There were no transfers between levels during the year ended December 31, 2012.
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Notes to Financial Statements
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1. Organization and Significant Accounting Policies:
BlackRock Pacific
Fund, Inc. (the Fund) is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a non-diversified, open-end management investment company. The Fund is organized as a Maryland corporation. The
Funds financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP), which may require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities in the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Fund offers multiple
classes of shares. Institutional Shares are sold without a sales charge and only to certain eligible investors. Investor A Shares are generally sold with a front-end sales charge. Investor B and Investor C Shares may be subject to a CDSC. Class R
Shares are sold without a sales charge and only to certain retirement and other similar plans. All classes of shares have identical voting, dividend, liquidation and other rights and the same terms and conditions, except that Investor A, Investor B,
Investor C and Class R Shares bear certain expenses related to the shareholder servicing of such shares, and Investor B, Investor C and Class R Shares also bear certain expenses related to the distribution of such shares. Investor B Shares
automatically convert to Investor A Shares after approximately eight years. Investor B Shares are only available through exchanges and dividend reinvestments by existing shareholders and for purchase by certain qualified employee benefit plans. Each
class has exclusive voting rights with respect to matters relating to its shareholder servicing and distribution expenditures (except that Investor B shareholders may vote on material changes to the Investor A distribution and service plan).
The following is a summary of significant accounting policies followed by the Fund:
Valuation: US GAAP defines fair value as the price the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market
participants at the measurement date. The Fund determines the fair values of its financial instruments at market value using independent dealers or pricing services under policies approved by the Board of Directors of the Fund (the
Board). The BlackRock Global Valuation Methodologies Committee (the Global Valuation Committee) is the committee formed by management to develop global pricing policies and procedures and to provide oversight of the pricing
function for the Fund for all financial instruments.
Equity investments traded on a recognized securities exchange or the NASDAQ Global Market System
(NASDAQ) are valued at the last reported sale price that day or the NASDAQ official closing price, if applicable. For equity investments traded on more than one exchange, the last reported sale price on the exchange where the stock is
primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last available bid (long positions) or ask (short positions) price. If no bid or ask price is available, the
prior days price will be used, unless it is determined that such prior days price no longer reflects the fair value of the security. Investments in open-end registered investment companies are valued at NAV each business day. Short-term
securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair value.
The Fund values its investments in
BlackRock Liquidity Series, LLC Money Market Series (the Money Market Series) at fair value, which is ordinarily based upon its pro rata ownership in the underlying funds net assets. The Money Market Series seeks current income
consistent with maintaining liquidity and preserving capital. Although the Money Market Series is not registered under the 1940 Act, its investments will follow the parameters of investments by a money market fund that is subject to Rule 2a-7 under
the 1940 Act. The Fund may withdraw up to 25% of its investment daily, although the manager of the Money Market Series, in its sole discretion, may permit an investor in the Money Market Series to withdraw more than 25% on any one day.
Securities and other assets and liabilities denominated in foreign currencies are translated into US dollars using exchange rates determined as of the close of business
on the New York Stock Exchange (NYSE). Foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the
settlement date of the contract is an interim date for which quotations are not available.
Exchange-traded options are valued at the mean between the last bid and
ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the
prior days price will be used, unless it is determined that the prior days price no longer reflects the fair value of the option. Over-the-counter (OTC) options are valued by an independent pricing service using a
mathematical model, which incorporates a number of market data factors, such as the trades and prices of the underlying instruments.
In the event that application
of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee or its
delegate, in accordance with a policy approved by the Board as reflecting fair value (Fair Value Assets). When determining the price for Fair Value Assets, the Global Valuation Committee, or its delegate, seeks to determine the price
that the Fund might reasonably expect to receive from the current sale of that asset in an arms-length trans-
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20
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|
BLACKROCK PACIFIC FUND, INC.
|
|
DECEMBER 31, 2012
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Notes to Financial Statements (continued)
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action. Fair value determinations shall be based upon all available factors that the investment advisor and/or sub-advisor deem relevant consistent with the principles of fair value measurement,
which include the market approach, income approach and/or in the case of recent investments, the cost approach, as appropriate. A market approach generally consists of using comparable market transactions. The income approach generally is used to
discount future cash flows to present value and adjusted for liquidity as appropriate. These factors include but are not limited to: (i) attributes specific to the investment or asset; (ii) the principal market for the investment or asset;
(iii) the customary participants in the principal market for the investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments or
assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the
inherent uncertainty of valuations of such investments, the fair values may differ from the values that would have been used had an active market existed. The Global Valuation Committee, or its delegate, employs various methods for calibrating
valuation approaches for investments where an active market does not exist, including regular due diligence of the Funds pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to
compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Value Assets is subsequently reported to
the Board or a committee thereof on a quarterly basis.
Generally, trading in foreign instruments is substantially completed each day at various times prior to the
close of business on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of business on the NYSE that may not be reflected in the computation of the Funds net assets.
If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to affect the value of such instruments materially, those instruments may be Fair Value Assets and valued at their
fair value, as determined in good faith by the Global Valuation Committee using a pricing service and/or policies approved by the Board. Each business day, the Fund uses a pricing service to assist with the valuation of certain foreign
exchange-traded equity securities and foreign exchange-traded and OTC options (the Systematic Fair Value Price). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign
options at fair value as of the close of business on the NYSE, which follows the close of the local markets.
Foreign Currency: The Funds books and records
are maintained in US dollars. Purchases and sales of investment securities are recorded at the rates of exchange prevailing on the respective date of such transactions. Generally, when the US dollar rises in value against a foreign currency,
the Funds investments denominated in that currency will lose value because that currency is worth fewer US dollars; the opposite effect occurs if the US dollar falls in relative value.
The Fund does not isolate the portion of the results of operations arising as a result of changes in the foreign exchange rates from the changes in the market prices of
investments held or sold for financial reporting purposes. Accordingly, the effects of changes in foreign currency exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those
investments but are included as a component of net realized and unrealized gain (loss) from investments. The Fund reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for
financial reporting purposes, whereas such components are treated as ordinary income for federal income tax purposes.
Participation Notes: The Fund may invest in
participation notes (P-Notes). P-Notes are promissory notes issued by banks or broker-dealers that are designed to offer the Fund a return measured by the change in the value of the underlying security or basket of securities (the
underlying security) while not holding the actual shares of the underlying security. P-Notes are typically used to allow the Fund to gain exposure to securities traded in foreign markets that may be restricted due to country-specific
regulations. When the P-Note matures, the issuer will pay to, or receive from, the Fund the difference between the value of the underlying security at the time of the purchase and the underlying securitys value at maturity of the P-Notes.
Income received on P-Notes is recorded by the Fund as dividend income in the Statement of Operations. An investment in a P-Note involves additional risks beyond the risks normally associated with a direct investment in the underlying security. While
the holder of a P-Note is entitled to receive from the bank or broker-dealer any dividends paid by the underlying security, the holder is not entitled to the same rights (e.g., voting rights) as a direct owner of the underlying security. P-Notes are
considered general unsecured contractual obligations of the bank or broker-dealer. The Fund must rely on the creditworthiness of the issuer for its investment returns on the P-Notes and has no rights against the issuer of the underlying security. A
P-Note may be more volatile and less liquid than other investments held by the Fund since the P-Note generally is dependent on the liquidity in the local trading market for the underlying security.
Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC) require
that the Fund either deliver collateral or segregate assets in connection with certain investments (e.g., foreign currency exchange contracts), the Fund will, consistent with SEC rules and/or certain interpretive letters issued by the SEC, segregate
collateral or designate on its books and records cash or liquid securities having a
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BLACKROCK PACIFIC FUND, INC.
|
|
DECEMBER 31, 2012
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21
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|
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|
Notes to Financial Statements (continued)
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|
market value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with certain exchanges and third party
broker-dealers, a Fund engaging in such transactions may have requirements to deliver/deposit securities to/with an exchange or broker-dealer as collateral for certain investments.
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into
(the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Dividends from foreign securities where the ex-dividend date may have passed
are subsequently recorded when the Fund is informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Income and realized and unrealized gains
and losses are allocated daily to each class based on its relative net assets.
Dividends and Distributions: Dividends and distributions paid by the Fund are
recorded on the ex-dividend dates. The portion of distributions that exceeds a Funds current and accumulated earnings and profits, which are measured on a tax basis, will constitute a nontaxable return of capital. Distributions in excess of a
Funds taxable income and net capital gains, but not in excess of a Funds earnings and profits, will be taxable to shareholders as ordinary income and will not constitute a nontaxable return of capital. Capital losses carried forward from
years beginning before 2011 do not reduce earnings and profits, even if such carried forward losses offset current year realized gains. The character and timing of dividends and distributions are determined in accordance with federal income tax
regulations, which may differ from US GAAP.
Securities Lending: The Fund may lend securities to approved borrowers, such as banks, brokers and other financial
institutions. The borrower pledges cash, securities issued or guaranteed by the US government or irrevocable letters of credit issued by a bank as collateral. The initial collateral received by the Fund is required to have a value of at least 102%
of the current value of the loaned securities for securities traded on US exchanges and a value of at least 105% for all other securities. The collateral is maintained thereafter in an amount equal to at least 100% of the current market value of the
loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Securities lending income, as disclosed in the
Statement of Operations, represents the income earned from the investment of the cash collateral, net of rebates paid to, or fees paid by, borrowers and less the fees paid to the securities lending agent. During the term of the loan, the Fund earns
dividend or interest income on the securities loaned but does not receive interest income on the securities received as collateral. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed
securities within the standard time period for settlement of securities transactions. The risks of securities lending include the risk that the borrower may not provide additional collateral when required or may not return the securities when due.
To mitigate this risk the Fund benefits from a borrower default indemnity provided by BlackRock, Inc. (BlackRock). BlackRocks indemnity allows for full replacement of securities lent. The Fund also could suffer a loss if the value
of an investment purchased with cash collateral falls below the market value of loaned securities or if the value of an investment purchased with cash collateral falls below the value of the original cash collateral received. During the year ended
December 31, 2012, any securities on loan were collateralized by cash.
Income Taxes: It is the Funds policy to comply with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required.
The Fund files US federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Funds
US federal tax returns remains open for each of the four years ended December 31, 2012. The statutes of limitations on the Funds state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management does not believe there are any uncertain tax positions that require recognition of a tax liability.
Recent Accounting Standards: In December 2011, the
Financial Accounting Standards Board (the FASB) issued guidance that will expand current disclosure requirements on the offsetting of certain assets and liabilities. The new disclosures will be required for investments and derivative
financial instruments subject to master netting or similar agreements, which are eligible for offset in the Statement of Assets and Liabilities and will require an entity to disclose both gross and net information about such investments and
transactions in the financial statements. In January 2013, the FASB issued guidance that clarifies which investments and transactions are subject to the offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will
be limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions. The guidance is effective for financial statements with fiscal years beginning on or after
January 1, 2013, and interim periods within those fiscal years. Management is evaluating the impact of this guidance on the Funds financial statement disclosures.
Other: Expenses directly related to the Fund or its classes are charged to the Fund or class. Other operating expenses shared by several funds are pro rated among those
funds on the basis of relative net assets or other appropriate methods. Expenses directly related to the Fund and other
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22
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|
BLACKROCK PACIFIC FUND, INC.
|
|
DECEMBER 31, 2012
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|
|
Notes to Financial Statements (continued)
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|
|
shared expenses pro rated to the Fund are allocated daily to each class based on its relative net assets or other appropriate methods.
The Fund has an arrangement with the custodian whereby fees may be reduced by credits earned on uninvested cash balances, which, if applicable, are shown as fees paid
indirectly in the Statement of Operations. The custodian imposes fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody charges.
2. Derivative Financial Instruments:
The Fund engages in various portfolio
investment strategies using derivative contracts both to increase the returns of the Fund and/or to economically hedge, or protect, its exposure to certain risks such as equity risk or foreign currency exchange rate risk. These contracts may be
transacted on an exchange or OTC.
Losses may arise if the value of the contract decreases due to an unfavorable change in the market rates or values of the
underlying instrument or if the counterparty does not perform under the contract. The Funds maximum risk of loss from counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any collateral pledged
by/posted to the counterparty.
The Fund may mitigate counterparty risk by procuring collateral and through netting provisions included within an International
Swaps and Derivatives Association, Inc. master agreement (ISDA Master Agreement) implemented between the Fund and each of its respective counterparties. An ISDA Master Agreement allows the Fund to offset with each separate counterparty
certain derivative financial instruments payables and/or receivables with collateral held. The amount of collateral moved to/from applicable counterparties is generally based upon minimum transfer amounts of up to $500,000. To the extent
amounts due to the Fund from its counterparties are not fully collateralized, contractually or otherwise, the Fund bears the risk of loss from counterparty non-performance. See Note 1 Segregation and Collateralization for information
with respect to collateral practices. In addition, the Fund manages counterparty risk by entering into agreements only with counterparties that it believes have the financial resources to honor its obligations and by monitoring the financial
stability of those counterparties.
Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity in
the event the Funds net assets decline by a stated percentage or the Fund fails to meet the terms of its ISDA Master Agreements, which would cause the Fund to accelerate payment of any net liability owed to the counterparty.
Foreign Currency Exchange Contracts: The Fund enters into foreign currency exchange contracts as an economic hedge against either specific transactions or portfolio
instruments or to obtain exposure to foreign currencies (foreign currency exchange rate risk). A foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a future date. Foreign
currency exchange contracts, when used by the Fund, help to manage the overall exposure to the currencies, in which some of the investments held by the Fund are denominated. The contract is marked-to-market daily and the change in market value is
recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. The use of foreign
currency exchange contracts involves the risk that the value of a foreign currency exchange contract changes unfavorably due to movements in the value of the referenced foreign currencies and the risk that the counterparty to the contract does not
perform its obligations under the agreement.
Options: The Fund purchases and writes call and put options to increase or decrease its exposure to underlying
instruments (including equity risk) and/or, in the case of options written, to generate gains from options premiums. A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the seller
(writer) to sell (when the option is exercised), the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy
the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. When the Fund purchases (write) an option, an amount equal to the premium paid (received) by the Fund is reflected as an asset
(liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the current market value of the option purchased (written). When an instrument is purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a
gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums received or paid). When the Fund writes a call option, such option is
covered, meaning that the Fund holds the underlying instrument subject to being called by the option counterparty. When the Fund writes a put option, such option is covered by cash in an amount sufficient to cover the obligation.
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|
BLACKROCK PACIFIC FUND, INC.
|
|
DECEMBER 31, 2012
|
|
23
|
|
|
|
Notes to Financial Statements (continued)
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|
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Derivative Financial Instruments Categorized by Risk Exposure:
|
|
Fair Values of Derivative Financial Instruments as of December 31,
2012
|
|
|
|
Asset Derivatives
|
|
|
|
Statement of Assets and
Liabilities Location
|
|
Value
|
|
Equity contracts
|
|
Investments at value-unaffiliated
1
|
|
$
|
52,330
|
|
|
|
|
Foreign currency exchange contracts
|
|
Unrealized appreciation on foreign currency exchange contracts
|
|
|
54
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
52,384
|
|
|
|
|
|
|
|
|
1
|
|
Includes options purchased at value as reported in the Schedule of Investments.
|
|
|
|
|
|
The Effect of Derivative Financial Instruments in the Statement of Operations
Year Ended December 31, 2012
|
|
|
|
Net Realized Gain (Loss) From
|
|
Foreign currency exchange contracts:
|
|
|
|
|
Foreign currency transactions
|
|
$
|
(354,350
|
)
|
|
|
|
|
|
|
|
Net Change in Unrealized
Appreciation/Depreciation on
|
|
Equity contracts:
|
|
|
|
|
Options
2
|
|
$
|
(317,562
|
)
|
Foreign currency exchange contracts:
|
|
Foreign currency translations
|
|
|
54
|
|
|
|
|
|
|
Total
|
|
$
|
(317,508
|
)
|
|
|
|
|
|
2
|
|
Options purchased are included in the net change in unrealized appreciation/depreciation on investments.
|
For the year ended December 31, 2012, the average quarterly balances of outstanding derivative financial instruments were as follows:
|
|
|
|
|
Foreign currency exchange contracts:
|
|
|
|
|
Average number of contracts US dollars purchased
|
|
|
2
|
|
Average number of contracts US dollars sold
|
|
|
2
|
|
Average US dollar amounts purchased
|
|
$
|
1,177,726
|
|
Average US dollar amounts sold
|
|
$
|
1,168,970
|
|
Options:
|
|
|
|
|
Average number of option contracts purchased
|
|
|
52
|
|
Average notional value of option contracts purchased
|
|
$
|
6,038,047
|
|
3. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. (PNC) is the largest stockholder and an affiliate, for 1940 Act purposes, of BlackRock.
The Fund entered into an Investment Advisory Agreement with BlackRock Advisors, LLC (the Manager), the Funds investment advisor, an indirect, wholly
owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of the Funds portfolio and provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services, the Fund pays the Manager a monthly fee based on a percentage of the Funds average daily net assets at the following annual rates:
|
|
|
|
|
Average Daily Net Assets
|
|
Investment Advisory
Fee
|
|
First 1 Billion
|
|
|
0.60
|
%
|
$1 Billion $3 Billion
|
|
|
0.56
|
%
|
$3 Billion $5 Billion
|
|
|
0.54
|
%
|
$5 Billion $10 Billion
|
|
|
0.52
|
%
|
Greater than $10 Billion
|
|
|
0.51
|
%
|
The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees the Fund pays to the
Manager indirectly through its investment in affiliated money market funds. However, the Manager does not waive its investment advisory fees by the amount of investment advisory fees paid in connection with the Funds investment in other
affiliated investment companies, if any. This amount is included in fees waived by Manager in the Statement of Operations. For the year ended December 31, 2012, the amount waived was $5,049.
The Manager entered into a sub-advisory agreement with each of BlackRock Investment Management, LLC (BIM) and effective October 19, 2012, BlackRock (Hong
Kong) Limited (BHK), both affiliates of the Manager. The Manager pays BIM and BHK, for services they provide, a monthly fee that is a percentage of the investment advisory fees paid by the Fund to the Manager.
For the year ended December 31, 2012, the Fund reimbursed the Manager $3,993 for certain accounting services, which is included in accounting services in the
Statement of Operations.
The Fund entered into a Distribution Agreement and Distribution and Service Plans with BlackRock Investments, LLC (BRIL), an
affiliate of the Manager. Pursuant to the Distribution and Service Plans and in accordance with Rule 12b-1 under the 1940 Act, the Fund pays BRIL ongoing service and distribution fees. The fees are accrued daily and paid monthly at annual rates
based upon the average daily net assets of the shares of the Fund as follows:
|
|
|
|
|
|
|
|
|
|
|
Service
Fee
|
|
|
Distribution
Fee
|
|
Investor A
|
|
|
0.25
|
%
|
|
|
|
|
Investor B
|
|
|
0.25
|
%
|
|
|
0.75
|
%
|
Investor C
|
|
|
0.25
|
%
|
|
|
0.75
|
%
|
Class R
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
Pursuant to sub-agreements with BRIL, broker-dealers and BRIL provide shareholder servicing and distribution services to the Fund. The
ongoing service and/or distribution fee compensates BRIL and each broker-dealer for providing shareholder servicing and/or distribution related services to Investor A, Investor B, Investor C and Class R shareholders.
Pursuant to written agreements, certain financial intermediaries, some of which may be affiliates, provide the Fund with sub-accounting,
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|
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|
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|
24
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|
BLACKROCK PACIFIC FUND, INC.
|
|
DECEMBER 31, 2012
|
|
|
|
|
|
Notes to Financial Statements (continued)
|
|
|
recordkeeping, sub-transfer agency and other administrative services with respect to sub-accounts they service. For these services, these entities receive an annual fee per shareholder account,
which will vary depending on share class and/or net assets. For the year ended December 31, 2012, the Fund paid the following to affiliates in return for these services, which is included in transfer agent class specific in the Statement
of Operations:
|
|
|
|
|
Institutional
|
|
$
|
7
|
|
Investor A
|
|
$
|
351
|
|
The Manager maintains a call center, which is responsible for providing certain shareholder services to the Fund, such as responding to
shareholder inquiries and processing transactions based upon instructions from shareholders with respect to the subscription and redemption of Fund shares. For the year ended December 31, 2012, the Fund reimbursed the Manager the following
amounts for costs incurred in running the call center, which are included in transfer agent class specific in the Statement of Operations:
For the year ended December 31, 2012, affiliates earned underwriting discounts, direct commissions and dealer concessions on sales
of the Funds Investor A Shares, which totaled $2,471.
The Fund received an exemptive order from the SEC permitting it, among other things, to pay an affiliated securities lending agent a fee
based on a share of the income derived from the securities lending activities and has retained BIM as the securities lending agent. BIM may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a
private investment company managed by the Manager or in registered money market funds advised by the Manager or its affiliates. The market value of securities on loan and the value of the related collateral, if applicable, are shown in the Statement
of Assets and Liabilities as securities loaned at value and collateral on securities loaned at value, respectively. The cash collateral invested by BIM is disclosed in the Schedule of Investments, if any. Securities lending income is equal to the
total of income earned from the reinvestment of cash collateral, net of rebates paid to, or fees paid by, borrowers of securities. The Fund retains 65% of securities lending income and pays a fee to BIM equal to 35% of such income. The Fund benefits
from a borrower default indemnity provided by BlackRock. As securities lending agent, BIM bears all operational costs directly related to securities lending as well as the cost of borrower default indemnification. BIM does not receive any fees for
managing the cash collateral. The share of income earned by the Fund is shown as securities lending affiliated net in the Statement of Operations. For the year ended December 31, 2012, BIM received $236,852 in securities lending
agent fees related to securities lending activities for the Fund.
Certain officers and/or directors of the Fund are officers and/or directors of BlackRock or its
affiliates. The Fund reimburses the Manager for a portion of compensation paid to the Funds Chief Compliance Officer.
Purchases and sales of investments excluding short-term securities for the year ended December 31, 2012, were $346,529,126 and $441,967,214, respectively.
US GAAP requires that certain components
of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. The following permanent differences as of December 31, 2012
attributable to foreign currency transactions and the sale of stock of passive foreign investment companies were reclassified to the following accounts:
The tax character of distributions paid during the fiscal years ended December 31, 2012 and December 31, 2011 was as follows:
As of December 31, 2012, the tax components of accumulated net earnings were as follows:
The Fund, along with
certain other funds managed by the Manager and its affiliates, is a party to a $500 million credit agreement with a group of lenders. The Fund may borrow under the credit agreement to fund shareholder redemptions. Effective November 2011 to November
2012, the credit agreement had the following terms: a commitment fee of 0.065% per annum based on the Funds pro rata share of the unused portion of the credit agreement and interest at a rate equal to the higher of (a) the one-month
London Interbank Offered Rate (LIBOR) plus 0.80% per annum or (b) the Fed Funds rate plus 0.80% per annum on amounts borrowed. In addition, the Fund paid administration and arrangement fees which were allocated to the Fund
based on its net assets as of October 31, 2011. The credit agreement, which expired in November 2012, was renewed with the same terms until November 2013. Effective November 2012 to November 2013, the credit agreement has the following terms: a
commitment fee of 0.065% per annum based on the Funds pro rata share of the unused portion of the credit agreement and interest at a rate equal to the higher of (a) the one-month LIBOR plus 0.80% per annum or (b) the Fed
Funds rate plus 0.80% per annum on amounts borrowed. In addition, the Fund paid administration and arrangement fees which were allocated to the Fund based on its net assets as of October 31, 2012. The Fund did not borrow under the credit
agreement during the year ended December 31, 2012.
In the normal course of business, the Fund invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or
failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Fund may decline in response to certain events, including those directly involving the issuers whose securities are owned by
the Fund; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Fund may be
exposed to counterparty credit risk, or the risk that an entity with which the Fund has unsettled or open transactions may fail to or be unable to perform on its commitments. The Fund manages counterparty credit risk by entering into transactions
only with counterparties that it believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Fund to market, issuer and
counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Funds exposure to market, issuer and counterparty credit risks with respect to these financial assets is
generally approximated by their value recorded in the Statement of Assets and Liabilities, less any collateral held by the Fund.
The Fund invests a substantial
amount of its assets in issuers located in a single country or a limited number of countries. When the Fund concentrates its investments in this manner, it assumes the risk that economic, political and social conditions in those countries may have a
significant impact on their investment performance. Foreign issuers may not be subject to the same uniform accounting, auditing and financial reporting standards and practices as used in the US. Foreign securities markets may also be less liquid,
more volatile, and less subject to governmental supervision not typically associated with investing in US securities. Please see the Schedule of Investments for concentrations in specific countries.
As of December 31, 2012, the Fund had the following industry classifications:
Prior to April 1, 2011 there was a 2% redemption fee on shares redeemed or exchanged that have been held for 30 days or less. The
redemption fees are collected and retained by the Fund for the benefit of the remaining shareholders. The redemption fees were recorded as a credit to paid-in-capital. Effective April 1, 2011, the redemption fee was terminated and is no longer
charged by the Fund.
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued and has determined that there were no
subsequent events requiring adjustment or additional disclosure in the financial statements.