FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BlackRock, Inc.
(Exact name of registrant as specified in its charter)
Delaware 6211 51-0380803
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
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345 Park Avenue
New York, NY 10154
(212) 754-5560
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Robert P. Connolly
Managing Director and General Counsel
BlackRock, Inc.
345 Park Avenue
New York, NY 10154
(212) 754-5560
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Matthew J. Mallow Gary S. Schpero Steven Kaplan
Skadden, Arps, Slate, Simpson Thacher & Bartlett Arnold & Porter
Meagher & Flom LLP 425 Lexington Avenue 555 Twelfth Street, N.W.
919 Third Avenue New York, New York 10017 Washington, D.C. 20004
New York, New York 10022 (212) 455-2000 (202) 942-5000
(212) 735-3000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the Securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Proposed
Maximum Amount of
Title of Each Class of Aggregate Registration
Securities To Be Registered Offering Price Fee
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Class A common stock, $.01 par value per share........... $100,000,000 $27,800
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used in connection with an offering in the United States and Canada (the "U.S. Prospectus") and one to be used in a concurrent international offering (the "International Prospectus"). The International Prospectus will be identical to the U.S. Prospectus in all respects except for the front cover page, pages 75, 76, 77 and 78, and the back cover page. The form of the U.S. Prospectus is included herein and is followed by the front cover page, pages 75, 76, 77 and 78, and the back cover page to be used in the International Prospectus.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated May 13, 1999
PROSPECTUS
Shares
[BlackRock Logo]
Class A Common Stock
This is BlackRock, Inc.'s initial public offering of its class A common stock. The U.S. underwriters are offering shares in the United States and Canada and the international managers are offering shares outside the United States and Canada.
We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. We expect that the class A common stock will trade on the New York Stock Exchange under the symbol " ."
Following the offerings we will have two classes of authorized common stock--class A common stock and class B common stock. The rights of holders of class A common stock and class B common stock are identical, except with respect to voting. Each share of class A common stock will have one vote and each share of class B common stock will have five votes on all matters submitted to a vote of our stockholders.
Investing in the class A common stock involves risks which are described in the "Risk Factors" section beginning on page 9 of this prospectus.
Per Share Total
--------- -----
Public Offering Price................................. $ $
Underwriting Discount................................. $ $
Proceeds, before expenses, to BlackRock............... $ $
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The U.S. underwriters may also purchase up to an additional shares of class A common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over- allotments. The international managers may similarly purchase up to an aggregate of an additional shares of class A common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares of class A common stock will be ready for delivery in New York, New York on or about , 1999.
Merrill Lynch & Co.
The date of this prospectus is , 1999.
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Dilution................................................................. 18
Capitalization........................................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 27
Management............................................................... 42
Executive Compensation................................................... 46
Ownership of the Common Stock............................................ 55
Certain Relationships and Related Transactions........................... 56
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 73
Underwriting............................................................. 75
Legal Matters............................................................ 79
Experts.................................................................. 79
Where You Can Find More Information...................................... 79
Index to Consolidated Financial Statements............................... F-1
Report of Independent Auditors........................................... F-2
Consolidated Statements of Financial Condition........................... F-3
Consolidated Statements of Income........................................ F-4
Consolidated Statements of Changes in Stockholders' Equity............... F-6
Consolidated Statements of Cash Flows.................................... F-7
Notes to Consolidated Financial Statements............................... F-8
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make statements about our future results in this prospectus that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and the current economic environment. We caution you that these statements are not guarantees of future performance. They involve a number of risks and uncertainties that are difficult to predict. Our actual results could differ materially from those expressed or implied in the forward- looking statements. Important factors, including those described under "Risk Factors" and elsewhere in this prospectus, could cause our actual results to differ materially from those in the forward-looking statements. We derived the forward-looking statements in the prospectus from certain assumptions, and the failure of those assumptions to be realized may also cause actual results to differ materially from those projected. We assume no obligation to publicly correct or update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting the forward- looking statements or if we later become aware that they are not likely to be achieved.
This prospectus contains information you should consider when making your investment decision. You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate at the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully. In this prospectus, "BlackRock," "we," "us" and "our" refer to BlackRock, Inc. and to our consolidated subsidiaries and any predecessor businesses where the context requires.
BlackRock
Overview. BlackRock is one of the 30 largest investment management firms in the United States with $131 billion of assets under management at December 31, 1998. After the offerings, we expect to be the fifth largest publicly- traded company focused on investment management in the United States on the basis of assets under management. The creation of BlackRock, Inc. in 1998 by PNC Bank Corp. (NYSE: PNC) ("PNC"), one of the largest diversified financial services companies in the United States, was the culmination of a strategic restructuring of PNC's asset management business. This process began in 1995 when PNC acquired BlackRock Financial Management ("BFM"), then a $24 billion fixed income manager. By year-end 1996, the BFM management team had assumed responsibility for overseeing PNC's mutual fund marketing and liquidity management efforts. The equity divisions were added in 1998, when a substantial portion of PNC's asset management businesses were consolidated under the BlackRock brand name. At that time, the BFM management team fully integrated all activities along functional lines and established interdisciplinary operating committees charged with day-to-day oversight of each product line.
Our Products and Services. We offer a variety of investment products to institutional and individual investors in the U.S. and internationally. At year-end 1998, fixed income products represented 50%, liquidity products represented 38%, equity products represented 11% and alternative investment products represented 1% of total assets under management. We manage these assets in approximately 350 separate accounts and 75 mutual funds on behalf of more than 3,000 institutions and 150,000 individual investors. We also offer a variety of risk management services to large institutional fixed income investors. Through these risk management services, which are an outgrowth of our longstanding commitment to developing highly sophisticated investment technology, we provide comprehensive risk analysis and advice with respect to more than $400 billion of assets managed by our clients.
Our Asset Growth. Over the past five years, our assets under management have increased by more than $78 billion, a 26% compound annual growth rate ("CAGR"). Separate accounts, which are offered primarily to institutional investors, grew by $51 billion, a 41% CAGR, and mutual funds, which are offered primarily under the BlackRock Funds and Provident Institutional Funds brand names, grew by $27 billion, a 15% CAGR. Most of this growth has been in our fixed income and liquidity products, in which assets have increased by $41 billion and $26 billion, respectively. Importantly, we achieved this growth largely by attracting new clients and additional funds from existing clients, despite the fact that investors have been shifting money out of bonds and into stocks to take advantage of the sustained bull market in equities during the past decade.
Our Investment Performance and Client Service. We believe that our success in increasing fixed income and liquidity assets under management is principally due to our long-term risk-adjusted returns relative to clients' benchmarks and to our comprehensive client service. We achieve our investment results by using a highly disciplined investment process, which brings together the expertise of our investment professionals and our extensive proprietary risk management systems. A group of senior professionals, who work closely with clients, consultants and distributors to better understand their needs, market our products and provide client service. Products and services are tailored to meet differing return objectives and risk tolerances, as well as
regulatory, tax, accounting and credit constraints. Our technology also plays an important role in client service by permitting efficient report customization and delivery over the Internet.
Our Strategies. We began 1999, our first full year as an integrated business, better prepared to pursue opportunities across our products and markets. We plan to continue to increase assets under management by pursuing our current business strategy, which consists of the following key elements:
. Retaining and attracting talented professionals. The quality and depth of our professional staff is critical to our business, and the market for management, investment, technology and marketing personnel is intensely competitive. As a result, we strongly emphasize recruiting, training and long-term career development. The experience and stability of our management team is one of our greatest strengths. To promote stability, 39 managing directors acquired 18% of BlackRock's equity and signed 5-year employment contracts during 1998. We also granted long-term deferred compensation to 60 key professionals. We expect to expand employee ownership over time, both to retain and motivate key personnel and to attract additional high caliber professionals committed to building our long-term value.
. Continuing to build our fixed income and liquidity presence. Although we have realized considerable growth in fixed income and liquidity assets, the market for these products is highly fragmented and no single firm accounts for substantial market share. Accordingly, there is a substantial opportunity for continued growth in these businesses. We plan to capitalize on these opportunities through continued direct calling on pension plan sponsors, insurance companies, corporations and industry consultants, as well as wholesaling efforts among financial intermediaries.
. Expanding our equity business. After assuming responsibility for PNC's equity products in 1998, we took steps to enhance our capabilities and build capacity for future growth, including upgrading systems, adding trading and operations resources and expanding risk management reporting. We will continue to pursue distribution opportunities for mutual funds, which currently comprise the majority of our equity assets under management. In addition, we will pursue both cross-selling and direct calling efforts among institutional investors, particularly as we establish longer term investment performance track records.
. Diversifying our products and clients. We will continue to diversify our products in order to better serve our existing clients and attract new ones. These efforts may include selective development of new products that build upon or expand our existing capabilities, including additional alternative investment products. We will also seek additional distribution outlets for our mutual funds, pursue relatively untapped segments of the institutional investor universe and seek to enhance the distribution of our products in international markets.
. Marketing our risk management services. We have developed highly sophisticated proprietary investment technology that supports our risk assessment and investment decision-making, as well as highly automated trade processing and compliance functions. We recently began offering risk management services separately from our asset management services and intend to gradually expand our marketing efforts in this area.
. Improving our operating efficiency and pursuing strategic opportunities. By integrating our businesses along functional lines, we expect to have opportunities to realize continued improvement in our operating margins. We will also seek to use our technology expertise to achieve greater automation and enhance firmwide infrastructure to support future growth.
Finally, we believe that as one of relatively few publicly-traded investment management firms, we will be better able to participate in future industry consolidation. We will pursue acquisition and joint venture opportunities that we believe can enhance stockholder value by adding scale, expanding product capabilities and strengthening distribution.
Legal Structure and Ownership. BlackRock was incorporated in 1998 in Delaware to effect the consolidation of a substantial portion of PNC's asset management businesses. We continue to work closely with PNC to seek ways to enhance value for both BlackRock and PNC stockholders. After the offerings, PNC will own, indirectly, through its wholly-owned subsidiary, PNC Bank, N.A. ("PNC Bank"), % of the class B common stock, representing % of the combined voting power of all classes of BlackRock stock. BlackRock's principal executive offices are located at 345 Park Avenue, New York, New York 10154 and the telephone number is (212) 754-5560.
The Offerings
The following information assumes that the underwriters and managers do not exercise the options granted by BlackRock to purchase additional shares in the offerings.
Class A common stock offered:
U.S. offering......................................... shares
International offering................................ shares
Total............................................... shares
Common stock outstanding after the offerings, including
shares reserved for issuance under our employee benefit
plans.
Class A common stock.................................. shares
Class B common stock.................................. shares
Total............................................... shares
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Use of proceeds............. We estimate that the net proceeds to be
received by BlackRock from these
offerings will be approximately $
million. We intend to use these net
proceeds to repay a portion of
outstanding indebtedness under our $175
million revolving line of credit with
PNC Bank. At March 31, 1999, the
outstanding balance on this line of
credit, including accrued interest, was
$151 million.
Dividend policy............. BlackRock intends to retain earnings to
finance the development and growth of
its business, including possible
investments, and does not anticipate
paying cash dividends in the
foreseeable future.
Voting rights............... The rights of holders of class A common
stock and class B common stock are
identical, except that holders of class
B common stock will have five votes per
share, while holders of class A common
stock will have one vote per share.
Risk factors................ See "Risk Factors" and the other
information included in this prospectus
for a discussion of factors you should
carefully consider before deciding to
invest in shares of the class A common
stock.
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NYSE Symbol................. " "
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 audited consolidated financial statements of BlackRock for the years ended December 31, 1996, 1997 and 1998 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated financial data includes the results of operations of BFM since its acquisition by PNC on February 28, 1995. Had BFM's results of operations been included for the year ended December 31, 1994 and the two months ended February 28, 1995, revenues would have increased by $55.1 million and $12.1 million, respectively. BFM's income before income taxes for these periods would not be comparable to post acquisition results due to the financing costs and goodwill amortization expense arising out of the acquisition and which have only been incurred in periods since the acquisition.
Year Ended December 31,
----------------------------------------------
1994 1995 1996 1997 1998
------- -------- -------- -------- --------
(unaudited)
($ in thousands, except per share data)
Income statement data
Revenue
Investment advisory and
administration fees:
Mutual funds................. $26,995 $ 61,877 $ 87,189 $117,977 $162,487
Separate accounts............ 7,638 24,458 43,069 62,985 101,352
BlackRock Asset Investors
(BAI)....................... -- 5,933 6,061 13,867 61,199
------- -------- -------- -------- --------
Total advisory and
administration fees........... 34,633 92,268 136,319 194,829 325,038
Other income................... 1,411 5,814 10,159 10,644 14,444
------- -------- -------- -------- --------
Total revenue.................. 36,044 98,082 146,478 205,473 339,482
Operating expenses
Employee compensation and
benefits.................... 7,073 33,698 53,703 73,217 109,741
BAI incentive compensation... -- 3,070 3,525 9,688 44,806
Fund administration and
servicing costs--
affiliates.................. 10,475 12,412 19,611 27,278 52,972
General and administration... 10,510 17,719 24,500 29,764 38,696
Amortization of goodwill..... -- 8,002 9,603 9,653 9,653
Closed-end fund offering
costs....................... -- -- -- -- 4,252
------- -------- -------- -------- --------
Total operating expenses....... 28,058 74,901 110,942 149,600 260,120
------- -------- -------- -------- --------
Operating income............... 7,986 23,181 35,536 55,873 79,362
Non-operating income (expense)
Interest and dividend
income...................... 331 943 1,877 3,117 1,995
Interest expense............. -- (14,253) (19,975) (20,249) (13,347)
------- -------- -------- -------- --------
331 (13,310) (18,098) (17,132) (11,352)
------- -------- -------- -------- --------
Income before income taxes..... 8,317 9,871 17,438 38,741 68,010
Income taxes................. 2,753 4,785 8,475 16,655 32,395
------- -------- -------- -------- --------
Net income..................... $ 5,564 $ 5,086 $ 8,963 $ 22,086 $ 35,615
======= ======== ======== ======== ========
Pro-forma net income per share
(1)
Basic..........................
Diluted........................
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Year Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------- -------- --------------- -------- --------
(unaudited)
($ in thousands)
Balance sheet data
Goodwill................... $ -- $232,100 $223,216 $213,563 $203,910
Total assets............... 15,039 293,270 332,719 335,507 440,784
Long-term debt............. -- 235,982 255,859 225,232 197,000
Total liabilities.......... 3,904 270,481 300,047 290,544 334,593
Stockholders' equity....... 11,135 22,789 32,672 44,963 106,191
Year Ended December 31,
--------------------------------------------------
1994 1995 1996 1997 1998
------- -------- --------------- -------- --------
(unaudited)
($ in millions)
Other financial data (2)
Assets under management
Separate accounts:
Fixed income*............ $13,848 $ 23,345 $ 28,958 $ 39,261 $ 52,869
Liquidity................ 3,269 5,556 7,430 10,019 13,826
Equity................... 540 700 1,204 1,763 2,417
------- -------- -------- -------- --------
Subtotal................. 17,657 29,601 37,592 51,043 69,112
Mutual funds:
Fixed income............. 10,021 11,969 12,546 13,714 13,888
Liquidity................ 20,398 21,183 23,933 29,827 35,713
Equity................... 4,615 6,306 8,643 10,829 12,087
------- -------- -------- -------- --------
Subtotal................. 35,034 39,458 45,122 54,370 61,688
------- -------- -------- -------- --------
Total...................... $52,691 $ 69,059 $ 82,714 $105,413 $130,800
======= ======== ======== ======== ========
EBITDA (Unaudited)
EBITDA (3) ($ in
thousands)................ $ 8,609 $ 33,657 $ 49,113 $ 71,141 $ 94,209
EBITDA, as-adjusted (4) ($
in thousands)............. $ 5,856 $ 14,619 $ 20,663 $ 34,237 $ 48,467
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(1) The unaudited pro-forma net income per share gives effect to the offerings, including the repayment of debt and decrease in interest expense and the increase in income tax expense thereon, as if the offerings had been effected as of January 1, 1998. The unaudited pro forma net income per share does not purport to represent the results of operations or the financial position of BlackRock which actually would have occurred had the offerings been consummated on January 1, 1998, or project the results of operations or the financial position of BlackRock for any future date or period.
(2) For comparative purposes, assets under management at December 31, 1994, include BFM.
(3) "EBITDA" represents earnings before interest expense, income taxes, depreciation, amortization and extraordinary items. EBITDA is not a measure of financial performance under generally accepted accounting principles and you should not consider it an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.
(4) "EBITDA, as-adjusted" represents earnings after interest expense and income taxes but before depreciation and amortization and extraordinary items. EBITDA, as-adjusted is not a measure of financial performance under generally accepted accounting principles and you should not consider it an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity.
Recent Developments
Results for the First Quarter Ended March 31, 1999. BlackRock's net income increased to $12.2 million in the first quarter of 1999, up $4.6 million or 59.6% from the first quarter of 1998 results of $7.7 million.
Total revenue for the first quarter of 1999 was $87.9 million, up $18.7 million or 27.0% from $69.2 million earned in the first quarter of 1998. Investment advisory and administration fees for the first quarter of 1999 were $84.0 million, an increase of $32.5 million or 63.2% from the first quarter of 1998 total of $51.5 million. The increase was attributable to a $27.1 billion or 24% increase in assets under management and the May 1998 conversion of $8.2 billion in PNC common trust funds into the BlackRock Funds which resulted in increased fees for BlackRock. Other income for first quarter of 1999 was $5.3 million which represented a $2.5 million or 91.3% increase from the prior year. The growth in other income was primarily due to new risk management advisory engagements. BlackRock Asset Investors ("BAI") revenues of ($1.4) million for the first quarter of 1999 primarily reflected asset sales and valuation adjustments since December 31, 1998, associated with the fund's liquidation. BAI revenues, including performance fees, were $14.9 million for the first quarter of 1998.
Operating expenses totaled $64.2 million, an increase of $13.0 million or 25.3% from the first quarter of 1998 total of $51.2 million. The rise in operating expenses was attributable to increases in compensation and benefits of $8.0 million, fund administration and servicing costs of $12.1 million and $4.2 million in general and administration expenses, and were offset by an $11.3 million decline in BAI incentive compensation. The increase in compensation and benefits reflect staff increases, escalation in 401k benefit costs due to program changes and increased incentive compensation costs associated with operating income growth which were partially offset by our adoption of Statement of Position 98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Fund administration and servicing costs increased due to the May 1998 conversion of $8.2 billion in PNC common trust funds into the BlackRock Funds. The increase in general and administration expense was largely attributable to higher marketing expenditures as well as management's decision to reduce the estimated useful life of certain equipment which increased depreciation expense.
Operating income was $23.7 million for the first quarter of 1999, representing a $5.7 million or 31.8% increase from first quarter 1998 results of $18.0 million.
Assets Under Management. BlackRock's assets under management at March 31, 1999, were $140.2 billion as compared to $113.1 billion and $130.8 billion at March 31 and December 31, 1998, respectively. The increase in assets under management from the prior year primarily reflects new fixed income advisory business. Fixed income and alternative investment products assets under management at March 31, 1999 were $78.2 billion which represented a $21.6 billion or 38.1% increase from the first quarter 1998 results of $56.7 billion.
Strategic Joint Venture. In 1998, we obtained more than $1 billion of new assets under our management in Japan through three investment trusts created with Nomura Asset Management Co., Ltd., ("NAM"), the largest money manager in Japan. Since year-end, we have entered into a formal relationship with NAM by establishing Nomura BlackRock Asset Management Co., Ltd., a joint venture that will initially focus on offering BlackRock's fixed income products in the Japanese institutional and investment trust markets. To further promote our international business, we will consider establishing additional strategic affiliations and foreign business development offices in the future.
Selected Operating Data
For the Quarter Ended
March 31,
----------------------
1998 1999
---------- ----------
(Unaudited)
Income statement data ($ in thousands)
Revenue
Investment advisory and administration fees........... $ 51,494 $ 84,048
BAI................................................... 14,948 (1,440)
Other................................................. 2,753 5,266
---------- ----------
Total revenue........................................... 69,195 87,874
Operating expenses...................................... 51,207 64,169
---------- ----------
Operating income........................................ 17,988 23,705
Interest and dividend income............................ 711 618
Interest expense--affiliates............................ (4,076) (3,670)
---------- ----------
Income before income taxes.............................. 14,623 20,653
Income tax provision.................................... 6,965 8,434
---------- ----------
Net income.............................................. $ 7,658 $ 12,219
========== ==========
Pro-forma net income per share
Basic.................................................
Diluted...............................................
Balance sheet data ($ in thousands)
Goodwill................................................ $ 211,150 $ 201,497
Total assets............................................ 292,869 400,131
Debt.................................................... 174,452 179,201
Total liabilities....................................... 223,326 281,756
Stockholders' equity.................................... 69,543 118,375
Other financial data ($ in millions)
Assets under management at period end:
Separate accounts*.................................... $ 57,326 $ 80,435
Mutual funds.......................................... 55,748 59,749
---------- ----------
Total................................................... $1 13,074 $ 140,184
========== ==========
Assets under management at period end:
Fixed income*......................................... $ 56,650 $ 78,220
Liquidity............................................. 42,051 47,511
Equity................................................ 14,373 14,453
---------- ----------
Total................................................... $ 113,074 $ 140,184
========== ==========
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RISK FACTORS
Investing in the class A common stock will provide you with an equity ownership interest in BlackRock. As a BlackRock stockholder, you will be subject to risks affecting our business, risks relating to our relationship with PNC and risks relating to the ownership of our stock. The performance of your shares will reflect the performance of our business relative to, among other things, our competitors, general economic and market conditions and industry conditions. The value of your investment may increase or decrease and could result in a loss. PNC is a bank holding company, but your shares will not be insured by the Federal Deposit Insurance Corporation ("FDIC") or guaranteed by any bank. You should carefully consider the following factors as well as other information contained in this prospectus before deciding to invest in shares of the class A common stock.
Risk factors affecting our business
Decline in the securities markets could lead to a decline in revenues Our investment management revenues are comprised largely of fees based on a percentage of the value of assets under management and, in certain circumstances, performance fees expressed as a percentage of the returns realized on assets under management. A decline in the prices of stocks or bonds could cause our revenues to decline by:
. causing the value of our assets under management to decrease, which would result in lower investment management fees;
. causing the returns realized on our assets under management to decrease, which would result in lower performance fees; and
. causing our clients to withdraw funds in favor of investments in markets that they perceive to offer greater opportunity and that we do not serve, which would result in lower investment management fees.
Poor performance could lead to loss of clients and revenues We believe that investment performance is one of the most important factors for the growth of our assets under management. Poor investment performance could impair our revenues and growth because:
. existing clients might withdraw funds in favor of better performing products, which would result in lower investment management fees;
. our ability to attract funds from existing and new clients might diminish; and
. we might earn little or no performance fees.
Our sources of revenues are subject to termination on short notice
Our revenues will decrease if our investment management contracts are terminated or if clients withdraw funds that we manage on their behalf. Any of the following would adversely affect our revenues:
. clients can, without penalty, terminate our investment management contracts and can withdraw their funds generally with little or no advance notice;
. the boards of registered investment companies that we advise could choose to terminate or not renew our investment management contract, which they must consider annually; and
. fund shareholders can withdraw assets with no advance notice.
Certain funds we manage have fixed terms and we may not be able to replace these revenues
We manage a variety of closed-end mutual funds that were designed with maturity dates ranging from October 1999 to December 2010. At maturity, all remaining assets will be distributed to investors in these funds and our investment advisory agreements will terminate. There is no assurance that clients will reinvest these assets in our other products or, if they do, that such reinvestments will be in products that provide us with equal revenues. Funds maturing in the next three years include:
. BAI, which is expected to liquidate by the fourth quarter of 1999, represented $173 million of our assets under management at December 31, 1998, and contributed $16.4 million of operating income in 1998;
. three closed-end funds maturing on or prior to December 31, 2001, which collectively represented $2.6 billion of our assets under management at December 31, 1998, and contributed $10.6 million of revenues during 1998.
Loss of significant separate accounts would adversely affect our revenues
We had approximately 350 separate accounts at December 31, 1998, of which the 10 largest (excluding alternative investment products) generated approximately 5.7% of our total revenues during 1998. Loss of any of these accounts would reduce our revenues. We have, from time to time, lost separate accounts because of corporate mergers and restructuring, and in the future we could lose accounts under these or other circumstances, such as adverse market conditions or poor performance.
Fee pressures could reduce profit margin
The investment management business is highly competitive and has relatively low barriers to entry. To the extent that we are forced to compete on the basis of price, we may not be able to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse affect on our profit margins and results of operations.
Performance fees may result in increased earnings volatility
A portion of our investment management revenues are derived from performance fees on certain separate accounts and private investment funds. Generally, we are entitled to performance fees only if the returns on the related portfolios exceed agreed-upon periodic or cumulative return targets. If we do not exceed these targets, we will not generate performance fees for that period and we may not earn performance fees in future periods if the targets are based on cumulative returns. Performance fees will vary from period to period in relation to volatility in returns, causing our earnings to be more volatile than if we did not manage assets on a performance fee basis. In 1998, performance fees, excluding BAI, represented 1.6% of our total revenue.
Many of our competitors have greater resources than we do
Many firms offer similar and additional investment management products and services to the same clients that we target. In addition, many of our competitors have or may in the future develop greater financial and other resources, more extensive distribution capabilities, more effective advertising and market strategies and broader name recognition. Our competitors may be able to use these resources and capabilities to place us at a competitive disadvantage in retaining assets under management and achieving increased market penetration.
Failure to successfully pursue our corporate or acquisition strategies may adversely affect us
We employ a variety of strategies intended to enhance our earnings and to improve our profit margins. In the future, these strategies may include acquisitions of other investment management businesses. We may not be able to find suitable businesses to acquire at acceptable prices and we may not be able to successfully integrate or realize the intended benefits from these acquisitions. In general, our strategies may not be effective and failure to successfully develop and implement our strategies may adversely affect our earnings and our competitive position in the investment management industry.
Failure to develop effective business continuity plans could disrupt operations and cause losses
We are dependent to a substantial degree on the availability of our office facilities and the proper functioning of our computer and telecommunications systems. A disaster, such as water damage, an explosion or a prolonged loss of electrical power, could materially interrupt our business operations and cause material financial loss, regulatory actions, reputational harm or legal liability.
We currently estimate that the total cost of developing and implementing our business continuity plans will not have a material impact on our results of operations, liquidity or capital resources. We cannot provide any assurance, however, that our business continuity plans will be effective or that our estimates regarding the timing and cost of completing the plans will be accurate.
Failure to achieve Year 2000 readiness could disrupt operations and cause losses
We are substantially dependent on the proper functioning of our computer systems. In addition, we interact with a variety of third parties in the normal course of business. A failure of our systems or any of their systems to be Year 2000 ready could disrupt our operations and have other adverse effects. The primary problem is that many existing computer systems and microprocessors with date functions use only two digits to identify a year in the date field, with the assumption that the first two digits of the year are always "19." Computers that are not Year 2000 ready may treat the year 2000 as the year 1900 and may fail to treat the year 2000 as a leap year. Systems that calculate, compare or sort using the incorrect date may malfunction, which could have the following effects on our business:
. in the case of our systems, incomplete or inaccurate recording or accounting of trades or inaccurate calculation of security valuations and risk parameters;
. in the case of third-party data providers, the receipt of inaccurate or out-of-date information that would impair our ability to perform critical data functions, including pricing portfolio assets or evaluating our risk exposures;
. in the case of customers, trading counterparties and financial intermediaries such as exchanges and clearing agents, disruption of funding flows, failed trade settlements or an inability to trade in certain markets;
. in the case of custodian banks, fund administrators and transfer agents, disruption of critical administrative, valuation and record-keeping services for our mutual fund, separate account and risk management clients;
. in the case of vendors, disruption of telecommunications and electrical power and other services upon which we depend; and
. in the case of the issuers of securities in which we invest, adverse impact on their operations and financial condition which could decrease the value and liquidity of the securities and adversely affect our investment management fees.
Disruption or suspension of activity in the world's financial markets is also possible. In addition, many market participants may reduce their market activities temporarily as they assess the effectiveness of their Year 2000 readiness efforts during a "phase-in" period beginning in late 1999. This reduction could decrease liquidity in the securities markets and inhibit our ability to manage our client portfolios.
We currently estimate that the total cost of implementing our Year 2000 program will not have a material impact on our results of operations, liquidity or capital resources. We cannot provide any assurance, however, that our Year 2000 program will be effective or that our estimates about the timing and cost of completing our Year 2000 program will be accurate or that third parties on which we are dependent will be Year 2000 ready.
Failure to comply with client guidelines or government regulations could adversely affect us
When clients retain us to manage assets on their behalf, they specify guidelines that we are required to observe in the management of their portfolios. A failure to comply with these guidelines could result in losses that the client could seek to recover from us and the client withdrawing its assets from us.
Our business is subject to extensive regulation in the United States and certain of our activities are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies or bodies. Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition on our engaging in certain activities, suspensions of our personnel or revocation of their licenses, suspension or termination of our investment adviser or broker- dealer registrations, or other sanctions.
Subsidiaries of ours are registered with the Securities and Exchange Commission ("SEC") under the Investment Advisers Act, and BlackRock's mutual funds are registered with the SEC under the Investment Company Act. The Investment Advisers Act imposes numerous obligations on registered investment advisers including record-keeping, operating and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act imposes similar obligations, as well as additional detailed operational requirements, on investment advisers to registered investment companies. The SEC is authorized to institute proceedings and impose sanctions for violations of the Investment Advisers Act and the Investment Company Act, ranging from censure to termination of an investment adviser's registration to prohibition to serve as advisers to SEC-registered funds. The failure of one of our subsidiaries to comply with the Investment Advisers Act or the Investment Company Act could have a material adverse effect on us.
Our asset management subsidiaries are subject to the Employee Retirement Income Security Act of 1974 ("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. The failure of any of our subsidiaries to comply with these requirements could have a material adverse effect on us.
Because we are a subsidiary of PNC and PNC Bank we are subject to certain banking regulations as described below under the heading "--Risks relating to our relationship with PNC--Banking regulation of PNC and BlackRock."
Risks relating to our relationship with PNC
We will be controlled by PNC as long as it controls a majority of the outstanding voting power of our common stock, and our other stockholders will be unable to affect the outcome of stockholder voting during such time
Immediately after completion of these offerings, four of our six directors will be directors and/or executive officers of PNC and PNC indirectly will own approximately % of our outstanding shares of class B common stock, representing % of the combined voting power of all classes of voting stock of
BlackRock. As long as PNC owns a majority of the outstanding voting power of our common stock, PNC will continue to be able to elect our entire board of directors and to remove any director, with or without cause, and generally to determine the outcome of all corporate actions requiring stockholder approval. Additionally, our bylaws provide that, subject to applicable law and exchange policy, prior to the date on which PNC or another person beneficially owns less than a majority of the voting power of BlackRock common stock, a majority of all directors on the committees of our board of directors will be designated by PNC or such other person. As a result, subject to the right of executive management to manage the day-to-day operations of BlackRock, PNC will be in a position to continue to control all matters affecting BlackRock, including:
. the composition of our board of directors and, through it, any determination with respect to the direction and policies of BlackRock, including the appointment and removal of officers;
. any determination with respect to mergers or other business combinations involving BlackRock;
. the acquisition or disposition of assets by BlackRock;
. future issuances of common stock or other securities of BlackRock;
. the incurrence of debt by BlackRock;
. amendments, waivers and modifications to our agreements, including those with PNC;
. the payment of dividends on our common stock; and
. determinations with respect to treatment of the items in our tax returns which are consolidated or combined with PNC's tax returns.
Concentration of PNC managed assets in BlackRock Funds
Approximately 81% ($19.5 billion at December 31, 1998) of the assets in the BlackRock Funds are assets of PNC clients and are managed on a discretionary basis by PNC. PNC may withdraw these assets at any time and we may not be able to replace them. In addition, we may not be successful in increasing sales through the PNC channels and PNC may determine to not continue marketing the BlackRock Funds or our other products.
Banking regulation of PNC and BlackRock
Because PNC is a bank holding company and BlackRock is a subsidiary of PNC and PNC Bank, one of its national bank subsidiaries, we are subject to bank regulations which limit our activities and the types of businesses in which we may engage and which may cause us to be at a competitive disadvantage. BlackRock is subject to the supervision, regulation, and examination of the Office of the Comptroller of the Currency ("OCC"). As a PNC Bank subsidiary, BlackRock is subject to the broad enforcement authority of the OCC, including the OCC's power to prohibit BlackRock from engaging in any activity that, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting its business. The OCC may also impose substantial fines and other penalties for violations of banking regulations applicable to BlackRock. Some of our subsidiaries that engage in activities outside the United States are subject to regulation and supervision by the Board of Governors of the Federal Reserve System ("Federal Reserve").
Change in control of PNC
Upon a change in control of PNC, under certain circumstances, PNC or its successor would be required to offer to purchase all our capital stock held by BlackRock's employee stockholders and by public stockholders. Upon a change in control of PNC, our existing management may leave and new management would be appointed. Such a change in control of PNC or in our management might be deemed an "assignment," which would result in the termination of certain of our investment management contracts unless the contracts were reapproved by the boards of registered investment companies. The termination of advisory agreements may result in other clients terminating their advisory agreements with BlackRock.
Holders may not participate in PNC's disposal of its common stock
After the offerings, PNC will beneficially own approximately % of BlackRock's outstanding class B common stock, representing % of the combined voting power of all classes of voting stock of BlackRock. At any time following the expiration of the 180 day lock-up period in connection with the offerings, PNC could decide to sell or otherwise dispose of all or a portion of its class B common stock, subject to rights of first refusal and tag along rights provided to our other employee stockholders in a stockholders agreement. If PNC were to dispose of all its class B common stock, members of our management team and other employee shareholders could choose to sell all of their shares of common stock in such transaction.
PNC will have the right to require BlackRock to register the class B common stock held by PNC for sale in public offerings. BlackRock's other existing stockholders also have registration rights and may therefore participate in a public or private sale of shares by PNC. Because it owns a controlling voting interest of BlackRock, PNC may realize a premium over the prevailing market price in selling its class B common stock. Holders of class A common stock may not be allowed to participate in any transfer by PNC of its controlling interest and may not realize any premium with respect to their shares of class A common stock.
Four of our directors may have conflicts of interest because they are also directors or executive officers of PNC
Four members of our board of directors are executive officers of PNC. Three of these PNC officers are also directors of PNC. Those directors who are also directors or executive officers of PNC will have obligations to both companies and may have conflicts of interest with respect to matters potentially or actually involving or affecting us, such as acquisitions, financings and other corporate opportunities that may be suitable both for us and for PNC. BlackRock's certificate of incorporation contains provisions designed to facilitate resolution of these potential conflicts, which we believe will assist our directors in fulfilling their fiduciary duties to our stockholders. These provisions do not, however, alter the fiduciary duty of loyalty of our directors under applicable Delaware law. Subject to applicable Delaware law, by becoming a BlackRock stockholder, you will be deemed to have notice of and have consented to these provisions of our certificate of incorporation. Although these provisions are designed to fairly resolve such conflicts between us and PNC, we cannot assure you that any conflicts will be so resolved.
Our directors and executive officers may have conflicts of interest because of
their ownership of PNC stock
Many of our directors and our executive officers own significant amounts
of PNC stock and employee stock options on PNC stock because of their
relationships with PNC prior to these offerings. Such ownership could create,
or appear to create, potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for
BlackRock and PNC.
Conflicts of interest with PNC due to our ongoing business relationship
Conflicts of interest may arise between BlackRock and PNC in a number of areas relating to our past, ongoing and future relationships, including:
. the nature, quality and pricing of services rendered to us by PNC and to PNC by us;
. competitive business activities;
. sales or distributions by PNC of all or a portion of its ownership interest in BlackRock;
. PNC's ability to control the management and affairs of BlackRock; or
. other intercompany relationships, including insurance policies.
We may not be able to resolve any conflict of interest with PNC or, if a conflict of interest is resolved, we may not receive as favorable a resolution as we might have received if we were dealing with an unaffiliated third party.
Risk factors relating to our class A common stock
Potential adverse effect on common stock share price from disparate voting rights
The holders of class A common stock and class B common stock have identical rights, except that:
. holders of class A common stock will have one vote per share on all matters to be voted on by stockholders in general;
. holders of class B common stock will have five votes per share on all matters to be voted on by stockholders in general; and
. holders of class A common stock are not eligible to vote on matters relating exclusively to class B common stock and vice versa.
The difference in voting rights and our ability to issue additional class B common stock could adversely affect the value of the class A common stock.
Shares available for future sale or distribution, when sold or distributed, may adversely affect the market price of the class A common stock
Immediately after the offerings, we will have outstanding shares of class A common stock and shares of class B common stock. Subject to the restrictions described under "Description of Capital Stock-- Common Stock--Stockholders Agreement," "Shares Eligible for Future Sale" and the lock-up agreements described under "Underwriting," PNC and our existing stockholders could from time to time and for any reason sell any or all of the shares of class B common stock owned by them.
We cannot predict the effect, if any, that future sales or distributions of class B common stock by PNC and our existing stockholders will have on the market price of the class A common stock. Sales or distributions of substantial amounts of class A common stock or class B common stock, or the perception that such sales or distributions could occur, may cause the market price for the class A common stock to decline.
Anti-takeover provisions may render changes of control more difficult
For so long as PNC owns a majority of the outstanding voting power of our common stock, any merger or business combinations involving BlackRock would require the prior approval of PNC. In the event that PNC were to control less than a majority of the outstanding voting power of our common stock, provisions in our corporate documents may have the effect of rendering more difficult or discouraging an acquisition of BlackRock or changes in control of BlackRock deemed undesirable by the board of directors. These obstacles to the acquisition of BlackRock by a third party could adversely affect the price of our common stock and include the following:
. Our certificate of incorporation and bylaws divide the board into three classes of directors, each of which serves staggered three- year terms. Because this makes it more difficult for stockholders to change the composition of the board, the classification of the board may discourage a third party from trying to gain control of BlackRock.
. Our certificate of incorporation authorizes our board of directors to issue "blank check" preferred equity with designations, rights and preferences as it may determine. Accordingly, the board of directors can, without stockholder approval, issue preferred equity with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the class A common stock.
. Our bylaws provide that meetings of stockholders may only be called by the board of directors and require stockholders who wish to bring matters before stockholder meetings to comply with stockholder notice and informational requirements. The certificate of incorporation also prohibits stockholders from acting by written consent in lieu of a meeting.
. Following the date on which PNC or another person ceases to control a majority of the voting power of our common stock, our certificate of incorporation also imposes some restrictions on mergers and business combinations between us and any holder of 15% or more of our outstanding voting stock.
Class A common stockholders will experience immediate and substantial dilution
Purchasers of class A common stock in the offerings will experience immediate and substantial dilution in net tangible book value of $ per share, based on an assumed initial public offering price of $ per share. To the extent that any options to be granted with respect to our common stock are exercised after the vesting period expires, purchasers of class A common stock will experience additional dilution.
Absence of a prior public market; volatility of price; no assurance that an active trading market will develop or be sustained
Prior to the offerings, there was no public market for the class A common stock and we do not know if an active trading market will develop or will be sustained. BlackRock, PNC and the underwriters negotiated the initial public offering price of the class A common stock, and that price may not be sustained after the offerings. The market price for the class A common stock may be highly volatile. Announcements by us, or by our competitors, of quarterly financial results or other matters could cause the market price of the class A common stock to fluctuate substantially. Market fluctuations or perceptions regarding BlackRock or the investment management industry, as well as general economic or political conditions, may cause the market price of the class A common stock to decline.
USE OF PROCEEDS
We estimate that the net proceeds to be received by BlackRock from these offerings, not including the proceeds received from the over-allotment option, will be approximately $ million. We intend to use these net proceeds to repay a portion of the outstanding indebtedness under our $175 million revolving line of credit with PNC Bank. At March 31, 1999 the outstanding balance of this facility, including accrued interest was $151 million. The revolving line of credit bears interest at PNC Bank's prime rate, which was 7.75% at March 31, 1999. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
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. See "Business--Regulation."
DILUTION
Our pro forma net tangible book value at December 31, 1998, was $ million, or $ per share of class A common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, each on a pro forma basis to reflect the sale of the shares of class A common stock offered by BlackRock in these offerings at an assumed public offering price of $ per share. The pro forma net tangible book value per share was calculated without deduction of the estimated underwriting discount and estimated offering expenses, and without any provision for the application of the estimated net proceeds. Our pro forma net tangible book value at December 31, 1998, would have been $ million, or $ per share. These offerings will cause an immediate decrease in the pro forma net tangible book value of $ per share to new investors in our class A common stock and an immediate increase in pro forma net tangible book value of $ per share of class B common stock held by our existing stockholders.
Public offering price per share(1)............................ $
Pro forma net tangible book value per share before these
offerings.................................................... $
Increase per share attributable to new investors.............. $
Pro forma net tangible book value per share after these
offerings.................................................... $
Dilution per share to new investors(2)(3)..................... $
============
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(2) Dilution is determined by subtracting the pro forma net tangible book value per share of our class A common stock after these offerings from the assumed public offering price paid by purchasers in these offerings for a share of our class A common stock.
(3) Assumes no exercise of outstanding employee stock options. As of the date of this prospectus, there are options, including both vested and unvested options, outstanding to purchase shares of class A common stock at a weighted average exercise price of $ per share. See "Executive Compensation." If any of these options are exercised, there will be further dilution to purchasers of class A common stock in these offerings.
Assuming the underwriters' over-allotment options are exercised in full, the pro forma net tangible book value at December 31, 1998, would have been $ million, or $ per share of class A common stock. The immediate increase in pro forma net tangible book value of shares owned by existing stockholders would be $ per share, and the immediate dilution to purchasers of shares of class A common stock in these offerings would be $ per share.
CAPITALIZATION
The following table sets forth the capitalization of BlackRock at December 31, 1998, on an actual basis and on an as-adjusted basis. The as- adjusted basis reflects the application of the estimated net proceeds from the offerings to repay a portion of the outstanding amounts under our revolving credit line with PNC Bank from the sale by BlackRock of shares of class A common stock offered hereby at an initial public offering price of $ per share after deducting the underwriter's discount and estimated offering expenses, and assuming that the over-allotment options are not exercised. This table should be read in conjunction with the consolidated financial statements and related notes and other financial and operating data contained elsewhere in our prospectus and "Management's Discussion and Analysis of Financial Condition and Results of Operations" located on page 20 of this prospectus.
December 31, 1998
-------------------
As
Actual Adjusted
-------- ---------
($ in thousands)
Debt
7.5% unsecured note due February 2000.................... $ 47,000 $
Revolving line of credit with PNC Bank................... 150,000
-------- ---------
Total debt................................................. 197,000
Stockholders' equity
Class A common stock, $0.01 par value per share;
shares authorized; shares issued and
outstanding.............................................
Class B common stock, $0.01 par value per share;
shares authorized; shares issued and
outstanding.............................................
Additional paid-in capital............................... 53,105
Retained earnings........................................ 53,286
Treasury stock, at cost, shares.................... (200)
-------- ---------
Total stockholders' equity................................. 106,191
-------- ---------
Total capitalization....................................... $303,191 $
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BlackRock was formed in 1998 as a result of PNC's decision to substantially consolidate its asset management businesses under the BlackRock brand and management team. Prior to this consolidation, PNC provided the fixed income, liquidity and equity advisory services now under BlackRock through various legal entities utilizing separate brand names. Through PNC Bank and other PNC affiliates, PNC continues to provide asset management services principally as part of its personal trust activities and otherwise to individual or smaller institutional clients.
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.
General
BlackRock derives a substantial portion of its revenues 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.
The following table presents the component changes in BlackRock's assets under management for the years ended December 31, 1996, 1997 and 1998:
1996 1997 1998
------- -------- --------
($ in millions)
Separate Accounts
Beginning assets under management........... $29,601 $ 37,592 $ 51,043
Net subscriptions........................... 6,616 11,301 15,166
Market appreciation......................... 1,375 2,150 2,903
------- -------- --------
Ending assets under management.............. 37,592 51,043 69,112
Mutual Funds
Beginning assets under management........... 39,458 45,122 54,370
Net subscriptions........................... 4,551 7,221 5,832
Market appreciation......................... 1,113 2,027 1,486
------- -------- --------
Ending assets under management.............. 45,122 54,370 61,688
------- -------- --------
Total Assets Under Management ("AUM")........ 82,714 105,413 130,800
======= ======== ========
Net subscriptions........................... $11,167 $ 18,522 $ 20,998
% of Change in AUM from net subscriptions... 81.8% 81.6% 82.7%
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Investment advisory agreements for certain separate accounts and BlackRock's alternative 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 revenues and earnings. Other income primarily reflects fees earned on risk management advisory engagements. See "Business--Risk Management Products".
BAI, one of our alternative investment vehicles, was created in 1994 to target opportunities in the rapidly changing real estate financing markets. Since its inception we have realized substantial amounts of revenue and expense from BAI, which are separately disclosed in our consolidated financial statements. BAI is
currently in the process of liquidating its assets, based on a plan approved by its Board of Trustees and shareholders. We expect the liquidation of BAI will be completed by the fourth quarter of 1999.
Operating expenses primarily consist of employee compensation and benefit expense, BAI incentive compensation expense, fund administration and servicing expense, general and administrative expense and goodwill amortization. Employee compensation and benefit expense reflects salaries, deferred and incentive compensation, and related benefit costs. BAI incentive compensation expense reflects compensation payable in accordance with various agreements to investment advisory and other employees of BlackRock. Fund administration and servicing expenses reflects payments made to PNC affiliated entities (see "Certain Relationships and Related Transactions" and Note 7 of "Notes to BlackRock's Consolidated Financial Statements") associated with the administration and servicing of BlackRock's mutual funds. Goodwill at December 31, 1998, was $203.9 million with annual amortization expense of approximately $9.7 million. Substantially all of the goodwill resulted from PNC's acquisition of BFM on February 28, 1995.
Operating Results for 1998 as Compared to 1997
Assets Under Management
Assets under management rose $25.4 billion in 1998, propelled by a 35.4% growth in separate account assets, primarily reflecting new fixed income advisory business. Net subscriptions of $21.0 billion comprised 83% of the $25.4 billion increase in assets under management with the remaining $4.4 billion (17%) reflecting market appreciation.
Year Ended December 31, Year-to-Year
----------------------- -----------------
1997 1998 $ Change % Change
----------- ----------- -------- --------
($ in millions) ($ in millions)
Separate Accounts
Fixed income*.................... $ 39,261 $ 52,869 $13,608 34.7%
Liquidity........................ 10,019 13,826 3,807 38.0%
Equity........................... 1,763 2,417 654 37.1%
----------- ----------- -------
Subtotal......................... 51,043 69,112 18,069 35.4%
----------- ----------- -------
Mutual Funds
Fixed income..................... 13,714 13,888 174 1.3%
Liquidity........................ 29,827 35,713 5,886 19.7%
Equity........................... 10,829 12,087 1,258 11.6%
----------- ----------- -------
Subtotal......................... 54,370 61,688 7,318 13.5%
----------- ----------- -------
Total.............................. $ 105,413 $ 130,800 $25,387 24.1%
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Revenues
Investment advisory and administration fees increased $130.2 million, from $194.8 million in 1997 to $325.0 million in 1998. The growth in investment advisory and administration fees for 1998 was due to increases in assets under management for separate accounts and mutual funds as well as an increase in BAI related performance fees.
Year Ended December 31, Year-to-Year
----------------------- -------------------------
1997 1998 $ Change % Change
----------- ----------- ---------------- --------
($ in thousands) ($ in thousands)
Investment advisory and
administration fees:
Mutual funds............ $ 117,977 $ 162,487 $ 44,510 37.7%
Separate accounts....... 62,985 101,352 38,367 60.9%
BAI..................... 13,867 61,199 47,332 341.3%
----------- ----------- --------
Total investment advisory
and administration
fees.................... 194,829 325,038 130,209 66.8%
Other income............. 10,644 14,444 3,800 35.7%
----------- ----------- --------
Total revenue........... $ 205,473 $ 339,482 $134,009 65.2%
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Mutual funds advisory and administration fees increased $44.5 million due to a $7.3 billion increase in mutual fund assets under management and the May 1998 conversion of $8.2 billion of PNC common trust funds into the BlackRock Funds which earn higher advisory fees. 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. BAI advisory fees increased $47.3 million primarily due to increased performance fees based on the market value of fund assets to be liquidated and projected fund returns. Other income increased $3.8 million primarily from new risk management advisory engagements.
Expenses
Operating expenses increased by $110.5 million, from $149.6 million in 1997 to $260.1 million in 1998. The change was primarily the result of increases in employee compensation and benefits, incentive compensation related to the liquidation of BAI, and fund administration and servicing costs due to higher levels of PNC client assets under management in the BlackRock Funds.
Year Ended December 31, Year-to-Year
----------------------- -------------------------
1997 1998 $ Change % Change
----------- ----------- ---------------- --------
($ in thousands) ($ in thousands)
Employee compensation and
benefits................... $ 73,217 $ 109,741 $ 36,524 49.9%
BAI incentive compensation.. 9,688 44,806 35,118 362.5%
Fund administration and
servicing costs-
affiliates................. 27,278 52,972 25,694 94.2%
Amortization of goodwill.... 9,653 9,653 -- 0.0%
General and administration.. 29,764 38,696 8,932 30.0%
Closed-end fund offering
costs...................... -- 4,252 4,252 NA
----------- ----------- --------
Total operating expenses.... $ 149,600 $ 260,120 $110,520 73.9%
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Employee compensation and benefits rose $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. Salary and benefit cost increases largely resulted from a 25% rise in full time employees to support business growth and enhance infrastructure. BAI incentive compensation increased $35.1 million based on the substantial increase in BAI performance fee revenues. Fund administration and servicing costs increased $25.7 million primarily due to the May 1998 conversion of $8.2 billion of PNC common trust funds into the BlackRock Funds on which BlackRock pays higher service fees. 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 result 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 closed-end fund in December 1998, which resulted in the immediate recognition of $4.3 million of expense for broker related sales commissions.
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. Net interest expense decreased to $11.4 million for 1998 as compared to $17.1 million for 1997, a 33.7% decrease due to the continuing reduction 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%.
Operating Results for 1997 as Compared to 1996
Assets Under Management
Total assets under management increased by 27.4% in 1997, reflecting strong growth in both separate account and mutual fund assets under management. Separate account assets under management rose $13.5 billion due to continued strong growth in new fixed income clients while mutual fund assets under management increased $9.2 billion, primarily due to $7.2 billion in net subscriptions.
Year Ended December 31, Year-to-Year
------------------------ ------------------------
1996 1997 $ Change % Change
----------- ------------ --------------- --------
($ in millions) ($ in millions)
Separate Accounts
Fixed income*............ $ 28,958 $ 39,261 $10,303 35.6%
Liquidity................ 7,430 10,019 2,589 34.8%
Equity................... 1,204 1,763 559 46.4%
----------- ------------ -------
Subtotal................. 37,592 51,043 13,451 35.8%
----------- ------------ -------
Mutual Funds
Fixed income............. 12,546 13,714 1,168 9.3%
Liquidity................ 23,933 29,827 5,894 24.6%
Equity................... 8,643 10,829 2,186 25.3%
----------- ------------ -------
Subtotal................. 45,122 54,370 9,248 20.5%
----------- ------------ -------
Total...................... $ 82,714 $ 105,413 $22,699 27.4%
=========== ============ =======
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Revenues
Investment advisory and administration fees totaled $194.8 million in 1997, which represented a $58.5 million or 42.9% increase from 1996. The increase in investment advisory and administration fees was primarily attributable to a $22.7 billion rise in mutual fund and separate account assets under management. Mutual fund advisory and administration fees for 1997 of $118.0 million increased $30.8 million from 1996 or 35.3% as mutual fund assets under management increased $9.2 billion or 20.5%. Separate account advisory fees were $63.0 million in 1997, an increase of $19.9 million or 46.2% reflecting a $13.5 billion or 35.8% increase in separate account assets under management. BAI advisory fees increased $7.8 million to $13.9 million in 1997, primarily as a result of higher performance fees. Other income increased by $0.5 million to $10.6 million in 1997.
Expenses
Operating expenses increased $38.7 million or 34.8% from $110.9 million in 1996 to $149.6 million in 1997. The increase was primarily due to significant business growth which resulted in higher employee compensation and benefit costs and increased marketing expenses.
Employee compensation and benefits of $73.2 million were up $19.5 million or 36.3% compared with 1996. The increase was attributable to additional expenses of $8.0 million related to salary and benefits and $11.5 million for incentive compensation based on operating profit growth. Salary and benefit cost increases were largely due to higher staffing levels to support new business growth together with normal merit pay raises and escalations in benefit costs. BAI incentive compensation of $9.7 million was up $6.2 million from the prior year. The rise was largely attributable to the rise in earned performance fees. Fund administration and servicing costs were $27.3 million in 1997, an increase of $7.7 million or 39.1% from the prior year. The increase was attributable to increases in PNC private banking client assets in the BlackRock Funds as well as higher assets under management in the Provident Institutional Funds on which BlackRock pays administration fees to a PNC mutual fund processing subsidiary. General and administration expense were $29.8 million in 1997, a $5.3 million or 21.5% increase over 1996. The increase was primarily attributable to a $4.1 million rise in marketing and promotion costs associated with increased mutual fund and institutional separate account sales.
Operating Income and Net Income
Operating income was $55.9 million for 1997, representing a $20.3 million increase or 57.2% from the prior year. Net interest expense declined to $17.1 million in 1997 from $18.1 million in 1996. Income tax expense was $16.7 million and $8.5 million for 1997 and 1996, respectively, representing effective tax rates of 43.0% and 48.6%. Net income totaled $22.1 million for 1997 as compared to $9.0 million for 1996, an increase of 146.4%.
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 under a $175 million revolving credit facility. Cash provided by operating activities totaled $17.9 million, $47.2 million and $53.7 million for the years ended December 31, 1996, 1997 and 1998, respectively. BlackRock expects that such cash flows will continue to serve as the principal source of working capital for the near future.
Net cash flow used in investing activities was $3.7 million, $3.0 million and $5.0 million for the years ended December 31, 1996, 1997 and 1998, respectively. Capital expenditures for computer hardware, furniture and equipment and leasehold improvements were $4.2 million, $2.2 million and $8.4 million for the years ended December 31, 1996, 1997 and 1998, respectively.
Total capital at December 31, 1998, was $303.2 million and was comprised of $106.2 million of stockholders' equity and $197 million of debt. Debt at December 31, 1998, included $150 million outstanding on a $175 million revolving credit facility with PNC Bank due December 31, 2002, and a $47 million unsecured note due through February 28, 2000, with B.P. Partners, L.P., an entity comprised of former partners of BFM who received deferred notes as part of the purchase price for BFM. The $197 million in outstanding debt as of December 31, 1998, represents amounts remaining from PNC's $240 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. BlackRock repaid $18.8 million on February 28, 1999, and $28.2 million is due on February 28, 2000.
BlackRock intends that the net proceeds from the offerings will be used to repay a portion of the outstanding indebtedness under our $175 million revolving credit facility with PNC Bank.
Net cash flow used in financing activities was $4.4 million and $40.4 million for 1998 and 1997, while such activities provided approximately $20.8 million of cash flow in 1996. 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 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. Debt payments totaled $28.2 million and $30.6 million for 1998 and 1997 with outstanding debt increasing in 1996 by approximately $19.9 million.
Recent Accounting Developments
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 ("Accounting for Derivative Instruments and Hedging Activities"). SFAS No. 133 establishes standards for recognizing and fair valuing derivative financial instruments. SFAS No. 133 is required to be adopted for fiscal years beginning after June 15, 1999. BlackRock does not expect implementation to have any significant effect on BlackRock's reported financial position or results of operations.
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. See "Risk Factors-- Risk factors affecting our business--Decline in the securities markets could lead to a decline in revenues."
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 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 financial position and results of operations by reducing BlackRock's assets under management, revenues or otherwise. See "Risk Factors--Risk factors affecting our business--Decline in the securities markets could lead to a decline in revenues."
Year 2000 Readiness
BlackRock has been working since 1997 to prepare its computer systems and applications to meet the Year 2000 challenge. This process involves 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 addressing of Year 2000 issues.
As of December 31, 1998, substantially all of BlackRock's internally developed systems had been tested and remediated where necessary. We had substantially completed an organization-wide assessment of Year 2000 issues relating to our critical systems that utilize embedded chip technologies as well as an assessment of the Year 2000 preparedness of our identified critical service providers.
The Year 2000 issue may have an adverse impact on the operations and financial condition of the issuers of the securities in which the firm invests. Before purchasing securities, BlackRock considers the Year 2000 readiness of issuers. The depth of the review depends on the issuers' industry. BlackRock will continue to review and assess the Year 2000 preparedness of issuers during 1999.
During the third quarter of 1999, BlackRock plans to conduct tests of its networking and telecommunications systems in an attempt to verify vendor representations of Year 2000 readiness. We currently estimate that the total cost of implementing our Year 2000 programs will not have a material impact on our results of operations, liquidity or capital resources. No significant expenditures have been made to replace existing systems solely for Year 2000 readiness reasons. The costs and timetable in which BlackRock plans to complete its Year 2000 readiness activities are based on management's best estimates, which were derived using numerous assumptions of future events including the continued availability of certain resources, third party preparedness and other factors. BlackRock can make no guarantee that these estimates will be achieved, and actual results could differ from such plans.
BlackRock has reviewed and strengthened its business continuity plans to address Year 2000 implications. BlackRock will continue to review all contingency plans during 1999 and modify them when necessary or appropriate. Certain critical systems contingency plans will be tested during 1999.
BlackRock's Year 2000 readiness efforts and contingency plans are also subject to oversight and regulation by certain regulatory authorities.
It is not possible to predict with certainty all of the adverse effects that could result from a failure of BlackRock or of third parties to become fully Year 2000 ready or whether such effects could have a material adverse impact on BlackRock. However, if BlackRock were to fail to correct internal Year 2000 problems or if BlackRock's contingency plans fail to mitigate any such problems, or if one or more third parties is unable, due to Year 2000 issues, to provide services required by BlackRock, a disruption of operations resulting in increased operating costs, loss of revenues and other adverse effects could occur. A disruption of operations might include a temporary inability to process transactions and delays in providing services. In addition, to the extent that the issuers of securities are weakened due to Year 2000 issues, the value and liquidity of client portfolios could be adversely affected. Disruption or suspension of activity in the world's financial markets is also possible as a result of Year 2000 issues. See "Risk Factors--Risk factors affecting our business--Failure to achieve Year 2000 readiness could disrupt operations and cause losses."
BUSINESS
We differentiate ourselves from our competitors through our highly disciplined investment process, our extensive proprietary risk management systems, the quality of our client service and the stability of our management team. Together, these promote the delivery of consistently superior risk- adjusted returns and enable our experienced professionals to best serve the varying needs of our clients with customized products and services. We believe that these factors, as well as the quality and depth of our employees, have been critical to achieving growth in assets under management and will continue to be of primary importance to our future success. We also believe that these offerings will enhance stockholder value by furthering our ability to attract and retain talented professionals, permitting strategic investments in our existing business, and improving our ability to participate in future industry consolidation.
Assets Under Management
At December 31, Compound
----------------------------------------- Annual
1994 1995 1996 1997 1998 Growth Rate
------- ------- ------- -------- -------- ----------- ---
($ in millions)
Separate Accounts
Fixed income*...... $13,848 $23,345 $28,958 $ 39,261 $ 52,869 40%
Liquidity.......... 3,269 5,556 7,430 10,019 13,826 43%
Equity............. 540 700 1,204 1,763 2,417 45%
------- ------- ------- -------- --------
Subtotal........... 17,657 29,601 37,592 51,043 69,112 41%
Mutual Funds
Fixed income....... 10,021 11,969 12,546 13,714 13,888 9%
Liquidity.......... 20,398 21,183 23,933 29,827 35,713 15%
Equity............. 4,615 6,306 8,643 10,829 12,087 27%
------- ------- ------- -------- --------
Subtotal........... 35,034 39,458 45,122 54,370 61,688 15%
------- ------- ------- -------- --------
Total................ $52,691 $69,059 $82,714 $105,413 $130,800 26%
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Background
The formation of BlackRock was the culmination of a strategic restructuring of PNC's asset management businesses that began in 1995 with the acquisition of BFM. PNC acquired BFM, then a $24 billion fixed income manager, to complement existing capabilities in liquidity and equities. Since the acquisition, all of BFM's senior management team have remained with the firm. During the same period fixed income assets have nearly tripled. As highlighted below, the BFM management team has assumed increasing responsibility for a substantial portion of PNC's other asset management activities over time.
. Mutual Funds. PNC has been actively involved in the mutual funds management business for over 40 years, having offered its first common trust fund in 1956. In January 1996, the BFM management team merged several of PNC's open-end fund families and assumed responsibility for related marketing and product management efforts. We have continually worked to enhance service to PNC and its customers, which represent the funds' largest investor base. In addition, we sought to build on the relationships developed through BFM's closed-end fund business by targeting distribution through broker-dealers and other intermediaries. Assets have grown by more than $10 billion, or 77%, since BFM's management team assumed responsibility for the fund family, which we renamed BlackRock Funds in 1998. We have also established more than 200 broker agreements and, as of December 31, 1998, the BlackRock Funds ranked as the 17th largest wholesale fund family in the United States.
. Liquidity. PNC entered the liquidity management business in 1973 with the introduction of TempFund, the first institutional money market fund. At year-end 1996, BFM's management team was charged with overseeing PNC's liquidity management business. We restructured sales and marketing to enhance our ability to grow our institutional money market fund family, Provident Institutional Funds, and to build a separate account business in this product area. We also transitioned PNC's liquidity portfolios to BlackRock's fixed income system to enhance capacity and operating efficiency. Liquidity assets have increased by $18 billion, or more than 58%, since BFM assumed responsibility for the business.
. Equities. PNC's involvement in equity funds extends back to 1958 when it introduced the PNC Common Stock Fund, a common trust fund that was merged into the BlackRock Funds Select Equity Portfolio in 1998. The BFM management team assumed responsibility for a substantial portion of PNC's equity investment management businesses in the first quarter of 1998. Our initial efforts have focused on maintaining continuity with our equity professionals and on building the foundation for future growth by making critical infrastructure investments, pursuing selected enhancements to our investment process and integrating equity expertise with our marketing and client service capabilities.
On March 31, 1998, BFM's management team completed the strategic restructuring by consolidating all its asset management activities and a substantial portion of PNC's asset management activities under the BlackRock brand name, integrating the business along functional lines, and establishing operating committees charged with day-to-day oversight of each product line. We began 1999, our first full year as an integrated business, better prepared to pursue opportunities across our products and markets. We believe that the PNC/BFM affiliation has been and will continue to be successful in large measure because of our shared commitment to attracting and retaining talented professionals, developing and delivering highly sophisticated investment management services and systems, and finding ways to jointly pursue distribution of our products.
Asset Management Products
Today, we offer a wide variety of fixed income, liquidity, equity and alternative investment products. Revenues from these products consist 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, 1998, fixed income assets under management, excluding alternative investment products, were $65 billion. Since 1994, fixed income assets have grown by 28% on a compound annual basis despite the fact that investors have been shifting money out of bonds and into stocks to participate in the equity bull market of the past decade. Our strategies emphasize value creation through security selection, rather than interest rate anticipation, and are implemented by a team of highly qualified portfolio managers employing a strictly disciplined investment process and our extensive proprietary risk management systems and analytics.
Over time we have introduced new fixed income products to better meet investor needs, when such efforts could be fully integrated with our investment team and process. In 1998, we introduced both high yield capabilities and BlackRock's Equity Plus product. Both of these initiatives exemplify our deliberate approach to product line expansion. Specifically, we waited to establish our high yield product until we were able to identify high caliber professionals who integrated well with our portfolio management group. BlackRock's Equity Plus product, on the other hand, utilizes existing capabilities in fixed income and derivative investments and was developed in direct response to client demand. Our fixed income products, excluding alternative products, can be broadly grouped in three categories, as described below.
Fixed Income Products*
At December 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
($ in millions)
Core.................................... $ 5,061 $ 9,817 $14,175 $21,050 $28,310
Sector specialty........................ 7,143 11,044 11,136 12,771 16,838
Targeted duration....................... 11,665 14,352 15,790 18,665 19,673
------- ------- ------- ------- -------
Total................................... $23,869 $35,213 $41,101 $52,486 $64,821
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* excluding alternative investment products.
Core. Core products represented 44% of our fixed income assets at December 31, 1998, and have increased at a compound annual growth rate of 54% since 1994. All of these accounts seek to achieve superior risk-adjusted total returns relative to 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 26% of our fixed income assets at December 31, 1998, and have grown at a 24% compound annual 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 management of their portfolios.
Targeted duration. Targeted duration products represented 30% of our fixed income assets at December 31, 1998, and have experienced a compound annual growth in excess of 14% since 1994. These accounts are designed to achieve returns in excess of the duration of specified liabilities or of indices consisting of U.S. Treasury securities or other obligations maturing within defined time parameters. These products are often used by investors seeking to earn a spread relative to their financing costs or to fund other liabilities.
. Liquidity. At December 31, 1998, liquidity assets under management were $50 billion. Products are designed to meet the needs of domestic corporations and their foreign subsidiaries, municipal treasurers, banks, bank trust departments and other intermediaries. We seek to achieve attractive yields, subject to stringent safety and liquidity guidelines, which are implemented by a dedicated team of portfolio managers based in Wilmington, Delaware, supported by our fixed income credit analyst team as well as our risk management systems. As highlighted below, we offer three basic types of liquidity products.
Liquidity Products
At December 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
($ in millions)
Prime................................... $12,874 $13,187 $16,103 $23,279 $32,479
Government.............................. 7,518 8,954 10,211 11,384 12,835
Tax-exempt.............................. 3,275 4,598 5,049 5,183 4,225
------- ------- ------- ------- -------
Total................................... $23,667 $26,739 $31,363 $39,846 $49,539
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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.
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 business represents the smallest of our primary products lines, with assets under management of approximately $15 billion at December 31, 1998. Over 80% of these assets are in mutual funds, all of which emphasize long-term capital appreciation and strict adherence to investment discipline and market capitalization guidelines. We have expanded our capacity in this business and we intend to pursue separate accounts for institutional investors, particularly as longer term investment performance track records are established. Strategies are developed and implemented by dedicated portfolio managers and research analysts based in Philadelphia, Pennsylvania, and Edinburgh, Scotland. Our equity products can be classified as discussed below.
Equity Products
At December 31,
------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------- -------
($ in millions)
U.S. Growth................................ $ 841 $1,576 $2,676 $ 3,542 $ 4,447
U.S. Value................................. 1,729 2,185 2,990 3,989 4,201
International.............................. 846 1,056 1,676 1,926 2,084
Other...................................... 1,739 2,189 2,505 3,135 3,772
------ ------ ------ ------- -------
Total...................................... $5,155 $7,006 $9,847 $12,592 $14,504
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U.S. Growth. U.S. Growth equity products seek to achieve returns by investing in companies that are expected to realize significant earnings growth and price appreciation. Products are differentiated by the market capitalization of the companies in which they invest, and include large-, mid-, small- and micro- cap portfolios.
U.S. Value. U.S. Value equity products seek to achieve returns versus market indices by investing in companies that are undervalued relative to industry peers and/or historical trading ratios. These products also vary according to the size of the market capitalization of the underlying stocks in the portfolio, and include large-, mid- and small-cap portfolios.
International. International equity products are designed to deliver returns by investing in a variety of foreign stock markets. These products are typically differentiated by geographic markets and include EAFE, Europe, Pacific Basin and emerging market portfolios.
Other. Other equity products that we offer include balanced funds, which invest in both equities and fixed income securities, as well as index and enhanced index funds.
. Alternative Investment Products. At December 31, 1998, we managed $1.9 billion in alternative investment products. We have created these products to take advantage of unique market opportunities or to meet specific client interests. These products usually involve a higher level of investment risk and offer the potential for significantly greater absolute returns than our traditional investment products. We generally structure these products as commingled investment vehicles and limit the amount of capital we will accept from investors. To date, we have created four alternative investment products.
Alternative Investment Products
At December 31,
----------------------------
1994 1995 1996 1997 1998
------ ---- ---- ---- ------
($ in millions)
BAI................................................ $ -- $101 $359 $243 $ 173
Obsidian........................................... -- -- 44 246 582
Anthracite......................................... -- -- -- -- 181
Magnetite.......................................... -- -- -- -- 1,000
------ ---- ---- ---- ------
Total.............................................. $ -- $101 $403 $489 $1,936
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BlackRock Asset Investors. BAI was created in 1994 to target opportunities we perceived in the rapidly changing real estate financing markets. We structured BAI as a closed-end fund to address unique regulatory restrictions applicable to our pension clients. BAI is currently in liquidation, which we expect to complete by the fourth quarter of 1999. We expect to realize returns substantially in excess of our original targets.
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. We aggressively restructured Anthracite's asset/liability structure last fall to strengthen its balance sheet. We continue to seek ways to enhance Anthracite's performance.
Magnetite Asset Investors. Late last year, we created Magnetite Asset Investors, LLC 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 & Co., a leveraged buyout firm, to enhance Magnetite's access to certain types of high yield investments. Magnetite is privately offered to institutional and high net worth investors, from whom we raised $1 billion to be invested by the fourth quarter of 1999.
Investment Process
Our investment process emphasizes a highly-disciplined team approach, rather than a star system, use of our extensive proprietary risk management systems and analytics, and intensive credit and fundamental research. 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 concentrate on enhancing yield, subject to safety 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. Rather, 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.
Our equity strategies seek to achieve returns in excess of market indices. We seek to add value through a disciplined stock selection process that uses inputs from proprietary quantitative analysis, fundamental research provided by our equity analysts and market flow information supplied by our equity traders. Strategies are developed by portfolio management teams dedicated to each of our product specialties.
. Risk Management. BlackRock has a longstanding commitment to the development and use of extensive risk management systems as an integral part of our disciplined investment process. We look at investment risk across all of our products in an asset/liability management framework. We believe that in order to achieve long- term risk-adjusted investment performance consistent with clients' expectations, we must have a comprehensive understanding of the investment risks taken, or proposed to be taken, in each portfolio relative to the corresponding liability, as well as those risks inherent in the increasingly complex global capital markets. Our risk analyses are customized as necessary to address unique regulatory, accounting and tax considerations applicable to individual client portfolios. We produce risk management reports daily and provide on-line access to analyses that our portfolio managers use to evaluate and monitor risks and refine investment strategy.
Credit and fundamental research are also critical components of our investment process. 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.
. Compliance. Our proprietary risk management systems, used in our fixed income and liquidity businesses, provide 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 prevent entry 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 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 to our Intranet.
. Investment Performance. We believe that our disciplined investment process is critical to achieving our performance objectives. 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, 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 40% 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 51 managers reporting core composite returns to Frank Russell Company.
. Liquidity performance is illustrated below for our TempFund, which represents more than 50% 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.
BlackRock Core Composite
7-years ended December 31, 1998
Standard
Deviation Return
--------- ------
BlackRock......................... 4.17 8.25
Universe.......................... 4.73 8.07
Index............................. 4.44 7.64
TempFund
10-years ended December 31, 1998
Standard
Deviation Return
--------- ------
TempFund.......................... 1.81 5.69
Index............................. 1.83 5.51
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. Equity performance is illustrated with the Lipper quartile rankings of the equity BlackRock Funds, which represent more than 80% of our equity assets under management. For the 1-year period ended December 31, 1998, six of our equity funds ranked in the first quartile.
BlackRock Funds Portfolios Lipper Quartile Ranking* as of December 31, 1998
1-Year 3-Year 5-Year
------ ------ ------
U.S. Growth
Large Cap Growth......................................... 1 1 2
Mid-Cap Growth........................................... 1 NA NA
Small Cap Growth......................................... 1 2 1
Micro-Cap................................................ NA NA NA
U.S. Value
Large Cap Value.......................................... 3 3 2
Mid-Cap Value............................................ 4 NA NA
Small Cap Value.......................................... 3 2 2
International
International Equity..................................... 2 3 3
International Small Cap.................................. 2 NA NA
International Emerging Markets........................... 4 4 NA
Other
Index Equity............................................. 1 2 3
Select Equity............................................ 1 1 1
Balanced................................................. 1 1 1
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Distribution
Our investment products are offered to individual and institutional investors worldwide through separate accounts and a variety of open-end and closed-end mutual funds. We believe that our success in growing assets under management reflects our comprehensive approach to client service. 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 and analytics to develop products and to enhance client service by customizing reports and, in the case of institutional clients, delivering them efficiently over the Internet.
. Separate Accounts. We have increased separate account assets under management from $18 billion at year-end 1994 to $69 billion at year-end 1998, which represents a compound annual growth of 41%. Asset growth reflects additional assets from existing clients and new client assignments. We distribute separate accounts and alternative investment products principally through the direct marketing efforts of our account management group, which included 35 professionals as of December 31, 1998. These employees focus primarily on three client bases: tax-exempt, taxable and international institutions. Alternative investment products are used to expand investment options offered to existing clients and to gain access to relatively untapped segments of the investor universe.
Separate Account Clients
At December 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
($ in millions)
Tax-exempt.............................. $ 4,926 $ 8,133 $12,766 $19,529 $25,765
Taxable................................. 11,900 20,048 23,658 27,898 37,008
International........................... 831 1,420 1,168 3,616 6,339
------- ------- ------- ------- -------
Total................................... $17,657 $29,601 $37,592 $51,043 $69,112
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Tax-exempt. Our tax-exempt clients consist primarily of defined benefit and defined contribution plans. As of December 31, 1998, 115 pension plans maintained separate accounts with us. Last year, assets managed for tax-exempt investors increased by over $6 billion or 32%. Our growth in pension assets last year resulted in our being ranked as the 10th fastest growing pension asset manager across all products and the 7th fastest growing among active domestic fixed income advisers. 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 growth for the largest and best performing managers. We have been benefiting 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, 1998, we managed $37.0 billion in assets for taxable clients, which represented a $9.1 billion or 33% increase from the prior year. We are one of the largest independent managers of insurance company assets with more than $22 billion under management as of December 31, 1998. We offer a comprehensive range of services to our insurance clients, many of which seek to outsource some or all of their investment functions and retain us to manage multiple portfolios, to serve as a manager of managers and to deliver consolidated risk management reports through password- protected sites on the World Wide Web. 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 and supranationals located in 15 countries. We have been active in these markets since BFM was formed and, as of December 31, 1998, we managed over $6.3 billion of assets on behalf of international clients. Products include separate accounts and offshore funds for both institutional and retail investors. In 1998, we raised more than $1 billion of new assets in Japan through three investment trusts created with NAM, the largest money manager in Japan. Since year-end, we have entered into a formal relationship with NAM by establishing Nomura BlackRock Asset Management Co., Ltd., a joint venture that will initially focus on offering BlackRock's fixed income products in the Japanese institutional and investment trust markets. To further promote our international business, we will consider establishing additional strategic affiliations and foreign business development offices in the future.
. Mutual Funds. We have increased mutual fund assets under management from $35 billion at year-end 1994 to $62 billion at year-end 1998, which represents compound annual growth of more than 15%. Approximately $50 billion, or more than 80%, of our mutual fund assets
are managed in our two open-end fund families, BlackRock Funds and Provident Institutional Funds. We also manage 21 publicly-traded closed-end funds and several short-term investment funds ("STIFs"). Our funds group is responsible for wholesaling to PNC, third party broker-dealers and other intermediaries. The funds group also conducts direct calling efforts for our institutional funds and develops and implements marketing, product management, branding and media relations strategies designed to enhance client service and distribution across all channels.
Mutual Fund Assets
At December 31,
---------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
($ in millions)
BlackRock Funds........................ $10,038 $13,670 $17,846 $22,129 $24,231
Provident Institutional Funds.......... 16,421 15,496 16,230 20,278 25,368
Closed-end funds....................... 7,080 7,953 7,881 8,114 7,756
STIFs.................................. 1,495 2,339 3,165 3,849 4,333
------- ------- ------- ------- -------
Total.................................. $35,034 $39,458 $45,122 $54,370 $61,688
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BlackRock Funds. The BlackRock Funds family consists of 36 portfolios, including 13 equity, 15 fixed income and eight liquidity funds. In May 1998, PNC converted $8.2 billion of PNC common trust funds into the BlackRock Funds. For comparative purposes in the table above, assets in the BlackRock Funds have been restated to include the PNC common trust fund assets as if such assets were part of the BlackRock Funds. Prior to 1996, assets were gathered almost exclusively through PNC channels and by acquisition. In addition to working closely with the PNC channels, we have pursued marketing opportunities with third party intermediaries by building a staff of 23 wholesalers and securing more than 200 broker agreements. Through these efforts, we have established BlackRock Funds as the 17th largest wholesale fund family in the United States. We intend to continue to pursue distribution within both PNC and wholesale channels. We also plan to pursue opportunities with fund supermarkets, financial planners and other distribution bases to expand market penetration in the future.
Provident Institutional Funds. Provident Institutional Funds is our institutional money market fund family and consists of 11 prime, government and tax-exempt funds. We market these funds through the direct calling efforts of a dedicated sales force consisting of 12 regional salespeople. A limited number of additional professionals are responsible for wholesaling Provident Institutional Funds through the PNC channels. In addition, we develop and deliver software, including cash sweep and Web-based order entry capabilities, that enhance clients' ability to efficiently invest in Provident Institutional 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. Closed-end funds represent approximately 13% of our mutual fund assets, with $8 billion managed at December 31, 1998, in 21 funds listed on the New York or American stock exchanges. All of these funds are fixed income products, including 13 target term trusts, a product that we introduced to the industry in 1988. When the BlackRock 1998 Term Trust matured at the end of last year at $10.02 per share, we became the first and only term trust manager to meet or exceed the fund's targeted
terminal value. Unlike open-end funds, closed-end funds are generally underwritten and sold exclusively through broker- dealers. Although we maintain very close relationships with brokerage firms, access to distribution is highly competitive and increasingly expensive. In 1998, we raised $95 million in the BlackRock High Yield Trust (NYSE: BHY), our first public closed-end fund offering since 1993. We will continue to create and offer closed-end funds as market opportunities permit.
STIFs. Short-term investment funds are also offered to institutional clients through PNC. At December 31, 1998, we managed over $4 billion of assets in several STIFs, which are structured as open-end commingled investment trusts, rather than as registered mutual funds.
Risk Management Products
Since the formation of BFM in 1988, we have made substantial investments in developing sophisticated, proprietary risk management systems and analytics. Today, the risk management staff represents more than 25% of our total employees. Professionals include quantitative and credit analysts, financial model and software developers, and management information systems and technology personnel. These professionals support our investment process, client service efforts, computing environment and the growing number of clients who separately purchase our risk management services.
Our investment technology has evolved over the years into a comprehensive information-processing capability fully integrated with sophisticated analytics that support risk assessment and investment decision-making. We believe that our combination of integrated front-to-back office automation and professional expertise resulted in the increasing number of requests for our technology products by large institutional clients. As a result, in 1995, we began offering high value-added risk management systems and advisory services separate from our asset management products. As of December 31, 1998, we provided these services to 10 clients, including 4 relationships that we added in 1998. In total, we provide analyses with respect to more than $400 billion of assets managed by these clients.
. Analytics Service Bureau. 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-protected sites on the Internet or through dedicated lines to the client's in-house systems. Service bureau contracts are typically multi-year arrangements in which we are paid a set-up fee at the outset and an ongoing service fee based on the number of positions processed.
. Advisory Services. We also offer a range of advisory services in conjunction with risk management reporting to enhance clients' development of a variety of asset/liability management strategies. Over time, these services have included asset disposition, portfolio restructuring and hedging advice provided to service bureau clients, broker-dealers, REITs and mortgage banks. Our senior risk management professionals provide a highly customized consulting service, working closely with clients to evaluate their risk positions relative to their liabilities, market conditions and regulatory, accounting and tax considerations. Hedging and other risk management strategies are jointly developed for implementation by the client or, at the client's direction, by us. Assignments can be project-oriented or ongoing in nature, and contracts provide fixed advisory fees and, occasionally, performance fees based on the client's determination of overall value-added.
. Trading Systems Services. In 1998, we entered into our first contract to provide trading system outsourcing. BlackRock's system was chosen following a search by the 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. We have chosen to limit marketing of this product until this first installation has been made and tested, but potential clients include banks, insurance companies, brokerage firms and other substantial fixed income investors.
We view these risk management activities as a start-up technology service venture. By first establishing an analytics service bureau and providing risk management advisory services, we have been able to attract or expand relationships with a variety of sophisticated institutional investors, many of which are leaders in their industries. At the same time, we are building the capability to provide trading system outsourcing or to license our trading system to others, which should provide substantially greater scale in the risk management business over time.
Facilities
BlackRock's principal executive offices are located at 345 Park Avenue, New York, New York 10154 where it occupies approximately 65,000 square feet of space under various leases expiring through 2005. BlackRock also has office space at 1600 Market Street, Philadelphia, Pennsylvania 19103 and 400 Bellevue Parkway, Wilmington, Delaware 19805 where it occupies a total of approximately 46,500 square feet of space under a lease arrangement with PNC. See "Certain Relationships and Related Transactions" and Note 7 of "Notes to BlackRock's Consolidated Financial Statements."
Competition
BlackRock competes with mutual fund companies, integrated asset and investment management firms, insurance companies, banks, brokerage firms and other financial institutions that offer products which have features and investment objectives similar to those offered by BlackRock. Many of the investment management firms with which BlackRock competes are subsidiaries of large diversified financial companies and many others are much larger in terms of assets under management and revenues and, accordingly, have much larger sales organizations and marketing budgets. Historically, BlackRock has competed primarily on the basis of the long-term performance of many of our funds. We believe BlackRock's asset management services are differentiated by our highly disciplined investment process, our extensive commitment to risk management systems, and the quality of our client services. Moreover, BlackRock has taken steps to substantially increase our distribution channels, brand name awareness and marketing efforts. Although there can be no assurance that BlackRock will be successful in these efforts, our net sales of mutual funds have increased significantly over the past year, and BlackRock's strategy is to continue to devote significant additional resources to our sales and marketing efforts.
The market for providing investment management services to institutional and high net worth separate accounts is also highly competitive. Selection of investment advisers by U.S. institutional investors is often subject to a screening process and to favorable recommendations by investment industry consultants. Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer, and also to focus on one and three year performance records. Over the past five years, BlackRock has succeeded in significantly growing aggregate assets under management. At the current time, BlackRock believes that our investment performance record would be attractive to potential new institutional and high net worth clients, and BlackRock has decided to devote additional resources to the institutional and high net worth investor market. No assurance can be given, however, that BlackRock's efforts to obtain new business will be successful.
Employees
At December 31, 1998, BlackRock had 586 full-time employees, including 91 professionals in the portfolio management group, 147 professionals in risk management and analytics, 106 professionals in the separate account and funds marketing and client service areas and 82 professionals in administrative and support departments.
Legal Proceedings
From time to time, we may be a defendant in various lawsuits incidental to our business. We do not believe the outcome of any current litigation will have a material adverse effect on BlackRock's financial condition or results of operations.
Regulation
Virtually all aspects of BlackRock's business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients, shareholders 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 SEC, the Department of Labor, the OCC, the Federal Reserve, the Commodity Futures Trading Commission ("CFTC") and other regulatory bodies.
The Investment Advisers Act imposes numerous obligations on registered investment advisers 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 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.
BlackRock derives a substantial majority of its revenues from investment advisory services through its investment management agreements. Under the Investment Advisers Act, BlackRock's investment management agreements may not be assigned without the client's consent. Under the Investment Company Act, advisory agreements with registered investment companies terminate automatically upon assignment. The term "assignment" is broadly defined and may include direct assignments as well as assignments that may be deemed to occur upon the transfer, directly or indirectly, of a controlling interest in BlackRock or any of its parent companies. The offerings will not constitute an assignment for these purposes. Accordingly, BlackRock does not intend to seek client consents or approvals of new investment advisory agreements in connection with these transactions.
BlackRock's subsidiaries 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 ("NFA"). 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 ("NASD"). 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 regulated by the Federal Reserve under the Bank Holding Company Act. PNC Bank, the indirect parent of BlackRock, is a national bank subsidiary of PNC. As the subsidiary of PNC Bank, a national 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. The OCC and the 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 terminate deposit insurance, 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 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 Federal Reserve has regulatory and supervisory authority with respect to PNC's non-U.S. activities and investments as well as with respect to its non-bank subsidiaries; the OCC, the FDIC, and the Office of Thrift Supervision have regulatory and supervisory authority with respect to PNC's bank and thrift subsidiaries and subsidiaries of such banks and thrifts.
Because BlackRock is a consolidated subsidiary of PNC Bank, federal restrictions on payments of dividends by PNC Bank may apply 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 a 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 first obtains the written approval of the OCC and, with respect to non-U.S. activities, the Federal Reserve. The OCC will only approve activities and investments that are legally permissible for a national bank or that are part of or incidental to the business of banking, and consistent with prudent banking principles and regulatory policy. The Federal Reserve 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. BlackRock's current domestic and overseas activities are permissible for a national bank.
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 would 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;
. 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.
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, 1998, 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 to hold its ownership interest in BlackRock at the holding company level as a nonbank subsidiary, BlackRock would no longer be subject to OCC supervision and regulation, but would instead become subject to Federal Reserve supervision and regulation as a nonbank subsidiary of a bank holding company.
MANAGEMENT
Directors and Executive Officers of BlackRock
The following table sets forth certain information concerning the directors and executive officers of BlackRock. Our board currently has six members. Four of our directors, Thomas H. O'Brien, Walter E. Gregg, Jr., Helen P. Pudlin and James E. Rohr, are currently executive officers and/or directors of PNC. We expect to add four board members in the several months following the offerings, all of whom will be independent. The ages listed below are as of January 1, 1999.
Our board will be divided into three classes (I, II, and III) serving staggered terms. After an initial transition period following the offerings, directors in each class will be elected to serve for three-year terms and until their successors are elected and qualified. Each year, the directors of one class will stand for election as their terms of office expire. We expect that after the offerings:
. will be designated class I directors, with terms expiring in 2000,
. will be designated class II directors, with terms expiring in 2001, and
. will be designated class III directors, with terms expiring in 2002.
Name Age Position ---- --- -------- Laurence D. Fink........ 46 Director, Chairman and Chief Executive Officer Ralph L. Schlosstein.... 47 Director and President Thomas H. O'Brien....... 62 Director James E. Rohr........... 50 Director Walter E. Gregg, Jr..... 57 Director Helen P. Pudlin......... 49 Director Robert S. Kapito........ 41 Vice Chairman Paul L. Audet........... 45 Managing Director and Chief Financial Officer Robert P. Connolly...... 44 Managing Director and General Counsel |
Laurence D. Fink, director, chairman and chief executive officer of BlackRock, is chairman of the management committee and co-chair of the investment strategy group. He is also chairman of the board of BlackRock's family of closed-end mutual funds, a director of BlackRock's offshore funds and alternative investment vehicles, and chairman of the board of Nomura BlackRock Asset Management Co., Ltd. Mr. Fink serves on the asset liability committee of PNC Bank. Prior to founding BFM in 1988, Mr. Fink was a managing director and member of the management committee of The First Boston Corporation.
Ralph L. Schlosstein, director and president of BlackRock, is a member of the management committee and the investment strategy group. Mr. Schlosstein is president and a director of BlackRock's family of closed-end mutual funds and a director or officer of BlackRock's alternative investment vehicles. Prior to founding BFM in 1988, Mr. Schlosstein was a managing director of Lehman Brothers Inc. Mr. Schlosstein is a director of Pulte Corporation.
Thomas H. O'Brien, director, is chairman and chief executive officer of PNC and PNC Bank and a member of PNC's Office of the Chairman. Mr. O'Brien was appointed to the board of directors and elected vice chairman in 1983 and was elected to the additional post of chairman in June 1988. Prior to his election as president and chief executive officer in 1985, he was chairman and chief executive officer of Pittsburgh National Bank (a predecessor to PNC Bank). He joined Pittsburgh National Bank in 1962, was elected vice president in 1967, senior vice president in 1973, executive vice president in 1980 and vice chairman of the bank in 1983. Mr. O'Brien is a director of Bell Atlantic Corp. and Hilb, Rogal & Hamilton Co.
James E. Rohr, director, is president and chief operating officer of PNC and PNC Bank and a member of PNC's Office of the Chairman. Mr. Rohr joined PNC through its Management Development Program in 1972. In 1990, Mr. Rohr was elected chairman and chief executive officer of Pittsburgh National Bank. He was elected a vice chairman of PNC in 1989, named a director in 1990, elected as president in 1992 and named chief operating officer in 1998. Mr. Rohr is a director of Allegheny Teledyne Incorporated and Equitable Resources, Inc.
Walter E. Gregg, Jr., director, is vice chairman of PNC and a member of PNC's Office of the Chairman. He also is a director of PFPC Worldwide, PNC's mutual fund servicing arm. Mr. Gregg joined Pittsburgh National Bank in 1974 as resident attorney, adding the title of assistant secretary in 1976. He was elected senior vice president, treasurer and chief counsel-regulatory reporting/acquisition in 1983, and executive vice president, finance and administration, for PNC in 1989 and Vice Chairman in 1999.
Helen P. Pudlin, director, is senior vice president and general counsel of PNC. Ms. Pudlin joined Provident National Bank as general counsel in 1989 from the law firm of Ballard, Spahr, Andrews & Ingersoll in Philadelphia, where she was a partner. She was elected senior vice president and deputy general counsel for PNC in 1992 and became a managing general counsel in 1993 and named senior vice president and general counsel of PNC and PNC Bank later in 1993.
Robert S. Kapito, vice chairman, is head of the portfolio management group, co-head of the equity operating committee, a member of the investment strategy group and a member of the management committee. Mr. Kapito serves as a vice president of BlackRock's family of closed-end mutual funds and of the Smith Barney Adjustable Rate Government Income Fund. Prior to founding BFM in 1988, Mr. Kapito was a vice president in the mortgage products group at The First Boston Corporation.
Paul L. Audet, managing director, is chief financial officer of BlackRock and a member of the management committee and co-head of the infrastructure operating committee. Prior to joining BlackRock, Mr. Audet was a senior vice president at PNC, responsible for mergers and acquisitions and for finance at PNC Asset Management Group, Inc. He joined PNC in 1991 as chief financial officer of PNC's eastern operations, which included Provident National Bank in Philadelphia and PFPC Worldwide in Wilmington, Delaware.
Robert P. Connolly, managing director, is general counsel of BlackRock and a member of the management committee. Mr. Connolly is responsible for all legal affairs of BlackRock. Prior to joining PNC Asset Management Group, Inc. (a predecessor to BlackRock) in 1997, Mr. Connolly was managing director and general counsel of New England Funds, L.P.
Committees of the Board of Directors
BlackRock has established an executive committee, a compensation
committee and a nominating committee. An audit committee comprised solely of
independent directors will be established after the offerings.
have been appointed as the initial members of the executive committee.
have been appointed as the initial members of the compensation
committee. have been appointed as the initial members of the nominating
committee. As additional persons join our board in connection with and
following the offerings, we expect that membership on some of these committees
will be modified and that we will appoint other members to some of these
committees. We expect that, so long as PNC owns a majority of the voting power
of our outstanding common stock, the majority of the members of each committee
will be directors who are also directors and/or officers of PNC.
The executive committee will be authorized to exercise, between meetings of our board, all of the powers and authority of the board in the direction and management of BlackRock, except as prohibited by applicable law and except to the extent another committee has been accorded authority over the matter.
The audit committee will recommend the annual appointment of BlackRock's auditors, with whom the audit committee will review the scope of audit and non- audit assignments and related fees, accounting principles used by BlackRock in financial reporting, internal auditing procedures and the adequacy of BlackRock's risk management compliance and internal control procedures. The compensation committee will administer BlackRock's 1999 stock award and incentive plan and will establish the compensation for BlackRock's executive officers. The nominating committee will review the qualifications of potential candidates for the board of directors, report its findings to the board of directors and propose nominations for board memberships for approval by the board of directors and submission to the stockholders of BlackRock for approval. Our board may establish other committees from time to time to facilitate the management of the business and affairs of BlackRock.
Key Employees
The following table sets forth certain information concerning key employees of BlackRock. The ages listed below are as of January 1, 1999.
Name Age Position ---- --- -------- Keith T. Anderson.................... 39 Managing Director Rosemarie F. Bruno................... 39 Managing Director Daniel B. Eagan...................... 36 Managing Director Hugh R. Frater....................... 43 Managing Director Henry Gabbay......................... 51 Managing Director Bennett W. Golub..................... 41 Managing Director Charles S. Hallac.................... 34 Managing Director Barbara G. Novick.................... 38 Managing Director Karen H. Sabath...................... 33 Managing Director Susan L. Wagner...................... 37 Managing Director William J. Wykle..................... 61 Managing Director |
Keith T. Anderson, managing director, is chief investment officer, fixed income and co-chair of the investment strategy group, as well as co-head of the fixed income operating committee and a member of BlackRock's management committee. Mr. Anderson also serves as a vice president of BlackRock's family of closed-end mutual funds. Prior to founding BFM in 1988, Mr. Anderson was a vice president in fixed income research at The First Boston Corporation.
Rosemarie F. Bruno, managing director, is director of human resources and a member of the management committee. Ms. Bruno is responsible for the firm's human resources strategy, programs and policies. Prior to joining BlackRock in 1998, Ms. Bruno was the New York Metro Region Human Resources Director for Kwasha HR Solutions of PricewaterhouseCoopers.
Daniel B. Eagan, managing director, is a senior portfolio manager, equities, a member of the equity operating committee and a member of the management committee. His primary responsibility is as lead manager for large cap value and enhanced core equity portfolios. He is also the co-manager for small cap value products. Before joining PNC Asset Management Group in 1994, Mr. Eagan was a senior research consultant for William M. Mercer Asset Planning, Inc.
Hugh R. Frater, managing director, is president and director of Anthracite Capital, Inc., head of the real estate operating committee and a member of the management committee. Anthracite Capital, Inc. is a REIT that was created by BlackRock in 1998. Prior to forming the REIT, Mr. Frater co-headed BlackRock's account management group. Before joining BFM in 1988, Mr. Frater was a vice president in investment banking at Lehman Brothers Inc.
Henry Gabbay, Ph.D., managing director, is the head of the fund administration and operations group and is a member of the management committee. Dr. Gabbay also serves as treasurer for BlackRock's family of closed-end mutual funds. Prior to joining BFM in 1989, Dr. Gabbay was a vice president in the finance department at The First Boston Corporation.
Bennett W. Golub, Ph.D., managing director, is co-head of the risk management and analytics group, a member of the investment strategy group and the credit committee, and a member of the management committee. Prior to founding BFM in 1988, Dr. Golub was a vice president at The First Boston Corporation.
Charles S. Hallac, managing director, is co-head of the risk management and analytics group, a member of the investment strategy group and a member of the management committee. Prior to joining BFM in 1988, Mr. Hallac was an associate in the mortgage products group at The First Boston Corporation.
Barbara G. Novick, managing director, is head of the account management group, co-head of the fixed income and equity operating committees and a member of the management committee. Prior to founding BFM in 1988, Ms Novick was a vice president in the mortgage products group at The First Boston Corporation.
Karen H. Sabath, managing director, is co-head of the funds group and the funds operating committee and a member of the BlackRock's management committee. Ms. Sabath also serves as the secretary for BlackRock's family of closed-end mutual funds. Prior to joining BFM in 1988, Ms. Sabath was an associate in the mortgage products group at The First Boston Corporation.
Susan L. Wagner, managing director, is head of the strategy and product development group, co-head of the infrastructure operating committee and is a member of the management committee. Ms. Wagner serves as a director of BlackRock's offshore funds and an officer of BlackRock's alternative investment vehicles. Prior to founding BFM in 1988, Ms. Wagner was a vice president in the mortgage and savings institutions group at Lehman Brothers Inc.
William J. Wykle, managing director, is a senior portfolio manager, equities, a member of the equity operating committee and a member of the management committee. His primary responsibility is lead manager on the mid, small and micro cap growth products, for which he oversees the investment management and research process. Before joining PNC Asset Management Group in 1986, Mr. Wykle was a senior vice president and chief investment officer at One Valley Bancorp of West Virginia.
EXECUTIVE COMPENSATION
Summary of Compensation
The following summary compensation table sets forth information concerning compensation earned in the fiscal year ended December 31, 1998, by BlackRock's chief executive officer and its other four most highly compensated executive officers (the "named executive officers").
Summary Compensation Table
Long-term Compensation
------------------------------
Annual Compensation Awards Payouts
------------------------- ---------------------- -------
Number of
Other Restricted Securities
Name and Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option/SARs Payouts Compensation
------------------ ---- ------ ----- ------------ ---------- ----------- ------- ------------
Laurence D. Fink........ 1998 $ $ $ $ $ $ $
Chairman and Chief
Executive Officer
Ralph L. Schlosstein.... 1998 $ $ $ $ $ $ $
President
Robert S. Kapito........ 1998 $ $ $ $ $ $ $
Vice Chairman
Paul L. Audet........... 1998 $ $ $ $ $ $ $
Chief Financial Officer
Robert P. Connolly...... 1998 $ $ $ $ $ $ $
General Counsel
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PNC Stock Options and Stock Appreciation Rights
The following table sets forth information concerning the grant of PNC stock options to each of BlackRock's named executive officers during the last fiscal year.
Option/SAR Grants in Last Fiscal Year
Individual Grants
--------------------------------------------------
% of Total
Number of Options/SARs Grant
Securities Granted to Date
Underlying PNC Employees Exercise Present
Options/SARs in Fiscal or Base Expiration Value
Name Granted(1) Year Price ($/SH) Date ($)(2)
---- ------------ ------------- ------------ ---------- --------
Laurence D. Fink........ 35,000 1.00% $57.8125 5/28/08 $335,000
Ralph L. Schlosstein.... 25,000 0.72% $57.8125 5/28/08 $239,500
Robert S. Kapito........ 10,000 0.29% $57.8125 5/28/08 $ 95,800
Paul L. Audet........... 15,000 0.43% $54.7188 2/19/08 $134,400
Robert P. Connolly...... 7,400 0.21% $54.7188 2/19/08 $ 66,304
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Exercise of PNC Options and Stock Appreciation Rights
The following table sets forth information concerning the exercise of PNC stock options during the last fiscal year by each of BlackRock's named executive officers and the fiscal year-end value of unexercised options.
Aggregated Option/SAR Exercises in Last Fiscal Year, and Fiscal Year-End Option/SAR Values
Number of Securities
Shares Underlying Value of Unexercised
Acquired on Value Unexercised Options/SARs In-the-Money Options/SARs
Exercise Realized at FY-End at FY-End
----------- -------- ------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Laurence D. Fink........ -- $ -- 40,000 35,000 $956,250 $ --
Ralph L. Schlosstein.... 30,000 $499,376 -- 25,000 $ -- $ --
Robert S. Kapito ....... -- $ -- 9,400 10,000 $ 96,937 $ --
Paul L. Audet........... -- $ -- 12,700 15,000 $130,968 $ --
Robert P. Connolly...... -- $ -- -- 7,400 $ -- $ --
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PNC Long-Term Incentive Award Plan
Mr. Audet, the only BlackRock executive officer who participated during the last fiscal year in PNC's long-term incentive plan, held 13,500 shares of restricted common stock with an aggregate dollar value at December 31, 1998 of $729,844. The per share price used to calculate this value was $54.0625, the average of the high and low sale price of a share of PNC's common stock on the NYSE on December 31, 1998.
PNC Defined Benefit or Actuarial Plan
Mr. Audet, the only BlackRock executive officer who participates in PNC's defined benefit plan, would receive estimated total annual benefits (including those payable by both supplemented non-qualified pension plans) upon retirement at age 65 equal to $320,939. The benefits have been projected assuming that (a) Mr. Audet's salary remains constant until retirement; and (b) the 30-year U.S. Treasury Bond rate until retirement is 7.0%.
Employment Agreements
BlackRock has entered into employment agreements and stock arrangements with each of its managing directors, including all members of its management committee, designed to retain their services through compensation and equity arrangements. Generally, these agreements are due to expire on December 31, 2002.
BlackRock intends to enter into amended and restated employment agreements with these executives which will become effective when the offerings are completed. These employment agreements provide for compensation for each executive in the form of (i) an annual base salary and (ii) an annual bonus in an amount determined by BlackRock. The employment agreements entered into with Messrs. Fink and Schlosstein and certain other key employees of BlackRock also provide that BlackRock's chief executive officer and a majority of the members of its management committee will manage the day-to-day operations of BlackRock. The employment agreements do not provide for the payment of any compensation or severance to the executive following the termination of the agreement.
BlackRock and each executive have the right to terminate his or her employment agreement at any time, provided that in the event the executive's employment is terminated by BlackRock without cause (as defined below) or Good Reason (as defined below), or due to the death or disability of the executive, all unvested shares of stock owned by that executive will immediately vest. In the event an executive is terminated by BlackRock with Cause or Good Reason, or the executive voluntarily terminates his or her employment with
BlackRock for any reason other than deficient opportunity (as defined below), BlackRock will purchase the shares of unvested stock held by the executive at a purchase price equal to the lower of (i) the market value of the stock and (ii) the price paid by the executive for the stock.
For purposes of the employment agreements, "cause" means the occurrence or existence with respect to the executive of: (i) a material breach by the executive of any written policies of BlackRock or an affiliate of BlackRock required by law or established to maintain compliance with applicable law, (ii) any act of fraud, misappropriation, dishonesty, embezzlement or similar conduct by the executive against BlackRock or an affiliate of BlackRock or any client of BlackRock or an affiliate of a client of BlackRock, (iii) conviction of the executive for the commission of a felony or (iv) entry of any order against the executive by any governmental body having regulatory authority with respect to our business or the business of any of our subsidiaries, which order relates to or arises out of the executive's employment relationship with BlackRock or a subsidiary of BlackRock. "Good reason" means as the failure of the executive to substantially perform any material assigned duties (other than by reason of death or disability or, in the case of Messrs. Fink and Schlosstein and certain other key employees of BlackRock, deficient opportunity). "Deficient opportunity" occurs if (i) the executive does not have duties and reporting responsibilities in BlackRock which are substantially equivalent to those as of the beginning of his or her term of employment or (ii) the executive's principal work location is relocated beyond a specified geographic area.
The employment agreements provide that upon a change of control of PNC (as defined below under "Certain Relationships and Related Transactions--IPO Agreement--Change in Control of PNC") that causes the fundamental economics of BlackRock's business and prospects to be materially and adversely impacted and that has not been consented to by BlackRock's chief executive officer and a majority of its management committee members, PNC or its successor will be obligated to offer to purchase all of the capital stock, whether previously vested or unvested, of all of the management executives, and to offer to purchase all of the capital stock held by public shareholders, at a price equal to the "fair value" (as defined below under "Certain Relationships and Related Party Transactions--IPO Agreement--Changes in Control of PNC") of the stock.
The employment agreements also provide that each executive will not during and after the term of employment, (i) disclose or use any confidential or proprietary information of BlackRock except in the ordinary course of his or her employment, (ii) during the term and for one year after, solicit any existing or potential clients of BlackRock, (iii) during the term and for one year after, employ or offer to employ any other employee of BlackRock, (iv) during the term and for all times after, disparage BlackRock or any of its employees or officers and (v) in the case of the agreements with Messrs. Fink and Schlosstein and certain other key executives of BlackRock, during the term and for nine months after the term, unless the executive's employment was terminated without cause or good reason or because of the executive's death or disability, engage in a business activity which is in competition with any business activity conducted by BlackRock. These restrictions lapse upon the termination of the employment agreements following a change in control of PNC. See "Certain Relationships and Related Transactions--IPO Agreement--Change in Control of PNC."
Compensation of Directors
Directors who are also employees of BlackRock or PNC will receive no remuneration for serving as directors or committee members. Non-employee directors will receive total compensation of $ per year. Non-employee directors will receive an additional fee of $ per year for serving as chairperson of a board committee.
BlackRock, Inc. 1999 Stock Award and Incentive Plan
On , 1999 BlackRock adopted, and on , 1999 the stockholders approved, the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the "Award Plan"). A maximum of shares of class A common stock has been reserved for issuance under the Award Plan. The number of shares authorized is generally subject to equitable adjustment upon the occurrence of any stock dividend or other distribution, recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange, or other similar corporate transaction or event.
Pursuant to the Award Plan, BlackRock may grant awards which may consist of:
. stock options, including incentive stock options and nonqualified stock options;
. stock appreciation rights, either in connection with stock options granted under the Award Plan or independently of options;
. restricted stock;
. restricted stock units; and/or
. dividend equivalents and other stock or cash based awards.
From and after the consummation of the initial public offerings, the Award Plan is intended to satisfy any applicable requirements of Rule 16b-3 promulgated under Section 16 of the Securities Exchange Act of 1934 and Section 162(m) of the Code, and will be interpreted in a manner consistent with the requirements of those rules and regulations.
The Award Plan will be administered by the compensation committee established by the board of directors, consisting of two or more persons each of whom shall be an "outside director" within the meaning of Section 162(m) and a "nonemployee director" within the meaning of Rule 16b-3. The compensation committee shall have full authority, subject to the provisions of the Award Plan, to, among other things, determine the persons to whom awards will be granted, determine the terms and conditions (including any applicable performance criteria) of the awards, and prescribe, amend and rescind rules and regulations relating to the Award Plan.
Grants of awards may be made under the Award Plan to selected employees, independent contractors and directors of BlackRock and its present or future affiliates, at the discretion of the compensation committee.
Stock options and appreciation rights
Stock options may be either "incentive stock options," as such term is defined in Section 422 of the Code, or nonqualified stock options. The exercise price of a nonqualified stock option may be above, at or below the fair market value per share of class A common stock on the date of grant; the exercise price of an incentive stock option may not be less than the fair market value per share of class A common stock on the date of grant. The exercise price may be paid in cash or by the surrender or withholding of class A common stock.
Stock appreciation rights may be granted alone or together with stock options. A stock appreciation right is a right to be paid an amount equal to the excess of the fair market value of a share of class A common stock on the date the stock appreciation right is exercised over either the fair market value of a share of class A common stock on the date of grant (in case of a free standing stock appreciation right) or the exercise price of the related stock option (in case of a tandem stock appreciation right). Payment can be made in cash, class A common stock or both, as specified in the award agreement or as determined by the compensation committee.
No person may be granted stock options or stock appreciation rights under the Award Plan in any calendar year representing an aggregate of more than shares of class A common stock. Stock options and stock appreciation rights will be exercisable at such times and upon such conditions as the compensation committee may determine, as reflected in the applicable award agreement. In addition, all stock options and stock appreciation rights will become exercisable in the event of a "change in control" of BlackRock. The exercise period shall be determined by the compensation committee except that, in the case of an incentive stock option, the exercise period shall not exceed ten years from the date of grant of the incentive stock option.
Except to the extent that the applicable award agreement provides otherwise, in the event of the termination of employment of an employee or termination of the independent contractor relationship or termination of service as a director, the right to exercise stock options and stock appreciation rights held by such participant, independent contractor or director, as applicable, will cease.
Restricted stock and restricted stock units
A restricted stock award is an award of class A common stock and a restricted stock unit award is an award of the right to receive cash or class A common stock at a future date. In each case, the award is subject to restrictions on transferability and other restrictions, if any, as the compensation committee may impose at the date of grant. The restrictions may lapse separately or in combination at such times, under such circumstances, including, without limitation, a specified period of employment or the satisfaction of pre-established performance goals, in such installments, or otherwise, as the compensation committee may determine. Except to the extent restricted under the award agreement relating to the restricted stock, a participant granted restricted stock will have all of the rights of a stockholder, including, without limitation, the right to vote and the right to receive dividends on the restricted stock. The compensation committee can accelerate the lapsing of all or any portion of any outstanding restrictions on the restricted stock. In addition, all restrictions affecting the awarded shares or units will lapse in the event of a "change in control" of BlackRock.
Upon termination of employment or termination of the independent contractor relationship or termination of service as a director during the applicable restriction period, restricted stock, restricted stock units and any accrued but unpaid dividends or dividend equivalents that are at that time subject to restrictions will be forfeited unless the compensation committee provides otherwise. The compensation committee can determine, by rule or regulation or in any award agreement, or in any individual case, that restrictions or forfeiture conditions relating to restricted stock or restricted stock units will be waived in whole or in part in the event of terminations resulting from specified causes. The compensation committee may in other cases waive in whole or in part the forfeiture of restricted stock.
No person may be granted restricted stock or restricted stock units under the Award Plan in any calendar year representing an aggregate of more than shares of class A common stock.
Other awards
The compensation committee may grant to a participant the right to receive cash or class A common stock, in each case equal in value to dividends paid with respect to a specified number of shares of class A common stock. Dividend equivalents may be awarded on a free-standing basis or in connection with another award, and may be paid currently or on a deferred basis. The compensation committee is also authorized to grant class A common stock as a bonus or to grant other cash awards.
Transferability
Except as otherwise determined by the compensation committee, awards granted under the Award Plan may be transferred only by will or by the laws of descent and distribution.
Amendment and termination
The Award Plan may, at any time and from time to time, be altered,
amended, suspended, or terminated by the board of directors or the compensation
committee, in whole or in part, except that no amendment that requires
stockholder approval in order for the Award Plan to continue to comply with
Section 162(m), state law, stock exchange requirements or other applicable law
will be effective unless the amendment has received the required stockholder
approval. In addition, no amendment may be made which adversely affects any of
the rights of any award holder previously granted an award, without the
holder's consent.
Outstanding awards
On , 1999, BlackRock granted to stock options to acquire shares of class A common stock at an exercise price of $ . These stock options vest .
Deferred Compensation Plan
BlackRock has adopted the deferred compensation plan, effective as of , 1999, with respect to its eligible employees and directors.
The purpose of the deferred compensation plan is to recognize the value to BlackRock of the past and present services of individuals covered by the deferred compensation plan, to encourage participants to increase their ownership in common stock and to encourage and assure their continued service with BlackRock. The deferred compensation plan is intended to constitute an unfunded, unsecured plan of deferred compensation for a select group of management, directors or highly compensated employees. The principal features of the deferred compensation plan are described below. The description of the deferred compensation plan set forth herein is qualified in its entirety by reference to the text of the deferred compensation plan.
The deferred compensation plan will be administered by the compensation committee. The compensation committee will supervise the administration and enforcement of the deferred compensation plan according to its terms and provisions. The compensation committee will have such powers as are necessary to accomplish the purposes of the deferred compensation plan.
Directors and officers of BlackRock earning cash compensation of at least may participate in the deferred compensation plan. Until 2000, however, directors and otherwise eligible officers may become participants in the deferred compensation plan only if so designated by the compensation committee. For the initial period ending 2000, the compensation committee has designated , and as participants.
Under the deferred compensation plan, participants may voluntarily elect to defer all or a portion of their salaries and/or annual bonuses or, in the case of participants who are directors, of their annual fees. An election to defer must generally be made prior to the beginning of the fiscal year in which it will be earned; once made, the election is generally irrevocable for the first calendar year with respect to which the election is made. Amounts deferred are credited to each participant's account.
The deferred amounts will be deemed to be invested, pursuant to the election of the participant, in the Fund or such other funds as the compensation committee may from time to time make available. Investment designations for current and future deferred amounts may be changed, subject to the terms and conditions of the deferred compensation plan. Additional restrictions may apply to investment decisions of participants who are subject to the reporting requirements of Section 16(a) of the Exchange Act. At least annually, the compensation committee will determine the net income or loss equivalents of each fund for the period elapsed since the preceding valuation date and allocate the equivalents to participant's account.
Each deferral election will indicate the time and form of payment for the amounts to be deferred during the applicable fiscal year, including any net income or loss equivalents allocated to the deferred amounts. Salaries, bonuses and/or fees may not be deferred for more than five years. Distributions will be made in cash to the participant at the time irrevocably selected on the deferral form, or, in the event of the participant's death, to the participant's beneficiary. Early withdrawals are subject to a 10% penalty, except in the event of unforeseeable financial emergencies. BlackRock may defer payment of all or any portion of a distribution that it determines is likely not to be deductible by BlackRock under applicable income tax provisions.
Each participant or beneficiary will be an unsecured general creditor with respect to any payments due and owing to such participant under the deferred compensation plan.
The compensation committee may amend, and the board of directors may amend or terminate, the deferred compensation plan at any time, except that no amendment may be made that would impair the rights of a participant with respect to amounts already deferred or otherwise allocated to his account.
Key Executive Long-Term Incentive Bonus Plan
BlackRock has adopted the Key Executive Long-Term Incentive Bonus Plan ("Incentive Bonus Plan"), effective as of , 1999, with respect to its eligible participants. The Incentive Bonus Plan is intended to serve as a qualified performance-based compensation program under Section 162(m) of the Internal Revenue Code.
Section 162(m) of the Code limits the deductibility of certain
compensation in excess of $1 million per year paid by a publicly traded
corporation to the chief executive officer and the four other executive
officers named in the summary compensation table of the corporation's proxy
statement. Compensation that qualifies as "performance-based" compensation is,
however, exempt from the $1 million deductibility limitation. In order for
compensation granted pursuant to the Incentive Bonus Plan to qualify for this
exemption, among other things, the material terms under which the compensation
is to be paid must be disclosed to and approved by stockholders in a separate
vote prior to payment, and the compensation must be paid solely on account of
achieving pre-established, objective performance goals. The Incentive Bonus
Plan will serve as a qualified performance-based compensation program under
Section 162(m) of the Internal Revenue Code, in order to preserve BlackRock's
tax deduction paid under the Incentive Bonus Plan to the named executive
officers.
The board of directors believes that adoption of the Incentive Bonus Plan is necessary to meet BlackRock's objectives of securing, motivating and retaining officers and other employees of BlackRock and its subsidiaries. The principal features of the Incentive Bonus Plan are described below. The description of the Incentive Bonus Plan set forth herein is qualified in its entirety by reference to the text of the Incentive Bonus Plan.
The purpose of the Incentive Bonus Plan is to encourage behavior by Incentive Bonus Plan participants that create superior financial performance and strengthen the commonality of interests between the participants and stockholders in creating superior stockholder value.
The Incentive Bonus Plan will be administered by the compensation committee.
The Incentive Bonus Plan provides that any employee who is selected by the compensation committee is eligible to participate in the Incentive Bonus Plan. Payment of awards to participants are permitted if, and only to the extent that, performance goals established by the compensation committee are met for the applicable three-year performance period. The performance goals may relate to the performance of BlackRock, a business unit, product line, territory or any combination thereof. With respect to participants who are not executive officers, performance goals may also include such objective or subjective performance goals as the compensation committee may, from time to time, establish. Performance goals may include a threshold level of performance below which no award payment will be made and levels of performance at which specified percentages of the target award will be paid, and may also include a maximum level of performance above which no additional award will be paid. The performance measure or measures and the performance goals established by the compensation committee may be different for different three-year performance periods and different goals may be applicable to different divisions or other operational segments.
Before any awards for a particular three-year performance period can be paid to the named executive officers, the compensation committee must certify the extent to which performance goals and any other material terms were satisfied.
Unless the compensation committee otherwise determines, a participant will receive the award only if the participant is employed by BlackRock on the last day of the applicable performance period. If a participant is terminated by BlackRock for cause prior to the date on which the payment of awards is made, the participant will forfeit all claims to unpaid amounts earned or otherwise due under the Incentive Bonus Plan.
A participant's award with respect to each three-year performance period will be paid in cash. The amount of the award payable to a named executive officer upon attainment of a performance goal cannot be increased by the compensation committee at its discretion and cannot exceed with respect to any three-year performance period.
The board or the compensation committee may from time to time amend, suspend or discontinue the Incentive Bonus Plan. No amendment that requires stockholder approval in order for the Incentive Bonus Plan to continue to comply with Section 162(m) of the Code will be effective unless it receives stockholder approval. No amendment, however, shall affect adversely any of the rights of any participant under any award following the end of the applicable performance period.
Since benefits under the Incentive Bonus Plan will be determined by the compensation committee and performance goal criteria may vary from three-year performance period to three-year performance period and from participant to participant, benefits to be paid under the Incentive Bonus Plan are not determinable at this time.
Employee Stock Purchase Plan
BlackRock has also adopted the Employee Stock Purchase Plan, effective as of , 1999. The purpose of the Employee Stock Purchase Plan is to align the interests of employees and stockholders by encouraging participants to purchase shares of class A common stock. The Employee Stock Purchase Plan is intended to comply with the requirements of Section 423 of the Code, and to provide participants with the tax advantages provided by Section 423. A total of of class A common stock have been authorized for issuance under the Employee Stock Purchase Plan, subject to adjustment in the event of a recapitalization, stock split, stock dividend or other similar transaction. The description of the Employee Stock Purchase Plan set forth herein is qualified in its entirety by the text of the Employee Stock Purchase Plan.
The Employee Stock Purchase Plan will be administered by the compensation committee. The compensation committee may make rules and regulations and establish procedures for the administration of the Employee Stock Purchase Plan as it deems appropriate.
Subject to certain procedural requirements, all employees of BlackRock who have at least one year of service and work more than twenty hours per week will be eligible to participate in the Employee Stock Purchase Plan, except that employees who are "highly compensated" within the meaning of Section 414(q) of the Code and employees who are five percent or more stockholders of BlackRock or any subsidiary of BlackRock will not be eligible to participate. Designations of corporations participating in the Employee Stock Purchase Plan may be made from time to time by the compensation committee from among the subsidiaries of BlackRock, including corporations which become subsidiaries after approval and adoption of the Plan. Currently, all subsidiaries of BlackRock are participating in the Employee Stock Purchase Plan.
Pursuant to the Employee Stock Purchase Plan, each eligible employee will be permitted to purchase shares of class A common stock through regular payroll deductions and/or cash payments in an aggregate amount equal to % to % of the employee's base pay. Under the Employee Stock Purchase Plan, the fair market value of the shares of class A common stock which may be purchased by any employee during any calendar year may not exceed $25,000.
Participating employees will be able to purchase shares of class A common stock with payroll deductions and/or cash payments on the last day of each six month purchase period during each one-year cycle, at a purchase price equal to the lesser of:
. 85 percent of the fair market value of class A common stock on the date the cycle begins; and
. 85 percent of the fair market value of class A common stock on the last day of the purchase period.
A right to purchase shares of class A common stock which is granted to a participant under the Employee Stock Purchase Plan is transferable only by will or the laws of descent and distribution, and is exercisable, during the participant's lifetime, only by the participant.
The compensation committee may from time to time amend or terminate the Employee Stock Purchase Plan. No such amendment or termination may adversely affect the rights of any participant without the consent of such participant and, to the extent required by Section 423 of the Code or any other law, regulation or stock exchange rule, no amendment will be effective without the approval of stockholders entitled to vote on the amendment. Additionally, the compensation committee may make such amendments as it deems necessary to comply with applicable laws, rules and regulations.
Since the amount of benefits to be received by each participant is determined by his or her elections, the amount of future benefits to be allocated to any individual or group of individuals under each Employee Stock Purchase Plan is not determinable.
Non-employee Directors Stock Purchase Plan
The board of directors adopted the Nonemployee Directors Stock Purchase Plan effective as of , 1999. The purpose of the director plan is to encourage members of the board of directors who are not also employees of BlackRock or any of its subsidiaries and who receive fees for their services to acquire additional stock ownership interests in BlackRock. The following is a description of the material terms of the director plan, and as such is qualified in its entirety by the actual terms of the director plan.
Under the director plan, a maximum of shares of class A common stock may be distributed to outside directors. Only outside directors are eligible to participate in the director plan. Currently, outside directors serve on the board of directors. The director plan will be administered by the compensation committee which may at any time alter, amend, suspend or terminate the director plan.
Each outside director may elect that a specified percentage of his or her future compensation as a director be paid in shares of class A common stock rather than in cash. Shares of class A common stock issuable to an outside director under the director plan will be transferred to the outside director as soon as practicable following the end of each calendar quarter. The total number of shares of class A common stock to be so transferred on each such date will be determined by dividing:
(a)the product of (1) the percentage of compensation elected by the outside directors and (2) the outside director's compensation payable for services rendered in the calendar quarter with respect to which such transfer is being made; by
(b)the fair market value (as defined in the director plan) of a share of class A common stock on the last day of such calendar quarter. Cash will be paid in lieu of any fractional shares of class A common stock.
Awards under the director plan will only be transferable by outside directors by the laws of descent and distribution.
Because awards under the director plan depend on elections by outside directors, and no elections have been made, the awards to be made in 1999 have not been determined.
OWNERSHIP OF THE COMMON STOCK
The following table sets forth certain information with respect to the beneficial ownership of the common stock as of December 31, 1998; by:
. Each person who is known by us to own beneficially more than 5% of the outstanding shares of common stock;
. Each of our directors;
. Our executive officers named in the "Summary Compensation Table" on page 46 of this prospectus; and
. All of our directors and executive officers as a group.
Except as otherwise noted, the beneficial owners named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
Beneficial Ownership Prior to Beneficial Ownership After
Offerings Offerings
-------------------------------- --------------------------------
Percent of Percent of Percent of Percent of
class A class B class A class B
common stock common stock common stock common stock
Number outstanding outstanding Number outstanding outstanding
------ ------------ ------------ ------ ------------ ------------
PNC Asset Management
Inc.
One PNC Plaza
249 Fifth Avenue
Pittsburgh, PA 15222
Laurence D. Fink
Ralph L. Schlosstein
Robert S. Kapito
Thomas H. O'Brien
James E. Rohr
Walter E. Gregg, Jr.
Helen P. Pudlin
Paul L. Audet
Robert P. Connolly
All directors and
executive officers as a
group ( persons)
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Background
BFM was acquired by PNC on February 28, 1995, for total consideration of $240 million. PNC accounted for the acquisition by contributing $10 million of equity capital and utilized "push down" accounting to record approximately $230 million of debt and approximately $240 million of goodwill on the books of BFM. Outstanding debt included a $94 million unsecured note payable to certain managing partners of BFM through February 2000 with the balance ultimately representing amounts borrowed from PNC Bank under a $175 million revolving credit facility.
Equity Offering to Employees of BFM
In July of 1997, PNC retained an independent investment bank to assist in the valuation of PNC's investment management business, including a fair market valuation of BFM in connection with a proposed sale of equity to employees. PNC's objectives were to establish a long-term retention program for key employees and to more closely align PNC and employee interests in generating stockholder value growth. On January 31, 1998, PNC sold 30,000 shares of BFM restricted stock with a fair value of $999.36 per share to key employees at a purchase price of $966.00 per share. PNC retained 70,000 shares or a 70% ownership interest in BFM. BFM received $29.0 million in proceeds from the sale and recorded compensation expense of $1.0 million reflecting the purchase price discount from fair value.
In connection with these offerings, BFM, PNC and certain employees of BFM entered into a Shareholders Agreement. The Shareholders Agreement restricts transfer of BFM employee shares until restrictions are ratably removed on December 31, 2000, 2001 and 2002, or earlier in certain situations. The Shareholders Agreement also requires holders of restricted stock who voluntarily terminate their employment with BFM to sell their shares back to BFM at the lower of cost or fair market value and provides a right of first refusal in the favor of PNC and BFM employee stockholders before any sale of BFM stock to a third party. See "Description of Capital Stock--Common Stock--Shareholders Agreement."
Formation Transactions
On March 31, 1998, PNC contributed BFM and certain of its other investment management subsidiaries into a new holding company. The contribution was recorded at historical book value as a combination of entities under common control. On the formation date, BFM's employee stockholders and PNC exchanged their shares in BFM for an equal number of shares in BlackRock with PNC receiving $12.3 million in cash dividends and an additional 94,000 shares of stock representing the value of PNC's other contributed investment management businesses. As part of the formation, BlackRock also offered to sell an additional 5,507 shares of restricted stock with a market value of $1,085.15 per share to key employees of PNC's other contributed businesses at a per share price of $966.00. These stock transactions were completed in May 1998 with all employee stockholders, including BFM employees, required to execute a new Shareholders Agreement with BlackRock and PNC containing the same provisions previously outlined in the sale of stock to employees of BFM. Proceeds from the second sale of stock were $5.3 million with BlackRock recording an additional $0.7 million in compensation expense. At December 31, 1998, there were five forward sale agreements to purchase restricted stock outstanding with certain key employees. These agreements totaled 637 additional shares at an initial price per share of $966.00 plus an imputed financing charge of one percent per month.
Transactions with PNC and Its Subsidiaries
After completion of the offerings, PNC will beneficially own approximately % of the combined voting power of BlackRock's outstanding common stock (approximately % if the underwriters over-allotment options are exercised in full).
BlackRock provides risk management advisory services to PNC's corporate and line of business asset/liability management committees ("ALCO") for which it received an annual fee of $3.0 million for 1996, 1997 and 1998. Effective June 1, 1998, BlackRock entered into an agreement with PNC's private banking group to provide model portfolio and investment research services for $4.4 million per year. Total fees earned in 1998 were $2.6 million.
BlackRock acts as the investment adviser for certain commingled funds or separate accounts which are either sponsored by PNC affiliated entities or are PNC clients. In most instances, these advisory and administration services are provided in accordance with formal advisory agreements. BlackRock is generally compensated on the basis of fees calculated as a percentage of the market value of the assets under management. Investment advisory and administration fees associated with PNC affiliated entities for the years ended December 31, 1996, 1997 and 1998 amounted to $10.3 million, $13.1 million and $11.0 million, respectively. The decrease in 1998 was attributable to the May 1998 conversion of $8.2 billion in PNC commingled common trust fund assets into the BlackRock Funds.
At December 31, 1998, clients of PNC affiliated entities maintained approximately $19.5 billion of investments in the BlackRock Funds, which represents approximately 81% of the assets in the BlackRock Funds. For the year ended December 31, 1998, BlackRock earned approximately $69 million in investment advisory and administrative fees on PNC client investments in the BlackRock Funds. As a result of the formation and the common trust fund conversion, BlackRock and PNC entered into a memorandum of understanding in 1998 establishing the services to be provided and fees to be paid to PNC affiliated entities associated with maintaining their client investments in the BlackRock Funds. BlackRock also pays co-administration fees to a PNC mutual fund servicing affiliate for administrative services provided to the Provident Institutional Funds. Costs for these services are based on a percentage of the market value of assets under management. Fund administration and servicing costs for the years ended December 31, 1996, 1997 and 1998 were $19.6 million, $27.3 million and $53.0 million, respectively. The increase in expense for 1998 was largely due to the May 1998 common trust fund conversion.
Pursuant to an administrative services agreement, PNC provides BlackRock with certain management and administrative services. The services include legal, audit, employee benefit, payroll and information services. As consideration for these services, BlackRock pays PNC a monthly fee based on actual usage of the services or on defined formulas which, in management's view, result in reasonable charges. Total expense for these services was $6.9 million, $3.0 million and $3.3 million for the years ended December 31, 1996, 1997 and 1998, respectively.
Pursuant to a master lease agreement with an affiliate of PNC, BlackRock currently leases approximately 22,500 square feet of office space at 400 Bellevue Parkway, Wilmington, Delaware 19805 and 24,000 square feet of office space at 1600 Market Street, Philadelphia, Pennsylvania 19103. The lease is subject to annual renewal and calls for annual lease payments of approximately $1.4 million. BlackRock believes that the price and other terms under the lease are at least as favorable as prices and terms being offered generally in the same marketplaces by unrelated parties for comparable space.
Debt of $197 million at December 31, 1998, included $150 million outstanding on a $175 million revolving line of credit facility with PNC Bank and a $47 million unsecured note due through February 28, 2000, with B.P. Partners, L.P. BlackRock's outstanding debt largely reflects amounts remaining from PNC's acquisition of BFM on February 28, 1995. B.P. Partners, L.P. is a limited partnership comprised of former partners of BFM who received deferred notes as part of the purchase price for BFM. The revolving credit facility 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. BlackRock repaid $18.8 million on February 28, 1999, and $28.2 million is due on February 28, 2000. Interest expense paid by BlackRock for the years ended December 31, 1996, 1997 and 1998 was $20.0 million, $20.2 million and $13.3 million, respectively. BlackRock intends that net proceeds from the offerings will be used to repay a portion of the outstanding indebtedness under the revolving credit facility with PNC Bank.
BlackRock participates in the PNC tax sharing policy. The policy provides, among other things, that the consolidated federal tax liability for all 80% or more owned subsidiaries of PNC will generally be allocated to each subsidiary based on their separately calculated liability. The policy also provides that State and Municipal income tax liabilities will be determined as if the PNC subsidiary had filed a separate return. In the event that a state or municipality imposes income or franchise taxes on a consolidated, combined or unitary basis, the liability will be equitably allocated to those subsidiaries whose business operations generated the liability. As a result of the sale of a 30% equity interest to certain employees of BFM in 1998, PNC files a separate consolidated federal tax return for PNC Asset Management, Inc., the entity in which PNC holds its investment and reports consolidated results of operations for BlackRock.
IPO Agreement
General
We have entered into an Initial Public Offering Agreement with PNC which governs our respective rights and duties with respect to the offerings, and sets forth covenants we and PNC have agreed to for various periods following the offerings.
Subsequent Issuances of Common Stock and Additional Purchases of Common Stock by PNC
The IPO Agreement provides that we will not, without PNC's prior written consent, which it may withhold in its sole and absolute discretion, issue any shares of common stock or any rights, warrants or options to acquire our common stock. This concept was specifically rejected last Friday. The IPO Agreement further provides that at any time following the offerings until the date on which PNC or another person (a "PNC Transferee") beneficially owns less than a majority of the voting power of our common stock (the "Trigger Date"), if we propose to issue common stock, PNC will be entitled, but not required, to purchase a number of shares of common stock so that PNC would continue to maintain the same proportionate economic and voting rights after the issuance as it had before the issuance of common stock. If we issue class A shares for cash, PNC must pay the same per share price to purchase additional shares. In all other cases, the price that PNC must pay to purchase the additional shares of common stock shall be equal to the average of the closing prices of the class A common stock reported on the NYSE for the ten trading days prior to the completion of the issuance giving rise to PNC's additional purchase right.
Change in Control of PNC
The IPO Agreement provides that if there is a change in control of PNC, as defined below, at any time following the offerings until the Trigger Date, under certain circumstances PNC or its successor would be required to offer to purchase all of our outstanding capital stock not held by PNC or its successor (i.e., stock held by public stockholders and employee stockholders) at a "fair value" to be determined in the manner described below. PNC or its successor would only be required to make such a purchase following a change in control of PNC if the fundamental economics of our business and prospects at that time would be materially and adversely affected as a result of the change in control of PNC and our chief executive officer and a majority of the other members of our management committee do not consent to the change in control of PNC. If the change in control of PNC would enhance or would not materially and adversely impact the fundamental economics of the business and prospects or is consented to by our chief executive officer and a majority of the other members of our management committee, neither PNC nor its successor will have any obligation to purchase our capital stock that it does not own.
The "fair value" of our capital stock would be determined through negotiation by us and PNC or its successor. However, if we were unable to agree on a fair value, then the fair value would be determined by two nationally recognized investment banking or business appraisal firms--one selected by PNC or its successor and one selected by our management committee. If these two firms were unable to agree on the fair value of our capital stock, they would jointly select a third nationally recognized investment banking or business appraisal firm which would resolve any disputes between the two original firms and conclusively determine the fair value of our capital stock. Our fair value will be determined by reference to the trading value of our common stock prior to the announcement of the change in control of PNC.
A "change in control of PNC" will be deemed to occur if, whether by an actual or threatened proxy contest, including a consent solicitation, or any merger, reorganization, consolidation or similar transaction, persons who are directors of PNC immediately prior to the proxy contest or execution of the agreement pursuant to which the transaction is consummated cease to constitute a majority of the board of directors of PNC or any successor entity immediately following the proxy contest or the consummation of the transaction. In making the determination as to whether a majority of the board of directors consists of persons who served as directors prior to the proxy contest or other transaction, any director whose initial assumption of office was in connection with a prior actual or threatened proxy contest will not be deemed to be a prior director regardless of when the individual took office.
Limitation on BlackRock Business Activities
We have agreed in the IPO Agreement that as long as PNC, or a successor company, or a PNC subsidiary owns any of our capital stock, or the capital stock of any successor entity to us, we are prohibited from directly or indirectly owning any asset or engaging in any activity if to do so would mean that we or PNC would be in violation of any applicable federal banking law or any rule, regulation, policy or order of any federal banking regulator which has regulatory jurisdiction over us or PNC. We have further agreed to take any action necessary to ensure compliance with the foregoing provision, including, without limitation, obtaining approval from or filing an application or notice with one or more federal banking regulators. See "Description of Capital Stock--Certificate of Incorporation and Bylaw Provisions--Certain Business Activities."
Other BlackRock Covenants
After the offerings, PNC will continue to own a significant portion of our outstanding voting stock. As a result, PNC will continue to include us as a "subsidiary" for various financial reporting, accounting and other purposes. Accordingly, we have agreed to certain covenants in the IPO Agreement. Certain of these covenants are described below:
Financial Information. We have agreed that, for so long as PNC is required to consolidate our results of operations and financial position or account for its investment in BlackRock using the equity method of accounting, and subject to appropriate confidentiality provisions to protect the confidentiality commitments we have made to our customers, we will:
. provide PNC certain financial information regarding BlackRock and our subsidiaries;
. provide PNC copies of all quarterly and annual financial information and other reports and documents we intend to file with the SEC prior to such filings, as well as final copies upon filing;
. provide PNC with copies of our budgets and financial projections, as well as the opportunity to meet with our management to discuss such budgets and projections;
. consult with PNC regarding the timing and content of earnings releases; and
. cooperate fully, and cause our accountants to cooperate fully, with PNC in connection with any of its public filings.
Auditors and Audits; Annual Statements and Accounting. We have agreed that, for so long as PNC is required to consolidate our results of operations and financial position or account for its investment in BlackRock under the equity method of accounting, we will:
. provide to PNC and its auditors all information required for PNC to meet its schedule for the filing and distribution of its financial statements; make available to PNC and its auditors work papers related to the annual audit of BlackRock as well as access to the personnel who perform the annual audit and our subsidiaries' books and records so that PNC and its auditors may conduct reasonable audits relating to our financial statements; and adhere to certain accounting standards specified by PNC;
. notify and consult with PNC regarding any changes to our accounting principles; and
. make any changes to our accounting estimates and principles requested by PNC which are necessary to the proper presentation of PNC's financial statements in accordance with generally accepted accounting principles ("GAAP").
We have generally agreed to indemnify PNC and its affiliates against all liabilities arising out of any incorrect, inaccurate or incomplete financial and other information we provide to PNC pursuant to the terms of the IPO Agreement.
Other Covenants. Until the Trigger Date, we have agreed that:
. we will not, without PNC's prior written consent, which it may withhold in its sole and absolute discretion, take any action which limits PNC's ability to freely sell, pledge or otherwise dispose of shares of our common stock or limits the legal rights of or denies any benefit to PNC as a BlackRock stockholder in a manner not applicable to BlackRock stockholders generally; and
. to the extent that PNC is a party to, or enters into, any agreements that provide that certain actions of PNC's subsidiaries may result in PNC being in breach or default under such agreements, and we have been advised of the existence of such agreements, we will not take any actions that may result in PNC being in breach or default under any such agreement.
Expenses
In general, unless otherwise provided for in the IPO Agreement or any other agreement, we and PNC will pay our respective costs and expenses incurred in connection with the offerings.
Registration Rights Agreement
PNC and our employees who hold shares of class B common stock could not freely sell such shares without registration under the Securities Act. Accordingly, we have entered into a Registration Rights Agreement (as amended from time to time, the "Registration Rights Agreement") with PNC and our employee shareholders to provide them with certain registration rights relating to the shares of our class B common stock that they hold. Any shares of class B common stock sold by PNC or any employee shareholder under the Registration Rights Agreement will be converted to shares of class A common stock. No shares may be sold under the Registration Rights Agreement until the expiration of the 180-day lock-up period. See "Shares Eligible for Future Sale."
Shares Covered. The Registration Rights Agreement covers those shares of our class B common stock that are held by PNC and shares of class B common stock held by our employee shareholders that are not subject to restrictions or transfer immediately following the offerings and any restricted shares of class B or class A common stock that PNC or our employee shareholders acquire in the future.
Demand Registrations. PNC or employee shareholders holding a majority in interest of the class B common stock held by all employee shareholders may request registration (each a "Demand Registration") under the Securities Act of all or any portion of our shares covered by the Registration Rights Agreement and we will be obligated to register such shares as requested by PNC or the employee shareholders.
. Terms of Each Offering. PNC or the employee shareholders will designate the terms of each offering effected pursuant to a Demand Registration, which may take any form, including:
(1) an underwritten public offering;
(2) a shelf registration;
(3) in the case of PNC, a registration in connection with the distribution of, or exchange of or offer to exchange, shares of our common stock to holders of debt or equity securities of PNC, a subsidiary or affiliate thereof or any other person; or
(4) in the case of PNC, a distribution in connection with the registration by PNC or a subsidiary or affiliate thereof of securities convertible into, exercisable for or otherwise related to such shares of our common stock.
Except for an offering described in clauses (3) and (4) above, each Demand Registration must meet a certain minimum aggregate expected offering price.
. Timing of Demand Registration. We are not required to undertake a Demand Registration within 90 days of the effective date of a previous Demand Registration, other than a Demand Registration that was effected as a shelf registration. Also, we have the right to postpone the filing or effectiveness of any Demand Registration for up to 90 days if in our reasonable judgment such registration would reasonably be expected to have a material adverse effect on any existing proposal or plans by our company to engage in certain material transactions, provided, however, that we may exercise this right only once in any 12-month period.
. Priority on Demand Registrations. Other parties, including us, can participate in any Demand Registration only if all of the securities PNC and our employee shareholders propose to include in such registration are so included.
Piggyback Registrations. The Registration Rights Agreement also provides for certain "piggyback" registration rights for PNC and our employee shareholders. Whenever we propose to register any of our securities under the Securities Act for ourselves or others, subject to certain customary exceptions, we must provide prompt notice to PNC and our employee shareholders and include in such registration all shares of our stock which PNC or our employee shareholders request to be included (each, a "Piggyback Registration").
. Priority on Piggyback Registrations. If a Piggyback Registration is being made on our behalf and the underwriters advise us that cutbacks are necessary, we must include in such registration:
. first, the securities we propose to offer;
. second, the securities requested to be included by PNC and our employee shareholders; and
. third, any other securities requested to be included in such registration.
If a Piggyback Registration is being made on behalf of other holders of our securities and the underwriters advise us that cutbacks are necessary, we must include in such registration:
. first, the securities requested to be included therein by the holders requesting such registration and the securities requested to be included therein by PNC and our employee shareholders, pro rata among such holders and PNC and our employee shareholders on the basis of the number of securities owned by each such holder; and
. second, any other securities requested to be included in such registration.
Registration Procedures and Expenses. The Registration Rights Agreement sets forth customary registration procedures, including a covenant by us to make available our senior management for road show presentations. All registration expenses incurred in connection with the Registration Rights Agreement, including all filing fees, fees and expenses of compliance with securities and/or blue sky laws, financial printing expenses, fees and disbursements of custodians, transfer agents, exchange agents and/or information agents, and fees and disbursements of counsel for our company and all independent certified public accountants, underwriters, excluding discounts and commissions, and other persons retained by us will be paid by us. In addition, we must reimburse PNC and our employee shareholders for the fees and disbursements of their outside counsel as well as out-of-pocket expenses incurred in connection with any such registration.
Indemnification. The Registration Rights Agreement contains customary indemnification and contribution provisions by us for the benefit of PNC, our employee shareholders and any underwriters and by PNC and our employee shareholders for the benefit of us and any underwriters with respect to information provided by PNC or our employee shareholders.
Transfer. PNC and our employee shareholders may transfer shares covered by the Registration Rights Agreement and the holders of such transferred shares will be entitled to the benefits of the Registration Rights Agreement, provided that each such transferee agrees to be bound by the terms of the Registration Rights Agreement. Such transferees will be entitled to the rights available to PNC or our employee shareholders described above. Any successor entities to our company will be bound by the terms of the Registration Rights Agreement.
Duration. The registration rights under the Registration Rights Agreement will remain in effect with respect to any shares of our shares of class B common stock until:
. such shares have been sold pursuant to an effective registration statement under the Securities Act;
. such shares have been sold to the public pursuant to Rule 144 under the Securities Act, or any successor provision;
. such shares have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by us and subsequent public distribution of them shall not require registration of them under the Securities Act or any similar state law;
. such shares have ceased to be outstanding; and
. in the case of shares held by a transferee of PNC or any employee shareholder, when such shares become eligible for sale pursuant to Rule 144(k) under the Securities Act, or any successor provision.
DESCRIPTION OF CAPITAL STOCK
Our authorized equity capital consists of shares of class A common stock, $.01 par value per share, shares of class B common stock, $.01 par value per share, (the class A common stock and class B common stock, together, the "common stock"), and shares of preferred stock, $.01 par value per share. No preferred stock is outstanding as of the date of this prospectus. Of the class A common stock authorized, shares are being offered in the offerings ( shares if the underwriters' over- allotment options are exercised in full). class A common shares have been reserved for issuance pursuant to certain of our employee benefits plans. See "Management -- Executive Compensation." Of the shares of class B common stock authorized, will be outstanding and held by PNC (or its affiliates) and certain employee stockholders. The following summary description of our capital stock is qualified by reference to our certificate of incorporation and bylaws, copies of which are filed as exhibits to the registration statement, and to Delaware corporate law.
Common Stock
Voting Rights
The holders of class A common stock and class B common stock generally have identical rights. The one exception is that, on all matters to be voted on by stockholders, holders of class A common stock are entitled to one vote per share, whereas holders of class B common stock are entitled to five votes per share. Holders of shares of class A common stock and class B common stock are not entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of class A common stock and class B common stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any outstanding preferred stock.
Except as otherwise provided by law or in our certificate of incorporation or bylaws, and subject to any voting rights granted to holders of any outstanding preferred stock, amendments to our certificate of incorporation generally must be approved by a majority of the combined voting power of all class A common stock and class B common stock voting together as a single class. Amendments to our certificate of incorporation that would alter or change the powers, preferences, or special rights of the class A common stock or the class B common stock so as to affect them adversely also must be approved by a majority of the votes entitled to be cast by the holders of the shares adversely affected by the amendment, voting as a separate class. Holders of class A common stock are not eligible to vote on any change in the powers, preferences, or special rights of the class B common stock that would not adversely affect the rights of the class A common stock (and vice versa). For the foregoing purposes, any provisions for the voluntary, mandatory or other conversion of class B common stock into or for class A common stock on a one- for-one basis are deemed not to adversely affect the rights of the class A common stock. Any amendment to our certificate of incorporation to increase the authorized shares of any class or classes of capital stock will be deemed not to affect adversely the powers, preferences, or special rights of the class A common stock or class B common stock.
Dividends
Holders of class A common stock and class B common stock will receive an equal amount per share in any dividend declared by the board of directors. Dividends to any holders of common stock are subject to any preferential rights of any outstanding preferred stock. In addition, because BlackRock is a consolidated subsidiary of PNC, federal restrictions on payment of dividends by PNC may apply to BlackRock. See "Business --Regulation." Dividends consisting of shares of class A common stock and class B common stock may be paid only as follows:
. shares of class A common stock may be paid only to holders of class A common stock and shares of class B common stock may be paid only to holders of class B common stock; and
. shares will be paid proportionally with respect to each outstanding share of class A common stock and class B common stock.
We may not reclassify, subdivide or combine the shares of either class of common stock without at the same time proportionally reclassifying, subdividing or combining shares of the other class.
Conversion
Except in certain circumstances described below, if a holder of shares of class B common stock attempts to transfer any shares to another person, each share of class B common stock will automatically be converted into one share of class A common stock, and the transferee then will be treated for all purposes as having become a record owner of the class A common stock issuable upon such conversion. The only transfers of class B common stock which will not result in automatic conversion into class A common stock are the following:
. any transfer of shares of class B common stock by a holder of class B common stock to any person who, prior to the transfer, already held shares of class B common stock (a "Permitted Transferee");
. any transfer of class B common stock held by PNC or a PNC Transferee to any one person if such person will thereby hold a least a majority of the voting power of our common stock;
. any transfer of 5% or more of the then outstanding shares of class B common stock by a holder of class B common stock to any one person; or
. any transfer of shares of class B common stock by our employee stockholders to the estate, personal representative or certain family members of the employee stockholder, or to certain entities which hold economic interests for the benefit of any such persons, as described below in "Shareholders Agreement."
Other Rights
In the event of any reorganization or consolidation of BlackRock with one or more corporations or a merger of BlackRock with another corporation in which shares of common stock are converted into or exchangeable for shares of stock, other securities or property, including cash, all holders of common stock, regardless of class, will be entitled to receive the same kind and amount of shares of stock and other securities and property, including cash, unless otherwise approved by a majority of the votes entitled to be cast by the holders of each class of common stock, voting separately as a class.
On liquidation, dissolution, or winding up of BlackRock, after payment in full of any amounts required to be paid to holders of preferred stock, all holders of common stock, regardless of class, are entitled to share ratably in any assets available for distribution to holders of shares of common stock. No shares of common stock are subject to redemption or have preemptive rights to purchase additional shares of common stock, except as provided under the terms of the IPO Agreement. Under the IPO Agreement, PNC has the right, at its option, any time we issue additional shares of common stock, to purchase a sufficient number of shares of common stock so that PNC maintains its proportionate economic and voting rights after the issuance as it had before the issuance of common stock. See "Certain Relationships and Related Transactions--IPO Agreement--Subsequent Issuances of Common Stock and Additional Purchases of Common Stock by PNC." Upon consummation of the offerings, all the outstanding shares of class A common stock and class B common stock will be validly issued, fully paid, and nonassessable.
Shareholders Agreement
BlackRock, PNC Asset Management, Inc., the indirect, wholly owned subsidiary of PNC that holds PNC's shares of class B common stock, and certain employees of BlackRock, or its affiliates, who will hold shares of class B common stock, have been parties to a Shareholders Agreement since January 31, 1998. These parties will enter into an Amended and Restated Shareholders Agreement which will become effective when the offerings are completed. In the Amended Shareholders Agreement, BlackRock, PNC and the employee Shareholders have agreed to certain matters regarding the corporate governance and operations of BlackRock, certain restrictions that will be applicable to the shares of class B common stock held by the employee stockholders and certain rights and arrangements if any holder of class B shares proposes to sell or otherwise dispose of any of his, her or its class B shares. Except for the restrictions imposed by the Amended Shareholders Agreement, the rights and privileges attaching to the shares of class B common stock held by the employee stockholders are identical to those attaching to other shares of class B common stock.
The Amended Shareholders Agreement provides that at least four directors on the BlackRock board of directors will be designated by PNC and that at least two BlackRock directors shall be designated by the BlackRock management committee. Accordingly, the employee stockholders have agreed to vote their shares of class B common stock for four PNC nominees in elections of directors. PNC has also agreed, subject to applicable law and its fiduciary duties, to vote its shares of class B common stock for two BlackRock management committee nominees in elections of directors.
Under the terms of the Amended Shareholders Agreement, employees generally may not transfer their class B shares, except for certain limited transfers to permit employees to engage in estate planning. However, one-third of the class B shares held by the employee stockholders will no longer be subject to this transfer restriction as of December 31, 2000. The second third will no longer be subject to this restriction as of December 31, 2001. The final third will no longer be subject to this restriction as of December 31, 2002. Upon the death or disability of an employee or under certain circumstances when an employee is terminated by us, all of such employee's class B shares will no longer be subject to this restriction on transfer. Any transfers of employees' class B shares made in violation of the terms of the Amended Shareholders Agreement are null and void.
Any class B shares held by any employee stockholder or valid transferee of any employee stockholder that are still subject to a restriction on transfer must be repurchased by us immediately after the employee stockholder ceases to be an employee at the lower of:
. the market value of the shares, which will be equal to the market value of shares of class A common stock, or
. the cost at which the shares were originally acquired by the employee stockholder.
The Amended Shareholders Agreement provides that any proposed transfer or disposition of class B common stock by PNC, or any transfer or disposition of unrestricted employee shares by employee stockholders or valid transferees, will be subject to a right of first refusal and in certain circumstances, rights to participate in the proposed transfer or disposition by the other holders of class B common stock as follows:
. The right of first refusal means that before a holder of class B common stock can sell any of its shares of class B common stock to a third party, it must first offer the shares on the same terms as offered to the third party to the other holders of class B common stock for purchase in proportion to their respective ownership interests. Any shares which are not claimed under the right of first refusal within 30 days may then be sold to the third party at a price that is at least as high as was originally proposed.
. The rights to participate in the proposed transfer or disposition apply if a holder of class B common stock proposes to transfer to a third party shares constituting more than 5% of the
then outstanding class B common stock. In that event, any other holder of class B common stock who does not exercise the right to purchase the shares pursuant to the right of first refusal described above may instead require the transferring stockholder to include a portion of the holder's unrestricted shares in the block of shares being sold to the third party.
The right of first refusal and rights to participate in the proposed transfer or disposition are not applicable to transfers of shares of class B common stock among PNC affiliates.
Preferred Stock
At the date of this prospectus, no shares of preferred stock are outstanding. The board of directors may authorize the issuance of preferred stock in one or more series and may determine, with respect to any series, the designations, powers, preferences, and rights of the series, and its qualifications, limitations, and restrictions, including, without limitation:
. the designation of the series;
. the number of shares of the series, which number the board of directors may later increase or decrease, unless otherwise provided in the designations for the series; however, the number of shares cannot be decreased below the number of shares of the series then outstanding;
. whether dividends, if any, will be cumulative or noncumulative and the dividend rate of the series; the conditions upon which and the dates at which dividends, if any, will be payable, and the relation that those dividends, if any, will bear to the dividends payable on any other class or classes of stock;
. the redemption rights and price or prices, if any, for shares of the series;
. the terms and amounts of any sinking fund provided for the purchase or redemption of shares of the series;
. the amounts payable on shares of the series and the preferences, if any, of shares of the series in the event of any voluntary or involuntary liquidation, dissolution, or winding up of BlackRock;
. whether the shares of the series will be convertible into shares of any other class or series, or any other security, of BlackRock or any other corporation; if the shares will be convertible, the specification of the other class or series or the other security, the conversion price or prices or rate or rates, any applicable adjustments, the date or dates at which the shares will be convertible and all other terms and conditions upon which the conversion may be made;
. restrictions, if any, on the issuance of shares of the same series or of any other class or series of BlackRock capital stock; and
. the voting rights, if any, of the holders of shares of the series.
We believe that the ability of the board of directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs that might arise. The authorized shares of preferred stock will be available for issuance without further action by our stockholders, unless action is required by applicable law or the rules of any stock exchange on which our securities may be listed or traded. The NYSE, on which BlackRock expects to list the class A common stock, currently requires stockholder approval as a prerequisite to listing shares in several instances, including where the present or potential issuance of shares could result in an increase of at least 20% in the number of shares of common stock outstanding or in the amount of voting securities outstanding.
Although the board of directors has no current intention of doing so, it could issue a series of preferred stock that could, depending on the terms of the series, impede the completion of a merger, tender offer, or other takeover attempt. The board of directors will make any determination to issue shares based on its judgment as to the best interests of BlackRock and our stockholders. In making its determination, the board of directors could issue preferred stock having terms that could discourage a potential acquirer from making an acquisition attempt that may change the composition of the board of directors, without first negotiating with the board of directors. The transactions that might be discouraged could include a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then current market price of the stock.
Delaware Business Combination Statute
Our amended and restated certificate of incorporation provides that
Section 203 of the Delaware General Corporation Law, which restricts certain
business combinations between a corporation and certain interested stockholders
of that corporation, is not applicable to us. However, our amended and restated
certificate of incorporation contains provisions that as of and following the
Trigger Date will restrict transactions between us and interested stockholders
in the same manner such transactions would be restricted if we were subject to
Section 203. See "--Certificate of Incorporation and Bylaw Provisions--
Restrictions on Business Combinations."
Certificate of Incorporation and Bylaw Provisions
The summary set forth below describes material provisions of the certificate of incorporation and bylaws. The summary is qualified in its entirety by reference to the provisions of the certificate of incorporation and bylaws, copies of which were filed as exhibits to the registration statement of which this prospectus forms a part.
Certain of the provisions of the certificate of incorporation or the bylaws discussed below may, following the Trigger Date, either alone or in combination with the provisions of the Delaware General Corporation Law discussed above, make more difficult or discourage a tender offer, proxy contest or other takeover attempt that is opposed by the board of directors but that a stockholder might consider to be in such stockholder's best interest. Those provisions include restrictions on the rights of stockholders to remove or elect directors and prohibitions against stockholders calling a special meeting of stockholders. Prior to the Trigger Date, these provisions will have little practical significance in terms of discouraging takeover attempts because such attempts cannot succeed so long as PNC or a PNC Transferee owns 50% of more of our voting power. In addition, the certificate of incorporation contains provisions relating to the allocation of certain corporate opportunities and resolution of certain conflicts of interest.
Staggered Board
The certificate of incorporation and the bylaws divide the board of directors into three classes of directors, each class constituting approximately one-third of the total number of directors. One class will be originally elected for a term expiring at the annual meeting of stockholders to be held in 2000, another will be originally elected for a term expiring at the annual meeting of stockholders to be held in 2001 and another will be originally elected for a term expiring at the annual meeting of stockholders to be held in 2002. Each director is to hold office until his or her successor is duly elected and qualified. Commencing with the 2000 annual meeting of stockholders, directors elected to succeed directors whose terms then expire will be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until such person's successor is duly elected and qualified.
The classification of the board of directors will make it more difficult for stockholders to change the composition of the board of directors because only a minority of the directors can be elected at once. The classification provisions could also discourage a third party from accumulating BlackRock's stock or attempting to obtain control of BlackRock, even though this attempt might be beneficial to BlackRock and some, or a
majority, of its stockholders. Accordingly, under certain circumstances stockholders could be deprived of opportunities to sell their shares of common stock at a higher price than might otherwise be available.
Number and Composition of Directors; Filling Vacancies; Removal
The certificate of incorporation and bylaws provide that the board of directors will consist of a number of directors as may be fixed from time to time pursuant to a resolution adopted by directors constituting, prior to the Trigger Date, at least 80% of the directors on the board of directors, and as of and following the Trigger Date, a majority of the board of directors. The bylaws provide that of the six directors currently in office, four directors are to be designated by PNC, including its affiliates and two directors are to be designated by a majority of our employee stockholders holding shares of class B common stock. The certificate of incorporation provides that unless the board of directors otherwise determines, any vacancies on the board of directors will be filled only by the affirmative vote of a majority of the remaining directors, even if less than a quorum, or by a sole remaining director. These provisions would be subject to any rights of holders of preferred stock to elect directors under specified circumstances. Accordingly, absent an amendment to the certificate of incorporation or the bylaws, the board of directors could prevent any stockholder from enlarging the board of directors and filling the new directorships with such stockholder's own nominees.
The certificate of incorporation and the bylaws provide that as of and following the Trigger Date, a director may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of common stock entitled to vote generally in the election of directors, voting together as a single class. Prior to the Trigger Date, directors may be removed, with or without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding voting stock, voting together as a single class. This means that prior to the Trigger Date, PNC or a PNC Transferee will always have the power to remove any director, subject to its obligations under the Amended Shareholders Agreement. See "--Shareholders Agreement."
Committees
The bylaws provide that, to the extent permitted by applicable law or stock exchange policy,
. prior to the Trigger Date, a majority of all of the directors on the committees of the board of directors will be directors designated by PNC or by a PNC Transferee, and
. at least one director on each committee of the board of directors will be a director designated by a majority of our employee stockholders holding shares of class B common stock.
Quorum; Certain Board Voting Requirements
The bylaws provide that a quorum for the transaction of business by the board of directors at a meeting will only be constituted if a majority of the board of the directors, including the chairman of the board of directors and two directors designated by PNC, are present at the meeting, provided, that the board of directors will be entitled to take any action at any meeting if a quorum is otherwise present if, after having been sent required notice of the meeting, either all of the directors designated by PNC or the chairman of the board are absent from the meeting and the absent PNC designated directors or chairman of the board will have failed to communicate in writing to the secretary of BlackRock good reason for such absence in advance of the relevant meeting. The bylaws also provide that, except as otherwise provided by applicable law, certain bylaw amendments and other matters which may significantly affect the economic interests of PNC or of a PNC Transferee, including but not limited to those relating to: changes in the size and composition of the board of directors, mergers, acquisitions and certain other significant transactions, issuance of additional stock, incurrence of indebtedness, engaging in new business activities, proposed changes in auditors and dividend declarations, may only be acted upon or put into effect by the affirmative vote of 80% of the board of directors.
Based on the expected composition of the board of directors following the offerings, an affirmative vote of 80% of the board of directors would require the affirmative vote of at least two directors who are designated to be directors by PNC or a PNC Transferee.
Certain Business Activities
The bylaws provide that so long as PNC, or any successor company, or any of PNC's subsidiaries or their respective successors, directly or indirectly owns any of the capital stock of BlackRock, or any successor company, BlackRock or its successor entity may not own directly or indirectly own any asset or engage in any activity if to do so would cause BlackRock or any of its subsidiaries or the PNC entity that owns capital stock of BlackRock or any successor to such PNC entity, to be in violation of any applicable federal banking law or any rule, regulation, policy or order of any federal banking regulator with jurisdiction over BlackRock or the PNC entity or any successor to such PNC entity. The bylaws further provide that BlackRock will, and will cause its subsidiaries to, take any necessary action to ensure compliance with the foregoing provision, including, without limitation, obtaining any required approval from, or filing any required notice or application with, any applicable federal banking agency.
No Stockholder Action by Written Consent
The certificate of incorporation and bylaws provide that, subject to the rights of any holders of preferred stock to elect additional directors under specified circumstances,
. effective as of the Trigger Date, stockholder action can be taken only at an annual or special meeting of stockholders and stockholder action may not be taken by written consent in lieu of a meeting; and
. prior to the Trigger Date, any stockholder action can be taken by written consent in lieu of an annual or special meeting of stockholders as permitted by law.
Advance Notice Procedures
The bylaws provide for an advance notice procedure for the nomination, other than by or at the direction of the board of directors, of candidates for election as directors, as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise matters at meetings will have to be received in writing by BlackRock not less than 90 nor more than 120 days prior to the anniversary of the previous year's annual meeting of stockholders. The notice must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal.
Special Meetings
The certificate of incorporation and bylaws provide that special meetings of stockholders can be called only by BlackRock's chairman or president or a majority of the board of directors. Prior to the Trigger Date, special meetings can also be called at the request of PNC or a PNC Transferee. Effective as of the Trigger Date, the power of any stockholder to call a special meeting is specifically denied. This provision is subject to the rights of holders of any series of preferred stock to elect additional directors under specified circumstances. The business permitted to be conducted at any special meeting of stockholders is limited to the business brought before the meeting pursuant to the notice of meeting.
The provisions of the bylaws permitting special meetings to be called only by BlackRock's chairman or president or at the request of a majority of the board of directors may have the effect, after the Trigger Date, of delaying consideration of a stockholder proposal until the next annual meeting. Moreover, a stockholder could not force stockholder consideration of a proposal over the opposition of BlackRock's chairman or president or a majority of the board of directors by calling a special meeting of stockholders prior to the time they believe stockholder consideration to be appropriate.
Business Combination Transaction Restrictions
As of and following the Trigger Date, we will be subject to restrictions on certain business combinations between us and an interested stockholder set forth in our certificate of incorporation. These restrictions are intended to be equivalent to the restrictions on business combinations with interested stockholders imposed by Section 203 of the Delaware General Corporation Law. BlackRock has elected not to be subject to Section 203 of the Delaware General Corporation Law. The following discussion is a summary of these restrictions in our certificate of incorporation. An "interested stockholder" is a stockholder owning 15% or more of our outstanding voting stock or its affiliates or associates for a period of three years following the time that the stockholder becomes an "interested stockholder." The restrictions do not apply if:
. prior to an interested stockholder becoming an interested stockholder, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in any person becoming an interested stockholder, the interested stockholder owned at least 85% of our voting equity outstanding at the time the transaction commenced (excluding shares owned by certain employee equity ownership plans and persons who are both our directors and officers); or
. at or subsequent to the time an interested stockholder becomes an interested stockholder, the business combination is both approved by the board of directors and authorized at an annual or special meeting of our stockholders, not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting equity not owned by the interested stockholder.
Under certain circumstances, these provisions will make it more difficult for a person who would be an "interested stockholder" as of and following the Trigger Date to effect various business combinations with us for a three-year period. Although the stockholders may elect to repeal these restrictions, the repeal would not take effect for twelve months following stockholder approval of the repeal. It is anticipated that these provisions may encourage companies interested in acquiring us to negotiate in advance with the board of directors, since the stockholder approval requirement would be avoided if a majority of the directors then in office approves, prior to the date on which a stockholder becomes an interested stockholder, either the business combination or the transaction that results in the stockholder becoming an interested stockholder.
These restrictions on business combination transactions with interested stockholders will not be applicable prior to the Trigger Date. Therefore, these restrictions will not be applicable to any proposed business combination transactions between us and PNC or any PNC Transferee.
Liability of Directors; Indemnification
BlackRock's certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporation Law, no director of BlackRock will be liable to BlackRock or its stockholders for monetary damages for the breach of his or her fiduciary duty as a director. Under the Delaware General Corporation Law, this provision does not eliminate or limit the liability of any director if a judgment or other final adjudication establishes that his or her acts or omissions constituted a breach of his or her duty of loyalty to BlackRock or its stockholders or were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained a material profit or other advantage to which he was not legally entitled or that his acts violated Section 174 of the Delaware General Corporation Law.
As a result of this provision, BlackRock and its stockholders may be unable to obtain monetary damages from a director for breach of his duty of care. Although stockholders may continue to seek injunctive or other equitable relief for an alleged breach of fiduciary duty by a director, stockholders may not have any effective remedy against the challenged conduct if equitable remedies are unavailable.
The bylaws provide that BlackRock will indemnify, to the maximum extent not prohibited by Delaware law, any person who was or is a party to any threatened, pending, or completed action, suit or proceeding because he or she is or was a director or officer of BlackRock, or is or was serving at the request of BlackRock as a director or officer of another corporation, partnership or other enterprise. The bylaws provide that indemnification will be from and against expenses, judgments, fines and amounts paid in settlement by the director or officer.
Overview of Corporate Opportunity and Conflict of Interest Policies
Our certificate of incorporation sets forth certain provisions which regulate and define the conduct of certain business and affairs of BlackRock from the time of the completion of the offerings until the time PNC ceases to be the owner of voting stock representing 25% or more of the votes entitled to be cast by the holders of all the then outstanding voting stock. For purposes of this section, "PNC" will include PNC as well as its affiliates and any PNC Transferee. These provisions serve to determine and delineate the respective rights and duties of BlackRock, PNC and certain of their respective directors, officers and employees, in anticipation that:
. directors, officers, and/or employees of PNC may serve as directors of BlackRock;
. PNC engages in and is expected to continue to engage in lines of business that are the same, similar or related to, overlap or compete with the lines of business of BlackRock; and
. PNC and BlackRock will engage in material business transactions, including, without limitation, pursuant to the agreements described under "Certain Relationships and Related Transactions."
BlackRock may, from time to time, enter into and perform agreements with PNC to engage in any transaction, and to agree to compete or not to compete with each other, including to allocate, or to cause their respective directors, officers and employees to allocate, corporate opportunities between themselves. BlackRock may also enter into such agreements with its own or PNC's directors, officers or employees, or with other entities in which these persons have a financial interest. The certificate of incorporation provides that:
. no such agreement will be void or voidable solely due to the nature of the parties thereto,
. no such agreement, or the performance thereof, will be considered contrary to any fiduciary duty of PNC, as the controlling stockholder of BlackRock, or of any directors, officers and/or employees, and
. the parties to any such agreement will be deemed to have acted in good faith and in a manner they reasonably believed to be in and not opposed to the best interests of BlackRock, and will be deemed not to have derived an improper personal benefit from the agreement, if one or more of the following conditions are satisfied:
(1)the agreement was entered into before the offerings and is continued in effect after that time; or
(2)the agreement or transaction was approved or ratified, after being made aware of the material facts of the relationship between BlackRock and PNC and the material terms and facts of the agreement or transaction, by:
(a)BlackRock's board, by affirmative vote of a majority of directors who are not Interested Persons, as defined in BlackRock's certificate of incorporation,
(b)by a committee of BlackRock's board consisting of members who are not Interested Persons, by affirmative vote of a majority of such members, or
(c)by one or more officers or employees of BlackRock who is not an Interested Person and who was authorized by BlackRock's Board or committee thereof as specified in clauses (a) and (b) above or, in the case of an employee, to whom the authority has been delegated by an officer to whom the authority to approve or ratify the agreement or transaction has been so delegated; or
(3)the agreement or transaction was fair to BlackRock as of the time it was entered into by BlackRock; or
(4)the agreement or transaction was approved or ratified by affirmative vote of a majority of the shares of capital stock entitled to vote thereon and who do vote thereon, excluding PNC and any Interested Person in respect of such agreement or transaction.
The provisions of our certificate of incorporation with regard to such transactions and/or corporate opportunities will terminate at such time as when PNC ceases to be the owner of voting stock representing 25% or more of the votes entitled to be cast by the holders of all the then outstanding voting stock; provided, however, that the termination will not terminate the effect of those provisions with respect to any agreement between BlackRock and PNC that was entered into before that time or any transaction entered into in the performance of such agreement, whether entered into before or after that time, or any transaction entered into between BlackRock and PNC for the allocation of any opportunity between them before that time. These provisions do not alter the fiduciary duty of loyalty of our directors under applicable Delaware law. Subject to applicable Delaware law, by becoming a stockholder in BlackRock, you will be deemed to have notice of and have consented to these provisions of our certificate of incorporation. These provisions may be amended only with the affirmative vote of the holders of at least 80% of the voting power of all shares of voting stock then outstanding, voting together as a single class.
Amendment
In general, our certificate of incorporation may be altered or repealed and new provisions thereof adopted by the affirmative vote of the holders of a majority of the outstanding voting stock and by the affirmative vote of a majority of the board of directors. Similarly, our bylaws may be altered or repealed and new provisions thereof adopted by the affirmative vote of the holders of a majority of the outstanding voting stock or by the affirmative vote of a majority of the board of directors, except that prior to the Trigger Date, the board of directors will only be able to effect such an amendment through the affirmative vote of at least 80% of the members of the board of directors. As of and following the Trigger Date, certain provisions of our certificate of incorporation and bylaws, including those relating to stockholder action by written consent, the calling of special stockholder meetings, other stockholder actions and proposals and certain matters related to our board of directors, may be amended only by the affirmative vote of holders of at least 80% of the voting stock.
Listing
We intend to apply for the listing of the class A common stock on the NYSE under symbol " ."
Transfer Agent and Registrar
The transfer agent and registrar for the class A common stock is .
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offerings, we will have outstanding shares of class A common stock and shares of class B common stock. All of the shares of class A common stock to be sold in the offerings will be freely tradable without restrictions or further registration under the Securities Act, except that shares purchased by one of our "affiliates" (as that term is defined in Rule 144) will be subject to the resale limitations of Rule 144. The shares of class A and class B and common stock owned by PNC and our other existing stockholders are "restricted securities" as defined in Rule 144 under the Securities Act, and may not be sold in the absence of registration under the Securities Act other than pursuant to Rule 144 under the Securities Act or another exemption from registration under the Securities Act.
In general, under Rule 144:
. a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of common stock as to which at least one year has elapsed since such shares were sold by us or by an affiliate in a transaction or chain of transactions not involving a public offering ("restricted securities"); or
. an affiliate who holds shares of common stock that are not restricted securities
may sell, within any three-month period, a number of shares that does not exceed the greater of 1% of our class of common stock then outstanding or the average weekly trading volume in the class of common stock during the four calendar weeks preceding the date on which notice of the sale required under Rule 144 was filed. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and availability of current public information about us.
Affiliates must comply with the requirements of Rule 144, including the one-year holding period requirement, to sell shares of common stock that are restricted securities. Furthermore, if a period of at least two years has elapsed from the date restricted securities were acquired from us or an affiliate, a holder of restricted securities who is not an affiliate at the time of the sale and has not been an affiliate at any time during the three months prior to the sale would be entitled to sell the shares without regard to the volume limitation and other conditions described above.
The shares of common stock authorized for issuance pursuant to options that may be granted under the Award Plan may be either authorized but unissued shares or treasury shares obtained by us through market or private purchases. See "Management--1999 Stock Award and Incentive Plan." We intend to register under the Securities Act the shares of common stock issuable upon the exercise of options granted pursuant to the Award Plan.
Prior to the offerings, there has been no public market for the common stock. Although we can make no prediction as to the effect, if any, that sales of shares of common stock by PNC and our other existing stockholders would have on the market price prevailing from time to time, sales of substantial amounts of common stock or the availability of the shares for sale could adversely affect prevailing market prices.
All of our executive officers, directors and stockholders have entered into contractual "lock-up" agreements, providing that subject to certain limited exceptions they will not during the period of 180 days from the date of this prospectus, without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of or otherwise transfer or dispose of, any common stock or any securities convertible into or exercisable or
exchangeable for common stock, whether now earned or subsequently acquired or to which officers, directors and stockholders have or later acquire the power of disposition, or file any registration statement under the Securities Act with respect to any of the foregoing; or
. enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock;
In each case, whether the swap or transaction is settled by delivery of common stock or other securities, in cash or otherwise.
As a result of contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rule 144 promulgated under the Securities Act, which are summarized above, shares subject to lock-up agreements will not be saleable until the agreements expire.
We have agreed subject to certain limited exceptions not to, during the period of days from the date of this prospectus, without the prior written consent of Merrill Lynch, directly or indirectly:
. offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of, any common stock or any securities convertible into or exercisable or exchangeable for common stock or file any registration statement under the Securities Act with respect to any of the foregoing; or
. enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock;
in each case, whether the swap or transaction is settled by delivery of common stock or other securities, in cash or otherwise. However, we may:
. grant stock options or stock awards under our existing benefit and compensation plans as referred to in the prospectus;
. issue shares of class A common stock upon the exercise of options, warrants or rights or the conversion of currently outstanding securities as referred to in the prospectus; and
. issue, offer and sell shares of class A common stock or securities convertible, exercisable or exchangeable into shares of class A common stock in transactions not involving a public offering, as long as each recipient of the securities agrees in writing to be bound by the restrictions in this paragraph.
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is acting as representative (the "U.S. Representative") of each of the underwriters named below (the "U.S. Underwriters"). Subject to the terms and conditions set forth in a U.S. purchase agreement (the "U.S. Purchase Agreement") among BlackRock and the U.S. Underwriters, and concurrently with the sale of shares of class A common stock to the International Managers (as defined below), BlackRock has agreed to sell to the U.S. Underwriters, and each of the U.S. Underwriters severally and not jointly has agreed to purchase from BlackRock, the number of shares of class A common stock set forth opposite its name below.
Number of
U.S. Underwriter Shares
---------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
------
Total.................................................
======
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BlackRock has also entered into an international purchase agreement (the "International Purchase Agreement") with certain underwriters outside the United States and Canada (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters") for whom Merrill Lynch International is acting as lead manager (the "Lead Manager"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of shares of class A common stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, BlackRock has agreed to sell to the International Managers, and the International Managers severally have agreed to purchase from BlackRock, an aggregate of shares of class A common stock. The initial public offering price per share and the total underwriting discount per share of class A common stock are identical under the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of class A common stock being sold pursuant to each such agreement if any of the shares of class A common stock being sold pursuant to such agreement are purchased. In the event of a default by an Underwriter, the U.S. Purchase Agreement and the International Purchase Agreement provide that, in certain circumstances, the purchase commitments of the nondefaulting Underwriters may be increased or the Purchase Agreements may be terminated. The closings with respect to the sale of shares of class A common stock to be purchased by the U.S. Underwriters and the International Managers are conditioned upon one another.
The U.S. Representative has advised BlackRock that the U.S. Underwriters propose initially to offer the shares of class A common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of class A common stock. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of class A common stock to certain other dealers. After the initial public offerings, the public offering price, concession and discount may change.
BlackRock has granted options to the U.S. Underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of class A common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The U.S. Underwriters may exercise these options solely to cover over-allotments, if any, made on the sale of the class A common stock offered hereby. To the extent that the U.S. Underwriters exercise these options, each U.S. Underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of class A common stock proportionate to such U.S. Underwriter's initial amount reflected in the foregoing table. BlackRock has granted options to the International Managers, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of class A common stock to cover over-allotments, if any, on terms similar to those granted to the U.S. Underwriters.
The following table shows the per share and total public offering price, underwriting discount to be paid by BlackRock to the U.S. Underwriters and the International Managers and the proceeds before expenses to BlackRock. This information is presented assuming either no exercise or full exercise by the U.S. Underwriters and the International Managers of their over-allotment options.
Per Total Without Total With
Share Option Option
----- ------------- ----------
Public offering price..................... $ $ $
Underwriting discount..................... $ $ $
Proceeds, before expenses, to BlackRock... $ $ $
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The expenses of the offerings (exclusive of the underwriting discount) are estimated at $ and are payable by BlackRock.
The shares of class A common stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part.
At the request of BlackRock, the Underwriters have reserved for sale, at the initial public offering price, up to shares of the class A common stock that will be offered by this prospectus for directors, officers and employees of BlackRock and PNC. All purchasers of reserved shares will have agreed in writing not to sell, transfer, assign, pledge or hypothecate such shares for months from their date of purchase. The number of shares of class A common stock available for sale to the general public will be reduced to the extent reserved shares are purchased by such persons. Any reserved shares that are not purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered in this prospectus.
BlackRock and BlackRock's executive officers and directors and all existing stockholders have agreed, subject to exceptions, not to directly or indirectly: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell or grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of common stock or securities convertible into or exchangeable or exercisable for or repayable with common stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing; or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the common stock whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this prospectus. See "Shares Eligible for Future Sale."
The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement that provides for the coordination of their activities. Pursuant to the intersyndicate agreement, the U.S. Underwriters and the International Managers are permitted to sell shares of class A common stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the intersyndicate agreement, the U.S. Underwriters and any dealer to whom they sell shares of class A common stock will not offer to sell or sell shares of class A common stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non- Canadian persons, and the International Managers and any dealer to whom they sell shares of class A common stock will not offer to sell or sell shares of class A common stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions pursuant to the intersyndicate agreement.
Prior to the offerings, there has been no public market for the class A common stock of BlackRock. The initial public offering price will be determined through negotiations among BlackRock, PNC and the U.S. Representative and the Lead Manager. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representative and the Lead Manager believe to be comparable to BlackRock, certain financial information of BlackRock, the history of, and the prospects for, BlackRock and the industry in which it competes, and an assessment of BlackRock's management, its past and present operations, the prospects for, and timing of, future revenues of BlackRock, and the present state of BlackRock's development. There can be no assurance that an active trading market will develop for the class A common stock or that the class A common stock will trade in the public market subsequent to the offerings at or above the initial public offering price.
Application has been made to list the class A common stock on the New York Stock Exchange under the symbol " ". In order to meet the requirements for listing of the class A common stock on that exchange, the U.S. Underwriters and the International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
Because BlackRock may be deemed to be an affiliate of , the offerings will be conducted in accordance with Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which requires that the public offering price of an equity security be no higher than the price recommended by a qualified independent underwriter which has participated in the preparation of the registration statement and performed its usual standard of due diligence. Merrill Lynch has agreed to act as qualified independent underwriter with respect to the offerings, and the public offering price of the class A common stock will be no higher than that recommended by .
The Underwriters do not expect sales of the class A common stock to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby.
The Underwriters will not confirm sales of the class A common stock to any account over which they exercise discretionary authority without the prior written specific approval of the customer.
BlackRock has agreed to indemnify the U.S. Underwriters and the International Managers against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the U.S. Underwriters and International Managers may be required to make.
Until the distribution of the class A common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the class A common stock. As an exception to these rules, the U.S. Representative is permitted to engage in transactions that stabilize the price of the class A common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the class A common stock.
If the Underwriters create a short position in the class A common stock in connection with the offerings, i.e., if they sell more shares of class A common stock than are set forth on the cover page of this prospectus, the U.S. Representative may reduce that short position by purchasing class A common stock in the open market. The U.S. Representative may also elect to reduce any short position by exercising all or part of the over-allotment options described above.
The U.S. Representative may also impose a penalty bid on Underwriters and selling group members. This means that if the U.S. Representative purchases shares of class A common stock in the open market to reduce the Underwriters' short position or to stabilize the price of the class A common stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of the class A common stock to the extent that it discourages resale of the class A common stock.
Neither BlackRock nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the class A common stock. In addition, neither BlackRock nor any of the Underwriters makes any representation that the U.S. Representative will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
Certain of the underwriters and their affiliates engage in transactions with, and perform services for, BlackRock in the ordinary course of business and have engaged, and may in the future engage, in commercial banking and investment banking transactions with BlackRock. Merrill Lynch distributes BlackRock Funds and provides stockholder services in connection with those funds in the ordinary course of business, for which it receives customary compensation.
LEGAL MATTERS
Legal matters with respect to the validity of the shares of the class A common stock offered hereby will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Legal matters relating to the class A common stock will be passed upon for the underwriters by Simpson Thacher & Bartlett, New York, New York. Simpson Thacher & Bartlett has from time to time in the past and may in the future provide services to BlackRock and its affiliates for which it has or will receive customary compensation.
EXPERTS
The consolidated financial statements of BlackRock at December 31, 1997 and 1998, and for each of the three years in the periods ended December 31, 1998, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. Ernst & Young LLP also serve as PNC's independent auditors.
WHERE YOU CAN FIND MORE INFORMATION
After the offerings, we will be subject to the reporting requirements of the Securities Exchange Act of 1934 and as a result we will file reports, proxy statements and other information with the SEC. Our SEC filings will be available over the Internet at the SEC's web site at http://www.sec.gov. You may also read, without charge, or copy, at prescribed rates, any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for more information on the public reference rooms and their copy charges. You may also inspect our SEC reports and other information at The New York Stock Exchange, 20 Broad Street, New York, New York 10005.
We have filed a registration statement on Form S-1 with the SEC covering the class A common stock. For further information on us and the class A common stock, you should refer to our registration statement and its exhibits. This prospectus summarizes material provisions of contracts and other documents to which we refer you. Since the prospectus may not contain all the information that you may find important, you should review the full text of these documents. We have included copies of these documents as exhibits to our registration statement.
We intend to furnish to our stockholders annual reports containing audited consolidated financial statements and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Report of Independent Auditors.............................................. F-2 Consolidated Statements of Financial Condition.............................. F-3 Consolidated Statements of Income........................................... F-4 Consolidated Statements of Changes in Stockholders' Equity.................. F-6 Consolidated Statements of Cash Flows....................................... F-7 Notes to Consolidated Financial Statements.................................. F-8 |
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, 1997 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, 1998. These financial statements are the responsibility of BlackRock's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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, 1997 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, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 26, 1999
BLACKROCK, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollar amounts in thousands, except share data)
December 31,
-----------------
1997 1998
-------- --------
Assets
Cash and cash equivalents................................... $ 69,085 $113,450
Accounts receivable
Advisory and administration fees.......................... 28,632 47,611
BlackRock Asset Investors (BAI)........................... 7,214 58,599
Investments (cost: $5,891 in 1997 and $2,349 in 1998)....... 5,915 2,515
Property and equipment, net................................. 7,037 12,252
Goodwill (less accumulated amortization of $27,309 in 1997
and $36,962 in 1998)....................................... 213,563 203,910
Receivable from affiliate................................... 1,868 446
Other assets................................................ 2,193 2,001
-------- --------
Total assets................................................ 335,507 440,784
======== ========
Liabilities and stockholders' equity
Note and loan payable to affiliates......................... 225,232 197,000
Accrued compensation
Employees................................................. 40,424 65,523
BAI incentive compensation................................ 8,308 44,806
Accounts payable and accrued liabilities
Affiliate................................................. 7,926 16,478
Other..................................................... 5,053 7,627
Accrued interest payable to affiliates...................... 1,658 1,175
Other liabilities........................................... 1,943 1,984
-------- --------
Total liabilities........................................... 290,544 334,593
-------- --------
Stockholders' equity
Common stock, no par value, 400,000 shares authorized,
164,000 and 199,300 shares issued, respectively.......... -- --
Additional paid--in capital............................... 15,091 53,105
Retained earnings......................................... 29,872 53,286
Treasury stock, at cost, 207 shares......................... -- (200)
-------- --------
Total stockholders' equity.................................. 44,963 106,191
-------- --------
Total liabilities and stockholders' equity.................. $335,507 $440,784
======== ========
|
See notes to consolidated financial statements.
BLACKROCK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share data)
Year Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
Revenue
Investment advisory and administration fees
Mutual funds.................................. $ 87,189 $117,977 $162,487
Separate accounts............................. 43,069 62,985 101,352
BAI........................................... 6,061 13,867 61,199
Other income
Affiliate..................................... 3,000 3,000 3,000
Other......................................... 7,159 7,644 11,444
-------- -------- --------
Total revenues.................................. 146,478 205,473 339,482
-------- -------- --------
Expenses
Employee compensation and benefits.............. 53,703 73,217 109,741
BAI incentive compensation...................... 3,525 9,688 44,806
Fund administration and servicing costs--
affiliates..................................... 19,611 27,278 52,972
General and administration
Affiliate..................................... 7,559 3,900 4,666
Other......................................... 16,941 25,864 34,030
Amortization of goodwill........................ 9,603 9,653 9,653
Closed-end fund offering costs.................. -- -- 4,252
-------- -------- --------
Total expenses.................................. 110,942 149,600 260,120
-------- -------- --------
Operating income................................ 35,536 55,873 79,362
Non-operating income (expense)
Interest and divided income..................... 1,877 3,117 1,995
Interest expense--affiliates.................... (19,975) (20,249) (13,347)
-------- -------- --------
(18,098) (17,132) (11,352)
-------- -------- --------
Income before income taxes...................... 17,438 38,741 68,010
Income taxes.................................... 8,475 16,655 32,395
-------- -------- --------
Net income...................................... $ 8,963 $ 22,086 $ 35,615
======== ======== ========
Earnings per share
Basic......................................... $ 183.04
========
Diluted....................................... $ 182.44
========
Weighted average shares outstanding
Basic......................................... 194,578
========
Diluted....................................... 195,215
========
|
See notes to consolidated financial statements.
BLACKROCK, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollar amounts in thousands, except share data)
Year ended
December 31, 1998
-----------------
Unaudited pro forma data
Income before income taxes, as reported..................... $68,010
Pro forma interest adjustment for debt repayment............
Pro forma adjustment to income taxes........................
-------
Pro forma net income........................................ $
=======
Unaudited pro forma net income per share
Basic.......................................................
Diluted.....................................................
Unaudited pro forma weighted average shares outstanding
Basic.......................................................
Diluted.....................................................
|
See notes to consolidated financial statements.
BLACKROCK, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1996, 1997 and 1998
(Dollar amounts in thousands)
Additional Total
Paid-In Retained Treasury Stockholders'
Capital Earnings Stock Equity
---------- -------- -------- -------------
December 31, 1995.................. $15,091 $ 7,698 $ -- $ 22,789
Net Income....................... -- 8,963 -- 8,963
Forgiveness of intercompany
allocations..................... -- 920 -- 920
------- -------- ----- --------
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 restricted stock..... 35,951 -- -- 35,951
Purchase of treasury stock....... -- -- (200) (200)
Forgiveness of intercompany
allocations..................... -- 99 -- 99
Capital contribution from PNC.... 2,063 -- -- 2,063
------- -------- ----- --------
December 31, 1998.................. $53,105 $ 53,286 $(200) $106,191
======= ======== ===== ========
|
See notes to consolidated financial statements.
BLACKROCK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
Cash flows from operating activities
Net income....................................... $ 8,963 $ 22,086 $ 35,615
Adjustments to reconcile net income to net cash
provided from (used in) operating activities:
Depreciation and amortization.................. 11,700 12,151 12,852
Discount on issuance of restricted stock....... -- -- 1,737
Changes in operating assets and liabilities:
(Increase) in accounts receivable............ (9,204) (7,484) (70,364)
Decrease (increase) in receivable from
affiliate................................... (1,487) (325) 1,422
Decrease (increase) in other assets.......... (1,019) (358) 192
Increase in accrued compensation............. 10,424 16,723 61,597
Increase in accounts payable and accrued
liabilities................................. 2,282 6,516 11,126
(Decrease) in accrued interest payable to
affiliates.................................. (3,419) (536) (483)
Increase (decrease) in other liabilities..... (317) (1,578) 41
------- -------- --------
Cash provided from operating activities.......... 17,923 47,195 53,735
------- -------- --------
Cash flows from investing activities
Purchases of property and equipment.............. (4,155) (2,165) (8,414)
(Purchase)/sale of investments................... 474 (790) 3,400
------- -------- --------
Cash used by investing activities................ (3,681) (2,955) (5,014)
------- -------- --------
Cash flows from financing activities
Net borrowings from/(repayment of) note and loan
payable to affiliates........................... 19,876 (30,627) (28,232)
Issuance of restricted stock..................... -- -- 34,214
Capital contribution from PNC.................... -- -- 2,063
Purchase of treasury stock....................... -- -- (200)
Forgiveness of intercompany allocations.......... 920 -- 99
Dividend of intercompany allocations............. -- (9,795) --
Dividends to PNC................................. -- -- (12,300)
------- -------- --------
Cash provided by (used in) financing activities.. 20,796 (40,422) (4,356)
------- -------- --------
Net increase in cash and cash equivalents........ 35,038 3,818 44,365
Cash and cash equivalents, beginning of year..... 30,229 65,267 69,085
------- -------- --------
Cash and cash equivalents, end of year........... $65,267 $ 69,085 $113,450
======= ======== ========
Supplemental disclosures
Cash paid for interest........................... $28,239 $ 20,780 $ 13,683
======= ======== ========
Cash paid for income taxes....................... $ 2,759 $ 4,730 $ 25,983
======= ======== ========
|
See notes to consolidated financial statements.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1997 and 1998
(Dollar amounts in thousands)
1. Significant Accounting Policies
Organization and Basis of Presentation
BlackRock, Inc. ("BlackRock" or "Company") is majority owned by PNC Bank Corp. ("PNC") through its wholly-owned subsidiary PNC Bank, N.A. 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 Advisors, 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 retail investors through various investment vehicles. The institutional investment management business 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. The individual investor services business primarily consists of the management of the Company's sponsored open and closed-end mutual 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 BlackRock reflect the "carved out" historical financial position, results of operations, cash flows and changes in stockholders' equity 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 consolidated statement of operations has 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 BlackRock are reflected in BlackRock's consolidated statements of changes in stockholders' equity as dividend or forgiveness of intercompany allocations.
The consolidated financial statements reflect the results of operations of BlackRock Financial Management, LP and BFM Advisory LP, which were acquired by PNC on February 28, 1995. Total consideration for the acquisition was $240 million, of which $71 million was paid in cash at closing with the remaining $169 million comprising unsecured debt, ultimately payable to the BFM partners and recorded on the books of BFM. Goodwill recognized at acquisition approximated $240 million.
Significant intercompany accounts and transactions between the consolidated entities have been eliminated.
Formation Transactions
BlackRock was formed in 1998 as a result of PNC's decision to consolidate a substantial portion of its investment management businesses under a common management and brand (BlackRock). Prior to the formation, on January 31, 1998, PNC sold, pursuant to a private placement under Regulation D under the Securities Act of 1933, as amended (the "Securities Act"), 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.
On March 31, 1998, PNC contributed BFM and certain other investment management subsidiaries into a new holding company, BlackRock. BFM's employee stockholders exchanged their stock in BFM for an equal
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (continued)
number of restricted shares in BlackRock while PNC received 70,000 shares of BlackRock for its ownership interest in BFM and an additional 94,000 shares representing the fair value based on an independent valuation of PNC's other contributed investment management businesses.
In May 1998, BlackRock sold an additional 5,507 shares of restricted stock pursuant to a private placement under Regulation D under the Securities Act to key employees of the contributed businesses. BlackRock also executed forward sales of 637 shares of Company restricted stock to key employees. During the year, one employee stockholder terminated his employment and sold 207 shares back to BlackRock at cost.
At December 31, 1998, there were 199,300 common shares of BlackRock outstanding including 164,000 (82.3%) owned by PNC and 35,300 (17.7%) owned by employees. Total proceeds from employee purchases of restricted stock amounted to $34,214. These shares were issued at a discount to fair market value of $1,737, which was recorded as compensation expense.
Use of Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles 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 BlackRock 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 consolidated statements of income.
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 are shown net of fees waived pursuant to expense limitations.
BlackRock also receives performance fees or an incentive allocation from selected institutional and private placement portfolios based on the returns for each portfolio taking into consideration realized and unrealized gains and losses. These performance fees generally are subject to payment only upon attaining specified return thresholds and may contain other restrictions.
Administration and Servicing Costs
BlackRock incurs certain administration and servicing costs, which are expensed as incurred, related to mutual funds advised by BlackRock. Such costs are paid to affiliated companies.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies (continued)
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 of five 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. BlackRock assesses the recoverability of goodwill based on the estimated future nondiscounted cash flows over the remaining amortization period.
Earnings Per Share
BlackRock has adopted Financial Accounting Standards ("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 share is computed using the treasury stock method. Diluted earnings per common share assumes full dilution and is computed by dividing net income by the total of the weighted average number of shares of common stock outstanding and common stock equivalents.
Business Segments
BlackRock has not presented business segment data in accordance with SFAS No. 131 because it operates predominantly in one business segment, the investment advisory and asset management business.
Recent Accounting Pronouncements
Comprehensive Income
BlackRock has adopted SFAS No. 130, "Reporting Comprehensive Income," which requires companies to report all changes in equity during a period, except those resulting from investments by owners and distributions to owners. BlackRock has not presented a consolidated statement of comprehensive income because the amount of "other comprehensive income" is immaterial.
Software Costs
BlackRock intends to adopt, effective January 1, 1999, 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 will be capitalized and amortized over the estimated useful life of the software. Software costs currently are expensed as incurred. Restatement of prior year financial statements is not permitted. The adoption of SOP 98-1 is not expected to have a material impact on BlackRock's results of operations or financial position.
Derivative Instruments and Hedging Activities
BlackRock intends to adopt, effective January 1, 2000, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires BlackRock to recognize all financial derivatives,
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncements (continued)
including hedges, at fair value, and all changes in fair value or cash flow of both the hedge and the hedged item in earnings in the same period.
BlackRock did not enter into any derivative instruments or hedging activities for the periods covered under the financial statements. The adoption of SFAS 133 is not expected to have a material impact on BlackRock's results of operations or financial position.
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 and accrued liabilities approximate fair value due to the short maturities.
. The fair value of investments is based on quoted market price.
. The fair value of the unsecured note is based on current rates offered to BlackRock for debt with a similar remaining maturity (see Note 3). The revolving line of credit is stated at fair value as its interest rate is at prime.
2. Property and Equipment
Property and equipment consists of the following:
December 31,
---------------
1997 1998
------- -------
Office and computer equipment............................. $ 9,392 $13,472
Furniture and fixtures.................................... 4,660 5,792
Leasehold improvements.................................... 2,462 5,207
------- -------
16,514 24,471
Less accumulated depreciation............................. 9,477 12,219
------- -------
Property and equipment, net............................... $ 7,037 $12,252
======= =======
|
Depreciation expense amounted to $2,097, $2,498 and $3,199 for the years ended December 31, 1996, 1997 and 1998, respectively.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3.Note and Loan Payable to Affiliates
BlackRock had the following note and line of credit outstanding:
December 31,
-----------------
1997 1998
-------- --------
7.5% unsecured note, with interest payable semiannually,
through February 2000.................................. $ 65,800 $ 47,000
Revolving line of credit with PNC Bank, with interest at
prime rate (7.75% at December 31, 1998), maximum
outstanding principal of $175,000 due December 2002.... 159,432 150,000
-------- --------
$225,232 $197,000
======== ========
|
The 7.5% unsecured note is unconditionally guaranteed by PNC and is ultimately payable to certain employees of BlackRock resulting from PNC's acquisition of BFM on February 28, 1995.
At December 31, 1998, future principal maturities of debt are as follows:
1999.............................................................. $ 18,800
2000.............................................................. 28,200
2001.............................................................. --
2002.............................................................. 150,000
--------
$197,000
========
|
At December 31, 1998, the fair value of BlackRock's 7.5% unsecured note due through February 2000, estimated based on the current rates offered to BlackRock for debt with a similar remaining maturity, was approximately $47,700. The revolving line of credit with PNC is carried at cost which approximates fair value.
4.Commitments
BlackRock leases its primary office space under agreements which expire in 2011. Future minimum commitments under these operating leases, net of rental reimbursements of $959 through 2002 from a sublease arrangement, are as follows:
1999............................................................... $ 4,225
2000............................................................... 3,790
2001............................................................... 3,714
2002............................................................... 1,831
2003............................................................... 1,459
Thereafter......................................................... 3,547
-------
$18,566
=======
|
Under the lease agreement, BlackRock is responsible for certain escalation payments. Equipment and occupancy expense amounted to $6,160, $7,253 and $10,060 for the years ended December 31, 1996, 1997 and 1998, respectively.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Employee Benefit Plans
BlackRock's employees participate in PNC's Incentive Savings Plan ("ISP"). Under the ISP, employee contributions of up to 6% of eligible compensation, subject to Internal Revenue Code limitations, are matched by BlackRock. ISP expenses for BlackRock were $837, $1,019 and $1,210 for the years ended December 31, 1996, 1997 and 1998, 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 post-retirement benefits allocated to BlackRock by PNC were $114, $105 and $217 for the fiscal years ended December 31, 1996, 1997 and 1998, respectively. At December 31, 1997 and 1998, accrued post-retirement benefits included in the consolidated statements of financial condition totaled $311 and $528, respectively. No separate financial obligation data for BlackRock is available with respect to such plan. BlackRock currently does not have any retired employees and as such did not make any benefit payments for retirees in 1997 and 1998.
6. Deferred Compensation Plan
Effective January 1, 1998, BlackRock established the Long-Term Compensation Plan (the "Plan") to provide a competitive long-term incentive for key officers and employees. The Plan provides for payment of $18.5 million divided equally in three separate awards. The awards vest in 2001, 2002 and 2003, respectively, and are recorded to expense on a straight-line method over the respective vesting periods. Compensation expense for 1998 was $6,321.
7. Related Party Transactions
BlackRock and its consolidated subsidiaries provide investment advisory and administration services to BlackRock's open-end and closed-end funds, the Provident Institutional Funds and other commingled funds. Substantially all of these services are provided under contracts that set forth the services to be provided and the fees to be charged. Contracts for the Registered Investment Companies are subject to annual review and approval by each of the funds' boards of directors or trustees and, in certain circumstances, by the stockholders.
Revenues for services provided to these mutual funds are as follows:
Year Ended December 31,
-------------------------
1996 1997 1998
------- -------- --------
Investment advisory and administration fees--
mutual funds:
BlackRock open-end funds.................... $29,752 $ 44,009 $ 86,225
BlackRock closed-end funds.................. 34,960 36,050 36,521
Provident Institutional Funds............... 13,039 26,266 32,202
Commingled funds............................ 9,438 11,652 7,539
------- -------- --------
$87,189 $117,977 $162,487
======= ======== ========
|
During May 1998, approximately $8.2 billion in assets of the PNC common trust commingled funds were converted to the BlackRock open-end funds. For the years ended December 31, 1996 and 1997, BlackRock earned fees of $6,443 and $7,150, respectively, related to these funds. During the first four months of 1998, $3,142 of fees were earned prior to the conversion.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Related Party Transactions (continued)
BlackRock provides investment advisory and administration services to certain PNC subsidiaries for a fee, based on assets under management. In addition, BlackRock provides risk management and, beginning in 1998, model portfolio services to PNC. Revenues for such services are as follows:
Year Ended December
31,
--------------------
1996 1997 1998
------ ------ ------
Revenues:
Investment advisory and administration fees:
Separate accounts................................ $ 901 $1,496 $3,468
Model portfolio services......................... -- -- 2,567
Other income--risk management...................... 3,000 3,000 3,000
|
BlackRock has entered into various memoranda of understanding and co- administration agreements with affiliates of PNC pursuant to which BlackRock pays administration fees for the Provident Institutional Funds and certain other commingled funds based on total fund assets and service fees based on assets under management for PNC's private banking clients invested in the BlackRock open-end funds.
BlackRock also incurred interest expense to related parties in connection with the 7.5% unsecured note and the revolving line of credit with PNC Bank. PNC also provides general and administration services to BlackRock. 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 PNC subsidiaries are as follows:
Year Ended December 31,
-----------------------
1996 1997 1998
------- ------- -------
Expenses:
Fund administration and servicing costs--
affiliates.................................... $19,611 $27,278 $52,972
General and administration..................... 7,559 3,900 4,666
Interest expense--affiliates................... 19,975 20,249 13,347
|
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 open-end funds. This entity finances broker sales commissions and receives all associated sales charges.
8. BlackRock Asset Investors
BFM is an investment advisor to BlackRock Asset Advisors ("BAI"), a closed-end investment company. BAI's principal business is 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.
The Board of Trustees ("Trustees") of BAI approved a plan of liquidation on September 18, 1997 which was adopted by its stockholders on October 6, 1997. The plan term runs two years from the stockholder approval date. The plan requires the trustees to oversee the liquidation. Any remaining assets and liabilities may be deposited in a voting trust at any time before the end of the plan term.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. BlackRock Asset Investors (continued)
BFM recorded management fees for BAI in 1996, 1997 and 1998 of $6,061, $6,067 and $3,291, 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 anticipated asset liquidation schedules BlackRock recorded performance fees of $0, $7,800 and $57,908 in 1996, 1997 and 1998, respectively.
In accordance with various contractual arrangements including the 1994 acquisition agreement between PNC and BFM, $3,525, $9,688 and $44,806 of BAI revenue was allocated to incentive compensation for the years ended December 31, 1996, 1997, and 1998, 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, 1998, PAI net capital was $3,290 in excess of regulatory requirements.
10. Closed-End Fund Offering Costs
In accordance with SOP 98-5, "Reporting on the Costs of Start-Up Activities," BlackRock has expensed the offering costs it incurred in connection with an initial offering of a closed-end fund.
11. Income Taxes
BlackRock 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 bases.
On a historical basis, the operating results of BlackRock have been primarily included in the consolidated U.S. Federal income tax returns of PNC or its subsidiaries. For state and local income tax purposes, BlackRock has been included in the consolidated and unitary tax returns with PNC and its subsidiaries, and has filed separate returns. BlackRock's tax provision has been determined pursuant to the PNC tax sharing agreement.
The provision (benefit) for income taxes consists of the following:
Year Ended December
31,
----------------------
1996 1997 1998
------ ------- -------
Current:
Federal........................................... $4,434 $11,872 $16,408
State & local..................................... 2,578 3,011 8,746
------ ------- -------
Total current....................................... 7,012 14,883 25,154
Deferred:
Federal........................................... 957 1,159 4,422
State & local..................................... 506 613 2,819
------ ------- -------
Total deferred...................................... 1,463 1,772 7,241
------ ------- -------
Total............................................... $8,475 $16,655 $32,395
====== ======= =======
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BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Income Taxes (continued)
The reconciliation between the federal statutory income tax rate and BlackRock's effective income tax rate consists of the following:
Year Ended
December 31,
-----------------
1996 1997 1998
----- ----- -----
Statutory Federal income tax rate........................ 35.0% 35.0% 35.0%
Increase resulting from:
State and local income taxes........................... 11.6% 6.1% 11.1%
Other.................................................. 2.0% 1.9% 1.5%
----- ----- -----
Total effective income tax rate.......................... 48.6% 43.0% 47.6%
===== ===== =====
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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 statement of financial condition, consisted of the following:
December 31,
--------------
1997 1998
------ -------
Deferred tax assets:
Compensation and benefits................................ $2,355 $31,388
Other.................................................... 2,316 3,606
------ -------
Gross deferred tax asset................................. $4,671 $34,994
====== =======
Deferred tax liabilities:
Deferred revenue......................................... $ -- $33,980
Goodwill................................................. 9,704 13,129
Other.................................................... 4 163
------ -------
Gross deferred tax liability............................. $9,708 $47,272
------ -------
Net deferred tax liability................................. $5,037 $12,278
====== =======
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12. Subsequent Events (Unaudited)
Stock Award and Incentive Plan
BlackRock intends to adopt a stock award and incentive plan, and a deferred compensation plan (the "Plan") prior to or concurrent with the initial public offerings ("Offering"), the terms of which have not been determined.
Pro Forma Information
The unaudited pro forma amounts included in the accompanying pro forma consolidated statement of income for the year ended December 31, 1998 reflects the use of Offering proceeds to repay outstanding debt as of January 1, 1998, and the corresponding reduction in interest expense and tax benefit thereon. The unaudited pro-forma consolidated statement of income does not give effect to the Plan because its terms have not been finalized.
BLACKROCK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Subsequent Events (Unaudited) (continued)
BlackRock has not determined whether it will continue to file consolidated and unitary returns with PNC and its subsidiaries. However, it if does file on a consolidated and unitary basis, BlackRock intends to compute its income tax provision after the Offering as if it filed on a stand-alone basis. BlackRock's tax provision for the year ended December 31, 1998 is expected to approximate the provision BlackRock would have paid on a stand-alone basis.
Through and including (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in these offerings, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Shares
[BlackRock Logo]
Class A Common Stock
PROSPECTUS
Merrill Lynch & Co.
, 1999
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[International--Alternate Cover Page]
Subject to Completion
Preliminary Prospectus dated May 13, 1999
PROSPECTUS
Shares
[BlackRock Logo]
Class A Common Stock
This is BlackRock, Inc.'s initial public offering of its class A common stock. The international managers will offer shares outside the United States and Canada and the U.S. underwriters will offer shares in the United States and Canada.
We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After the pricing of the offering, we expect that the class A common stock will trade on The New York Stock Exchange under the symbol " ."
Following the offering, we will have two classes of authorized common stock--class A common stock and class B common stock. The rights of holders of class A common stock and class B common stock are identical, except with respect to voting. Each share of class A common stock entitles its holder to one vote and each share of class B common stock entitles its holder to five votes on all matters submitted to a vote of our stockholders.
Investing in the class A common stock involves risks which are described in the "Risk Factors" section beginning on page 9 of this prospectus.
Per Share Total
--------- -----
Public Offering Price................................. $ $
Underwriting Discount................................. $ $
Proceeds, before expenses, to BlackRock............... $ $
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The international managers may also purchase up to an additional shares of class A common stock at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The U.S. underwriters may similarly purchase up to an aggregate of an additional shares of class A common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Merrill Lynch International
The date of this prospectus is , 1999.
[International-Alternate Page]
UNDERWRITING
Merrill Lynch International is acting as lead manager (the "Lead Manager") for each of the International Managers named below (the "International Managers"). Subject to the terms and conditions set forth in an international purchase agreement (the "International Purchase Agreement") among BlackRock and the International Managers, and concurrently with the sale of shares of class A common stock to the U.S. Underwriters (as defined below), BlackRock has agreed to sell to the International Managers, and each of the International Managers severally and not jointly has agreed to purchase from BlackRock, the number of shares of class A common stock set forth opposite its name below.
Number
of
International Manager Shares
--------------------- ------
Merrill Lynch International
-----
Total.........................................................
=====
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BlackRock has also entered into a U.S. purchase agreement (the "U.S. Purchase Agreement") with certain underwriters in the United States and Canada (the "U.S. Underwriters" and, together with the International Managers the "Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is acting as representative (the "U.S. Representative"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of shares of class A common stock to the International Managers pursuant to the International Purchase Agreement, BlackRock has agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed to purchase from BlackRock, an aggregate of shares of class A common stock. The initial public offering price per share and the total underwriting discount per share of class A common stock are identical under the International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of class A common stock being sold pursuant to each such agreement if any of the shares of class A common stock being sold pursuant to such agreement are purchased. In the event of a default by an Underwriter, the U.S. Purchase Agreement and the International Purchase Agreement provide that, in certain circumstances, the purchase commitments of the nondefaulting Underwriters may be increased or the Purchase Agreements may be terminated. The closings with respect to the sale of shares of class A common stock to be purchased by the International Managers and the U.S. Underwriters are conditioned upon one another.
The Lead Manager has advised BlackRock that the International Managers propose initially to offer the shares of class A common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of class A common stock. The International Managers may allow, and such dealers may reallow, a discount not in excess of $ per share of class A common stock to certain other dealers. After the initial public offerings, the public offering price, concession and discount may change.
BlackRock has granted options to the International Managers, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of class A common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The International Managers may exercise these options solely to cover over- allotments, if any, made on the sale of the class A common stock offered hereby. To the extent that the International Managers exercise these options, each International Manager will be obligated, subject to certain conditions, to purchase a number of additional shares
[International-Alternate Page]
of class A common stock proportionate to such International Manager's initial amount reflected in the foregoing table. BlackRock has granted options to the U.S. Underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of additional shares of class A common stock to cover over-allotments, if any, on terms similar to those granted to the International Managers.
The following table shows the per share and total public offering price, underwriting discount to be paid by BlackRock to the International Managers and the U.S. Underwriters and the proceeds before expenses to BlackRock. This information is presented assuming either no exercise or full exercise by the International Managers and the U.S. Underwriters of their over-allotment options.
Per Total Without Total With
Share Option Option
----- ------------- ----------
Public offering price..................... $ $ $
Underwriting discount..................... $ $ $
Proceeds, before expenses, to BlackRock... $ $ $
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The expenses of the offerings (exclusive of the underwriting discount) are estimated at $ and are payable by BlackRock.
The shares of class A common stock are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify any such offer and to reject orders in whole or in part.
At the request of BlackRock, the Underwriters have reserved for sale, at the initial public offering price, up to shares of the class A common stock that will be offer by this prospectus for directors, officers and employees of BlackRock and PNC. All purchasers of reserved shares will have agreed in writing not to sell, transfer, assign, pledge or hypothecate such shares for months from their date of purchase. The number of shares of class A common stock available for sale to the general public will be reduced to the extent reserved shares are purchased by such persons. Any reserved shares that are not purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered in this prospectus.
BlackRock and BlackRock's executive officers and directors and all existing stockholders have agreed, subject to exceptions, not to directly or indirectly: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell or grant any option, right or warrant for the sale of or otherwise dispose of or transfer any shares of common stock or securities convertible into or exchangeable or exercisable for or repayable with common stock, whether now owned or thereafter acquired by the person executing the agreement or with respect to which the person executing the agreement thereafter acquires the power of disposition, or file a registration statement under the Securities Act with respect to the foregoing; or (ii) enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of the common stock whether any such swap or transaction is to be settled by delivery of common stock or other securities, in cash or otherwise, without the prior written consent of Merrill Lynch on behalf of the Underwriters for a period of 180 days after the date of this prospectus. See "Shares Eligible for Future Sale."
The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement that provides for the coordination of their activities. Pursuant to the intersyndicate agreement, the International Managers and the U.S. Underwriters are permitted to sell shares of class A common stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the intersyndicate agreement, the U.S. Underwriters and any dealer to whom they sell shares of class A common stock will not offer to sell or sell shares of class A common stock to persons who
[International-Alternate Page]
are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of class A common stock will not offer to sell or sell shares of class A common stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions pursuant to the intersyndicate agreement.
Prior to the offerings, there has been no public market for the class A common stock of BlackRock. The initial public offering price will be determined through negotiations among BlackRock, PNC and the U.S. Representative and the Lead Manager. The factors considered in determining the initial public offering price, in addition to prevailing market conditions, are price-earnings ratios of publicly traded companies that the U.S. Representative and the Lead Manager believe to be comparable to BlackRock, certain financial information of BlackRock, the history of, and the prospects for, BlackRock and the industry in which it competes, and an assessment of BlackRock's management, its past and present operations, the prospects for, and timing of, future revenues of BlackRock, and the present state of BlackRock's development. There can be no assurance that an active trading market will develop for the class A common stock or that the class A common stock will trade in the public market subsequent to the offerings at or above the initial public offering price.
Application has been made to list the class A common stock on the New York Stock Exchange under the symbol " ". In order to meet the requirements for listing of the class A common stock on that exchange, the U.S. Underwriters and the International Managers have undertaken to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners.
Because BlackRock may be deemed to be an affiliate of , the offerings will be conducted in accordance with Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which requires that the public offering price of an equity security be no higher than the price recommended by a qualified independent underwriter which has participated in the preparation of the registration statement and performed its usual standard of due diligence. Merrill Lynch has agreed to act as qualified independent underwriter with respect to the offerings, and the public offering price of the class A common stock will be no higher than that recommended by .
The Underwriters do not expect sales of the class A common stock to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered hereby.
The Underwriters will not confirm sales of the class A common stock to any account over which they exercise discretionary authority without the prior written specific approval of the customer.
BlackRock has agreed to indemnify the International Managers and the U.S. Underwriters against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments the U.S. Underwriters and International Managers may be required to make.
Until the distribution of the class A common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the class A common stock. As an exception to these rules, the U.S. Representative is permitted to engage in transactions that stabilize the price of the class A common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the class A common stock.
If the Underwriters create a short position in the class A common stock in connection with the offerings, i.e., if they sell more shares of class A common stock than are set forth on the cover page of this prospectus, the U.S. Representative may reduce that short position by purchasing class A common stock in the open market. The U.S. Representative may also elect to reduce any short position by exercising all or part of the over-allotment options described above.
The U.S. Representative may also impose a penalty bid on Underwriters and selling group members. This means that if the U.S. Representative purchases shares of class A common stock in the open market to
[International--Alternate Page] reduce the Underwriters' short position or to stabilize the price of the class A common stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares.
In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of the class A common stock to the extent that it discourages resale of the class A common stock.
Neither BlackRock nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the class A common stock. In addition, neither BlackRock nor any of the Underwriters makes any representation that the U.S. Representative will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
Each International Manager has agreed that:
(i)it has not offered or sold and, prior to the expiration of the period of six months from the closing date, will not offer or sell any shares of class A common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995;
(ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the class A common stock in, from or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of class A common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 as amended by the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997 or is a person to whom such document may otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of class A common stock, or the possession, circulation or distribution of this prospectus or any other material relating to BlackRock or shares of class A common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of class A common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in connection with the shares of class A common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction.
Purchasers of the shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof.
Certain of the underwriters and their affiliates engage in transactions with, and perform services for, BlackRock in the ordinary course of business and have engaged, and may in the future engage, in commercial banking and investment banking transactions with BlackRock. Merrill Lynch distributes BlackRock Funds and provides stockholder services in connection with those funds in the ordinary course of business, for which it receives customary compensation.
Through and including (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Shares
[BlackRock Logo]
Class A Common Stock
Merrill Lynch International
, 1999
PART II
Item 13. Other Expenses of Issuance and Distribution
The following table indicates the estimated expenses to be incurred in connection with the Offerings, all of which will be paid by BlackRock.
SEC registration fee............................................. $27,800
NASD fee......................................................... 10,500
Listing fee...................................................... *
Accounting fee and expenses...................................... *
Legal fees and expenses.......................................... *
Printing and engraving........................................... *
Transfer Agent's fees............................................ *
Blue Sky fees and expenses (including counsel fees).............. *
Miscellaneous expenses........................................... *
-------
Total.......................................................... $ *
=======
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Item 14. Indemnification of Directors and Officers
In accordance with Section 145 of the Delaware General Corporation Law, Article VII of BlackRock's certificate of incorporation provides that no director of BlackRock shall be personally liable to BlackRock or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to BlackRock or its stockholders;
. for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
. in respect of certain unlawful dividend payments or stock redemptions or repurchases; or
. for any transaction from which the director derived an improper personal benefit.
In addition, the certificate of incorporation provides that if the
Delaware General Corporation Law is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of
a director of BlackRock shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended. Article V of
BlackRock's bylaws provides for indemnification by BlackRock of its officers
and certain non-officer employees under certain circumstances against expenses
(including attorneys' fees, judgments, fines and amounts paid in settlement)
reasonably incurred in connection with the defense or settlement of any
threatened, pending or completed legal proceeding in which any such person is
involved by reason of the fact that such person is or was an officer or
employee of BlackRock if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of
BlackRock, and, with respect to criminal actions or proceedings, if such person
had no reasonable cause to believe his or her conduct was unlawful.
The form of underwriting agreement to be filed as Exhibit 1.1 will contain agreements between BlackRock, PNC and BlackRock's management and directors and the underwriters and their controlling persons providing for indemnification against civil liabilities, including liabilities under the Securities Act, or for contribution to payments which any of them may be required to make in respect thereof.
II-1
Item 15. Recent Sales of Unregistered Securities.
See Note 1 to "Notes to BlackRock's Consolidated Financial Statements -- Significant Accounting Policies--Formation Transactions."
Item 16. Exhibits
(a)Exhibits
Exhibit
Number Description of Exhibit
------- ----------------------
1.1 --Form of Underwriting Agreement.*
3.1 --Form of Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 --Form of Amended and Restated Bylaws of the Registrant.*
4.1 --Specimen of Common Stock Certificate (per class).*
4.2 --Amended and Restated Shareholders' Agreement.*
5.1 --Opinion of Skadden, Arps, Slate Meagher & Flom LLP, regarding
legality of securities being registered.*
10.1 --Lease Agreement, dated as of March 31, 1993, between BlackRock
Advisors, Inc. and 345 Park Company.*
10.2 --Tax Sharing and Indemnification Agreement between the Registrant and
PNC Bank, N.A.*
10.3 --Form of Lock-Up Agreement.*
10.4 --Form of Key Executive Long-term Incentive Bonus Plan.*
10.5 --Form of Employee Stock Purchase Plan.*
10.6 --Form of Non-employee Stock Purchase Plan.*
10.7 --Form of Employment Agreement.*
10.8 --Line of Credit Agreement, dated February 28, 1996, between PNC Bank,
N.A. and BlackRock Financial Management, Inc.*
10.9 --Line of Credit Agreement, dated March 1, 1995, between PNC Bank,
N.A. and BlackRock Financial Management, Inc.*
10.10 --Form of Initial Public Offering Agreement among the Registrant, PNC
Bank Corp. and PNC Asset Management, Inc.*
10.11 --Form of Registration Rights Agreement among the Registrant, PNC
Asset Management, Inc. and certain holders of class B common stock of
the Registrant.*
21.1 --List of subsidiaries of the Registrant.*
23.1 --Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1).*
23.2 --Consent of Ernst & Young LLP.
24.1 --Powers of Attorney (included on page II-4).
27.1 --Financial Data Schedule.
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(b)Financial Statement Schedules
We did not include financial statement schedules with this item because they are not required, not applicable or the information is included in the financial statements or notes to the financial statements that are part of the prospectus.
Item 17. Undertakings
(a) The undersigned registrant hereby undertakes to provide the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
II-2
(b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of New York, New York on the 13th day of May, 1999.
BLACKROCK, INC.
/s/ Laurence D. Fink
By: _________________________________
Laurence D. Fink
Chairman of the Board of
Directors and Chief
Executive Officer
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ralph L. Schlosstein, Paul L. Audet and Robert P. Connolly, his true and lawful attorney-in-fact and agent, each acting alone, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign the Registration Statement to be filed in connection with the public offerings of ordinary shares of BlackRock, Inc. and any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and the other documents in connection therewith, with the Securities and Exchange Commission, granting into said attorney-in-fact and agent, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact or his substitutes, each acting alone, may lawfully do or cause to be done by virtue thereof.
II-4
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Laurence D. Fink Chairman of the Board of May 13, 1999
____________________________________ Directors and Chief
Laurence D. Fink Executive Officer (Principal
Executive Officer)
/s/ Paul L. Audet Managing Director, Chief May 13, 1999
____________________________________ Financial Officer (Principal
Paul L. Audet Financial and Accounting
Officer)
/s/ Ralph L. Schlosstein Director and President May 13, 1999
____________________________________
Ralph L. Schlosstein
/s/ Thomas H. O'Brien Director May 13, 1999
____________________________________
Thomas H. O'Brien
/s/ James E. Rohr Director May 13, 1999
____________________________________
James E. Rohr
/s/ Walter E. Gregg, Jr. Director May 13, 1999
____________________________________
Walter E. Gregg, Jr.
/s/ Helen P. Pudlin Director May 13, 1999
____________________________________
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II-5
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report on the Consolidated Financial Statements of BlackRock, Inc. and subsidiaries dated February 26, 1999, in this Registration Statement on Form S-1 and the related Prospectus of BlackRock, Inc. to be filed on or about May 13, 1999.
/s/ Ernst & Young LLP
New York, New York
May 13, 1999
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| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | DEC 31 1998 |
| PERIOD START | JAN 01 1998 |
| PERIOD END | DEC 31 1998 |
| CASH | 113,450 |
| SECURITIES | 2,515 |
| RECEIVABLES | 106,656 |
| ALLOWANCES | 0 |
| INVENTORY | 0 |
| CURRENT ASSETS | 0 |
| PP&E | 12,252 |
| DEPRECIATION | 12,219 |
| TOTAL ASSETS | 440,784 |
| CURRENT LIABILITIES | 0 |
| BONDS | 197,000 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 53,105 |
| OTHER SE | 53,086 |
| TOTAL LIABILITY AND EQUITY | 440,784 |
| SALES | 339,482 |
| TOTAL REVENUES | 339,482 |
| CGS | 0 |
| TOTAL COSTS | 0 |
| OTHER EXPENSES | 260,120 |
| LOSS PROVISION | 0 |
| INTEREST EXPENSE | 13,347 |
| INCOME PRETAX | 68,010 |
| INCOME TAX | 32,395 |
| INCOME CONTINUING | 35,615 |
| DISCONTINUED | 0 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 35,615 |
| EPS PRIMARY | 183.04 |
| EPS DILUTED | 182.44 |