UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2007

Or

 

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

For the transition period from              to              .

Commission File No. 001-33099

 

 

BlackRock, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   32-0174431

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

40 East 52nd Street, New York, NY 10022

(Address of principal executive offices)

(212) 810-5300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange

on which registered

Common Stock, $.01 par value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known, seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ¨

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

Large accelerated filer   x     Accelerated filer   ¨     Non-accelerated filer   ¨     

(Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of June 30, 2007 was approximately $2.2 billion. There is no non-voting common stock of the registrant outstanding.

As of January 31, 2008, there were 117,282,558 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference herein:

Portions of the definitive Proxy Statement of BlackRock, Inc. to be filed pursuant to Regulation 14A of the general rules and regulations under the Securities Exchange Act of 1934, as amended, for the 2008 annual meeting of stockholders to be held on May 27, 2008 (“Proxy Statement”) are incorporated by reference into Part III of this Form 10-K.

 

 


BlackRock, Inc.

Index to Form 10-K

 

TABLE OF CONTENTS
PART I

Item 1

  

Business

   1

Item 1A

  

Risk Factors

   17

Item 1B

  

Unresolved Staff Comments

   22

Item 2

  

Properties

   23

Item 3

  

Legal Proceedings

   23

Item 4

  

Submission of Matters to a Vote of Security Holders

   23
PART II

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   24

Item 6

  

Selected Financial Data

   26

Item 7

  

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

   28

Item 7A

  

Quantitative and Qualitative Disclosures About Market Risk

   64

Item 8

  

Financial Statements and Supplementary Data

   65

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   65

Item 9A

  

Controls and Procedures

   65

Item 9B

  

Other Information

   68
PART III

Item 10

  

Directors, Executive Officers and Corporate Governance

   68

Item 11

  

Executive Compensation

   68

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   68

Item 13

  

Certain Relationships and Related Transactions, and Director Independence

   68

Item 14

  

Principal Accountant Fees and Services

   68
PART IV

Item 15

  

Exhibits and Financial Statement Schedules

   69


Part I

 

Item 1. BUSINESS

Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms in the United States with $1.357 trillion of assets under management (“AUM”) at December 31, 2007. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and balanced and alternative investment separate accounts and funds. In addition, BlackRock provides risk management, investment system outsourcing and financial advisory services globally to institutional investors.

BlackRock is independent in ownership and governance, with no single majority stockholder and a majority of directors are independent. At December 31, 2007, Merrill Lynch & Co., Inc. (“Merrill Lynch”) owned approximately 45.1% of the Company’s voting common stock and approximately 49.0% of the Company’s capital stock on a fully diluted basis. The PNC Financial Services Group, Inc. (“PNC”), owned approximately 33.5% of the Company’s capital stock. Headquartered in New York City, the Company has 70 offices in 19 countries throughout the United States, Europe, Asia and Australia.

BlackRock closed 2007 with AUM of $1.357 trillion, up $232.0 billion or 21% over year-end 2006 levels. Over the past five years, BlackRock’s AUM has had a compound annual growth rate of 37.8%.

 

     Assets Under Management
By Product Type
Year ended December 31,
 
(Dollars in millions)    2007    2006    2005    2004    2003    2002    5 Year
CAGR
 

Fixed income

   $ 513,020    $ 448,012    $ 303,928    $ 240,709    $ 214,356    $ 175,586    23.9 %

Equity and balanced

     459,182      392,708      37,303      14,792      13,721      13,464    102.6 %

Cash management

     313,338      235,768      86,128      78,057      74,345      78,512    31.9 %

Alternative investments

     71,104      48,139      25,323      8,202      6,934      5,279    68.2 %
                                                

Total

   $ 1,356,644    $ 1,124,627    $ 452,682    $ 341,760    $ 309,356    $ 272,841    37.8 %
                                                

 

CAGR = Compound Annual Growth Rate

Growth in AUM over the past five years includes acquired AUM of $660.8 billion. On September 29, 2006, Merrill Lynch contributed the entities and assets that constituted its investment management business (the “MLIM Business,” formerly named Merrill Lynch Investment Managers or “MLIM”) to the Company (the “MLIM Transaction”), adding $589.2 billion in AUM. Acquired AUM also includes approximately $21.9 billion in AUM acquired as a result of BlackRock’s acquisition of the fund of funds business of Quellos Group, LLC (the “Quellos Business” or “Quellos”) which closed on October 1, 2007 (the “Quellos Transaction”) and approximately $49.7 billion in AUM acquired as a result of BlackRock’s acquisition of SSRM Holdings, Inc. from MetLife, Inc. in January 2005 (the “SSR Transaction”).

 

1


Item 1. BUSINESS (continued)

 

Overview (continued)

 

     Assets Under Management
By Product Mix
Year ended December 31,
 
     2007     2006     2005     2004     2003  

Fixed income

   37.8 %   39.8 %   67.1 %   70.4 %   69.3 %

Equity and balanced

   33.9 %   34.9 %   8.3 %   4.3 %   4.4 %

Cash management

   23.1 %   21.0 %   19.0 %   22.9 %   24.0 %

Alternative investments

   5.2 %   4.3 %   5.6 %   2.4 %   2.3 %
                              

Total

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %
                              

Through the MLIM, Quellos and SSR Transactions, BlackRock has enhanced the diversification of its products, offering a broad range of fixed income, equity and balanced, cash management and alternative investment products to institutional and retail clients worldwide. At December 31, 2007, fixed income products represented approximately 38%, equity and balanced products approximately 34%, cash management products approximately 23% and alternative investment products approximately 5% of BlackRock’s total AUM. At year-end 2007, approximately 69% of assets were managed for institutions and approximately 31% for retail and high net worth investors. At December 31, 2007, approximately 64% of BlackRock’s AUM was managed for U.S. investors and approximately 36% for international clients. In addition, the Company continued to expand its BlackRock Solutions ® products and related services, which achieved year-over-year revenue growth of approximately 34% in 2007.

While BlackRock operates in a global marketplace characterized by market volatility and economic uncertainty, management believes the following factors position the Company to seek solid relative returns for stockholders over time:

 

   

The Company’s diversification of product offerings, providing the firm with the ability to leverage capabilities to offer both traditional and alternative investment products, combined with its established commitment to risk management.

 

   

The Company’s sustained competitive investment performance across products, with 58% of bond fund assets and 84% of equity fund assets in the top half of their respective peer groups and 87% of our money market fund assets over benchmark for the year ended December 31, 2007.

 

   

The continued development of, and increased interest in, BlackRock Solutions products and services.

 

   

The Company’s expanded global presence, with nearly one-third of employees outside of the U.S. and clients in over 60 countries.

 

   

The growing recognition of the BlackRock brand, the strength of the Company’s culture and the depth and breadth of its intellectual capital.

The Company’s ability to increase revenue, earnings and stockholder value over time is predicated on its ability to generate net new business in investment management and BlackRock Solutions products and services. New business efforts are dependent on BlackRock’s ability to achieve clients’ investment objectives in a manner consistent with their risk preferences and to deliver excellent client service. All of these efforts require the commitment and contributions of BlackRock employees. Accordingly, the ability to retain and attract talented professionals to BlackRock is critical to its long-term success.

 

2


Item 1. BUSINESS (continued)

 

Overview (continued)

 

Selected financial results for the last six years are shown below:

 

     Selected GAAP Financial Results  
(Dollars in thousands, except per share amounts)    2007    2006    2005    2004    2003    2002    5 Year
CAGR
 

Revenue

   $ 4,844,655    $ 2,097,976    $ 1,191,386    $ 725,311    $ 598,212    $ 576,977    53.0 %

Operating income

   $ 1,293,664    $ 471,800    $ 340,541    $ 165,798    $ 228,276    $ 215,139    43.2 %

Net income

   $ 995,272    $ 322,602    $ 233,908    $ 143,141    $ 155,402    $ 133,249    49.5 %

Diluted earnings per share

   $ 7.53    $ 3.87    $ 3.50    $ 2.17    $ 2.36    $ 2.04    29.8 %
     Selected Non-GAAP Financial Results 2  
(Dollars in thousands, except per share amounts)    2007 1    2006 1    2005 1    2004    2003    2002 2    5 Year
CAGR
 

Operating income, as adjusted

   $ 1,559,423    $ 688,108    $ 425,812    $ 270,791    $ 233,971    $ 216,592    48.4 %

Net income, as adjusted

   $ 1,079,694    $ 444,703    $ 269,622    $ 177,709    $ 155,402    $ 133,249    52.0 %

Diluted earnings per share, as adjusted

   $ 8.17    $ 5.33    $ 4.03    $ 2.69    $ 2.36    $ 2.04    32.0 %

 

1

See reconciliation to GAAP measures in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.

2

Prior year data reflects certain reclassifications to conform to the current year presentation.

See additional information in Item 6, Selected Financial Data.

While BlackRock reports its financial results using accounting principles generally accepted in the United States of America (“GAAP”), management believes that evaluating the Company’s ongoing operating results may not be as useful if investors are limited to reviewing only GAAP financial measures. Management reviews non-GAAP financial measures to assess the Company’s ongoing operations, and for the reasons described below, considers them to be effective indicators, for both management and investors, of BlackRock’s financial performance over time. BlackRock’s management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Certain prior year non-GAAP data has been restated to conform to current year presentation.

 

3


Item 1. BUSINESS (continued)

 

Overview (continued)

 

Non-GAAP Operating Income Adjustments:

GAAP reported operating income includes all compensation related expenses associated with certain of BlackRock’s long-term incentive plans (“LTIP”) which are partially funded by BlackRock common stock currently held by PNC, certain costs related to the integration of the MLIM Transaction, certain costs related to the integration of the assets acquired from Quellos in 2007, certain costs associated with the SSR Transaction in 2005, a termination fee for closed-end fund administration and servicing arrangements with Merrill Lynch, closed-end fund launch costs and commissions, compensation expense associated with appreciation / (depreciation) on assets related to BlackRock’s deferred compensation plans and compensation charges, which the Company anticipates will be reimbursed by Merrill Lynch in the future.

Operating income, as adjusted (a non-GAAP measure), excludes the portion of the LTIP expense associated with awards met by the distribution to participants of shares of BlackRock common stock previously held by PNC because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. A detailed discussion of the LTIP is included in Note 12 to the consolidated financial statements beginning on page F-1 of this Form 10-K. MLIM, Quellos and SSR integration costs consist principally of certain professional fees and compensation costs related to those transactions. Also included in MLIM Transaction costs are marketing costs associated with rebranding. MLIM, Quellos and SSR integration costs have been deemed non-recurring by management and have been excluded from operating income, as adjusted, to help ensure the comparability of this information to prior periods. The expense related to the termination of the closed-end fund administration and servicing arrangements with Merrill Lynch has been excluded from operating income, as adjusted, as the termination of the arrangements is deemed non-recurring by management Closed-end fund launch costs and commissions have been excluded from operating income, as adjusted, because such costs fluctuate considerably and revenues associated with the expenditure of such costs will not fully impact the Company’s results until future periods. Compensation expense associated with the appreciation / (depreciation) of assets related to certain of BlackRock’s deferred compensation plans has been excluded from operating income, as adjusted, as investment returns on these assets are reported in non-operating income, net of the related impact on compensation expense, and results in a nominal impact on net income. Compensation charges to be reimbursed by Merrill Lynch have been excluded from operating income, as adjusted, because these charges are not expected to impact BlackRock’s book value.

Non-GAAP Net Income Adjustments:

GAAP reported net income and GAAP diluted earnings per share include certain charges and gains, the after-tax impact of which management considers non-recurring and, therefore, are excluded in calculating net income, as adjusted.

Net income and diluted earnings per share, as adjusted (a non-GAAP measure), exclude the after-tax impact of the termination of closed-end fund administration and servicing arrangements with Merrill Lynch, LTIP expense to be funded by PNC and by an expected Merrill Lynch compensation contribution, MLIM, Quellos and SSR integration costs and the effect on deferred income tax expense attributable to corporate income tax rate reductions.

See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for a detailed reconciliation of GAAP reported operating income, net income and diluted earnings per share to adjusted non-GAAP operating income, net income and diluted earnings per share.

 

4


Item 1. BUSINESS (continued)

 

Products*

BlackRock offers a wide variety of fixed income, equity and balanced, cash management and alternative investment products. Revenue from these products primarily consists of advisory fees, typically structured as a percentage of AUM and, in some instances, performance fees expressed as a percentage of returns in excess of agreed targets. BlackRock also offers risk management, investment system outsourcing, financial advisory and transition management services to institutional investors under the BlackRock Solutions name.

BlackRock’s bond portfolios are denominated in many currencies including U.S. dollars, pounds sterling, euros, yen and Australian dollars. The Company’s equity platform spans global markets, styles and capitalization ranges. BlackRock’s alternative investment capabilities include private equity, private equity funds of funds, real estate equity and debt, hedge funds of funds, single-strategy hedge funds, long-only absolute return strategies, commodities and structured products. The Company also manages sector-specific mandates across asset classes as well as multi-asset class strategies.

Fixed Income

BlackRock offers an array of fixed income products across various bond markets and sectors as well as various maturities along the yield curve. BlackRock tailors client portfolios to reflect specific investment guidelines and objectives with respect to interest rate exposure, sector allocation and credit quality. In 2007, BlackRock’s fixed income AUM increased 15% year-over-year to $513.0 billion at year-end.

All bond portfolios are managed by BlackRock’s fixed income team, which is comprised of regional and sector specialists as well as credit and quantitative analysts, all of whom work closely together to share information, formulate investment themes and implement specific strategies in accordance with each portfolio’s investment objectives and guidelines. They are supported by extensive analytical tools and a shared research database that includes reports from both equity and credit analysts throughout the Company.

Net new business in fixed income totaled $27.2 billion in 2007, with flows representative of the trend toward more customized solutions and a broader array of investment strategies. Inflows demonstrated continued allocation of capital to global fixed income ($9.6 billion into global portfolios), the growth of target date and target return funds ($19.1 billion net new business in targeted duration portfolios), and the redefinition of “traditional” fixed income strategies to include a range of absolute return and structured products ($10.4 billion net inflows into CDOs and the reclassification of $14.0 billion of alternative assets to fixed income to better align with the evolution of the business). Along with moderate inflows in municipal bonds, the strong net inflows offset outflows in core, sector-specialty and equity plus mandates.

During 2007, BlackRock further diversified its fixed income client base geographically with 79% of net new business, or $21.5 billion, from non-U.S. investors. At December 31, 2007, 35% of fixed income AUM was managed for non-U.S. investors, up from 31% at year-end 2006. Inflows were positive across all regions, with net new business of $5.7 billion and $21.5 billion from U.S. and international clients, respectively.

The fixed income business remains largely institutional, with 83% of total bond AUM and 93%, or $25.3 billion, of net new business from institutional clients during the year. At December 31, 2007, 44% of fixed income AUM was from tax-exempt clients, with 79%, or $21.6 billion, of net new fixed income business from tax-exempt institutions in 2007. Inflows through the retail and high net worth channels increased from a slight net outflow in 2006 to net inflows of $1.9 billion in 2007.

 

* See Product Performance Notes below.

 

5


Item 1. BUSINESS (continued)

 

Products (continued)

 

Fixed Income (continued)

 

BlackRock’s fixed income portfolio management team seeks competitive investment performance by consistently employing a disciplined process designed to add incremental returns in excess of benchmarks. While competitive performance is key, ensuring that portfolio risks are consistent with client objectives is paramount. For the one-, three- and five-year periods ended December 31, 2007, 58%, 74% and 64% of bond fund assets ranked in the top two quartiles of their peer groups.

Equity and Balanced

BlackRock manages a range of equity strategies that span the risk/return spectrum, along with several targeted opportunities in specific market sectors. BlackRock closed 2007 with equity and balanced AUM of $459.2 billion, up 17% year-over-year.

The Company’s equity and balanced products employ primarily either an active quantitative approach or an active fundamental approach, both of which seek to add value principally through stock selection. BlackRock’s quantitative strategies employ sophisticated, proprietary models to drive the investment process. The firm’s fundamental strategies emphasize in-depth company and industry research as well as macro-economic analysis as the basis for stock selection. Portfolios are managed by distinct teams that each invest according to their own philosophy, process and style and all benefit from shared information and a common trading, systems, operations, administration and compliance platform.

Despite market volatility in the latter half of 2007, net new business in the equity platform totaled $23.5 billion in 2007. Concerns about the market drove investors to investments with more embedded advice and a broader global allocation, as evidenced by $13.9 billion of net inflows into balanced and asset allocation funds over the year. The equity platform has also had strong inflows into U.S. equity, quantitative/enhanced index and sector funds, particularly natural resources, offsetting outflows from regional/country funds.

BlackRock’s equity platform is diversified across its clients and channels. At December 31, 2007, 46% of the Company’s total equity and balanced AUM, or $211.1 billion, was managed for U.S. investors and 54%, or $248.1 billion, was managed for non-U.S. investors. We continue to benefit from our global reach, expanding our presence in Asia and opening an investment center in Hong Kong in 2007. While net inflows in 2007 were heavily weighted from retail and high net worth investors (97% of net new business or $22.7 billion), the channel mix at year-end remained well balanced with 42% of assets managed on behalf of institutions and 58% managed on behalf of retail and high net worth investors.

BlackRock’s equity investment teams sustained strong performance track records, with 84%, 90% and 90% of equity fund assets ranked in the top two quartiles of their peer groups for the one-, three- and five-year periods ended December 31, 2007.

Cash Management

BlackRock cash management products cover the short end of the duration spectrum and reflect a firm focus on credit quality and risk management. BlackRock is a leading provider of cash management products with $313.3 billion in global cash management AUM at December 31, 2007, including a variety of money market funds and customized portfolios. AUM in these strategies increased $77.6 billion, or 33%, during 2007. Net new business totaled $75.3 billion during the year.

 

6


Item 1. BUSINESS (continued)

 

Products (continued)

 

Cash Management (continued)

 

Net inflows of $52.4 billion into cash management products in the third and fourth quarters highlight the industry-wide reallocation of funds out of higher risk strategies and into money market funds in response to credit market concerns and reaction to Federal Reserve rate cuts. Although inflows had continued in early 2008, we anticipate outflows when overnight rates stabilize and investors return to more typical asset allocation strategies.

BlackRock’s cash management activities are primarily conducted on behalf of U.S. clients, although there is increasing demand among international clients for similar products. At December 31, 2007, cash management AUM for U.S. investors reached $286.4 billion and assets for international investors were $26.9 billion. For 2007, net inflows from U.S. investors totaled $71.0 billion and $4.3 billion was raised from international investors. Institutional clients represent the largest percentage of BlackRock’s cash management platform with $248.4 billion of assets at December 31, 2007. Retail and high net worth client cash management assets have grown from $53.6 billion at year-end 2006 to $64.9 billion at year-end 2007.

For the one-, three- and five-year periods ended December 31, 2007, 100% of BlackRock’s U.S. institutional money market fund assets outperformed their benchmarks.

Alternative Investment Products

BlackRock’s alternative investment products capitalize on evolving capital market opportunities that benefit from the Company’s resources in risk management, product development, client service and operational support. Strategies are designed to provide returns with low correlations to the broad equity and bond markets. BlackRock’s capabilities include private equity, private equity funds of funds, real estate equity and debt, hedge funds of funds, single-strategy hedge funds, long-only absolute return strategies, commodities and structured products. Total assets managed in alternative investments increased by $23.0 billion to $71.1 billion at December 31, 2007. The increase accounts for $21.9 billion of assets acquired in the Quellos Transaction and a reclassification of $14.0 billion of structured products and absolute return products to fixed income earlier in the year.

In 2007, BlackRock launched BlackRock Alternative Advisors (“BAA”), created by the merger of the Quellos Business with our existing absolute return and private equity fund of funds business. BAA will continue to manage assets across absolute return, private capital and hybrid strategies, with emphasis on the Company’s long-standing investment philosophy and process. AUM in these strategies totaled $29.5 billion at year-end. We have already begun to realize the power of the combined businesses, with $1.4 billion of net new business in the quarter since closing the transaction.

BlackRock real estate investments span a wide range of strategies, including core, value-add and opportunistic equity and high-yield debt for institutional and private investors. AUM on the real estate platform grew to $29.4 billion at year-end, including $7.3 billion of net new business in 2007. Notable accomplishments this year include the launch of the Company’s first opportunity funds (Global Opportunity Fund and Retail Opportunity Fund), completion of funding for the Peter Cooper Village and Stuyvesant Town partnerships, and initiation of a broader global expansion.

 

7


Item 1. BUSINESS (continued)

 

Products (continued)

 

Alternative Investment Products (continued)

 

BlackRock launched distressed credit and mortgage funds in 2007, leveraging market dislocations on behalf of the Company’s clients and bringing $1.1 billion of net new business in 2007, with additional commitments to follow in 2008. BlackRock’s portable alpha business nearly doubled in 2007, with year-end assets under management of $1.3 billion, including $549 million of net inflows.

BlackRock Solutions ®

Since its formation, BlackRock has developed and maintained proprietary investment systems to support its business. These capabilities are offered under the brand name, BlackRock Solutions . In 2007 BlackRock Solutions’ revenues from system outsourcing, risk management, advisory, transition and investment services increased by 34% in the aggregate to $198.3 million. During the year, six net new assignments were added. By year-end 2007, BlackRock Solutions had completed six system implementations and had four implementations in process. In addition, the advisory team added 21 and completed 18 short-term assignments. Importantly, these increases in BlackRock Solutions business occurred concurrently with the continuing and extensive efforts to complete the conversion of MLIM’s equity portfolios to the Aladdin platform.

BlackRock Solutions’ core products consist of tools that support the investment process. These include Aladdin and a variety of other proprietary analytical tools for clients that do not require all of the functionality of the enterprise system. In addition, BlackRock Solutions offers a variety of risk management and financial advisory services. In 2007, BlackRock Solutions was retained on seven net new Aladdin assignments and one net new long-term risk management and advisory assignment. BlackRock Solutions also provides investment accounting outsourcing, typically bundled with asset management services, as well as ancillary outsourcing services, such as performance measurement and middle and back office trade support, for clients who wish to extend their relationships. BlackRock Solutions added one new investment accounting relationship in 2007. BlackRock Solutions also offers transition management services.

At year-end 2007, BlackRock Solutions managed 115 distinct assignments for 98 clients, including 28 Aladdin assignments, 62 risk management and advisory assignments and 25 outsourcing assignments. BlackRock Solutions provided these services for a well-diversified list of clients including banks, insurance companies, broker-dealers, asset managers, hedge funds, pensions, endowments, foundations and other financial institutions.

Product Performance Notes

Past performance is not indicative of future results. Investments in mutual funds are neither insured nor guaranteed by the U.S. government. Relative peer group performance is based on quartiles from Lipper Inc. for U.S. funds and Morningstar © , Inc. for non-U.S. funds. Rankings are based on total returns with dividends and distributions reinvested and do not reflect sales charges. BlackRock waives certain fees, without which performance would be lower. Funds with returns among the top 50% of a peer group of funds with comparable objectives are in the top two quartiles. Some funds have less than three years of performance.

 

8


Item 1. BUSINESS (continued)

 

Clients

BlackRock serves a diverse client base of institutional and retail investors globally. Products are offered both directly and through financial intermediaries. BlackRock seeks to distinguish itself by using its enhanced global perspective and scale to benefit clients and help them creatively solve problems. At year-end, the Company’s AUM had grown to $1.357 trillion, up $232.0 billion over year-end 2006, including $21.9 billion of AUM acquired in the Quellos Transaction. In 2007, BlackRock was also retained on six net new BlackRock Solutions assignments, for a total of 115 distinct assignments for 98 clients. Increasingly, clients are turning to BlackRock for a variety of services. As of December 31, 2007, over 500 clients turned to BlackRock for investment solutions in more than one asset class or business.

During the year, the Company was awarded $37.5 billion of net new business from non-U.S. investors in over 36 countries, bringing the total managed for international clients to $483.3 billion at December 31, 2007. New business efforts encompass direct contact with institutional investors and their consultants, as well as wholesale distribution of funds and unit trusts through broker-dealers and other financial intermediaries. International clients are served by offices in over 29 cities outside the U.S.

BlackRock also serves a large and growing base of U.S. investors. In 2007, net new business from U.S. clients totaled $100.1 billion across a wide range of products, increasing total assets managed for U.S. investors to $873.3 billion at year-end. Client channels served include pension and other tax exempt clients, insurance and other taxable investors, institutional cash management and institutional and retail fund investors.

BlackRock’s asset base is also diversified by the types of clients served. At December 31, 2007, BlackRock managed $935.6 billion, or 69% of total AUM, on behalf of institutional investors and $421.0 billion, or 31% of total AUM, on behalf of retail and high net worth clients globally. During the year, institutional investor AUM grew $168.6 billion with $100.4 billion from net new business across client segments, including $9.4 billion from a single client. Institutional clients include pension funds, official institutions, foundations, endowments and charities, insurance companies, banks, sub-advisory relationships and private banks in more than 60 countries.

Assets managed for tax-exempt institutions, including defined benefit and defined contribution pension plans, foundations, endowments and other non-profit organizations, increased 21% to $423.3 billion at December 31, 2007. For the year, net new business from these investors totaled $25.3 billion. BlackRock works with pension plan sponsors and their consultants to address changing asset allocation strategies and to consider appropriate investment opportunities. Management believes that these clients increasingly demonstrate a preference for more services from fewer managers and that BlackRock can benefit from this trend. In addition, management believes a more robust mutual fund family should be of interest to defined contribution plans and smaller institutional investors, while expanded alternative investment offerings should appeal to foundations and endowments.

AUM for taxable institutions worldwide increased 13% during the year to $255.0 billion at year-end 2007.

The Company’s insurance business encompasses customized investment management, specialized risk management and accounting services. BlackRock is one of the largest managers of insurance assets worldwide, benefiting from an ongoing trend toward investment outsourcing. This business is, however, subject to event risk arising from insurance company mergers as well as client decisions to internalize asset management.

 

9


Item 1. BUSINESS (continued)

 

Clients (continued)

 

At year-end 2007, AUM in institutional cash management products was $248.4 billion, up 36% from December 31, 2006, including $64.2 billion of net new business. BlackRock continually seeks ways to provide innovative cash management solutions to clients. In 2007, these efforts focused on helping clients identify opportunities to successfully manage around the highly unsettled market conditions while maintaining competitive yields. BlackRock also focuses on providing flexible and responsive client service, which is conducted through its call center and online account management tools. Management believes that these efforts will continue to enable BlackRock to better withstand volatility in asset flows, build its client base and increase market share over time.

The investment and risk management expertise that BlackRock brings to the management of institutional products is also available globally through separate accounts, open-end and closed-end funds, offshore funds, unit trusts and alternative investment vehicles for individual investors. As of December 31, 2007, BlackRock managed $421.1 billion on behalf of retail and high net worth investors worldwide, including $273.1 billion for U.S. and $148.0 billion for international investors, up 18% from year-end 2006. In 2007, $37.3 billion of net new business from retail and high net worth clients was largely driven by $23.3 billion of net inflows from U.S. investors and $14.0 billion from investors internationally. These results reflect the growing strength of BlackRock’s retail platform globally. The Company sustained the strength of its Merrill Lynch distribution and is seeing increased traction in the U.S. outside of Merrill Lynch, recording over 30 new wins on broker-dealer mutual fund and Separately Managed Account (“SMA”) platforms. The $14.0 billion of net new business in international retail represents an annualized organic growth rate of 13% and includes $9.6 billion of net inflows into equity and balanced mandates.

 

10


Item 1. BUSINESS (continued)

 

Competition

BlackRock competes with investment management firms, mutual fund complexes, insurance companies, banks, brokerage firms and other financial institutions that offer products that are similar to, or alternatives to, those offered by BlackRock. In order to grow its business, BlackRock must be able to compete effectively for AUM. Key competitive factors include investment performance track records, investment style and discipline, client service and brand name recognition. Historically, the Company has competed principally on the basis of its long-term investment performance track record, its investment process, its risk management and analytic capabilities and the quality of its client service. BlackRock has historically grown aggregate AUM and management believes that the Company will continue to do so by focusing on strong investment performance and client service and by developing new products and new distribution capabilities. Many of the Company’s competitors, however, have greater marketing resources and better brand name recognition than BlackRock, particularly in retail channels and outside the United States. These factors may place BlackRock at a competitive disadvantage and there can be no assurance that the Company’s strategies and efforts to maintain its existing AUM and to attract new business will be successful.

Geographic Information

BlackRock has clients in over 60 countries across the globe, including the United States, the United Kingdom and Japan.

The following chart shows the Company’s revenues and long-lived assets, which includes goodwill and property and equipment for the years ended December 2007, 2006 and 2005. These amounts are aggregated on a legal entity basis and do not necessarily reflect, in all cases, where the customer is sourced or where the asset is physically located.

 

Revenues (in millions)

   2007    % of
total
    2006    % of
total
    2005    % of
total
 

North America

   $ 3,069.3    63.4 %   $ 1,715.2    81.7 %   $ 1,157.7    97.2 %

Europe

     1,536.9    31.7 %     320.9    15.3 %     24.4    2.0 %

Asia-Pacific

     238.5    4.9 %     61.9    3.0 %     9.3    0.8 %
                                       

Total revenues

   $ 4,844.7    100 %   $ 2,098.0    100.0 %   $ 1,191.4    100 %
                                       

Long-Lived Assets (in millions)

                                 

North America

   $ 5,695.2    98.4 %   $ 5,408.1    98.8 %   $ 316.6    99.2 %

Europe

     34.6    0.6 %     30.1    0.6 %     2.1    0.7 %

Asia-Pacific

     56.4    1.0 %     33.6    0.6 %     0.6    0.1 %
                                       

Total long-lived assets

   $ 5,786.2    100.0 %   $ 5,471.8    100.0 %   $ 319.3    100.0 %
                                       

Revenues and long-lived assets in North America are primarily comprised of the United States, while Europe and Asia-Pacific are primarily comprised of the United Kingdom and Japan, respectively.

Employees

At December 31, 2007, BlackRock had a total of 5,952 full-time employees, including 435 Metric Property Management, Inc. (“Metric”) employees whose salaries are fully reimbursed by certain real estate funds. Of all full-time employees, 1,795 are located in offices outside the United States.

 

11


Item 1. BUSINESS (continued)

 

Regulation

Virtually all aspects of BlackRock’s business are subject to various laws and regulations both in and outside the United States, some of which are summarized below. These laws and regulations are primarily intended to protect investment advisory clients, stockholders of registered and unregistered investment companies and PNC’s bank subsidiaries and their customers. Under these laws and regulations, agencies that regulate investment advisers, investment funds and bank holding companies and their subsidiaries, such as BlackRock and its subsidiaries, have broad administrative powers, including the power to limit, restrict or prohibit the regulated entity 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.

U.S. Regulation

Certain of BlackRock’s U.S. subsidiaries are subject to regulation, primarily at the federal level, by the Securities and Exchange Commission (the “SEC”), the Department of Labor (the “DOL”), the Board of Governors of the Federal Reserve Bank (the “FRB”), the Financial Industry Regulatory Authority (“FINRA”), the Commodity Futures Trading Commission (the “CFTC”) and other government agencies and regulatory bodies. Certain BlackRock U.S. subsidiaries are also subject to various anti-money laundering regulations, including the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”), the Bank Secrecy Act and regulations promulgated by the Office of Foreign Assets Control of the U.S. Treasury Department.

The Investment Advisers Act of 1940, as amended (the “Advisers Act”), imposes numerous obligations on registered investment advisers such as BlackRock, including record-keeping, operational and marketing requirements, disclosure obligations and prohibitions on fraudulent activities. The Investment Company Act of 1940, as amended (the “Investment Company Act”), imposes stringent governance, operational, disclosure and related obligations on registered investment companies and on investment advisers to those companies and distributors, such as BlackRock. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act and the Investment Company Act, ranging from fines and censure to termination of an investment adviser’s registration. Investment advisers also are subject to certain state securities laws and regulations. Non-compliance with certain provisions of the Advisers Act, the Investment Company Act or other federal and state securities laws and regulations could result in investigations, sanctions and reputational damage.

BlackRock’s trading and investment activities for client accounts are regulated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as the rules of various U.S. and non-U.S. securities exchanges and self-regulatory organizations, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements (e.g., volume limitations, reporting obligations) and market regulation policies in the United States and globally. In addition, BlackRock manages a variety of investment funds listed on U.S. and non-U.S. exchanges, which are subject to the rules of such exchanges. Violation of these laws and regulations could result in restrictions on the Company’s activities and in damage to its reputation. BlackRock manages a variety of private pools of capital, including hedge funds, funds of hedge funds, private equity funds, real estate funds, collective investment trusts, managed futures funds and hybrid funds. Congress, regulators, tax authorities and others continue to explore, on their own and in response to demands from the investment community, increased regulation related to private pools of capital, including changes with respect to investor eligibility, certain limitations on trading activities, the scope of anti-fraud protections and a variety of other matters. BlackRock may be adversely affected by new legislation or rule-making or changes in the interpretation or enforcement of existing rules and regulations imposed by various regulators.

 

12


Item 1. BUSINESS (continued)

 

Regulation (continued)

 

U.S. Regulation (continued)

 

Certain BlackRock subsidiaries are subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), and to regulations promulgated thereunder by the DOL, 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 impose excise taxes for violations of these prohibitions, mandate certain required periodic reporting and disclosures and require BlackRock to carry bonds ensuring against losses caused by fraud or dishonesty. ERISA also imposes additional compliance, reporting and operational requirements on BlackRock that otherwise are not applicable to non-benefit plan clients.

BlackRock has two subsidiaries that are registered as commodity pool operators and commodity trading advisers, and one additional subsidiary registered as only a commodity pool operator, with the CFTC. All three of these subsidiaries are members of the National Futures Association (the “NFA”). The CFTC and NFA each administer a comparable regulatory system covering futures contracts and various other financial instruments in which certain BlackRock clients may invest. One of BlackRock’s other subsidiaries, BlackRock Investments, Inc. (“BII”), is registered with the SEC as a broker-dealer and is a member-firm of FINRA. BII’s FINRA membership agreement limits its permitted activities to the sale of investment company securities, certain private placements of securities, and certain investment banking and financial consulting activities. Although BII has limited business activities, it is subject to the customer dealing, reporting and other requirements of FINRA, as well as the net capital and other requirements of the SEC. BII is also an approved person with the New York Stock Exchange (“NYSE”), which subjects its operations to NYSE regulation.

U.S. Banking Regulation

PNC is a bank holding company and a “financial holding company” regulated by the FRB under the Bank Holding Company Act of 1956, as amended, (the “BHC Act”). Since PNC’s ownership interest in BlackRock exceeds 25%, BlackRock is deemed to be a non-bank subsidiary of PNC and therefore subject to most banking laws, regulations and orders that are applicable to PNC and consequently to the supervision, regulation, and examination of the FRB. The supervision and regulation of PNC and its subsidiaries under the applicable banking laws is intended primarily for the protection of PNC’s banking subsidiaries, their depositors, the deposit insurance funds of the Federal Deposit Insurance Corporation, and the banking system as a whole, rather than for the protection of stockholders, creditors or clients of PNC or BlackRock. PNC’s relationships and good standing with its regulators are important to the conduct of BlackRock’s business. BlackRock may also be subject to foreign banking laws and supervision that could affect its business.

BlackRock generally may conduct only activities that are authorized for a “financial holding company” under the BHC Act. Investment management is an authorized activity, but must be conducted within applicable regulatory requirements, which in some cases are more restrictive than those BlackRock faces under applicable securities laws. BlackRock may also invest in investment companies and private investment funds to which it provides advisory, administrative or other services, to the extent consistent with applicable law and regulatory interpretations. The FRB has broad powers to approve, deny or refuse to act upon applications or notices for BlackRock to conduct new activities, acquire or divest businesses or assets, or reconfigure existing operations. PNC and its subsidiaries are also subject to examination by various banking regulators, which results in examination reports and ratings that may adversely impact the conduct and growth of BlackRock’s businesses.

 

13


Item 1. BUSINESS (continued)

 

Regulation (continued)

 

U.S. Banking Regulation (continued)

 

The FRB has broad enforcement authority over BlackRock, including the power to prohibit BlackRock from conducting any activity that, in the FRB’s opinion, is unauthorized or constitutes an unsafe or unsound practice in conducting its business, and to impose substantial fines and other penalties.

Any failure of PNC to maintain its status as a financial holding company could result in the imposition of substantial limitations on certain BlackRock activities and its growth. Such a change of status could be caused by any failure of PNC’s bank subsidiaries to remain “well capitalized,” by an examination downgrade of PNC or its bank subsidiaries, or by any failure of PNC’s bank subsidiaries to maintain a satisfactory rating under the Community Reinvestment Act.

Non-U.S. Regulation

BlackRock’s international operations are subject to the laws of non-U.S. jurisdictions and non-U.S. regulatory agencies and bodies. As BlackRock continues to expand its international business, a number of its subsidiaries and international operations have become subject to regulatory systems comparable to those affecting its operations in the United States.

The Financial Services Authority (the “FSA”) regulates BlackRock’s subsidiaries in the United Kingdom. Authorization by the FSA is required to conduct any financial services related business in the United Kingdom pursuant to the Financial Services and Markets Act 2000. The FSA’s rules govern a firm’s capital resources requirements, senior management arrangements, conduct of business, interaction with clients and systems and controls. Breaches of these rules may result in a wide range of disciplinary actions against the Company’s U.K.-regulated subsidiaries. In addition, these subsidiaries, and other European subsidiaries or branches, must comply with the pan-European regime established by the Markets in Financial Instruments Directive (“MiFID”), which came into effect on November 1, 2007 and regulates the provision of investment services throughout the European Economic Area, as well as the Capital Requirements Directive, which delineates regulatory capital requirements. MiFID replaced and expanded upon the Investment Services Directive (the “ISD”), which had been in place since 1995. MiFID sets out more detailed requirements governing the organization and conduct of business of investment firms and regulated markets. It also includes new pre- and post-trade transparency requirements for equity markets and more extensive transaction reporting requirements.

MiFID seeks to further harmonize the provision of financial services across Europe by implementing requirements for key areas such as senior management systems and controls. MiFID also attempts to clarify jurisdictional uncertainties that arose under the ISD to facilitate cross border services. The United Kingdom has adopted the new rules into national legislation. Implementation of the directive throughout the European Union is ongoing, however, and the introduction of further new regulations that will apply to BlackRock’s European activities remains a possibility.

In addition to the FSA, the activities of certain BlackRock subsidiaries and investment funds are regulated by, among other regulators, the Irish Financial Services Regulatory Authority, the Cayman Islands Monetary Authority, the Commission de Surveillance du Secteur Financier in Luxembourg and the Financial Services Commission in Jersey. Regulators in these jurisdictions have authority with respect to financial services including, among other things, the authority to grant or cancel required licenses or registrations. In addition, these regulators may also subject certain BlackRock subsidiaries to net capital requirements.

 

14


Item 1. BUSINESS (continued)

 

Regulation (continued)

 

Non-U.S. Regulation (continued)

 

In Japan, certain BlackRock subsidiaries are subject to the Financial Instruments and Exchange Law (the “FIEL”) and the Law Concerning Investment Trusts and Investment Corporations. These laws are administered and enforced by the Japanese Financial Services Agency (the “JFSA”), which establishes standards for compliance with these laws including capital adequacy and financial soundness requirements, customer protection requirements and conduct of business rules. The JFSA is empowered to conduct administrative proceedings that can result in censure, fine, the issuance of cease and desist orders or the suspension or revocation of registrations and licenses granted under the FIEL.

BlackRock’s Australian-based subsidiary is subject to various Australian federal and state laws and is regulated primarily by the Australian Securities and Investments Commission (the “ASIC”). The ASIC regulates companies and financial services in Australia and is responsible for promoting investor, creditor and consumer protection. Failure to comply with applicable law and regulations could result in the cancellation, suspension or variation of this subsidiary’s license in Australia.

There are parallel legal and regulatory arrangements in force in many other non-U.S. jurisdictions where BlackRock’s subsidiaries are authorized to conduct business, including Taiwan, Hong Kong, Singapore, Germany and The Netherlands.

Other Regulation

Additional legislation, changes in rules promulgated by our regulators and self-regulatory organizations, or changes in the interpretation or enforcement of existing laws and rules may directly affect the method of operation and profitability of BlackRock. The profitability of BlackRock also could be affected by rules and regulations that impact the business and financial communities in general, including changes to the laws governing taxation, antitrust regulation and electronic commerce.

The rules governing the regulation of financial institutions and their holding companies and subsidiaries are very detailed and technical. Accordingly, the above discussion is general in nature and does not purport to be complete.

 

15


Item 1. BUSINESS (continued)

 

Available Information

BlackRock files annual, quarterly and current reports, proxy statements and all amendments to these reports and other information with the SEC. BlackRock makes available free-of–charge, on or through its website at http://www.blackrock.com , the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Company also makes available on its website the charters for the Audit Committee, Management Development and Compensation Committee and Nominating and Governance Committee of the Board of Directors, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Further, BlackRock will provide, without charge, upon written request, a copy of the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and all amendments to those filings as well as the committee charters, its Code of Business Conduct and Ethics, its Code of Ethics for Chief Executive and Senior Financial Officers and its Corporate Governance Guidelines. Requests for copies should be addressed to Investor Relations, BlackRock, Inc., 55 East 52nd Street, New York, New York 10055. Investors may read and copy any document BlackRock files at the SEC’s Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on the operation of the Public Reference Room. Reports, proxy statements and other information regarding issuers that file electronically with the SEC, including BlackRock’s filings, are also available to the public from the SEC’s website at http://www.sec.gov .

 

16


Item 1A. RISK FACTORS

As a leading investment management firm, risk is an inherent part of BlackRock’s business. Global markets, by their nature, are prone to uncertainty and subject participants to a variety of risks. While BlackRock devotes significant resources across all of its operations to identify, measure, monitor, manage and analyze market and operating risks, BlackRock’s business, financial condition or results of operations could be materially adversely affected, however, by any of the following risks.

Risks Related to BlackRock’s Business and Competition

Changes in the securities or other markets could lead to a decline in revenues.

BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns earned on AUM. Movements in equity market prices, interest rates, foreign exchange rates, or all three could cause the following, which would result in lower investment advisory and administration fees:

 

   

the value of AUM to decrease;

 

   

the returns realized on AUM to decrease;

 

   

clients to withdraw funds in favor of products in markets that they perceive offer greater opportunity and that BlackRock does not serve;

 

   

clients to rebalance assets away from products that BlackRock manages into products that it does not manage; and

 

   

clients to rebalance assets away from products that earn higher fees into products with lower fees.

Poor investment performance could lead to the loss of clients and a decline in revenues.

The Company’s management believes that investment performance is one of the most important factors for the growth and retention of AUM. Poor investment performance relative to applicable portfolio benchmarks and to competitors could reduce revenues and growth because:

 

   

existing clients might withdraw funds in favor of better performing products, which could result in lower investment management fees;

 

   

the ability to attract funds from existing and new clients might diminish; or

 

   

the Company might earn minimal or no performance fees.

BlackRock may elect to invest in or provide other support to its products from time to time.

BlackRock may, at its option, from time to time support investment products through seed or follow-on investments, warehouse lending facilities or other forms of capital or credit support. See, for example, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Other Operating Items” and “—Liquidity and Capital Resources.” Such investments or support utilize capital that would otherwise be available for other corporate purposes. Losses on such investments or support, or failure to have or devote sufficient capital to support products, could have an adverse impact on revenues and earnings.

Changes in the securities or other markets could lead to a decline in the value of investments that BlackRock owns.

At December 31, 2007, BlackRock held approximately $2.0 billion of investments that are reflected on its statement of financial condition. Approximately $1.1 billion of this amount is the result of consolidation of certain sponsored investment funds. BlackRock’s economic interest in these investments is the result of seed investments in its sponsored investment funds. A decline in the prices of stocks or bonds or value of real estate or other alternative investments within or outside the United States could lower the value of these investments and result in a decline of non-operating income.

 

17


Item 1A. RISK FACTORS (continued)

 

Loss of key employees could lead to the loss of clients and a decline in revenues.

The ability to attract and retain quality personnel has contributed significantly to BlackRock’s growth and success and is important to attracting and retaining clients. The market for qualified fund managers, investment analysts, financial advisers and other professionals is competitive. Key employees may depart because of issues relating to the difficulties in integrating the MLIM or Quellos Businesses. There can be no assurance that the Company will be successful in its efforts to recruit and retain required personnel. Loss of key personnel could have an adverse effect on the Company.

BlackRock’s investment advisory contracts may be terminated or may not be renewed by clients and the liquidation of certain funds may be accelerated at the option of investors.

Separate account clients may terminate their investment management contracts with BlackRock or withdraw funds on short notice. The Company has, from time to time, lost separate accounts and could, in the future, lose accounts or significant assets under management under various circumstances such as adverse market conditions or poor performance.

Additionally, BlackRock manages its U.S. mutual funds pursuant to management contracts with the funds that must be renewed and approved by the funds’ boards of directors annually. A majority of the directors of each mutual fund are independent from BlackRock. Consequently, there can be no assurance that the board of directors of each fund that the Company manages will approve the fund’s management contract each year, or will not condition its approval on the terms of the management contract being revised in a way that is adverse to the Company.

Further, the governing agreements of many of the Company’s private investment funds generally provide that, subject to certain conditions, investors in those funds, and in some cases independent directors of those funds, may remove the investment adviser, general partner or the equivalent of the fund or liquidate the fund without cause by a simple majority vote, resulting in a reduction in the management or incentive fees as well as the total carried interest we would earn.

Failure to comply with client contractual requirements and/or guidelines could result in damage awards against BlackRock and loss of revenues due to client terminations.

When clients retain BlackRock to manage assets or provide products or services on their behalf, they specify guidelines or contractual requirements that the Company is required to observe in the provision of its services. A failure to comply with these guidelines or contractual requirements could result in damage to BlackRock’s reputation or in its clients seeking to recover losses, withdrawing their AUM or terminating their contracts, any of which could cause the Company’s earnings or stock price to decline.

Competitive fee pressures could reduce revenues and profit margins.

The investment management business is highly competitive and has relatively low barriers to entry. To the extent that the Company is forced to compete on the basis of price, it may not be able to maintain its current fee structure. Fee reductions on existing or future new business could cause revenues and profit margins to decline.

Performance fees may increase earnings volatility, which could decrease BlackRock’s stock price.

A portion of the Company’s revenues is derived from performance fees on investment and risk management advisory assignments. In most cases, performance fees are based on investment returns, although in some cases they are based on achieving specific service standards. Generally, the Company is entitled to performance fees only if the returns on the related portfolios exceed agreed-upon periodic or cumulative return targets. If these targets are not exceeded, performance fees for that period will not be earned and, if targets are based on cumulative returns, the Company may not earn performance fees in future periods. Performance fees will vary from period to period in relation to volatility in investment returns and the timing of revenue recognition, causing earnings to be more volatile than if assets were not managed on a performance fee basis. The volatility in earnings may decrease BlackRock’s stock price. Performance fees represented $350.2 million, or 7.2%, of total revenue for the year ended December 31, 2007.

 

18


Item 1A. RISK FACTORS (continued)

 

Additional acquisitions may decrease earnings and harm the Company’s competitive position.

BlackRock employs a variety of strategies intended to enhance earnings and expand product offerings in order to improve profit margins. These strategies have included smaller-sized lift-outs of investment teams and acquisitions of investment management businesses, such as the MLIM and Quellos Transactions. In general, these strategies may not be effective and failure to successfully develop and implement these strategies may decrease earnings and harm the Company’s competitive position in the investment management industry. In the event BlackRock pursues additional sizeable acquisitions, it may not be able to find suitable businesses to acquire at acceptable prices and it may not be able to successfully integrate or realize the intended benefits from these acquisitions.

Risks Related to BlackRock’s Operations

Failure to maintain adequate infrastructure could impede the ability to support business growth.

BlackRock has experienced significant growth in its business activities as a result of the MLIM and Quellos Transactions and other efforts. The Company is in the process of building out its infrastructure to integrate the MLIM and Quellos Businesses and to support continued growth, including technological capacity, data centers, backup facilities and sufficient space for expanding staff levels. The failure to maintain an adequate infrastructure commensurate with expansion could impede the Company’s growth, which could cause the Company’s earnings or stock price to decline.

Expansion into international markets increases BlackRock’s operational, regulatory and other risks.

BlackRock has increased its international business activities as a result of the MLIM Transaction and other efforts. As a result of such expansion, the Company faces increased operational, regulatory, reputation and foreign exchange rate risks. The failure of the Company’s systems of internal control to properly mitigate such additional risks, or of its operating infrastructure to support such international expansion could result in operational failures and regulatory fines or sanctions, which could cause the Company’s earnings or stock price to decline.

Failure to maintain a technological advantage could lead to a loss of clients and a decline in revenues.

A key element to BlackRock’s continued success is the ability to maintain a technological advantage both in terms of operational efficiency and in providing the sophisticated risk analytics incorporated into BlackRock’s operating systems that support investment advisory and BlackRock Solutions clients. Moreover, the Company’s technological and software advantage is dependent on a number of third parties who provide various types of data. The failure of these third parties to provide such data or software could result in operational difficulties and adversely impact BlackRock’s ability to provide services to its investment advisory and BlackRock Solutions clients. There can be no assurance that the Company will be able to maintain this technological advantage or be able to effectively protect and enforce its intellectual property rights in these systems and processes.

 

19


Item 1A. RISK FACTORS (continued)

 

Failure to implement effective information security policies, procedures and capabilities could disrupt operations and cause financial losses that could result in a decrease in BlackRock’s earnings or stock price.

BlackRock is dependent on the effectiveness of its information security policies, procedures and capabilities to protect its computer and telecommunications systems and the data that reside on or are transmitted through them. An externally caused information security incident, such as a hacker attack or a virus or worm, or an internally caused issue, such as failure to control access to sensitive systems, could materially interrupt business operations or cause disclosure or modification of sensitive or confidential information and could result in material financial loss, regulatory actions, breach of client contracts, reputational harm or legal liability, which, in turn, could cause a decline in the Company’s earnings or stock price.

The continuing integration of the MLIM and Quellos businesses creates numerous risks and uncertainties that could adversely affect profitability.

The MLIM and Quellos businesses and personnel are in the process of being integrated with BlackRock’s previously existing business and personnel. These transition activities are complex and the Company may encounter unexpected difficulties or incur unexpected costs including:

 

   

the diversion of management’s attention to integration matters;

 

   

difficulties in achieving expected synergies associated with the respective transactions;

 

   

difficulties in the integration of operations and systems;

 

   

difficulties in the assimilation of employees;

 

   

challenges in keeping existing clients and obtaining new clients, including potential conflicts of interest; and

 

   

challenges in attracting and retaining key personnel.

As a result, the Company may not be able to realize the expected revenue growth and other benefits that it hopes to achieve from the respective transactions. In addition, BlackRock may be required to spend additional time or money on integration that would otherwise be spent on the development and expansion of its business and services.

Risks Related to Relationships with Merrill Lynch and PNC

Merrill Lynch is an important distributor of BlackRock’s products, and the Company is therefore subject to risks associated with the business of Merrill Lynch.

Under a global distribution agreement entered into with Merrill Lynch in connection with the MLIM Transaction, Merrill Lynch provides distribution, portfolio administration and servicing for certain BlackRock asset management products and services through its various distribution channels. The Company may not be successful in distributing products through Merrill Lynch or in distributing its products and services through other third party distributors. If BlackRock is unable to distribute its products and services successfully or if it experiences an increase in distribution-related costs, BlackRock’s business, results of operations or financial condition may be adversely affected.

Loss of market share with Merrill Lynch’s Global Private Client Group could harm operating results.

A significant portion of the revenue of the MLIM business has historically come from AUM generated by Merrill Lynch’s Global Private Client Group (“GPC”). BlackRock’s ability to maintain a strong relationship with GPC is material to the Company’s future performance. If one of the Company’s competitors gains significant additional market share within the GPC retail channel at the expense of BlackRock, then BlackRock’s business, results of operations or financial condition may be negatively impacted.

 

20


Item 1A. RISK FACTORS (continued)

 

For so long as Merrill Lynch and PNC maintain certain levels of stock ownership, Merrill Lynch and PNC will vote as stockholders in accordance with the recommendation of BlackRock’s Board of Directors, and certain actions will require special board approval or the prior approval of Merrill Lynch and PNC.

As a result of the stockholder agreements entered into with PNC and Merrill Lynch in connection with the MLIM Transaction, together with the Company’s ownership structure, stockholders may have no effective power to influence corporate actions. As of December 31, 2007, Merrill Lynch owned approximately 45.1% of BlackRock’s issued and outstanding common stock and approximately 49.0% of total capital stock on a fully-diluted basis, and PNC owned approximately 33.5% of BlackRock’s total capital stock.

Merrill Lynch and PNC have agreed to vote all of their shares in accordance with the recommendation of BlackRock’s Board of Directors to the extent consistent with the provisions of the Merrill Lynch stockholder agreement and the PNC implementation and stockholder agreement. As a consequence, matters submitted to a stockholder vote that require a majority or a plurality of votes for approval, including elections of directors, will be approved or disapproved solely in accordance with the determinations of the BlackRock Board of Directors, so long as the shares held by Merrill Lynch and PNC constitute a majority of the outstanding shares. This arrangement has the effect of concentrating control over BlackRock in its Board of Directors, whether or not stockholders agree with any particular determination of the Board.

Legal and Regulatory Risks

BlackRock is subject to extensive regulation in the United States and internationally.

BlackRock’s business is subject to extensive regulation in the United States and around the world. See the discussion under the heading “Business – Regulation.” Violation of applicable laws or regulations could result in fines, temporary or permanent prohibition of the engagement in certain activities, reputational harm, suspensions of personnel or revocation of their licenses, suspension or termination of investment adviser or broker-dealer registrations, or other sanctions, which could cause the Company’s earnings or stock price to decline. Additionally, BlackRock’s business may be adversely impacted by regulatory and legislative initiatives imposed by various U.S. and non-U.S. regulatory and exchange authorities, and industry participants that continue to review and, in many cases, adopt changes to their established rules and policies.

Failure to comply with the Advisers Act and the Investment Company Act and related regulations could result in substantial harm to BlackRock’s reputation and results of operations.

Certain BlackRock subsidiaries are registered with the SEC under the Advisers Act and BlackRock’s U.S. mutual funds are registered with the SEC under the Investment Company Act. The Advisers Act imposes numerous obligations and fiduciary duties 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 failure of any of BlackRock’s subsidiaries to comply with the Advisers Act or the Investment Company Act could cause the SEC to institute proceedings and impose sanctions for violations of either of these acts, including censure, termination of an investment adviser’s registration or prohibition to serve as adviser to SEC-registered funds, and could lead to litigation by investors in those funds or harm to the Company’s reputation, any of which could cause its earnings or stock price to decline.

 

21


Item 1A. RISK FACTORS (continued)

 

Failure to comply with ERISA regulations could result in penalties and cause the Company’s earnings or stock price to decline.

Certain BlackRock 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 duties on persons who are fiduciaries under ERISA, prohibit specified transactions involving ERISA plan clients and provide monetary penalties for violations of these prohibitions. The failure of any of BlackRock’s subsidiaries to comply with these requirements could result in significant penalties that could reduce the Company’s earnings or cause its stock price to decline.

BlackRock is subject to banking regulations that may limit its business activities.

Since PNC’s ownership interest in BlackRock exceeds 25%, BlackRock is deemed to be a non-bank subsidiary of PNC, a financial holding company, which subjects BlackRock to general banking regulations that limit the activities and the types of businesses in which it may engage. Banking regulations may put BlackRock at a competitive disadvantage because most of its competitors are not subject to these limitations. As a non-bank subsidiary of PNC, BlackRock is subject to the supervision, regulation and examination of the FRB. The Company is also subject to the broad enforcement authority of the FRB, including the FRB’s power to prohibit BlackRock from engaging in any activity that, in the FRB’s opinion, constitutes an unsafe or unsound practice in conducting the Company’s business. The FRB also may impose substantial fines and other penalties for violations of applicable banking regulations.

Legal proceedings could adversely affect operating results and financial condition for a particular period.

Many aspects of BlackRock’s business involve substantial risks of legal liability. The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with BlackRock’s activities. While Merrill Lynch has agreed to indemnify the Company for certain of the pre-closing liabilities related to legal proceedings acquired in the MLIM Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Liability for legal actions for which no indemnification is available could reduce earnings and cash flows and cause BlackRock’s stock price to decline. Additionally, the investment funds that the Company manages are subject to lawsuits, any of which could harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

 

Item 1B. UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments from the SEC staff relating to BlackRock’s periodic or current reports filed with the SEC pursuant to the Exchange Act of 1934.

 

22


Item 2. PROPERTIES

BlackRock’s principal office, which is leased, is located at 40 East 52nd Street, New York, New York. BlackRock leases additional office space in New York City at 55 East 52nd Street and throughout the world, including Boston, Chicago, Edinburgh, Florham Park (New Jersey), Hong Kong, London, Melbourne, Munich, Plainsboro (New Jersey), San Francisco, Seattle, Singapore, Melbourne and Tokyo. The Company also owns an 84,500 square foot office building in Wilmington (Delaware).

 

Item 3. LEGAL PROCEEDINGS

BlackRock has received subpoenas from various U.S. federal and state governmental and regulatory authorities and various information requests from the SEC in connection with industry-wide investigations of U.S. mutual fund matters. BlackRock is continuing to cooperate fully in these matters. From time to time, BlackRock is also subject to other regulatory inquiries and proceedings.

The Company and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations, class actions, and other litigation and regulatory proceedings arising in connection with BlackRock’s activities. While Merrill Lynch has agreed to indemnify the Company for certain pre-closing liabilities related to legal and regulatory proceedings acquired in the MLIM Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

Management, after consultation with legal counsel, does not currently anticipate that the aggregate liability, if any, arising out of such regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows, although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.

 

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of BlackRock’s security holders during the fourth quarter of the year ended December 31, 2007.

 

23


Part II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

BlackRock’s common stock is listed on the NYSE and is traded under the symbol “BLK”. At the close of business on January 31, 2008, there were 582 common stockholders of record. Common stockholders include institutional or omnibus accounts that hold common stock for multiple underlying investors.

The following table sets forth for the periods indicated the high and low reported sale prices, period-end closing prices and dividends declared per share for the common stock as reported on the NYSE:

 

     Stock Price Ranges    Closing
Price
   Dividends
Declared
     High    Low      

2007

           

First Quarter

   $ 180.30    $ 151.32    $ 156.31    $ 0.67

Second Quarter

   $ 162.83    $ 143.69    $ 156.59    $ 0.67

Third Quarter

   $ 179.97    $ 139.20    $ 173.41    $ 0.67

Fourth Quarter

   $ 224.54    $ 172.18    $ 216.80    $ 0.67

2006

           

First Quarter

   $ 161.49    $ 105.74    $ 140.00    $ 0.42

Second Quarter

   $ 159.36    $ 120.69    $ 139.17    $ 0.42

Third Quarter

   $ 152.34    $ 123.04    $ 149.00    $ 0.42

Fourth Quarter

   $ 158.50    $ 140.72    $ 151.90    $ 0.42

BlackRock’s closing stock price as of February 27, 2008 was $ 201.30.

Dividends

On February 15, 2008, the Board of Directors approved an increase of BlackRock’s quarterly dividend to $0.78 to be paid on March 24, 2008 to stockholders of record on March 7, 2008.

Merrill Lynch and its affiliates, as the sole holders of BlackRock’s series A non-voting participating preferred stock, receive dividends on the preferred stock equivalent to the dividends received by common stockholders and may elect to receive such dividends in cash or BlackRock common stock, subject to the ownership limitations contained within the stockholders agreement with BlackRock.

 

24


Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (continued)

 

Issuer Purchases of Equity Securities

During the three months ended December 31, 2007, the Company made the following purchases of its common stock, which are registered pursuant to Section 12(b) of the Exchange Act.

 

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

October 1, 2007 through October 31, 2007

   17,314 2   $ 173.30    —      751,400

November 1, 2007 through November 30, 2007

   2,255 2   $ 172.25    —      751,400

December 1, 2007 through December 31, 2007

   42,415 2   $ 208.96    —      751,400
                    

Total

   61,984     $ 197.67    —     
                    

 

1

On August 2, 2006, the Company announced a 2.1 million share repurchase program with no stated expiration date.

2

Reflects purchases made by the Company primarily to satisfy income tax withholding obligations of employees related to the vesting of certain restricted stock or restricted stock unit awards. All such purchases were made outside of the publicly announced share repurchase program.

 

25


Item 6. SELECTED FINANCIAL DATA

The selected financial data presented below has been derived in part from, and should be read in conjunction with, the consolidated financial statements of BlackRock and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Form 10-K. Prior year data reflects certain reclassifications to conform to the current year presentation.

 

     Year Ended December 31,  
(Dollar amounts in thousands, except per share data)    2007     2006 1     2005 2     2004     2003  

Income statement data:

          

Revenue

          

Investment advisory and administration base fees

   $ 4,010,061     $ 1,598,741     $ 850,378     $ 592,016     $ 519,817  

Investment advisory performance fees

     350,188       242,282       167,994       41,607       8,875  
                                        

Investment advisory and administration fees

     4,360,249       1,841,023       1,018,372       633,623       528,692  

Distribution fees

     123,052       35,903       11,333       —         —    

Other revenue

     361,354       221,050       161,681       91,688       69,520  
                                        

Total revenue

     4,844,655       2,097,976       1,191,386       725,311       598,212  
                                        

Expenses

          

Employee compensation and benefits

     1,767,063       934,887       587,773       386,158       225,988  

Portfolio administration and servicing costs

     547,620       172,531       64,611       49,816       44,081  

Amortization of deferred sales commissions

     108,091       29,940       9,346       —         —    

General and administration 3 , 4

     870,367       451,303       181,610       122,592       98,940  

Termination of closed-end fund administration and servicing arrangements

     128,114       —         —         —         —    

Amortization of intangible assets

     129,736       37,515       7,505       947       927  
                                        

Total expenses

     3,550,991       1,626,176       850,845       559,513       369,936  
                                        

Operating income

     1,293,664       471,800       340,541       165,798       228,276  
                                        

Non-operating income (expense)

          

Net gain on investments

     504,001       36,930       24,226       20,670       7,955  

Interest and dividend income

     74,466       29,419       18,912       14,805       15,391  

Interest expense

     (49,412 )     (9,916 )     (7,924 )     (835 )     (720 )
                                        

Total non-operating income

     529,055       56,433       35,214       34,640       22,626  
                                        

Income before income taxes and non-controlling interest

     1,822,719       528,233       375,755       200,438       250,902  

Income tax expense

     463,832       189,463       138,558       52,264       95,247  
                                        

Income before non-controlling interest

     1,358,887       338,770       237,197       148,174       155,655  

Non-controlling interest

     363,615       16,168       3,289       5,033       253  
                                        

Net income

   $ 995,272     $ 322,602     $ 233,908     $ 143,141     $ 155,402  
                                        

Per share data 5:

          

Basic earnings

   $ 7.75     $ 4.00     $ 3.64     $ 2.25     $ 2.40  

Diluted earnings

   $ 7.53     $ 3.87     $ 3.50     $ 2.17     $ 2.36  

Book value 6

   $ 90.13     $ 83.57     $ 14.41     $ 12.07     $ 11.13  

Common and preferred cash dividends per share

   $ 2.68     $ 1.68     $ 1.20     $ 1.00     $ 0.40  

 

26


Item 6. SELECTED FINANCIAL DATA (continued)

 

 

     December 31,
(Dollar amounts in thousands)    2007    2006 1    2005 2    2004    2003

Balance sheet data:

              

Cash and cash equivalents

   $ 1,656,200    $ 1,160,304    $ 484,223    $ 457,673    $ 315,941

Investments

   $ 1,999,944    $ 2,097,574    $ 298,668    $ 227,497    $ 234,923

Goodwill and intangible assets, net

   $ 12,072,836    $ 11,139,447    $ 483,982    $ 184,110    $ 192,079

Total assets

   $ 22,561,515    $ 20,469,492    $ 1,848,000    $ 1,145,235    $ 967,223

Short-term borrowings

   $ 300,000    $ —      $ —      $ —      $ —  

Long-term borrowings

   $ 947,021    $ 253,167    $ 253,791    $ 4,810    $ 5,736

Total liabilities

   $ 10,386,350    $ 8,578,520    $ 916,143    $ 359,714    $ 252,676

Non-controlling interest

   $ 578,210    $ 1,109,092    $ 9,614    $ 17,169    $ 1,239

Stockholders’ equity

   $ 11,596,955    $ 10,781,880    $ 922,243    $ 768,352    $ 713,308
     December 31,
(Dollar amounts in millions)    2007    2006 1    2005 2    2004    2003

Assets under management:

              

Fixed income

   $ 513,020    $ 448,012    $ 303,928    $ 240,709    $ 214,356

Equity and balanced

     459,182      392,708      37,303      14,792      13,721

Cash management

     313,338      235,768      86,128      78,057      74,345

Alternative investments

     71,104      48,139      25,323      8,202      6,934
                                  

Total assets under management

   $ 1,356,644    $ 1,124,627    $ 452,682    $ 341,760    $ 309,356
                                  

 

1

Significant increases in 2006 are primarily the result of the closing of the MLIM Transaction on September 29, 2006.

2

Significant increases in 2005 are partially due to the result of the closing of the SSR Transaction in January 2005.

3

Includes a 2006 fee sharing payment to MetLife, Inc. of $34,450 representing a one-time expense related to a large institutional real estate equity client account acquired in the SSR Transaction.

4

Includes a $6,097 impairment of intangible assets in 2004 which represented the write-off of an intangible management contract related to certain funds in which the portfolio manager resigned and the funds were subsequently liquidated.

5

Series A non-voting participating preferred stock is considered to be common stock for purposes of per share calculations.

6

At December 31 of the respective year-end.

 

27


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

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

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

In addition to factors previously disclosed in BlackRock’s SEC reports and those identified elsewhere in this report, including the Risk Factors section of Item 1A. of this report, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: (1) the introduction, withdrawal, success and timing of business initiatives and strategies; (2) changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in demand for products or services or in the value of assets under management; (3) the relative and absolute investment performance of BlackRock’s investment products; (4) the impact of increased competition; (5) the impact of capital improvement projects; (6) the impact of future acquisitions or divestitures; (7) the unfavorable resolution of legal proceedings; (8) the extent and timing of any share repurchases; (9) the impact, extent and timing of technological changes and the adequacy of intellectual property protection; (10) the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to BlackRock, Merrill Lynch or PNC; (11) terrorist activities and international hostilities, which may adversely affect the general economy, domestic and local financial and capital markets, specific industries, and BlackRock; (12) the ability to attract and retain highly talented professionals; (13) fluctuations in the carrying value of BlackRock’s investments; (14) fluctuations in foreign currency exchange rates, which may adversely affect the value of advisory and administration fees earned by BlackRock and the carrying value of certain assets and liabilities denominated in foreign currencies; (15) the impact of changes to tax legislation and, generally, the tax position of the Company; (16) BlackRock’s ability to successfully integrate the MLIM and Quellos Businesses with its existing business; (17) the ability of BlackRock to effectively manage the former MLIM and Quellos assets along with its historical assets under management; and (18) BlackRock’s success in maintaining the distribution of its products.

 

28


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview

BlackRock, Inc. (“BlackRock” or the “Company”) is one of the largest publicly traded investment management firms in the United States with $1.357 trillion of assets under management (“AUM”) at December 31, 2007. BlackRock manages assets on behalf of institutional and individual investors worldwide through a variety of fixed income, cash management, equity and balanced and alternative investment separate accounts and funds. In addition, BlackRock provides risk management, strategic advisory and enterprise investment system services to a broad base of clients.

On September 29, 2006, BlackRock and Merrill Lynch & Co., Inc. (“Merrill Lynch”) closed a transaction pursuant to which Merrill Lynch contributed its investment management business, Merrill Lynch Investment Managers (“MLIM”), to BlackRock in exchange for an aggregate of 65 million shares of newly issued BlackRock common and non-voting participating preferred stock (the “MLIM Transaction”). On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1.719 billion in a combination of cash and common stock (the “Quellos Transaction”). At December 31, 2007, Merrill Lynch owned approximately 45.1% of the Company’s voting common stock and approximately 49.0% of the capital stock on a fully diluted basis of the Company and The PNC Financial Services Group, Inc. (“PNC”) owned approximately 33.5% of the capital stock.

The following table summarizes BlackRock’s operating performance for the years ended December 31, 2007, 2006 and 2005:

BlackRock, Inc.

Financial Highlights

(Dollar amounts in thousands, except per share data)

 

     Year ended December 31,     Variance  
     2007 vs. 2006     2006 vs. 2005  
     2007     2006     2005     Amount    %     Amount    %  

Total revenue

   $ 4,844,655     $ 2,097,976     $ 1,191,386     $ 2,746,679    130.9 %   $ 906,590    76.1 %

Total expenses

   $ 3,550,991     $ 1,626,176     $ 850,845     $ 1,924,815    118.4 %   $ 775,331    91.1 %

Operating income

   $ 1,293,664     $ 471,800     $ 340,541     $ 821,864    174.2 %   $ 131,259    38.5 %

Operating income, as adjusted (a)

   $ 1,559,423     $ 688,108     $ 425,812     $ 871,315    126.6 %   $ 262,296    61.6 %

Net income

   $ 995,272     $ 322,602     $ 233,908     $ 672,670    208.5 %   $ 88,694    37.9 %

Net income, as adjusted (b)

   $ 1,079,694     $ 444,703     $ 269,622     $ 634,991    142.8 %   $ 175,081    64.9 %

Diluted earnings per share (c)

   $ 7.53     $ 3.87     $ 3.50     $ 3.66    94.6 %   $ 0.37    10.6 %

Diluted earnings per share, as adjusted (b) (c)

   $ 8.17     $ 5.33     $ 4.03     $ 2.84    53.3 %   $ 1.30    32.3 %

Weighted average diluted shares outstanding (c)

     132,088,810       83,358,394       66,875,149       48,730,416    58.5 %     16,483,245    24.6 %

Operating margin, GAAP basis

     26.7 %     22.5 %     28.6 %          

Operating margin, as adjusted (a)

     37.5 %     36.7 %     38.9 %          

 

29


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

 

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

Operating margin, as adjusted, equals operating income, as adjusted, divided by revenue used for operating margin measurement, as indicated in the table below. As a result of recent changes in BlackRock’s business, management has altered the way it views its operating margin, as adjusted. As such, the calculation of operating income, as adjusted, and operating margin, as adjusted, were modified in the second quarter 2007 primarily to adjust for costs associated with closed-end fund issuances and amortization of deferred sales costs, as shown below. Revenue used for operating margin, as adjusted, for all periods presented includes affiliated and unaffiliated portfolio administration and servicing costs. Certain prior period non-GAAP data has been reclassified to conform to current presentation. Computations for all years are derived from the Company’s consolidated statements of income as follows:

 

     Year ended  
     2007     2006     2005  

Operating income, GAAP basis

   $ 1,293,664     $ 471,800     $ 340,541  

Non-GAAP adjustments:

      

Termination of closed-end fund administration and servicing arrangements

     128,114       —         —    

PNC LTIP funding obligation

     53,517       50,031       48,587  

Merrill Lynch compensation contribution

     10,000       1,848       —    

MLIM integration costs

     20,201       141,932       —    

Quellos integration costs

     460       —         —    

SSR integration costs

     —         —         8,873  

Closed-end fund launch costs

     35,594       11,586       13,259  

Closed-end fund launch commissions

     6,029       3,374       4,105  

Compensation expense related to appreciation on deferred compensation plans

     11,844       7,537       10,447  
                        

Operating income, as adjusted

   $ 1,559,423     $ 688,108     $ 425,812  
                        

Revenue, GAAP basis

   $ 4,844,655     $ 2,097,976     $ 1,191,386  

Non-GAAP adjustments:

      

Portfolio administration and servicing costs

     (547,620 )     (172,531 )     (64,611 )

Amortization of deferred sales costs

     (108,091 )     (29,940 )     (9,346 )

Reimbursable property management compensation

     (26,811 )     (22,618 )     (23,376 )
                        

Revenue used for operating margin measurement, as adjusted

   $ 4,162,133     $ 1,872,887     $ 1,094,053  
                        

Operating margin, GAAP basis

     26.7 %     22.5 %     28.6 %
                        

Operating margin, as adjusted

     37.5 %     36.7 %     38.9 %
                        

 

30


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

BlackRock, Inc.

Financial Highlights

(continued)

 

(a) (continued)

 

Management believes that operating income, as adjusted, and operating margin, as adjusted, are effective indicators of management’s ability to effectively employ BlackRock’s resources. As such, management believes that operating income, as adjusted, and operating margin, as adjusted, provide useful disclosure to investors.

Non-GAAP Operating Income Adjustments:

The expense related to the termination of the closed-end fund administration and servicing arrangements with Merrill Lynch has been excluded from operating income, as adjusted, as the termination of the arrangements is deemed non-recurring by management. The portion of the Long-Term Incentive Plan (“LTIP”) expense associated with awards funded through the distribution to participants of shares of BlackRock common stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. MLIM and Quellos integration costs, as well as SSR acquisition costs consist principally of certain professional fees, rebranding costs and compensation costs related to the integration which were reflected in GAAP operating income. Integration and acquisition costs have been deemed non-recurring by management and have been excluded from operating income, as adjusted, to help ensure the comparability of this information to prior periods. Closed-end fund launch costs and commissions have been excluded from operating income, as adjusted, because such costs can fluctuate considerably and revenues associated with the expenditure of such costs will not fully impact the Company’s results until future periods. As such, management believes that operating margins exclusive of these costs are more representative of the operating performance for the respective periods. Compensation expense associated with appreciation (depreciation) on assets related to certain BlackRock deferred compensation plans has been excluded as returns on investments for these plans are reported in non-operating income.

Non-GAAP Revenue Adjustments:

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

 

31


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

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

 

     Year ended  
     December 31,  
     2007     2006    2005  

Net income, GAAP basis

   $ 995,272     $ 322,602    $ 233,908  

Non-GAAP adjustments, net of tax:

       

Termination of closed-end fund administration and servicing arrangements

     81,993       —        —    

PNC’s LTIP funding obligation

     34,251       31,520      30,610  

Merrill Lynch compensation contribution

     6,400       1,164      —    

MLIM integration costs

     12,929       89,417      —    

Quellos integration costs

     294       —        —    

SSR integration costs

     —         —        5,590  

Corporate deferred income tax rate changes

     (51,445 )     —        —    

Impact of Trepp sale

     —         —        (486 )
                       

Net income, as adjusted

   $ 1,079,694     $ 444,703    $ 269,622  
                       

Diluted weighted average shares outstanding (c)

     132,088,810       83,358,394      66,875,149  
                       

Diluted earnings per share, GAAP basis (c)

   $ 7.53     $ 3.87    $ 3.50  
                       

Diluted earnings per share, as adjusted (c)

   $ 8.17     $ 5.33    $ 4.03  
                       

Management believes that net income, as adjusted, and diluted earnings per share, as adjusted, are effective measurements of BlackRock’s profitability and financial performance. The termination of the closed-end fund administration and servicing arrangements with Merrill Lynch has been excluded from net income, as adjusted, as the termination of the arrangements is deemed non-recurring by management. The portion of the LTIP expense associated with awards funded through the distribution to participants of shares of BlackRock common stock held by PNC and the anticipated Merrill Lynch compensation contribution have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, because, exclusive of the impact related to LTIP participants’ put options, these charges do not impact BlackRock’s book value. MLIM, Quellos and SSR integration costs, reflected in GAAP net income have been deemed non-recurring by management and have been excluded from net income, as adjusted, and diluted earnings per share, as adjusted, to help ensure the comparability of this information to prior reporting periods. Integration costs consist principally of compensation costs, professional fees and rebranding costs incurred in conjunction with the integrations. The United Kingdom and Germany, during third quarter 2007, enacted legislation reducing corporate income taxes, effective in April and January of 2008, respectively, which resulted in a revaluation of certain deferred tax liabilities. The resulting decrease in deferred income taxes has been excluded from net income, as adjusted, as it is non-recurring and to ensure comparability to prior reporting periods. The gain on the sale of the Company’s equity interest in Trepp, LLC reflected in GAAP net income, has been deemed non-recurring by management and has been excluded from net income, as adjusted, to help ensure the comparability of this information to subsequent reporting periods.

 

(c) Series A non-voting participating preferred stock is considered to be common stock for purposes of earnings per share calculations.

 

32


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

BlackRock has portfolio managers located around the world, including the United States, the United Kingdom, The Netherlands, Japan and Australia. The Company provides a wide array of taxable and tax-exempt fixed income, equity and balanced mutual funds and separate accounts, as well as a wide assortment of index-based equity and alternative investment products to a diverse global clientele. BlackRock provides global advisory services for mutual funds and other non-U.S. equivalent retail products. The Company’s non-U.S. mutual funds are based in a number of domiciles and cover a range of asset classes, including cash management, fixed income and equities. The primary retail fund group offered outside the United States is the Merrill Lynch International Investment Funds (“MLIIF”), which is authorized for distribution in more than 35 jurisdictions worldwide. In the United States, the primary retail offerings include a wide variety of open-end and closed-end funds. Additional fund offerings include structured products, real estate funds, hedge funds, hedge funds of funds, private equity funds and funds of funds, managed futures funds and exchange funds. These products are sold to both U.S. and non-U.S. high net worth, retail and institutional investors in a wide variety of active and passive strategies covering both equity and fixed income assets.

BlackRock’s client base consists of financial institutions and other corporate clients, pension funds, high net worth individuals and retail investors around the world. BlackRock maintains a significant sales and marketing presence both inside and outside the United States that is focused on establishing and maintaining retail and institutional investment management relationships by marketing its services to retail and institutional investors directly and through financial professionals, pension consultants and establishing third-party distribution relationships. BlackRock also distributes certain of its products and services through Merrill Lynch.

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

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

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

 

33


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Overview (continued)

 

Operating expenses consist of employee compensation and benefits, portfolio administration and servicing costs, amortization of deferred mutual fund sales commissions, general and administration expense and amortization of intangible assets. Employee compensation and benefits expense reflects salaries, deferred and incentive compensation, stock-based compensation and related benefit costs. Portfolio administration and servicing costs reflect payments made to Merrill Lynch-affiliated entities and PNC-affiliated entities, as well as third parties, primarily associated with the administration and servicing of client investments in certain BlackRock products.

Assets Under Management

AUM increased approximately $232.0 billion, or 20.6%, to $1.357 trillion at December 31, 2007, compared with $1.125 trillion at December 31, 2006. The growth in AUM was attributable to $137.6 billion in net subscriptions, $60.1 billion in net market appreciation, $21.9 billion acquired in the Quellos Transaction and $12.4 billion in net foreign exchange gains.

BlackRock, Inc.

Assets Under Management

 

     Year ended December 31,    Variance  
(Dollar amounts in millions)    2007    2006    2005    2007 vs. 2006     2006 vs. 2005  

Fixed income

   $ 513,020    $ 448,012    $ 303,928    14.5 %   47.4 %

Equity and balanced

     459,182      392,708      37,303    16.9 %   NM  

Cash management

     313,338      235,768      86,128    32.9 %   173.7 %

Alternative investments

     71,104      48,139      25,323    47.7 %   90.1 %
                         

Total

   $ 1,356,644    $ 1,124,627    $ 452,682    20.6 %   148.4 %
                         

 

NM – Not Meaningful

 

34


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Assets Under Management (continued)

 

Net subscriptions of $137.6 billion for the year ended December 31, 2007 were primarily the result of net new business of $75.3 billion in cash management products, $27.2 billion in fixed income products, $23.5 billion in equity and balanced products and $11.7 billion in alternative investment products. Market appreciation of $60.1 billion largely reflected appreciation in equity and balanced products of $35.0 billion, as equity markets improved during the year ended December 31, 2007 and market appreciation on fixed income products of $20.1 billion due to current income and changes in market interest rates. BlackRock acquired $21.9 billion in alternative investment products from the Quellos Transaction.

The following table presents the component changes in BlackRock’s AUM for the years ended December 31, 2007, 2006 and 2005. Prior year data reflects certain reclassifications to conform to the current year presentation.

BlackRock, Inc.

Component Changes in Assets Under Management

 

     Year ended  
   December 31,  
(Dollar amounts in millions)    2007     2006     2005  

Beginning assets under management

   $ 1,124,627     $ 452,682     $ 341,760  

Net subscriptions

     137,639       32,814       50,155  

Acquisitions

     21,868       589,158       49,966  

Market appreciation

     60,132       42,196       13,238  

Foreign exchange

     12,378       7,777       (2,437 )
                        

Ending assets under management

   $ 1,356,644     $ 1,124,627     $ 452,682  
                        

Percent change in change in AUM from net subscriptions and acquisitions

     68.7 %     92.6 %     90.3 %

Percent change in total AUM

     20.6 %     148.4 %     32.5 %

The following table presents the component changes in BlackRock’s AUM for 2007.

 

(Dollar amounts in millions)    December 31,
2006
   Net
subscriptions
(redemptions)
   Acquisitions/
reclassifications  1
   Market
appreciation
(depreciation)
   Foreign
Exchange  2
   December 31,
2007

Fixed income

   $ 448,012    $ 27,196    $ 14,037    $ 20,091    $ 3,684    $ 513,020

Equity and balanced

     392,708      23,489      —        35,016      7,969      459,182

Cash management

     235,768      75,272      —        1,933      365      313,338

Alternative investments

     48,139      11,682      7,831      3,092      360      71,104
                                         

Total

   $ 1,124,627    $ 137,639    $ 21,868    $ 60,132    $ 12,378    $ 1,356,644
                                         

 

1

Data reflects reclassification of $14.0 billion of fixed income oriented absolute return and structured products to fixed income from alternative investments, as well as the $21.9 billion of net assets acquired in the Quellos Transaction on October 1, 2007.

2

Foreign exchange reflects the impact of converting non-dollar denominated AUM into U.S. dollars for reporting.

 

35


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Business Outlook

As fiscal 2008 began, domestic and international markets generally reflected mixed economic and market performance due to a downturn in the United States housing market and ongoing credit market concerns. Low interest rates and a weaker dollar suggest increased allocations outside the United States over time, as well as faster adoption of new strategies, including liability driven investing, the increased use of multiple asset class products and the mainstreaming of alternatives. The timing and direction of market changes, investment performance and new client asset flows will impact the revenue the Company recognizes.

The Company notes that the liquidity crunch and associated market disruption have impacted our business, which may be affected by further market changes during the remainder of 2008.

 

   

The build-up of institutional liquidity assets experienced in the fourth quarter of 2007 may be temporary, as these assets are expected to be redeployed to longer-dated strategies as market conditions stabilize. The Company’s strategic focus on performance, globalization and product diversification, client service and independent advice may enable retention of a portion of these assets.

 

   

The liquidity crunch and associated market disruption have given rise to greater demand for our advisory services, marrying our extensive capital markets and structuring expertise with rigorous modeling and analytical capabilities. While we anticipate demand for these services to remain high through the volatile markets, demand may return to historical levels should market concerns ease.

 

   

In early 2008, returns on many major equity indices have declined from year-end 2007, which may impact the Company’s revenue in future periods.

 

36


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006

Operating results for the year ended December 31, 2007 reflect the full year impact of the MLIM Transaction, which closed on September 29, 2006. With the exception of BlackRock Solutions , the magnitude of the acquired business is the primary driver of most line item variances in the analysis below comparing the year ended December 31, 2007 to the year ended December 31, 2006. Certain prior year amounts have been reclassified to conform to the current presentation.

Revenue

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2007    2006    Amount    %  

Investment advisory and administration fees:

           

Fixed income

   $ 917,390    $ 590,225    $ 327,165    55.4 %

Equity and balanced

     2,202,076      625,390      1,576,686    252.1 %

Cash management

     519,733      202,515      317,218    156.6 %

Alternative investments

     370,862      180,611      190,251    105.3 %
                       

Investment advisory and administration base fees

     4,010,061      1,598,741      2,411,320    150.8 %

Investment advisory performance fees

     350,188      242,282      107,906    44.5 %
                       

Total investment advisory and administration fees

     4,360,249      1,841,023      2,519,226    136.8 %

Distribution fees

     123,052      35,903      87,149    242.7 %

Other revenue:

           

BlackRock Solutions

     198,262      147,987      50,275    34.0 %

Other revenue

     163,092      73,063      90,029    123.2 %
                       

Total other revenue

     361,354      221,050      140,304    63.5 %
                       

Total revenue

   $ 4,844,655    $ 2,097,976    $ 2,746,679    130.9 %
                       

Total revenue for the year ended December 31, 2007 increased $2,746.7 million, or 130.9%, to $4,844.7 million, compared with $2,098.0 million for the year ended December 31, 2006. Total investment advisory and administration fees increased $2,519.2 million to $4,360.2 million for the year ended December 31, 2007, compared with $1,841.0 million for the year ended December 31, 2006. Distribution fees increased by $87.1 million to $123.1 million for the year ended December 31, 2007 compared with $35.9 million for the year ended December 31, 2006. Other revenue increased by $140.3 million, or 63.5%, to $361.4 million for the year ended December 31, 2007 compared with $221.1 million for the year ended December 31, 2006.

Investment advisory and administration fees

The increase in investment advisory and administration fees of $2,519.2 million, or 136.8%, was the result of an increase in investment advisory and administration base fees of $2,411.3 million, or 150.8%, to $4,010.1 million for the year ended December 31, 2007, compared with $1,598.7 million for the year ended December 31, 2006 along with an increase of $107.9 million in performance fees. Investment advisory and administration base fees increased for the year ended December 31, 2007 primarily due to the MLIM Transaction which added $589.2 billion in AUM on September 29, 2006 and additional increased AUM of $232.0 billion during 2007.

 

37


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Revenue (continued)

 

Investment advisory and administration fees (continued)

 

The increase in investment advisory and administration base fees of $2,411.3 million for the year ended December 31, 2007, compared with the year ended December 31, 2006 consisted of increases of $1,576.7 million in equity and balanced products, $327.2 million in fixed income products, $317.2 million in cash management products and $190.3 million in alternative products. The increase in investment advisory and administration fees for equity and balanced, fixed income, cash management and alternative investment products was driven by AUM acquired in the MLIM Transaction on September 29, 2006, as well as increases in AUM of $66.5 billion, $65.0 billion, $77.6 billion and $23.0 billion, respectively, over the past twelve months, which includes the $21.9 billion of alternative investment AUM acquired in the Quellos Transaction.

Performance fees increased by $107.9 million, or 44.5%, to $350.2 million for the year ended December 31, 2007, compared to $242.3 million for the year ended December 31, 2006 primarily due to higher performance fees on equity and fixed income hedge funds, as well as real estate equity products.

Distribution Fees

Distribution fees increased by $87.1 million to $123.1 million for the year ended December 31, 2007, as compared to $35.9 million for the year ended December 31, 2006. The increase in distribution fees is primarily the result of the acquisition of distribution financing arrangements from the MLIM Transaction in third quarter 2006 and from PNC in second quarter 2007.

Other Revenue

Other revenue of $361.4 million for the year ended December 31, 2007 increased $140.3 million compared with the year ended December 31, 2006. Other revenue primarily represents fees earned on BlackRock Solutions products and services of $198.3 million, property management fees of $38.2 million earned on real estate products (primarily related to reimbursement of salaries and benefits of certain Realty employees from certain real estate products), fees for fund accounting of $27.2 million, fees related to securities lending of $27.1 million and $13.9 million for other advisory service fees.

The increase in other revenue of $140.3 million, or 63.5%, for the year ended December 31, 2007 as compared to $221.1 million for the year ended December 31, 2006 was primarily the result of an increase of $50.3 million from BlackRock Solutions products and services driven by new Aladdin ® and advisory valuation assignments, an increase of $24.6 million in unit trust sales commissions, an increase of $20.8 million in fees earned related to securities lending, $14.6 million in fund accounting services, and $13.7 million for other advisory service fees.

 

38


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Expenses

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2007    2006    Amount     %  

Expenses:

          

Employee compensation and benefits

   $ 1,767,063    $ 934,887    $ 832,176     89.0 %

Portfolio administration and servicing costs

     547,620      172,531      375,089     217.4 %

Amortization of deferred sales commissions

     108,091      29,940      78,151     261.0 %

General and administration

     870,367      416,853      453,514     108.8 %

Termination of closed-end fund administration and servicing arrangements

     128,114      —        128,114     NM  

Fee sharing payment

     —        34,450      (34,450 )   (100.0 )%

Amortization of intangible assets

     129,736      37,515      92,221     245.8 %
                            

Total expenses

   $ 3,550,991    $ 1,626,176    $ 1,924,815     118.4 %
                            

 

NM – Not Meaningful

Total expenses, which reflect the impact of the MLIM Transaction on September 29, 2006, increased $1,924.8 million, or 118.4%, to $3,551.0 million for the year ended December 31, 2007, compared with $1,626.2 million for the year ended December 31, 2006. Total expense included integration charges related to the MLIM Transaction of $20.2 million and $141.9 million in 2007 and 2006, respectively. The year ended December 31, 2007 included $20.2 million of total MLIM integration charges primarily in general and administration, compared to integration charges of $45.0 million related to employee compensation and benefits and $96.9 million related to general and administration, respectively in the year ended December 31, 2006.

Employee Compensation and Benefits

Employee compensation and benefits increased by $832.2 million, or 89.0%, to $1,767.1 million, at December 31, 2007 compared to $934.9 million for the year ended December 31, 2006. The increase in employee compensation and benefits was primarily attributable to increases in incentive compensation, salaries and benefits and stock-based compensation of $405.7 million, $368.4 million and $66.3 million, respectively. The $405.7 million, increase in incentive compensation is primarily attributable to higher operating income and direct incentives associated with higher performance fees earned on the Company’s alternative investment products. The $368.4 million increase in salaries and benefits was primarily attributable to higher staffing levels associated with the MLIM and Quellos Transactions and business growth. Employees (including employees of Metric Property Management, Inc. (“Metric”) at December 31, 2007 totaled 5,952 as compared to 5,113 at December 31, 2006.

 

39


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Expenses (continued)

 

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs increased $375.1 million to $547.6 million during the year ended December 31, 2007, compared to $172.5 million for the year ended December 31, 2006. These costs include payments to third parties, including Merrill Lynch and PNC, primarily associated with the administration and servicing of client investments in certain BlackRock products. Portfolio administration and servicing costs included $436.9 million of expense for the year ended December 31 2007 payable to Merrill Lynch and affiliates and $23.2 million of expense for the year ended December 31, 2007 payable to PNC and other affiliates.

Amortization of Deferred Sales Commissions

Amortization of deferred sales commissions increased by $78.2 million to $108.1 million for the year ended December 31, 2007, as compared to $29.9 million for the year ended December 31, 2006. The increase in amortization of deferred sales commissions was primarily the result of the acquisition of distribution financing arrangements from MLIM at the end of third quarter 2006 and from PNC in second quarter 2007.

General and Administration Expense

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2007    2006    Amount    %  

General and administration expense:

           

Portfolio services

   $ 169,676    $ 51,694    $ 117,982    228.2 %

Marketing and promotional

     169,206      100,089      69,117    69.1 %

Occupancy

     130,089      64,086      66,003    103.0 %

Technology

     117,597      61,040      56,557    92.7 %

Professional services

     94,282      72,740      21,542    29.6 %

Closed-end fund launch costs

     35,594      11,586      24,008    207.2 %

Other general and administration

     153,923      55,618      98,305    176.8 %
                       

Total general and administration expense

   $ 870,367    $ 416,853    $ 453,514    108.8 %
                       

General and administration expense increased $453.5 million, or 108.8%, for the year ended December 31, 2007 to $870.4 million, compared to $416.9 million for the year ended December 31, 2006.

 

40


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Expenses (continued)

 

Portfolio services costs increased by $118.0 million to $169.7 million, relating to supporting higher AUM levels and increased trading activities. Marketing and promotional expense increased $69.1 million, or 69.1%, to $169.2 million for the year ended December 31, 2007, compared to $100.1 million for the year ended December 31, 2006 primarily due to increased marketing activities, including $84.8 million related to domestic and international marketing efforts, partially offset by a decrease of $15.7 million related to BlackRock’s advertising and rebranding campaign in 2006. Occupancy costs for the year ended December 31, 2007 totaled $130.1 million, representing a $66.0 million, or 103.0%, increase from $64.1 million for the year ended December 31, 2006. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities as a result of the MLIM and Quellos Transactions and business growth. Technology expenses increased $56.6 million, or 92.7%, to $117.6 million compared to $61.0 million for the year ended December 31, 2006 primarily due to a $13.0 million increase in technology consulting expenses, a $19.4 million increase in hardware depreciation expense and a $14.7 million increase in software licensing and maintenance costs. Closed-end fund launch costs totaled $35.6 million for the year ended December 31, 2007 relating to three new closed-end funds launched during the year, generating approximately $3.0 billion in AUM. Closed-end fund launch costs for the year ended December 31, 2006 totaled $11.6 million relating to three new closed-end funds launched during the period, generating $2.2 billion in AUM. Professional services increased $21.5 million, or 29.6%, to $94.3 million compared to $72.7 million for the year ended December 31, 2006 primarily due to increased accounting, tax and legal services necessary to support business growth. Other general and administration costs increased by $98.3 million to $153.9 million from $55.6 million, including $23.9 million of capital contributions to two enhanced cash funds in support of fund net asset values and a $12 million charge reflecting the valuation of capital support agreements covering certain securities remaining in the funds and $32.4 million in office related expenses.

Termination of Closed-end Fund Administration and Servicing Arrangements

For the year ended December 31, 2007, BlackRock recorded an expense of $128.1 million, related to the termination of administration and servicing arrangements with Merrill Lynch on 40 closed-end funds with original terms of 30-40 years.

Fee Sharing Payment

For the year ended December 31, 2006, BlackRock recorded a fee sharing payment of $34.5 million, representing a payment related to a large institutional real estate equity client account acquired in the SSR Transaction in January 2005.

Amortization of Intangible Assets

The $92.2 million increase in the amortization of intangible assets to $129.7 million for the year ended December 31, 2007, compared to $37.5 million for the year ended December 31, 2006, primarily reflects amortization of finite-lived intangible assets acquired in the MLIM and Quellos Transactions.

 

41


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Non-Operating Income, Net of Non-Controlling Interest

Non-operating income, net of non-controlling interest, for the years ended December 31, 2007 and 2006 was as follows:

 

     Year ended
December 31,
    Variance  
(Dollar amounts in thousands)    2007     2006     Amount     %  

Total non-operating income

   $ 529,055     $ 56,433     $ 472,622     NM  

Non-controlling interest

     (363,615 )     (16,168 )     (347,447 )   NM  
                          

Total non-operating income, net of non-controlling interest

   $ 165,440     $ 40,265     $ 125,175     310.9 %
                          

 

NM – Not Meaningful

The components of non-operating income, net of non-controlling interest, for the year ended December 31, 2007 and 2006 were as follows:

 

     Year ended
December 31,
    Variance  
(Dollar amounts in thousands)    2007     2006     Amount     %  

Non-operating income, net of non-controlling interest:

        

Net gain on investments, net of non-controlling interest:

        

Private equity 1

   $ 64,971     $ 64     $ 64,907     NM  

Real estate

     36,756       1,030       35,726     NM  

Other alternative products

     30,800       7,369       23,431     NM  

Other 2

     9,859       12,353       (2,494 )   NM  
                          

Total net gain on investments, net of non-controlling interest

     142,386       20,816       121,570     NM  

Other non-controlling interest 3

     (2,000 )     (54 )     (1,946 )   NM  

Interest and dividend income

     74,466       29,419       45,047     153.1 %

Interest expense

     (49,412 )     (9,916 )     (39,496 )   398.3 %
                          

Total non-operating income, net of non-controlling interest

   $ 165,440     $ 40,265     $ 125,175     310.9 %
                          

 

NM – Not Meaningful

 

1

Includes earnings on BlackRock’s limited partnership investments in private equity funds.

2

Includes investment income related to equity and fixed income investments, collateralized debt obligations, deferred compensation arrangements and BlackRock’s seed capital hedging program.

3

Includes non-controlling interest related to non-investment activities.

Non-operating income, net of non-controlling interest, increased $125.2 million to $165.4 million for the year ended December 31, 2007, compared to $40.3 million for the year ended December 31, 2006 as a result of a $121.6 million increase in net gain on investments, net of non-controlling interest, and a $45.0 million increase in interest and dividend income, partially offset by a $39.5 million increase in interest expense primarily related to borrowings under BlackRock’s revolving credit agreement and the $700 million issuance of long-term debt in September 2007. The increase in net gain on investments, net of non-controlling interest, was primarily due to market appreciation and investment gains from seed investments in private equity products, real estate equity products and other alternative products including hedge funds and funds of funds, partially offset by $14.2 million of increased impairments related to seed investments in collateralized debt obligations.

 

42


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2007, as compared with the year ended December 31, 2006 (continued)

 

Income Taxes

Income tax expense was $463.8 million and $189.5 million for the years ended December 31, 2007 and 2006, respectively, representing effective income tax rates of 31.8% and 37.0%, respectively. The reduction in the effective tax rate is primarily the result of a one-time deferred income tax benefit of $51.4 million, recognized in the third quarter of 2007, due to tax legislation changes enacted in third quarter 2007 in the United Kingdom and Germany that will reduce corporate income tax rates in those jurisdictions in 2008. Accordingly, BlackRock revalued its deferred tax liabilities in these jurisdictions. Absent this deferred income tax benefit, the 2007 effective tax rate would have been 35.3%.

Net Income

Net income totaled $995.3 million, or $7.53 per diluted share, for the year ended December 31, 2007, which was an increase of $672.7 million, or $3.66 per diluted share, compared to the year ended December 31, 2006. Net income for the year ended December 31, 2007 includes $82.0 million related to the after-tax impacts of the termination of closed-end fund administration and servicing arrangements with Merrill Lynch, $34.3 million related to the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC, $12.9 million related to integration costs associated with the MLIM and Quellos Transactions and $6.4 million related to an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees. In addition, the United Kingdom and Germany enacted legislation reducing corporate income tax rates resulting in a one-time decrease of $51.4 million in income tax expense which is included in net income. MLIM and Quellos integration costs primarily include compensation costs, professional fees and rebranding costs.

Net income of $322.6 million during the year ended December 31, 2006 included the after-tax impacts of the portion of certain LTIP awards to be funded through a capital contribution of $31.5 million of BlackRock common stock held by PNC, MLIM integration costs of $89.4 million and an expected contribution by Merrill Lynch of $1.2 million to fund certain compensation of former MLIM employees. Exclusive of these items, fully diluted earnings per share, as adjusted, for the year ended December 31, 2007 increased $2.84, or 53.3%, to $8.17 compared to $5.33 for the year ended December 31, 2006.

Operating Margin

The Company’s operating margin was 26.7% for the year ended December 31, 2007 compared to 22.5% for the year ended December 31, 2006. Operating margin for the year ended December 31, 2007 includes the impacts of $128.1 million for the termination of closed-end fund administration and servicing arrangements with Merrill Lynch, $41.6 million of closed-end fund launch costs and commissions and $20.7 million of integration costs. Operating margin for the year ended December 31, 2006 includes the impact of $15.0 million of closed-end fund launch costs and commissions and $141.9 million of integration costs. Including the impact of a $92 million increase in amortization of intangible assets associated with the MLIM and Quellos acquisitions, operating margin improved 4.2% primarily due to the reduction of integration costs as well as operating leverage associated with the growth in revenue, partially offset by the impact of the termination of certain closed-end fund administration and servicing agreements.

Operating margin, as adjusted, was 37.5% and 36.7% for the years ended December 31, 2007 and 2006, respectively. Operating margin, as adjusted, is described in more detail in the Overview to Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

43


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005

The following table presents the component changes in BlackRock’s AUM for 2006.

 

(Dollar amounts in millions)    December 31,
2005
   Net
subscriptions
(redemptions)
   Acquisition  1    Foreign
Exchange  2
   Market
appreciation
(depreciation)
   December 31,
2006

Fixed income

   $ 303,928    $ 3,157    $ 124,886    $ 2,184    $ 13,857    $ 448,012

Equity and balanced

     37,303      10,675      314,419      5,166      25,145      392,708

Cash management

     86,128      12,224      135,630      169      1,617      235.768

Alternative investments

     25,323      6,758      14,223      258      1,577      48,139
                                         

Total

   $ 452,682    $ 32,814    $ 589,158    $ 7,777    $ 42,196    $ 1,124,627
                                         

 

1

Reflects net assets acquired in the MLIM Transaction on September 29, 2006. Amount includes $27.7 billion of net new business related to MLIM in the first nine months of 2006, prior to the MLIM Transaction.

2

Foreign exchange reflects the impact of converting non-dollar denominated AUM into U.S. dollars for reporting.

Operating results for the year ended December 31, 2006 reflect the impact of the MLIM Transaction, subsequent to closing on September 29, 2006. With the exception of BlackRock Solutions , the magnitude of the acquired business is the primary driver of most line item variances in the analysis below comparing the year ended December 31, 2006 to the year ended December 31, 2005. Certain prior year amounts have been reclassified to conform to the current presentation.

Revenue

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

Investment advisory and administration fees:

           

Fixed income

   $ 590,225    $ 453,742    $ 136,483    30.1 %

Equity and balanced

     625,390      176,278      449,112    254.8 %

Cash management

     202,515      105,406      97,109    92.1 %

Alternative investments

     180,611      114,952      65,659    57.1 %
                       

Investment advisory and administration base fees

     1,598,741      850,378      748,363    88.0 %

Investment advisory performance fees

     242,282      167,994      74,288    44.2 %
                       

Total investment advisory and administration fees

     1,841,023      1,018,372      822,651    80.8 %

Distribution fees

     35,903      11,333      24,570    216.8 %

Other revenues:

           

BlackRock Solutions

     147,987      123,623      24,364    19.7 %

Other revenue

     73,063      38,058      35,005    92.0 %
                       

Total other revenues

     221,050      161,681      59,369    36.7 %
                       

Total revenue

   $ 2,097,976    $ 1,191,386    $ 906,590    76.1 %
                       

 

44


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

Revenue (continued)

 

Total revenue for the year ended December 31, 2006 increased $906.6 million, or 76.1%, to $2,098.0 million, compared with $1,191.4 million for the year ended December 31, 2005. Total Investment advisory and administration fees increased $822.7 million to $1,841.0 million for the year ended December 31, 2006, compared with $1,018.4 million for the year ended December 31, 2005. Distribution fees increased by $24.6 million to $35.9 million for the year ended December 31, 2006 compared with $11.3 million for the year ended December 31, 2005. Other revenue increased by $59.4 million, or 36.7%, to $221.1 million for the year ended December 31, 2006, compared with $161.7 million for the year ended December 31, 2005.

Investment advisory and administration fees

The increase in total investment advisory and administration fees of $822.7 million, or 80.8%, was the result of an increase in investment advisory and administration base fees of $748.4 million, or 88.0%, to $1,598.7 million for the year ended December 31, 2006, compared with $850.4 million for the year ended December 31, 2005 along with an increase of $74.3 million in performance fees. Investment advisory and administration base fees increased in the year ended December 31, 2006 primarily due to increased AUM of $671.9 billion, including $589.2 billion of AUM acquired in the MLIM Transaction.

The increase in investment advisory and administration base fees of $748.4 million for the year ended December 31, 2006 compared with the year ended December 31, 2005 consisted of increases of $449.1 million in equity and balanced products, $136.5 million in fixed income products, $97.1 million in cash management products and $65.7 million in alternative investment products. The increase in investment advisory and administration fees for equity and balanced, fixed income, cash management and alternative investment products was driven by increases in AUM of $355.4 billion, $149.6 billion, $144.1 billion and $22.8 billion, respectively, over the past twelve months, which included the AUM acquired in the MLIM Transaction on September 29, 2006.

Performance fees increased by $74.3 million, or 44.2%, to $242.3 million for the year ended December 31, 2006 compared to $168.0 million for the year ended December 31, 2005 primarily due to fees earned on a large institutional real estate client account and the Company’s other alternative products.

Distribution Fees

Distribution fees increased by $24.6 million to $35.9 million for the year ended December 31, 2006, as compared to $11.3 million for the year ended December 31, 2005. The increase in distribution fees was primarily the result of the acquisition of distribution financing arrangements from the MLIM Transaction in the third quarter 2006.

Other Revenue

Other revenue of $221.1 million for the year ended December 31, 2006 increased $59.4 million compared with the year ended December 31, 2005 and primarily represents fees earned on BlackRock Solutions’ products and services of $148.0 million, property management fees of $32.1 million earned on real estate products (primarily related to reimbursement of salaries and benefits of certain Realty employees from certain real estate products), fees for fund accounting of $12.6 million and fees related to securities lending of $6.3 million.

The increase in other revenue of $59.4 million, for the year ended December 31, 2006 as compared to $161.7 million for the year ended December 31, 2005 was primarily the result of an increase of $24.4 million from BlackRock Solutions’ products and services primarily driven by new Aladdin assignments, and increases of $12.6 million in fund accounting services and $6.3 million in fees earned related to securities lending.

 

45


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

Expenses

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount    %  

Expenses:

           

Employee compensation and benefits

   $ 934,887    $ 587,773    $ 347,114    59.1 %

Portfolio administration and servicing costs

     172,531      64,611      107,920    167.0 %

Amortization of deferred sales commissions

     29,940      9,346      20,594    220.3 %

General and administration

     416,853      181,610      235,243    129.5 %

Fee sharing payment

     34,450      —        34,450    NM  

Amortization of intangible assets

     37,515      7,505      30,010    399.9 %
                       

Total expenses

   $ 1,626,176    $ 850,845    $ 775,331    91.1 %
                       

 

NM – Not Meaningful

Total expenses, which reflects the impact of the MLIM Transaction on September 29, 2006 and includes $141.9 million of integration charges, increased $775.3 million, or 91.1%, to $1,626.2 million for the year ended December 31, 2006, compared with $850.8 million for the year ended December 31, 2005. The increase was attributable to increases in employee compensation and benefits, portfolio administration and servicing costs, general and administration expense, a fee sharing payment, and amortization of intangible assets. Integration charges related to the MLIM Transaction included $45.0 million in employee compensation and benefits and $96.9 million in general and administration expense.

Employee Compensation and Benefits

Employee compensation and benefits expense increased by $347.1 million, or 59.1%, to $934.9 million, at December 31, 2006 compared to $587.8 million for the year ended December 31, 2005. The increase in employee compensation and benefits was primarily attributable to increases in salaries and benefits and incentive compensation of $193.6 million and $142.8 million, respectively. The $193.6 million, increase in salaries and benefits was primarily attributable to higher staffing levels associated with business growth and the MLIM Transaction. Employees (including employees of Metric) at December 31, 2006 totaled 5,113 as compared to 2,148 at December 31, 2005. The $142.8 million, increase in incentive compensation is primarily attributable to growth in operating income and higher incentive compensation associated with performance fees earned on the Company’s alternative investment products and $45.0 million of MLIM integration costs.

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs increased $107.9 million to $172.5 million during the year ended December 31, 2006. These costs include payments to third parties, including Merrill Lynch and PNC, primarily associated with the administration and servicing of client investments in certain BlackRock products. Portfolio administration and servicing costs included $96.4 million of expense in the fourth quarter 2006 payable to Merrill Lynch and affiliates and $24.1 million of expense for the year ended December 31, 2006 payable to PNC and affiliates.

 

46


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

Expenses (continued)

 

Amortization of Deferred Sales Commissions

Amortization of deferred sales commissions increased by $20.6 million to $29.9 million for the year ended December 31, 2006 as compared to $9.3 million for the year ended December 31, 2005. The increase in amortization of deferred sales commissions is primarily the result of the acquisition of distribution financing arrangements from MLIM.

General and Administration Expense

 

     Year ended
December 31,
   Variance  
(Dollar amounts in thousands)    2006    2005    Amount     %  

General and administration expense:

          

Portfolio services

   $ 51,694    $ 14,046    $ 37,648     268.0 %

Marketing and promotional

     100,089      37,565      62,524     166.4 %

Occupancy

     64,086      36,190      27,896     77.1 %

Technology

     61,040      22,662      38,378     169.3 %

Professional services

     72,740      18,360      54,380     296.2 %

Closed-end fund launch costs

     11,586      13,259      (1,673 )   (12.6 )%

Other general and administration

     55,618      39,528      16,090     40.7 %
                        

Total general and administration expense

   $ 416,853    $ 181,610    $ 235,243     129.5 %
                        

General and administration expense increased $235.2 million, or 129.5%, for the year ended December 31, 2006 to $416.9 million, compared to $181.6 million for the year ended December 31, 2005. The increase in general and administration expense was primarily due to increases in marketing and promotional expense of $62.5 million, professional services of $54.4 million, technology expense of $38.4 million, portfolio services expense of $37.6 million, occupancy expense of $27.9 million and other general and administration expense of $16.1 million, partially offset by a reduction in closed-end fund launch costs of $1.7 million. The increase in general and administration expense included $96.9 million of integration costs primarily related to marketing and promotional and professional services in connection with the MLIM Transaction.

 

47


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

General and Administration (continued)

 

Marketing and promotional expense increased $62.5 million, or 166.4%, to $100.1 million for the year ended December 31, 2006, compared to $37.6 million for the year ended December 31, 2005 primarily due to increased marketing activities, including $29.6 million related to domestic and international marketing efforts and $32.9 million related to BlackRock’s advertising and rebranding campaign. Professional services expenses increased $54.4 million, or 296.2%, to $72.7 million compared to $18.4 million for the year ended December 31, 2005 primarily related to the MLIM Transaction. Technology expenses increased $38.4 million, to $61.0 million compared to $22.7 million for the year ended December 31, 2005 primarily related to the integration of the MLIM business. Portfolio services increased by $37.6 million to $51.7 million, relating to supporting higher AUM levels and increased trading activities of the combined Company. Occupancy costs for the year ended December 31, 2006 totaled $64.1 million, representing a $27.9 million, increase from $36.2 million for the year ended December 31, 2005. The increase in occupancy costs primarily reflects costs related to the expansion of corporate facilities as a result of the MLIM Transaction and business growth. Closed-end fund launch costs totaled $11.6 million for the year ended December 31, 2006 related to three new closed-end funds launched during the period, generating approximately $2.2 billion in AUM. Closed-end fund launch costs for the year ended December 31, 2005 totaled $13.3 million relating to four new closed-end funds launched during the period, generating $2.1 billion in AUM. Other general and administration costs increased by $16.1 million to $55.6 million from $39.5 million, as a result of increased operating growth and the MLIM Transaction.

Fee Sharing Payment

For the year ended December 31, 2006, BlackRock recorded a fee sharing payment of $34.5 million, representing a payment related to a large institutional real estate equity client account acquired in the SSRM Holdings, Inc. acquisition in January 2005.

Amortization of Intangible Assets

The $30.0 million increase in amortization of intangible assets to $37.5 million for the year ended December 31, 2006, compared to $7.5 million for the year ended December 31, 2005, primarily reflects amortization of finite-lived intangible assets acquired in the MLIM Transaction.

Non-Operating Income, Net of Non-Controlling Interest

Non-operating income, net of non-controlling interest, for the years ended December 31, 2006 and 2005 was as follows:

 

     Year ended
December 31,
    Variance  
(Dollar amounts in thousands)    2006     2005     Amount     %  

Total non-operating income

   $ 56,433     $ 35,214     $ 21,219     60.3 %

Non-controlling interest

     (16,168 )     (3,289 )     (12,879 )   391.6 %
                          

Total non-operating income, net of non-controlling interest

   $ 40,265     $ 31,925     $ 8,340     26.1 %
                          

 

NM – Not Meaningful

        

 

48


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

Non-Operating Income, Net of Non-Controlling Interest (continued)

 

The components of non-operating income, net of non-controlling interest, for the years ended December 31, 2006 and 2005 were as follows:

 

       Year ended
December 31,
    Variance  
(Dollar amounts in thousands)    2006     2005     Amount     %  

Non-operating income, net of non-controlling interest:

        

Net gain (loss) on investments, net of non-controlling interest:

        

Private equity 1

   $ 64     $ —       $ 64     NM  

Real estate

     1,030       2,303       (1,273 )   (55.3 )%

Other alternative products

     7,369       13,904       (6,535 )   (47.0 )%

Other 2

     12,353       7,515       4,838     64.4 %
                          

Total net gain on investments, net of non-controlling interest

     20,816       23,722       (2,906 )   (12.3 )%

Other non-controlling interest 3

     (54 )     (2,785 )     2,731     (98.1 )%

Interest and dividend income

     29,419       18,912       10,507     55.6 %

Interest expense

     (9,916 )     (7,924 )     (1,992 )   25.1 %
                          

Total non-operating income, net of non-controlling interest

   $ 40,265     $ 31,925     $ 8,340     26.1 %
                          

 

NM – Not Meaningful

1         Includes earnings on BlackRock’s limited partnership investments in private equity funds.

2         Includes investment income related to equity and fixed income investments, collateralized debt obligations, deferred compensation arrangements and BlackRock’s seed capital hedging program.

3         Includes non-controlling interest related to non-investment activities.

 

           

            

           

Non-operating income, net of non-controlling interest, increased $8.3 million to $40.3 million for the year ended December 31, 2006 compared to $31.9 million for the year ended December 31, 2005 as a result of a $10.5 million increase in interest and dividend income, partially offset by a $2.0 million increase in interest expense primarily related to interest owed to Merrill Lynch on certain liabilities assumed in the MLIM Transaction and a $2.9 million decrease in net gain on investments, net of non-controlling interest. The decrease in the net gain on investments, net of non-controlling interest, was primarily due to a decrease in net investment gains on seed investments in real estate and other alternative products, partially offset by significant growth of the Company’s investments in sponsored investment products.

Income Taxes

Income tax expense was $189.5 million and $138.6 million for the years ended December 31, 2006 and 2005, representing effective tax rates of 37.0% and 37.2%, respectively.

 

49


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Operating results for the year ended December 31, 2006, as compared with the year ended December 31, 2005 (continued)

 

Net Income

Net income totaled $322.6 million, or $3.87 per diluted share, for the year ended December 31, 2006 an increase of $88.7 million, or $0.37 per diluted share, compared to the year ended December 31, 2005. Net income for the year ended December 31, 2006 included the after-tax impacts of integration costs related to the MLIM Transaction, the portion of certain LTIP awards to be funded through a capital contribution of BlackRock common stock held by PNC, and an expected contribution by Merrill Lynch to fund certain compensation of former MLIM employees, of $89.4 million, $31.5 million and $1.2 million, respectively. MLIM integration costs primarily include compensation costs, professional fees and rebranding costs.

Net income of $233.9 million during the year ended December 31, 2005 included the after-tax impacts of the portion of LTIP awards funded by a capital contribution of BlackRock stock held by PNC and SSR integration costs of $30.6 million and $5.6 million, respectively. SSR integration costs included acquisition-related payments to continuing employees of BlackRock and professional fees. Exclusive of these items, fully diluted earnings per share, as adjusted, for the year ended December 31, 2006 increased $1.30, or 32.3%, compared to the year ended December 31, 2005.

Other Operating Items

Support of Two Enhanced Cash Funds

At December 31, 2007, BlackRock managed approximately $313 billion in cash management assets. Of this amount, approximately $1.7 billion was held by two private placement enhanced cash funds. During the third and fourth quarters, market events reduced the liquidity of certain securities, including those issued by asset-backed structured investment vehicles, held by these two funds.

During 2007 BlackRock made investments in the funds to enhance fund liquidity and to facilitate redemptions. At December 31, 2007, BlackRock’s total net investment in these two funds was approximately $89 million. BlackRock also provided capital contributions totaling $24 million during 2007 to help preserve a one dollar net asset value per share for these two funds. The capital contributions resulted in an increase to general and administration expense of $24 million for 2007.

In December 2007, BlackRock entered into capital support agreements with the two funds, backed by letters of credit drawn under BlackRock’s existing credit facility. Pursuant to the capital support agreements, BlackRock has agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100 million, related to specified securities held by the funds. The terms of the capital support agreements expire in December 2008 unless renewed by BlackRock. In addition, due to continuing market illiquidity, BlackRock suspended cash redemptions from these two funds in December 2007. As of February 2008, subsequent to the suspension of cash redemptions, the funds distributed approximately $930 million in aggregate to investors as a result of security sales and maturities.

In addition, BlackRock recorded $12 million in general and administration expense in the fourth quarter and a corresponding liability at December 31, 2007 related to the fair value of the capital support agreements with the two funds. The fair value of the potential liability related to the capital support agreements will fluctuate in subsequent periods based principally on projected cash flows of the specified securities covered by the capital support agreements and market liquidity.

In addition, BlackRock may, at its option, from time to time, purchase securities from the funds at the greater of the funds’ amortized cost or fair value. In the event securities are purchased at amortized cost, a loss would be recorded based on its difference from fair value.

 

50


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Other Operating Items (continued)

 

Support of Two Enhanced Cash Funds (continued)

 

Under FASB Interpretation No. 46(R) (“FIN 46(R)”) these two funds meet the definition of variable interest entities. In applying the provisions of FIN 46(R) the Company applies an expected loss model to the funds to determine the primary beneficiary of the funds. As a result of the application of the model, BlackRock has concluded that it is not the primary beneficiary of either fund. The Company will perform the expected loss model calculation quarterly to determine whether BlackRock is the primary beneficiary.

Exposure to Collateralized Debt Obligations

In the normal course of business, BlackRock manages various collateralized debt obligations (“CDOs”). A CDO is a managed investment vehicle that purchases a portfolio of assets or enters into swaps. A CDO funds its activities, through the issuance of several tranches of debt and equity, the repayment and return of which are linked to the performance of the assets in the CDO. Typically, BlackRock’s role is as collateral manager. The Company also may invest in a percentage of the debt or equity issued. These entities meet the definition of a variable interest entity under FIN 46(R). BlackRock has concluded that it is not the primary beneficiary of these CDOs, and as a result it does not consolidate these CDOs in its consolidated financial statements. At December 31, 2007, BlackRock’s carrying value on the statement of financial condition, of investments in these CDOs was approximately $10.5 million, of which approximately $9.3 million was in CDOs backed by leveraged finance assets and approximately $1.2 million backed by structured finance securities.

In addition, BlackRock manages a series of credit default swap transactions, referred to collectively as the Pillars synthetic CDO transaction, which is backed by a portfolio of both investment grade corporate and structured finance exposures. In connection with the transaction, BlackRock has entered into a credit default swap with a counterparty to provide credit protection of $16.7 million, which represents the Company’s maximum risk of loss with respect to the provision of credit protection. Under the terms of its credit default swap, the Company is entitled to an annual coupon of 4% of the swap’s notional balance of $16.7 million and 25% of the structure’s residual balance at its expected termination date of December 23, 2009. Management has performed an assessment of the Company’s variable interest under FIN 46(R) and has concluded the Company is not the primary beneficiary of the CDO transaction. At December 31, 2007, the fair value of the credit default swap was approximately $4.9 million and was included on the Company’s consolidated statement of financial condition in other assets.

At December 31, 2007, BlackRock’s maximum risk of loss related to CDOs was approximately $32.1 million.

Liquidity and Capital Resources

Capital Resources

The Company manages its consolidated financial condition and funding to maintain appropriate liquidity for the business. At December 31, 2007, the Company had total cash and cash equivalents on its consolidated statements of financial condition of $1,656.2 million. Cash and cash equivalents, net of amounts in consolidated sponsored investment funds of $67.0 million and net of regulatory capital requirements ($217.4 million, partially met with cash and cash equivalents) was $1,371.8 million. In addition, at December 31, 2007, the Company had committed access to $2,100 million of undrawn cash via its 2007 five-year credit facility, resulting in cash, net of cash in consolidated sponsored investment funds and regulatory capital requirements, plus credit capacity of $3,471.8 million.

Approximately $67.0 million in cash and cash equivalents and $1,054.2 million in investments included in the Company’s consolidated statement of financial condition at December 31, 2007 are held by sponsored investment funds that are consolidated by BlackRock in accordance with GAAP. The Company may not be able to access such cash or investments to use in its operating activities. In addition, a significant portion of the Company’s investments are illiquid in nature and, as such, are not readily convertible to cash.

 

51


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Liquidity and Capital Resources (continued)

 

Operating Activities

Sources of BlackRock’s operating cash include investment advisory and administration fees, revenues from BlackRock Solutions’ products and services, property management fees, mutual fund distribution fees and realized earnings and distributions on certain of the Company’s investments. BlackRock primarily uses its operating cash to pay compensation and benefits, portfolio administration and servicing costs, general and administration expenses, interest on the Company’s borrowings, purchases of investments, capital expenditures, income taxes and dividends on BlackRock’s capital stock.

Investment Activities

At December 31, 2007, the Company had $513.9 million of various capital commitments to fund sponsored investment funds and unfunded commitments related to one private equity warehouse facility. Generally, the timing of the funding of capital commitments is uncertain and such commitments could expire before funding. The Company intends to make additional capital commitments from time to time to seed additional investment products for and with clients.

At December 31, 2007, the Company had loaned approximately $79.5 million to certain funds of funds managed by the Company and warehouse entities established for such funds. At December 31, 2007, the Company had committed to make additional loans of approximately $89.6 million under the agreements. The Company anticipates making additional commitments under these facilities from time to time, but is not obligated to do so.

Borrowings

In December 2006, the Company entered into an unsecured revolving credit facility with a syndicate of banking institutions. This facility, as amended in February 2007 (the “2006 facility”), permitted the Company to borrow up to $800 million.

In August 2007, the Company terminated the 2006 facility and entered into a new five year $2.5 billion unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500 million of borrowing capacity, subject to lender credit approval, up to a maximum of $3.0 billion. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied at December 31, 2007.

The 2007 facility was used to refinance the 2006 facility and will provide back-up liquidity, fund ongoing working capital for general corporate purposes and fund investment opportunities. At December 31, 2007, the Company had $300 million outstanding under the 2007 facility with interest rates between 5.105% to 5.315% and maturity dates between March 2008 and September 2008 in addition to the $100 million of letters of credit outstanding related to the capital support agreements for the two enhanced cash funds.

In September 2007, the Company issued $700 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”). The Notes were issued at a discount of $5.6 million, which is being amortized over the ten-year term. A portion of the net proceeds of the Notes was used to fund the initial cash payment for the acquisition of the fund of funds business of Quellos and the remainder was used for general corporate purposes.

At December 31, 2007, long-term borrowings were $947.0 million. Debt service and repayment requirements, assuming the convertible debentures (discussed later) are repaid at BlackRock’s option in 2010, are $51.0 million in 2008 and 2009, $297.7 million in 2010 and $43.8 million in 2011 and 2012.

 

52


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Liquidity and Capital Resources (continued)

 

Capital Activities

In June 2007, the Company announced that it had entered into an asset purchase agreement under which it would acquire certain assets of the fund of funds business of Quellos for up to $1.719 billion. This transaction closed on October 1, 2007, and BlackRock paid Quellos $562.5 million in cash and $187.5 million in BlackRock common stock. The common stock will be held in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. In addition, Quellos may receive up to an additional $969 million in a combination of cash and stock contingent upon achieving certain operating measures through December 31, 2010.

On August 2, 2006, BlackRock announced that its Board of Directors had authorized a share repurchase program to purchase an additional 2.1 million shares of BlackRock common stock. Pursuant to this repurchase program, BlackRock may make repurchases from time to time, as market conditions warrant, in the open market or in privately negotiated transactions at the discretion of management. The Company repurchased 1,348,600 shares under the program in open market transactions for approximately $200.9 million through December 31, 2007. As a result, the Company is currently authorized to repurchase an additional 751,400 shares under its share repurchase program.

In 2007, under the terms of the 2002 LTIP Awards, employees elected to put approximately 95% of the stock portion of the awards back to BlackRock at a total fair market value of approximately $166 million.

During 2007, BlackRock paid cash dividends of $353.5 million, or 35.5% of its net income. BlackRock announced an increase to the quarterly dividend rate, effective with the March 24, 2008 payment, to $0.78 per share from $0.67 per share paid in 2007.

Net Capital Requirements

The Company is required to maintain net capital in certain international jurisdictions, which is met in part by retaining cash and cash equivalent investments in those jurisdictions. As a result, the Company may be restricted in its ability to transfer cash between different jurisdictions. Additionally, transfer of cash between international jurisdictions, including repatriation to the United States, may have adverse tax consequences that could discourage such transfers. At December 31, 2007, the Company was required to maintain approximately $217.4 million in net capital at these subsidiaries and is in compliance with all applicable regulatory minimum net capital requirements.

 

53


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Contractual Obligations, Commitments and Contingencies

The following table sets forth contractual obligations, commitments and contingencies by year of payment as of December 31, 2007:

 

(Dollar amounts in thousands)    2008    2009    2010    2011    2012    Thereafter    Total

Contractual obligations and commitments:

                    

Long-term borrowings 1

                    

Long-term notes

   $ 43,750    $ 43,750    $ 43,750    $ 43,750    $ 43,750    $ 918,750    $ 1,137,500

Convertible debentures

     6,563      6,563      253,278      —        —        —        266,404

Other

     684      684      684      —        —        —        2,052

Short-term borrowings 1

     309,086      —        —        —        —        —        309,086

Operating leases

     71,696      65,463      62,919      60,576      54,944      216,982      532,580

Purchase obligations

     48,310      32,270      14,180      9,537      6,164      —        110,461

Investment / loan commitments

     98,795      89,642      49,548      643      —        364,927      603,555
                                                

Total contractual obligations and commitments

     578,884      238,372      424,359      114,506      104,858      1,500,659      2,961,638
                                                

Contingent obligations:

                    

Contingent distribution obligations

     409,363      307,022      —        —        —        —        716,385

Contingent payments related to business acquisitions

     —        295,000      10,000      595,000      —        —        900,000
                                                

Total contractual obligations, commitments and contingent obligations 2

   $ 988,247    $ 840,394    $ 434,359    $ 709,506    $ 104,858    $ 1,500,659    $ 4,578,023
                                                

 

1

Amounts include principal repayments and interest payments.

2

The table above does not include: (a) approximately $61.8 million of uncertain tax positions and potential interest on such positions in accordance with FIN No. 48 and (b) $100 million related to capital support agreements for the two enhanced cash funds as the Company is unable to estimate the timing of the ultimate outcome.

 

54


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Contractual Obligations, Commitments and Contingencies (continued)

 

Long-term Notes

In September 2007, the Company issued $700.0 million in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017. Interest is payable semi-annually on March 15 and September 15 of each year. The Notes may be redeemed prior to maturity at any time in whole or in part at the option of the Company at a “make-whole” premium. The Notes were issued at a discount of $5.6 million, which is being amortized over their ten-year term.

Convertible Debentures

In February 2005, the Company issued $250.0 million aggregate principal amount of convertible debentures due in 2035 and bearing interest at a rate of 2.625% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, or approximately $6.6 million per year. The convertible debentures are callable by the Company at any time on or after February 20, 2010. In addition, the convertible debentures contain certain put and conversion provisions. On the contractual obligations table above, the principal balance of the convertible debentures is assumed to be repaid at BlackRock’s option in 2010, and the related interest has been included through the call date. However, beginning in February 2009 the convertible debentures may be converted at the option of the holders.

Short-term Borrowings

At December 31, 2007, the Company had $300.0 million outstanding under the 2007 facility with interest rates between 5.105% to 5.315% and maturity dates between March 2008 and September 2008.

Operating Leases

The Company leases its primary office space and certain office equipment under agreements that currently expire through 2023. In connection with certain lease agreements, the Company is responsible for escalation payments. The contractual obligations table above includes only guaranteed minimum lease payments for such leases and does not project potential escalation or other lease-related payments. These leases are classified as operating leases and, as such, are not recorded as liabilities on the consolidated statements of financial condition.

Purchase Obligations

In the ordinary course of business, BlackRock enters into contracts or purchase obligations with third parties whereby the third parties provide services to or on behalf of BlackRock. Purchase obligations included in the contractual obligations table above represent executory contracts which are either non-cancelable or cancelable with a penalty. At December 31, 2007, the Company’s obligations primarily reflect standard service contracts for portfolio, market data and office related services. Purchase obligations are recorded on the Company’s financial statements only after the goods or services have been received and, as such, obligations for services not received are not included in the Company’s consolidated statement of financial condition at December 31, 2007.

 

55


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Contractual Obligations, Commitments and Contingencies (continued)

 

Investment /Loan Commitments

The Company has various capital commitments to fund companies or investment funds in which it has an ownership stake as well as loan commitments to certain funds of funds managed by the Company and warehouse entities established for such funds. Generally, the timing of the funding of these commitments is unknown. Therefore, amounts are shown to be paid upon the expiration date of the commitment. Actual payments could be made at any time prior to such date and, if not called by that date, such commitments would expire. These commitments have not been recorded on the Company’s consolidated statements of financial condition at December 31, 2007. The above schedule does not include potential future commitments approved by the Company’s Capital Committee, but which are not yet legally binding commitments.

BlackRock is also obligated to maintain specified ownership levels in certain investment products, which may result in additional required contributions or distributions of capital. These amounts are inherently uncertain and have been excluded from the contractual obligations schedule above. In addition, as a general partner in certain private equity partnerships, the Company receives certain carried interest distributions from the partnerships according to the provisions of the partnership agreements. The Company may, from time to time, be required to return all or a portion of such distributions to the limited partners in the event the limited partners do not achieve a certain return as specified in the various partnership agreements.

Contingent Distribution Obligations

BlackRock has entered into a global distribution agreement with Merrill Lynch which requires the Company to make payments to Merrill Lynch contingent upon sales of products and level of assets under management maintained in BlackRock products. The economic terms of the agreement will remain in effect until September 30, 2009. After such term, the agreement will renew for additional one-year terms, subject to certain conditions.

Contingent Payments Related to Business Acquisitions

Amounts included in the table above are additional contingent payments to be paid in cash related to its acquisitions of: (i) SSRM Holdings, Inc., and (ii) certain assets of Quellos. As the remaining contingent obligations are primarily dependent upon achievement of certain operating measures, the ultimate liabilities are not certain as of December 31, 2007 and have not been recorded on the Company’s consolidated statements of financial condition. The amount of contingent payments reflected for any year represents the maximum amount of cash that could be payable at the earliest possible date under the terms of the business purchase agreements.

In January 2005, the Company closed its acquisition of SSRM Holdings, Inc. from MetLife for adjusted consideration of approximately $265.1 million in cash and 550,000 restricted shares of BlackRock common stock and certain additional contingent payments. On the fifth anniversary of the closing of the SSR Transaction, MetLife may be entitled to receive an additional payment of up to a maximum of $10.0 million based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans.

In connection with the Quellos Transaction, Quellos may be entitled to receive two contingent payments upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to an additional $969 million in a combination of cash and stock. The first contingent payment, of up to $374 million, is payable up to 25% in BlackRock common stock and the remainder in cash. The second contingent payment of up to $595 million is payable in cash. At December 31, 2007, the Company believes it is likely that the first contingent payment will be paid in full, however the ultimate outcome is not certain.

 

56


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Contractual Obligations, Commitments and Contingencies (continued)

 

The following items have not been included in the contractual obligations, commitments and contingencies table:

Compensation and benefit obligations

The Company has various compensation and benefit obligations, including bonuses, commissions and incentive payments payable, defined contribution plan matching contribution obligations, and deferred compensation arrangements, that are excluded from the table above primarily due to uncertainties in their payout periods. These arrangements are discussed in more detail in Notes 12 and 13 to the consolidated financial statements contained herein. Accrued compensation and benefits at December 31, 2007 totaled $1,086.6 million and included incentive compensation of $834.6 million, deferred compensation of $133.0 million and other compensation and benefits related obligations of $119.0 million. Incentive compensation was primarily paid in the first quarter of 2008, while the deferred compensation obligations are generally payable over periods up to five years.

Separate Account Liabilities

The Company’s wholly-owned registered life insurance company in the United Kingdom maintains separate account assets representing segregated funds held for purposes of funding individual and group pension contracts. The net investment income and net realized and unrealized gains and losses attributable to these separate account assets accrue to the contract owner and, as such, an offsetting separate account liability is recorded. At December 31, 2007, the Company had $4.7 billion of assets and offsetting liabilities on the consolidated statement of financial condition. The payment of these contractual obligations is inherently uncertain and varies by customer. As such, these liabilities have been excluded from the contractual obligations table above.

Indemnifications

In many of the Company’s contracts, including the MLIM and Quellos Transaction agreements, BlackRock agrees to indemnify third parties under certain circumstances. The terms of the indemnities vary from contract to contract and the amount of indemnification liability, if any, cannot be determined and has not been included in the table above or recorded in the Company’s consolidated statement of financial condition at December 31, 2007. See further discussion in Note 11 to the consolidated financial statements beginning on F-1 of this Form 10-K.

 

57


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Management considers the following critical accounting policies important to understanding our consolidated financial statements. For a summary of these and additional accounting policies see Note 2 to the consolidated financial statements beginning on page F-1 of this Form 10-K.

Investments

Consolidation of Investments

The accounting method used for the Company’s investments generally is dependent upon the influence the Company has on its investee. For investments where BlackRock can exert control over the financial and operating policies of the investee, which generally exists if BlackRock has a 50% or greater voting interest, the investee is consolidated into BlackRock’s financial statements. For certain investments where the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may be consolidated if BlackRock is considered the primary beneficiary of the investee.

Significant judgment is required in the determination of whether the Company is the primary beneficiary of a VIE. If the Company, with its related parties, is determined to be the primary beneficiary of a VIE, the entity will be consolidated within BlackRock’s consolidated financial statements. In order to determine whether the Company is the primary beneficiary of a VIE, management must make significant estimates and assumptions of probable future cash flows and assign probabilities to different cash flow scenarios. Assumptions made in such analyses include, but are not limited to, market prices of securities, market interest rates, potential credit defaults on individual securities or default rates on a portfolio of securities, gain realization, liquidity or marketability of certain securities, discount rates and the probability of certain other outcomes.

The Company, as general partner or managing member of its funds, is generally presumed to control funds that are limited partnerships or limited liability companies. The Company reviews such investment vehicles to determine if such a presumption can be overcome by determining if other non-related party partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or otherwise to remove BlackRock as the general partner or managing member without cause, or have substantive participating rights. If the investment vehicle is not a VIE and the presumption of control is not overcome, the investment vehicle will be consolidated into BlackRock’s financial statements.

BlackRock acts as general partner or managing member for consolidated private equity funds of funds. In December 2007, BlackRock took necessary steps to grant additional rights to the third party investors in approximately 14 funds with net assets at December 31, 2007 of approximately $1 billion. The granting of these rights resulted in the deconsolidation of such investment funds from the consolidated financial statements as of December 31, 2007.

 

58


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies (continued)

 

Fair Value of Investments

BlackRock records substantially all investments on its consolidated statements of financial condition at fair value or amounts that approximate fair value. For certain investments, including investments classified as trading investments and consolidated sponsored investment funds, changes in fair value affect net income in the period of the change. For other investments classified as available-for-sale securities, changes in fair value are recorded as a component of stockholders’ equity and generally do not directly impact BlackRock’s net income until such investments are sold or are considered impaired (see below). Marketable securities are priced using publicly available market data. Non-marketable securities, however, generally are priced using a variety of methods and resources, including the most currently available net asset values or capital accounts of the investment, internal valuation models which utilize available market data and management assumptions or in the absence of other methods and resources the fair value for an investment is estimated in good faith by the Company’s management based on a number of factors including the liquidity, financial condition and current and projected operating performance of the investment.

At December 31, 2007, BlackRock had approximately $2.0 billion in investments. Changes in fair value on approximately $1.736 billion of such investments will impact the Company’s consolidated statements of income and approximately $264 million will impact accumulated other comprehensive income. As of December 31, 2007, approximately $1.054 billion of such investments related to investments within consolidated funds whereby changes in fair value of such investments will impact BlackRock’s investment income and non-controlling interest expense on the consolidated statements of income. BlackRock’s net exposure to changes in fair value of such consolidated investment funds is $325 million.

Equity Method Investments

For equity investments where BlackRock does not control the investee, and where the Company is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company uses the equity method of accounting. The evaluation of whether the Company exerts control or significant influence over the financial and operational policies of its investees requires significant judgment based on the facts and circumstances surrounding each individual investment. Factors considered in these evaluations may include the type of investment, the legal structure of the investee, the terms and structure of the investment agreement including investor voting or other rights, the terms of BlackRock’s advisory agreement or other agreements with the investee, any influence BlackRock may have on the governing board of the investee, the legal rights of other investors in the entity pursuant to the fund’s operating documents and the relationship between BlackRock and other investors in the entity.

Under the equity method of accounting, BlackRock’s share of the investee’s underlying net income, based upon the most currently available information, is recorded as non-operating income .

At December 31, 2007 and 2006 the Company had $554.0 million and $326.5 million, respectively, of equity method investees reflected within investments.

 

59


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies (continued)

 

Impairment of Investments

The Company’s management periodically assesses impairment on its investments. If circumstances indicate that impairment may exist, investments are evaluated using market values, where available, or the expected future cash flows of the investment. If the undiscounted expected future cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded to the consolidated statements of income.

When the fair value of an available-for-sale security is lower than its cost or amortized cost value, the Company evaluates the security to determine whether the impairment is considered “other-than-temporary”. In making this determination, the Company considers, among other factors, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and near-term prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, a charge is recorded to the consolidated statements of income. There were no impairments of investments, other than CDOs (see below), for the years ended December 31, 2007, 2006 or 2005.

The Company evaluates its CDO investments for impairment quarterly throughout the term of the investment. The Company reviews cash flow estimates throughout the life of each CDO investment. If the net present value of the estimated future cash flows is lower than the carrying value of the investment and also is lower than the net present value of the previous estimate of cash flows, an impairment is considered other-than-temporary. The impairment loss is then recognized based on the excess of the carrying amount of the investment over its estimated fair value. CDO impairments were $16.4 million, $2.3 million and $0.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Evaluations of impairments of securities involve significant assumptions and management judgments, which could differ from actual results and these differences could have a material impact on the Company’s consolidated statements of income.

Goodwill and Intangible Assets

At December 31, 2007, the carrying amounts of the Company’s goodwill and intangible assets were as follows:

 

(Dollar amounts in thousands)    December 31,
2007

Goodwill

   $ 5,519,714

Intangible assets

  

Indefinite–lived

     5,351,132

Finite–lived, net of accumulated amortization

     1,201,990
      

Total goodwill and intangible assets

   $ 12,072,836
      

 

60


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies (continued)

 

Goodwill and Intangible Assets (continued)

 

The value of contracts to manage assets in proprietary open-end funds and closed-end funds without a specified termination date is classified as an indefinite-lived intangible asset. The assignment of indefinite lives to such mutual fund contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage these funds due to the likelihood of continued renewal at little or no cost. Goodwill represents the cost of a business acquisition in excess of the fair value of the net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , indefinite-lived intangible assets and goodwill are not amortized. Finite-lived management contracts are amortized over their expected useful lives, which, at December 31, 2007, ranged from less than 1 year to 20 years with a weighted average remaining estimated useful life of 8.7 years.

The Company assesses its indefinite-lived management contracts and goodwill for impairment at least annually, considering factors such as AUM, product mix, projected cash flows, average base fees by product and revenue multiples to determine whether the values of each asset are impaired and whether the indefinite-life classification is still appropriate. The fair value of indefinite-lived intangible assets and goodwill is determined based on the discounted value of expected future cash flows. The fair value of finite-lived intangible assets is reviewed at least annually to determine whether circumstances exist which indicate there may be a potential impairment. If such circumstances are considered to exist, the Company will perform an impairment test, using an undiscounted cash flow analysis. If the asset is determined to be impaired, the difference between the book value of the asset and its current fair value is recognized as an expense in the period in which the impairment is determined.

Expected future cash flows are estimated using many variables which require significant management judgment, including market interest rates, equity prices, credit default ratings, discount rates, revenue multiples, inflation rates and AUM growth rates. Actual results could differ from these estimates, which could materially impact the impairment conclusion. No such impairments were recorded in 2007, 2006 or 2005. In addition, management judgment is required to estimate the period over which intangible assets will contribute to the Company’s cash flows and the pattern in which these assets will be consumed. A change in the remaining useful life of any of these assets, or the reclassification of an indefinite-lived intangible asset to a finite-lived intangible asset, could have a significant impact on the Company’s amortization expense, which was $129.7 million, $37.5 million and 7.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Income Taxes

The Company accounts for income taxes under the asset and 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 differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases using currently enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

BlackRock adopted the provisions of FASB Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes , on January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. FIN No. 48 also provides guidance on, among other things, de-recognition of deferred tax assets and liabilities and interest and penalties on uncertain tax positions.

 

61


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies (continued)

 

Income Taxes (continued)

 

The application of SFAS No. 109 and FIN No. 48 requires management to make estimates of the ranges of possible outcomes, the probability of favorable or unfavorable tax outcomes and potential interest and penalties related to such unfavorable outcomes, which require significant management judgment. Actual future tax consequences of uncertain tax positions may be materially different than the Company’s current estimates. At December 31, 2007, BlackRock had $66.3 million of unrecognized tax benefits, of which $40.6 million, if recognized, would affect the effective tax rate.

In accordance with SFAS No. 109, management is required to estimate the timing of the recognition of deferred tax assets and liabilities, make assumptions about the future deductibility of deferred tax assets and assesses deferred tax liabilities based on enacted tax rates for the appropriate tax jurisdictions to determine the amount of such deferred tax assets and liabilities. Changes in the calculated deferred tax assets and liabilities may occur in certain circumstances, including statutory income tax rate changes, statutory tax law changes, changes in the anticipated timing of recognition of deferred tax assets and liabilities or changes in the structure or tax status of the Company. Such changes in circumstance would cause the Company to revalue its deferred tax balances with the resulting change impacting the income statement in the period of the change. Such changes may be material to the Company’s consolidated financial statements. At December 31, 2007, the Company had deferred tax assets of $9.1 million and deferred tax liabilities of approximately $2.1 billion.

Further, the Company records its income taxes based upon its estimated income tax liability or benefit. The Company’s actual tax liability or benefit may differ from the estimated income tax liability or benefit. The Company had current income taxes receivable of approximately $47.1 million and current income taxes payable of $228.4 million at December 31, 2007.

Revenue Recognition

Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of AUM or, in the case of certain real estate separate accounts, net operating income generated by the underlying properties, and are affected by changes in AUM, including market appreciation or depreciation and net subscriptions or redemptions. Investment advisory and administration fees for mutual funds are shown net of fees waived pursuant to expense limitations or voluntary waivers. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are generally recognized at the closing of the respective real estate transactions.

The Company contracts with third parties, as well as related parties, for various mutual fund administration and shareholder servicing to be performed on behalf of certain funds managed by the Company. Such arrangements generally are priced as a portion of the Company’s management fee paid by the fund. In certain cases, the fund takes on the primary responsibility for payment for services such that BlackRock bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with Emerging Issues Task Force (“EITF”) No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent , and records its investment advisory and administration fees net of retrocessions. Retrocessions for the year ended December 31, 2007 and 2006 were $780.4 million and $156.0 million, respectively.

The Company also receives performance fees or incentive allocations from alternative investment products and certain separate accounts. These performance fees generally are earned upon exceeding specified investment return thresholds. Such fees are recorded upon completion of the measurement period. For the years ended December 31, 2007, 2006 and 2005, performance fee revenue totaled $350.2 million, $242.3 million and $168.0 million, respectively.

 

62


Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

 

Critical Accounting Policies and Estimates (continued)

 

Revenue Recognition (continued)

 

The Company receives carried interest from certain alternative investment funds upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these investments. BlackRock records carried interest subject to such claw-back provisions as revenue on its consolidated statements of income upon the earlier of the termination of the alternative investment fund or when the likelihood of claw-back is mathematically improbable. The Company records a deferred carried interest liability to the extent it receives cash or capital allocations prior to meeting the revenue recognition criteria. At December 31, 2007 and 2006 the Company had $28.6 million and $0, respectively of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition.

Adjustments to revenue arising from initial estimates historically have been immaterial since the majority of BlackRock’s investment advisory and administration revenue is calculated on the fair value of AUM and since the Company does not record revenues until performance thresholds have been exceeded and the likelihood of claw-back of carried interest is mathematically improbable. Management can give no assurance, however, that these estimates would not result in a material adjustment in the future.

Related Party Transactions

See related party transactions discussion in Note 14 to the consolidated financial statements beginning on page F-1 of this Form 10-K.

Recent Accounting Developments

Recent accounting developments are discussed in Note 2 to the consolidated financial statements beginning on page F-1 of this Form 10-K.

 

63


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a leading investment management firm, BlackRock devotes significant resources across all of its operations to identifying, measuring, monitoring, managing and analyzing market and operating risks, including the management and oversight of its own investment portfolio. The Board of Directors of the Company has adopted guidelines for the review of investments to be made by the Company, requiring, among other things, that all investments be reviewed by the Company’s Capital Committee, which consists of senior officers of the Company, and that certain investments over prescribed thresholds receive prior approval from the Audit Committee or the Board of Directors depending on the circumstances.

AUM Market Price Risk

BlackRock’s investment management revenues are primarily comprised of fees based on a percentage of the value of AUM and, in some cases, performance fees expressed as a percentage of the returns realized on AUM. At December 31, 2007, the majority of our investment advisory and administration fees were based on AUM of the applicable mutual funds or separate accounts. Movements in equity market prices, interest rates, foreign exchange rates, or all three could cause the following, which would result in lower investment advisory and administration fees:

 

   

the value of AUM to decrease;

 

   

the returns realized on AUM to decrease;

 

   

clients to withdraw funds in favor of products in markets that they perceive to offer greater opportunity and that BlackRock does not serve;

 

   

clients to rebalance assets away from products that BlackRock manages into products that BlackRock does not manage; and

 

   

clients to reallocate assets away from products that earn higher fees into products with lower fees.

Corporate Investments Portfolio Risks

In the normal course of its business, BlackRock is exposed to equity market price risk, interest rate risk and foreign exchange rate risk associated with its corporate investments.

BlackRock has investments primarily in sponsored investment products that invest in a variety of asset classes. Investments generally are made to establish a performance track record, for co-investment purposes or to hedge exposure to certain deferred compensation plans. Currently, the Company has a seed capital hedging program in which it enters into total return swaps to hedge exposure to certain equity investments. At December 31, 2007, the outstanding total return swaps had an aggregate notional value of approximately $94 million.

At December 31, 2007, approximately $1,054 million of BlackRock’s total investments were maintained in sponsored investment funds that are deemed to be controlled by BlackRock in accordance with GAAP and therefore are consolidated even though BlackRock may not own a majority of such funds. The Company’s net economic exposure to its investment portfolio is as follows:

 

(Dollar amounts in millions)    December 31,
2007
    December 31,
2006
 

Total investments

   $ 2,000     $ 2,098  

Consolidated sponsored investments funds

     (1,054 )     (1,470 )

Net exposure to consolidated investment funds

     325       325  
                

Total net “economic” investment exposure

   $ 1,271     $ 953  
                

 

64


Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)

 

Equity Market Price Risk

At December 31, 2007, the Company’s net exposure to equity price risk is approximately $835 million (net of $94 million of certain equity investments that are hedged via total return swaps) of the Company’s net economic investment exposure. The Company estimates that a 10% adverse change in equity prices would result in a decrease of approximately $83.5 million in the carrying value of such investments .

Interest Rate Risk

At December 31, 2007, the Company was exposed to interest-rate risk as a result of approximately $342 million of investments in debt securities and sponsored investment products that invest primarily in debt securities. Management considered a hypothetical 100 basis point fluctuation in interest rates and estimates that the impact of such a fluctuation on these investments, in the aggregate, would result in a decrease, or increase, of approximately $5.1 million in the carrying value of such investments.

Foreign Exchange Rate Risk

As discussed above, the Company invests in sponsored investment products that invest in a variety of asset classes. The carrying value of the net economic investment exposure denominated in foreign currencies, primarily the British pound sterling and the Euro, was $93 million. A 10% adverse change in foreign exchange rates would result in approximately a $9.3 million decline in the carrying value of such investments.

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The report of the independent registered public accounting firm and financial statements listed in the accompanying index are included in Item 15 of this report. See Index to the consolidated financial statements on page F-1 of this Form 10-K.

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements on accounting and financial disclosure matters. BlackRock has not changed accountants in the two most recent fiscal years.

 

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the direction of BlackRock’s Chief Executive Officer and Chief Financial Officer, BlackRock evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2007. Based on this evaluation, BlackRock’s Chief Executive Officer and Chief Financial Officer have concluded that BlackRock’s disclosure controls and procedures were effective as of December 31, 2007.

Internal Control and Financial Reporting

Other than system conversion activities related to the transition of support from Merrill Lynch to BlackRock, there have been no changes in internal control over financial reporting during the quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, such internal control over financial reporting. The Company has completed an evaluation of its internal control over financial reporting in light of the MLIM Transaction and expects to make additional integration related modifications.

 

65


Item 9A. CONTROLS AND PROCEDURES (continued)

 

Management’s Report on Internal Control Over Financial Reporting

Management of BlackRock, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal controls over financial reporting include those policies and procedures that:

 

   

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

   

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with the authorization of management and directors of the Company; and

 

   

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Based on this assessment, management concluded that, as of December 31, 2007, the Company’s internal control over financial reporting is effective.

The Company’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Company’s internal control over financial reporting. This report begins on page 67.

February 28, 2008

 

66


Item 9A. CONTROLS AND PROCEDURES (continued)

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of BlackRock, Inc.:

We have audited the internal control over financial reporting of BlackRock, Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 2007 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the year then ended of the Company and our report dated February 28, 2008 expressed an unqualified opinion on those financial statements.

 

/s/ Deloitte & Touche LLP

 

New York, New York

 

February 28, 2008

 

 

67


Item 9B. OTHER INFORMATION

The Company is furnishing no other information in this Form 10-K.

Part III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information regarding directors and executive officers set forth under the captions “Item 1: Election of Directors – Information Concerning the Nominees and Directors” and “Item 1: Election of Directors – Other Executive Officers” of the Proxy Statement in connection with the 2008 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference.

The information regarding compliance with Section 16(a) of the Exchange Act set forth under the caption “Item 1: Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.

The information regarding BlackRock’s Code of Ethics for Chief Executive and Senior Financial Officers under the caption “Item 1: Corporate Governance Guidelines and Code of Business Conduct and Ethics” in the Proxy Statement is incorporated herein by reference.

 

Item 11. EXECUTIVE COMPENSATION

The information contained in the sections captioned “Item 1: Compensation of Executive Officers” and “Item 1: 2007 Director Compensation” of the Proxy Statement is incorporated herein by reference.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information contained in the sections captioned “Item 1: Ownership of BlackRock Common and Preferred Stock” and “Equity Compensation Plan Information” of the Proxy Statement is incorporated herein by reference.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information contained in the sections captioned “Item 1: Certain Relationships and Related Transactions” and “Item 1: Director Independence” of the Proxy Statement is incorporated herein by reference.

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information regarding BlackRock’s independent auditor fees and services in the section captioned “Item 2: Ratification of Appointment of Independent Registered Public Accounting Firm” of the Proxy Statement is incorporated herein by reference.

 

68


Part IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  1. Financial Statements

The Company’s consolidated financial statements are included herein on pages F-1 through F-73.

 

  2. Financial Statement Schedules

Ratio of Earnings to Fixed Charges has been included as Exhibit 12.1. All other schedules have been omitted because they are not applicable, not required or the information required is included in the Company’s consolidated financial statements or notes thereto.

 

69


Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued)

 

  3. Exhibits

As used in this exhibit list, “BlackRock” refers to BlackRock, Inc. (formerly named New BlackRock, Inc. and previously, New Boise, Inc.) (Commission File No. 001-15305) and “Old BlackRock” refers to BlackRock Holdco 2, Inc. (formerly named BlackRock, Inc.) (Commission File No. 001-33099), which is the predecessor of BlackRock. The following exhibits are filed as part of this Annual Report on Form 10-K:

 

Exhibit No.

 

Description

  2.1(1)   Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., BlackRock, Boise Merger Sub, Inc. and Old BlackRock.
  3.1(2)   Amended and Restated Certificate of Incorporation of BlackRock.
  3.2(2)   Amended and Restated Bylaws of BlackRock.
  3.3(2)   Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock.
  4.1(3)   Specimen of Common Stock Certificate.
  4.2(4)   Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035.
  4.3(4)   Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.2).
  4.4(2)   First Supplemental Indenture, dated September 29, 2006, relating to the 2.625% Convertible Debentures due 2035.
  4.5(5)   Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities.
  4.6(6)   Form of 6.25% Notes due 2017.
10.1(7)   Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.2(3)   BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.3(3)   Amendment No. 1 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.4(3)   Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.5(3)   Amendment No. 3 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.6(3)   Amendment No. 4 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.7(3)   BlackRock, Inc. 2002 Long-Term Retention and Incentive Program.+
10.8(3)   Amendment No. 1 to 2002 Long-Term Retention and Incentive Program.+
10.9(3)   Amendment No. 2 to 2002 Long-Term Retention and Incentive Program.+
10.10(3)   BlackRock, Inc. Nonemployee Directors Stock Compensation Plan.+
10.11(3)   BlackRock, Inc. Voluntary Deferred Compensation Plan.+

 

70


Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued)

 

3. Exhibits (continued)

 

Exhibit No.

 

Description

10.12(3)   BlackRock, Inc. Involuntary Deferred Compensation Plan.+
10.13(2)   Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.14(2)   Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.15(2)   Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.16(2)   Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.17(8)   BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+
10.18(9)   Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+
10.19(2)   Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc.
10.20(10)   Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and Old BlackRock.
10.21(11)   Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and Old BlackRock.
10.22(12)   Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+
10.23(1)   First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and Old BlackRock.+
10.24(13)   Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+
10.25(14)   Amended and Restated, BlackRock, Inc. 1999 Annual Incentive Performance Plan. +
10.26(15)   Amendment No. 1 to the BlackRock, Inc. Amended and Restated 1999 Annual Incentive Performance Plan+
10.27(16)   Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and Old BlackRock.
10.28(16)   Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and Old BlackRock.

 

71


Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued)

 

  3. Exhibits (continued)

 

Exhibit No.

 

Description

10.29(17)   Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. Old BlackRock and BlackRock Financial Management, Inc., dated August 25, 2004.
10.30(4)   Registration Rights Agreement, dated as of February 23, 2005, between Old BlackRock and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035.
10.31(1)   Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., BlackRock and Old BlackRock.
10.32(1)   Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and BlackRock.
10.33(18)   Global Distribution Agreement, dated as of September 29, 2006, by and between BlackRock and Merrill Lynch & Co., Inc.
10.34(18)   Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock.
10.35(19)   Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, Inc., BAA Holdings, LLC and Quellos Holdings, LLC.
10.36(20)   Five-Year Revolving Credit Agreement, dated as of August 22, 2007, by and among BlackRock, Inc., Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book managers, Citigroup Global Markets Inc., as syndication agent, and HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., and Morgan Stanley Bank, as documentation agents.
12.1   Computation of Ratio of Earnings to Fixed Charges.
23.1   Deloitte & Touche LLP Consent
31.1   Section 302 Certification of Chief Executive Officer.
31.2   Section 302 Certification of Chief Financial Officer.
32.1   Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

 

(1) Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K filed on February 22, 2006
(2) Incorporated by Reference to BlackRock’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2006.
(3) Incorporated by Reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed with the Securities and Exchange Commission on September 29, 2006
(4) Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2004.
(5) Filed herewith.
(6) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007.
(7) Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
(8) Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on March 14, 2000.

 

72


Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (continued)

 

  3. Exhibits (continued)

 

(9) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2000.
(10) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended March 31, 2000.
(11) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001.
(12) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2002.
(13) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007.
(14) Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K, for the year ended December 31, 2002.
(15) Incorporated by reference to Old BlackRock’s Current Report on Form 8-K, filed on May 24, 2006.
(16) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2004.
(17) Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on August 30, 2004.
(18) Incorporated by Reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed with the Securities and Exchange Commission on June 9, 2006.
(19) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007.
(20) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007.
+ Denotes compensatory plans or arrangements

 

73


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

BLACKROCK, INC.
By:   /s/ Laurence D. Fink
  Laurence D. Fink
  Chairman, Chief Executive Officer and Director
  February 28, 2008

Each of the officers and directors of BlackRock, Inc. whose signature appears below, in so signing, also makes, constitutes and appoints Laurence D. Fink, Paul L. Audet and Robert P. Connolly, his true and lawful attorneys-in-fact, with full power and substitution, for him in any and all capacities, to execute and cause to be filed with the Securities and Exchange Commission any and all amendments to the Annual Report on Form 10-K, with exhibits thereto and other documents connected therewith and to perform any acts necessary to be done in order to file such documents, and hereby ratifies and confirms all that said attorney-in-fact or his substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

        

Title

  

Date

/s/ Laurence D. Fink

     Chairman, Chief Executive Officer and    February 28, 2008
Laurence D. Fink      Director (Principal Executive Officer)   

/s/ Paul L. Audet

     Managing Director and Acting Chief Financial    February 28, 2008
Paul L. Audet      Officer (Principal Financial Officer)   

/s/ Joseph Feliciani, Jr.

     Managing Director and Chief Accounting    February 28, 2008
Joseph Feliciani, Jr.      Officer (Principal Accounting Officer)   

/s/ William O. Albertini

     Director    February 28, 2008
William O. Albertini        

/s/ Mathis Cabiallavetta

     Director    February 28, 2008
Mathis Cabiallavetta        

/s/ Dennis D. Dammerman

     Director    February 28, 2008
Dennis D. Dammerman        

/s/ William S. Demchak

     Director    February 28, 2008
William S. Demchak        

/s/ Robert C. Doll

     Director    February 28, 2008
Robert C. Doll        

/s/ Kenneth B. Dunn

     Director    February 28, 2008
Kenneth B. Dunn        

/s/ Gregory J. Fleming

     Director    February 28, 2008
Gregory J. Fleming        

/s/ Murry S. Gerber

     Director    February 28, 2008
Murry S. Gerber        

/s/ James Grosfeld

     Director    February 28, 2008
James Grosfeld        

/s/ Robert S. Kapito

     Director    February 28, 2008
Robert S. Kapito        

 

74


SIGNATURES (continued)

 

/s/ David H. Komansky

     Director    February 28, 2008   
David H. Komansky           

/s/ Sir Deryck Maughan

     Director    February 28, 2008   
Sir Deryck Maughan           

/s/ Thomas H. O’Brien

     Director    February 28, 2008   
Thomas H. O’Brien           

/s/ Linda Gosden Robinson

     Director    February 28, 2008   
Linda Gosden Robinson           

/s/ James E. Rohr

     Director    February 28, 2008   
James E. Rohr           

/s/ John A. Thain

     Director    February 28, 2008   
John A. Thain           

 

75


TABLE OF CONTENTS

FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm

   F-2

Consolidated Statements of Financial Condition

   F-3

Consolidated Statements of Income

   F-4

Consolidated Statements of Comprehensive Income

   F-5

Consolidated Statements of Changes in Stockholders’ Equity

   F-6

Consolidated Statements of Cash Flows

   F-7

Notes to the Consolidated Financial Statements

   F-10

 

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of BlackRock, Inc.:

We have audited the accompanying consolidated statements of financial condition of BlackRock, Inc. and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of BlackRock, Inc. and subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

New York, New York

February 28, 2008

 

F-2


BlackRock, Inc.

Consolidated Statements of Financial Condition

(Dollar amounts in thousands, except per share data)

 

     December 31,  
     2007     2006  

Assets

    

Cash and cash equivalents

   $ 1,656,200     $ 1,160,304  

Accounts receivable

     1,235,940       964,366  

Due from related parties

     174,853       113,184  

Investments

     1,999,944       2,097,574  

Separate account assets

     4,669,874       4,299,879  

Deferred mutual fund sales commissions

     174,849       177,242  

Property and equipment, net

     266,460       214,784  

Intangible assets, net

     6,553,122       5,882,430  

Goodwill

     5,519,714       5,257,017  

Other assets

     310,559       302,712  
                

Total assets

   $ 22,561,515     $ 20,469,492  
                

Liabilities

    

Accrued compensation and benefits

   $ 1,086,590     $ 1,051,273  

Accounts payable and accrued liabilities

     788,968       753,839  

Due to related parties

     114,347       243,836  

Short-term borrowings

     300,000       —    

Long-term borrowings

     947,021       253,167  

Separate account liabilities

     4,669,874       4,299,879  

Deferred tax liabilities

     2,059,980       1,738,670  

Other liabilities

     419,570       237,856  
                

Total liabilities

     10,386,350       8,578,520  
                

Non-controlling interest

     578,210       1,109,092  
                

Commitments and Contingencies (Note 11)

    

Stockholders’ equity

    

Common stock ($0.01 par value, 500,000,000 shares authorized, 118,573,367 and 117,381,582 shares issued and 116,059,560 and 116,408,897 shares outstanding at December 31, 2007 and 2006, respectively)

     1,186       1,174  

Series A participating preferred stock ($0.01 par value, 500,000,000 shares authorized and 12,604,918 shares issued and outstanding at December 31, 2007 and 2006)

     126       126  

Additional paid-in capital

     10,274,096       9,799,447  

Retained earnings

     1,622,041       993,821  

Accumulated other comprehensive income, net

     71,020       44,666  

Escrow shares, common, at cost (1,191,785 and 0 shares held at December 31, 2007 and 2006, respectively)

     (187,500 )     —    

Treasury stock, common, at cost (1,322,022 and 972,685 shares held at December 31, 2007 and 2006, respectively)

     (184,014 )     (57,354 )
                

Total stockholders’ equity

     11,596,955       10,781,880  
                

Total liabilities, non-controlling interest and stockholders’ equity

   $ 22,561,515     $ 20,469,492  
                

See accompanying notes to consolidated financial statements.

 

F-3


BlackRock, Inc.

Consolidated Statements of Income

(Dollar amounts in thousands, except per share data)

 

     Year ended  
     December 31,  
     2007     2006     2005  

Revenue

      

Investment advisory and administration base fees

      

Related parties

   $ 2,640,275     $ 864,998     $ 344,943  

Other

     1,369,786       733,743       505,435  

Investment advisory performance fees

     350,188       242,282       167,994  
                        

Investment advisory and administration fees

     4,360,249       1,841,023       1,018,372  

Distribution fees

     123,052       35,903       11,333  

Other revenue

      

Other

     338,278       212,450       156,111  

Related parties

     23,076       8,600       5,570  
                        

Total revenue

     4,844,655       2,097,976       1,191,386  
                        

Expenses

      

Employee compensation and benefits

     1,767,063       934,887       587,773  

Portfolio administration and servicing costs

      

Other

     77,879       46,358       41,552  

Related parties

     469,741       126,173       23,059  

Amortization of deferred sales commissions

     108,091       29,940       9,346  

General and administration

      

Other

     777,697       399,103       179,130  

Related parties

     92,670       17,750       2,480  

Termination of closed-end fund administration and servicing arrangements

     128,114       —         —    

Fee sharing payment

     —         34,450       —    

Amortization of intangible assets

     129,736       37,515       7,505  
                        

Total expenses

     3,550,991       1,626,176       850,845  
                        

Operating income

     1,293,664       471,800       340,541  
                        

Non-operating income (expense)

      

Net gain on investments

     504,001       36,930       24,226  

Interest and dividend income

     74,466       29,419       18,912  

Interest expense

     (49,412 )     (9,916 )     (7,924 )
                        

Total non-operating income

     529,055       56,433       35,214  
                        

Income before income taxes and non-controlling interest

     1,822,719       528,233       375,755  

Income tax expense

     463,832       189,463       138,558  
                        

Income before non-controlling interest

     1,358,887       338,770       237,197  

Non-controlling interest

     363,615       16,168       3,289  
                        

Net income

   $ 995,272     $ 322,602     $ 233,908  
                        

Earnings per share

      

Basic

   $ 7.75     $ 4.00     $ 3.64  

Diluted

   $ 7.53     $ 3.87     $ 3.50  

Dividends declared and paid per share

   $ 2.68     $ 1.68     $ 1.20  

Weighted-average shares outstanding

      

Basic

     128,488,561       80,638,167       64,182,766  

Diluted

     132,088,810       83,358,394       66,875,149  

See accompanying notes to consolidated financial statements.

 

F-4


BlackRock, Inc.

Consolidated Statements of Comprehensive Income

(Dollar amounts in thousands)

 

     Year ended  
     December 31,  
     2007     2006    2005  

Net income

   $ 995,272     $ 322,602    $ 233,908  

Other comprehensive income:

       

Net unrealized gain (loss) from available-for-sale investments, net of tax

     (2,784 )     5,081      (1,046 )

Minimum pension liability adjustment

     —         379      (202 )

Foreign currency translation adjustments

     29,138       36,533      (4,333 )
                       

Comprehensive income

   $ 1,021,626     $ 364,595    $ 228,327  
                       

See accompanying notes to consolidated financial statements.

 

F-5


BlackRock, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Dollar amounts in thousands)

 

    Common
Stock
  Common
Stock Class
A&B
    Participating
Preferred
Stock
  Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Common
Shares held
in Escrow
    Treasury Stock     Total
Equity
 
                Common     Class A & B    

December 31, 2004

  $ —     $ 647     $ —     $ 160,789     $ 650,016     $ 8,254     $ —       $ —       ($ 51,354 )   $ 768,352  

Net income

    —       —         —       —         233,908       —         —         —         —         233,908  

Dividends paid

    —       —         —       —         (77,040 )     —         —         —         —         (77,040 )

Conversion of class B common stock to class A common stock

    —       (2 )     —       (27,393 )     —         —         —         —         27,395       —    

Issuance of class A common stock

    —       8       —       24,812       —         —         —         —         17,618       42,438  

Amortization of discount on issuance of class B common stock

    —       —         —       12,052       —         —         —         —         —         12,052  

Stock based compensation

    —       —         —       1,597       —         —         —         —         —         1,597  

Treasury stock transactions

    —       —         —       (5,734 )     —         —         —         —         (52,716 )     (58,450 )

Tax benefits from stock-based awards

    —       —         —       4,967       —         —         —         —         —         4,967  

Minimum pension liability adjustment

    —       —         —       —         —         (202 )     —         —         —         (202 )

Foreign currency translation loss

    —       —         —       —         —         (4,333 )     —         —         —         (4,333 )

Unrealized loss on investments, net of tax

    —       —         —       —         —         (1,046 )     —         —         —         (1,046 )
                                                                           

December 31, 2005

    —       653       —       171,090       806,884       2,673           (59,057 )     922,243  

Net income

    —       —         —       —         322,602       —             —         322,602  

Dividends paid

    —       —         —       —         (135,665 )     —             —         (135,665 )

Conversion of class B common stock to class A common stock

    —       (2 )     —       (14,337 )     —         —             14,339       —    

Issuance of common stock to Merrill Lynch

    523     —         —       7,719,366       —         —         —         —         —         7,719,889  

Issuance of series A participating preferred shares to Merrill Lynch

    —       —         126     1,857,082       —         —         —         —         —         1,857,208  

Conversion of class A and B stock to common stock in connection with MLIM Transaction

    651     (651 )     —       —         —         —         —         —         —         —    

Conversion of treasury stock in connection with MLIM Transaction

    —       —         —       —         —         —         —         (52,035 )     52,035       —    

Stock based compensation

    —       —         —       61,361       —         —         —         —         —         61,361  

Treasury stock transactions

    —       —         —       33       —         —         —         (5,319 )     (7,317 )     (12,603 )

Tax benefits from stock-based awards

    —       —         —       4,852       —         —         —         —         —         4,852  

Minimum pension liability adjustment

    —       —         —       —         —         379       —         —         —         379  

Foreign currency translation gain

    —       —         —       —         —         36,533       —         —         —         36,533  

Unrealized gain on investments, net of tax

    —       —         —       —         —         5,081           —         5,081  
                                                                           

December 31, 2006

    1,174     —         126     9,799,447       993,821       44,666       —         (57,354 )     —         10,781,880  

January 1, 2007 Adjustment to initially apply FIN No. 48

    —       —         —       —         (13,589 )     —         —         —         —         (13,589 )

Net income

    —       —         —       —         995,272       —         —         —         —         995,272  

Dividends paid

    —       —         —       —         (353,463 )     —         —         —         —         (353,463 )

Issuance of common stock to escrow agent in connection with Quellos Transaction

    12     —         —       187,488       —         —         (187,500 )     —         —         —    

Stock based compensation

    —       —         —       182,168       —         —         —         570       —         182,738  

PNC capital contribution

    —       —         —       174,932       —         —         —         —         —         174,932  

Treasury stock transactions

    —       —         —       (186,259 )     —         —         —         (127,230 )     —         (313,489 )

Tax benefits from stock-based awards

    —       —         —       118,574       —         —         —         —         —         118,574  

Other costs associated with common stock

    —       —         —       (2,254 )     —         —         —         —         —         (2,254 )

Foreign currency translation gain

    —       —         —       —         —         29,138       —         —         —         29,138  

Unrealized loss on investments, net of tax

    —       —         —       —         —         (2,784 )     —         —         —         (2,784 )
                                                                           

December 31, 2007

  $ 1,186   $ —       $ 126   $ 10,274,096     $ 1,622,041     $ 71,020     ($ 187,500 )   ($ 184,014 )   $ —       $ 11,596,955  
                                                                           

See accompanying notes to consolidated financial statements.

 

F-6


BlackRock, Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

     Year ended December 31,  
     2007     2006     2005  

Cash flows from operating activities

      

Net income

   $ 995,272     $ 322,602     $ 233,908  

Adjustments to reconcile net income to cash from operating activities:

      

Depreciation and amortization

     198,824       72,809       30,902  

Amortization of deferred mutual fund sales commissions

     108,091       29,940       9,346  

Non-controlling interest

     363,615       16,168       3,289  

Stock-based compensation

     188,256       120,436       69,450  

Deferred income tax expense

     (104,654 )     (42,509 )     18,895  

Tax benefit from stock-based compensation

     —         —         4,967  

Net gains on non-trading investments

     (442,082 )     (3,730 )     (3,965 )

Purchases of investments within consolidated funds

     (870,310 )     —         —    

Proceeds from sale of investments within consolidated funds

     596,898       —         —    

Earnings from equity method investees

     (83,894 )     (5,659 )     (11,526 )

Distributions of earnings from equity method investees

     16,443       1,939       2,620  

Other adjustments

     1,334       (4,233 )     3,842  

Changes in operating assets and liabilities:

      

Accounts receivable

     (273,199 )     (8,670 )     (138,868 )

Due from related parties

     (3,699 )     (75,436 )     (6,614 )

Deferred mutual fund sales commissions

     (71,702 )     (2,666 )     —    

Investments, trading

     (44,713 )     (86,637 )     (6,188 )

Other assets

     (80,172 )     (15,066 )     (52,907 )

Accrued compensation and benefits

     171,828       226,373       51,579  

Accounts payable and accrued liabilities

     (33,273 )     754       28,010  

Due to related parties

     (137,524 )     174,785       8,261  

Other liabilities

     92,110       (316 )     9,936  
                        

Cash flows from operating activities

     587,449       720,884       254,937  
                        

Cash flows from investing activities

      

Purchases of investments

     (521,226 )     (212,629 )     (51,579 )

Proceeds from sale of investments

     265,561       25,662       57,681  

Escrow deposits

     —         —         (7,700 )

Sales of real estate held for sale

     —         —         112,184  

Distributions of capital from equity method investees

     7,017       —         —    

Net consolidations (deconsolidations) of sponsored investment funds

     (117,102 )     2,172       —    

Acquisitions, net of cash acquired and purchase price contingencies

     (591,765 )     272,353       (275,218 )

Purchases of property and equipment

     (111,317 )     (83,993 )     (55,154 )
                        

Cash flows from investing activities

     (1,068,832 )     3,565       (219,786 )
                        

 

F-7


BlackRock, Inc.

Consolidated Statements of Cash Flows (continued)

(Dollar amounts in thousands)

 

     Year ended December 31,  
     2007     2006     2005  

Cash flows from financing activities

      

Long-term borrowings, net

     693,854       (624 )     (1,019 )

Short-term borrowings, net

     300,000       —         133,160  

Cash dividends paid

     (353,463 )     (135,665 )     (76,606 )

Reissuance of treasury stock

     76,842       8,140       15,141  

Purchases of treasury stock

     (383,310 )     (30,973 )     (77,466 )

Subscriptions received from non-controlling interest holders, net of distributions

     399,534       68,490       7,871  

Issuance of common stock

     —         1,192       706  

Excess tax benefit from stock-based compensation

     118,574       4,852       —    

Borrowings by consolidated sponsored investment funds

     113,914      

Other financing activities

     (7,084 )     (313 )     (6,055 )
                        

Cash flows from financing activities

     958,861       (84,901 )     (4,268 )
                        

Effect of exchange rate changes on cash and cash equivalents

     18,418       36,533       (4,333 )
                        

Net increase in cash and cash equivalents

     495,896       676,081       26,550  

Cash and cash equivalents, beginning of year

     1,160,304       484,223       457,673  
                        

Cash and cash equivalents, end of year

   $ 1,656,200     $ 1,160,304     $ 484,223  
                        

See accompanying notes to consolidated financial statements.

Supplemental disclosure of cash flow information is as follows:

 

     Year ended December 31,
     2007    2006    2005

Cash paid for interest

   $ 29,979    $ 7,618    $ 3,940
                    

Cash paid for income taxes

   $ 375,731    $ 154,497    $ 134,764
                    

 

F-8


Supplemental schedule of non-cash investing and financing transactions is as follows:

 

     Year ended
     December 31,
     2007    2006    2005

Common and preferred stock issued in MLIM Transaction

   $ —      $ 9,577,100    $ —  

Issuance of treasury stock

   $ 179,323    $ 15,373    $ 29,712

Increase in investments due to net consolidations of sponsored investment funds

   $ —      $ 275,073    $ —  

Decrease in investments due to net deconsolidations of sponsored investment funds

   $ 1,149,517    $ —      $ 13,758

Increase in non-controlling interest due to net consolidations of sponsored investment funds

   $ —      $ 163,045    $ —  

Decrease in non-controlling interest due to net deconsolidations of sponsored investment funds

   $ 1,294,667    $ —      $ 18,170

PNC LTIP capital contribution

   $ 174,932    $ —      $ —  

Stock issued in the SSR Transaction

   $ —      $ —      $ 37,212

Short term borrowings assumed in the SSR Transaction

   $ —      $ —      $ 111,840

 

F-9


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

1. Introduction and Basis of Presentation

Business

BlackRock, Inc. (together, with its subsidiaries and predecessors, unless the context otherwise indicates, “BlackRock” or the “Company”) provides diversified investment management services to institutional clients and to individual investors through various investment vehicles. Investment management services primarily consist of the active management of fixed income, cash management and equity client accounts, the management of a number of open-end and closed-end mutual fund families and other non-U.S. equivalent retail products serving the institutional and retail markets, and the management of alternative funds developed to serve various customer needs. In addition, BlackRock provides risk management strategic advisory and enterprise investment system services to a broad base of clients.

On October 1, 2007, BlackRock acquired certain assets and assumed certain liabilities of the fund of funds business of Quellos Group, LLC (“Quellos”) for up to $1,719,000 (the “Quellos Transaction”). BlackRock paid Quellos $562,500 in cash and issued 1,191,785 shares of BlackRock common stock valued at $187,500. The common stock will be held in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. The Quellos business was combined with the existing BlackRock fund of funds business and the combined platform comprises one of the largest fund of funds platforms in the world.

On September 29, 2006, pursuant to the Transaction Agreement and Plan of Merger (the “Transaction Agreement”), Merrill Lynch & Co., Inc. (“Merrill Lynch”) contributed the entities and assets that constituted its investment management business (the “MLIM Business”) to BlackRock via a capital contribution. In exchange for this contribution, BlackRock issued to Merrill Lynch 52,395,082 shares of common stock and 12,604,918 shares of series A non-voting participating preferred shares, representing a 45% voting interest and approximately 49.3% of the fully-diluted capital stock at such date (such transactions, collectively, referred to as the “MLIM Transaction”). Prior to the MLIM Transaction, the Company was owned approximately 69% by The PNC Financial Services Group, Inc. (“PNC”). PNC’s ownership was reduced to approximately 34% of the total capital stock as a result of the MLIM Transaction.

Basis of Presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include the accounts of the Company and its controlled subsidiaries as determined by GAAP. Non-controlling interest includes the portion of consolidated sponsored investment funds in which the Company does not have direct equity ownership. All significant accounts and transactions between consolidated entities have been eliminated.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

F-10


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies

Cash and Cash Equivalents

Cash and cash equivalents primarily consists of cash and short-term, highly liquid investments with original maturities, at date of purchase, of three months or less in which the Company is exposed to market and credit risk. Cash and cash equivalent balances which are legally restricted from use by the Company are recorded in other assets on the consolidated statements of financial condition. Cash balances maintained by consolidated investments are not considered legally restricted and are included in cash and cash equivalents on the consolidated statements of financial condition.

Investments

Consolidation

The accounting method used for the Company’s equity investments is generally dependent upon the influence the Company has over its investee. For investments where BlackRock can exert control over the financial and operating policies of the investee, which generally exists if there is a 50% or greater voting interest, the investee is consolidated into BlackRock’s financial statements. For certain investments where the risks and rewards of ownership are not directly linked to voting interests (“variable interest entities” or “VIEs”), an investee may be consolidated if BlackRock, with its related parties, is considered the primary beneficiary of the investee. The primary beneficiary determination will consider not only BlackRock’s equity interest, but the benefits and risks associated with non-equity components of the Company’s relationship with the investee, including debt, investment advisory and other similar arrangements, in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities .

Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 04-5, Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights, the Company, as general partner or managing member of its funds, generally is presumed to control funds that are limited partnerships or limited liability companies that are not deemed to be VIEs. The Company reviews such investment vehicles to determine if such a presumption can be overcome by determining if third party partners or members of the limited partnership or limited liability company have the substantive ability to dissolve (liquidate) the investment vehicle, or otherwise to remove BlackRock as the general partner or managing member without cause, or have substantive participating rights.

 

F-11


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Investments (continued)

 

Consolidated Sponsored Investment Funds

From time to time, the Company will maintain a controlling interest in a sponsored investment fund. All of the investments held by consolidated sponsored investment funds are carried at fair value, with corresponding changes in the investments’ fair values reflected in non-operating income in the Company’s consolidated statements of income. In the absence of a publicly available market value, fair value for such investments are estimated in good faith by the Company’s management based on such factors as the liquidity, financial condition and current and projected operating performance of the investment and, in the case of private investment fund investments, the fund’s net asset value. When the Company no longer controls these funds due to reduced ownership percentage or other reasons, the funds are deconsolidated and accounted for under another accounting method. In addition, changes in fair value of certain illiquid investments held by these funds, including direct investments in equity or debt securities of privately held companies and certain real estate products, are recorded based upon the most current information available at the time, which may precede the date of the statement of financial position, considering any significant changes in the operations of the investment.

Investments in Debt and Marketable Equity Securities

BlackRock holds debt and marketable equity investments which, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, are classified as trading, available-for-sale, or held-to-maturity based on the Company’s intent to sell the security or for a debt security the Company’s intent and ability to hold the debt security to maturity.

Trading securities are those investments which are purchased principally for the purpose of selling them in the near term. Trading securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in non-operating income in the consolidated statements of income during the period of the change. Available-for-sale securities are those securities which are not classified as trading securities or held-to-maturity. Available-for-sale securities are carried at fair value on the consolidated statements of financial condition with changes in fair value recorded in the accumulated other comprehensive income component of stockholders’ equity in the period of the change. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income on the Company’s consolidated statements of income. Held-to-maturity debt securities are recorded at amortized cost in the consolidated statements of financial condition. At December 31, 2007 and 2006, BlackRock did not own any held-to-maturity investments.

 

F-12


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Investments (continued)

 

Equity Method

For equity investments where BlackRock does not control the investee, and where it is not the primary beneficiary of a VIE, but can exert significant influence over the financial and operating policies of the investee, the Company uses the equity method of accounting. Under the equity method of accounting, BlackRock’s share of the investee’s underlying net income or loss is recorded as non-operating income for investments in funds and as other revenue for operating or advisory company investments since such operating or advisory companies are considered to be integral to BlackRock’s core business. The net income of the investee is recorded based upon the most current information available at the time, which may precede the date of the statement of financial condition. Distributions received from the investment reduce the Company’s investment balance.

Cost Method

For equity investments where BlackRock neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting. Under the cost method, dividends received from the investment are recorded as non-operating income.

Collateralized Debt Obligations

The Company’s investments in collateralized debt obligations (“CDOs”) are recorded at fair value and the dividend income from these CDOs is accounted for in accordance with EITF No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets . Under EITF No. 99-20, dividend income on the Company’s CDOs is recorded based upon projected investment yield. Expected future cash flows for the CDOs are reviewed quarterly and changes in the yield are recorded prospectively. Dividend income for these investments is recorded in non-operating income on the consolidated statements of income.

Realized Gains and Losses

Realized gains and losses on trading, available-for-sale and other non equity method investments are calculated on a specific identification basis and, along with interest and dividend income, are included in non-operating income in the consolidated statements of income.

Impairments

The Company’s management periodically assesses its investments for impairment. If circumstances indicate that impairment may exist, investments are evaluated using market values, where available, or the expected future cash flows of the investment. If the undiscounted expected future cash flows are lower than the Company’s carrying value of the investment, an impairment charge is recorded in non-operating income in the consolidated statements of income.

 

F-13


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Investments (continued)

Impairments (continued)

 

When the fair value of available-for-sale securities is lower than its cost, the Company evaluates the securities to determine whether the impairment is considered to be “other-than-temporary”. In making this determination, the Company considers, among other factors, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and near-term prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of income.

The Company reviews its CDO investments for impairment quarterly throughout the term of the investment. The Company reviews cash flow estimates throughout the life of each CDO investment. If the net present value of the estimated future cash flows is lower than the carrying value of the investment and the estimated future cash flows are lower than the previous estimate of cash flows, an impairment is considered to be other-than-temporary. The impairment loss is recognized based on the excess of the carrying amount of the investment over its estimated fair value.

Goodwill and Intangible Assets

Goodwill includes goodwill and assembled workforce. Intangible assets are comprised of indefinite-lived intangible assets and finite-lived intangible assets. The value of contracts to manage assets in proprietary open-end funds and closed-end funds without a specified termination date is classified as an indefinite-lived intangible asset. The assignment of indefinite lives to such contracts is based upon the assumption that there is no foreseeable limit on the contract period to manage these funds due to the likelihood of continued renewal at little or no cost. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets , indefinite-lived intangible assets and goodwill are not amortized.

The Company assesses its indefinite-lived management contracts and goodwill for impairment at least annually, considering factors such as assets under management, product mix, projected cash flows, average base fees by product and revenue multiples to determine whether the values of each asset are impaired and whether the indefinite-life classification is still appropriate. The fair value of indefinite-lived intangible assets and goodwill is determined based on the discounted value of expected future cash flows. If circumstances exist which indicate there may be a potential impairment the Company will perform an impairment test, using an undiscounted cash flow analysis. If the asset is determined to be impaired, the difference between the book value of the asset and its current fair value is recognized as an expense in the period in which the impairment is determined.

 

F-14


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Goodwill and Intangible Assets (continued)

 

Change in Method of Applying an Accounting Principles

Prior to 2007, the Company performed its annual impairment tests for goodwill and indefinite-lived intangible assets, as required by SFAS No. 142, as of September 30 th . During the quarter ended September 30, 2007, the Company changed its annual impairment test date to July 31 st in order to provide additional time for testing due to the significant increase in these assets as a result of recent acquisitions. Impairment tests performed as of July 31, 2007 and September 30, 2006 indicated that no impairment charges were required. The Company’s management believes that this change in the method of applying an accounting principle is preferable under the circumstances and does not result in adjustments to the Company’s consolidated financial statements when applied retrospectively, nor would it result in the delay, acceleration or avoidance of recording a potential future impairment. This change in the method of applying SFAS No. 142 had no impact on the consolidated statements of income for the years ended December 31, 2007, 2006 or 2005.

Deferred Mutual Fund Sales Commissions

The Company holds the rights to receive certain cash flows from sponsored mutual funds without a front-end sales charge (“back-end load shares”). The fair value of these deferred mutual fund commissions are being amortized over periods between one and six years. The Company receives distribution fees from these funds and contingent deferred sales commissions (“CDSCs”) upon shareholder redemption of certain back-end load shares. Upon receipt of CDSCs, the Company records revenue and the remaining unamortized deferred commission is expensed.

In April 2007, the Company acquired from a subsidiary of PNC certain distribution financing arrangements to receive certain cash flows from sponsored open-ended mutual funds sold without a front-end sales charge (“back-end load shares”). The fair value of these assets was capitalized and is being amortized over periods up to six years. The Company also acquired the rights to related distribution fees from these funds and CDSCs upon shareholder redemption of certain back-end load shares prior to the end of the contingent deferred sales period. The Company paid $33,996 in exchange for the above rights, which is reflected on the consolidated statement of cash flows as an acquisition within investing activities.

The Company periodically reviews the carrying value of deferred mutual fund commission assets to determine whether a significant decline in the equity or bond markets or other events or circumstances indicate that an impairment in value may have occurred. If indicators of a potential impairment exist, the Company compares the carrying value of the asset to the estimated future net undiscounted cash flows related to the asset. If such assessments indicate that estimated future net undiscounted cash flows will not be sufficient to recover the recorded carrying value, the assets are adjusted to their estimated fair value. No such impairments were recorded for the years ended December 31, 2007, 2006 or 2005.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation. Depreciation generally is recorded using the straight-line method over the estimated useful lives of the various classes of property and equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life or the remaining lease term.

 

F-15


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Software Costs

BlackRock develops a variety of risk management, investment analytic and investment system services for its customers, as well as internal use, utilizing proprietary software which is hosted and maintained by BlackRock. The Company follows AICPA 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. Capitalized software costs are included within property and equipment, net on the consolidated statements of financial condition and are amortized beginning when the software project is complete and put into production, over their estimated useful life of the software of three years.

Separate Account Assets and Liabilities

A wholly-owned subsidiary of the Company in the United Kingdom is a registered life insurance company that maintains separate accounts representing segregated funds held for purposes of funding individual and group pension contracts. The separate account assets are not subject to general claims of the creditors of BlackRock. These accounts and the related liabilities are recorded as separate account assets and separate account liabilities on the consolidated statements of financial condition in accordance with the AICPA Audit and Accounting Guide: Life and Health Insurance Entities .

The net investment income and net realized and unrealized gains and losses attributable to separate account assets supporting individual and group pension contracts accrue directly to the contract owner and are not reported as revenue in the consolidated statements of income. Policy administration and management fees associated with separate account products are included in investment advisory and administration fees in the consolidated statements of income.

Treasury Stock

The Company records common stock purchased for treasury at cost. At the date of subsequent reissuance, the treasury stock account is reduced by the cost of such stock on the average cost method.

Revenue Recognition

Investment advisory and administration fees are recognized as the services are performed. Such fees are primarily based on pre-determined percentages of the market value of the assets under management (“AUM”) or, in the case of certain real estate clients, net operating income generated by the underlying properties. Investment advisory and administration fees are affected by changes in AUM, including market appreciation or depreciation and net subscriptions or redemptions. Investment advisory and administration fees for mutual funds are shown net of fees waived pursuant to expense limitations or for other reasons. Certain real estate fees are earned upon the acquisition or disposition of properties in accordance with applicable investment management agreements and are generally recognized at the closing of the respective real estate transactions.

 

F-16


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Revenue Recognition (continued)

 

The Company contracts with third parties and related parties for various mutual fund administration and shareholder servicing to be performed on behalf of certain funds managed by the Company. Such arrangements generally are priced as a portion of the Company’s management fee paid by the fund. In certain cases, the fund takes on the primary responsibility for payment for services such that BlackRock bears no credit risk to the third party. The Company accounts for such retrocession arrangements in accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent , and has recorded its management fees net of retrocessions. Retrocessions for the years ended December 31, 2007 and 2006 were $780,416 and $156,014, respectively, and were reflected net in investment advisory and administration fees on the consolidated statements of income. The Company did not enter into any retrocession arrangements prior to 2006.

The Company also receives performance fees or an incentive allocation from alternative investment products and certain separate accounts. These performance fees generally are earned upon exceeding specified investment return thresholds. Such fees are recorded upon completion of the measurement period.

The Company receives carried interest from certain alternative investments upon exceeding performance thresholds. BlackRock may be required to return all, or part, of such carried interest depending upon future performance of these investments. BlackRock records carried interest subject to such claw-back provisions as revenue on its consolidated statements of income upon the earlier of the termination of the alternative investment fund or when the likelihood of claw-back is mathematically improbable. The Company records a deferred carried interest liability to the extent it receives cash or capital allocations prior to meeting the revenue recognition criteria. At December 31, 2007 and 2006, the Company had $28,567 and $0, respectively of deferred carried interest recorded in other liabilities on the consolidated statements of financial condition.

BlackRock provides a variety of risk management, investment analytic and investment system services to insurance companies, finance companies, pension funds, asset managers, foundations, consultants, mutual fund sponsors, real estate investment trusts, commercial and mortgage banks, savings institutions and government agencies. These services are provided under the brand name BlackRock Solutions ® and include a wide array of risk management services and enterprise investment system outsourcing to clients. Fees earned for BlackRock Solutions services are based primarily on pre-determined percentages of the market value of assets subject to the services, on fixed monthly or quarterly payments or upon attainment of certain pre-defined milestones. The fees earned for risk management, investment analytic and investment system services are recorded in other revenue on the consolidated statements of income.

The Company also earns other advisory service fees which is recorded in other revenue on the statement of income when services are completed.

 

F-17


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Stock-based Compensation

Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation , prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company’s stock-based compensation plans generally vest over periods ranging from one to five years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the year ended December 31, 2005 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of SFAS No. 123.

The following table illustrates the effect on full year 2005 net income and earnings per share if the fair value based method in accordance with SFAS No. 123 had been applied to all outstanding and unvested option awards.

 

     Year ended
December 31,
 
     2005  

Net income, as reported

   $ 233,908  

Add: Stock-based employee compensation expense included in net income, as reported, net of tax

     8,458  

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax

     (16,384 )
        

Pro forma net income

   $ 225,982  
        

Earnings per share:

  

Basic - as reported

   $ 3.64  

Basic - pro forma

   $ 3.52  

Diluted - as reported

   $ 3.50  

Diluted - pro forma

   $ 3.38  

 

F-18


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Stock-based Compensation (continued)

 

In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment . This statement revised SFAS No. 123 and superseded Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees . The Company adopted SFAS No. 123(R) on January 1, 2006, using the modified-prospective transition approach, with no cumulative effect on net income. The statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. Entities are required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service (usually the vesting period) in exchange for the award. The adoption of SFAS No. 123(R) reduced 2006 pre-tax net income and net income by approximately $12,556 and $7,911, respectively, and affected earnings per share by approximately $0.10 per basic share and $0.09 per diluted share. The impact of the adoption of SFAS No. 123(R) was immaterial to the Company’s consolidated statement of cash flows.

The Company measures the grant-date fair value of employee share options and similar instruments using option-pricing models. If an equity award is modified after the grant date, incremental compensation cost is recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. The grant-date fair value of restricted share units is calculated using the Company’s share price on the date of grant. Compensation cost is recorded by the Company on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award is, in-substance, multiple awards. Awards under the Company’s stock-based compensation plans vest over periods ranging from one to five years. Expense is reduced by the number of awards expected to be forfeited prior to vesting. Forfeiture estimates generally are derived using historical forfeiture information, where available, and are reviewed for reasonableness at least annually.

The Company amortizes the grant-date fair value of stock-based compensation awards made to retirement eligible employees over the required service period. Upon notification of retirement, the Company accelerates the unamortized portion of the award over the contractually-required retirement notification period, if applicable.

The firm pays cash dividend equivalents on outstanding restricted stock units (“RSUs”). Dividend equivalents are charged to retained earnings. SFAS No. 123(R) requires dividend equivalents on RSUs expected to be forfeited to be included in compensation and benefits expense.

Portfolio Administration and Servicing Costs

Portfolio administration and servicing costs include payments to third parties and affiliates, including Merrill Lynch and PNC, primarily associated with the administration and servicing of client investments in certain BlackRock products. Portfolio administration and servicing costs are expensed when incurred.

Leases

The Company accounts for its operating leases in accordance with SFAS No. 13, Accounting for Leases . The Company expenses the lease payments associated with operating leases during the lease term (including rent-free periods), beginning on the commencement of the lease terms.

 

F-19


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Foreign Exchange

Financial assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the date of the consolidated statements of financial condition. Non-financial assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at historical exchange rates. Revenues and expenses are translated at average exchange rates during the period. Gains or losses resulting from translating foreign currency financial statements into U.S. dollars are included in accumulated other comprehensive income, a separate component of stockholders’ equity on the consolidated statements of financial condition. Gains or losses resulting from foreign currency transactions are included in general and administration expense on the consolidated statements of income.

Income Taxes

The Company accounts for income taxes under the asset and 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 differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using currently enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Management periodically assesses the recoverability of its deferred tax assets based upon expected future earnings, future deductibility of the asset, changes in applicable tax laws and other factors. If management determines that it is not more likely than not that the deferred tax asset will be fully recoverable in the future, a valuation allowance may be established for the difference between the asset balance and the amount expected to be recoverable in the future. This allowance will result in a charge to the Company’s consolidated statements of income. Further, the Company records its income taxes receivable and payable based upon its estimated income tax liability.

BlackRock adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes on January 1, 2007. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Excess tax benefits related to stock-based compensation are recognized as additional paid in capital and subsequent to the adoption of SFAS No. 123(R) are reflected as financing cash flows on the consolidated statements of cash flows. If the Company does not have additional paid-in capital credits (cumulative tax benefits recorded to additional paid-in capital), the Company will record an expense for any deficit between recorded tax benefit and tax return benefit. At December 31, 2007, BlackRock had excess additional paid-in capital credits to absorb potential deficits between recorded tax benefits and tax return benefits.

 

F-20


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

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 during the period. Diluted earnings per common share is computed by dividing net income by the total weighted average number of shares of common stock and common stock equivalents outstanding during the period. Diluted earnings per common share are computed using the treasury stock method.

Due to the similarities in terms between BlackRock series A non-voting participating preferred stock issued to Merrill Lynch in the MLIM Transaction and the Company’s common stock, the Company considers the series A non-voting participating preferred stock to be common stock for purposes of earnings per share calculations.

In accordance with SFAS No. 128, Earnings per Share , shares of the Company’s common stock are not included in basic earnings per share until contingencies are resolved and the shares are released. Shares of the Company’s common stock are not included in diluted earnings per share unless the contingency has been met assuming that the contingency period ended on the date of the consolidated statement of financial condition.

Business Segments

The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company operates in one business segment as defined in SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information .

Disclosure of Fair Value

SFAS No. 107, Disclosure about Fair Value of Financial Instruments , requires disclosure of estimated fair values of certain financial instruments, both on and off the consolidated statements of financial condition. The methods and assumptions are set forth below:

 

   

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

 

   

The fair value of marketable investments is based on quoted market prices. If investments are not readily marketable, fair values are primarily determined based on net asset values of investments in partnerships or by the Company based on management’s assumptions or estimates, taking into consideration financial information of the investment and industry. At December 31, 2007, the carrying value of investments approximated fair value.

 

   

At December 31, 2007, the estimated fair value of the Company’s $249,997 aggregate principal amount of convertible debentures was $540,000. The fair value was estimated using market prices.

 

   

At December 31, 2007, the estimated fair value of the Company’s $700,000 long-term notes was $726,600. The fair value was estimated using an applicable bond index.

 

F-21


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Derivative Instruments and Hedging Activities

SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , as amended, establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts and for hedging activities. SFAS No. 133 generally requires an entity to recognize all derivatives as either assets or liabilities in the consolidated statements of financial condition and to measure those investments at fair value.

The Company uses derivative financial instruments primarily for purposes of hedging (a) exposures to fluctuations in foreign currency exchange rates of certain assets and liabilities and (b) market exposures for certain investments. Derivative financial instruments are not entered into for trading or speculative purposes. The Company may use derivatives in connection with capital support agreements with affiliated investment companies. Certain consolidated funds may invest in derivatives as a part of their investment strategy. Changes in the fair value of the Company’s derivative financial instruments are recognized in current earnings and, where applicable, are offset by the corresponding gain or loss on the related foreign-denominated assets or liabilities, in the consolidated statements of income.

Reclassifications

Certain items previously reported have been reclassified to conform to the current year presentation.

Recent Accounting Developments

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are required to provide enhanced disclosure regarding instruments in the level 3 category (which have inputs to the valuation techniques that are unobservable and require significant management judgment), including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect the impact of adoption of SFAS No. 157 to have a material impact on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and 132 . SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit post-retirement plan as an asset or liability in its statement of financial condition and to recognize changes in the funded status in the year in which the changes occur. The statement also requires actuarial valuations to be performed as of the balance sheet date. The balance sheet recognition provisions of SFAS No. 158 were effective for fiscal years ending after December 15, 2006. The valuation date provisions are effective for fiscal years ending after December 15, 2008. The Company adopted the balance sheet recognition provisions of SFAS No. 158 on December 31, 2006 and the impact of adoption was not material to its consolidated financial statements.

 

F-22


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Recent Accounting Developments (continued)

 

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS No. 159 permits entities to choose to measure eligible financial assets and liabilities at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis, it should be applied to an entire instrument and it is irrevocable once elected. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attribute. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company does not expect the application of SFAS No. 159 to have a material impact on its consolidated financial statements.

In June 2007, the EITF ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards . Under the provisions of EITF 06-11, a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees on equity classified as non-vested equity shares, non-vested equity share units or outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007 and interim periods within those fiscal years. The Company does not expect the application of EITF 06-11 to have a material impact on its consolidated financial statements.

In June 2007, the Accounting Standards Executive Committee of the AICPA issued SOP 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies . SOP 07-1 provides guidance for determining whether the specialized accounting principles of the AICPA Audit and Accounting Guide for Investment Companies , (the “Guide”) should be applied by an entity and whether those specialized accounting principles should be retained by a parent company in consolidation or by an investor in the application of the equity method of accounting. On February 6, 2008, the FASB indefinitely deferred the effective date of SOP 07-1 to address the implementation issues that have arisen and to possibly revise SOP 07-1.

In May 2007, the FASB issued FSP FIN 46(R)-7, Application of FIN 46R to Investment Companies (“FSP FIN 46(R)-7”) which amends FIN 46(R) to make permanent the temporary deferral of the application of FIN 46R to entities within the scope of the revised audit guide under SOP 07-1. FSP FIN 46(R)-7 is effective upon adoption of SOP 07-1. The Company currently is evaluating the impact that the adoption of FSP FIN 46(R)-7 may have on its consolidated financial statements.

 

F-23


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

2. Significant Accounting Policies (continued)

 

Recent Accounting Developments (continued)

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 . SFAS No. 160 amends Accounting Research Bulletin No. 51, Consolidated Financial Statements , to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary and clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity, separate from the parent’s equity, in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. SFAS No. 160 requires retroactive adoption of the presentation and disclosure requirements for existing non-controlling interests. All other requirements of SFAS No. 160 shall be applied prospectively. The Company currently is evaluating the potential impact of SFAS No. 160 to its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) revises SFAS No. 141, Business Combinations , while retaining the fundamental requirements of SFAS No. 141 that the acquisition method of accounting (the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. SFAS No. 141(R) further defines the acquirer, establishes the acquisition date and broadens the scope of transactions that qualify as a business combination. Additionally, SFAS No. 141(R) changes the fair value measurement provisions for determining assets acquired and liabilities assumed and any non-controlling interest in the acquiree, provides guidance for the measurement of fair value in a step acquisition, changes the requirements for recognizing assets acquired and liabilities assumed subject to contingencies, provides guidance on recognition and measurement of contingent consideration and requires that acquisition-related costs of the acquirer be expensed as incurred. In addition, if liabilities for unrecognized tax benefits related to tax positions assumed in a business combination are settled prior to the adoption of SFAS 141(R), the reversal of any remaining liability will affect goodwill. If such liabilities reverse subsequent to the adoption of SFAS No. 141(R), such reversals will affect the income tax provision in the period of reversal. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company currently is evaluating the impact of the adoption of SFAS No. 141(R) on its consolidated financial statements.

 

F-24


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions

Quellos Group

On October 1, 2007, the Company closed the Quellos Transaction and paid Quellos $562,500 in cash and issued 1,191,785 shares of BlackRock common stock, valued at $187,500. The common stock will be held in escrow for up to three years and is available to satisfy certain indemnification obligations of Quellos under the asset purchase agreement. The value of the common stock consideration was determined using the average closing price of BlackRock’s common stock ten days before the Quellos Transaction announcement date.

In addition, Quellos may receive two contingent payments, upon achieving certain investment advisory revenue measures through December 31, 2010, totaling up to $969,000 in a combination of cash and stock. The first contingent payment, of up to $374,000 is payable, in 2009, up to 25% in BlackRock common stock converted into common shares at a price of $157.33, and the remainder in cash. The second contingent payment, based on investment advisory fees through 2010, of up to $595,000 is payable in cash.

The Quellos Transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations . Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the transaction. The excess, if any, of the final purchase price, which may include contingent consideration payments, over the fair value of assets acquired and liabilities assumed will be recorded as goodwill.

A summary of the estimated acquisition date fair values of the assets acquired and liabilities assumed in this acquisition is as follows:

 

     Estimate of
Fair Value
 

Investments

   $ 20,074  

Property and equipment

     9,435  

Other assets

     4,329  

Goodwill

     27,437  

Finite-life intangible management contracts

     161,000  

Indefinite-life intangible management contracts

     631,000  

Liabilities assumed

     (33,648 )

Due to Quellos

     (13,390 )

Deferred tax liabilities

     (281,104 )
        

Total purchase price, including transaction costs

   $ 525,133  
        

Summary of consideration, net of cash acquired:

  

Cash paid

   $ 562,500  

Cash acquired

     (49,340 )

Other capitalized transaction costs

     11,973  
        

Total consideration

   $ 525,133  
        

 

F-25


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions

 

Quellos Group (continued)

 

Finite-life intangible management contracts have a weighted average estimated useful life of approximately eight years and are amortized on the straight-line method.

Approximately $11,973 of direct costs were capitalized in conjunction with the Quellos Transaction, primarily representing $7,500 of financial advisory fees and approximately $4,473 in legal and other professional fees.

The purchase accounting adjustments are preliminary and subject to revision. At this time, except for the items noted below, the Company does not expect material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction. Specifically, the following assets and liabilities are subject to change:

 

   

Investments were valued at fair value using the most up to date information available. The values of such investments may change, primarily as the result of finalization of the valuations of non-marketable investments;

 

   

Intangible management contracts were valued using preliminary October 1, 2007 AUM and assumptions. The value of such contracts may change, primarily as the result of updates to AUM and those assumptions;

 

   

As management receives additional information, deferred income tax assets and liabilities may be adjusted as the result of changes in purchase accounting and applicable tax rates.

 

   

As contingencies are resolved, BlackRock common shares held in escrow may be released from escrow. If contingent consideration payments are made to Quellos, additional purchase price consideration will be recorded, which may result in additional goodwill if there is excess purchase price over the fair value of assets acquired and liabilities assumed.

 

F-26


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions

 

Quellos Group (continued)

 

The following unaudited pro forma combined financial information does not purport to be indicative of actual financial position or results of BlackRock’s operations had the Quellos and MLIM Transactions actually been consummated at the beginning of each period presented. The 2006 pro-forma financial information has been prepared as if the MLIM and Quellos acquisitions occurred at the beginning of the period. The 2007 pro-forma financial information was prepared as if the Quellos acquisition occurred at the beginning of the period. Certain one-time charges have been eliminated. The pro forma combined provision for income taxes may not represent the amount that would have resulted had BlackRock, Quellos and MLIM filed consolidated income tax returns during the year presented. Management expects to realize net operating synergies from this transaction. The pro forma combined financial information does not reflect the potential impact of these synergies.

 

(unaudited)    Year Ended
December 31,
(in millions, except per share data)    2007    2006

Total revenue

   $ 5,112    $ 4,094

Operating income

   $ 1,424    $ 1,205

Net income

   $ 1,052    $ 819

Earnings per share:

     

Basic

   $ 8.19    $ 6.35

Diluted

   $ 7.96    $ 6.21

BlackRock results included $20,661 and $141,932 of MLIM and Quellos integration costs during the years ended December 31, 2007 and 2006, respectively. For purposes of the pro forma financial information above, these costs have been removed as they are deemed to be one-time integration costs directly attributable to the transactions

The results for the year ended December 31, 2006 include a pre-tax expense of $62 million related to potential legal claims related to the Quellos business. The liability related to such claims was not assumed in the transaction. The MLIM Business for the nine months ended September 30, 2006 includes a pre-tax expense of $109 million related to the acceleration of certain stock-based compensation. These expenses are not excluded from the pro forma results above as they are not directly attributable to the transactions.

Fund of Hedge Funds

On April 30, 2003, the Company purchased an 80% interest in an investment manager of a hedge fund of funds for approximately $4,100 in cash. On October 1, 2007, the Company paid $27,000 in cash to purchase the remaining 20% of the investment manager. The purchase price of the remaining interest was performance-based and was not subject to a maximum, minimum or the continued employment of former employees of the investment manager with the Company. As a result of the transaction in October 2007 $21,292 and $8,400 of additional goodwill and indefinite-life intangible assets, respectively, was recorded.

 

F-27


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions (continued)

 

Merrill Lynch Investment Managers

On September 29, 2006, the Company completed the MLIM Transaction and issued 52,395,082 shares of BlackRock common stock and 12,604,918 of series A non-voting participating preferred stock to Merrill Lynch in consideration for the MLIM Business. Total consideration issued to Merrill Lynch was $9,089,233, net of cash acquired, including capitalized transaction costs. The Company’s consolidated financial statements include the accounts of the MLIM Business subsequent to September 29, 2006.

In connection with the MLIM Transaction, Merrill Lynch and PNC each have entered into stockholder agreements with BlackRock. Pursuant to the terms of the stockholder agreement, Merrill Lynch is restricted from owning more than 49.8% of the fully diluted capital stock of BlackRock. PNC, which owned approximately 69% of BlackRock’s total capital stock prior to the MLIM Transaction, owned approximately 34% of the total outstanding capital stock as of September 30, 2006 and December 31, 2006. Pursuant to the terms of the stockholder agreement, PNC generally is restricted from owning more than the greater of 35% of the capital stock of BlackRock or the percentage ownership it held immediately following the closing of the MLIM Transaction, except in the case where an increase in PNC’s percentage ownership is due to a BlackRock share buyback, in which case PNC is permitted to own no more than 40% of the Company’s outstanding capital stock.

In addition to the ownership restrictions described above, the stockholder agreements include the following additional provisions, among others:

 

   

Both Merrill Lynch and PNC generally are restricted from purchasing additional shares of BlackRock common stock if it would result in either exceeding their respective ownership caps;

 

   

Merrill Lynch is restricted from transferring any common stock or the series A non-voting participating preferred stock for a period of three years without the prior consent of BlackRock;

 

   

PNC, and Merrill Lynch after the third anniversary of the closing of the MLIM Transaction, are subject to additional transfer restrictions designed to ensure that no party acquires a significant holding of voting stock;

 

   

Merrill Lynch and PNC are required to vote their shares in accordance with the BlackRock Board of Directors’ recommendations to the extent consistent with the provisions of the stockholder agreements; and

 

   

Certain fundamental transactions may not be entered into without prior approval of all of the independent directors then in office, or at least two-thirds of the directors then in office. Additionally, BlackRock may not enter into certain key transactions without prior approval of Merrill Lynch and PNC.

 

F-28


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions (continued)

 

Merrill Lynch Investment Managers (continued)

 

The series A non-voting participating preferred stock:

 

   

Except as otherwise provided by applicable law, is non-voting;

 

   

Participates in dividends, on a basis generally equal to the common stock;

 

   

Grants the holder the right to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;

 

   

Benefits from a liquidation preference of $0.01 per share; and

 

   

Is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.

The MLIM Transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations . Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values at the date of the transaction. The excess of the purchase price over the fair value of assets acquired and liabilities assumed was recorded as goodwill. The value of the consideration paid for the net assets acquired was determined using the average closing price of BlackRock’s common stock two days before, the day of and two days after the MLIM Transaction announcement date of February 15, 2006 in accordance with EITF No. 99-12, Determination of the Market Price of Acquirer Securities Issued in a Purchase Business Combination . Both the common stock and the series A non-voting participating preferred stock were valued at a price of $147.34 per share since both classes of stock participate equally in dividends and have transfer restrictions.

A summary of the recorded fair values at September 29, 2006 of the assets acquired and liabilities assumed in this acquisition, including adjustments made subsequent to the Company’s original estimates is as follows:

 

     Adjusted
Estimate of
Fair Value
 

Accounts receivable

   $ 645,273  

Investments

     1,262,579  

Property and equipment

     36,631  

Deferred mutual fund commissions

     188,491  

Other assets

     151,592  

Separate account assets

     4,212,311  

Finite-life intangible management contracts

     1,135,100  

Indefinite-life intangible management contracts

     4,477,400  

Goodwill

     5,234,052  

Liabilities assumed

     (6,074,109 )

Deferred tax liabilities

     (2,001,019 )

Payable to Merrill Lynch

     (179,068 )
        

Total purchase price, including transaction costs

   $ 9,089,233  
        

Summary of consideration, net of cash acquired:

  

Capital stock, at fair value

   $ 9,577,100  

Cash acquired

     (519,761 )

Other capitalized transaction costs

     31,894  
        

Total consideration

   $ 9,089,233  
        

 

F-29


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

3. Mergers and Acquisitions (continued)

 

Merrill Lynch Investment Managers (continued)

 

The fair values of the assets acquired and liabilities assumed in the MLIM Transaction were estimated by management. The Company utilized an income approach to valuing the acquired intangible management contracts of MLIM, including mutual funds and separate accounts, which requires a projection of revenues, based in part upon estimates of AUM growth and client attrition, and expenses both specifically attributable to the intangible assets. The discounted cash flow method was then applied to the potential income streams. The value of the intangible asset was taken as the present value of the after-tax cash flows attributable to the asset.

Generally, acquired management contracts of mutual funds are considered indefinite-lived intangible assets, while acquired management contracts of separate accounts and funds with fixed terms are considered finite-lived. Remaining economic useful life of finite-lived intangible management contracts were based upon historical and projected client turnover.

Nomura BlackRock Asset Management

On September 29, 2006, BlackRock acquired the 50% interest in Nomura BlackRock Asset Management Co., Ltd. (“NBAM”) that was held by its joint venture partner, Nomura Asset Managers (“Nomura”), for a purchase price of five billion Japanese yen (approximately $42,408), subject to certain adjustment provisions. Prior to the NBAM transaction, NBAM was consolidated in the Company’s financial statements under FIN No. 46(R), as a result of the preferential payments received by a BlackRock subsidiary which resulted in BlackRock being considered the primary beneficiary of NBAM.

The Company accounted for its acquisition of NBAM using step acquisition accounting in accordance with SFAS No. 141, resulting in a partial step-up in the book basis of the assets of NBAM to fair value. As a result of the acquisition, the Company recorded finite-lived intangible assets of $13,100 with an amortizable life of nine years and goodwill of approximately $34,025.

SSRM Holdings, Inc.

On January 31, 2005, the Company closed the acquisition of SSR, the holding company of State Street Research & Management Company and SSR Realty Advisors, Inc. (renamed BlackRock Realty Advisors, Inc., “Realty”), from MetLife, Inc. (“MetLife”) for an adjusted purchase price of $265,089 in cash and 550,000 shares of BlackRock restricted common stock. The Company’s consolidated financial statements include the accounts of SSR subsequent to January 31, 2005. MetLife generally was precluded from selling the BlackRock shares received in the SSR Transaction until the third anniversary of the closing.

Pursuant to the terms of the stock purchase agreement for the SSR transaction an additional payment was made to MetLife in the amount of $50,000 based on the Company achieving specified retention levels of AUM and run-rate revenue for the year ended January 31, 2006. This amount was paid in the second quarter of 2006.

In addition, the stock purchase agreement provides for two other contingent payments. MetLife received 32.5% of performance fees earned, as of March 31, 2006, from a certain large institutional real estate client. In 2006, the Company incurred and paid a fee sharing expense of $34,450 related to this arrangement. In addition, on the fifth anniversary of the closing of the SSR Transaction, MetLife may receive an additional payment up to a maximum of $10,000 based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans.

 

F-30


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

4. Investments

A summary of the carrying value of total investments is as follows:

 

     Carrying Value
     December 31,
2007
   December 31,
2006

Available-for-sale investments

   $ 263,795    $ 158,442

Trading investments

     395,006      370,718

Other investments:

     

Consolidated sponsored investment funds

     760,378      1,199,484

Equity method

     554,016      326,537

Cost method

     4,039      24,247

Deferred compensation plan investments

     22,710      18,146
             

Total other investments

     1,341,143      1,568,414
             

Total investments

   $ 1,999,944    $ 2,097,574
             

BlackRock acts as general partner or managing member for consolidated sponsored private equity funds of funds. In December 2007, BlackRock took necessary steps to grant additional rights to the unaffiliated investors in approximately 14 funds with net assets at December 31, 2007 of approximately $1,000,000. The granting of these rights resulted in the deconsolidation of such investment funds from the consolidated financial statements as of December 31, 2007.

At December 31, 2007, the Company had $1,054,208 of total investments held by consolidated sponsored investment funds. At December 31, 2007, $293,830 and $760,378 of the investments held by consolidated sponsored investments funds were classified as a component of trading investments (equity and municipal debt securities) and other investments, respectively.

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

 

          Gross Unrealized     Carrying
     Cost    Gains    Losses     Value

December 31, 2007

          

Total available-for-sale investments:

          

Sponsored investment funds

   $ 245,677    $ 5,894    ($ 1,217 )   $ 250,354

Collateralized debt obligations

     10,458      53      —         10,511

Other

     2,815      115      —         2,930
                            

Total available-for-sale investments

   $ 258,950    $ 6,062    ($ 1,217 )   $ 263,795
                            

December 31, 2006

          

Total available-for-sale investments:

          

Sponsored investment funds

   $ 118,147    $ 8,085    ($ 583 )   $ 125,649

Collateralized debt obligations

     27,496      1,866      —         29,362

Other

     3,312      119      —         3,431
                            

Total available-for-sale investments

   $ 148,955    $ 10,070    ($ 583 )   $ 158,442
                            

 

F-31


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

4. Investments (continued)

 

The Company has reviewed the gross unrealized losses of $1,217 at December 31, 2007, the majority of which had been in a loss position for less than twelve months, and determined that these losses were not other than temporary primarily because the Company has the ability and intent to hold the securities for a period of time sufficient to recover such losses. As a result, the Company recorded no impairments on such securities.

During the years ended December 31, 2007, 2006 and 2005, the Company recorded impairments of $16,497, $2,256 and $811 to its CDO investments, respectively.

A summary of sale activity in the Company’s available-for-sale securities during the years ended December 31, 2007, 2006 and 2005 is shown below.

 

     Year ended December 31,  
     2007     2006    2005  

Sales proceeds

   $ 111,710     $ 6,682    $ 15,126  
                       

Net realized gain:

       

Gross realized gains

   $ 7,673     $ 1,428    $ 629  

Gross realized losses

     (152 )     —        (13 )
                       

Net realized gain

   $ 7,521     $ 1,428    $ 616  
                       

 

F-32


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

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

 

       Cost    Carrying
Value

December 31, 2007

     

Trading investments:

     

Deferred compensation plan investments

   $ 40,394    $ 44,680

Equity securities

     103,058      116,742

Municipal debt securities

     239,398      233,584
             

Total trading investments

   $ 382,850    $ 395,006
             

Other investments:

     

Consolidated sponsored investment funds

   $ 721,300    $ 760,378

Equity method

     463,497      554,016

Cost method

     4,039      4,039

Deferred compensation plan investments

     14,086      22,710
             

Total other investments

   $ 1,202,922    $ 1,341,143
             

December 31, 2006

     

Trading investments:

     

Deferred compensation plan and other investments

   $ 53,306    $ 54,527

Equity securities

     139,874      148,025

Municipal debt securities

     154,015      154,510

Corporate notes and bonds

     13,779      13,656
             

Total trading investments

   $ 360,974    $ 370,718
             

Other investments:

     

Consolidated sponsored investment funds

   $ 1,180,099    $ 1,199,484

Equity method

     308,470      326,537

Cost method

     24,247      24,247

Deferred compensation plan investments

     14,074      18,146
             

Total other investments

   $ 1,526,890    $ 1,568,414
             

Management reviewed the carrying value of investments accounted for using the cost method at December 31, 2007 and estimated their aggregate fair value to be equal to their carrying value. No impairments were recorded on such investments during the years ended December 31, 2007, 2006 or 2005.

 

F-33


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

4. Investments (continued)

 

Trading investments include deferred compensation plan investments, equity and debt securities within certain consolidated sponsored investment funds and equity securities held in separate accounts for the purpose of establishing an investment history in various investment strategies before being marketed to investors.

The carrying value of investments in debt securities by contractual maturity at December 31, 2007 and 2006 was as follows:

 

     Carrying Value

Maturity date

   December 31,
2007
   December 31,
2006

<1 year

   $ —      $ 776

1-5 years

     9,567      7,989

5-10 years

     28,677      2,772

After 10 years

     195,340      156,629
             

Total

   $ 233,584    $ 168,166
             

At December 31, 2007, the debt securities in the table above consist of municipal debt securities held by a fund that is consolidated in the Company’s financial statements.

The Company consolidates certain sponsored investment funds primarily because it is deemed to control such investments in accordance with GAAP. The investments that are owned by these consolidated investment funds are classified as trading and other investments. At December 31, 2007 and 2006, the following balances related to these funds were consolidated in the consolidated statements of financial condition:

 

     December 31,
2007
    December 31,
2006
 

Cash and cash equivalents

   $ 66,971     $ 90,919  

Investments

     1,054,208       1,469,930  

Other net liabilities

     (218,337 )     (127,266 )

Non-controlling interest

     (578,210 )     (1,109,092 )
                

Total exposure to consolidated investment funds

   $ 324,632     $ 324,491  
                

BlackRock’s total exposure to consolidated sponsored investment funds of $324,632 and $324,491 at December 31, 2007 and 2006, respectively, represents the fair value of the Company’s economic ownership interest in these sponsored investment funds. Valuation changes associated with these consolidated investment funds are reflected in non-operating income and non-controlling interest. Approximately $209,729 and $95,815 of borrowings by consolidated sponsored investment funds at December 31, 2007 and December 31, 2006, respectively, is included in other liabilities on the consolidated statements of financial condition.

The Company may not be readily able to access cash and cash equivalents held by consolidated sponsored investment funds to use in its operating activities. In addition, the Company may not be readily able to sell investments held by consolidated sponsored investment funds in order to obtain cash for use in its operations.

 

F-34


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

5. Variable Interest Entities

In the normal course of business, the Company is the manager of various types of investment vehicles, including collateralized debt obligations and private investment funds, that may be considered VIEs. The Company receives management fees or other incentive related fees for its services and may from time to time own equity or debt securities in the vehicles, each of which are considered variable interests. The Company engages in these variable interests principally to address client needs, through the launch of such investment vehicles.

At December 31, 2007, the Company was the primary beneficiary of one VIE, which resulted in consolidation of a sponsored private investment fund with net assets of $96,229, primarily consisting of cash and cash equivalents and investments. Creditors of the VIE do not have recourse to the credit of the Company. The Company’s variable interests and maximum risk of loss related to this VIE was not material to its consolidated financial statements.

At December 31, 2007 and 2006 the Company’s maximum risk of loss related to VIEs in which it had a significant variable interest and was not the primary beneficiary were as follows:

 

     December 31,
2007
   December 31,
2006

Maximum Risk of Loss from:

     

Collateralized debt obligations

   $ 32,098    $ 52,125

Private investment funds

     197,234      7,994
             

Total

   $ 229,332    $ 60,119
             

At December 31, 2007, the Net Assets of the VIEs in which the Company had a significant variable interest and was not the primary beneficiary was approximately $1,800,000.

At December 31, 2007, BlackRock’s maximum risk of loss for private investment funds primarily relates to: (i) BlackRock’s equity investment in two enhanced cash funds and (ii) the impact of the Company’s capital support agreements which were established in support of the two enhanced cash funds. In addition, the table above excludes the value of a credit default swap related to a synthetic CDO transaction. See Note 6 for further information.

 

F-35


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

6. Derivatives and Hedging

For the years ended December 31, 2007 and 2006, the Company did not hold any derivatives designated in a formal hedge relationship under SFAS No. 133, Derivative Instruments and Hedging Activities , as amended.

By using derivative financial instruments, the Company exposes itself to market risk. Market risk from forward foreign currency exchange contracts is the effect on the value of a financial instrument that results from a change in currency exchange rates. The Company manages exposure to market risk associated with foreign currency exchange contracts by establishing and monitoring parameters that limit the types and degrees of market risk that may be undertaken. For the year ended December 31, 2007, the change in fair value of foreign exchange forward contracts was not material to the Company’s consolidated financial statements.

During 2007, the Company entered into a series of total return swaps to economically hedge market price exposures with respect to seed investments in sponsored investment products. At December 31, 2007, the outstanding total return swaps had an aggregate notional value of approximately $93,600 and net realized and unrealized losses of approximately $820 for the year ended December 31, 2007. The net losses were included in non-operating income in the Company’s consolidated statements of income.

BlackRock entered into capital support agreements, up to $100,000 with two enhanced cash funds, backed by letters of credit (“LOCs”) in which BlackRock agreed to reimburse the bank for any amounts drawn on the LOCs . As of the date the LOCs were issued, BlackRock established a $12,000 derivative liability for the fair value of the capital support agreements for the two funds. The amount of the liability will increase or decrease as BlackRock’s obligation under the guarantee fluctuates based on the fair value of the derivative.

The Company acts as the portfolio manager in a series of credit default swap transactions, referred to collectively as the Pillars synthetic CDO transaction (“Pillars”). The Company has entered into a credit default swap with Citibank, N.A. (“Citibank”), providing Citibank credit protection of approximately $16,667, representing the Company’s maximum risk of loss with respect to the provision of credit protection. Under the terms of its credit default swap with Citibank, the Company is entitled to an annual coupon of 4% of the swap’s notional balance of $16,667 and 25% of the structure’s residual balance at its expected termination date in December 2009. The Company’s management has performed an assessment of its variable interest in Pillars (a collateral management agreement and the credit default swap) under FIN 46(R) and has concluded the Company is not Pillars’ primary beneficiary. Pursuant to SFAS No. 133, the Company carries the Pillars credit default swap at fair value based on the expected future cash flows under the arrangement. For the year ended December 31, 2007, the Company recorded a net gain of $64 in non-operating income in the consolidated statement of income related to interest accrued offset by the change in the fair value of the credit default swap. At December 31, 2007, the fair value of the Pillars credit default swap was approximately $4,920 and was included in other assets on the consolidated statement of financial condition.

The Company may, at times, consolidate certain sponsored investment funds which utilize derivative instruments as a part of the fund’s investment strategy. Such derivatives are not material to the Company’s consolidated financial statements.

 

F-36


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

7. Property and Equipment

Property and equipment consists of the following:

 

     Estimated useful    December 31,
     life - in years    2007    2006

Property and equipment:

        

Land

   N/A    $ 3,564    $ 3,564

Building

   39      16,972      16,972

Building improvements

   15      12,169      12,030

Leasehold improvements

   1-15      145,101      113,718

Equipment and computer software

   3-5      254,977      184,706

Furniture and fixtures

   3-7      51,036      39,072

Construction in progress

   N/A      8,286      4,555
                

Gross property and equipment

        492,105      374,617

Less: accumulated depreciation

        225,645      159,833
                

Property and equipment, net

      $ 266,460    $ 214,784
                

 

N/A—Not applicable

Qualifying software costs of approximately $25,457, $11,519 and $9,443 have been capitalized for the years ended December 31, 2007, 2006 and 2005 respectively, and are being amortized over an estimated useful life of three years.

Depreciation expense was $67,742, $35,291 and $23,397 for the years ended December 31, 2007, 2006 and 2005, respectively.

 

F-37


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

8. Goodwill

Goodwill activity during the years ended December 31, 2007 and 2006 is as follows:

 

     2007     2006

Beginning of year balance

   $ 5,257,017     $ 189,814

Goodwill acquired related to:

    

Quellos

     27,437       —  

Fund of hedge funds manager

     21,292       —  

MLIM

     —         5,021,959

NBAM

     —         27,725
              

Total goodwill acquired

     48,729       5,049,684

Goodwill adjustments related to:

    

MLIM

     212,093       —  

Quellos

     (4,684 )     —  

NBAM

     6,300    

Other

     259       17,519
              

Total goodwill adjustments

     213,968       17,519
              

End of year balance

   $ 5,519,714     $ 5,257,017
              

During the year ended December 31, 2007, the Company recorded goodwill adjustments of $213,968 primarily related to the MLIM Transaction as the result of the Company’s review of its purchase price allocation of the net assets acquired in the MLIM Transaction. Additional net deferred tax liabilities totaling $176,825 were recorded during the year, comprised of $212,374 of increased deferred tax liabilities related primarily to changes in expected applicable state tax rates, offset by $35,549 of deferred tax assets related to additional expected compensation deductions. Additionally, the Company established a reserve and the related deferred tax asset for an out-of-market lease assumed in the MLIM Transaction in the net amount of $23,166. These adjustments increased recorded goodwill arising from the MLIM Transaction.

Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. It is expected that goodwill will continue to be reduced in future periods by the amount of tax benefits realized from tax-deductible goodwill in excess of book goodwill.

 

F-38


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

9. Intangible Assets

Intangible assets at December 31, 2007 and 2006 consisted of the following:

 

     Remaining
Weighted-Average
Estimated

Useful Life
   December 31, 2007
      Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount

Indefinite-lived intangible assets:

           

Acquired management contracts:

           

Mutual funds

   N/A    $ 4,461,290    $ —      $ 4,461,290

Alternative investment products

   N/A      889,842      —        889,842
                       

Total indefinite-lived intangible assets

        5,351,132      —        5,351,132
                       

Finite-lived intangible assets:

           

Acquired management contracts:

           

Institutional

   8.5      832,500      119,237      713,263

Retail

   9.7      348,200      39,655      308,545

Alternative investment products

   7.6      199,740      19,558      180,182
                         

Total finite-lived intangible assets

   8.7      1,380,440      178,450      1,201,990
                       

Total intangible assets

      $ 6,731,572    $ 178,450    $ 6,553,122
                       

The 2007 increase in intangible assets was primarily related to the Quellos Transaction.

 

     Remaining
Weighted-Average
Estimated

Useful Life
   December 31, 2006
      Gross Carrying
Amount
   Accumulated
Amortization
   Net Carrying
Amount

Indefinite-lived intangible assets:

           

Acquired management contracts:

           

Mutual funds

   N/A    $ 4,461,290    $ —      $ 4,461,290

Alternative investment products

   N/A      250,442      —        250,442
                       

Total indefinite-lived intangible assets

        4,711,732      —        4,711,732
                       

Finite-lived intangible assets:

           

Acquired management contracts:

           

Institutional

   9.4      832,500      32,118      800,382

Retail

   10.7      348,200      8,000      340,200

Alternative investment products

   9.9      38,740      8,624      30,116
                         

Total finite-lived intangible assets

   9.8      1,219,440      48,742      1,170,698
                       

Total intangible assets

      $ 5,931,172    $ 48,742    $ 5,882,430
                       

 

N/A—Not applicable

Amortization expense for finite-lived intangible assets was $129,736, $37,515 and $7,505 in 2007, 2006 and 2005, respectively.

 

F-39


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

9. Intangible Assets (continued)

 

Finite-Lived Acquired Management Contracts

On May 15, 2000, BlackRock entered into a contract in connection with the agreement and plan of merger of CORE Cap, Inc. with Anthracite Capital, Inc. (“Anthracite”), a BlackRock managed REIT. This agreement assigns the managerial rights and duties of CORE Cap, Inc.’s former manager to BlackRock for consideration in the amount of $12,500 to be paid by BlackRock over a ten-year period. The present value of the acquired contract using an imputed interest rate of 10%, the prevailing interest rate on the date of acquisition, was $8,040 on May 15, 2000. This amount was recorded as an intangible asset and is being amortized on a straight-line basis over ten years. At December 31, 2007, the unamortized balance on this management contract was $1,909. The Company’s remaining liability at December 31, 2007 of $2,487 is included in long-term borrowings on the consolidated statement of financial condition. The Company’s remaining cash obligation at December 31, 2007 is approximately $684 per year for the next three years. If Anthracite’s management contract is terminated, not renewed or not extended for any reason other than cause, Anthracite would remit to the Company all future payments due under this obligation.

In January 2005, the Company acquired $63,200 in finite-life management contracts from MetLife, consisting of $48,300 in contracts with institutional separate accounts, $8,700 in contracts with real estate equity funds and $6,200 in contracts with CDOs. The useful lives of finite-life acquired management contracts range from 5 to 20 years.

On September 29, 2006, in conjunction with the MLIM Transaction, the Company acquired finite-life management contracts valued at $1,135,100, consisting primarily of $771,100 of contracts with institutional separate accounts, $348,200 of contracts with retail separate accounts, $11,200 of private equity accounts and $4,600 in trade name intangibles. The weighted-average estimated useful life of these finite-life management contracts is approximately 10.1 years.

On September 29, 2006, in conjunction with the NBAM transaction, the Company acquired $13,100 of finite-life management contracts, consisting primarily of institutional fixed income accounts. The weighted-average useful life of these finite-life management contracts is approximately nine years.

On October 1, 2007, in conjunction with the Quellos Transaction, the Company acquired $161,100 of finite-life management contracts, consisting primarily of private equity, fund of funds and other contracts. The weighted-average useful life of these finite-life management contracts is approximately 7.5 years.

Estimated amortization expense for finite lived intangible assets for each of the five succeeding years is as follows:

 

  2008    $ 145,489   
 

2009

   $ 143,770   
 

2010

   $ 142,699   
 

2011

   $ 139,382   
 

2012

   $ 138,646   

 

F-40


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

9. Intangible Assets (continued)

 

Indefinite-Lived Acquired Management Contracts

On September 29, 2006, in conjunction with the MLIM Transaction, the Company acquired indefinite-life management contracts valued at $4,477,400, consisting of accounts for 100% of $4,271,200 of retail mutual funds and $206,200 of alternative investment products.

On January 31, 2005, the Company acquired $229,200 in indefinite-life management contracts in the SSR transaction, consisting of $187,800 in contracts with mutual funds and $41,400 in contracts with alternative investment funds.

On October 1, 2007, in conjunction with the Quellos Transaction, the Company acquired $631,000 in indefinite-life management contracts, consisting of alternative investment products.

On October 1, 2007, the Company purchased the remaining 20% of an investment manager of a fund of hedge funds. In conjunction with this transaction, the Company recorded $8,400 in additional indefinite-life management contracts consisting of alternative investment products.

 

10. Borrowings

Short-Term Borrowings:

In December 2006, the Company entered into an unsecured revolving credit facility with a syndicate of banking institutions. This facility, as amended in February 2007 (the “2006 facility”), permitted the Company to borrow up to $800,000.

In August 2007, the Company terminated the 2006 facility and entered into a new five year $2,500,000 unsecured revolving credit facility (the “2007 facility”), which permits the Company to request an additional $500,000 of borrowing capacity, subject to lender credit approval, up to a maximum of $3,000,000. The 2007 facility requires the Company not to exceed a maximum leverage ratio (ratio of net debt to EBITDA, where net debt equals total debt less domestic unrestricted cash) of 3 to 1, which was satisfied at December 31, 2007.

The 2007 facility was used to refinance the 2006 facility and will provide back-up liquidity, fund ongoing working capital for general corporate purposes and fund various investment opportunities. At December 31, 2007, the Company had $300,000 outstanding under the 2007 facility with interest rates between 5.105% to 5.315% and maturity dates between March 2008 and September 2008.

In December 2007, in order to support two enhanced cash funds that BlackRock manages, BlackRock elected to procure two letters of credit under the existing 2007 facility totaling in aggregate $100 million.

 

F-41


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

10. Borrowings (continued)

 

Long-Term Borrowings:

The Company’s long-term borrowings included the following components:

 

     December 31,
     2007    2006

Long-term notes

   $ 694,537    $ —  

Convertible debentures

     249,997      249,997

Other

     2,487      3,170
             

Total long-term borrowings

   $ 947,021    $ 253,167
             

Long-term notes

In September 2007, the Company issued $700,000 in aggregate principal amount of 6.25% senior unsecured notes maturing on September 15, 2017 (the “Notes”). The Notes were issued at a discount of $5,628, which is being amortized over their ten-year term. The Company incurred approximately $4,000 in debt issuance costs, which are included in other assets on the consolidated statements of financial condition and are being amortized over the term of the Notes.

Convertible debentures

In February 2005, the Company issued $250,000 aggregate principal amount of convertible debentures (the “Debentures”), due in 2035 and bearing interest at a rate of 2.625% per annum. Interest is payable semi-annually in arrears on February 15 and August 15 of each year, and commenced August 15, 2005.

Prior to February 15, 2009, the Debentures may be convertible at the option of the holder at a December 31, 2007 conversion rate of 9.8508 shares of common stock per $1 principal amount of Debentures under certain circumstances. The Debentures will be convertible into cash and, in some situations as described below, additional shares of the Company’s common stock, if during the five business day period after any five consecutive trading day period in which the trading price per Debenture for each day of such period is less than 103% of the product of the last reported sales price of BlackRock’s common stock and the conversion rate of the Debentures on each such day or upon the occurrence of certain other corporate events, such as a distribution to the holders of BlackRock common stock of certain rights, assets or debt securities, if the Company becomes party to a merger, consolidation or transfer of all or substantially all of its assets or a change of control of the Company. On and after February 15, 2009, the Debentures will be convertible into cash at any time prior to maturity at the option of the holder and, in some situations as described below, additional shares of the Company’s common stock at the above initial conversion rate, subject to adjustments.

 

F-42


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

10. Borrowings (continued)

 

Long-Term Borrowings: (continued)

 

Convertible debentures (continued)

 

At the time the Debentures are tendered for conversion, for each $1 principal amount of Debentures converted, a holder shall be entitled to receive cash and shares of BlackRock common stock, if any, the aggregate value of which (the “conversion value”) will be determined by multiplying the applicable conversion rate by the average of the daily volume weighted average price of BlackRock common stock for each of the ten consecutive trading days beginning on the second trading day immediately following the day the Debentures are tendered for conversion (the “ten day weighted average price”). The Company will deliver the conversion value to holders as follows: (1) an amount in cash (the “principal return”) equal to the lesser of (a) the aggregate conversion value of the Debentures to be converted and (b) the aggregate principal amount of the Debentures to be converted, and (2) if the aggregate conversion value of the Debentures to be converted is greater than the principal return, an amount in shares (the “net shares”), determined as set forth below, equal to such aggregate conversion value less the principal return (the “net share amount”). The number of net shares to be paid will be determined by dividing the net share amount by the ten-day weighted average price. In lieu of delivering fractional shares, the Company will deliver cash based on the ten-day weighted average price.

The conversion rate for the Debentures is subject to adjustments upon the occurrence of certain corporate events, such as a change of control of the Company, each payment of quarterly dividends greater than $0.30 per share, the issuance of certain rights or warrants to holders of, or subdivisions on, BlackRock’s common stock, a distribution of assets or indebtedness to holders of BlackRock common stock or a tender offer on the common stock. The conversion rate adjustments vary depending upon the specific corporate event necessitating the adjustment and serve to ensure that any economic gains realized by the Company’s stockholders are shared with the holders of the Debentures. The initial conversion rate of 9.7282 was determined by the underwriters based on market conditions and has been subsequently revised in 2007 to 9.8508 as a result of dividends paid by the Company that were in excess of $0.30 per share.

If the effective date or anticipated effective date of certain transactions that constitute a change of control occurs on or prior to February 15, 2010, under certain circumstances, the Company will provide for a make-whole amount by increasing, for a certain time period, the conversion rate by a number of additional shares of common stock for any conversion of Debentures in connection with such transactions. The amount of additional shares will be determined based on the price paid per share of BlackRock common stock in the transaction constituting a change of control and the effective date of such transaction. However, if such transaction constitutes a public acquirer change of control, the Company may elect to issue shares of the acquiring company rather than BlackRock shares.

Beginning February 20, 2010, the Company may redeem any of the Debentures at a redemption price of 100% of their principal amount, plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any. Holders of the Debentures have the right to require the Company to repurchase the Debentures for cash on February 15, 2010, 2015, 2020, 2025 and 2030. In addition, holders of the Debentures may require the Company to repurchase the Debentures for cash at a repurchase price equal to 100% of their principal amount plus accrued and unpaid interest, including contingent interest and accrued and unpaid liquidated damages, if any, (i) upon a change of control of the Company or (ii) if BlackRock’s common stock is neither listed for trading on the New York Stock Exchange nor approved for trading on the NASDAQ.

 

F-43


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

10. Borrowings (continued)

 

Long-Term Borrowings: (continued)

 

Convertible debentures (continued)

 

The Company is obligated to pay contingent interest, which is the amount of interest payable to holders of the Debentures for any six-month period from February 15 to August 15 or from August 15 to February 15, with the initial six-month period commencing February 15, 2010, if the trading price of the Debentures for each of the ten trading days immediately preceding the first day of the applicable six-month period equals 120% or more of the principal amount of the Debentures. During any period when contingent interest is payable, the contingent interest payable per Debenture will equal 0.25% of the average trading price of the Debentures during the ten trading days immediately preceding the first day of the applicable six-month interest period.

 

11. Commitments and Contingencies

Lease Commitments

The Company leases its primary office space and certain office equipment under agreements which expire through 2023. Future minimum commitments under these operating leases are as follows:

 

     

Year

   Amount     
 

2008

   $ 71,696   
 

2009

     65,463   
 

2010

     62,919   
 

2011

     60,576   
 

2012

     54,944   
 

Thereafter

     216,982   
           
     $ 532,580   
           

The above lease commitments include facilities which currently are leased from Merrill Lynch, a related party to BlackRock. Future lease commitments on such leases are $11,435 in 2008, $8,539 in 2009, $7,314 in 2010, $5,770 in 2011 and $5,559 in 2012.

Rent expense and certain office equipment expense under agreements amounted to $84,888, $42,976 and $25,547 for the years ended December 31, 2007, 2006 and 2005, respectively.

 

F-44


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

11. Commitments and Contingencies (continued)

 

Investment / Loan Commitments

The Company has certain investment and loan commitments relating primarily to real estate products and funds of funds. Dates shown below represent the expiration dates of the commitments. Amounts to be funded generally are callable at any point prior to the expiration of the commitment. The Company has the following unfunded investment and loan commitments at December 31, 2007:

 

     

Year of Expiration

   Amount     
 

2008

   $ 98,795   
 

2009

     89,642   
 

2010

     49,548   
 

2011

     643   
 

2012

     —     
 

Thereafter

     364,927   
           
 

Total

   $ 603,555   
           

BlackRock also is obligated to maintain a specified ownership level in certain investment products, which may result in additional required contributions of capital. These amounts and timing of such amounts are inherently uncertain.

Contingent Payments Related to Business Acquisitions

On October 1, 2007, the Company acquired the fund of funds business of Quellos (See Note 3). The Asset Purchase Agreement associated with this acquisition provides for contingent payments to Quellos of up to an additional $969,000 in a combination of cash and stock contingent upon certain operating measures through December 31, 2010.

In addition, on January 31, 2010, the fifth anniversary of the closing of the SSR Transaction (See Note 3), MetLife may be entitled to receive an additional payment up to a maximum of $10,000 based on the Company’s retained AUM associated with the MetLife defined benefit and defined contribution plans.

Capital Support Agreements

In December 2007, BlackRock entered into capital support agreements with two enhanced cash funds, backed by letters of credit drawn under BlackRock’s existing credit facility. Pursuant to the capital support agreements, BlackRock has agreed to make subsequent capital contributions to the funds to cover realized losses, up to $100 million, related to specified securities held by the two enhanced cash funds. The terms of the capital support agreements expire in December 2008 unless renewed by BlackRock.

Other Contingent Payments

The Company acts as the portfolio manager in a series of credit default swap transactions and has a maximum potential exposure of $16,667 under a credit default swap between the Company and Citibank. See Note 6 for further discussion of this transaction and the related commitment.

 

F-45


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

11. Commitments and Contingencies (continued)

 

Legal Proceedings

BlackRock has received subpoenas from various U.S. federal and state governmental and regulatory authorities and various information requests from the SEC in connection with industry-wide investigations of U.S. mutual fund matters. BlackRock is continuing to cooperate fully in these matters. From time to time, BlackRock is subject to other regulatory inquiries and proceedings.

The Company, and certain of its subsidiaries have been named as defendants in various legal actions, including arbitrations, class actions, and other litigation and regulatory proceedings arising in connection with BlackRock’s activities. While Merrill Lynch has agreed to indemnify the Company for certain pre-closing liabilities related to legal and regulatory proceedings acquired in the MLIM Transaction, entities that BlackRock now owns may be named as defendants in these matters and the Company’s reputation may be negatively impacted. Additionally, certain of the investment funds that the Company manages are subject to lawsuits, any of which could potentially harm the investment returns of the applicable fund or result in the Company being liable to the funds for any resulting damages.

Management, after consultation with legal counsel, does not currently anticipate that the aggregate liability, if any, arising out of such regulatory matters or lawsuits will have a material adverse effect on BlackRock’s earnings, financial position, or cash flows, although, at the present time, management is not in a position to determine whether any such pending or threatened matters will have a material adverse effect on BlackRock’s results of operations in any future reporting period.

Indemnifications

In the ordinary course of business, BlackRock enters into contracts with third parties pursuant to which the third parties provide services on behalf of BlackRock. In many of the contracts, BlackRock agrees to indemnify the third party service provider under certain circumstances. The terms of the indemnity vary from contract to contract and the amount of indemnification liability, if any, cannot be determined.

Under the Transaction Agreement in the MLIM Transaction, the Company has agreed to indemnify Merrill Lynch for losses it may incur arising from (1) inaccuracy in or breach of representations or warranties related to the Company’s SEC reports, absence of undisclosed liabilities, litigation and compliance with laws and government regulations, without giving effect to any materiality or material adverse effect qualifiers, (2) any alleged or actual breach, failure to comply, violation or other deficiency with respect to any regulatory or fiduciary requirements relating to the operation of BlackRock’s business, (3) any fees or expenses incurred or owed by BlackRock to any brokers, financial advisors or comparable other person retained or employed by BlackRock in connection with the transactions, and (4) certain specified tax covenants.

Merrill Lynch is not entitled to indemnification for any losses arising from the circumstances and events described in (1) above until the aggregate losses (other than individual losses less than $100) of Merrill Lynch exceed $100,000. In the event that such losses exceed $100,000, Merrill Lynch is entitled to be indemnified only for such losses (other than individual losses less than $100) in excess of $100,000. Merrill Lynch is not entitled to indemnification payments pursuant to (1) above in excess of $1,600,000 or for claims made more than 18 months from the closing of the MLIM Transaction. These limitations do not apply to losses arising from the circumstances and events described in (2), (3) and (4) above, which survive indefinitely.

Management believes that the likelihood of any liability arising under these indemnification provisions to be remote and, as such, no liability has been recorded on the consolidated statements of financial condition. Management cannot estimate any potential maximum exposure due both to the remoteness of any potential claims and the fact that items that would be included within any such calculated claim would be beyond the control of BlackRock.

 

F-46


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation

The components of the Company’s stock-based compensation expense are comprised of the following:

 

     Year ended December 31,
     2007    2006    2005

Stock-based compensation:

        

Restricted stock and RSUs

   $ 121,762    $ 48,486    $ 12,044

Stock options

     12,977      12,537      340

Long-term incentive plans (funded by PNC)

     53,517      50,031      48,587

ESPP and other

     —        9,382      8,479
                    

Total stock-based compensation

   $ 188,256    $ 120,436    $ 69,450
                    

Stock Award and Incentive Plan

Pursuant to the BlackRock, Inc. 1999 Stock Award and Incentive Plan (the “Award Plan”), options to purchase shares of the Company’s common stock at an exercise price not less than the market value of BlackRock’s common stock on the date of grant in the form of stock options, restricted stock or RSUs may be granted to employees. A maximum of 17,000,000 shares of common stock are authorized for issuance under the Award Plan. Of this amount, 5,451,220 shares remain available for future awards at December 31, 2007. Upon exercise of employee stock options, the issuance of restricted stock or the vesting of RSUs, the Company issues shares out of treasury, to the extent available.

 

F-47


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Stock Options

Stock option grants were made to certain employees pursuant to the Award Plan in 1999 through 2003. Options granted have a ten-year life, vest ratably over periods ranging from three to four years and become exercisable upon vesting. Prior to the January 2007 grant described below, the Company had not granted any stock options since 2003. Stock option activity for the years ended December 31, 2007, 2006 and 2005 is summarized below:

 

           Weighted
     Shares     average
     under     exercise

Outstanding at

   option     price

December 31, 2004

   4,935,736     $ 36.84

Exercised

   (320,093 )   $ 37.18

Forfeited

   (38,002 )   $ 37.36
        

December 31, 2005

   4,577,641     $ 36.81

Exercised

   (113,572 )   $ 33.23

Forfeited

   (6,400 )   $ 37.36
        

December 31, 2006

   4,457,669     $ 36.90

Granted

   1,545,735     $ 167.76

Exercised

   (1,899,239 )   $ 36.96

Forfeited

   (3,000 )   $ 37.36
        

December 31, 2007 (1)

   4,101,165     $ 86.19
        

 

 

(1)

At December 31, 2007, approximately 3.9 million awards were vested or are expected to vest.

The aggregate intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $267,729, $11,531 and $14,502, respectively.

 

F-48


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Stock Options (continued)

 

Stock options outstanding and exercisable at December 31, 2007 are as follows:

 

     Options Outstanding    Options Exercisable

Exercise

Prices

   Options
Outstanding
   Weighted
Average
Remaining
Life
(years)
   Weighted
Average
Exercise
Price
   Options
Exercisable
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Life
(years)
   Aggregate
Intrinsic
Value of
Exercisable
Shares
(per share)                                   
$ 14.00    159,584    1.75    $ 14.00    159,584    $ 14.00    1.75    $ 32,364
$ 37.36    1,985,646    4.79    $ 37.36    1,985,646    $ 37.36    4.79      356,304
$ 43.31    410,200    2.95    $ 43.31    410,200    $ 43.31    2.95      71,165
$ 167.76    1,545,735    9.08    $ 167.76    —        —      —        —  
                                
   4,101,165    6.10    $ 86.19    2,555,430    $ 36.86    4.30    $ 459,833
                                

On January 31, 2007, the Company awarded options to purchase 1,545,735 shares of BlackRock common stock to certain executives as long-term incentive compensation. The options vest on September 29, 2011, provided that the Company has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The options have a strike price of $167.76, which was the closing price of the shares on the grant date. Fair value, as calculated in accordance with a modified Black-Scholes model, was approximately $45.88 per option. The fair value of the options is being amortized over the vesting period as exceeding the performance hurdles was deemed probable of occurring.

Assumptions used in calculating the grant-date fair value for the stock options issued in January 2007 were as follows:

 

Exercise price

   $ 167.76  

Expected term (years)

     7.335  

Expected volatility

     24.5 %

Dividend yield

     1.0%-4.44 %

Risk-Free interest rate

     4.8 %

 

F-49


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Stock Options (continued)

 

The Company’s expected option term was derived using the mathematical average between the earliest vesting date and the option expiration date in accordance with SEC Staff Accounting Bulletin No. 107. The Company’s expected stock volatility assumption was based upon historical stock price fluctuations of BlackRock’s common stock. The dividend yield assumption was derived using estimated dividends over the expected term and the stock price at the date of grant. The risk free interest rate is based on the U.S. Treasury yield at date of grant.

As of December 31, 2007, the Company had $56,988 in unrecognized stock-based compensation expense related to unvested stock options. The unrecognized compensation cost is expected to be recognized over a remaining weighted-average period of 3.8 years.

Restricted Stock

Pursuant to the Award Plan, restricted stock grants and RSUs may be granted to certain employees. Restricted stock was issued for stock awards prior to 2006. RSUs were issued for the majority of grants in 2006 and 2007. These restricted shares and RSUs vest over periods ranging from one to five years and are expensed on the straight-line method over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. Dividend equivalents on restricted stock and RSUs are paid to employees based on the dividend payment date.

 

F-50


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Restricted Stock (continued)

 

Restricted stock and RSU activity for the years ended December 31, 2007, 2006 and 2005 is summarized below:

 

Outstanding at

   Unvested
Restricted
Stock and
Units
    Weighted
Average
Grant Date
Fair Value

December 31, 2004

   140,814     $ 51.77

Granted

   251,095     $ 80.33

Converted

   (100,261 )   $ 66.48
        

December 31, 2005

   291,648     $ 71.30

Granted

   1,341,975     $ 137.97

Converted

   (113,456 )   $ 68.15

Forfeited

   (4,277 )   $ 113.13
        

December 31, 2006

   1,515,890     $ 130.49

Granted

   2,551,913     $ 167.64

Converted

   (274,164 )   $ 104.15

Forfeited

   (84,631 )   $ 159.95
        

December 31, 2007 (1)

   3,709,008     $ 158.01
        

 

 

(1)

At December 31, 2007, approximately 3.5 million awards are expected to vest.

The Company values restricted stock and RSUs at their grant-date fair value as measured by BlackRock’s common stock price. In January 2006, the Company issued approximately 299,400 RSUs to certain employees at a total fair value of approximately $33,874. The awards vest evenly over three years. In November 2006, the Company granted approximately 1,013,600 RSUs, which vest after five years as incentive awards to former MLIM employees remaining with BlackRock after the closing of the MLIM Transaction.

On January 25, 2007, the Company issued approximately 901,200 RSUs to employees in conjunction with their annual incentive compensation awards. The RSU awards vest over three years through January 2010. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant, or $169.70. The grant date fair value of the RSUs is being amortized into earnings on the straight-line method over the requisite service period, net of expected forfeitures, for each separately vesting portion of the award as if the award was, in substance, multiple awards. In addition, in January 2007, the Company granted 1,559,022 of RSUs as long-term incentive compensation which will be funded by shares currently held by PNC.

At December 31, 2007, there was $398,551 of total unrecognized compensation cost related to unvested restricted stock and RSUs. The unrecognized compensation cost is expected to be recognized over a remaining weighted average period of 4.5 years.

In January 2008, the Company issued approximately $240,061 of RSUs to employees as part of an annual incentive compensation under the Award Plan that vests evenly over three years.

 

F-51


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Long-Term Incentive Plans Funded by PNC

Under a share surrender agreement, PNC committed to provide up to 4,000,000 shares of BlackRock common stock, held by PNC, to fund certain BlackRock long-term incentive plans (“LTIP”).

The BlackRock, Inc. 2002 Long-Term Retention and Incentive Plan (the “2002 LTIP Awards”) permitted the grant of up to $240,000 in deferred compensation awards, of which the Company previously granted approximately $232,700. Approximately $208,200 of the 2002 LTIP Awards were paid in January 2007. The 2002 LTIP Awards were payable approximately 16.7% in cash and the remainder in BlackRock stock contributed by PNC and distributed to plan participants. Approximately $20,000 of previously issued 2002 LTIP Awards will result in the settlement of BlackRock shares held by PNC through 2010 at a conversion price approximating the market price on the settlement date. The fair value of the remaining 2002 LTIP Awards are accrued prior to settlement over the remaining service period in accrued compensation and benefits on the consolidated statements of financial condition.

The settlement of the 2002 LTIP Awards in January 2007 resulted in the surrender by PNC of approximately 1,000,000 shares of BlackRock common stock. Under the terms of the 2002 LTIP Awards, employees elected to put approximately 95% of the stock portion of the awards back to the Company at a total fair market value of approximately $165,700. On the payment date, the Company recorded a capital contribution from PNC for the amount of shares funded by PNC. For the shares not put back to the Company, no dilution resulted from the delivery of stock pursuant to the awards since they were funded by shares held by PNC and were issued and outstanding at December 31, 2006. Put elections made by employees were accounted for as treasury stock repurchases and are accretive to the Company’s earnings per share. The shares repurchased were retained as treasury stock.

During 2007, the Company granted additional long-term incentive awards, out of the Award Plan, of approximately 1,600,000 RSUs, that will be settled using BlackRock shares held by PNC in accordance with the share surrender agreement. The RSU awards vest on September 29, 2011 provided that BlackRock has actual GAAP earnings per share of at least $5.20 in 2009, $5.52 in 2010 or $5.85 in 2011 or has attained an alternative performance hurdle based on the Company’s earnings per share growth rate versus certain peers over the term of the awards. The value of the RSUs was calculated using BlackRock’s closing stock price on the date of grant. The grant date fair value of the RSUs is being amortized into earnings on the straight-line method over the vesting period, net of expected forfeitures. The maximum value of awards that may be funded by PNC, prior to the earlier of September 29, 2011 or the date the performance criteria are met, is approximately $271,000, net of forfeitures, which includes approximately $270,000 of awards granted in 2007.

Subsequent to September 29, 2011, the remaining committed PNC shares, of approximately 1,400,000, would be available for future long-term incentive awards.

 

F-52


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

12. Stock-Based Compensation (continued)

 

Employee Stock Purchase Plan

Through August 2006, the terms of the BlackRock Employee Stock Purchase Plan (“ESPP”) allowed eligible employees to purchase shares of the Company’s common stock at 85% of the lesser of fair market value on the first or last day of each six-month offering period. Eligible employees could not purchase more than 500 shares of common stock in any six-month offering period. In addition, for any calendar year in which the option to purchase shares is outstanding, Section 423(b)(8) of the Internal Revenue Code restricts an ESPP participant from purchasing more than $25 worth of common stock based on its fair market value. The Company used the fair value method of measuring compensation cost pursuant to SFAS No. 123 and incurred ESPP-related compensation expense of approximately $988 and $1,258 during the years ended December 31, 2006 and 2005, respectively. The ESPP was suspended in August 2006 and amended effective January 2007.

Effective January 2007, the terms of the amended ESPP allow eligible employees to purchase the Company’s common stock at 95% of the fair market value on the last day of each three-month offering period. In accordance with SFAS No. 123R, the Company will not record compensation expense related to employees purchasing shares under the amended ESPP.

Through August 2006, the fair value of ESPP shares was estimated using the Black-Scholes option-pricing model with the following assumptions for the years ended December 31, 2006 and 2005, respectively:

 

       2006    2005

Expected dividend yield

   1.3%    1.42% to 1.5%

Expected volatility

   28.03%    19.46% to 24.24%

Risk-free interest

   4.59%    2.77% to 3.69%

Expected term

   6 months    6 months

These assumptions were developed by management based upon reviews of third party market data as of the end of the latest offer period.

The weighted average fair value of the discount, including the fair value of the embedded look-back option, on ESPP shares acquired by employees in 2006 and 2005 was $30.13 and $17.46, per share, respectively.

 

F-53


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans

Involuntary Deferred Compensation Plan

Effective January 2002, the Company adopted an Involuntary Deferred Compensation Plan (“IDCP”) for the purpose of providing deferred compensation and retention incentives to key officers and employees. The IDCP provided for a mandatory deferral of up to 15% of annual incentive compensation. For annual incentive awards for fiscal years prior to 2005, the mandatory deferral was matched by BlackRock in an amount equal to 20% of the deferral for employees with total compensation above certain levels. The matching contribution related to the mandatory deferral vests on the third anniversary of the deferral date. The Company funds the obligation through the establishment of a rabbi trust on behalf of the participants in the plan. No mandatory deferrals under the IDCP have been made since the annual incentive awards for fiscal year 2004.

Voluntary Deferred Compensation Plan

Effective January 2002, the Company adopted a Voluntary Deferred Compensation Plan (“VDCP”) which allows participants to elect to defer between 1% and 100% of that portion of the employee’s annual incentive compensation not mandatorily deferred under the IDCP or the Company’s RSUs. The participants must specify a deferral period of one, three, five or ten years. The Company funds the obligation through the establishment of a rabbi trust on behalf of the participants in the plan.

Rabbi Trust

The rabbi trust established for the IDCP and VDCP, with assets totaling $67,293 and $49,401 as of December 31, 2007 and 2006, respectively, is reflected in investments on the Company’s consolidated statements of financial condition. Such investments are classified as trading and other investments. The corresponding liability balance of $60,009 and $48,647 as of December 31, 2007 and 2006 is reflected in the Company’s consolidated statements of financial condition as accrued compensation and benefits. Earnings in the rabbi trust, including unrealized appreciation or depreciation, are reflected as non-operating income or loss and changes in the corresponding liability are reflected as employee compensation and benefits expense in the accompanying consolidated statements of income.

Defined Benefit Plans

Certain employees of the Company participate in PNC’s non-contributory defined benefit pension plan. Effective July 1, 2004, PNC froze all accrued benefits related to BlackRock participants under this plan and closed this plan to new BlackRock participants. Effective September 29, 2006, the Company paid PNC $1,945 to assume all future liabilities under the Plan. BlackRock recorded pension expenses related to this plan of $0, $626 and $0 for the years ended December 31, 2007, 2006 and 2005, respectively.

Through the MLIM Transaction, the Company assumed several defined benefit pension plans in Japan, Germany, Luxembourg, and Jersey. All accrued benefits under these defined benefit plans are currently frozen and the plans are closed to new participants,with the exception of Jersey. Otherwise, participant benefits under the plans will not change with salary increases or additional years of service. The liabilities assumed under these plans were recorded as part of the purchase price allocation for the MLIM Transaction (see Note 3) and are immaterial to the Company’s 2007 and 2006 consolidated statements of financial condition.

 

F-54


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans (continued)

 

Defined Benefit Plans (continued)

 

Pension benefit costs for the State Street Research & Management Retirement Plan (“SSRM Plan”) are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants and changes in plan asset levels.

Effective July 1, 2007, the Company terminated the SSRM Plan. Upon termination of the SSRM Plan, participants are eligible to elect to receive a distribution of their benefits in the form of a one-time lump sum payment or an annuity, to be purchased from an insurer at market rates. The Company expects to distribute the assets of the Plan in the second quarter of 2008. Additional costs of termination were not material to the Company’s consolidated financial statements.

The measurement date used to determine the pension benefit obligation measures for the SSRM Plan was December 31, 2007.

The following tables provide a reconciliation of the changes in the benefit obligation and fair value of plan assets for 2007 and 2006 as well as a summary of the unfunded status at December 31, 2007 and 2006.

 

       December 31,
2007
    December 31,
2006
 

Change in accumulated benefit obligation:

    

Accumulated benefit obligation, beginning of the year

   $ 3,564     $ 3,685  

Interest cost

     209       201  

Actuarial (gain) or loss

     910       (213 )

Disbursements

     (121 )     (109 )
                

Accumulated benefit obligation, end of year

   $ 4,562     $ 3,564  
                
       December 31,
2007
    December 31,
2006
 

Change in plan assets:

    

Fair value of plan assets, beginning of the year

   $ 3,230     $ 2,727  

Actual return on plan assets

     194       289  

Employer contributions

     —         323  

Disbursements

     (121 )     (109 )
                

Fair value of plan assets, end of year

   $ 3,303     $ 3,230  
                

 

F-55


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans (continued)

 

Defined Benefit Plans (continued)

 

 

       December 31,
2007
    December 31,
2006
 

Unfunded status:

    

Unfunded status, beginning of the year

   $ (1,304 )   $ (334 )
                

Net amount recognized

   $ (1,304 )   $ (334 )
                

The net benefit cost consists of the following:

 

       For the Year ended December 31,  
     2007     2006     2005  

Net periodic benefit cost:

      

Interest cost

   $ 209     $ 201     $ 178  

Expected return on plan assets

     (222 )     (194 )     (177 )
                        

Net periodic benefit cost

   $ (13 )   $ 7     $ 1  
                        

Weighted-average assumptions used to determine benefit obligations are as follows:

 

     2007     2006  

Discount rate

   5.90 %   5.50 %

Expected long-term rate of return on plan assets

   7.00 %   7.00 %

Rate of future compensation increase

   N/A     N/A  

 

F-56


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans (continued)

 

Defined Benefit Plans (continued)

 

The weighted-average allocation of pension plan assets is as follows:

 

       December 31,
2007
    December 31,
2006
 

Asset Category

    

Equity

   44.0 %   47.0 %

Fixed income

   35.0     33.0  

Other

   21.0     20.0  
            

Total

   100.0 %   100.0 %
            

Plan assets consist primarily of listed domestic equity securities and U.S. government, agency and corporate debt securities held in two BlackRock funds. Plan assets do not include any common stock or debt of BlackRock.

The Company did not make a contribution into the SSRM Plan during 2007. The Company expects to make a contribution in connection with the termination of the SSRM Plan in the second quarter of 2008 of approximately $1,247.

 

F-57


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans (continued)

 

Defined Contribution Plans

Until September 30, 2006, the Company’s employees participated in PNC’s Incentive Savings Plan (“ISP”), a defined contribution plan. Under the ISP, employee contributions of up to 6% of eligible compensation, as defined by the plan, were matched by the Company, subject to Internal Revenue Code limitations. Effective in October 2006, the Company established the BlackRock Retirement Savings Plan (“BRSP”). Active employee accounts in the ISP were transferred directly to the BRSP in October 2006. Under BRSP, employee contributions of up to 6% of eligible compensation subject to Internal Revenue Code limitations are matched by the Company at 50%. As part of the BRSP, the Company will also make an annual retirement contribution on behalf of each eligible participant equal to 3% of eligible compensation, as well as up to an additional 2% of eligible compensation may be made at the Company’s discretion. The BRSP and ISP expense for the Company was $30,680, $10,608, and $7,221 for the years ended December 31, 2007, 2006 and 2005, respectively. Contributions to the ISP were matched by shares of BlackRock’s common stock in 2006 and 2005. 500,000 shares of BlackRock’s common stock have been reserved for the ISP, of which approximately 493,000 shares have been issued as of December 31, 2007. Contributions to the BRSP are made in cash. Investments in BlackRock stock were transferred from the ISP to the BRSP; however, no new investments in BlackRock stock or matching contributions of stock are available in the BRSP.

BlackRock International, Ltd. (“BIL”) and BlackRock Investment Management (UK) Limited (“BIM”), wholly-owned subsidiaries of the Company, contribute to the BlackRock Group Personal Pension Plan a defined contribution plan for all employees of BIL and BIM. BIL and BIM contribute between 6% and 15% of each employee’s eligible compensation, which totaled $1,558, $1,119 and $833 during the years ended December 31, 2007, 2006 and 2005, respectively.

The Company assumed two 401(k) Plans covering employees of SSR and Realty (the “Research Plan” and “Realty Plan,” respectively) as a result of the SSR Transaction. Effective with the closing of the SSR Transaction, contributions ceased for all participants in the Research Plan and selected participants in the Realty Plan and the Research Plan was closed to new participants. All participants for which contributions ceased in either the Research Plan or Realty Plan, participated in the ISP through September 30, 2006 and became participants of the BRSP thereafter. For all employees who remain active participants in the Realty Plan, employee contributions of up to 3% of eligible compensation, as well as an additional 50% of the next 2% of eligible compensation, subject to Internal Revenue Code limitations, are matched by the Company.

Effective November 1, 2007, the Company merged the assets of the Research Plan and select participant accounts of the Realty Plan into the BRSP.

 

F-58


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

13. Employee Benefit Plans (continued)

 

Deferred Compensation Plans

SSR and Realty have deferred compensation plans (collectively, the “SSR New Plan”) which allowed participants to elect to defer a portion of their annual incentive compensation or commissions for either a fixed term or until retirement and invest the funds in specified investments. SSR has funded a portion of the obligation through the purchase of company-owned life insurance (“COLI”) policies to the benefit of SSR. The COLI assets are carried at fair value on the consolidated statement of financial condition, and at December 31, 2007, the value of the COLI assets was $15,618 and was recorded in other assets. Changes in the cash surrender value of the COLI policies are recorded to non-operating income in the consolidated statements of income. In addition, the Company has recorded a related obligation to repay the deferred incentive compensation, plus applicable earnings, to employees, which totaled $18,188 and was recorded in accrued compensation and benefits on the consolidated statement of financial condition as of December 31, 2007. Changes in the Company’s obligation under the SSR New Plan, as a result of appreciation of the underlying investments in an employee’s account, are recorded as compensation and benefits expense in the consolidated statements of income. Effective March 2004 the SSR New Plan no longer allowed participants to defer a portion of their annual incentive compensation or commissions.

Prior to 2003, SSR sponsored a deferred compensation plan (the “SSR Old Plan”) under which eligible participants could defer annual incentive compensation and commissions for either a fixed term or until retirement. Obligations under this plan were funded through split-dollar life insurance policies acquired by SSR to the benefit of the respective participant. SSR is entitled to the return of any premium paid by the Company and, as such, premiums paid are recorded by SSR as a receivable from the participant. At the end of a participant’s deferral period, all amounts advanced by SSR under the SSR Old Plan will be applied first against the obligation to repay premiums advanced by SSR, with any remaining value accruing to the benefit of the employee. All obligations under the SSR Old Plan are convertible to obligations under the SSR New Plan at the election of the participant at the respective insurance policy’s cash surrender value. At December 31, 2007, the receivables from employees and obligations under the SSR Old Plan were $991.

Post-retirement Benefits

Until December 31, 2006, PNC provided certain post-retirement health care and life insurance benefits for certain eligible employees. As of December 31, 2006, the Company transferred all future liability under this plan to PNC for $1,828. Expenses for post-retirement benefits allocated to the Company by PNC were $794 and $68 for the years ended December 31, 2006 and 2005, respectively. No separate financial obligation data for the Company is available with respect to such plan.

In addition, in conjunction with the MLIM Transaction the Company assumed a requirement to deliver post-retirement medical benefits to a closed population based in the United Kingdom. For the years ended December 31, 2007 and 2006 expenses for these benefits were immaterial to the Company’s consolidated financial statements.

 

F-59


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

14. Related Party Transactions

Determination of Related Parties

As a result of the MLIM Transaction (see Note 3 for further discussion), Merrill Lynch acquired approximately 49.3% of the total capital stock of BlackRock on a fully diluted basis. The Company has considered Merrill Lynch, along with its affiliates, a related party in accordance with SFAS No. 57, Related Party Disclosures , since the closing of the MLIM Transaction based on its level of ownership. At December 31, 2007, Merrill Lynch owned approximately 45.1% of the Company’s voting common stock and approximately 49.0% of the capital stock on a fully diluted basis.

For the years ended December 31, 2007, 2006 and 2005, the Company considered PNC, along with its affiliates, to be related parties based on their collective ownership of BlackRock capital stock of approximately 69% for those years through September 29, 2006. At December 31, 2007 PNC owned approximately 33.5% of the Company’s capital stock.

In connection with the closing of the SSR Transaction in January 2005, MetLife was issued 550,000 shares of restricted BlackRock common stock (see Note 3 for further discussion). The Company has considered MetLife a related party since January 2005 because of this level of ownership and because of the significance of the revenue earned by BlackRock from MetLife. Subsequent to the MLIM Transaction, however, MetLife’s ownership interest in the Company has decreased to less than 1% of the Company’s total capital stock and the revenue earned by BlackRock from MetLife has decreased as a percentage of the Company’s total revenue due to the significant increase in the Company’s revenue. Consequently, the Company has not considered MetLife to be a related party since December 31, 2006.

For the year ended December 31, 2005, the Company considered Nomura to be a related party because the Company and Nomura were joint venture partners, each holding a 50% interest, in NBAM, and as a result of the significance of revenues earned by the Company from Nomura. On September 29, 2006, the Company purchased Nomura’s 50% interest in NBAM (see Note 3 for additional information) and the Company’s revenue increased significantly as a result of the MLIM Transaction. Consequently, the Company has not considered Nomura to be a related party since December 31, 2006.

For the years ended December 31, 2007, 2006 and 2005, the Company considers its mutual funds to be related parties as a result of the influence the Company has over such mutual funds as a result of the Company’s advisory relationship.

 

F-60


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

14. Related Party Transactions (continued)

 

Investment Advisory and Administration Fees from Related Parties

The Company provides investment advisory and administration services to its open and closed-end funds and other commingled or pooled funds and separate accounts in which related parties invest. In addition, the Company provides investment advisory and administration services to certain Merrill Lynch subsidiaries, PNC subsidiaries, MetLife sponsored variable annuities and separate accounts and Nomura and its affiliates for a fee based on AUM. Further, the Company provides risk management services to PNC.

Revenues for services provided by the Company to these related parties are as follows:

 

       Year ended December 31,
     2007    2006    2005

Investment advisory and administration fees from related parties:

        

Merrill Lynch and affiliates

   $ 89,471    $ 20,499    $ —  

PNC and affiliates

     8,781      12,557      13,327

MetLife and affiliates

     —        61,613      51,805

Nomura and affiliates

     —        6,474      8,781

Mutual funds

     2,542,023      763,855      271,030
                    

Total investment advisory and administration fees from related parties

   $ 2,640,275    $ 864,998    $ 344,943
                    

 

F-61


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

14. Related Party Transactions (continued)

 

Certain Agreements and Arrangements with Merrill Lynch

On September 29, 2006, BlackRock entered into a global distribution agreement with Merrill Lynch. The global distribution agreement provides a framework under which Merrill Lynch provides portfolio administration and servicing of client investments in certain BlackRock investment advisory products (including those of the former MLIM Business). Pursuant to the global distribution agreement, Merrill Lynch has agreed to cause each of its distributors to continue distributing BlackRock covered products and covered products of the former MLIM Business that it distributed as of February 15, 2006 on the same economic terms as were in effect on February 15, 2006 or as the parties otherwise agree. For new covered products introduced by BlackRock to Merrill Lynch for distribution that do not fall within an existing category, type or platform of covered products distributed by Merrill Lynch, the Merrill Lynch distributors must be offered the most favorable economic terms offered by BlackRock to other distributors of the same product. If a covered product that does not fall within an existing category, type or platform of covered products distributed by Merrill Lynch becomes part of a group or program of similar products distributed by the Merrill Lynch distributors, some of which are sponsored by managers other than BlackRock, the economic terms offered by Merrill Lynch distributors to BlackRock for the distribution of such covered products must be at least as favorable as the most favorable economic terms to which any such product is entitled. The economic terms of all covered products distributed by Merrill Lynch will remain in effect until September 30, 2009. After such term, the agreement will renew for additional one-year terms, subject to certain conditions.

The total amount expensed by BlackRock during 2007 relating to Merrill Lynch portfolio administration and servicing of products covered by the global distribution agreement, including mutual funds, separate accounts, liquidity funds, alternative investments and insurance products, was approximately $436,886.

On September 29, 2006, BlackRock entered into a transition services agreement with Merrill Lynch and its controlled affiliates to allow BlackRock to transition from relying on Merrill Lynch for various functions for the former MLIM business and to allow Merrill Lynch to transition from relying on the former MLIM Business for various functions. The pricing for such services is required to be consistent with historical practices. The total amount expensed by BlackRock for the years ended December 31, 2007 and 2006 relating to the transition services agreement with Merrill Lynch was approximately $5,418 and $5,837, respectively.

In connection with the MLIM Transaction, Merrill Lynch has agreed that it will provide reimbursement to BlackRock for employee incentive awards issued to former MLIM employees who became BlackRock employees subsequent to the MLIM Transaction. Reimbursements will amount to 50% of the total amount of awards to former MLIM employees between $100,000 and $200,000. The Company is entitled to invoice Merrill Lynch following its determination of the portion of awards entitled to reimbursement for a given calendar year. Through January 2007, the Company had issued total eligible incentive compensation to qualified employees in excess of $200,000 per year and intends to seek reimbursement from Merrill Lynch for an appropriate portion of these awards. Contributions made by Merrill Lynch will be recorded as capital contributions when received.

Effective September 29, 2006, the Company leases certain office buildings from Merrill Lynch. The lease agreements expire in 2018. Rent expense of $17,773 and $4,328 for the years ended December 31, 2007 and 2006, respectively, was recorded related to office buildings leased from Merrill Lynch.

 

F-62


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

14. Related Party Transactions (continued)

 

Merrill Lynch and certain of its affiliates have been engaged by the Company to provide recordkeeping, administration and trustee services to the BRSP. All compensation to Merrill Lynch and its affiliates for these services is paid by the Company.

On September 28, 2007, the Company insourced certain closed-end fund administration and servicing arrangements in place with Merrill Lynch. In connection with this insourcing, the Company terminated 40 agreements with Merrill Lynch with original terms ranging from 30 to 40 years and made a one-time payment to Merrill Lynch of $128,114 on October 31, 2007. The payment is reported as “termination of closed-end fund administration and servicing arrangements” on the consolidated statement of income. As a result of these terminations, Merrill Lynch was discharged of any further duty to provide the services and BlackRock was discharged from any further payment obligation.

Certain Agreements and Arrangements with MetLife

During 2006, the Company incurred a fee sharing payment of $34,450 payable to MetLife based upon certain contractual arrangements entered into in conjunction with the SSR Transaction. See Note 3 for further information.

Aggregate Expenses for Transactions with Related Parties

Aggregate expenses included in the consolidated statements of income for transactions with affiliates, including related parties are as follows:

 

       Year ended December 31,
     2007    2006    2005

Expenses with related parties:

        

Portfolio administration and servicing costs

        

Merrill Lynch and affiliates

   $ 444,376    $ 96,362    $ —  

PNC and affiliates

     23,201      24,060      17,259

Other

     2,164      5,751      5,800
                    
     469,741      126,173      23,059

General and administration

        

Merrill Lynch and affiliates

     48,459      11,062      —  

PNC and affiliates

     —        1,607      1,824

MetLife and affiliates

     —        3,932      —  

Support of two private enhanced cash funds

     35,948      —        —  

Other

     8,263      1,149      656
                    
     92,670      17,750      2,480

Termination of closed-end fund administration and servicing arrangements to Merrill Lynch

     128,114      —        —  

Fee sharing payment - MetLife

     —        34,450      —  
                    

Total expenses with related parties

   $ 690,525    $ 178,373    $ 25,539
                    

 

F-63


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

14. Related Party Transactions (continued)

 

Receivables and Payables with Related Parties

Due from related parties was $174,853 and $113,184 at December 31, 2007 and 2006, respectively, and primarily represented receivables for investment advisory and administration services provided by BlackRock and loan receivables from certain funds of funds managed by BlackRock and warehouse entities established for such funds. Due from related parties at December 31, 2007 included $14,819 in receivables from PNC and affiliates and $42,956 in receivables from Merrill Lynch and affiliates. Due from related parties at December 31, 2006 primarily represented $40,622 in receivables from PNC and $35,372 in receivables from Merrill Lynch and affiliates.

Accounts receivable at December 31, 2007 and 2006 includes $388,125 and $321,706, respectively, related to receivables from BlackRock mutual funds for investment advisory and administration services.

Due to related parties was $114,347 and $243,836 at December 31, 2007 and 2006, respectively including $96,459 payable to Merrill Lynch and $3,364 payable to PNC and its affiliates at December 31, 2007. The payable to Merrill Lynch primarily includes acquired payables and accrued liabilities under the global distribution agreement and the transition services agreement. The payable to PNC and its affiliates represents fund administration and servicing costs.

 

15. Net Capital Requirements

The Company is required to maintain net capital in certain international jurisdictions, which is met in part by retaining cash and cash equivalent investments in those jurisdictions. As a result, the Company may be restricted in its ability to transfer cash between different jurisdictions. At December 31, 2007, the Company was required to maintain approximately $217,361 in net capital at these subsidiaries and was in compliance with all regulatory minimum net capital requirements.

BlackRock Investments, Inc. (“BII”), a registered broker-dealer and a wholly-owned subsidiary of BlackRock 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, 2007, BII’s net capital was $10,161 in excess of minimum regulatory requirements.

 

16. Capital Stock

At December 31, 2005, BlackRock’s authorized class A common stock, $0.01 par value, was 250,000,000 shares and BlackRock’s authorized class B common stock, $0.01 par value, was 100,000,000 shares. Holders of class A common stock had one vote per share and holders of class B common stock had five votes per share on all stockholder matters affecting both classes.

On September 29, 2006, the Company completed the MLIM Transaction and issued 52,395,082 shares of BlackRock common stock and 12,604,918 of series A non-voting participating preferred shares to Merrill Lynch in consideration for the MLIM business. In conjunction with the MLIM Transaction, all existing class A and class B common stockholders exchanged their shares for the newly issued common stock of the Company. All such shares contain the same voting rights.

 

F-64


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

16. Capital Stock (continued)

 

BlackRock’s authorized common stock, $0.01 par value, was 500,000,000 shares at December 31, 2006. BlackRock’s authorized Series A non-voting participating preferred stock, $0.01 par value, was 500,000,000 shares at December 31, 2006.

The series A non-voting participating preferred stock:

 

   

Except as otherwise provided by applicable law, is non-voting;

 

   

Participates in dividends on a basis generally equal to the common stock;

 

   

Grants the holder the option to receive dividends in common stock (subject to applicable ownership restrictions) or in cash;

 

   

Benefits from a liquidation preference of $0.01 per share; and

 

   

Is mandatorily convertible to BlackRock common stock upon transfer to an unrelated party.

On October 1, 2007, the Company acquired the fund of funds business of Quellos (See Note 3). The Company issued 1,191,785 shares of newly-issued BlackRock common stock in connection with the acquisition. The BlackRock common stock will be held in an escrow account for up to three years and will be available to satisfy certain indemnification obligations of Quellos under the Asset Purchase Agreement.

The Company’s common shares issued and outstanding and related activity consist of the following:

 

F-65


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except per share data or as otherwise noted)

 

16. Capital Stock (continued)

 

      Shares Issued   Shares Outstanding
      Common
Shares

Class A&B
    Common
Shares
  Escrow
Shares
    Treasury
Shares

Class A&B
    Treasury
Shares
    Preferred
Shares

Series A
  Common
Shares

Class A&B
    Common
Shares
    Preferred
Shares

Series A

January 1, 2005

  64,743,388     —     —       (1,077,665 )   —       —     63,665,723     —       —  

Conversion of class B stock to class A stock

  (351,579 )   —     —       351,579     —       —     —       —       —  

Issuance of class A common stock

  700,780     —     —       587,580     —       —     1,288,360     —       —  

Treasury stock transactions

  —       —     —       (953,265 )   —       —     (953,265 )   —       —  
                                               

December 31, 2005

  65,092,589     —     —       (1,091,771 )   —       —     64,000,818     —       —  

Conversion of class B stock to class A stock

  (154,181 )   —     —       154,181     —       —     —       —       —  

Issuance of class A common stock

  48,094     —     —       179,604     —       —     227,698     —       —  

Treasury stock transactions

  —       —     —       (190,081 )   —       —     (190,081 )   —       —  

Conversion of class A common stock to common stock

  (20,072,356 )   20,072,356   —       —       —       —     (20,072,356 )   20,072,356     —  

Conversion of class B common stock to common stock

  (44,914,146 )   44,914,146   —       —       —       —     (44,914,146 )   44,914,146     —  

Issuance of preferred series A stock

  —       —     —       —       —       12,604,918   —       —       12,604,918

Issuance of common stock

  —       52,395,080   —       —       (24,618 )   —     —       52,370,462     —  

Conversion of class A treasury stock to treasury shares

  —       —     —       141,400     (141,400 )   —     141,400     (141,400 )   —  

Conversion of class B treasury stock to treasury shares

  —       —     —       806,667     (806,667 )   —     806,667     (806,667 )   —  
                                               

December 31, 2006

  —       117,381,582   —       —       (972,685 )   12,604,918   —       116,408,897     12,604,918
                                               

Issuance of common stock

  —       —     —       —       2,089,341     —     —       2,089,341     —  

Issuance of common stock to escrow agent in connection with Quellos Transaction

  —       1,191,785   (1,191,785 )   —       —       —     —       —       —  

PNC capital contribution

  —       —     —       —       (966,512 )   —     —       (966,512 )   —  

Treasury stock transactions

  —       —     —       —       (1,472,166 )   —     —       (1,472,166 )   —  
                                               

December 31, 2007

  —       118,573,367   (1,191,785 )   —       (1,322,022 )   12,604,918   —       116,059,560     12,604,918
                                               

During the years ended December 31, 2007 and 2006, the Company paid cash dividends of $2.68 per common/preferred shares, or $353,463, and $1.68 per share, or $135,665, respectively.

 

F-66


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

17. Income Taxes

The components of income taxes are as follows:

 

       Year ended December 31,  
     2007     2006     2005  

Current income tax expense:

      

Federal

   $ 327,299     $ 183,835     $ 137,461  

State and local

     47,771       22,199       16,986  

Foreign

     193,416       25,938       3,006  
                        

Total net current income tax expense

     568,486       231,972       157,453  
                        

Deferred income tax expense:

      

Federal

     (38,329 )     (25,528 )     (17,715 )

State and local

     (8,778 )     (10,592 )     (1,180 )

Foreign

     (57,547 )     (6,389 )     —    
                        

Total net deferred income tax expense

     (104,654 )     (42,509 )     (18,895 )
                        

Net current and deferred income tax expense

   $ 463,832     $ 189,463     $ 138,558  
                        

Income tax expense has been based on the following components of income before taxes:

 

       Year ended December 31,
     2007    2006    2005

Domestic

   $ 735,682    $ 448,252    $ 362,882

Foreign

     723,422      63,813      9,584
                    

Total

   $ 1,459,104    $ 512,065    $ 372,466
                    

A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows:

 

       Year ended December 31,  
     2007     %     2006     %     2005     %  

Statutory income tax expense

   $ 510,686     35.0 %   $ 179,223     35.0 %   $ 130,363     35.0 %

Increase (decrease) in income taxes resulting from:

            

Change in deferred foreign taxes for tax rate changes

     (51,445 )   (3.5 )     —       —         —       —    

Effect of foreign tax rates

     (35,990 )   (2.5 )     4,770     0.9       (1,191 )   (0.3 )

State and local taxes (net of federal benefit)

     38,993     2.7       16,204     3.2       10,275     2.7  

Change in deferred state and local taxes for tax rate changes

     —       —         (10,592 )   (2.1 )     —       —    

Other

     1,588     0.1       (142 )   (0.0 )     (889 )   (0.2 )
                                          

Income tax expense

   $ 463,832     31.8 %   $ 189,463     37.0 %   $ 138,558     37.2 %
                                          

 

F-67


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

17. Income Taxes (continued)

 

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the Company’s financial statements. These temporary differences result in taxable or deductible amounts in future years.

The components of deferred tax assets and liabilities are shown below:

 

       December 31,  
     2007     2006  

Deferred tax assets:

    

Compensation and benefits

   $ 147,245     $ 166,239  

Other

     85,381       12,723  
                

Gross deferred tax asset

     232,626       178,962  
                

Deferred tax liabilities:

    

Goodwill and acquired intangibles

     2,246,084       1,871,078  

Other

     37,403       31,867  
                

Gross deferred tax liability

     2,283,487       1,902,945  
                

Net deferred tax (liabilities) asset

   $ (2,050,861 )   $ (1,723,983 )
                

Deferred tax assets and liabilities are recorded net when related to the same tax jurisdiction. At December 31, 2007, the Company recorded on the statement of financial condition deferred income tax assets, within other assets, and deferred tax liabilities of $9,119 and $2,059,980, respectively. At December 31, 2006, the Company recorded $14,687 of deferred tax assets and $1,738,670 of deferred tax liabilities.

During the third quarter of 2007, the United Kingdom and Germany enacted legislation to reduce corporate income tax rates, effective in April and January 2008, respectively. As a result, the Company revalued its deferred tax liabilities attributable to these jurisdictions and recorded a one-time deferred income tax benefit of $51,445 in 2007.

The change in the deferred tax liability related to goodwill and acquired intangibles during 2007 relates in part to the Quellos Transaction and in part to purchase price adjustments recorded for the Company’s acquisition of MLIM. Deferred tax liabilities of $281,104 were recorded for book tax differences in goodwill and intangibles associated with the Quellos business. Additional deferred tax liabilities of $176,825 were also recorded during 2007 as purchase price adjustments relating to MLIM.

Goodwill recorded in connection with the Quellos Transaction has been reduced during the period by the amount of tax benefit realized from tax-deductible goodwill. (See Note 8)

At December 31, 2007, the Company had $15,200 of deferred tax assets recorded in the consolidated statements of financial condition for state and foreign tax net operating losses and tax credits. These deferred tax assets were fully offset by a $15,200 valuation allowance.

 

F-68


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

17. Income Taxes (continued)

 

Current income taxes are recorded net in the consolidated statements of financial condition when related to the same tax jurisdiction. The Company had current income taxes receivable and payable of $47,078 and $228,402, respectively, as of December 31, 2007 recorded in other assets and accounts payable and accrued liabilities, respectively. At December 31, 2006, the Company recorded current income taxes receivable of $42,068 and current income taxes payable of $171,378.

The Company records a portion of the tax benefits related to stock-based compensation to additional paid-in capital. For the years ended December 31, 2007, 2006 and 2005, the Company increased additional paid-in capital for these tax benefits by $118,574, $4,852 and $4,967, respectively.

Under the provisions of APB No. 23, Accounting for Income Taxes , the Company has not recorded a provision for the residual U.S. income taxes and foreign withholding taxes that would occur upon repatriation of previously undistributed foreign earnings that are considered permanently reinvested. At December 31, 2007, the amount of undistributed foreign earnings was approximately $528,000. A determination of unrecognized deferred tax liability associated with unrepatriated foreign earnings is not practicable.

BlackRock adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income Taxes , on January 1, 2007. As a result of the adoption of FIN 48, the Company recognized approximately $15,200 in increased income tax reserves related to uncertain tax positions. Approximately $13,600 of this increase related to taxes that would affect the effective tax rate if recognized, and this portion was accounted for as a reduction to the January 1, 2007 balance in retained earnings. The remaining $1,600 balance, if disallowed, would not affect the annual effective tax rate. Total gross unrecognized tax benefits at January 1, 2007 were approximately $52,100. The total amount of unrecognized tax benefits that, if recognized, would have affected the effective tax rate at January 1, 2007, was approximately $25,700.

A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for 2007 is as follows:

 

Balance at January 1, 2007

   $ 52,100  

Additions for tax positions of prior years

     1,238  

Reductions for tax positions of prior years

     (10,980 )

Additions based on tax positions related to the current year

     24,440  

Lapse of statute of limitations

     (475 )
        

Balance at December 31, 2007

   $ 66,323  
        

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate at December 31, 2007 was approximately $40,601.

The Company recognizes interest and penalties related to income tax matters as a component of income tax expense. Potential interest expense of $1,727, related to these unrecognized tax benefits, was accrued during 2007, and in total, at December 31, 2007, the Company has recorded a liability for potential interest of $6,327. The Company has not accrued any tax-related penalties.

BlackRock is subject to U.S. federal income tax as well as income tax in multiple jurisdictions. The tax years after 2003 remain open to U.S. federal, state and local income tax examination, and the tax years after 2004 remain open to income tax examination in the United Kingdom. Prior to the closing of the MLIM Transaction, BlackRock filed New York State and New York City income tax returns on a combined basis with PNC and the tax years after 2001 remain open to income tax examination in New York State and New York City. The Company, however, is currently under audit in several jurisdictions. The Company does not anticipate that any possible adjustments resulting from these audits would result in a material change to its financial position.

 

F-69


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

17. Income Taxes (continued)

 

As of December 31, 2007, it is reasonably possible the total amounts of unrecognized tax benefits will significantly decrease within the next twelve months. PNC has entered into a closing agreement with the Internal Revenue Service regarding its federal income tax returns. As part of that agreement, the state and local income tax returns filed with PNC will be amended to report these changes. The Company anticipates that it is reasonably possible that its portion of the payments, in the range of $5,000 to $6,000, will be made by the end of 2008 related to these amended tax returns.

PNC and BlackRock have entered into a tax disaffiliation agreement that sets forth each party’s rights and obligations with respect to income tax payments and refunds and addresses related matters such as the filing of tax returns and the conduct of audits or other proceedings involving claims made by taxing authorities. As such, the Company may be responsible for its pro rata share of tax positions taken by PNC for unaudited tax years which may be subsequently challenged by taxing authorities. Management does not anticipate that any such amounts would be material to the Company’s operations, financial position or cash flows.

For the years ended December 31, 2006 and 2005, BlackRock has filed, and will file for the year ended December 31, 2007, its own consolidated federal income tax return. BlackRock has filed selected state and municipal income tax returns with one or more PNC subsidiaries on a combined or unitary basis for the year ended December 31, 2005, and filed selected state and municipal income tax returns with one or more PNC subsidiaries on a combined or unitary basis for the period from January 1, 2006 though September 29, 2006. Other state and municipal income tax returns for the year ended December 31, 2005, have been filed separately. BlackRock has not filed state or municipal income tax returns with PNC subsidiaries on a combined or unitary basis for periods after September 29, 2006.

When BlackRock was included in a group’s combined or unitary state or municipal income tax filing with PNC subsidiaries, BlackRock’s share of the liability generally was an allocation to BlackRock of a percentage of the total tax liability based upon BlackRock’s level of activity in such state or municipality.

 

F-70


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

18. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

 

       Year ended December 31,
     2007    2006    2005

Net income

   $ 995,272    $ 322,602    $ 233,908
                    

Basic weighted-average shares outstanding

     128,488,561      80,638,167      64,182,766

Dilutive potential shares from stock options and restricted stock units

     2,447,727      2,207,139      2,692,383

Dilutive potential shares from convertible debt

     1,033,789      513,088      —  

Dilutive potential shares from acquisition-related contingent stock payments

     118,733      —        —  
                    

Dilutive weighted-average shares outstanding

     132,088,810      83,358,394      66,875,149
                    

Basic earnings per share

   $ 7.75    $ 4.00    $ 3.64
                    

Diluted earnings per share

   $ 7.53    $ 3.87    $ 3.50
                    

Due to the similarities in terms between BlackRock series A non-voting participating preferred stock and the Company’s common stock, the Company considers the series A non-voting participating preferred stock to be common stock for purposes of earnings per share calculations. As such, the Company has included the outstanding series A non-voting participating preferred stock in the calculation of average basic and diluted shares outstanding for the years ended December 31, 2007 and 2006.

For the year ended December 31, 2007, 1,545,735 stock options were excluded from the calculation of diluted earnings per share because to include them would have an anti-dilutive effect.

Shares issued in acquisition

On October 1, 2007, the Company acquired the fund of funds business of Quellos (See Note 3). The Company issued 1,191,785 shares of newly-issued BlackRock common stock, which is being held in an escrow account. The shares issued have no dilutive effect for 2007, however will have a dilutive effect in future periods based on the timing of the release of shares from the escrow account in accordance with the Quellos Asset Purchase Agreement.

 

F-71


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

19. Segment Information

The Company’s management directs BlackRock’s operations as one business, the asset management business. As such, the Company believes it operates in one business segment in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information .

The following table illustrates investment advisory and administration base fee revenue by asset class for the years ended December 31, 2007, 2006 and 2005, respectively.

 

       Year ended December 31,
(Dollar amounts in thousands)    2007    2006    2005

Investment advisory and administration fees:

        

Fixed income

   $ 917,390    $ 590,225    $ 453,742

Equity and balanced

     2,202,076      625,390      176,278

Cash management

     519,733      202,515      105,406

Alternative investments

     370,862      180,611      114,952
                    

Total investment advisory and administration base fees

   $ 4,010,061    $ 1,598,741    $ 850,378
                    

The following chart shows the Company’s revenues and long-lived assets, including goodwill and property and equipment for the years ended December 2007, 2006 and 2005. These amounts are aggregated on a legal entity basis and do not necessarily reflect, in all cases, where the customer is sourced or where the asset is physically located.

 

Revenues (in millions)

   2007    % of
total
    2006    % of
total
    2005    % of
total
 

North America

   $ 3,069.3    63.4 %   $ 1,715.2    81.7 %   $ 1,157.7    97.2 %

Europe

     1,536.9    31.7 %     320.9    15.3 %     24.4    2.0 %

Asia-Pacific

     238.5    4.9 %     61.9    3.0 %     9.3    0.8 %
                                       

Total revenues

   $ 4,844.7    100 %   $ 2,098.0    100.0 %   $ 1,191.4    100 %
                                       

Long-Lived Assets (in millions)

               

North America

   $ 5,695.2    98.4 %   $ 5,408.1    98.8 %   $ 316.6    99.2 %

Europe

     34.6    0.6 %     30.1    0.6 %     2.1    0.7 %

Asia-Pacific

     56.4    1.0 %     33.6    0.6 %     0.6    0.1 %
                                       

Total long-lived assets

   $ 5,786.2    100.0 %   $ 5,471.8    100.0 %   $ 319.3    100.0 %
                                       

Revenue and Long-lived assets in North America are primarily comprised of the United States, while Europe and Asia-Pacific are primarily comprised of the United Kingdom and Japan, respectively.

 

F-72


BlackRock, Inc.

Notes to the Consolidated Financial Statements

(Dollar amounts in thousands, except share data or as otherwise noted)

 

20. Selected Quarterly Financial Data (unaudited)

 

       1 st Quarter    2 nd Quarter    3 rd Quarter    4 th Quarter

2007

                   

Revenue

   $ 1,005,374    $ 1,097,023    $ 1,298,079    $ 1,444,179

Operating income

   $ 272,229    $ 282,001    $ 271,718    $ 467,716

Net income

   $ 195,389    $ 222,244    $ 255,200    $ 322,439

Earnings per share:

           

Basic

   $ 1.52    $ 1.73    $ 1.99    $ 2.51

Diluted

   $ 1.48    $ 1.69    $ 1.94    $ 2.43

Weighted-average shares outstanding:

           

Basic

     128,809,726      128,544,894      128,161,027      128,449,943

Diluted

     131,895,570      131,383,470      131,316,455      132,578,679

Dividend Declared Per Share

   $ 0.67    $ 0.67    $ 0.67    $ 0.67

Common stock price per share:

           

High

   $ 180.30    $ 162.83    $ 179.97    $ 224.54

Low

   $ 151.32    $ 143.69    $ 139.20    $ 172.18

Close

   $ 156.31    $ 156.59    $ 173.41    $ 216.80

2006

                   

Revenue

   $ 395,660    $ 360,733    $ 323,058    $ 1,018,525

Operating income

   $ 100,027    $ 96,683    $ 29,008    $ 246,082

Net income

   $ 70,862    $ 63,404    $ 18,914    $ 169,422

Earnings per share:

           

Basic

   $ 1.11    $ 0.99    $ 0.29    $ 1.31

Diluted

   $ 1.06    $ 0.95    $ 0.28    $ 1.28

Weighted-average shares outstanding:

           

Basic

     64,074,888      64,136,378      64,761,447      129,040,518

Diluted

     66,731,560      66,653,479      67,477,536      131,853,835

Dividend Declared Per Share

   $ 0.42    $ 0.42    $ 0.42    $ 0.42

Common stock price per share:

           

High

   $ 161.49    $ 159.36    $ 152.34    $ 158.50

Low

   $ 105.74    $ 120.69    $ 123.04    $ 140.72

Close

   $ 140.00    $ 139.17    $ 149.00    $ 151.90

 

 

 

Increases in the 4 th quarter of 2006 reflect the impact of the MLIM Transaction.

 

 

 

The 3 rd quarter of 2007 includes the impact of a $128,114 pre-tax expense related to the termination of administration and servicing arrangements with Merrill Lynch and a $51,445 tax benefit resulting from a decrease in deferred income taxes due to enacted legislation during the quarter reducing corporate income taxes in the United Kingdom and Germany.

 

F-73


EXHIBIT INDEX

 

  Exhibit No.            Description

 

Exhibit No.

 

Description

  2.1(1)   Transaction Agreement and Plan of Merger, dated as of February 15, 2006, by and among Merrill Lynch & Co., Inc., BlackRock, Boise Merger Sub, Inc. and Old BlackRock.
  3.1(2)   Amended and Restated Certificate of Incorporation of BlackRock.
  3.2(2)   Amended and Restated Bylaws of BlackRock.
  3.3(2)   Certificate of Designations of Series A Convertible Participating Preferred Stock of BlackRock.
  4.1(3)   Specimen of Common Stock Certificate.
  4.2(4)   Indenture, dated as of February 23, 2005, between Old BlackRock and The Bank of New York (as successor-in-interest to JPMorgan Chase Bank, N.A.), as trustee, relating to the 2.625% Convertible Debentures due 2035.
  4.3(4)   Form of 2.625% Convertible Debenture due 2035 (included as Exhibit A in Exhibit 4.2).
  4.4(2)   First Supplemental Indenture, dated September 29, 2006, relating to the 2.625% Convertible Debentures due 2035.
  4.5(5)   Indenture, dated September 17, 2007, between BlackRock and The Bank of New York, as trustee, relating to senior debt securities.
  4.6(6)   Form of 6.25% Notes due 2017.
10.1(7)   Tax Disaffiliation Agreement, dated October 6, 1999, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc., formerly PNC Bank Corp.
10.2(3)   BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.3(3)   Amendment No. 1 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.4(3)   Amendment No. 2 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.5(3)   Amendment No. 3 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.6(3)   Amendment No. 4 to the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.7(3)   BlackRock, Inc. 2002 Long-Term Retention and Incentive Program.+
10.8(3)   Amendment No. 1 to 2002 Long-Term Retention and Incentive Program.+
10.9(3)   Amendment No. 2 to 2002 Long-Term Retention and Incentive Program.+
10.10(3)   BlackRock, Inc. Nonemployee Directors Stock Compensation Plan.+
10.11(3)   BlackRock, Inc. Voluntary Deferred Compensation Plan.+


EXHIBIT INDEX (continued)

 

10.12(3)   BlackRock, Inc. Involuntary Deferred Compensation Plan.+
10.13(2)   Form of Stock Option Agreement expected to be used in connection with future grants of Stock Options under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.14(2)   Form of Restricted Stock Agreement expected to be used in connection with future grants of Restricted Stock under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.15(2)   Form of Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.16(2)   Form of Directors’ Restricted Stock Unit Agreement expected to be used in connection with future grants of Restricted Stock Units under the BlackRock, Inc. 1999 Stock Award and Incentive Plan.+
10.17(8)   BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+
10.18(9)   Amendment No. 1 to the BlackRock International, Ltd. Amended and Restated Long-Term Deferred Compensation Plan.+
10.19(2)   Registration Rights Agreement, dated as of September 29, 2006, among BlackRock, Merrill Lynch & Co., Inc. and the PNC Financial Service Group, Inc.
10.20(10)   Agreement of Lease, dated May 3, 2000, between 40 East 52nd Street L.P. and Old BlackRock.
10.21(11)   Agreement of Lease, dated September 4, 2001, between 40 East 52nd Street L.P. and Old BlackRock.
10.22(12)   Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+
10.23(1)   First Amendment, dated as of February 15, 2006, to the Share Surrender Agreement, dated as of October 10, 2002, among PNC Bancorp, Inc., The PNC Financial Services Group, Inc. and Old BlackRock.+
10.24(13)   Second Amendment, dated as of June 11, 2007, to the Share Surrender Agreement, dated October 10, 2002, among Old BlackRock, PNC Asset Management, Inc. and The PNC Financial Services Group, Inc.+
10.25(14)   Amended and Restated, BlackRock, Inc. 1999 Annual Incentive Performance Plan. +
10.26(15)   Amendment No. 1 to the BlackRock, Inc. Amended and Restated 1999 Annual Incentive Performance Plan+
10.27(16)   Agreement of Lease, dated July 29, 2004, between Park Avenue Plaza Company L.P. and Old BlackRock.
10.28(16)   Letter Agreement, dated July 29, 2004, amending the Agreement of Lease between Park Avenue Plaza Company L.P. and Old BlackRock.


EXHIBIT INDEX (continued)

 

10.29(17)   Stock Purchase Agreement among MetLife, Inc., Metropolitan Life Insurance Company, SSRM Holdings, Inc. Old BlackRock and BlackRock Financial Management, Inc., dated August 25, 2004.
10.30(4)   Registration Rights Agreement, dated as of February 23, 2005, between Old BlackRock and Morgan Stanley & Co. Incorporated, as representative of the initial purchasers named therein, relating to the 2.625% Convertible Debentures due 2035.
10.31(1)   Implementation and Stockholder Agreement, dated as of February 15, 2006, among The PNC Financial Services Group, Inc., BlackRock and Old BlackRock.
10.32(1)   Stockholder Agreement, dated as of February 15, 2006, between Merrill Lynch & Co., Inc. and BlackRock.
10.33(18)   Global Distribution Agreement, dated as of September 29, 2006, by and between BlackRock and Merrill Lynch & Co., Inc.
10.34(18)   Transition Services Agreement, dated as of September 29, 2006, by and between Merrill Lynch & Co., Inc. and BlackRock.
10.35(19)   Asset Purchase Agreement, dated as of June 26, 2007, by and among BlackRock, Inc., BAA Holdings, LLC and Quellos Holdings, LLC.
10.36(20)   Five-Year Revolving Credit Agreement, dated as of August 22, 2007, by and among BlackRock, Inc., Wachovia Bank, National Association, as administrative agent, swingline lender and issuing lender, Sumitomo Mitsui Banking Corporation, as Japanese Yen lender, a group of lenders, Wachovia Capital Markets, LLC and Citigroup Global Markets Inc., as joint lead arrangers and joint book managers, Citigroup Global Markets Inc., as syndication agent, and HSBC Bank USA, N.A., JPMorgan Chase Bank, N.A., and Morgan Stanley Bank, as documentation agents.
12.1   Computation of Ratio of Earnings to Fixed Charges.
23.1   Deloitte & Touche LLP Consent
31.1   Section 302 Certification of Chief Executive Officer.
31.2   Section 302 Certification of Chief Financial Officer.
32.1   Section 906 Certification of Chief Executive Officer and Chief Financial Officer.

 

(1) Incorporated by Reference to Old BlackRock’s Current Report on Form 8-K filed on February 22, 2006
(2) Incorporated by Reference to BlackRock’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2006.
(3) Incorporated by Reference to BlackRock’s Registration Statement on Form S-8 (Registration No. 333-137708) filed with the Securities and Exchange Commission on September 29, 2006
(4) Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K for the year ended December 31, 2004.
(5) Filed herewith.
(6) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on September 17, 2007.
(7) Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-1 (Registration No. 333-78367), as amended, originally filed with the Securities and Exchange Commission on May 13, 1999.
(8) Incorporated by Reference to Old BlackRock’s Registration Statement on Form S-8 (Registration No. 333-32406), originally filed with the Securities and Exchange Commission on March 14, 2000.


EXHIBIT INDEX (continued)

 

(9) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2000.
(10) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended March 31, 2000.
(11) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2001.
(12) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2002.
(13) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on June 15, 2007.
(14) Incorporated by Reference to Old BlackRock’s Annual Report on Form 10-K, for the year ended December 31, 2002.
(15) Incorporated by reference to Old BlackRock’s Current Report on Form 8-K, filed on May 24, 2006.
(16) Incorporated by Reference to Old BlackRock’s Quarterly Report on Form 10-Q, for the quarter ended June 30, 2004.
(17) Incorporated by reference to Old BlackRock’s Current Report on Form 8-K filed on August 30, 2004.
(18) Incorporated by Reference to BlackRock’s Registration Statement on Form S-4, as amended, originally filed with the Securities and Exchange Commission on June 9, 2006.
(19) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on July 2, 2007.
(20) Incorporated by reference to BlackRock’s Current Report on Form 8-K filed on August 27, 2007.
+ Denotes compensatory plans or arrangements

Exhibit 4.5

EXECUTION VERSION

 

 

 

BLACKROCK, INC.

TO

THE BANK OF NEW YORK, as Trustee

Indenture

Dated as of September 17 , 2007

Senior Debt Securities

 

 

 


Certain Sections of this Indenture relating to Sections 310 through 318,

inclusive, of the Trust Indenture Act of 1939:

 

Trust Indenture

      Indenture Section

Act Section

     

§310(a)(1)

      609

(a)(2)

      609

(a)(3)

      Not Applicable

(a)(4)

      Not Applicable

(b)

      608, 610

§ 311(a)

      613

(b)

      613

§ 312(a)

      701
      702

(b)

      702

(c)

      702

§ 313(a)

      703

(b)

      703

(c)

      703

(d)

      703

§ 314(a)

      704

(a)(4)

      101
      1004

(b)

      Not Applicable

(c)(1)

      102

(c)(2)

      102

(c)(3)

      Not Applicable

(d)

      Not Applicable

(e)

      102

§ 315(a)

      601

(b)

      602

(c)

      601

(d)

      601

(e)

      514

§ 316(a)

      101

(a)(1)(A)

      502, 512

(a)(1)(B)

      513

(a)(2)

      Not Applicable

(b)

      508

(c)

      104

§ 317(a)(l)

      503

(a)(2)

      504

(b)

      1003

§ 318(a)

      107

NOTE: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture.

 

i


TABLE OF CONTENTS

Page

 

ARTICLE ONE DEFINITIONS

   1

SECTION 101.

   Definitions.    1

SECTION 102.

   Compliance Certificates and Opinions.    6

SECTION 103.

   Form of Documents Delivered to Trustee.    6

SECTION 104.

   Acts of Holders; Record Dates.    7

SECTION 105.

   Notices, Etc., to Trustee and Company.    8

SECTION 106.

   Notice to Holders; Waiver.    8

SECTION 107.

   Conflict with Trust Indenture Act.    9

SECTION 108.

   Effect of Headings and Table of Contents.    9

SECTION 109.

   Successors and Assigns.    9

SECTION 110.

   Separability Clause.    9

SECTION 111.

   Benefits of Indenture.    9

SECTION 112.

   Governing Law.    9

SECTION 113.

   Legal Holidays.    9

SECTION 114.

   Language of Notices, Etc.    10

SECTION 115.

   Submission to Jurisdiction.    10

SECTION 116.

   Waiver of Jury Trial.    10

ARTICLE TWO SECURITY FORMS

   10

SECTION 201.

   Forms Generally.    10

SECTION 202.

   Form of Legend for Global Securities.    10

SECTION 203.

   Form of Trustee's Certificate of Authentication.    11

SECTION 204.

   Securities in Global Form.    11

ARTICLE THREE THE SECURITIES

   12
SECTION 301.    Amount Unlimited; Issuable In Series.    12

SECTION 302.

   Denominations.    15

SECTION 303.

   Execution, Authentication, Delivery and Dating.    15

SECTION 304.

   Temporary Securities.    16

SECTION 305.

   Registration, Registration of Transfer and Exchange.    16

SECTION 306.

   Mutilated, Destroyed, Lost and Stolen Securities.    17

SECTION 307.

   Payment of Interest; Interest Rights Preserved.    18

SECTION 308.

   Persons Deemed Owners.    19

SECTION 309.

   Cancellation.    19

SECTION 310.

   Computation of Interest.    19

SECTION 311.

   CUSIP Numbers.    19

ARTICLE FOUR SATISFACTION AND DISCHARGE

   19

SECTION 401.

   Satisfaction and Discharge of Indenture.    19

SECTION 402.

   Application of Trust Money.    20

SECTION 403.

   Repayment of Moneys Held by Paying Agent.    20

ARTICLE FIVE REMEDIES

   21

SECTION 501.

   Events of Default.    21

SECTION 502.

   Acceleration of Maturity; Rescission and Annulment.    22

SECTION 503.

   Collection of Indebtedness and Suits for Enforcement by Trustee.    23

SECTION 504.

   Trustee May File Proofs of Claim.    23

SECTION 505.

   Trustee May Enforce Claims Without Possession of Securities.    23

SECTION 506.

   Application of Money Collected.    24

SECTION 507.

   Limitation on Suits.    24

SECTION 508.

   Unconditional Right of Holders to Receive Principal, Premium and Interest.    24

 

ii


SECTION 509.

   Restoration of Rights and Remedies.    25

SECTION 510.

   Rights and Remedies Cumulative.    25

SECTION 511.

   Delay or Omission Not Waiver.    25

SECTION 512.

   Control by Holders.    25

SECTION 513.

   Waiver of Past Defaults.    25

SECTION 514.

   Undertaking for Costs.    26

SECTION 515.

   Waiver of Usury, Stay or Extension Laws.    26

SECTION 516.

   [Intentionally Omitted].    26

ARTICLE SIX THE TRUSTEE

   26

SECTION 601.

   Duties of Trustee.    26

SECTION 602.

   Certain Rights of Trustee.    27

SECTION 603.

   Not Responsible for Recitals or Issuance of Securities.    28

SECTION 604.

   May Hold Securities.    29

SECTION 605.

   Money Held In Trust.    29

SECTION 606.

   Compensation and Reimbursement.    29

SECTION 607.

   Conflicting Interests.    30

SECTION 608.

   Corporate Trustee Required; Eligibility.    30

SECTION 609.

   Resignation and Removal; Appointment of Successor.    30

SECTION 610.

   Acceptance of Appointment by Successor.    31

SECTION 611.

   Merger, Conversion, Consolidation or Succession to Business.    32

SECTION 612.

   Preferential Collection of Claims Against Company.    32

SECTION 613.

   Appointment of Authenticating Agent.    32

ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY

   33

SECTION 701.

   Company to Furnish Trustee Names and Addresses of Holders.    33

SECTION 702.

   Preservation of Information; Communications to Holders.    34

SECTION 703.

   Reports by Trustee.    34

SECTION 704.

   Reports by Company.    34

ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

   34

SECTION 801.

   Company May Consolidate, Etc., Only on Certain Terms.    34

SECTION 802.

   Successor Substituted.    35

ARTICLE NINE SUPPLEMENTAL INDENTURES

   35

SECTION 901.

   Supplemental Indentures Without Consent of Holders.    35

SECTION 902.

   Supplemental Indentures With Consent of Holders.    36

SECTION 903.

   Execution of Supplemental Indentures.    37

SECTION 904.

   Effect of Supplemental Indentures.    37

SECTION 905.

   Conformity with Trust Indenture Act.    37

SECTION 906.

   Reference in Securities to Supplemental Indentures.    38

ARTICLE TEN COVENANTS

   38

SECTION 1001.

   Payment of Principal, Premium and Interest.    38

SECTION 1002.

   Maintenance of Office or Agency.    38

SECTION 1003.

   Money for Securities Payments to Be Held in Trust.    38

SECTION 1004.

   Statement by Officers as to Default.    39

SECTION 1005.

   Existence.    39

SECTION 1006.

   Maintenance of Properties.    40

SECTION 1007.

   Payment of Taxes and Other Claims.    40

SECTION 1008.

   Waiver of Certain Covenants.    40

SECTION 1009.

   Additional Amounts.    40

ARTICLE ELEVEN REDEMPTION OF SECURITIES

   41

SECTION 1101.

   Applicability of Article.    41

SECTION 1102.

   Election to Redeem; Notice to Trustee.    41

SECTION 1103.

   Selection by Trustee of Securities to Be Redeemed.    41

 

3


SECTION 1104.

   Notice of Redemption.    42

SECTION 1105.

   Deposit of Redemption Price.    42

SECTION 1106.

   Securities Payable on Redemption Date.    42

SECTION 1107.

   Securities Redeemed in Part.    43

ARTICLE TWELVE SINKING FUNDS

  

SECTION 1201.

   Applicability of Article.    43

SECTION 1202.

   Satisfaction of Sinking Fund Payments with Securities.    43

SECTION 1203.

   Redemption of Securities for Sinking Fund.    43

ARTICLE THIRTEEN DEFEASANCE AND COVENANT DEFEASANCE

   44

SECTION 1301.

   Company's Option to Effect Defeasance or Covenant Defeasance.    44

SECTION 1302.

   Defeasance and Discharge.    44

SECTION 1303.

   Covenant Defeasance.    44

SECTION 1304.

   Conditions to Defeasance or Covenant Defeasance.    44

SECTION 1305.

   Deposited Money and Government Obligations to be Held in Trust; Other Miscellaneous Provisions.    46

SECTION 1306.

   Reinstatement.    46

ARTICLE FOURTEEN MEETING OF HOLDERS OF SECURITIES

   47

SECTION 1401.

   Purposes for which Meetings may be Called.    47

SECTION 1402.

   Call, Notice and Place of Meetings.    47

SECTION 1403.

   Persons entitled to Vote at Meetings.    47

SECTION 1404.

   Quorum; Action.    47

SECTION 1405.

   Determination of Voting Rights; Conduct and Adjournment of Meetings.    48

SECTION 1406.

   Counting Votes and Recording Action of Meetings.    49

ARTICLE FIFTEEN IMMUNITY OF INCORPORATIONS, STOCKHOLDERS, OFFICERS DIRECTORS AND EMPLOYEES

   49

SECTION 1501.

   Exemption from Individual Liability.    49

ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS

   50

SECTION 1601.

   Successors and Assigns of Company Bound by Indenture.    50

 

iv


INDENTURE, dated as of September 17, 2007 between BlackRock, Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the “Company”), having its principal office at 40 East 52 nd St. New York, New York 10022 and The Bank of New York, as Trustee (herein called the “Trustee”).

R ECITALS OF T HE C OMPANY

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), which may be convertible into or exchangeable for any securities of any persons (including the Company), to be issued in one or more series as in this Indenture provided.

All things necessary to make this Indenture a valid and legally binding agreement of the Company, in accordance with its terms, have been done.

NOW , THEREFORE , THIS INDENTURE WITNESSETH :

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of Series thereof, as follows:

ARTICLE ONE

DEFINITIONS

SECTION 101. Definitions.

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

(2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

(3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with United States generally accepted accounting principles, the term “generally accepted accounting principles” with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted as consistently applied by the Company at the date of such computation;

(4) unless the context otherwise requires, any reference to an “Article,” a “Section” or an “Exhibit” refers to an Article, a Section or an Exhibit, as the case may be, of or to this Indenture; and

(5) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

Certain terms, used principally in Article Six and Article Thirteen, are defined in those Articles.

“Act”, when used with respect to any Holder, has the meaning specified in Section 104.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting

 

1


securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Authenticating Agent” means any Person authorized by the Trustee pursuant to Section 613 to act on behalf of the Trustee to authenticate Securities of one or more series.

“Authorized Newspaper” means a newspaper, in the English language or in an official language of the country of publication, customarily published on each Business Day, whether or not published on Saturdays, Sundays or holidays, and of general circulation in each place in connection with which the term is used or in the financial community of each such place. Where successive publications are required to be made in Authorized Newspapers, the successive publications may be made in the same or in different newspapers in the same city meeting the foregoing requirements and in each case on any Business Day.

“Automated Clearing House” means an electronic funds transfer system that processes electronically originated batches of credit and debit transfers.

“Board of Directors” means either the board of directors of the Company or any duly authorized committee of that board.

“Board Resolution” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee.

“Business Day”, when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close.

“Commission” means the United States Securities and Exchange Commission, from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument the United States Securities and Exchange Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

“Company” means the Person named as the “Company” in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company” shall mean such successor Person.

“Company Request” or “Company Order” means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or a Managing Director, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee.

“Corporate Trust Office” means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which as of the date hereof is located at 101 Barclay Street – Floor 8W, New York, New York 10286, Attention: Corporate Finance Group.

“corporation” means a corporation, association, company, joint-stock company or business trust.

“Covenant Defeasance” has the meaning specified in Section 1303.

“Defaulted Interest” has the meaning specified in Section 307.

“Defeasance” has the meaning specified in Section 1302.

“Depositary” means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depositary for such Securities as contemplated by Section 301.

“Event of Default” has the meaning specified in Section 501.

 

2


“Exchange Act” means the United States Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time.

“Expiration Date” has the meaning specified in Section 104.

“Global Security” means a Security that evidences all or part of the Securities of any series and bears the legend set forth in Section 202 (or such legend as may be specified as contemplated by Section 301 for such Securities).

“Government Obligation” has the meaning specified in Section 1304.

“Holder” means the Person in whose name the Security is registered in the Security Register.

“Indenture” means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term “Indenture” shall also include the terms of particular series of Securities established as contemplated by Section 301; provided, however, that, if at any time more than one Person is acting as Trustee under this instrument, “Indenture” shall mean, with respect to any one or more series of Securities for which a Person is Trustee, this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof and shall include the terms of the or those particular series of Securities for which such Person is Trustee established as contemplated by Section 301, exclusive, however, of any provisions or terms which related solely to other series of Securities for which such Person is Trustee, regardless of when such terms or provisions were adopted, and exclusive of any provisions or terms adopted by means of one or more indentures supplemental hereto executed and delivered after such Person had become such Trustee but to which such Person, as such Trustee, was not a party.

“interest”, when used with respect to an Original Issue Discount Security which by its terms bears interest only after Maturity, means interest payable after Maturity.

“Interest Payment Date”, when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security.

“Investment Company Act” means the United States Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time.

“Managing Director”, when used with respect to the Company or the Trustee, means any managing director, whether or not designated by a number or a word or words added before or after the title “managing director.”

“Maturity”, when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“Notice of Default” means a written notice of the kind specified in Section 501(4).

“Officers’ Certificate” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or a Managing Director, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers’ Certificate given pursuant to Section 1004 shall be the principal executive, financial or accounting officer of the Company.

“Opinion of Counsel” means a written opinion of counsel. The term “Opinion of Counsel” shall mean an opinion in writing signed by legal counsel, who may be an employee of or of counsel to the Company (and who shall be reasonably acceptable to the Trustee), and delivered to the Trustee. Each such

 

3


opinion shall include the statements provided for in Section 102, if and to the extent required by the provisions thereof.

“Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502.

“Outstanding”, when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(1) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;

(2) Securities or portions thereof for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities or portions thereof are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made;

(3) Securities as to which Defeasance has been effected pursuant to Section 1302; and

(4) Securities that have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a protected purchaser in whose hands such Securities are valid obligations of the Company;

provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver, or other action hereunder as of any date or whether a quorum is present at a meeting of Holders of Securities, (A) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 502, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security that shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by Section 301, (C) the principal amount of a Security denominated in one or more foreign currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 301, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver, or other action, or upon any such determination as to the presence of a quorum, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.

“Paying Agent” means any Person authorized by the Company to pay the principal of or any premium or interest on any Securities on behalf of the Company.

 

4


“Person” means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Place of Payment”, when used with respect to the Securities of any series, means the place or places specified in accordance with Section 301 where the principal of and any premium and interest on the Securities of that series are payable.

“Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

“Redemption Date”, when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture.

“Redemption Price”, when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.

“Regular Record Date” for the interest payable on any Interest Payment Date on the Securities of any series means the date specified for that purpose as contemplated by Section 301.

“Responsible Officer”, when used with respect to the Trustee, means any officer of the Trustee having direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject.

“Securities” has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture.

“Securities Act” means the United States Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time.

“Security Register” and “Security Registrar” have the respective meanings specified in Section 305.

“Special Record Date” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307.

“Stated Maturity”, when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable.

“Subsidiary” means a corporation or limited liability company more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting-stock” means the equity interest that ordinarily has voting power for the election of directors, managers or trustees of an entity, or persons performing similar functions, whether at all times or only so long as no senior class of equity interest has such voting power by reason of any contingency.

“Trust Indenture Act” means the United States Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

“Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean or include each Person who is then a Trustee hereunder, and if at any time

 

5


there is more than one such Person, “Trustee” as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series.

“United States Alien” means any Person who, for United States Federal income tax purposes, is a foreign corporation, a non-resident alien individual, a non-resident alien fiduciary of a foreign estate or trust, or a foreign partnership one or more of the members of which is, for United States Federal income tax purposes, a foreign corporation, a non-resident alien individual or a non-resident alien fiduciary of a foreign estate or trust.

SECTION 102. Compliance Certificates and Opinions.

Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee: an Officers’ Certificate to the effect that, in the opinion of the signers, all conditions precedent and covenants, if any, provided for in this Indenture relating to the proposed action have been satisfied, and an Opinion of Counsel to the effect that, in the opinion of such counsel, all such conditions precedent and covenants have been satisfied if any, provided for in this Indenture relating to the proposed action have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (except for certificates provided for in Section 1004) shall comply with the provisions of the Trust Indenture Act, and shall include,

(1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

SECTION 103. Form of Documents Delivered to Trustee.

In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

 

6


Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

SECTION 104. Acts of Holders; Record Dates.

Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of the Outstanding Securities of all series or one or more series, as the case may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing. Except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments and shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.

The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.

The principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register.

Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

The Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, provided, that the Company may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided, that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in Section 502, (iii) any request to institute proceedings referred

 

7


to in Section 507(2) or (iv) any direction referred to in Section 512, in each case with respect to Securities of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided, that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be cancelled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities of the relevant series in the manner set forth in Section 106.

With respect to any record date set pursuant to this Section, the party hereto that sets such record date may designate any day as the “Expiration Date” and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities of the relevant series in the manner set forth in Section 106, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto that set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph.

Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.

SECTION 105. Notices, Etc., to Trustee and Company.

Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

(1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing (which may be via facsimile) to or with the Trustee at its Corporate Trust Office, Attention: Corporate Finance Group, or

(2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument, Attention: Secretary, or at any other address previously furnished in writing to the Trustee by the Company.

SECTION 106. Notice to Holders; Waiver.

Except as otherwise expressly provided herein, where this Indenture provides for notice of any event to Holders of Securities, such notice shall be sufficiently given to Holders of Securities if in writing and mailed, first-class postage prepaid, to each Holder of a Security affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice.

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice to Holders of Securities by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

 

8


In any case where notice to Holders of Securities is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder of a Security shall affect the sufficiency of such notice with respect to other Holders.

Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders of Securities shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

SECTION 107. Conflict with Trust Indenture Act.

This Indenture shall incorporate and be governed by the provisions of the Trust Indenture Act that are required to be part of and to govern indentures qualified under the Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be.

SECTION 108. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

SECTION 109. Successors and Assigns.

All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

SECTION 110. Separability Clause.

In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 111. Benefits of Indenture.

Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.

SECTION 112. Governing Law.

This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York.

SECTION 113. Legal Holidays.

In any case where any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security which specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date, or at the Stated Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be.

 

9


SECTION 114. Language of Notices, Etc.

Any request, demand, authorization, direction, notice, consent or waiver required or permitted under this Indenture shall be in the English language, except that any published notice may be in an official language of the country of publication.

SECTION 115. Submission to Jurisdiction.

The Company irrevocably submits to the non-exclusive jurisdiction of any federal or state court in the City, County and State of New York, United States, and any appellate court from any thereof, in any legal suit, action or proceeding based on or arising under the Securities or this Indenture and agrees that all claims in respect of such suit or proceeding may be determined in any such court. The Company irrevocably waives to the fullest extent permitted by law, any objection to any such suit, including actions, suits or proceedings relating to the securities laws of the United States of America or any state thereof, in such courts whether on the grounds of venue, residence or domicile or the defense of an inconvenient forum or objections to personal jurisdiction with respect to the maintenance of such legal suit, action or proceeding. The Company agrees that the final judgment in any such suit, action or proceeding brought in such court shall be conclusive and binding upon the Company and may be enforced in any court to the jurisdiction of which the Company is subject by a suit upon such judgment.

SECTION 116. Waiver of Jury Trial.

Each of the Company and the Trustee irrevocably waives, to the fullest extent that it may effectively do so under applicable law, trial by jury.

ARTICLE TWO

SECURITY FORMS

SECTION 201. Forms Generally.

The Securities of each series shall be in substantially the forms set forth in Exhibits A and A1 or in such other form (including temporary or permanent global form) as shall be established by or pursuant to a Board Resolution or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor or as may, consistently herewith, be determined by the officers executing such Securities as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by Section 303 for the authentication and delivery of such Securities (or any such temporary global Security).

The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.

SECTION 202. Form of Legend for Global Securities.

Unless otherwise specified as contemplated by Section 301 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend in substantially the following form:

THIS S ECURITY IS A G LOBAL S ECURITY WITHIN THE MEANING OF THE I NDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A D EPOSITARY OR A NOMINEE THEREOF . T HIS S ECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A S ECURITY REGISTERED , AND NO TRANSFER OF THIS S ECURITY IN

 

10


WHOLE OR IN PART MAY BE REGISTERED , IN THE NAME OF ANY P ERSON OTHER THAN SUCH D EPOSITARY OR A NOMINEE THEREOF , EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE I NDENTURE .

SECTION 203. Form of Trustee’s Certificate of Authentication.

The Trustee’s certificates of authentication shall be in substantially the following form:

This is one of the Securities of the series designated therein referred to in the within mentioned Indenture.

The Bank of New York,                        

As Trustee

By:                                                         

Authorized Signatory

Dated:                                                      

SECTION 204. Securities in Global Form.

If Securities of or within a series are issuable in global form, as specified as contemplated by Section 301, then, notwithstanding clause (10) of Section 301 and the provisions of Section 302, any such Security shall represent such of the Outstanding Securities of such series as shall be specified therein and may provide that it shall represent the aggregate amount of Outstanding Securities from time to time endorsed thereon and that the aggregate amount of Outstanding Securities represented thereby may from time to time be reduced to reflect exchanges. Any endorsement of a Security in global form to reflect the amount, or any increase or decrease in the amount, of Outstanding Securities represented thereby shall be made by the Trustee in such manner and upon instructions given by such Person or Persons as shall be specified therein or in the Company Order to be delivered to the Trustee pursuant to Section 303 or Section 304. Subject to the provisions of Section 303 and, if applicable, Section 304, the Trustee shall deliver and redeliver any Security in permanent global form in the manner and upon instructions given by the Person or Persons specified therein or in the applicable Company Order. If a Company Order pursuant to Section 303 or Section 304 has been, or simultaneously is, delivered, any instructions by the Company with respect to endorsement or delivery or redelivery of a Security in global form shall be in writing but need not comply with Section 102.

The provisions of the last sentence of Section 303 shall apply to any Security represented by a Security in global form if such Security was never issued and sold by the Company and the Company delivers to the Trustee the Security in global from together with written instructions (which need not comply with Section 102) with regard to the reduction in the principal amount of Securities represented thereby, together with the written statement contemplated by the last sentence of Section 303.

Notwithstanding the provisions of Section 201 and 307, unless otherwise specified as contemplated by Section 301, payment of principal of and any premium and interest on any Security in permanent global form shall be made to the Person or Persons specified therein.

 

11


ARTICLE THREE

THE SECURITIES

SECTION 301. Amount Unlimited; Issuable In Series.

The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 303, set forth, or determined in the manner provided, in an Officers’ Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, any or all of the following as applicable (each of which (except for the matters set forth in clauses (1) and (2) below), if so provided in the Officers’ Certificate or supplemental indenture establishing the terms of such series of Securities, may be determined from time to time by the Company with respect to unissued Securities of the series and set forth in such Securities of the series when issued from time to time):

(1) the title of the Securities of the series, including CUSIP numbers, if applicable (which shall distinguish the Securities of the series from Securities of any other series);

(2) any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 304, 305, 306, 906 or 1107 and except for any Securities which, pursuant to Section 303, are deemed never to have been authenticated and delivered hereunder);

(3) whether any Securities of the series are to be issuable initially in temporary global form and whether any Securities of the series are to be issuable in permanent global form and, if so, whether beneficial owners of interests in any such permanent global Security may exchange such interests for Securities of such series and of like tenor of any authorized form and denomination and the circumstances under which any such exchanges may occur, if other than in the manner provided in Section 305;

(4) the Person to whom any interest on any Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, the extent to which, or the manner in which, any interest payable on a temporary global Security on an Interest Payment Date will be paid if other than in the manner provided in Section 304;

(5) the date or dates on which the principal of the Securities of the series is payable;

(6) the ability to issue additional Securities in the same series;

(7) the price or prices at which the Company will sell the Securities;

(8) the right, if any, to extend the interest payment periods and the duration of any such deferral period, including the maximum consecutive period during which interest payment periods may be extended;

(9) provisions, if any, granting special rights to holders of the Securities upon the occurrence of specified events;

(10) the terms, if any, upon which Holders may convert or exchange the Securities into or for the Company’s common stock, preferred stock or other securities or property;

(11) the rate or rates at which the Securities of the series shall bear interest, if any, or the method by which such rate shall be determined, the date or dates from which any such interest

 

12


shall accrue, the Interest Payment Dates on which any such interest shall be payable, the Regular Record Date for the interest payable on any Securities on any Interest Payment Date;

(12) the place or places where, subject to the provisions of Section 1002, the principal of and any premium, if any, and interest, if any, on Securities of the series shall be payable, where any Securities of the series may be surrendered for registration of transfer, where Securities of the series may be surrendered for exchange, where Securities of the series that are convertible or exchangeable may be surrendered for conversion or exchange, as applicable, and notices and demands to or upon the Company in respect of the Securities of the series and this Indenture may be served;

(13) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced;

(14) the obligation, if any, of the Company to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;

(15) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Securities of the series shall be issuable;

(16) whether the amount of payments of principal (or premium, if any) or interest, if any, on the Securities of the series may be determined with reference to an index, formula or other method (which index, formula or method may be based, without limitation, on one or more currencies, commodities, equity indices or other indices), and the manner in which such amounts shall be determined;

(17) the currency or currencies, including composite currencies, in which payment of the principal of and any premium and interest on any Securities of the series shall be payable if other than the currency of the United States of America and the manner of determining the equivalent thereof in the currency of the United States of America for purposes of the definition of “Outstanding” in Section 101;

(18) if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined);

(19) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 502;

(20) if the principal of and any premium or interest on the Securities of the series are to be payable, at the election of the Company or a Holder thereof, in a currency or currencies, including composite currencies, other than that or those in which the Securities are stated to be payable, the currency or currencies in which payment of the principal of and any premium and interest on Securities of such series as to which such election is made shall be payable, and the periods within which and the terms and conditions upon which such election is to be made;

(21) [INTENTIONALLY OMITTED];

 

13


(22) if the amount of principal and interest on the Securities of the series may be determined by reference to an index, the manner in which such amounts shall be determined;

(23) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed, to be the principal amount shall be determined);

(24) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Section 1302 or Section 1303 or both such Sections and, if other than by a Board Resolution, the manner in which any election by the Company to defease such Securities shall be evidenced;

(25) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositaries for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in Section 202 and any circumstances in addition to or in lieu of those set forth, in the seventh paragraph of Section 305 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered in the name or name of Persons other than the Depositary for such Global Security or a nominee thereof;

(26) any addition to or change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 502;

(27) any addition to or change in the covenants set forth in Article Ten which applies to Securities of the series;

(28) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 901(5)); and

(29) whether, under what circumstances and the Currency in which the Company will pay Additional Amounts as contemplated by Section 1009 on the Securities of the series to any Holder who is not a United States Person(s) (including any modification to the definition of such term) in respect of any tax, assessment or governmental charge and, if so, whether the Company will have the option to redeem such Securities rather than pay such Additional Amounts (and the terms of any such option).

All Securities of such series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 303) set forth, or determined in the manner provided, in the Officers’ Certificate referred to above or in any such indenture supplemental hereto. Not all Securities of any one series need be issued at the same time, and, unless otherwise provided, a series may be reopened for issuances of additional Securities of such series.

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers’ Certificate setting forth the terms of the series.

 

14


SECTION 302. Denominations.

Unless otherwise provided as contemplated by Section 301 with respect to the Securities of any series, any Securities of such series, other than Securities issued in global form (which may be of any denomination), shall be issuable in denominations of $1,000 and any integral multiple thereof.

SECTION 303. Execution, Authentication, Delivery and Dating.

The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Managing Directors. The signature of any of these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile signatures of individuals who were at any time they signed such Securities the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the forms or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 201 and 301, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel stating,

(1) if the forms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 201, that such forms have been established in conformity with the provisions of this Indenture;

(2) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 301, that such terms have been established in conformity with the provisions of this Indenture; and

(3) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company enforceable in accordance with their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee’s own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner that is not reasonably acceptable to the Trustee.

Notwithstanding the provisions of Section 301 and of the two preceding paragraphs, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officer’s Certificate otherwise required pursuant to Section 301 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraphs at or prior to the authentication of each Security of such series if such documents are delivered at or prior to the authentication upon original issuance of the first Security of such series to be issued.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form

 

15


provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 309, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

SECTION 304. Temporary Securities.

Pending the preparation of definitive Securities of any series, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of that series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and like aggregate principal amount and tenor.

Until exchanged in full as hereinafter provided, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of the same series and of like tenor authenticated and delivered hereunder.

The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among depositary participants or beneficial owners of interests in any certificated Security or global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Neither the Trustee nor any agent shall have any responsibility for any actions taken or not taken by the depositary.

SECTION 305. Registration, Registration of Transfer and Exchange.

The Company shall cause to be kept at an office or agency to be maintained by the Company in accordance with Section 1002 a register (being the combined register of the Security Registrar and all transfer agents designated pursuant to Section 1002 for the purpose of registration of transfer of Securities and sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and the registration of transfers of Securities. The Trustee is hereby appointed “Security Registrar” for the purpose of registering Securities and transfers of Securities as herein provided.

Upon surrender for registration of transfer of any Security of a series at the office or agency of the Company maintained pursuant to Section 1002 for such purpose in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount.

At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, upon

 

16


surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive.

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee or any transfer agent) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar or any transfer agent duly executed, by the Holder thereof or his attorney duly authorized in writing.

No service charge shall be made for any registration of transfer or exchange of Securities, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.

If the Securities of any series (or of any series and specified tenor) are to be redeemed in part, the Company shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before any selection of Securities of that series to be redeemed and ending at the close of business on the day of the mailing of the relevant notice of redemption.

The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security (including any transfers between or among depositary participants or beneficial owners of interests in any certificated Security or global Security) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. Neither the Trustee nor any agent shall have any responsibility for any actions taken or not taken by the depositary.

SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.

If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a protected purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

Notwithstanding the provisions of the previous two paragraphs, in case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.

Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not

 

17


the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 307. Payment of Interest; Interest Rights Preserved.

Except as otherwise provided as contemplated by Section 301 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest on any Security may at the Company’s option be paid by mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 308, to the address of such Person as it appears on the Security Register or by wire transfer to an account of the Person entitled thereto as such account shall be provided to the Security Registrar and shall appear on the Security Register.

Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below:

(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities of such series in the manner set forth in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2).

(2) The Company may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.

 

18


Subject to the foregoing provisions of this Section and Section 305, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

SECTION 308. Persons Deemed Owners.

Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any premium and (subject to Section 305 and Section 307) any interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

SECTION 309. Cancellation.

All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by a Company Order or in the Trustee’s customary manner, which manner shall be communicated in writing to the Company.

SECTION 310. Computation of Interest.

Except as otherwise specified as contemplated by Section 301 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.

SECTION 311. CUSIP Numbers.

The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use such “CUSIP” numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee in writing of any change “CUSIP” numbers.

ARTICLE FOUR

SATISFACTION AND DISCHARGE

SECTION 401. Satisfaction and Discharge of Indenture.

This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for, and any right to receive additional amounts, as provided in Section 1009), and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(1) either

(A) all Securities theretofore authenticated and delivered (other than Securities which have been destroyed, lost or stolen and which have been

 

19


replaced or paid as provided in Section 306 and Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 1003) have been delivered to the Trustee for cancellation; or

(B) all such Securities not theretofore delivered to the Trustee for cancellation:

(i) have become due and payable, or

(ii) will become due and payable at their Stated Maturity within one year, or

(iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of (i), (ii) or (iii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust money for the purpose and in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

(2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(3) the Company has delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

In the event there are Securities of two or more series hereunder, the Trustee shall be required to execute an instrument acknowledging satisfaction and discharge of this Indenture only if requested to do so with respect to Securities of all series as to which it is Trustee and if the other conditions thereto are met. In the event there are two or more Trustees hereunder, then the effectiveness of any such instrument shall be conditioned upon receipt of such instruments from all Trustees hereunder.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 606, the obligations of the Company to any Authenticating Agent under Section 613 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive such satisfaction and discharge.

SECTION 402. Application of Trust Money.

Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee.

SECTION 403. Repayment of Moneys Held by Paying Agent.

In connection with the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent (other than the Trustee, if the Trustee be a Paying Agent) under the provisions of this

 

20


Indenture shall, upon demand of the Company, be repaid to it or paid to the Trustee and thereupon such Paying Agent shall be released from all further liability with respect to such moneys.

ARTICLE FIVE

REMEDIES

SECTION 501. Events of Default.

“Event of Default”, wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be occasioned by the provisions of Article Fourteen or be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or,

(2) default in the payment of the principal of or any premium on any Security of that series at its Maturity and (if so established as contemplated by Section 301 in respect of that series), in the case of technical or administrative difficulties only if such default persists for a period of five days; or

(3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or

(4) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(5) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or

(6) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, of the consent by the Company to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by

 

21


it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

(7) any other Event of Default provided with respect to Securities of that series.

The Trustee shall within 90 days after the occurrence of an event (which is known to the Trustee and is continuing) which is an Event of Default with respect to the Securities of any series (without regard to any grace period or notice requirements) give to the Holders of the Securities of such series notice of such event.

SECTION 502. Acceleration of Maturity; Rescission and Annulment.

If an Event of Default (other than an Event of Default specified in Section 501(5) or 501(6)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in Section 501(5) or 501(6) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable.

At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if

(1) the Company has paid or deposited with the Trustee a sum sufficient to pay

(A) all overdue interest on all Securities of that series,

(B) the principal of (and premium, if any, on) any sinking fund payments with respect to any Securities of that series which have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities,

(C) to the extent that payment of such interest is lawful, interest upon overdue interest to the date of such payment or deposit at the rate or rates prescribed therefor in such Securities, or if no such rate or rates are so prescribed, at the rate borne by the Securities during the period of such default, and

(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel;

and

(2) all Events of Default with respect to Securities of that series, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513.

No such rescission shall affect any subsequent default or impair any right consequent thereon.

 

22


SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee.

The Company covenants that if

(1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or

(2) default is made in the payment of the principal of (or premium, if any, on) any Security of any series on its Maturity or otherwise, then,

the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in Section 502(1)(C), and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances, of the Trustee, its agents and counsel.

If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon such Securities of such series and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon such Securities of such series wherever situated the moneys adjudged or decreed be payable.

If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem reasonably necessary to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

SECTION 504. Trustee May File Proofs of Claim.

In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 606.

No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided , however , that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors’ or other similar committee.

SECTION 505. Trustee May Enforce Claims Without Possession of Securities.

All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any

 

23


proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

SECTION 506. Application of Money Collected.

Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under Section 606;

SECOND: Subject to Article Fourteen, to the payment of the amounts then due and unpaid for principal of and any premium and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and any premium and interest, respectively; and

THIRD: To the Company.

SECTION 507. Limitation on Suits.

No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

(1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;

(2) the Holders of not less than 25% in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(3) such Holder or Holders have offered to the Trustee reasonable indemnity satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request;

(4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(5) no direction inconsistent with such written request has been given to the Trustee during such 60–day period by the Holders of a majority in principal amount of the Outstanding Securities of that series;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders.

SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest.

Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to Sections 305 and 307) interest on such Security on the respective Stated Maturities expressed in

 

24


such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

SECTION 509. Restoration of Rights and Remedies.

If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder; then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

SECTION 510. Rights and Remedies Cumulative.

Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 511. Delay or Omission Not Waiver.

No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.

SECTION 512. Control by Holders.

The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that the Trustee may refuse to follow any decision that conflicts with any rule of law or with this Indenture, or that may result in the incurrence of liability by the Trustee, and the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

SECTION 513. Waiver of Past Defaults.

Subject to Section 502, the Holders of not less than a majority in principal amount of the Outstanding Securities of any series may on behalf of the Holders of all the Securities of such series waive any past default hereunder with respect to such series and its consequences, except a default

(1) in the payment of the principal of or any premium or interest on any Security of such series, or

(2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected.

Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture, and the Company, the Trustee and the Holders shall be restored to their former positions and rights hereunder, respectively, but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

 

25


SECTION 514. Undertaking for Costs.

In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs including reasonable attorneys’ fees and expenses against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided this Section shall not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 508, or a suit by Holders of more than 10% in aggregate principal amount of the then outstanding Securities of any series.

SECTION 515. Waiver of Usury, Stay or Extension Laws.

The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

SECTION 516. [INTENTIONALLY OMITTED].

ARTICLE SIX

THE TRUSTEE

SECTION 601. Duties of Trustee.

(a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

(b) Except during the continuance of an Event of Default:

(i) the duties of the Trustee shall be determined solely by the express provisions of this Indenture and the TIA and the Trustee need perform only those duties that are specifically set forth in this Indenture and no others, and no implied covenants or obligations shall be read into this Indenture or the TIA against the Trustee; and

(ii) in the absence of bad faith on its part, the Trustee may conclusively rely, without investigation, as to the truth or the statements and the correctness of the opinions expressed therein, upon and statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture but need not verify the contents thereof. However, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall examine the certificates and opinions to determine whether or not they conform on their face to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical calculations or other facts stated therein).

(c) The Trustee may not be relieved from liabilities for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:

 

26


(i) this paragraph does not limit the effect of paragraph (b) of this Section;

(ii) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts; and

(iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 512 or 513.

(d) Whether or not therein expressly so provided, every provision of this Indenture that in any way relates to the Trustee is subject to this Section 601 and Section 602.

(e) No provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, pursuant to the provisions of this Indenture, including, without limitation, Section 512, unless such Holders shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense which might be incurred by it in compliance with such request or direction.

(f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law.

SECTION 602. Certain Rights of Trustee.

Subject to the provisions of Section 601:

(1) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document (whether in its original or facsimile form) believed by it to be genuine and to have been signed or presented by the proper party or parties;

(2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolution of the Board of Directors shall be sufficiently evidenced by a Board Resolution;

(3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers’ Certificate;

(4) the Trustee may consult with counsel of its own selection and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or Indemnity satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or

 

27


document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney;

(7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder;

(8) the Trustee shall not be liable for any action taken, suffered, or omitted to be taken by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture;

(9) the Trustee shall not be deemed to have notice of any Default or Event of Default unless a Responsible Officer of the Trustee has actual knowledge thereof or unless written notice of any event which is in fact such a default is received by the Trustee at the Corporate Trust Office of the Trustee, and such notice references the Securities and this Indenture;

(10) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and each agent, custodian and the Person employed to act hereunder;

(11) in no event shall the Trustee be responsible or liable for special, indirect, or consequential loss or damage of any kind whatsoever (including, but not limited to, loss of profit) irrespective of whether the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action;

(12) in no event shall the Trustee be responsible or liable for any failure or delay in the performance of its obligations hereunder arising out of or caused by, directly or indirectly, forces beyond its control, including, without limitation strikes, work stoppages, accidents, acts of war or terrorism, civil or military disturbances, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities; it being understood that the Trustee shall use reasonable efforts which are consistent with accepted practices in the banking industry to resume performance as soon as practicable under the circumstances;

(13) the permissive rights of the Trustee enumerated herein shall not be construed as duties; and

(14) The Trustee may request that the Company deliver a certificate setting forth the name of the individual and/or titles of officers authorized at such time to take specific actions pursuant to this Indenture, which certificate may be signed by any Person authorized to sign an Officers’ Certificate, including any Person specified as so authorized in any such certificate previously delivered and not superseded.

SECTION 603. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of Securities or the proceeds thereof.

 

28


SECTION 604. May Hold Securities.

The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 607 and 612, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent

SECTION 605. Money Held In Trust.

Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company.

If a Default or Event of Default occurs and is continuing, the Trustee shall mail to Holders of Notes a notice of the Default or Event of Default within 90 days after such Event of Default becomes known to the Trustee. Except in the case of a Default in payment on any Security (including the failure to make a mandatory repurchase pursuant hereto), the Trustee may withhold the notice if and so long as a committee of its Responsible Officers in good faith determines that withholding the notice is in the interests of the Holders of the Securities.

SECTION 606. Compensation and Reimbursement.

The Company agrees

(1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as shall be determined to have been caused by its own negligence or bad faith; and

(3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability claim, damage or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

The obligations of the Company under this Section 606 shall survive the resignation or removal of the Trustee, the satisfaction and discharge of this Indenture and the termination of this Indenture.

To secure the Company’s payment obligations in this Section 606, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal, Redemption Price or interest on, particular Securities. Such Lien shall survive the resignation or removal of the Trustee, the satisfaction and discharge of this Indenture and the termination of this Indenture.

When the Trustee incurs expenses or renders services after an Event of Default specified in Section 501(5) or 501(6) occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law.

 

29


SECTION 607. Conflicting Interests.

If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series.

SECTION 608. Corporate Trustee Required; Eligibility.

There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series who may be the Trustee hereunder for Securities of one or more other series. The Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000 and has its Corporate Trust Office in New York, New York. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee with respect to the Securities of any series shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 609. Resignation and Removal; Appointment of Successor.

No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 610.

The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 610 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction (at the expense of the Company) for the appointment of a successor Trustee with respect to the Securities of such series.

The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company.

If at any time:

(1) the Trustee shall fail to comply with Section 607 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

(2) the Trustee shall cease to be eligible under Section 608 and shall fail to resign after written request therefor by the Company or by any such Holder, or

(3) the Trustee shall become incapable of acting or shall be adjudged bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, (A) the Company by a Board Resolution may remove the Trustee with respect to all Securities, or (B) subject to Section 514, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees.

 

30


If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Board Resolution, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 610. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 610, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders of Securities of such series and accepted appointment in the manner required by Section 610, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in Section 106. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office.

SECTION 610. Acceptance of Appointment by Successor.

In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request

 

31


of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.

Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be.

No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.

SECTION 611. Merger, Conversion, Consolidation or Succession to Business.

Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.

SECTION 612. Preferential Collection of Claims Against Company.

The Trustee is subject to TIA § 311(a), excluding any creditor relationship listed in TIA § 311(b). A Trustee who has resigned or been removed shall be subject to TIA § 311(a) to the extent indicated therein.

SECTION 613. Appointment of Authenticating Agent.

The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 306, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustee, and a copy of such instrument shall be promptly furnished to the Company. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section.

Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall he a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided

 

32


such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.

An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment in the manner provided in Section 106 to all Holders of Securities of the series with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section.

The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section.

If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee’s certificate of authentication, an alternative certificate of authentication in the following form:

This is one of the Securities of the series designated therein referred to in the within mentioned Indenture.

The Bank of New York,                      

As Trustee

By:                                                          

        As Authenticating Agent

By:                                                          

        Authorized Officer

If all of the Securities of a series may not be originally issued at one time, and if the Trustee does not have an office capable of authenticating Securities upon original issuance located in a Place of Payment where the Company wishes to have Securities of such series authenticated upon original issuance, the Trustee, if so requested by the Company in writing (which writing need not comply with Section 102 and need not be accompanied by an Opinion of Counsel), shall appoint in accordance with this Section an Authenticating Agent having an office in a Place of Payment designated by the Company with respect to such series of Securities.

ARTICLE SEVEN

HOLDERS’ LISTS AND REPORTS BY TRUSTEE AND COMPANY

SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.

The Company will furnish or cause to be furnished to the Trustee

(1) semi-annually, not later than 15 days after each Regular Record Date or in the case of any series of Securities on which semi-annual interest is not payable, not more than 15 days after such semi-annual dates specified by the Trustee, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of the Regular Record Date or such semi-annual date, as the case may be, and

 

33


(2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar.

SECTION 702. Preservation of Information; Communications to Holders.

The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 701 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 701 upon receipt of a new list so furnished.

The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act.

Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act.

SECTION 703. Reports by Trustee.

The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto.

A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when any Securities are listed on any stock exchange or delisted therefrom.

SECTION 704. Reports by Company.

The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission.

Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee’s receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including the Company’s compliance with any of its covenants hereunder (as to which the Trustee is entitled to rely exclusively on Officers’ Certificates).

ARTICLE EIGHT

CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.

The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person (other than a direct or indirect wholly-owned subsidiary of the Company) and the Company shall not permit any Person (other than a

 

34


direct or indirect wholly-owned subsidiary of the Company) to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:

(1) the Company is the surviving corporation or, in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including all additional amounts, if any payable pursuant to Section 1009) on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed;

(2) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of the Company or any Subsidiary as a result of such transaction as having been incurred by the Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing;

(3) if, as a result of any such consolidation or merger or such conveyance, transfer or lease, properties or assets of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance which would not be permitted by this Indenture, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary effectively to secure the Securities equally and ratably with (or prior to) all indebtedness secured thereby; and

(4) the Company has delivered to the Trustee an Officers’ Certificate stating that such consolidation, merger, conveyance, transfer or lease comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with and, if a supplemental indenture is required in connection with such transaction, an Officers’ Certificate and an Opinion of Counsel stating that such supplemental indenture complies with this Article.

SECTION 802. Successor Substituted.

Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities.

ARTICLE NINE

SUPPLEMENTAL INDENTURES

SECTION 901. Supplemental Indentures Without Consent of Holders.

Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:

 

35


(1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or

(2) to add to the covenants of the Company for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company; or

(3) to add any additional Events of Default for the benefit of the Holders of all or any series of Securities (and if such additional Events of Default are to be for the benefit of less than all series of Securities, stating that such additional Events of Default are expressly being included solely for the benefit of such series); provided, however, that in respect of any such additional Events of Default such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default or may limit the right of the Holders of a majority in aggregate principal amount of that or those series of Securities to which such additional Events of Default apply to waive such default; or

(4) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or

(5) to secure the Securities; or

(6) to establish the form or terms of Securities of any series as permitted by Sections 201 and 301; or

(7) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 610; or

(8) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture, provided that such action pursuant to this Clause (8) shall not adversely affect the interests of the Holders of Securities of any series in any material respect.

SECTION 902. Supplemental Indentures With Consent of Holders.

With the consent of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities of each series affected by such supplemental indenture, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or of modifying in any manner the rights of the Holders of Securities of such series under this Indenture; provided , however , that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or

 

36


any premium payable upon the redemption thereof, or change any obligation of the Company to pay additional amounts pursuant to Section 1009 (except as contemplated by Section 801(1) and permitted by Section 901(1), or reduce the amount of the principal of an Original Issue Discount Security or any other Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), or

(2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or

(3) change any obligation of the Company to maintain an office or agency in the places and for the purposes specified in Section 1002, or

(4) modify any of the provisions of this Section, Section 513 or Section 1009, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; provided , however , that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to “the Trustee” and concomitant changes in this Section and Section 1008, or the deletion of this proviso, in accordance with the requirements of Sections 610 and 901(7).

A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series.

It shall not be necessary for any Act of Holders of Securities under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 903. Execution of Supplemental Indentures.

In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 601) shall be fully protected in relying upon, an Opinion of Counsel and an Officers’ Certificate each stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and that all conditions precedent herein to the execution of the supplemental indenture have been complied with. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee’s owner’s rights, duties or immunities under this Indenture or otherwise.

SECTION 904. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 905. Conformity with Trust Indenture Act.

Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.

 

37


SECTION 906. Reference in Securities to Supplemental Indentures.

Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

ARTICLE TEN

COVENANTS

SECTION 1001. Payment of Principal, Premium and Interest.

The Company covenants and agrees for the benefit of Holders of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture. Each installment of interest on any Security may at the Company’s option be paid by mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 307, to the address of such Person as it appears on the Security Register or by wire transfer to an account of the Person entitled thereto as such account shall be provided to the Security Registrar and shall appear on the Security Register or by transfer through the Automated Clearing House mechanism to an account maintained by such Person with a bank in the continental United States. At the option of the Company, all payments of principal may be paid by official bank check to the registered Holder of the Security or other person entitled thereto against surrender of such Security.

SECTION 1002. Maintenance of Office or Agency.

The Company will maintain in each Place of Payment for any series an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency in respect of any series of Securities or shall fail to furnish the Trustee with the address thereof, such presentations and surrenders of Securities of that series may be made and notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the same as its agent to receive such respective presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided , however , that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency.

SECTION 1003. Money for Securities Payments to Be Held in Trust.

If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit

 

38


with a Paying Agent a sum sufficient to pay the principal and any premium or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.

The Company will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series.

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or any premium or interest on any Security of any series and remaining unclaimed for two years after such principal and any premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided , however , that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in an Authorized Newspaper in each Place of Payment, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

SECTION 1004. Statement by Officers as to Default.

The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers’ Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. The Company shall deliver to the Trustee, as soon as reasonably practicable and in any event within 20 days after the Company becomes aware of the occurrence of any Event of Default or an event which, with notice or the lapse of time or both, would constitute an Event of Default, an Officers’ Certificate setting forth the details of such Event of Default or default.

SECTION 1005. Existence.

Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided , however , that the Company shall not be required to preserve any such right or franchise if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the ability of the Company to make payments hereunder.

 

39


SECTION 1006. Maintenance of Properties.

The Company will cause all properties used or useful in the conduct of its business or the business of any Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided , however , that nothing in this Section shall prevent the Company from discontinuing the operation or maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the ability of the Company to make payments hereunder.

SECTION 1007. Payment of Taxes and Other Claims.

The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all taxes, assessments and governmental charges levied or imposed upon the Company or any Subsidiary or upon the income, profits or property of the Company or any Subsidiary, and (2) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Subsidiary; provided , however , that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith.

SECTION 1008. Waiver of Certain Covenants.

Except as otherwise specified as contemplated by Section 301 for Securities of such series, the Company may, with respect to the Securities of any series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to Section 301(27), 901(2) or 901(7) for the benefit of the Holders of such series if before the time for such compliance the Holders of at least 50% in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect.

SECTION 1009. Additional Amounts.

If the Securities of a series provide for the payment of additional amounts, the Company will pay to the Holder of any Security of such series additional amounts as provided therein. Whenever in this Indenture there is mentioned, in any context, the payment of the principal of or any premium or interest on, or in respect of, any Security of any series or the net proceeds received on the sale or exchange of any Security of any series, such mention shall be deemed to include mention of the payment of additional amounts provided for in this Section to the extent that, in such context, additional amounts are, were or would be payable in respect thereof pursuant to the provisions of this Section and express mention of the payment of additional amounts (if applicable) in any provisions hereof shall not be construed as excluding additional amounts in those provisions hereof where such express mention is not made.

If the Securities of a series provide for the payment of additional amounts, at least 10 days prior to the first Interest Payment Date with respect to that series of Securities (or if the Securities of that series will not bear interest prior to Maturity, the first day on which a payment of principal and any premium is made), and at least 10 days prior to each date of payment of principal and any premium or interest if there has been any change with respect to the matters set forth in the below-mentioned Officers’ Certificate, the Company will furnish the Trustee and the Company’s principal Payment Agent or Paying Agents, if other than the Trustee, with an Officers’ Certificate instructing the Trustee and such Paying Agent or Paying Agents whether such payment of principal of and any premium or interest on the Securities of that series shall be made to Holders of Securities of that series who are United States Aliens without withholding for or on account of any tax, assessment or other governmental charge described in the Securities of that series. If

 

40


any such withholding shall be required, then such Officers’ Certificate shall specify by country the amount, if any, required to be withheld on such payments to such Holders of Securities and the Company will pay to the Trustee or such Paying Agent the additional amounts required by this Section. The Company covenants to indemnify the Trustee and any Paying Agent for, and to hold them harmless against, any loss, liability or expense reasonably incurred without negligence or bad faith on their part arising out of or in connection with actions taken or omitted by any of them in reliance on any Officers’ Certificate furnished pursuant to this Section.

ARTICLE ELEVEN

REDEMPTION OF SECURITIES

SECTION 1101. Applicability of Article.

Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 301 for such Securities) in accordance with this Article.

SECTION 1102. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities shall be evidenced by a Board Resolution or in another manner specified as contemplated by Section 301 for such Securities. In case of any redemption at the election of the Company of less than all the Securities of any series (including any such redemption affecting only a single Security), the Company shall, at least 45 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed (unless all of the Securities of a specified tenor are to be redeemed). In the case of any redemption of Securities (i) prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, or (ii) pursuant to an election of the Company which is subject to a condition specified in the terms of such Securities, the Company shall furnish the Trustee with an Officers’ Certificate evidencing compliance with such restriction or condition.

SECTION 1103. Selection by Trustee of Securities to Be Redeemed.

If less than all the Securities of any series are to be redeemed (unless all the Securities of such series and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series or of the principal amount of global securities of such series. If so specified in the Securities of a series, partial redemptions must be in an amount not less than $1,000 principal amount of Securities.

The Trustee shall promptly notify the Company in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed.

The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

 

41


For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.

SECTION 1104. Notice of Redemption.

Notice of redemption shall be given in the manner provided in Section 106 to the Holders of Securities to be redeemed not less than 30 nor more than 60 days prior to the Redemption Date.

All notices of redemption shall state:

(1) the Redemption Date,

(2) the Redemption Price,

(3) if less than all the Outstanding Securities of any series consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities of any series consisting of a single Security are to be redeemed, the principal amount of the particular Security to be redeemed,

(4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,

(5) the place or places where such Securities are to be surrendered for payment of the Redemption Price,

(6) that the redemption is for a sinking fund, if such is the case; and

(7) applicable CUSIP numbers, if any.

A notice of redemption published as contemplated by Section 106 need not identify particular Registered Securities to be redeemed.

Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company and shall be irrevocable.

SECTION 1105. Deposit of Redemption Price.

Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date.

SECTION 1106. Securities Payable on Redemption Date.

Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided , however , that, unless otherwise specified as contemplated by Section 301, installments of interests on Securities whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor

 

42


Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307.

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

SECTION 1107. Securities Redeemed in Part.

Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.

ARTICLE TWELVE

SINKING FUNDS

SECTION 1201. Applicability of Article.

The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by Section 301 for such Securities.

The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a “mandatory sinking fund payment,” and any payment in excess of such minimum amount provided for by the terms of such Securities is herein referred to as an “optional sinking fund payment.” If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 1202. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities.

SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.

The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply, as a credit, Securities of a series which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent provided for by the terms of such Securities; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed, for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

SECTION 1203. Redemption of Securities for Sinking Fund.

Not less than 45 days prior (unless a shorter period shall be satisfactory to the Trustee) to each sinking fund payment date for any Securities, the Company will deliver to the Trustee an Officers’ Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities pursuant to Section 1202 and will also deliver to the Trustee any Securities to be so delivered. Not less than 45 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 1103 and cause notice of the redemption

 

43


thereof to be given in the name of and at the expense of the Company in the manner provided in Section 1104. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Sections 1106 and 1107.

ARTICLE THIRTEEN

DEFEASANCE AND COVENANT DEFEASANCE

SECTION 1301. Company’s Option to Effect Defeasance or Covenant Defeasance.

The Company may at its option, at any time elect to have either Section 1302 or Section 1303 applied to the Outstanding Securities of any series upon compliance with the conditions set forth below in this Article Thirteen.

SECTION 1302. Defeasance and Discharge.

Upon the Company’s exercise of the option provided in Section 1301 applicable to this Section, the Company shall be deemed to have been discharged from its obligations with respect to the Outstanding Securities of any series on the date the conditions set forth below are satisfied (hereinafter, “defeasance”). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities of such series and to have satisfied all its other obligations under the Securities of such series and this Indenture insofar as the Securities of such series are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of the Securities of such series to receive, solely from the trust fund described in Section 1304 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on the Securities of such series when such payments are due, (B) the Company’s obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Thirteen. Subject to compliance with this Article Thirteen, the Company may exercise its option under this Section 1302 notwithstanding the prior exercise of its option under Section 1303.

SECTION 1303. Covenant Defeasance.

Upon the Company’s exercise of the option provided in Section 1301 applicable to this Section, (i) the Company shall be released from its obligations with respect to the Securities of such Series under Section 801, Sections 1005 through 1009, inclusive, and any covenants provided pursuant to Section 301(27), 901(2) or 901(7) for the benefit of the Holders of such Securities and (ii) the occurrence of an event specified in Sections 501(3) or (4) shall not be deemed to be an Event of Default on and after the date the conditions set forth below are satisfied (hereinafter, “covenant defeasance”). For this purpose, such covenant defeasance means that the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or clause whether directly or indirectly by reason of any reference elsewhere herein to any such Section or clause or by reason of any reference in any such Section or clause to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby.

SECTION 1304. Conditions to Defeasance or Covenant Defeasance.

The following shall be the conditions to application of either Section 1302 or Section 1303 to the then Outstanding Securities of any series:

(1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 609 who shall agree to comply with the provisions of this Article Thirteen applicable to it) as trust funds in trust for the purpose of making the following payments specifically pledged as security for, and dedicated solely to, the benefit of the Holders of the Securities of such series, (A) money in an amount, or (B) Government Obligations which through the scheduled payment of principal and interest in respect

 

44


thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and each installment of interest on the Securities of such series on the Stated Maturity of such principal or installment of interest in accordance with the terms of this Indenture and of the Securities of such series. For this purpose, “Government Obligations” means, with respect to any series of Securities, securities that are (x) direct obligations of the government that issued the currency in which such series is denominated (or, if such series is denominated in euro, the direct obligations of any government that is a member of the European Monetary Union) for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of such government the payment of which is unconditionally guaranteed as a full faith and credit obligation by such government, which, in either case, are not callable or redeemable at the option of the issuer thereof and shall also include a depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any Government Obligation where the relevant government is the United States of America or a specific payment of principal of or interest on any such Government Obligation held by such custodian for the account of the holder of such depositary receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of such Government Obligation or the specific payment of principal of or interest on such Government Obligation evidenced by such depository receipt.

(2) In the event of an election to have Section 1302 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since the date of this Indenture there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred.

(3) In the event of an election to have Section 1303 apply to any Securities or any series of Securities, as the case may be, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect the that Holders of the Outstanding Securities of such series will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and covenant defeasance had not occurred.

(4) The Company shall have delivered to the Trustee an Officer’s Certificate to the effect that the Securities of such series, if then listed on any securities exchange, will not be delisted as a result of such deposit.

(5) No Event of Default or event which with notice or lapse of time or both would become an Event of Default with respect to the Securities of such series shall have occurred and be continuing on the date of such deposit or, in the event of an election to have Section 1302 apply to any Securities or any series of Securities, insofar as subsections 501(5) and (6) are concerned, at any time during the period ending on the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period).

(6) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest as defined in Section 607 and for purposes of the Trust Indenture Act with respect to any securities of the Company.

 

45


(7) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which it is bound.

(8) The Company shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 1302 or the covenant defeasance under Section 1303 (as the case may be) have been complied with.

(9) Such defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the Investment Company Act, or such trust shall be qualified under such act or exempt from regulation thereunder.

SECTION 1305. Deposited Money and Government Obligations to be Held in Trust; Other Miscellaneous Provisions.

Subject to the provisions of the last paragraph of Section 1003, all money and Government Obligations (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee (solely for purposes of this Section and Section 1306, the Trustee and any such other trustee are referred to collectively, for purposes of this Section 1305, as the “Trustee”) pursuant to Section 1304 in respect of the Securities of such series shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities of such series and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of the Securities of such series, of all sums due and to become due thereon in respect of principal (and premium, if any) and interest, but such money need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the Government Obligations deposited pursuant to Section 1304 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities.

Anything in this Article Thirteen to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Obligations held by it as provided in Section 1304 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance.

SECTION 1306. Reinstatement.

If the Trustee or the Paying Agent is unable to apply any money in accordance with Section 1302 or 1303 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company’s obligations under this Indenture and the Securities of such series shall be revived and reinstated as though no deposit had occurred pursuant to this Article Thirteen until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1302 or 1303; provided , however , that if the Company makes any payment of principal of (and premium, if any) or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of the Securities of such series to receive such payment from the money held by the Trustee or the Paying Agent.

 

46


ARTICLE FOURTEEN

MEETING OF HOLDERS OF SECURITIES

SECTION 1401. Purposes for which Meetings may be Called.

A meeting of Holders of Securities of any or all series of Securities may be called at any time and from time to time pursuant to this Article to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be made, given to taken by Holders of Securities of such series.

SECTION 1402. Call, Notice and Place of Meetings.

(a) The Trustee may at any time call a meeting of Holders of Securities of any series for any purposes specified in Section 1401, to be held at any such time and at such place in the Borough of Manhattan, the City of New York as the Trustee shall determine. Notice of every meeting of Holders of Securities of any series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given, in the manner provided in Section 106, not less than 21 nor more than 180 days prior to the date fixed for the meeting.

(b) In case at any time the Company, pursuant to a Board Resolution, or the Holders of at least 10% in principal amount of the Outstanding Securities of any series shall have requested the Trustee to call a meeting of the Holders of Securities of such series for any purpose specified in Section 1401, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have made the first publication of the notice of such meeting within 21 days after receipt of such request or shall not thereafter proceed to cause the meeting to be held as provided herein, then the Company or the Holders of Securities of such series in the amount above specified, as the case may be, may determine the time and the place in the Borough of Manhattan, the City of New York for such meeting and may call such meeting for such purposes by giving notice thereof as provided in subsection (a) of this Section.

SECTION 1403. Persons entitled to Vote at Meetings.

Upon the calling of a meeting of Holders with respect to the Securities of a series all or part of which are represented by a Security, a record date shall be established for determining Holders of Outstanding Securities of such series entitled to vote at such meeting, which record date shall be the close of business on the day the notice of the meeting of Holders is given in accordance with Section 1402. The Holders on such record date, and their designated proxies, and only such Persons, shall be entitled to vote at such meeting of Holders. To be entitled to vote at any meeting of Holders, a Person shall (a) be a Holder of one or more Securities or (b) be a Person appointed by an instrument in writing as proxy by a Holder of one or more Securities; provided , however , that in the case of any meeting of Holders with respect to the Securities of a series all or part of which are represented by a Security, only Holders, or their designated proxies, of record on the record date established pursuant to Section 1403 hereof shall be entitled to vote at such meeting. The only Persons who shall be entitled to be present or to speak at any meeting of Holders shall be the Persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel.

SECTION 1404. Quorum; Action.

The Persons entitled to vote a majority in principal amount of the Outstanding Securities of a series shall constitute a quorum for a meeting of Holders of Securities of such series; provided , however , that if any action is to be taken at such meeting with respect to a consent or waiver which this Indenture expressly provides may be given by the Holders of not less than 50% in principal amount of the Outstanding Securities of a series, the Persons entitled to vote 50% in principal amount of the Outstanding Securities of such series shall constitute a quorum. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of Holders of Securities of such series, be dissolved. In any other case the meeting may be adjourned for a period of not less than

 

47


10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such adjourned meeting. Notice of the reconvening of any adjourned meeting shall be given as provided in Section 1402(a), except that such notice need be given only once not less than five days prior to the date on which the meeting is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting shall state expressly the percentage, as provided above, of the principal amount of the Outstanding Securities of such series which shall constitute a quorum.

Except as limited by the proviso to the first paragraph of Section 902, any resolution presented to a meeting or adjourned meeting duly reconvened at which a quorum is present as aforesaid may be adopted by the affirmative vote of the Holders of a majority in principal amount of the Outstanding Securities of that series; provided , however , that, except as limited by the proviso to the first paragraph of Section 902, any resolution with respect to any consent or waiver which this Indenture expressly provides may be given by the Holders of not less than 50% in principal amount of the Outstanding Securities of a series may be adopted at a meeting or an adjourned meeting duly convened and at which a quorum is present as aforesaid only by the affirmative vote of the Holders of 50% in principal amount of the Outstanding Securities of that series; and provided , further , that, except as limited by the proviso to the first paragraph of Section 902, any resolution with respect to any request, demand, authorization, direction, notice, consent, waiver or other action which this Indenture expressly provides may be made, given or taken by the Holders of a specified percentage, which is less than a majority, in principal amount of the Outstanding Securities of a series may be adopted at a meeting or any adjourned meeting duly reconvened and at which a quorum is present as aforesaid by the affirmative vote of the Holders of such specified percentage in principal amount of the Outstanding Securities of that series.

Any resolution passed or decision taken at any meeting of Holders of Securities of any series duly held in accordance with this Section shall be binding on all the Holders of Securities of such series and the related coupons, whether or not present or represented at the meeting.

SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of Meetings.

(a) Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Holders of Securities of a series in regard to proof of the holding of Securities of such series and of the appointment of proxies and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall deem appropriate. Except as otherwise permitted or required by any such regulations, the holding of Securities shall be proved in the manner specified in Section 104 and the appointment of any proxy shall be proved in the manner specified in Section 104 or by having the signature of the person executing the proxy witnessed or guaranteed by any trust company, bank or banker authorized by Section 104. Such regulations may provide that written instruments appointing proxies, regular on their face, may be presumed valid and genuine without the proof specified in Section 104 or other proof.

(b) The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Holders of Securities as provided in Section 1402(b), in which case the Company or the Holders of Securities of the series calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting.

(c) At any meeting, each Holder of a Security of such series or proxy shall be entitled to one vote for each $1,000 principal amount of the Outstanding Securities of such series held or represented by him; provided , however , that no vote shall be cast or counted at any meeting in respect of any Security challenged as not Outstanding and ruled by the chairman of the meeting to be not Outstanding. The chairman of the meeting shall have no right to vote, except as a Holder of a Security of such series or proxy.

 

48


(d) Any meeting of Holders of Securities of any series duly called pursuant to Section 1402 at which a quorum is present may be adjourned from time to time by Persons entitled to vote a majority in principal amount of the Outstanding Securities of such series represented at the meeting; and the meeting may be held as so adjourned without further notice.

SECTION 1406. Counting Votes and Recording Action of Meetings.

The vote upon any resolution submitted to any meeting of Holders of Securities of any series shall be by written ballots on which shall be subscribed the signatures of the Holders of Securities of such series or of their representatives by proxy and the principal amounts and serial numbers of the Outstanding Securities of such series held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record, at least in duplicate, of the proceedings of each meeting of Holders of Securities of any series shall be prepared by the secretary of the meeting and there shall be attached to said record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was given as provided in Section 1402 and, if applicable, Section 1404. Each copy shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one such copy shall be delivered to the Company, and another to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

ARTICLE FIFTEEN

IMMUNITY OF INCORPORATIONS, STOCKHOLDERS, OFFICERS

DIRECTORS AND EMPLOYEES

SECTION 1501. Exemption from Individual Liability.

No recourse under or upon any obligation, covenant or agreement of this Indenture, or of any Security, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator, stockholder, officer, director or employee, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations of the Company, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers, directors or employees, as such, of the Company or of any successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such incorporator, stockholder, officer, director or employee, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in any of the Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities.

 

49


ARTICLE SIXTEEN

MISCELLANEOUS PROVISIONS

SECTION 1601. Successors and Assigns of Company Bound by Indenture.

All the covenants, stipulations, promises and agreements in this Indenture contained by or in behalf of the Company shall bind its respective successors and assigns, whether so expressed or not

 

50


IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated: September 17, 2007

BLACKROCK, INC.

By: /s/ A NN M ARIE P ETACH                             

Name: Ann Marie Petach

Title: Managing Director and Head of Business Finance

 

51


IN WITNESS WHEREOF, the Trustee has caused this instrument to be duly executed.

Dated: September 17, 2007

THE BANK OF NEW YORK, as Trustee

By: /s/ F RANCA M. F ERRERA                     

Name: Franca M. Ferrera

Title: Assistant Vice President

 

52


EXHIBIT A

Form of Face of Registered Security

 

No.                                          

   $                                     

BlackRock, Inc., a corporation duly organized and existing under the laws of Delaware (herein called the “Company,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________________ , or registered assigns, the principal sum of __________________ Dollars on _____________________ [if applicable insert: at an interest rate of _____% per annum from ___________, ]. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the ___________ or __________ (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture].

[If the Security is not to bear interest prior to Maturity, insert — The principal of this Security shall not bear interest except in the case of a default in payment of principal upon acceleration, upon redemption or at Stated Maturity and in such case the overdue principal and any overdue premium shall bear interest at the rate of _____% per annum (to the extent that the payment of such interest shall be legally enforceable), from the dates such amounts are due until they are paid or made available for payment. Interest on any overdue principal or premium shall be payable on demand.

Payment of the principal of (and premium, if any) and any such interest on this Security will be made at the office or agency of the Company maintained for that purpose in _________, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided , however , that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register.

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereof has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

 

53


IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed.

Dated:

  
  
By:    

Name:

Title:

 

54


EXHIBIT A1

Form of Reverse of Security

This Security is one of a duly authorized issue of securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of _________, 2007 (herein called the “Indenture,” which term shall have the meaning assigned to it in such instrument), between the Company and ___________, as Trustee (herein called the “Trustee,” which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee[, the holders of Senior Debt] and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. [This Security is one of the series designated on the face hereof , limited in aggregate principal amount to $            .]

[ If applicable, insert — The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, [if applicable, insert — (1) on_______________in any year commencing with the year _____________and ending with the year _____________ through operation of the sinking fund for this series at a Redemption Price equal to 100% of the principal amount, and (2)] at any time [ if applicable, insert — (1) on or after ______________ , 20__], as a whole or in part, at the election of the Company, at the following Redemption Prices (expressed as percentages of the principal amount): If redeemed [if applicable, insert — on or before _________________ %, and if redeemed] during the 12-month period beginning ______________ of the years indicated,

 

Year

   Redemption
Price
   Year    Redemption
Price
        
        
        
        

and thereafter at a Redemption Price equal to ________% of the principal amount, together in the case of any such redemption [if applicable, insert — (whether through operation of the sinking fund or otherwise)] with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]

[If applicable, insert — The Securities of this series are subject to redemption upon not less than 30 days’ notice by mail, (1) on ______________in any year commencing with the year ____________and ending with the year • through operation of the sinking fund for this series at the Redemption Prices for redemption through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below, and (2) at any time [if applicable, insert — on or after______________], as a whole or in part, at the election of the Company, at the Redemption Prices for redemption otherwise than through operation of the sinking fund (expressed as percentages of the principal amount) set forth in the table below: If redeemed during the 12-month period beginning _____________of the years indicated,

 

Year

   Redemption Price For
Redemption Through Operation
of the Sinking Fund
   Redemption Price For
Redemption Otherwise Than
Through Operation of the
Sinking Fund
     
     
     
     

 

55


and thereafter at a Redemption Price equal to _____________% of the principal amount, together in the case of any such redemption (whether through operation of the sinking fund or otherwise) with accrued interest to the Redemption Date, but interest installments whose Stated Maturity is on or prior to such Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Dates referred to on the face hereof, all as provided in the Indenture.]

[If applicable, insert — Notwithstanding the foregoing, the Company may not, prior to __________________redeem any Securities of this series as contemplated by [ if applicable, insert — Clause (2) of] the preceding paragraph as a part of, or in anticipation of, any refunding operation by the application, directly or indirectly, of moneys borrowed having an interest cost to the Company (calculated in accordance with generally accepted financial practice) of less than __________% per annum.]

[If applicable, insert — The sinking fund for this series provides for the redemption on __________________ in each year beginning with the year___________ and ending with the year_______ of [if applicable, insert — not less than $_________ (“mandatory sinking fund”) and not more than] $___________ aggregate principal amount of Securities of this series. Securities of this series acquired or redeemed by the Company otherwise than through [if applicable, insert — mandatory] sinking fund payments may be credited against subsequent [if applicable, insert — mandatory] sinking fund payments otherwise required to be made [if applicable, insert — , in the inverse order in which they become due].]

[If the Security is subject to redemption of any kind, insert — In the event of redemption of this Security in part only, a new Security or Securities of this series and of like tenor for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof.]

[If applicable, insert — The Indenture contains provisions for defeasance at any time of [the entire indebtedness of this Security] [or] [certain restrictive covenants and Events of Default with respect to this Security] [, in each case] upon compliance with certain conditions set forth in the Indenture.]

[If the Security is not an Original Issue Discount Security, insert — If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.]

[If the Security is an Original Issue Discount Security, insert — If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to — insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal, premium and interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company’s obligations in respect of the payment of the principal of and premium and interest, if any, on the Securities of this series shall terminate.]

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of 50% in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee

 

56


written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Securities of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Securities of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of and any premium and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series and of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities of this series are issuable only in registered form without coupons in denominations of $ __________ and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company or the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

This Security shall be governed by and construed in accordance with the law of the State of New York.

 

57

Exhibit 12.1

RATIO OF EARNINGS TO FIXED CHARGES

(unaudited)

(dollars in thousands)

 

     December 31,  
     2007     2006     2005     2004     2003  

Pre-tax income 1

   $ 1,459,104     $ 512,065     $ 372,466     $ 195,405     $ 250,649  

Add: Fixed charges

     76,872       22,393       15,236       5,590       5,211  

Distributions from equity method investees

     23,460       1,939       2,620       2,276       3,144  

Less: Income from equity method investees

     (83,894 )     (5,659 )     (11,526 )     (2,549 )     (4,912 )
                                        

Pre-tax income before fixed charges

   $ 1,475,542     $ 530,738     $ 378,796     $ 200,722     $ 254,092  
                                        

Fixed charges:

          

Interest expense

   $ 49,412     $ 9,916     $ 7,924     $ 835     $ 720  

Interest expense on uncertain tax positions 2

     1,727       —         —         —         —    

Portion of rent representative of interest

     25,733       12,477       7,312       4,755       4,491  
                                        

Total fixed charges

   $ 76,872     $ 22,393     $ 15,236     $ 5,590     $ 5,211  
                                        

Ratio of earnings to fixed charges

     19.19       23.70       24.86       35.91       48.76  
                                        

 

1

Pre-tax income includes operating income and non-operating income, net of non-controlling interest.

2

Interest expense on uncertain tax positions, in accordance with FIN. No. 48, has been recorded within income tax expense on the consolidated statements of income.

Exhibit 21.1

SUBSIDIARIES OF REGISTRANT

The following table lists the direct and indirect subsidiaries of BlackRock, Inc. as of December 31, 2007.

 

Name of Subsidiary

  

Jurisdiction/State of Incorporation

BlackRock Advisors, LLC    Delaware
BAA Holdings, LLC    Delaware
BlackRock Advisors Holdings, Inc.    Pennsylvania
BlackRock Advisors Singapore Pte. Ltd.    Singapore
BlackRock Asset Management U.K. Limited    United Kingdom
BlackRock AV, Inc.    Delaware
BlackRock Capital Management, Inc.    Delaware
BlackRock Capital Markets, LLC    Delaware
BlackRock Cayco Limited    Cayman Islands
BlackRock Cayman Company    Cayman Islands
BlackRock Cayman Newco Limited    Cayman Islands
BlackRock (Channel Islands) Limited    Jersey
BlackRock Co., Ltd.    Japan
BlackRock (Deutschland) GmbH    Germany

BlackRock (Deutschland) GmbH – Vienna representative office

   Austria
BlackRock Employee Trust Co. Limited    United Kingdom
BlackRock European Holdings S. a r.l.    Luxembourg
BlackRock Executor & Trustee Co. Limited    United Kingdom
BlackRock Financial Management, Inc.    Delaware
BlackRock Financing, LLC    Delaware
BlackRock Finco, LLC    Delaware
BlackRock Finco UK, Ltd.    United Kingdom
BlackRock First Partner Limited    Jersey
BlackRock Funding, Inc.    Delaware
BlackRock Funding International, Ltd.    Cayman Islands
BlackRock Fund Management Company S.A.    Luxembourg
BlackRock Fund Managers (Isle of Man) Limited    Isle of Man
BlackRock Fund Managers Limited    United Kingdom
BlackRock Global Real Estate Opportunity Fund, LLC    Delaware

BlackRock Global Real Estate Opportunity Fund (UK) LP Limited

   United Kingdom
BlackRock Group Limited    United Kingdom
BlackRock Holdco Limited    Cayman Islands
BlackRock HK Holdco Limited    Hong Kong
BlackRock Holdco 1, LLC    Delaware
BlackRock Holdco 2, Inc.    Delaware
BlackRock Holdco 3, LLC    Delaware
BlackRock (Hong Kong) Limited    Hong Kong
BlackRock HPB Management LLC    Delaware
BlackRock India Private Ltd.    Mumbai, India
BlackRock (Institutional) Canada, Ltd.    Canada


SUBSIDIARIES OF REGISTRANT (Continued)

 

Name of Subsidiary

  

Jurisdiction/State of Incorporation

BlackRock Institutional Management Corporation    Delaware
BlackRock Insurance PCC Limited    Isle of Man
BlackRock International, Ltd.    United Kingdom
BlackRock International, Ltd. – Munich branch    Germany
BlackRock International Holdings, Inc.    Delaware
BlackRock Investments, Inc.    Delaware
BlackRock Investment Management (Australia) Limited    Victoria, Australia
BlackRock Investment Management B.V.    Netherlands
BlackRock Investment Management (Dublin) Limited    Dublin, Ireland
BlackRock Investment Management International Limited    United Kingdom
BlackRock Investment Management, LLC    Delaware
BlackRock Investment Management (Singapore) Ltd.    Singapore
BlackRock Investment Management (UK) Limited    United Kingdom

BlackRock Investment Management (UK) Limited – Amsterdam Branch

   Netherlands

BlackRock Investment Management (UK) Limited – Beijing Representative Office

  

People’s Republic of China

BlackRock Investment Management (UK) Limited – Brussels Branch

  

Belgium

BlackRock Investment Management (UK) Limited – Madrid Branch

  

Spain

BlackRock Investment Management (UK) Limited – Milan Branch

  

Milan, Italy

BlackRock Investment Management (UK) Limited – Paris Branch

  

France

BlackRock Investment Management (UK) Limited – Seoul Representative Office

  

Seoul, Republic of Korea

BlackRock Investment Management (UK) Limited – Stockholm Branch

  

Sweden

BlackRock Investment Management (UK) Limited – Zurich Branch

  

Zurich, Switzerland

BlackRock (Isle of Man) Holdings Limited    Isle of Man
BlackRock (Isle of Man) Limited    Isle of Man
BlackRock Japan Co., Ltd.    Japan
BlackRock Japan Holdings GK    Japan
BlackRock Jersey Holdco Limited    Jersey
BlackRock Kelso Capital Advisors, LLC    Delaware
BlackRock Lux Finco S. a r.l.    Luxembourg
BlackRock (Luxembourg) S.A.    Luxembourg
BlackRock (Netherlands) B.V.    Netherlands
BlackRock Operations (Luxembourg) S. a r.l.    Luxembourg
BlackRock Pensions Limited    United Kingdom
BlackRock Pension Nominees Limited    United Kingdom
BlackRock Portfolio Holdings, Inc.    Delaware
BlackRock Portfolio Investments, LLC    Delaware
BlackRock RE Management Company (Luxembourg) S.A.    Luxembourg
BlackRock Second Partner Limited    Jersey
BlackRock Realty Advisors, Inc.    Delaware
BlackRock Singapore Holdco Pte. Ltd    Singapore
BlackRock (Taiwan) Limited    Taipei, Taiwan


SUBSIDIARIES OF REGISTRANT (Continued)

 

Name of Subsidiary

  

Jurisdiction/State of Incorporation

BlackRock Trident Holding Company Ltd.    Ireland
BlackRock UK 1 LP    United Kingdom
BlackRock (Uruguay) S.A.    Uruguay
BlackRock US Newco, Inc.    Delaware
BLK Isle of Man Holdings Limited    Isle of Man
Grosvenor Ventures Limited    United Kingdom
Grosvenor Alternate Partner Limited    United Kingdom
Mercury Carry Company Ltd. (Isle of Man)    Isle of Man
Mercury Private Equity MUST 3 (Jersey) Limited    Jersey
Metric Property Management, Inc.    Delaware
Portfolio Administration & Management Ltd.    Cayman Islands
Princeton Administrators, LLC    Delaware
St. Albans House Nominees (Jersey) Ltd.    Jersey
SSRM Holdings, Inc.    Delaware
State Street Research & Management Company    Delaware
State Street Research Investment Services, Inc.    Massachusetts
Tower General Partner Limited    United Kingdom
The Tower Nominees No. 1 Limited    United Kingdom
The Tower Nominees No. 2 Limited    United Kingdom
The Tower Nominees No. 3 Limited    Jersey
Tower Management Services Limited    United Kingdom
Trident Merger, LLC    Delaware
Wimco Nominees Limited    United Kingdom

 

* Certain subsidiaries that are not significant have been omitted.

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in Registration Statement Nos. 333-139457 and 333-145976 on Form S-3 and Registration Statement No. 333-137708 on Form S-8 of BlackRock, Inc. of our reports dated February 28, 2008, relating to the consolidated financial statements BlackRock, Inc., and the effectiveness of BlackRock, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of BlackRock, Inc. for the year ended December 31, 2007.

 

/s/ Deloitte & Touche LLP

 
New York, New York  
February 28, 2008  

Exhibit 31.1

CEO CERTIFICATION

I, Laurence D. Fink, certify that:

 

1. I have reviewed this Annual Report on Form 10-K, for the fiscal year ended December 31, 2007 of BlackRock, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)), for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

    By:  

/s/ Laurence D. Fink

   
Date: February 28, 2008     Laurence D. Fink  
    Chairman & Chief Executive Officer  

Exhibit 31.2

CFO CERTIFICATION

I, Paul L. Audet, certify that:

 

1. I have reviewed this Annual Report on Form 10-K, for the fiscal year ended December 31, 2007 of BlackRock, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)), for the registrant and have:

 

  (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

 

  (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

    By:  

/s/ Paul L. Audet

   
Date: February 28, 2008     Paul L. Audet  
    Managing Director & Acting Chief Financial Officer  

Exhibit 32.1

Certification of CEO and CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of BlackRock, Inc. (the “Company”) for the annual period ending December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Laurence D. Fink, as Chief Executive Officer of the Company, and Paul L. Audet, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

/s/ Laurence D. Fink

Name:   Laurence D. Fink
Title:   Chief Executive Officer
Date:   February 28, 2008

/s/ Paul L. Audet

Name:   Paul L. Audet
Title:   Acting Chief Financial Officer
Date:   February 28, 2008