SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 30, 2001
--------------
Commission File Number 1-7182
--------------
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-2740599
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
4 World Financial Center
New York, New York 10080
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
835,134,179 shares of Common Stock and 4,197,921 Exchangeable Shares as of
the close of business on May 4, 2001. The Exchangeable Shares, which were issued
by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland
Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one
basis and entitle holders to dividend, voting, and other rights equivalent to
Common Stock.
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
- -----------------------------
Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
For the Three Months Ended
----------------------------------------------
Mar. 30, Mar. 31, Percent
(in millions, except per share amounts) 2001 2000 Inc. (Dec.)
--------- -------- ----------
Net Revenues
Commissions $1,505 $2,160 (30.3)%
Principal transactions 1,740 2,038 (14.6)
Investment banking
Underwriting 629 670 (6.1)
Strategic advisory 284 326 (12.9)
Asset management and portfolio service fees 1,379 1,390 (0.8)
Other 164 249 (34.1)
------ ------
Subtotal 5,701 6,833 (16.6)
------ ------
Interest and dividend revenues 6,249 4,473 39.7
Less interest expense 5,524 3,782 46.1
------ ------
Net interest profit 725 691 4.9
------ ------
Total Net Revenues 6,426 7,524 (14.6)
------ ------
Non-Interest Expenses
Compensation and benefits 3,244 3,918 (17.2)
Communications and technology 598 584 2.4
Occupancy and related depreciation 270 253 6.7
Advertising and market development 208 245 (15.1)
Brokerage, clearing, and exchange fees 235 233 0.9
Professional fees 134 147 (8.8)
Goodwill amortization 52 56 (7.1)
Other 334 403 (17.1)
------ ------
Total Non-Interest Expenses 5,075 5,839 (13.1)
------ ------
Earnings Before Income Taxes and Dividends on
Preferred Securities Issued by Subsidiaries 1,351 1,685 (19.8)
Income tax expense 428 535 (20.0)
Dividends on preferred securities issued by subsidiaries 49 49 -
------ ------
Net Earnings $ 874 $1,101 (20.6)
====== ======
Net Earnings Applicable to Common Stockholders $ 864 $1,091 (20.8)
====== ======
Earnings Per Common Share
Basic $ 1.04 $ 1.40
====== ======
Diluted $ 0.92 $ 1.24
====== ======
Dividend Paid Per Common Share $ 0.16 $ 0.14
====== ======
Average Shares Used in Computing
Earnings Per Common Share
Basic 832.2 780.2
====== ======
Diluted 938.0 881.7
====== ======
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
2
Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
Mar. 30, Dec. 29,
(dollars in millions) 2001 2000
- ------------------------------------------------------------------------------------------ -------- --------
ASSETS
Cash and cash equivalents $ 25,696 $ 23,205
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations 5,628 6,092
Receivables under resale agreements and securities borrowed transactions 124,138 114,581
Marketable investment securities 59,621 49,251
Trading assets, at fair value
Equities and convertible debentures 22,747 20,232
Corporate debt and preferred stock 15,145 17,377
Contractual agreements 22,897 20,361
U.S. Government and agencies 20,663 17,519
Mortgages, mortgage-backed, and asset-backed 9,413 8,225
Non-U.S. governments and agencies 4,786 5,009
Municipals and money markets 3,684 2,791
-------- --------
99,335 91,514
Securities pledged as collateral 12,272 9,097
-------- --------
Other receivables
Customers (net of allowance for doubtful accounts of $82 in 2001 and $68 in 2000) 39,472 41,613
Brokers and dealers 21,383 26,421
Interest and other 7,912 8,879
-------- --------
68,767 76,913
-------- --------
Investments of insurance subsidiaries 3,996 4,002
Loans, notes, and mortgages (net of allowance for loan losses of $205 in 2001 and $176 in 2000) 17,512 17,472
Other investments 4,770 4,938
Equipment and facilities (net of accumulated depreciation and
amortization of $4,777 in 2001 and $4,658 in 2000) 3,462 3,444
Goodwill (net of accumulated amortization of $751 in 2001 and $720 in 2000) 4,214 4,407
Other assets 2,193 2,284
-------- --------
Total Assets $431,604 $407,200
======== ========
3
Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
Mar. 30, Dec. 29,
(dollars in millions, except per share amount) 2001 2000
- ---------------------------------------------------------------------------------------------- -------- --------
LIABILITIES
Payables under repurchase agreements and
securities loaned transactions $103,722 $103,883
Commercial paper and other short-term borrowings 13,084 15,183
Deposits 77,929 67,648
Trading liabilities, at fair value
Contractual agreements 24,041 21,587
Equities and convertible debentures 20,644 18,535
U.S. Government and agencies 20,073 14,466
Non-U.S. governments and agencies 8,898 7,135
Corporate debt, municipals and preferred stock 5,415 7,134
-------- --------
79,071 68,857
-------- --------
Other payables
Customers 26,231 24,762
Brokers and dealers 13,508 9,514
Interest and other 18,198 22,204
-------- --------
57,937 56,480
-------- --------
Liabilities of insurance subsidiaries 3,869 3,908
Long-term borrowings 73,345 70,223
-------- --------
Total Liabilities 408,957 386,182
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,708 2,714
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity (42,500 shares issued, liquidation preference $10,000 per share) 425 425
-------- --------
Common Stockholders' Equity
Shares exchangeable into common stock 62 68
Common stock (par value $1.33 1/3 per share; authorized: 1,000,000,000 shares;
issued: 2001 and 2000 - 962,533,498 shares) 1,283 1,283
Paid-in capital 4,039 2,843
Accumulated other comprehensive loss (net of tax) (287) (345)
Retained earnings 16,887 16,156
-------- --------
21,984 20,005
Less: Treasury stock, at cost: 2001 - 130,336,130 shares; 2000 - 154,578,945 shares 1,052 1,273
Employee stock transactions 1,418 853
-------- --------
Total Common Stockholders' Equity 19,514 17,879
-------- --------
Total Stockholders' Equity 19,939 18,304
-------- --------
Total Liabilities, Preferred Securities Issued by Subsidiaries,
and Stockholders' Equity $431,604 $407,200
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
4
Merrill Lynch & Co., Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended
-------------------------------
(dollars in millions) Mar. 30, Mar. 31,
2001 2000
------- -------
Cash flows from operating activities:
Net earnings $ 874 $ 1,101
Noncash items included in earnings:
Depreciation and amortization 217 193
Policyholder reserves 47 48
Goodwill amortization 52 56
Amortization of stock-based compensation 158 119
Other 1,305 491
(Increase) decrease in operating assets:
Trading assets and securities pledged as collateral (10,677) (9,062)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations 464 (228)
Receivables under resale agreements and securities borrowed transactions (9,557) (17,908)
Customer receivables 2,131 (6,119)
Brokers and dealers receivables 5,038 249
Other 1,000 (509)
Increase (decrease) in operating liabilities:
Trading liabilities 10,214 7,557
Payables under repurchase agreements and securities loaned transactions (161) 13,948
Customer payables 1,469 2,665
Brokers and dealers payables 3,994 1,271
Other (3,994) 794
------- -------
Cash provided by (used for) by operating activities 2,574 (5,334)
------- -------
Cash flows from investing activities:
Proceeds from (payments for):
Maturities of available-for-sale securities 7,300 1,146
Sales of available-for-sale securities 4,502 667
Purchases of available-for-sale securities (21,689) (4,884)
Maturities of held-to-maturity securities 239 1,550
Purchases of held-to-maturity securities (249) (1,292)
Loans, notes, and mortgages (57) (244)
Other investments and other assets (536) 89
Equipment and facilities (235) (230)
------- -------
Cash used for investing activities (10,725) (3,198)
------- -------
Cash flows from financing activities:
Proceeds from (payments for):
Commercial paper and other short-term borrowings (2,099) 3,188
Deposits 10,281 721
Issuance and resale of long-term borrowings 10,884 8,961
Maturities and repurchases of long-term borrowings (8,191) (5,266)
Issuance of treasury stock 256 196
Other common and preferred stock transactions (346) 15
Dividends (143) (113)
------- -------
Cash provided by financing activities 10,642 7,702
------- -------
Increase (decrease) in cash and cash equivalents 2,491 (830)
Cash and cash equivalents, beginning of year 23,205 12,155
------- -------
Cash and cash equivalents, end of period $25,696 $11,325
======= =======
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes $ 89 $ 142
Interest 5,804 3,357
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
5
Merrill Lynch & Co., Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 30, 2001
- --------------------------------------------------------------------------------
Note 1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Basis of Presentation
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 29, 2000
unaudited Consolidated Balance Sheet was derived from the audited financial
statements. The interim consolidated financial statements for the three month
periods are unaudited; however, in the opinion of Merrill Lynch management, all
adjustments necessary for a fair statement of the results of operations have
been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report included
as an exhibit to Form 10-K for the year ended December 29, 2000. The nature of
Merrill Lynch's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
New Accounting Pronouncements
On the first day of fiscal year 2001, Merrill Lynch adopted the provisions of
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS No. 133"). On adoption, all existing hedge relationships were designated
anew. Merrill Lynch recorded a pre-tax loss of $32 million ($22 million
after-tax) in interest expense upon adoption of SFAS No. 133.
SFAS No.133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts ("embedded derivatives"), and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
Consolidated Balance Sheet and measure those instruments at fair value. The
accounting for changes in fair value of a derivative instrument depends on its
intended use and the resulting designation.
The majority of Merrill Lynch's derivatives are recognized at fair value as
trading assets and liabilities, as they are entered into in a dealing capacity.
As part of its trading activities, Merrill Lynch uses derivatives to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The Corporate Risk Management group monitors and manages these risks
in accordance with established risk management policies and procedures that
include risk tolerance levels. For further information on Merrill Lynch's risk
management see the Annual Report on Form 10-K for the year ended December 29,
2000.
As part of its overall risk management strategy, Merrill Lynch uses derivatives
to manage its risk exposures arising from non-trading assets and liabilities,
some of which, depending on the nature of the derivative and the related hedged
item, were not previously carried at fair value. These derivatives are typically
designated as fair-value hedges, to manage the interest rate and currency
exposure on long-term borrowings and marketable investment securities. These
derivatives generally include interest rate and currency swap agreements that
are primarily used to convert fixed rate assets and liabilities into U.S.
dollar-based floating rate instruments.
The net losses associated with the ineffective portion (the extent to which
exact offset is not achieved) of the fair value hedges were $14 million for
the three months ended March 30, 2001 and are included in net interest
profit on the Consolidated Statement of Earnings.
6
Merrill Lynch also uses derivatives and foreign-currency-denominated debt to
manage its exposure to foreign exchange rate movements related to investments in
non-U.S. operations. These derivatives generally include forward exchange
contracts and cross currency interest rate swaps.
For the three months ended March 30, 2001, $196 million of net gains
related to non-U.S. dollar net investment hedges, which were principally offset
by the net losses recorded on these investments, were included in "Accumulated
other comprehensive loss" on the Consolidated Balance Sheet.
Merrill Lynch issues long-term obligations whose repayment terms are linked to
the performance of equity or other indexes (e.g., S&P 500), baskets of
securities, or individual securities. The contingent components of these indexed
debt obligations may be embedded derivatives. If the contingent component is
determined to be a derivative it is separated from the underlying obligation and
carried at fair value. The separated embedded derivative is reported in
long-term borrowings on the Consolidated Balance Sheet with the underlying
obligation. The embedded derivatives are hedged with derivatives that are
carried at fair value.
In addition, Merrill Lynch enters into cash flow hedges to hedge interest rate
risk. All of these hedges qualify for the "short-cut method" as defined by SFAS
No. 133. As such, no ineffectiveness related to these hedges is reported in
earnings.
Derivative instruments are reported on a net-by-counterparty basis on the
Consolidated Balance Sheet where management believes a legal right of setoff
exists under an enforceable netting agreement. The fair value of derivative
instruments is set forth below:
(dollars in millions)
- -----------------------------------------------------------------------------------------------------------
Mar. 30, 2001 Dec. 29, 2000
------------------------- -----------------------
Assets Liabilities Assets Liabilities
------- ----------- ------- -----------
Swap agreements $19,798 $20,989 $17,283 $18,819
Forward contracts 618 659 1,580 1,335
Options(1) 6,931 12,125 6,759 10,587
- ---------------------------------------- ----------------- ------------------------------------------------
(1) Due to cross product netting under master netting agreements, the majority
of the firm's FX options are included in forward contracts.
In September 2000, the Financial Accounting Standards Board released SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, a replacement of SFAS No. 125. Merrill Lynch has
adopted those provisions of the statement that are required to be adopted as of
December 29, 2000. These provisions relate primarily to the accounting and
disclosures for collateral received or pledged in secured borrowing
transactions. Other provisions of the statement are not required to be adopted
until the second quarter of 2001. These provisions provide new guidance for
determining whether a transfer of assets should be accounted for as a sale or a
secured borrowing, and also change the accounting for certain securities lending
transactions. Under the new provisions, Merrill Lynch is required to recognize
on the Consolidated Balance Sheet certain securities lending transactions in
which Merrill Lynch acts as securities lender and receives securities (rather
than cash) as collateral. Merrill Lynch is currently evaluating the impact of
adoption.
7
- --------------------------------------------------------------------------------
Note 2. Short-Term Borrowings
- --------------------------------------------------------------------------------
Short-term borrowings at March 30, 2001 and December 29, 2000 are presented
below:
(dollars in millions)
- --------------------------------------------------------------------------------
Mar. 30, Dec. 29,
2001 2000
-------- -------
Payables under repurchase agreements
and securities loaned transactions
Repurchase agreements $ 94,157 $ 89,901
Securities loaned transactions 9,565 13,982
-------- --------
Total $103,722 $103,883
======== ========
Commercial paper and other short-term
borrowings
Commercial paper $ 10,803 $ 14,022
Other 2,281 1,161
-------- --------
Total $ 13,084 $ 15,183
======== ========
Deposits
U.S. $ 66,188 $ 54,887
Non-U.S. 11,741 12,761
-------- --------
Total $ 77,929 $ 67,648
======== ========
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
Note 3. Segment Information
- --------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: the Corporate and Institutional Client Group
("CICG"), the Private Client Group ("PCG") and Merrill Lynch Investment Managers
("MLIM"). Prior period amounts have been restated to conform to the current
period presentation. For information on each segment's activities, see the 2000
Annual Report included as an exhibit to Form 10-K.
Operating results by business segment follow:
(dollars in millions)
- ------------------------------------------------------------------------------------------------
Corporate
Three Months Ended CICG PCG MLIM Items (1) Total
-------- -------- ------ --------- --------
March 30, 2001
Non-interest revenues $ 2,957 $ 2,274 $ 553 $ (83)(2) $ 5,701
Net interest revenue(3) 288 435 15 (13)(4) 725
-------- -------- ------ ------ --------
Net revenues 3,245 2,709 568 (96) 6,426
Non-interest expenses 2,266 2,354 470 (15)(5) 5,075
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 979 $ 355 $ 98 $ (81) $ 1,351
======== ======== ====== ====== ========
Quarter-end total assets $297,463 $127,542 $2,385 $4,214 $431,604
======== ======== ====== ====== ========
- ------------------------------------------------------------------------------------------------
Corporate
CICG PCG MLIM Items (1) Total
-------- -------- ------ --------- --------
Three Months Ended
March 31, 2000
Non-interest revenues $ 3,333 $ 2,994 $ 598 $ (92)(2) $ 6,833
Net interest revenue(3) 318 389 15 (31)(4) 691
-------- -------- ------ ------ --------
Net revenues 3,651 3,383 613 (123) 7,524
Non-interest expenses 2,442 2,899 510 (12)(5) 5,839
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 1,209 $ 484 $ 103 $ (111) $ 1,685
======== ======== ====== ====== ========
Quarter-end total assets $275,541 $ 61,985 $2,621 $4,845 $344,992
======== ======== ====== ====== ========
- ------------------------------------------------------------------------------------------------
(1) Including intersegment eliminations.
(2) Represents the elimination of intersegment revenues and, in 2001, 33% of the
loss incurred by Merrill Lynch HSBC.
(3) Management views interest income net of interest expense in evaluating
results.
(4) Represents Mercury financing costs.
(5) Represents goodwill amortization of $52 million, net of elimination of
intersegment expenses of $67 million in 2001 and $56 million and
$68 million, respectively, in 2000.
9
- --------------------------------------------------------------------------------
Note 4. Comprehensive Income
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
(dollars in millions)
- -------------------------------------------------------------------------------------
Three Months Ended
--------------------------
Mar. 30, Mar. 31,
2001 2000
------- -------
Net earnings $874 $1,101
------- -------
Other comprehensive income, net of tax:
Currency translation adjustment 38 (8)
Net unrealized gain (loss) on investment
securities available-for-sale (1) 10
Deferred gain on cash flow hedges 21 -
------- -------
Total other comprehensive income, net of tax 58 2
------- -------
Comprehensive income $932 $1,103
======= =======
- --------------------------------------------------------------------------------
Note 5. Earnings Per Common Share
- --------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
(dollars in millions)
- --------------------------------------------------------------------------------
Three Months Ended
-------------------------
Mar. 30, Mar. 31,
2001 2000
-------- --------
Net earnings $ 874 $ 1,101
Preferred stock dividends 10 10
-------- --------
Net earnings applicable to
common stockholders $ 864 $ 1,091
======== ========
(shares in thousands)
Weighted-average shares outstanding 832,195 780,220
-------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 64,379 61,928
FCCAAP shares 27,688 28,215
Restricted Units 13,587 11,162
ESPP shares 105 156
-------- --------
Dilutive potential common shares 105,759 101,461
------- -------
Total weighted-average diluted shares 937,954 881,681
======== ========
- --------------------------------------------------------------------------------
Basic earnings per common share $ 1.04 $ 1.40
Diluted earnings per common share $ 0.92 $ 1.24
- --------------------------------------------------------------------------------
(1) During the 2001 and 2000 first quarter there were 39 million and 153
thousand instruments, respectively that were considered antidilutive and
were not included in the above computations.
(2) See Note 11 to Consolidated Financial Statements in the 2000 Annual Report
included as an exhibit to Form 10-K for a description of these instruments.
10
- --------------------------------------------------------------------------------
Note 6. Commitments, and Other Contingencies
- --------------------------------------------------------------------------------
In the normal course of business, Merrill Lynch enters into underwriting
commitments and commitments to extend credit. As of March 30, 2001, these
commitments are not material to the financial condition of Merrill Lynch.
As of March 30, 2001, Merrill Lynch has been named as parties in various
actions, some of which involve claims for substantial amounts. Although the
results of legal actions cannot be predicted with certainty, it is the opinion
of management that the resolution of these actions will not have a material
adverse effect on the financial condition of Merrill Lynch as set forth in the
Consolidated Financial Statements, but may be material to Merrill Lynch's
operating results for any particular period.
- --------------------------------------------------------------------------------
Note 7. Regulatory Requirements
- --------------------------------------------------------------------------------
Certain U.S. and non-U.S. subsidiaries are subject to various securities,
banking and insurance regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which they
operate. Merrill Lynch's principal regulated subsidiaries are discussed below.
Securities Regulation
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a U.S. registered
broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under
the Securities Exchange Act of 1934. Under the alternative method permitted by
this rule, the minimum required net capital, as defined, shall not be less than
2% of aggregate debit items arising from customer transactions. At March 30,
2001, MLPF&S's regulatory net capital of $3,868 million was 19% of aggregate
debit items, and its regulatory net capital in excess of the minimum required
was $3,451 million.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject
to capital requirements of the Financial Services Authority ("FSA"). Financial
resources, as defined, must exceed the total financial resources requirement of
the FSA. At March 30, 2001, MLI's financial resources were $4,539 million,
exceeding the minimum requirement by $695 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, is subject to the capital adequacy requirements of the
Government Securities Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At March 30, 2001, MLGSI's liquid capital of $1,341
million was 226% of its total market and credit risk, and liquid capital in
excess of the minimum required was $629 million.
Banking Regulation
Two of the direct subsidiaries of ML & Co., Merrill Lynch Bank USA ("MLBUSA"),
an FDIC-insured Utah chartered depository institution, and Merrill Lynch Bank &
Trust Co. ("MLB&T"), an FDIC-insured New Jersey chartered depository
institution, are each subject to certain minimum aggregate capital requirements
under applicable federal banking laws. Among other things, Part 325 of the FDIC
regulations establishes levels of Risk Based Capital ("RBC") each institution
must maintain. RBC is defined as the ratio of (i) Tier 1 capital or Total
capital to (ii) risk-weighted assets, as those terms are defined in the FDIC
regulations. As of March 30, 2001, MLBUSA had a Tier I RBC ratio of 10.34% and a
total RBC ratio of 10.99% and MLB&T had a Tier I RBC ratio of 10.08%
11
and a total RBC ratio of 10.10%. At March 30, 2001 MLBUSA had Tier I
capital of $3,066 million and MLB&T had Tier I capital of $1,015 million.
MLBUSA and MLB&T have each entered into a synthetic securitization of specified
reference portfolios of asset-backed securities ("ABS") owned by each
institution totaling in aggregate up to $20 billion. These ABS are AAA-rated and
all are further insured as to principal and interest payments by a AAA-rated
insurer. The synthetic securitization has allowed MLBUSA and MLB&T to reduce the
credit risk on the respective reference portfolios by means of credit default
swaps with a bankruptcy-remote special purpose vehicle ("SPV"). In turn, the SPV
has issued a $20 million credit linked note to an unaffiliated buyer. These
transactions have resulted in reductions in each institution's risk-weighted
assets. MLBUSA has retained a first risk of loss equity tranche in this
transaction of $1 million.
As a result of this transaction, MLBUSA has been able to reduce risk-weighted
assets by $13,477 million at March 30, 2001, thereby increasing its Tier I and
Total RBC ratios by 323 basis points and 344 basis points, respectively. MLB&T
has been able to reduce risk-weighted assets by $2,362 million at March 30,
2001, thereby increasing its Tier I and Total RBC ratios by 192 basis points.
These structures have not resulted in a material change in the distribution or
concentration of risk in the retained portfolio.
12
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of March 30,
2001, and the related condensed consolidated statements of earnings and cash
flows for the three-month periods ended March 30, 2001 and March 31, 2000. These
financial statements are the responsibility of Merrill Lynch's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Merrill Lynch as of December 29, 2000, and the related consolidated statements
of earnings, changes in stockholders' equity, comprehensive income and cash
flows for the year then ended (not presented herein); and in our report dated
February 26, 2001, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 29, 2000 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
May 11, 2001
New York, New York
13
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, advisory, insurance, and related
services worldwide. The financial services industry, in which Merrill Lynch is a
leading participant, is highly competitive and highly regulated. This industry
and the global financial markets are influenced by numerous uncontrollable
factors. These factors include economic conditions, monetary and fiscal
policies, the liquidity of global markets, international and regional political
events, regulatory developments, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility of
financial markets. While greater volatility may increase risk, it may also
increase order flow and revenues in businesses such as trading and brokerage.
Revenues and net earnings may vary significantly from period to period due to
these unpredictable factors and the resulting market volatility and volumes.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions and competition from new entrants as well as established
competitors using the Internet or other technology to establish or expand their
businesses, and diminishing margins in many mature products and services. The
Gramm-Leach-Bliley Act, passed in 1999, which repealed laws that separated
commercial banking, investment banking and insurance activities, together with
changes to the industry resulting from previous reforms, has increased the
number of companies competing for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations and objectives expressed in these statements. These factors
include, but are not limited to, the factors listed in the previous two
paragraphs, as well as actions and initiatives taken by both current and
potential competitors, the effect of current, pending, and future legislation
and regulation both in the United States and throughout the world, and the other
risks detailed in Merrill Lynch's 2000 Form 10-K and in this Form 10-Q.
Merrill Lynch undertakes no responsibility to update or revise any
forward-looking statements.
- --------------------------------------------------------------------------------
Business Environment
- --------------------------------------------------------------------------------
Global financial markets continued to face challenging conditions and a
difficult operating environment in the first quarter of 2001. While the equity
markets continued to suffer, the debt environment benefited from declining
interest rates, precipitated by three rate cuts by the U.S. Federal Reserve Bank
in the quarter totaling 150 basis points, and few inflationary pressures.
Global debt underwriting volumes were boosted during the quarter by an increased
demand for debt securities, as conservative investors showed a preference for
stability.
14
Long-term U.S. interest rates, as measured by the yield on the 10-year U.S.
Treasury note, declined modestly during the quarter to 4.92% from 5.11%. The
decline generally resulted from a flight to quality, as investors exercised
caution in uncertain equity markets, driving note prices upward. However, the
yield on the longer term 30-year Treasury bond remained virtually unchanged from
the end of 2000. The Treasury yield curve steepened during the quarter, as
investors anticipated both further interest rate cuts and a large paydown of
government debt, which stimulated demand for shorter term securities. The U.S.
Federal Reserve Bank rate cuts of 150 basis points caused short-term U.S. rates
to decline since year-end. Credit spreads, which represent the risk premium over
the risk-free rate paid by an issuer (based on the issuer's perceived
creditworthiness), widened slightly in the first quarter, as credit quality
declined. European and Japanese short- and long-term interest rates declined
during the 2001 first quarter.
U.S. equity indices, which experienced increased volatility beginning in the
second half of 2000, continued to face sharp declines in 2001, as the market
responded to numerous corporate profit warnings. The Nasdaq Composite Index
ended the 2001 first quarter down 25.5% for the three-month period and 59.8%
from the 2000 first quarter, as technology stocks continued to decline in value.
The Dow Jones Industrial Average lost 8.4% during the quarter, and 9.6% from the
end of the first quarter of 2000. The S&P 500 fell 12.1% from year-end 2000, and
22.6% from the end of the 2000 first quarter.
As evidenced by the Dow Jones World Index, global equity markets dropped 14.1%
during the 2001 first quarter, and 29.0% since the end of the first quarter of
2000, as the downturn in the U.S. economy spread globally. Growth in European
markets slowed, though the European Central Bank was the only major bank not to
ease interest rates during the quarter. The stock market in Japan, as measured
by the Dow Jones Global Index, fell 10% in U.S. dollar terms, and the Bank of
Japan announced the adoption of a policy focused on increasing money supply,
rather than targeting interest rates. The increased liquidity is intended to
ensure that Japanese overnight interbank rates remain at approximately 0%.
Total global stock and debt issuance increased 11% from the year-ago quarter, as
investors increased the demand for debt and convertible securities. Global debt
underwriting volume increased from $747 billion in the first quarter of 2000 to
$921 billion in the first quarter of 2001 according to Thomson Financial
Securities Data, as bond issuers took advantage of lower interest rates.
However, global equity underwriting volume was down 44% from the first quarter
of 2000, as the Initial Public Offering ("IPO") market declined dramatically
compared with the first quarter a year ago. In the first quarter of 2001, only
25 companies were brought public in the U.S., compared with 122 in the same
period last year.
Merger and acquisition activity dropped sharply in the first quarter of 2001 as
a result of economic uncertainty and unfavorable market conditions. Global
announced merger and acquisition volume was $455 billion, down 61% from the
first quarter of 2000, and down 37% from the fourth quarter of 2000, according
to Thomson Financial Securities Data. In the U.S., announced merger and
acquisition volume was $212 billion, down 63% and 47% from the first and fourth
quarters of 2000, respectively.
Merrill Lynch continually evaluates its businesses for profitability and
performance under varying market conditions and, in light of the evolving
conditions in its competitive environment, for alignment with its long-term
strategic objectives. Maintaining long-term client relationships, closely
monitoring costs and risks, diversifying revenue sources, and growing fee-based
revenues, all contribute to mitigating the effects of market volatility on
Merrill Lynch's business as a whole.
15
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
For the Three Months Ended % Inc. /(Dec.)
1Q01 Versus
------------------------------- --------------
(dollars in millions, Mar. 30, Dec. 29, Mar. 31,
except per share amounts) 2001 2000 2000 4Q00 1Q00
------- ------- ------- ---- ----
Total revenues $11,950 $11,663 $11,306 2% 6%
Net revenues 6,426 6,268 7,524 3 (15)
Pre-tax earnings 1,351 1,308 1,685 3 (20)
Net earnings 874 877 1,101 - (21)
Earnings per common share:
Basic 1.04 1.07 1.40 (3) (26)
Diluted 0.92 0.93 1.24 (1) (26)
Annualized return on average common
stockholders' equity 18.4 % 20.0% 32.4%
Pre-tax profit margin 21.0 20.9 22.4
- ----------------------------------------------------------------------------------------------
Merrill Lynch's net earnings were $874 million for the 2001 first quarter, 21%
lower than the record $1.1 billion in the first quarter of 2000, and essentially
unchanged from the fourth quarter of last year. Earnings per common share were
$1.04 basic and $0.92 diluted, compared with $1.40 basic and $1.24 diluted in
the 2000 first quarter, and $1.07 basic and $0.93 diluted in the fourth quarter
of 2000.
Net revenues were $6.4 billion, 15% lower than the 2000 first quarter and 3%
above the fourth quarter of 2000. Non-compensation expenses were $1.8 billion,
5% lower than the 2000 first quarter.
The pre-tax profit margin for the quarter was 21.0%, compared with 22.4% in the
first quarter of 2000 and 20.9% in the 2000 fourth quarter. The first quarter
annualized return on average common equity was 18.4%, compared with 32.4% and
20.0% in the first and fourth quarters of 2000, respectively.
- --------------------------------------------------------------------------------
Business Segments
- --------------------------------------------------------------------------------
Merrill Lynch reports its results in three business segments: Corporate and
Institutional Client Group ("CICG"), Private Client Group ("PCG"), and Merrill
Lynch Investment Managers ("MLIM"). CICG provides investment banking and capital
market services to corporate, institutional, and governmental clients throughout
the world. PCG provides wealth management services and products to individuals,
small- to mid-size businesses and employee benefit plan clients globally; and
MLIM provides investment management services to a wide variety of retail and
institutional clients. For further information on services provided to clients
within these segments, see the 2000 Form 10-K and the portions of the 2000
Annual Report included as an exhibit thereto.
Certain MLIM and CICG products are distributed by PCG distribution channels, and
to a lesser extent, certain MLIM products are distributed through the
distribution capabilities of CICG. Revenues and expenses associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. In addition, revenue and expense sharing agreements for shared
activities are in place and the results of each segment reflect the agreed upon
portion of these activities. The following segment operating results, which
exclude certain corporate items, represent the information that is relied upon
by management in its decision-making processes. Restatements occur to reflect
reallocations of revenues and expenses which result from changes in Merrill
Lynch's business strategy and structure.
16
- --------------------------------------------------------------------------------
Corporate and Institutional Client Group
- --------------------------------------------------------------------------------
CICG's Results of Operations
- --------------------------------------------------------------------------------
For the Three Months Ended
--------------------------
Mar. 30, Mar. 31, Percent Change
(dollars in millions) 2001 2000 Inc./ (Dec.)
- ---------------------------------------------------------------------------------------------------
Commissions $ 611 $ 745 (18) %
Principal transactions and net interest profit 1,715 1,945 (12)
Investment banking 802 782 3
Other revenues 117 179 (35)
------ ------
Total net revenues $3,245 $3,651 (11)
------ ------
Pre-tax earnings $ 979 $1,209 (19)
------ ------
Pre-tax profit margin 30.2% 33.1%
- ---------------------------------------------------------------------------------------------------
CICG faced difficult market conditions in the 2001 first quarter, characterized
by the decline in most global equity markets, a reduction in equity IPOs and
secondary offerings, and a sharp drop in merger and acquisition activity.
Despite the challenging environment, CICG achieved solid results, including
strong debt markets revenues. Net revenues were $3.2 billion for the quarter,
compared with $3.7 billion in the first quarter of 2000. CICG's pre-tax earnings
were $979 million in the first quarter of 2001, a decline of 19% from the first
quarter of 2000. The net impact on pre-tax earnings in the first quarter of 2001
from the energy-trading business was $84 million ($51 million after-tax). This
includes the gain on the sale of the majority of the assets of this business.
The pre-tax profit margin was 30.2% , compared with 33.1% in the 2000 first
quarter.
Client Facilitation and Trading
Commissions
Commissions revenues fell 18% in the first quarter of 2001 to $611 million
from $745 million in the first quarter of 2000 partly as a result of a decline
in equity trading volume.
Principal transactions and net interest profit
- -------------------------------------------------------------------------------------------------
For the Three Months Ended
------------------------------
Mar. 30, Mar. 31, Percent Change
(dollars in millions) 2001 2000 Inc. /(Dec.)
------- ------- --------------
Equities and equity derivatives $ 696 $1,338 (48)%
Debt and debt derivatives 1,019 607 68
------ ------
Total $1,715 $1,945 (12)
- -------------------------------------------------------------------------------------------------
Trading of over-the-counter equity, fixed-income, and equity derivative
instruments and related hedging and financing activities generates both
principal transactions revenues and net interest profit. In assessing the
profitability of its client facilitation and trading activities, Merrill Lynch
aggregates net interest profit and principal transactions revenues. For
financial reporting purposes, realized and unrealized gains and losses on
trading positions, including hedges, are recorded in principal transactions
revenues and dividends and interest are in net interest revenues. Changes in the
composition of trading inventories and hedge positions can cause the recognition
of principal transactions and net interest revenues to fluctuate.
17
Principal transactions and net interest revenues were $1.7 billion in the first
quarter of 2001, down 12% from $1.9 billion in the first quarter of 2000. The
decrease from the year-ago quarter reflects significantly lower revenues from
equities and equity derivatives, partially offset by improved debt markets
trading revenues. Net trading revenues from debt and debt derivatives increased
68% to $1.0 billion, benefiting from improved results in derivatives and
government bonds as well as the net impact of the energy-trading business.
Reduced order flow and spread compression resulting from declining stock prices
contributed to a 48% decline in equity trading revenues.
Investment Banking
- ----------------------------------------------------------------------------------------------
For the Three Months Ended
------------------------------
Mar. 30, Mar. 31, Percent Change
(dollars in millions) 2001 2000 Inc. /(Dec.)
------- ------- --------------
Debt underwriting $191 $ 90 112 %
Equity underwriting 327 367 (11)
Strategic advisory services 284 325 (13)
---- ----
Total $802 $782 3
- ----------------------------------------------------------------------------------------------
Underwriting
- ------------
Underwriting revenues were $518 million, up 13% from the $457 million recorded
in the first quarter of 2000, as increased revenues from corporate debt issues
more than offset an 11% decline in equity underwriting revenues. Merrill Lynch
retained its position as the leading global underwriter of total debt and equity
offerings during the first quarter of 2001. Merrill Lynch's underwriting market
share information based on transaction value follows:
- ----------------------------------------------------------------------------------------
For the Three Months Ended
--------------------------------------------
Mar. 2001 Mar. 2000
---------------- ---------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
Global proceeds
Debt and equity 13.0% 1 10.6% 1
Debt 12.8 1 10.7 2
Equity and equity-linked 15.2 2 8.4 5
U.S. proceeds
Debt and equity 16.2% 1 13.5% 1
Debt 15.8 1 14.3 1
Equity and equity-linked 20.0 2 7.7 6
- ----------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic Advisory Services
- ---------------------------
Strategic advisory services fees fell 13% from the first quarter of 2000 to $284
million in the first quarter of 2001 as a result of lower fees from completed
merger and acquisition transactions. Global announced merger and acquisition
industry volume was down 61% from the first quarter of 2000. Merrill Lynch's
merger and acquisition market share information based on transaction values
follows:
18
- -----------------------------------------------------------------------------------------
For the Three Months Ended
---------------------------------------------
Mar. 2001 Mar. 2000
----------------- ---------------
Market Market
Share Rank Share Rank
------ ---- ------ ----
Completed transactions
Global 40.1% 3 28.2% 3
U.S. 52.7 3 13.4 5
Announced transactions
Global 21.0% 2 27.5% 4
U.S. 21.1 4 43.1 3
- -----------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
Other Revenues
Other revenues include investment gains and losses and partnership
distributions. Other revenues declined 35% to $117 million in the first quarter
of 2001 as the result of lower gains on investments.
- --------------------------------------------------------------------------------
Private Client Group
- --------------------------------------------------------------------------------
PCG's Results of Operations
- ---------------------------------------------------------------------------------------------------------
For the Three Months Ended
---------------------------
Mar. 30, Mar. 31, Percent Change
(dollars in millions) 2001 2000 Inc. /(Dec.)
------- ------- --------------
Commissions $ 863 $1,402 (38) %
Principal transactions and new issue revenues 417 627 (33)
Asset management and portfolio service fees 928 903 3
Net interest profit 435 389 12
Other revenues 66 62 6
------ ------
Total net revenues $2,709 $3,383 (20)
------ ------
Pre-tax earnings $ 355 $ 484 (27)
------ ------
Pre-tax profit margin 13.1% 14.3%
- ---------------------------------------------------------------------------------------------------------
First quarter pre-tax earnings for PCG were $355 million, 27% lower than the
first quarter of 2000. Lower transaction volumes and a reduction in demand for
new equity and mutual fund products adversely impacted net revenues. Net
revenues were $2.7 billion, 20% below the first quarter of last year. The 2001
first quarter pre-tax profit margin was 13.1%, compared with 14.3% in the first
quarter of 2000. PCG's results were a combination of a relatively strong
performance in the United States and weaker results outside the United States.
Net revenues in the United States declined 14% from the first quarter of 2000,
while, as a result of actions taken in the United States in the second half of
2000 to contain expenses, pre-tax earnings declined only 2% over the same
period. Outside the United States, where transaction-related commissions are a
higher percentage of revenues than fees and net interest, net revenues declined
more sharply compared with the first quarter of last year due to a greater
reduction in equity transaction volumes and lower demand for new equity and
mutual fund products.
PCG employed approximately 19,400 financial advisors at the end of the first
quarter, compared with 19,000 at the end of the 2000 first quarter and 20,200 at
year-end 2000. The reduction in the first quarter of 2001 is a result of normal
attrition in a difficult business environment, fewer trainee hires, more
selective recruiting, and the consolidation or sale of selected Private Client
offices.
19
Commissions
Commissions revenues declined 38% to $863 million from $1.4 billion in the first
quarter of 2000, due primarily to a global decline in client transaction
volumes, particularly in equities and mutual funds. In addition, as assets have
moved from traditional transaction-priced accounts to asset-priced services,
there has been a shift in revenue from commissions to portfolio service fees.
Principal transactions and new issue revenues
Principal transactions and new issue revenues declined 33% to $417 million in
the 2001 first quarter, as trading and new issue volume declined in a less
favorable market environment, compared with the first quarter of 2000.
Asset management and portfolio service fees
Asset management and portfolio service fees, which includes asset management
fees from taxable money market funds, portfolio service fees, account fees, and
other fees, rose 3% to $928 million. The increase was largely due to a rise in
portfolio fees, as assets shifted from transaction-priced accounts to
asset-priced services, such as Unlimited Advantage(Service Mark) and Merrill
Lynch Consults(Registered Trademark).
An analysis of changes in assets in Private Client accounts from March 31, 2000
to March 30, 2001 is detailed below:
- ---------------------------------------------------------------------------------------------------------
Net Changes Due To
--------------------------------------
Mar. 31, New Asset Mar. 30,
(dollars in billions) 2000 Money Depreciation 2001
- ---------------------------------------------------------------------------------------------------------
Assets in Private Client accounts $1,573 $ 119 $(307) $ 1,385
- ---------------------------------------------------------------------------------------------------------
Total assets in U.S. Private Client accounts declined 12% from the end of
the 2000 first quarter to $1.3 trillion, as a result of market devaluations
despite net new money inflows of $24 billion in the first quarter of 2001 and
$95 billion since the first quarter of 2000. Outside the United States, client
assets were $131 billion, with $4 billion of net new money in the 2001 first
quarter and $24 billion since the end of the 2000 first quarter. Total assets in
asset-priced accounts were $193 billion, compared with $209 billion at the end
of 2000.
Net interest profit
Net interest profit was $435 million, up 12% from $389 million in the first
quarter of 2000. The increase in net interest profit resulted from growth in
deposits and the related investment portfolios at Merrill Lynch's U.S. banks,
partially offset by a decline in net interest revenue related to margin loans.
Other revenues
Other revenues, which is primarily comprised of investment gains, increased 6%,
from $62 million to $66 million in the first quarter of 2001.
20
- --------------------------------------------------------------------------------
Merrill Lynch Investment Managers
- --------------------------------------------------------------------------------
MLIM's Results of Operations
- --------------------------------------------------------------------------------
For the Three Months Ended
----------------------------
Mar. 30, Mar. 31, Percent Change
(dollars in millions) 2001 2000 Inc. /(Dec.)
------- ------- --------------
Commissions $ 79 $106 (25) %
Asset management fees 446 482 (7)
Other revenues 43 25 72
---- ----
Total net revenues $568 $613 (7)
---- ----
Pre-tax earnings $ 98 $103 (5)
---- ----
Pre-tax profit margin 17.3% 16.8%
- -----------------------------------------------------------------------------------------
MLIM continued to produce competitive investment performance and to attract
net new money during the quarter. However, a 6% drop in assets under management
in the 2001 first quarter due to market depreciation and adverse foreign
exchange translation negatively impacted financial results. Pre-tax earnings for
MLIM were $98 million in the first quarter of 2001, a decline of 5% from the
first quarter of 2000. Net revenues declined 7% from the first quarter of last
year to $568 million. The pre-tax profit margin grew from 16.8% in the first
quarter of 2000 to 17.3% in the first quarter of 2001. MLIM's improved profit
margin since the year-ago quarter, despite lower assets under management,
reflects a reduction in expenses over the period, including the completion of
amortization of employee stock awards related to the Mercury acquisition. In
addition, a benefit was realized from the January 2001 outsourcing of U.S.
mutual fund accounting.
Commissions
Commissions revenues declined 25% to $79 million due to lower sales of mutual
funds in the first quarter of 2001 compared with the first quarter of 2000.
Asset management fees
Asset management fees were $446 million, a decline of 7% from the first quarter
of 2000 due to lower performance fees and a decrease in management fees,
resulting from the depreciation in assets under management. At the end of the
first quarter of 2001, assets under management totaled $525 billion, compared
with $602 billion at the end of the 2000 first quarter. MLIM has attracted
positive net new money for six consecutive quarters, including $7 billion in
the first quarter of 2001, after adjusting for money flows from taxable money
market funds to U.S. bank deposits.
MLIM's assets under management include taxable money market funds, the fees
for which are incuded in the results of PCG. These funds totaled $64 billion
at March 30, 2001. An analysis of changes in assets under management from March
31, 2000 to March 30, 2001 is as follows:
- -------------------------------------------------------------------------------------------------------
Net Changes Due To
--------------------------------------------
Mar. 31, New Asset Mar. 30,
(dollars in billions) 2000 Money Depreciation (1) Other(2) 2001
- -------------------------------------------------------------------------------------------------------
Assets under management $ 602 $ 36 $ (78) $ (35) $ 525
- -------------------------------------------------------------------------------------------------------
(1)Includes $(27) billion impact of foreign exchange, primarily due to the
decline in value of the British Pound against the U.S. dollar.
(2)Includes reinvested dividends of $9 billion and net outflows of $44 billion
of retail money market funds which were transferred to bank deposits at
Merrill Lynch's U.S. banks.
Other Revenues
Other revenues increased 72% from the first quarter of 2000 to $43 million in
the first quarter of 2001.
21
- --------------------------------------------------------------------------------
Non-Interest Expenses
- --------------------------------------------------------------------------------
Merrill Lynch's non-interest expenses are summarized below:
- --------------------------------------------------------------------------------
For the Three Months Ended
------------------------------
Mar. 30, Mar. 31,
(dollars in millions) 2001 2000
------- -------
Compensation and benefits $ 3,244 $ 3,918
------- -------
Non-compensation expenses:
Communications and technology 598 584
Occupancy and related depreciation 270 253
Advertising and market development 208 245
Brokerage, clearing, and exchange fees 235 233
Professional fees 134 147
Goodwill amortization 52 56
Other 334 403
------- -------
Total non-compensation expenses 1,831 1,921
------- -------
Total non-interest expenses $ 5,075 $ 5,839
------- -------
Compensation and benefits
as a percentage of net revenues 50.5% 52.1%
Non-compensation expenses
as a percentage of net revenues 28.5 25.5
- -------------------------------------------------------------------------------------------------------
Compensation and benefits, the largest expense category, decreased 17% from the
2000 first quarter to $3.2 billion as a result of reduced profitability.
Compensation and benefits as a percentage of net revenues was 50.5% for the 2001
first quarter, compared with 52.1% in the first quarter of last year and in line
with the previous quarter. Non-compensation expenses were 5% lower than the 2000
first quarter, as the result of actions initiated in the second half of 2000 to
contain expenses and more effective allocation of resources.
Communications and technology expenses were $598 million, up 2% from the first
quarter of 2000 due to higher technology equipment costs.
Occupancy and related depreciation expense was $270 million in the first
quarter of 2001, 7% higher than the first quarter of 2000 principally due to
increased depreciation expense.
Advertising and market development expenses declined 15% from the 2000 first
quarter to $208 million, due to continued lower levels of advertising
spending, in line with the second half of 2000.
Brokerage, clearing, and exchange fees were $235 million, approximately equal
to the year-ago quarter.
Professional fees decreased 9% to $134 million primarily due to reduced
spending on legal and consulting services.
Goodwill amortization was $52 million in the first quarter of 2001, virtually
unchanged from the 2000 first quarter. Other expenses were $334 million, 17%
lower than the 2000 first quarter due to a decline in provisions.
22
The effective tax rate was 31.7% for the first quarter of 2001, virtually
unchanged from the corresponding period in 2000 and up from the full-year 2000
rate of 30.4%. The increase from the full-year 2000 is a result of a lower
percentage of non-U.S. income.
- --------------------------------------------------------------------------------
Average Assets and Liabilities
- --------------------------------------------------------------------------------
Management continually monitors and evaluates on a daily basis the level and
composition of the balance sheet.
For the first three months of 2001, average total assets were $423 billion, up
10% from $385 billion for the 2000 fourth quarter. Average total liabilities
increased 10% to $401 billion from $365 billion for the 2000 fourth quarter. The
major components in the changes in average total assets and liabilities for the
first three months of 2001 as compared with the fourth quarter of 2000 are
summarized as follows:
- ------------------------------------------------------------------------------------------------
(dollars in millions) Increase Change
- ------------------------------------------------------------------------------------------------
Average assets
Marketable investment securities $ 9,718 21%
Trading assets 4,226 4
Receivables under resale agreements and securities
borrowed transactions 13,377 13
Average liabilities
Deposits $15,405 27%
Long-term borrowings 3,338 5
Customer payables 3,197 11
Payables under repurchase agreements and
securities loaned transactions 11,719 11
- ------------------------------------------------------------------------------------------------
The significant growth in deposits in the first three months of 2001 reflects
the continued cash inflows from certain CMA(Registered Trade Mark) and other
types of accounts from taxable money market funds which are included in assets
under management to bank deposits at Merrill Lynch's U.S. banks. This increase
in deposits was used by the U.S. banks to fund the growth in marketable
investment securities. Additionally, receivables under resale agreements and
securities borrowed transactions rose due to increased matched-book activity.
- --------------------------------------------------------------------------------
Capital Adequacy and Liquidity
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
1. Ensure sufficient equity capital to absorb losses,
2. Support the business strategies, and
3. Assure liquidity at all times, across market cycles, and through periods of
financial stress.
These objectives and Merrill Lynch's capital structure and funding policies are
discussed more fully in the Annual Report on Form 10-K for the year ended
December 29, 2000.
At March 30, 2001, Merrill Lynch's equity capital was comprised of $19.5 billion
in common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries. Preferred securities issued by subsidiaries
consist primarily of Trust Originated Preferred Securities (Service Mark)
("TOPrS"(Service Mark)). Based on various analyses and criteria, management
believes that Merrill Lynch's equity capital base of $22.6 billion is adequate.
23
Merrill Lynch's leverage ratios were as follows:
- ----------------------------------------------------------------------------------
Adjusted Adjusted
Leverage Leverage Leverage
Ratio(1) Ratio(2) Ratio(3)
- ----------------------------------------------------------------------------------
Period-end
March 30, 2001 19.1x 13.6x 10.9x
December 29, 2000 19.4x 13.9x 11.6x
Average (4)
Three months ended March 30, 2001 19.5x 14.0x 11.5x
Year ended December 29, 2000 19.0x 13.1x 11.7x
- ----------------------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less receivables under resale agreements and
securities borrowed transactions to total stockholders' equity and
preferred securities issued by subsidiaries.
(3) Total assets less (a) receivables under resale agreements and
securities borrowed transactions and (b) marketable investment
securities to total stockholders' equity and preferred securities issued
by subsidiaries.
(4) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of assets,
hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not
rely on overall leverage ratios to assess risk-based capital adequacy.
Commercial paper outstanding totaled $10.8 billion at March 30, 2001 and $14.0
billion at December 29, 2000, which was 3% of total assets at March 30, 2001 and
year-end 2000. Deposits at Merrill Lynch's banking subsidiaries have increased
from $67.6 billion at year-end 2000 to $77.9 billion at March 30, 2001,
including $66.2 billion at Merrill Lynch's U.S. banks. The U.S. bank deposits
were primarily invested in high quality marketable investment securities.
Outstanding long-term borrowings increased to $73.3 billion at March 30, 2001
from $70.2 billion at December 29, 2000. Major components of the change in
long-term borrowings during the first three months of 2001 follow:
- ----------------------------------------------
(dollars in billions)
- ----------------------------------------------
Balance at December 29, 2000 $70.2
Issuances 10.9
Maturities (8.2)
Other, net 0.4
---------
Balance at March 30, 2001 (1) $73.3
=========
- ----------------------------------------------
(1) At March 30, 2001, $51.6 billion of long-term borrowings had maturity dates
beyond one year.
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its core balance sheet assets. Another source of
liquidity is a committed, senior, unsecured bank credit facility which at March
30, 2001 totaled $8.0 billion and was not drawn upon. Additionally, Merrill
Lynch maintains access to significant uncommitted credit lines, both secured and
unsecured, from a large group of banks.
24
The cost and availability of unsecured financing generally are dependent on
credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and
TOPrS were rated by several recognized credit rating agencies at March 30, 2001
as follows:
- ---------------------------------------------------------------------------------------------
Senior Preferred Stock
Debt and TOPrS
Rating Agency Ratings Ratings
- ---------------------------------------------------------------------------------------------
Dominion Bond Rating Service Ltd AA (Low) Not Rated
Fitch AA AA-
Moody's Investors Service, Inc. Aa3 aa3
Rating and Investment Information, Inc. AA A+
Standard & Poor's Rating Service AA- A
- ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risk Management
- --------------------------------------------------------------------------------
Risk-taking is an integral part of Merrill Lynch's core business activities. In
the course of conducting its business operations, Merrill Lynch is exposed to a
variety of risks. These risks include market, credit, liquidity, process, and
other risks that are material and require comprehensive controls and management.
The responsibility and accountability for these risks remain primarily with the
individual business units. For a full discussion of Merrill Lynch's risk
management, see the Annual Report on Form 10-K for the year ended December 29,
2000.
Market Risk
Value-at-risk ("VaR") is an estimate of the amount that Merrill Lynch's present
portfolios could lose with a specified degree of confidence over a given time
interval. The VaR for Merrill Lynch's overall portfolios is less than the sum of
the VaRs for individual risk categories because movements in different risk
categories occur at different times and, historically, extreme movements have
not occurred in all risk categories simultaneously. The difference between the
sum of the VaRs for individual risk categories and the VaR calculated for all
risk categories is shown in the following tables and may be viewed as a measure
of the diversification within Merrill Lynch's portfolios. Merrill Lynch's
Corporate Risk Management believes that the tabulated risk measures provide some
guidance as to the amount Merrill Lynch could lose in future periods and it
works continuously to improve its measurement and the methodology of its VaR.
However, like all statistical measures, especially those that rely heavily on
historical data, VaR needs to be interpreted with a clear understanding of its
assumptions and limitations.
The Merrill Lynch VaR system uses a historical simulation approach to estimate
value-at-risk using a 99% confidence level and a two-week holding period for
trading and non-trading portfolios. Sensitivities to market risk factors are
aggregated and combined with a database of historical biweekly changes in market
factors to simulate a series of profits and losses. The level of loss that is
exceeded in that series 1% of the time is used as the estimate for the 99%
confidence level VaR. The overall total VaR amounts are presented across major
risk categories, including exposure to volatility risk found in certain
products, e.g., options. The table that follows presents Merrill Lynch's VaR for
its trading portfolios at March 30, 2001 and December 29, 2000 as well as daily
average VaR for the three months ended March 30, 2001. Additionally, high and
low VaR for the first quarter of 2001 is presented based on an overall aggregate
basis.
25
- -----------------------------------------------------------------------------------------------------------
Daily
Mar. 30, Dec. 29, Average High Low
(dollars in millions) 2001 2000 1Q01 2001 2001
- -----------------------------------------------------------------------------------------------------------
Trading value-at-risk(1)
Interest rate and credit spread $ 90 $ 81 $ 83 $ 95 $ 84
Equity 50 77 66 78 47
Commodity 2 9 6 4 8
Currency 13 14 18 13 16
Volatility 26 34 40 28 56
---- ----- ---- ---- -----
181 215 213 218 211
Diversification benefit (75) (116) (105) (89) (123)
---- ----- ---- ---- -----
Overall(2) $106 $ 99 $108 $129 $ 88
==== ===== ==== ==== =====
- -----------------------------------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$20 million at both March 30, 2001 and December 29, 2000.
During the first quarter of 2001, overall VaR increased slightly as the impact
of an increase in interest and credit spread VaR and a decrease in the
diversification benefit was substantially offset by decreases in equity and
volatility VaR.
Merrill Lynch's energy trading business, for which VaR has severe
limitations as a risk measure, has been excluded from the table above.
During the first quarter of 2001, Merrill Lynch sold the majority of its
energy-trading assets. Although Merrill Lynch entered into a thirty - month
non-compete covenant in connection with this asset sale, some energy-trading
positions still remain.
The following table presents Merrill Lynch's VaR for its non-trading portfolios
(excluding U.S. banks):
- -----------------------------------------------------------------------------
Mar. 30, Dec. 29,
(dollars in millions) 2001 2000
- -----------------------------------------------------------------------------
Non-trading value-at-risk(1)
Interest rate and credit spread $ 79 $ 67
Currency 15 23
Equity 46 47
Volatility 10 3
---- ----
150 140
Diversification benefit (26) (44)
---- ----
Overall $124 $ 96
==== ====
- -----------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
Non-Trading VaR increased during the first quarter of 2001 due to higher
interest rate and credit spread risk and volatility risk as well as a lower
diversification benefit, partially offset by lower currency risk.
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrS at March 30, 2001 and
December 29, 2000 was $91 million and $138 million, respectively. TOPrS, which
are fixed-rate perpetual preferred securities, are considered a component of
Merrill Lynch's equity capital and, therefore, the associated interest rate
sensitivity is not hedged.
Beginning in 2000, client funds in certain CMA and other types of accounts were
redirected from taxable money market funds to bank deposits at Merrill Lynch's
U.S. banks. This increase in deposits was used to fund the growth in high
quality marketable investment securities. The overall
26
VaR for the U.S. banks, driven largely by these securities and based on a
99% confidence interval and a two-week holding period, was $254 million and $191
million at March 30, 2001 and December 29, 2000, respectively.
Credit Risk
Merrill Lynch enters into International Swaps and Derivatives Association, Inc.
master agreements or their equivalent ("master netting agreements") with each of
its derivative counterparties as soon as possible. Master netting agreements
provide protection in bankruptcy in certain circumstances and, in some cases,
enable receivables and payables with the same counterparty to be offset on the
Consolidated Balance Sheets, providing for a more meaningful balance sheet
presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally U.S. Government and agencies securities, on certain derivative
transactions. From an economic standpoint, Merrill Lynch evaluates default risk
exposures net of related collateral. The following is a summary of counterparty
credit ratings for the replacement cost (net of $5.0 billion of collateral) of
trading derivatives in a gain position by maturity at March 30, 2001. (Please
note that the following table is inclusive of credit exposure from derivative
transactions only and does not include other credit exposures, which may be
material).
- -----------------------------------------------------------------------------------------
Years to Maturity Cross-
Credit --------------------------------------------- Maturity
Rating(1) 0-3 3-5 5-7 Over 7 Netting(2) Total
- -----------------------------------------------------------------------------------------
AAA $ 2,082 $1,028 $ 785 $1,593 $ (706) $ 4,782
AA+/AA 1,489 626 400 724 (479) 2,760
AA- 1,981 997 730 958 (1,438) 3,228
A+/A 2,298 685 283 594 (829) 3,031
A- 2,959 736 473 771 (525) 4,414
BBB 1,305 382 247 571 (358) 2,147
BB+ 805 97 141 131 (147) 1,027
Other 537 257 133 152 (168) 911
------- ------ ------ ------ ------ -------
Total $13,456 $4,808 $3,192 $5,494 $(4,650) $22,300
======= ====== ====== ====== ====== =======
- -----------------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent of internal credit ratings.
(2) Represents netting of payable balances with receivable balances for the same
counterparty across maturity band categories. Receivable and payable
balances with the same counterparty in the same maturity category, however,
are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate its
default risk on derivatives whenever possible by entering into transactions with
provisions that enable Merrill Lynch to terminate or reset the terms.
- --------------------------------------------------------------------------------
Non-Investment Grade Holdings
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions, involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and
highly-leveraged positions may vary significantly from period to period as a
result of inventory turnover, investment sales, and asset redeployment.
27
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated as BB+
or lower, or equivalent ratings by recognized credit rating agencies, sovereign
debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
In addition to the amounts included in the following table, derivatives may also
expose Merrill Lynch to credit risk related to the underlying security where a
derivative contract either synthesizes ownership of the underlying security
(e.g., long total return swaps) or can potentially force ownership of the
underlying security (e.g., short put options). Derivatives may also subject
Merrill Lynch to credit spread or issuer default risk, in that changes in credit
spreads or in the credit quality of the underlying securities may adversely
affect the derivatives' fair values. Merrill Lynch seeks to manage these risks
by engaging in various hedging strategies to reduce its exposure associated with
non-investment grade positions, such as purchasing an option to sell the related
security or entering into other offsetting derivative contracts.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
- --------------------------------------------------------------------------------
Trading Exposures
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's trading exposure to
non-investment grade or highly-leveraged issuers or counterparties:
- ---------------------------------------------------------------------
Mar. 30, Dec. 29,
(dollars in millions) 2001 2000
- ---------------------------------------------------------------------
Trading assets:
Cash instruments $ 4,995 $ 5,227
Derivatives 3,384 3,982
Trading liabilities - cash instruments (1,270) (1,087)
Collateral on derivative assets (1,446) (1,796)
------- -------
Net trading asset exposure $ 5,663 $ 6,326
======= =======
- ---------------------------------------------------------------------
Among the trading exposures included in the preceding table are debt and equity
securities and bank loans of companies in various stages of bankruptcy
proceedings or in default. At March 30, 2001, the carrying value of such debt
and equity securities totaled $57 million, of which 18% resulted from Merrill
Lynch's market-making activities in such securities, compared with $43 million
at December 29, 2000, of which 64% related to market-making activities. Also
included are distressed bank loans with a carrying value totaling $153 million
and $122 million at March 30, 2001 and December 29, 2000, respectively.
28
- --------------------------------------------------------------------------------
Non-Trading Exposures
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's non-investment grade non-trading
exposures:
- --------------------------------------------------------------------------------------
Mar. 30, Dec. 29,
(dollars in millions) 2001 2000
- --------------------------------------------------------------------------------------
Marketable investment securities $ 112 $ 199
Investments of insurance subsidiaries 123 136
Loans (net of allowance for loan losses):
Bridge loans 476 524
Other loans(1) 2,966 2,741
Other investments:
Partnership interests(2) 1,141 993
Other equity investments(3) 185 284
- --------------------------------------------------------------------------------------
(1)Represents outstanding loans to 145 and 135 companies at March 30, 2001 and
December 29, 2000, respectively.
(2)Includes $632 million and $504 million in investments at March 30, 2001 and
December 29, 2000, respectively, related to deferred compensation plans, for
which the default risk of the investments generally rests with the
participating employees.
(3)Includes investments in 80 and 98 enterprises at March 30, 2001 and
December 29, 2000, respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly-leveraged counterparties:
- ---------------------------------------------------------------------------------------------
Mar. 30, Dec. 29,
(dollars in millions) 2001 2000
- ---------------------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 354 $ 467
Unutilized revolving lines of credit and other
lending commitments 3,455 3,664
- ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
New Accounting Pronouncement
- --------------------------------------------------------------------------------
In September 2000, the Financial Accounting Standards Board released SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, a replacement of SFAS No. 125. Merrill Lynch has
adopted those provisions of the statement that are required to be adopted as of
December 29, 2000. These provisions relate primarily to the accounting and
disclosures for collateral received or pledged in secured borrowing
transactions. Other provisions of the statement are not required to be adopted
until the second quarter of 2001. These provisions provide new guidance for
determining whether a transfer of assets should be accounted for as a sale or a
secured borrowing, and also change the accounting for certain securities lending
transactions. Under the new provisions, Merrill Lynch will be required to
recognize on the Consolidated Balance Sheet securities lending transactions in
which Merrill Lynch as securities lender receives securities (rather than cash)
as collateral. Merrill Lynch is currently evaluating the impact of adoption.
29
- --------------------------------------------------------------------------------
Statistical Data
- --------------------------------------------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr.
2000 2000 2000 2000 2001
-------- -------- -------- -------- --------
Client Assets (dollars in billions):
Private Client
U.S. $ 1,424 $ 1,415 $ 1,417 $ 1,337 $ 1,254
Non-U.S. 149 146 148 140 131
-------- -------- -------- -------- --------
Total Private Client 1,573 1,561 1,565 1,477 1,385
MLIM direct sales (1) 219 211 203 204 179
-------- -------- -------- -------- --------
Total client assets $ 1,792 $ 1,772 $ 1,768 $ 1,681 $ 1,564
======== ======== ======== ======== ========
Assets in Asset-Priced Accounts $ 203 $ 208 $ 220 $ 209 $ 193
Assets Under Management:
Retail $ 307 $ 283 $ 274 $ 250 $ 233
Institutional 253 257 252 262 250
Private investors 42 45 45 45 42
Equity 341 343 337 321 282
Fixed-income 103 104 101 108 118
Money market 158 138 133 128 125
U.S. 364 356 351 333 319
Non-U.S. 238 229 220 224 206
U.S. Bank Deposits $ 7 $ 19 $ 38 $ 55 $ 66
- ------------------------------------------------------------------------------------------------------------------------
Underwriting:
Global Debt and Equity:
Volume (dollars in billions) $ 96 $ 92 $ 108 $ 76 $ 132
Market share 10.6% 12.1% 13.8% 11.8% 13.0%
U.S. debt and equity:
Volume (dollars in billions) $ 79 $ 69 $ 77 $ 55 $ 112
Market share 13.5% 14.2% 14.7% 12.6% 16.2%
- ------------------------------------------------------------------------------------------------------------------------
Full-Time Employees:
U.S. 50,900 52,300 52,700 51,800 50,400
Non-U.S. 18,500 19,200 20,000 20,200 19,900
Total -------- -------- -------- -------- --------
69,400 71,500 72,700 72,000 70,300
======== ======== ======== ======== ========
Financial advisors and
other investment professionals 19,900 20,600 21,000 21,200 20,400
- ------------------------------------------------------------------------------------------------------------------------
Income Statement:
Net earnings (dollars in millions) $ 1,101 $ 921 $ 885 $ 877 $ 874
Annualized return on average
common stockholders' equity 32.4% 24.4% 21.6% 20.0% 18.4%
Earnings per common share:
Basic $ 1.40 $ 1.15 $ 1.09 $ 1.07 $ 1.04
Diluted 1.24 1.01 0.94 0.93 0.92
- ------------------------------------------------------------------------------------------------------------------------
Balance Sheet (dollars in millions):
Total assets $344,992 $334,875 $361,691 $407,200 $431,604
Total stockholders' equity $ 14,733 $ 16,014 $ 17,171 $ 18,304 $ 19,939
Book value per common share $ 18.13 $ 19.47 $ 20.70 $ 21.95 $ 23.28
Share Information (in thousands):
Weighted-average shares outstanding:
Basic 780,220 795,070 805,855 811,943 832,195
Diluted 881,681 904,246 929,048 930,688 937,954
Common shares outstanding 789,057 800,863 809,069 814,572 838,389
- ------------------------------------------------------------------------------------------------------------------------
(1) Reflects funds managed by MLIM not sold through Private Client channels.
30
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 27, 2001, ML & Co. held its Annual Meeting of Stockholders, at which
84.4% of the shares of ML & Co. common stock outstanding and eligible to vote,
either in person or by proxy, were represented, constituting a quorum. At the
Annual Meeting, the following matters were voted upon: (i) the election of three
directors to the Board of Directors to hold office for a term of three years;
(ii) a proposal to amend ML & Co.'s certificate of incorporation to increase the
authorized shares of common stock from 1,000,000,000 to 3,000,000,000; (iii) a
proposal to amend ML & Co.'s employee stock purchase plan to increase the number
of shares of common stock available under the plan by 25,000,000 for a total of
125,600,000 shares; and (iv) a stockholder proposal concerning cumulative voting
in the election of directors. Proxies for the Annual Meeting were solicited by
the Board of Directors pursuant to Regulation 14A of the Securities Exchange Act
of 1934.
The stockholders elected all three nominees to the Board of Directors as set
forth in ML & Co.'s Proxy Statement. There was no solicitation in opposition to
the nominees. The votes cast for or withheld from the election of directors were
as follows: David H. Komansky received 698,451,092 votes in favor and 6,010,492
votes were withheld; Robert P. Luciano received 698,759,648 votes in favor and
5,701,936 votes were withheld; and David K. Newbigging received 698,564,387
votes in favor and 5,897,197 votes were withheld.
The stockholders approved the proposal to amend the certificate of incorporation
to increase the authorized shares of common stock. The votes cast for and
against, as well as the number of abstentions for this proposal were as follows:
588,488,443 votes in favor, 112,461,876 votes against, and 3,511,265 shares
abstained.
The stockholders approved the proposal to amend the employee stock purchase plan
to increase the number of shares of common stock available under the plan. The
votes cast for and against, as well as the number of abstentions for this
proposal were as follows: 646,050,682 votes in favor, 54,702,585 votes against,
and 3,708,317 shares abstained.
The stockholders did not approve the stockholder proposal concerning cumulative
voting in the election of directors. The votes cast for and against, as well as
the number of abstentions and broker non-votes for this proposal were as
follows: 157,609,479 votes in favor, 395,421,760 votes against, 7,719,191 shares
abstained, and 143,711,154 shares represented broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(3)(i) ML & Co.'s Restated Certificate of Incorporation
effective as of May 3, 2001
(ii) ML & Co.'s By-Laws effective as of April 27, 2001
(4) Instruments defining the rights of security holders,
including indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML &
Co. hereby undertakes to furnish to the Securities and
Exchange Commission, upon request, copies of the
instruments defining the rights of holders of long-term
debt securities of ML & Co. that authorize an amount of
securities constituting 10% or less of the total assets of
ML & Co. and its subsidiaries on a consolidated basis.
(10) Merrill Lynch & Co., Inc. Deferred Stock Unit and Stock
Option Plan for Non-Employee Directors, as amended
February 16, 2001
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
31
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed with or furnished
to the Securities and Exchange Commission during the quarterly period
covered by this report:
(i) Current Report dated January 18, 2001, for the purpose of
furnishing notice of a webcast of a conference call
scheduled for January 23, 2001 to review ML & Co.'s
operating results.
(ii) Current Report dated January 23, 2001, for the purpose of
filing ML & Co.'s Preliminary Unaudited Earnings Summary for
the three months and the year ended December 29, 2000.
(iii)Current Report dated February 28, 2001, for the purpose of
filing ML & Co.'s Preliminary Unaudited Consolidated Balance
Sheet as of December 29, 2000.
(iv) Current Report dated March 5, 2001, for the purpose of
furnishing notice of a webcast of a meeting scheduled for
March 12, 2001 between ML & Co. management and investors.
32
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
----------------------------
(Registrant)
Date: May 11, 2001 By: /s/ Thomas H. Patrick
----------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
33
INDEX TO EXHIBITS
Exhibits
3 (i) ML & Co.'s Restated Certificate of Incorporation effective as of
May 3, 2001
(ii) ML & Co.'s By-Laws effective as of April 27, 2001
10 Merrill Lynch & Co., Inc. Deferred Stock Unit and Stock
Option Plan for Non-Employee Directors, as amended February 16, 2001
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
34