EXHIBIT 13
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended Last Friday in December
--------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts) 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------------------------------
(53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
OPERATING RESULTS
Revenues $ 16,588,177 $ 13,412,668 $ 12,352,812 $ 11,147,229 $ 11,273,223
Interest Expense 6,029,947 4,835,267 5,106,344 5,363,900 5,371,028
------------ ------------ ------------ ------------ ------------
Net Revenues 10,558,230 8,577,401 7,246,468 5,783,329 5,902,195
Non-Interest Expenses 8,133,422 6,956,012 6,229,050 5,501,001 6,060,581
------------ ------------ ------------ ------------ ------------
Earnings (Loss) Before Income Taxes,
Cumulative Effect of Changes in
Accounting Principles and
Discontinued Operations 2,424,808 1,621,389 1,017,418 282,328 (158,386)
Income Tax Expense 1,030,449 668,984 321,301 90,472 58,980
------------ ------------ ------------ ------------ ------------
Earnings (Loss) Before Cumulative
Effect of Changes in Accounting
Principles and Discontinued Operations $ 1,394,359 $ 952,405 $ 696,117 $ 191,856 $ (217,366)
============ ============ ============ ============ ============
Net Earnings (Loss) $ 1,358,939 $ 893,825 $ 696,117 $ 191,856 $ (213,385)
============ ============ ============ ============ ============
Net Earnings (Loss) Applicable to
Common Stockholders $ 1,353,558 $ 887,486 $ 678,392 $ 167,932 $ (235,401)
============ ============ ============ ============ ============
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FINANCIAL POSITION
Total Assets $152,910,362 $107,024,173 $ 86,259,343 $ 68,129,527 $ 63,942,263
Short-Term Borrowings (a) $ 79,632,477 $ 51,179,530 $ 38,697,544 $ 27,340,915 $ 28,558,220
Long-Term Borrowings $ 13,468,900 $ 10,871,100 $ 7,964,424 $ 6,341,559 $ 6,897,109
Total Stockholders' Equity $ 5,485,913 $ 4,569,104 $ 3,818,088 $ 3,225,430 $ 3,151,343
- -------------------------------------------------------------------------------------------------------------------------------
TAX INFORMATION
Other Taxes, Principally Payroll and
Property $ 223,377 $ 221,930 $ 191,291 $ 169,457 $ 177,780
Total Taxes (b) $ 1,253,826 $ 890,914 $ 512,592 $ 259,929 $ 236,760
- -------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA
Primary:
Earnings (Loss) Before Cumulative
Effect of Changes in Accounting
Principles and Discontinued
Operations $ 6.14 $ 4.18 $ 3.01 $ .80 $ (1.18)
============ ============ ============ ============ ============
Net Earnings (Loss) $ 5.98 $ 3.92 $ 3.01 $ .80 $ (1.16)
============ ============ ============ ============ ============
Fully Diluted:
Earnings (Loss) Before Cumulative
Effect of Changes in Accounting
Principles and Discontinued
Operations $ 6.11 $ 4.17 $ 2.95 $ .80 $ (1.18)
============ ============ ============ ============ ============
Net Earnings (Loss) $ 5.95 $ 3.91 $ 2.95 $ .80 $ (1.16)
============ ============ ============ ============ ============
Book Value $ 26.17 $ 21.37 $ 17.88 $ 14.99 $ 14.26
Total Taxes (b) $ 5.54 $ 3.94 $ 2.27 $ 1.23 $ 1.16
Dividends Paid $ .70 $ .575 $ .50 $ .50 $ .50
Weighted Average Shares Outstanding:
Primary 226,331,000 226,402,000 225,350,000 211,052,000 203,718,000
Fully Diluted 227,480,000 226,854,000 229,916,000 211,052,000 203,718,000
Shares Outstanding at Year-End (c) 203,989,691 207,202,688 205,443,636 199,669,270 205,382,754
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pretax Margin (e) 23.0% 18.9% 14.0% 4.9% (d)
Profit Margin (f) 13.2% 11.1% 9.6% 3.3% (d)
Common Dividend Payout Ratio 10.9% 13.5% 15.2% 61.8% (d)
Return on Average Assets 1.0% 0.8% 0.8% 0.3% (d)
Return on Average Common Stockholders'
Equity 27.3% 22.0% 20.8% 5.8% (7.4)%
Leverage 27.4x 25.1x 24.1x 22.9x 20.2x
Adjusted Leverage (g) 16.6x 15.9x 16.3x 15.3x 13.8x
- -------------------------------------------------------------------------------------------------------------------------------
OTHER STATISTICS
Number of Full-Time Employees 41,900 40,100 38,300 39,000 41,200
Number of Financial Consultants and
Account Executives 13,100 12,700 12,100 11,800 12,300
Number of Sales Offices:
Domestic 460 460 460 460 465
International 50 50 50 50 55
- -------------------------------------------------------------------------------------------------------------------------------
(a) Short-Term Borrowings include repurchase agreements, and commercial paper
and other short-term borrowings.
(b) Excludes $25,075 and $73,065 of income taxes in 1993 and 1992, respectively,
related to the cumulative effect of changes in accounting principles.
Excludes income taxes of $2,883 in 1989 associated with the discontinued
operations of Fine Homes International, L.P.
(c) Does not include 8,932,332, 11,201,672, 13,636,820, 16,071,968, and
18,653,462 unallocated shares held in the Employee Stock Ownership Plan at
year-end 1993, 1992, 1991, 1990 and 1989, respectively, which are not
considered outstanding for accounting purposes.
(d) As a result of the net loss in 1989, this ratio is not meaningful.
(e) Earnings Before Income Taxes, Cumulative Effect of Changes in Accounting
Principles, and Discontinued Operations to Net Revenues.
(f) Earnings Before Cumulative Effect of Changes in Accounting Principles and
Discontinued Operations to Net Revenues.
(g) Average total assets less resale agreements and securities borrowed, to
average total stockholders' equity.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
BUSINESS ENVIRONMENT
Merrill Lynch & Co., Inc. and its subsidiaries (collectively referred to as
the "Corporation") conduct their businesses in global financial markets that are
influenced by a number of factors including economic conditions, political
events, and investor sentiment. The reaction of issuers and investors to a
particular condition or event is unpredictable and can create volatility in the
marketplace. While higher volatility can increase risk, it also increases order
flow, which drives many of the Corporation's businesses. Other market and
economic conditions, including the liquidity of secondary markets, the level and
volatility of interest rates, currency and security valuations, competitive
conditions, and the size, number and timing of transactions may also affect
earnings. As a result, revenues and net earnings can vary significantly from
year to year, and from quarter to quarter.
For the third consecutive year, securities firms in the United States posted
record profits. In 1993, the securities industry continued to benefit from
favorable market conditions in the U.S. and further expansion of international
market activities. The combination of historically low interest rates, the
continued restructuring of corporate balance sheets, steady economic improvement
in the United States, and the growth in emerging market financings, particularly
privatizations, contributed to robust underwriting activity. The aggregate
volume of new stock and bond issues established new records both in the U.S.
and worldwide. Fees generated from the underwriting of equities (including
initial public offerings), high-yield bonds, and Eurobonds reached new highs
industrywide.
Emerging market financings continued to grow due to the development of
capital markets in countries such as China and the growing need for additional
foreign capital and investment. Emerging market countries improved existing
infrastructures and privatized state-owned industries through global financings.
Demand for financing through privatizations, particularly in Latin America,
Europe, and China remained strong and is expected to be a growing source of
underwriting activity for the industry in the near term. In the second half of
1993, merger and acquisition activity rebounded, benefiting from
telecommunication and health care related consolidations.
The institutional investor market remained strong and was buoyed by
increasing cross-border and secondary trading activity, expanding investor
portfolios, and growing mutual funds. Trading in swaps and other derivatives,
including structured transactions, remained strong as investors used these
products to manage interest rate and currency risks, improve yields, and
diversify their investments.
Individual investors continued to diversify their holdings seeking both
domestic and international investment opportunities. Investors steadily moved
away from lower-yielding, short-term investments and, instead, redeployed assets
into equities, corporate and municipal bonds, and an assortment of domestic and
international mutual funds. Consequently, revenues from commissions, principal
transactions, and fee-based services advanced as a result of increased investor
activity.
The Corporation recognizes that market and economic conditions can change
and continues to focus on those factors that help reduce the impact of the
cyclical nature of markets on profitability. These factors include managing
risks, controlling costs, expanding fee-based businesses, linking compensation
to profitability, evaluating businesses based on performance criteria, and
restructuring or exiting those businesses that fail to consistently achieve
measurement standards and strategic objectives.
RESULTS OF OPERATIONS
Favorable markets, continued cost control, risk management, and strong
market share contributed to the Corporation's record performance in 1993. Net
earnings were a record $1.36 billion or $5.98 per common share primary ($5.95
fully diluted), up 52% above the $893.8 million or $3.92 per common share
primary ($3.91 fully diluted) reported in 1992. In 1991, net earnings were
$696.1 million or $3.01 per common share primary ($2.95 fully diluted). On
October 11, 1993, the Corporation's Board of Directors declared a two-for-one
common stock split, effected in the form of a 100% stock dividend, paid on
November 24, 1993 (see Stockholders' Equity in the Notes to Consolidated
Financial Statements). All share and per share data presented herein have been
restated for the effect of the common stock split.
The 1993 results include the early adoption of Statement of Financial
Accounting Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment
Benefits." The cumulative effect of this change in accounting principle
decreased 1993 earnings by $35.4 million ($60.5 million before income taxes), or
$.16 per common share primary and fully diluted. Earnings before the cumulative
effect charge were $1.39 billion or $6.14 per common share primary ($6.11 fully
diluted).
Results for 1993 also include a non-recurring first quarter pretax lease
charge totaling $103.0 million ($59.7 million after income taxes), related to
the Corporation's decision not to occupy certain space at its World Financial
Center Headquarters ("Headquarters") facility. This space was made available
for sublease as a result of continued streamlining of operations and the
declining number of employees at the Headquarters location. An agreement to
sublet this space was executed in the 1993 fourth quarter.
In 1992, the Corporation adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" and SFAS No. 109, "Accounting for
Income Taxes." The cumulative effect of these changes in accounting principles
reduced 1992 earnings by $58.6 million or $.26 per common share primary and
fully diluted. Earnings before the cumulative effect adjustment were $952.4
million or $4.18 per common share primary ($4.17 fully diluted).
Pretax earnings were a record $2.42 billion, up 50% over the $1.62 billion
reported in 1992. In 1991, pretax earnings were $1.02 billion. The pretax
profit margin on net revenues rose to 23.0% in 1993 from 18.9% in 1992 and 14.0%
in 1991.
32
Total revenues for 1993 were a record $16.59 billion, advancing 24% and 34%,
respectively, from those reported in the previous two years. Revenue growth was
broad-based, with records established in virtually all categories. Net revenues
(revenues after interest expense) grew to $10.56 billion, exceeding 1992 and
1991 amounts by 23% and 46%, respectively.
[GRAPHIC NO. 1 TO APPEAR HERE]
Non-interest expenses were $8.13 billion, increasing 17% and 31% from those
reported in 1992 and 1991, respectively. Excluding the non-recurring 1993 first
quarter lease charge of $103.0 million, non-interest expenses were up only 15%
from 1992. Incentive and production-related compensation, communications costs,
brokerage, clearing and exchange fees, and certain advertising and market
development expenses all rose due to increased business volume. Other
non-interest expenses, which include base salaries, payroll taxes, benefits
costs and all remaining expense categories, increased 12% over 1992 and 23%
above 1991 levels. Many of these expense categories, including advertising and
market development and professional fees, contain discretionary components that
can be reduced if business conditions change.
The Corporation capitalized on strong markets during the past three years.
At the same time, emphasis on managing and controlling costs has continued to
positively influence the bottom line. After-tax profit margins have steadily
improved, rising to 13.2% (12.9% after the cumulative effect of accounting
change) in 1993 from 11.1% (10.4% after the cumulative effect of accounting
changes) in 1992, and 9.6% in 1991. The Corporation's return on average common
stockholders' equity climbed to 27.3% in 1993, compared with 22.0% and 20.8% in
1992 and 1991, respectively.
In 1993, the Corporation reclassified certain income statement and balance
sheet categories. Prior years' financial statements have been reclassified to
conform to the presentation for the current period. (See Basis of Presentation
in the Notes to Consolidated Financial Statements.)
The following discussion highlights in more detail changes in the major
categories of revenues and expenses and other pertinent information on the
Corporation's business activities.
COMMISSIONS
Commission revenues advanced 19% in 1993 to $2.89 billion, due primarily to
the continued growth of listed securities transactions and increased sales of
mutual funds, regulated commodities contracts, and over-the-counter securities.
Commissions from listed securities increased 23% from 1992 to $1.41 billion
as investors remained active in the equity markets. Market participation
increased as investors continued to reposition their investment portfolios to
enhance potential yield and growth opportunities. In 1993, the average daily
trading volume on the New York Stock Exchange ("NYSE") increased 29% from 1992
to 260 million shares. The Dow Jones Industrial Average ("DJIA") average daily
closing index, a measure of share prices, was 3,522, 7% above the 1992 average
daily close. The Corporation's 1993 market share of publicly listed NYSE equity
volume was approximately 10%, down slightly from 1992.
Mutual fund commissions rose 27% in 1993 to $846 million. Individual
investors continued shifting maturing certificates of deposits and other
low-yielding cash investments into domestic and global equity mutual funds and,
to a lesser extent, fixed-income mutual funds. As a result, revenues from sales
of front-end funds increased 30% over 1992 to $500 million. Moreover, strong
current and prior-period sales led to a 31% increase to $297 million in
distribution fees from deferred-charge funds. Redemption fees declined 10% to
$49 million from the prior year.
Other commissions consisted primarily of money market, commodities,
over-the-counter, and option products. In 1993, other commissions increased 5%
to $639 million on the strength of higher commodity and over-the-counter
transactions, partially offset by lower commission revenues from retail money
market instruments.
In 1992, commission revenues advanced 12% from 1991, primarily as a result
of the growth in listed securities transactions and sales of mutual funds.
Listed securities commissions benefited from higher NYSE volume and increased
market participation by individual investors. Mutual fund commissions advanced
due to investors shifting assets from low interest-yielding short-term
investments to potentially higher-yielding equity and fixed-income mutual funds.
Other commission revenues increased 4% from 1991 levels.
At year-end 1993, the Corporation had approximately 13,100 Private Client
Financial Consultants and Institutional Account Executives worldwide, compared
with 12,700 at year-end 1992 and 12,100 at year-end 1991.
INTEREST AND DIVIDENDS
Significant components of interest and dividend revenues and interest
expense for 1993, 1992, and 1991 follow:
33
- ---------------------------------------------------------
(IN MILLIONS) 1993 1992 1991
- ---------------------------------------------------------
Interest and dividend revenues:
Trading inventories $2,437 $2,007 $1,697
Resale agreements 1,124 1,066 1,302
Securities borrowed 1,521 823 616
Margin lending 779 598 569
Other 1,238 1,312 1,577
- ---------------------------------------------------------
Subtotal 7,099 5,806 5,761
- ---------------------------------------------------------
Interest expense:
Borrowings 2,515 1,697 1,653
Repurchase agreements 1,383 1,225 1,489
Commitments for securities
sold but not yet purchased 1,252 931 727
Other 880 982 1,237
- ---------------------------------------------------------
Subtotal 6,030 4,835 5,106
- ---------------------------------------------------------
Net interest and dividend
profit $1,069 $ 971 $ 655
====== ====== ======
- ---------------------------------------------------------
Interest and dividend revenues increased 22% in 1993 to $7.10 billion, due
to increases in collateralized lending activities, and higher levels of other
interest-earning assets, principally inventories. Interest expense, which
includes dividend expense, increased 25% to $6.03 billion as a result of
increases in collateralized borrowing activities and higher levels of
interest-bearing liabilities. In 1993, net interest and dividend profit
advanced 10% from 1992 to a record $1.07 billion. Contributing to these strong
results were the expansion of collateralized borrowing and lending activities,
growth in trading inventories and on-balance sheet hedges, the increased
availability of interest-free funds due to a larger equity base, and reduced
funding costs due to lower interest rates and improved credit ratings.
In 1992, net interest and dividend profit advanced 48% over 1991 to $971
million primarily as a result of higher balance sheet levels, increases in
equity capital and improved rate spreads due to lower funding costs.
PRINCIPAL TRANSACTIONS
Principal transactions revenues reached record levels in 1993, up 35% to
$2.92 billion from the prior record set in 1992, primarily due to increases in
customer order flow, tighter credit spreads, and favorable trading results.
Fixed-income and foreign exchange trading revenues, in the aggregate, increased
33% to $2.18 billion on higher revenues from swaps and derivatives, corporate
bonds and preferred stocks, and non-U.S. governments and agencies. These
advances were somewhat offset by decreases in mortgage-backed products and
foreign exchange trading.
Swaps and derivatives revenues continued to grow in 1993 and represented 26%
of total principal transactions revenues (see discussion on Derivative Financial
Instruments on page 41). Swaps and derivatives revenues have benefited from
increased volume and market growth, as well as an expanding product base. The
advance in swaps and derivatives was due to higher revenues from both dollar and
non-dollar swap trading activities, as well as increased revenues from equity
derivatives. Dollar swap trading revenues increased as issuers and investors
looked to hedge interest rate risk, while non-dollar swap trading revenues
benefited from investor and issuer demand, and favorable trading results. In
addition, equity derivative revenues rose due to investor demand for
equity-linked products.
Corporate bond and preferred stock revenues, in the aggregate, increased
100% to $376 million due to increased trading volume and tighter credit spreads.
Non-U.S. government and agency revenues rose 185% to $175 million, benefiting
from increased volume due to lower interest rates on foreign government bonds,
and higher revenues from over-the-counter options. Mortgage-backed principal
transactions revenues continued to be negatively affected, in part, by
prepayments, refinancings, and the accounting effect of dollar roll
transactions. (See discussion below on relationship between principal
transactions and net interest.) In 1993, mortgage-backed principal transactions
revenues were essentially break-even; net revenues including related hedges and
net interest, however, were positive, although 22% below 1992 record levels.
Municipal and money market instruments principal transactions revenues rose 20%
and 95%, respectively, on the strength of increased client demand for tax-exempt
securities and improved trading in fixed- and floating-rate medium-term notes.
Foreign exchange trading revenues declined 16% from 1992 record levels to $128
million as a result of lower volatility in European currencies.
Equity revenues rose 39% to $744 million, principally on the strength of a
78% increase in revenues from international equities and a 24% improvement in
revenues from U.S. over-the-counter markets. Over-the-counter equities
trading revenue benefited from increased volume, as 1993 NASDAQ average daily
trading volume rose 37%.
Trading, hedging, and financing activities affect the recognition of both
principal transactions revenues and net interest and dividend profit. In
assessing the profitability of financial instruments, the Corporation views net
interest and principal transactions components in the aggregate. For financial
reporting purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (e.g., the spread representing interest earned versus
financing costs on financial instruments) for trading positions, including
hedges, is recorded as either principal transactions revenues or net interest
profit, depending on the nature of the specific position. Interest income or
expense on a U.S. Treasury security, for example, is reflected in net interest,
while the gain or loss is included in principal transactions. Financial
instruments requiring forward settlement, such as mortgage-backed "to be
announced" mortgage pools, have interest components built into their market
value; any change in the market value, however, is recorded in principal
transactions revenues. Changes in the composition of trading inventories and
hedge positions can cause the recognition of revenues within these categories to
fluctuate. Consequently, net interest and principal transactions revenue
components should be evaluated collectively.
34
In 1992, principal transactions revenues increased 14% from 1991 to $2.17
billion. Fixed-income and foreign exchange trading revenues, in the aggregate,
advanced 16% as a result of substantially higher revenues from swaps and
derivatives, which represented 22% of total principal transactions revenues, and
increased revenues from foreign exchange. Foreign exchange revenues rose due to
increased volume, as investors were active in the currency markets due to
European monetary volatility. Equities revenues rose 8% from 1991 due primarily
to increased activity in the over-the-counter and international equity markets,
principally related to client order flow.
The table below provides information on aggregate trading profits, including
net interest. Principal transactions revenues amounts are derived from external
reporting categories, while interest revenue and expense components are based on
management's assessment of the cost to finance trading positions, which
considers the underlying liquidity of these positions.
- -------------------------------------------------------------------
Principal Net Interest Net
Transactions Revenue Trading
(IN MILLIONS) Revenue (Expense) Revenue
- -------------------------------------------------------------------
1993
Fixed-income and foreign
exchange $1,415 $412 $1,827
Swaps and derivatives(1) 761 (8) 753
Equities 744 (9) 735
------ ---- ------
TOTAL $2,920 $395 $3,315
====== ==== ======
- -------------------------------------------------------------------
1992
Fixed-income and foreign
exchange $1,146 $368 $1,514
Swaps and derivatives(1) 486 63 549
Equities 534 (12) 522
------ ---- ------
TOTAL $2,166 $419 $2,585
====== ==== ======
- -------------------------------------------------------------------
1991
Fixed-income and foreign
exchange $1,119 $221 $1,340
Swaps and derivatives(1) 291 2 293
Equities 496 (36) 460
------ ---- ------
TOTAL $1,906 $187 $2,093
====== ==== ======
- -------------------------------------------------------------------
(1) Swaps and derivatives revenues include transactions recorded by the
Corporation's primary derivative subsidiaries.
INVESTMENT BANKING
Investment banking revenues climbed 23% in 1993 to a record $1.83 billion,
surpassing the prior record established in 1992. Underwriting revenues advanced
26% to $1.65 billion in 1993 as the aggregate volume of global debt and equity
issuances industrywide exceeded the prior year's record by 36%. Market
conditions in 1993 were similar in many respects to those of 1992, with low
interest rates and higher share prices the key factors behind the surge in
volume. Companies continued to refinance their balance sheets, retiring higher
interest-bearing debt with lower rate issuances, or raising capital through
equity offerings. Investor demand remained strong for equities and high-yield
bonds which offered the potential for increased returns, compared with other
investment alternatives.
In 1993, emerging market financings in Latin America and China produced some
of the significant deals of the year and, in the current environment, should
continue to be a growth sector within underwriting revenues. Demand for global
issues was strong, as investors continued to diversify their worldwide holdings.
Favorable markets also benefited convertible and corporate bond offerings, and
private placement issuances.
The Corporation retained its position as top underwriter of domestic
securities for the sixth consecutive year and leader of global offerings for the
fifth consecutive year. In 1993, the Corporation brought to market $193 billion
of securities worldwide. The Corporation's domestic and global share of
underwriting volume was virtually unchanged in 1993; 16.3% and 12.8%,
respectively, versus 16.5% and 13.0% in the year-earlier period.
Strategic services revenues, which include fees for debt restructuring,
merger and acquisition activity and other advisory services, grew 5% to $184
million in 1993. Merger and acquisition activity and advisory fee services
increased in the second half of 1993, benefiting from services provided to
industrial corporations.
In 1992, investment banking revenues increased 26% from 1991 to $1.48
billion, due primarily to higher revenues from the underwriting of equities,
preferred stock, corporate debt, and high-yield and municipal bonds. Revenues
from strategic services rose 13% in 1992 but remained at historically low
levels.
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
Revenues from asset management and portfolio service fees rose 24% in 1993
to a record $1.56 billion, principally as a result of increased fees earned from
asset management activities, the Merrill Lynch Consults(Registered Trademark)
("ML Consults") portfolio management service, and other fee-based services.
This revenue line now includes revenues from the Corporation's fee-based
services, some of which were previously recorded in other revenues. Included in
asset management and portfolio service fees are revenues from managing assets,
custodial services, ML Consults, transfer agency, mortgage servicing, variable
life and annuity insurance contracts, and various trust-related activities.
Asset management fees, of which 87% are attributable to Merrill
Lynch-sponsored mutual funds, increased to $706 million, up 21% from 1992, due
primarily to growth in stock and bond funds.
The Corporation's strategy of advising clients to (i) begin saving early and
often to meet short- and long-term financial goals, (ii) assess and continuously
re-evaluate retirement needs, and (iii) allocate assets by type (i.e., stocks,
bonds, mutual funds) and by region (i.e., domestic and international) to achieve
greater returns and diversification, has contributed to record levels of assets
under management.
35
Assets under management by Merrill Lynch Asset Management ("MLAM"),
increased $22 billion or 16%, reaching $160 billion at year-end 1993. As
indicated earlier, the increase was mostly attributable to stock and bond funds,
which grew by $21 billion to $72 billion in 1993. Money market funds
represented 41% of MLAM assets under management and totaled $66 billion in 1993,
virtually unchanged from 1992 levels. Included in assets under management were
$6 billion of investments of insurance subsidiaries. Investments of insurance
subsidiaries managed by MLAM declined 22% from 1992 levels, due to the
Corporation's previously announced decision to curtail activity in fixed-rate
life insurance and annuities and, instead, focus on separate account variable
insurance products.
Revenues from ML Consults advanced 66% from 1992 to $294 million as a result
of more accounts, increased assets, and higher asset values. At December 31,
1993, the total number of accounts was 87,000, an increase of 36% over 1992.
Asset levels were up 38% to $16.9 billion at year-end 1993.
Other fee-based revenues were up 13% from 1992 to $558 million due, in part,
to increased revenues from mortgage servicing, insurance, and custodial fees for
retirement accounts.
In 1992, asset management and portfolio service fee revenues advanced 25%
from 1991 to $1.25 billion due principally to the substantial growth of the ML
Consults product, higher levels of assets under management and increases in
CMA(Registered Trademark) revenues. In 1992, the number of ML Consults
accounts increased nearly 160% from 1991 to 64,000, while related asset levels
increased 135% to $12.2 billion. Assets under fee-based management by MLAM
grew by $15 billion to $138 billion at year-end 1992, a 12% increase from year-
end 1991. The advance in CMA revenues was partly attributable to a 25%
increase in the annual fee initiated in September 1991 as well as growth in
the number of client accounts.
OTHER REVENUES
Other revenues were up 1% in 1993 to $285 million. Other revenues include
investment gains and losses, mortgage application and securities processing
fees, and proxy activities.
Contributing to the advance in other revenues were higher fees generated
from growth in home equity loan activity, partially offset by higher net
investment losses related primarily to provisions for merchant banking
activities. Net investment losses totaled $133 million in 1993, compared with
$120 million in 1992. Merchant banking loss provisions reflect adjustments to
certain positions where the carrying value was in excess of the estimated net
realizable value. Merchant banking positions are carried at lower of cost or
estimated net realizable value. In certain instances, sales of merchant banking
positions are subject to restrictions, limiting the Corporation's ability to
dispose of these instruments until required holding periods expire. Management
believes that such assets as currently valued are fairly stated. Nevertheless,
as economic conditions change in 1994 and beyond, additional loss provisions may
be required. (See discussion of Non-Investment Grade Holdings and Highly
Leveraged Transactions.)
In 1992, other revenues declined 17% from 1991 to $281 million due primarily
to net investment losses related to merchant banking activities. Net investment
losses increased by 154% from the $47 million reported in 1991, as provisions
related to certain merchant banking positions increased.
NON-INTEREST EXPENSES
Non-interest expenses were up 17% over the prior year to $8.13 billion;
excluding the 1993 first quarter non-recurring lease charge of $103.0
million, non-interest expenses increased 15%. The largest expense category,
compensation and benefits, increased 20% from 1992 to $5.26 billion. The
increase in compensation and benefits expense was due to heightened business
activity which increased production-related compensation, a rise in
incentive-related compensation linked to the Corporation's improved
profitability and return on average common equity, and a 5% increase in the
number of full-time employees. Benefits expense increased from 1992 due
primarily to severance accruals for selected reductions in personnel, higher
payroll taxes related to increased incentive and production-related
compensation, and increased health care costs.
In 1993, the Corporation selectively increased the number of full-time
personnel from 40,100 at the end of 1992, to 41,900 at year-end 1993. This
increase was primarily among revenue producers and sales assistants.
Nevertheless, compensation and benefits as a percentage of net revenues declined
to 49.8% in 1993 from 50.9% in 1992. This ratio has dropped in each of the last
three years. The Corporation's ratio of support employees to producers and
sales assistants, decreased from 1.38 to 1 in 1992 to 1.34 to 1 at year-end
1993. Excluding sales assistants, the ratio was 1.43 to 1 in 1993 versus 1.44
to 1 in 1992.
Facilities-related costs, including occupancy, communications and equipment
rental, and depreciation and amortization, increased 13% from a year ago (3%
excluding the non-recurring lease charge). Occupancy rose 20% in 1993 as a
result of the $103.0 million pretax non-recurring charge recorded in the 1993
first quarter related to the Corporation's decision not to occupy certain space
at its Headquarters facility. An agreement to sublet this space was executed in
the 1993 fourth quarter. Excluding this charge, occupancy expense declined 2%.
Communications and equipment rental expenses were up 5% as a result of increased
volume for market data and news services, and telephone charges. Depreciation
and amortization expense rose 10%, primarily as a result of accelerated
depreciation for the replacement of trading and client order processing
equipment at various domestic and international locations. This equipment is
being replaced for technology upgrades.
Advertising and market development expenses rose 25% from 1992, reflecting
higher sales promotion and recognition program costs for Financial Consultants
tied to increased business activity. Travel costs were up as the increase in
business volume required additional domestic and international travel. Certain
discretionary national and local advertising campaigns also were expanded.
36
Professional fees increased 13% from a year ago, due primarily to the
increased use of system and management consultants for the technology upgrades
noted earlier. Employment agency fees were also up due to the increase in the
number of producer personnel hired during 1993, while other professional fees
increased as a result of strategic market studies.
Brokerage, clearing and exchange fees were up 1% from the prior-period as a
result of increased trading volume, partially offset by reduced rates on
renegotiated service agreements. Other expenses increased 5% principally as a
result of additions to loss provisions related to litigation and claims (see
Litigation in the Notes to Consolidated Financial Statements), while other loss
provisions related to specific business activities declined significantly from
1992 levels.
Non-interest expenses in 1992 increased 12% from 1991 to $6.96 billion.
Favorable markets, increased business volume, and profitability contributed to
higher compensation and benefits expense. Advertising and market development
expenses increased due to higher sales promotions and Financial Consultant
recognition costs tied to heightened business activity, and increases in
discretionary national advertising. Brokerage, clearing and exchange fees also
increased due to higher levels of business. Professional fees increased over
1991 levels due to increased systems and strategic development projects. Other
expenses increased as a result of additions to loss provisions related to
various business activities.
INCOME TAXES
The Corporation's income tax provision was $1.03 billion and represented a
42.5% effective tax rate. In 1992 and 1991, income tax provisions were $669
million and $321 million, respectively, representing effective tax rates of
41.3% in 1992 and 31.6% in 1991.
In 1993, the Omnibus Budget Reconciliation Act (the "Revenue Act") was
enacted. Under the Revenue Act, the Corporation's statutory income tax rate was
increased to 35.0% retroactive to January 1, 1993. The increase in the
Corporation's 1993 effective tax rate, compared with 1992, related primarily to
the increase in the Federal statutory rate from 34.0% in 1992 to 35.0% in 1993.
In 1992, the Corporation adopted SFAS No. 109, "Accounting for Income
Taxes." Previously, the Corporation accounted for income taxes in accordance
with SFAS No. 96. As a result of adopting this accounting pronouncement, the
Corporation recorded a $17.8 million cumulative effect benefit in 1992. The
cumulative effect adjustment recognizes the utilization of previously
unrecorded state and local tax benefits. The increase in the effective tax
rate, compared with 1991, represented reduced availability of alternative
minimum tax credits and net operating loss carryforwards. All available
alternative minimum tax credits and net operating loss tax benefit
carryforwards from prior years were utilized by the end of 1992.
Income tax expense in 1991 reflected the utilization of previously
unrecognized tax benefits.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1993 increased 20% to $5.49 billion
from the $4.57 billion reported at year-end 1992. The increase in 1993 was
principally the result of net earnings, less common and preferred dividends
declared by the Corporation, partially offset by an increase in treasury stock
related primarily to the Corporation's share repurchase program. On December
31, 1993, the Corporation adopted SFAS No. 115, "Accounting for Investments in
Certain Debt and Equity Securities," which increased stockholders' equity, net
of applicable income taxes, by $21 million (see Accounting Changes in the Notes
to Consolidated Financial Statements).
In the 1993 fourth quarter, the Corporation's Board of Directors declared a
two-for-one common stock split effected in the form of a 100% stock dividend.
In the second quarter of 1993, stockholders of the Corporation approved an
increase in the authorized number of common stock from 200 million to 500
million shares. In addition, 1,637,314 shares of common stock were issued
related to certain employee benefit plans.
The Corporation granted a total of approximately 1.8 million shares of
common stock during 1993 to certain employees under the Long-Term Incentive
Compensation Plan and Equity Capital Accumulation Plan.
In 1993, the Corporation repurchased approximately 0.1 million shares of
common stock at an average cost of $33.65 per share to meet share requirements
under the Employee Stock Purchase Plan and an additional 16.2 million shares at
an average price of $42.59 per share for other employee benefit plans, and
general corporate purposes.
At December 31, 1993, total common shares outstanding, excluding the
unallocated Employee Stock Ownership Plan ("ESOP") reversion common shares,
amounted to 204.0 million, down 2% from the 207.2 million shares outstanding at
December 25, 1992. Including unallocated ESOP shares, total outstanding common
shares amounted to 212.9 million at year-end 1993. Total outstanding common
shares, including unallocated ESOP shares, and commitments for shares related to
employee benefit plans approximated 319.2 million at December 31, 1993.
LIQUIDITY AND LIABILITY MANAGEMENT
The primary objective of the Corporation's funding policies is to assure
liquidity at all times. To strengthen liquidity the Corporation maintains a
strong capital base, issues term debt, obtains committed backup credit
facilities, concentrates debt issuance through Merrill Lynch & Co., Inc., (the
"Parent"), and pursues expansion and diversification of investors, funding
instruments, and creditors.
There are three key elements to the Corporation's liquidity strategy. The
first is to maintain alternative funding sources such that all debt obligations
maturing within one year, including commercial paper and the current portion of
term debt, can be funded when due without issuing new unsecured debt or
liquidating any business assets. The most significant alternative funding
sources are the proceeds from executing repurchase agreements ("repos") and
obtaining secured bank loans,
37
both employing unencumbered investment-grade marketable securities. The
calculation of proceeds available from repos and secured bank loans takes into
account both a conservative estimate of excess collateral required by secured
lenders, and regulatory restrictions on upstreaming cash from subsidiaries to
the Parent. The ability to execute this secured funding is demonstrated by the
Corporation's routine use of repo markets to finance inventory and by periodic
tests of secured borrowing procedures with banks. Other alternative funding
sources could include liquidating cash equivalents, securitizing additional home
equity and Prime First(Registered Trademark) loans, and drawing upon committed
unsecured credit facilities.
As an additional measure, the Corporation regularly reviews its assets and
liabilities to ascertain its ability to conduct core businesses without reliance
on issuing new unsecured debt or drawing upon committed credit facilities for
terms beyond one year. The composition of the Corporation's asset mix provides
a great degree of flexibility in managing liquidity. The Corporation monitors
the liquidity of assets, the quality of committed credit facilities and the
overall level of term debt in assessing financial strength and capital adequacy
at any point in time.
The second element of the Corporation's liquidity strategy is to concentrate
all general purpose borrowing at the Parent level, except where tax regulations
or time differences make this impractical. The benefits of this guideline are:
a) the lower financing costs that result from the reduced risks of a diversified
asset and business base; b) the simplicity, control and wider name recognition
for banks, creditors and rating agencies; and c) the flexibility to meet
variable funding requirements within subsidiaries.
The third element is to expand and diversify funding sources and to maintain
strict concentration standards for short-term lenders. The Corporation's short-
and long-term funding programs benefit from the large, diversified customer base
and financial creativity of the Corporation's capital market and private client
operations. Commercial paper remains the Corporation's major source of
short-term general purpose funding. Commercial paper outstanding totaled $14.9
billion at December 31, 1993 and $9.6 billion at December 25, 1992, which
represented 10% and 9% of total assets at year-end 1993 and 1992, respectively.
Through its own sales force, the Corporation markets its commercial paper to
thousands of investors and is able to maintain tight concentration standards
that include limits for any single investor. Total term debt issuance was a
record in 1993 as the Corporation was active in both domestic debt markets and
Euro markets through public and private placements. Foreign currencies and
different interest rate indices were hedged to match the economic
characteristics of the Corporation's assets. Outstanding term debt grew to
$13.5 billion from $10.9 billion in 1992. During 1993, the Corporation issued
$7.3 billion of long-term debt. During the same period, maturities and
repurchases were $4.6 billion. In addition, approximately $580 million of the
Corporation's securities held by subsidiaries were sold and $673 million were
purchased. At December 31, 1993, $7.8 billion of term debt had maturity dates
beyond one year, and the average maturity on all outstanding term debt was 2.9
years, compared with 2.8 years at year-end 1992.
CAPITAL RESOURCES AND CAPITAL ADEQUACY
The Corporation remains one of the most highly capitalized institutions in
the U.S. securities industry with an equity base of $5.49 billion at December
31, 1993, including $5.29 billion in common equity, supplemented by $0.2 billion
in preferred stock. The Corporation's overall capital needs are continually
reviewed to ensure that its capital base can support the estimated needs of its
businesses as well as the regulatory and legal capital requirements of
subsidiaries. Based upon these analyses, management believes the Corporation's
equity base is adequate.
ASSETS AND LIABILITIES
The Corporation manages its balance sheet and risk limits according to
market conditions and business needs subject to profitability and control of
risk. Asset and liability levels are primarily determined by order flow and
fluctuate daily, sometimes significantly, depending upon volume and demand. The
liquidity and maturity characteristics of assets and liabilities are monitored
continuously. The Corporation uses average daily balances to monitor and manage
the growth of its balance sheet. Average daily balances were derived from the
Corporation's management information system which summarizes balances on a
settlement date basis. Financial statement balances as required under generally
accepted accounting principles are recorded on a trade date basis. The
discussion that follows compares the changes in settlement date average daily
balances, not year-end balances. The reasons underlying changes in average
balances, however, are similar to changes in year-end balances.
The increase in average balance sheet levels in 1993 was attributable to
many factors, including investor demand, continued low interest rates, and hedge
transactions. In 1993, average assets were $143 billion, up 36% from $105
billion in 1992. Average liabilities in 1993 rose 37% to $139 billion from $102
billion in 1992. The major components in the growth of average assets and
liabilities are summarized as follows:
- ---------------------------------------------------
INCREASE
IN AVERAGE PERCENT
ASSETS INCREASE
---------- --------
(IN MILLIONS)
Trading inventories $14,230 45%
Resale agreements 12,630 53
Securities borrowed 7,200 44
Customer receivables 3,362 38
- ---------------------------------------------------
INCREASE
IN AVERAGE PERCENT
LIABILITIES INCREASE
----------- --------
Repurchase agreements $15,754 47%
Commercial paper and other
short-term borrowings 8,385 50
Commitments for securities
sold but not yet purchased 7,567 52
Long-term borrowings 2,894 29
- ---------------------------------------------------
38
The Corporation's trading inventories increased due to continued demand for
non-U.S. Government and agency securities, equities, and corporate debt. In
1993, the Corporation entered into certain trading strategies which required
higher levels of trading inventories and related hedges.
As recorded on the Consolidated Balance Sheets at December 31, 1993,
trading inventories were $51.5 billion, up 63% from $31.7 billion at year-end
1992 primarily related to increased client order flow. Included in trading
inventories were on-balance sheet hedges totaling $13.3 billion at December 31,
1993. Commitments for securities sold but not yet purchased were $21.7 billion
at December 31, 1993, a 49% increase from year-end 1992. This advance was
primarily due to increased hedge activity. At December 31, 1993, these hedges
totaled $14.7 billion. The Corporation uses hedges principally to reduce risk
in connection with its trading activities. Trading inventories were financed
primarily with repurchase agreements.
Funding sources continued to expand in 1993 and helped finance other
portions of the Corporation's businesses. The Corporation diversified its
funding base, increasing the number of commercial paper holders and used
medium-term notes (included in long-term borrowings) to provide greater
financing flexibility.
In managing its balance sheet, the Corporation uses hedges, in part, to
match-fund its interest-earning assets with interest-bearing liabilities.
Match-funding, for example, is common in the resale/repo markets where
securities received on resales are repoed to third parties, with an interest
spread earned on these transactions. The Corporation is an active issuer of
long-term debt, with the mix of long-term funding adjusted to match the lives of
longer-term, less liquid assets and to strengthen overall liquidity.
Customer receivables advanced as demand remained strong for equities,
foreign securities, particularly emerging market issuances, and corporate and
high-yield debt. In 1993, continued emphasis was also placed on
collateralized lending activities to facilitate client demand. Securities
borrowed increased primarily to facilitate deliveries to customers.
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
In the normal course of business, the Corporation underwrites, trades and
holds non-investment grade securities in connection with its market-making,
investment banking and derivative structuring activities. As a result of
improved liquidity and credit ratings of issuers in this market, the Corporation
has increased its non-investment grade trading inventories to satisfy client
demand for higher-yielding investments. The growth in non-investment grade
trading inventories is also attributable to the volume of domestic high-yield
underwritings, which reached record levels industrywide. High-yield
underwritings have increased as a result of issuers looking to refinance higher
interest-bearing debt in an effort to improve their cash flows and balance
sheets.
For purposes of this discussion, non-investment grade securities have been
defined as debt and preferred equity securities rated by Standard and Poor's as
BB+ or lower and by Moody's as Ba1 or lower (or equivalent ratings for other
instruments and non-U.S. securities), certain sovereign debt in emerging
markets, amounts due under various derivative contracts from non-investment
grade counterparties as well as non-rated securities which, in the opinion of
management, are non-investment grade. At December 31, 1993, long and short
non-investment grade inventories accounted for 4.6% of aggregate consolidated
trading inventories, compared with 4.2% at year-end 1992 and 3.3% at year-end
1991. Non-investment grade trading inventories are carried at fair value.
In conjunction with its investment and merchant banking activities, the
Corporation provides financing and advisory services to, and invests in,
companies entering into leveraged transactions. Examples of leveraged
transactions may include leveraged buyouts, recapitalizations, and mergers and
acquisitions. Merchant banking financings are extended on a select and limited
basis. The Corporation provides extensions of credit to leveraged companies in
the form of senior and subordinated debt, as well as bridge financing. Loans to
highly leveraged companies are carried at unpaid principal balances less a
reserve for estimated losses. The allowance for loan losses is estimated based
on a review of each loan, and considerations of economic, market and credit
conditions. At December 31, 1993, there were no bridge loans outstanding.
The Corporation holds direct equity investments in leveraged companies,
interests in partnerships that invest in leveraged transactions, and
non-investment grade securities. Equity investments in privately held companies
for which sale is restricted by government or contractual requirements are
carried at the lower of cost or net realizable value. The Corporation has a
co-investment arrangement to enter into direct equity investments and also has
committed to participate in limited partnerships that invest in leveraged
transactions.
The Corporation's involvement in highly leveraged transactions and
non-investment grade securities is subject to risks related to the
creditworthiness of the issuers and the liquidity of the market for such
securities, in addition to the usual risks associated with extending credit,
investing, underwriting, and trading investment grade instruments. The
Corporation recognizes such risks and, when possible, develops strategies to
mitigate its exposures.
The specific components and overall level of highly leveraged and
non-investment grade positions may vary significantly from period to period as a
result of inventory turnover, investment sales and asset redeployment. The
Corporation continuously monitors credit risk by individual issuer and industry
concentration. In addition, valuation policies provide for recognition of
market liquidity, as well as the trading pattern of specific securities. In
certain instances, the Corporation will hedge the exposure associated with
owning a high-yield or non-investment grade position by selling short the
related equity security, and in other instances, the Corporation uses
non-investment grade inventories to reduce exposure related to structured
derivative transactions.
During the fourth quarter of 1993, the Corporation increased certain
non-investment grade trading inventories (non-U.S. Governments and agencies) to
accommodate demand for client order flow and to hedge the exposure arising from
structured derivative trans-
39
actions. For structured derivative transactions, collateral, consisting
principally of U.S. Government securities, may be obtained to reduce credit
risk.
The Corporation's insurance subsidiaries hold non-investment grade
securities. At December 31, 1993, non-investment grade insurance investments as
a percentage of total insurance investments were 5.8%, compared with 4.5% at
year-end 1992 and 5.6% at year-end 1991.
At December 31, 1993, non-investment grade securities of insurance
subsidiaries classified as trading or available-for-sale are carried at fair
value. Prior to year-end 1993, investments of insurance subsidiaries were
carried at amortized cost.
A summary of the Corporation's non-investment grade holdings and highly
leveraged transactions follows:
- -------------------------------------------------------------------
(IN MILLIONS) 1993 1992 1991
- -------------------------------------------------------------------
Non-investment grade trading inventories $3,129 $1,723 $ 978
Non-investment grade commitments for
securities sold but not yet purchased 214 209 150
Non-investment grade investments of
insurance subsidiaries 458 409 544
Loans (net of allowance for loan
losses) (a) 435 822 1,081
Bridge loans -- -- 79
Equity investments (b) 276 360 350
Partnership interests (c) 92 120 97
- -------------------------------------------------------------------
Additional commitments to invest in
partnerships (d) $ 19 $ 27 $ 18
Additional co-investment commitments 49 89 185
Unutilized revolving lines of credit
and other lending commitments 49 75 67
- -------------------------------------------------------------------
(a) Represented outstanding loans to 42, 50, and 55 medium-sized companies at
year-end 1993, 1992, and 1991, respectively.
(b) Invested in 82, 103, and 99 enterprises at year-end 1993, 1992, and 1991,
respectively.
(c) Subsequent to year-end 1993, the Corporation increased its
partnership interests by $15 million.
(d) Subsequent to year-end 1993, the Corporation had additional partnership
commitments of up to $50 million.
At December 31, 1993, the largest non-investment grade concentration
consisted of various issues of a Latin American sovereign totaling $341 million,
of which $146 million represented on-balance sheet hedges. No one industry
sector accounted for more than 15% of total non-investment grade positions.
Included in the table above are debt and equity securities of issuers who were
in various stages of bankruptcy proceedings or in default. At December 31,
1993, the carrying value of these securities totaled $393 million, of which 59%
resulted from the Corporation's market-making activities.
CASH FLOWS
Total cash and cash equivalents increased $532 million in 1993 to $1.78
billion. At year-end 1992, total cash and cash equivalents increased $178
million to $1.25 billion, while at year-end 1991, total cash and cash
equivalents decreased $713 million to $1.07 billion.
In 1993, cash provided by financing and investing activities was used for
operating activities, while in 1992 and 1991, cash provided by financing
activities was used for operating and investing activities.
Cash used for operating activities totaled $17.1 billion in 1993 primarily
reflecting increases in operating assets and liabilities consistent with the
level of business activity. Increases in trading inventory levels of $19.8
billion, securities borrowed of $5.4 billion, other operating assets of $3.7
billion, and customer receivables of $3.5 billion were partially offset by
increases in commitments for securities sold but not yet purchased of $7.1
billion, other operating liabilities of $4.4 billion and customer payables of
$3.7 billion. Non-cash charges aggregating $1.5 billion were included in 1993
net earnings.
In 1992, cash used for operating activities was $5.2 billion. Increases in
trading inventory levels of $6.8 billion, customer receivables of $2.4 billion,
securities borrowed of $1.7 billion and reductions in insurance liabilities of
$1.2 billion were partially offset by increases in commitments for securities
sold but not yet purchased of $5.0 billion. In 1992, non-cash charges included
in net earnings were $1.8 billion. Cash used for operating activities in 1991
was $8.6 billion. Volume-related growth in trading inventories of $7.6 billion,
securities borrowed of $4.1 billion and other assets of $2.9 billion were
partially offset by increases in commitments for securities sold but not yet
purchased and customer liabilities totaling $3.4 billion and $0.8 billion,
respectively. In 1991, non-cash charges included in net earnings were $1.7
billion.
In 1993, investing activities provided the Corporation with cash of $387
million, primarily representing net proceeds from maturities and net sales of
insurance investments totaling $1.5 billion offset by net purchases of
marketable investment securities, property, leasehold improvements and
equipment, and other assets of $1.2 billion. Cash used for investing in 1992
and 1991 principally represented net purchases of marketable investment
securities and investments of the Corporation's insurance subsidiaries totaling
$229 million in 1992 and $1.2 billion in 1991.
In 1993, $17.3 billion was provided by financing activities reflecting
increases in repurchase agreements, net of resale agreements, and commercial
paper and other short-term borrowings of $10.9 billion and $4.4 billion,
respectively. Net long-term borrowing activities generated $2.6 billion. (See
Long-Term Borrowings Note to Consolidated Financial Statements.) These funds
were used to finance the growth in the Corporation's balance sheet.
Financing activities provided the Corporation with $5.4 billion of cash in
1992. Proceeds from net short-term funding activities were $2.8 billion, while
$2.9 billion was generated from net long-term borrowing activities. In 1991,
financing activities provided the Corporation with $9.4 billion from various
increases in short- and long-term borrowing activities.
40
NEW ACCOUNTING DEVELOPMENTS
BALANCE SHEET NETTING OF UNREALIZED GAINS AND LOSSES FOR OFF-BALANCE-SHEET
TRANSACTIONS
Consistent with industry practice, the Corporation presents unrealized gains
and losses for off-balance-sheet financial instruments, such as swaps and
foreign exchange contracts, net on the balance sheet. Beginning in 1994,
Financial Accounting Standards Board ("FASB") Interpretation No. 39, "Offsetting
of Amounts Related to Certain Contracts," requires the Corporation to report
separately on the balance sheet unrealized gains as assets, and unrealized
losses as liabilities. Netting will be permitted only when a legal right of
setoff exists with the same counterparty under a master netting arrangement. If
this requirement had been in effect at December 31, 1993, assets and liabilities
would have increased approximately $6.7 billion.
ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." This pronouncement, effective in 1995, establishes
accounting standards for creditors of impaired loans. A loan is considered
impaired when it is probable that a creditor will be unable to collect all
amounts due according to the contractual terms of the loan agreement. The
statement requires measurement of impaired loans based on the present value of
expected future cash flows discounted at the loan's effective interest rate, the
loan's observable market price, or the fair value of collateral held. This
statement does not apply to large groups of consumer-type loans collectively
evaluated for impairment, loans carried at fair value or lower of cost or fair
value, leases or debt securities. This statement is not expected to have a
material effect on the consolidated financial statements of the Corporation.
DERIVATIVE FINANCIAL INSTRUMENTS
Origination and trading of derivative financial instruments have grown
steadily over the past decade. Derivative financial instruments, which include
swaps, options, forwards and futures, are contracts based on an underlying asset
(e.g., corporate bond), index (e.g., S&P 500) or reference rate (e.g.,
three-month LIBOR). Derivatives can be traded on an exchange or negotiated in
the over-the-counter markets. Futures contracts, certain options and
MITTS(Registered Trademark), a bond linked to the appreciation of an equity
index or value of a portfolio of specified securities, are examples of exchange
listed derivatives. Swap contracts, including swap options, caps and floors, and
forward contracts, are examples of over-the-counter derivatives.
Derivative transactions may have both on- and off-balance-sheet
implications, depending upon the nature of the contract. Premiums on option
contracts purchased, for example, are recorded in trading inventories, but
futures contracts, excluding the unrealized gain or loss, are treated as
off-balance sheet.
Derivatives provide many benefits to participants by facilitating risk
transfer and enhancing liquidity in the marketplace. For issuers, derivatives
provide cost effective funding alternatives, while for investors, derivatives
provide alternative investment options with potentially higher return
opportunities and the ability to hedge risk. Market participants include
dealers such as banks, insurance companies, and other financial institutions;
and end-users such as corporations, governments, pension funds, and government
agencies. Financial institutions benefit from derivatives both as an end-user
and as a dealer. As a dealer, the Corporation trades derivatives and provides
clients with customized financing products. These activities help strengthen
existing client relationships. Derivatives also assist the Corporation in asset
and liability management and reduce overall borrowing costs.
Increased market participation and competition has helped to increase
liquidity in conventional derivatives, such as interest rate swaps. Competition
has also contributed to the development of more complex products structured for
specific clients. Rapid growth and complexity have contributed to the
perception, by some, that these products possess additional risk to users and to
financial markets. The risks of these transactions, however, are not unlike
those in other markets. Similar to other financial instruments, derivatives are
subject to market, credit, and operational risks which need to be managed in a
manner consistent with a company's overall risk management policies.
Certain market and credit risks for derivative and cash market instruments
are similar. Credit considerations, for example, are similar for a corporate
bond (a cash market instrument) and an interest rate swap. For market risk,
both of these instruments are sensitive to movements in interest rates which
affect their respective pricing. Nevertheless, the complexity of derivatives
contributes to the mystique surrounding these products. This uncertainty has
recently contributed to increased scrutiny from rating agencies, regulators and
legislators.
In response to these concerns, the Group of Thirty, an organization which
sponsors work on various complex financial issues, completed a study on the
global derivatives business. The study made 24 recommendations that dealers and
end-users should implement in managing their derivative activities, and is
designed to educate and promote a greater understanding of the derivatives
business. The recommendations cover policy and management, market risk, credit
risk, documentation, systems and operations, accounting and disclosure, and
legislation and regulation. The Corporation participated in the Group of Thirty
study and fully supports its recommendations.
The Corporation conducts its derivatives activities through a number of
wholly owned subsidiaries, entering into interest rate, currency and commodity
swaps, including caps, collars, floors, and swap options, currency option
contracts, forward rate agreements, and equity derivative transactions as part
of its client-driven and proprietary business activities. In connection with
these derivatives activities, such subsidiaries also purchase and sell
interest-bearing securities, equity securities, and financial futures and
forward contracts for hedging purposes. As an end-user, the Corporation
directly (or through its subsidiaries) uses derivatives to hedge certain trading
positions. The Corporation also hedges its fixed-rate debt issuances through
floating-rate
41
swap agreements with Merrill Lynch Capital Services, Inc. ("MLCS"), the
Corporation's principal swaps dealer. In turn, MLCS enters into other contracts
with third parties as part of the Corporation's asset and liability management
strategies. Merrill Lynch Derivative Products, Inc. is the Corporation's AAA
rated (Moody's and Standard and Poor's) swap subsidiary which provides credit
intermediation for interest rate and currency swaps, options, and similar
transactions between highly rated counterparties and MLCS.
MANAGEMENT REVIEW
Senior management and other management personnel play an important role in
managing the Corporation's derivative activities by setting risk and credit
limits, reviewing new products, and establishing accounting, credit, and risk
policies. Similar to other financial products, presentations on derivatives are
made periodically to senior management. These presentations address current
business issues and industry developments and provide details of other
specific issues that are important to the Corporation in managing its
derivatives business.
ACCOUNTING, VALUATION AND RISK MANAGEMENT
The notional values of derivative contracts represent a measure of
outstanding transactions, and are not the amounts recorded on the balance sheet.
Derivatives used to hedge trading positions in a dealer capacity are
marked-to-market. The mark-to-market unrealized gain or loss is recorded on the
Consolidated Balance Sheets with the related income or loss reported in
principal transactions revenues. Derivatives used to hedge the issuance of
long-term debt by the Corporation are recorded on an accrual basis. Interest is
accrued into income or expense over the life of the contract.
The Corporation's derivative transactions are generally marked-to-market on
a daily basis by pricing models using mid-market valuations. These values are
adjusted for credit, market and liquidity risks and include items such as
ongoing service costs, administrative fees, and transaction hedging costs. The
Corporation defers income recognition, in whole or in part, on certain long-term
derivative contracts, significant trading positions, and new products if there
are unhedged risks, unsold positions, or uncertainty related to the completion
of a transaction or market liquidity. Sources of derivative revenues and their
related components are regularly reviewed by product, with profitability
measured net of related hedge activities.
The Corporation's independent Risk Management Group ("Risk Management") has
developed pricing and risk management models to assess compliance with
established limits. Risk Management uses a variety of techniques to measure
market risk relative to limits across all broad market cycles. Stress-test
simulations under changing market conditions can also be performed. These
simulations take into account significant changes in price, interest and
discount rates, as well as volatility and basis risk.
Operational risks for derivative instruments require ongoing review. These
instruments reset periodically based on floating-interest rates, amortizing
principals, or variations in other factors. The Corporation's operations
personnel ensure that periodic payments/receipts on these instruments are based
on the appropriate variables and that the mark-to-market valuations reflect the
most current data.
CREDIT
The Corporation actively manages its credit risk for derivative activities.
The Credit Division ("Corporate Credit") is responsible for establishing client
limits, monitoring monthly credit exposures, and implementing collateral
requirements. Corporate Credit assists the business units in developing and
refining credit risk measurement models, analyzing potential credit exposures
for complex transactions, and establishing credit enhancement provisions.
Credit enhancements protect the Corporation against counterparty credit
difficulties. Such provisions require counterparties to post additional
collateral or terminate a contract early if counterparty credit is downgraded,
and if certain key ratios or covenants are not met.
Whenever possible, the Corporation executes the International Swap Dealers'
Association ("ISDA") master netting agreement with its counterparties to help
reduce overall credit exposure. Master netting agreements provide, in certain
instances, protection in bankruptcy and enable receivables and payables with the
same counterparty to be presented net on the Consolidated Balance Sheets. This
provides for a more meaningful balance sheet presentation. Obtaining executed
master netting agreements, however, remains a problem for the industry. Often,
several months will elapse before a master netting agreement is executed. The
industry is actively trying to resolve this issue and determine whether such
agreements provide bankruptcy protection across all jurisdictions.
The notional or contractual values of derivative transactions do not
represent exposure to credit risk. Credit risk represents the amount of
accounting loss that the Corporation would incur if a counterparty failed to
perform its obligations under contractual terms and the collateral held was
deemed worthless. The Corporation, however, generally requires collateral from
its counterparties to mitigate credit risk, when appropriate. From an economic
standpoint, credit risk is evaluated net of the related collateral. Credit
exposures are analyzed to assess current and potential credit risk. Current
credit exposure represents the replacement cost of those contracts in a gain
position, while potential credit exposures are based on calculations of future
replacement costs over the remaining life of the contract.
Overall, derivative products are part of the evolution of financial products
and services. The financial markets will continue tailoring products to address
the changing needs of issuers and investors. Although the form of derivative
financial instruments may differ from traditional cash instruments, their risks
in substance are similar.
RISK MANAGEMENT
The Corporation operates in dynamic businesses that are subject to many
risks which are continually monitored and evaluated in accordance with its
corporate
42
governance policies. The Corporation's management has developed procedures
that require specific areas and units to assist in the identification,
assessment and control of these risks. Senior management takes an active role
in the oversight of the risk management process.
Risk management is a decentralized process with centralized oversight.
Managing risk begins with each trading desk and involves constant communication,
judgment and knowledge of specialized products and markets. The Corporation
incurs risk associated with its market-making and underwriting activities. To
mitigate risk, the Corporation uses risk management techniques such as hedging
trading positions, establishing trading limits, monitoring concentrations in any
product, evaluating counterparty credit quality, and revenue diversity.
Determining proper asset and liability valuations as well as establishing
detailed funding and liquidity objectives are also essential. The Corporation
performs oversight reviews using independent risk management, credit, finance,
corporate audit and compliance units, each critical to managing risk.
To monitor risks associated with assets and liabilities, the Corporation has
established a Reserve Committee of Senior Management ("Reserve Committee")
composed of legal, credit, finance, corporate audit, risk management, and
operations personnel. Finance personnel,who report to the Chief Financial
Officer, work closely with business managers to establish appropriate levels of
accounting reserves commensurate with business risks and activities. The
Reserve Committee meets monthly to review current market conditions, and act on
specific issues brought to its attention by finance and business personnel.
Trading inventories are monitored on a global basis for aging and
concentration levels in specific issues and issuers. Finance personnel from the
Chief Financial Officer's division independently review the pricing of trading
inventories and formula-driven contractual arrangements. Any specific issues
requiring action are brought to the attention of trading management and, as
appropriate, the Reserve Committee. The Corporation has established policies
and procedures for recognizing provisions for loss and utilization of reserves
which consider historical experience and current business conditions.
The Corporate Audit and Compliance Units provide oversight functions.
Corporate Audit, which reports to the Audit and Finance Committee of the Board
of Directors, provides management with an independent assessment of the
Corporation's operations and control environment through reviews of business and
operational areas.
The Compliance Unit establishes procedures to see that management's policies
encompassing conduct, ethics and business practices are followed, and external
regulatory requirements are strictly enforced. Compliance reports directly to
the Vice Chairman and General Counsel. Adherence with corporate policy is
accomplished by conducting education programs, monitoring the Corporation's
businesses, evaluating supervisory procedures, and recommending internal
disciplinary action when necessary. The Corporation's reputation and assets are
protected through increased training and awareness which emphasizes protection
of clients' interest and the Corporation's integrity.
MARKET RISK
The Corporation's trading activities are primarily client order flow driven
rather than proprietary, with hedging transactions executed where appropriate.
This strategy helps reduce volatility in principal transactions revenues.
Risk Management monitors the Corporation's exposure to losses in the value
of its trading inventory resulting from changes in the market environment.
Inventory values are affected by changes in interest rates and credit spreads,
currency fluctuation, and market volatility and liquidity. Risk Management is
headed by a Senior Vice President, who is a member of the Executive Management
Committee and reports directly to the Chairman and Chief Executive Officer.
Risk Management sets and monitors all trading limits, actively monitors trading
and inventory exposures, approves new products in conjunction with the
Corporation's new product review process, and has the authority to require
reductions in specific trading desk exposures or to veto proposed transactions.
Risk Management is organized along product lines with independent
professionals responsible for maintaining daily contact with specific trading
areas. On-line trading systems and complementary risk monitoring systems allow
these professionals to track established limit levels and exposures. Certain
classes of transactions are automatically subject to prior approval from Risk
Management. These include new financial products, proposed equity, emerging
market, and high-yield underwritings, and bridge loans.
Trading areas may execute transactions only within their product authority
and limits, which are customized for each product. Existing trading positions
are regularly compared with established limits. In addition to Risk Management
establishing trading limits, individual product areas have established their own
more specific trading limits.
Risk Management information systems compare established trading limits with
actual positions to determine the exposure to the Corporation. Trading systems
are designed to assist traders in mitigating market and other risks prevalent in
trading. Risk Management can also access trading systems to allow for
monitoring of positions and for performing computerized analytics on various
market situations and conditions.
CREDIT RISK
Credit risk, the risk that a counterparty will fail to perform under its
contractual commitments, is monitored by Corporate Credit. Corporate Credit is
headed by a Senior Vice President who reports directly to the Executive Vice
President responsible for Corporate Strategy, Credit, and Research.
Corporate Credit is centralized and organized geographically, and within
each region, along industry lines. Credit officers perform credit analysis, set
credit limits by country and by counterparty, approve specific transactions,
recommend credit reserves, manage credit exposures, and participate in the new
product review process. Credit analysis, in many cases, is enhanced by
face-to-face due diligence meetings with counterparties. Many types of
transactions, including derivatives, are reviewed and subject to prior approval
from Corporate Credit.
43
Within Corporate Credit, prescribed levels of authority have been
established for approval of standard transactions. Required authority levels
are governed by the counterparty's credit quality, as well as the maturity
and potential risk of the transaction. Transactions which exceed prescribed
levels must be approved by the Credit Committee, which is composed of several
Senior Credit Officers and the Chief Credit Officer.
The credit information system aggregates credit exposure with each
counterparty for its various legal entities. This system maintains overall
counterparty limits, specific product limits and limit expiration dates.
Detailed information on firmwide inventory positions and transactions executed,
including current and potential credit exposure, is updated daily and compared
with limits. Collateral, which reduces the Corporation's credit exposure, is
obtained as needed and tracked on the credit system. The system enables
Corporate Credit to monitor counterparty, product, industry, country, and credit
quality concentrations.
CONCENTRATION RISK
Concentration risk, the risk that the Corporation's businesses will be
dependent upon a single source of revenue, product or market, is periodically
reviewed as part of the Corporation's ongoing strategic and business planning
process. The Corporation has diversified its revenue sources and continues to
grow fee-based businesses to ensure that it is not dependent on a single
financial product, customer base or market to generate revenues.
[GRAPHIC NO. 2 TO APPEAR HERE]
OPERATIONAL RISK
Operational risk focuses on the Corporation's ability to accumulate, process
and communicate information necessary to conduct business in a global market
environment. These risks are monitored on both a local and centralized basis.
Information systems provide operational risk assessments on transactions in
major markets. This technology allows the Corporation to promptly respond to
changing market conditions worldwide. As required, systems and equipment are
updated for changes in technology. This enables the Corporation to effectively
compete in the dynamic financial services industry. Exception reports are also
used to manage operational risk, highlight reconciliation issues and enable the
Corporation to identify instances where additional collateral is required.
These reports also help identify potential business risk exposures and promote
compliance with both internal management policies and regulatory requirements.
Operations personnel who are responsible for entering trades, report to an
operations or business manager, not to the traders. Operations personnel
provide support and control for trading, clearance and settlement activities,
and perform custodial functions for customer and proprietary assets. Central to
management of its operational risk, the Corporation maintains backup facilities
worldwide.
44
STATEMENTS OF CONSOLIDATED EARNINGS
- -----------------------------------------------------------------------------------
Year Ended Last Friday in December
(Dollars in Thousands, --------------------------------------
Except Per Share Amounts) 1993 1992 1991
- -----------------------------------------------------------------------------------
(53 Weeks) (52 Weeks) (52 Weeks)
REVENUES
Commissions $ 2,894,228 $ 2,422,084 $ 2,166,301
Interest and dividends 7,099,155 5,806,710 5,761,061
Principal transactions 2,920,439 2,165,725 1,905,728
Investment banking 1,831,253 1,484,067 1,175,992
Asset management and portfolio
service fees 1,557,778 1,252,829 1,003,904
Other 285,324 281,253 339,826
----------- ----------- -----------
Total Revenues 16,588,177 13,412,668 12,352,812
Interest Expense 6,029,947 4,835,267 5,106,344
----------- ----------- -----------
NET REVENUES 10,558,230 8,577,401 7,246,468
----------- ----------- -----------
NON-INTEREST EXPENSES
Compensation and benefits 5,255,258 4,364,454 3,867,849
Occupancy 572,936 477,754 473,562
Communications and equipment rental 385,809 366,161 356,850
Depreciation and amortization 308,499 281,228 276,125
Advertising and market development 376,881 301,146 249,844
Professional fees 290,324 256,887 235,344
Brokerage, clearing and exchange fees 280,712 277,166 239,828
Other 663,003 631,216 529,648
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSES 8,133,422 6,956,012 6,229,050
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 2,424,808 1,621,389 1,017,418
Income tax expense 1,030,449 668,984 321,301
----------- ----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 1,394,359 952,405 696,117
Cumulative Effect of Changes in
Accounting Principles
(net of applicable income taxes of
$25,075 in 1993 and $55,291 in 1992) (35,420) (58,580) --
----------- ----------- -----------
NET EARNINGS $ 1,358,939 $ 893,825 $ 696,117
=========== =========== ===========
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS $ 1,353,558 $ 887,486 $ 678,392
=========== =========== ===========
- -----------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE
Earnings Before Cumulative Effect of
Changes in Accounting Principles $ 6.14 $ 4.18 $ 3.01
Cumulative Effect of Changes in
Accounting Principles (.16) (.26) --
----------- ----------- -----------
NET EARNINGS $ 5.98 $ 3.92 $ 3.01
=========== =========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
Earnings Before Cumulative Effect of
Changes in Accounting Principles $ 6.11 $ 4.17 $ 2.95
Cumulative Effect of Changes in
Accounting Principles (.16) (.26) --
----------- ----------- -----------
NET EARNINGS $ 5.95 $ 3.91 $ 2.95
=========== =========== ===========
- -----------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
45
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------
December 31, December 25,
(Dollars in Thousands, ---------------------------
Except Per Share Amounts) 1993 1992
- ----------------------------------------------------------------------
ASSETS
CASH AND CASH EQUIVALENTS $ 1,783,408 $ 1,251,572
------------ ------------
CASH AND SECURITIES SEGREGATED FOR
REGULATORY PURPOSES OR DEPOSITED WITH
CLEARING ORGANIZATIONS 4,069,424 3,424,711
------------ ------------
MARKETABLE INVESTMENT SECURITIES 1,749,254 1,173,970
------------ ------------
TRADING INVENTORIES, AT FAIR VALUE
Corporate debt, contractual
agreements, and preferred stock 16,764,084 10,494,877
Non-U.S. Governments and agencies 9,260,725 2,605,337
U.S. Government and agencies 7,287,081 4,937,272
Equities and convertible debentures 6,806,539 2,732,934
Mortgages and mortgage-backed 6,486,464 5,803,322
Money markets 3,337,839 4,009,846
Municipals 1,606,097 1,135,601
------------ ------------
TOTAL 51,548,829 31,719,189
------------ ------------
RESALE AGREEMENTS 38,137,528 25,002,230
------------ ------------
SECURITIES BORROWED 19,001,061 13,565,803
------------ ------------
RECEIVABLES
Customers (net of allowance for
doubtful accounts of $47,953 in 1993
and $31,230 in 1992) 13,242,875 9,785,266
Brokers and dealers 7,292,332 4,231,597
Interest and other 2,758,768 1,956,091
------------ ------------
TOTAL 23,293,975 15,972,954
------------ ------------
INVESTMENTS OF INSURANCE SUBSIDIARIES 7,841,444 9,052,839
LOANS, NOTES AND MORTGAGES (NET OF
ALLOWANCE FOR LOAN LOSSES OF $142,414
IN 1993 AND $218,960 IN 1992) 2,083,553 2,542,760
OTHER INVESTMENTS 873,806 957,657
PROPERTY, LEASEHOLD IMPROVEMENTS AND
EQUIPMENT (NET OF ACCUMULATED
DEPRECIATION AND AMORTIZATION OF
$1,677,334 IN 1993 AND $1,459,020 IN
1992) 1,506,964 1,409,115
OTHER ASSETS 1,021,116 951,373
------------ ------------
TOTAL ASSETS $152,910,362 $107,024,173
============ ============
- ----------------------------------------------------------------------
46
- -------------------------------------------------------------------------
December 31, December 25,
---------------------------
1993 1992
- -------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
REPURCHASE AGREEMENTS $ 56,418,148 $ 32,410,407
------------ ------------
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS 23,214,329 18,769,123
------------ ------------
COMMITMENTS FOR SECURITIES SOLD BUT NOT
YET PURCHASED, AT FAIR VALUE
U.S. Government and agencies 12,183,271 8,685,321
Equities and convertible debentures 3,953,850 2,114,375
Corporate debt, contractual
agreements, and preferred stock 3,577,056 2,641,898
Non-U.S. Governments and agencies 1,762,154 947,808
Municipals 184,041 182,702
------------ ------------
TOTAL 21,660,372 14,572,104
------------ ------------
CUSTOMERS 13,571,379 9,897,399
INSURANCE 7,405,673 8,711,976
BROKERS AND DEALERS 4,862,584 2,392,803
OTHER LIABILITIES AND ACCRUED INTEREST 6,823,064 4,830,157
LONG-TERM BORROWINGS 13,468,900 10,871,100
------------ ------------
TOTAL LIABILITIES 147,424,449 102,455,069
------------ ------------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per
share (Liquidation preference
$100,000 per share); authorized:
25,000,000 shares; issued: 1993
and 1992-3,000 shares; outstanding:
1993 and 1992-1,938 shares 193,800 193,800
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $1.33 1/3 per
share; authorized: 500,000,000
shares; issued: 1993-236,330,162
shares; 1992-234,692,848 shares 315,105 312,922
Paid-in capital 1,156,367 1,081,469
Foreign currency translation
adjustment (18,305) (6,129)
Unrealized appreciation of investment
securities available-for-sale (net
of applicable income taxes of
$12,493) 21,355 --
Retained earnings 4,777,142 3,570,980
------------ ------------
Subtotal 6,251,664 4,959,242
Less:
Treasury stock, at cost:
1993-23,408,139 shares 695,788 286,599
1992-16,288,488 shares
Unallocated ESOP shares, at cost:
1993- 8,932,332 shares 140,684 176,426
1992-11,201,672 shares
Employee stock transactions 123,079 120,913
------------ ------------
TOTAL COMMON STOCKHOLDERS' EQUITY 5,292,113 4,375,304
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,485,913 4,569,104
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $152,910,362 $107,024,173
============ ============
- -------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
47
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------
Year Ended Last Friday in December
(Dollars in Thousands, ---------------------------------------
Except Per Share Amounts) 1993 1992 1991
- ------------------------------------------------------------------------------------
PREFERRED STOCK, PAR VALUE $1.00
BALANCE, BEGINNING AND END OF YEAR
(3,000 SHARES IN 1993, 1992 AND 1991) $ 3 $ 3 $ 3
---------- ---------- ----------
PAID-IN CAPITAL, BEGINNING AND END OF
YEAR 299,997 299,997 299,997
---------- ---------- ----------
PREFERRED TREASURY STOCK, AT COST
Balance, beginning of year (1,062
shares in 1993; 945 in 1992) (106,200) (94,500) --
Treasury stock purchased (117 shares
in 1992; 945 in 1991) -- (11,700) (94,500)
---------- ---------- ----------
BALANCE, END OF YEAR (1,062 SHARES IN
1993 AND 1992; 945 IN 1991) (106,200) (106,200) (94,500)
---------- ---------- ----------
BALANCE, END OF YEAR $ 193,800 $ 193,800 $ 205,500
========== ========== ==========
COMMON STOCK, PAR VALUE $1.33 1/3
Balance, beginning of year
(234,692,848 shares in 1993 and
1992; 234,690,600 in 1991) $ 312,922 $ 312,922 $ 312,920
Issued:
Employee benefit plans (1,637,314
shares in 1993) 2,183 -- --
To debenture holders through
conversion rights (2,248 shares in
1991) -- -- 2
---------- ---------- ----------
BALANCE, END OF YEAR (236,330,162
SHARES IN 1993; 234,692,848 IN 1992
AND 1991) $ 315,105 $ 312,922 $ 312,922
========== ========== ==========
PAID-IN CAPITAL
Balance, beginning of year $1,081,469 $ 999,612 $ 983,008
Issuance of Common stock:
To employees (2,456) (6,116) (5,604)
Employee stock grants 13,645 56,326 5,583
To debenture holders through
conversion rights -- -- 68
To ESOP (including allocation of
shares in 1993, 1992 and 1991) 63,709 31,647 16,557
---------- ---------- ----------
BALANCE, END OF YEAR $1,156,367 $1,081,469 $ 999,612
========== ========== ==========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, beginning of year $ (6,129) $ 10,219 $ 14,585
Translation adjustment* (12,176) (16,348) (4,366)
---------- ---------- ----------
BALANCE, END OF YEAR $ (18,305) $ (6,129) $ 10,219
========== ========== ==========
UNREALIZED APPRECIATION OF INVESTMENT
SECURITIES AVAILABLE-FOR-SALE (NET OF
APPLICABLE INCOME TAXES)
BALANCE, END OF YEAR $ 21,355 $ -- $ --
========== ========== ==========
RETAINED EARNINGS
Balance, beginning of year $3,570,980 $2,803,392 $2,228,721
Net earnings 1,358,939 893,825 696,117
Cash dividends declared:
Remarketed Preferred stock (5,290) (6,745) (18,080)
Common stock ($.70 per share in
1993; $.575 in 1992; $.50 in 1991) (147,487) (119,492) (103,366)
---------- ---------- ----------
BALANCE, END OF YEAR $4,777,142 $3,570,980 $2,803,392
========== ========== ==========
COMMON TREASURY STOCK, AT COST
Balance, beginning of year
(16,288,488 shares in 1993;
15,612,392 in 1992; 18,949,362 in
1991) $ (286,599) $ (167,507) $ (211,669)
Treasury stock purchased (16,345,568
shares in 1993; 10,653,858 in 1992;
5,919,852 in 1991) (695,431) (259,526) (116,612)
Issued out of treasury (net of
reacquisitions):
Employees (955,391 shares in 1993;
1,272,014 in 1992; 1,763,410 in
1991) 33,299 34,421 30,462
Employee stock grants (8,270,526
shares in 1993; 8,705,748 in 1992;
7,493,412 in 1991) 252,943 106,013 130,312
---------- ---------- ----------
BALANCE, END OF YEAR (23,408,139
SHARES IN 1993; 16,288,488 IN 1992;
15,612,392 in 1991) $ (695,788) $ (286,599) $ (167,507)
========== ========== ==========
UNALLOCATED ESOP SHARES, AT COST
Balance, beginning of year
(11,201,672 shares in 1993;
13,636,820 in 1992; 16,071,968 in
1991) $ (176,426) $ (214,780) $ (253,133)
Allocation of shares to participants
(2,269,340 shares in 1993; 2,435,148
in 1992 and 1991) 35,742 38,354 38,353
---------- ---------- ----------
BALANCE, END OF YEAR (8,932,332
SHARES IN 1993; 11,201,672 IN 1992;
13,636,820 IN 1991) $ (140,684) $ (176,426) $ (214,780)
========== ========== ==========
EMPLOYEE STOCK TRANSACTIONS
Balance, beginning of year $ (120,913) $ (131,270) $ (149,003)
Net issuance of employee stock grants (115,251) (105,342) (62,025)
Amortization of employee stock grants 106,867 109,908 74,127
Repayment of loans 6,218 5,791 5,631
---------- ---------- ----------
BALANCE, END OF YEAR $ (123,079) $ (120,913) $ (131,270)
========== ========== ==========
TOTAL STOCKHOLDERS' EQUITY $5,485,913 $4,569,104 $3,818,088
========== ========== ==========
- ------------------------------------------------------------------------------------
*Net of income tax (expense) benefit of $(1,837) in 1993, $386 in 1992 and
$(364) in 1991.
See Notes to Consolidated Financial Statements
48
STATEMENTS OF CONSOLIDATED CASH FLOWS
- -----------------------------------------------------------------------------------------
Year Ended Last Friday in December
--------------------------------------------
(Dollars in Thousands) 1993 1992 1991
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 1,358,939 $ 893,825 $ 696,117
Noncash items included in earnings:
Cumulative effect of changes in
accounting principles 35,420 58,580 --
Depreciation and amortization 308,499 281,228 276,125
Policyholder reserves 516,741 624,012 717,352
Other 649,100 795,220 678,636
(Increase) decrease in operating assets:
Trading inventories (19,829,640) (6,794,804) (7,610,914)
Cash and securities segregated for
regulatory purposes or deposited
with clearing organizations (644,713) (70,120) 687,437
Securities borrowed (5,435,258) (1,734,088) (4,145,484)
Customers (3,481,056) (2,409,415) (229,054)
Other (3,708,028) (550,705) (3,344,726)
Increase (decrease) in operating liabilities:
Commitments for securities sold but
not yet purchased 7,088,268 4,977,122 3,387,365
Customers 3,673,980 (340,505) 755,849
Insurance (2,028,539) (1,221,883) 55,158
Other 4,388,965 276,785 (506,402)
------------ ------------ ------------
CASH USED FOR OPERATING ACTIVITIES (17,107,322) (5,214,748) (8,582,541)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities and sales of investments
by insurance subsidiaries 3,983,077 3,904,587 4,537,265
Purchases of investments by insurance
subsidiaries (2,438,571) (3,304,652) (5,552,334)
Marketable investment securities (575,284) (828,647) (194,147)
Other investments and other assets (176,322) 344,263 (158,461)
Property, leasehold improvements and
equipment (406,348) (131,246) (188,946)
------------ ------------ ------------
CASH PROVIDED BY (USED FOR) INVESTING
ACTIVITIES 386,552 (15,695) (1,556,623)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale
agreements 10,872,443 (1,770,519) 7,318,966
Commercial paper and other short-term
borrowings 4,445,206 4,593,854 841,211
Issuance and resale of long-term
borrowings 7,861,813 6,773,739 6,395,992
Settlement and repurchases of long-
term borrowings (5,263,104) (3,861,745) (4,859,142)
Repurchases of Remarketed Preferred
stock -- (11,700) (94,500)
Other common stock transactions (510,975) (189,301) (54,772)
Dividends (152,777) (126,237) (121,446)
------------ ------------ ------------
CASH PROVIDED BY FINANCING ACTIVITIES 17,252,606 5,408,091 9,426,309
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 531,836 177,648 (712,855)
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 1,251,572 1,073,924 1,786,779
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,783,408 $ 1,251,572 $ 1,073,924
============ ============ ============
- -----------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Income taxes totaled $1,031,980 in 1993, $590,481 in 1992 and $354,773 in 1991.
Interest totaled $5,788,218 in 1993, $4,753,336 in 1992 and $5,311,974 in 1991.
Supplemental Disclosure of Non-Cash Investing Activities:
Unrealized appreciation of investment securities available-for-sale totaled
$21,355, net of applicable income taxes of $12,493 in 1993.
See Notes to Consolidated Financial Statements
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Merrill Lynch
& Co., Inc. and all significant subsidiaries (collectively referred to as the
"Corporation"). All material intercompany balances and transactions have been
eliminated.
In 1993, the Corporation reclassified to "Asset management and portfolio
service fees" certain fee-based revenues, previously shown on the Statements of
Consolidated Earnings as "Other revenues." The reclassifications provide a
more meaningful presentation of the Corporation's fee-based services by
recording similar items in one revenue line.
On the Consolidated Balance Sheets in 1993, the Corporation reclassified
certain fixed-income investment securities from "Other investments" to a new
category, "Marketable investment securities." These investments, consisting
principally of debt securities, are highly rated, liquid instruments held by
subsidiaries of the Corporation to meet rating agency and other requirements.
Certain investments in partnerships and joint ventures, previously recorded in
"Other assets," were reclassified to "Other investments" to more accurately
depict the nature of the asset. The Corporation reclassified its trade date
adjustment for international subsidiaries from customer receivables or payables
to broker and dealer receivables or payables. Certain other limited
classification and format changes have been implemented in the Consolidated
Balance Sheets, and Statements of Consolidated Earnings and Cash Flows. Prior
years' financial statements have been reclassified to conform to the 1993
presentation.
TRADING POSITIONS
Trading inventories and commitments for securities sold but not yet
purchased, including assets and liabilities arising from contractual agreements
for futures, forwards, options, interest rate and currency swaps, and other
derivative products, are recorded at fair value. Fair value is based on quoted
market prices, pricing models (utilizing indicators of general market conditions
or other such economic measurements) or determined by management based on
estimates of amounts to be realized on settlement, assuming current market
conditions and an orderly disposition over a reasonable period of time. Net
unrealized gains and losses resulting from trading activities are included in
earnings of the current period. Trading inventories, commitments for securities
sold but not yet purchased, commission revenues, and related expenses are
recorded on a trade date basis.
The Corporation enters into when-issued and delayed delivery transactions.
Unrealized gains and losses from these transactions are recorded in earnings of
the current period.
INVESTMENT SECURITIES
Investments in debt and qualifying equity securities are classified as
either "held-to-maturity," "trading," or "available-for-sale" in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS No. 115"). (See Accounting
Changes Note to the Consolidated Financial Statements.)
Held-to-maturity investments are debt securities which the Corporation has
the positive intent and ability to hold to maturity. These investments are
recorded at amortized cost unless a decline in value is deemed other than
temporary, in which case the carrying value is adjusted. The amortization of
premium or accretion of discount, as well as any unrealized loss deemed other
than temporary, is included in current period earnings.
Debt and equity securities purchased principally for the purpose of resale
in the near term are classified as trading investments and are recorded at fair
value. Unrealized gains or losses on these investments are included in earnings
of the current period.
Other debt and equity securities which are not categorized as held-to-
maturity or trading are classified as available-for-sale and reported at fair
value. Unrealized gains or losses on these securities are reported as a
separate component of stockholders' equity, net of applicable income tax expense
or benefit, and other related items.
Restricted equity investment securities, which are excluded from the
provisions of SFAS No. 115, are reported at the lower of cost or estimated net
realizable value. Unrealized losses resulting from adjustments to carrying
values are included in current period earnings.
COLLATERALIZED FINANCING ACTIVITIES
Repurchase and resale agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts, including
accrued interest. The Corporation's policy is to take possession of securities
purchased under resale agreements. This collateral is valued daily with
additional collateral, as required through contractual provisions, obtained when
appropriate to ensure that the market value of the underlying collateral remains
sufficient.
Securities borrowed and securities loaned are recorded at the amount of cash
collateral advanced or received. For non-cash collateral transactions, the fee
received or paid by the Corporation is recorded in the Statements of
Consolidated Earnings as interest income or interest expense. Securities
borrowed transactions require the Corporation to provide the counterparty with
collateral in the form of cash, letters of credit, or other securities. The
Corporation receives collateral in the form of cash or other securities for
securities loaned transactions. The Corporation measures the market value of
securities borrowed or loaned against the collateral value daily with additional
amounts obtained when appropriate.
Substantially all collateralized financing activities are transacted under
master netting agreements which give the Corporation the right, in the event of
default, to liquidate collateral held and to setoff receivables and payables
with the same counterparty. For financial reporting, the Corporation nets
receivables and payables with the same counterparty on the Consolidated Balance
Sheets, when appropriate.
INCOME TAXES
Merrill Lynch & Co., Inc. and certain of its wholly owned subsidiaries file
a consolidated Federal income
50
tax return. The Corporation uses the asset and liability method in
providing income taxes on all transactions that have been recognized in the
financial statements, in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). (See
Accounting Changes Note to the Consolidated Financial Statements.) The asset and
liability method requires deferred taxes be adjusted to reflect the tax rates at
which future taxable amounts will be settled or realized. The effects of tax
rate changes on future deferred tax liabilities and deferred tax benefits, as
well as other changes in income tax laws, are recognized in net earnings in the
period such changes are enacted. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
The consolidated financial statements for 1991 reflect income taxes under the
liability method, in accordance with Statement of Financial Accounting Standards
No. 96 ("SFAS No. 96"). The Corporation does not provide for deferred income
taxes on the undistributed earnings of foreign subsidiaries that are considered
to be permanent in duration.
PROPERTY, LEASEHOLD IMPROVEMENTS AND EQUIPMENT
Property (excluding land), leasehold improvements and equipment are reported
at historical cost, net of accumulated depreciation and amortization. Land is
reported at historical cost.
Depreciation and amortization are computed using the straight-line method.
Property and equipment are depreciated over the estimated useful lives of the
assets, while leasehold improvements are amortized over the lesser of the
estimated economic useful life of the asset or the term of the lease.
Maintenance and repair costs are expensed as incurred.
Facilities-related depreciation and amortization expense was $140,340,
$130,448 and $130,286 in 1993, 1992 and 1991, respectively. Non-facilities-
related depreciation and amortization expense for 1993, 1992 and 1991 was
$168,159, $150,780 and $145,839, respectively.
INSURANCE
Insurance liabilities represent future benefits payable related to annuity
and interest-sensitive life contracts and reflect deposits received plus
interest credited during the contract accumulation period, the present value of
future payments for contracts which have annuitized, and a mortality provision
for certain products. Certain policyholder liabilities are also adjusted for
those investments classified as available-for-sale (see discussion below).
Interest crediting rates range from 2.4% to 10.0%. Liabilities for unpaid
claims and claim adjustment expenses are based on the experience of the
Corporation. Policy deposits are recorded as insurance liabilities when
received. Policy withdrawal, maintenance and other fees are recognized as
revenue when earned.
Substantially all investments of insurance subsidiaries, principally debt
securities, are classified as available-for-sale and recorded at fair value in
accordance with SFAS No. 115. The Corporation records an adjustment to
deferred acquisition costs and policyholder account balances which, when
combined, are equal to the adjustment that would have been recorded if those
available-for-sale investments had been sold at their estimated fair value and
the proceeds reinvested at current yields. The corresponding credits or charges
for those adjustments are recorded as unrealized gains or losses in stock-
holders' equity, net of applicable income tax expense or benefit. (See
Accounting Changes Note to the Consolidated Financial Statements.) Prior to
December 31, 1993, these investments were recorded at amortized cost.
Certain variable costs related to the sale or acquisition of new and renewal
insurance contracts have been deferred to the extent such costs are deemed
recoverable from future income. Deferred costs are amortized, based on
actuarial factors, over the lives of the contracts in proportion to the
estimated gross profit expected to be realized for each group of contracts.
The Corporation maintains separate accounts representing segregated funds
held for purposes of funding variable annuity and variable life contracts.
Subsidiaries of the Corporation receive various administrative and advisory fees
for managing such funds. Separate account assets are accounted for as customer
assets since the contract holders bear the risk of ownership, consistent with
the Corporation's other investment products. Accordingly, separate account
assets and the related liabilities are not consolidated with the assets and
liabilities of the Corporation.
TRANSLATION OF FOREIGN CURRENCIES
Assets and liabilities of foreign subsidiaries are translated at year-end
currency exchange rates, while revenues and expenses are translated at average
currency exchange rates during the year. Adjustments that result from
translating foreign currency financial statements, net of hedging gains or
losses and related tax effects, are reported as a separate component of
stockholders' equity. Gains or losses from foreign currency transactions are
included in earnings of the current period.
CASH FLOWS
For purposes of the Statements of Consolidated Cash Flows, the Corporation
defines cash equivalents as short-term, highly liquid floating rate securities
and interest-earning deposits with original maturities of less than 90 days.
INTEREST EXPENSE
Interest expense includes payments in lieu of dividends of $21,436, $12,556
and $32,520 in 1993, 1992 and 1991, respectively.
OTHER SIGNIFICANT EVENTS
ACCOUNTING CHANGES
During the fourth quarter of 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits" ("SFAS No. 112") and SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 112 was effective
as of the 1993 first quarter. Quarterly information has been restated to
reflect the impact of this pronouncement. SFAS No. 115 was effective as of the
last day of the fiscal year.
51
SFAS No. 112 establishes accrual accounting standards for employer-provided
benefits which cover former or inactive employees after employment but before
retirement ("postemployment benefits"). Prior to 1993, the Corporation
accounted for such costs on a modified "pay-as-you-go" basis. Postemployment
benefits include severance benefits, short- and long-term disability, workers'
compensation, and the continuation of certain health care and life insurance
coverage. The cumulative effect of this change in accounting principle reported
in the Statements of Consolidated Earnings resulted in a charge of $35,420 (net
of applicable income tax benefits of $25,075). The effect of adopting SFAS
No. 112 on the current year's results of operations was not material.
SFAS No. 115 requires certain subsidiaries of the Corporation, principally
insurance and banking, to classify their investments in debt and qualifying
equity securities into three categories: "trading," "available-for-sale" or
"held-to-maturity." Investments that are classified as trading and available-
for-sale are recorded at fair value. Investments in debt securities
classified as held-to-maturity continue to be carried at amortized cost. Prior
to adoption, the Corporation's non-broker-dealer subsidiaries recorded
investments in debt securities at amortized cost and investments in equity
securities at the lower of cost or estimated net realizable value. Under SFAS
No. 115, unrealized gains or losses on trading investments are reported in
current period earnings. Unrealized gains or losses on available-for-sale
investments are recorded as a separate component of stockholders' equity (net of
applicable income taxes). At December 31, 1993, the increase to stockholders'
equity for available-for-sale investments totaled $21,355 (net of $12,493
applicable income taxes). The impact of trading investments on the
Corporation's financial statements was not material.
In 1992, the Corporation adopted Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions"
("SFAS No. 106") and SFAS No. 109, "Accounting for Income Taxes." These changes
were effective as of the 1992 first quarter.
SFAS No. 106 requires accrual accounting for postretirement benefits,
primarily health care and life insurance benefits. Prior to 1992, the
Corporation accounted for such costs on a modified "pay-as-you-go" basis. The
cumulative effect of this change in accounting principle, reported in the
Statements of Consolidated Earnings, resulted in a charge of $76,354 (net of
related income tax benefits of $55,291). The adoption of SFAS No. 106
increased compensation and benefits expense in 1992 by $8,500.
SFAS No. 109 superseded SFAS No. 96 and changed the conditions under which
deferred tax assets are recognized. The cumulative effect of this change in
accounting principle reported in the Statements of Consolidated Earnings was a
credit of $17,774, and related principally to recognition of deferred state and
local tax benefits.
OCCUPANCY CHARGE
The Corporation recorded a non-recurring pretax charge totaling $103,000
($59,700 after income taxes) in the 1993 first quarter. The non-recurring
charge related to the Corporation's decision not to occupy certain office space
at its World Financial Center Headquarters facility and, instead, to offer for
sublease the unused space to third parties. An agreement to sublet this space
was entered into in December 1993.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 1993 and December 25, 1992, approximately 98% and 90% of
financial instrument assets, and all financial instrument liabilities, respec-
tively, are carried at fair value or amounts which approximate fair value.
Assets carried at amounts which approximate fair value consist predominantly
of short-term financial instruments, which include cash and cash equivalents,
cash and securities segregated for regulatory purposes or deposited with
clearing organizations, resale agreements, securities borrowed, and
receivables. Similarly, short-term liabilities, including repurchase
agreements, commercial paper and other short-term borrowings, customers, brokers
and dealers, and other liabilities and accrued interest, are carried at amounts
which approximate fair value. The Corporation's insurance liabilities are
exempt from the fair value disclosure requirements.
Trading positions and commitments for securities sold but not yet purchased
are carried at fair value. Fair value for these instruments is estimated using
market quotations for traded instruments, market quotations of similarly traded
instruments and pricing models. Market quotations for traded instruments are
obtained from various sources, including the major securities exchanges and
dealers. Pricing models, which consider the time value and volatility of the
underlying financial instrument, are used to value derivatives and other
contractual agreements.
For substantially all long-term borrowings, the Corporation enters into swap
agreements to convert fixed interest rate payments into floating rate payments
and, in certain instances, to hedge foreign currency exposures. Fair value of
these borrowings and related hedge instruments is estimated using current market
prices and pricing models. At December 31, 1993 and December 25, 1992, the fair
value of these borrowings and related hedge instruments approximated carrying
value.
52
Financial instruments with carrying values different than fair values are
presented below:
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, 1993(1) DECEMBER 25, 1992
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------
Insurance subsidiaries' investments $7,841,444 $7,841,444 $9,052,839 $9,337,816
Merchant banking equity and debt portfolio $ 780,665 $ 996,581 $1,192,319 $1,480,123
Loans, notes and mortgages (excluding loans
related to merchant banking) $1,628,225 $1,639,551 $1,746,333 $1,756,706
Excess mortgage servicing rights $ 72,117 $ 117,823 $ 49,065 $ 67,402
- -----------------------------------------------------------------------------------------------------------
(1) Includes debt and equity securities identified as available-for-sale (see
Investments Note to the Consolidated Financial Statements).
Marketable investment securities principally include U.S. Government and
agencies securities, municipal securities, commercial paper, medium-term notes,
and corporate debt held by subsidiaries of the Corporation to meet rating agency
and other requirements. The fair value of these investment securities is
estimated using market quotations. At December 31, 1993 and December 25, 1992,
carrying value approximated fair value.
The fair value of insurance subsidiaries' investments is generally estimated
by market quotes obtained from exchanges for listed securities or dealers for
unlisted securities.
In connection with its merchant banking activities, the Corporation holds
certain equity instruments including partnership interests (included in other
investments in the Consolidated Balance Sheets), and loans consisting primarily
of senior and subordinated debt. Fair value for equity instruments is estimated
using a number of methods including earnings multiples, cash flow analyses,
review of underlying financial conditions and other market factors. These
instruments may be subject to restrictions on disposition (e.g., minority
ownership, consent of other investors), which may limit the Corporation's
ability to realize currently the estimated fair value. Accordingly, the
Corporation's current estimate of fair value and its ultimate realization on
these instruments may differ. Loans made in connection with merchant banking
activities are carried at unpaid principal balances less a reserve for estimated
losses. Fair value is estimated using discounted cash flows.
The Corporation's estimate of fair value for its loans, notes and mortgages
(excluding loans made in connection with merchant banking activities) is
determined based on loan characteristics. For certain homogeneous categories of
loans, including residential mortgages and home equity loans, fair value is
estimated using market price quotations or previously executed transactions for
securities backed by similar loans adjusted for credit risk and other individual
loan characteristics. For the Corporation's floating rate loan receivables,
carrying value approximates fair value.
Other assets include capitalized excess mortgage servicing rights.
Capitalized excess servicing represents the net present value of estimated
future servicing rights for mortgages securitized by the Corporation. Fair
value is computed based on the present value of estimated future servicing
revenues, using current market assumptions for discount rates, prepayment
speeds, default estimates, and interest rate assumptions.
INVESTMENTS
The Corporation has several broad categories of investments on its
Consolidated Balance Sheets, including investments of insurance subsidiaries,
marketable investment securities and other investments.
The Corporation's insurance subsidiaries have investments which are used to
fund policyholder liabilities. Marketable investment securities consist of
equity and debt securities held for rating agency purposes or to manage cash
flows related to certain liabilities of the Corporation's banking subsidiaries.
Other investments consist principally of equity and debt securities which were
acquired principally in connection with prior years' merchant banking
activities. Certain merchant banking investments are subject to restrictions
which may limit the Corporation's ability to realize its investment until such
restrictions expire.
On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (see Accounting Changes Note
to the Consolidated Financial Statements). A reconciliation of the Corporation's
investment securities to those reported in the Consolidated Balance Sheets is
presented below:
- --------------------------------------------------------------------------------
Investments of insurance subsidiaries:
Available-for-sale $6,088,443
Trading 164,620
Non-qualifying 1,588,381
----------
TOTAL $7,841,444
==========
Marketable investment securities:
Available-for-sale $ 471,862
Held-to-maturity 1,277,392
----------
TOTAL $1,749,254
==========
Other investments:
Available-for-sale $ 151,801
Held-to-maturity 16,635
Non-qualifying 705,370
----------
TOTAL $ 873,806
==========
- --------------------------------------------------------------------------------
53
Information regarding investment securities subject to SFAS No. 115 follows:
- ----------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE
---------------------------------------------------------
COST/ GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
1993
Corporate debt $ 3,516,922 $ 173,206 $ (21,644) $ 3,668,484
Governments and agencies 366,690 1,128 (55) 367,763
Municipals 233,595 12,646 (1,152) 245,089
Mortgage-backed securities 2,294,935 91,144 (4,214) 2,381,865
----------- ----------- ---------- -----------
Total debt securities 6,412,142 278,124 (27,065) 6,663,201
Equity securities 45,934 6,591 (3,620) 48,905
----------- ----------- ---------- -----------
TOTAL (1) $ 6,458,076 $ 284,715 $ (30,685) $ 6,712,106
=========== =========== ========== ===========
- ---------------------------------------------------------------------------------------
(1) See reconciliation below of net unrealized appreciation of investment
securities classified as available-for-sale.
For registrants subject to the information reporting requirements of the
Securities Exchange Act of 1934, SFAS No. 115 requires the Corporation's
insurance subsidiaries to adjust deferred acquisition costs and certain
policyholder liabilities associated with investments classified as
available-for-sale. These adjustments are recorded in stockholders' equity and
assume that the unrealized gain or loss on available-for-sale securities were
realized. The table below provides the components of the amount recorded in
stockholders' equity for available-for-sale investments.
- -------------------------------------------------------
Net unrealized appreciation of
investment securities available-for-
sale $ 254,030
Adjustments for policyholder liabilities (205,495)
Adjustments for deferred policy
acquisition costs (14,687)
Deferred income taxes (12,493)
---------
Net unrealized appreciation of
investment securities classified as
available-for-sale $ 21,355
=========
- -------------------------------------------------------
- -----------------------------------------------------------------------------------
HELD-TO-MATURITY
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------
1993
Corporate debt $ 534,452 $1,455 $(648) $ 535,259
Governments and agencies 203,992 246 (42) 204,196
Municipals 778 46 -- 824
Foreign government debt 2,992 40 -- 3,032
Mortgage-backed securities 483,966 7,887 -- 491,853
Other debt securities 67,847 41 (1) 67,887
---------- ------ ----- ----------
TOTAL $1,294,027 $9,715 $(691) $1,303,051
========== ====== ===== ==========
- -----------------------------------------------------------------------------------
At December 31, 1993, the Corporation had $164,620 of insurance trading
investment securities which are recorded at fair value. The Corporation's
insurance subsidiaries hold policy loans and other non-qualifying investments
totaling $1,588,381. The estimated fair value of all investments of insurance
subsidiaries was $7,841,444 at December 31, 1993, with gross unrealized gains of
$273,482 and gross unrealized losses of $29,096. During 1993, certain debt
investments of insurance subsidiaries were sold. Proceeds from sales of debt
securities during 1993 were $3,828,224, with gross gains and gross losses
realized of $76,145 and $4,564, respectively.
Prior to the adoption of SFAS No. 115, substantially all investments of
insurance subsidiaries were carried at amortized cost, unless a decline in value
was deemed other than temporary, in which case the carrying value was adjusted.
Information regarding investments of insurance subsidiaries as of December
25, 1992 is presented below:
- -----------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------
1992
Corporate debt $3,510,703 $153,911 $(10,006) $3,654,608
Mortgage-backed securities 3,704,475 153,543 (14,867) 3,843,151
Other debt securities 202,870 4,121 (3,312) 203,679
---------- -------- -------- ----------
Total debt securities 7,418,048 311,575 (28,185) 7,701,438
Policy loans and other 1,634,791 1,587 -- 1,636,378
---------- -------- -------- ----------
TOTAL $9,052,839 $313,162 $(28,185) $9,337,816
========== ======== ======== ==========
- -----------------------------------------------------------------------------------
54
The carrying value and estimated fair value of debt securities at December
31, 1993 by contractual maturity, for available-for-sale and held-to-maturity
investments follow:
- ------------------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
----------------------- -----------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Due in one year or less $ 588,783 $ 595,169 $ 151,431 $ 152,655
Due after one year through five years 1,346,131 1,397,348 633,677 633,346
Due after five years through ten years 1,633,096 1,722,222 2,781 2,803
Due after ten years 549,197 566,597 22,172 22,394
---------- ---------- ---------- ----------
Subtotal 4,117,207 4,281,336 810,061 811,198
Mortgage-backed securities 2,294,935 2,381,865 483,966 491,853
---------- ---------- ---------- ----------
TOTAL (1) $6,412,142 $6,663,201 $1,294,027 $1,303,051
========== ========== ========== ==========
- ------------------------------------------------------------------------------------------
(1) Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
STOCKHOLDERS' EQUITY
COMMON EQUITY
On October 11, 1993 the Corporation's Board of Directors declared a
two-for-one common stock split, effected in the form of a 100 percent stock
dividend. The new shares were distributed on November 24, 1993 to stockholders
of record on October 22, 1993. The par value of these shares remained at
$1.33 1/3 per share. Accordingly, an adjustment totaling $157,553 from paid-in
capital to common stock was required to preserve the par value of the post-split
shares. All share and per share data presented in this Annual Report to
Stockholders have been restated for the effect of the split.
During the 1993 second quarter, stockholders of the Corporation approved an
increase in the authorized number of shares of common stock from 200 million to
500 million shares. In addition, the Corporation issued 1,637,314 shares of
common stock in connection with certain employee benefit plans.
PREFERRED EQUITY
The Corporation is authorized to issue 25,000,000 shares of $1.00 par value
per share preferred stock of which 3,000 shares of Remarketed Preferred (Service
Mark)("RP")(Registered Tradmark) stock, Series C, were issued at $100,000 per
share and 1,938 shares are outstanding.
At the end of each dividend period, the RP stock, Series C, is subject to a
remarketing process. As part of the remarketing process, both the dividend
period and the dividend rate may be adjusted for periods generally of seven or
49 days with a maximum dividend rate dependent on the credit rating assigned to
the RP shares. Dividends on RP stock, Series C, are cumulative and payable when
declared by the authority of the Corporation's Board of Directors. Dividend
rates in effect during 1993 on RP stock, Series C, ranged from 2.45% to 3.40%
per annum. The maximum dividend rate on the RP stock, Series C, ranges from 115%
to 250% of the "AA" Composite Commercial Paper Rate based on the Moody's and
Standard and Poor's ratings on the date on which the dividend rate is reset.
Total dividends declared on RP shares in 1993 were $5,290. Generally, the
Corporation has the option to redeem the RP stock, Series C shares, in whole or
in part, at $100,000 per share plus accumulated dividends on any dividend
payment date.
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a subsidiary
of the Corporation, acts as one of the remarketing agents for the RP stock. As
a market maker, MLPF&S may occasionally acquire a temporary position in the RP
stock. At December 31, 1993, RP stock held by MLPF&S for the purpose of resale
was not material.
The Corporation's Stockholder Rights Plan provides for the distribution of
preferred stock purchase rights to common stockholders which separate from the
common stock ten days following: (a) an announcement of an acquisition by a
person or group ("acquiring party") of 20% or more of the outstanding common
shares of the Corporation; or (b) the commencement of a tender offer or exchange
offer for 30% or more of the common shares. One-half right is attached to each
outstanding share of common stock and will attach to all subsequently issued
shares. Rights entitle the holder to purchase fractions of a share ("units") of
Series A Junior Preferred Stock, par value $1.00 per share, at an exercise price
of $100 per unit. The units of preferred stock are nonredeemable, voting and
are entitled to certain preferential dividend rights. The exercise price and
the number of units issuable are subject to adjustment to prevent dilution.
If, after the rights have been distributed, the Corporation is a party to a
business combination or other specifically defined transaction, each right
(other than those held by the acquiring party) will entitle the holder to
receive, upon exercise, units of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of the
right. The rights expire December 16, 1997 and are redeemable (at the option of
a majority of the independent directors of the Corporation) at $.01 per right at
any time until the tenth day following an announcement of the acquisition of 20%
or more of the Corporation's common shares.
55
PER COMMON SHARE COMPUTATION
In 1993 and 1992, the Corporation computed its earnings per common share
calculation using the modified treasury stock method ("modified method") in
accordance with Accounting Principles Board Opinion No. 15. The modified
method is used when the number of shares obtainable upon exercise of outstanding
options, warrants and their equivalents exceed 20% of the Corporation's
outstanding common stock.
Under this method, all options, warrants and their equivalents are assumed
exercised (whether dilutive or antidilutive) with the aggregate proceeds
obtained used to repurchase up to 20% of the Corporation's outstanding common
stock, subject to certain limitations. If the combined effect of the assumed
exercise is dilutive, all options, warrants and their equivalents are included
in the computation.
In 1991, the Corporation computed earnings per common share using the
treasury stock method. The treasury stock method assumes that any proceeds
obtainable upon exercise of dilutive options, warrants or their equivalents
would be used to repurchase the Corporation's outstanding common stock.
Primary earnings per common share is computed by dividing net earnings,
after deducting preferred stock dividend requirements of $5,381, $6,339 and
$17,725 for 1993, 1992 and 1991, respectively, by the weighted average number of
common shares and common stock equivalents outstanding during each year. Shares
of common stock issuable under various employee stock plans are considered
common stock equivalents (incremental shares).
The weighted average number of common shares and incremental shares included
in the primary and fully diluted per common share computations follows:
- --------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------
Primary:
Weighted average common shares 209,276,000 207,730,000 204,754,000
Incremental shares 17,055,000 18,672,000 20,596,000
----------- ----------- -----------
TOTAL 226,331,000 226,402,000 225,350,000
=========== =========== ===========
Fully Diluted:
Weighted average common shares 209,276,000 207,730,000 204,754,000
Incremental shares 18,204,000 19,124,000 25,162,000
----------- ----------- -----------
TOTAL 227,480,000 226,854,000 229,916,000
=========== =========== ===========
- --------------------------------------------------------------------------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
At December 31, 1993 and December 25, 1992, commercial paper totaled
$14,895,540 and $9,578,612, respectively. The weighted average interest rates
on these borrowings were 3.10% in 1993 and 3.82% in 1992.
Other short-term borrowings at December 31, 1993 and December 25, 1992 are
presented below:
- --------------------------------------------------
1993 1992
- --------------------------------------------------
Demand and time deposits $5,946,244 $5,569,754
Securities loaned 1,047,059 3,357,555
Bank loans and other 1,325,486 263,202
---------- ----------
TOTAL $8,318,789 $9,190,511
========== ==========
- --------------------------------------------------
LONG-TERM BORROWINGS
Long-term borrowings at December 31, 1993 and December 25, 1992 consisted of
the following:
- --------------------------------------------------------------------
1993 1992
- --------------------------------------------------------------------
SENIOR DEBT*
U.S. Dollar denominated fixed-rate
obligations due 1994 to 2019 at
interest rates ranging from 4.75% to
12.125% $ 5,814,146 $ 5,222,387
Foreign currency denominated fixed-rate
obligations due 1994 to 2001 at
interest rates ranging from 5.10% to
12.10% 684,637 838,912
U.S. Dollar denominated variable-rate
and indexed obligations 782,055 454,637
Foreign currency denominated variable-
rate obligations 97,554 17,263
U.S. Dollar denominated medium-term
notes 5,983,837 4,239,638
Foreign currency denominated medium-
term notes 106,671 98,263
----------- -----------
TOTAL $13,468,900 $10,871,100
=========== ===========
- --------------------------------------------------------------------
*Rates and maturities presented are as of December 31, 1993.
Maturities of long-term borrowings at December 31, 1993 consisted of the
following:
- ---------------------------------
MATURITIES SENIOR DEBT
- ---------------------------------
1994 $ 5,693,067
1995 1,878,032
1996 1,061,188
1997 718,746
1998 564,893
1999 and thereafter 3,552,974
-----------
TOTAL $13,468,900
===========
- ---------------------------------
Substantially all of the Corporation's fixed-rate long-term borrowings are
swapped into floating interest rates. These swaps are used to hedge interest
rate and foreign currency exposures related to the Corporation's long-term
borrowings. Payments or receipts from these swaps are recognized as adjustments
to interest over the life of the debt obligation.
At December 31, 1993, floating interest rates were obtained on $6,423,370 or
99% of the Corporation's $6,498,783 total U.S. Dollar denominated fixed-rate
obligations and foreign currency denominated fixed-rate obligations. Foreign
currency denominated fixed-rate
56
obligations have been swapped into U.S. Dollar liabilities. The effective
weighted average interest rate on fixed-rate obligations swapped into
floating-rate obligations was 3.42% in 1993. The Corporation's remaining
fixed-rate long-term obligations totaling $75,413 had an effective weighted
average interest rate of 10.54% in 1993.
Included in U.S. Dollar denominated variable-rate obligations are various
derivative-linked indexed instruments issued by the Corporation. Payments on
these instruments may be linked to a specific index (e.g., S&P 500) or industry
basket of stocks (e.g., telecommunications stocks). These instruments may be
exchange listed or sold privately. The Corporation hedges its exposure on these
indexed instruments through a combination of swaps and option contracts to
purchase the underlying index, or through replication of the stock portfolio.
The effective weighted average interest rates on the Corporation's U.S.
Dollar denominated variable-rate obligations and the Corporation's foreign
currency denominated variable-rate obligations were both 3.42% in 1993.
Floating interest rates are generally based on variable rates such as the London
Interbank Offered Rate ("LIBOR"), the "AA" Commercial Paper Composite Rate, U.S.
Treasury Bill Rate, or the Federal Funds Rate ("Fed Funds").
The effective weighted average interest rate on all medium-term notes was
3.59% in 1993. Maturities of medium-term notes currently range from nine months
to fifteen years from the date of issue.
Certain long-term borrowing agreements contain provisions whereby the
borrowings are redeemable at the option of the holder at specified dates prior
to maturity. Pursuant to these provisions, long-term borrowings that mature in
1995 and thereafter may be redeemed at the earliest in 1994 and 1995 in the
amounts of $373,355 and $10,000, respectively. Management believes, however,
that a significant portion of such borrowings may remain outstanding beyond
their earliest redemption date.
Subsequent to year-end 1993 and through February 22, 1994, long-term
borrowings, net of repayments and repurchases, increased in the amount of
approximately $965,698.
INCOME TAXES
Income tax provisions (benefits) on earnings before the cumulative effect of
changes in accounting principles consisted of:
- -------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------
Federal: Current $ 877,903 $435,093 $218,013
Deferred (274,517) (59,007) (51,774)
State and Local: Current 376,085 252,498 127,961
Deferred (57,760) (20,868) (7,343)
Foreign: Current 163,690 65,271 33,265
Deferred (54,952) (4,003) 1,179
---------- -------- --------
TOTAL $1,030,449 $668,984 $321,301
========== ======== ========
- -------------------------------------------------------------------
A reconciliation of the statutory Federal income tax to the Corporation's
income tax provision for earnings before the cumulative effect of accounting
changes follows:
- --------------------------------------------------------------------------
1993 1992 1991
- --------------------------------------------------------------------------
Federal income tax at
statutory rates $ 848,683 $551,272 $345,922
State and local income taxes,
net 206,911 152,876 79,607
Tax-exempt interest (16,228) (13,706) (4,142)
Dividends received deduction (8,249) (23,730) (13,378)
Foreign operations 2,704 5,636 12,370
Pension plan transaction 13,705 14,885 20,713
Alternative minimum tax, net
of credits recognized -- -- (77,508)
Utilization of net operating
loss tax benefits -- -- (42,588)
Other, net (17,077) (18,249) 305
---------- -------- --------
TOTAL $1,030,449 $668,984 $321,301
========== ======== ========
- --------------------------------------------------------------------------
The Omnibus Budget Reconciliation Act of 1993 (the "Revenue Act") was
enacted on August 10, 1993. Under the Revenue Act, the corporate statutory rate
was increased to 35.0% retroactive to January 1, 1993. The impact of this
change is included in the current year's results of operations. The adjustment
to record the retroactive increase in the corporate statutory rate was not
material.
For financial reporting purposes, the Corporation had no unrecognized net
operating loss or alternative minimum tax benefit carryforwards, at December
31, 1993.
Deferred income taxes are provided for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. These temporary differences result in taxable or
deductible amounts in future years. At December 31, 1993, the Corporation had
deferred tax assets and liabilities totaling $998,000 and $315,000,
respectively. Deferred tax assets consist principally of valuation and
liability reserves of $659,000 and deferred compensation of $91,000. Deferred
tax liabilities consist primarily of accelerated tax depreciation of $114,000,
lease transactions of $78,000 and unrealized gains on trading inventories of
$36,000. At December 31, 1993, the Corporation had a deferred tax valuation
allowance of approximately $2,500 for benefits related to losses from certain
foreign subsidiaries. During 1993, $75,150 of net income tax benefits were
allocated to stockholders' equity related to employee compensation transactions.
At December 25, 1992, the Corporation had deferred tax assets and
liabilities totaling $705,000 and $457,000, respectively. Deferred tax assets
consisted principally of valuation and liability reserves of $442,000 and
deferred compensation of $114,000. Deferred tax liabilities consisted primarily
of accelerated tax depreciation of $138,000, lease transactions of $141,000 and
unrealized gains on trading inventories of $41,000. At
57
December 25, 1992, the Corporation had no deferred tax asset valuation
allowance. In 1992, $114,487 of net income tax benefits were allocated to
stockholders' equity related to employee compensation transactions.
In 1991, the deferred Federal tax provision computed under SFAS No. 96
included tax benefits from both deferred compensation plans of $(26,000) and the
divestiture of a subsidiary of $(28,000).
Earnings before income taxes include approximately $395,000, $130,000 and
$133,000 of earnings attributable to foreign entities for 1993, 1992 and 1991,
respectively. Cumulative undistributed earnings of foreign subsidiaries
amounted to approximately $673,000, at December 31, 1993. No deferred Federal
income taxes have been provided for the undistributed earnings as these earnings
have been, and will continue to be, reinvested in the Corporation's foreign
operations. Assuming utilization of foreign tax credits, the Corporation
estimates that approximately $84,000 of Federal taxes and $32,000 of foreign
withholding taxes would be incurred on the repatriation of the foreign
subsidiaries' earnings.
REVOLVING CREDIT AGREEMENTS
The Corporation has obtained committed, unsecured revolving lines of credit
aggregating $4,680,000 under agreements with two groups of banks. There have
never been any borrowings under current or prior revolving credit agreements.
The agreements contain covenants that require, among other things, that the
Corporation maintain specified levels of net worth, as defined in the
agreements, on the date of an advance. The details of these agreements as of
December 31, 1993 are presented below:
- --------------------------------------------------------------------
1993 MATURITY
- --------------------------------------------------------------------
Committed Unsecured
Revolving Lines of Credit:
International and Regional Banks $3,455,000 1994*
Money Center Banks 1,225,000 1994**
----------
TOTAL $4,680,000
==========
- --------------------------------------------------------------------
*$935,000 expires in March 1994; $1,105,000 expires in June 1994; $1,415,000
expires in November 1994. At maturity, the Corporation may convert amounts
then borrowed, if any, into term loans which would mature in March, June and
November 1996, respectively.
**At maturity in June 1994, the Corporation may convert amounts then borrowed,
if any, into a term loan which would mature in June 1996.
REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
MLPF&S, a registered broker-dealer, is subject to the Securities and
Exchange Commission's ("SEC") Net Capital Rule 15c3-1. Under the alternative
method permitted by this rule, the minimum required net capital, as defined,
shall not be less than 2% of aggregate debit items arising from customer
transactions. At December 31, 1993, MLPF&S's regulatory net capital of
$1,178,421 was 9% of aggregate debit items, and its regulatory net capital in
excess of the minimum required was $928,951.
In addition to amounts presented in the accompanying Consolidated Balance
Sheets as cash and securities segregated for regulatory purposes or deposited
with clearing organizations, securities with a market value of $837,725,
primarily collateralizing resale agreements, have been segregated in a special
reserve bank account for the exclusive benefit of customers pursuant to the
Reserve Formula requirements of SEC Rule 15c3-3.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in
U.S. Government securities and a subsidiary of the Corporation, is subject to
the Capital Adequacy Rule of the Government Securities Act of 1986. This rule
requires dealers to maintain liquid capital in excess of market and credit risk,
as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 31, 1993,
MLGSI's liquid capital of $1,309,081 was 211% of its total market and credit
risk, and liquid capital in excess of the minimum required was $566,089.
Merrill Lynch International Limited ("MLIL") is a United Kingdom registered
broker-dealer and is subject to capital requirements of the Securities and
Futures Authority. Minimum capital as defined, must exceed total financial
resources. At December 31, 1993, MLIL's regulatory net capital was $1,317,655,
and exceeded the minimum required by $313,762.
The Corporation's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. As
of December 31, 1993, $648,663, representing 88% of the insurance subsidiaries'
net assets, was unavailable for distribution to the Corporation.
Over 40 U.S. and non-U.S. subsidiaries are subject to regulatory
requirements promulgated by the regulatory and exchange authorities of the
countries in which they operate. These regulatory restrictions may limit the
amounts that these subsidiaries dividend or advance to the Corporation. At
December 31, 1993, restricted net assets of all subsidiaries were $4,338,640.
In addition, to satisfy rating agency standards, a subsidiary of the Corporation
must also meet certain minimum capital requirements. At December 31, 1993, this
minimum capital requirement was $358,256.
There are no restrictions on the Corporation's present ability to pay
dividends on common stock, other than (a) the Corporation's obligation first to
make dividend payments on its preferred stock; and (b) the governing provisions
of the Delaware General Corporation Law.
EMPLOYEE BENEFIT PLANS
The Corporation provides retirement benefits to its employees worldwide
through defined contribution plans, a group annuity contract and international
defined benefit plans. The Corporation reserves the right to amend or terminate
these plans at any time.
DEFINED CONTRIBUTION PLANS
The U.S. defined contribution plans consist of the Retirement Accumulation
Plan ("RAP"), the Employee Stock Ownership Plan ("ESOP"), and the 401(k) Savings
& Investment Plan ("SIP"). The RAP, ESOP and SIP
58
cover substantially all U.S. employees who have met the age and/or service
requirements.
Allocations of stock held in the ESOP and cash contributions to the RAP are
made quarterly based on years of service, age and eligible compensation.
Generally, only cash contributions are deductible for income tax purposes.
In 1989, the Corporation sold 24,341,470 shares of common stock to the ESOP
trust. The ESOP trust acquired the shares with residual funds transferred from
a terminated defined benefit pension plan and loan proceeds from a subsidiary of
the Corporation.
Shares held in the ESOP resulting from cash funding are being allocated to
participants' accounts over a period of not more than eight years, ending in
1997. Shares held in the ESOP funded by the loan are allocated to participants'
accounts as principal as the loan is repaid. The loan to the ESOP trust, due
September 5, 1999, bears interest at 9.1% per annum, with principal and interest
payable quarterly upon receipt of dividends on certain shares of common stock or
other cash contributions. Interest incurred on the ESOP debt during 1993, 1992
and 1991 amounted to $4,675, $5,119 and $5,626, respectively. The 1993, 1992
and 1991 dividends on ESOP shares used for debt service amounted to $10,044,
$9,678 and $9,705, respectively.
As of December 31, 1993, 10,964,694 shares were allocated to participant
accounts since the inception of the ESOP. The unallocated portion of shares
purchased with the residual funds of $140,684 from the terminated defined
benefit pension plan, and the $46,470 outstanding loan to the ESOP trust, which
is included in employee stock transactions, are included as reductions to
stockholders' equity.
Employees can participate in the SIP by contributing, on a tax deferred
basis, up to 15% of their eligible compensation but not more than the maximum
annual amount allowed by law. The Corporation's contributions are equal to
one-half of the first 4% of each participant's eligible compensation contributed
to the SIP, up to a maximum of fifteen hundred dollars annually. No corporate
contributions are made for participants who are also Employee Stock Purchase
Plan participants.
GROUP ANNUITY CONTRACT
In the U.S., the Corporation purchased a group annuity contract from
Metropolitan Life Insurance Company ("Metropolitan") which guarantees the
payment of benefits vested under a defined benefit plan terminated in accordance
with the applicable provisions of the Employee Retirement Income Security Act of
1974. At December 31, 1993, a substantial portion of the assets of Metropolitan
supporting the annuity were invested in U.S. Government and agency securities.
The Corporation, under a supplemental agreement, may be responsible for, or
benefit from, actuarial experience and investment performance of these annuity
assets.
INTERNATIONAL DEFINED BENEFIT PLANS
Employees of certain non-U.S. subsidiaries participate in various local
plans. These pension plans provide benefits that are generally based on years
of credited service and a percentage of the employee's eligible compensation
during the final years of employment. The Corporation's funding policy has
been to contribute annually the amount necessary to satisfy local funding
standards.
PENSION PLAN COST AND FUNDED STATUS
Pension cost includes the following components:
- -------------------------------------------------------------------------
1993 1992 1991
- -------------------------------------------------------------------------
Defined benefit plans (1):
Service cost for benefits earned
during the year(2) $ 12,328 $ 11,333 $ 8,512
Interest cost on projected
benefit obligation 89,115 84,366 78,254
Actual return on plan assets (281,022) (107,549) (189,527)
Deferral and amortization of
unrecognized items 188,700 21,441 107,004
--------- --------- ---------
Total defined benefit plan cost 9,121 9,591 4,243
Defined contribution plan cost 146,148 133,264 111,904
--------- --------- ---------
Total pension cost(3) $ 155,269 $ 142,855 $ 116,147
========= ========= =========
- -------------------------------------------------------------------------
(1) The following actuarial assumptions were used in calculating the defined
benefit cost (credit) and benefit obligations. Rates as of the beginning of
the year are:
- ----------------------------------------------------
1994 1993 1992
- ----------------------------------------------------
Discount rate 6.7% 7.9% 8.0%
Rate of compensation
increase (not applicable
to terminated plan) 5.9% 6.3% 7.5%
Expected long-term
rate of return
on plan assets 6.7% 7.6% 7.6%
- ----------------------------------------------------
(2) The Corporation calculated service cost using the projected unit credit
method based on years of service to date.
(3) Total pension cost excludes supplemental retirement and other benefit plan
costs.
59
The funded status of the defined benefit plans (including the terminated plan)
follows:
- ----------------------------------------------------------------------------------------------------
1993 1992
---------------------------- ----------------------------
PENSION PLANS IN WHICH: PENSION PLANS IN WHICH:
---------------------------- ----------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEEDED BENEFITS EXCEEDED BENEFITS
ACCUMULATED EXCEEDED ACCUMULATED EXCEEDED
BENEFITS ASSETS BENEFITS ASSETS
------------ ------------ ------------ ------------
Actuarial present value of:
Vested accumulated benefit
obligation $(1,266,994) $(33,072) $(1,060,598) $(27,478)
Non-vested accumulated benefit
obligation (3,903) (4,877) (3,523) (3,663)
----------- -------- ----------- --------
Accumulated benefit obligation (1,270,897) (37,949) (1,064,121) (31,141)
Effect of assumed increase in
compensation levels (17,430) (17,309) (18,050) (15,743)
----------- -------- ----------- --------
Projected benefit obligation (1,288,327) (55,258) (1,082,171) (46,884)
Plan assets at fair value 1,445,016 12,503 1,191,834 13,162
----------- -------- ----------- --------
Plan assets in excess of (less
than) projected benefit
obligation 156,689 (42,755) 109,663 (33,722)
Unrecognized net liability at
transition 3,460 1,368 3,759 1,620
Unrecognized net (gain) loss (13,526) 13,224 17,740 5,236
Unrecognized prior service
(benefit) cost (2,833) (1,594) 2,945 (1,178)
----------- -------- ----------- --------
Prepaid (accrued) benefit cost $ 143,790 $(29,757) $ 134,107 $(28,044)
=========== ======== =========== ========
- ----------------------------------------------------------------------------------------------------
SUPPLEMENTAL RETIREMENT AND OTHER BENEFIT PLANS
The Corporation also has supplemental retirement and other benefit plans.
The unfunded projected benefit obligation was $8,959 and $7,711 in 1993 and
1992, respectively. Supplemental retirement and other benefit plan costs were
$1,469, $1,305 and $1,464 in 1993, 1992, and 1991, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Corporation provides health and life insurance benefits to retired
employees. The health care component is contributory, with retiree
contributions adjusted periodically. The life insurance component of the plan
is noncontributory. The accounting for health care anticipates future changes
in cost-sharing provisions. The Corporation reserves the right to amend or
terminate these programs at any time. Full-time employees of the Corporation
become eligible for these benefits upon attainment of age 55 and completion of
10 years of service. Prior to the adoption of SFAS No. 106 (see Accounting
Changes Note to the Consolidated Financial Statements), the cost of these
benefits was expensed as claims were paid and totaled $6,379 in 1991.
Net periodic postretirement benefit expense included the following
components:
- ----------------------------------------------------------------------------
1993 1992
- ----------------------------------------------------------------------------
Service cost $ 4,593 $ 4,144
Interest cost on accumulated postretirement benefit
obligation 11,254 10,293
------- -------
TOTAL $15,847 $14,437
======= =======
- ----------------------------------------------------------------------------
The Corporation pays claims as incurred. As of December 31, 1993, the plan
had not been funded. The amounts recognized for the Corporation's postretirement
benefit plans follow:
- ------------------------------------------------------------------
1993 1992
- ------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ (58,597) $ (61,738)
Fully eligible active plan
participants (36,769) (37,600)
Other active plan participants (42,254) (40,783)
---------- ----------
Subtotal (137,620) (140,121)
Unrecognized net gain from past
experience different from that
assumed and from changes in
assumptions (16,900) --
---------- ----------
Postretirement benefits accrued
liability $(154,520) $(140,121)
========== ==========
- ------------------------------------------------------------------
The following actuarial assumptions were used in calculating the
postretirement benefit cost and obligations. Rates as of the beginning of the
year are:
- -------------------------------------------------------------
1994 1993
- -------------------------------------------------------------
Discount rate 6.8% 8.0%
Health care cost trend rates (assumed
to decrease gradually until the year
2000 and remain constant thereafter):
Pre-65 12.0%- 14.0%-
5.5% 7.0%
Post-65 10.0%- 11.0%-
4.5% 5.0%
- -------------------------------------------------------------
The assumed health care cost trend rate has a significant effect on the
amounts reported above. Increasing the assumed trend rate by one percentage
point per year would increase the accumulated postretirement benefit obligation
as of December 31, 1993 and December 25,
60
1992 by $19,312 and $18,636, respectively, and increase the aggregate of
service and interest costs for 1993 and 1992 by $2,659 and $2,180, respectively.
POSTEMPLOYMENT BENEFITS
The Corporation provides salary, medical coverage, life insurance and
retirement benefits for employees on extended leave due to injury or illness.
The Corporation reserves the right to amend or terminate this program at any
time. The Corporation is mandated by state regulation to provide reimbursements
for medical costs, rehabilitation costs, and certain lost wages to employees in
the event of work-related illness or injury. Federal law also requires the
Corporation to offer continued medical coverage to all terminated employees for
up to 18 months. Full-time employees are eligible for all of these benefits as
of their first day of employment. The Corporation funds these benefit
requirements through a combination of self-insured and insured plans.
In 1993, the Corporation adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" (see Accounting Changes Note to the Consolidated
Financial Statements). A charge of $60,495 ($35,420 after income taxes),
representing the transition obligation, was recorded as a cumulative effect of a
change in accounting principle. Excluding the cumulative effect charge, the
adoption of SFAS No. 112 had no material effect on the Corporation's results of
operations.
EMPLOYEE STOCK PLANS
EMPLOYEE STOCK PURCHASE PLAN
The Employee Stock Purchase Plan ("ESPP") allows eligible employees to
invest from 1% to 10% of their eligible compensation, subject to certain
limitations, in the Corporation's common stock at a purchase price equal to 85%
of the fair market value of the stock on four quarterly investment dates. Stock
purchases are generally made through authorized payroll deductions. Up to
25,000,000 shares of the Corporation's common stock have been authorized for
issuance under the ESPP.
The activity in the ESPP for the two most recent fiscal years was as
follows:
- -----------------------------------------------------------
ESPP SHARES
------------------------
1993 1992
- -----------------------------------------------------------
Available, beginning of year 7,914,788 9,246,704
Authorized during the year -- --
Purchased through plan (984,432) (1,331,916)
--------- ----------
Available, end of year 6,930,356 7,914,788
========= ==========
- -----------------------------------------------------------
EQUITY CAPITAL ACCUMULATION PLAN
The Equity Capital Accumulation Plan ("ECAP") provides for grants for both
Performance and Restricted Shares to senior management and other eligible
employees who pay no cash consideration therefor. Upon grant, Restricted Shares
become issued and outstanding shares of the Corporation's common stock and are
subject to forfeiture during the established Restricted Period. A Performance
Share is deemed to be equivalent in fair market value to one share of the
Corporation's common stock and is subject to forfeiture during the established
Performance Period. Performance Shares are payable 50% in cash and 50% in the
Corporation's common stock. Payment of Restricted Shares and Performance Shares
is contingent upon continued employment for a specified period of time and, with
respect to Performance Shares, the achievement of specific performance goals.
Up to 26,200,000 shares of the Corporation's common stock have been authorized
for issuance under the ECAP. At December 31, 1993, there were 2,813,148 shares
available for issuance to employees under the ECAP, which would be reduced to
2,310,480 shares as long as the Corporation continues to have the ECAP qualify
under Rule 16b-3 of the Securities Exchange Act of 1934 ("Rule 16b-3 Qualifica-
tion").
The activity in the ECAP for the years ended December 31, 1993 and December
25, 1992 was as follows:
- -----------------------------------------------------------
PERFORMANCE
RESTRICTED SHARES SHARE GRANTS
----------------------- -----------------
1993 1992 1993 1992
- -----------------------------------------------------------
Outstanding,
beginning
of year 6,962,698 11,595,946 -- 645,000
Granted 67,638 25,540 -- --
Paid or
released
from con-
tingencies (4,795,464) (4,455,956) -- (361,200)
Forfeited (143,082) (202,832) -- (283,800)
---------- ---------- --- -------
Outstanding,
end of
year 2,091,790 6,962,698 -- --
========== ========== === =======
- -----------------------------------------------------------
FINANCIAL CONSULTANT CAPITAL ACCUMULATION AWARD PLAN
Under the Financial Consultant Capital Accumulation Award Plan and its
predecessor plans ("FCCAAP"), eligible employees are granted awards generally
based upon their prior year's performance. Payment for an award is contingent
upon continued employment for a specified period of time and is subject to
forfeiture during that period. The award is payable at the end of such period
in either common shares of the Corporation or in cash, depending on the market
value of the Corporation's common stock. A total of 20,222,830 shares of the
Corporation's common stock are authorized for issuance under the FCCAAP. Shares
of common stock issuable under the FCCAAP may only be from shares held as
treasury stock. Although the first grant is scheduled to be paid in l996, under
certain circumstances grants may be paid prior to the scheduled dates. At
December 31, 1993, there were 6,869,898 shares available for issuance under the
FCCAAP.
LONG-TERM INCENTIVE COMPENSATION PLAN
The Long-Term Incentive Compensation Plan ("Long-Term Plan") provides for
grants of Performance Shares and Units, Restricted Shares and Units, Incentive
and Nonqualified Stock Options, Stock Appreciation Rights and Other ML & Co.
Securities to certain key employ-
61
ees. Up to 80,000,000 shares of the Corporation's common stock have been
authorized for distribution under the Long-Term Plan. Performance Units,
Restricted Units and in certain circumstances Stock Appreciation Rights and
Other ML & Co. Securities are paid in cash.
Payments under the Long-Term Plan are contingent upon continued employment
for a specified period of time, and with respect to Performance Shares and
Performance Units, the achievement of specific performance goals.
Upon grant, a Performance Share is deemed to be equivalent in fair market
value to one share of the Corporation's common stock, and shares issued in
payment could be subject to a Restricted Period subsequent to the termination of
the Performance Period. Restricted Shares are shares of the Corporation's
common stock that are subject to forfeiture during a Vesting Period. Each
Performance and Restricted Unit is deemed to be equivalent in fair market value
to one share of common stock and is payable in cash at the end of the
Performance Period, or Vesting Period. Performance Shares or Restricted Shares
could be subject to a certain Restricted Period subsequent to the termination of
the Performance Period or Vesting Period. Cash amounts equal to cash dividends
payable on an equivalent number of shares of the Corporation's common stock are
payable to Restricted Unit holders and may be payable to Performance Unit and
Performance Share holders. As of December 31, 1993, there have been no grants
of Performance Shares, Performance Units, Stock Appreciation Rights, Incentive
Stock Options, or Other ML & Co. Securities under the Long-Term Plan.
The activity for Restricted Shares and Units under the Long-Term Plan for
the years ended December 31, 1993 and December 25, 1992 is presented below:
- ------------------------------------------------------------------------
RESTRICTED UNIT
RESTRICTED SHARES GRANTS
------------------------- -----------------------------
1993 1992 1993 1992
- ------------------------------------------------------------------------
Outstanding,
beginning
of year 4,918,230 6,200,802 5,083,318 6,361,934
Granted 1,720,818 1,624,776 1,765,306 1,632,832
Forfeited or
released
from con-
tingencies (4,906,894) (2,907,348) (4,950,356) (2,911,448)
---------- ---------- ---------- ----------
Outstanding,
end of year 1,732,154 4,918,230 1,898,268 5,083,318
========== ========== ========== ==========
- ------------------------------------------------------------------------
Under the Long-Term Plan, eligible employees may also be granted Incentive
and Nonqualified Stock Options to purchase shares of the Corporation's common
stock. The exercise price of Incentive Stock Options may not be less than 100%
of the fair market value of the Corporation's common stock at time of grant.
The exercise price for Nonqualified Stock Options is established at the time
of grant and cannot be less than 50% of the fair market value of a share of
common stock at the time of grant. Stock Options granted in 1989 through 1993
are exercisable in four equal installments commencing one year after the date of
grant. The Stock Options expire 10 years after their grant date.
The activity for Nonqualified Stock Options under the Long-Term Plan for the
years ended December 31, 1993 and December 25, 1992 was as follows:
- ---------------------------------------------------------
SHARES SUBJECT TO OPTION
------------------------
1993 1992
- ---------------------------------------------------------
Balance, beginning of year 27,408,324 27,280,924
Granted 5,862,666 5,440,700
Exercised (5,742,374) (4,607,822)
Forfeited or surrendered (523,845) (705,478)
---------- ----------
Balance, end of year 27,004,771 27,408,324
========== ==========
- ---------------------------------------------------------
At December 31, 1993, approximately 8,741,000 options were exercisable at
prices per share ranging from $10.6875 to $34.3750. During 1993, share prices
for the attributed fair market value of shares acquired by the exercise of
options ranged from $29.4063 to $50.4688.
At December 31, 1993, there were 34,460,360 shares available (net of shares
reserved for issuance upon exercise of options) for issuance to employees under
the Long-Term Plan. Restricted Shares forfeited by employees after October 31,
1991 (totaling 239,452 shares) have been excluded from shares available for
issuance because the Corporation has elected Rule 16b-3 Qualification for the
Long-Term Plan. In January 1994, eligible participants were granted
Nonqualified Stock Options for 4,526,300 shares. In February 1994, 1,257,827
and 1,495,645 Restricted Shares and Units, respectively, were granted to
eligible employees.
INCENTIVE EQUITY PURCHASE PLAN
The Incentive Equity Purchase Plan ("IEPP") allows selected employees to
purchase the Corporation's common stock at a price equal to the book value per
share as of the valuation date preceding the purchase date ("Book Value
Shares"). These shares may be sold back to the Corporation at the book value
per share as of the valuation date preceding the sale (adjusted for certain
non-recurring items), provided they have been held for a minimum of six months.
Alternatively, Book Value Shares may be exchanged at any time for a
specified number of freely transferable market shares, the number of which is
determined by the ratio of book value to market value at the time of purchase.
Up to 30,000,000 shares of the Corporation's common stock have been authorized
for issuance under the IEPP. At December 31, 1993, 23,788,290 shares were
available for purchase by eligible employees. Because the Corporation has
elected Rule 16b-3 Qualification for the IEPP, shares reacquired from employees
after April 25, 1991 through purchase or exchange have been excluded from total
Book Value Shares available for purchase. Book Value Shares outstanding as of
December 31, 1993 and December 25, 1992 were 1,464,900 and 1,530,800,
respectively.
62
MANAGEMENT CAPITAL ACCUMULATION PLAN
Under the Management Capital Accumulation Plan ("MCAP"), eligible retail
management employees are granted MCAP Units. MCAP Units are equivalent to, and
payable in, shares of the Corporation's common stock. Payment of MCAP Units is
contingent upon continued employment for a specified period of time and is
subject to forfeiture during this period. During this period, MCAP Units are
credited with an amount equal to cash dividends payable on an equivalent
number of shares of the Corporation's common stock. Such dividend equivalents
are converted into additional MCAP Units. A total of 4,000,000 shares of the
Corporation's common stock are authorized for issuance under the MCAP. Shares
of common stock issued under the MCAP may only be from shares held as treasury
stock. At December 31, 1993, there were 1,920,498 shares available for
issuance to employees under the MCAP. At December 31, 1993, there were no
MCAP Units outstanding. At December 25, 1992, 712,800 MCAP Units were
outstanding.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Corporation operates in all major global financial markets and, as such,
enters into transactions involving a wide variety of financial instruments
that have both on- and off-balance-sheet implications. These financial
instruments, often referred to as "derivatives," are represented by a
contractual agreement and include financial futures, forward contracts,
options, and interest rate, currency, and equity-linked swaps, including swap
options, caps, collars and floors.
The Corporation uses derivatives in conjunction with on-balance-sheet
financial instruments to facilitate customer transactions, to manage its own
interest rate, currency and market risk, and to meet trading and financing
needs. Derivative contracts often involve future commitments to swap interest
payment streams, to purchase or sell other financial instruments (including
mortgage-backed securities) at specified terms on a specified date, or to
exchange currencies. In addition, the Corporation purchases and writes options
on a wide range of financial instruments such as securities, currencies, futures
and various market indices. (See the "Derivative Financial Instruments" section
of Management's Discussion and Analysis-unaudited.)
Transactions involving derivative financial instruments may contain both
market and credit risk in excess of amounts recognized in the Consolidated
Balance Sheets.
MARKET RISK
Market risk is the potential change in value caused by movements in interest
rates, foreign exchange rates or market prices of the underlying financial
instrument. Market risk is also caused by volatility and illiquidity in the
markets in which financial instruments are traded.
The notional or contractual amounts of derivative financial instruments
provide only a measure of involvement in these types of transactions and do not
represent the amounts subject to market risk. In many cases, these financial
instruments limit the Corporation's exposure to losses from market risk by
hedging other on- or off-balance-sheet transactions. The Corporation seeks to
control market risk by developing and refining hedging strategies that correlate
price and currency movements of trading inventories and related hedges.
The notional or contractual amounts of these instruments are set forth
below:
- ----------------------------------------------
NOTIONAL OR
CONTRACTUAL AMOUNT
------------------
(In Billions) 1993 1992
- ----------------------------------------------
Forward Contracts:
Securities(1) $ 53 $ 33
Foreign Exchange(2) 101 72
Securities Futures Contracts(3) 105 190
Swap Agreements:(4)
U.S. Dollar 360 224
Non-Dollar 200 133
Options Written:
Securities 48 17
Foreign Exchange 24 27
- ----------------------------------------------
(1) Represents purchases of $29 and sales of $24 in 1993 and purchases of $17
and sales of $16 in 1992.
(2) Represents purchases of $50 and sales of $51 in 1993 and purchases of $34
and sales of $38 in 1992.
(3) Represents purchases of $30 and sales of $75 in 1993 and purchases of $151
and sales of $39 in 1992.
(4) Includes swap options, caps, collars and floors.
The majority of the Corporation's off-balance-sheet transactions are
short-term in duration with a weighted average maturity of approximately 2.62
years as of December 31, 1993 and 2.21 years as of December 25, 1992. The
remaining maturities for notional or contractual amounts outstanding for swaps
and other derivatives follow:
[GRAPHIC NO. 3 TO APPEAR HERE]
63
In addition to futures, forward, swap and option contracts, the Corporation
enters into commitments to sell securities not yet purchased which are recorded
as liabilities on the Consolidated Balance Sheets. The Corporation is exposed
to off-balance-sheet risk that potential market price increases will cause the
ultimate obligations under these commitments to exceed the amount recognized on
the balance sheet.
CREDIT RISK
Credit risk is the amount of accounting loss that the Corporation would
incur if a counterparty failed to perform its obligations under contractual
terms and the collateral held was deemed worthless. The Corporation has controls
in place to monitor credit exposures by limiting transactions with specific
counterparties and assessing the future creditworthiness of counterparties.
The Corporation also seeks to control credit risk by following an
established credit approval process, monitoring credit limits, and by requiring
collateral where appropriate. Certain contracts require counterparties to
pledge collateral at the onset of the transaction or when certain credit
sensitive provisions are triggered during the life of the transaction.
Collateral usually is in the form of cash, U.S. Government and government
agency securities, medium-term notes or asset-backed securities, depending upon
the nature of the transaction. Collateral exposures are monitored and
collateral levels and transaction limits are adjusted, as appropriate, to
minimize risk. The Corporation also seeks to limit its credit exposure through
the use of legally enforceable master netting agreements. These agreements
provide for the net settlement of covered contracts with the same counterparty
in the event of default or early termination.
The notional or contractual values of financial futures, forward contracts
and swap agreements do not represent exposure to credit risk, which is limited
to the current cost of replacing those contracts in a gain position (i.e., the
accounting loss). For futures contracts, the Corporation usually does not
intend to take or make physical delivery of the underlying security, asset, or
index. Since futures contracts require daily cash settlement, the related risk
of accounting loss at any given time is limited to a one-day net positive change
in market value. The replacement cost for purchased option contracts in a gain
position, or for written option contracts in a loss position, is recorded
separately as an asset or a liability, respectively. Realized and unrealized
gains and losses on forward contracts and swaps and other derivatives used for
trading and hedging purposes are recognized currently in principal transactions
revenues. The net unrealized gain or loss on these contracts is included in the
Consolidated Balance Sheets.
Beginning in 1994, however, the Corporation is required to present
unrealized gains as assets and unrealized losses as liabilities separately on
the Consolidated Balance Sheets in accordance with Financial Accounting
Standards Board Interpretation No. 39 ("Interpretation No. 39"), "Offsetting of
Amounts Related to Certain Contracts." Interpretation No. 39 allows the
offsetting of unrealized gains and losses for swap, forward and other similar
exchange or conditional type contracts executed with the same counterparty
covered by a legally enforceable master netting agreement.
The replacement cost not recorded on the Consolidated Balance Sheet at
December 31, 1993 that would have been recorded under Interpretation No. 39 is
summarized as follows:
- ----------------------------------------------------------------------
FORWARD SWAP
(In Millions) CONTRACTS AGREEMENTS
- ----------------------------------------------------------------------
Replacement cost of contracts
in a gain position $ 952 $ 6,483
Less: (liabilities) assets recorded
on the consolidated balance sheet (6) 735
----- -------
Credit exposure not recorded on
the consolidated balance sheet $ 958 $ 5,748
===== =======
- ----------------------------------------------------------------------
At December 25, 1992, the replacement cost for forward contracts and swap
agreements in a gain position was $1,227,000 and $3,396,000, respectively.
To reduce credit risk, the Corporation requires collateral on certain
derivative financial instrument transactions, consisting principally of U.S.
Government and agency securities. Presented below is a summary of counterparty
credit ratings for the replacement cost (net of $564,000 collateral) of
contracts in a gain position. At December 31, 1993, 94% of such contracts were
with investment grade counterparties.
[GRAPHIC NO. 4 TO APPEAR HERE]
In the normal course of business, the Corporation executes, settles and
finances various customer securities and commodity transactions. These
transactions include the purchase and sale (including "short sales") of
securities, the writing of options, and the purchase and sale of commodity and
financial futures contracts. These activities may expose the Corporation to
off-balance-sheet risk arising from the potential that customers or
counterparties may fail to satisfy their obligations and the collateral will be
insufficient. In these situations, the Corporation
64
may be required to purchase or sell financial instruments at unfavorable market
prices to satisfy obligations to its customers or counterparties. The
Corporation seeks to control the risks associated with its customer activities
by requiring customers to maintain margin collateral in compliance with
regulatory and internal guidelines.
The Corporation also borrows and lends securities to finance securities
transactions and to facilitate the settlement process, utilizing both securities
owned by the Corporation and securities owned by customers collateralizing
margin debt. In addition, security transactions are financed through
collateralized resale and repurchase agreements.
The Corporation enters into resale agreements, generally collateralized by
U.S. Government and government agency securities, medium-term notes or
asset-backed securities with a market value in excess of the Corporation's
receivable under the contract. For repurchase agreements, the Corporation
provides collateral to counterparties with a market value in excess of the
Corporation's obligation under the contract.
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed to receive) are recorded at the amount for which the
securities were acquired and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed to receive, the
Corporation may purchase the underlying security in the market and seek
reimbursement for losses from the counterparty.
The market value of securities owned by the Corporation that have been
loaned or were collateralizing either repurchase agreements or obligations
associated with various settlement processes at December 31, 1993 and December
25, 1992, was $45,373,000 and $20,492,000, respectively.
The Corporation, in the normal course of business, enters into commitments
to extend credit, predominantly at floating interest rates, in connection with
certain merchant banking transactions and to provide customers with lines of
credit collateralized by first and second mortgages on real estate or certain
liquid assets of small businesses. The Corporation also issues various
guarantees to counterparties in connection with certain leasing, securitization,
and other transactions. Such commitments and guarantees expose the Corporation
to off-balance-sheet credit risk. These commitments and guarantees, which
usually have a fixed expiration date, are contingent on certain contractual
conditions and may require the payment of a fee by the counterparty. Once
commitments are drawn upon or guarantees are issued, the Corporation may require
the counterparty to post collateral depending upon the creditworthiness of the
counterparty and market conditions. The contractual amounts of these
commitments and guarantees represent the amounts at risk should the contract be
fully drawn upon, the client default and the value of the existing collateral
become worthless.
The total amount of outstanding commitments and guarantees may not represent
future cash requirements as commitments may expire without being drawn upon. As
of December 31, 1993 and December 25, 1992, the Corporation was committed to
extend credit of $1,248,000 and $1,072,000, respectively. As of December 31,
1993 and December 25, 1992, the Corporation had outstanding guarantees
totaling $587,000 and $631,000, respectively. The fair value of these
outstanding guarantees was $39,000 at year-end 1993 and $43,000 at year-end
1992.
CONCENTRATIONS OF CREDIT RISK
The Corporation provides brokerage, investment, financing, insurance and
related services to a diverse group of domestic and foreign clients which
include governments, corporations, and institutional and individual investors.
As a market-maker, the Corporation takes principal positions in domestic and
foreign governments and corporate obligations.
The Corporation's exposure to credit risk associated with these transactions
is measured on an individual counterparty basis, as well as by groups of
counterparties that share similar attributes. Concentrations of credit risk can
be affected by changes in geographic, industry or economic factors. To
alleviate the potential for risk concentration, credit limits are established
and continually monitored in light of changing counterparty and market
conditions.
At December 31, 1993, the Corporation's most significant concentration of
credit risk is with the U.S. Government and its agencies. This concentration
arises from trading and investment securities owned. Total holdings of U.S.
Government and agency securities, were $8,533,000 or 6% of total assets at
December 31, 1993.
At December 31, 1993, the Corporation had concentrations of credit risk with
other counterparties including an Asian and a European sovereign both rated
AA+ or above by Standard and Poor's or Aa1 or above by Moody's. In addition,
the Corporation had a concentration of credit risk in short-term debt of a Latin
American sovereign predominantly rated A-1+ by Standard and Poor's. The total
exposure to these counterparties, excluding collateral held, was $3,498,000 or
2% of total assets.
In addition to these specific exposures, the Corporation's most significant
industry concentration is domestic and foreign financial institutions. These
financial institutions include other brokers and dealers, commercial banks,
insurance companies, and mutual funds. This concentration arises in the normal
course of the Corporation's brokerage, trading, financing and underwriting
activities. In connection with its mortgage trading activities, the Corporation
had resale agreements totaling $3,400,000 with mortgage bankers, banks, and
thrifts at December 31, 1993. These agreements were collateralized by whole
loans with a market value of $3,800,000.
The Corporation's credit exposure relates to the risk of non-performance by
customers or counterparties in fulfilling their contractual obligations, and can
be directly influenced by volatile or illiquid trading markets. The Corporation
attempts to minimize credit risk associated with these activities by monitoring
customer/counterparty credit exposure and collateral values daily and requiring
additional collateral to be deposited with or returned to the Corporation when
deemed necessary. Additionally, the Corporation monitors regional expo-
65
sures worldwide. Within these regions, sovereign governments represent the most
significant concentration, followed by financial institutions, non-financial
institutions and individuals.
In conjunction with its investment and merchant banking activities, the
Corporation, from time to time, provides short-term bridge financing and other
extensions of credit and equity investments to facilitate leveraged
transactions. In the normal course of its business, the Corporation also
purchases, sells and makes markets in non-investment grade securities.
Non-investment grade securities have been defined as debt and preferred equity
securities which are rated by Standard and Poor's as BB+ or lower and by Moody's
as Ba1 or lower (or equivalent ratings for other instruments and non-U.S.
securities), certain sovereign debt issued by emerging market countries, amounts
due under various derivative contracts from non-investment grade counterparties,
as well as non-rated securities which in the opinion of management are
non-investment grade.
These activities expose the Corporation to a higher degree of credit risk
than is associated with investing, extending credit, underwriting and trading in
investment grade instruments. At December 31, 1993, the Corporation's aggregate
exposure to credit risk (both on- and off-balance-sheet) associated with
non-investment grade securities, high-yield financings and highly leveraged
transactions amounted to $4,721,000. (See "Non-Investment Grade Holdings and
Highly Leveraged Transactions" included in Management's Discussion and
Analysis-unaudited.)
COMMITMENTS AND CONTINGENCIES
LEASES
The Corporation has entered into various noncancelable long-term lease
agreements for premises and equipment that expire through 2024 including the
World Financial Center headquarters ("WFC"). The Corporation has also
entered into various noncancelable short-term lease agreements which are
primarily monthly commitments of less than one year under equipment leases.
Future minimum rental commitments with initial or remaining noncancelable
lease terms exceeding one year are presented below:
- ---------------------------------------------------
WFC OTHER TOTAL
- ---------------------------------------------------
Minimum Rental
Commitments:
1994 $ 124,040 $172,108 $ 296,148
1995 $ 124,553 $165,941 $ 290,494
1996 $ 125,409 $149,906 $ 275,315
1997 $ 125,580 $131,209 $ 256,789
1998 $ 129,766 $115,248 $ 245,014
Thereafter $2,446,263 $639,567 $3,085,830
- ---------------------------------------------------
Total minimum rental commitments have not been reduced by $956,858 of
minimum sublease rentals to be received in the future under noncancelable
subleases.
OTHER COMMITMENTS
In the normal course of business, the Corporation enters into when-issued
transactions and underwriting commitments. Settlement of these transactions as
of December 31, 1993, would not have a material effect on the consolidated
financial condition of the Corporation.
In the normal course of business, the Corporation obtains letters of credit
to satisfy various collateral requirements in lieu of the Corporation depositing
securities or cash. A standby letter of credit represents the guarantee of an
obligation to a beneficiary on the part of an issuer. Letters of credit
aggregated $2,667,000 at December 31, 1993.
The Corporation provides an investment certificate program for all Financial
Consultants. Under this program Financial Consultants meeting minimum
production and asset gathering criteria are issued investment certificates with
a face amount of $100. Such certificates mature 10 years from date issued and
are payable if certain performance requirements are achieved. Failure to
achieve such performance requirements and to be continuously employed by the
Corporation for the 10-year period results (with certain exceptions) in the
certificates expiring. The certificates bear interest commencing with the date
the requirements are achieved. Financial Consultants who do not initially meet
the eligibility requirements become eligible to receive similar certificates
upon meeting such requirements. As of December 31, 1993, the Corporation had
$102,798 accrued under this plan.
The Corporation has service agreements with providers of communications and
data processing services. Under the terms of these agreements, the Corporation
receives various communications and market data services. As of December 31,
1993, minimum fee commitments under these contracts aggregated $96,400.
LITIGATION
There are numerous civil actions, arbitration proceedings and claims pending
against the Corporation as of December 31, 1993, some of which involve claims
for substantial amounts. Although the ultimate outcome of these matters 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 matters will not have a material adverse effect on the consolidated
financial statements of the Corporation. Item 3, "Legal Proceedings," in the
Corporation's 1993 Annual Report on Form 10-K, which is unaudited and
available upon request, contains additional information concerning pending
lawsuits.
INDUSTRY AND GLOBAL OPERATIONS
The Corporation operates principally in the financial services industry and
services individual and institutional clients. These services, due to certain
legal requirements, are conducted through various subsidiaries including those
operating as brokers and dealers, insurance companies, and banks.
The Corporation operates in both international and domestic markets. The
Corporation's international
66
business activities operate through regional offices in the Americas, including
Latin America and Canada; Europe and the Middle East; and Asia/Pacific, which
includes Japan, the Asia Pacific Region and Australia. In Canada, the
Corporation is a broker for securities and commodities and a market-maker for
bonds and money market instruments. The Corporation also provides investment
banking and research for Canadian clients. The Latin American region provides
international banking, brokerage and trust services and has been instrumental
in the privatization of many Latin American companies. Europe and Middle
Eastern operations offer international investment and private banking
services, research, and dealer services in Eurobonds, derivatives, equity and
fixed-income securities, futures, commodity contracts, and options.
The Corporation's Asia/Pacific operations conduct business throughout
various countries including Japan, Hong Kong, Singapore, Australia, and China.
The Corporation has exchange memberships in Tokyo, Hong Kong, Sydney, and
Singapore. Traditional retail and institutional services are provided in
virtually all locations.
Although no one method of allocating revenues, expenses, and assets is
completely precise, the principal methodology used in preparing the
international data set forth below includes the following: (i) commission
revenues are recorded at the location of the sales force; (ii) trading revenues
are principally recorded at the location of the trader; (iii) investment banking
revenues are recorded at the location of the client; and (iv) asset management
and portfolio service fees are recorded at the location of the fund manager.
Earnings before income taxes include the allocation of certain shared expenses
among regions. The information presented below, in management's judgment,
provides a reasonable representation of each region's contribution to the
consolidated amounts.
- -------------------------------------------------------------------------------
GLOBAL
OPERATIONS 1993 1992 1991 1993 1992 1991
- -------------------------------------------------------------------------------
(IN MILLIONS) TOTAL REVENUES NET REVENUES
Canada and
Latin America $ 526 $ 378 $ 238 $ 377 $ 259 $ 184
Europe and
Middle East 3,111 1,867 1,304 1,358 953 772
Asia/Pacific 879 374 335 683 309 273
------- ------- ------- ------- ------- -------
Subtotal 4,516 2,619 1,877 2,418 1,521 1,229
United States 13,475 11,685 11,136 9,309 7,833 6,512
Eliminations (1,403) (891) (660) (1,169) (777) (495)
------- ------- ------- ------- ------- -------
TOTAL $16,588 $13,413 $12,353 $10,558 $ 8,577 $ 7,246
======= ======= ======= ======= ======= =======
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EARNINGS BEFORE
INCOME TAXES TOTAL ASSETS
Canada and
Latin America $ 139 $ 89 $ 67 $ 5,658 $ 2,145 $ 1,076
Europe and
Middle East 481 181 100 37,107 15,645 9,999
Asia/Pacific 191 (3) 12 8,546 2,865 1,569
------- ------- ------- -------- -------- -------
Subtotal 811 267 179 51,311 20,655 12,644
United States 1,614 1,354 838 106,132 88,835 76,635
Eliminations - - - (4,533) (2,466) (3,020)
------- ------- ------- -------- -------- -------
TOTAL $ 2,425 $ 1,621 $ 1,017 $152,910 $107,024 $86,259
======= ======= ======= ======== ======== =======
- -------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MERRILL LYNCH & CO., INC.:
We have audited the accompanying consolidated balance sheets of Merrill
Lynch & Co., Inc. and subsidiaries as of December 31, 1993 and December 25,
1992 and the related statements of consolidated earnings, changes in
consolidated stockholders' equity and consolidated cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Corporation and its
subsidiaries at December 31, 1993 and December 25, 1992, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in the note to the consolidated financial statements entitled,
"Accounting Changes," in 1993 the Corporation and its subsidiaries changed their
method of accounting for postemployment benefits and their method of accounting
for certain investments in debt and equity securities to conform with Statements
of Financial Accounting Standards No. 112 and No. 115, respectively, and in
1992 changed their method of accounting for postretirement benefits other than
pensions and their method of accounting for income taxes to conform with
Statements of Financial Accounting Standards No. 106 and No. 109,
respectively.
/s/ Deloitte and Touche
New York, New York
February 28, 1994
67
FIVE-YEAR FINANCIAL SUMMARY
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended Last Friday in December
-------------------------------------------------------------------------------------------
(Dollars in Thousands) 1989 1990 1991 1992 1993
- ------------------------------------------------------------------------------------------------------------------------------------
REVENUES (52 Weeks) (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks)
COMMISSIONS
Listed securities $ 988,801 8.8% $ 840,650 7.6% $1,064,977 8.6% $1,147,142 8.6% $1,408,943 8.5%
Mutual funds 321,889 2.8 389,524 3.5 519,089 4.2 667,519 5.0 846,213 5.1
Money market instruments 187,159 1.7 189,963 1.7 175,980 1.4 190,525 1.4 165,028 1.0
Other 346,964 3.1 349,017 3.1 406,255 3.3 416,898 3.1 474,044 2.9
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
Total 1,844,813 16.4 1,769,154 15.9 2,166,301 17.5 2,422,084 18.1 2,894,228 17.5
INTEREST AND DIVIDENDS 5,859,767 52.0 5,944,706 53.3 5,761,061 46.7 5,806,710 43.3 7,099,155 42.8
PRINCIPAL TRANSACTIONS
Fixed-income and foreign exchange 866,296 7.7 1,146,974 10.3 1,410,165 11.4 1,631,641 12.1 2,176,427 13.1
Equities 383,142 3.4 312,007 2.8 495,563 4.0 534,084 4.0 744,012 4.5
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
Total 1,249,438 11.1 1,458,981 13.1 1,905,728 15.4 2,165,725 16.1 2,920,439 17.6
INVESTMENT BANKING
Underwriting 737,983 6.5 534,835 4.8 1,020,310 8.2 1,308,787 9.8 1,646,960 9.9
Strategic services 357,896 3.2 260,609 2.3 155,682 1.3 175,280 1.3 184,293 1.1
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
Total 1,095,879 9.7 795,444 7.1 1,175,992 9.5 1,484,067 11.1 1,831,253 11.0
ASSET MANAGEMENT AND PORTFOLIO SERVICE
FEES 676,482 6.0 815,739 7.3 1,003,904 8.1 1,252,829 9.3 1,557,778 9.4
OTHER 546,844 4.8 363,205 3.3 339,826 2.8 281,253 2.1 285,324 1.7
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
TOTAL REVENUES 11,273,223 100.0 11,147,229 100.0 12,352,812 100.0 13,412,668 100.0 16,588,177 100.0
INTEREST EXPENSE 5,371,028 47.6 5,363,900 48.1 5,106,344 41.3 4,835,267 36.0 6,029,947 36.4
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
NET REVENUES 5,902,195 52.4 5,783,329 51.9 7,246,468 58.7 8,577,401 64.0 10,558,230 63.6
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
NON-INTEREST
EXPENSES
Compensation and benefits 3,084,028 52.3 3,077,485 53.2 3,867,849 53.4 4,364,454 50.9 5,255,258 49.8
Occupancy 487,928 8.3 519,156 9.0 473,562 6.5 477,754 5.6 572,936 5.4
Communications and equipment rental 445,457 7.5 375,432 6.5 356,850 4.9 366,161 4.3 385,809 3.6
Depreciation and amortization 290,089 4.9 289,361 5.0 276,125 3.8 281,228 3.3 308,499 2.9
Advertising and market development 247,775 4.2 225,712 3.9 249,844 3.5 301,146 3.5 376,881 3.6
Professional fees 249,710 4.2 233,565 4.0 235,344 3.3 256,887 3.0 290,324 2.7
Brokerage, clearing and exchange fees 229,940 3.9 234,031 4.1 239,828 3.3 277,166 3.2 280,712 2.7
Other 555,654 9.4 546,259 9.4 529,648 7.3 631,216 7.3 663,003 6.3
Provision for restructuring 470,000 8.0 -- -- -- -- -- -- -- --
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
TOTAL NON-INTEREST EXPENSES 6,060,581 102.7 5,501,001 95.1 6,229,050 86.0 6,956,012 81.1 8,133,422 77.0
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
EARNINGS (LOSS) BEFORE INCOME TAXES,
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES AND DISCONTINUED
OPERATIONS (158,386) (2.7) 282,328 4.9 1,017,418 14.0 1,621,389 18.9 2,424,808 23.0
Income Tax Expense 58,980 1.0 90,472 1.6 321,301 4.4 668,984 7.8 1,030,449 9.8
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING PRINCIPLES AND
DISCONTINUED OPERATIONS (217,366) (3.7) 191,856 3.3 696,117 9.6 952,405 11.1 1,394,359 13.2
Cumulative Effect of Changes in
Accounting Principles, Net of Income
Taxes -- -- -- -- -- -- (58,580) (.7) (35,420) (.3)
Discontinued Operations, Net of Income
Taxes 3,981 0.1 -- -- -- -- -- -- -- --
---------- ---- --------- ---- ---------- ---- ---------- ---- ---------- ----
NET EARNINGS (LOSS) $(213,385) (3.6)% $ 191,856 3.3% $ 696,117 9.6% $ 893,825 10.4% $1,358,939 12.9%
========== ==== ========= ==== ========== ==== ========== ==== ========== ====
- ------------------------------------------------------------------------------------------------------------------------------------
*Revenues and Interest Expense are presented as a percentage of Total Revenues.
Non-Interest Expenses, Cumulative Effect of Changes in Accounting Principles,
Discontinued Operations and Earnings are presented as a percentage of Net
Revenues.
68
QUARTERLY INFORMATION
Presented below are the unaudited results of operations of the Corporation by
quarter for 1993 and 1992. Quarterly information includes certain financial
statement reclassifications and adjustments for the two-for-one common stock
split. The first quarter of 1993 has been restated for the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 112. Quarterly
results for 1992 include the adoption of SFAS No. 106 and SFAS No. 109 (see
Accounting Changes Note to the Consolidated Financial Statements). The
quarterly information is prepared in conformity with generally accepted
accounting principles and reflects all adjustments (which consist of only normal
recurring adjustments except as noted above, and a non-recurring $103,000 1993
first quarter pretax lease charge related to the Corporation's decision not to
occupy certain floors at its headquarters facility) that are, in the opinion of
management, necessary for a fair presentation of the results of operations for
the periods presented. The nature of the Corporation's business is such that
the results of an interim period are not necessarily indicative of results for a
full year.
- ---------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Dec. 31, Sept. 24, June 25, Mar. 26, Dec. 25, Sept. 25, June 26, Mar. 27,
Except Per Share Amounts) 1993 1993 1993 1993 1992 1992 1992 1992
- ---------------------------------------------------------------------------------------------------------------------------------
(14 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (13 weeks)
Total Revenues $4,526,136 $4,140,048 $3,963,009 $3,958,984 $3,263,718 $3,385,910 $3,352,714 $3,410,326
Interest Expense 1,768,139 1,506,428 1,408,512 1,346,868 1,186,796 1,230,231 1,226,347 1,191,893
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Revenues 2,757,997 2,633,620 2,554,497 2,612,116 2,076,922 2,155,679 2,126,367 2,218,433
Non-Interest Expenses 2,160,717 1,991,321 1,959,589 2,021,795 1,715,817 1,761,387 1,736,316 1,742,492
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes and
Cumulative Effect of Changes in
Accounting Principles 597,280 642,299 594,908 590,321 361,105 394,292 390,051 475,941
Income Tax Expense 250,041 282,612 249,861 247,935 139,664 165,603 163,821 199,896
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Cumulative Effect
of Changes in Accounting
Principles 347,239 359,687 345,047 342,386 221,441 228,689 226,230 276,045
Cumulative Effect of Changes in
Accounting Principles (Net of
Applicable Income Taxes) -- -- -- (35,420) -- -- -- (58,580)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Earnings $ 347,239 $ 359,687 $ 345,047 $ 306,966 $ 221,441 $ 228,689 $ 226,230 $ 217,465
========== ========== ========== ========== ========== ========== ========== ==========
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings Per Common Share:
Primary $ 1.53 $ 1.57 $ 1.52 $ 1.35 $ .99 $ 1.02 $ .99 $ .93
========== ========== ========== ========== ========== ========== ========== ==========
Fully Diluted $ 1.53 $ 1.56 $ 1.51 $ 1.35 $ .98 $ 1.02 $ .99 $ .93
========== ========== ========== ========== ========== ========== ========== ==========
The 1993 and 1992 first quarters include the cumulative effect of changes in
accounting principles of $(.16) and $(.26) per common share primary and fully
diluted, respectively.
Earnings per common share have been restated for the two-for-one common stock
split (see Stockholders' Equity Note to the Consolidated Financial Statements).
DIVIDENDS PER COMMON SHARE
(declared and paid)
- --------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD. QTR. 4TH QTR.
- --------------------------------------------------------------
1993 $.15 $.175 $.175 $.20
- --------------------------------------------------------------
1992 $.125 $.15 $.15 $.15
- --------------------------------------------------------------
Dividends per common share amounts give effect to the two-for-one common stock
split (see Stockholders' Equity Note to the Consolidated Financial Statements).
There are no restrictions on the Corporation's present ability to pay
dividends on common stock, other than (a) the Corporation's obligation first
to make dividend payments on its preferred stock and (b) the governing
provisions of the Delaware General Corporation Law. Certain subsidiaries'
ability to declare dividends may also be limited as described in the Regulatory
Requirements and Dividends Restrictions Note to the Consolidated Financial
Statements.
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified calendar
quarters are noted below. Prices have been restated for the two-for-one
common stock split as described in the Notes to Consolidated Financial
Statements.
- -----------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- -----------------------------------------------------------------------------------
1993 $37 1/16 $28 $40 15/16 $33 5/8 $50 7/8 $39 9/16 $51 3/16 $41 3/4
- -----------------------------------------------------------------------------------
1992 $33 3/8 $26 3/4 $27 15/16 $22 3/16 $26 7/8 $24 $31 3/8 $23 1/8
- -----------------------------------------------------------------------------------
The approximate number of record holders of common stock as of February 4, 1994
was 12,600.
69
GRAPHICS APPENDIX LIST
----------------------
Page Where
Graphic
Appears DESCRIPTION OF GRAPHIC
- -------------------------------------------------------------------------------
Graphic No. 1 The graph is entitled "NET REVENUE CATEGORIES AND
COMPENSATION AND BENEFITS"
Presented is a bar graph comparing Merrill Lynch & Co.,
Inc.'s net revenue categories with compensation and
benefits expense levels for the past five years. Graph is
presented in billions with net revenues comprised of
commissions, principal transactions, investment banking,
asset management and portfolio service fees, net interest,
and other. The graph shows total net revenues of $5.9,
$5.8, $7.2, $8.6, and $10.6 for year-end 1989 through
1993, respectively, and compensation and benefits of $3.1,
$3.1, $3.9, $4.4, and $5.3 for 1989 through 1993,
respectively.
- -------------------------------------------------------------------------------
Graphic No. 2 The graph is entitled "FEE-BASED REVENUES AS A PERCENTAGE
OF FIXED AND SEMI-FIXED EXPENSES"
Presented is a bar graph showing Merrill Lynch & Co.,
Inc's fee-based revenues as a percentage of fixed and
semi-fixed expenses. The graph is presented in millions
with fixed and semi-fixed expenses of $3,507, $3,392,
$3,338, $3,656, and $4,103 for 1989 through 1993,
respectively. Fee-based revenues as a percentage of fixed
and semi-fixed expenses are 37%, 43%, 51%, 55%, and 59%
for 1989 through 1993, respectively.
- -------------------------------------------------------------------------------
Graphic No. 3 The graph is entitled "REMAINING MATURITIES OF SWAPS AND
DERIVATIVES"
Presented is a bar graph showing Merrill Lynch & Co.,
Inc.'s remaining maturities of swaps and derivatives. The
graph is presented in billions with swap and derivatives
comprised of swaps, forward contracts, futures contracts,
and options written, which, in the aggregate total $891,
$508, $389, $297, $215, $132, $102, and $73 for December
1993 through 1999, and after 1999, respectively.
- -------------------------------------------------------------------------------
Graphic No. 4 The graph is entitled "CREDIT QUALITY OF SWAPS AND
DERIVATIVES COUNTERPARTIES"
Presented is a bar graph showing Merrill Lynch & Co.,
Inc.'s credit quality of swaps and derivatives
counterparties. The graph is presented in millions with
swaps and derivatives comprised of swaps and forward
contracts totaling $901, $392, $1,994, $1,285, $1,114,
$761, $270, and $154 in total for AAA (rating agency
equivalent), AA+/AA, AA-, A+/A-, A-, BBB, BB+, and other,
respectively.