Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended June 30, 2002
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to .
Commission file number 001-15305
BlackRock, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 51-0380803 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
40 East 52nd Street, New York, NY 10022
(Address of principal executive offices)
(Zip Code)
(212) 754-5300
(Registrant’s telephone number, including area code)
(Former name, former address and for new 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 proceeding 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 ¨ |
As of July 31, 2002, there were 17,422,921 shares of the registrant’s class A common stock outstanding and 47,351,138 shares of the registrant’s class B common stock outstanding.
Table of Contents
BlackRock Inc.
PART I
FINANCIAL INFORMATION
Page | ||||
Item 1. | Financial Statements | |||
1 | ||||
2 | ||||
3 | ||||
4 | ||||
Item 2. | 12 | |||
Item 3. | 35 | |||
PART II | ||||
OTHER INFORMATION | ||||
Item 4. | 36 | |||
Item 6. | 37 |
Table of Contents
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BlackRock, Inc.
(Dollar amounts in thousands)
June 30, 2002 | December 31, 2001 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 169,533 | $ | 186,451 | ||||
Accounts receivable | 109,902 | 94,090 | ||||||
Investments (cost: $166,918 and $143,600, respectively) | 163,003 | 139,126 | ||||||
Property and equipment, net | 92,772 | 70,510 | ||||||
Intangible assets, net | 181,286 | 181,688 | ||||||
Receivable from affiliates | 8,809 | 2,569 | ||||||
Other assets | 8,989 | 10,044 | ||||||
Total assets | $ | 734,294 | $ | 684,478 | ||||
Liabilities and stockholders’ equity | ||||||||
Accrued compensation | $ | 120,035 | $ | 146,019 | ||||
Accounts payable and accrued liabilities | ||||||||
Affiliate | 21,473 | 15,972 | ||||||
Other | 16,279 | 19,075 | ||||||
Acquired management contract obligation | 6,578 | 7,344 | ||||||
Other liabilities | 8,711 | 9,951 | ||||||
Total liabilities | 173,076 | 198,361 | ||||||
Stockholders’ equity | ||||||||
Common stock, class A, 17,337,643 and 15,916,944 shares issued, respectively | 173 | 159 | ||||||
Common stock, class B, 47,670,696 and 48,674,607 shares issued, respectively | 477 | 487 | ||||||
Additional paid-in capital | 194,390 | 184,041 | ||||||
Retained earnings | 373,733 | 307,498 | ||||||
Unearned compensation | (1,376 | ) | (1,927 | ) | ||||
Accumulated other comprehensive loss | (2,907 | ) | (3,537 | ) | ||||
Treasury stock, class A, at cost 249 and 0 shares issued, respectively | (11 | ) | — | |||||
Treasury stock, class B, at cost 265,558 and 125,633 shares issued, respectively | (3,261 | ) | (604 | ) | ||||
Total stockholders’ equity | 561,218 | 486,117 | ||||||
Total liabilities and stockholders’ equity | $ | 734,294 | $ | 684,478 | ||||
See accompanying notes to consolidated financial statements.
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BlackRock, Inc.
(Dollar amounts in thousands, except share data)
(unaudited)
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||
Revenue | ||||||||||||||||
Investment advisory and administration fees | ||||||||||||||||
Mutual funds | $ | 54,736 | $ | 54,791 | $ | 109,995 | $ | 109,707 | ||||||||
Separate accounts | 88,755 | 71,624 | 165,271 | 142,009 | ||||||||||||
Other income | ||||||||||||||||
Affiliate | 1,250 | 1,250 | 2,500 | 2,500 | ||||||||||||
Other | 11,954 | 7,597 | 25,042 | 14,755 | ||||||||||||
Total revenue | 156,695 | 135,262 | 302,808 | 268,971 | ||||||||||||
Expense | ||||||||||||||||
Employee compensation and benefits | 67,830 | 55,534 | 128,217 | 110,964 | ||||||||||||
Fund administration and servicing costs—affiliates | 11,916 | 15,722 | 25,094 | 32,412 | ||||||||||||
General and administration | ||||||||||||||||
Affiliate | 1,887 | 1,757 | 3,787 | 3,704 | ||||||||||||
Other | 20,156 | 16,927 | 40,668 | 32,035 | ||||||||||||
Amortization of intangible assets | 201 | 2,614 | 402 | 5,228 | ||||||||||||
Total expense | 101,990 | 92,554 | 198,168 | 184,343 | ||||||||||||
Operating income | 54,705 | 42,708 | 104,640 | 84,628 | ||||||||||||
Non-operating income (expense) | ||||||||||||||||
Investment income | 4,014 | 2,632 | 7,034 | 4,494 | ||||||||||||
Interest expense | (171 | ) | (201 | ) | (354 | ) | (402 | ) | ||||||||
Total non-operating income | 3,843 | 2,431 | 6,680 | 4,092 | ||||||||||||
Income before income taxes | 58,548 | 45,139 | 111,320 | 88,720 | ||||||||||||
Income taxes | 23,712 | 18,909 | 45,085 | 36,994 | ||||||||||||
Net income | $ | 34,836 | $ | 26,230 | $ | 66,235 | $ | 51,726 | ||||||||
Earnings per share | ||||||||||||||||
Basic | $ | 0.54 | $ | 0.41 | $ | 1.02 | $ | 0.81 | ||||||||
Diluted | $ | 0.53 | $ | 0.40 | $ | 1.01 | $ | 0.80 | ||||||||
Weighted-average shares outstanding | ||||||||||||||||
Basic | 64,726,856 | 64,248,630 | 64,687,900 | 64,204,186 | ||||||||||||
Diluted | 65,333,228 | 64,877,389 | 65,261,868 | 64,867,348 |
See accompanying notes to consolidated financial statements.
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BlackRock, Inc.
(Dollar amounts in thousands)
(unaudited)
Six months ended June 30, | ||||||||
2002 | 2001 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 66,235 | $ | 51,726 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 9,966 | 12,131 | ||||||
Stock-based compensation | 3,105 | 2,911 | ||||||
Deferred income taxes | 8,066 | 653 | ||||||
Tax benefit from stock-based compensation | 6,304 | 5,140 | ||||||
Purchase of investments, trading, net | (17,350 | ) | — | |||||
Net gain on investments | (1,423 | ) | — | |||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in accounts receivable | (15,812 | ) | 5,138 | |||||
Increase in receivable from affiliates | (14,306 | ) | (70 | ) | ||||
Decrease in other assets | 1,055 | 2,372 | ||||||
Decrease in accrued compensation | (20,434 | ) | (36,987 | ) | ||||
Increase in accounts payable and accrued liabilities | 2,705 | 15,759 | ||||||
Increase (decrease) in other liabilities | (1,240 | ) | 1,699 | |||||
Cash provided by operating activities | 26,871 | 60,472 | ||||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (31,826 | ) | (18,033 | ) | ||||
Purchase of investments | (5,118 | ) | (127,731 | ) | ||||
Cash used in investing activities | (36,944 | ) | (145,764 | ) | ||||
Cash flows from financing activities | ||||||||
Issuance of class A common stock | 760 | 203 | ||||||
Purchase of treasury stock | (9,174 | ) | (6,472 | ) | ||||
Reissuance of treasury stock | 1,691 | 212 | ||||||
Acquired management contract obligation payment | (766 | ) | (1,500 | ) | ||||
Cash used in financing activities | (7,489 | ) | (7,557 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | 644 | (510 | ) | |||||
Net decrease in cash and cash equivalents | (16,918 | ) | (93,359 | ) | ||||
Cash and cash equivalents, beginning of period | 186,451 | 192,590 | ||||||
Cash and cash equivalents, end of period | $ | 169,533 | $ | 99,231 | ||||
See accompanying notes to consolidated financial statements.
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BlackRock, Inc.
Six Months Ended June 30, 2002 and 2001
(Dollar amounts in thousands, except share data)
(unaudited)
1. | Significant Accounting Policies |
Basis of Presentation
The consolidated interim financial statements of BlackRock, Inc. and its subsidiaries (“BlackRock” or the “Company”) included herein have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. The Company follows the same accounting policies in the preparation of interim reports as set forth in the annual report. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows of BlackRock for the interim periods presented and are not necessarily indicative of a full year’s results.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates.
Investments
The Company’s investments are classified as trading and available for sale. Investments, trading represent matching investments made by, and held in a Rabbi Trust for, the Company with respect to the BlackRock Voluntary and Involuntary Deferred Compensation Plans and are recorded at fair market value with unrealized gains and losses included in the accompanying consolidated statements of income as non-operating investment income or loss. Investments, available for sale consist primarily of investments in BlackRock funds and certain institutional and private placement portfolios (“alternative investment products”), and are stated at market values. Securities, which are not readily marketable (alternative investment products), are stated at their estimated fair market value as determined by the Company’s management. The resulting unrealized gains and losses on investments, available for sale are included in the accumulated other comprehensive loss component of stockholders’ equity, net of tax. Realized gains and losses on trading and available for sale investments and interest and dividend income are included in investment income (expense) in the accompanying consolidated statements of income.The Company’s management periodically assesses impairment on investments to determine if they are other than temporary. Any impairment on investments, other than temporary impairments, is recorded in the consolidated statements of income.
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Business Combinations
On July 20, 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” SFAS No. 141 requires the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001 and eliminates the pooling-of-interests method of accounting. The statement also addresses disclosure requirements for business combinations and initial recognition and measurement criteria for goodwill and other intangible assets as a result of purchase business combinations.
Intangible Assets
Intangible assets are comprised of goodwill and management contract acquired. For the three months and six months ended June 30, 2001, goodwill was amortized on a straight-line basis over 25 years. On July 20, 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changed the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recognized relating to past business combinations, ceases upon adoption of the new standard. Impairment testing for goodwill at a reporting unit level is required on at least an annual basis. The new standard also addresses other accounting matters, disclosure requirements and financial statement presentation issues relating to goodwill and other intangible assets. The Company adopted SFAS No. 142, effective on January 1, 2002, as required. Assuming no impairment adjustments are necessary, no future business combinations, and no other changes to goodwill, the Company expects diluted earnings per share to increase by approximately $.08 per share in 2002 as a result of the cessation of goodwill amortization. Management contract acquired is amortized in proportion to and over the period of contract revenue, which is ten years. The Company regularly evaluates the carrying value of intangible assets. Any impairment would be recognized when the future operating cash flows expected to be derived from such intangible assets are less than their carrying value. In such instances, impairment, if any, is measured on a discounted future cash flow basis.
Accounting for Obligations Associated with the Retirement of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 143, “Accounting for Obligations Associated with the Retirement of Long-Lived Assets,” which requires that the fair value of a liability be recognized when incurred for the retirement of a long-lived asset and the value of the asset be increased by that amount. The statement also requires that the liability be maintained at its present value in subsequent periods and outlines certain disclosures for such obligations. The adoption of this statement, which is effective January 1, 2003, is not expected to have a material impact on the Company’s financial statements.
Accounting for the Impairment or Disposal of Long-Lived Assets
In October 2001, the FASB also issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and For Assets to be Disposed Of.” This statement primarily defines one accounting model for long-lived assets to be disposed of by sale, including discontinued operations and addresses implementation issues. The adoption of this statement, which is effective January 1, 2002, is not expected to have a material impact on the Company’s financial statements.
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Derivative Instruments and Hedging Activities
In 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and No. 138. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. SFAS No. 133 generally requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those investments at fair value. The Company adopted the new statement as of January 1, 2001.
The Company enters into forward foreign currency exchange contracts with financial institutions to hedge certain assets denominated in foreign currencies. The purpose of the Company’s foreign currency hedging activities is to protect the Company from foreign currency exposures related to non-dollar denominated investments on its statement of financial condition.
During the term of the forward foreign currency exchange contracts, changes in fair value will be recognized in the consolidated statements of financial condition and included among assets (if there is an unrealized gain) or among liabilities (if there is an unrealized loss). A corresponding amount will be included as a component of general and administrative expenses in the consolidated statements of income.
By using derivative financial instruments to hedge exposure to changes in exchange rates, the Company exposes itself to market risk. Market risk is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages exposure to market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Reclassification of Prior Period’s Statements
Certain items previously reported have been reclassified to conform with the current period presentation.
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Investments, Trading and Available for Sale
A summary of the cost and fair market value of investments are as follows:
Gross Unrealized | Fair Market Value | |||||||||||
June 30, 2002 | Cost | Gains | Losses | |||||||||
Trading | $ | 17,350 | 450 | — | $ | 17,800 | ||||||
Total investments, trading | 17,350 | 450 | — | 17,800 | ||||||||
Mutual funds | 134,421 | — | 1,475 | 132,946 | ||||||||
Collateralized bond obligations | 13,951 | — | 2,890 | 11,061 | ||||||||
Other | 1,196 | — | — | 1,196 | ||||||||
Total investments, available for sale | 149,568 | — | 4,365 | 145,203 | ||||||||
Total investments, trading and available for sale | $ | 166,918 | $ | 450 | $ | 4,365 | $ | 163,003 | ||||
December 31, 2001 | ||||||||||||
Mutual funds | $ | 129,304 | — | $ | 1,882 | $ | 127,422 | |||||
Collateralized bond obligation | 12,689 | — | 2,607 | 10,082 | ||||||||
Other | 1,607 | 15 | — | 1,622 | ||||||||
Total investments, available for sale | $ | 143,600 | $ | 15 | $ | 4,489 | $ | 139,126 | ||||
BlackRock acts as investment advisor for all investments.
Net realized gains on the sale of investments totaled $856 and $0 for the three months ended June 30, 2002 and June 30, 2001, respectively, and $973 and $6 for the six months ended June 30, 2002 and 2001, respectively.
3. Intangible Assets
a) Goodwill
The consolidated financial statements reflect the results of operations of the former BlackRock Financial Management, L.P. and BFM Advisory L.P., which were acquired by PNC on February 28, 1995. Goodwill recognized at acquisition approximated $240,000 and was amortized on a straight-line basis over 25 years. On July 20, 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changed the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recognized relating to past business combinations, ceased upon adoption of the new standard. Impairment testing for goodwill at a reporting unit level is required on at least an annual basis.
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b) Management Contract Acquired
On May 15, 2000, BlackRock entered into a contract in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT. This agreement assigns the managerial rights and duties of CORE Cap, Inc.’s former manager to BlackRock for consideration in the amount of $12,500 to be paid by BlackRock over a ten-year period. The present value of the acquired contract using an imputed interest rate of 10% was $8,040 on the date of acquisition. This amount is recorded as an intangible asset and is being amortized on a straight-line basis over ten years. If BlackRock were terminated as manager of the REIT with cause, the then remaining present value of future payments would be written off. If BlackRock were terminated without cause then the REIT would be required to pay BlackRock for the remaining payments.
Goodwill | Management Contract Acquired | Total Intangible Assets | |||||||
Balance at December 31, 2001 | $ | 240,797 | $ | 8,040 | $ | 248,837 | |||
Accumulated amortization at June 30, 2002 | 65,842 | 1,709 | 67,551 | ||||||
Balance at June 30, 2002 | $ | 174,955 | $ | 6,331 | $ | 181,286 | |||
The following table reflects the adoption of SFAS No. 142:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
Reported net income | $ | 34,836 | $ | 26,230 | $ | 66,235 | $ | 51,726 | ||||
Goodwill amortization, net of tax | — | 1,284 | — | 2,568 | ||||||||
Adjusted net income | $ | 34,836 | $ | 27,514 | $ | 66,235 | $ | 54,294 | ||||
Basic earnings per share: | ||||||||||||
Reported | $ | 0.54 | $ | 0.41 | $ | 1.02 | $ | 0.81 | ||||
Goodwill amortization, net of tax | — | 0.02 | — | 0.04 | ||||||||
Adjusted | $ | 0.54 | $ | 0.43 | $ | 1.02 | $ | 0.85 | ||||
Diluted earnings per share: | ||||||||||||
Reported | $ | 0.53 | $ | 0.40 | $ | 1.01 | $ | 0.80 | ||||
Goodwill amortization, net of tax | — | 0.02 | — | 0.04 | ||||||||
Adjusted | $ | 0.53 | $ | 0.42 | $ | 1.01 | $ | 0.84 | ||||
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b) Management Contract Acquired (continued)
The Company expects amortization expense to be $402 for the remainder of 2002 and $804 annually for 2003 through 2006.
4. Common Stock
BlackRock’s class A, $0.01 par value, common shares authorized was 250,000,000 shares as of June 30, 2002 and December 31, 2001, respectively. BlackRock’s class B, $0.01 par value, common shares authorized was 100,000,000 shares as of June 30, 2002 and December 31, 2001, respectively.
The Company’s common shares issued and outstanding and related activity consists of the following:
Shares issued | Shares outstanding | ||||||||||||||||
Common shares Class | Treasury shares Class | Class | |||||||||||||||
A | B | A | B | A | B | ||||||||||||
December 31, 2001 | 15,916,944 | 48,674,607 | — | (125,633 | ) | 15,916,944 | 48,548,974 | ||||||||||
Conversion of class B stock to class A stock | 940,462 | (1,003,911 | ) | 63,449 | (16,607 | ) | 1,003,911 | (1,020,518 | ) | ||||||||
Issuance of shares to Nonemployee Directors | 1,910 | — | — | — | 1,910 | — | |||||||||||
Issuance of class A common stock | 472,365 | — | — | — | 472,365 | — | |||||||||||
Issuance of class B common stock | — | — | — | — | — | — | |||||||||||
Treasury stock transactions | 5,962 | — | (63,698 | ) | (123,318 | ) | (57,736 | ) | (123,318 | ) | |||||||
June 30, 2002 | 17,337,643 | 47,670,696 | (249 | ) | (265,558 | ) | 17,337,394 | 47,405,138 | |||||||||
5. Comprehensive Income
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||
Net income | $ | 34,836 | $ | 26,230 | $ | 66,235 | $ | 51,726 | |||||||
Other comprehensive income gain (loss): | |||||||||||||||
Unrealized gain (loss) from investments, available for sale, net | 943 | (29 | ) | (14 | ) | 1,397 | |||||||||
Foreign currency translation gain (loss) | 1,056 | 13 | 644 | (510 | ) | ||||||||||
Comprehensive income | $ | 36,835 | $ | 26,214 | $ | 66,865 | $ | 52,613 | |||||||
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6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
Net income | $ | 34,836 | $ | 26,230 | $ | 66,235 | $ | 51,726 | ||||
Basic weighted-average shares outstanding | 64,726,856 | 64,248,630 | 64,687,900 | 64,204,186 | ||||||||
Dilutive potential shares from forward sales | 53,639 | 107,277 | 53,639 | 107,277 | ||||||||
Dilutive potential shares from stock options | 552,733 | 521,482 | 520,329 | 555,885 | ||||||||
Dilutive weighted-average shares outstanding | 65,333,228 | 64,877,389 | 65,261,868 | 64,867,348 | ||||||||
Basic earnings per share | $ | 0.54 | $ | 0.41 | $ | 1.02 | $ | 0.81 | ||||
Diluted earnings per share | $ | 0.53 | $ | 0.40 | $ | 1.01 | $ | 0.80 | ||||
7. Supplemental Statements of Cash Flow Information
Supplemental disclosure of cash flow information:
Six months ended June 30, | |||||||||
2002 | 2001 | ||||||||
Cash paid for interest | $ | 734 | $ | 804 | |||||
Cash paid for income taxes | $ | 40,111 | $ | 18,207 | |||||
Supplemental schedule of noncash transactions:
Six months ended June 30, | |||||||||
2002 | 2001 | ||||||||
Stock-based compensation | $ | 5,550 | $ | 6,831 | |||||
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8. Subsequent Event
On July 22, 2002, BlackRock entered into two forward foreign currency exchange contracts of €10 million and £7 million as fair value hedges, which mature in December 2002. The purpose of these hedges is to protect the Company from foreign currency exposure related to specific non-dollar seed investments in certain offshore money market funds. During the term of these forward contracts, changes in fair value will be recognized in the consolidated statements of financial condition. A corresponding amount will be included in general and administrative expenses of the consolidated statements of income.
In July 2002, BlackRock and PNC entered into a revised agreement with respect to investment management services. The agreement incorporates a reduction in the rate of fees paid to PNC based on current market conditions with PNC related assets invested in theBlackRock Funds declining approximately $4.1 billion since inception of the previous agreement in May 1998 and which now comprise approximately 70% of BlackRock Funds as compared to 85% in 1998. Based on the current levels and mix of investments in theBlackRock Funds by PNC accounts, the agreement is expected to reduce fund administration and servicing costs-affiliates by approximately 25% annually as compared to the level of fund administration and servicing costs affiliates that would have been paid under the previous investment services agreement.
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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 $249.8 billion of assets under management at June 30, 2002. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of equity, fixed income, liquidity and alternative investment separate accounts and mutual funds, includingBlackRock Funds andBlackRock Provident Institutional Funds(“BPIF”). In addition, BlackRock provides risk management and investment system services and products to institutional investors under theBlackRock Solutions name. BlackRock is a majority-owned indirect subsidiary of The PNC Financial Services Group, Inc. (“PNC”), one of the largest diversified financial services companies in the United States, operating businesses engaged in regional community banking, corporate banking, real estate finance, asset-based lending, wealth management, asset management and global fund services. As of June 30, 2002, PNC indirectly owns approximately 69%, the public owns approximately 16% and BlackRock employees own approximately 15% of BlackRock.
The following table summarizes BlackRock’s operating performance for the three months ended June 30, 2002, June 30, 2001 and March 31, 2002 and six months ended June 30, 2002 and June 30, 2001:
BlackRock, Inc.
Financial Highlights
(Dollar amounts in thousands, except share data or otherwise stated)
(unaudited)
Three months ended | Variance vs. | |||||||||||||||||||||||||||||||
June 30, | March 31, | June 30, 2001 | March 31, 2002 | |||||||||||||||||||||||||||||
2002 | 2001 | 2002 | Amount | % | Amount | % | ||||||||||||||||||||||||||
Total revenue | $ | 156,695 | $ | 135,262 | $ | 146,113 | $ | 21,433 | 16% | $ | 10,582 | 7% | ||||||||||||||||||||
Total expense | $ | 101,990 | $ | 92,554 | $ | 96,178 | $ | 9,436 | 10% | $ | 5,812 | 6% | ||||||||||||||||||||
Operating income | $ | 54,705 | $ | 42,708 | $ | 49,935 | $ | 11,997 | 28% | $ | 4,770 | 10% | ||||||||||||||||||||
Net income | $ | 34,836 | $ | 26,230 | $ | 31,399 | $ | 8,606 | 33% | $ | 3,437 | 11% | ||||||||||||||||||||
Diluted earnings per share | $ | 0.53 | $ | 0.40 | $ | 0.48 | $ | 0.13 | 33% | $ | 0.05 | 10% | ||||||||||||||||||||
Average diluted shares outstanding | 65,333,228 | 64,877,389 | 65,219,988 | 455,839 | 1% | 113,240 | 0% | |||||||||||||||||||||||||
EBITDA (a) | $ | 63,684 | $ | 51,722 | $ | 57,956 | $ | 11,962 | 23% | $ | 5,728 | 10% | ||||||||||||||||||||
Operating margin (b) | 37.8% | 35.7% | 37.6% | |||||||||||||||||||||||||||||
Assets under management ($ in millions) | $ | 249,778 | $ | 212,694 | $ | 238,116 | $ | 37,084 | 17% | $ | 11,662 | 5% |
Six months ended June 30, | Variance vs. | ||||||||||
2002 | 2001 | Amount | % | ||||||||
Total revenue | $ | 302,808 | $ | 268,971 | $ | 33,837 | 13% | ||||
Total expense | $ | 198,168 | $ | 184,343 | $ | 13,825 | 8% | ||||
Operating income | $ | 104,640 | $ | 84,628 | $ | 20,012 | 24% | ||||
Net income | $ | 66,235 | $ | 51,726 | $ | 14,509 | 28% | ||||
Diluted earnings per share | $ | 1.01 | $ | 0.80 | $ | 0.21 | 26% | ||||
Average diluted shares outstanding | 65,261,868 | 64,867,348 | 394,520 | 1% | |||||||
EBITDA (a) | $ | 121,640 | $ | 101,253 | $ | 20,387 | 20% | ||||
Operating margin (b) | 37.7% | 35.8% | |||||||||
Assets under management ($ in millions) | $ | 249,778 | $ | 212,694 | $ | 37,084 | 17% |
(a) Earnings before interest expense, taxes, depreciation and amortization.
(b) Operating income divided by total revenue less fund administration and servicing costs—affiliates.
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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 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.
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 earned when investment performance exceeds a contractual threshold or as fixed percentage of actual returns over stipulated performance periods and, accordingly, may increase the volatility of BlackRock’s revenue and earnings.
BlackRock provides a variety of risk management and technology services to insurance companies, finance companies, pension funds, foundations, 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. The fees earned on risk management advisory assignments are recorded as other income.
Operating expense primarily consists of employee compensation and benefits, fund administration and servicing costs-affiliates, and general and administration expense. Employee compensation and benefits expense reflects salaries, deferred and incentive compensation and related benefit costs. Fund administration and servicing costs-affiliates expense reflects payments made to PNC affiliated entities, primarily associated with the administration and servicing of PNC client investments in theBlackRock Funds. Intangible assets at June 30, 2002 and December 31, 2001 were $181.3 million and $181.7 million, respectively, with amortization expense of approximately $0.2 million and $2.6 million for the three months ended June 30, 2002 and 2001, respectively, and $0.4 million and $5.2 million for the six months ended June 30, 2002 and June 30, 2001, respectively. Intangible assets reflect PNC’s acquisition of BlackRock Financial Management, L.P. (“BFM”) on February 28, 1995 and a management contract acquired in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT, on May 15, 2000. On July 20, 2001, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which changed the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recognized relating to past business combinations, ceased upon adoption of the new standard. Impairment testing for goodwill at a reporting unit level is required on at least an annual basis. The new standard also addresses other accounting matters, disclosure requirements and financial statement presentation issues relating to goodwill and other intangible assets. The Company adopted SFAS No. 142, effective on January 1, 2002, as required. Assuming no impairment adjustments are necessary, no future business combinations and no other changes to goodwill, the Company expects diluted earnings per share to increase by approximately $.08 per share in 2002 resulting from the cessation of goodwill amortization.
Assets Under Management
Assets under management increased $37.1 billion, or 17%, to $249.8 billion at June 30, 2002, compared with $212.7 billion at June 30, 2001. The growth in assets under management was attributable to increases of $28.2 billion or 20% in separate accounts and $8.9 billion or 12% in mutual fund assets.
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The increase in separate accounts at June 30, 2002, as compared with June 30, 2001, was the result of net subscriptions of $20.2 billion and market appreciation of $8.0 billion. Net subscriptions in fixed income, equity, and alternative investment products accounts were $21.4 billion, $2.6 billion, and $1.1 billion, respectively, while liquidity- securities lending and liquidity separate account assets experienced net redemptions of $3.6 billion and $1.3 billion, respectively. The rise in fixed income and alternative investment products separate account assets was attributable to new client sales and increased fundings from existing clients associated with solid investment performance and client service and included approximately $6.6 billion of merger related terminations. The growth in equity separate account assets primarily reflected new business from international equity mandates of $3.0 billion and was partially offset by $0.4 billion from domestic equity redemptions due to weak relative investment performance and the continued decline in the U.S. stock markets. Liquidity-securities lending and liquidity separate account assets experienced net redemptions of $4.9 billion, with security lending mandates accounting for $3.6 billion or 72% of the outflows since June 2001 as a result of a substantial decline in equity values. Market appreciation of $8.0 billion in separate accounts largely reflected appreciation in fixed income assets of $8.9 billion due to declining interest rates, partially offset by market depreciation in equity assets of $0.8 billion.
The $8.9 billion increase in mutual fund assets since June 30, 2001 reflected net subscriptions of $10.9 billion, which was partially offset by $2.0 billion of market depreciation primarily in theBlackRock Funds associated with the decline in the equity markets and poor relative performance in a number of key products. Net subscriptions in BPIF and closed-end funds since June 30, 2001 were $9.2 billion and $3.8 billion, respectively, and was partially offset by $2.1 billion in net redemptions in theBlackRock Funds. The increase in BPIF assets was the result of strong sales driven in part by the decline in short-term interest rates and investors’ flight to quality. Management does not assume that the current level of BPIF assets will be sustained as the economy improves and short-term interest rates stabilize or begin to rise. The increase in closed-end funds was the result of the Company’s offering of new closed-end funds. Net redemptions in theBlackRock Fundssince June 30, 2001 primarily reflected withdrawals by PNC’s private banking clients.
BlackRock experienced $7.9 billion in net subscriptions for the first six months of 2002 reflecting separate account net subscriptions of $12.1 billion offset by $4.2 billion of mutual fund redemptions. Fixed income, equity and alternative product separate accounts exhibited continued strong growth with net subscriptions of $17.7 billion which was partially offset by $5.7 billion of redemptions in lower fee security lending and liquidity separate account assets. Liquidity asset balances experienced significant volatility in the first six months of 2002, which could continue through the balance of 2002. Mutual fund net redemptions for the first six months of 2002 was attributable to $3.0 billion in net redemptions in theBlackRock Fundsand $2.0 billion in net redemptions in the BPIF funds which was partially offset by $0.8 billion in net subscriptions in the BlackRock closed-end and short term investment funds.
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BlackRock, Inc.
Assets Under Management
(Dollar amounts in millions)
(unaudited)
June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
All Accounts | |||||||||||||
Fixed income | $ | 157,913 | $ | 122,809 | $ | 35,104 | 28.6 | % | |||||
Liquidity | 70,599 | 65,615 | 4,984 | 7.6 | |||||||||
Equity | 15,898 | 19,791 | (3,893 | ) | (19.7 | ) | |||||||
Alternative investment products | 5,368 | 4,479 | 889 | 19.8 | |||||||||
Total | $ | 249,778 | $ | 212,694 | $ | 37,084 | 17.4 | % | |||||
Separate Accounts | |||||||||||||
Fixed income | $ | 140,738 | $ | 110,483 | $ | 30,255 | 27.4 | % | |||||
Liquidity | 5,516 | 6,782 | (1,266 | ) | (18.7 | ) | |||||||
Liquidity-Securities lending | 6,435 | 10,004 | (3,569 | ) | (35.7 | ) | |||||||
Equity | 10,119 | 8,257 | 1,862 | 22.6 | |||||||||
Alternative investment products | 5,368 | 4,479 | 889 | 19.8 | |||||||||
Subtotal | 168,176 | 140,005 | 28,171 | 20.1 | |||||||||
Mutual Funds | |||||||||||||
Fixed income | 17,175 | 12,326 | 4,849 | 39.3 | |||||||||
Liquidity | 58,648 | 48,829 | 9,819 | 20.1 | |||||||||
Equity | 5,779 | 11,534 | (5,755 | ) | (49.9 | ) | |||||||
Subtotal | 81,602 | 72,689 | 8,913 | 12.3 | |||||||||
Total | $ | 249,778 | $ | 212,694 | $ | 37,084 | 17.4 | % | |||||
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The following tables present the component changes in BlackRock’s assets under management for the three months and six months ended June 30, 2002 and 2001, respectively. The data reflects certain reclassifications to conform with the current year’s presentation.
BlackRock, Inc.
Component Changes in Assets Under Management
(Dollar amounts in millions)
(unaudited)
Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||
All Accounts | |||||||||||||||
Beginning assets under management | $ | 238,116 | $ | 201,636 | $ | 238,584 | $ | 203,769 | |||||||
Net subscriptions | 8,209 | 10,172 | 7,898 | 8,074 | |||||||||||
Market appreciation | 3,453 | 886 | 3,296 | 851 | |||||||||||
Ending assets under management | $ | 249,778 | $ | 212,694 | $ | 249,778 | $ | 212,694 | |||||||
Separate Accounts | |||||||||||||||
Beginning assets under management | $ | 153,954 | $ | 132,711 | $ | 151,986 | $ | 133,743 | |||||||
Net subscriptions | 10,189 | 6,871 | 12,078 | 3,897 | |||||||||||
Market appreciation | 4,033 | 423 | 4,112 | 2,365 | |||||||||||
Ending assets under management | 168,176 | 140,005 | 168,176 | 140,005 | |||||||||||
Mutual Funds | |||||||||||||||
Beginning assets under management | 84,162 | 68,925 | 86,598 | 70,026 | |||||||||||
Net subscriptions (redemptions) | (1,980 | ) | 3,301 | (4,180 | ) | 4,177 | |||||||||
Market appreciation (depreciation) | (580 | ) | 463 | (816 | ) | (1,514 | ) | ||||||||
Ending assets under management | 81,602 | 72,689 | 81,602 | 72,689 | |||||||||||
Total | $ | 249,778 | $ | 212,694 | $ | 249,778 | $ | 212,694 | |||||||
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BlackRock, Inc.
Assets Under Management
Quarterly Trend
(Dollar amounts in millions)
(unaudited)
Quarter ended | Six months ended June 30, 2002 | |||||||||||||||||||||||
2001 | 2002 | |||||||||||||||||||||||
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||||||
Separate Accounts | ||||||||||||||||||||||||
Fixed Income | ||||||||||||||||||||||||
Beginning assets under management | $ | 107,371 | $ | 110,483 | $ | 118,336 | $ | 119,488 | $ | 123,983 | $ | 119,488 | ||||||||||||
Net subscriptions | 2,682 | 2,959 | 1,731 | 4,437 | 12,270 | 16,707 | ||||||||||||||||||
Market appreciation (depreciation) | 430 | 4,894 | (579 | ) | 58 | 4,485 | 4,543 | |||||||||||||||||
Ending assets under management | 110,483 | 118,336 | 119,488 | 123,983 | 140,738 | 140,738 | ||||||||||||||||||
Liquidity | ||||||||||||||||||||||||
Beginning assets under management | 5,713 | 6,782 | 6,987 | 6,831 | 5,441 | 6,831 | ||||||||||||||||||
Net subscriptions (redemptions) | 1,042 | 181 | (171 | ) | (1,395 | ) | 80 | (1,315 | ) | |||||||||||||||
Market appreciation (depreciation) | 27 | 24 | 15 | 5 | (5 | ) | — | |||||||||||||||||
Ending assets under management | 6,782 | 6,987 | 6,831 | 5,441 | 5,516 | 5,516 | ||||||||||||||||||
Liquidity-Securities lending | ||||||||||||||||||||||||
Beginning assets under management | 7,514 | 10,004 | 8,069 | 10,781 | 9,544 | 10,781 | ||||||||||||||||||
Net subscriptions (redemptions) | 2,490 | (1,935 | ) | 2,712 | (1,237 | ) | (3,109 | ) | (4,346 | ) | ||||||||||||||
Market appreciation | — | — | — | — | — | — | ||||||||||||||||||
Ending assets under management | 10,004 | 8,069 | 10,781 | 9,544 | 6,435 | 6,435 | ||||||||||||||||||
�� | ||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||
Beginning assets under management | 7,796 | 8,257 | 8,185 | 9,577 | 9,445 | 9,577 | ||||||||||||||||||
Net subscriptions (redemptions) | 488 | 1,144 | 675 | (80 | ) | 884 | 804 | |||||||||||||||||
Market appreciation (depreciation) | (27 | ) | (1,216 | ) | 717 | (52 | ) | (210 | ) | (262 | ) | |||||||||||||
Ending assets under management | 8,257 | 8,185 | 9,577 | 9,445 | 10,119 | 10,119 | ||||||||||||||||||
Alternative investment products | ||||||||||||||||||||||||
Beginning assets under management | 4,317 | 4,479 | 4,879 | 5,309 | 5,541 | 5,309 | ||||||||||||||||||
Net subscriptions | 169 | 426 | 411 | 164 | 64 | 228 | ||||||||||||||||||
Market appreciation (depreciation) | (7 | ) | (26 | ) | 19 | 68 | (237 | ) | (169 | ) | ||||||||||||||
Ending assets under management | 4,479 | 4,879 | 5,309 | 5,541 | 5,368 | 5,368 | ||||||||||||||||||
Total Separate Accounts | ||||||||||||||||||||||||
Beginning assets under management | 132,711 | 140,005 | 146,456 | 151,986 | 153,954 | 151,986 | ||||||||||||||||||
Net subscriptions | 6,871 | 2,775 | 5,358 | 1,889 | 10,189 | 12,078 | ||||||||||||||||||
Market appreciation | 423 | 3,676 | 172 | 79 | 4,033 | 4,112 | ||||||||||||||||||
Ending assets under management | $ | 140,005 | $ | 146,456 | $ | 151,986 | $ | 153,954 | $ | 168,176 | $ | 168,176 | ||||||||||||
Mutual Funds | ||||||||||||||||||||||||
Fixed Income | ||||||||||||||||||||||||
Beginning assets under management | $ | 13,600 | $ | 12,326 | $ | 13,985 | $ | 15,754 | $ | 16,270 | $ | 15,754 | ||||||||||||
Net subscriptions (redemptions) | (1,207 | ) | 1,397 | 2,000 | 644 | 565 | 1,209 | |||||||||||||||||
Market appreciation (depreciation) | (67 | ) | 262 | (231 | ) | (128 | ) | 340 | 212 | |||||||||||||||
Ending assets under management | 12,326 | 13,985 | 15,754 | 16,270 | 17,175 | 17,175 | ||||||||||||||||||
Liquidity | ||||||||||||||||||||||||
Beginning assets under management | 44,252 | 48,829 | 56,221 | 62,141 | 59,994 | 62,141 | ||||||||||||||||||
Net subscriptions (redemptions) | 4,577 | 7,392 | 5,920 | (2,147 | ) | (1,347 | ) | (3,494 | ) | |||||||||||||||
Market appreciation | — | — | — | — | 1 | 1 | ||||||||||||||||||
Ending assets under management | 48,829 | 56,221 | 62,141 | 59,994 | 58,648 | 58,648 | ||||||||||||||||||
Equity | ||||||||||||||||||||||||
Beginning assets under management | 11,073 | 11,534 | 8,934 | 8,703 | 7,898 | 8,703 | ||||||||||||||||||
Net redemptions | (69 | ) | (558 | ) | (1,040 | ) | (697 | ) | (1,198 | ) | (1,895 | ) | ||||||||||||
Market appreciation (depreciation) | 530 | (2,042 | ) | 809 | (108 | ) | (921 | ) | (1,029 | ) | ||||||||||||||
Ending assets under management | 11,534 | 8,934 | 8,703 | 7,898 | 5,779 | 5,779 | ||||||||||||||||||
Total Mutual Funds | ||||||||||||||||||||||||
Beginning assets under management | 68,925 | 72,689 | 79,140 | 86,598 | 84,162 | 86,598 | ||||||||||||||||||
Net subscriptions (redemptions) | 3,301 | 8,231 | 6,880 | (2,200 | ) | (1,980 | ) | (4,180 | ) | |||||||||||||||
Market appreciation (depreciation) | 463 | (1,780 | ) | 578 | (236 | ) | (580 | ) | (816 | ) | ||||||||||||||
Ending assets under management | $ | 72,689 | $ | 79,140 | $ | 86,598 | $ | 84,162 | $ | 81,602 | $ | 81,602 | ||||||||||||
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BlackRock, Inc.
Assets Under Management
Quarterly Trend
(Dollar amounts in millions)
(unaudited)
Quarter ended | Six months ended June 30, 2002 | |||||||||||||||||||||||
2001 | 2002 | |||||||||||||||||||||||
June 30 | September 30 | December 31 | March 31 | June 30 | ||||||||||||||||||||
Mutual Funds | ||||||||||||||||||||||||
BlackRock Funds | ||||||||||||||||||||||||
Beginning assets under management | $ | 24,383 | $ | 24,589 | $ | 22,790 | $ | 24,195 | $ | 22,176 | $ | 24,195 | ||||||||||||
Net subscriptions (redemptions) | (253 | ) | 49 | 755 | (1,830 | ) | (1,123 | ) | (2,953 | ) | ||||||||||||||
Market appreciation (depreciation) | 459 | (1,848 | ) | 650 | (189 | ) | (789 | ) | (978 | ) | ||||||||||||||
Ending assets under management | 24,589 | 22,790 | 24,195 | 22,176 | 20,264 | 20,264 | ||||||||||||||||||
BlackRock Global Series | ||||||||||||||||||||||||
Beginning assets under management | 105 | 134 | 127 | 149 | 247 | 149 | ||||||||||||||||||
Net subscriptions (redemptions) | 33 | 1 | 13 | 95 | (52 | ) | 43 | |||||||||||||||||
Market appreciation (depreciation) | (4 | ) | (8 | ) | 9 | 3 | 13 | 16 | ||||||||||||||||
Ending assets under management | 134 | 127 | 149 | 247 | 208 | 208 | ||||||||||||||||||
BPIF | ||||||||||||||||||||||||
Beginning assets under management | 37,047 | 41,954 | 48,889 | 53,167 | 52,534 | 53,167 | ||||||||||||||||||
Net subscriptions (redemptions) | 4,907 | 6,935 | 4,278 | (633 | ) | (1,407 | ) | (2,040 | ) | |||||||||||||||
Ending assets under management | 41,954 | 48,889 | 53,167 | 52,534 | 51,127 | 51,127 | ||||||||||||||||||
Closed End | ||||||||||||||||||||||||
Beginning assets under management | 6,841 | 5,440 | 6,728 | 8,512 | 8,611 | 8,512 | ||||||||||||||||||
Net subscriptions (redemptions) | (1,409 | ) | 1,212 | 1,865 | 149 | 586 | 735 | |||||||||||||||||
Market appreciation (depreciation) | 8 | 76 | (81 | ) | (50 | ) | 196 | 146 | ||||||||||||||||
Ending assets under management | 5,440 | 6,728 | 8,512 | 8,611 | 9,393 | 9,393 | ||||||||||||||||||
Short Term Investment Funds (STIF) | ||||||||||||||||||||||||
Beginning assets under management | 549 | 572 | 606 | 575 | 594 | 575 | ||||||||||||||||||
Net subscriptions (redemptions) | 23 | 34 | (31 | ) | 19 | 16 | 35 | |||||||||||||||||
Ending assets under management | 572 | 606 | 575 | 594 | 610 | 610 | ||||||||||||||||||
Total Mutual Funds | ||||||||||||||||||||||||
Beginning assets under management | 68,925 | 72,689 | 79,140 | 86,598 | 84,162 | 86,598 | ||||||||||||||||||
Net subscriptions (redemptions) | 3,301 | 8,231 | 6,880 | (2,200 | ) | (1,980 | ) | (4,180 | ) | |||||||||||||||
Market appreciation (depreciation) | 463 | (1,780 | ) | 578 | (236 | ) | (580 | ) | (816 | ) | ||||||||||||||
Ending assets under management | $ | 72,689 | $ | 79,140 | $ | 86,598 | $ | 84,162 | $ | 81,602 | $ | 81,602 | ||||||||||||
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Table of Contents
Operating results for the three months ended June 30, 2002 as compared with the three months ended June 30, 2001.
Revenue
Total revenue for the three months ended June 30, 2002 increased $21.4 million or 16% to $156.7 million compared with $135.3 million for the three months ended June 30, 2001. Investment advisory and administration fees increased $17.1 million or 14% to $143.5 million for the three months ended June 30, 2002, compared with $126.4 million for the three months ended June 30, 2001. The growth in investment advisory and administration fees was primarily due to a 17% increase in assets under management to $249.8 billion at June 30, 2002. Other income of $13.2 million increased $4.4 million or 49% for the three months ended June 30, 2002 compared with $8.8 million for the three months ended June 30, 2001 primarily due to increased sales ofBlackRock Solutions products and portfolio accounting services.
Three months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
Investment advisory and administration fees: | |||||||||||||
Mutual funds | $ | 54,736 | $ | 54,791 | ($ | 55 | ) | -0.1 | % | ||||
Separate accounts | 88,755 | 71,624 | 17,131 | 23.9 | |||||||||
Total investment advisory and administration fees | 143,491 | 126,415 | 17,076 | 13.5 | |||||||||
Other income | 13,204 | 8,847 | 4,357 | 49.2 | |||||||||
Total revenue | $ | 156,695 | $ | 135,262 | $ | 21,433 | 15.8 | % | |||||
Mutual fund advisory and administration fees for the second quarter were essentially flat compared with the three months ended June 30, 2001, with strong growth in BPIF, closed-end and STIF revenue of approximately $6.5 million, $2.2 million and $0.1 million, respectively, which was entirely offset by an $8.8 million or 28% decline in revenue from theBlackRock Funds. The increase in BPIF revenue was primarily due to increases in assets under management of $9.2 billion or 22% as compared with the second quarter of 2001 resulting from expanded sales efforts, solid investment performance and investors’ flight to quality. The rise in closed-end fund revenue was a result of an increase in assets of $4.0 billion or 73% due to the Company’s new fund offerings. The decrease inBlackRock Funds revenue was attributable to a decrease in assets of $4.3 billion or 18% primarily due to the continued weakness in the equity markets and poor relative investment performance in a number of key products.
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Table of Contents
Separate account revenue increased $17.1 million or 24% to $88.8 million for the three months ended June 30, 2002, compared with $71.6 million for the three months ended June 30, 2001. Excluding performance fees, advisory fees on separate accounts increased $11.7 million or 22% to $65.5 million for the three months ended June 30, 2002 compared with $53.7 million for the three months ended June 30, 2001. The increase was driven by a $28.2 billion or 20% increase in separate account assets under management particularly in fixed income and international equity separate accounts, which increased $30.3 billion and $2.6 billion, respectively and was partially offset by a decrease in liquidity and liquidity-securities lending separate accounts of $4.8 billion. Performance fees of $23.3 million for the three months ended June 30, 2002 increased $5.4 million or 30% compared with $17.9 million for the three months ended June 30, 2001. Performance fees earned on the Company’s fixed income hedge fund totaled $18.4 million for the second quarter of 2002 as compared with $16.8 million for the second quarter of 2001. Investment losses occurring late in the second quarter have resulted in a high water mark for the fund, which will substantially reduce the likelihood of earning additional performance fees for the remainder of 2002.
Three months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
Mutual funds revenue | �� | ||||||||||||
BlackRock Funds | $ | 22,892 | $ | 31,740 | ($ | 8,848 | ) | (27.9 | %) | ||||
Closed End Funds | 9,873 | 7,617 | 2,256 | 29.6 | |||||||||
BPIF | 21,763 | 15,285 | 6,478 | 42.4 | |||||||||
STIF | 208 | 149 | 59 | 39.6 | |||||||||
Total mutual funds revenue | 54,736 | 54,791 | (55 | ) | (0.1 | ) | |||||||
Separate accounts revenue | |||||||||||||
Separate account base fees | 65,451 | 53,705 | 11,746 | 21.9 | |||||||||
Separate account performance fees | 23,304 | 17,919 | 5,385 | 30.1 | |||||||||
Total separate accounts revenue | 88,755 | 71,624 | 17,131 | 23.9 | |||||||||
Total investment advisory and administration fees | 143,491 | 126,415 | 17,076 | 13.5 | |||||||||
Other income | 13,204 | 8,847 | 4,357 | 49.2 | |||||||||
Total revenue | $ | 156,695 | $ | 135,262 | $ | 21,433 | 15.8 | % | |||||
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Expense
Total expense increased $9.4 million or 10% to $102.0 million for the three months ended June 30, 2002, compared with $92.6 million for the three months ended June 30, 2001. The change primarily reflects increases in employee compensation and benefits and general and administration expenses, partially offset by a decrease in fund administration and servicing costs-affiliates and amortization of intangible assets.
Three months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
Employee compensation and benefits | $ | 67,830 | $ | 55,534 | $ | 12,296 | 22.1 | % | |||||
Fund administration and servicing costs-affiliates | 11,916 | 15,722 | (3,806 | ) | (24.2 | ) | |||||||
General and administration | 22,043 | 18,684 | 3,359 | 18.0 | |||||||||
Amortization of intangible assets | 201 | 2,614 | (2,413 | ) | (92.3 | ) | |||||||
Total expense | $ | 101,990 | $ | 92,554 | $ | 9,436 | 10.2 | % | |||||
Employee compensation and benefits increased $12.3 million primarily due to increased incentive compensation of $7.2 million reflecting accruals based on the growth of operating income, $2.7 million related to direct incentives on alternative product performance fees and $2.4 million in salary and benefits. Salary and benefit cost increases were the result of an 11% increase in full-time employees and $0.2 million attributable to investment returns associated with the recently established Voluntary and Involuntary Deferred Compensation programs. For the three months ended June 30, 2002, fund administration and servicing costs-affiliates declined $3.8 million or 24% due to lower levels of PNC client assets invested in theBlackRock Funds. General and administration expenses increased $3.4 million or 18% to $22.0 million for the three months ended June 30, 2002 compared with $18.7 million for the three months ended June 30, 2001 largely due to higher marketing and promotional expenses and increased depreciation and leasehold amortization costs. Amortization of intangible assets decreased due to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” effective on January 1, 2002, which changed the accounting for goodwill from an amortization method to an impairment-only approach.
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Three months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
General and administration expense: | |||||||||||||
Marketing and promotional | $ | 6,581 | $ | 5,399 | $ | 1,182 | 21.9 | % | |||||
Occupancy expense | 5,020 | 2,871 | 2,149 | 74.9 | |||||||||
Technology | 4,535 | 3,499 | 1,036 | 29.6 | |||||||||
Other general and administration | 5,907 | 6,915 | (1,008 | ) | (14.6 | ) | |||||||
Total general and administration expense | $ | 22,043 | $ | 18,684 | $ | 3,359 | 18.0 | % | |||||
Marketing and promotional expenses of $6.6 million for the three months ended June 30, 2002 increased $1.2 million or 22% primarily due to increased institutional marketing costs and expenses attributable to launching the new closed-end funds. Occupancy expense of $5.0 million for the three months ended June 30, 2002 increased $2.1 million due to higher depreciation and leasehold costs associated with corporate facility expansion, particularly at 40 East 52nd Street, New York, Wilmington, Delaware, San Francisco, California, Boston, Massachusetts and Hong Kong. Technology expenses increased approximately $1.0 million or 30% to $4.5 million for the three months ended June 30, 2002 as a result of higher depreciation charges associated with the completion of new data processing facilities in New York and Delaware, and capitalized investments to support the growth ofBlackRock Solutions. The decrease in other general and administration expense was primarily due to foreign currency translation gains associated with the weakening of the U.S. dollar versus the Euro and U.K. pound.
Operating Income and Net Income
Operating income was $54.7 million for the three months ended June 30, 2002, representing a $12.0 million or 28% increase compared with the three months ended June 30, 2001. Non-operating income increased $1.4 million to $3.8 million for the three months ended June 30,2002 as compared with the three months ended June 30, 2001. The rise was primarily due to an increase of $0.9 million in gains on the sale of securities and a $0.2 million increase associated with investment returns on the recently established Voluntary and Involuntary Deferred Compensation programs. Income tax expense was $23.7 million and $18.9 million, representing effective tax rates of 40.5% and 41.9% for the three months ended June 30, 2002 and June 30, 2001, respectively. Net income totaled $34.8 million for the three months ended June 30, 2002 compared with $26.2 million for the three months ended June 30, 2001, representing an increase of $8.6 million or 33%.
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Operating results for the six months ended June 30, 2002 as compared with the six months ended June 30, 2001.
Revenue
Total revenue for the six months ended June 30, 2002 increased $33.8 million or 13% to $302.8 million compared with $269.0 million for the six months ended June 30, 2001. Investment advisory and administration fees increased $23.6 million or 9% to $275.3 million for the six months ended June 30, 2002, compared with $251.7 million for the six months ended June 30, 2001. The growth in investment advisory and administration fees was primarily due to a 17% increase in assets under management to $249.8 billion at June 30, 2002. Other income of $27.5 million increased $10.3 million or 60% for the six months ended June 30, 2002 compared with $17.2 million for the six months ended June 30, 2001 primarily due to increased sales ofBlackRock Solutionsproducts.
Six months ended June 30, | Variance | |||||||||||
2002 | 2001 | Amount | % | |||||||||
Dollar amounts in thousands | (unaudited) | |||||||||||
Investment advisory and administration fees: | ||||||||||||
Mutual funds | $ | 109,995 | $ | 109,707 | $ | 288 | 0.3 | % | ||||
Separate accounts | 165,271 | 142,009 | 23,262 | 16.4 | ||||||||
Total investment advisory and administration fees | 275,266 | 251,716 | 23,550 | 9.4 | ||||||||
Other income | 27,542 | 17,255 | 10,287 | 59.6 | ||||||||
Total revenue | $ | 302,808 | $ | 268,971 | $ | 33,837 | 12.6 | % | ||||
Mutual fund advisory and administration fees increased $0.3 million to $110.0 million for the six months ended June 30, 2002, compared with $109.7 million for the six months ended June 30, 2001. The increase in mutual fund revenue was the result of increases in BPIF, closed end fund and STIF revenue of $11.9 million, $4.3 million and $0.1 million, respectively and was partially offset by a decrease of $16.0 million or 25% inBlackRock Funds revenue. The increase in BPIF revenue was primarily due to increases in assets under management of $9.2 billion or 22% at June 30, 2002 resulting from expanded sales efforts, solid investment performance and investors’ flight to quality. The rise in closed-end fund revenue was a result of an increase in assets of $4.0 billion or 73% due to the Company’s new fund offerings. The decrease inBlackRock Funds revenue was attributable to a decrease in assets of $4.3 billion or 18% primarily due to the continued weakness in the equity markets and poor relative investment performance in a number of key products.
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Separate account revenue increased $23.3 million or 16% to $165.3 million for the six months ended June 30, 2002, compared with $142.0 million for the six months ended June 30, 2001. Excluding performance fees, advisory fees on separate accounts increased $22.5 million or 21% to $127.9 million for the six months ended June 30, 2002 compared with $105.4 million for the six months ended June 30, 2001. The increase reflected a $28.2 billion or 20% increase in separate account assets under management particularly in fixed income and international equity separate accounts of $30.3 billion and $2.6 billion, respectively and was partially offset by a decrease in liquidity and liquidity-securities lending separate accounts of $4.8 billion. Performance fees of $37.3 million for the six months ended June 30, 2002 increased $0.7 million or 2% compared with $36.6 million for the six months ended June 30, 2001. Performance fees earned on the Company’s fixed income hedge fund totaled $30.4 million for the first half of 2002 as compared to $32.8 million for the first half of 2001. Investment losses occurring late in the second quarter have resulted in a high water mark for the fund, which will substantially reduce the likelihood of earning additional performance fees for the remainder of 2002.
Six months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
Mutual funds revenue | |||||||||||||
BlackRock Funds | $ | 48,587 | $ | 64,603 | ($ | 16,016 | ) | (24.8 | %) | ||||
Closed End Funds | 19,361 | 15,075 | 4,286 | 28.4 | |||||||||
BPIF | 41,637 | 29,744 | 11,893 | 40.0 | |||||||||
STIF | 410 | 285 | 125 | 43.9 | |||||||||
Total mutual funds revenue | 109,995 | 109,707 | 288 | 0.3 | |||||||||
Separate accounts revenue | |||||||||||||
Separate account base fees | 127,950 | 105,421 | 22,529 | 21.4 | |||||||||
Separate account performance fees | 37,321 | 36,588 | 733 | 2.0 | |||||||||
Total separate accounts revenue | 165,271 | 142,009 | 23,262 | 16.4 | |||||||||
Total investment advisory and administration fees | 275,266 | 251,716 | 23,550 | 9.4 | |||||||||
Other income | 27,542 | 17,255 | 10,287 | 59.6 | |||||||||
Total revenue | $ | 302,808 | $ | 268,971 | $ | 33,837 | 12.6 | % | |||||
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Expense
Total expense increased $13.8 million or 8% to $198.1 million for the six months ended June 30, 2002, compared with $184.3 million for the six months ended June 30, 2001. The change primarily reflects increases in employee compensation and benefits and general and administration expenses, partially offset by a decrease in fund administration and servicing costs-affiliates and amortization of intangible assets.
Six months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
Employee compensation and benefits | $ | 128,217 | $ | 110,964 | $ | 17,253 | 15.5 | % | |||||
Fund administration and servicing costs-affiliates | 25,094 | 32,412 | (7,318 | ) | (22.6 | ) | |||||||
General and administration | 44,455 | 35,739 | 8,716 | 24.4 | |||||||||
Amortization of intangible assets | 402 | 5,228 | (4,826 | ) | (92.3 | ) | |||||||
Total expense | $ | 198,168 | $ | 184,343 | $ | 13,825 | 7.5 | % | |||||
Employee compensation and benefits increased $17.3 million primarily due to increased incentive compensation of $10.9 million reflecting accruals based on the growth of operating income, $5.8 million in salary and benefits and $0.6 million related to direct incentives on alternative product performance fees. Salary and benefit cost increases were the result of a 11% increase in full-time employees and $0.5 million attributable to investment returns associated with the recently established Voluntary and Involuntary Deferred Compensation programs. For the six months ended June 30, 2002, fund administration and servicing costs-affiliates declined $7.3 million or 23% due to lower levels of PNC client assets invested in theBlackRock Funds. General and administration expenses increased $8.7 million or 24% to $44.4 million for the six months ended June 30, 2002 compared with $35.7 million for the six months ended June 30, 2001 largely due to higher marketing and promotional expenses and increased depreciation and leasehold amortization costs. Amortization of intangible assets decreased due to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” effective on January 1, 2002, which changed the accounting for goodwill from an amortization method to an impairment-only approach.
Six months ended June 30, | Variance | ||||||||||||
2002 | 2001 | Amount | % | ||||||||||
Dollar amounts in thousands | (unaudited) | ||||||||||||
General and administration expense: | |||||||||||||
Marketing and promotional | $ | 12,497 | $ | 10,246 | $ | 2,251 | 22.0 | % | |||||
Occupancy expense | 9,742 | 5,407 | 4,335 | 80.2 | |||||||||
Technology | 8,932 | 6,654 | 2,278 | 34.2 | |||||||||
Other general and administration | 13,284 | 13,432 | (148 | ) | (1.1 | ) | |||||||
Total general and administration expense | $ | 44,455 | $ | 35,739 | $ | 8,716 | 24.4 | % | |||||
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Marketing and promotional expenses of $12.5 million for the six months ended June 30, 2002 increased $2.3 million or 22% primarily due to increased institutional marketing costs and expenses associated with launching the new closed-end funds. Occupancy expense of $9.7 million for the six months ended June 30, 2002 increased $4.3 million due to higher depreciation and leasehold amortization costs associated with corporate facility expansion, particularly at 40 East 52nd Street, New York, Wilmington, Delaware, San Francisco, California, Boston, Massachusetts and Hong Kong. Technology expenses increased approximately $2.3 million or 34% to $8.9 million for the six months ended June 30, 2002 as a result of higher depreciation charges associated with the completion of new data processing facilities in New York and Delaware, and capitalized investments to support the growth ofBlackRock Solutions.
Operating Income and Net Income
Operating income was $104.6 million for the six months ended June 30, 2002, representing a $20.0 million or 24% increase compared with the six months ended June 30, 2001. Non-operating income increased $2.6 million to $6.7 million for the six months ended June 30,2002 as compared with the six months ended June 30, 2001. The rise was primarily due to a increase of $1.0 million in gains on the sale of securities and a $0.5 million increase associated with investment returns on the recently established Voluntary and Involuntary Deferred Compensation programs. Income tax expense was $45.1 million and $37.0 million, representing effective tax rates of 40.5% and 41.7% for the six months ended June 30, 2002 and June 30, 2001, respectively. Net income totaled $66.2 million for the six months ended June 30, 2002 compared with $51.7 million for the six months ended June 30, 2001, representing an increase of $14.5 million or 28%.
Liquidity and Capital Resources
BlackRock meets its working capital requirements through cash generated by its operating activities. Cash provided by the Company’s operating activities totaled $26.9 million for the six months ended June 30, 2002. Operating activities for the six months ended June 30, 2002, included net purchases of investments, trading of approximately $17.4 million, which represented initial investments related to the Company’s Voluntary and Involuntary Deferred Compensation Plans and $1.4 million in net gains on investments. The increase in receivables from affiliates since December 31, 2001 was primarily due to the recognition of a deferred tax asset on the amounts transferred under the Company’s new Voluntary and Involuntary Deferred Compensation Plans.
Net cash flow used in investing activities was $36.9 million for the six months ended June 30, 2002. Capital expenditures for the six months ended June 30, 2002 for property and equipment was $31.8 million and primarily reflected construction costs for 40 East 52nd Street and the purchase of equipment to support corporate expansion and the growth ofBlackRock Solutions. Net purchases of investments, available for sale were $5.1 million for the six months ended June 30, 2002, reflected purchases of $123.3 million in theBlackRock Funds Low Duration Bond Portfolio and $3.5 million in seed investments partially offset by redemptions of $85.1 million and $35.0 million in theBlackRock Funds Intermediate Bond Portfolio andBlackRock Funds Core Plus Total Return Portfolio, respectively.
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Net cash flow used in financing activities was $7.5 million for the six months ended June 30, 2002. Financing activities primarily represented treasury stock activity for the six months ended June 30, 2002. On January 31, 2002, in connection with the Long-term Deferred Compensation Plan, BlackRock repurchased approximately 150,000 shares of class A common stock at a fair market value of $42.33 per share from certain employees to facilitate required employee income tax payments. On May 2, 2001, BlackRock’s Board of Directors authorized BlackRock to repurchase up to 500,000 of its outstanding shares of class A common stock from time to time as market and business conditions warrant in open market or privately negotiated transactions. To date, BlackRock has not purchased any shares of its outstanding class A common stock under this repurchase program. In connection with the BlackRock Inc. 2001 Employee Stock Purchase Plan (“ESPP”), the Company reissued approximately 44,000 shares of class A treasury stock to its participants on January 31, 2002. During February 2002, the Company also purchased class B common stock from a former BlackRock employee in the amount of $2.1 million.
Total capital at June 30, 2002 was $561.2 million and was comprised entirely of stockholders’ equity.
Contractual Obligations and Commercial Commitments
The Company leases office space in New York, New York, Edinburgh, Scotland, Hong Kong, San Francisco, California, and Boston, Massachusetts under agreements which expire through 2017. Future minimum commitments under all operating leases are $174.3 million.
In connection with the management contract acquired associated with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT, the Company recorded an $8.0 million liability using an imputed interest rate of 10%. At June 30, 2002, the future commitment under the agreement is $9.5 million.
As of June 30, 2002 and 2001, the Company had an unused revolving line of credit, which will expire in December 2002, with PNC Bank whereby the Company may borrow principal amounts up to $175 million at prime rate (4.75% at June 30, 2002).
The Company enters into various contractual commitments with BlackRock sponsored funds in order to provide seed investments in new products. Approximately $7.9 million of these commitments remained unfunded at June 30, 2002.
Summary of Commitments:
Total | 2002 | 2003 | 2004 | 2005 | 2006 | Thereafter | |||||||||||||||
(Dollar amounts in thousands) | |||||||||||||||||||||
Lease Commitments | $ | 174,276 | $ | 5,529 | $ | 10,907 | $ | 10,822 | $ | 10,713 | $ | 10,867 | $ | 125,438 | |||||||
Acquired Management Contract | 9,500 | — | 1,500 | 1,500 | 1,500 | 1,000 | 4,000 | ||||||||||||||
Investment Commitments | 7,900 | 7,900 | — | — | — | — | — | ||||||||||||||
Line of Credit with PNC | — | — | — | — | — | — | — | ||||||||||||||
Total Commitments | $ | 191,676 | $ | 13,429 | $ | 12,407 | $ | 12,322 | $ | 12,213 | $ | 11,867 | $ | 129,438 | |||||||
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Long-term Incentive and Retention Plan-Status
BlackRock and PNC are continuing to develop a new long-term incentive and retention program for key employees in anticipation of the lapse of all employment agreements and final vesting of substantially all restricted stock on December 31, 2002. Management expects to announce the terms of the new program shortly.
Critical Accounting Policies
Significant intercompany accounts and transactions between the consolidated entities have been eliminated. 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. The Company follows the same accounting policies in the preparation of interim reports as set forth in the Annual Report on Form 10-K for the year ended December 31, 2001. Management considers the following accounting policies critical to an informed review of BlackRock’s consolidated financial statements.
Investments
The Company’s investments are classified as trading and available for sale. Investments, trading represent matching investments made by, and held in a Rabbi Trust for, the Company with respect to the BlackRock Voluntary and Involuntary Deferred Compensation Plans and are recorded at fair market value with unrealized gains and losses included in the accompanying consolidated statements of income as non-operating income or loss. Investments, available for sale consist primarily of investments in BlackRock funds and certain institutional and private placement portfolios (“alternative investment products”) and are stated at quoted market values. Securities, which are not readily marketable, (alternative investment products) are stated at their estimated fair market value as determined by the Company’s management. The resulting unrealized gains and losses on investments, available for sale are included in the accumulated other comprehensive loss component of stockholders’ equity, net of tax. Realized gains and losses on investments and interest and dividend income are included in investment income (expense) in the accompanying consolidated statements of income. The Company’s management periodically assesses impairment on investments to determine if they are other than temporary. Any impairment on investments, other than temporary impairments, is recorded in earnings.
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Intangible Assets
Intangible assets are comprised of goodwill and management contract acquired. For the three months and six months ended June 30, 2001, goodwill was amortized on a straight-line basis over 25 years. On July 20, 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changed the accounting for goodwill from an amortization method to an impairment-only approach. The amortization of goodwill, including goodwill recognized relating to past business combinations, ceased upon adoption of the new standard. Impairment testing for goodwill at a reporting unit level is required on at least an annual basis. The new standard also addresses other accounting matters, disclosure requirements and financial statement presentation issues relating to goodwill and other intangible assets. The Company adopted SFAS No. 142 effective January 1, 2002, as required. Assuming no impairment adjustments are necessary, no future business combinations, and no other changes to goodwill, the Company expects diluted earnings per share to increase by approximately $.08 per share in 2002 as a result of the cessation of goodwill amortization. Management contract acquired is amortized in proportion to and over the period of contract revenue, which is ten years. The Company continually evaluates the carrying value of intangible assets. Any impairment would be recognized when the future operating cash flows expected to be derived from such intangible assets are less than their carrying value. In such instances, impairment, if any, is measured on a discounted future cash flow basis.
Software Costs
The Company has adopted Statement of Position (“SOP”) 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. Qualifying software costs are being amortized over an estimated useful life of three years.
Stock-based Compensation
The Company follows SFAS No. 123, “Accounting for Stock-based Compensation,” and has adopted the intrinsic value method for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. Fair value disclosures are included in the notes to the consolidated financial statements as stated in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Pursuant to SFAS No. 123, the Company has elected to account for its 1999 Stock Award and Incentive Plan and shares issued under the BlackRock 2001 Employee Stock Purchase Plan under Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” and adopt the disclosure only provisions of SFAS No. 123.
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Revenue Recognition
Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on predetermined percentages of the market values of the assets under management. Investment advisory and administration fees for mutual funds are shown net of fees waived pursuant to expense limitations.
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 contractual investment return thresholds or as a fixed percentage of actual returns over stipulated performance periods. Such fees are recorded as earned. Should the alternative investment products and separate accounts subject to performance fees not continue to meet specified investment return thresholds, performance fees and related employee compensation expense previously recorded may be subject to reversal. At June 30, 2002, no performance fees recorded by the Company are subject to reversal.
BlackRock provides a variety of risk management and technology services to insurance companies, finance companies, pension funds, 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. The fees earned on risk management advisory assignments are recorded as other income.
In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements.” SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company adopted SAB No. 101 as required in the first quarter of 2000. The adoption of SAB No. 101 did not have a material effect on the Company’s consolidated results of operations and financial position.
Accounting for Off-Balance Sheet Activities
BlackRock has equity interests in collateralized bond obligations (“CBO”), which are reflected in investments in the accompanying consolidated statements of financial condition. These investments are periodically assessed to determine whether the underlying assets and liabilities should be consolidated. See “Off-Balance Sheet Activities.”
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Related Party Transactions
The Company and its consolidated subsidiaries provide investment advisory and administration services to theBlackRock Funds, BPIF, the BlackRock Closed-end Funds and other commingled funds.
Revenues for services provided to these mutual funds including amounts associated with clients of PNC affiliated entities are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(Dollar amounts in thousands) | (unaudited) | |||||||||||
Investment advisory and administration fees: | ||||||||||||
BlackRock Open-end Funds: | ||||||||||||
PNC | $ | 16,114 | $ | 23,338 | $ | 34,396 | $ | 47,257 | ||||
Other | 6,778 | 8,400 | 14,190 | 17,344 | ||||||||
BlackRock Closed-end Funds—Other | 9,873 | 7,617 | 19,361 | 15,075 | ||||||||
BlackRock Provident Institutional Funds | ||||||||||||
PNC | 3,458 | 2,948 | 6,881 | 5,819 | ||||||||
Other* | 18,305 | 12,338 | 34,757 | 23,926 | ||||||||
Commingled Funds—PNC | 208 | 150 | 410 | 286 | ||||||||
$ | 54,736 | $ | 54,791 | $ | 109,995 | $ | 109,707 | |||||
* | 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 and affiliates for a fee, based on assets under management. In addition, the Company provides risk management and model portfolio services to PNC.
Revenues for such services are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(Dollar amounts in thousands) | (unaudited) | |||||||||||
Investment advisory and administration fees: | ||||||||||||
Separate accounts | $ | 3,941 | $ | 3,156 | $ | 7,401 | $ | 6,764 | ||||
Model Portfolio Services | 1,101 | 1,098 | 2,201 | 2,196 | ||||||||
Other income-risk management | 1,250 | 1,250 | 2,500 | 2,500 | ||||||||
Fixed income trading services | 282 | 282 | 564 | 564 | ||||||||
$ | 6,574 | $ | 5,786 | $ | 12,666 | $ | 12,024 | |||||
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The Company has entered into various memoranda of understanding and co-administration agreements with affiliates of PNC pursuant to which the Company pays administration fees for BPIF and certain other commingled funds and service fees for PNC Advisors’ (PNC’s wealth management business) clients invested in theBlackRock 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. Aggregate expenses included in the consolidated financial statements for transactions with related parties are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||
(Dollar amounts in thousands) | (unaudited) | |||||||||||
Fund administration and servicing costs-affiliates | $ | 11,916 | $ | 15,722 | $ | 25,094 | $ | 32,412 | ||||
General and administration | 1,587 | 1,757 | 3,187 | 3,704 | ||||||||
General and administration-consulting | 300 | — | 600 | — | ||||||||
$ | 13,803 | $ | 17,479 | $ | 28,881 | $ | 36,116 | |||||
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.
Payable to affiliates was $21,473 and $15,972 at June 30, 2002 and December 31, 2001, respectively. These amounts primarily represent income taxes payable and fund administration and servicing costs-affiliates payable. These amounts do not bear interest.
Included in accounts receivable is approximately $4,770 and $5,387 at June 30, 2002 and December 31, 2001, respectively, which primarily represents investment and administration services provided to PNC subsidiaries and affiliates.
Receivable from affiliates was approximately $8,809 and $2,569 at June 30, 2002 and December 31, 2001, respectively. The amount primarily represents reimbursed expenses due from the BlackRock Funds and affiliates as well as a deferred tax asset on the amounts associated with the Company’s Voluntary and Involuntary Deferred Compensation Plans.
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Off-Balance Sheet Activities
As an investment manager of alternative and traditional investment products, the Company has investments in and/or may provide investment management, advisory or administrative services to funds and other investment companies organized as limited liability companies (“LLC”), corporations or business trusts.
Specifically, BlackRock acts as the collateral manager for four CBO funds organized as corporations or limited liability companies. At June 30, 2002, aggregate assets and debt in the CBO’s approximated $1.9 billion and $1.8 billion, respectively. BlackRock’s equity ownership was approximately $14.7 million at June 30, 2002.
BlackRock serves as the investment manager for two fixed income hedge funds (“Obsidian Funds”), with one fund structured as an LLC and the other as a corporate entity, that engage in the trading of fixed income securities. BlackRock serves as the managing member for the LLC, which had total assets and liabilities of approximately $23.8 billion and $23.3 billion, respectively. BlackRock’s equity ownership was approximately $0.1 million at June 30, 2002.
Under current accounting principles generally accepted in the United States, the Company has not consolidated the CBO’s or the Obsidian Funds because non-affiliated parties have sufficient equity ownership and BlackRock has not guaranteed any of their obligations nor is it contractually liable for any of their obligations. Accordingly, the statements of financial condition and results of operations of the CBO’s and the LLC are not included in BlackRock’s financial statements with the exception of BlackRock’s equity ownership. The accounting for special purpose entities is currently under review by the Financial Accounting Standards Board and the conditions for consolidation or non-consolidation of such entities could change.
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 rapidly 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.
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Forward Looking Statements
This report and other statements made by BlackRock may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act with respect to the outlook for earnings and revenues and other future financial or business performance, strategies and expectations. Forward-looking statements are typically identified by words or phrases such as “believe,” “prospects,” “opportunity,” “expectations,” “optimistic,” “pessimistic,” “expect,” “anticipate,” “intend,” “estimate,” “position,” “target,” “mission,” “assume,” “achievable,” “potential,” “strategy,” “goal,” “objective,” “plan,” “aspiration,” “outlook,” “outcome,” “continue,” “remain,” “maintain,” “strive,” “trend,” and variations of such words 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 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.
In addition to factors previously disclosed in BlackRock’s SEC reports and those identified elsewhere in this 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 reduced demand for products or services or reduced value of assets under management; (3) the investment performance of BlackRock’s advised or sponsored investment products and separately managed accounts; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions; (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; (10) the impact of legislative and regulatory actions and reforms; and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or PNC and (11) terrorist activities, including the September 11 terrorist attacks, which may adversely affect the general economy, financial and capital markets, specific industries, and BlackRock. BlackRock cannot predict the severity or duration of effects stemming from such activities or any actions taken in connection with them.
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In the normal course of its business, BlackRock is exposed to the risk of interest rate, securities market and general economic fluctuations.
BlackRock’s investments, trading represent matching investments made by, and held in a Rabbi Trust for, the Company with respect to the BlackRock Voluntary and Involuntary Deferred Compensation Plans. As of June 30, 2002, the fair market value of these investments was $17.8 million. BlackRock’s investments, available for sale, consist primarily of investments in BlackRock funds and certain institutional and private placement portfolios. Occasionally, the Company 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 account to establish a performance history. As of June 30, 2002, the fair market value of seed investments was $21.3 million. The fair market value of BlackRock’s other investments included in the mutual funds total, as stated below, was $123.9 million as of June 30, 2002 and is comprised of $123.9 million in theBlackRock Funds Low Duration Bond Portfolio. These investments expose BlackRock to equity price risk. BlackRock did not hold any derivative securities to hedge its investments through the period ended June 30, 2002. The following table summarizes the fair values of the investments and provides a sensitivity analysis of the estimated fair values of these financial instruments assuming a 10% increase or decrease in equity prices:
Fair Market Value | Fair market value assuming 10% increase in market price | Fair market value assuming 10% decrease in market price | |||||||
June 30, 2001 | |||||||||
Trading | $ | 17,800 | $ | 19,580 | $ | 16,020 | |||
Total investments, trading | 17,800 | 19,580 | 16,020 | ||||||
Mutual funds | 132,946 | 146,241 | 119,651 | ||||||
Collateralized bond obligation | 11,061 | 12,167 | 9,955 | ||||||
Other | 1,196 | 1,316 | 1,076 | ||||||
145,203 | 159,723 | 130,683 | |||||||
Total investments, trading and available for sale | $ | 163,003 | $ | 179,303 | $ | 146,703 | |||
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PART II – OTHER INFORMATION
The annual meeting of stockholders of BlackRock was held on May 14, 2002, for the purpose of considering and acting upon the following:
Four Class III directors were elected and the votes cast for or against/withheld were as follows:
Aggregate Votes | ||||
Nominee | For | Against/Withheld | ||
Murry S. Gerber | 243,007,295 | 220,798 | ||
Walter E. Gregg, Jr. | 242,952,545 | 275,548 | ||
James Grosfeld | 243,007,295 | 220,298 | ||
Helen P. Pudlin | 233,761,740 | 275,661 |
There were no broker non-votes. The continuing directors of BlackRock are Laurence D. Fink, Ralph L. Schlosstein, Frank T. Nickell, Laurence M. Wagner, James E. Rohr and Thomas H. O’Brien.
With respect to the preceding matters, holders of BlackRock’s class A common stock, and class B common stock voted together as a single class. Holders of BlackRock’s class A common stock are entitled to one vote per share. Holders of BlackRock’s class B common stock are entitled to five votes per share.
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(a) Exhibits
Exhibit No. | Description | |
3.1(1) | Amended and Restated Certificate of Incorporation of the Registrant. | |
3.2 | Amended and Restated Bylaws of the Registrant. | |
3.3 | Amendment No. 1 to the Amended and Restated Bylaws of the Registrant. | |
3.4 | Amendment No. 2 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. | |
10.1(1) | Tax Disaffiliation Agreement, dated October 6, 1999, among BlackRock Inc., PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | |
10.2 (1) | 1999 Stock Award and Incentive Plan. + | |
10.3(1) | 1999 Annual Incentive Performance Plan. + | |
10.4(1) | Nonemployee Directors Stock Compensation Plan. + | |
10.5(1) | Form of Employment Agreement. + | |
10.6(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. | |
10.7(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. | |
10.8(1) | Services Agreement, dated October 6, 1999, between the Registrant and The PNC Financial Services Group, Inc., formerly PNC Bank Corp. | |
10.9(2) | BlackRock, Inc. Amended and Restated Long-Term Deferred Compensation Plan. + | |
10.10 (2) | BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. + | |
10.11(3) | Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and the Registrant. | |
10.12(4) | Amendment No. 1 to the 1999 Stock Award and Incentive Plan. + | |
10.13(4) | Amendment No. 1 to the 1999 Amended and Restated Long-Term Deferred Compensation Plan. + | |
10.14(4) | Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan. + | |
10.15(4) | Amendment No. 2 to the 1999 Stock Award and Incentive Plan. + | |
10.16(5) | Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and the Registrant. | |
10.17(6) | BlackRock, Inc. 2001 Employee Stock Purchase Plan. + | |
10.18(7) | BlackRock, Inc. Voluntary Deferred Compensation Plan. + | |
10.19 | BlackRock, Inc. Involuntary Deferred Compensation Plan. + | |
10.20(8) | Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan. + | |
99.1 | 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 March 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 March 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 June 30, 2001. |
(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. 333-68668), originally filed with the Securities and Exchange Commission on August 30, 2001. |
(8) | 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. |
+ | Denotes compensatory plan. |
(b) Reports on Form 8-K
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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) | ||||||||
By: | /s/ PAUL L. AUDET | |||||||
Date: | August 13, 2002 | Paul L. Audet Managing Director & Chief Financial Officer |
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