Exhibit 99
SELECTED FINANCIAL DATA
(dollars in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------
YEAR ENDED LAST FRIDAY IN DECEMBER
---------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total Revenues $ 38,757 $ 44,852 $ 35,332 $ 34,828 $ 31,460
Less Interest Expense 16,877 18,086 13,019 17,038 14,957
--------- ---------- --------- --------- ---------
Net Revenues 21,880 26,766 22,313 17,790 16,503
Non-Interest Expenses 20,503 21,049 18,107 15,670 13,401
--------- ---------- --------- --------- ---------
Earnings Before Income Taxes and Dividends on
Preferred Securities Issued by Subsidiaries 1,377 5,717 4,206 2,120 3,102
Income Tax Expense 609 1,738 1,319 725 1,127
Dividends on Preferred Securities Issued by
Subsidiaries 195 195 194 124 47
--------- ---------- --------- --------- ---------
Net Earnings $ 573 $ 3,784 $ 2,693 $ 1,271 $ 1,928
========= ========== ========= ========= =========
Net Earnings Applicable to Common Stockholders(a) $ 535 $ 3,745 $ 2,654 $ 1,233 $ 1,889
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $ 419,419 $ 407,200 $ 309,850 $ 286,446 $ 298,057
Short-Term Borrowings(b) $ 178,146 $ 186,714 $ 115,409 $ 98,655 $ 123,946
Long-Term Borrowings $ 76,572 $ 70,223 $ 54,043 $ 57,599 $ 43,176
Preferred Securities Issued by Subsidiaries $ 2,695 $ 2,714 $ 2,725 $ 2,627 $ 627
Total Stockholders' Equity $ 20,008 $ 18,304 $ 13,004 $ 10,264 $ 8,663
- -------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA(c)
(in thousands, except per share amounts)
Earnings Per Share:
Basic $ 0.64 $ 4.69 $ 3.52 $ 1.69 $ 2.70
========= ========== ========= ========= =========
Diluted $ 0.57 $ 4.11 $ 3.11 $ 1.49 $ 2.33
========= ========== ========= ========= =========
Weighted-Average Shares Outstanding:
Basic 838,683 798,273 754,672 728,929 698,300
Diluted 938,555 911,416 853,499 830,276 809,819
Shares Outstanding at Year End(d) 843,474 807,955 752,501 729,981 696,611
Book Value Per Share $ 23.03 $ 21.95 $ 16.49 $ 13.31 $ 11.69
Dividends Paid Per Share $ 0.64 $ 0.61 $ 0.53 $ 0.46 $ 0.38
- -------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pre-tax Profit Margin(e) 6.3% 21.4% 18.8% 11.9% 18.8%
Common Dividend Payout Ratio 100.0% 13.0% 15.1% 27.2% 14.1%
Return on Average Assets 0.1% 1.1% 0.9% 0.4% 0.7%
Return on Average Common Stockholders' Equity 2.7% 24.2% 23.8% 13.4% 25.9%
Average Leverage(f) 18.8x 19.0x 21.4x 29.9x 34.9x
Average Adjusted Leverage(g) 13.1x 13.2x 14.2x 19.0x 21.1x
- -------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
(dollars in billions)
Full-Time Employees:
U.S. 43,500 51,800 49,700 47,900 46,600
Non-U.S. 13,900 20,200 18,200 17,300 13,900
--------- ---------- --------- --------- ---------
Total(h) 57,400 72,000 67,900 65,200 60,500
========= ========== ========= ========= =========
Private Client Financial Advisors 16,400 20,200 18,600 17,800 14,900
Client Assets $ 1,458 $ 1,681 $ 1,696 $ 1,446 $ 1,229
- -------------------------------------------------------------------------------------------------------------------
(a) Net earnings less preferred stock dividends.
(b) Consists of Payables under repurchase agreements, Payables under securities
loaned transactions, Commercial paper and other short-term borrowings, and
Deposits.
(c) All share and per share data have been restated for the two-for-one common
stock split paid in August 2000 (see Note 11 to the Consolidated Financial
Statements).
(d) Does not include 4,195; 4,654; 8,019; 9,012; and 9,436 shares exchangeable
into common stock (see Note 11 to the Consolidated Financial Statements) at
year-end 2001, 2000, 1999, 1998, and 1997, respectively.
(e) Earnings before income taxes and dividends on preferred securities issued
by subsidiaries to Net revenues.
(f) Average total assets to average Total stockholders' equity and Preferred
securities issued by subsidiaries.
(g) Average total assets less average (i) Receivables under resale agreements,
(ii) Receivables under securities borrowed transactions, and (iii)
Securities received as collateral to average Total stockholders' equity and
Preferred securities issued by subsidiaries.
(h) Excludes 3,200 full-time employees on salary continuation severance at
year-end 2001.
References to the Consolidated Financial Statements and the Notes thereto are
references to the Consolidated Financial Statements and Notes to be filed with
Merrill Lynch's 2001 Annual Report on Form 10-K.
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
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, banking,
and related products and services on a global basis. 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 unpredictable factors. These factors include economic
conditions, monetary and fiscal policies, the liquidity of global markets,
international and regional political events, acts of war or terrorism, changes
in applicable laws and regulations, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility
and trading volumes of financial markets. Greater volatility increases risk but
also could lead to increased order flow and revenues in the trading and
brokerage businesses. 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 an intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, competition from new and established competitors using the
Internet or other technology, and diminishing margins in many mature products
and services. The trend of consolidation of commercial and investment banks made
possible by the Gramm-Leach-Bliley Act has also increased the competition for
investment banking business through the use of lending activities in conjunction
with investment banking activities.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated expense savings and financial
results, and other similar matters. A variety of factors, many of which are
beyond Merrill Lynch's control, affect its operations, performance, business
strategy, and results 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 of 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 and uncertainties detailed in Merrill Lynch's Form 10-K and in the
following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
Global financial markets, particularly equity markets, had a difficult year in
2001 as a slowdown in economic activity, reduced corporate earnings, widespread
corporate downsizing, the devaluation of technology and telecommunications
companies, and the September 11th terrorist attacks caused equity markets to
fall and investors to shift to less volatile, fixed-income investments. The U.S.
Federal Reserve's interest rate cuts during the year did little to help the
slumping U.S. economy. The September 11th terrorist attacks negatively impacted
stock markets around the world, and forced a suspension of trading in U.S.
equity markets for an unprecedented four consecutive business days. A modest
rally occurred in global equity markets during the fourth quarter 2001, but was
not enough to put global indices in positive territory for the year.
Long-term U.S. interest rates, as measured by the yield on the 10-year U.S.
Treasury note, slipped slightly from 5.11% at year-end 2000 to 5.02% at the end
of 2001. Treasury bond prices rose sharply in 2001, as demand grew from
investors seeking an alternative to the stock market. The Federal Reserve Bank
cut interest rates 11 times during 2001, for a total of 475 basis points on the
federal funds
PAGE 1
rate and the discount rate, bringing these rates to 40-year lows of 1.75% and
1.25%, respectively. Credit spreads, which represent the risk premium over the
risk-free rate paid by an issuer (based on the issuer's perceived
creditworthiness), tightened significantly through September 11th, after which
credit spreads widened.
Despite the fourth quarter rally, U.S. equity indices declined for the
second consecutive year. The Nasdaq Composite Index fell 21.1% in 2001, after
declining 39.3% in the prior year, as telecommunications and technology stocks
continued to perform poorly. The Dow Jones Industrial Average and the S&P 500
dropped 7.1% and 13.0%, respectively, for the year.
Equity indices around the world dropped to their lowest levels in more than
three years amid a global recession. The Dow Jones World Index, excluding the
United States, sank 21.0% from the end of 2000, the worst one-year performance
since inception of the index. European stock markets were hit hard, as virtually
all industry sectors declined, leading to one of the worst annual performances
ever. In Japan, the Nikkei 225 index fell 23.5%, marking the seventh losing year
since 1990. Latin American markets also performed poorly, led by Argentina,
where interest rates surged and the stock market declined 29.1% amid concerns
about that country's solvency.
The volume of global debt underwriting rose 24.7% in 2001, as U.S.
companies attempted to lock in low interest rates amid the series of short-term
interest rate cuts made by the U.S. Federal Reserve. Global equity and
equity-linked underwriting volumes decreased 29.8% in 2001, despite an increase
in U.S. convertible debt issuances, which reached a record $103 billion, nearly
double the previous record set in 2000. The volume of U.S. Initial Public
Offerings ("IPOs") sank 37.7% in 2001, while global IPOs fell 57.4%.
After reaching record levels in 2000, global announced mergers and
acquisitions slid 49.6% in 2001, while U.S. announced mergers and acquisitions
fell 52.9%, as the global economic slowdown and the volatile U.S. stock markets
negatively affected merger and acquisition activity.
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. The strategy of maintaining long-term client
relationships, closely monitoring costs and risks, diversifying revenue sources,
and growing fee-based revenues all continue as objectives to mitigate the
effects of a volatile market environment on Merrill Lynch's business as a whole.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
In the fourth quarter of 2001, Merrill Lynch recorded a pre-tax charge of $2.2
billion ($1.7 billion after-tax) related to the resizing of selected businesses
and other structural changes. This charge, which is recorded as Restructuring
and other charges on the Consolidated Statements of Earnings, was the result of
a detailed review of all businesses, with a focus on improving profit margins
and aligning capacity with growth initiatives. These actions are expected to
yield pre-tax annual expense savings of approximately $1.4 billion, a portion of
which will be reinvested in priority growth initiatives. The expense reductions
will result primarily from lower compensation and benefits, depreciation, and
occupancy expenses. For further information regarding the details of
restructuring and other charges see Note 2 to the Consolidated Financial
Statements and the sections that follow.
(dollars in millions, except per share amounts)
- -------------------------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------------------------
Total revenues $ 38,757 $ 44,852 $ 35,332
Net revenues 21,880 26,766 22,313
Pre-tax operating earnings, before
September 11th-related expenses
and restructuring and other charges in 2001 3,701 5,717 4,206
After-tax operating earnings,
before September 11th-related expenses
and restructuring and other charges in 2001 2,381 3,784 2,693
Net earnings 573 3,784 2,693
Operating earnings per common
share, before September 11th-related
expenses and restructuring
and other charges in 2001:
Basic 2.79 4.69 3.52
Diluted 2.50 4.11 3.11
Earnings per common share:
Basic 0.64 4.69 3.52
Diluted 0.57 4.11 3.11
Return on average common
stockholders' equity--
operating basis(1) 11.7% 24.2% 23.8%
Operating pre-tax profit margin(1) 16.9% 21.4% 18.8%
- -------------------------------------------------------------------------------------------------
(1) Before September 11th-related expenses ($131 million pre-tax and $83
million after-tax) and restructuring and other charges ($2,193 million
pre-tax and $1,725 million after-tax) in 2001.
Merrill Lynch reported net earnings of $573 million in 2001, or $0.57 per
diluted share, including after-tax restructuring and other charges of $1.7
billion ($2.2 billion pre-tax) and $83 million of after-tax September
11th-related expenses ($131 million pre-tax). Excluding these items, net
operating earnings were $2.4 billion, or $2.50 per diluted share in 2001, down
from $3.8 billion, or $4.11 per diluted share in 2000. Operating earnings, which
exclude September 11th-related expenses and restructuring and other charges,
should not be considered an alternative to net earnings (as determined in
accordance with accounting principles generally accepted in the United States),
but rather as a measure considered relevant by management in comparing current
year results with prior year results. These
PAGE 2
results represent a 37% decrease in operating earnings and an 18% decrease in
net revenues from 2000.
Operating return on average common stockholders' equity was 11.7% and the
operating pre-tax profit margin was 16.9%. In 2000, the return on average common
stockholders' equity was 24.2% and the pre-tax profit margin was 21.4%. Net
earnings in 1999 were $2.7 billion, or $3.11 per diluted share. Return on
average common stockholders' equity for 1999 was 23.8% and the pre-tax profit
margin was 18.8%.
The following chart illustrates the composition of net revenues by category
in 2001.
[PIE CHART]
2001 NET REVENUES BY CATEGORY
Commissions 24%
Principal transactions 18%
Investment banking 16%
Asset management and portfolio service fees 25%
Net interest profit 15%
Other 2%
The following discussion provides details of the operating performance for
each Merrill Lynch business segment, as well as details of products and services
offered. The discussion also includes details of net revenues by segment.
Certain prior year amounts have been restated to conform with the current year
presentation. For further segment information, see Note 3 to the Consolidated
Financial Statements.
BUSINESS SEGMENTS
Merrill Lynch reports its results in three business segments: Global Markets and
Investment Banking ("GMI") (previously known as the Corporate and Institutional
Client Group ("CICG")), the Private Client Group ("Private Client"), and Merrill
Lynch Investment Managers ("MLIM"). GMI provides investment banking and capital
markets services to corporate, institutional, and governmental clients around
the world. Private Client provides global wealth management services and
products to individuals, small- to mid-size businesses, and employee benefit
plans. MLIM provides investment management services to retail and institutional
clients.
[PIE CHART]
2001 NET REVENUES BY SEGMENT
GMI 45%
Private Client 46%
MLIM 9%
Certain MLIM and GMI products are distributed through Private Client
distribution channels, and to a lesser extent, certain MLIM products are
distributed through GMI. 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 between segments are in place and the results of each segment reflect
the agreed-upon portion of these activities. The following segment results
represent the information that is relied upon by management in its
decision-making processes. These results exclude items reported in the Corporate
segment, including September 11th-related expenses. Restatements occur to
reflect reallocations of revenues and expenses which result from changes in
Merrill Lynch's business strategy and structure (see Note 3 to the Consolidated
Financial Statements for further information).
GLOBAL MARKETS AND INVESTMENT BANKING
GMI provides investment banking and strategic merger and acquisition advisory
services, as well as equity and debt trading and capital markets services to its
clients around the world. GMI raises capital for its clients through securities
underwriting, private placements, and loan syndications. GMI trades securities,
currencies, over-the-counter derivatives and other financial instruments to
satisfy customer demand for these instruments, and for proprietary positioning.
Merrill Lynch has one of the largest equity trading and underwriting operations
of any firm in the world. Through its expertise in fixed-income trading, GMI is
also a leader in the global distribution of debt market products. GMI's
client-focused strategy provides investors with opportunities to diversify their
portfolios, manage risk, and enhance returns by tailoring investments and
structuring derivatives to meet their customized needs. In addition, through
Merrill Lynch Securities Services Division ("SSD"), GMI provides clients with
financing, securities clearing, settlement, and custody services.
GMI faced a challenging market environment in 2001. Equity origination and
trading activity declined and global completed merger and acquisition volumes
decreased throughout the year. Offsetting these factors was a strong debt
market, as 11 interest rate cuts by the U.S. Federal Reserve were a catalyst for
significant origination and trading activity for most of the year.
In early 2001, Merrill Lynch sold essentially all of its energy trading
assets, effectively exiting the business. In 2000, the merger with Herzog,
Heine, Geduld, Inc. ("Herzog"), a leading Nasdaq market-maker, was completed.
During 2001, as part of Merrill Lynch's overall business review process,
GMI completed in-depth reviews of its businesses with the goal of improving
overall efficiency and operating flexibility. As a result of these reviews, GMI
streamlined its management and reorganized the investment banking division by
reducing the number of global industry teams, realigning sector coverage, and
broadening responsibilities. In addition, GMI consolidated trading operations
outside the United States to enhance client service and realize efficiencies.
The completion of these reviews led to a fourth quarter pre-tax charge of $833
million, primarily related to severance.
PAGE 3
GMI'S RESULTS OF OPERATIONS
(dollars in millions)
- -------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------
Commissions $ 2,128 $ 2,415 $ 2,037
Principal transactions
and net interest profit 4,137 6,003 4,194
Investment banking 3,126 3,449 3,060
Other revenues 598 813 527
------- ------- -------
Total net revenues $ 9,989 $12,680 $ 9,818
======= ======= =======
Pre-tax operating
earnings(1) $ 2,479 $ 3,963 $ 2,653
Pre-tax earnings $ 1,646 $ 3,963 $ 2,653
Pre-tax operating profit 24.8% 31.3% 27.0%
margin(1)
Total full-time employees 12,600 15,300 14,000
- -------------------------------------------------------------------
(1) Before $833 million of pre-tax restructuring and other charges in 2001.
In 2001, GMI's pre-tax operating earnings were $2.5 billion, 37% lower than
in 2000, with a pre-tax operating profit margin of 24.8%. GMI's net revenues in
2001 declined 21% from 2000 to $10.0 billion due principally to reduced equity
and equity-linked trading and origination. Additionally, lower strategic
advisory revenues and increased write-downs of credit and private equity
positions contributed to the decline. These declines were partially offset by
increased debt trading and origination revenues in 2001. Included in GMI's
results are net revenues related to investments, including dividend income and
realized and unrealized gains and losses. Investment-related net revenues were
$291 million in 2001, $611 million in 2000 and $206 million in 1999. In 2000,
pre-tax earnings and net revenues rose 49% and 29%, respectively, from 1999, due
primarily to strong performance in equity and equity-linked trading and
origination, and record strategic advisory fees.
The September 11th terrorist attacks on the World Trade Center had a
negative impact on GMI's 2001 results, as the temporary closure of markets, loss
of communication with key clients, and business disruption caused by the
relocation of approximately 9,000 Merrill Lynch employees led to lower than
normal market shares and reduced business activity in the period immediately
following the attacks. For further information regarding September 11th, see
Note 2 to the Consolidated Financial Statements.
A detailed discussion of GMI's revenues follows:
CLIENT FACILITATION AND TRADING
COMMISSIONS
Commissions revenues primarily arise from agency transactions in listed and
over-the-counter equity securities and commodities, money market instruments,
and options. In addition, in late 2001 Merrill Lynch instituted a program for
providing enhanced brokerage services to certain of its customers with large
size Nasdaq orders in exchange for an agreed upon commission in lieu of the
traditional spread.
Commissions revenues decreased 12% in 2001 to $2.1 billion, due primarily
to a global decline in client transaction volumes. In 2000, commissions revenues
rose 19% from 1999 to $2.4 billion, due primarily to increased volumes of listed
and over-the-counter securities transactions.
PRINCIPAL TRANSACTIONS AND NET INTEREST PROFIT
(dollars in millions)
- -------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------
Equities and equity derivatives $1,929 $3,870 $2,366
Debt and debt derivatives 2,208 2,133 1,828
------ ------ ------
Total $4,137 $6,003 $4,194
- -------------------------------------------------------------------------
Principal transactions and net interest profit includes realized gains and
losses from the purchase and sale of securities in which Merrill Lynch acts as
principal and unrealized gains and losses on trading assets and liabilities. In
addition, principal transactions and net interest profit includes unrealized
gains of $213 million and $212 million in 2001 and 2000, respectively, related
to equity investments held by Merrill Lynch's broker-dealers. Changes in the
composition of trading inventories and hedge positions can cause the recognition
of principal transactions and net interest profit to fluctuate.
Net interest profit is a function of the level and mix of total assets and
liabilities, including financial instruments owned, repurchase and reverse
repurchase agreements, trading strategies associated with GMI's institutional
securities business, and the prevailing level, term structure, and volatility of
interest rates. Net interest profit is an integral component of trading
activity. In assessing the profitability of its client facilitation and trading
activities, Merrill Lynch views net interest profit and principal transactions
in the aggregate.
Net trading revenues, which include principal transactions and net interest
profit, were $4.1 billion in 2001, down 31% from 2000. Equities and equity
derivatives net trading revenues decreased 50% from 2000 to $1.9 billion, due to
reduced global transaction volumes and lower volatility through much of the
year. Debt and debt derivatives net trading revenues were $2.2 billion, up 4%
from 2000, as improvements in interest rate trading results were partially
offset by provisions and write-downs of credit positions of approximately $470
million. Included in debt and debt derivatives trading revenues in 2001 and 2000
are net revenues from the energy-trading business of $53 million and $38
million, respectively. The 2001 energy-trading net revenues include a first
quarter gain on the sale of essentially all of the assets of this business.
In 2000, net trading revenues were up $1.8 billion from 1999. Equities and
equity derivatives net trading revenues advanced 64% from 1999 to $3.9 billion
due to significantly higher revenues from both U.S. and non-U.S. equities, as
well as portfolio trading. Debt and debt derivatives net trading revenues were
$2.1 billion, up 17% from 1999 due to increased global derivative trading,
partially offset by lower trading revenue in investment-grade and emerging
market debt. Net revenues from the energy-trading business were $36 million in
1999.
PAGE 4
INVESTMENT BANKING
(dollars in millions)
- ---------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------
Debt underwriting $ 690 $ 441 $ 508
Equity underwriting 1,336 1,630 1,257
------ ------ ------
Total underwriting 2,026 2,071 1,765
Strategic advisory services 1,100 1,378 1,295
------ ------ ------
Total $3,126 $3,449 $3,060
- ---------------------------------------------------------------------
UNDERWRITING
Underwriting revenues represent fees earned from the underwriting of debt and
equity and equity-linked securities as well as loan syndication and commitment
fees.
Total underwriting revenues were $2.0 billion in 2001, essentially
unchanged from 2000, as a 56% increase in debt underwriting revenues was more
than offset by an 18% decline in equity and equity-linked underwriting revenues.
In global equity and equity-linked underwriting, Merrill Lynch ranked first for
the year with an increased market share of 14.4%. Merrill Lynch's debt
underwriting focus shifted during the year towards higher margin businesses and
away from the achievement of aggregate market share goals.
Merrill Lynch's underwriting market share information based on transaction
value is as follows:
- --------------------------------------------------------------------------------------
2001 2000 1999
-------------- -------------- --------------
MARKET MARKET MARKET
SHARE RANK SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------------
GLOBAL PROCEEDS
Equity and
equity-linked 14.4% 1 10.4% 2 8.7% 4
Debt 10.2 2 11.6 1 12.8 1
Debt and equity 10.6 2 11.5 1 12.4 1
U.S. PROCEEDS
Equity and
equity-linked 17.4% 2 12.1% 4 10.6% 4
Debt 11.5 2 13.7 1 15.7 1
Debt and equity 12.2 2 14.2 1 15.8 1
- --------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
STRATEGIC ADVISORY SERVICES
Strategic advisory services revenues, which include merger and acquisition and
other advisory fees, decreased 20% in 2001 to $1.1 billion, due to a reduced
volume of completed merger and acquisition transactions. Merrill Lynch ranked
second in global announced mergers and acquisitions, increasing market share to
27.4%. Merrill Lynch advised on 10 of the largest 25 global transactions
announced in 2001.
Merrill Lynch's merger and acquisition market share information based on
transaction values is as follows:
- --------------------------------------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
MARKET MARKET MARKET
SHARE RANK SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------
ANNOUNCED
TRANSACTIONS
Global 27.4% 2 21.4% 4 34.5% 2
U.S. 35.3 2 26.8 4 30.0 3
COMPLETED
TRANSACTIONS
Global 27.4% 3 31.5% 3 21.7% 4
U.S. 33.2 3 29.2 3 22.2 4
- --------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
OTHER REVENUES
Other revenues, which include realized investment gains and losses and
partnership distributions, decreased 26% to $598 million in 2001. In 2001, other
revenues also included a pre-tax gain related to the sale of the Canadian
securities clearing business as well as write-downs of private equity
investments. The decrease from 2000 is primarily due to lower gains on
investments. Other revenues were up 54% in 2000 as compared with 1999 as a
result of higher investment gains recorded in 2000.
PRIVATE CLIENT GROUP
Private Client provides wealth management services to assist clients around the
world in building financial assets, and maximizing returns relative to risk
tolerance and investment objectives. Private Client offers a choice of
traditional commission-based investment accounts, a variety of asset-priced
investment services, and self-directed online accounts, many of which include
access to Merrill Lynch's award-winning research. Assets in Private Client
accounts totaled $1.3 trillion at December 28, 2001.
Private Client offers a wide range of products and services, including
retail brokerage, asset and liability management, retail and private banking,
trust and generational planning services, and insurance products. Private
Client's private banking services help high-net-worth individuals meet their
financial objectives with investing and borrowing strategies, investment
management, trust and personal holding company services, and currency
management. Private Client serves individual investors, corporations, and
institutions through various distribution networks, including nearly 16,400
Financial Advisors in approximately 750 Private Client offices around the world
at year-end 2001.
Financial Advisors and other investment professionals work to address
clients' financial concerns by matching Merrill Lynch and third-party product
offerings with clients' customized needs. These products include:
.The Cash Management Account ("CMA(R)") for individuals, and Working Capital
Management Account ("WCMA(R)") for small and mid-sized businesses, which
encompass securities transactions, money sweeps, electronic funds-transfer
capabilities, debit card access, and many other financial management features.
PAGE 5
.A global array of mutual fund products covering a wide cross section of
industries and regions of the world.
.Various brokerage and investment advisory services, including Merrill Lynch
Consults,(R) Unlimited Advantage,/SM/ and Merrill Lynch Mutual Fund
Advisor./SM/
.Other services provided include mortgages and other consumer loans, margin
lending, commercial financing, insurance products, and advisory and
administrative activities for defined contribution, defined benefit, and other
stock plans.
During 2001, Private Client conducted a detailed business review to
reallocate and focus the use of resources in its businesses. In the United
States, this process began in 2000 and resulted in the completion of several
actions in 2001, including: a long-term outsourcing arrangement for certain
mortgage origination and servicing operations of Merrill Lynch Credit
Corporation; outsourcing the administrative services for smaller U.S. 401(k)
plans; and the sale of the health and welfare division of Merrill Lynch's Howard
Johnson and Company. In addition, in 2001, Private Client consolidated certain
offices and announced the closing of one of three operation centers in the
United States. Outside the United States, Private Client is focusing on serving
high-net-worth and ultra-high-net-worth clients, Merrill Lynch's traditional
strength. This resulted in several strategic actions in 2001, including: the
sale of the Canadian Private Client business; the consolidation of branch
offices in Europe, the Middle East, and Asia Pacific; and the announced
refocusing of the Private Client business in Japan. These strategic changes were
made with the goal of retaining and growing the elements of the business where
Merrill Lynch can make the best returns on its investments.
To be more responsive to client needs and enhance the quality of our
clients' experience, Merrill Lynch adopted a multi-channel service model in the
United States, more closely aligning Financial Advisors with clients based on
levels of investable assets. For example, ultra-high-net-worth clients will be
aligned with Private Wealth Advisors ("PWAs"). PWAs are Financial Advisors who
have completed a rigorous accreditation program built around skill requirements
including trust, tax minimization, restricted stock, and executive stock
options, and focus on clients with more than $10 million of investable assets.
For clients with less than $100,000 of investable assets, Merrill Lynch
developed the Financial Advisory Center ("FAC") to more effectively serve these
clients. All FAC customers receive a team-based advisory relationship, with
24-hour-a-day, seven-day-a-week access by phone or online.
Beginning in mid-2000 Merrill Lynch modified the cash sweep options for
certain CMA(R) and other types of Merrill Lynch accounts to generally sweep
cash into interest-bearing bank deposits at Merrill Lynch's U.S. banks, rather
than MLIM-managed money market mutual funds. U.S. bank deposits, included in
Deposits on the Consolidated Balance Sheets grew to $73.6 billion at year-end
2001 from $54.9 billion at the end of 2000 primarily as a result of individual
investors increasing the cash component of their holdings. These deposits were
invested primarily in high-quality marketable investment securities. Interest
rates on the deposits are set at competitive levels based on prevailing interest
rate levels, and are tiered based on the scope of clients' relationships with
Merrill Lynch.
In April 2000, Merrill Lynch formed a 50/50 joint venture with HSBC
Holdings plc ("HSBC") to create a global online investment and banking services
company, serving individual self-directed customers outside the United States
("MLHSBC"). The venture launched online integrated investment and banking
services, including research, in Canada and Australia during 2000, and in the
United Kingdom in 2001. As the decline in worldwide equity markets has reduced
the demand for online trading, MLHSBC has not achieved the growth that was
forecast when the venture was formed and has not yet achieved profitability.
PRIVATE CLIENT'S RESULTS OF OPERATIONS
(dollars in millions)
- ------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Commissions $ 2,981 $ 4,394 $ 4,118
Principal transactions and
new issue revenues 1,546 2,000 2,023
Asset management and
portfolio service fees 3,608 3,760 3,055
Net interest profit 1,880 1,632 1,171
Other revenues 121 175 212
------- ------- -------
Total net revenues $10,136 $11,961 $10,579
======= ======= =======
Pre-tax operating earnings(1) $ 1,239 $ 1,561 $ 1,424
Pre-tax earnings $ 162 $ 1,561 $ 1,424
Pre-tax operating
profit margin(1) 12.2% 13.1% 13.5%
Total full-time employees 36,900 46,800 44,900
Total Financial Advisors 16,400 20,200 18,600
- ------------------------------------------------------------------------------
(1) Before $1,077 million of pre-tax restructuring and other charges in 2001.
Private Client's 2001 pre-tax operating earnings were $1.2 billion, a
decrease of 21% from 2000. Net revenues were $10.1 billion, down 15% from 2000.
The overall decline in net revenues and pre-tax operating earnings resulted from
lower transaction volumes and reduced demand for mutual fund and equity
products, partially offset by an increase in net interest profit. In addition,
as a result of the completion of a detailed business review, Private Client
recorded $1.1 billion of pre-tax restructuring and other charges in the fourth
quarter of 2001, primarily related to severance and the write-down of real
estate and technology assets. These charges include costs associated with a
decision to focus the non-U.S. business more exclusively on high-net-worth
individuals and institutional middle markets clients. In addition to the amounts
included in the fourth quarter restructuring charge, Private Client's pre-tax
operating earnings reflect severance expenses in both 2001 and 2000. In 2000,
pre-tax earnings increased 10% and net revenues rose 13% from 1999. The 2001
pre-tax operating profit margin was 12.2%, compared with 13.1% in 2000 and 13.5%
in 1999. The 2001 results reflect a solid performance
PAGE 6
in the United States and a weaker performance outside the United States. Pre-tax
operating earnings in the United States for 2001 were 9% lower than 2000 levels,
and a pre-tax operating loss was recorded outside the United States in 2001.
COMMISSIONS
Commissions revenues primarily arise from agency transactions in listed and
over-the-counter equity securities, as well as sales of mutual funds, insurance
products, and options.
Commissions revenues decreased 32% to $3.0 billion in 2001, as a result of
a global decline in client transaction volume, particularly in mutual fund and
equity products. In addition, over the past two years, commissions revenues have
decreased as clients have opened asset-priced accounts, paying fees in place of
commissions. Commissions revenues increased 7% in 2000 compared with 1999
primarily as a result of increased mutual fund commissions.
PRINCIPAL TRANSACTIONS AND NEW ISSUE REVENUES
Private Client's principal transactions and new issue revenues primarily
represent bid-offer revenues in over-the-counter equity securities, government
bonds, and municipal securities as well as selling concessions on underwritings
of debt and equity products. Private Client does not take any significant
principal trading risk positions.
Principal transactions and new issue revenues decreased 23% to $1.5 billion
in 2001 due to a reduction in both debt and equity sales volume to retail
customers in a less favorable market environment compared with 2000. Principal
transactions and new issue revenues were essentially unchanged in 2000 from
1999.
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
Asset management and portfolio service fees include asset management fees from
taxable and tax-exempt money market funds as well as portfolio fees from
fee-based accounts such as Unlimited Advantage/SM/ and Merrill Lynch
Consults,(R) servicing fees related to such accounts, as well as account and
other fees.
Asset management and portfolio service fees were $3.6 billion in 2001, 4%
lower than in 2000. This decrease primarily reflects a market-driven decline in
asset values in asset-priced accounts. In 2000 these fees were $3.8 billion, up
from $3.1 billion in 1999 primarily due to a rise in portfolio service fees as
assets shifted to asset-priced accounts such as Unlimited Advantage/SM/ and
Merrill Lynch Consults.(R)
The value of assets in Private Client accounts at year-end 2001, 2000, and
1999 is summarized as follows:
(dollars in billions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Assets in Private Client accounts
U.S. $1,185 $1,337 $1,338
Non-U.S. 101 140 137
------ ------ ------
Total $1,286 $1,477 $1,475
====== ====== ======
Assets in asset-priced accounts $ 205 $ 209 $ 168
- --------------------------------------------------------------------------------
Analysis of changes in assets in Private Client accounts from year-end 2000
to year-end 2001 are detailed below:
(dollars in billions)
- -------------------------------------------------------------------------------------------
NET CHANGES DUE TO
------------------------------------
YEAR-END NEW ASSET YEAR-END
2000 MONEY DEPRECIATION OTHER 2001
- -------------------------------------------------------------------------------------------
Assets in Private
Client accounts:
U.S. $1,337 $ 49 $ (198) $ (3) $1,185
Non-U.S. 140 13 (20) (32) 101
------ ------ ------ ------ ------
Total $1,477 $ 62 $ (218) $ (35) $1,286
- -------------------------------------------------------------------------------------------
[BAR CHART]
PRIVATE CLIENT ASSETS
(in billions of dollars)
- --------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
U.S. $1,185 $1,337 $1,338 $1,164 $979
Non-U.S. 101 140 137 98 84
------ ------ ------ ------ ------
Total $1,286 $1,477 $1,475 $1,262 $1,063
- --------------------------------------------------------------------------------
Total assets in Private Client accounts in the United States declined 11%
to $1.2 trillion at the end of 2001, with net new money inflows of $49 billion
during the year. Outside the United States, client assets were $101 billion at
the end of 2001, down 28% from year-end 2000, due largely to the sale of the
Canadian Private Client business, with net new money inflows of $13 billion in
2001. Total assets in asset-priced accounts were $205 billion at the end of
2001, a decrease of 2% from the end of 2000. The decline in asset levels in 2001
is due primarily to market depreciation.
NET INTEREST PROFIT
Interest revenue for Private Client is derived primarily from interest earned on
the investment portfolio, principally related to Merrill Lynch's U.S. banks, as
well as interest earned on margin and other loans. Interest expense mainly
consists of interest paid on bank deposits and other borrowings.
Net interest profit was $1.9 billion, up 15% from $1.6 billion in 2000 and
$1.2 billion in 1999. The increase in net interest profit in 2001 and 2000
resulted from growth in deposits and the related investment portfolio at Merrill
Lynch's U.S. banks and, in 2001, an increase in investment portfolio spreads,
particularly following the rate cuts by the Federal Reserve.
OTHER REVENUES
Other revenues decreased 31% in 2001, from $175 million to $121 million.
Included in Private Client's other revenues are realized and unrealized gains
and losses associated with investments. Investment-related net revenues were a
loss of $52 million in 2001 and a gain of $18 million in 2000.
Investment-related net revenues in
PAGE 7
2001 include a pre-tax gain on the sale of the Canadian Private Client business
which was more than offset by losses on various e-commerce investments.
MERRILL LYNCH INVESTMENT MANAGERS
MLIM is among the world's largest asset managers with $529 billion of assets
under management at the end of 2001. MLIM offers a wide array of taxable
fixed-income, tax-exempt fixed-income, equity and balanced open-ended mutual
funds, private accounts, and alternative investments to a diverse global
clientele of institutions, including pension plans and corporations,
high-net-worth individuals, mutual funds, and other investment vehicles. In the
United States, MLIM-branded mutual fund products are available through the
Private Client distribution channel, and through GMI and third-party
distribution networks. Outside the United States, MLIM-branded mutual fund
products are available through Private Client and GMI distribution networks as
well as through other financial intermediaries. MLIM also maintains a
significant sales and marketing presence in both the United States and overseas
that is focused on acquiring and maintaining institutional investment management
relationships. MLIM markets its services both directly to these investors and
through pension consultants.
During 2001, MLIM reviewed all of its business activities to further
enhance future profit potential and target selected growth opportunities. As a
result of these in-depth reviews, MLIM consolidated the management of its Japan,
Asia Pacific and European activities into a single management structure, reduced
its staff by nearly 25%, and significantly reduced its global real estate
footprint by selling, closing or downsizing offices in Los Angeles, Korea, and
Singapore and consolidating its New York metropolitan area-based operations.
MLIM also undertook strategic outsourcing opportunities, consolidated real
estate in Tokyo and London, reduced technology spending, and exited its Defined
Asset Funds business. In addition, in January 2002, MLIM sold its Canadian
retail investment management operations.
MLIM'S RESULTS OF OPERATIONS
(dollars in millions)
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Commissions $ 295 $ 392 $ 394
Asset management fees 1,722 1,913 1,684
Other revenues 76 148 169
------ ------ ------
Total net revenues $2,093 $2,453 $2,247
====== ====== ======
Pre-tax operating earnings(1) $ 307 $ 501 $ 483
Pre-tax earnings $ 24 $ 501 $ 483
Pre-tax operating profit margin(1) 14.7% 20.4% 21.5%
Total full-time employees 3,200 4,200 3,800
- --------------------------------------------------------------------------------
(1) Before $283 million of pre-tax restructuring and other charges in 2001.
Pre-tax operating earnings for MLIM were $307 million in 2001, down 39%
from $501 million in 2000. Net revenues decreased 15% from 2000 to $2.1 billion,
and the pre-tax operating profit margin in 2001 was 14.7%, compared with 20.4%
in 2000, and 21.5% in 1999. The reduction in pre-tax operating earnings was
primarily the result of a market-driven decline in assets under management
combined with an increase in costs related to litigation. In addition, as a
result of the completion of the previously mentioned detailed business review,
MLIM recorded $283 million of pre-tax restructuring and other charges in the
fourth quarter of 2001, primarily related to severance and costs associated with
the closing of certain mutual funds, including investment write-downs of $32
million principally related to mutual fund seed capital.
COMMISSIONS
Commissions for MLIM principally consist of distribution and redemption fees
related to mutual funds. The distribution fees represent revenues for promoting
and distributing mutual funds ("12b-1 fees"). As a result of lower transaction
volumes, commissions decreased 25% to $295 million in 2001. Commissions were
relatively unchanged in 2000 as compared with 1999.
ASSET MANAGEMENT FEES
Asset management fees primarily consist of fees earned from the management and
administration of funds as well as performance fees earned by MLIM. Asset
management fees declined 10% to $1.7 billion from a record $1.9 billion in 2000.
These fees were $1.7 billion in 1999. The reduction in 2001 is due to a
market-driven decline in assets under management as well as a shift from equity
funds to lower-fee fixed-income products. The increase in 2000 was primarily the
result of higher management and performance fees.
MLIM's assets under management for each of the last three years were
comprised of the following:
(dollars in billions)
- ------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------
Assets Under Management
Retail(1) $220 $250 $300
Institutional 266 262 255
Private investors(2) 43 45 39
---- ---- ----
Total $529 $557 $594
- ------------------------------------------------------------
(1) Net of outflows of $10 billion and $36 billion of money market funds, which
transferred to bank deposits at Merrill Lynch's U.S. banks in 2001 and
2000, respectively.
(2) Represents segregated portfolios for individuals, small corporations, and
institutions.
[BAR CHART]
ASSETS UNDER MANAGEMENT BY TYPE
(in billions of dollars)
-----------------------------------------------------------
2001 2000 1999 1998 1997
-----------------------------------------------------------
Equity $229 $274 $296 $266 $245
Fixed income 110 113 108 104 95
Money market 147 125 151 139 115
Private investors 43 45 39 35 32
------ ------ ------ ------ ------
Total $529 $557 $594 $544 $487
-----------------------------------------------------------
PAGE 8
At year-end 2001, assets under management totaled $529 billion, a 5%
decline from 2000. This decline is primarily market-driven, partially offset by
$19 billion of global net inflows.
An analysis of changes in assets under management from year-end 2000 to
year-end 2001 is as follows:
(dollars in billions)
- --------------------------------------------------------------------------------
NET CHANGES DUE TO
---------------------------------
YEAR-END NEW ASSET YEAR-END
2000 MONEY DEPRECIATION OTHER(1) 2001
- --------------------------------------------------------------------------------
Assets under
management $557 $ 19 $(41) $(6) $529
- --------------------------------------------------------------------------------
(1) Includes reinvested dividends of $7 billion, net outflows of $10 billion of
retail money market funds which transferred to bank deposits at Merrill
Lynch's U.S. banks, and other changes, primarily related to foreign
exchange rate movements.
[PIE CHART]
2001 ASSETS UNDER MANAGEMENT
CLIENT TYPE
Institutional 50%
Retail 42%
Private Investors 8%
CLIENT LOCATION
Americas 65%
Europe 27%
Other Non-U.S. 8%
OTHER REVENUES
Other revenues, which primarily include net interest profit and investment
gains, fell 49% to $76 million in 2001. The decrease was due to losses on
investments. Other revenues in 2000 were $148 million, 12% lower than 1999
levels. In 1999, other revenues included a pre-tax gain of $89 million on the
sale of an investment.
GLOBAL OPERATIONS
Merrill Lynch's operations outside the United States are organized into five
geographic regions:
.Europe, Middle East, and Africa
.Japan
.Asia Pacific
.Canada, and
.Latin America
The following chart illustrates the regional operating results excluding
all items included in the corporate segment. For further geographic information
see Note 3 to the Consolidated Financial Statements.
[PIE CHART]
2001 NET REVENUES BY GEOGRAPHIC REGION
U.S. 69%
Europe 16%
Japan 5%
Other Non-U.S. 10%
EUROPE, MIDDLE EAST, AND AFRICA
(dollars in millions)
- -------------------------------------------------------------------------------
2001 2000 1999
- -------------------------------------------------------------------------------
Net revenues $3,640 $4,876 $3,976
Pre-tax operating earnings(1) 335 1,315 1,132
Pre-tax earnings 42 1,315 1,132
Total full-time employees 7,200 8,800 7,600
- -------------------------------------------------------------------------------
(1) Before $293 million of pre-tax restructuring and other charges in 2001.
Merrill Lynch operates in Europe, the Middle East, and Africa as a dealer
in a wide array of equity and debt products, and also provides asset management,
investment banking, private banking, and research services. Merrill Lynch
believes this region is poised for accelerated growth due to changes in
demographics, the growth in equity markets, and the development of the Euroland
economy. In line with its strategy of becoming a global leader with a strong
local presence in key markets, Merrill Lynch has offices in 18 countries in the
region. Merrill Lynch has preeminent asset management capabilities in this
region, operating under the Merrill Lynch Investment Managers brand.
As a result of a detailed business review in the fourth quarter of 2001,
Private Client consolidated offices in Europe and the Middle East, MLIM
consolidated its Japan, Asia Pacific and European activities into a single
management structure and GMI streamlined its management and reorganized its
investment banking division. These actions resulted in a fourth quarter pre-tax
charge of $293 million in the region, primarily related to severance.
In May 2001, following the launch in the United Kingdom of a free research
service by MLHSBC in 2000, a full transactional service for self-directed
investors was launched.
Merrill Lynch demonstrated leadership in investment banking in the region
in 2001, ranking first in equity origination, according to IFR magazine, with a
market share of 16.6% and third in announced mergers and acquisitions, up from
fifth in 2000, according to Thomson Financial Securities Data. In addition, in
the Reuters/Tempest Survey of U.K. Larger Companies, Merrill Lynch was ranked
top broker for research by corporations and managers and best firm for equity
derivatives for the third consecutive year. Merrill Lynch ranked second in the
Institutional Investor 2001 All-Europe Research Team Survey.
In 2001, net revenues for the region decreased 25% from 2000. Pre-tax
operating earnings decreased 75% from 2000 to $335 million due primarily to
decreased equity trading and origination revenues. In 2000, net revenues and
pre-tax earnings for the region were up 23% and 16%, respectively, from 1999,
primarily due to strong equity trading and advisory revenues.
PAGE 9
JAPAN
(dollars in millions)
- ----------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------
Net revenues $ 1,023 $ 1,511 $ 1,193
Pre-tax operating earnings (loss)(1) (7) 243 (33)
Pre-tax earnings (loss) (387) 243 (33)
Total full-time employees 2,900 3,500 3,200
- ----------------------------------------------------------------------------
(1) Before $380 million of pre-tax restructuring and other charges in 2001.
In Japan, Merrill Lynch provides an integrated range of GMI, Private
Client, and MLIM products and services to individual, corporate and
institutional clients. In March 2001, Merrill Lynch completed the consolidation
of GMI and Private Client businesses into the single Japan-incorporated entity,
Merrill Lynch Japan Securities Co., Ltd. ("MLJS"). GMI and Private Client
successfully distributed several debt and equity public offerings through MLJS
in 2001.
GMI maintained its strong presence in Japan in 2001. Despite the further
deterioration of the Japanese economy, the debt business achieved record
earnings and completed the consolidation of various management and support
units, resulting in a more cost-effective structure. Investment banking also
demonstrated its strong international network and ability to provide innovative
services in underwriting.
Private Client is sharpening its focus on small- to medium-sized business
clients and high-net-worth individual investors. To accomplish this, Private
Client will close a number of branch offices in 2002, but maintain several
smaller locations across Japan, including complexes in Tokyo and Osaka, and a
Financial Service Center in Tokyo to serve the non-Financial Advisor-assisted
client base. These actions resulted in a fourth quarter 2001 pre-tax charge of
$380 million and will result in additional wind-down expenses of $80-$100
million in 2002. While representing less than 20% of total accounts, the middle
markets and high-net-worth client base has accounted for the majority of Merrill
Lynch's Private Client assets in Japan since inception in 1998.
MLIM is one of the leading institutional money managers in Japan and,
despite the challenging economic conditions in 2001, MLIM attracted $1.5 billion
in net new money for institutional clients.
Net revenues in the Japan region in 2001 were down 32% from 2000 to $1.0
billion, reflecting weak market conditions, except in the GMI debt business. The
corresponding decrease in pre-tax operating earnings was partially alleviated by
the reduction in expenses as a result of strict cost management in 2001. In
2000, net revenues and pre-tax earnings were up $318 million and $276 million,
respectively, from 1999, reflecting increased debt and equity trading revenues
and higher asset management fees.
ASIA PACIFIC
(dollars in millions)
- ----------------------------------------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------
Net revenues $ 874 $ 1,247 $ 1,018
Pre-tax operating earnings(1) 49 269 183
Pre-tax earnings (loss) (40) 269 183
Total full-time employees 2,200 2,700 2,500
- ----------------------------------------------------------------------------
(1) Before $89 million of pre-tax restructuring and other charges in 2001.
Merrill Lynch serves a broad retail and institutional client base
throughout the Asia Pacific region, and offers a full range of GMI, Private
Client, and MLIM products. Merrill Lynch has an established trading presence and
exchange memberships in major financial markets in the region. The Private
Client business operates 13 offices, including four in the Western United
States, offering investment services and wealth management products to its
clients. MLHSBC began providing online financial services to self-directed
investors in Australia in 2001. MLIM operates 10 offices offering a diverse mix
of investment management products and services to institutional and retail
clients.
As part of Merrill Lynch's detailed business review in 2001, Private Client
restructured its operations in Australia by moving the focus to high-net-worth
investors and consolidating offices. MLIM restructured its operations by
consolidating the investment management activities for the region into its
London location, and GMI sold its equity brokerage operation in the Philippines
to a local management team. As a result of the completion of these detailed
business reviews, a pre-tax charge of $89 million was recorded in the fourth
quarter of 2001.
In 2001, IFR magazine named Merrill Lynch "Asian Equity and Equity-Linked
House of the Year," the Far Eastern Economic Review named Merrill Lynch "Most
Respected Investment Bank in Asia," and Institutional Investor magazine ranked
Merrill Lynch first in Asian Equity Research for the third consecutive year.
Merrill Lynch experienced a reduction in business volumes in the region
during 2001. Net revenues in the region declined 30% in 2001 to $874 million.
Pre-tax operating earnings declined 82% to $49 million. The decline was a direct
result of the deterioration in business volumes related to a slowdown in the
regional economy. In 2000, net revenues in the region were $1.2 billion, up from
$1.0 billion in 1999, due to strong revenues in the equity markets and record
Private Client revenues, as well as higher advisory fees. Pre-tax earnings
increased 47% in 2000 to $269 million, primarily as a result of strong equity
markets.
CANADA
(dollars in millions)
- ------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------
Net revenues $ 877 $ 854 $ 652
Pre-tax operating earnings(1) 283 176 57
Pre-tax earnings 253 176 57
Total full-time employees 500 4,000 3,700
- ------------------------------------------------------------------------
(1) Before $30 million of pre-tax restructuring and other charges in 2001.
PAGE 10
During 2001 Merrill Lynch operated a full-service Canadian securities
firm, providing an integrated range of GMI, Private Client and MLIM products and
services. However, as a result of the completion of a detailed business review
in the fourth quarter of 2001, Merrill Lynch sold its Private Client and
securities clearing businesses in Canada in December and, in January 2002, sold
its MLIM retail investment management business. The 2001 sales resulted in a
significant reduction in the number of full-time employees in the region. MLHSBC
began providing online services to self-directed Canadian investors in late
2000.
All GMI businesses performed well in 2001, with notable contributions from
debt markets and investment banking. The fixed income markets performed at
record highs, resulting in increased debt underwriting and trading revenues.
Euromoney magazine named Merrill Lynch "Best Foreign Bond House" in Canada.
Merrill Lynch has been the leading non-domestic Canadian Dollar debt underwriter
for the last three years, according to Bloomberg rankings. In 2001, Merrill
Lynch ranked first in announced mergers and acquisitions, having advised on 10
of the 24 largest transactions in Canada. Equity trading continued its
significant progress and the Brendan Woods International Survey ranked Merrill
Lynch third in the institutional equity commission business in Canada, with the
largest year-over-year market share gain in the country.
In 2001, net revenues in the region were essentially unchanged as increases
in GMI revenues and a gain on the sale of businesses were principally offset by
decreases in Private Client operating revenues. Pre-tax operating earnings
increased to $283 million in 2001, due to record earnings in investment banking
and a pre-tax gain of $158 million on the sale of the Private Client and
securities clearing businesses. Excluding the impact of the sales, the Private
Client and securities clearing businesses contributed $358 million and $7
million to net revenues and pre-tax earnings, respectively, in Canada in 2001.
In 2000, net revenues and pre-tax earnings in the region increased 31% and 209%,
respectively, compared with 1999. These increases were primarily the result of
improvements in equity origination and trading as well as improved profitability
in Private Client.
LATIN AMERICA
(dollars in millions)
- ------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------
Net revenues $ 475 $ 731 $ 672
Pre-tax operating earnings(1) 32 175 127
Pre-tax earnings 18 175 127
Total full-time employees 1,000 1,200 1,200
- ------------------------------------------------------------------------
(1) Before $ 14 million of pre-tax restructuring and other charges in 2001.
Merrill Lynch provides various brokerage and investment services, including
financial planning, investment banking, research, and asset management to Latin
American clients.
In July 2001, Merrill Lynch closed its broker-dealer in Argentina. The
economies of Latin America took a downward turn in 2001. Argentina suspended
payment on a portion of its $141 billion of debt, a prelude to the largest
sovereign default in history. The depreciation of Brazil's currency and an
energy crisis have also taken a toll on the Latin American economy.
In Institutional Investor's 2001 survey, Merrill Lynch's Latin American
Research team was ranked first, for the fifth year in a row.
Net revenues for the region in 2001 decreased 35% from 2000. Pre-tax
operating earnings were $32 million, a decrease of $143 million from 2000. A
major contributing factor to this decline was the volatility of the Latin
American economy. Despite the economic environment, Private Client's business in
Latin America has remained strong. Net revenues and pre-tax earnings in 2000
increased 9% and 38%, respectively, from 1999 due to higher commission revenues
and the gain on a sale of the Puerto Rico retail brokerage business in 2000.
NON-INTEREST EXPENSES
Merrill Lynch's non-interest expenses are summarized as follows:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------
2001 2000 1999
- ---------------------------------------------------------------------------------------------------
Compensation and benefits $11,269 $13,730 $11,337
------- ------- -------
Non-compensation expenses:
Communications and technology 2,232 2,320 2,053
Occupancy and related depreciation 1,077 1,006 953
Brokerage, clearing, and exchange fees 895 893 779
Advertising and market development 703 939 783
Professional fees 545 637 571
Office supplies and postage 349 404 346
Goodwill amortization 207 217 227
Other 902 903 1,058
------- ------- -------
Total non-compensation expenses, excluding
September 11th-related and restructuring and
other charges in 2001 6,910 7,319 6,770
September 11th-related 131 - -
Restructuring and other charges 2,193 - -
------- ------- -------
Total non-compensation expenses 9,234 7,319 6,770
------- ------- -------
Total non-interest expenses $20,503 $21,049 $18,107
======= ======= =======
Compensation and benefits as a
percentage of net revenues 51.5% 51.3% 50.8%
Non-compensation expenses, excluding
September 11th-related and
restructuring and other charges in 2001,
as a percentage of net revenues 31.6 27.3 30.3
Total full-time employees(1) 57,400 72,000 67,900
- ---------------------------------------------------------------------------------------------------
(1) Excludes 3,200 full-time employees on salary continuation severance at
year-end 2001.
Non-interest expenses were $20.5 billion in 2001, compared with $21.0
billion in 2000. Excluding September 11th-related expenses and restructuring and
other charges, non-interest expenses were $18.2 billion in 2001. Compensation
and benefits were down 18% from 2000 due to a
PAGE 11
decrease in incentive and production-related compensation, resulting from a
decline in revenue and a lower number of employees. Compensation and benefits
expenses include severance expenses not included in the restructuring charge of
$281 million and $70 million in 2001 and 2000, respectively. Compensation and
benefits were 51.5% of net revenues for 2001, relatively unchanged from 2000.
Non-compensation expenses, excluding September 11th-related expenses and
restructuring and other charges, were 31.6% of net revenues in 2001, compared
with 27.3% in 2000 and 30.3% in 1999.
Communications and technology expense declined 4% in 2001 to $2.2 billion
due to reduced systems consulting costs. Occupancy and related depreciation
increased 7% in 2001, primarily due to a new London headquarters building.
Brokerage, clearing, and exchange fees were $895 million, essentially
unchanged from 2000. Advertising and market development expense was $703
million, down 25% from 2000 due to reduced spending on travel, advertising, and
recognition programs. Professional fees decreased 14% to $545 million as a
result of a reduction in spending on employment and non-technology consulting
services. Office supplies and postage expense decreased 14% to $349 million due
primarily to lower expenses for supplies. Other expenses were $902 million,
essentially unchanged from 2000.
Non-interest expenses in 2000 were up 16% compared with 1999, largely due
to compensation and benefits, which rose 21% to $13.7 billion. This increase was
caused by higher incentive and production-related compensation resulting from
increased revenues.
Non-compensation expenses also increased in 2000 as compared with 1999, due
primarily to a 13% increase in communications and technology expenses that
resulted from higher technology-related depreciation and systems consulting, as
well as increased expenses related to market data services. Brokerage, clearing,
and exchange fees were 15% higher than 1999 due to higher execution and clearing
costs as a result of increased transaction volumes. Higher travel expenses and
sales promotion costs resulting from increased business activity were the cause
of a 20% increase in advertising and market development in 2000. Professional
fees rose 12% partly as a result of higher employment service fees. Office
supplies and postage expense increased 17% due primarily to higher printing
expenses.
SEPTEMBER 11TH-RELATED EXPENSES
September 11th-related expenses of $131 million pre-tax ($83 million after-tax)
were recorded in 2001. These amounts are net of an insurance recovery of $100
million and insurance receivables of $115 million. The majority of the September
11th-related gross expenses pertain to the write-off of damaged assets and
sublease income, the repair and replacement of equipment, as well as
transportation, moving, and related costs for displaced workers. For additional
information see Note 2 to the Consolidated Financial Statements.
RESTRUCTURING AND OTHER CHARGES
As a result of actions taken to position Merrill Lynch for improved
profitability and growth, including the resizing of selected businesses and
other structural changes, a pre-tax charge of $2.2 billion ($1.7 billion
after-tax) was recorded during the fourth quarter of 2001. A detailed review of
all businesses was conducted in the fourth quarter and these in-depth reviews
led to a number of actions, primarily focused on resizing the businesses for the
current environment. The charge included the following components:
.Approximately $1.2 billion of the charge is associated with severance costs
related to workforce reductions, and other staff-related costs. Workforce
reductions were made through a combination of divestitures, voluntary
separations, and managed reductions. The majority of the employee separations
associated with the fourth-quarter charges have been completed or announced,
and all have been identified. Approximately half of the 9,000 employee
separations are associated with divestitures and discontinued businesses; the
remainder result from voluntary separation, or targeted actions in selected
businesses.
.Real estate initiatives include the consolidation of Private Client offices in
the United States, Europe, Asia, and Australia and the closure or subletting of
excess office space in the United States. Approximately $500 million of the
charge is associated with real estate initiatives.
.Technology initiatives include the disposal of certain technology assets and
the sale-leaseback and related write-down of other technology assets.
Approximately $300 million of the charge is associated with technology
initiatives.
.Other business rationalization costs, which comprise $200 million of the
charge are principally related to costs associated with the refocusing of the
Private Client business in Japan.
Management expects the restructuring plan to yield pre-tax cost savings of
$1.4 billion annually, beginning in the first quarter of 2002, a portion of
which will be reinvested in priority growth initiatives. These savings largely
relate to reduced employee-related and facilities costs and are expected to be
realized in compensation and benefits, depreciation, and occupancy expenses.
Merrill Lynch expects to substantially complete the restructuring by the end of
2002. Management will continue to review its business groups and product
offerings throughout 2002 to meet the needs of the changing economic environment
and to ensure its goal of improved profitability.
For additional information on these charges, see Note 2 to the Consolidated
Financial Statements.
PAGE 12
INCOME TAXES
Merrill Lynch's 2001 income tax provision was $609 million, representing a 44.2%
effective tax rate compared with 30.4% in 2000 and 31.4% in 1999. The increase
in the 2001 effective tax rate is due primarily to prior and current year
non-deductible losses associated with the refocusing of the Japan Private Client
business, which were included in the fourth-quarter charge, including a
write-off of previously recognized deferred tax assets of approximately $135
million. The decline in the 2000 effective tax rate was primarily attributable
to an increase in lower-taxed non-U.S. income and additional tax-advantaged
financing. Deferred tax assets and liabilities are recorded for the effects of
temporary differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Merrill Lynch assesses its ability
to realize deferred tax assets primarily based on a strong earnings history and
the absence of negative evidence as discussed in Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." During the
last 10 years, average pre-tax earnings were $2.7 billion. Accordingly,
management believes that it is more likely than not that remaining deferred tax
assets, net of the related valuation allowance, will be realized (see Note 15 to
the Consolidated Financial Statements).
- --------------------------------------------------------------------------------
BALANCE SHEET
OVERVIEW
Management continually monitors and evaluates the level and composition of the
balance sheet. The following chart illustrates the composition of the balance
sheet at December 28, 2001.
[PIE CHART]
ASSETS
Securities Financing Transactions 30%
Trading Assets 26%
Marketable Investment Securities 18%
Other 16%
Trading-Related Receivables 10%
LIABILITIES
Seurities Financing Transactions 22%
Deposits 22%
Trading Liabilities 20%
Long-Term Borrowings 19%
Trading-Related Payables 9%
Other 7%
Short-Term Borrowings 1%
In 2001, average total assets were $429 billion, up 16% from $371 billion
in 2000. Average total liabilities in 2001 increased 15% to $406 billion from
$352 billion in 2000, and average equity capital increased 23% to $23 billion
during 2001. The major components of the increase in average total assets and
liabilities are summarized as follows:
(dollars in millions)
- ---------------------------------------------------------------------------
2001 VS. 2000
-----------------------------
INCREASE
(DECREASE) CHANGE
- ---------------------------------------------------------------------------
AVERAGE ASSETS
Marketable investment securities $ 39,299 158%
Receivables under resale agreements 18,314 24
Loans, notes and mortgages 6,358 48
- ---------------------------------------------------------------------------
AVERAGE LIABILITIES
Deposits $ 46,219 134%
Payables under repurchase agreements 17,390 21
Long-term borrowings 14,908 24
Commercial paper and other short-term
borrowings (14,158) (59)
- ---------------------------------------------------------------------------
The significant growth in deposits in 2001 resulted from the mid-2000
modification of the cash sweep options for certain CMA(R) and other types of
Merrill Lynch accounts to generally sweep cash into interest-bearing bank
deposits at Merrill Lynch's U.S. banks, rather than MLIM-managed money market
mutual funds. This increase in deposits was primarily used by the U.S. banks to
purchase marketable investment securities. Receivables under resale agreements
and payables under repurchase agreements rose due to increased matched-book
activity. Additionally, the increase in long-term borrowings is related to the
reduction in the use of commercial paper and other short-term borrowings in
2001.
The discussion that follows analyzes the changes in year-end financial
statement balances of the major asset and liability categories.
TRADING-RELATED ASSETS AND LIABILITIES
Trading-related balances primarily consist of trading assets (including
securities pledged as collateral) and liabilities, receivables under resale
agreements and securities borrowed transactions, payables under repurchase
agreements and securities loaned transactions, and certain receivable/payable
balances that result from trading activities. At December 28, 2001 total
trading-related assets and liabilities were $273.6 billion and $203.4 billion,
respectively.
Although trading-related balances comprise a significant portion of the
balance sheet, the magnitude of these balances does not necessarily convey a
sense of the risk profile assumed by Merrill Lynch. The market and credit risks
associated with trading-related balances are mitigated through various hedging
strategies, as discussed in the following section (see Note 6 to the
Consolidated Financial Statements for descriptions of market and credit risks).
Merrill Lynch reduces a significant portion of the credit risk associated
with trading-related receivables by requiring counterparties to post cash or
securities as collateral in accordance with collateral maintenance policies.
Conversely, Merrill Lynch may be required to post cash or securities to
counterparties in accordance with similar policies.
PAGE 13
TRADING ASSETS AND LIABILITIES
Trading inventory principally represents securities purchased ("long"
positions), securities sold but not yet purchased ("short" positions), and the
fair value of derivative contracts (see Note 1 to the Consolidated Financial
Statements for related accounting policies). These positions are primarily the
result of market-making, hedging, and proprietary activities.
Merrill Lynch acts as a market-maker in a wide range of securities,
resulting in a significant amount of trading inventory to facilitate customer
transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary
trading inventory in seeking to profit from existing or projected market
opportunities.
Merrill Lynch uses both cash instruments and derivatives to manage trading
inventory market risks. As a result of these hedging techniques, a significant
portion of trading assets and liabilities represent hedges of other trading
positions. Long U.S. Government securities, for example, may be hedged with
short interest rate futures contracts. These hedging techniques, which are
generally initiated at the trading unit level, are supplemented by corporate
risk management policies and procedures (see the Risk Management section for a
description of risk management policies and procedures).
Trading assets, including securities pledged as collateral, at year-end
2001 were up 4% from year-end 2000, and trading liabilities increased 10% to
$75.9 billion.
SECURITIES FINANCING TRANSACTIONS
Repurchase agreements and, to a lesser extent, securities loaned transactions
are used to fund a significant portion of trading assets. Likewise, Merrill
Lynch uses resale agreements and securities borrowed transactions to obtain the
securities needed for delivery on short positions. These transactions are
typically short-term in nature with a significant portion entered into on an
overnight or open basis. Resale and repurchase agreements entered into on a term
basis typically mature within 90 days.
Merrill Lynch also enters into these transactions to meet customers' needs.
These "matched-book" repurchase and resale agreements or securities borrowed and
loaned transactions are entered into with different customers using the same
underlying securities, generating a spread between the interest revenue on the
resale agreements or securities borrowed transactions and the interest expense
on the repurchase agreements or securities loaned transactions. Exposures on
these transactions are limited by their typically short-term nature and
collateral maintenance policies.
Receivables under resale agreements and securities borrowed transactions at
year-end 2001 increased 9% from 2000, and payables under repurchase agreements
and securities loaned transactions decreased 16% from year-end 2000.
OTHER TRADING-RELATED RECEIVABLES AND PAYABLES
Securities trading may lead to various customer or broker-dealer balances.
Broker-dealer balances may also result from recording trading inventory on a
trade date basis. Certain receivable and payable balances also arise when
customers or broker-dealers fail to pay for securities purchased or fail to
deliver securities sold, respectively. These receivables are generally fully
collateralized by the securities that the customer or broker-dealer purchased
but did not receive. Customer receivables also include margin loans
collateralized by customer-owned securities held by Merrill Lynch. Collateral
policies significantly limit Merrill Lynch's credit exposure to customers and
broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will
sell securities that have not been paid for, or purchase securities sold but not
delivered, after a relatively short period of time, or will require additional
margin collateral, as necessary. These measures reduce market risk exposure
related to these balances.
Interest receivable and payable balances related to trading inventory are
principally short-term in nature. Interest balances for resale and repurchase
agreements, securities borrowed and loaned transactions, and customer margin
loans are generally considered when determining the collateral requirements
related to these transactions.
Trading-related receivables at year-end 2001 were $40.8 billion, down 32%
from 2000, and trading-related payables increased 55% to $37.1 billion from
year-end 2000, primarily due to changes in broker-dealer balances.
NON-TRADING ASSETS
INVESTMENTS
Marketable investment securities, including those held for liquidity management
purposes, consist of highly liquid debt and equity securities. Marketable
investment securities grew to $77.8 billion at December 28, 2001 from $49.3
billion at December 29, 2000, funded by increased bank deposits (see the
Non-Trading Liabilities -- Borrowings section for further information).
Investments of insurance subsidiaries, primarily debt securities, are used to
fund policyholder liabilities. Other investments consist of equity and debt
securities, including those acquired in connection with merchant banking
activities, and venture capital investments, including technology investments,
and investments that economically hedge deferred compensation liabilities (see
Note 5 to the Consolidated Financial Statements).
LOANS, NOTES, AND MORTGAGES
Merrill Lynch's portfolio of loans, notes, and mortgages consists of mortgage
loans on residences, working capital loans to small- and medium-sized
businesses, and syndicated loans. Merrill Lynch generally maintains collateral
on some of these extensions of credit in the form of securities, liens on real
estate, perfected security interests in other assets of the borrower, and
guarantees. Loans, notes, and mortgages increased 9% in 2001 to $19.0 billion
due to
PAGE 14
increased consumer lending activities. Merrill Lynch maintained collateral of
$14.7 billion at December 28, 2001 to reduce related default risk against
certain of these credits.
OTHER
Other non-trading assets, which include cash and cash equivalents, goodwill,
equipment and facilities, and other assets, decreased $12.8 billion from
year-end 2000 levels. This decrease is primarily due to decreased cash
equivalent investment balances at Merrill Lynch's U.S. banks.
NON-TRADING LIABILITIES
BORROWINGS
Portions of trading and non-trading assets are funded through deposits,
long-term borrowings, and commercial paper (see the Capital Adequacy and Funding
section for further information on funding sources).
Commercial paper decreased from $14.0 billion at year-end 2000 to $3.0
billion at year-end 2001. Deposits increased $18.2 billion in 2001 as a result
of higher customer deposits in U.S. banking subsidiaries which resulted from the
mid-2000 modification of the cash sweep options for certain CMA(R) and other
types of Merrill Lynch accounts to generally sweep cash into interest-bearing
bank deposits at Merrill Lynch's U.S. banks, rather than MLIM-managed money
market mutual funds. Outstanding long-term borrowings increased to $76.6 billion
at December 28, 2001 from $70.2 billion at December 29, 2000. In the second
quarter of 2001, Merrill Lynch issued Liquid Yield Option/TM/ Notes
("LYONs"(R)) due in 2031. LYONs(R) are zero-coupon senior debt instruments
convertible into Merrill Lynch common stock at a premium under certain defined
terms and conditions. For additional information on LYONs(R) see Note 8 to the
Consolidated Financial Statements.
Major components of the changes in long-term borrowings for 2001 and 2000
follow:
(dollars in billions)
- ----------------------------------------------------------------------
2001 2000
- ----------------------------------------------------------------------
Beginning of year $ 70.2 $ 54.0
Issuances 38.5 33.7
Maturities (32.8) (15.7)
Other 0.7 (1.8)
------- -------
End of year(1) $ 76.6 $ 70.2
======= =======
Average maturity in years of long-term
borrowings, when measured to:
Maturity 4.1 3.6
Earlier of the call or put date 2.8 3.0
- ----------------------------------------------------------------------
(1) At year-end 2001 and 2000, $54.1 billion and $48.8 billion of long-term
borrowings had maturity dates beyond one year, respectively.
OTHER
Other non-trading liabilities, which include liabilities of insurance
subsidiaries and other payables, increased slightly from year-end 2000 levels.
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
Preferred securities issued by subsidiaries consist primarily of Trust
Originated Preferred Securities/SM/ ("TOPrS"/SM/) (see Note 10 to the
Consolidated Financial Statements for further information). TOPrS/SM/ proceeds
are utilized as part of general balance sheet funding (see Capital Adequacy and
Funding section for more information).
STOCKHOLDERS' EQUITY
Stockholders' equity at December 28, 2001 increased 9% to $20.0 billion from
$18.3 billion at year-end 2000. This increase primarily resulted from net
earnings and the net effect of employee stock transactions, partially offset by
dividends.
At December 28, 2001, total common shares outstanding, excluding shares
exchangeable into common stock, were 843.5 million, 4% higher than the 808.0
million shares outstanding at December 29, 2000. The increase was attributable
principally to employee stock grants and option exercises. There were no common
stock repurchases during 2001 or 2000.
Total shares exchangeable into common stock at year-end 2001, issued in
connection with the 1998 merger with Midland Walwyn Inc., were 4.2 million,
compared with 4.7 million at year-end 2000. For additional information see Note
11 to the Consolidated Financial Statements.
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND FUNDING
The primary objectives of Merrill Lynch's capital structure and funding policies
are to support the successful execution of the firm's business strategies while
ensuring:
.sufficient equity capital to absorb losses and,
.liquidity at all times, across market cycles, and through periods of
financial stress.
CAPITAL ADEQUACY
At December 28, 2001, Merrill Lynch's equity capital was comprised of $19.6
billion in common equity, $425 million in preferred stock, and $2.7 billion of
TOPrS./SM/
Merrill Lynch continually reviews overall equity capital needs to ensure
that its equity capital base can support the estimated risks and needs of its
businesses, as well as the regulatory and legal capital requirements of its
subsidiaries. Merrill Lynch uses statistically based risk models, developed in
conjunction with risk management practices, to estimate potential losses arising
from market and credit risks. Equity capital needs are determined based on these
models, which dynamically capture changes in risk profile. Merrill Lynch also
assesses the need for equity capital to support business risks, such as process
risk, that may not be adequately measured through these risk models, as well as
the potential use of equity capital to support growth. Merrill Lynch determines
the appropriateness of its equity capital composition, which includes common
stock, preferred stock, and TOPrS,/SM/ taking into account the perpetual nature
of its preferred stock and TOPrS./SM/ Based on these
PAGE 15
analyses and criteria, management believes that Merrill Lynch's equity capital
base of $22.7 billion is adequate.
Merrill Lynch operates in many regulated businesses that require various
minimum levels of capital (see Note 16 to the Consolidated Financial Statements
for further information). Merrill Lynch's broker-dealer, banking, insurance, and
futures commission merchant activities are subject to regulatory requirements
that may restrict the free flow of funds to affiliates. Regulatory approval is
generally required for paying dividends in excess of certain established levels
and making affiliated investments. Merrill Lynch's capital adequacy models and
planning take into account these regulatory considerations.
Merrill Lynch's leverage ratios were as follows:
- ------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- ------------------------------------------------------------------
YEAR-END
December 28, 2001 18.5x 12.8x
December 29, 2000 19.4x 13.9x
AVERAGE(3)
Year ended December 28, 2001 18.8x 13.1x
Year ended December 29, 2000 19.0x 13.2x
- ------------------------------------------------------------------
(1) Total assets to Total stockholders' equity and Preferred securities issued
by subsidiaries.
(2) Total assets less (a) Receivables under resale agreements (b) Receivables
under securities borrowed transactions and (c) Securities received as
collateral to Total stockholders' equity and Preferred securities issued by
subsidiaries.
(3) 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.
FUNDING
Merrill Lynch strives to continually expand and globally diversify its funding
programs, markets, and investor and creditor base. Merrill Lynch benefits by
distributing a significant portion of its liabilities and equity through its own
sales force to a large, diversified global client base. Available funding
sources include:
.repurchase agreements and securities loaned transactions,
.U.S., Euro, Canadian, Japanese, and Australian commercial paper programs,
.deposits at Merrill Lynch's banking subsidiaries,
.bank loans,
.U.S., Euro, Canadian, and Australian medium- and long-term debt programs,
.letters of credit,
.TOPrS,/SM/
.preferred stock, and
.common stock.
Merrill Lynch typically concentrates its unsecured, non-deposit
general-purpose funding at the ML & Co. level, except where tax regulations,
time zone differences, or other business considerations make this impractical.
The benefits of this strategy are enhanced control, reduced financing costs,
wider name recognition by creditors, and greater flexibility to meet variable
funding requirements of subsidiaries.
During 2001 and 2000, Merrill Lynch reduced its reliance on commercial
paper as a source of funding. Commercial paper represented 4% and 16% of total
unsecured borrowings at year-end 2001 and 2000, respectively. Merrill Lynch
diversifies its borrowings by maintaining various limits, including a limit on
the amount of commercial paper held by a single investor.
LIQUIDITY MANAGEMENT
Liquidity risk occurs when there are timing differences between cash inflows
from the businesses and cash outflows for business needs and maturing debt
obligations. Merrill Lynch's liquidity policy is to maintain alternative funding
sources such that all unsecured debt obligations maturing within one year can be
repaid when due without issuing new unsecured debt or requiring business assets
to be liquidated. The main alternative funding sources to unsecured borrowings
are repurchase agreements, securities loaned, and secured bank loans, which
require pledging unencumbered marketable securities held for trading or
investment purposes.
As an additional source of liquidity, Merrill Lynch maintains a portfolio
of segregated U.S. government and agency obligations, and asset-backed
securities of high credit quality, which had a carrying value, net of related
hedges of $8.4 billion at December 28, 2001 and $7.4 billion at December 29,
2000. These assets may be sold or pledged to provide immediate liquidity even
during periods of adverse market conditions.
For funding purposes, Merrill Lynch assesses its assets and commitments in
order to determine the appropriate level of short-term and long-term funding.
Long-term funding sources include a portion of deposits, the non-current portion
of long-term debt, TOPrS/SM/, preferred stock, and common equity. Generally,
trading and other current assets are financed with a combination of short-term
and long-term funding. Long-term, less liquid assets are fully financed with
long-term funding. Merrill Lynch also finances the long-term funding
requirements of commitments and other contingent obligations, including
additional collateral that may be required under derivative contracts in certain
rating downgrade scenarios. In assessing the appropriate tenor of its short-term
and long-term funding, Merrill Lynch seeks to ensure sufficient coverage over
the spectrum of maturities.
Merrill Lynch recognizes that regulatory restrictions may limit the free
flow of funds among affiliates. For example, a portion of deposits held by
Merrill Lynch bank subsidiaries fund securities that can be sold or pledged to
provide immediate liquidity for the banks. However, there are regulatory
restrictions on the use of this liquidity for non-bank affiliates of Merrill
Lynch.
PAGE 16
Approximately $81.7 billion of indebtedness at December 28, 2001 is
considered senior indebtedness as defined under various indentures. Merrill
Lynch's debt obligations do not contain provisions that could, upon an adverse
change in ML & Co.'s credit rating, financial ratios, earnings, cash flows, or
stock price, trigger a requirement for an early payment, additional collateral
support, changes in terms, acceleration of maturity, or the creation of an
additional financial obligation. Merrill Lynch may issue structured notes that,
under certain circumstances, require Merrill Lynch to immediately settle the
obligation for cash or other securities. A limited number of structured notes
may be accelerated based on the value of the underlying securities. Merrill
Lynch typically hedges these notes with positions in the underlying securities.
Merrill Lynch maintains a committed, senior, unsecured bank credit facility
that totaled $5 billion at December 28, 2001 and $8 billion at December 29,
2000. The current facility expires in May 2002. While Merrill Lynch expects to
renew the facility, it may choose to do so in a reduced amount. In 2001, Merrill
Lynch elected to reduce the amount of its credit facility. This reduction was
offset by an increase in the liquidity portfolio of unencumbered securities that
may be sold or pledged to provide immediate liquidity. At December 28, 2001 and
December 29, 2000, there were no borrowings outstanding under these credit
facilities. Merrill Lynch's revolving line of bank credit contains covenants,
including a minimum net worth requirement, with which Merrill Lynch has
maintained compliance at all times. The credit facility does not, however,
require Merrill Lynch to maintain specified credit ratings.
Merrill Lynch maintains a contingency funding plan that outlines actions
that would be taken in the event of a funding disruption.
ASSET AND LIABILITY MANAGEMENT
Merrill Lynch routinely issues debt in a variety of maturities and currencies to
achieve the lowest cost financing possible and an appropriate liability maturity
profile. Merrill Lynch uses derivative transactions to more closely match the
duration of these borrowings to the duration of the assets being funded to
enable interest rate risk to be managed within limits set by Corporate Risk
Management. Interest rate swaps also serve to reduce Merrill Lynch's interest
expense and effective borrowing rate, when interest rates decline. Merrill Lynch
also enters into currency swaps to ensure that foreign-currency denominated
assets are funded with like-currency denominated liabilities (to the extent that
the currency cannot be sourced more efficiently through a direct debt issuance).
Investments in subsidiaries in foreign currencies are also effectively hedged to
a level which minimizes translation adjustments in the Cumulative Translation
Account. For further information, see Notes 1 and 6 to the Consolidated
Financial Statements.
CREDIT RATINGS
The cost and availability of unsecured funding generally are dependent on credit
ratings. Merrill Lynch's senior long-term debt, preferred stock, and TOPrS/SM/
were rated by several recognized credit rating agencies at February 25, 2002 as
indicated below. These ratings do not reflect outlooks that may be expressed by
the rating agencies from time to time, which are currently negative. Subsequent
to the announcement of Merrill Lynch's fourth quarter 2001 restructuring and
other charges, all of these rating agencies reaffirmed Merrill Lynch's current
ratings.
- --------------------------------------------------------------------------------
PREFERRED
SENIOR DEBT STOCK TOPrS/SM/
RATING AGENCY RATINGS RATINGS RATINGS
- --------------------------------------------------------------------------------
Dominion Bond Rating
Service Ltd. AA (low) Not Rated Not Rated
Fitch Ratings AA AA- AA-
Moody's Investors Service, Inc. Aa3 A2 A1
Rating & Investment
Information, Inc.(1) AA A+ A+
Standard & Poor's
Ratings Services AA- A A
- --------------------------------------------------------------------------------
(1) Located in Japan.
NON-TRADING RELATED CONTRACTUAL OBLIGATIONS
As a part of its normal operating strategy, Merrill Lynch enters into various
contractual obligations and commitments which may require future payments. The
table below outlines the significant contractual obligations outstanding as of
December 28, 2001 and provides reference to where further information on each
obligation can be found elsewhere in this document:
- --------------------------------------------------------------------------------
CONTRACTUAL OBLIGATION REFERENCE
- --------------------------------------------------------------------------------
Long-term borrowings Note 8
Leases Note 12
Deferred compensation plans Note 14
Additional commitments to Note 12 and Non-Investment
invest in partnerships Grade Holdings and Highly
Leveraged Transactions
Unutilized revolving lines of
credit and other commitments to
extend credit Note 12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITAL PROJECTS AND EXPENDITURES
Merrill Lynch continually prepares for the future by reviewing its operations
and investing in new technology to improve service to clients.
Merrill Lynch has agreed to invest not more than $600 million in MLHSBC,
the 50/50-owned corporation created to provide global online investment and
banking services. At December 28, 2001, Merrill Lynch had invested $197 million.
The timing of the funding of additional investments will be determined by the
Board of Directors of MLHSBC, which has equal representation from Merrill Lynch
and HSBC.
PAGE 17
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RISK MANAGEMENT
RISK MANAGEMENT PHILOSOPHY
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 including 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
businesses. The Corporate Risk Management ("CRM") group along with other control
units, ensures that these risks are properly identified, monitored, and managed
throughout Merrill Lynch. To accomplish this, CRM has established a risk
management process, which includes:
.a formal risk governance organization that defines the oversight process
and its components;
.a regular review of the entire risk management process by the Audit
Committee of the Board of Directors;
.clearly defined risk management policies and procedures supported by
analytic tools;
.communication and coordination between the business, executive, and risk
functions while maintaining strict segregation of responsibilities,
controls, and oversight; and
.clearly articulated risk tolerance levels as defined by a group composed of
executive management ("the Management Group") that are regularly reviewed
to ensure that Merrill Lynch's risk-taking is consistent with its business
strategy, capital structure, and current and anticipated market conditions.
The risk management process, combined with CRM's personnel and analytic
infrastructure, works to ensure that Merrill Lynch's risk tolerance is
well-defined and understood by the firm's businesses as well as by its executive
management. Other groups, including Corporate Audit, Finance, Legal and
Treasury, work with CRM to establish this overall risk management control
process. While no risk management system can ever be absolutely complete, the
goal of CRM is to make certain that risk related losses occur within acceptable,
predefined levels.
RISK GOVERNANCE STRUCTURE
Merrill Lynch's risk governance structure is comprised of the Audit Committee,
the Management Group, the Risk Oversight Committee ("ROC"), the business units,
CRM, and various corporate governance committees. The roles of these respective
groups are as follows:
The Audit Committee is comprised entirely of external directors and has
authorized the ROC to establish Merrill Lynch's risk management policies.
The Management Group establishes risk tolerance levels for the firm and
authorizes material changes in Merrill Lynch's risk profile. It also ensures
that the risks assumed by Merrill Lynch are managed within these tolerance
levels and verifies that Merrill Lynch has implemented appropriate policies for
the effective management of risks. The Management Group must approve all
substantive changes to risk policies, including those proposed by the ROC. The
Management Group pays particular attention to risk concentrations and liquidity
concerns.
The ROC, comprised of senior business and control managers and currently
chaired by the Chief Financial Officer, oversees Merrill Lynch's risks and
ensures that the business units create and implement processes to identify,
measure, and monitor their risks. The ROC also assists the Management Group in
determining risk tolerance levels for the firm's business units and monitors the
activities of Merrill Lynch's corporate governance committees, reporting
significant issues and transactions to the Management Group and the Audit
Committee.
Various other governance committees exist to create policy, review
activity, and ensure that new and existing business initiatives remain within
established risk tolerance levels. These committees include the New Product
Review Committee, Debt and Equity Capital Commitment Committees, Real Estate
Capital Commitment Committee, Credit Policy Committee, Corporate Transaction
Review Committee, and Reserve Committee. Representatives of the principal
independent control functions participate as voting members of these committees.
CORPORATE RISK MANAGEMENT
CRM is an independent control function responsible for Merrill Lynch's market
and credit risk management processes. The co-heads of CRM report directly to the
Chief Financial Officer who chairs the ROC and is a member of the Management
Group. Market risk is defined to be the potential change in value of financial
instruments caused by fluctuations in interest rates, exchange rates, equity and
commodity prices, credit spreads, and/or other risks. Credit risks are defined
to be the potential for loss that can occur as a result of impairment in the
creditworthiness of an issuer or counterparty or a default by an issuer or
counterparty on its contractual obligations. CRM also provides Merrill Lynch
with an overview of its risk for various aggregate portfolios and develops the
analytics, systems, and policies to conduct all risk management functions.
CRM's chief monitoring and risk measurement tool is Merrill Lynch's Risk
Framework. The Risk Framework defines and communicates Merrill Lynch's risk
tolerance and establishes aggregate and broad risk limits for the firm. Market
risk limits are intended to constrain exposure to specific classes and factors
of market risk and Value-at-Risk ("VaR"). VaR is a statistical measure of the
potential loss in the fair value of a portfolio due to adverse movements in
underlying risk factors. Credit risk limits are intended to constrain the
magnitude and tenor of exposure to individual counterparties and issuers, types
of counterparties and issuers, countries, and financing collateral. Risk
Framework exceptions and violations are reported and investigated at pre-defined
and appropriate levels of management. The Risk Framework and
PAGE 18
its limits have been approved by the Management Group and the risk parameters
that define the Risk Framework have been reviewed by the Audit Committee. The
Management Group reviews the Risk Framework annually and approves any material
changes. The ROC reports all substantive Risk Framework changes to the Audit
Committee.
The overall effectiveness of Merrill Lynch's risk processes and policies
can be seen on a broader level when analyzing weekly net trading revenues over
time. CRM policies and procedures of monitoring and controlling risk combined
with the businesses' focus on customer order-flow driven revenues and selective
proprietary positioning have helped Merrill Lynch to reduce earnings volatility
within its portfolios. While no guarantee can be given regarding future earnings
volatility, Merrill Lynch will continue to pursue policies and procedures that
assist the firm in measuring and monitoring its risks. A graph of Merrill
Lynch's weekly revenues from trading-related activities for 2001 follows:
[BAR CHART]
2001 DISTRIBUTION OF WEEKLY REVENUES FROM
TRADING-RELATED ACTIVITIES
(in millions of dollars)
Number of Weeks
---------------
Less than $50 2
$50 - 75 4
$75 - 100 4
$100 - 125 17
$125 - 150 11
$150 - 175 6
$175 - 200 5
Over $200 3
MARKET RISK
CRM's Market Risk Group is responsible for defining the products and markets in
which Merrill Lynch's major business units and functions will transact and take
risk. Moreover, it is responsible for identifying the risks to which these
businesses and units will be exposed in these approved products and markets. The
Market Risk Group uses a variety of quantitative metrics to assess the risk of
Merrill Lynch's positions and portfolios. In particular, the Market Risk Group
quantifies the sensitivities of Merrill Lynch's present portfolios to changes in
market variables. These sensitivities are then utilized in the context of
historical data to estimate earnings and loss distributions that Merrill Lynch's
present portfolios would have incurred throughout the historical period. From
these distributions, CRM derives a number of useful risk statistics including
VaR. 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. CRM 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 VaR. However, calculation of VaR requires
numerous assumptions and thus VaR should not be viewed as a precise measure of
risk.
In the Merrill Lynch VaR system, CRM uses a historical simulation approach
to estimate VaR using a 99% confidence level and a two-week holding period for
trading and non-trading instruments. Sensitivities to market risk factors are
aggregated and combined with a database of historical market factor movements 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 trading instruments at
year-end 2001 and 2000 and the 2001 average VaR. Additionally, high and low VaR
is presented independently for each risk category and overall. Because high and
low VaR numbers for these risk categories may have occurred on different days,
high and low numbers for diversification benefit would not be meaningful.
(dollars in millions)
- -------------------------------------------------------------------------------
DAILY
YEAR-END YEAR-END AVERAGE HIGH LOW
2001 2000 2001 2001 2001
- -------------------------------------------------------------------------------
Trading value-at-risk(1)
Interest rate and credit spread $ 113 $ 81 $ 84 $ 124 $ 52
Equity 94 77 61 103 35
Commodity 2 9 3 14 0
Currency 3 14 11 50 1
Volatility 44 34 35 67 14
----- ----- ----- ----- ---
256 215 194
Diversification benefit (144) (116) (92)
----- ----- -----
Overall(2) $ 112 $ 99 $ 102 $ 138 $ 76
- -------------------------------------------------------------------------------
(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
$21 million and $20 million at year-end 2001 and 2000, respectively.
Due to the mix of the trading portfolio, overall VaR increased in 2001 due
to increases in interest rate and credit spread VaR and equity VaR. These
increases were partially offset by an increase in diversification benefit.
The following table presents Merrill Lynch's VaR for non-trading
instruments (excluding U.S. banks):
PAGE 19
(dollars in millions)
- -------------------------------------------------------------------------------
QUARTERLY
YEAR-END YEAR-END AVERAGE
2001 2000 2001
- -------------------------------------------------------------------------------
Non-trading value-at-risk(1)
Interest rate and credit spread $ 77 $ 67 $ 76
Currency 20 23 19
Equity 57 47 51
Volatility 11 3 9
----- ---- -----
165 140 155
Diversification benefit (59) (44) (45)
----- ---- -----
Overall $ 106 $ 96 $ 110
- --------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
Non-trading VaR increased modestly during 2001 due to increases in interest
rate and credit spread VaR and equity VaR. The higher interest rate and credit
spread risk is primarily due to an increase in marketable investment securities
held for liquidity purposes. The increase in the non-trading equity VaR is
primarily due to the increased volatility in the U.S. equity markets.
Non-trading VaR does not include the risk related to Merrill Lynch's $2.4
billion of outstanding LYONs(R) since management expects that the LYONs(R)
will be converted to common stock and will not be replaced by fixed income
securities.
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrS/SM/ at year-end 2001 and
2000 was $82 million and $138 million, respectively. TOPrS,/SM/ 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 mid-2000 Merrill Lynch modified the cash sweep options for
certain CMA(R) and other types of Merrill Lynch accounts to generally sweep
cash into interest-bearing bank deposits at Merrill Lynch's U.S. banks, rather
than MLIM-managed money market mutual funds. This increase in deposits was used
to fund the growth in high quality marketable investment securities. The overall
VaR for the U.S. banks, driven largely by these securities and based on a 99%
confidence level and a two-week holding period, was $156 million at year-end
2001 compared with $113 million at year-end 2000. The increase in comparable
year-over-year measures reflects continued asset growth and changes in asset mix
within the banks. For more information on Merrill Lynch's U.S. banks see Capital
Adequacy and Funding.
CREDIT RISK
CRM's Credit Risk Group assesses the creditworthiness of existing and potential
individual clients, institutional counterparties and issuers, and determines
firm-wide credit risk levels within Framework limits. The Group reviews and
monitors specific transactions as well as portfolio and other credit risk
concentrations. It is also responsible for ongoing credit quality and limit
compliance, and the Group works with the business units of Merrill Lynch to
manage and mitigate credit risk.
The Credit Risk Group uses a variety of methodologies to set limits on
exposure resulting from a counterparty or issuer failing to perform on its
contractual obligations. The Group performs analysis in the context of
industrial, regional, and global economic trends and incorporates portfolio and
concentration effects when determining tolerance levels. Credit risk limits take
into account measures of both current and potential exposure and are set and
monitored by broad risk type, product type, and tenor to maturity. Credit risk
mitigation techniques include, where appropriate, the right to require initial
collateral or margin, the right to terminate transactions or obtain collateral
should unfavorable events occur, the right to call for collateral when certain
exposure thresholds are exceeded, and the purchase of credit default protection.
With senior management involvement, Merrill Lynch conducts regular portfolio
reviews, monitors counterparty creditworthiness, and evaluates transaction risk
with a view toward early problem identification and protection against
unacceptable credit-related losses. In 2001, the Credit Risk Group invested
additional resources to enhance its methods and policies to assist in the
management of Merrill Lynch's credit risk.
Credit risk and exposure that originates from Merrill Lynch's retail
customer business is monitored constantly by CRM. Exposures include credit risks
for mortgages, home equity lines of credit, margin accounts, and working capital
lines that Merrill Lynch maintains with certain small business clients. When
required, these exposures are collateralized in accordance with regulatory
requirements governing such activities. Credit risk in Merrill Lynch's U.S.
banks' investment portfolios is monitored within CRM and by credit risk
management analysts. In addition, Merrill Lynch's U.S. banks have independent
credit approval and monitoring processes.
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 the
replacement value of trading derivatives in a gain position (net of $7.3 billion
of collateral) by counterparty credit rating and maturity at December 28, 2001.
(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.)
PAGE 20
(dollars in millions)
- --------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
CREDIT ---------------------------------------- MATURITY
RATING(1) 0-3 3-5 5-7 OVER 7 NETTING(2) TOTAL
- --------------------------------------------------------------------------------
AAA $ 4,013 $1,069 $ 987 $1,530 $ (822) $ 6,777
AA 4,397 2,599 912 1,838 (1,545) 8,201
A 2,696 1,309 436 891 (580) 4,752
BBB 1,605 602 266 343 (364) 2,452
Other 1,138 291 144 87 (116) 1,544
------- -------- ------ ------ -------- -------
Total $13,849 $5,870 $2,745 $4,689 $(3,427) $23,726
- --------------------------------------------------------------------------------
(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 of its
derivative contracts.
PROCESS RISK
Process Risk Management is an evolving risk management discipline. Merrill Lynch
defines process risk as the risk of loss resulting from inadequate controls or
business disruption relating to people, internal processes, systems, or external
events. Examples of process risks faced by the firm include systems failure,
human error, fraud, and major fire or other disasters. Merrill Lynch manages
process risks in a variety of ways including maintaining a comprehensive system
of internal controls, using technology to automate processes and reduce manual
errors, monitoring risk events, employing experienced personnel, monitoring
business activities by compliance professionals, maintaining backup facilities,
conducting internal audits, requiring education and training of employees, and
emphasizing the importance of management oversight.
On September 11th terrorists attacked the World Trade Center complex, which
subsequently collapsed and damaged surrounding buildings, including some
occupied by Merrill Lynch. These events precipitated the temporary relocation of
approximately 9,000 employees from Merrill Lynch's global headquarters in the
North Tower of the World Financial Center, and from offices at the South Tower
of the World Financial Center and 222 Broadway. Merrill Lynch has reoccupied the
North Tower of the World Financial Center and 222 Broadway and is restoring the
South Tower of the World Financial Center. Although some of Merrill Lynch's
businesses were temporarily disrupted, resulting in lower than normal market
shares and reduced business activity, all its businesses are now functioning and
serving clients worldwide. In certain instances, Merrill Lynch is utilizing
temporary locations and backup infrastructures.
OTHER RISKS
Liquidity Risks arise in the course of Merrill Lynch's general funding
activities and in the management of its balance sheet. This risk includes both
being unable to raise funding with appropriate maturity and interest rate
characteristics and the risk of being unable to liquidate an asset in a timely
manner at a reasonable price. For more information on how Merrill Lynch manages
liquidity risk, see the Capital Adequacy and Funding section.
Merrill Lynch encounters a variety of other risks, which have the ability
to impact the viability, profitability, and cost effectiveness of present or
future transactions. Such risks include political, tax, and regulatory risks
that may arise due to changes in local laws, regulations, accounting standards,
or tax statutes. To assist in the mitigation of such risks, Merrill Lynch
rigorously reviews new and pending legislation and regulations. Additionally,
Merrill Lynch employs professionals in jurisdictions in which the company
operates to actively follow issues of potential concern or impact to the firm
and to participate in related interest groups.
In mid-2001, in a further effort to ensure the independence and objectivity
of its research, Merrill Lynch announced a new policy, which prohibits equity
analysts and their staff members from buying equity shares for companies they
cover. In addition, for shares they already hold, they must either divest,
transfer the securities to a managed account over which they have no discretion,
or maintain existing shares under stricter disclosure and disposition rules.
Further, the existence of any equity position maintained by any analyst with
responsibility for any security discussed in a research report will be described
in the research report.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS AND
HIGHLY LEVERAGED TRANSACTIONS
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.
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
PAGE 21
contract can either synthesize ownership of the underlying security (e.g., long
total return swaps) or 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 continue to be made on a
select basis.
TRADING EXPOSURES
The following table summarizes trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 2001 and 2000:
(dollars in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 4,597 $ 5,227
Derivatives 4,478 3,982
Trading liabilities--cash instruments (1,535) (1,087)
Collateral on derivative assets (2,934) (1,796)
------- -------
Net trading asset exposure $ 4,606 $ 6,326
- --------------------------------------------------------------------------------
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
December 28, 2001, the carrying value of such debt and equity securities totaled
$58 million, of which 18% resulted from Merrill Lynch's market-making activities
in such securities. This compared with $43 million at December 29, 2000, of
which 64% related to market-making activities. Also included are distressed bank
loans totaling $245 million and $122 million at year-end 2001 and 2000,
respectively.
NON-TRADING EXPOSURES
The following table summarizes non-trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 2001 and 2000:
(dollars in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Marketable investment securities $ 221 $ 199
Investments of insurance subsidiaries 114 136
Loans (net of allowance for loan losses):
Bridge loans 130 524
Other loans(1) 2,578 2,741
Other investments:
Partnership interests(2) 1,359 993
Other equity investments(3) 140 284
- --------------------------------------------------------------------------------
(1) Represents outstanding loans to 138 and 135 companies at year-end 2001 and
2000, respectively.
(2) Includes $712 million and $504 million in investments at year-end 2001 and
2000, respectively, related to deferred compensation plans, for which the
default risk of the investments rests with the participating employees.
(3) Includes investments in 81 and 98 enterprises at year-end 2001 and 2000,
respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly leveraged counterparties at year-end 2001 and
2000:
(dollars in millions)
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Additional commitments to invest
in partnerships $ 288 $ 467
Unutilized revolving lines of credit and
other lending commitments 1,947 3,664
- --------------------------------------------------------------------------------
At December 28, 2001, the largest industry exposure was to the financial
services sector, which accounted for 22% of total non-investment grade positions
and highly leveraged transactions.
Merrill Lynch sponsors certain deferred compensation plans in which eligible
employees, who meet certain minimum compensation and net worth levels, may
participate. Contributions to the plans are made on a tax-deferred basis by
participants. Contributions are invested by Merrill Lynch in mutual funds and
other funds as directed by the employee, and the plans may include a leverage
feature which is non-recourse to the employees. In addition, certain Merrill
Lynch employees, who manage the assets of certain of these plan partnerships,
participate in the profits of these entities.
Merrill Lynch also allows certain qualified high-net-worth employees to
invest in certain private equity investments in selected third-party funds.
PAGE 22
- --------------------------------------------------------------------------------
LITIGATION
Certain actions have been filed against Merrill Lynch in connection with Merrill
Lynch's business activities. Although the ultimate outcome of legal actions,
arbitration proceedings, and claims pending against ML & Co. or its subsidiaries
cannot be ascertained at this time and the results of legal proceedings 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.
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The following is a summary of Merrill Lynch's critical accounting policies. For
a full description of these and other accounting policies see Note 1 to the
Consolidated Financial Statements.
USE OF ESTIMATES
In presenting the Consolidated Financial Statements, management makes estimates
regarding certain trading inventory valuations, the outcome of litigation, the
carrying amount of goodwill, the allowance for loan losses, the realization of
deferred tax assets, recovery of insurance deferred acquisition costs, September
11th-related insurance recoveries, restructuring and other charges, and other
matters that affect the reported amounts and disclosure of contingencies in the
financial statements. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ from those
estimates and could have a material impact on the Consolidated Financial
Statements and it is possible that such changes could occur in the near term.
For more information regarding the specific methodologies used in determining
estimates, refer to Use of Estimates in Note 1 to the Consolidated Financial
Statements.
USE OF VALUATION OF FINANCIAL INSTRUMENTS
Fair values for certain exchange-traded derivatives, principally futures and
certain options, are based on quoted market prices. Fair values for
over-the-counter ("OTC") derivative financial instruments, principally forwards,
options, and swaps, represent amounts estimated to be received from or paid to a
third party in settlement of these instruments. Obtaining the fair value for OTC
derivative contracts requires the use of management judgment and estimates.
These derivatives are valued using pricing models based on the net present value
of estimated future cash flows, and directly observed prices from
exchange-traded derivatives, other OTC trades, or external pricing services.
New, complex instruments may have immature or limited markets. As a result,
the pricing models used for valuation often incorporate significant estimates
and assumptions, which may impact the level of precision in the financial
statements. For long-dated and illiquid contracts, extrapolation methods are
applied to observed market data in order to estimate inputs and assumptions that
are not directly observable. This enables Merrill Lynch to mark all positions
consistently when only a subset of prices are directly observable. Values for
non-exchange-traded derivatives are verified using observed information about
the costs of hedging out the risk and other trades in the market. As the markets
for these products develop, Merrill Lynch continually refines its pricing models
based on experience to correlate more closely to the market risk of these
instruments.
Merrill Lynch holds investments that may have quoted market prices but that
are subject to restrictions (e.g., consent of other investors) that may limit
Merrill Lynch's ability to realize the quoted market price. Accordingly, Merrill
Lynch estimates the fair value of these securities based on management's best
estimate which incorporates pricing models based on projected cash flows,
earnings multiples, comparisons based on similar market transactions and/or
review of underlying financial conditions and other market factors.
Valuation adjustments are an integral component of the mark-to-market
process and are taken for individual positions where either the sheer size of
the trade or other specific features of the trade or particular market (such as
counterparty credit quality or concentration or market liquidity) requires
greater attention than simple application of the pricing models.
CONSOLIDATION AND TRANSACTIONS INVOLVING SPECIAL PURPOSE ENTITIES
Special purpose entities ("SPEs") are trusts, partnerships, or corporations
established for a particular limited purpose. Merrill Lynch engages in
transactions with SPEs for a variety of reasons. Many of these SPEs are used to
facilitate the securitization of client assets whereby mortgages, loans or other
assets owned by clients are transformed into securities (securitized). SPEs are
also used to create securities with a specific risk profile desired by
investors. In the course of its normal business, Merrill Lynch, from time to
time, establishes SPEs; sells assets to SPEs; underwrites, distributes, and
makes markets in securities issued by SPEs; engages in derivative transactions
with SPEs; owns notes or certificates issued by SPEs; and provides liquidity
facilities or other guarantees to SPEs.
PAGE 23
Merrill Lynch follows the guidance in Statement of Financial Accounting
Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" and Emerging Issues Task Force
("EITF") Topic D-14, "Transactions Involving Special-Purpose Entities" and EITF
Issue No. 90-15, "Impact of Nonsubstantive Lessors, Residual Value Guarantees,
and Other Provisions in Leasing Transactions" to determine whether or not an SPE
is required to be consolidated in its Consolidated Financial Statements. Many of
the SPEs with which Merrill Lynch enters into transactions meet the requirements
of qualifying special purpose entities ("QSPEs") as defined by SFAS No. 140.
Based on the requirements of SFAS No. 140, QSPEs are not consolidated by Merrill
Lynch.
Many SPEs do not qualify as QSPEs either because the SPEs' permitted
activities are not sufficiently limited, or because the SPE owns assets that are
not financial instruments, or otherwise does not meet all of the conditions of a
QSPE. In situations where Merrill Lynch is either the sponsor of the SPE or
where Merrill Lynch transfers assets to the SPE, Merrill Lynch relies on the
guidance provided by EITF Topic D-14 to determine whether consolidation of these
SPEs is required. Under this guidance, an SPE is not required to be consolidated
by a transferor or sponsor if the SPE issues equity in legal form to
unaffiliated third parties that is at least 3% of the value of the assets held
by the SPE, and the transferor or sponsor has not retained the substantive risks
and rewards of ownership of the SPE and does not have control over the
activities of the SPE. Merrill Lynch looks to a number of both qualitative and
quantitative factors in determining whether it is the sponsor of an SPE for
purposes of applying the guidance in EITF Topic D-14, and judgment is required
in making this determination.
Merrill Lynch may also act as a liquidity provider to investors in
securities issued by SPEs or enter into other guarantees related to SPEs.
Additional information regarding liquidity facilities and guarantees to SPEs is
provided in Note 12 to the Consolidated Financial Statements. Merrill Lynch may
also retain interests in assets securitized by an SPE, or enter into derivative
transactions with SPEs, both of which are recorded at estimated fair value in
the financial statements. Therefore, material economic exposures to SPEs related
to these transactions are recorded or disclosed in the Consolidated Financial
Statements. Refer to Balance Sheet Captions -- Marketable Investment Securities
in Note 1 to the Consolidated Financial Statements for more information on
interests retained in securitization transactions.
In addition to the SPEs described above, Merrill Lynch has entered into
transactions with two SPEs to facilitate the financing of physical property for
its own use (facilities and aircraft). Merrill Lynch's U.S. banking subsidiaries
have also entered into transactions with SPEs in order to improve the liquidity
of mortgage portfolios and reduce credit risk of investment portfolios, which
resulted in reduced regulatory capital requirements. See Note 16 to the
Consolidated Financial Statements for more information regarding these
transactions.
- -------------------------------------------------------------------------------
RECENT DEVELOPMENTS
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") released SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of the business as previously defined in that opinion. SFAS No. 144
also amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No. 144 provides guidance on the
financial accounting and reporting for the impairment or disposal of long-lived
assets. Merrill Lynch will adopt the provisions of SFAS No. 144 in the first
quarter of 2002 and has not yet determined the impact of adoption.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, intangible assets with indefinite lives and
goodwill will no longer be amortized. Instead, these assets will be tested
annually for impairment. Merrill Lynch adopted the provisions of SFAS No. 142 at
the beginning of fiscal year 2002.
SFAS No. 142 will require that Merrill Lynch perform an assessment of
whether there is an indication that goodwill is impaired as of the date of
adoption. This test is required to be completed within six months of the date of
adoption. If an indication of impairment exists, quantification of the
impairment is required to be completed as soon as possible, but no later than
the end of the year. Any impairment loss, as of the first day of fiscal year
2002, will be recognized as the cumulative effect of a change in accounting
principle in Merrill Lynch's statement of earnings upon adoption. Merrill Lynch
is currently assessing the impact of adopting this standard; annual amortization
expense related to goodwill approximated $200 million in 2001.
In July 2001, the FASB released SFAS No. 141, "Business Combinations." SFAS
No. 141 requires all business combinations initiated after June 30, 2001, to be
accounted for using the purchase method. Merrill Lynch adopted the provisions of
SFAS No. 141 on July 1, 2001.
PAGE 24