10-Q 1 0001.txt FORM 10-Q FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ________________. Commission file number 001-15305 BlackRock, Inc. --------------- (Exact name of registrant as specified in its charter) Delaware 51-038-0803 -------- ----------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 345 Park Avenue, New York, NY 10154 ----------------------------------- (Address of principal executive offices) (Zip Code) (212) 754-5560 -------------- (Registrant's telephone number, including area code) ____________________________ (Former name or former address, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- As of August 10, 2000, there were 9,002,841 shares of the registrant's class A common stock issued and outstanding and 54,886,382 shares of the registrant's class B common stock issued and outstanding. BlackRock, Inc. Index to Form 10-Q PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Statements of Financial Condition 1 Consolidated Statements of Income 2 Consolidated Statements of Cash Flows 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION Item 1 Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 20 i PART I - FINANCIAL INFORMATION Item 1. Financial Statements BlackRock, Inc. Consolidated Statements of Financial Condition (Dollar amounts in thousands)
June 30, December 31, 2000 1999 ------------- -------------- (unaudited) Assets Cash and cash equivalents $ 116,633 $ 157,129 Accounts receivable 71,024 63,726 Investments, available for sale (cost: $10,141 and $2,486, respectively) 10,004 2,255 Property and equipment, net 28,661 22,677 Intangible assets, net 197,370 194,257 Receivable from affiliates 1,225 2,111 Other assets 8,812 5,427 ------------- -------------- Total assets $ 433,729 $ 447,582 ============= ============== Liabilities and stockholders' equity Note payable to affiliate $ -- $ 28,200 Accrued compensation 63,950 90,350 Accounts payable and accrued liabilities Affiliate 30,404 33,476 Other 9,357 10,474 Accrued interest payable to affiliates -- 705 Acquired management contract obligation 8,040 -- Other liabilities 791 3,851 ------------- -------------- Total liabilities 112,542 167,056 ------------- -------------- Stockholders' equity Common stock, class A, $0.01 par value, 250,000,000 shares authorized and 9,001,419 and 9,000,000 shares outstanding, respectively 90 90 Common stock, class B, $0.01 par value, 100,000,000 shares authorized and 54,864,382 shares outstanding 549 549 Additional paid-in capital 169,714 169,554 Retained earnings 152,757 112,703 Unearned compensation (1,840) (2,139) Accumulated other comprehensive loss (83) (231) ------------- -------------- Total stockholders' equity 321,187 280,526 ------------- -------------- Total liabilities and stockholders' equity $ 433,729 $ 447,582 ============= ==============
See accompanying notes to consolidated financial statements. 1 BlackRock, Inc. Consolidated Statements of Income (Dollar amounts in thousands, except share data) (unaudited)
Three months ended Six months ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenue Investment advisory and administration fees Mutual funds 56,228 51,123 115,328 99,637 Separate accounts 51,204 35,968 93,974 71,334 BAI -- (614) -- (2,054) Other income Affiliate 1,250 1,250 2,500 2,500 Other 3,889 4,490 8,829 8,675 ---------- ---------- ---------- ---------- Total revenue 112,571 92,217 220,631 180,092 ---------- ---------- ---------- ---------- Expense Employee compensation and benefits 42,680 32,731 83,350 65,963 BAI incentive compensation -- (115) -- (1,493) Fund administration and servicing costs - affiliates 18,450 18,359 38,209 36,335 General and administration Affiliate 1,314 1,246 2,503 2,566 Other 13,291 10,663 25,202 21,268 Amortization of intangible assets 2,514 2,413 4,927 4,827 ---------- ---------- ---------- ---------- Total expense 78,249 65,297 154,191 129,466 ---------- ---------- ---------- ---------- Operating income 34,322 26,920 66,440 50,626 Non-operating income (expense) Interest and dividend income 1,417 675 2,467 1,293 Interest expense (86) (3,451) (439) (7,121) ---------- ---------- ---------- ---------- Total non-operating income (expense) 1,331 (2,776) 2,028 (5,828) ---------- ---------- ---------- ---------- Income before income taxes 35,653 24,144 68,468 44,798 Income taxes 14,796 10,377 28,414 18,813 ---------- ---------- ---------- ---------- Net income 20,857 13,767 40,054 25,985 ========== ========== ========== ========== Earnings per share Basic $ 0.33 $ 0.25 $ 0.63 $ 0.47 Diluted $ 0.32 $ 0.25 $ 0.62 $ 0.47 Weighted-average shares outstanding Basic 63,865,770 54,807,482 63,865,076 54,807,482 Diluted 64,492,447 54,982,635 64,423,376 54,982,635
See accompanying notes to consolidated financial statements. 2 BlackRock, Inc. Consolidated Statements of Cash Flows (Dollar amounts in thousands) (unaudited)
Six months ended June 30, --------------------------- 2000 1999 --------- --------- Cash flows from operating activities Net income $ 40,054 $ 25,985 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 9,535 9,456 Amortization of discount on issuance of class B common stock 299 -- Shares issued under the Nonemployee Directors Stock Compensation Plan 29 -- Changes in operating assets and liabilities: (Increase) decrease in accounts receivable (7,298) 4,198 Decrease (increase) in receivable from affiliates 886 (981) Increase in other assets (3,385) (3,423) Decrease in accrued compensation (26,400) (19,864) (Decrease) increase in accounts payable and accrued liabilities (4,189) 2,496 Decrease in accrued interest payable to affiliates (705) (470) Decrease in other liabilities (3,060) (1,781) --------- --------- Cash provided by operating activities 5,766 15,616 Cash flows from investing activities Purchase of property and equipment (10,592) (9,114) (Purchase) sale of investments (7,575) 110 --------- --------- Cash used in investing activities (18,167) (9,004) Cash flows from financing activities Repayment of note and loan payable to affiliates (28,200) (43,800) Additional proceeds received from issuance of class A common stock 222 -- Expenses related to issuance of class A common stock (91) -- --------- --------- Cash used in financing activities (28,069) (43,800) --------- --------- Effect of exchange rate changes on cash and cash equivalents (26) -- --------- --------- Net decrease in cash and cash equivalents (40,496) (37,188) Cash and cash equivalents, beginning of period 157,129 113,450 --------- --------- Cash and cash equivalents, end of period $ 116,633 $ 76,262 ========= =========
See accompanying notes to consolidated financial statements. 3 BlackRock, Inc. Notes to Consolidated Financial Statements Quarter Ended June 30, 2000 and 1999 (Dollar amounts in thousands, except share data) (unaudited) 1. Significant Accounting Policies Basis of Presentation The consolidated interim financial statements of BlackRock, Inc. and its subsidiaries ("BlackRock" or the "Company") included herein have been prepared in accordance with generally accepted accounting principles for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. The Company follows the same accounting policies in the preparation of interim reports. In the opinion of management, the consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations and cash flows of BlackRock for the interim periods presented and are not necessarily indicative of a full year's results. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Intangible Assets Intangible assets are comprised of goodwill and management contract acquired. Goodwill is amortized on a straight-line basis over their estimated useful lives of twenty-five years. Management contract acquired is amortized in proportion to and over the period of contract revenue. This period is estimated to be ten years. The Company continually evaluates the carrying value of intangible assets. Any impairment would be recognized when the future operating cash flows derived from such intangible assets is less than their carrying value. In such instances, impairment, if any, is measured on a discounted future cash flow basis. Reclassification of Prior Period's Statements Certain items previously reported have been reclassified to conform with the current year's presentation. Recent Accounting Pronouncement In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company has adopted SAB No. 101 as required in the first quarter of 2000. The adoption of SAB No. 101 has not had a material effect on the Company's consolidated results of operations and financial position. 4 2. Property and Equipment Property and equipment consists of the following: June 30, December 31, ----------------------- 2000 1999 ------- ------- Equipment and Computer Software $31,353 $26,778 Leasehold improvements 7,501 7,454 Furniture and fixtures 7,106 6,893 Land 3,564 3,564 Construction in progress 5,748 -- ------- ------- 55,272 44,689 ------- ------- Less accumulated depreciation 26,611 22,012 ------- ------- Property and equipment, net $28,661 $22,677 ======= ======= Depreciation expense was approximately $2,388 and $1,688 for the three months ended June 30, 2000 and 1999, respectively and $4,608 and $4,629 for the six months ended June 30, 2000 and 1999, respectively. During the fourth quarter of 1999, the Company purchased land in Wilmington, Delaware for $3,564 and is presently constructing an 84,000 square foot office building at an estimated cost of approximately $20,000. Construction in progress reflects expenditures on capital projects located in Wilmington, Delaware and New York City, New York. 3. Intangible Assets a) Goodwill The consolidated financial statements reflect the results of operations of BlackRock Financial Management, LP ("BFM") and BFM Advisory LP, which were acquired by The PNC Financial Services Group, Inc. on February 28, 1995. Goodwill recognized at acquisition approximated $240,000 and is being amortized by the straight-line method over 25 years. b) Management Contract Acquired On May 15, 2000, BlackRock entered into a contract in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT. This agreement assigns the managerial rights and duties of CORE Cap, Inc.'s former manager to BlackRock for consideration in the amount of $12,500 to be paid by BlackRock over a ten- year period. The present value of the acquired contract using an imputed interest rate of 10 percent is $8,040. This amount is recorded as an intangible asset and is being amortized over ten years. 5 4. Note and Loan Payable to Affiliates On February 29, 2000, the Company paid the remaining balance of $28,200 on the unsecured note with B.P. Partners, L.P., an entity comprised of former partners of BFM, who received deferred notes on February 28, 1995 as part of the purchase price for BFM. 5. Commitments a) Lease Commitments The Company leases its primary office space under agreements which expire in 2017. Future minimum commitments under these operating leases, net of rental reimbursements of $1,831 through 2005 from a sublease arrangement, are as follows: 2000 $ 3,624 2001 4,901 2002 8,774 2003 9,541 2004 9,541 Thereafter 114,693 -------- $151,074 ======== In connection with certain lease agreements, the Company is responsible for escalation payments. Occupancy expense amounted to $2,181 and $1,911 for the three months ended June 30, 2000 and 1999, respectively and $4,414 and $3,843 for the six months ended June 30, 2000 and 1999, respectively. On May 3, 2000, BlackRock signed a lease with 40 East 52nd Street L.P. for approximately 171,000 square feet of office space at 40 East 52nd Street, New York, New York. This location will house BlackRock's corporate headquarters and will accommodate all of BlackRock's current New York City based operations. Under the lease, BlackRock will occupy approximately 19,000 square feet in July, 2000 with the remaining 152,000 square feet to commence on or about September 1, 2001. The lease will terminate on February 28, 2017. Total rent payments over the lease term will approximate $138,000. The 152,000 square feet of new space will be placed in service in early 2002 consistent with the termination of all other New York City leaseholds on February 28, 2002. b) Acquired Management Contract Obligation In connection with the management contract acquired associated with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT, the Company recorded an $8,040 liability using an imputed interest rate of 10 percent. At June 30, 2000, the future minimum commitment under the agreement is as follows: 2001 $1,500 2002 1,500 2003 1,500 2004 1,500 2005 1,500 Thereafter 5,000 ------ 12,500 ------ less: Imputed interest 4,460 ------ Present value of Management Contract $8,040 ====== 6 6. Comprehensive Income
Three months ended Six months ended June 30, June 30, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 20,857 $ 13,767 $ 40,054 $ 25,985 Accumulated other comprehensive gain (loss): Unrealized gain (loss) from investments, available for sale, net 423 (99) 174 (99) Foreign currency translation loss (16) -- (26) -- -------- -------- -------- -------- Comprehensive income $ 21,264 $ 13,668 $ 40,202 $ 25,886 ======== ======== ======== ========
7. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three months ended Six months ended June 30, June 30, ------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- -------------- Net income $ 20,857 $ 13,767 $ 40,054 $ 25,985 ----------- ----------- ----------- -------------- Basic weighted-average shares outstanding 63,865,770 54,807,482 63,865,076 54,807,482 Dilutive potential shares from forward sales 175,153 175,153 175,153 175,153 Dilutive potential shares from stock options 451,524 -- 383,147 -- ----------- ----------- ----------- -------------- Dilutive weighted-average shares outstanding 64,492,447 54,982,635 64,423,376 54,982,635 Basic earnings per share $ 0.33 $ 0.25 $ 0.63 $ 0.47 =========== =========== =========== ============== Diluted earnings per share $ 0.32 $ 0.25 $ 0.62 $ 0.47 =========== =========== =========== ==============
Net income per common share is computed using the weighted-average number of common and common equivalent shares outstanding. Common and common equivalent shares from stock options are excluded from the computation if their effect is antidilutive, except that, pursuant to the Securities and Exchange Commission 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 date of BlackRock's initial public offering 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. 7 8. Supplemental Statements of Cash Flows Information Supplemental disclosure of cash flow information: Six months ended June 30, 2000 1999 ----------------------- Cash paid for interest $ 1,058 $ 7,591 ======= ======= Cash paid for income taxes $26,988 $16,889 ======= ======= Supplemental schedule of noncash transactions: Six months ended June 30, 2000 1999 ----------------------- Acquired management contract $8,040 -- ======= ======= 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations BlackRock, Inc., a Delaware corporation (together with its subsidiaries "BlackRock" or the "Company"), is one of the 30 largest investment management firms in the United States with approximately $177.3 billion of assets under management at June 30, 2000. BlackRock is a majority owned indirect subsidiary of The PNC Financial Services Group, Inc. ("PNC"), one of the largest diversified financial services organizations providing regional banking, corporate banking, real estate finance, asset-backed lending, asset management, global funds services and mortgage banking. PNC acquired BlackRock in 1995 and consolidated a substantial part of PNC's asset management businesses under the BlackRock name in 1998. On October 1, 1999, BlackRock offered 9 million shares of class A common stock in an initial public offering ("IPO"). As of June 30, 2000, PNC owns approximately 70%, the public owns approximately 14% and BlackRock employees own approximately 16% of BlackRock. The following table summarizes BlackRock's operating performance for the three months ended and six months ended June 30, 2000 and June 30, 1999: BlackRock, Inc. Financial Highlights ($ in thousands, except share data) (unaudited)
Three months ended ------------------------------ June 30, Variance ------------------------------ ---------------------- 2000 1999 Amount % ------------------------------ ------------ ------- Total revenue $ 112,571 $ 92,217 $ 20,354 22% Total expense $ 78,249 $ 65,297 $ 12,952 20% Operating income $ 34,322 $ 26,920 $ 7,402 27% Net income $ 20,857 $ 13,767 $ 7,090 51% Diluted earnings per share $ 0.32 $ 0.25 $ 0.07 28% Diluted cash earnings per share (a) $ 0.37 $ 0.30 $ 0.07 23% Average diluted shares outstanding 64,492,447 54,982,635 9,509,812 17% EBITDA (b) $ 40,641 $ 31,696 $ 8,945 28% Operating margin (c) 36.5% 36.4% Assets under management ($ in millions) $ 177,337 $ 141,801 $ 35,536 25% Six months ended June 30, Variance ------------------------------ ---------------------- 2000 1999 Amount % ------------------------------ ------------ ------- Total revenue $ 220,631 $ 180,092 $ 40,539 23% Total expense $ 154,191 $ 129,466 $ 24,725 19% Operating income $ 66,440 $ 50,626 $ 15,814 31% Net income $ 40,054 $ 25,985 $ 14,069 54% Diluted earnings per share $ 0.62 $ 0.47 $ 0.15 32% Diluted cash earnings per share (a) $ 0.70 $ 0.56 $ 0.14 25% Average diluted shares outstanding 64,423,376 54,982,635 9,440,741 17% EBITDA (b) $ 78,442 $ 61,375 $ 17,067 28% Operating margin (c) 36.4% 35.2% Assets under management ($ in millions) $ 177,337 $ 141,801 $ 35,536 25%
(a) Net income plus amortization expense for the period divided by average diluted shares outstanding. (b) Earnings before interest, taxes, depreciation and amortization. (c) Operating income divided by total revenue less fund administration and servicing costs - affiliates. 9 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 range from consulting assignments to actual execution of hedging transactions on behalf of BlackRock's 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, BAI generated an operating loss of $0.5 million and $0.6 million for the three months and six months ended June 30, 1999, respectively. 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, is reported separately and is included in total revenue. Operating expense primarily consists of employee compensation and benefits, fund administration and servicing costs-affiliates, general and administration, and amortization of intangible assets. 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. Intangible assets at June 30, 2000 and December 31, 1999, was $197.4 million and $194.3 million, respectively, with amortization expense of approximately $2.5 million and $2.4 million for the three months ended June 30, 2000 and 1999, respectively and $4.9 million and $4.8 million for the six months ended June 30, 2000 and 1999, respectively. Intangible assets reflect PNC's acquisition of BlackRock Financial Management, L.P. ("BFM") on February 28, 1995 and a management contract acquired in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT using a 10 percent imputed interest rate on May 15, 2000. This agreement assigns the managerial rights and duties of CORE Cap, Inc.'s external manager to BlackRock for consideration in the amount of $12.5 million to be paid by BlackRock over a ten-year period. The present value of the acquired contract is $8.0 million. This amount is recorded as an intangible asset and is being amortized over ten years. 10 Assets Under Management Assets under management ("AUM") increased $35.5 billion, or 25%, to $177.3 billion at June 30, 2000, compared with $141.8 billion at June 30, 1999. The growth in assets under management was attributable to increases of $28.7 billion in separate accounts and $6.9 billion in mutual fund assets. The increase in separate accounts was due to net subscriptions of $25.3 billion and market appreciation of $3.4 billion. Net subscriptions in fixed income, liquidity and equity accounts was $15.4 billion, $5.3 billion and $4.6 billion, respectively. Market appreciation was $2.7 billion and $.6 billion in fixed income and equity accounts, respectively. The rise in liquidity separate accounts was largely attributable to a $4.9 billion increase in cash collateral assets associated with client securities lending activities . The growth in equity assets was primarily the result of new business in the international sector, generated by BlackRock's European equity team, of approximately $5.0 billion. The $6.9 billion increase in mutual fund assets reflected net subscriptions totaling $6.0 billion and market appreciation of $.9 billion. The rise in mutual fund assets was largely due to net subscriptions in the BlackRock Funds and Provident Institutional Funds, which increased $3.0 billion or 12% and $4.0 billion or 19%, respectively.
June 30, % Change ----------------------- ------------------------ 2000 1999 Amount Percent --------- --------- ---------- ----------- ($ in millions) ($ in millions) Separate Accounts Fixed income * $ 86,344 $ 68,286 $18,058 26.4% Liquidity 17,707 12,362 5,345 43.2 Equity 7,621 2,353 5,268 223.9 -------- -------- ------- ------- Subtotal $111,672 $ 83,001 $28,671 34.5 -------- -------- ------- ------- Mutual Funds Fixed income 13,919 13,617 302 2.2 Liquidity 35,944 31,921 4,023 12.6 Equity 15,802 13,262 2,540 19.2 -------- -------- ------- ------- Subtotal 65,665 58,800 $ 6,865 11.7 -------- -------- ------- ------- Total $177,337 $141,801 $35,536 25.1% ======== ======== ======= =======
*Includes alternative investment products. 11 BlackRock, Inc Component Changes in Assets Under Management (unaudited) The following tables present the component changes in BlackRock's assets under management for the three month and six month periods ended June 30, 2000 and 1999. The data reflects certain reclassifications between net subscriptions (redemptions) and market appreciation (depreciation) from amounts previously reported. For the three months and six months ended June 30, 2000, net subscriptions represented 106% and 75%, respectively, of the total increase in assets under management. Net subscriptions were $5.1 billion and $9.6 billion for the three months and six months ended June 30, 2000, respectively.
Three months ended Six months ended June 30, June 30, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- ($ in millions) ($ in millions) Separate Accounts* Beginning assets under management $ 105,349 $ 80,477 $ 99,220 $ 69,112 Net subscriptions 5,815 2,903 9,622 14,527 Market appreciation (depreciation) 508 (379) 2,830 (638) --------- --------- --------- --------- Ending assets under management 111,672 83,001 111,672 83,001 --------- --------- --------- --------- Mutual Funds Beginning assets under management 67,224 59,749 65,297 61,530 Net redemptions (762) (1,546) (2) (3,452) Market appreciation (depreciation) (797) 597 370 722 --------- --------- --------- --------- Ending assets under management 65,665 58,800 65,665 58,800 --------- --------- --------- --------- Total $ 177,337 $ 141,801 $ 177,337 $ 141,801 ========= ========= ========= ========= Net subscriptions $ 5,053 $ 1,357 $ 9,620 $ 11,075 % of Change in AUM from net subscriptions 106.1% 86.2% 75.0% 99.2%
*Includes alternative investment products. 12 BlackRock, Inc. Assets Under Management Quarterly Trend (Dollar amounts in millions) (unaudited)
Quarter Ended -------------------------------------------------------------- 1999 2000 Six months ended -------------------------------------------------------------- June 30 September 30 December 31 March 31 June 30 June 30, 2000 -------------------------------------------------------------- ---------------- Separate Accounts * Fixed Income Beginning assets under management $64,381 $68,286 $69,266 $ 75,206 $ 79,825 $ 75,206 Net subscriptions 4,509 886 6,106 2,541 5,851 8,392 Market appreciation (depreciation) (604) 94 (166) 2,078 668 2,746 ----------------------------------------------------------- -------- Ending assets under management 68,286 69,266 75,206 79,825 86,344 86,344 ----------------------------------------------------------- -------- Liquidity Beginning assets under management 13,975 12,362 17,310 20,934 19,110 20,934 Net subscriptions (redemptions) (1,626) 4,933 3,602 (1,847) (1,423) (3,270) Market appreciation 13 15 22 23 20 43 ----------------------------------------------------------- -------- Ending assets under management 12,362 17,310 20,934 19,110 17,707 17,707 ----------------------------------------------------------- -------- Equity Beginning assets under management 2,121 2,353 2,454 3,080 6,414 3,080 Net subscriptions 20 94 35 3,113 1,387 4,500 Market appreciation (depreciation) 212 7 591 221 (180) 41 ----------------------------------------------------------- -------- Ending assets under management 2,353 2,454 3,080 6,414 7,621 7,621 ----------------------------------------------------------- -------- Total Separate Accounts Beginning assets under management 80,477 83,001 89,030 99,220 105,349 99,220 Net subscriptions 2,903 5,913 9,743 3,807 5,815 9,622 Market appreciation (depreciation) (379) 116 447 2,322 508 2,830 ----------------------------------------------------------- -------- Ending assets under management $83,001 $89,030 $99,220 $105,349 $111,672 $111,672 =========================================================== ======== Mutual Funds BlackRock Funds Beginning assets under management $24,757 $25,255 $24,453 $ 27,339 $ 29,280 $ 27,339 Net subscriptions (redemptions) (259) (172) 1,577 994 (168) 826 Market appreciation (depreciation) 757 (630) 1,309 947 (850) 97 ----------------------------------------------------------- -------- Ending assets under management 25,255 24,453 27,339 29,280 28,262 28,262 ----------------------------------------------------------- -------- PIF Beginning assets under management 22,978 21,578 22,387 25,554 25,755 25,554 Net subscriptions (redemptions) (1,400) 809 3,167 201 (140) 61 Market appreciation - - - - - - ----------------------------------------------------------- -------- Ending assets under management 21,578 22,387 25,554 25,755 25,615 25,615 ----------------------------------------------------------- -------- Closed End Beginning assets under management 7,668 7,507 7,579 7,340 7,560 7,340 Net subscriptions (redemptions) (1) 121 (130) - (30) (30) Market appreciation (depreciation) (160) (49) (109) 220 53 273 ----------------------------------------------------------- -------- Ending assets under management 7,507 7,579 7,340 7,560 7,583 7,583 ----------------------------------------------------------- -------- Short Term Investment Funds (STIF) Beginning assets under management 4,346 4,460 4,653 5,064 4,629 5,064 Net subscriptions (redemptions) 114 193 411 (435) (424) (859) Market appreciation - - - - - - ----------------------------------------------------------- -------- Ending assets under management 4,460 4,653 5,064 4,629 4,205 4,205 ----------------------------------------------------------- -------- Total Mutual Funds Beginning assets under management 59,749 58,800 59,072 65,297 67,224 65,297 Net subscriptions (redemptions) (1,546) 951 5,025 760 (762) (2) Market appreciation (depreciation) 597 (679) 1,200 1,167 (797) 370 ----------------------------------------------------------- -------- Ending assets under management $58,800 $59,072 $65,297 $ 67,224 $ 65,665 $ 65,665 =========================================================== ========
*Includes alternative investment products. 13 Operating Results For The Three Months Ended June 30, 2000 Compared With The Three Months Ended June 30, 1999. Revenue Total revenue for the three months ended June 30, 2000 increased $20.4 million or 22% to $112.6 million compared with the three months ended June 30, 1999. Investment advisory and administration fees increased $21.0 million or 24% to $107.4 million for the three months ended June 30, 2000, compared with the three months ended June 30, 1999. The growth in investment advisory and administration fees was primarily due to increases in assets under management, which totaled $177.3 billion at June 30, 2000, a 25% increase compared with June 30, 1999.
Three months ended June 30, Change -------------------- ----------------------- 2000 1999 Amount Percent -------- -------- ---------- ----------- ($ in thousands) ($ in thousands) Investment advisory and administration fees: Mutual funds $ 56,228 $ 51,123 $ 5,105 10.0% Separate accounts 51,204 35,968 15,236 42.4 BAI revenue -- (614) 614 NM -------- -------- --------- ------- Total investment advisory and administration fees: 107,432 86,477 20,955 24.2 Other income 5,139 5,740 (601) (10.5) -------- -------- --------- ------- Total revenue $112,571 $ 92,217 $ 20,354 22.1% ======== ======== ========= =======
NM-Not meaningful Mutual fund advisory and administration fees increased $5.1 million or 10% to $56.2 million for the three months ended June 30, 2000 compared with the three months ended June 30, 1999, primarily due to an increase in assets under management in the BlackRock Funds and the Provident Institutional Funds of $3.0 billion and $4.0 billion, respectively. Separate account advisory fees increased $15.2 million or 42%, primarily due to a $28.7 billion or 35% increase in assets under management and higher performance fees. The increase in separate account assets was driven by continued strong growth in fixed income and liquidity assets (26% and 43%, respectively) and a $5 billion increase in international equity assets. The $.6 million change in BAI advisory fees was due to the discontinuance of any further business activity together with reversals of previously accrued performance fees associated with the fund's liquidation in 1999. 14 Expense Total expense increased $13.0 million to $78.2 million for the three months ended June 30, 2000, compared with $65.2 million for the three months ended June 30, 1999. The change was primarily the result of increases in employee compensation and benefits and general and administration expenses.
Three months ended June 30, Change ------------------- ----------------------- 2000 1999 Amount Percent -------- -------- ---------- ----------- ($ in thousands) ($ in thousands) Employee compensation and benefits $ 42,680 $ 32,731 $ 9,949 30.4% BAI incentive compensation -- (115) 115 NM Fund administration and servicing costs-affiliates 18,450 18,359 91 0.5 General and administration 14,605 11,909 2,696 22.6 Amortization of intangible assets 2,514 2,413 101 4.2 -------- -------- --------- -------- Total expense $ 78,249 $ 65,297 $ 12,952 19.8% ======== ======== ========= ========
NM-Not meaningful Employee compensation and benefits increased $9.9 million or 30% due to additional expenses of $5.3 million for incentive compensation primarily based on operating profit growth and $4.6 million related to salary and benefits. Salary and benefit cost increases were the result of a 16% increase in full-time employees to support business growth. The change in BAI incentive compensation was due to the discontinuance of any further business activity together with reversals of previously accrued incentive compensation for the three months ended June 30, 1999 associated with the fund's liquidation. General and administration expenses increased $2.7 million or 23% due to a $1.2 million increase in marketing and promotional costs associated with the BlackRock Funds and international business expansion, a $.8 million increase in portfolio and related services, a $.4 million increase in technology and related services, and a $.3 million increase in office and related services. Amortization of intangible assets increased $.1 million or 4% primarily due to the management contract entered into on May 15, 2000 in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc., a BlackRock managed REIT. Operating Income and Net Income Operating income was $34.3 million for the three months ended June 30, 2000 representing a $7.4 million or 28% increase compared with the three months ended June 30, 1999. Non-operating income increased $4.1 million to $1.3 million for the three months ended June 30, 2000 as compared with $2.8 million of non- operating expense for the three months ended June 30, 1999. The significant improvement largely reflects reduced interest expense due to the repayment of $153.2 million in debt since June 30, 1999 of which approximately $115 million represented net proceeds from the IPO. Income tax expense was $14.8 million and $10.4 million representing effective tax rates of 41.5% and 43.0% for the three months ended June 30, 2000 and 1999, respectively. Net income totaled $20.9 million for the three months ended June 30, 2000 compared with $13.8 million for the three months ended June 30, 1999, representing an increase of 51%. 15 Operating Results For The Six Months Ended June 30, 2000 Compared With The Six Months Ended June 30, 1999. Revenue Total revenue for the six months ended June 30, 2000 increased $40.5 million or 23% to $220.6 million compared with the six months ended June 30, 1999. Investment advisory and administration fees increased $40.4 million or 24% to $209.3 million for the six months ended June 30, 2000, compared with the six months ended June 30, 1999. The growth in investment advisory and administration fees was primarily due to increases in assets under management, which totaled $177.3 billion at June 30, 2000, a 25% increase compared with June 30, 1999.
Six months ended June 30, Change ------------------- ----------------------- 2000 1999 Amount Percent -------- -------- ---------- ----------- ($ in thousands) ($ in thousands) Investment advisory and administration fees: Mutual funds $115,328 $ 99,637 $ 15,691 15.7% Separate accounts 93,974 71,334 22,640 31.7 BAI revenue - (2,054) 2,054 - -------- -------- --------- -------- Total investment advisory and administration fees: 209,302 168,917 40,385 23.9 Other income 11,329 11,175 154 1.4 -------- -------- --------- -------- Total revenue $220,631 $180,092 $ 40,539 22.5% ======== ======== ========= ========
NM-Not meaningful Mutual fund advisory and administration fees increased $15.7 million or 16% to $115.3 million for the six months ended June 30, 2000 compared with the six months ended June 30, 1999, primarily due to a $3.0 billion increase in assets under management in the BlackRock Funds. Separate account advisory fees increased $22.6 million or 32%, primarily due to a $28.7 billion or 35% increase in assets under management and higher performance fees. The $2.1 million change in BAI advisory fees was due to the discontinuance of any further business activity together with reversals of previously accrued performance fees associated with the fund's liquidation in 1999. 16 Expense Total expense increased $24.7 million or 19% to $154.2 million for the six months ended June 30, 2000, compared with $129.5 million for the six months ended June 30, 1999. The change was primarily the result of increases in employee compensation and benefits, fund administration and servicing costs- affiliates and general and administration expenses.
Six months ended June 30, Change ------------------- ----------------------- 2000 1999 Amount Percent -------- -------- ---------- ----------- ($ in thousands) ($ in thousands) Employee compensation and benefits $83,350 $65,963 $ 17,387 26.4% BAI incentive compensation - (1,493) 1,493 NM Fund administration and servicing costs-affiliates 38,209 36,335 1,874 5.2 General and administration 27,705 23,834 3,871 16.2 Amortization of goodwill 4,927 4,827 100 2.1 -------- -------- --------- -------- Total expense $154,191 $129,466 $ 24,725 19.1% ======== ======== ========= ========
NM-Not meaningful Employee compensation and benefits increased $17.4 million due to additional expenses of $10.3 million related to salary and benefits and $7.1 million for incentive compensation primarily based on operating profit growth. Salary and benefit cost increases were the result of a 16% increase in full-time employees to support business growth. The change in BAI incentive compensation was due to the discontinuance of any further business activity together with reversals of previously accrued incentive compensation in the six months ended June 30, 1999 associated with the fund's liquidation. Fund administration and servicing costs-affiliates increased $1.9 million due to higher levels of PNC client assets invested in the BlackRock Funds. General and administration expenses increased $3.9 million or 16% primarily due to a $2.3 million increase in marketing and promotional costs associated with the BlackRock Funds and international business expansion, a $1.3 million increase in portfolio and related services and a $.7 million increase in office and related services. The increases were partially offset by a reduction in professional fees of $.5 million. Operating Income and Net Income Operating income was $66.4 million for the six months ended June 30, 2000, representing a $15.8 million or 31% increase compared with the six months ended June 30, 1999. Non-operating income increased $7.8 million to $2.0 million for the six months ended June 30, 2000 as compared with $5.8 million of non- operating expense for the six months ended June 30, 1999. The significant improvement largely reflects reduced interest expense due to the repayment of $153.2 million in debt since June 30, 1999 of which approximately $115 million represented net proceeds from the IPO. Income tax expense was $28.4 million and $18.8 million representing effective tax rates of 41.5% and 42.0% for the six months ended June 30, 2000 and 1999, respectively. Net income totaled $40.1 million for the six months ended June 30, 2000 compared with $26.0 million for the six months ended June 30, 1999, representing an increase of $14.1 million or 54%. 17 Liquidity and Capital Resources BlackRock has historically met its working capital requirements through cash generated by its operating activities and borrowings from PNC Bank, N.A. ("PNC Bank") under a $175.0 million revolving credit facility. Cash provided by operating activities totaled $5.7 million and $15.6 million for the six months ended June 30, 2000 and 1999, respectively. Net cash flow used in investing activities was $18.2 million and $9.0 million for the six months ended June 30, 2000 and 1999, respectively. Capital expenditures for property and equipment were $10.6 million and $9.1 million for the six months ended June 30, 2000 and 1999, respectively. Capital expenditures in 2000 includes $5.3 million in construction costs incurred to date on a new office building in Wilmington, Delaware as well as higher technology investments associated with risk management activities and increased office and related costs to support personnel growth. Net investments were $7.6 million for the six months ended June 30, 2000 and represented investments made in the new BlackRock Funds and alternative investment products, which were launched during the second quarter. Net cash used in financing activities was $28.0 million and $43.8 million for the six months ended June 30, 2000 and 1999, respectively. Debt repayments totaled $28.2 million and $43.8 million for the six months ended June 30, 2000 and 1999, respectively. Total capital at June 30, 2000 was $321.2 million and was comprised solely of stockholders' equity. 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 revenue from investment advisory and administration fees based on assets under management, BlackRock's revenue 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 revenue is 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, except that 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, revenue or otherwise. 18 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 "likely," "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 and future results could differ materially from historic performance. The following factors, among others, could cause actual results to differ materially from forward-looking statements or historic performance: the introduction, withdrawal, success and timing of business initiatives and strategies; economic conditions; changes in interest rates and financial and capital markets; the investment performance of BlackRock's sponsored investment products and separately managed accounts; competitive conditions; capital improvement projects; future acquisitions; and the impact, extent and timing of technological changes and legislative and regulatory actions and reforms. Reference is made to BlackRock's Annual Report on Form 10-K for the year ended December 31, 1999 and subsequent reports filed with the Securities and Exchange Commission which identify additional factors that can affect forward- looking statements. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings. No material developments have occurred during the second quarter regarding previously reported legal proceedings. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 27.1 Financial data schedule (b) Reports on Form 8-K Since March 31, 2000, the Company has filed the following Current Reports on Form 8-K: Form 8-K dated as of April 11, 2000, reporting the Company's results of operations for the three months ended March 31, 2000, filed pursuant to Item 5. Form 8-K dated as of July 12, 2000, reporting the Company's results of operations for the three months and six months ended June 30, 2000, filed pursuant to Item 5. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BLACKROCK, INC. (Registrant) Date: August 11, 2000 By: /s/ Paul L. Audet ------------------------- Paul L. Audet Managing Director & Chief Financial Officer 21