewhere in this quarterly report, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s advised or sponsored investment products, andincluding its separately managed accounts;accounts and the MLIM business pending completion of the MLIM transaction; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions andor divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or PNC; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and global financial and capital markets, specific industries, and BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in foreign currency exchange rates, which may adversely affect the value of advisory fees earned by BlackRock; and (14) the impact of changes to tax legislation and, generally, the tax position of the Company.Company; (15) BlackRock’s success in maintaining the distribution of its products; (16) BlackRock’s ability to complete the Merrill Lynch Transaction; (17) BlackRock’s ability to successfully integrate the MLIM business with its existing business; and (18) the ability of BlackRock to effectively manage the former MLIM assets along with its historical assets under management.

-13-


PART I — FINANCIAL INFORMATION (continued)

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

 

Overview

BlackRock is one of the largest publicly traded investment management firms in the United States with $463.1 billion of AUM at March 31, 2006. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and alternative investment separate accounts and mutual funds, including theBlackRock Funds and theBlackRock 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 PNC, which is one of the nation’s largest diversified financial services organizations operating businesses engaged in retail banking, corporate and institutional banking, asset management and global fund processing services. As of March 31, 2006, PNC indirectly owned approximately 69% of BlackRock.

The following table summarizes BlackRock’s Annual Report on Form 10-Koperating performance for each of the yearthree months ended March 31, 2006 and 2005 and December 31, 2004 and BlackRock’s subsequent reports filed with the SEC, accessible on the SEC’s website athttp://www.sec.govand on BlackRock’s website athttp://www.blackrock.com, discuss these factors2005:

BlackRock, Inc.

Financial Highlights

(Dollar amounts in more detail and identify additional factors that can affect forward-looking statements.thousands, except share data)

(unaudited)

   Three months ended  Variance vs. 
   March 31,  December 31,  March 31, 2005  December 31, 2005 
   2006  2005  2005  Amount  %  Amount  % 

Total revenue

  $395,660  $250,083  $369,107  $145,577  58.2% $26,552  7.2%

Total expense

  $295,633  $183,501  $256,713  $112,132  61.1% $38,921  15.2%

Operating income(a)

  $100,027  $66,582  $112,394  $33,445  50.2% $(12,369) (11.0)%

Operating margin (a)

   25.3%  26.6%  30.5%    

Net income(b)

  $70,862  $46,536  $72,919  $24,326  52.3% $(2,057) (2.8)%

Diluted earnings per share (b)

  $1.06  $0.70  $1.09  $0.36  51.4% $(0.03) (2.8)%

Average diluted shares outstanding

   66,731,560   66,880,713   66,914,279   (149,153) (0.2)%  (182,719) (0.3)%

Assets under management ($ in millions)

  $463,060  $391,328  $452,682  $71,732  18.3% $10,378  2.3%

 

- 6514 -


PART I - FINANCIAL INFORMATION (continued)

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

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

(a)While BlackRock reports its financial results on a GAAP basis, management believes that evaluating its ongoing operating results may not be as useful if investors are limited to reviewing only GAAP-basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations, and for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

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 unaffiliated 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 
   March 31,  December 31, 
   2006  2005  2005 

Operating income, GAAP basis

  $100,027  $66,582  $112,394 

Non-GAAP adjustments:

    

Fee sharing payment

   34,450   —     —   

PNC LTIP funding obligation

   11,676   11,736   12,292 

MLIM transaction costs

   6,579   —     —   

Appreciation (depreciation) on deferred compensation plans

   4,542   2,098   (19)

SSR acquisition costs

   —     8,873   —   
             

Operating income, as adjusted

   157,274   89,289   124,667 
             

Revenue, GAAP basis

   395,660   250,083   369,107 

Non-GAAP adjustments:

    

Fund administration and servicing costs

   (10,374)  (9,109)  (11,340)

Reimbursable property management compensation

   (5,598)  (4,059)  (6,595)
             

Revenue used for operating margin measurement, as adjusted

  $379,688  $236,915  $351,172 
             

Operating margin, GAAP basis

   25.3%  26.6%  30.5%
             

Operating margin, as adjusted

   41.4%  37.7%  35.5%
             

Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of management’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. The 2006 fee sharing payment has been excluded because it represents a non-recurring payment (based upon a performance fee) pursuant to the SSR acquisition agreement. The portion of the BlackRock Long-Term Retention and Incentive Plan (“LTIP”) expense associated with awards to be met by the distribution to participants of shares of BlackRock stock currently held by PNC has been excluded because, exclusive of the potential impact related to LTIP participants’ put options, these charges will not impact BlackRock’s book value. Compensation expense associated with appreciation on assets related to BlackRock’s deferred compensation plans has been excluded because investment returns on these assets reported in non-operating income, net of the related impact on compensation expense, result in a nominal impact on net income. MLIM transaction costs consist of compensation costs and professional fees incurred in 2006 related to the pending MLIM transaction. SSR acquisition costs consist of compensation costs and professional fees incurred in 2005.

Fund administration and servicing costs have been excluded from revenue used for operating margin measurement, as adjusted, because the Company receives offsetting revenue and expense for these services. Reimbursable property management compensation represents compensation and benefits paid to 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.

- 15 -


PART I — FINANCIAL INFORMATION (continued)

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

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

(b)While BlackRock reports its financial results on a GAAP basis, management believes that evaluating the Company’s ongoing operating results may not be as useful if investors are limited to reviewing only GAAP-basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations, and for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

   Three months ended
   March 31,  

December 31,

2005

   2006  2005  

Net income, GAAP basis

  $70,862  $46,536  $72,919

Non-GAAP adjustments, net of tax

      

PNC’s LTIP funding requirement

   7,356   7,394   7,744

MLIM transaction costs

   4,145   —     —  

SSR acquisition costs

   —     5,590   —  
            

Net income, as adjusted

  $82,363  $59,520  $80,663
            

Diluted weighted average shares outstanding

   66,731,560   66,880,713   66,914,279
            

Diluted earnings per share, GAAP basis

  $1.06  $0.70  $1.09
            

Diluted earnings per share, as adjusted

  $1.23  $0.89  $1.21
            

Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRock’s profitability and financial performance. The portion of 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, exclusive of the potential impact related to LTIP participants’ put options, these charges will not impact BlackRock’s book value. SSR acquisition costs consist of compensation costs and professional fees in 2005. Compensation reflected in this amount represents direct performance incentives paid to SSR employees assumed 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 the current period’s operations. MLIM transaction costs consist of compensation costs and professional fees incurred in 2006 in conjunction with the pending MLIM transaction. Professional fees related to the SSR acquisition and the MLIM transaction reflected in GAAP net income have been deemed non-recurring by management and 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.

- 16 -


PART I — FINANCIAL INFORMATION (continued)

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

Overview (continued)

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 pre-determined percentages of the market value of AUM or, in the case of certain real estate equity separate accounts, net operating income generated by the underlying properties, and are affected by changes in AUM, 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 (including dividend reinvestment), withdrawals of assets from, and termination of, client accounts and purchases and redemptions of mutual fund shares. Market appreciation or depreciation 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 AUM. Performance fees generally are earned after a given period of time or when investment performance exceeds a contractual threshold, which may increase the volatility of BlackRock’s revenue and earnings.

BlackRock provides a variety of risk management, investment analytic and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts (“REITs”), commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand nameBlackRock Solutions® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned forBlackRock Solutions services are based on a number of factors including pre-determined percentages of the market value of assets subject to the services and the number of individual investment accounts, or fixed fees. Fees earned on risk management, investment analytic and investment system assignments are recorded as other income in the condensed consolidated statements of income.

Operating expense primarily consists of employee compensation and benefits, fund administration and servicing costs, general and administration expense and amortization of intangible assets. Employee compensation and benefits expense reflects salaries, deferred and incentive compensation, vesting of awards granted under the LTIP plan and related benefit costs. Fund administration and servicing costs reflect payments made to PNC-affiliated entities and third parties, primarily associated with the administration and servicing of client investments in theBlackRock Fundsand the BlackRock Closed-End Funds.

- 17 -


PART I — FINANCIAL INFORMATION (continued)

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

Assets Under Management

BlackRock, Inc.

Assets Under Management

   March 31,  December 31,  Variance vs. 
   2006  2005  2005  March 31, 2005  December 31, 2005 
(Dollar amounts in millions)           $  %  $  % 

All Accounts:

           

Fixed income

  $308,945  $265,291  $303,928  $43,654  16.5% $5,017  1.7%

Cash management

   86,484   74,083   86,128   12,401  16.7%  356  0.4%

Equity

   40,751   32,388   37,303   8,363  25.8%  3,448  9.2%

Alternative investment products

   26,880   19,566   25,323   7,314  37.4%  1,557  6.1%
                           

Total

  $463,060  $391,328  $452,682  $71,732  18.3% $10,378  2.3%
                           

Separate Accounts:

           

Fixed income

  $284,418  $239,912  $279,368  $44,506  18.6% $5,050  1.8%

Cash management

   9,654   7,307   7,275   2,347  32.1%  2,379  32.7%

Cash management-Securities lending

   8,073   6,791   5,294   1,282  18.9%  2,779  52.5%

Equity

   23,082   18,610   20,832   4,472  24.0%  2,250  10.8%

Alternative investment products

   26,880   19,566   25,323   7,314  37.4%  1,557  6.1%
                           

Total separate accounts

   352,107   292,186   338,092   59,921  20.5%  14,015  4.1%
                           

Mutual Funds:

           

Fixed income

   24,527   25,379   24,560   (852) (3.4)%  (33) (0.1)%

Cash management

   68,757   59,985   73,559   8,772  14.6%  (4,802) (6.5)%

Equity

   17,669   13,778   16,471   3,891  28.2%  1,198  7.3%
                           

Total mutual funds

   110,953   99,142   114,590   11,811  11.9%  (3,637) (3.2%)
                           

Total all accounts

  $463,060  $391,328  $452,682  $71,732  18.3% $10,378  2.3%
                           

AUM increased approximately $71.7 billion, or 18.3%, to $463.1 billion at March 31, 2006, compared with $391.3 billion at March 31, 2005. The growth in AUM was attributable to $57.8 billion in net subscriptions and $13.9 billion in market appreciation.

- 18 -


PART I — FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

Separate Account Assets Under Management

AUM for separate accounts at March 31, 2006 increased $59.9 billion, or 20.5%, to $352.1 billion as compared with $292.2 billion at March 31, 2005, as a result of net subscriptions of $47.2 billion and market appreciation of $12.8 billion. Net subscriptions were primarily attributable to new fixed income client sales and increased fundings from existing fixed income clients of $38.9 billion, $4.4 billion from net new business in alternative products and $3.4 billion in net new business in cash management products as a result of customer reallocations of funds due to changes in prevailing economic policy. Market appreciation of $12.8 billion in separate accounts largely reflected appreciation on fixed income products of $5.6 billion due to current income and changes in market interest rates, appreciation in equity assets of $4.1 billion as equity markets improved during the twelve months ended March 31, 2006 and $2.9 billion of market appreciation on alternative investment products.

Mutual Fund Assets Under Management

The $11.8 billion increase in mutual fund AUM to $111.0 billion at March 31, 2006, compared with $99.1 billion at March 31, 2005, primarily reflected net subscriptions of $10.6 billion and market appreciation of $1.1 billion. During the year, net subscriptions inBlackRock Liquidity Funds, the BlackRock Closed-End Funds and other commingled funds totaled $7.4 billion, $1.8 billion and $1.5 billion, respectively, all of which was partially offset by net redemptions inBlackRock Global Series plc of $0.1 billion. Net new business inBlackRock Liquidity Fundswas primarily due to $10.6 billion of net subscriptions, driven by strong investment performance relative to competitors, and was partially offset by net redemptions attributable to increases in the Federal Funds rate, resulting in a temporary yield advantage for direct investments in money market investments versus mutual funds during that period. The increase in AUM of $1.8 billion in the BlackRock Closed-End Funds primarily reflects new funds launched since March 31, 2005, partially offset by term trust maturities. Net subscriptions in other commingled funds resulted from the continued growth of an enhanced cash management strategy product launched in 2004. Market appreciation of $1.1 billion in mutual funds largely reflected appreciation in theBlackRock Funds of $1.0 billion as equity markets improved during the twelve months ended March 31, 2006.

- 19 -


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 AUM for each of the three months ended March 31, 2006 and 2005 and December 2005. Prior year financial information reflects certain reclassifications to conform to the current year presentation.

BlackRock, Inc.

Component Changes in Assets Under Management

(Dollar amounts in millions)

(Unaudited)

   Three months ended             
   March 31,  

December 31,

2005

  Variance vs. 
   2006  2005   March 31, 2005  December 31, 2005 
            $  %  $  % 

All Accounts:

        

Beginning assets under management

  $452,682  $341,760  $427,837  $110,922  32.5% $24,845  5.8%

Net subscriptions

   7,719   105   23,743   7,614  NM   (16,024) (67.5)%

Acquisitions

   —     49,877   —     (49,877) (100.0)%  —    NM 

Market appreciation (depreciation)

   2,659   (414)  1,102   3,073  NM   1,557  141.3%
                       

Ending assets under management

  $463,060  $391,328  $452,682  $71,732  18.32% $10,378  2.3%
                       

Percent change in AUM from net subscriptions and acquisitions

   74.4%  100.8%  95.6%    

Separate Accounts:

        

Beginning assets under management

  $338,092  $247,927  $323,986  $90,165  36.4% $14,106  4.4%

Net subscriptions

   12,286   4,522   11,979   7,764  171.7%  307  2.6%

Acquisitions

   —     40,181   —     (40,181) (100.0)%  —    NM 

Market appreciation (depreciation)

   1,729   (444)  2,127   2,173  (489.4)%  (398) (18.7)%
                       

Ending assets under management

   352,107   292,186  $338,092   59,921  20.5%  14,015  4.1%
                       

Mutual Funds:

        

Beginning assets under management

   114,590   93,833   103,851   20,757  22.1%  10,739  10.3%

Net subscriptions (redemptions)

   (4,567)  (4,417)  11,764   (150) (3.4)%  (16,331) (138.8)%

Acquisitions

   —     9,696   —     (9,696) (100.0)%  —    NM 

Market appreciation (depreciation)

   930   30   (1,025)  900  NM   1,955  (190.7)
                       

Ending assets under management

   110,953   99,142   114,590   11,811  11.9%  (3,637) (3.2)%
                       

Total All Accounts

  $463,060  $391,328  $452,682  $71,732  18.3% $10,378  2.3%
                       

NM – Not Meaningful

- 20 -


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)

   2006  2005 
   March 31,  December 31,  September 30,  June 30,  March 31, 

Separate Accounts

      

Fixed Income

      

Beginning assets under management

  $279,368  $264,704  $258,411  $239,912  $216,070 

Net subscriptions

   5,892   13,288   6,891   12,855   4,906 

Acquisitions

   —     —     —     —     20,005 

Market appreciation (depreciation)

   (842)  1,376   (598)  5,644   (1,069)
                     

Ending assets under management

   284,418   279,368   264,704   258,411   239,912 
                     

Alternative Investment Products

      

Beginning assets under management

   25,323   25,483   22,768   19,566   8,202 

Net subscriptions (redemptions)

   861   (326)  1,692   2,204   462 

Acquisitions

   —     —     —     —     10,557 

Market appreciation

   696   166   1,023   998   345 
                     

Ending assets under management

   26,880   25,323   25,483   22,768   19,566 
                     

Equity

      

Beginning assets under management

   20,832   19,789   18,525   18,610   9,397 

Net subscriptions (redemptions)

   438   504   (203)  (376)  (107)

Acquisitions

   —     —     —     —     9,061 

Market appreciation

   1,812   539   1,467   291   259 
                     

Ending assets under management

   23,082   20,832   19,789   18,525   18,610 
                     

Cash Management

      

Beginning assets under management

   7,275   8,357   8,164   7,307   7,360 

Net subscriptions (redemptions)

   4,194   (1,127)  153   809   (632)

Acquisitions

   —     —     —     —     558 

Market appreciation

   63   45   40   48   21 
                     

Ending assets under management

   11,532   7,275   8,357   8,164   7,307 
                     

Cash Management-Securities lending

      

Beginning assets under management

   5,294   5,653   7,368   6,791   6,898 

Net subscriptions (redemptions)

   901   (359)  (1,715)  577   (107)
                     

Ending assets under management

   6,195   5,294   5,653   7,368   6,791 
                     

Total Separate Accounts

      

Beginning assets under management

   338,092   323,986   315,236   292,186   247,927 

Net subscriptions

   12,286   11,980   6,818   16,069   4,522 

Acquisitions

   —     —     —     —     40,181 

Market appreciation (depreciation)

   1,729   2,126   1,932   6,981   (444)
                     

Ending assets under management

  $352,107  $338,092  $323,986  $315,236  $292,186 
                     

- 21 -


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 (continued)

(Dollar amounts in millions)

(unaudited)

   2006  2005 
   March 31,  December 31,  September 30,  June 30,  March 31, 

Mutual Funds

      

Cash Management

      

Beginning assets under management

  $73,559  $62,703  $59,651  $59,985  $63,799 

Net (redemptions) subscriptions

   (4,802)  10,856   3,052   (334)  (4,023)

Acquisitions

   —     —     —     —     210 

Market depreciation

   —     —     —     —     (1)
                     

Ending assets under management

   68,757   73,559   62,703   59,651   59,985 
                     

Fixed Income

      

Beginning assets under management

   24,560   25,337   25,671   25,379   24,639 

Net subscriptions (redemptions)

   69   (458)  (82)  68   (139)

Acquisitions

   —     —     —     89   989 

Market (depreciation) appreciation

   (103)  (319)  (252)  135   (110)
                     

Ending assets under management

   24,526   24,560   25,337   25,671   25,379 
                     

Equity

      

Beginning assets under management

   16,471   15,811   13,853   13,778   5,395 

Net subscriptions (redemptions)

   166   1,366   959   (244)  (255)

Acquisitions

   —     —     —     —     8,497 

Market appreciation (depreciation)

   1,033   (706)  999   319   141 
                     

Ending assets under management

   17,670   16,471   15,811   13,853   13,778 
                     

Total Mutual Funds

      

Beginning assets under management

   114,590   103,851   99,175   99,142   93,833 

Net (redemptions) subscriptions

   (4,567)  11,764   3,929   (510)  (4,417)

Acquisitions

   —     —     —     89   9,696 

Market appreciation (depreciation)

   930   (1,025)  747   454   30 
                     

Ending assets under management

  $110,953  $114,590  $103,851  $99,175  $99,142 
                     

- 22 -


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)

   2006  2005 
   March 31,  December 31,  September 30,  June 30,  March 31, 

Mutual Funds

      

BlackRock Liquidity Funds

      

Beginning assets under management

  $66,386  $56,150  $53,229  $53,864  $58,453 

Net (redemptions) subscriptions

   (5,133)  10,236   2,921   (635)  (4,589)
                     

Ending assets under management

   61,253   66,386   56,150   53,229   53,864 
                     

BlackRock Funds

      

Beginning assets under management

   25,670   26,204   25,598   25,755   16,705 

Net subscriptions (redemptions)

   378   269   (122)  (549)  (430)

Acquisitions

   —     —     —     89   9,476 

Market appreciation (depreciation)

   755   (803)  728   303   4 
                     

Ending assets under management

   26,803   25,670   26,204   25,598   25,755 
                     

Closed-End Funds

      

Beginning assets under management

   17,599   17,281   16,270   15,835   15,410 

Net subscriptions

   39   536   993   284   175 

Acquisitions

   —     —     —     —     220 

Market appreciation (depreciation)

   162   (218)  18   151   30 
                     

Ending assets under management

   17,800   17,599   17,281   16,270   15,835 
                     

Other Commingled Funds

      

Beginning assets under management

   3,993   3,123   3,055   2,573   2,042 

Net subscriptions

   96   870   68   482   531 
                     

Ending assets under management

   4,089   3,993   3,123   3,055   2,573 
                     

BlackRock Global Series

      

Beginning assets under management

   942   1,093   1,023   1,115   1,223 

Net subscriptions (redemptions)

   53   (147)  69   (92)  (104)

Market appreciation (depreciation)

   13   (4)  1   —     (4)
                     

Ending assets under management

   1,008   942   1,093   1,023   1,115 
                     

Total Mutual Funds

      

Beginning assets under management

   114,590   103,851   99,175   99,142   93,833 

Net (redemptions) subscriptions

   (4,567)  11,764   3,929   (510)  (4,417)

Acquisitions

   —     —     —     89   9,696 

Market appreciation (depreciation)

   930   (1,025)  747   454   30 
                     

Ending assets under management

  $110,953  $114,590  $103,851  $99,175  $99,142 
                     

- 23 -


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 March 31, 2006 as compared with the three months ended March 31, 2005.

Revenue

   Three months ended
March 31,
  Variance 
(Dollar amounts in thousands)  2006  2005  Amount  % 

Investment advisory and administration fees:

        

Separate account revenue

        

Separate account base fees

  $147,601  $115,229  $32,372  28.1%

Separate account performance fees

   114,607   26,656   87,951  329.9%
              

Total separate account revenue

   262,208  $141,885   120,323  84.8%
              

Mutual fund revenue

        

BlackRock Funds

   36,235   29,040   7,195  24.8%

Closed-end Funds

   25,729   19,898   5,831  29.3%

BlackRock Liquidity Funds

   24,486   21,021   3,465  16.5%

Other Commingled Funds

   1,050   412   638  154.9%
              

Total mutual fund revenue

   87,500   70,371   17,129  24.3%
              

Total investment advisory and administration fees

   349,708  $212,256   137,452  64.8%

Other income

   45,952   37,827   8,125  21.5%
              

Total revenue

  $395,660  $250,083  $145,577  58.2%
              

Total revenue for the three months ended March 31, 2006 increased $145.6 million, or 58.2%, to $395.7 million, compared with $250.1 million for the three months ended March 31, 2005. Investment advisory and administration fees increased $137.5 million, or 64.8%,to $349.7 million for the three months ended March 31, 2006, compared with $212.3 million for the three months ended March 31, 2005. The increase in investment advisory and administration fees was the result of increases in fees earned across all asset classes as well as increased performance fees principally related to a product acquired in the SSR transaction.

- 24 -


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 March 31, 2006 as compared with the three months ended March 31, 2005. (continued)

Revenue (continued)

Investment Advisory and Administration Fees

Separate account revenue increased $120.3 million, or 84.8%, to $262.2 million for the three months ended March 31, 2006, compared with $141.9 million for the three months ended March 31, 2005. Separate account base fees increased $32.4 million, or 28.1%, to $147.6 million for the three months ended March 31, 2006, compared with $115.2 million for the three months ended March 31, 2005. Separate account base fees increased in the quarter ended March 31, 2006, primarily due to increased AUM of $47.2 billion, or 16.1%, related to net new subscriptions and an increase of $12.8 billion, or 5.1%, in AUM due to market appreciation. Performance fees of $114.6 million for the quarter ended March 31, 2006 increased $88.0 million compared with $26.7 million for the quarter ended March 31, 2005. The increase in separate account performance fees was primarily attributable to fees earned on a large institutional real estate equity account acquired in the SSR transaction.

Mutual fund advisory and administration fees increased $17.1 million, or 24.3%, to $87.5 million for the three months ended March 31, 2006, compared with $70.4 million for the three months ended March 31, 2005. The increase in mutual fund revenue was primarily the result of increases inBlackRock Funds revenue and closed-end fund revenue of $7.2 million and $5.8 million, respectively. The increase inBlackRock Fundsrevenue was primarily due to the merger of SSR’s mutual funds intoBlackRock Funds at the end of January 2005. Closed-end fund revenue increased $5.8 million, or 29.3%, during the period as the result of a $2.0 billion increase in AUM, primarily the result of four closed-end fund launches since March 31, 2005.

Other Income

Other income of $46.0 million for the quarter ended March 31, 2006 primarily represents fees earned onBlackRock Solutions products and services of $29.3 million, property management fees of $7.7 million (which represent direct reimbursement of the salaries of certain BlackRock Realty employees), fees for investment accounting services of $2.9 million and distribution fees earned onBlackRock Funds of $2.4 million.

The increase in other income of $8.1 million, or 21.5%, for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 was primarily the result of increased revenues of $2.7 million fromBlackRock Solutions products and services driven by new assignments and higher property management fees of $2.1 million.

- 25 -


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 March 31, 2006 as compared with the three months ended March 31, 2005. (continued)

Expense

   Three months ended
March 31,
  Variance 
(Dollar amounts in thousands)  2006  2005  Amount  % 

Expense:

        

Employee compensation and benefits

  $191,796  $126,944  $64,852  51.1%

Fund administration and servicing costs

   10,374   9,109   1,265  13.9%

Fee sharing payment

   34,450   —     34,450  NM 

General and administration

   56,984   46,167   10,817  23.4%

Amortization of intangible assets

   2,029   1,281   748  58.4%
                

Total expense

  $295,633  $183,501  $112,132  61.1%
                

NM – Not Meaningful

Total expense increased $112.1 million, or 61.1%, to $295.6 million for the three months ended March 31, 2006, compared with $183.5 million for the three months ended March 31, 2005. The increase was primarily attributable to increases in compensation and benefits, a fee sharing payment to MetLife related to the SSR acquisition and general and administration expense.

Employee Compensation and Benefits

Compensation and benefits expense increased by $64.9 million, or 51.1%, to $191.8 million, compared to $126.9 million for the three months ended March 31, 2005. The increase in employee compensation and benefits was primarily attributable to increases in incentive compensation and salaries and benefits of $41.0 million and $22.3 million, respectively. The $41.0 million, or 81.7%, increase in incentive compensation was primarily attributable to higher performance fees earned on the Company’s alternative investment products and operating income growth. The increase of $22.3 million in salaries and benefits was primarily attributable to higher staffing levels associated with business growth and includes $3.1 million related to MLIM integration costs.

- 26 -


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 March 31, 2006 as compared with the three months ended March 31, 2005. (continued)

Expense (continued)

General and administration expense and fee sharing payment

   Three months ended
March 31,
  Variance 
(Dollar amounts in thousands)  2006  2005  Amount  % 

General and administration expense:

        

Marketing and promotional

  $17,838  $14,127  $3,711  26.3%

Occupancy

   10,228   7,587   2,641  34.8%

Technology

   6,490   5,887   603  10.2%

Portfolio services

   4,671   2,793   1,878  67.2%

Other general and administration

   17,757   15,773   1,984  12.6%
              

Total general and administration expense

  $56,984  $46,167  $10,817  23.4%
              

Fee sharing payment

  $34,450  $0  $34,450  NM 
              

NM – Not Meaningful

General and administration expense increased $10.8 million, or 23.4%, in the three months ended March 31, 2006 to $57.0 million, compared to $46.2 million for the three months ended March 31, 2005. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $3.7 million, occupancy expense of $2.6 million, portfolio services expense of $1.9 million and other general and administration expense of $2.0 million.

Marketing and promotional expense increased $3.7 million, or 26.3%, to $17.8 million, compared to $14.1 million for the three months ended March 31, 2005 primarily due to increased marketing activities of $2.7 million related to domestic and international marketing efforts and increased institutional service fees of $0.8 million. Occupancy costs for the three months ended March 31, 2006 totaled $10.2 million, representing a $2.6 million, or 34.8%, increase, from $7.6 million for the three months ended March 31, 2005. The increase in occupancy costs during the quarter ended March 31, 2006 primarily reflects costs related to the expansion of corporate facilities related to business growth. Portfolio services costs increased by 67.2% to $4.7 million, related to supporting higher AUM levels and increased trading activities. Other general and administration costs increased by 12.6% to $17.8 million from $15.8 million, and included $3.5 million in professional fees related to the MLIM transaction.

During the first quarter 2006, BlackRock recorded a fee sharing payment of $34.5 million, representing a one-time estimated expense related to a product acquired in the SSR acquisition in January 2005.

- 27 -


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 March 31, 2006 as compared with the three months ended March 31, 2005. (continued)

Non-Operating Income

Non-operating income increased $5.3 million, or 68.5%, to $13.1 million for the quarter ended March 31, 2006 as compared to $7.8 million for the quarter ended March 31, 2005 primarily as a result of a $5.3 million, or 53.9%, increase in investment income. The increase in investment income was primarily due to market appreciation and increased investment returns on Company investments in 2006.

Income Taxes

Income tax expense was $41.6 million and $27.3 million, representing an effective tax rate of 37.0% for the quarters ended March 31, 2006 and 2005, respectively.

Net Income

Net income totaled $70.9 million for the three months ended March 31, 2006 and includes the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of BlackRock common stock by PNC and expenses related to the MLIM transaction, of $7.4 million and $4.1 million, respectively, after tax. MLIM transaction costs include professional fees and acquisition-related payments to continuing employees of BlackRock. In addition, net income of $46.5 million during the three months ended March 31, 2005 included the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of stock by PNC of $7.4 million and expenses related to the SSR acquisition of $5.6 million. SSR acquisition costs included acquisition-related payments to continuing employees of BlackRock and professional fees.

Liquidity and Capital Resources

Liquidity

BlackRock generally meets its working capital requirements through net cash generated by operating activities. Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues fromBlackRock Solutionsproducts and services, property management fees, mutual fund distribution fees and earnings on the Company’s investments. BlackRock primarily uses its operating cash to pay compensation and benefits, fund administration and servicing costs, general and administration expenses, interest on the Company’s long-term debt, capital expenditures and dividends on BlackRock’s common stock.

Cash used in the Company’s operating activities totaled $62.0 million for the quarter ended March 31, 2006, and included payments of approximately $237.1 million related to the Company’s 2005 incentive compensation programs. BlackRock management expects that cash flows provided by operating activities will continue to serve as the principal source of working capital for the near future.

- 28 -


PART I — FINANCIAL INFORMATION (continued)

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

Liquidity and Capital Resources (continued)

Capital Resources

Net cash used in investing activities was $39.9 million during the quarter ended March 31, 2006, primarily consisting of $41.4 million related to the purchase of several seed investments and $14.6 million in capital expenditures primarily in computer hardware and software as a result of business growth, partially offset by the sale of certain investments of $16.1 million.

Net cash used in financing activities was $16.4 million during the quarter ended March 31, 2006, primarily representing the payment of $26.9 million in dividends, partially offset by $6.1 million in additions to minority interest for entities consolidated by the Company.

As a result of the agreement with Merrill Lynch, holders of the Company’s convertible debentures due in 2035 (the “Debentures”) may have the right to convert their Debentures at any time from and after the date which is 15 days prior to the anticipated effective date of the contemplated transaction with Merrill Lynch until 15 days after the actual date of such transaction. The Company’s management does not believe this conversion will result in a significant cash flow impact since, as of April 30, 2006, the Debentures were trading, and are expected to continue trading, above the conversion value of the Debentures.

At March 31, 2006, long-term debt, including current maturities, was $253.8 million. Debt service requirements are $6.9 million in 2006 and 2007, $6.8 million in 2008 and $6.7 million in 2009 and 2010.

- 29 -


PART I — FINANCIAL INFORMATION (continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

In the normal course of its business, BlackRock is primarily exposed to the risks of securitiesequity market price risk and interest rate fluctuations.

risk.

SecuritiesEquity Market Price Risk

BlackRock’s investments consist primarily ofBlackRock funds,Funds, private investment funds and debt securities. Occasionally, BlackRock invests in new mutual funds or advisory accounts (seed investments) sponsored by BlackRock in order to provide investable cash to the new mutual fund or advisory account to establish a performance history. In certain cases, BlackRock maintains a controlling interest in a sponsored investment fund and the underlying securities are reflected on the Company’s statementstatements of financial conditions. As of September 30, 2005, the carrying value of seed investments was $153.7 million.condition. These investments expose BlackRock to either equity price risk or interest rate risk dependent upondepending on the underlying securities portfolio of each investment fund. BlackRock generally does not generally hold derivative securities to hedge its investments. The following table summarizes the fair values of the investments exposed to equity price risk and provides a sensitivity analysis of the estimated fair values of those investments, assuming a 10% increase or decrease in equity prices:

   Fair Value

  Fair value
assuming 10%
increase in
market price


  Fair value
assuming 10%
decrease in
market price


September 30, 2005

            

Mutual funds

  $21,789  $23,968  $19,610

Equity securities

   19,819   21,801   17,837
   

  

  

Total investments, trading

   41,608   45,769   37,447
   

  

  

Mutual funds

   8,166   8,983   7,349
   

  

  

Total investments, available for sale

   8,166   8,983   7,349
   

  

  

Other

            

Cost method

   1,125   1,238   1,013

Fair value

   32,489   35,738   29,240

Equity method

   69,802   76,782   62,822
   

  

  

Total investments, other

   103,416   113,758   93,075
   

  

  

Total investments

  $153,190  $168,510  $137,871
   

  

  

December 31, 2004

            

Mutual funds

  $15,688  $17,257  $14,119

Equity securities

   9,385   10,324   8,447
   

  

  

Total investments, trading

   25,073   27,581   22,566
   

  

  

Mutual funds

   2,617   2,879   2,355
   

  

  

Total investments, available for sale

   2,617   2,879   2,355
   

  

  

Other

            

Equity method

   28,730   31,603   25,857

Fair value

   30,379   33,417   27,341
   

  

  

Total investments, other

   59,109   65,020   53,198
   

  

  

Total investments

  $86,799  $95,480  $78,119
   

  

  

- 66 -


PART I - FINANCIAL INFORMATION (continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)

 

March 31, 2006

  Fair Value  Fair value
assuming 10%
increase in
market price
  Fair value
assuming 10%
decrease in
market price

Mutual funds

  $21,394  $23,533  $19,255

Equity securities

   19,731   21,704   17,758
            

Total trading investments

   41,125   45,238   37,013
            

Mutual funds

   952   1,047   857

Other

   1,287   1,416   1,158
            

Total available for sale investments

   2,239   2,463   2,015
            

Other fund investments

   97,785   107,564   88,007

Deferred compensation plans

   24,917   27,409   22,425

Other

   1,178   1,296   1,060
            

Total other investments

   123,880   136,268   111,492
            

Total equity price risk on investments

  $167,244  $183,969  $150,520
            

December 31, 2005

         

Mutual funds

  $22,319  $24,551  $20,087

Equity securities

   18,425   20,268   16,583
            

Total trading investments

   40,744   44,818   36,670
            

Mutual funds

   766   843   689
            

Total available for sale investments

   766   843   689
            

Other fund investments

   84,843   93,327   76,359

Deferred compensation plans

   24,495   26,945   22,046

Other

   973   1,070   876
            

Total other investments

   110,311   121,342   99,280
            

Total equity price risk on investments

  $151,821  $167,004  $136,639
            

Securities Market Risk (continued)

At September 30, 2005, investments, trading and investments, other, with carrying values of approximately $21.8BlackRock’s deferred compensation plans comprise $21.4 million and $24.4$22.3 million of total trading investments, and $24.9 million and $24.5 million of total other investments, at March 31, 2006 and December 31, 2005, respectively, and reflect investments held by BlackRock with respect to senior employee elections under the Company’sBlackRock’s deferred compensation plans. Therefore, anyAny change in the carryingfair value of these investments is offset by a corresponding change in the related deferred compensation liability.

 

- 30 -


PART I — FINANCIAL INFORMATION (continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)

Interest Rate Risk

The following table summarizes the fair value of the Company’s investments in debt securities and funds that invest primarily in debt securities, at September 30, 2005 and December 31, 2004, which expose BlackRock to interest rate risk.risk, at March 31, 2006 and December 31, 2005. The table also provides a sensitivity analysis of the estimated fair value of these financial instruments, assuming 100 basis point upward and downward parallel shifts in the yield curve:

 

   Fair Market
Value


  Fair market value
assuming +100
basis point shift


  Fair market value
assuming -100
basis point shift


September 30, 2005

            

Mortgage-backed securities

  $13,790  $13,510  $14,070

Corporate notes and bonds

   8,215   7,876   8,554

Municipal bonds

   124   119   129
   

  

  

Total investments, trading

   22,129   21,505   22,753
   

  

  

Mutual funds

   3,567   3,448   3,688

Collaterialized debt obligations

   26,402   27,376   25,428
   

  

  

Total investments, available for sale

   29,969   30,824   29,116
   

  

  

Fair value

   3,138   3,138   3,138

Equity method

   30,395   29,198   31,592

Cost method

   53,446   52,438   54,454
   

  

  

Total investments, other

   86,979   84,774   89,184
   

  

  

Total investments

  $139,077  $137,103  $141,053
   

  

  

December 31, 2004

            

U.S. government securities

  $22,275  $22,275  $24,073

Mortgage-backed securities

   12,388   12,388   12,639

Corporate notes and bonds

   9,371   8,981   9,769

Municipal bonds

   120   120   126
   

  

  

Total investments, trading

   44,154   43,764   46,607
   

  

  

Mutual funds

   3,662   3,662   3,796

Collaterialized debt obligations

   12,760   12,759   13,326
   

  

  

Total investments, available for sale

   16,422   16,421   17,121
   

  

  

Equity method

   45,518   45,518   45,957

Cost method

   34,605   35,004   34,858
   

  

  

Total investments, other

   80,123   80,522   80,815
   

  

  

Total investments

  $140,699  $140,706  $144,543
   

  

  

March 31, 2006

  Fair Market
Value
  Fair market value
assuming +100
basis point shift
  Fair market value
assuming -100
basis point shift

Mortgage-backed securities

  $18,430  $18,098  $18,764

Corporate notes and bonds

   9,300   8,864   9,671

Municipal bonds

   117   111   122
            

Total trading investments

   27,847   27,073   28,557
            

Mutual funds

   3,561   3,414   3,710

Collaterialized debt obligations

   25,427   25,188   25,664
            

Total available for sale investments

   28,988   28,602   29,374
            

Other fund investments

   114,282   111,791   116,772
            

Total other investments

   114,282   111,791   116,772
            

Total investments

  $171,117  $167,466  $174,703
            

December 31, 2005

         

Mortgage-backed securities

  $13,069  $12,827  $13,311

Corporate notes and bonds

   7,946   7,575   8,262

Municipal bonds

   123   117   128
            

Total trading investments

   21,138   20,519   21,701
            

Mutual funds

   3,543   3,426   3,660

Collaterialized debt obligations

   25,717   25,222   26,212
            

Total available for sale investments

   29,260   28,648   29,872
            

Other fund investments

   96,449   94,998   97,900
            

Total other investments

   96,449   94,998   97,900
            

Total investments

  $146,847  $144,165  $149,473
            

 

- 6731 -


PART I - FINANCIAL INFORMATION (continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk (continued)

Other Market Risks

In February 2005, the Company issued $250 million aggregate principal amount of convertible debentures, which will be due in 2035 and bear interest at 2.625% per annum. Prior to February 15, 2009, the debentures will be convertible, only under certain conditions, at the option of the holder into cash and, in certain circumstances, shares of the Company’s class A common stock at an initial conversion rate of 9.7282 shares of class A common stock per $1 principal amount of debentures. 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 certain circumstances, shares of class A common stock at the above initial conversion rate, subject to adjustments. At September 30, 2005, the fair value of the debentures was $259.1 million.

Due to the debentures’ conversion feature, these financial instruments are exposed to both interest rate risk and equity price risk. At March 31, 2006, the fair value of the debentures was $356.2 million. Assuming 100 basis point upward and downward parallel shifts in the yield curve, based on the fair value of the debentures on September 30, 2005,March 31, 2006, the fair value of the debentures would fluctuate to $251.8$347.2 million and $266.3$365.1 million, respectively. Assuming a 10% increase and 10% decrease in the Company’s stock price, based on the fair value of the debentures on September 30, 2005,March 31, 2006, the fair value of the debentures would fluctuate to $274.3$385.3 million and $244.8$327.5 million, respectively.

In addition, BlackRock’s investment management revenues are comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. Declines in equity market prices or interest rates, or both, could cause revenues to decline because of lower investment management fees by

- 68 -

causing the value of AUM to decrease,

causing the returns realized on AUM to decrease,


causing clients to withdraw funds in favor of investments in markets that they perceive offer greater opportunity and that the Company does not serve, and

PART I - FINANCIAL INFORMATION (continued)

causing clients to rebalance assets away from investments that BlackRock manages into investments that BlackRock does not manage.

Item 4. Controls and Procedures

Under the direction of BlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock management evaluated the effectiveness of its disclosure controls and procedures as of September 30, 2005.March 31, 2006. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective as of September 30, 2005.

March 31, 2006.

No change in internal control over financial reporting occurred during the quarter ended September 30, 2005March 31, 2006 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

- 69 -


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, BlackRock has received subpoenas from various federal and state governmental and regulatory authorities and various information requests from the Securities and Exchange CommissionSEC in connection with industry-wide investigations of mutual fund matters. BlackRock is continuing to cooperate fully in these matters.

BlackRock and persons to whom BlackRock may have indemnification obligations, in the normal course of business, are subject to various pending and threatened lawsuits, in which claims for monetary damages are asserted. Management, after consultation with legal counsel, does not currently anticipate that the aggregate liability, if any, arising out of such lawsuits will have a material adverse effect on BlackRock’s financial position, although at the present time, management is not in a position to determine whether any such pending or threatened litigation will have a material adverse effect on BlackRock’s results of operations in any future reporting period.

 

- 7032 -


PART II - OTHER INFORMATION (continued)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

(c)During the three months ended September 30, 2005,March 31, 2006, the Company made the following purchases of its equity securitiesshares of class A common stock that are registered pursuant to Section 12(b) of the Securities Exchange Act of 1934.

 

   Total Number of
Shares
Purchased


 Average Price
Paid per Share


  Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs


  Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs1


July 1, 2005 through July 31, 2005

  64,387 2 $82.96  60,800  592,225

August 1, 2005 through August 31, 2005

  412,608 2 $84.41  411,400  180,825

September 1, 2005 through September 30, 2005

  —    —    —    180,825
   
 

  
   

Total

  476,995 $84.21  472,200   
   
 

  
   
   Total Number
of Shares
Purchased
 Average Price
Paid per Share
  Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
  Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs1

January 1, 2006 through January 31, 2006

  3102 $125.71  —    180,825

February 1, 2006 through February 28, 2006

  —    —    —    180,825

March 1, 2006 through March 31, 2006

  —    —    —    180,825
           

Total

  310 $125.71  —    
           

1On January 21, 2004, the Company announced a two million share repurchase program. The Company is currently authorized to repurchase approximately 0.2 million shares under this repurchase program.
2Includes purchases made by the Company primarily to satisfy income tax withholding obligations of certain employees.

 

- 7133 -


PART II - OTHER INFORMATION (continued)

Item 6. Exhibits

 

Exhibit No.


 

Description


2.1 (18)Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., New Boise, Inc., Boise Merger Sub, Inc. and the Registrant.
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (8) Amended and Restated Bylaws of the Registrant.
3.3 (8)(17) Amendment No. 1 to the Amended and Restated Bylaws of the Registrant.
3.4 (8)(17) Amendment No. 2 to the Amended and Restated Bylaws of the Registrant.
3.5 (17) Amendment No. 3 to the Amended and Restated Bylaws of the Registrant.
4.1 (1) Specimen of Common Stock Certificate (per class).
4.2 (1) Amended and Restated Stockholders Agreement, dated September 30, 1999, by and among the Registrant, PNC Asset Management, Inc. and certain employees of the Registrant and its affiliates.
4.3 (9) Amendment No. 1 to the Amended and Restated Stockholders Agreement, dated October 10, 2002, by and among the Registrant, PNC Asset Management, Inc. and certain employees of the Registrant and its affiliates.
4.4 (16) Indenture, dated as of February 23, 2005, between the Registrant and JPMorgan Chase Bank, N.A., as trustee, relating to the 2.625% Convertible Debentures due 2035.
4.5 (16) Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.4).
10.1 (1) Tax Disaffiliation Agreement, dated October 6, 1999, among the Registrant, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.2 (1) 1999 Stock Award and Incentive Plan. +
10.4 (1) Nonemployee Directors Stock Compensation Plan. +
10.5 (1) Initial Public Offering Agreement, dated September 30, 1999, among the Registrant, The PNC Financial Services Group, Inc., formerly PNC Bank Corp., and PNC Asset Management, Inc.
10.6 (1) Registration Rights Agreement, dated October 6, 1999, among the Registrant, PNC Asset Management, Inc. and certain holders of class B common stock of the Registrant.
10.7 (1) Services Agreement, dated October 6, 1999, between the Registrant and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.8 (2) BlackRock, Inc. Amended and Restated Long-Term Deferred Compensation Plan. +
10.9 (2) BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. +
10.10 (3) Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and the Registrant.
10.11 (4) Amendment No. 1 to the 1999 Stock Award and Incentive Plan. +
10.12 (4) Amendment No. 1 to the BlackRock, Inc. Amended and Restated Long-Term Deferred Compensation Plan. +
10.13 (4) Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. +
10.14 (5) Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and the Registrant.
10.15 (6) BlackRock, Inc. 2001 Employee Stock Purchase Plan. +
10.16 (10) Amended and Restated BlackRock, Inc. Voluntary Deferred Compensation Plan. +
10.17 (10) Amended and Restated BlackRock, Inc. Involuntary Deferred Compensation Plan. +
10.18 (7) Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan. +
10.19 (9) BlackRock, Inc. 2002 Long Term Retention and Incentive Plan. +

- 34 -


PART II — OTHER INFORMATION (continued)

Item 6. Exhibits (continued)

Exhibit No.

Description

10.20 (9) Share Surrender Agreement, dated October 10, 2002, among the Registrant, PNC Asset Management, Inc., and The PNC Financial Services Group, Inc.

- 72 -


PART II - OTHER INFORMATION (continued)

Item 6. Exhibits (continued)

Exhibit No.    

10.21 (19)
 

Description    


First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and the Registrant.
10.21
10.22 (9) Employment Agreement, between the Registrant and Laurence D. Fink, dated October 10, 2002. +
10.2210.23 (9) Amendment No. 1 to the Initial Public Offering Agreement, dated October 10, 2002, among The PNC Financial Services Group, Inc., PNC Asset Management, Inc. and the Registrant.
10.2310.24 (9) Amendment No. 1 to the Registration Rights Agreement, dated October 10, 2002, among the Registrant, PNC Asset Management, Inc. and certain holders of class B common stock of the Registrant.
10.2410.25 (10) Amended and Restated 1999 Annual Incentive Performance Plan. +
10.29 (11) First Amendment to the BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan. +
10.30 (12) Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and the Registrant.
10.31 (12) Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and the Registrant.
10.32 (13) Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. BlackRock, Inc. and BlackRock Financial Management, Inc., dated August 25, 2004.
10.33 (14) Form of Restricted Stock Agreement under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.
10.34 (14) Form of BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan Award Agreement. +
10.35 (15) Bridge Promissory Note between Morgan Stanley Senior Funding, Inc. and BlackRock, Inc., dated January 28, 2005
10.36 (16) Purchase Agreement, dated February 16, 2005, between the Registrant and Morgan Stanley & Co., Inc., as representative of the initial purchasers named therein.
10.37 (16) Second Amendment to the BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan. +
10.38 (16) Registration Rights Agreement dated as of February 23, 2005, between the Registrant and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035.
10.39 (17) Employment Offer Letter, tobetween the Registrant and Steven E. Buller, Chiefdated September 7, 2005. +

- 35 -


PART II — OTHER INFORMATION (continued)

Item 6. Exhibits (Continued)

Exhibit No.

Description

10.40 (20)Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Officer of BlackRock,Services Group, Inc. +, New Boise, Inc. and the Registrant.
21.1 (16)10.41 (21) SubsidiariesStockholder Agreement, dated as of the Registrant.February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

(1)Incorporated by referenceReference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
(2)Incorporated by referenceReference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on JuneMarch 14, 2000.
(3)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended JuneMarch 31, 2000.
(4)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2000.
(5)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001.
(6)Incorporated by referenceReference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68670), originally filed with the Securities and Exchange Commission on August 30, 2001.
(7)Incorporated by referenceReference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68666), originally filed with the Securities and Exchange Commission on August 30, 2001.
(8)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2002.
(9)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002.
(10)Incorporated by referenceReference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002.
(11)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended JuneMarch 31, 2004.

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PART II - OTHER INFORMATION (continued)

Item 6. Exhibits (Continued)

(12)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004.
(13)Incorporated by referenceReference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004.
(14)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2004.
(15)Incorporated by referenceReference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on January 31, 2005.
(16)Incorporated by referenceReference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004.
(17)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2005.
(18)Incorporated by Reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(19)Incorporated by Reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(20)Incorporated by Reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(21)Incorporated by Reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
+Denotes Compensatory Plan.compensatory plans.

 

- 7436 -


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

BLACKROCK, INC.

(Registrant)

Date: May 8, 2006 By: 

/s/ Steven E. Buller


Date: November 4, 2005  Steven E. Buller
  

Managing Director &

Chief Financial Officer

 

- 7537 -


EXHIBIT INDEX

 

Exhibit No.


 

Description


2.1 (18)Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., New Boise, Inc., Boise Merger Sub, Inc. and the Registrant.
3.1 (1) Amended and Restated Certificate of Incorporation of the Registrant.
3.2 (8) Amended and Restated Bylaws of the Registrant.
3.3 (8)(17) Amendment No. 1 to the Amended and Restated Bylaws of the Registrant.
3.4 (8)(17) Amendment No. 2 to the Amended and Restated Bylaws of the Registrant.
3.5 (17) Amendment No. 3 to the Amended and Restated Bylaws of the Registrant.
4.1 (1) Specimen of Common Stock Certificate (per class).
4.2 (1) Amended and Restated Stockholders Agreement, dated September 30, 1999, by and among the Registrant, PNC Asset Management, Inc. and certain employees of the Registrant and its affiliates.
4.3 (9) Amendment No. 1 to the Amended and Restated Stockholders Agreement, dated October 10, 2002, by and among the Registrant, PNC Asset Management, Inc. and certain employees of the Registrant and its affiliates.
4.4 (16) Indenture, dated as of February 23, 2005, between the Registrant and JPMorgan Chase Bank, N.A., as trustee, relating to the 2.625% Convertible Debentures due 2035.
4.5 (16) Form of 2.625% Convertible Debenture due 2035 included(included as Exhibit A toin Exhibit 4.4).
10.1 (1) Tax Disaffiliation Agreement, dated October 6, 1999, among BlackRock Inc.,the Registrant, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.2 (1) 1999 Stock Award and Incentive Plan. +
10.4 (1) Nonemployee Directors Stock Compensation Plan. +
10.5 (1) Initial Public Offering Agreement, dated September 30, 1999, among the Registrant, The PNC Financial Services Group, Inc., formerly PNC Bank Corp., and PNC Asset Management, Inc.
10.6 (1) Registration Rights Agreement, dated October 6, 1999, among the Registrant, PNC Asset Management, Inc. and certain holders of class B common stock of the Registrant.
10.7 (1) Services Agreement, dated October 6, 1999, between the Registrant and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.8 (2) BlackRock, Inc. Amended and Restated Long-Term Deferred Compensation Plan. +
10.9 (2) BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. +
10.10 (3) Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and the Registrant.
10.11 (4) Amendment No. 1 to the 1999 Stock Award and Incentive Plan. +
10.12 (4) Amendment No. 1 to the BlackRock, Inc. Amended and Restated Long-Term Deferred Compensation Plan. +
10.13 (4) Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. +
10.14 (5) Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and the Registrant.
10.15 (6) BlackRock, Inc. 2001 Employee Stock Purchase Plan. +
10.16 (10) Amended and Restated BlackRock, Inc. Voluntary Deferred Compensation Plan. +
10.17 (10) Amended and Restated BlackRock, Inc. Involuntary Deferred Compensation Plan. +
10.18 (7) Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan. +
10.19 (9) BlackRock, Inc. 2002 Long Term Retention and Incentive Plan. +


EXHIBIT INDEX (continued)

Exhibit No.

Description

10.20 (9)10.20(9) Share Surrender Agreement, dated October 10, 2002, among the Registrant, PNC Asset Management, Inc., and The PNC Financial Services Group, Inc.
10.21 (9)10.21(19)First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and the Registrant.
10.22(9) Employment Agreement, between the Registrant and Laurence D. Fink, dated October 10, 2002. +
10.22 (9)10.23(9) Amendment No. 1 to the Initial Public Offering Agreement, dated October 10, 2002, among The PNC Financial Services Group, Inc., PNC Asset Management, Inc. and the Registrant.
10.23 (9)10.24(9) Amendment No. 1 to the Registration Rights Agreement, dated October 10, 2002, among the Registrant, PNC Asset Management, Inc. and certain holders of class B common stock of the Registrant.
10.24 (10)10.25(10) Amended and Restated 1999 Annual Incentive Performance Plan. +
10.29 (11)10.29(11) First Amendment to the BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan. +


EXHIBIT INDEX (continued)

Exhibit No.

Description


10.30(12) Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and the Registrant.
10.31(12) Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and the Registrant.
10.32(13) Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. BlackRock, Inc. and BlackRock Financial Management, Inc., dated August 25, 2004.
10.33(14) Form of Restricted Stock Agreement under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.
10.34(14) Form of BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan Award Agreement. +
10.35(15) Bridge Promissory Note between Morgan Stanley Senior Funding, Inc. and BlackRock, Inc., dated January 28, 2005
10.36(16) Purchase Agreement, dated February 16, 2005, between the Registrant and Morgan Stanley & Co., Inc., as representative of the initial purchasers named therein.
10.37(16) Second Amendment to the BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan. +
10.38(16) Registration Rights Agreement dated as of February 23, 2005, between the Registrant and Morgan Stanley & Co. Incorporated, as representedrepresentative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035.
10.3910.39(20) Employment Offer Letter to Steven E. Buller, ChiefImplementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Officer of BlackRock,Services Group, Inc. +, New Boise, Inc. and the Registrant.


EXHIBIT INDEX (continued)

21.1(16)

Exhibit No.

 Subsidiaries

Description

10.40 (21)Stockholder Agreement, dated as of the Registrant.February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
31.1 Section 302 Certification of Chief Executive Officer.
31.2 Section 302 Certification of Chief Financial Officer.
32.1 Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

(1)Incorporated by Reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
(2)Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on JuneMarch 14, 2000.
(3)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended JuneMarch 31, 2000.
(4)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2000.
(5)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001.
(6)Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68670), originally filed with the Securities and Exchange Commission on August 30, 2001.
(7)Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68666), originally filed with the Securities and Exchange Commission on August 30, 2001.
(8)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended SeptemberJune 30, 2003.2002.
(9)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002.
(10)Incorporated by referenceReference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002.
(11)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended JuneMarch 31, 2004.
(12)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004.
(13)Incorporated by Reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004.
(14)Incorporated by referenceReference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2004.
(15)Incorporated by Reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on January 31, 2005.
(16)Incorporated by Reference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004.
(17)Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2005.
(18)Incorporated by Reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(19)Incorporated by Reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(20)Incorporated by Reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
(21)Incorporated by Reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
+Denotes compensatory plans.