BlackRock, Inc. 2Q2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

 

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

For the quarterly period ended June 30, 2006

OR

 

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

For the transition period from                          to                         .

Commission file number 001-15305

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

  

51-0380803

(State or other jurisdiction of
incorporation or organization)
   (I.R.S. Employer Identification No.)

40 East 52nd Street, New York, NY 10022

(Address of principal executive offices)

(Zip Code)

(212) 810-5300

(Registrant’s telephone number, including area code)

 


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes         X            No                     

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer     X        Accelerated filer                 Non-accelerated filer             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes                         No         X        

As of July 31, 2006, there were 19,891,531 shares of the registrant’s class A common stock outstanding and 44,107,478 shares of the registrant’s class B common stock outstanding.


BlackRock, Inc.

Index to Form 10-Q

PART I

FINANCIAL INFORMATION

 

          Page

Item 1.

   Financial Statements (unaudited)   
   Condensed Consolidated Statements of Financial Condition    1
   Condensed Consolidated Statements of Income    2
   Condensed Consolidated Statements of Cash Flows    3
   Notes to Condensed Consolidated Financial Statements    4

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    37

Item 4.

   Controls and Procedures    39
   PART II   
   OTHER INFORMATION   

Item 1.

   Legal Proceedings    39

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    40

Item 4.

   Submission of Matters to a Vote of Security Holders    41

Item 6.

   Exhibits    42

 

ii


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BlackRock, Inc.

Condensed Consolidated Statements of Financial Condition

(Dollar amounts in thousands)

(unaudited)

 

     June 30,
2006
    December 31,
2005
 

Assets

    

Cash and cash equivalents

   $ 368,687     $ 484,223  

Accounts receivable

     420,249       310,423  

Receivable from affiliates

     18,027       29,155  

Investments

     347,253       298,668  

Intangible assets, net

     290,291       294,168  

Goodwill

     199,385       189,814  

Property and equipment, net

     142,526       129,451  

Deferred taxes

     59,452       43,498  

Deferred mutual fund commissions

     11,411       16,025  

Other assets

     66,640       52,575  
                

Total assets

   $ 1,923,921     $ 1,848,000  
                

Liabilities

    

Accrued compensation

   $ 474,635     $ 522,637  

Accounts payable and accrued liabilities

     110,764       75,779  

Purchase price contingencies

           39,463  

Long-term borrowings

     253,170       253,791  

Other liabilities

     24,249       24,473  
                

Total liabilities

     862,818       916,143  
                

Minority interest

     19,953       9,614  
                

Stockholders’ equity

    

Common stock, class A, 20,033,283 and 19,975,305 shares issued, respectively

     200       200  

Common stock, class B, 44,914,146 and 45,117,284 shares issued, respectively

     451       453  

Additional paid-in capital

     189,924       183,797  

Retained earnings

     878,335       794,177  

Accumulated other comprehensive income

     6,049       2,673  

Treasury stock, class A, at cost, 0 and 285,104 shares held, respectively

           (25,248 )

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

     (33,809 )     (33,809 )
                

Total stockholders’ equity

     1,041,150       922,243  
                

Total liabilities, minority interest and stockholders’ equity

   $ 1,923,921     $ 1,848,000  
                

See accompanying notes to condensed consolidated financial statements.

 

1


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statements of Income

(Dollar amounts in thousands, except share data)

(unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2006     2005     2006     2005  

Revenue

        

Investment advisory and administration fees

        

Separate accounts

   $ 224,825     $ 154,224     $ 487,033     $ 296,109  

Mutual funds

     89,103       77,247       176,603       147,618  

Other income

     46,805       39,918       92,757       77,744  
                                

Total revenue

     360,733       271,389       756,393       521,471  
                                

Expense

        

Employee compensation and benefits

     177,098       131,015       368,894       257,959  

Fund administration and servicing costs

     10,556       10,426       20,930       19,535  

General and administration

     74,367       46,397       131,351       92,564  

Fee sharing payment

                 34,450        

Amortization of intangible assets

     2,029       1,656       4,058       2,937  
                                

Total expense

     264,050       189,494       559,683       372,995  
                                

Operating income

     96,683       81,895       196,710       148,476  
                                

Non-operating income (expense)

        

Investment income

     6,845       6,027       21,909       15,814  

Interest expense

     (2,030 )     (2,063 )     (3,999 )     (4,077 )
                                

Total non-operating income

     4,815       3,964       17,910       11,737  
                                

Income before income taxes and minority interest

     101,498       85,859       214,620       160,213  

Income taxes

     37,237       31,324       78,855       58,655  
                                

Income before minority interest

     64,261       54,535       135,765       101,558  

Minority interest

     857       1,200       1,499       1,687  
                                

Net income

   $ 63,404     $ 53,335     $ 134,266     $ 99,871  
                                

Earnings per share

        

Basic

   $ 0.99     $ 0.83     $ 2.09     $ 1.55  

Diluted

   $ 0.95     $ 0.80     $ 2.02     $ 1.49  

Dividends paid per share

   $ 0.42     $ 0.30     $ 0.84     $ 0.60  

Weighted-average shares outstanding

        

Basic

     64,136,378       64,354,069       64,105,803       64,322,465  

Diluted

     66,653,479       66,796,087       66,520,436       66,844,720  

See accompanying notes to condensed consolidated financial statements.

 

2


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

BlackRock, Inc.

Condensed Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

(unaudited)

 

    

Year to Date

June 30,

 
     2006     2005  

Cash flows from operating activities

    

Net income

   $ 134,266     $ 99,871  

Adjustments to reconcile net income to cash from operating activities:

    

Depreciation and amortization

     18,517       14,468  

Minority interest

     1,499       1,687  

Stock-based compensation

     53,256       35,251  

Deferred income taxes

     (15,954 )     (8,312 )

Net gain on investments

     (7,414 )     (3,856 )

Amortization of bond issuance costs

     604       403  

Amortization of deferred mutual fund commissions

     4,614       5,426  

Dividends received from equity investees

     397        

Tax benefit from stock-based compensation

           2,503  

Other adjustments

     (3,009 )      

Changes in operating assets and liabilities:

    

Increase in accounts receivable

     (109,826 )     (20,575 )

Increase (decrease) in investments, trading

     (7,065 )     (7,159 )

Increase (decrease) in receivable from affiliates

     11,128       (12,863 )

Increase in other assets

     (11,573 )     (4,906 )

Decrease in accrued compensation

     (72,086 )     (132,071 )

(Decrease) increase in accounts payable and accrued liabilities

     35,040       11,734  

(Decrease) increase in other liabilities

     (224 )     8,152  
                

Cash flows from operating activities

     32,170       (10,247 )
                

Cash flows from investing activities

    

Purchase of investments

     (47,044 )     (13,572 )

Sale of investments

     9,915       28,129  

Sale of real estate held for sale

           112,184  

Acquisitions, net of cash acquired and purchase price contingencies

     (49,214 )     (249,535 )

Purchase of property and equipment

     (27,535 )     (29,138 )
                

Cash flows from investing activities

     (113,878 )     (151,932 )
                

Cash flows from financing activities

    

Borrowings net of issuance costs

           395,000  

Principal repayment of borrowings

           (150,000 )

Repayment of short-term borrowings

           (111,840 )

Additions to minority interest

     13,175       9,891  

Transfer of cash to deconsolidated sponsored investment fund

     (804 )     (5,509 )

Distributions paid to minority interest holders

     (14 )      

Dividends paid

     (54,112 )     (38,434 )

Reissuance of treasury stock

     4,441       8,315  

Purchase of treasury stock

     (1,226 )     (32,606 )

Issuance of class A common stock

     133       706  

Tax benefit from stock-based compensation

     1,875        

Acquired management contract obligation payment

     (621 )     (1,019 )
                

Cash flows from financing activities

     (37,153 )     74,504  
                

Effect of exchange rate changes on cash and cash equivalents

     3,325       (2,612 )
                

Net decrease in cash and cash equivalents

     (115,536 )     (90,287 )

Cash and cash equivalents, beginning of period

     484,223       457,673  
                

Cash and cash equivalents, end of period

   $ 368,687     $ 367,386  
                

See accompanying notes to condensed consolidated financial statements.

 

3


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

BlackRock, Inc.

Notes to Condensed Consolidated Financial Statements

(Dollar amounts in thousands, except share data)

(unaudited)

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

 

1. Significant Accounting Policies

Basis of Presentation

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its controlled subsidiaries. All material accounts and transactions between consolidated entities have been eliminated.

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

The interim financial data as of June 30, 2006 and for each of the three months and six months ended June 30, 2006 and 2005 are unaudited. However, in the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s results for the periods presented. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. Certain amounts in the Company’s prior year condensed consolidated financial statements have been reclassified to conform to the 2006 presentation.

 

4


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

  1. Significant Accounting Policies (continued)

Stock-based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment. This statement is a revision of SFAS No. 123 and supersedes Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees. The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost is recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the award. The grant-date fair value of employee share options and similar instruments is measured using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost is recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification.

The Company adopted SFAS No. 123(R), using the modified-prospective transition method, effective January 1, 2006, with no cumulative effect on net income. Under the modified-prospective transition method, the Company is recognizing compensation cost for share-based awards to employees based on their grant-date fair value from January 1, 2006, as well as compensation cost for awards that were granted prior to, but not vested as of, the date of adoption. Prior periods remain unchanged and pro forma disclosures previously required by SFAS No. 123 continue to be required. The impact of SFAS No. 123(R) was to reduce net income for the three months ended June 30, 2006 by $1,978, or $0.03 per basic share and $0.02 per diluted share, and for the six months ended June 30, 2006 by $3,956, or $0.07 per basic share and $0.03 per diluted share. Pro forma basic and diluted earnings per share for the three months ended June 30, 2005, including the impact of stock options not expensed under SFAS No. 123(R) would have been $0.80 and $0.77, respectively, and for the six months ended June 30, 2005 would have been $1.49 and $1.43, respectively. Net income for the three months and six months ended June 30, 2005 would have been reduced by approximately $1,978 and $3,956, respectively.

Consolidation

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

 

5


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

  1. Significant Accounting Policies (continued)

Impairment of Investments

In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1/124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, which provides guidance for determining when impairment charges should be taken on certain debt and equity securities. FSP FAS 115-1/124-1 requires that debt and equity securities subject to the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and equity securities subject to the provisions of APB No. 18, The Equity Method of Accounting for Investments in Common Stock, but which are not accounted for under the equity method (i.e., securities accounted for under the cost method) shall be reviewed for impairment when circumstances warrant. For securities subject to SFAS No. 115, a review for other-than-temporary impairments shall occur in each accounting period where the fair value of the security is less than its cost. For securities subject to APB No. 18, a review for other-than-temporary impairments shall occur in each accounting period where a) circumstances indicate that impairment may exist and b) the fair value of the security is less than its carrying value. The provisions of the FSP were required to be applied to reporting periods beginning after December 15, 2005. The adoption of FSP FAS 115-1/124-1 on January 1, 2006 had no material impact on the Company’s condensed consolidated financial statements.

Accounting Changes and Corrections

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented under the new accounting principle. SFAS No. 154 also requires that a change in the method of depreciating or amortizing a long-lived non-financial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed “restatements”. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 on January 1, 2006 had no impact on the Company’s condensed consolidated financial statements.

Disclosure of Fair Value

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

 

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

 

    The fair value of readily marketable investments is based on quoted market prices. If securities are not readily marketable, fair values are determined by the Company’s management. At June 30, 2006, the carrying value of investments approximates their fair value.

 

    At June 30, 2006, the estimated fair value of the Company’s $250,000 aggregate principal amount of debentures is $346,475 compared with $288,125 at December 31, 2005.

 

    At June 30, 2006, the estimated fair value of the acquired management contract obligation based on current rates offered to the Company for debt, assuming an investment rating of “AAA” or its equivalent, with a similar remaining maturity was approximately $3,526. The book value of this contract at June 30, 2006 was $3,170.

 

6


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

Disclosure of Fair Value (continued)

The Company acts as the portfolio manager in a series of credit default swap transactions, referred to collectively as the Pillars Synthetic Collateralized Debt Obligation (“Pillars”) transaction. The Company has entered into a credit default swap with a major multi-national financial institution (the “Counterparty”), affording the Counterparty credit protection of approximately $16,667, representing the Company’s maximum possible risk of loss. Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. For the three and six months ended June 30, 2006, the Company recorded gains of $355 and $1,670, respectively, in non-operating income in the Condensed Consolidated Statement of Income related to changes in the fair value of the Pillars credit default swap. The fair value of the Pillars credit default swap was approximately $6,382 as of June 30, 2006, and is included in other assets on the Condensed Consolidated Statements of Financial Condition.

Recent Accounting Developments

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

 

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

 

    Concentrations of credit risk in the form of subordination are not considered embedded derivatives.

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

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets. SFAS No. 156 amends SFAS No. 140 to require that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable. SFAS No. 156 also permits servicers to subsequently measure each separate class of servicing assets and liabilities at fair value rather than at the lower of cost or market. For companies that elect to measure their servicing assets and liabilities at fair value, SFAS No. 156 requires the difference between the carrying value and fair value at the date of adoption to be recognized as a cumulative effect of a change in accounting principle as of the beginning of the fiscal year in which the election is made. The Company is currently assessing the impact of adopting SFAS No. 156 and intends to adopt the Statement on January 1, 2007.

 

7


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

1. Significant Accounting Policies (continued)

Recent Accounting Developments (continued)

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, and Related Implementation Issues (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a Company’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective as of the beginning of fiscal years that begin after December 15, 2006. The Company is currently evaluating the effects of implementing this new standard.

 

2. Pending Acquisition

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

 

8


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

3. Investments

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

 

June 30, 2006

  

Cost

   Gross Unrealized    

Carrying

Value

      Gains    Losses    

Available-for-sale investments:

          

Collateralized debt obligations

   $ 22,489    $ 836    ($ 60 )   $ 23,265

Mutual funds

     4,595      43      (195 )     4,443

Other

     1,671      199            1,870
                            

Total available-for-sale investments

   $ 28,755    $ 1,078    ($ 255 )   $ 29,578
                            

December 31, 2005

                    

Available-for-sale investments:

          

Collateralized debt obligations

   $ 25,750    $ 773    ($ 806 )   $ 25,717

Mutual funds

     4,442      20      (153 )     4,309
                            

Total available-for-sale investments

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

At June 30, 2006 and December 31, 2005, the Company’s available-for–sale investments had an aggregate cost basis of $28,755 and $30,192 and an aggregate fair value of $29,578 and $30,026, respectively. During the six months ended June 30, 2006, the Company recorded impairments of $2,066 to certain collateralized debt obligations. Gross unrealized losses of $195 on mutual fund investments at June 30, 2006 includes unrealized losses from three mutual fund investments totaling $155, that have been in a loss position for greater than 12 consecutive months, and unrealized losses from four additional mutual funds that have been in a loss position for less than 12 months. Management has reviewed the Company’s portfolio of available-for-sale mutual fund investments at June 30, 2006 and has concluded that the $195 gross unrealized loss in fair value is not other-than-temporary as defined by FSP FAS 115-1/124-1. Management’s review considered such factors as the current and expected future economic environment as it relates to the mutual funds, historical fund performance, stage of growth of the fund, materiality of the loss in proportion to the cost value of the securities, dividend payments being received on the investments and the Company’s ability and intent to hold the securities until the losses are recovered.

 

9


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

3. Investments (continued)

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

 

June 30, 2006

   Cost    Carrying
Value

Trading investments:

     

Mutual funds

   $ 18,999    $ 21,673

Equity securities

     16,197      19,948

Mortgage-backed securities

     6,592      6,344

Corporate notes and bonds

     11,005      10,614

Municipal debt securities

     119      112
             

Total trading investments

     52,912      58,691
             

Other investments:

     

Other fund investments

     217,687      236,085

Deferred compensation plans

     17,744      21,442

Other

     972      1,457
             

Total other investments

     236,403      258,984
             

Total trading and other investments

   $ 289,315    $ 317,675
             

December 31, 2005

         

Trading investments:

     

Mutual funds

   $ 19,699    $ 22,319

Equity securities

     15,964      18,425

Mortgage-backed securities

     13,345      13,069

Corporate notes and bonds

     8,146      7,946

Municipal debt securities

     119      123
             

Total trading investments

     57,273      61,882
             

Other investments:

     

Other fund investments

     167,593      181,292

Deferred compensation plans

     20,976      24,495

Other

     193      973
             

Total other investments

     188,762      206,760
             

Total trading and other investments

   $ 246,035    $ 268,642
             

 

10


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

3. Investments (continued)

Included in other investments is $91,367 of investments accounted for using the cost method. FSP FAS 115-1/124-1 requires that a company review cost method investments for other-than-temporary impairments whenever management estimates a fair value for such investments or when events or changes in circumstances have occurred that may have a significant adverse effect on the fair value of the investment. At June 30, 2006, management reviewed $45,880 in carrying value of other investments and estimated an aggregate fair value of $49,912. One such security had a gross loss of $299, which was approximately 5.7% of its original cost. Management reviewed this security and concluded that this impairment is not other-than-temporary. Management’s review considered such factors as the current and expected future economic environment as it relates to the investment, historical fund performance, stage of growth of the fund, materiality of the loss in proportion to its carrying value and the Company’s ability and intent to hold the investment until the loss is recovered.

In addition, $45,487 in cost basis investments were not reviewed for other-than-temporary impairment because management’s review concluded that no events had occurred that indicated a potentially significant adverse impact on the fair value of the investment.

 

4. Goodwill

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

The SSR stock purchase agreement provides for an additional payment to MetLife based on the Company achieving specified assets under management (“AUM”) retention levels and run-rate revenue levels for the 12 months ended January 31, 2006. Based on AUM levels and run-rate revenue as of January 31, 2006, the Company’s additional liability on this contingency was approximately $50,000. This $50,000 additional purchase price eliminated the contingent liability balance. As of June 30, 2006, the excess of the purchase price over the fair value of net assets acquired has been recorded as goodwill in the Condensed Consolidated Statement of Financial Condition.

 

5. Fee Sharing Payment

The SSR stock purchase agreement provides that BlackRock pay a fee sharing payment to MetLife equal to 32.5% of any performance fees earned, as of March 31, 2006, on a large institutional real estate client. As of June 30, 2006, the Company had recorded a liability of $35,994, primarily representing the fee sharing payment due to MetLife related to the SSR acquisition. This amount is included in accounts payable and accrued liabilities in the Condensed Consolidated Statement of Financial Condition.

 

11


PART I – FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

6. Variable Interest Entities

The Company is involved with various entities in the normal course of business that are considered to be variable interest entities (“VIEs”) and holds interests therein, including investment advisory agreements and equity securities, which are considered variable interests. The Company engages in these transactions principally to address client needs through the launch of collateralized debt obligations (“CDOs”) and private investment funds. At June 30, 2006 and December 31, 2005, the aggregate assets, debt and BlackRock’s maximum risk of loss in VIEs in which BlackRock is not the primary beneficiary were as follows:

 

June 30, 2006

   Assets    Debt    BlackRock’s
Maximum Risk
of Loss

Collateralized debt obligations

   $ 6,362,171    $ 5,887,940    $ 39,931

Private investment funds

     5,740,226      1,179,990      19,215
                    

Total

   $ 12,102,397    $ 7,067,930    $ 59,146
                    

December 31, 2005

              

Collateralized debt obligations

   $ 6,289,500    $ 5,491,200    $ 42,383

Private investment funds

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

Total

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

 

7. 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,

     2006    2005    2006    2005

Net income

   $ 63,404    $ 53,335    $ 134,266    $ 99,871
                           

Basic weighted-average shares outstanding

     64,136,378      64,354,069      64,105,803      64,322,465

Dilutive potential shares from stock options and stock units

     2,187,667      2,442,018      2,078,017      2,522,255

Dilutive potential shares from convertible debt

     329,434           336,616     
                           

Dilutive weighted-average shares outstanding

     66,653,479      66,796,087      66,520,436      66,844,720
                           

Basic earnings per share

   $ 0.99    $ 0.83    $ 2.09    $ 1.55
                           

Diluted earnings per share

   $ 0.95    $ 0.80    $ 2.02    $ 1.49
                           

 

12


PART I - FINANCIAL INFORMATION (continued)

Item 1. Financial Statements (continued)

 

8. Other Comprehensive Income (Loss)

 

    

Three months ended

June 30,

   

Six months ended

June 30,

 
     2006     2005     2006    2005  

Net Income

   $ 63,404     $ 53,335     $ 134,266    $ 99,871  

Unrealized (loss) gain from investments, net of tax

     (325 )     41       51      (962 )

Foreign currency gain (loss), net of tax

     2,914       (1,984 )     3,326      (2,612 )
                               

Comprehensive income

   $ 65,993     $ 51,392     $ 137,643    $ 96,297  
                               

 

9. Supplemental Statements of Cash Flow Information

Supplemental disclosure of cash flow information:

 

    

Six months ended

June 30,

     2006    2005

Cash paid for interest

   $ 3,595    $ 484
             

Cash paid for income taxes

   $ 104,489    $ 67,034
             

Supplemental schedule of non-cash transactions:

 

    

Six months ended

June 30,

 
     2006    2005  

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

   $ 3,293    $ 774  

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

   $ 51    ($ 962 )

Dividend reinvestment

   $ 325    $ 209  

Decrease in investment due to deconsolidation of sponsored investment fund

   $ 3,538    $ 13,758  

Decrease in minority interest due to deconsolidation of sponsored investment fund

   $ 4,321    $ 18,170  

Short-term borrowings assumed in SSR acquisition

   $    $ 111,840  

Stock issued in SSR acquisition

   $    $ 37,212  

Convertible debt issuance costs

   $    $ 5,000  

 

13


PART I - FINANCIAL INFORMATION (continued)

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

Forward-looking Statements

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

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

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 changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products, including its separately managed accounts and the MLIM business pending completion of the MLIM transaction; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock or PNC; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and global financial and capital markets, specific industries, and BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in foreign currency exchange rates, which may adversely affect the value of advisory fees earned by BlackRock; (14) the impact of changes to tax legislation and, generally, the tax position of the Company; (15) BlackRock’s success in maintaining the distribution of its products; (16) BlackRock’s ability to complete the MLIM transaction; (17) BlackRock’s ability to successfully integrate the MLIM business with its existing business; and (18) the ability of BlackRock to effectively manage the MLIM assets subsequent to the MLIM transaction along with its historical assets under management.

 

14


PART I - FINANCIAL INFORMATION (continued)

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

Overview

BlackRock is one of the largest publicly traded investment management firms in the United States with $464.1 billion of AUM at June 30, 2006. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and alternative investment separate accounts and mutual funds, including the BlackRock Funds and the BlackRock Liquidity Funds. In addition, BlackRock provides risk management, investment system outsourcing and financial advisory services to institutional investors. BlackRock is a majority-owned indirect subsidiary of PNC, which is one of the nation’s largest diversified financial services organizations operating businesses engaged in retail banking, corporate and institutional banking, asset management and global fund processing services. As of June 30, 2006, PNC indirectly owned approximately 69% of BlackRock.

The following table summarizes BlackRock’s operating performance for each of the three months ended June 30, 2006, March 31, 2006 and June 30, 2005 and the six months ended June 30, 2006 and June 30, 2005:

BlackRock, Inc.

Financial Highlights

(Dollar amounts in thousands, except share data)

(unaudited)

 

     Three months ended     Variance vs.  
     June 30,     March 31,     June 30, 2005     March 31, 2006  
     2006     2005     2006     Amount     %     Amount     %  

Total revenue

   $ 360,733     $ 271,389     $ 395,660     $ 89,344     32.9 %   ($ 34,927 )   (8.8 %)

Total expense

   $ 264,050     $ 189,494     $ 295,633     $ 74,556     39.3 %   ($ 31,583 )   (10.7 %)

Operating income (a)

   $ 96,683     $ 81,895     $ 100,027     $ 14,788     18.1 %   ($ 3,344 )   (3.3 %)

Operating margin (a)

     26.8 %     30.2 %     25.3 %        

Net income (b)

   $ 63,404     $ 53,335     $ 70,862     $ 10,069     18.9 %   ($ 7,458 )   (10.5 %)

Diluted earnings per share (b)

   $ 0.95     $ 0.80     $ 1.06     $ 0.15     18.8 %   ($ 0.11 )   (10.4 %)

Average diluted shares outstanding

     66,653,479       66,796,087       66,731,560       (142,608 )   (0.2 %)     (78,081 )   (0.1 %)

Assets under management ($ in millions)

   $ 464,070     $ 414,411     $ 463,060     $ 49,659     12.0 %   $ 1,010     0.2 %

 

     Six months ended
June 30,
    Variance  
     2006     2005     Amount     %  

Total revenue

   $ 756,393     $ 521,471     $ 234,922     45.0 %

Total expense

   $ 559,683     $ 372,995     $ 186,688     50.1 %

Operating income (a)

   $ 196,710     $ 148,476     $ 48,234     32.5 %

Operating margin (a)

     26.0 %     28.5 %    

Net income (b)

   $ 134,266     $ 99,871       34,395     34.4 %

Diluted earnings per share (b)

   $ 2.02     $ 1.49     $ 0.53     35.6 %

Average diluted shares outstanding

     66,520,436       66,844,720       (324,284 )   (0.5 %)

Assets under management ($ in millions)

   $ 464,070     $ 414,411     $ 49,659     12.0 %

 

15


PART I - FINANCIAL INFORMATION (continued)

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

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

 

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

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

 

     Three months ended     Six months ended  
     June 30,     March 31,     June 30,  
     2006     2005     2006     2006     2005  

Operating income, GAAP basis

   $ 96,683     $ 81,895     $ 100,027     $ 196,710     $ 148,476  

Non-GAAP adjustments:

          

Fee sharing payment

                 34,450       34,450        

PNC LTIP funding obligation

     12,347       12,247       11,676       24,023       23,983  

MLIM transaction costs

     12,547             6,579       19,126        

Appreciation on deferred compensation plans

     1,044       191       4,542       5,586       2,289  

SSR acquisition costs

                             8,873  
                                        

Operating income, as adjusted

     122,621       94,333       157,274       279,895       183,621  
                                        

Revenue, GAAP basis

     360,733       271,389       395,660       756,393       521,471  

Non-GAAP adjustments:

          

Fund administration and servicing costs

     (10,556 )     (10,426 )     (10,374 )     (20,930 )     (19,535 )

Reimbursable property management compensation

     (5,879 )     (6,239 )     (5,598 )     (11,477 )     (10,298 )
                                        

Revenue used for operating margin measurement, as adjusted

   $ 344,298     $ 254,724     $ 379,688     $ 723,986     $ 491,638  
                                        

Operating margin, GAAP basis

     26.8 %     30.2 %     25.3 %     26.0 %     28.5 %
                                        

Operating margin, as adjusted

     35.6 %     37.0 %     41.4 %     38.7 %     37.3 %
                                        

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

 

16


PART I - FINANCIAL INFORMATION (continued)

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

Overview (continued)

BlackRock, Inc.

Financial Highlights

(continued)

 

  (a) (continued)

Fund administration and servicing costs have been excluded from revenue used for operating margin measurement, as adjusted, because the Company receives offsetting revenue and expense for these services. Reimbursable property management compensation represents compensation and benefits paid to BlackRock Realty Advisors, Inc. (“Realty”) personnel. These employees are retained on Realty’s payroll when certain properties are acquired by Realty’s clients. The related compensation and benefits are fully reimbursed by Realty’s clients and have been excluded from revenue used for operating margin measurement, as adjusted, because they bear no economic cost to BlackRock.

 

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

 

     Three months ended   

Six months ended

June 30,

 
     June 30,     March 31,   
     2006    2005     2006    2006    2005  

Net income, GAAP basis

   $ 63,404    $ 53,335     $ 70,862    $ 134,266    $ 99,871  

Non-GAAP adjustments, net of tax

             

PNC’s LTIP funding requirement

     7,779      7,716       7,356      15,135      15,110  

MLIM transaction costs

     7,905            4,145      12,050       

Impact of Trepp sale

          (486 )               (486 )

SSR acquisition costs

                          5,590  
                                     

Net income, as adjusted

   $ 79,088    $ 60,565     $ 82,363    $ 161,451    $ 120,085  
                                     

Diluted weighted average shares outstanding

     66,653,479      66,796,087       66,731,560      66,520,436      66,844,720  
                                     

Diluted earnings per share, GAAP basis

   $ 0.95    $ 0.80     $ 1.06    $ 2.02    $ 1.49  
                                     

Diluted earnings per share, as adjusted

   $ 1.19    $ 0.91     $ 1.23    $ 2.43    $ 1.80  
                                     

Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRock’s profitability and financial performance. The portion of LTIP expense associated with awards to be met by PNC’s funding requirement has been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because, exclusive of the potential impact related to LTIP participants’ put options, these charges will not impact BlackRock’s book value. SSR acquisition costs consist of compensation costs and professional fees in 2005. Compensation reflected in this amount represents direct performance incentives paid to SSR employees assumed in conjunction with the acquisition and settled by BlackRock with no future service requirement. Net income, as adjusted, and diluted earnings per share, as adjusted, exclude this amount because it does not relate to the current period’s operations. MLIM transaction costs consist of compensation costs and professional fees incurred in 2006 in conjunction with the pending MLIM transaction. Professional fees related to the SSR acquisition and the MLIM transaction reflected in GAAP net income have been deemed non-recurring by management and have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, to help ensure the comparability of this information to prior reporting periods.

 

17


PART I - FINANCIAL INFORMATION (continued)

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

Overview (continued)

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

Investment advisory agreements for certain separate accounts and BlackRock’s alternative investment products provide for performance fees in addition to fees based on AUM. Performance fees generally are earned after a given period of time or when investment performance exceeds a contractual threshold, which may increase the volatility of BlackRock’s revenue and earnings.

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

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

 

18


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management

 

BlackRock, Inc.

Assets Under Management

(Dollar amounts in millions)

(unaudited)

 

               December 31,    Variance vs.  
     June 30,       June 30, 2005     December 31, 2005  
     2006    2005    2005    $     %     $     %  

(Dollar amounts in millions)

                 

All Accounts:

                 

Fixed income

   $ 307,640    $ 284,082    $ 303,928    $ 23,558     8.3 %   $ 3,712     1.2 %

Cash management

     88,431      75,183      86,128      13,248     17.6 %     2,303     2.7 %

Equity

     40,872      32,378      37,303      8,494     26.2 %     3,569     9.7 %

Alternative investment products

     27,127      22,768      25,323      4,359     19.1 %     1,804     7.1 %
                                         

Total

   $ 464,070    $ 414,411    $ 452,682    $ 49,659     12.0 %   $ 11,388     2.5 %
                                         

Separate Accounts:

                 

Fixed income

   $ 283,235    $ 258,411    $ 279,368    $ 24,824     9.6 %   $ 3,867     1.4 %

Cash management-Securities lending

     11,295      7,368      5,294      3,927     53.3 %     6,001     113.4 %

Cash management

     9,956      8,164      7,275      1,792     22.0 %     2,681     36.9 %

Equity

     22,702      18,525      20,832      4,177     22.5 %     1,870     9.0 %

Alternative investment products

     27,127      22,768      25,323      4,359     19.1 %     1,804     7.1 %
                                         

Total separate accounts

     354,315      315,236      338,092      39,079     12.4 %     16,223     4.8 %
                                         

Mutual Funds:

                 

Fixed income

     24,405      25,671      24,560      (1,266 )   (4.9 %)     (155 )   (0.6 %)

Cash management

     67,180      59,651      73,559      7,529     12.6 %     (6,379 )   (8.7 %)

Equity

     18,170      13,853      16,471      4,317     31.2 %     1,699     10.3 %
                                         

Total mutual funds

     109,755      99,175      114,590      10,580     10.7 %     (4,835 )   (4.2 %)
                                         

Total all accounts

   $ 464,070    $ 414,411    $ 452,682    $ 49,659     12.0 %   $ 11,388     2.5 %
                                         

AUM increased approximately $49.7 billion, or 12.0%, to $464.1 billion at June 30, 2006, compared with $414.4 billion at June 30, 2005. The growth in AUM was attributable to $41.8 billion in net subscriptions and $7.9 billion in market appreciation.

 

19


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

Separate Account Assets Under Management

AUM for separate accounts at June 30, 2006 increased $39.1 billion, or 12.4%, to $354.3 billion as compared with $315.2 billion at June 30, 2005, as a result of net subscriptions of $31.3 billion and market appreciation of $7.8 billion. Net subscriptions were primarily attributable to new fixed income client sales and increased fundings from existing fixed income clients of $23.1 billion, $5.5 billion in net new business in cash management products as a result of customer reallocations of funds due to changes in prevailing economic policy and $2.1 billion from net new business in alternative products. Market appreciation of $7.8 billion in separate accounts largely reflected appreciation in equity assets of $3.6 billion as equity markets improved during the twelve months ended June 30, 2006, $2.3 billion of market appreciation on alternative investment products and market appreciation on fixed income products of $1.8 billion due to current income and changes in market interest rates.

Mutual Fund Assets Under Management

The $10.6 billion increase in mutual fund AUM to $109.8 billion at June 30, 2006, compared with $99.2 billion at June 30, 2005, primarily reflected net subscriptions of $10.5 billion and market appreciation of $0.1 billion. During the year, net subscriptions in BlackRock Liquidity Funds, other commingled funds, the BlackRock Closed-End Funds and BlackRock Funds totaled $6.2 billion, $2.2 billion, $1.6 billion and $0.6 billion, respectively, all of which was partially offset by net redemptions in BlackRock Global Series plc of $0.1 billion. Net new business in BlackRock Liquidity Funds was primarily due to $6.2 billion of net subscriptions, driven by strong investment performance, and was partially offset by net redemptions attributable to increases in the Federal Funds rate, resulting in a temporary yield advantage for direct investments in money market investments versus mutual funds during that period. Net subscriptions of $2.2 billion in other commingled funds resulted from the continued growth of an enhanced cash management strategy product launched in 2004. Net subscriptions of $1.6 billion in the BlackRock Closed-End Funds primarily reflects new funds launched since June 30, 2005, partially offset by term trust maturities. Net subscriptions totaled $0.6 billion in BlackRock Funds as equity markets improved during the twelve months ended June 30, 2006.

 

20


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

The following tables present the component changes in BlackRock’s AUM for each of the three months ended June 30, 2006 and 2005 and March 2006. Prior year financial information reflects certain reclassifications to conform to the current year presentation.

 

BlackRock, Inc.

Component Changes in Assets Under Management

(Dollar amounts in millions)

(Unaudited)

 

     Three months ended     Variance vs.  
     June 30,     March 31,     June 30, 2005     March 31, 2006  
     2006     2005     2006     $     %     $     %  

All Accounts:

              

Beginning assets under management

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

Net (redemptions) subscriptions

     (447 )     15,559       7,719       (16,006 )   (102.9 %)     (8,166 )   (105.8 %)

Acquisitions

           89             (89 )   (100.0 %)         NM  

Market appreciation

     1,457       7,435       2,659       (5,978 )   (80.4 %)     (1,202 )   (45.2 %)
                                            

Ending assets under management

   $ 464,070     $ 414,411     $ 463,060     $ 49,659     12.0 %   $ 1,010     0.2 %
                                            

Percent change in AUM from net subscriptions and acquisitions

     NM       67.8 %     74.4 %        

Separate Accounts:

              

Beginning assets under management

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

Net subscriptions

     161       16,069       12,286       (15,908 )   (99.0 %)     (12,125 )   (98.7 %)

Market appreciation

     2,047       6,981       1,729       (4,934 )   (70.7 %)     318     18.4 %
                                            

Ending assets under management

     354,315       315,236       352,107       39,079     12.4 %     2,208     0.6 %
                                            

Mutual Funds:

              

Beginning assets under management

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

Net redemptions

     (608 )     (510 )     (4,567 )     (98 )   (19.2 %)     3,959     86.7 %

Acquisitions

           89             (89 )   (100.0 %)         NM  

Market (depreciation) appreciation

     (590 )     454       930       (1,044 )   (230.0 %)     (1,520 )   (163.4 )%
                                            

Ending assets under management

     109,755       99,175       110,953       10,580     10.7 %     (1,198 )   (1.1 %)
                                            

Total All Accounts

   $ 464,070     $ 414,411     $ 463,060     $ 49,659     12.0 %   $ 1,010     0.2 %
                                            

NM — Not Meaningful

 

21


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

Assets Under Management (continued)

The following tables present the component changes in BlackRock’s AUM for each of the six months ended June 30, 2006 and 2005, respectively. Prior year financial information reflects certain reclassifications to conform to the current year presentation.

BlackRock, Inc.

Component Changes in Assets Under Management

(Dollar amounts in millions)

(unaudited)

 

     Six months ended
June 30,
   

Variance vs.

June 30, 2005

 
     2006     2005     $     %  

All Accounts:

        

Beginning assets under management

   $ 452,682     $ 341,760     $ 110,922     32.5 %

Net subscriptions

     7,272       15,664       (8,392 )   (53.6 %)

Acquisitions

           49,966       (49,966 )   (100.0 %)

Market appreciation

     4,116       7,021       (2,905 )   (41.4 %)
                          

Ending assets under management

   $ 464,070     $ 414,411     $ 49,659     12.0 %
                          

Percent change in AUM from net subscriptions and acquisitions

     63.9 %     90.3 %    

Separate Accounts:

        

Beginning assets under management

   $ 338,092     $ 247,927     $ 90,165     36.4 %

Net subscriptions

     12,447       20,591       (8,144 )   (39.6 %)

Acquisitions

           40,181       (40,181 )   (100.0 %)

Market appreciation

     3,776       6,537       (2,761 )   (42.2 %)
                          

Ending assets under management

     354,315       315,236       39,079     12.4 %
                          

Mutual Funds:

        

Beginning assets under management

     114,590       93,833       20,757     22.1 %

Net redemptions

     (5,175 )     (4,927 )     (248 )   (5.0 %)

Acquisitions

           9,785       (9,785 )   (100.0 %)

Market appreciation

     340       484       (144 )   (29.8 %)
                          

Ending assets under management

     109,755       99,175       10,580     10.7 %
                          

Total All Accounts

   $ 464,070     $ 414,411     $ 49,659     12.0 %
                          

 

22


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

BlackRock, Inc.

Assets Under Management

Quarterly Trend

(Dollar amounts in millions)

(unaudited)

 

     2006    

Six months
ended

June 30, 2006

   2005  
     June 30     March 31        December 31     September 30     June 30  

Separate Accounts

             

Fixed Income

             

Beginning assets under management

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

Net subscriptions (redemptions)

     (3,016 )     5,892       2,876      13,288       6,891       12,855  

Market (depreciation) appreciation

     1,833       (842 )     991      1,376       (598 )     5,644  
                                               

Ending assets under management

     283,235       284,418       283,235      279,368       264,704       258,411  
                                               

Cash Management

             

Beginning assets under management

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

Net subscriptions (redemptions)

     (1,662 )     4,194       2,532      (1,127 )     153       809  

Market appreciation

     86       63       149      45       40       48  
                                               

Ending assets under management

     9,956       11,532       9,956      7,275       8,357       8,164  
                                               

Cash Management Securities lending

             

Beginning assets under management

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

Net subscriptions (redemptions)

     5,100       901       6,001      (359 )     (1,715 )     577  
                                               

Ending assets under management

     11,295       6,195       11,295      5,294       5,653       7,368  
                                               

Equity

             

Beginning assets under management

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

Net subscriptions (redemptions)

     (129 )     438       309      504       (203 )     (376 )

Market appreciation (depreciation)

     (251 )     1,812       1,561      539       1,467       291  
                                               

Ending assets under management

     22,702       23,082       22,702      20,832       19,789       18,525  
                                               

Alternative Investment Products

             

Beginning assets under management

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

Net subscriptions (redemptions)

     (132 )     861       729      (326 )     1,692       2,204  

Market appreciation

     379       696       1,075      166       1,023       998  
                                               

Ending assets under management

     27,127       26,880       27,127      25,323       25,483       22,768  
                                               

Total Separate Accounts

             

Beginning assets under management

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

Net subscriptions

     161       12,286       12,447      11,980       6,818       16,069  

Market appreciation

     2,047       1,729       3,776      2,126       1,932       6,981  
                                               

Ending assets under management

   $ 354,315     $ 352,107     $ 354,315    $ 338,092     $ 323,986     $ 315,236  
                                               

 

23


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

BlackRock, Inc.

Assets Under Management

Quarterly Trend (continued)

(Dollar amounts in millions)

(unaudited)

 

     2006    

Six months
ended

June 30, 2006

    2005  
     June 30     March 31       December 31     September 30     June 30  

Mutual Funds

            

Fixed Income

            

Beginning assets under management

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

Net subscriptions (redemptions)

     106       69       175       (458 )     (82 )     68  

Acquisitions

                                   89  

Market (depreciation) appreciation

     (228 )     (103 )     (331 )     (319 )     (252 )     135  
                                                

Ending assets under management

     24,404       24,526       24,404       24,560       25,337       25,671  
                                                

Cash Management

            

Beginning assets under management

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

Net (redemptions) subscriptions

     (1,577 )     (4,802 )     (6,379 )     10,856       3,052       (334 )
                                                

Ending assets under management

     67,180       68,757       67,180       73,559       62,703       59,651  

Equity

            

Beginning assets under management

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

Net subscriptions (redemptions)

     863       166       1,029       1,366       959       (244 )

Market (depreciation) appreciation

     (362 )     1,033       671       (706 )     999       319  
                                                

Ending assets under management

     18,171       17,670       18,171       16,471       15,811       13,853  
                                                

Total Mutual Funds

            

Beginning assets under management

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

Net (redemptions) subscriptions

     (608 )     (4,567 )     (5,175 )     11,764       3,929       (510 )

Acquisitions

                                   89  

Market (depreciation) appreciation

     (590 )     930       340       (1,025 )     747       454  
                                                

Ending assets under management

   $ 109,755     $ 110,953     $ 109,755     $ 114,590     $ 103,851     $ 99,175  
                                                

 

24


PART I - FINANCIAL INFORMATION (continued)

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

Assets Under Management (continued)

 

BlackRock, Inc.

Assets Under Management

Quarterly Trend

(Dollar amounts in millions)

(unaudited)

 

     2006    

Six months
ended

June 30, 2006

    2005  
     June 30     March 31       December 31     September 30     June 30  

Mutual Funds

            

BlackRock Liquidity Funds

            

Beginning assets under management

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

Net (redemptions) subscriptions

     (1,821 )     (5,133 )     (6,954 )     10,236       2,921       (635 )
                                                

Ending assets under management

     59,432       61,253       59,432       66,386       56,150       53,229  
                                                

BlackRock Funds

            

Beginning assets under management

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

Net subscriptions (redemptions)

     79       378       457       269       (122 )     (549 )

Acquisitions

                                   89  

Market appreciation (depreciation)

     (364 )     755       391       (803 )     728       303  
                                                

Ending assets under management

     26,518       26,803       26,518       25,670       26,204       25,598  
                                                

Closed-End Funds

            

Beginning assets under management

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

Net subscriptions

     5       39       44       536       993       284  

Market appreciation (depreciation)

     (217 )     162       (55 )     (218 )     18       151  
                                                

Ending assets under management

     17,588       17,800       17,588       17,599       17,281       16,270  
                                                

Other Commingled Funds

            

Beginning assets under management

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

Net subscriptions

     1,148       96       1,244       870       68       482  

Market depreciation

     (20 )           (20 )                  
                                                

Ending assets under management

     5,217       4,089       5,217       3,993       3,123       3,055  
                                                

BlackRock Global Series

            

Beginning assets under management

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

Net subscriptions (redemptions)

     (19 )     53       34       (147 )     69       (92 )

Market appreciation (depreciation)

     11       13       24       (4 )     1        
                                                

Ending assets under management

     1,000       1,008       1,000       942       1,093       1,023  
                                                

Total Mutual Funds

            

Beginning assets under management

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

Net (redemptions) subscriptions

     (608 )     (4,567 )     (5,175 )     11,764       3,929       (510 )

Acquisitions

                                   89  

Market appreciation (depreciation)

     (590 )     930       340       (1,025 )     747       454  
                                                

Ending assets under management

   $ 109,755     $ 110,953     $ 109,755     $ 114,590     $ 103,851     $ 99,175  
                                                

 

25


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the three months ended June 30, 2006 as compared with the three months ended June 30, 2005.

Revenue

 

     Three months ended
June 30,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount     %  

Investment advisory and administration fees:

          

Separate account revenue

          

Separate account base fees:

          

Fixed income

   $ 86,917    $ 79,477    $ 7,440     9.4 %

Cash management

     1,988      2,079      (91 )   (4.4 %)

Equity

     21,898      18,661      3,237     17.3 %

Alternative investment products

     44,079      32,569      11,510     35.3 %
                        

Total separate account base fees

     154,882      132,786      22,096     16.6 %

Separate account performance fees

     69,943      21,438      48,505     226.3 %
                        

Total separate account revenue

     224,825      154,224      70,601     45.8 %
                        

Mutual fund revenue

          

Fixed income

     26,947      28,674      (1,727 )   (6.0 %)

Cash management

     28,275      23,674      4,601     19.4 %

Equity

     33,881      24,899      8,982     36.1 %
                        

Total mutual fund revenue

     89,103      77,247      11,856     15.3 %
                        

Total investment advisory and administration fees

     313,928      231,471      82,457     35.6 %
                        

BlackRock Solutions

     29,217      23,927      5,290     22.1 %

Other income

     17,588      15,991      1,597     10.0 %
                        

Total other income

     46,805      39,918      6,887     17.3 %
                        

Total revenue

   $ 360,733    $ 271,389      89,344     32.9 %
                        

Total revenue for the three months ended June 30, 2006 increased $89.3 million, or 32.9%, to $360.7 million, compared with $271.4 million for the three months ended June 30, 2005. Investment advisory and administration fees increased $82.5 million, or 35.6%, to $313.9 million for the three months ended June 30, 2006, compared with $231.5 million for the three months ended June 30, 2005. The increase in investment advisory and administration fees was the result of increases in base fees earned across all asset classes, as well as increased performance fees principally related to alternative investment products.

 

26


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the three months ended June 30, 2006 as compared with the three months ended June 30, 2005. (continued)

Revenue (continued)

Investment Advisory and Administration Fees

Separate account revenue increased $70.6 million, or 45.8%, to $224.8 million for the three months ended June 30, 2006, compared with $154.2 million for the three months ended June 30, 2005. Separate account base fees increased $22.1 million, or 16.6%, to $154.9 million for the three months ended June 30, 2006, compared with $132.8 million for the three months ended June 30, 2005. Separate account base fees increased in the quarter ended June 30, 2006, primarily due to increased AUM of $31.2 billion, or 9.9%, related to net new subscriptions and an increase of $7.8 billion, or 2.5%, in AUM due to market appreciation. Performance fees of $69.9 million for the quarter ended June 30, 2006 increased $48.5 million compared with $21.4 million for the quarter ended June 30, 2005. The increase in separate account performance fees was primarily attributable to fees earned on an energy equity hedge fund.

Mutual fund advisory and administration fees increased $11.9 million, or 15.3%, to $89.1 million for the three months ended June 30, 2006, compared with $77.2 million for the three months ended June 30, 2005. The increase in mutual fund revenue was primarily the result of increases in Equity and Cash Management product revenue of $9.0 million and $4.6 million, respectively. Equity product revenue increased $9.0 million, or 36.1%, during the second quarter 2006 compared to the second quarter 2005 as the result of a $4.3 billion increase in AUM, primarily due to the improvement in the equity markets during the twelve months ended June 30, 2006. The increase in Cash Management revenue was the result of approximately $7.5 billion increase in AUM during the period driven by strong investment performance.

Other Income

Other income of $46.8 million for the quarter ended June 30, 2006 primarily represents fees earned on BlackRock Solutions products and services of $29.2 million, property management fees of $8.2 million (which represent direct reimbursement of the salaries of certain BlackRock Realty employees), fees for investment accounting services of $3.0 million and distribution fees earned on BlackRock Funds of $2.5 million.

The increase in other income of $6.9 million, or 17.3%, for the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 was primarily the result of increased revenues of $5.3 million from BlackRock Solutions products and services driven by new assignments.

 

27


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the three months ended June 30, 2006 as compared with the three months ended June 30, 2005. (continued)

Expense

 

     Three months ended
June 30,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

Expense:

           

Employee compensation and benefits

   $ 177,098    $ 131,015    $ 46,083    35.2 %

Fund administration and servicing costs

     10,556      10,426      130    1.2 %

General and administration

     74,367      46,397      27,970    60.3 %

Amortization of intangible assets

     2,029      1,656      373    22.5 %
                       

Total expense

   $ 264,050    $ 189,494    $ 74,556    39.3 %
                       

Total expense increased $74.6 million, or 39.3%, to $264.1 million for the three months ended June 30, 2006, compared with $189.5 million for the three months ended June 30, 2005. The increase was primarily attributable to increases in compensation and benefits and general and administration expense.

Employee Compensation and Benefits

Compensation and benefits expense increased by $46.1 million, or 35.2%, to $177.1 million, compared to $131.0 million for the three months ended June 30, 2005. The increase in employee compensation and benefits was primarily attributable to increases in incentive compensation and salaries and benefits of $25.1 million and $21.2 million, respectively. The $25.1 million, or 48.9%, increase in incentive compensation was primarily attributable to direct incentive compensation associated with higher performance fees earned on the Company’s alternative investment products and increased operating income growth. The increase of $21.2 million, or 31.9%, in salaries and benefits was primarily attributable to higher staffing levels associated with business growth.

 

28


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the three months ended June 30, 2006 as compared with the three months ended June 30, 2005. (continued)

Expense (continued)

General and administration expense and fee sharing payment

 

     Three months ended
June 30,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

General and administration expense:

           

Marketing and promotional

   $ 18,892    $ 15,756    $ 3,136    19.9 %

Occupancy

     11,392      9,094      2,298    25.3 %

Technology

     7,183      5,393      1,790    33.2 %

Portfolio services

     5,907      3,569      2,338    65.5 %

Other general and administration

     30,993      12,585      18,408    146.3 %
                       

Total general and administration expense

   $ 74,367    $ 46,397    $ 27,970    60.3 %
                       

General and administration expense increased $28.0 million, or 60.3%, in the three months ended June 30, 2006 to $74.4 million, compared to $46.4 million for the three months ended June 30, 2005. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $3.1 million, portfolio services expense of $2.3 million, occupancy expense of $2.3 million and other general and administration expense of $18.4 million.

Marketing and promotional expense increased $3.1 million, or 19.9%, to $18.9 million, compared to $15.8 million for the three months ended June 30, 2005 primarily due to increased marketing activities of $2.5 million related to domestic and international marketing efforts and increased institutional service fees of $0.6 million. Occupancy costs for the three months ended June 30, 2006 totaled $11.4 million, representing a $2.3 million, or 25.3%, increase, from $9.1 million for the three months ended June 30, 2005. The increase in occupancy costs during the quarter ended June 30, 2006 primarily reflects costs related to the expansion of corporate facilities related to business growth. Portfolio services costs increased by 65.5% to $5.9 million, related to supporting higher AUM levels and increased trading activities. Other general and administration costs increased by 146.3% to $31.0 million from $12.6 million, and included $12.5 million in professional fees and other expenses related to the MLIM transaction.

 

29


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the three months ended June 30, 2006 as compared with the three months ended June 30, 2005. (continued)

Non-Operating Income

Non-operating income increased $0.9 million, or 21.5%, to $4.8 million for the quarter ended June 30, 2006, as compared to $4.0 million for the quarter ended June 30, 2005 primarily as a result of a $0.8 million, or 13.6%, increase in investment income. The increase in investment income was primarily due to market appreciation and increased investment returns on Company investments in 2006.

Income Taxes

Income tax expense was $37.2 million and $31.3 million, representing an effective tax rate of 37.0% for the quarters ended June 30, 2006 and 2005.

Net Income

Net income was $63.4 million for the three months ended June 30, 2006 and includes the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of BlackRock common stock currently held by PNC and expenses related to the MLIM transaction, of $7.8 million and $7.9 million, respectively, after tax. MLIM transaction costs include professional fees related to the pending transaction. In addition, net income of $53.3 million during the three months ended June 30, 2005 included the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of BlackRock stock currently held by PNC of $7.7 million.

 

30


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005.

Revenue

 

     Six months ended
June 30,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount     %  

Investment advisory and administration fees:

          

Separate account revenue

          

Separate account base fees:

          

Fixed income

   $ 172,270    $ 153,214    $ 19,056     12.4 %

Cash Management

     3,845      3,702      143     3.9 %

Equity

     42,921      34,150      8,771     25.7 %

Alternatives

     83,446      56,949      26,497     46.5 %
                        

Total separate account base fees

     302,482      248,015      54,467     22.0 %

Separate account performance fees

     184,551      48,094      136,457     283.7 %
                        

Total separate account revenue

     487,033      296,109      190,924     64.5 %
                        

Mutual fund revenue

          

Fixed income

     53,600      55,879      (2,279 )   (4.1 %)

Cash Management

     56,278      47,244      9,034     19.1 %

Equity

     66,725      44,495      22,230     50.0 %
                        

Total mutual fund revenue

     176,603      147,618      28,985     19.6 %
                        

Total investment advisory and administration fees

     663,636    $ 443,727      219,909     49.6 %
                        

BlackRock Solutions

     58,539      50,562      7,977     15.8 %

Other income

     34,218      27,182      7,036     25.9 %
                        

Total other income

     92,757      77,744      15,013     19.3 %
                        

Total revenue

   $ 756,393    $ 521,471    $ 234,922     45.0 %
                        

Total revenue for the six months ended June 30, 2006 increased $234.9 million, or 45.0%, to $756.4 million, compared with $521.5 million for the six months ended June 30, 2005. Investment advisory and administration fees increased $219.9 million, or 49.6%, to $663.6 million for the six months ended June 30, 2006, compared with $443.7 million for the six months ended June 30, 2005. The increase in investment advisory and administration fees was the result of increases in fees earned across all asset classes, as well as increased performance fees principally related to a large institutional real estate equity client account and an energy equity hedge fund acquired in the SSR transaction.

 

31


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005. (continued)

Revenue (continued)

Investment Advisory and Administration Fees

Separate account revenue increased $190.9 million, or 64.5%, to $487.0 million for the six months ended June 30, 2006, compared with $296.1 million for the six months ended June 30, 2005. Separate account base fees increased $54.5 million, or 22.0%, to $302.5 million for the six months ended June 30, 2006, compared with $248.0 million for the six months ended June 30, 2005. Separate account base fees increased for the six months ended June 30, 2006 as compared to June 30, 2005, primarily due to increased AUM of $31.2 billion, or 9.9%, related to net new subscriptions and an increase of $7.8 billion, or 2.5%, in AUM due to market appreciation. Performance fees of $184.6 million for the six months ended June 30, 2006 increased $136.5 million compared with $48.1 million for the six months ended June 30, 2005. The increase in separate account performance fees was primarily attributable to fees earned on a large institutional real estate equity client account and fees earned on an energy equity hedge fund, which were both acquired in the SSR transaction.

Mutual fund advisory and administration fees increased $29.0 million, or 19.6%, to $176.6 million for the six months ended June 30, 2006, compared with $147.6 million for the six months ended June 30, 2005. The increase in mutual fund revenue was primarily the result of increases in Equity and Cash Management products of $22.2 million and $9.0 million, respectively. Equity revenue in mutual funds increased $22.2 million, or 50.0%, during the three months ended June 30, 2006 as compared to the three months ended June 30, 2005 as the result of a $4.3 billion increase in AUM, primarily due to the improvement in the equity markets during the twelve months ended June 30, 2006. The increase in Cash Management revenue in mutual funds was the result of approximately a $7.5 billion increase in AUM during the twelve month period ended June 30, 2006 driven by strong investment performance.

Other Income

Other income of $92.8 million for the six months ended June 30, 2006 primarily represents fees earned on BlackRock Solutions products and services of $58.5 million, property management fees of $15.9 million which represent direct reimbursement of the salaries of certain BlackRock Realty employees, fees for investment accounting services of $6.0 million and distribution fees earned on BlackRock Funds of $4.9 million.

The increase in other income of $15.0 million, or 19.3%, for the six months ended June 30, 2006 as compared to the six months ended June 30, 2005 was primarily the result of increased revenues of $8.0 million from BlackRock Solutions products and services driven by new assignments, new investment accounting assignments of $2.4 million and higher property management fees of $1.6 million.

 

32


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005. (continued)

Expense

 

     Six months ended
June 30,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

Expense:

           

Employee compensation and benefits

   $ 368,894    $ 257,959    $ 110,935    43.0 %

Fund administration and servicing costs

     20,930      19,535      1,395    7.1 %

Fee sharing payment

     34,450           34,450    NM  

General and administration

     131,351      92,564      38,787    41.9 %

Amortization of intangible assets

     4,058      2,937      1,121    38.2 %
                       

Total expense

   $ 559,683    $ 372,995    $ 186,688    50.1 %
                       

NM — Not Meaningful

Total expense increased $186.7 million, or 50.1%, to $559.7 million for the six months ended June 30, 2006, compared with $373.0 million for the six months ended June 30, 2005. The increase was primarily attributable to increases in compensation and benefits, general and administration expense and a fee sharing payment to MetLife related to the SSR acquisition.

Employee Compensation and Benefits

Employee compensation and benefits expense increased by $110.9 million, or 43.0%, to $368.9 million, compared to $258.0 million for the six months ended June 30, 2005. The increase in employee compensation and benefits was primarily attributable to increases in incentive compensation and salaries and benefits of $66.1 million and $43.5 million, respectively. The $66.1 million, or 65.1%, increase in incentive compensation was primarily attributable to direct incentive compensation associated with higher performance fees earned on the Company’s alternative investment products and increased operating income growth. The increase of $43.5 million, or 33.8%, in salaries and benefits was primarily attributable to higher staffing levels associated with business growth.

 

33


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005. (continued)

Expense (continued)

General and administration expense and fee sharing payment

 

    

Six months ended

June 30,

   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

General and administration expense:

           

Marketing and promotional

   $ 36,730    $ 29,881    $ 6,849    22.9 %

Occupancy

     21,619      16,680      4,939    29.6 %

Technology

     13,673      11,283      2,390    21.2 %

Portfolio services

     10,579      6,361      4,218    66.3 %

Other general and administration

     48,750      28,359      20,391    71.9 %
                       

Total general and administration expense

   $ 131,351    $ 92,564    $ 38,787    41.9 %
                       

Fee sharing payment

   $ 34,450    $    $ 34,450    NM  
                       

NM — Not Meaningful

General and administration expense increased $38.8 million, or 41.9%, in the six months ended June 30, 2006 to $131.4 million, compared to $92.6 million for the six months ended June 30, 2005. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $6.8 million, occupancy expense of $4.9 million, portfolio services expense of $4.2 million and other general and administration expense of $20.4 million.

Marketing and promotional expense increased $6.8 million, or 22.9%, to $36.7 million, compared to $29.9 million for the six months ended June 30, 2005 primarily due to increased marketing activities of $5.8 million related to domestic and international marketing efforts and increased institutional service fees of $1.4 million. Occupancy costs for the six months ended June 30, 2006 totaled $21.6 million, representing a $4.9 million, or 29.6%, increase, from $16.7 million for the six months ended June 30, 2005. The increase in occupancy costs during the six months ended June 30, 2006 primarily reflects costs related to the expansion of corporate facilities related to business growth. Portfolio services costs increased by 66.3% to $10.6 million, related to supporting higher AUM levels and increased trading activities. Other general and administration costs increased by 71.9% to $48.8 million from $28.4 million, and included $16.6 million in professional fees related to the MLIM transaction.

For the six months ended June 30, 2006, BlackRock recorded a fee sharing payment of $34.5 million, representing a one-time estimated expense related to a large institutional real estate equity client account acquired in the SSR acquisition in January 2005.

 

34


PART I - FINANCIAL INFORMATION (continued)

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

Operating results for the six months ended June 30, 2006 as compared with the six months ended June 30, 2005. (continued)

Non-Operating Income

Non-operating income increased $6.2 million, or 52.6%, to $17.9 million for the period ended June 30, 2006, as compared to $11.7 million for the period ended June 30, 2005 primarily as a result of a $6.1 million, or 38.5%, increase in investment income. The increase in investment income was primarily due to market appreciation and increased investment returns on Company investments in 2006.

Income Taxes

Income tax expense was $78.9 million and $58.7 million, representing an effective tax rate of 37.0% for the six months ended June 30, 2006 and 2005.

Net Income

Net income totaled $134.3 million for the six months ended June 30, 2006 and includes the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of BlackRock common stock currently held by PNC and expenses related to the MLIM transaction, of $15.1 million and $12.1 million, respectively, after tax. MLIM transaction costs include professional fees and other general and administration expenses. In addition, net income of $99.9 million during the six months ended June 30, 2005 included the after-tax impact of the portion of LTIP awards to be funded by a capital contribution of BlackRock stock currently held by PNC of $15.1 million and expenses related to the SSR acquisition of $5.6 million. SSR acquisition costs included acquisition-related payments to continuing employees of BlackRock and professional fees.

Liquidity and Capital Resources

Liquidity

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

Cash provided by the Company’s operating activities totaled $32.2 million for the six months ended June 30, 2006, and included payments of approximately $237.1 million related to the Company’s 2005 incentive compensation programs. BlackRock management expects that cash flows provided by operating activities will continue to serve as the principal source of working capital for the near future.

 

35


PART I - FINANCIAL INFORMATION (continued)

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

Liquidity and Capital Resources (continued)

Capital Resources

Net cash used in investing activities was $113.9 million during the six months ended June 30, 2006, primarily consisting of $50.0 million in cash consideration paid in the SSR acquisition, $47.0 million related to the purchase of several seed investments and $27.5 million in capital expenditures primarily in computer hardware and software as a result of business growth (of which approximately $10.0 million is related to integration efforts for the MLIM transaction), partially offset by the sale of certain investments of $9.9 million.

Net cash used in financing activities was $37.2 million during the period ended June 30, 2006, primarily representing the payment of $54.1 million in dividends, partially offset by $13.2 million in additions to minority interest for entities consolidated by the Company.

As a result of the agreement with Merrill Lynch, holders of the Company’s convertible debentures due in 2035 (the “Debentures”) may have the right to convert their Debentures at any time from and after the date which is 15 days prior to the anticipated effective date of the contemplated transaction with Merrill Lynch until 15 days after the actual date of such transaction. The Company’s management does not believe this conversion will result in a significant cash flow impact since, as of July 31, 2006, the Debentures were trading, and are expected to continue trading, above the conversion value of the Debentures.

At June 30, 2006, long-term debt, including current maturities, was $253.2 million. Debt service requirements are $6.9 million in 2006 and 2007, $6.8 million in 2008 and $6.7 million in 2009 and 2010.

 

36


PART I — FINANCIAL INFORMATION (continued)

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Equity Market Price Risk

BlackRock’s investments consist primarily of BlackRock Funds, private investment funds and debt securities. Occasionally, BlackRock invests in new mutual funds or advisory accounts it sponsors in order to provide investable cash to the new mutual fund or advisory account to establish a performance history. In certain cases, BlackRock maintains a controlling interest in a sponsored investment fund and the underlying securities are reflected on the Company’s statements of financial condition. These investments expose BlackRock to either equity price risk or interest rate risk depending on the underlying securities portfolio of each investment fund. BlackRock generally does not hold derivative securities to hedge its investments. The following table summarizes the fair values of the investments exposed to equity price risk and provides a sensitivity analysis of the estimated fair values of those investments, assuming a 10% increase or decrease in equity prices:

 

June 30, 2006

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

Mutual funds

   $ 21,673    $ 23,840    $ 19,505

Equity securities

     19,948      21,942      17,953
                    

Total trading investments

     41,621      45,782      37,458
                    

Mutual funds

     927      1,019      834

Other

     1,870      2,057      1,683
                    

Total available-for-sale investments

     2,797      3,076      2,517
                    

Other fund investments

     142,607      156,867      128,346

Deferred compensation plans

     21,442      23,586      19,297

Other

     1,457      1,602      1,311
                    

Total other investments

     165,506      182,055      148,954
                    

Total equity price risk on investments

   $ 209,924    $ 230,913    $ 188,929
                    

December 31, 2005

              

Mutual funds

   $ 22,319    $ 24,550    $ 20,087

Equity securities

     18,425      20,267      16,582
                    

Total trading investments

     40,744      44,817      36,669
                    

Mutual funds

     766      842      689
                    

Total available-for-sale investments

     766      842      689
                    

Other fund investments

     84,843      93,327      76,358

Deferred compensation plans

     24,495      26,944      22,045

Other

     973      1,070      875
                    

Total other investments

     110,311      121,341      99,278
                    

Total equity price risk on investments

   $ 151,821    $ 167,000    $ 136,636
                    

BlackRock’s deferred compensation plans comprise $21.7 million and $22.3 million of total trading investments, and $21.4 million and $24.5 million of total other investments, at June 30, 2006 and December 31, 2005, respectively, and reflect investments held by BlackRock with respect to senior employee elections under BlackRock’s deferred compensation plans. Any change in the fair value of these investments is offset by a corresponding change in the related deferred compensation liability.

 

37


PART I - FINANCIAL INFORMATION (continued)

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

Interest Rate Risk

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

 

June 30, 2006

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

Mortgage-backed securities

   $ 6,344    $ 6,132    $ 6,556

Corporate notes and bonds

     10,614      10,259      10,969

Municipal bonds

     112      108      116
                    

Total trading investments

     17,070      16,499      17,641
                    

Mutual funds

     3,516      3,372      3,660

Collateralized debt obligations

     23,265      23,280      23,265
                    

Total available-for-sale investments

     26,781      26,652      26,925
                    

Other fund investments

     93,478      92,247      95,628
                    

Total other investments

     93,478      92,247      95,628
                    

Total investments

   $ 137,329    $ 135,398    $ 140,194
                    

December 31, 2005

              

Mortgage-backed securities

   $ 13,069    $ 12,827    $ 13,311

Corporate notes and bonds

     7,946      7,575      8,262

Municipal bonds

     123      117      128
                    

Total trading investments

     21,138      20,519      21,701
                    

Mutual funds

     3,543      3,426      3,660

Collateralized debt obligations

     25,717      25,222      26,212
                    

Total available-for-sale investments

     29,260      28,648      29,872
                    

Other fund investments

     96,449      94,998      97,900
                    

Total other investments

     96,449      94,998      97,900
                    

Total investments

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

 

38


PART I - FINANCIAL INFORMATION (continued)

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

Other Market Risks

In February 2005, the Company issued $250 million aggregate principal amount of convertible debentures, which will be due in 2035 and bear interest at 2.625% per annum. Due to the debentures’ conversion feature, these financial instruments are exposed to both interest rate risk and equity price risk. At June 30, 2006, the fair value of the debentures was $346.5 million. Assuming 100 basis point upward and downward parallel shifts in the yield curve, based on the fair value of the debentures on June 30, 2006, the fair value of the debentures would fluctuate to $338.1 million and $354.8 million, respectively. Assuming a 10% increase and 10% decrease in the Company’s stock price, based on the fair value of the debentures on June 30, 2006, the fair value of the debentures would fluctuate to $375.7 million and $317.7 million, respectively.

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

 

    causing the value of AUM to decrease,

 

    causing the returns realized on AUM to decrease,

 

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

 

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

Item 4. Controls and Procedures

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

No change in internal control over financial reporting occurred during the period ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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

 

39


PART II - OTHER INFORMATION (continued)

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

 

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

 

     Total Number of
Shares
Purchased
    Average Price
Paid per Share
   Total Number of
Shares
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plans or
Programs 1

April 1, 2006 through April 31, 2006

               180,825

May 1, 2006 through May 31, 2006

   5,809 2   $ 137.30       180,825

June 1, 2006 through June 30, 2006

   2,933 2   $ 132.71       180,825
                    

Total

   8,742     $ 135.76      
                    

1 On January 21, 2004, the Company announced a two million share repurchase program. On August 2, 2006, the Company announced that it had made purchases of all two million shares under this program and that the Board has authorized a new program to purchase an additional 2.1 million shares.

 

2 Includes purchases made by the Company primarily to satisfy income tax withholding obligations of certain employees.

 

40


Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of stockholders of BlackRock was held on May 24, 2006, for the purpose of considering and acting upon the following:

 

  (1) Election of Directors. Five Class I directors were elected and the votes cast for or against/withheld were as follows:

 

     Aggregate Votes
     For    Withheld

Nominees

     

William O. Albertini

   231,964,482    852,347

Kenneth B. Dunn, Ph.D.

   232,308,104    508,725

Laurence D. Fink

   229,216,399    3,600,430

Frank T. Nickell

   227,982,228    4,834,601

Thomas H. O’Brien

   232,213,360    603,469

 

  (2) Compensation Plans. Two matters were approved and the votes cast for or against and the abstentions were as follows:

 

     Aggregate Votes
     For    Against    Abstained

Approval of the Amendment of the BlackRock, Inc. 1999 Stock Award and Incentive Plan

   225,724,311    4,454,596    4,910

 

     Aggregate Votes
     For    Against    Abstained

Approval of the Amendment to the Amended and Restated BlackRock, Inc. 1999 Annual Incentive Performance Plan

   230,029,684    149,099    5,034

There were no broker non-votes. The continuing directors of BlackRock are Dennis D. Dammerman, William S. Demchak, Murry S. Gerber, James Grosfeld, David H. Komansky, William C. Mutterperl, Linda Gosden Robinson, James E. Rohr and Ralph L. Schlosstein.

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.

 

41


PART II - OTHER INFORMATION (continued)

Item 6. Exhibits

 

Exhibit No.    

Description

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

 

42


PART II - OTHER INFORMATION (continued)

Item 6. Exhibits (continued)

 

Exhibit No.    

Description

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

 

43


PART II - OTHER INFORMATION (continued)

Item 6. Exhibits (Continued)

 

Exhibit No.    

Description

10.40 (20)   Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., New Boise, Inc. and the Registrant.
10.41 (21)   Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
31.1     Section 302 Certification of Chief Executive Officer.
31.2     Section 302 Certification of Chief Financial Officer.
32.1     Section 906 Certification of Chief Executive Officer and Chief Financial Officer.
 
  (1) Incorporated by Reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
  (2) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on 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 September 30, 2000.
  (5) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001.
  (6) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68670), originally filed with the Securities and Exchange Commission on August 30, 2001.
  (7) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68666), originally filed with the Securities and Exchange Commission on August 30, 2001.
  (8) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2002.
  (9) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002.
  (10) Incorporated by Reference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002.
  (11) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended March 31, 2004.
  (12) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004.
  (13) Incorporated by Reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004.
  (14) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2004.
  (15) Incorporated by Reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on January 31, 2005.
  (16) Incorporated by Reference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004.
  (17) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2005.
  (18) Incorporated by Reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Commission File
No. 001-15305) filed on February 22, 2006.
  (19) Incorporated by Reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  (20) Incorporated by Reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  (21) Incorporated by Reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  + Denotes compensatory plans.

 

44


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/    STEVEN E. BULLER        
Date: August 9, 2006        

Steven E. Buller

Managing Director &

Chief Financial Officer


EXHIBIT INDEX

 

Exhibit No.    

Description

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


EXHIBIT INDEX (continued)

 

Exhibit No.    

Description

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


EXHIBIT INDEX (continued)

 

Exhibit No.    

Description

10.40 (21)   Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and New Boise, Inc.
31.1     Section 302 Certification of Chief Executive Officer.
31.2     Section 302 Certification of Chief Financial Officer.
32.1     Section 906 Certification of Chief Executive Officer and Chief Financial Officer.
 
  (1) Incorporated by Reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
  (2) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on 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 September 30, 2000.
  (5) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2001.
  (6) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68670), originally filed with the Securities and Exchange Commission on August 30, 2001.
  (7) Incorporated by Reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-68666), originally filed with the Securities and Exchange Commission on August 30, 2001.
  (8) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2002.
  (9) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended September 30, 2002.
  (10) Incorporated by Reference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305), for the year ended December 31, 2002.
  (11) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended March 31, 2004.
  (12) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305), for the quarter ended June 30, 2004.
  (13) Incorporated by Reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on August 30, 2004.
  (14) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2004.
  (15) Incorporated by Reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on January 31, 2005.
  (16) Incorporated by Reference to the Registrant’s Annual Report on Form 10-K (Commission File No. 001-15305) for the year ended December 31, 2004.
  (17) Incorporated by Reference to the Registrant’s Quarterly Report on Form 10-Q (Commission File No. 001-15305) for the quarter ended September 30, 2005.
  (18) Incorporated by Reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (Commission File
No. 001-15305) filed on February 22, 2006.
  (19) Incorporated by Reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  (20) Incorporated by Reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  (21) Incorporated by Reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 001-15305) filed on February 22, 2006.
  + Denotes compensatory plans.