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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________________________
Commission File No. 001-15305
BlackRock, Inc.
---------------
(Exact name of Registrant as specified in its charter)
Delaware 51-038-0803
- -------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Park Avenue, New York, NY 10154
-----------------------------------
(Address of principal executive offices)
212-754-5560
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class On which registered
- -------------------------------- -----------------------
Class A Common Stock, $.01 New York Stock Exchange
par value
Securities registered pursuant to Section 12 (g) of the Act:
None
1
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in the Proxy Statement incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X)
The aggregate market value of BlackRock's class A common stock held by
non-affiliates of BlackRock as of March 7, 2000, is $193,212,800.
As of March 7, 2000 there were 9,000,000 shares of the Registrant's
class A common stock issued and outstanding and 54,864,382 shares of the
Registrant's class B common stock issued and outstanding.
The following documents are incorporated by reference herein:
Portions of the definitive Proxy Statement of BlackRock, Inc., for the annual
meeting of stockholders to be held on May 1, 2000 ("Proxy Statement") are
incorporated by reference into Part III of this Form 10-K.
2
TABLE OF CONTENTS
PART I
Item 1 Business 4
Item 2 Properties 19
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to Vote of Security Holders 19
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk 32
Item 8 Financial Statements and Supplementary Data 32
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 32
Part III
Item 10 Directors and Executive Officers of the Registrant 33
Item 11 Executive Compensation 33
Item 12 Security Ownership of Certain Beneficial Owners and Management 33
Item 13 Certain Relationships and Related Transactions 33
Part IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
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Item 1. BUSINESS
Overview
BlackRock, Inc., a Delaware corporation (together with its subsidiaries
"BlackRock" or the "Company"), is one of the 30 largest investment management
firms in the United States with approximately $165 billion of assets under
management at December 31, 1999. BlackRock is a majority owned subsidiary of
The PNC Financial Services Group, Inc., formerly PNC Bank Corp. ("PNC"), one of
the largest diversified financial services companies in the U.S. PNC acquired
BlackRock in 1995 and consolidated a substantial part of its asset management
businesses under the BlackRock name in 1998. On October 1, 1999, BlackRock
offered 9 million shares of class A common stock in an initial public offering.
Following our IPO, PNC owns 70%, the public owns 14% and BlackRock employees own
16% of BlackRock.
BlackRock offers a variety of investment products to institutional and
individual investors in the U.S. and internationally. At December 31, 1999,
fixed income products represented 53%, money market or liquidity products
represented 35%, equity products represented 11% and alternative investment
products represented 1% of total assets under management. We manage these
assets in approximately 500 separate accounts and 70 mutual funds on behalf of
more than 3,000 institutions and 160,000 individual investors. We also offer a
variety of risk management services to large institutional fixed income
investors. Through these risk management services, we use software, which we
have developed over the past 12 years, to provide comprehensive risk analysis
and advice with respect to more than $780 billion of assets managed by our
clients.
Over the past five years, BlackRock's assets under management have more than
tripled, growing by nearly $112 billion, or a 26% compound annual growth rate.
Separate accounts, which are offered primarily to institutional investors, grew
by $82 billion, a 41% compound annual growth rate, and mutual funds, which are
offered primarily under the BlackRock Funds and Provident Institutional Funds
brand names, grew by $30 billion, a 13% compound annual growth rate. Most of
this growth has been in fixed income and liquidity products in which assets
under management have increased by $63 billion and $34 billion, respectively.
Assets Under Management
December 31, 5-Year
-----------------------------------------------------------
1995 1996 1997 1998 1999 CAGR
-------- -------- -------- -------- -------- --------
($ in millions)
Fixed Income $ 35,213 $ 41,101 $ 52,486 $ 64,821 $ 86,438 29%
Liquidity 26,739 31,363 39,846 49,381 57,521 19%
Equity 7,006 9,847 12,592 14,504 18,472 29%
Alternative Investment Products 101 403 489 1,936 2,086 NM
-------- -------- -------- -------- --------
Total $ 69,059 $ 82,714 $105,413 $130,642 $164,517 26%
======== ======== ======== ======== ========
NM= Not Meaningful; CAGR = Compound Annual Growth Rate.
We differentiate ourselves from our competitors through our investment
process, the risk management software we have developed, the quality of our
client service and the stability of our management team. Our goal is to deliver
investment returns that consistently meet or exceed our clients' performance
benchmarks within appropriate risk parameters. Our experienced professionals
serve the varying needs of our clients with customized products and services.
We believe the quality and depth of our employees, our process and our
investment performance have been critical to achieving growth in assets under
management and will continue to be of primary importance to our future
success.
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Strategy
We plan to continue to increase assets under management by pursuing our
current business strategy, which consists of the following key elements:
. Increasing our institutional fixed income penetration. Although we have
realized considerable growth in fixed income assets, the market for these
products is highly fragmented and no single firm accounts for significant
market share. Accordingly, there is a substantial opportunity for continued
growth in this business. We plan to capitalize on these opportunities
through continued direct calling on pension plan sponsors, insurance
companies, corporations, industry consultants and financial intermediaries.
. Expanding our equity business. Since assuming responsibility for PNC's
equity products in 1998, we have taken steps to enhance our capabilities
and build capacity for future growth, including upgrading computer systems,
adding trading and operations resources and expanding risk management
analysis. In the past year, we added investment specialists in our emerging
capitalization and European equity teams, and we will continue to
selectively add expertise to strengthen our existing capabilities.
Strategies for growth include continuing to distribute our equity mutual
funds, increasing direct and cross-selling efforts for institutional
separate accounts and pursuing targeted product development opportunities.
. Enhancing our international presence. Since 1988, BlackRock has maintained
a small, but successful business with international investors. We believe
that the combination of structural changes in foreign markets and our
expanded product menu have expanded our opportunities overseas. We will
seek to capitalize on these opportunities by building regional marketing
capabilities directly and through strategic alliances. These efforts have
recently included launching Nomura BlackRock Asset Management (NBAM), a
joint venture with Nomura Asset Management, Japan's largest money manager,
establishing regional marketing and client service capabilities in Asia
(Tokyo) and Europe (Edinburgh), and initiating a distribution relationship
with Investec Guinness Flight, a leading distributor of funds in Europe and
South Africa.
. Expanding our retail distribution. Retail distribution of our mutual funds
is pursued largely through wholesaling efforts with third party broker-
dealers and through PNC Advisors, our private banking affiliate. These
efforts have positioned BlackRock Funds as the 14th largest wholesale fund
family in the U.S. (as reported by Financial Research Corp. as of December
31, 1999). With the majority of retail investors continuing to use brokers
and financial advisors, we will continue to focus on distribution through
these channels rather than direct sales efforts. To expand our penetration,
we will continue to work closely with our distributors to understand
investor demand, hone our marketing and product development efforts and
build our brand recognition.
. Further developing our risk management business. Our internally developed
systems provide comprehensive information processing and integrated risk
management capabilities that result in highly efficient investment
operations and enhance the investment management process. We also provide
risk management services to a very limited number of large, sophisticated
institutions for use in the management of their investment operations. To
date, we have pursued these activities on a highly selective basis. We will
continue to evaluate whether we can further enhance stockholder value by
more aggressively pursuing commercialization of our risk management
services.
Asset Management Products
BlackRock offers a wide variety of fixed income, liquidity, equity and
alternative investment products. Revenue from these products consists of
advisory fees typically structured as a percentage of assets managed and, in
some instances, a performance fee expressed as a percentage of returns realized
in excess of agreed-upon targets.
. Fixed Income. At December 31, 1999, fixed income assets under management
were $86 billion, a 33% increase from year-end 1998. Since December 31,
1994, fixed income assets have grown at a 29% compound annual rate despite
the fact that investors have been shifting money out of bonds and into
stocks
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to participate in the equity bull market of the past decade. Over time we
have introduced new fixed income products to better meet investor needs.
Our product development efforts emphasize leveraging our existing
capabilities and adding professional expertise that can be fully integrated
with our existing operations. Our fixed income products can be broadly
grouped into three categories, as described below.
Fixed Income Products
December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
($ in millions)
Core $ 9,817 $14,175 $21,050 $28,310 $41,807
Sector Specialty 11,044 11,136 12,771 16,838 21,077
Targeted Duration 14,352 15,790 18,665 19,673 23,554
------- ------- ------- ------- -------
Total $35,213 $41,101 $52,486 $64,821 $86,438
======= ======= ======= ======= =======
Core. Core products represented 48% of our fixed income assets at
December 31, 1999, an increase of 48% from year-end 1998 and a compound
annual growth rate of 53% since 1994. These accounts seek to achieve
superior returns while assuming equal or lower levels of risk than the
Lehman Brothers Aggregate Index or other broad market indices.
Traditional core accounts invest in all asset classes represented in the
index while maintaining portfolio duration close to that of the
securities in the index. Enhanced index core accounts more tightly
constrain portfolio risk parameters relative to the benchmark, while core
plus accounts are permitted to invest in assets not included in the
index, such as high yield and non-dollar debt.
Sector specialty. Sector specialty accounts represented 24% of our fixed
income assets at December 31, 1999, an increase of 25% from year-end 1998
and a 24% compound annual growth rate since 1994. This product line
includes all accounts that seek to outperform a subset of the broad fixed
income market. Examples include mortgage, corporate, U.S. Treasury and
high yield mandates. The investment objective is typically total return
based, although clients may specify income, tax or other constraints to
be observed in the management of their portfolios.
Targeted duration. Targeted duration products represented 27% of our
fixed income assets at December 31, 1999, an increase of 20% from year-
end 1998 and a compound annual growth of 15% since 1994. These accounts
are typically managed relative to finite-term liabilities or indices
focused on a narrow portion of the U.S. Treasury yield curve. Products
include LIBOR and short, intermediate and long duration portfolios. This
category also includes BlackRock Equity PLUS, which is a product that
combines fixed income securities and equity market derivatives to achieve
incremental returns relative to the S&P 500 Index.
. Liquidity. At December 31, 1999, liquidity assets under management were $58
billion, a 16% increase from year-end 1998. Liquidity products are designed
to meet the needs of domestic corporations and their foreign subsidiaries,
municipal treasurers, banks, bank trust departments and other
intermediaries. We seek to achieve attractive yields, subject to
conservative credit and liquidity guidelines, which are implemented by a
dedicated team of portfolio managers who are based in Wilmington, Delaware
and are supported by our fixed income credit analyst team as well as our
risk management systems. In general, clients use our liquidity products to
invest money that they expect to need in the short-term. As a result, our
money market portfolios experience a high level of subscriptions and
redemptions on a daily basis, and liquidity assets under management can be
quite volatile. As highlighted below, we offer three basic types of
liquidity products.
6
Liquidity Products
December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
($ in millions)
Prime $13,187 $16,103 $23,279 $32,479 $40,707
Government 8,954 10,211 11,384 12,677 12,722
Tax-Exempt 4,598 5,049 5,183 4,225 4,092
------- ------- ------- ------- -------
Total $26,739 $31,363 $39,846 $49,381 $57,521
======= ======= ======= ======= =======
Prime. Prime products are designed to utilize a wide variety of liquidity
instruments to achieve enhanced money market returns. These portfolios
invest in "prime" or short-term corporate and bank debt, as well as U.S.
Treasury and agency obligations. Customized versions include our
offshore liquidity funds, which are subject to investment constraints
based on tax considerations, and separate accounts that permit broader
investment flexibility than money market funds. Last year's $8 billion
increase in assets in prime products reflect increased security lending
activity.
Government. Government products are designed to meet the needs of
investors who cannot assume credit risk of any kind or otherwise prefer
highly conservative products for their liquidity investments. These
products include all portfolios that invest solely in U.S. Treasuries,
agency securities and/or obligations backed by U.S. Treasuries or
agencies.
Tax-exempt. Tax-exempt products are designed for investors seeking to
optimize after-tax returns. These products include national funds
investing in securities that are exempt from federal taxation, as well as
state-specific funds that invest solely in securities exempt from both
federal and state taxation.
. Equity. Our equity assets rose 27% from year-end 1998 to $18 billion at
December 31, 1999. Over 83% of these assets are in mutual funds, all of
which emphasize long-term capital appreciation and strict adherence to
various investment discipline and market capitalization guidelines. We have
expanded our equity capacity, including upgrading computer systems, adding
trading and operations resources and expanding risk management analysis in
our equity offices based in Philadelphia, Pennsylvania, and Edinburgh,
Scotland. We also expanded our emerging capitalization and European
investment teams, and will continue to look for opportunities to expand our
existing capabilities. Our equity products can be classified as discussed
below.
Equity Products
December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
($ in millions)
Large Capitalization $ 4,670 $ 6,099 $ 7,455 $ 8,601 $ 9,863
Emerging Capitalization 1,280 2,308 3,440 4,049 6,031
International 1,056 1,440 1,697 1,854 2,578
------- ------- ------- ------- -------
Total $ 7,006 $ 9,847 $12,592 $14,504 $18,472
======= ======= ======= ======= =======
Large Capitalization. BlackRock offers a variety of large capitalization
products, including core equity, large cap growth and large cap value.
Our core equity product seeks to achieve excess returns relative to broad
market indices (e.g., the S&P 500) with relatively low tracking error by
combining the expertise and best ideas of both our value and growth
investment specialists. Large cap growth strategies focus on companies
with above average earnings and revenue growth rates, while large cap
7
value portfolios focus on companies that are undervalued on the basis of
price/earnings, price/book, price/cash flow or price/sales ratios.
Emerging Capitalization. BlackRock's emerging capitalization products
include U.S. mid-cap, small-cap and micro-cap growth, international small
cap and U.S. mid-cap and small-cap value portfolios. Emerging cap growth
portfolios focus on companies that have the potential for superior
capital appreciation on the basis of revenue and earnings growth, as well
as high relative price momentum. Like their large cap counterparts,
emerging cap value products emphasize companies that are undervalued
relative to historical valuation ratios.
International. Our international equity products include a variety of
European, Pacific Basin and Europe/Australia/Far East (EAFE) portfolios.
Investment strategies emphasize bottom-up stock selection based on a
defined universe of quantitative screens, fundamental research and
company visits. Portfolios are generally comprised of a relatively small
number of positions in companies that are perceived as having superior
price appreciation potential, whether they be growth or value stocks.
Between January 1, 2000, when we expanded our European equity team, and
March 7, 2000, we have attracted over $3 billion in a variety of European
equity separate accounts.
. Alternative Investment Products. At December 31, 1999, we managed $2.1
billion in alternative investment products. We created these products to
take advantage of unique market opportunities or to meet specific client
interests. These products usually involve a higher level of investment
risk, but offer the potential for significantly greater absolute returns
than our traditional investment products. We generally structure these
products as commingled investment vehicles and limit the amount of capital
we will accept from investors. To date, we have created four alternative
investment products, and a number of new products are at various stages of
development.
Alternative Investment Products
December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
($ in millions)
BAI $ 101 $ 359 $ 243 $ 173 $ 46
Obsidian Funds - 44 246 582 864
Anthracite - - - 181 176
Magnetite - - - 1,000 1,000
------- ------- ------- ------- -------
Total $ 101 $ 403 $ 489 $ 1,936 $ 2,086
======= ======= ======= ======= =======
BlackRock Asset Investors. BAI was created in 1994 to target
opportunities in the rapidly changing real estate financing markets. We
structured BAI as a mutual fund to address unique regulatory restrictions
applicable to our pension clients. BAI was liquidated in September 1999,
with the remaining assets being sold through a liquidating trust.
Obsidian Funds. The Obsidian Funds, our domestic and offshore fixed
income hedge funds, were introduced in 1996 in direct response to client
interest. These products implement the strategies of our fixed income
portfolio management team on a more leveraged or more concentrated basis.
Anthracite Capital. Anthracite Capital, Inc. (NYSE: AHR) was offered in
early 1998 to focus on continuing investment opportunities in the real
estate debt markets. Anthracite is a mortgage REIT that brings together
our capital markets expertise with PNC's commercial mortgage loan
origination and servicing capabilities. Anthracite recently announced an
agreement to acquire CORE Cap, Inc., a private REIT, which, if approved
by CORE Cap's shareholders, will increase net assets under management to
approximately $300 million.
8
Magnetite Asset Investors. In late 1998, we created Magnetite Asset
Investors to pursue investment opportunities in the high yield market.
Specifically, Magnetite invests in a variety of high yield securities
using our disciplined investment process and the sub-advisory services of
Kelso & Company, a leveraged buyout firm, to enhance Magnetite's access
to certain types of high yield investments. Magnetite was privately
offered to institutional and high net worth investors, from whom we
raised debt and equity capital of $1 billion.
Investment Process
Our investment process emphasizes a highly disciplined team approach, rather
than depending upon a few "star" managers, use of our extensive internally
developed risk management software, and intensive credit and fundamental
research. Fixed income analysts evaluate industry conditions, the
creditworthiness of individual issuers and the features of individual securities
in order to recommend relative industry weightings, establish our approved
credit list and provide ongoing surveillance throughout the holding period.
Equity analysts review company filings and research reports and visit companies
to assess numerous factors, including the quality of a company's management
team, its cash flows, the diversity of its products and customers, its balance
sheet strength and financial condition, and both the company's and the
industry's stage in the business life cycle. Multiple checks and balances are
incorporated in the process, including automated compliance monitoring.
The formal components of our investment process include new account meetings
prior to funding, daily portfolio management meetings, weekly investment
strategy group meetings and monthly account review meetings. Other groups that
support the investment process, such as the credit committee and product
specialist teams, also meet regularly. All of these efforts are designed to
help us achieve our clients' objectives, while adhering to their investment
guidelines and regulatory requirements and conducting our operations
efficiently.
. Investment Strategy. Our fixed income strategies seek to achieve consistent
returns in excess of client benchmarks with equal or lower levels of risk.
Our liquidity strategies seek to enhance yield, subject to conservative
credit and liquidity guidelines. Although interest rates are a critical
factor in determining bond values, we do not emphasize strategies that
involve speculating on the level or direction of interest rates. Instead,
we seek to add value relative to client benchmarks principally by choosing
the types of bonds and the individual securities in which to invest. The
judgment of our portfolio managers, as well as quantitative and credit
research, are fundamental to our investment process. Broad strategies are
set by our investment strategy group, which considers macroeconomic and
market conditions, as well as credit and liquidity trends, to determine
appropriate portfolio positioning. The investment strategy group's
conclusions are implemented across all portfolios by product specialists,
subject to each client's investment guidelines.
Similarly, our equity strategies seek to achieve returns in excess of
market indices. Our equity investment management team seeks to add value
through a disciplined stock selection process that uses inputs from
proprietary quantitative analysis, fundamental research and market flow
information. Investment strategies are developed by senior members of the
equity management team dedicated to each of our equity specialties.
. Risk Management. We believe that to make informed investment decisions and
manage portfolios consistent with client expectations we must understand
the risk exposures in our portfolios and in the corresponding benchmarks.
Accordingly, we look at investment risk across all of our products in an
asset/liability management framework, with risk management reports produced
on a daily basis and available on-line for portfolio managers to use to
evaluate and monitor risks and refine investment strategy.
. Compliance. Our internally developed risk management system, used in our
fixed income and liquidity businesses, provides a high degree of automation
in trade processing and compliance. Trades are entered electronically by
our portfolio managers. Compliance criteria are built into our system to
provide efficient checks and balances. Our system is designed to help
prevent execution of non-compliant trades and to alert portfolio compliance
personnel, who consult investment guidelines and regulations, as well as
portfolio and account managers, to determine further action. Compliant
trades are forwarded to operations and administration personnel and to
clients' custodians, who work together to process each trade from
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confirmation through settlement. Similar, though more manual, processes are
applied in our equity business and opportunities will be pursued to achieve
greater automation in these activities over time.
. Interdisciplinary Account Teams. All account team members, including
marketing and client service, portfolio and risk management,
administration, operations and compliance personnel, attend formal monthly
account review meetings. These meetings are organized by product type, so
that deviations in performance among accounts with comparable objectives
and guidelines can be quickly identified. In addition, investment
performance, guideline changes, and custody and trade operations issues are
reviewed for each account. To facilitate ongoing communication and senior
management oversight, up-to-date guidelines, portfolio holdings, risk
analyses and credit research are published on our intranet.
. Investment Performance. Separate account returns are aggregated into
composites in accordance with industry standards and reported to pension
consultants, who track and report performance (as measured by gross
returns) relative to market indices and manager universes. Similarly,
independent third parties, such as Lipper Inc. and others, maintain mutual
fund data and report performance relative to indices and peers.
Fixed income. Performance is illustrated below for our core fixed income
product, which represents over 48% of our total fixed income assets under
management. Specifically, over the past 7 years, we have consistently
achieved higher returns and lower risk than both the Lehman Brothers
Aggregate Index, the most frequently used benchmark, and a group of 53
managers reporting core composite returns to Frank Russell Company.
Liquidity. Performance is illustrated below for our TempFund, which
represents more than 55% of the assets managed in our Provident
Institutional Funds. Specifically, over the past 10 years, we have
delivered higher yields and lower risk than the universe of first tier,
institutions-only money market funds as reported by IBC Financial Data
Inc.
BlackRock Core Composite
7-Years Ended Dec. 31, 1999
Annualized Standard
Return Deviation
Fixed Income: 7-years Ended 12/31/99
Core Bond Composite 7.10 4.15
Median 6.78 4.54
LBAG 6.42 4.33
Results do not reflect the deduction of management/advisory fees and
other expenses; management/advisory fees and other expenses will reduce a
client's return. For example, assuming an annual gross return of 8% and
an annual management/advisory fee of 0.70%, the net annualized total
return of the portfolio would be 7.24% over a 7-year period. Past results
are not necessarily indicative of future results.
TempFund
10-Years Ended Dec. 31, 1999
Annualized Standard
Return Deviation
Liquidity: 10-Years Ended 12/31/99
TempFund 5.20 1.35
IBC Financial First Tier I-O Index 4.82 1.59
Results are based on net simple annual returns provided by IBC
Financial Data, Inc.'s MONEY FUND REPORT. Past results are not
necessarily indicative of future results
10
Equity. Performance is illustrated below for our core equity product,
which recently attained a 3-year record. With this milestone, we expect
our core equity product to be of growing importance in our separate
account marketing efforts. Over the past 3 years, we have consistently
achieved higher returns while assuming only slightly higher risk than the
S&P 500 Index and less risk than a group of 144 managers reporting core
equity composite returns to Frank Russell Company.
BlackRock Core Equity Composite
3-Years Ended Dec. 31, 1999
Annualized Standard
Return Deviation
Equity: 3-Years Ended 12/31/99
Core Equity Composite 28.30 18.10
Median 25.52 19.02
S&P 500 27.66 17.68
Results do not reflect the deduction of management/advisory fees and
other expenses; management/advisory fees and other expenses will reduce a
client's return. For example, assuming an annual gross return of 10% and
an annual management/advisory fee of 0.35%, the net annualized total
return of the portfolio would be 9.62% over a 3-year period. Past results
are not necessarily indicative of future results.
Distribution
Our investment products are offered to individual and institutional investors
worldwide through separate accounts and a variety of mutual funds. Senior
professionals work closely with our clients, consultants and distributors to
better understand investor needs. We tailor our products and services to meet
differing return objectives and risk tolerances, as well as regulatory, tax,
accounting and credit constraints. We use our technology capabilities to develop
products, to enhance client service by customizing reports and, in the case of
institutional clients, to deliver them efficiently over the Internet.
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Assets Under Management
December 31, 5-Year
------------------------------------------------------------
1995 1996 1997 1998 1999 CAGR
-------- -------- -------- -------- -------- --------
($ in millions)
Separate Accounts
Fixed Income* $ 23,345 $ 28,958 $ 39,261 $ 52,869 $ 75,206 40%
Liquidity 5,556 7,430 10,019 13,826 20,934 45%
Equities 700 1,204 1,763 2,417 3,080 42%
-------- -------- -------- -------- --------
Sub-Total $ 29,601 $ 37,592 $ 51,043 $ 69,112 $ 99,220 41%
-------- -------- -------- -------- --------
Mutual Funds
Fixed Income $ 11,969 $ 12,546 $ 13,714 $ 13,888 $ 13,318 6%
Liquidity 21,183 23,933 29,827 35,555 36,587 12%
Equity 6,306 8,643 10,829 12,087 15,392 27%
-------- -------- -------- -------- --------
Sub-Total 39,458 45,122 54,370 61,530 65,297 13%
-------- -------- -------- -------- --------
Total $ 69,059 $ 82,714 $105,413 $130,642 $164,517 26%
======== ======== ======== ======== ========
* Including alternative investment products.
CAGR = Compound Annual Growth Rate
. Separate Accounts. We increased separate account assets under management
from $18 billion at year-end 1994 to $99 billion at December 31, 1999,
which represents compound annual growth of 41%. During 1999, separate
account assets grew by over $30 billion, or 44%. Asset growth reflects
additional assets from existing clients and new client assignments. We
distribute separate accounts and alternative investment products
principally through the direct marketing efforts of our account management
group, which included 42 professionals as of December 31, 1999. These
employees focus primarily on three client bases: tax-exempt, taxable and
international institutions. Alternative investment products are used to
expand investment options offered to existing clients and to gain access to
relatively untapped segments of the investor universe. In 1999, we
introduced lower minimum balance taxable fixed income separate accounts for
high net worth and smaller institutional clients of PNC Advisors, our
private banking affiliate.
Separate Account Assets
December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
($ in millions)
Tax-Exempt $ 7,502 $ 12,068 $ 18,856 $ 25,181 $ 39,191
Taxable 20,679 24,356 28,571 37,592 48,489
International 1,420 1,168 3,616 6,339 10,309
BSAM* - - - - 1,231
-------- -------- -------- -------- --------
Total $ 29,601 $ 37,592 $ 51,043 $ 69,112 $ 99,220
======== ======== ======== ======== ========
* BlackRock Specialized Account Management
Tax-exempt. Our tax-exempt clients consist primarily of defined benefit
and defined contribution pension plans. As of December 31, 1999, 142
pension plans maintained $37 billion in separate accounts with us. During
1999, assets managed for tax-exempt investors increased by over $14
billion, or 56%. Although the market for investment management services
in this channel remains highly fragmented, industry data suggests that
tax-exempt investors are increasingly consolidating their manager
universes, resulting in above average
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growth particularly for the largest and best performing fixed income
managers. We have benefited from this trend and we believe that we can
further develop this distribution channel with direct calling and cross-
selling efforts, as well as by introducing new products and capabilities
over time that enable us to meet the needs of a broader universe of tax-
exempt investors.
Taxable. Our taxable clients include insurance companies, corporations,
banks, third party mutual fund sponsors and other financial services
companies. As of December 31, 1999, we managed $48 billion in assets for
taxable clients, an increase of $11 billion, or 29%, from year-end 1998.
We offer insurance companies services ranging from customized portfolio
management to comprehensive investment management outsourcing. With $25
billion of assets managed on behalf of these clients as of year-end, we
are one of the largest independent managers of insurance assets.
Liquidity, short term and other portfolios are managed for a variety of
other taxable investors seeking to maximize income relative to their
funding costs. In addition, BlackRock manages mutual funds for third
party sponsors who wish to obtain investment management services, while
retaining marketing and distribution consistent with their internal
branding strategies.
International. Our international clients include mutual fund sponsors,
insurance companies, banks, corporations, supranationals and central
banks based in 16 countries. During 1999, assets managed for
international investors increased by $4 billion to more than $10 billion.
Several initiatives were undertaken in 1999 to expand our international
presence, including augmenting our New York-based team, introducing
marketing and client service capabilities in Asia and Europe and
launching NBAM. Since its July 1999 launch, NBAM has raised over $1
billion of assets under management. In February 2000, we initiated an
alliance with Investec Guinness Flight for distribution of European
equity funds managed by BlackRock to retail investors throughout Europe
and South Africa.
BlackRock Specialized Account Management (BSAM). On October 1, 1999, we
assumed portfolio management responsibility for taxable fixed income
accounts with assets between $5 and $50 million on behalf of PNC
Advisors. At December 31, 1999, these assets totaled $1.2 billion,
consisting of 69 portfolios. PNC Advisors will continue to provide client
services to these high net worth and smaller institutional clients.
BlackRock supports PNC Advisors' efforts and pursues business development
with a dedicated team based in Wilmington, Delaware.
. Mutual Funds. We increased mutual fund assets under management from $35
billion at year-end 1994 to $65 billion at December 31, 1999, which
represents compound annual growth of more than 13%. Approximately $53
billion, or over 80%, of our mutual fund assets are managed in our two
open-end fund families, BlackRock Funds and Provident Institutional Funds
(PIF). We also manage 22 publicly-traded closed-end funds and several
short-term investment funds (STIFs). Our funds group is responsible for
wholesaling to PNC, third party broker-dealers and other intermediaries.
The funds group also conducts direct calling efforts for our institutional
funds and develops and implements marketing, product management, branding
and media relations strategies designed to enhance client service and
distribution across all channels.
13
Mutual Fund Assets
December 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
($ in millions)
BlackRock Funds $ 13,670 $ 17,846 $ 22,129 $ 24,231 $ 27,339
PIF 15,496 16,230 20,278 25,368 25,554
Closed-End Funds 7,953 7,881 8,114 7,756 7,340
STIFs 2,339 3,165 3,849 4,175 5,064
-------- -------- -------- -------- --------
Total $ 39,458 $ 45,122 $ 54,370 $ 61,530 $ 65,297
======== ======== ======== ======== ========
BlackRock Funds. The BlackRock Funds family consists of 36 portfolios,
including 13 equity, 15 fixed income and 8 money market funds. Prior to
1996, assets were gathered almost exclusively through PNC channels and by
acquisition. In addition to working closely with PNC, we have pursued
marketing opportunities with third party intermediaries by building a
staff of 28 wholesalers and securing more than 300 broker agreements. In
1999, we raised net subscriptions in excess of $1 billion through broker-
dealers and established BlackRock Funds as the 14th largest wholesale
fund family in the U.S.
Provident Institutional Funds. PIF is our institutional money market fund
family and consists of 11 prime, government and tax-exempt funds. We
market these funds principally through the direct calling efforts of a
dedicated sales force consisting of 12 regional salespeople. We also
develop and support software that enables clients to efficiently invest
in these funds. Our marketing strategies have focused on diversifying our
client base in light of consolidation and internalization trends in the
banking industry. We will continue to closely observe industry trends and
develop marketing strategies to further diversify our client base.
Closed-end funds. At December 31, 1999, we managed over $7 billion in 22
closed-end bond funds listed on the New York or American stock exchanges,
including 2 new municipal bond funds offered through Salomon Smith Barney
during the year. Thirteen of these funds are target term trusts, a
product that we introduced to the industry in 1988. With the 1998 and
1999 maturity of our first two target term trusts, we became the first
and only manager to meet or exceed the funds' targeted terminal values.
Closed-end funds are generally underwritten by broker-dealers and access
to distribution is highly limited and very expensive. Accordingly, we
pursue closed-end fund offerings opportunistically.
STIFs. Short-term investment funds are offered to institutional clients
through PNC. In 1999, STIF assets increased by $900 million, or 21%, to
over $5 billion. The majority of these assets are invested through PNC's
proprietary end-of-day sweep product. We have been working closely with
PNC to identify product enhancements, including offering PIF as a sweep
investment alternative.
Risk Management Products
Since the formation of BlackRock in 1988, we have made substantial investments
in developing sophisticated risk management and analytic software. Today, the
risk management staff represents nearly 30% of our total employees.
Professionals include quantitative analysts, financial model and software
developers, and management information systems and technology personnel. Our
system has evolved into a comprehensive information processing capability fully
integrated with sophisticated analytics that support risk assessment and
investment decision-making. In 1995, we began offering risk management services
on a very limited basis to very large, sophisticated institutional investors.
These services include analytics, consulting and trading system outsourcing.
. Analytics and Consulting. We offer daily, weekly or monthly production of
risk management reports to a variety of clients, including insurance
companies, banks and pension plans. Portfolio transactions executed by the
client's investment staff or other asset managers on the client's behalf
are transmitted to us. Asset and liability positions are modeled and risk
parameters are measured for each position, for the corresponding portfolio
and/or for the balance sheet as a whole. We then generate risk management
reports and provide them through password-
14
protected sites on the Internet or through dedicated lines to the client's
in-house systems. We also work directly with consulting clients to
interpret their balance sheet exposures relative to market conditions and
accounting, tax and regulatory policies and to assist in their development
of asset/liability management strategies. While analytics contracts are
generally multi-year arrangements with fees based on the number of
positions processed, consulting contracts can be ongoing or project-
oriented with fixed and performance-based fees.
. Trading System. In 1998, we entered into our first contract to provide
trading system outsourcing. BlackRock's system was chosen following a
search by a large institutional client that included well-established
industry competitors, evidencing our strong capabilities in investment
technology. A long lead-time was necessary to complete hardware upgrades,
further software development and user documentation. The multi-year
contract provides set-up fees, annual service fees and consulting fees for
client-specified customization. Revenues, particularly in the early years,
will be substantially reinvested in order to satisfy our obligations under
the contract and to build our ability to provide this service more
efficiently in the future.
Competition
BlackRock competes with investment management firms, mutual fund complexes,
insurance companies, banks, brokerage firms and other financial institutions
that offer products that are similar to, or alternatives to, those offered by
BlackRock. In order to grow our business, BlackRock must be able to compete
effectively for assets under management. Key competitive factors include
investment performance track records, investment style and discipline, quality
of client service and brand name recognition. We have historically competed
principally on the basis of our long-term investment performance track record,
our investment process, our risk management and analytic capabilities and our
approach to client service. Over the past five years, we have succeeded in
growing aggregate assets under management, and we believe that we will continue
to be able to do so by maintaining strong investment performance and client
service, building longer-term track records in our institutional equity
products, and developing new products and new distribution capabilities. Many
of our competitors, however, have greater financial or marketing resources and
better brand name recognition than BlackRock. These factors may place BlackRock
at a competitive disadvantage, and there can be no assurance that our strategies
and efforts to maintain our existing assets and attract new business will be
successful.
Employees
At December 31, 1999, BlackRock had 633 full-time employees, including 108
professionals in the portfolio management group, 169 professionals in risk
management and analytics, 136 professionals in the separate account and funds
marketing and client service areas and 144 professionals in administrative and
support departments.
Regulation
Virtually all aspects of BlackRock's business are subject to various federal
and state laws and regulations, some of which are summarized below. These laws
and regulations are primarily intended to protect investment advisory clients,
stockholders of registered investment companies, PNC's bank subsidiaries and
bank customers of PNC Bank. Under these laws and regulations, agencies that
regulate investment advisers and bank subsidiaries such as BlackRock and its
subsidiaries have broad administrative powers, including the power to limit,
restrict or prohibit it from carrying on business if it fails to comply with
such laws and regulations. Possible sanctions for significant compliance
failures include the suspension of individual employees, limitations on engaging
in certain lines of business for specified periods of time, revocation of
investment adviser and other registrations, censures and fines.
BlackRock's subsidiaries are subject to regulation, primarily at the federal
level, by the Securities and Exchange Commission (SEC), the Department of Labor,
the Office of the Comptroller of the Currency (OCC), the Board of Governors of
the Federal Reserve System (FRB), the Commodity Futures Trading Commission
(CFTC) and other regulatory bodies.
The Investment Advisers Act imposes numerous obligations on registered
investment advisers, such as BlackRock, including record keeping requirements,
operational requirements, marketing requirements, disclosure obligations and
prohibitions on fraudulent activities. The Investment Company Act imposes
similar obligations, as well as detailed operational requirements, on investment
advisers, such as BlackRock, to registered investment companies and other
managed accounts. The SEC is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act and the Investment
Company Act, ranging from fine and censure to termination of an investment
adviser's registration.
15
BlackRock's subsidiaries also are subject to ERISA and to regulations
promulgated thereunder, insofar as they act as a "fiduciary" under ERISA with
respect to benefit plan clients. ERISA and applicable provisions of the Internal
Revenue Code impose certain duties on persons who are fiduciaries under ERISA,
prohibit certain transactions involving ERISA plan clients, and provide monetary
penalties for violations of these prohibitions. One of BlackRock's subsidiaries
is registered as a commodity pool operator and commodity trading adviser with
the CFTC and the National Futures Association. The CFTC and NFA administer a
comparable regulatory system covering futures contracts and various other
financial instruments in which BlackRock clients may invest. Another subsidiary
is registered with the SEC as a broker-dealer and is a member of the National
Association of Securities Dealers. Although this entity's NASD membership
agreement limits its permitted activities to the sale of investment company
securities and annuities and certain private placement and financial consulting
activities, it is subject to the customer dealing, reporting and other
requirements of the NASD, as well as the net capital and other requirements of
the SEC.
PNC is a bank holding company and, as discussed below, is also a "financial
holding company" regulated by the FRB. PNC Bank, the indirect parent of
BlackRock, is a national bank subsidiary of PNC. As a subsidiary of PNC Bank,
BlackRock is subject to most banking laws, regulations, and orders that are
applicable to PNC Bank, and therefore to the supervision, regulation, and
examination of the OCC, as well as the SEC. The OCC and the Federal Deposit
Insurance Corporation (FDIC) also have broad enforcement authority over PNC Bank
and its subsidiaries, including the power to prohibit PNC or any subsidiary from
engaging in any activity that, in the OCC's opinion, constitutes an unsafe or
unsound practice in conducting its business, to appoint the FDIC as conservator
or receiver of PNC Bank if any of a number of conditions are met, and to impose
substantial fines and other penalties. Supervision and regulation of PNC Bank
and its subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC, and the banking system as a whole, not for
the protection of stockholders or creditors of national banks or their
subsidiaries. The FRB has regulatory and supervisory authority with respect to
PNC's non-U.S. activities and investments, including non-U.S. activities and
investments of BlackRock, as well as with respect to its non-bank subsidiaries.
Because BlackRock is a consolidated subsidiary of PNC Bank, federal
restrictions on the payments of dividends by PNC Bank might be applied to
BlackRock. Under federal law, OCC approval is needed before PNC Bank may pay
dividends in any year in which the total of all dividends paid would exceed the
total of PNC Bank's net profits for that year combined with its retained net
profits from the prior two years. PNC Bank also may not pay dividends exceeding
its capital surplus.
As an operating subsidiary of a national bank, BlackRock may not conduct new
activities, establish a subsidiary, or acquire the stock or assets of another
company unless it obtains the approval of the OCC or, with respect to most non-
U.S. activities or investments, the FRB. The OCC will approve only those
activities and investments that are legally permissible for a national bank and
consistent with prudent banking principles and regulatory policy. The FRB will
approve only those activities that are usual in connection with the transaction
of the business of banking or other financial operations outside of the United
States. Investment management firms with which BlackRock competes commonly
invest in investment companies and private investment funds to which they
provide services. BlackRock may invest in investment companies and private
investment funds to which it provides advisory, administrative or other
services, to the extent consistent with applicable law and regulatory
interpretations, including applicable banking laws. BlackRock's current domestic
and overseas activities are permissible for a national bank.
Pursuant to the Gramm-Leach-Bliley Act (GLB Act), which became effective on
March 11, 2000, a qualifying bank holding company may become a financial holding
company and engage in a broad range of financial activities. A bank holding
company may elect to become a financial holding company if each of its
subsidiary banks is "well capitalized," is "well managed," and has at least a
satisfactory rating under the Community Reinvestment Act. PNC became a
financial holding company as of March 13, 2000.
The GLB Act also permits a national bank, such as PNC Bank, to engage through
the formation of a "financial subsidiary," in expanded activities, including
securities underwriting and dealing.
In order to qualify to establish or acquire a financial subsidiary, a national
bank and each of its depository institution affiliates must be "well-
capitalized" and "well-managed," and may not have a less than satisfactory
Community Reinvestment Act rating. In addition, the total assets of all
financial subsidiaries of a national bank may not exceed the lesser of 45% of
the parent bank's total assets or $50 billion. A national bank that is one of
the largest 50 insured banks must also have issued debt with a certain rating.
In addition to calculating its risk-based capital on a GAAP basis, a national
bank with one or more financial subsidiaries must also be well capitalized after
excluding from its assets and
16
equity all equity investments, including retained earnings, in a financial
subsidiary, and the assets of the financial subsidiary from the bank's
consolidated assets. Any published financial statement for a national bank with
a financial subsidiary must provide risk-based capital information both in
accordance with GAAP and as described above. The bank must also have policies
and procedures to assess financial subsidiary risk and protect the bank from
such risks and potential liabilities.
Pursuant to the GLB Act, PNC Bank has filed a "financial subsidiary
certification" with the OCC. In accordance with the financial subsidiary
provisions, BlackRock, while remaining an operating subsidiary of a national
bank, may now establish financial subsidiaries that engage in a broader range of
activities than would be permissible for an operating subsidiary of a national
bank.
Under the GLB Act and the OCC's proposed regulations, if a national bank that
has one or more financial subsidiaries subsequently fails to be "well
capitalized" or "well managed," the national bank must enter into an agreement
with the OCC to correct the condition. The OCC has the authority to limit the
activities of such a national bank. If the condition is not corrected within
six months or within the additional time granted by the OCC, the national bank
could be required to divest the activities conducted in reliance upon the
financial subsidiary authority. In addition, if the bank or any insured
depository institution affiliate receives a less than satisfactory Community
Reinvestment Act examination rating, the national bank would not be permitted to
engage in new activities, or to make new investments, in reliance upon the
financial subsidiary authority.
The GLB Act, while establishing the FRB as the umbrella supervisor for
financial holding companies, adopts a functional approach to regulation and
supervision that requires the FRB and the OCC to defer to the actions and
requirements of the "functional" regulators of subsidiary broker-dealers,
investment managers, investment companies, banks and other regulated
institutions. Thus, the various state and federal regulators of a bank holding
company's or national bank's subsidiaries, such as the SEC, would retain their
jurisdiction and authority over functionally regulated operating entities. As
the umbrella supervisor, however, the FRB has the potential to affect the
operations and activities of a financial holding company's subsidiaries through
its authority over the financial holding company parent. In addition, the GLB
Act provides the FRB with back-up regulatory authority over functionally
regulated subsidiaries, such as broker-dealers and banks, to intervene directly
in the affairs of the subsidiary for specific reasons.
Under federal law, PNC Bank and its subsidiaries, including BlackRock,
generally may not engage in transactions with PNC or its non-bank subsidiaries,
except on terms and under circumstances that are substantially the same as those
prevailing for comparable transactions involving nonaffiliated companies, or, in
the absence of comparable transactions, that in good faith would be offered to
or would apply to nonaffiliated companies. In addition, certain transactions,
including loans and other extensions of credit, guarantees, investments, and
asset purchases between PNC Bank and its subsidiaries, including BlackRock, on
the one hand, and PNC and its nonbank subsidiaries, on the other hand, are
limited to 10% of PNC Bank's capital and loan loss reserve allowance for
transactions with a single company and to 20% of PNC Bank's capital and loan
loss reserve allowance for aggregate transactions with PNC and all of its
nonbank subsidiaries and other affiliates. In certain circumstances, federal
regulatory authorities may impose more restrictive limitations. Such extensions
of credit, with limited exceptions, must be fully collateralized.
The FDIC could be appointed as conservator or receiver of PNC Bank if the bank
were to become insolvent or if other conditions or events were to occur. As
conservator or receiver, the FDIC could exercise all rights of PNC Bank as a
stockholder of BlackRock. The FDIC would also have the authority to repudiate
contracts by PNC Bank, including servicing or other contracts with BlackRock, at
any time within 180 days of its appointment as conservator or receiver, and
would be obligated to pay BlackRock only "actual direct compensatory damages,"
not including damages for lost profits or opportunity, as of the date of
conservatorship or receivership as a result of such repudiation. The FDIC could
also disregard, without paying damages, any contract that tended to diminish or
defeat the FDIC's interest in any PNC Bank asset if the contract were not:
. in writing;
. executed by PNC Bank and BlackRock contemporaneously with the acquisition
of the asset by PNC Bank;
. approved by the board of directors of PNC Bank or its loan committee with
the approval reflected in the minutes of the board or committee; and
. continuously, from the time of its execution, an official record of PNC
Bank.
17
In addition, the FDIC could obtain a stay of up to 90 days of any judicial
action or proceeding involving PNC Bank, and could require BlackRock to exhaust
its remedies under FDIC claims procedures before pursuing any available judicial
remedy.
PNC's bank and thrift subsidiaries are subject to "cross-guarantee" provisions
under federal law that provide if one of these banks or thrifts fails or
requires FDIC assistance, the FDIC may assess a "commonly controlled" bank or
thrift, such as PNC Bank, for the estimated losses suffered by the FDIC. The
FDIC's claim is superior to the claims of affiliates, such as BlackRock, and of
stockholders of the banks. At December 31, 1999, all of PNC's bank and thrift
subsidiaries exceeded the required ratios for classification as "well
capitalized" under statutory and regulatory standards.
BlackRock's international operations are subject to the laws of non-U.S.
jurisdictions and non-U.S. regulatory agencies or bodies. As BlackRock expands
its international business, its internal operations may become subject to
requirements in numerous jurisdictions regarding reporting of beneficial
ownership positions in securities issued by companies whose securities are
publicly traded in those countries. BlackRock's subsidiaries are subject to
periodic examination by these regulatory agencies. BlackRock's international
subsidiaries have developed comprehensive compliance systems in order to satisfy
applicable regulatory requirements. The failure of BlackRock's internal
operations to comply with the applicable regulatory frameworks could have a
material adverse effect on BlackRock.
PNC currently holds its ownership interest in BlackRock through a subsidiary
of PNC Bank. As such, BlackRock currently is not subject to regulation under the
nonbanking provisions of the Bank Holding Company Act. If PNC were instead to
hold its ownership interest in BlackRock at the holding company level, BlackRock
would no longer be subject to OCC supervision and regulation as a financial
subsidiary of a national bank, but would instead become subject to FRB
supervision and regulation as a nonbank subsidiary of a financial holding
company. A financial subsidiary of a national bank generally may conduct the
same broad range of financial activities that are permitted for a nonbank
subsidiary of a financial holding company, except that it is prohibited from
engaging in insurance underwriting, insurance investment, real estate investment
or development, or merchant banking.
The rules governing the regulation of financial institutions and their holding
companies are very detailed and technical. Accordingly, the above discussion is
general in nature and does not purport to be complete.
18
Item 2. PROPERTIES
BlackRock's facilities are concentrated in New York, New York, where it leases
space sufficient to meet its operating needs. The Company's principal office is
located at 345 Park Avenue, New York, New York. The Company also leases space
at 101 East 52nd Street, New York, New York, Philadelphia, Pennsylvania,
Wilmington, Delaware, Edinburgh, Scotland and White Plains, New York. During the
fourth quarter of 1999, the Company purchased land in Wilmington, Delaware for
$3.5 million and is presently constructing an 84,000 square foot office building
at an estimated cost of approximately $20 million. This facility is scheduled
to be completed in the first quarter of 2001.
Item 3. LEGAL PROCEEDINGS
As previously reported, on or about August 30, 1999, a purported shareholder
of The BlackRock New York Insured Municipal 2008 Term Trust commenced a
purported class action lawsuit in the United States District Court for the
Southern District of New York against BlackRock Financial Management, Inc.
("BFM"), certain of its officers and directors, and certain of the municipal
term trusts managed by BFM. The complaint alleges violations of the Investment
Advisers Act of 1940, Sections 20(a), 36(b) and 48(a) of the Investment Company
Act of 1940, as well as breaches of fiduciary duty and contract in connection
with possible mergers of the defendant municipal term trusts into certain
municipal perpetual funds also managed by BFM. The complaint seeks, among other
things, unspecified damages and equitable relief enjoining consummation of the
mergers. In November 1999, the boards of directors of the trusts, due to
various factors including a change in market conditions, elected not to proceed
with proposing the mergers to the shareholders of the trusts. On December 23,
1999, the plaintiff voluntarily dismissed this lawsuit and on March 10, 2000,
filed a motion for an award of attorneys' fees. BlackRock intends to oppose
this motion for attorneys' fees.
As previously reported, in September 1999, BlackRock was notified by the civil
division of the United States Attorney's Office for the District of Columbia
that BlackRock Capital Finance, L.P. has been named as a defendant, along with
other unidentified entities, in a civil lawsuit brought by a private party
pursuant to the federal False Claims Act. Under the False Claims Act, the
existence of the lawsuit, the identities of the parties and the complaint filed
by the private party remain under seal while the U.S. Department of Justice
determines whether to elect to intervene and assume primary responsibility for
litigating the case. At this time, according to the U.S. Attorney's Office, the
Department of Justice has not determined whether to intervene in this case.
Although the complaint remains under seal, the U.S. Attorney's Office has
provided BlackRock with a copy of the complaint from which certain portions have
been redacted by the U.S. Attorney's Office. Based on the complaint, it is
alleged that BlackRock Capital Finance entered into a financial advisory
subcontract with an advisor to the U.S. Department of Housing and Urban
Development in connection with its auctioning of notes. The complaint alleges
that approximately $4.7 billion of government-owned notes were improperly
directed to BlackRock Capital Finance and its various bidding partners for
prices that were below those which could have been obtained for the notes in a
full and fair competition. The complaint further alleges that BlackRock Capital
Finance was given inside information relating to certain of the note sales in
which BlackRock Capital Finance was bidding. As a result of the alleged scheme,
BlackRock Capital Finance and its bidding partners purportedly were awarded 62%
of the loans purchased in nine loan auctions conducted by a certain financial
advisor to HUD, and 96% of the $1.98 billion in non-performing single family
notes sold in the auctions. The complaint does not state a monetary amount of
damages. Under the False Claims Act, any damage award could be trebled.
Although BlackRock cannot predict with certainty the ultimate outcome of the
litigation at this time, BlackRock believes that the allegations in the
complaint are without merit.
From time to time, BlackRock may be a defendant in various other lawsuits
incidental to its business. BlackRock does not believe the outcome of any such
litigation currently pending will have a material adverse effect on BlackRock's
financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of BlackRock's security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
19
Part II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
BlackRock's class A common stock began trading on the New York Stock
Exchange on October 1, 1999 under the symbol "BLK". BlackRock's class B common
stock is not included for listing or quotation on any established market. At the
close of business on March 7, 2000 there were 12 class A common stockholders of
record and 50 class B common stockholders of record.
The following table sets forth for the periods indicated the high and
low reported sale prices per share for the class A common stock as reported on
the NYSE:
Stock Price Ranges December 31, 1999
-------------------- -----------------
High Low Close
-------- -------- -----------------
Fourth Quarter (Commencing October 1, 1999) $19.38 $12.50 $17.19
Dividends
BlackRock has not declared any dividends since its IPO on October 1,
1999. We intend to retain future earnings, if any, for the development of our
business and therefore do not anticipate that our board of directors will
declare or pay any dividends on the class A common stock and class B common
stock in the foreseeable future. The declaration and payment of dividends by
BlackRock are subject to the discretion of our board of directors. BlackRock is
a holding company and, as such, our ability to pay dividends is subject to the
ability of our subsidiaries to provide cash to us. The board of directors will
determine future dividend policy based on our results of operations, financial
conditions, capital requirements and other circumstances. In addition, because
we are a consolidated subsidiary of PNC Bank, federal banking restrictions on
payments of dividends by PNC Bank may apply to us.
Item 6. SELECTED FINANCIAL DATA
The consolidated financial statements of BlackRock reflect the "carved
out" historical operating results of the asset management businesses of PNC
which were consolidated under BlackRock in 1998 as if the combined operations
had been a separate entity prior to the formation of BlackRock. The selected
financial data presented below has been derived in part from, and should be read
in conjunction with, the consolidated financial statements of BlackRock and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this filing. The consolidated financial data
includes the results of operations of BlackRock Financial Management, Inc. since
its acquisition by PNC on February 28, 1995.
20
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data)
Year ended
December 31,
------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
Income statement data
- -------------------------------------------
Revenue
Investment advisory and administration fees:
Mutual funds $214,728 $162,487 $117,977 $ 87,189 $ 61,877
Separate accounts 154,046 101,352 62,985 43,069 24,458
BlackRock Asset Investors (BAI) (1) (7,072) 61,199 13,867 6,061 5,933
-------- -------- -------- -------- --------
Total investment advisory and administration fees 361,702 325,038 194,829 136,319 92,268
Other income 19,279 14,444 10,644 10,159 5,814
-------- -------- -------- -------- --------
Total revenue 380,981 339,482 205,473 146,478 98,082
Expense
Employee compensation and benefits 138,025 109,741 73,217 53,703 33,698
BAI incentive compensation (1) (5,387) 44,806 9,688 3,525 3,070
Fund administration and servicing costs-affiliates 78,666 52,972 27,278 19,611 12,412
General and administration 48,570 38,696 29,764 24,500 17,719
Amortization of goodwill 9,653 9,653 9,653 9,603 8,002
Closed-end fund offering costs 511 4,252 - - -
-------- -------- -------- -------- --------
Total expense 270,038 260,120 149,600 110,942 74,901
-------- -------- -------- -------- --------
Operating income 110,943 79,362 55,873 35,536 23,181
-------- -------- -------- -------- --------
Non-operating income (expense)
Interest and dividend income 3,445 1,995 3,117 1,877 943
Interest expense (10,938) (13,347) (20,249) (19,975) (14,253)
-------- -------- -------- -------- --------
(7,493) (11,352) (17,132) (18,098) (13,310)
Income before income taxes 103,450 68,010 38,741 17,438 9,871
Income taxes 44,033 32,395 16,655 8,475 4,785
-------- -------- -------- -------- --------
Net income $ 59,417 $ 35,615 $ 22,086 $ 8,963 $ 5,086
======== ======== ======== ======== ========
Per share data (unaudited)
- -------------------------------------------
Basic earnings $ 1.04 $ 0.67 $ 0.49 $ 0.20 $ 0.11
Diluted earnings 1.04 0.66 0.49 0.20 0.11
Book value 4.39 1.94 1.00 0.72 0.51
Market value 17.19 - - - -
Cash dividends declared per common share NA NA NA NA NA
Balance sheet data
- -------------------------------------------
Goodwill $194,257 $203,910 $213,563 $223,216 $232,100
Total assets 447,582 440,784 335,507 332,719 293,270
Long-term debt - 178,200 206,432 234,255 149,754
Total liabilities 167,056 334,593 290,544 300,047 270,481
Stockholders' equity 280,526 106,191 44,963 32,672 22,789
Other financial data (unaudited)
- -------------------------------------------
Assets under management
Separate accounts:
Fixed income* $ 75,206 $ 52,869 $ 39,261 $ 28,958 $ 23,345
Liquidity 20,934 13,826 10,019 7,430 5,556
Equity 3,080 2,417 1,763 1,204 700
-------- -------- -------- -------- --------
Subtotal 99,220 69,112 51,043 37,592 29,601
-------- -------- -------- -------- --------
Mutual funds:
Fixed income 13,318 13,888 13,714 12,546 11,969
Liquidity 36,587 35,555 29,827 23,933 21,183
Equity 15,392 12,087 10,829 8,643 6,306
-------- -------- -------- -------- --------
Subtotal 65,297 61,530 54,370 45,122 39,458
-------- -------- -------- -------- --------
Total $164,517 $130,642 $105,413 $ 82,714 $ 69,059
======== ======== ======== ======== ========
* including alternative investment products.
(1) Pursuant to a plan of liquidation, the assets of BAI were sold and its
business operations terminated on September 27, 1999. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General".
21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BlackRock, Inc. (together with its subsidiaries "BlackRock" or the "Company")
was formed in 1998 as a result of The PNC Financial Services Group, Inc.'s,
formerly PNC Bank Corp. ("PNC"), decision to substantially consolidate its asset
management businesses under the BlackRock brand name and management team. Prior
to this consolidation, PNC provided the fixed income, liquidity and equity
advisory services now offered under BlackRock through various legal entities
utilizing separate brand names.
The consolidated financial statements of BlackRock reflect the "carved out"
historical operating results of the asset management businesses of PNC that were
consolidated under BlackRock in 1998 as if the combined operations had been a
separate entity prior to the formation of BlackRock. The following table
summarizes BlackRock's operating performance for the years ended December 31,
1999, 1998 and 1997.
BlackRock, Inc.
Financial Highlights
(amounts in thousands, except per share data)
Year ended
December 31, % Change
--------------------------------------------- -------------------------------
1999 1998 1997 1999 vs. 1998 1998 vs. 1997
----------- ----------- ----------- ------------- -------------
Operating Revenue $ 388,053 $ 278,283 $ 191,606 39.4% 45.2%
BAI Revenue (7,072) $ 61,199 $ 13,867 NM NM
Total Revenue $ 380,981 $ 339,482 $ 205,473 12.2% 65.2%
Operating Expense $ 275,425 $ 215,314 $ 139,912 27.9% 53.9%
BAI Expense ($5,387) $ 44,806 $ 9,688 NM NM
Total Expense $ 270,038 $ 260,120 $ 149,600 3.8% 73.9%
Operating Income Including BAI $ 110,943 $ 79,362 $ 55,873 39.8% 42.0%
Net Income $ 59,417 $ 35,615 $ 22,086 66.8% 61.3%
Diluted Earnings Per Share $ 1.04 $ 0.66 $ 0.49 57.6% 34.7%
Diluted Cash Earnings Per Share (a) $ 1.21 $ 0.84 $ 0.70 44.0% 20.0%
Average Diluted Shares Outstanding 57,268,912 53,682,204 45,100,000 6.7% 19.0%
EBITDA (b) $ 132,541 $ 94,209 $ 71,141 40.7% 32.4%
Operating Margin (c) 36.6% 29.8% 31.5%
(a) Net income plus goodwill amortization for the period divided by weighted
average shares outstanding.
(b) "EBITDA" represents earnings before interest expense, income taxes,
depreciation, amortization and extraordinary items.
(c) Operating income adjusted for BAI results and closed-end fund offering costs
divided by operating revenues less fund administration and servicing costs-
affiliates.
NM-Not meaningful
22
General
BlackRock derives a substantial portion of its revenue from investment
advisory and administration fees, which are recognized as the services are
performed. Such fees are primarily based on predetermined percentages of the
market value of assets under management and are affected by changes in assets
under management, including market appreciation or depreciation and net
subscriptions or redemptions. Net subscriptions or redemptions represent the
sum of new client assets, additional fundings from existing clients, withdrawals
of assets from and termination of client accounts and purchases and redemptions
of mutual fund shares.
Investment advisory agreements for certain separate accounts and BlackRock's
alternative investment products provide for performance fees in addition to fees
based on assets under management. Performance fees are earned when investment
performance exceeds a contractual threshold and, accordingly, may increase the
volatility of BlackRock's revenue and earnings.
BlackRock provides a variety of risk management services to insurance
companies, finance companies, pension funds, REITS, commercial and mortgage
banks, savings institutions and government agencies. The services provided
range from consulting assignments to actual execution of hedging transactions on
behalf of our clients. The fees earned on risk management advisory engagements
are recorded as other income.
BlackRock Asset Investors ("BAI"), was an alternative investment product
created in 1994 in response to the opportunity that the Company perceived in the
commercial real estate sector. Due to reduced opportunities to generate
appropriate returns BAI's Board of Trustees and shareholders approved
management's recommendation in 1997 to liquidate the fund, which was completed
on September 27, 1999. As a result of the liquidation, which involved the sale
of BAI's assets, BlackRock realized an operating loss of $1.7 million for the
year ended December 31, 1999. For the years ended December 31, 1998, and 1997,
BAI generated operating income (advisory and performance fees, net of expense)
of $16.4 million, and $4.2 million, respectively.
In May, 1998, PNC's private bank, PNC Advisors, converted approximately $8.2
billion of common trust assets into the BlackRock Funds. Prior to the
conversion, the Company received subadvisory fees for investment management
services provided on these assets. Subsequent to the conversion, as sponsor to
the BlackRock Funds, BlackRock is required to report advisory and administration
revenues on these assets gross with amounts paid to PNC Advisors, as subadvisor
and subadministrator, reported as a separate operating expense. Accordingly,
BlackRock's mutual fund advisory and administration fees and fund administration
and servicing costs-affiliates for 1999 and 1998 reflect significant increases
associated with the conversion.
Operating revenue primarily consists of investment advisory and administration
fees earned on separate account and mutual fund assets under management and
other income. Revenue associated with BAI, which was liquidated in 1999 are
reported separately and are included in total revenue.
Operating expense primarily consists of employee compensation and benefits,
fund administration and servicing costs-affiliates, general and administration,
and goodwill amortization. Employee compensation and benefit expense reflects
salaries, deferred and incentive compensation, and related benefit costs. Fund
administration and servicing costs-affiliates expense reflects payments made to
PNC affiliated entities primarily associated with the administration and
servicing of PNC client investments in the BlackRock Funds. BAI incentive
compensation expense, which is reported separately and included in total
expense, reflects compensation earned by investment advisory and other employees
of BlackRock in accordance with various contractual and other arrangements with
PNC and the fund. Goodwill at December 31, 1999 was $194 million with annual
amortization expense of approximately $9.7 million. Substantially all of the
goodwill resulted from PNC's acquisition of BlackRock Financial Management, L.P.
("BFM") on February 28, 1995.
Assets Under Management
Assets under management ("AUM") increased $33.9 billion, or 25.9% to $164.5
billion at December 31, 1999 compared to $130.6 billion at December 31, 1998.
The growth in assets was attributable to increases of $30.1 billion in separate
accounts and $3.8 billion in mutual fund assets.
The increase in separate accounts was primarily due to net subscriptions in
fixed income accounts and liquidity accounts of $23.3 billion and $7.1 billion,
respectively. The increase in liquidity separate accounts was largely
attributable
23
to higher levels of assets associated with securities lending activities
conducted by PFPC Worldwide Inc., a subsidiary of PNC which provides accounting
and administration, transfer agency and custody services to the BlackRock Funds
and Provident Institutional Funds.
The $3.8 billion increase in mutual fund assets primarily reflected net
subscriptions totaling $2.5 billion and market appreciation of $1.2 billion.
The rise in mutual fund assets was largely due to growth in the BlackRock Funds
which increased $3.1 billion, including $1.5 billion in net subscriptions.
Net subscriptions increased each of the last three years with net inflows of
$32.7 billion, $20.8 billion and $18.5 billion for the years ended December 31,
1999, 1998 and 1997, respectively. For the three year period ended December 31,
1999 net subscriptions accounted for 88% of asset growth while market
appreciation accounted for 12%.
Year ended
December 31, % Change
------------------------------------ --------------------------------
1999 1998 1997 1999 vs. 1998 1998 vs. 1997
-------- -------- -------- ------------- -------------
($ in millions)
Separate Accounts
Fixed income* $ 75,206 $ 52,869 $ 39,261 42.2% 34.7%
Liquidity 20,934 13,826 10,019 51.4 38.0
Equity 3,080 2,417 1,763 27.4 37.1
-------- -------- -------- -------- --------
Subtotal 99,220 69,112 51,043 43.6 35.4
-------- -------- -------- -------- --------
Mutual Funds
Fixed income 13,318 13,888 13,714 (4.1) 1.3
Liquidity 36,587 35,555 29,827 2.9 19.2
Equity 15,392 12,087 10,829 27.3 11.6
-------- -------- -------- -------- --------
Subtotal 65,297 61,530 54,370 6.1 13.2
-------- -------- -------- -------- --------
Total $164,517 $130,642 $105,413 25.9% 23.9%
======== ======== ======== ======== ========
*includes alternative investment products
The following tables present the component changes in BlackRock's assets under
management for the years ended December 31, 1999, 1998, and 1997, respectively.
The data reflects certain reclassifications between net subscriptions
(redemptions) and market appreciation (depreciation) from amounts previously
reported.
24
Year ended
December 31,
-------------------------------------------------
1999 1998 1997
-------- -------- --------
($ in millions)
Separate Accounts
Beginning assets under management $ 69,112 $ 51,043 $ 37,592
Net subscriptions 30,183 15,166 11,301
Market appreciation (depreciation) (75) 2,903 2,150
-------- -------- --------
Ending assets under management 99,220 69,112 51,043
-------- -------- --------
Mutual Funds
Beginning assets under management 61,530 54,370 45,122
Net subscriptions 2,524 5,674 7,221
Market appreciation 1,243 1,486 2,027
-------- -------- --------
Ending assets under management 65,297 61,530 54,370
-------- -------- --------
Total $164,517 $130,642 $105,413
======== ======== ========
Net subscriptions $ 32,707 $ 20,840 $ 18,522
% of Change in AUM from net subscriptions 96.6% 82.6% 81.6%
Year ended
December 31,
-------------------------------------------------
1999 1998 1997
-------- -------- --------
($ in millions)
Separate Accounts
Fixed Income*
Beginning assets under management $ 52,869 $ 39,261 $ 28,958
Net subscriptions 23,317 10,928 8,313
Market appreciation (depreciation) (980) 2,680 1,990
-------- -------- --------
Ending assets under management 75,206 52,869 39,261
-------- -------- --------
Liquidity
Beginning assets under management 13,826 10,019 7,430
Net subscriptions 7,061 3,788 2,586
Market appreciation 47 19 3
-------- -------- --------
Ending assets under management 20,934 13,826 10,019
-------- -------- --------
Equity
Beginning assets under management 2,417 1,763 1,204
Net subscriptions (redemptions) (195) 450 402
Market appreciation 858 204 157
-------- -------- --------
Ending assets under management 3,080 2,417 1,763
-------- -------- --------
Total Separate Accounts
Beginning assets under management 69,112 51,043 37,592
Net subscriptions 30,183 15,166 11,301
Market appreciation (depreciation) (75) 2,903 2,150
-------- -------- --------
Ending assets under management $ 99,220 $ 69,112 $ 51,043
======== ======== ========
* includes alternative investment products
25
Assets Under Management (continued)
Year ended
December 31,
-------------------------------------------------
1999 1998 1997
-------- -------- --------
($ in millions)
Mutual Funds
BlackRock Funds
Beginning assets under management $ 24,231 $ 22,129 $ 17,846
Net subscriptions 1,459 718 2,489
Market appreciation 1,649 1,384 1,794
-------- -------- --------
Ending assets under management 27,339 24,231 22,129
-------- -------- --------
Provident Institutional Funds (PIF)
Beginning assets under management 25,368 20,278 16,230
Net subscriptions 186 5,090 4,048
Market appreciation - - -
-------- -------- --------
Ending assets under management 25,554 25,368 20,278
-------- -------- --------
Closed End Funds
Beginning assets under management 7,756 8,114 7,881
Net redemptions (10) (460) -
Market appreciation (depreciation) (406) 102 233
-------- -------- --------
Ending assets under management 7,340 7,756 8,114
-------- -------- --------
Short Term Investment Funds (STIF)
Beginning assets under management 4,175 3,849 3,165
Net subscriptions 889 326 684
Market appreciation - - -
-------- -------- --------
Ending assets under management 5,064 4,175 3,849
-------- -------- --------
Total Mutual Funds
Beginning assets under management 61,530 $ 54,370 $ 45,122
Net subscriptions 2,524 5,674 7,221
Market appreciation 1,243 1,486 2,027
-------- -------- --------
Ending assets under management $ 65,297 $ 61,530 $ 54,370
======== ======== ========
26
Operating results for year ended December 31, 1999 as compared with year ended
December 31, 1998.
Revenue
Investment advisory and administration fees increased $104.9 million to $368.8
million for the year ended December 31, 1999, compared with $263.8 million for
the year ended December 31, 1998. The growth in investment advisory and
administration fees was primarily due to increases in separate account assets
under management and higher mutual fund advisory fees on PNC client assets
invested in the BlackRock Funds. Operating revenue increased $109.8 million to
$388.1 million for the year ended December 31, 1999 compared to $278.3 million
for the year ended December 31, 1998. Total revenue increased $41.5 million to
$381.0 million for the year ended December 31, 1999 net of reductions in BAI
revenues associated with the fund's liquidation.
Year ended
December 31, Change
---------------------- ----------------------
1999 1998 Amount Percent
-------- -------- -------- -------
($ in thousands) ($ in thousands)
Investment advisory and administration fees:
Mutual funds $214,728 $162,487 $ 52,241 32.2%
Separate accounts 154,046 101,352 52,694 52.0
-------- -------- -------- -------
Total investment advisory and administration fees: 368,774 263,839 104,935 39.8%
Other income 19,279 14,444 4,835 33.5
-------- -------- -------- -------
Operating revenue 388,053 278,283 109,770 39.4%
BAI revenue (7,072) 61,199 (68,271) NM
-------- -------- -------- -------
Total revenue $380,981 $339,482 $ 41,499 12.2%
======== ======== ======== =======
NM-Not meaningful
Mutual fund advisory and administration fees increased $52.2 million for the
year ended December 31, 1999, of which approximately $32.7 million reflects
increases largely attributable to the May 1998 conversion of $8.2 billion of PNC
common trust assets into the BlackRock Funds. The remaining $19.5 million
increase in mutual fund advisory and administration fees was due to a $3.8
billion increase in mutual fund assets under management. Separate account
advisory fees increased $52.7 million largely as a result of a $30.1 billion
growth in separate account assets under management as well as a $20.3 million
increase in base and performance fees earned on BlackRock's alternative
investment products. Other income increased $4.8 million due to new risk
management advisory engagements, which included a $2.0 million increase for
additional services provided to PNC. BAI revenues decreased $68.3 million due
to the discontinuance of business activity and reversals of previously accrued
performance fees associated with the fund's liquidation.
Expense
Operating expense increased $60.1 million to $275.4 million for the year ended
December 31, 1999, compared with $215.3 million for the year ended December 31,
1998. The rise in operating expense was primarily attributable to increases in
employee compensation and benefits, and fund administration and servicing costs-
affiliates. Total expense increased $9.9 million to $270.0 million for the year
ended December 31, 1999 as a result of lower BAI incentive compensation expense
related to the fund's liquidation.
27
Year ended
December 31, Change
------------------------- -----------------------
1999 1998 Amount Percent
-------- -------- -------- --------
($ in thousands) ($ in thousands)
Employee compensation and benefits $138,025 $109,741 $ 28,284 25.8%
Fund administration and servicing costs-affiliates 78,666 52,972 25,694 48.5
General and administration 48,570 38,696 9,874 25.5
Amortization of goodwill 9,653 9,653 - -
Closed end fund offering costs 511 4,252 (3,741) NM
-------- -------- -------- --------
Total operating expense 275,425 215,314 60,111 27.9%
BAI incentive compensation (5,387) 44,806 (50,193) NM
-------- -------- -------- --------
Total expense $270,038 $260,120 $ 9,918 3.8%
======== ======== ======== ========
NM- Not meaningful
Employee compensation and benefits increased $28.3 million due to additional
expenses of $10.5 million related to salary and benefits and $17.8 million for
incentive compensation primarily based on operating profit growth. Employee
compensation and benefit cost increases were attributable to a 19.2% increase in
full-time employees to support business growth and enhancements to PNC's 401(k)
plan that were partially offset by the adoption of SOP 98-1 (Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use) in 1999 which
resulted in a capitalization of approximately $4.9 million of costs. Fund
administration and servicing costs-affiliates increased $25.7 million of which
$24.6 million reflects increases largely attributable to the May 1998 conversion
of $8.2 billion of PNC common trust funds into the BlackRock Funds. General and
administration expenses increased $9.9 million primarily due to additional
expenditures of $6.1 million related to systems and communications, $3.9 million
related to marketing and promotional costs and $2.4 million related to occupancy
and office services. These increases reflect the substantial rise in full time
employment associated with business growth experienced during the period, as
well as a change in depreciable life on equipment from five years to three
years. BAI incentive compensation decreased by $50.2 million due to the
discontinuance of business activity and reversals of previously accrued
incentive compensation associated with the fund's liquidation.
Operating Income and Net Income
Operating income was $110.9 million for the year ended December 31, 1999,
representing a $31.6 million or 39.8% increase compared with the year ended
December 31, 1998. Non-operating expense decreased $3.9 million or 34.0% to $7.5
million for the year ended December 31, 1999 compared with $11.4 million for the
year ended December 31, 1998, largely due to reduced interest expense associated
with the repayment of debt. Income tax expense was $44.0 million and $32.4
million representing effective tax rates of 42.6% and 47.6% for the years ended
December 31, 1999 and 1998, respectively. The difference in the effective tax
rate reflects various permanent differences and state and local income tax
adjustments recorded pursuant to the PNC tax sharing policy. Net income totaled
$59.4 million for the year ended December 31, 1999 compared with $35.6 million
for the year ended December 31, 1998, an increase of 66.8%.
Operating results for year ended December 31, 1998 as compared with year ended
December 31, 1997.
Revenue
Investment advisory and administration fees increased $82.9 million to $263.8
million in 1998 from $180.9 million in 1997. The growth in investment advisory
and administration fees for 1998 was due to increases in assets under management
for separate accounts and mutual funds. Operating revenue increased $86.7
million to $278.3 million for the year ended December 31, 1998 as compared to
191.6 million for the year ended December 31, 1997. Total revenue increased
$134.0 million to $339.5 million for the year ended December 31, 1998 due to a
substantial increase in BAI performance fee revenues.
28
Year ended
December 31, Change
------------------------- -----------------------
1998 1997 Amount Percent
-------- -------- -------- --------
($ in thousands) ($ in thousands)
Investment advisory and administration fees:
Mutual funds $162,487 $117,977 $ 44,510 37.7%
Separate accounts 101,352 62,985 38,367 60.9
-------- -------- -------- --------
Total investment advisory and administration fees: 263,839 180,962 82,877 45.8
Other income 14,444 10,644 3,800 35.7
-------- -------- -------- --------
Total operating revenue 278,283 191,606 86,677 45.2%
BAI revenue 61,199 13,867 47,332 NM
-------- -------- -------- --------
Total revenue $339,482 $205,473 $134,009 65.2%
======== ======== ======== ========
NM- Not meaningful
Mutual funds advisory and administration fees increased $44.5 million of which
approximately $31.5 million was attributable to the May 1998 conversion of $8.2
billion of PNC common trust funds into the BlackRock Funds. The remaining $13.0
million increase in mutual fund advisory and administration fees was due to a
$7.2 billion increase in mutual fund assets under management, particularly a
$5.1 billion rise in Provident Institutional Fund (PIF) assets. Separate
account advisory fees rose $38.4 million largely as a result of an $18.1 billion
increase in separate account assets under management as well as increased
performance fees earned on BlackRock's domestic and off-shore fixed income hedge
funds. Other income increased $3.8 million primarily from new risk management
advisory engagements. BAI revenue increased $47.3 million primarily due to
increased performance fees based on the market value of fund assets and
projected fund returns.
Expenses
Operating expense increased by $75.4 million to $215.3 million in 1998 from
$139.9 million in 1997. The rise in operating expense was primarily the result
of increases in employee compensation and benefits and fund administration and
servicing costs due to higher levels of PNC client assets under management in
the BlackRock Funds. Total expense increased $110.5 million to $260.1 million
for the year ended December 31, 1998 due to a substantial increase in BAI
incentive compensation expense associated with higher performance fee revenues.
Year ended
December 31, Change
------------------------- -----------------------
1998 1997 Amount Percent
-------- -------- -------- --------
($ in thousands) ($ in thousands)
Employee compensation and benefits $109,741 $ 73,217 $ 36,524 49.9%
Fund administration and servicing costs-affiliates 52,972 27,278 25,694 94.2
General and administration 38,696 29,764 8,932 30.0
Amortization of goodwill 9,653 9,653 - -
Closed-end fund offering costs 4,252 - 4,252 NM
-------- -------- -------- --------
Total operating expense 215,314 139,912 75,402 53.9%
BAI incentive compensation 44,806 9,688 35,118 NM
-------- -------- -------- --------
Total expense $260,120 $149,600 $110,520 73.9%
======== ======== ======== ========
NM- Not meaningful
Employee compensation and benefits increased $36.5 million due to additional
expenses of $16.1 million related to salary and benefits, $16.0 million for
incentive compensation based primarily on operating profit growth and $4.4
million associated with the establishment of a deferred compensation program to
retain key executives and employees. Employee
29
compensation and benefit cost increases largely resulted from a 25% rise in full
time employees to support business growth and enhanced infrastructure. Fund
administration and servicing costs-affiliates increased $25.7 million entirely
due to the May 1998 conversion of $8.2 billion of PNC common trust funds into
the BlackRock Funds. General and administration expenses increased $8.9 million,
primarily attributable to additional expenditures of $1.8 million related to
occupancy and office services, $1.8 million related to marketing and promotion
and $1.3 million related to systems and communications. These increases resulted
from the substantial business growth experienced in 1998 as well as from
BlackRock's formation, which required significant staff increases and included
sizable new investments in technology and leased premises as compared to the
prior year. BlackRock also launched a new high yield mutual fund in December
1998, which resulted in the immediate recognition of $4.3 million of expense for
broker-related sales commissions. BAI incentive compensation expense was $44.8
million for the year ended December 31, 1998, a $35.1 million increase from the
$9.7 million reported in 1997. The increase was attributable to higher
performance fees based on the market value of fund assets and projected fund
returns.
Operating Income and Net Income
Operating income was $79.4 million for 1998, representing a $23.5 million or
42.0% increase from the prior year. Non-operating expense decreased to $11.4
million for 1998 as compared to $17.1 million for 1997, a 33.7% decrease
reflecting lower interest expense associated with the paydown of debt. Income
tax expense was $32.4 million and $16.7 million for 1998 and 1997, respectively,
representing effective tax rates of 47.6% and 43.0%. The increase in the
effective tax rate from the prior year is attributable to increased state and
local taxes. Net income totaled $35.6 million for 1998 as compared to $22.1
million for 1997, an increase of 61.3%.
Liquidity and Capital Resources
BlackRock's business is not capital intensive. BlackRock has historically met
its working capital requirements through cash generated by its operating
activities and borrowings with PNC Bank, N.A. (PNC Bank) under a $175 million
revolving credit facility. Cash provided by operating activities totaled $116.3
million, $53.7 million and $47.2 million for the years ended December 31, 1999,
1998 and 1997 respectively. The $62.6 million increase in cash provided by
operating activities in 1999 was primarily due to a $23.8 million increase in
net income, and a $40.8 million decrease in accounts receivable entirely due to
the liquidation of BAI. BlackRock expects that cash flows provided by operating
activities will continue to serve as the principal source of working capital for
the near future.
Net cash flow used in investing activities was $18.9 million, $5.0 million and
$3.0 million for the years ended December 31, 1999, 1998 and 1997 respectively.
Capital expenditures for software development, furniture and equipment and
leasehold improvements were $18.9 million, $8.4 million and $2.2 million for the
years ended December 31, 1999, 1998 and 1997 respectively.
Total capital at December 31, 1999 was $308.7 million and was comprised of
$280.5 million of stockholders' equity and $28.2 million of debt. Debt at
December 31, 1999 was solely comprised of $28.2 million on the unsecured note
due February 28, 2000 with B.P. Partners L.P., an entity comprised of former
partners of BlackRock Financial Management, Inc. (BFM), who received deferred
notes as part of the purchase price for BFM. BlackRock repaid $18.8 million on
February 28, 1999. Total capital at December 31, 1998 was $303.2 million and was
comprised of $106.2 million of stockholders' equity and $197.0 million of debt.
Debt at December 31, 1998 included $150.0 million outstanding on a $175.0
million revolving credit facility with PNC Bank due December 31, 2002, and $47.0
million on the unsecured note due through February 28, 2000 with B.P. Partners,
L.P. The outstanding debt as of December 31, 1999 and 1998, represents amounts
remaining from PNC's $240.0 million acquisition of BFM on February 28, 1995,
which was recorded on BFM's books. The revolving credit facility with PNC Bank,
dated February 28, 1996, as amended, bears interest at PNC Bank's "prime rate"
and is not terminable by the bank except in the event of a default. The
unsecured note bears interest at a fixed rate of 7.5% and is unconditionally
guaranteed by PNC.
Net cash flow used in financing activities was $53.8 million, $4.4 million and
$40.4 million for 1999,1998 and 1997, respectively. Debt payments totaled $168.8
million, $28.2 million and $30.6 million for 1999,1998 and 1997, respectively.
In its initial public offering on October 1, 1999, the Company issued 9 million
shares of class A common stock to the public at an offering price of $14 per
share (the "Offering"). The proceeds from the Offering, net of underwriters'
discount and estimated offering expenses, totaled approximately $114.9 million.
These proceeds were used to retire a portion of BlackRock's revolving credit
facility with PNC Bank on October 7, 1999. During 1998, BlackRock received $34.2
million in net proceeds from the sale of restricted stock to employees. On the
March 31, 1998 formation date, $12.3 million
30
in dividends were paid to PNC in order to establish an appropriate exchange
ratio for PNC and employee ownership interests based on the fair market value of
the combined businesses.
Recent Accounting Developments
Derivative Instruments and Hedging Activities
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivatives
embedded in other contracts and for hedging activities. SFAS No. 133 generally
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those investments at fair
value. SFAS No. 133, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," is required to be adopted for fiscal years beginning after
June 15, 2000. The Company did not acquire any derivative instruments or enter
into hedging activities for the periods covered under the consolidated financial
statements. The adoption of SFAS No. 133, as amended by SFAS No. 137, is not
expected to have a material impact on the Company's results of operations or
financial position.
Seasonality
BlackRock does not believe its operations are subject to significant seasonal
fluctuations.
Interest Rates
The value of assets under management is affected by changes in interest rates.
Since BlackRock derives the majority of its revenues from investment advisory
fees based on assets under management, BlackRock's revenues may be adversely
affected by changing interest rates. In a period of rapidly rising interest
rates, BlackRock's assets under management would likely be negatively affected
by reduced asset values and increased redemptions.
Inflation
The majority of BlackRock's revenues are based on the value of assets under
management. There is no predictable relationship between the rate of inflation
and the value of assets under management by BlackRock, except as inflation may
affect interest rates. BlackRock does not believe inflation will significantly
affect its compensation costs as they are substantially variable in nature.
However, the rate of inflation may affect BlackRock's expenses such as
information technology and occupancy costs. To the extent inflation results in
rising interest rates and has other effects upon the securities markets, it may
adversely affect BlackRock's results of operations by reducing BlackRock's
assets under management, revenues or otherwise.
Year 2000 Readiness
During 1999, BlackRock completed the process of preparing for the year 2000
date change event. This process involved reviewing, modifying and replacing
existing hardware, software and embedded chip technology systems, as necessary
and communicating with counterparties, external service providers and customers
regarding their response to year 2000 issues. BlackRock also assessed the year
2000 preparedness of issuers of the securities in which BlackRock invests, as
well as of third parties such as vendors, customers, governmental entities and
others. Contingency plans for year 2000 issues were maintained. Business
continuity plans were reviewed and strengthened to address year 2000
implications.
The estimated total cumulative cost to become year 2000 ready through December
31, 1999, which has been expensed as incurred, was approximately $1.0 million.
No significant outlays were made to replace existing systems solely for year
2000 reasons.
BlackRock to date has not encountered any materially significant problems
associated with its mission critical systems or service providers as a result of
the date change event.
Unanticipated issues associated with the year 2000 date change event could
still occur that may have an adverse impact on the operations and financial
condition of BlackRock, the issuers of securities in which BlackRock invests,
its customers
31
and service providers. If BlackRock were to fail to correct unanticipated year
2000 problems, or if BlackRock's contingency plans fail to mitigate any such
problems, a disruption of operations could occur, resulting in increased
operating costs, loss of revenues and other material adverse effects. To the
extent that the financial positions of the issuers of securities in which
BlackRock invests are weakened due to year 2000 issues, BlackRock's investment
performance could be impaired. It is not possible to predict with certainty all
of the adverse effects that could result from a failure of third parties to
address year 2000 issues or whether such effects could have a material adverse
impact on BlackRock. BlackRock will continue to monitor year 2000 operations
throughout 2000 including mission critical systems and service providers.
Forward-Looking Statements
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act with respect to financial performance
and other financial and business matters. Forward-looking statements are
typically identified by words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "position," and variations of such words and
similar expressions, or future or conditional verbs such as "will," "would, "
"should," "could," "may" or similar expressions. BlackRock cautions that these
forward-looking statements are subject to numerous assumptions, risks and
uncertainties, all of which change over time, and BlackRock assumes no duty to
update forward-looking statements. Actual results could differ materially from
those anticipated in these forward-looking statements.
In addition to factors previously disclosed by BlackRock and those identified
elsewhere herein, the following factors, among others, could cause actual
results to differ materially from forward-looking statements: the introduction,
withdrawal, success and timing of business initiatives and strategies; changes
in economic conditions, interest rates, and financial and capital markets; the
investment performance of BlackRock's sponsored investment products and
separately managed accounts; competitive conditions; future acquisitions; and
the impact, extent and timing of technological changes and legislative and
regulatory actions and reforms. Please refer to Exhibit 99.1 of this report and
subsequent quarterly reports on Form 10-Q filed with the SEC for a more detailed
discussion of these and other factors.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The independent auditor's reports and financial statements listed in the
accompanying index are included in Item 14 of this report. See Index to
Financial Statements and Financial Statement Schedules on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure
matters.
Part III.
Certain information required by Part III is omitted from this Annual Report on
Form 10-K in that the Company will file a definitive Proxy Statement within 120
days after the end of its fiscal year pursuant to Regulation 14A for its Annual
Meeting of Stockholders to be held on May 1, 2000 (the "Proxy Statement"), and
the information included therein is incorporated herein by reference.
32
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information contained in the section captioned "Item 1: Election of
Directors" of the Proxy Statement is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
The information contained in the section captioned "Compensation of Executive
Officers" and "Item 1: Election of Directors-Compensation of Directors" of the
Proxy Statement is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the section captioned "Ownership of BlackRock
Common Stock" and "Ownership of PNC Common Stock" of the Proxy Statement is
incorporated herein by reference
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained in the section captioned "Certain Relationships and
Related Transactions" of the Proxy Statement is incorporated herein by
reference.
Part IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included herein at pages F-1 through F-21
2. Financial Data Schedules
All schedules have been omitted because they are not applicable,
not required, or the information required is included in the
financial statements or notes thereto.
3. Exhibits
The following exhibits are filed as part of this Annual Report on Form 10-K:
Exhibit No. Description
----------- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Amended and Restated Bylaws of the Registrant.
3.3 Amendment No. 1 to the Amended and Restated Bylaws of the
Registrant.
4.1* Specimen of Common Stock Certificate (per class).
4.2* Amended and Restated Stockholders Agreement, dated September 30,
1999, by and among the Registrant, PNC Asset Management, Inc. and
certain employees of the Registrant and its affiliates.
10.1* Tax Disaffiliation Agreement, dated October 6, 1999, among
BlackRock Inc., PNC Asset Management, Inc. and The PNC Financial
Services Group, Inc., formerly PNC Bank Corp.
10.2* 1999 Stock Award and Incentive Plan.
10.3* 1999 Annual Incentive Performance Plan.
10.4* Nonemployee Directors Stock Compensation Plan.
10.5* Form of Employment Agreement.
10.6* Initial Public Offering Agreement, dated September 30, 1999,
among the Registrant, The PNC Financial Services Group, Inc.,
formerly PNC Bank Corp. and PNC Asset Management, Inc.
10.7* Registration Rights Agreement, dated October 6, 1999, among the
Registrant, PNC Asset Management, Inc. and certain holders of
class B common stock of the Registrant.
10.8* Services Agreement, dated October 6, 1999, between the Registrant
and The PNC Financial Services Group, Inc., formerly PNC Bank
Corp.
10.9** Amended and Restated Long-Term Deferred Compensation Plan
33
10.10** BlackRock International, Ltd. Amended and Restated Long-Term
Deferred Compensation Plan
21.1 List of subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (Included on the Signature Pages hereto).
27.1 Financial Data Schedule.
99.1 Cautionary Statement for Purposes of the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995.
---------------------------------------------------------------------------
* 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.
** 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.
(b) Reports on Form 8-K
1. A current report on Form 8-K, dated October 20, 1999, was filed with
the Securities and Exchange Commission in connection with BlackRock's
results of operations for the three and nine months ended September
30, 1999.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant, BlackRock, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
BLACKROCK, INC.
(Registrant)
By: /s/ Laurence D. Fink
--------------------
Laurence D. Fink
Chairman, Chief Executive Officer and Director
March 28, 2000
Each of the officers and directors of BlackRock, Inc. whose signature appears
below, in so signing, also makes, constitutes and appoints Robert P. Connolly
and Ralph L. Schlosstein, his true and lawful attorneys-in-fact, with full power
and substitution, for him in any and all capacities, to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments to the
Report on Form 10-K, with exhibits thereto and other documents connected
therewith and to perform any acts necessary to be done in order to file such
documents, and hereby ratifies and confirms all that said attorneys-in-fact or
their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of BlackRock,
Inc. and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Laurence D. Fink Chairman, Chief Executive Officer and March 28, 2000
- ---------------------------
Laurence D. Fink Director (Principal Executive Officer)
/s/ Paul L. Audet Managing Director and Chief Financial Officer March 28, 2000
- ---------------------------
Paul L. Audet (Principal Financial and Accounting Officer)
/s/ Murry S. Gerber Director March 28, 2000
- ---------------------------
Murry S. Gerber
/s/ Walter E. Gregg Director March 28, 2000
- ---------------------------
Walter E. Gregg
/s/ James Grosfeld Director March 28, 2000
- ---------------------------
James Grosfeld
/s/ Frank T. Nickell Director March 28, 2000
- ---------------------------
Frank T. Nickell
/s/ Thomas H. O'Brien Director March 28, 2000
- ---------------------------
Thomas H. O'Brien
/s/ Helen P. Pudlin Director March 28, 2000
- ---------------------------
Helen P. Pudlin
/s/ James E. Rohr Director March 28, 2000
- ---------------------------
James E. Rohr
/s/ Ralph L. Schlosstein Director March 28, 2000
- ---------------------------
Ralph L. Schlosstein
/s/ Lawrence M. Wagner Director March 28, 2000
- ---------------------------
Lawrence M. Wagner
35
TABLE OF CONTENTS
FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Management's Responsibility for Financial Reporting F-3
Consolidated Statements of Financial Condition F-4
Consolidated Statements of Income F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to the Consolidated Financial Statements F-8
F-1
Report of Independent Auditors
The Board of Directors and Stockholders
BlackRock, Inc.
We have audited the accompanying consolidated statements of financial condition
of BlackRock, Inc. as of December 31, 1999 and 1998, and the consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
BlackRock, Inc. at December 31, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
- ---------------------
ERNST & YOUNG LLP
New York, New York
January 31, 2000
F-2
Management's Responsibility for Financial Reporting
BlackRock, Inc. is responsible for the preparation, quality and fair
presentation of its published financial statements. The accompanying
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States and, as such,
include judgments and estimates of management. BlackRock, Inc, also prepared the
other information included in the Annual Report and is responsible for its
accuracy and consistency with the consolidated financial statements.
Management is responsible for establishing and maintaining effective internal
control over financial reporting. The internal control system is augmented by
written policies and procedures and by audits performed by an internal audit
staff which reports to the Audit Committee of the Board of Directors. Internal
auditors test the operation of the internal control system and report findings
to management and the Audit Committee, and corrective actions are taken to
address identified control deficiencies and other opportunities for improving
the system. The Audit committee, composed solely of outside directors, provides
oversight to the financial reporting process.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and circumvention or
overriding of controls. Accordingly, even effective internal control can provide
only reasonable assurance with respect to financial statement preparation.
Further, because of changes in conditions, the effectiveness of internal control
may vary over time.
Management assessed Blackrock, Inc.'s internal control over financial reporting
as of December 31, 1999. Based on this assessment management believes that
BlackRock, Inc. maintained an effective internal control system over financial
reporting as of December 31, 1999.
/s/ Laurence D. Fink /s/ Paul L. Audet
- -------------------- -----------------
Laurence D. Fink Paul L. Audet
Chairman & Chief Executive Officer Chief Financial Officer
F-3
BlackRock, Inc.
Consolidated Statements of Financial Condition
(Dollar amounts in thousands)
December 31,
--------------------------
1999 1998
-------- --------
Assets
Cash and cash equivalents $157,129 $113,450
Accounts receivable
Advisory and administration fees 63,726 47,611
BlackRock Asset Investors (BAI) - 58,599
Investments, available for sale (cost:$2,486 and $2,515, respectively) 2,255 2,515
Property and equipment, net 22,677 12,252
Goodwill (net of accumulated amortization
of $46,615 and $36,962, respectively) 194,257 203,910
Receivable from affiliates 2,111 446
Other assets 5,427 2,001
-------- --------
Total assets $447,582 $440,784
======== ========
Liabilities and stockholders' equity
Note and loan payable to affiliates $ 28,200 $197,000
Accrued compensation
Employees 90,350 65,523
BAI incentive compensation - 44,806
Accounts payable and accrued liabilities
Affiliate 33,476 16,478
Other 10,474 7,627
Accrued interest payable to affiliates 705 1,175
Other liabilities 3,851 1,984
-------- --------
Total liabilities 167,056 334,593
-------- --------
Stockholders' equity
Common stock, class A, $0.01 par value, 250,000,000 and 0 shares
authorized; 9,000,000 and 0 shares outstanding, respectively 90 -
Common stock, class B, $0.01 par value, 100,000,000 and
110,000,000 shares authorized; 54,864,382 and 54,807,482
shares outstanding, respectively 549 549
Additional paid-in capital 169,554 52,556
Retained earnings 112,703 53,286
Unearned compensation (2,139) -
Accumulated other comprehensive loss (231) -
Treasury stock, at cost, 0 and 56,900 shares, respectively - (200)
-------- --------
Total stockholders' equity 280,526 106,191
-------- --------
Total liabilities and stockholders' equity $447,582 $440,784
======== ========
See accompanying notes to consolidated financial statements.
F-4
BlackRock, Inc.
Consolidated Statements of Income
(Dollar amounts in thousands, except share data)
Year ended
December 31,
----------------------------------------------
1999 1998 1997
----------- ----------- -----------
Revenue
Investment advisory and administration fees
Mutual funds $ 214,728 $ 162,487 $ 117,977
Separate accounts 154,046 101,352 62,985
BAI (7,072) 61,199 13,867
Other income
Affiliate 5,000 3,000 3,000
Other 14,279 11,444 7,644
----------- ----------- -----------
Total revenue 380,981 339,482 205,473
----------- ----------- -----------
Expense
Employee compensation and benefits 138,025 109,741 73,217
BAI incentive compensation (5,387) 44,806 9,688
Fund administration and servicing costs - affiliates 78,666 52,972 27,278
General and administration
Affiliate 5,320 4,666 3,900
Other 43,250 34,030 25,864
Amortization of goodwill 9,653 9,653 9,653
Closed-end fund offering costs 511 4,252 -
----------- ----------- -----------
Total expense 270,038 260,120 149,600
----------- ----------- -----------
Operating income 110,943 79,362 55,873
Non-operating income (expense)
Interest and dividend income 3,445 1,995 3,117
Interest expense - affiliates (10,938) (13,347) (20,249)
----------- ----------- -----------
Total non-operating expense (7,493) (11,352) (17,132)
----------- ----------- -----------
Income before income taxes 103,450 68,010 38,741
Income taxes 44,033 32,395 16,655
----------- ----------- -----------
Net income $ 59,417 $ 35,615 $ 22,086
=========== =========== ===========
Earnings per share
Basic $ 1.04 $ 0.67 $ 0.49
Diluted $ 1.04 $ 0.66 $ 0.49
Weighted-average shares outstanding
Basic 57,057,014 53,507,051 45,100,000
Diluted 57,268,912 53,682,204 45,100,000
See accompanying notes to consolidated financial statements.
F-5
BlackRock, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands)
Accumulated
Common Stock Additional other Total
Class Class Unearned Paid-in Retained Comprehensive Treasury Stockholders'
A B Compensation Capital Earnings loss Stock Equity
----- ----- ------------ ---------- -------- ------------- -------- -------------
December 31, 1996 $ - $ - $ - $ 15,091 $ 17,581 $ - $ - $ 32,672
Net income - - - - 22,086 - - 22,086
Dividend of
intercompany allocations - - - - (9,795) - - (9,795)
----- ----- ------------ ---------- -------- ------------- -------- -------------
December 31, 1997 - - - 15,091 29,872 - - 44,963
Net income - - - - 35,615 - - 35,615
Dividends to PNC - - - - (12,300) - - (12,300)
Issuance of
class B common stock - - - 35,951 - - - 35,951
Stock reclassification - 549 - (549) - - - -
Purchase of
treasury stock - - - - - - (200) (200)
Forgiveness of
intercompany allocations - - - - 99 - - 99
Capital contribution
from PNC Bank, N.A. - - - 2,063 - - - 2,063
----- ----- ------------ ---------- -------- ------------- -------- -------------
December 31, 1998 - 549 - 52,556 53,286 - (200) 106,191
Net income - - - - 59,417 - - 59,417
Purchase of
treasury stock - - - - - - (550) (550)
Sale of
treasury stock - - (2,239) 2,239 - - 750 750
Issuance of class A
common stock, net 90 - - 114,759 - - - 114,849
Amortization of discount on
issuance of class B common
stock - - 100 - - - - 100
Unrealized loss -
on investments, net - - - - - (231) - (231)
----- ----- ------------ ---------- -------- ------------- -------- -------------
December 31, 1999 $90 $549 ($2,139) $169,554 $112,703 ($231) $ - $280,526
===== ===== ============ ========== ========= ============= ======== =============
See accompanying notes to consolidated financial statements.
F-6
BlackRock, Inc.
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Year ended
December 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net income $ 59,417 $ 35,615 $ 22,086
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization 18,153 12,852 12,151
Amortization of discount on issuance of class B common stock 100 1,737 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 42,484 (70,364) (7,484)
Decrease (increase) in receivable from affiliates (1,665) 1,422 (325)
Decrease (increase) in other assets (3,426) 192 (358)
Increase (decrease) in accrued compensation (19,979) 61,597 16,723
Increase in accounts payable and accrued liabilities 19,845 11,126 6,516
(Decrease) in accrued interest payable to affiliates (470) (483) (536)
Increase (decrease) in other liabilities 1,867 41 (1,578)
-------- -------- --------
Cash provided from operating activities 116,326 53,735 $ 47,195
Cash flows from investing activities
Purchase of property and equipment (18,925) (8,414) (2,165)
(Purchase) sale of investments 29 3,400 (790)
-------- -------- --------
Cash used in investing activities (18,896) (5,014) (2,955)
Cash flows from financing activities
Net repayment of note and loan payable to affiliates (168,800) (28,232) (30,627)
Issuance of class A common stock 117,495 - -
Expenses related to issuance of class A common stock (2,646) - -
Issuance of class B common stock - 34,214 -
Capital contribution from PNC Bank, N.A. - 2,063 -
Purchase of treasury stock (550) (200) -
Sale of treasury stock 750 - -
Forgiveness of intercompany allocations - 99 -
Dividend of intercompany allocations - - (9,795)
Dividends to PNC Bank, N.A. - (12,300) -
-------- -------- --------
Cash used in financing activities (53,751) (4,356) (40,422)
-------- -------- --------
Net increase in cash and cash equivalents 43,679 44,365 3,818
Cash and cash equivalents, beginning of period 113,450 69,085 65,267
-------- -------- --------
Cash and cash equivalents, end of period $157,129 $113,450 $ 69,085
======== ======== ========
Supplemental disclosures
Cash paid for interest $ 11,408 $ 13,683 $ 20,780
======== ======== ========
Cash paid for income taxes $ 34,900 $ 25,983 $ 4,730
======== ======== ========
See accompanying notes to consolidated financial statements.
F-7
BlackRock, Inc.
Notes to the Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Dollar amounts in thousands, except share data)
1. Significant Accounting Policies
Organization and Basis of Presentation
BlackRock, Inc. (together with its subsidiaries "BlackRock" or the
"Company") is majority owned by The PNC Financial Services Group, Inc., formerly
PNC Bank Corp. ("PNC"), through its wholly-owned subsidiary PNC Bank, N.A. ("PNC
Bank"). The consolidated financial statements of BlackRock include the assets,
liabilities and earnings of its wholly-owned subsidiaries BlackRock Advisors,
Inc. ("BA"), BlackRock Institutional Management Corporation ("BIMC"), Provident
Advisers, Inc. ("PAI"), BlackRock Financial Management, Inc. ("BFM") and
BlackRock International, Ltd. ("BI") and their subsidiaries. BlackRock and its
consolidated subsidiaries provide diversified investment management services to
institutional clients, including certain subsidiaries and affiliates of PNC, and
to individual investors through various investment vehicles. Institutional
investment management services primarily consists of the active management of
fixed income and equity client accounts and the management of the Provident
Institutional Funds, a money market mutual fund family serving the institutional
market. Individual investor services primarily consists of the management of the
Company's sponsored open-end and closed-end mutual funds ("BlackRock Funds").
BA, BIMC, BFM and BI are registered investment advisers under the Investment
Advisers Act of 1940 while PAI is a registered broker dealer.
The consolidated financial statements of the Company reflect the "carved
out" historical financial position, results of operations, cash flows and
changes in stockholders' equity of the asset management operations of PNC that
were combined under BlackRock as if they had been operating as a separate
corporate entity. The consolidated statements of income for the years ended
December 31, 1998 and 1997 have been adjusted to reflect an allocation of
certain expenses, primarily relating to office rent and overhead charges for
various administrative functions provided by PNC. The allocations were required
to reflect all costs of doing business and have been based on various methods
which management believes results in reasonable allocations of such costs.
The intercompany allocations and other adjustments related to the carve
out which were not paid or received by the Company are reflected in the
Company's consolidated statements of changes in stockholders' equity as dividend
or forgiveness of intercompany allocations.
Significant intercompany accounts and transactions between the
consolidated entities have been eliminated.
Formation Transactions
The Company was formed in 1998 as a result of PNC's decision to
substantially consolidate its investment management businesses under a common
management and brand (BlackRock). Prior to the formation, on January 31, 1998,
PNC sold 30,000 shares of restricted BFM stock to certain key employees and PNC
retained 70,000 shares. The purchase price for the stock was based on an
independent valuation of BFM with the shares subject to significant vesting and
transfer restrictions.
F-8
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
On March 31, 1998, PNC Bank contributed BFM and other investment
management subsidiaries into a new holding company, BlackRock. BFM's employee
shareholders exchanged their stock in BFM for 8,250,000 of restricted shares of
class B common stock in the Company while PNC received 19,250,000 shares of the
Company for its ownership interest in BFM and an additional 25,850,000 shares
representing the fair value based on an independent valuation of PNC's other
contributed investment management businesses. In May 1998, the Company sold an
additional 1,514,382 shares and executed forward sales of 175,153 shares of
restricted stock to key employees of the contributed businesses.
On September 30, 1999, the Company effected a 275:1 stock split by
reclassifying each share of common stock issued into 275 shares of class B
common stock (the "Stock Reclassification"). The Stock Reclassification has
been retroactively restated in the consolidated financial statements.
On September 30, 1999, BlackRock reissued 213,474 shares of class B
common stock, held in treasury, to key employees in the form of restricted
stock. These shares were sold at a discount to fair market value of $2.2 million
which will be expensed on a straight-line basis over the five-year vesting
period. The discount was recorded as additional paid-in capital and unearned
compensation in the consolidated statements of financial condition. The proceeds
from the sale of treasury stock approximated $750.
On October 1, 1999, BlackRock sold 9,000,000 shares of class A common
stock to the public at an initial price of $14 per share (the "Offering"). The
proceeds from the Offering, net of underwriters' discount and estimated offering
expenses, totaled approximately $115,000. These proceeds were used to retire a
portion of BlackRock's revolving line of credit with PNC Bank on October 7,
1999.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and short-term, highly liquid
investments with original maturities of three months or less. Cash and cash
equivalents are held at major financial institutions and in money market mutual
funds, to which the Company is exposed to market and credit risk.
Investments
Investments consist principally of shares of registered investment
companies and are stated at quoted market values. The resulting unrealized gains
and losses are included in the accumulated other comprehensive income component
of stockholders' equity, net of tax. Realized gains and losses on investments
are included in non-operating income. Interest and dividend income is also
included in non-operating income in the consolidated statements of income.
F-9
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Revenue Recognition
Investment advisory and administration fees are recognized as the
services are performed. Such fees are primarily based on predetermined
percentages of the market values of the assets under management. Investment
advisory and administration fees for mutual funds are shown net of fees waived
pursuant to expense limitations.
The Company also receives performance fees or an incentive allocation
from certain institutional and private placement portfolios ("alternative
investment products"). These performance fees are earned upon attaining
specified return thresholds and may contain other restrictions.
Administration and Servicing Costs
The Company incurs certain administration and servicing costs, which are
expensed as incurred, related to mutual funds advised by the Company.
Property and Equipment
Property and equipment is recorded at cost less accumulated depreciation.
Depreciation generally is provided on the straight-line method over an estimated
useful life ranging from three to seven years. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives or
lease terms, whichever is shorter.
Goodwill
Goodwill is amortized by the straight-line method over 25 years. The
Company assesses the recoverability of goodwill based on the estimated future
nondiscounted cash flows over the remaining amortization period.
Stock-based Compensation
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", and has adopted the
intrinsic value method for all arrangements under which employees receive shares
of stock or other equity instruments of the employer or the employer incurs
liabilities to employees in amounts based on the price of its stock. Fair value
disclosures are included in the notes to the consolidated financial statements.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share." Basic
earnings per common share is calculated by dividing net income applicable to
common stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per common share is computed by dividing net
income by the total weighted average number of shares of common stock
outstanding and common stock equivalents. Diluted earnings per share is computed
using the treasury stock method.
F-10
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
Business Segments
The Company has not presented business segment data in accordance with
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information", because it operates predominantly in one business segment, the
investment advisory and asset management business.
Software Costs
In 1999, the Company adopted Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 requires the capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. Qualifying
software costs of approximately $4.9 million have been capitalized through
December 31, 1999 and are being amortized over an estimated useful life of three
years.
Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 requires unrealized gains and losses from investments available for
sale to be included in accumulated other comprehensive income. Comprehensive
income has been presented to conform to SFAS No. 130 requirements.
Disclosure of Fair Value
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments,"
requires disclosure of estimated fair values of certain on- and off-balance
sheet financial instruments. The methods and assumptions are set forth below:
. Cash and cash equivalents, receivables, accounts payable, accrued
liabilities, and note and loan payable to affiliates approximate fair
value due to the short maturities.
. The fair value of investments is based on quoted market price.
Recent Accounting Pronouncements
Derivative Instruments and Hedging Activities
In 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivatives embedded in other contracts and for hedging
activities. SFAS No. 133 generally requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those investments at fair value. SFAS No. 133, as amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB Statement No. 133," is required to be
adopted for fiscal years beginning after June 15, 2000. The Company did not
acquire any derivative instruments or enter into hedging activities for the
periods covered under the consolidated financial statements. The adoption of
SFAS No. 133, as amended by SFAS No. 137, is not expected to have a material
impact on the Company's results of operations or financial position.
Reclassification of Prior Periods' Statements
Certain items previously reported have been reclassified to conform with
the current year's presentation.
F-11
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
2. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------
1999 1998
------- -------
Equipment and Computer Software $26,778 $13,472
Leasehold improvements 7,454 5,207
Furniture and fixtures 6,893 5,792
Land 3,564 -
------- -------
44,689 24,471
------- -------
Less accumulated depreciation 22,012 12,219
------- -------
Property and equipment, net $22,677 $12,252
======= =======
Depreciation expense was approximately $8,500, $3,199 and $2,498 for the
years ended December 31, 1999, 1998 and 1997, respectively.
During the fourth quarter of 1999, the Company purchased land in
Wilmington, Delaware for $3,500 and is presently constructing an 84,000 square
foot office building at an estimated cost of approximately $20,000.
3. Note and Loan Payable to Affiliates
The Company had the following note and line of credit outstanding:
December 31,
----------------------
1999 1998
------- --------
7.5% unsecured note, with interest payable
semi-annually, due February 2000 $28,200 $ 47,000
Revolving line of credit with PNC, with interest at
prime rate (8.5% and 7.75% at December 31, 1999 and
1998, respectively), maximum outstanding principal of
$175,000 due December 2002 - 150,000
------- --------
$28,200 $197,000
======= ========
Interest expense for the periods ended December 31, 1999, 1998 and 1997
was $10,938, $13,347 and $20,249, respectively.
The 7.5% unsecured note is unconditionally guaranteed by PNC and is
ultimately payable to certain employees of the Company resulting from PNC's
acquisition of BFM on February 28, 1995.
F-12
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
4. Commitments
The Company leases its primary office space under agreements which expire
in 2011. Future minimum commitments under these operating leases, net of rental
reimbursements of $1,831 through 2005 from a sublease arrangement, are as
follows:
2000 $ 5,423
2001 3,947
2002 1,613
2003 1,156
2004 1,156
Thereafter 1,751
-------
$15,046
=======
In connection with certain lease agreements, the Company is responsible
for escalation payments.
Occupancy expense amounted to $8,022, $5,662 and $3,903 for the years
ended December 31, 1999, 1998, and 1997, respectively.
5. Employee Benefit Plans
The Company's employees participate in PNC's Incentive Savings Plan
("ISP"), a defined contribution benefit plan. Under the ISP, employee
contributions of up to 6% of eligible compensation, subject to Internal Revenue
Code limitations, are matched by the Company. ISP expenses for the Company were
$2,212, $1,210 and $1,019 for the years ended December 31, 1999, 1998 and 1997,
respectively. Contributions to the plans are matched primarily by shares of
PNC's common stock funded by PNC's Employee Stock Ownership Plan.
PNC provides certain health care and life insurance benefits for retired
employees. Expenses for postretirement benefits allocated to the Company by PNC
were $225, $217 and $105 for the fiscal years ended December 31, 1999, 1998 and
1997, respectively. At December 31, 1999 and 1998, accrued postretirement
benefits included in the consolidated statements of financial condition totaled
$741 and $528, respectively. No separate financial obligation data for the
Company is available with respect to such plan.
Certain employees of the Company participate in PNC's noncontributory
defined benefit pension plan. Retirement benefits are based on compensation
level, age and length of service. Pension contributions are based on actuarially
determined amounts necessary to fund total benefits payable to plan
participants. During 1999, the Company contributed approximately $1,600 to the
plan and had a prepaid balance of approximately $1,200 in pension benefit
obligation as of December 31, 1999. This amount was recorded in other assets on
the consolidated statement of financial condition. Pension expense was
approximately $(81), $79, and $110 for the fiscal years ended December 31, 1999,
1998, and 1997, respectively.
F-13
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
6. Stock Award and Incentive Plans
Stock Option Plan
Effective October 1, 1999, the Board of Directors of BlackRock adopted
the 1999 Stock Award and Incentive Plan (the "Award Plan"). A maximum of
3,786,863 shares of class A common stock are authorized for issuance under the
Award Plan. On October 1, 1999, options to purchase 1,061,000 shares of class A
common stock at $14 per share were issued to eligible employees. These options
have a ten year life, vest ratably over three years and become exercisable upon
vesting.
Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company has elected to account for its stock option plan under APB Opinion 25,
"Accounting for Stock Issued to Employees," and adopt the disclosure only
provisions for SFAS No. 123. Under APB 25, no compensation costs were recognized
related to the Award Plan because the option exercise price of the options
awarded is equal to the fair market price of the common stock on the date of the
grant. Under SFAS No. 123, compensation costs related to the Award Plan are
measured at the grant date based on the fair value and are recognized ratably
over the vesting period. If the Company had elected to recognize compensation
costs based on the fair value of the options granted at the grant date as
prescribed by SFAS No. 123, net income would have been reduced by $331 for the
year ended December 31, 1999. Basic and diluted earnings per share would have
been reduced by $0.01 per share for the year ended December 31, 1999.
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following assumptions for fiscal 1999:
Expected dividend yield 0.00%
Expected volatility 27.50%
Risk-free interest 7.08%
Expected term 7 years
The fair value of the options granted was $6.51 per share. None of the
options were exercisable as of December 31, 1999.
The shares of class A common stock authorized under the Company's stock
option plan were 3,786,863 at December 31, 1999. Of this amount, 2,725,863
shares remain available for future awards.
F-14
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
Deferred Compensation Plan
The Company has a Long Term Deferred Compensation Plan (the "Plan") to
provide a competitive long-term incentive for key officers and employees. The
awards vest through 2004 and are expensed on a straight-line method over the
respective vesting periods.
On October 1, 1999, approximately $19,800 of the $20,700 deferred
compensation was converted into 1,518,690 shares of class A common stock in
connection with the Plan. The excess of the fair market value over the $13.06
conversion price of each share resulted in additional compensation expense of
$1,400. The compensation expense will be recorded over the applicable vesting
periods through 2004. Compensation expense for the years ended December 31, 1999
and 1998 was $5,033 and $6,321, respectively.
7. Related Party Transactions
The Company and its consolidated subsidiaries provide investment advisory
and administration services to the BlackRock open-end and closed-end funds, the
Provident Institutional Funds and other commingled funds.
Revenues for services provided to these mutual funds are as follows:
Year ended
December 31,
-----------------------------------------
1999 1998 1997
-------- -------- --------
Investment advisory and administration fees--mutual funds:
BlackRock Open-end Funds $142,597 $ 86,225 $ 44,009
BlackRock Closed-end Funds 34,581 36,521 36,050
Provident Institutional Funds 33,021 32,202 26,266
Commingled Funds 4,529 7,539 11,652
-------- -------- --------
$214,728 $162,487 $117,977
======== ======== ========
During May 1998, approximately $8,200,000 in assets of the PNC Common
Trust commingled funds were converted to the BlackRock Open-end Funds. During
the first four months of 1998, $3,142 of fees were earned on these commingled
funds as compared to $7,150 for the year ended December 31, 1997.
F-15
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
The Company provides investment advisory and administration services to
certain PNC subsidiaries for a fee, based on assets under management. In
addition, the Company provides risk management and, beginning in 1998, model
portfolio services to PNC. Revenues for such services are as follows:
Year ended
December 31,
-----------------------------------
1999 1998 1997
------- ------ ------
Investment advisory and administration fees:
Separate accounts $ 3,774 $3,468 $1,496
Model Portfolio Services 4,400 2,567 -
Other income--risk management 5,000 3,000 3,000
------- ------ ------
$13,174 $9,035 $4,496
======= ====== ======
The Company has entered into various memoranda of understanding and co-
administration agreements with affiliates of PNC pursuant to which the Company
pays administration fees for the Provident Institutional Funds and certain other
commingled funds and service fees for PNC Advisors' (an affiliate of PNC)
clients invested in the BlackRock Funds.
The Company incurred interest expense to related parties in connection
with the 7.5% unsecured note and the revolving line of credit with PNC. PNC also
provides general and administrative services to the Company. Charges for such
services were based on actual usage or on defined formulas which, in
management's view, resulted in reasonable allocations. Aggregate expenses
included in the consolidated financial statements for transactions with related
parties are as follows:
Year ended
December 31,
1999 1998 1997
------- ------- -------
Fund administration and servicing costs--affiliates $78,666 $52,972 $27,278
General and administrative 5,320 4,666 3,900
Interest expense--affiliates 10,938 13,347 20,249
------- ------- -------
$94,924 $70,985 $51,427
======= ======= =======
Additionally, an indirect wholly-owned subsidiary of PNC acts as a
financial intermediary associated with the sale of back-end loaded shares of
certain BlackRock funds. This entity finances broker sales commissions and
receives all associated sales charges.
Payable to affiliates approximated $33,476 and $16,478 at December 31,
1999 and 1998, respectively. These amounts primarily represent income taxes
payable and fund administration and servicing costs-affiliates payable. These
amounts do not bear interest.
Receivable from affiliates was approximately $2,111 and $446 at December
31, 1999 and 1998, respectively. The amount primarily represents a receivable
for administration fees earned in connection with services provided to the
BlackRock Closed-end Funds.
F-16
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
8. BlackRock Asset Investors
BFM previously served as an investment advisor to BlackRock Asset
Investors ("BAI"), a closed-end investment company. BAI was liquidated on
September 27, 1999 in accordance with a plan adopted by BAI's Board of Trustees
and shareholders in 1997. BAI's principal business was to acquire, work out,
pool and repackage performing and distressed commercial, multifamily, and single
family mortgage loans as commercial or residential mortgage-backed securities
for sale in the capital markets through independent underwriters and broker-
dealers.
BFM recorded investment advisory and administration fees for BAI for the
years ended December 31, 1999, 1998 and 1997 of $1,943, $3,291 and $6,067,
respectively. BFM earned performance fees based on a stipulated percentage of
the excess profits after BAI shareholders had received a minimum return on
invested capital. Based on the market value of BAI's underlying assets, overall
investor returns and final asset liquidation values, the Company recorded
performance fees/(reduction of previously recorded performance fees), of
$(9,015), $57,908 and $7,800 for the years ended December 31, 1999, 1998 and
1997, respectively.
In accordance with various contractual arrangements including the 1994
acquisition agreement between PNC and BFM, incentive compensation earned on BAI
revenue was $(5,387), $44,806 and $9,688 for the years ended December 31, 1999,
1998, and 1997, respectively.
9. Net Capital Requirements
As a registered broker-dealer, PAI is subject to the Uniform Net Capital
requirements under the Securities Exchange Act of 1934, which requires
maintenance of certain minimum net capital levels. At December 31, 1999, PAI net
capital was $5,217 in excess of regulatory requirements.
10. Income Taxes
The Company accounts for income taxes under the liability method
prescribed by SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
the differences between the financial statement carrying amount of existing
assets and liabilities and their respective tax basis.
Prior to and including October 6, 1999, the operating results of the
Company were primarily included in the consolidated U.S. Federal tax returns of
PNC or its subsidiaries. For state and local income tax purposes, the Company
was included in the combined and unitary tax returns with PNC and its
subsidiaries, and filed separate company returns.
Effective October 6, 1999, PNC and BlackRock entered into a tax
disaffiliation agreement (the "Tax Disaffiliation Agreement") that sets forth
each party's rights and obligations with respect to income tax payments and
refunds for periods before and after the completion of the Offering and
addresses related matters such as the filing of tax returns and the conduct of
audits or other proceedings involving claims made by taxing authorities.
For periods beginning on October 7, 1999 and thereafter, BlackRock will
file their own consolidated federal income tax return. BlackRock may file
separate state and municipal income tax returns or may be included in state
and/or municipal income tax returns with one or more PNC subsidiaries on a
combined or unitary basis. If BlackRock is included in a group's combined or
unitary state or municipal income tax filing with PNC subsidiaries, BlackRock's
share of the liability generally will be based upon an allocation to BlackRock
of a percentage of the total tax liability based upon BlackRock's level of
activity in such state or municipality.
F-17
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
The provision (benefit) for income taxes consists of the following:
Year ended
December 31,
-------------------------------
1999 1998 1997
------- ------- -------
Current:
Federal $39,540 $16,408 $11,872
State and local 11,320 8,746 3,011
------- ------- -------
Total current 50,860 25,154 14,883
------- ------- -------
Deferred:
Federal (5,177) 4,422 1,159
State and local (1,650) 2,819 613
------- ------- -------
Total deferred (6,827) 7,241 1,772
------- ------- -------
Total $44,033 $32,395 $16,655
======= ======= =======
The reconciliation between the federal statutory income tax rate and the
Company's effective income tax rate consists of the following:
Year ended
December 31,
-------------------------------
1999 1998 1997
------- ------- -------
Statutory Federal income tax rate 35.0% 35.0% 35.0%
Increase resulting from:
State and local income taxes 6.1% 11.1% 6.1%
Other 1.5% 1.5% 1.9%
------- ------- -------
Total effective income tax rate 42.6% 47.6% 43.0%
======= ======= =======
F-18
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities, which are shown net in accounts
payable and accrued liabilities--affiliate in the consolidated statements of
financial condition, consisted of the following:
December 31,
-------------------------
1999 1998
------- -------
Deferred tax assets:
Compensation and benefits $ 7,506 $31,388
Deferred revenues 1,426 -
Deferred state income taxes 2,038 -
Other 2,831 3,606
------- -------
Gross deferred tax asset 13,801 34,994
------- -------
Deferred tax liabilities:
Deferred revenues - 33,980
Goodwill 16,762 13,129
Other 2,489 163
------- -------
Gross deferred tax liability 19,251 47,272
------- -------
Net deferred tax liability $ 5,450 $12,278
======= =======
A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as follows:
Year ended
December 31,
------------------------------------------
1999 1998 1997
------- ------- -------
Expected income tax expense $36,208 $23,804 $13,559
Increase in income taxes resulting from:
State and local taxes 6,286 7,517 2,344
Other 1,539 1,074 752
------- ------- -------
Income tax expense $44,033 $32,395 $16,655
======= ======= =======
F-19
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
11. Comprehensive income
Year ended
December 31,
-----------------------------------------------
1999 1998 1997
------- ------- -------
Net Income $59,417 $35,615 $22,086
Accumulated other comprehensive loss:
Unrealized loss from investments, net (231) - -
------- ------- -------
Comprehensive income $59,186 $35,615 $22,086
======= ======= =======
12. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share:
Year ended
December 31,
--------------------------------------------------
1999 1998 1997
----------- ----------- -----------
Net Income $ 59,417 $ 35,615 $ 22,086
----------- ----------- -----------
Basic weighted-average shares outstanding 57,057,014 53,507,051 45,100,000
Dilutive potential shares from forward sales 175,153 175,153 -
Dilutive potential shares from stock options 36,745 - -
----------- ----------- -----------
Dilutive weighted-average shares outstanding 57,268,912 53,682,204 45,100,000
----------- ----------- -----------
Basic earnings per share $ 1.04 $ 0.67 $ 0.49
=========== =========== ===========
Diluted earnings per share $ 1.04 $ 0.66 $ 0.49
=========== =========== ===========
Net income per common share is computed using the weighted-average
number of common equivalent shares outstanding. Common equivalent shares from
stock options are excluded from the computation if their effect is antidilutive,
except that, pursuant to the Securities and Exchange Staff Accounting Bulletin
98, "Earnings per share," common and common equivalent shares issued at prices
below the public offering price during the twelve months immediately preceding
the initial filing date have been included in the calculation as if they were
outstanding for all periods presented using the treasury stock method and the
options' exercise price of $14.00.
F-20
BlackRock, Inc.
Notes to the Consolidated Financial Statements (continued)
13. Selected Quarterly Financial Data (unaudited):
Quarter
------------------------------------------------------------------------- -----------
1st 2nd 3rd 4th Total
----------- ----------- ----------- ----------- -----------
1999
- -------------------------------
Revenue $ 87,875 $ 92,217 $ 100,107 $ 100,782 $ 380,981
Operating income 23,706 26,920 30,658 29,659 110,943
Net Income 12,218 13,767 16,223 17,209 59,417
EBITDA $ 29,679 $ 31,696 $ 35,867 $ 35,299 $ 132,541
Earnings per share:
Basic $ 0.22 $ 0.25 $ 0.30 $ 0.27 $ 1.04
Diluted $ 0.22 $ 0.25 $ 0.30 $ 0.27 $ 1.04
Weighted-average shares
outstanding
Basic 54,807,482 54,807,482 54,675,353 63,864,382 57,057,014
Diluted 54,982,635 54,982,635 54,850,506 64,185,316 57,268,912
Common stock price per share:
(1)
High - - - $ 19.38 $ 19.38
Low - - - $ 12.50 $ 12.50
Close - - - $ 17.19 $ 17.19
1998
- -------------------------------
Revenue $ 69,195 $ 62,058 $ 78,571 $ 129,658 $ 339,482
Operating income 17,988 14,973 19,577 26,824 79,362
Net Income 7,657 6,192 8,790 12,976 35,615
EBITDA $ 21,782 $ 18,461 $ 23,213 $ 30,753 $ 94,209
Earnings per share:
Basic $ 0.15 $ 0.12 $ 0.16 $ 0.24 $ 0.67
Diluted $ 0.15 $ 0.11 $ 0.16 $ 0.24 $ 0.66
Weighted-average shares
outstanding
Basic 50,543,100 53,808,988 54,807,482 54,807,482 53,507,051
Diluted 50,718,252 53,984,141 54,982,635 54,982,635 53,682,204
Common stock price per share:
(1)
High - - - - -
Low - - - - -
Close - - - - -
(1) Prior to October 1, 1999, there was no public market for the common stock.
F-21