SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 1994
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COMMISSION FILE NUMBER 1-7182
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MERRILL LYNCH & CO., INC.
- - -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- - -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WORLD FINANCIAL CENTER, NORTH TOWER,
NEW YORK, NEW YORK 10281-1332
- - -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
- - -------------------------------------------------------------------------------
Registrant's telephone number, including area code
- - -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
- - -------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
199,708,457 shares of Common Stock*
(as of the close of business on May 6, 1994)
* Does not include 7,742,069 unallocated shares held in the Employee Stock
Ownership Plan that are not considered outstanding for accounting purposes.
Part I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------- PERCENT
APRIL 1, MARCH 26, INCREASE
(In Thousands, Except Per Share Amounts) 1994 1993 (DECREASE)
------------ ------------- ----------
REVENUES
Commissions................................ $ 868,244 $ 721,740 20%
Interest and dividends..................... 2,199,536 1,602,455 37
Principal transactions..................... 666,677 761,440 (12)
Investment banking......................... 444,395 445,356 -
Asset management and portfolio
service fees.............................. 444,228 360,823 23
Other...................................... 115,731 67,170 72
---------- ---------- ---------
Total Revenues............................. 4,738,811 3,958,984 20
Interest Expense......................... 1,906,983 1,346,868 42
---------- ---------- ---------
Net Revenues............................... 2,831,828 2,612,116 8
---------- ---------- ---------
NON-INTEREST EXPENSES
Compensation and benefits.................. 1,430,517 1,264,292 13
Occupancy.................................. 113,008 223,311 (49)
Communications and equipment rental........ 103,524 93,792 10
Depreciation and amortization.............. 74,171 69,898 6
Advertising and market development......... 98,605 81,053 22
Professional fees.......................... 94,077 60,202 56
Brokerage, clearing, and exchange fees..... 86,490 70,099 23
Other...................................... 179,228 159,148 13
---------- ---------- ---------
Total Non-Interest Expenses................ 2,179,620 2,021,795 8
---------- ---------- ---------
EARNINGS BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 652,208 590,321 10
Income tax expense......................... 280,449 247,935 13
---------- ---------- ---------
EARNINGS BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE............ 371,759 342,386 9
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF
$25,075 APPLICABLE INCOME TAXES).......... - (35,420) N/M
---------- ---------- ---------
NET EARNINGS............................... $ 371,759 $ 306,966 21%
========== ========== =========
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS.............................. $ 370,423 $ 305,570
========== ==========
PRIMARY EARNINGS PER COMMON SHARE:
Earnings Before Cumulative Effect
of Change in Accounting Principle....... $ 1.68 $ 1.51
Cumulative Effect of Change in
Accounting Principle.................... - (.16)
---------- ----------
NET EARNINGS............................... $ 1.68 $ 1.35
========== ==========
FULLY DILUTED EARNINGS PER COMMON SHARE:
Earnings Before Cumulative Effect
of Change in Accounting Principle....... $ 1.68 $ 1.51
Cumulative Effect of Change in
Accounting Principle.................... - (.16)
---------- ----------
NET EARNINGS............................... $ 1.68 $ 1.35
========== ==========
DIVIDEND PAID PER COMMON SHARE............. $ .20 $ .15
========== ==========
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE:
Primary.................................. 220,633 225,914
========== ==========
Fully diluted............................ 220,633 225,914
========== ==========
See Notes to Consolidated Financial Statements
1
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts) APRIL 1, DEC. 31,
ASSETS 1994 1993
- - -------------------------------------------------------- ------------ ------------
CASH AND CASH EQUIVALENTS............................... $ 1,150,135 $ 1,783,408
------------ ------------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS............... 4,028,823 4,069,424
------------ ------------
MARKETABLE INVESTMENT SECURITIES........................ 1,743,939 1,749,254
------------ ------------
TRADING INVENTORIES, AT FAIR VALUE
Corporate debt, contractual agreements,
and preferred stock.................................... 27,394,625 16,764,084
Non-U.S. governments and agencies....................... 8,831,084 9,260,725
U.S. Government and agencies............................ 8,752,521 7,287,081
Equities and convertible debentures..................... 8,097,207 6,806,539
Mortgages and mortgage-backed........................... 6,318,485 6,486,464
Money markets........................................... 2,362,471 3,337,839
Municipals.............................................. 1,150,676 1,606,097
------------ ------------
Total................................................... 62,907,069 51,548,829
------------ ------------
RESALE AGREEMENTS....................................... 49,144,330 38,137,528
------------ ------------
SECURITIES BORROWED..................................... 21,186,156 19,001,061
------------ ------------
RECEIVABLES
Customers (net of allowance for doubtful accounts of
$51,280 in 1994 and $47,953 in 1993)................... 14,498,266 13,242,875
Brokers and dealers..................................... 9,477,169 7,292,332
Interest and other...................................... 3,086,611 2,758,768
------------ ------------
Total................................................... 27,062,046 23,293,975
------------ ------------
INVESTMENTS OF INSURANCE SUBSIDIARIES................... 7,105,889 7,841,444
LOANS, NOTES, AND MORTGAGES (NET OF ALLOWANCE FOR
LOAN LOSSES OF $190,741 IN 1994 AND $142,414 IN 1993).. 1,811,146 2,083,553
OTHER INVESTMENTS....................................... 806,803 873,806
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION
OF $1,694,582 IN 1994 AND $1,677,334 IN 1993).......... 1,521,485 1,506,964
OTHER ASSETS............................................ 1,215,975 1,021,116
------------ ------------
TOTAL ASSETS............................................ $179,683,796 $152,910,362
============ ============
See Notes to Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in Thousands, Except Per Share Amounts) APRIL 1, DEC. 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1994 1993
- - ----------------------------------------------------------- ------------- -------------
LIABILITIES
REPURCHASE AGREEMENTS...................................... $ 66,156,594 $ 56,418,148
------------ ------------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS........... 23,299,088 23,214,329
------------ ------------
COMMITMENTS FOR SECURITIES SOLD BUT NOT YET PURCHASED, AT
FAIR VALUE
U.S. Government and agencies............................... 13,979,878 12,183,271
Equities and convertible debentures........................ 3,972,621 3,953,850
Corporate debt, contractual agreements,
and preferred stock....................................... 13,821,556 3,577,056
Non-U.S. governments and agencies.......................... 2,545,363 1,762,154
Municipals................................................. 136,972 184,041
------------ ------------
Total...................................................... 34,456,390 21,660,372
------------ ------------
CUSTOMERS.................................................. 13,462,387 13,571,379
INSURANCE.................................................. 6,797,586 7,405,673
BROKERS AND DEALERS........................................ 8,200,912 4,862,584
OTHER LIABILITIES AND ACCRUED INTEREST..................... 6,854,878 6,823,064
LONG-TERM BORROWINGS....................................... 14,852,894 13,468,900
------------ ------------
TOTAL LIABILITIES.......................................... 174,080,729 147,424,449
------------ ------------
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: 1994 and 1993 - 3,000 shares;
outstanding: 1994 and 1993 - 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: 1994 and 1993 - 236,330,162 shares................ 315,105 315,105
Paid-in capital............................................ 1,214,934 1,156,367
Foreign currency translation adjustment.................... (12,296) (18,305)
Net unrealized (losses) gains on investment securities
available-for-sale (net of applicable income tax
(benefit) expense of $(6,194) in 1994 and
$12,493 in 1993).......................................... (12,254) 21,355
Retained earnings.......................................... 5,106,190 4,777,142
------------ ------------
Subtotal................................................ 6,611,679 6,251,664
Less:
Treasury stock, at cost:
1994 - 27,694,702 shares;
1993 - 23,408,139 shares............................... 868,184 695,788
Unallocated ESOP shares, at cost:
1994 - 7,742,069 shares;
1993 - 8,932,332 shares................................ 121,938 140,684
Employee stock transactions............................... 212,290 123,079
------------ ------------
TOTAL COMMON STOCKHOLDERS' EQUITY.......................... 5,409,267 5,292,113
------------ ------------
TOTAL STOCKHOLDERS' EQUITY................................. 5,603,067 5,485,913
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $179,683,796 $152,910,362
============ ============
BOOK VALUE PER COMMON SHARE................................ $ 27.15 $ 26.17
============ ============
See Notes to Consolidated Financial Statements
3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
(In Thousands) ---------------------------
APRIL 1, MARCH 26,
1994 1993
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................................. $ 371,759 $ 306,966
Noncash items included in earnings:
Cumulative effect of change in accounting principle........ - 35,420
Depreciation and amortization.............................. 74,171 69,898
Policyholder reserves...................................... 102,801 145,231
Other...................................................... 341,065 244,744
(Increase) decrease in operating assets:
Trading inventories........................................ (11,358,240) (2,602,968)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations.................. 40,601 302,523
Securities borrowed........................................ (2,185,095) (7,033,445)
Customers.................................................. (1,260,679) (1,063,026)
Maturities and sales of trading investment securities...... 23,008 -
Purchases of trading investment securities................. (13,212) -
Other...................................................... (2,249,372) (2,454,748)
Increase (decrease) in operating liabilities:
Commitments for securities sold but not yet purchased...... 12,796,018 2,567,658
Customers.................................................. (108,992) 443,153
Insurance.................................................. (586,710) (401,161)
Other...................................................... 3,332,149 3,526,625
------------ -----------
CASH USED FOR OPERATING ACTIVITIES........................... (680,728) (5,913,130)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities................ 842,998 -
Sales of available-for-sale securities..................... 327,336 -
Purchases of available-for-sale securities................. (683,106) -
Maturities of held-to-maturity securities.................. 469,892 -
Purchases of held-to-maturity securities................... (426,963) -
Maturities and sales of investments by insurance
subsidiaries.............................................. - 1,135,649
Purchases of investments by insurance subsidiaries......... - (912,862)
Marketable investment securities........................... - (145,734)
Other investments and other assets......................... (251,588) (14,944)
Property, leasehold improvements, and equipment............ (88,692) (121,868)
------------ -----------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES............. 189,877 (59,759)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements............ (1,268,356) 3,513,974
Commercial paper and other short-term borrowings........... 84,759 1,845,894
Issuance and resale of long-term borrowings................ 3,978,405 1,856,187
Settlement and repurchase of long-term borrowings.......... (2,640,968) (1,310,875)
Other common stock transactions............................ (253,551) (31,752)
Dividends.................................................. (42,711) (32,891)
------------ -----------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES............. (142,422) 5,840,537
------------ -----------
DECREASE IN CASH AND CASH EQUIVALENTS........................ (633,273) (132,352)
Cash and cash equivalents, beginning of year................. 1,783,408 1,251,572
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................... $ 1,150,135 $ 1,119,220
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes totaled $136,036 in 1994 and $17,735 in 1993.
Interest totaled $1,861,182 in 1994 and $1,346,586 in 1993.
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:
The decrease in unrealized gain on investment securities available-for-sale
totaled $33,609.
See Notes to Consolidated Financial Statements
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 1, 1994
BASIS OF PRESENTATION
The consolidated financial statements, prepared in accordance with generally
accepted accounting principles, include the accounts of Merrill Lynch & Co.,
Inc. and its subsidiaries (collectively referred to as the "Corporation"). All
material intercompany balances and transactions have been eliminated. The
December 31, 1993 consolidated balance sheet was derived from the audited
financial statements. The interim consolidated financial statements for the
three-month periods are unaudited; however, in the opinion of the management of
the Corporation, all adjustments necessary for a fair statement of the results
of operations have been included. The adjustments consist of normal recurring
accruals and a non-recurring pretax lease charge of $103.0 million ($59.7
million after income taxes) previously reported in the 1993 first quarter.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in the Corporation's Annual Report on Form
10-K for the year ended December 31, 1993. The nature of the Corporation's
business is such that the results of any interim period are not necessarily
indicative of results for a full year. Prior period financial statements have
been restated (see Note on Accounting Changes) and reclassified, where
appropriate, to conform to the 1994 presentation.
ACCOUNTING CHANGES
On January 1, 1994, the Corporation adopted Financial Accounting Standards Board
Interpretation No. 39 ("Interpretation No. 39"), "Offsetting of Amounts Related
to Certain Contracts." Interpretation No. 39 affects the financial statement
presentation of balances related to swap, forward and other similar exchange or
conditional type contracts, and unconditional type contracts. The Corporation
is generally required to report separately on the balance sheet unrealized gains
as assets, and unrealized losses as liabilities. For exchange or conditional
contracts, netting is permitted only when a legal right of setoff exists with
the same counterparty under a master netting arrangement. For unconditional
contracts, such as resale and repurchase agreements, net cash settlement of the
related receivable and payable balances is also required.
Prior to the adoption of Interpretation No. 39, the Corporation followed
industry practice in reporting balances related to certain types of contracts on
a net basis. Unrealized gains and losses for swap, forward, and other similar
contracts were reported net on the balance sheet by contract type, while certain
receivables and payables related to resale and repurchase agreements were
reported net by counterparty. The adoption of Interpretation No. 39 increased
assets and liabilities at April 1, 1994 by approximately $14.0 billion.
5
The Corporation adopted Statement of Financial Accounting Standards ("SFAS") No.
112, "Employers' Accounting for Postemployment Benefits," effective as of the
1993 first quarter. The cumulative effect of this change in accounting
principle, reported in the 1993 Statement of Consolidated Earnings, resulted in
a charge (net of applicable income tax benefit) of $35.4 million. The 1993
first quarter has been restated to reflect the impact of this pronouncement.
INVESTMENTS
On December 31, 1993, the Corporation adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." 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. Other investments, including
restricted equity securities, are excluded from the provisions of SFAS No. 115
and are classified as non-qualifying 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. A reconciliation of the
Corporation's investment securities to those reported in the Consolidated
Balance Sheets is presented below:
April 1, December 31,
(In thousands) 1994 1993
- - -------------- ---------- ----------
Investments of insurance subsidiaries:
Available-for-sale $5,449,694 $6,088,443
Trading 155,094 164,620
Non-qualifying 1,501,101 1,588,381
---------- ----------
Total $7,105,889 $7,841,444
========== ==========
Marketable investment securities:
Available-for-sale $ 511,765 $ 471,862
Held-to-maturity 1,232,174 1,277,392
---------- ----------
Total $1,743,939 $1,749,254
========== ==========
Other investments:
Available-for-sale $ 65,479 $ 151,801
Held-to-maturity 3,346 16,635
Non-qualifying 737,978 705,370
---------- ----------
Total $ 806,803 $ 873,806
========== ==========
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
6
stockholders' equity and assume that the unrealized gain or loss on
available-for-sale securities was realized.
The table that follows provides the components of the net unrealized (loss) gain
recorded in stockholders' equity for available-for-sale investments:
April 1, December 31,
(In thousands) 1994 1993
- - -------------- ---------- ----------
Net unrealized (losses) gains
on investment securities
available-for-sale $(207,996) $ 254,030
Adjustments for:
Policyholder liabilities 124,178 (205,495)
Deferred policy acquisition costs 31,522 (14,687)
Deferred income taxes 18,687 (12,493)
--------- ---------
Net activity for the period (33,609) 21,355
Net unrealized gains on investment
securities classified as
available-for-sale, beginning
of year 21,355 -
--------- ---------
Net unrealized (losses) gains
on investment securities
classified as available-for-sale,
end of period $ (12,254) $ 21,355
========= =========
In the 1994 first quarter, gross realized gains and losses related to available-
for-sale investment securities were $5.4 million and $5.5 million, respectively.
The cost basis of each investment sold is specifically identified for purposes
of computing realized gains and losses. The net unrealized loss included in the
1994 Statement of Consolidated Earnings for trading investment securities was
$7.2 million.
INTEREST AND DIVIDEND EXPENSE
Interest expense includes payments in lieu of dividends of $7.6 million and $3.5
million for the first quarters of 1994 and 1993, respectively.
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings are presented below:
April 1, December 31,
(In millions) 1994 1993
- - ------------- ------- -------
Commercial paper $14,965 $14,896
Demand and time deposits 5,931 5,946
Securities loaned 1,619 1,047
Bank loans and other 784 1,325
------- -------
Total $23,299 $23,214
======= =======
7
COMMITMENTS
The Corporation enters into contractual agreements, often referred to as
"derivatives" or off-balance-sheet financial instruments, involving futures,
forwards (including mortgage-backed securities), options and swap transactions,
including swap options, caps, collars, and floors. The Corporation uses
derivatives in conjunction with on-balance-sheet financial instruments to
facilitate customer transactions, manage its own interest rate, currency, and
market risk, and to meet trading and financing needs. Derivatives contracts
often involve future commitments to swap interest payment streams, to purchase
or sell other financial instruments at specified terms on a specified date, or
to exchange currencies. In addition, the Corporation writes options on a wide
range of financial instruments such as securities, currencies, futures, and
various market indices.
The contractual or notional amounts of these instruments are set forth below:
April 1, December 31,
(In billions) 1994 1993
- - ------------- ----- -----
Forward contracts $ 192 $ 154
Futures contracts 160 105
Swap agreements 599 560
Options written 85 72
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. At April 1, 1994, letters of credit aggregating $2,450
million were used for this purpose.
In the normal course of business, the Corporation also enters into underwriting
commitments, when-issued transactions, and commitments to extend credit.
Settlement of these commitments as of April 1, 1994 would not have a material
effect on the consolidated financial condition of the Corporation.
REGULATORY REQUIREMENTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a broker-dealer
and subsidiary of the Corporation, is subject to the Securities and Exchange
Commission's Net Capital Rule. Under the alternative method permitted by this
rule, the minimum required net capital, as defined, shall not be less than 2% of
aggregate debit balances arising from customer transactions. At April 1, 1994,
MLPF&S's regulatory net capital of $1,349 million was 11.2% of aggregate debit
balances, and its regulatory net capital in excess of the minimum required was
$1,108 million.
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 required by the Government Securities Act of 1986. This
rule requires dealers to maintain liquid
8
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At April 1, 1994, MLGSI's liquid capital of $1,238
million was 287% of its total market and credit risk, and liquid capital in
excess of the minimum required was $720 million.
Merrill Lynch International Limited ("MLIL") is a United Kingdom registered
broker-dealer and is subject to capital requirements of the Securities and
Futures Authority ("SFA"). Regulatory capital, as defined, must exceed the
financial resources requirement of the SFA. At April 1, 1994, MLIL's
regulatory capital was $1,377 million, and exceeded the minimum requirement by
$393 million.
9
INDEPENDENT ACCOUNTANTS' REPORT
- - -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries as of April 1, 1994, and the related
condensed statements of consolidated earnings and consolidated cash flows for
the three-month periods ended April 1, 1994 and March 26, 1993. These financial
statements are the responsibility of the management of Merrill Lynch & Co., Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch & Co., Inc. and
subsidiaries as of December 31, 1993, and the related statements of consolidated
earnings, changes in consolidated stockholders' equity and consolidated cash
flows for the year then ended (not presented herein); and in our report dated
February 28, 1994, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1993 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
As discussed in the note to the condensed consolidated financial statements
entitled, "Accounting Changes", in 1993 the Corporation and its subsidiaries
changed their method of accounting for postemployment benefits to conform with
Statement of Financial Accounting Standards No. 112.
/s/ Deloitte & Touche
New York, New York
May 13, 1994
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
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.
Strong markets, which contributed to the Corporation's third consecutive record
year in 1993, continued in the first half of the 1994 first quarter with heavy
retail volume, growth in underwritings, particularly emerging market financings,
consistent trading revenues, and increased inflows of client assets. In the
second half of the quarter, markets became more volatile as inflationary fears
prompted the Federal Reserve to increase short-term interest rates in early
February and mid-March. The advance in interest rates and political uncertainty
in various regions of the world contributed to lower revenue levels for the
second part of the quarter, especially in institutional markets.
Underwriting volume declined industrywide in the second half of the 1994 first
quarter as issuer refinancings decreased due to rising interest rates, and
investor demand was limited to higher quality issues. Strategic services
revenues, however, continued to benefit from increased merger and acquisition
activity. Trading results were generally down for the quarter industrywide, as
rising interest rates and regional instabilities, particularly in Mexico,
increased volatility in bond and equity markets. Continued strong performance in
swaps and other derivatives and foreign equities was offset by lower revenues in
certain fixed-income products, and losses by many financial services firms,
including the Corporation, in emerging market securities. Latin American Brady
bonds, in particular, experienced sharp declines, as these securities are linked
to performance of long-term U.S. Treasury bonds and were affected by political
tensions in Mexico.
The retail markets remained active during the 1994 first quarter. Commission
revenues benefited from increased volume and market volatility. The New York
Stock Exchange ("NYSE") average daily trading volume was 311 million shares in
the 1994 first quarter, 20% and 14% above volumes in the 1993 first and fourth
quarters, respectively. Heightened investor activity also contributed to
increased fee-based revenues during the 1994 first quarter. Uncertainty in
stock and bond markets during March, however, altered the flow of investor
assets from stock and bond funds to money market funds, industrywide.
11
The Dow Jones Industrial Average ("DJIA") average daily closing index for the
1994 first quarter was 3,861, 15% above the 1993 first quarter average closing
index and 5% above the 1993 fourth quarter average close. Nevertheless, after
reaching a record high in January 1994, the DJIA dropped approximately 11% by
quarter end. In the bond market, prices of the 30 year U.S. Treasury bond fell
throughout the latter half of the quarter, dropping nearly 14% from the end of
January 1994, the largest decline since 1987. The yield on the 30 year U.S.
Treasury bond surpassed 7%, ending at 7.26%.
Despite less favorable markets in the second half of the 1994 first quarter, the
Corporation achieved record quarterly results and continued to benefit from
effective risk management, expanding fee-based revenues, and diversified revenue
sources.
First Quarter 1994 Versus First Quarter 1993
- - --------------------------------------------
Net earnings for the 1994 first quarter were a record $371.8 million, up $64.8
million (21%) from the $307.0 million reported for the 1993 first quarter. Net
earnings for the 1993 first quarter were restated to reflect the $35.4 million
cumulative effect charge (net of $25.1 million of applicable income tax
benefits) related to the adoption in 1993 of Statement of Financial Accounting
Standards ("SFAS") No. 112, "Employers' Accounting for Postemployment Benefits."
Earnings before the cumulative effect of the change in accounting principle
increased 9% from the $342.4 million reported in the 1993 first quarter.
Results for the 1993 first quarter included a non-recurring pretax lease charge
totaling $103.0 million ($59.7 million after income taxes) related to the
Corporation's decision not to occupy certain office space at its World Financial
Center Headquarters ("Headquarters") facility. An agreement to sublet this
space was entered into in the 1993 fourth quarter.
Primary and fully diluted earnings per common share were $1.68 in the 1994 first
quarter compared with $1.35 primary and fully diluted ($1.51 primary and fully
diluted before the cumulative effect of the change in accounting principle) for
the comparable 1993 period.
After deducting preferred stock dividends, net earnings applicable to common
stockholders in the 1994 first quarter totaled $370.4 million, up 21% from the
$305.6 million in the year-ago quarter.
The Corporation's pretax profit margin in the 1994 first quarter increased to
23.0% from 22.6% in the prior year's first quarter, while the net profit margin
increased to 13.1% from 11.8% (13.1% before the cumulative effect of the change
in accounting principle) in the year-earlier quarter. Total revenues increased
20% from the 1993 first quarter to $4,739 million. Net revenues (revenues after
interest expense) advanced 8% over the year-ago period to $2,832 million for the
1994 first quarter. As previously mentioned, market conditions were less
favorable during the second half of the 1994 first quarter. Net revenues during
this period were down 8% from average net revenues for a comparable period in
the 1993 first quarter. These less favorable market conditions continued into
April 1994.
12
Commission revenues increased 20% over the year-ago quarter to a record $868
million. Mutual fund commissions rose 43% from the 1993 first quarter to $281
million, benefiting from continued investor demand for potentially higher
yielding investments. Growth in sales of front-end mutual funds and
distribution and redemption fees earned on deferred charge funds contributed to
higher commission levels. Commissions on listed securities advanced 12% to $403
million reflecting higher NYSE average daily trading volume. Other commission
revenues increased 11% to $184 million on the strength of higher commodity and
over-the-counter transactions, partially offset by lower commission revenues
from money market instruments.
Interest and dividend revenues advanced 37% to $2,200 million due to increases
in collateralized lending activities and higher levels of interest-earning
assets, principally inventories. Interest expense, which includes dividend
expense, increased 42% to $1,907 million as a result of increases in
collateralized borrowing activities and higher levels of interest-bearing
liabilities. Net interest and dividend profit rose 14% to a record $293 million
for the first quarter of 1994. Contributing to these strong results were the
continued expansion of collateralized borrowing and lending activities, growth
in fixed-income trading inventories and related hedges, and the increased
availability of interest-free funds due to a higher equity base.
Significant components of interest and dividend revenues and interest expense
for the three-month periods ended April 1, 1994 and March 26, 1993,
respectively, follow:
Three Months Ended
-----------------------------
(In millions) April 1, 1994 March 26, 1993
- - ------------- ------------- --------------
Interest and
dividend revenues:
Trading inventories $ 802 $ 540
Resale agreements 313 305
Securities borrowed 550 267
Margin lending 216 181
Other 319 309
------ ------
Total 2,200 1,602
------ ------
Interest expense:
Borrowings 811 514
Repurchase agreements 443 329
Commitments for securities
sold but not yet purchased 446 259
Other 207 244
------ ------
Total 1,907 1,346
------ ------
Net interest and
dividend profit $ 293 $ 256
====== ======
Principal transactions revenues declined 12% to $667 million for the 1994 first
quarter, compared to record levels in the corresponding 1993 quarter. Fixed-
income and foreign exchange trading revenues, in the aggregate, decreased 25% to
$443 million. The increase in U.S.
13
interest rates and political instability in certain parts of the world during
the second half of the 1994 first quarter negatively affected trading results in
certain products. Revenues were lower in corporate bonds and preferred stock,
municipal bonds, and money market instruments. Revenues from these products
decreased 61% from levels of a year-ago. Moreover, volatility in emerging
market securities contributed to a $10 million loss, principally unrealized, in
non-U.S. government and agency securities. Offsetting these declines were
substantially higher revenues from swaps and other derivatives, mortgage-backed
products, and U.S. Government and agency securities.
Swaps and derivatives revenues, which represented 37% of total principal
transactions revenues in the 1994 first quarter, benefited from continued high
volume and market growth, as well as an expanding product base. Mortgage-backed
products revenues rose $22 million from the year-ago quarter due to increased
trading activity in mortgage- and asset-backed securities and whole loans. U.S.
Government and agency securities revenues increased $19 million from the 1993
first quarter due to increased trading volume and favorable market positioning
relative to rising interest rates.
Equity and commodity trading revenues, in the aggregate, rose 32% to $224
million due primarily to higher trading revenues from American Depositary
Receipts and foreign equities and increased commodity trading activity.
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 either as 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 any realized or unrealized 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.
The table that follows provides information on aggregate trading profits,
including net interest. Principal transactions revenues amounts are derived
from the external reporting categories, while interest revenue and expense
components are based on external reporting categories and management's
assessment of the cost to finance trading positions, which considers the
underlying liquidity of these positions.
14
Principal Net Interest Net
Transactions Revenue Trading
(In millions) Revenue (Expense) Revenue
- - ------------- ------------ ------------- -------
1994 First Quarter
- - ------------------
Fixed-income and foreign
exchange $195 $120 $315
Swaps and derivatives (1) 248 (10) 238
Equities and commodities 224 2 226
---- ---- ----
Total $667 $112 $779
==== ==== ====
1993 First Quarter
- - ------------------
Fixed-income and foreign
exchange $412 $109 $521
Swaps and derivatives (1) 180 16 196
Equities and commodities 169 (3) 166
---- ---- ----
Total $761 $122 $883
==== ==== ====
(1) Swaps and derivatives revenues include transactions recorded by the
Corporation's primary derivative subsidiaries.
Investment banking revenues were $444 million, virtually unchanged from the 1993
first quarter. Underwriting activity slowed during the latter half of the 1994
first quarter, with industrywide declines in volume from a year ago. Issuers
were less active as increased interest rates reduced refinancings and market
volatility delayed issuances. Moreover, investors were more selective as
markets became less favorable. As a result, underwriting revenues decreased 11%
from the 1993 first quarter to $379 million. The decrease resulted primarily
from lower underwriting revenues in corporate debt and municipal securities and
preferred stock, partially offset by increased revenues from high-yield debt
offerings. Despite lower underwriting revenues, the Corporation retained its
position as top underwriter of debt and equity securities both in the U.S., with
a 16.6% market share, and globally, with a 13.1% market share, according to
Securities Data Co. Strategic services revenues rose 267% to $65 million due to
increased merger and acquisitions activity in the healthcare, retail, and
entertainment industries.
Asset management and portfolio service fees were a record $444 million, up 23%
from the 1993 first quarter. Fees earned from asset management activities, the
Merrill Lynch Consults (Registered Trademark) ("ML Consults") portfolio
management service, and other fee-based services contributed to the advance.
Asset management fees increased 26% to $199 million due primarily to growth in
stock and bond funds. Assets under management by Merrill Lynch Asset Management
("MLAM") rose 13% to $164 billion at quarter-end, compared with $145 billion at
the close of the 1993 first quarter. As indicated earlier, the increase in
assets under management was attributable to stock and bond funds, which grew 33%
from a year-ago to $73 billion.
15
At year-end 1993, assets under management by MLAM totaled $160 billion. During
the first quarter of 1994, asset levels in stock and money market funds
increased, while bond funds declined modestly.
Revenues from ML Consults advanced 27% to $82 million as a result of more
accounts and increased asset levels. The number of accounts increased 15% over
last year's first quarter to 88,000 accounts at quarter-end, while asset levels
were up 17% to $17 billion.
Other revenues increased 72% to $116 million principally as a result of a small
net investment gain in the 1994 first quarter compared to a $49 million net
investment loss in the corresponding 1993 quarter.
Non-interest expenses increased 8% (14% excluding the non-recurring lease charge
of $103.0 million) from the 1993 first quarter to $2,180 million. The largest
expense category, compensation and benefits, increased 13% to $1,431 million.
Compensation expense advanced primarily due to higher production-related
compensation, standard merit increases, and a 6% increase in the number of full-
time employees. Higher payroll taxes contributed to the increase in benefits
costs. Compensation and benefits expense as a percentage of net revenues
increased to 50.5% from 48.4% in the year-ago period.
Occupancy costs decreased 6% (49% including the $103.0 million non-recurring
charge in 1993), benefiting from reduced space utilization at the Headquarters
facility. Communications and equipment rental expenses were up 10% to $104
million, due to increased usage of market data, news, and statistical services,
and higher volume-related telephone charges. Depreciation and amortization
expense rose 6% to $74 million primarily due to facilities and equipment
acquired during 1993 and the first quarter of 1994. Advertising and market
development expenses increased 22% to $99 million as a result of increases in
travel costs due to the heightened level of business activity and in Financial
Consultant recognition expenses related to higher production levels.
Professional fees increased 56% to $94 million. The Corporation continued to
use system and management consultants to upgrade technology in trading, credit
and customer systems. Brokerage, clearing, and exchange fees advanced 23% to
$86 million due to increased volume on security and commodity exchanges. Other
expenses increased 13% to $179 million due, in part, to the write-off of certain
facility-related fixed assets.
Income tax expense totaled $280 million. The effective tax rate in the 1994
first quarter was 43%, compared to 42% in the year-ago period. The effective
tax rate increased in the 1994 first quarter primarily as a result of tax
legislation enacted in the 1993 third quarter.
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.
16
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, 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 PrimeFirst (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 $15.0
billion at April 1, 1994 and $14.9 billion at December 31, 1993, which
represented 8% and 10% of total assets at quarter-end 1994 and year-end 1993,
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. At April
1, 1994, total long-term debt was $14.9 billion compared with $13.5 billion at
year-end 1993. During the first quarter of 1994, the Corporation issued $3.4
billion in long-term debt. During the same period, maturities and repurchases
were $1.9 billion. In addition, approximately $563 million of the Corporation's
securities held by subsidiaries were sold and $712 million were purchased.
17
Approximately $30.5 billion of the Corporation's indebtedness at April 1, 1994
is considered senior indebtedness as defined under various indentures covering
subordinated debt.
In the 1994 first quarter, cash and cash equivalents decreased approximately
$633 million to $1,150 million. Cash of $190 million was provided from
investing activities in the 1994 first quarter. During the same period, the
Corporation used $681 million for operating activities and $142 million for
financing activities.
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 $5.6 billion at April 1, 1994,
including $5.4 billion in common equity, supplemented by $0.2 billion in
preferred stock. The Corporation's average leverage ratio, computed as the
ratio of average month-end assets to average month-end stockholders' equity, was
31.8x and 26.2x for the first quarters of 1994 and 1993, respectively. The
Corporation's leverage ratio at the end of the 1994 first quarter was 32.1x.
The leverage ratio was affected by the adoption of Financial Accounting
Standards Board Interpretation No. 39 ("Interpretation No. 39"), "Offsetting of
Amounts Related to Certain Contracts" (see Accounting Changes Note to the
Consolidated Financial Statements), which increased assets by approximately
$14.0 billion at April 1, 1994.
To compute the Corporation's average adjusted leverage ratio, resale agreements
and securities borrowed transactions are subtracted from total assets. The
average adjusted leverage ratio was 19.4x and 16.0x for the first three months
of 1994 and 1993, respectively. The Corporation's adjusted leverage ratio at
the end of the 1994 first quarter was 19.5x.
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 that 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 monitors and manages the growth of its balance
sheet using point-in-time and average daily balances. 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
18
on a trade date basis. The discussion that follows compares the changes in
settlement date average daily balances, not quarter-end balances. The reasons
underlying changes in average balances, however, are similar to changes in
quarter-end balances. The increase in average balance sheet levels during the
1994 first quarter was attributable to many factors, including the adoption of
Interpretation No. 39, increased trading activity, and investor demand.
In the 1994 first quarter, average assets were $189 billion, up 15% versus the
$165 billion for the 1993 fourth quarter. Average liabilities rose 15% to $184
billion from $160 billion for the 1993 fourth quarter. Excluding the effects of
adopting Interpretation No. 39, average assets and liabilities increased by
approximately $15 billion in the first quarter of 1994. Interpretation No. 39
primarily affected balances related to contractual agreements and resale and
repurchase agreements.
The major components in the growth of average assets and liabilities are
summarized in the table that follows:
Increase in Percent
(Dollars in millions) Average Assets Increase
- - --------------------- ------------------- --------
Trading inventories $10,452 19%
Resale agreements $ 8,106 18%
Securities borrowed $ 2,991 11%
Increase in Average Percent
Liabilities Increase
------------------- --------
Repurchase agreements $11,000 18%
Commitments
for securities sold
but not yet purchased $ 7,613 29%
Commercial paper and other
short-term borrowings $ 2,814 10%
Long-term borrowings $ 1,071 8%
Inventory levels rose during the 1994 first quarter as a result of the effect of
adopting Interpretation No. 39 and increased trading activity in equity and
fixed-income products. On-balance-sheet hedges, included in trading inventories
and commitments for securities sold but not yet purchased, also increased due,
in part, to market volatility during the latter half of the 1994 first quarter.
The Corporation uses hedges principally to reduce risk in connection with its
trading activities.
The Corporation continues to diversify its sources for financing inventories
using repurchase agreements, commercial paper and other short-term borrowing
facilities, and medium-term notes (included in long-term borrowings).
In managing its balance sheet, the Corporation approximately match-funds its
interest-earning assets with interest-bearing liabilities.
19
For example, the Corporation match-funds a portion of its repurchase
agreements/resale agreements and its securities borrowed/securities loaned
business, earning an interest spread 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.
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 the improved
liquidity and credit ratings of issuers in this market, the Corporation has
increased its non-investment grade trading inventories to satisfy customer
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 remained favorable in the first quarter industrywide.
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 issued 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 April 1, 1994, long and short non-
investment grade trading inventories accounted for 4.0% of aggregate
consolidated trading inventories, compared with 4.6% at year-end 1993. 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 selective and
limited basis. The Corporation provides extensions of credit to leveraged
companies in the form of senior term 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 April 1, 1994 and 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 estimated net realizable value. The Corporation has a
co-investment arrangement to enter into direct equity investments. The
Corporation also has committed to participate in limited partnerships that
invest in leveraged transactions.
20
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 investing in, financing, 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.
The Corporation uses certain non-investment grade trading inventories,
principally non-U.S. government and agency securities, to accommodate client
demand and to hedge the exposure arising from structured derivative
transactions. Collateral, consisting principally of U.S. Government securities,
may be obtained to reduce credit risk related to these transactions.
The Corporation's insurance subsidiaries hold non-investment grade securities.
At April 1, 1994, non-investment grade insurance investments as a percentage of
total insurance investments were 6.4%, compared with 5.8% at year-end 1993.
Non-investment grade securities of insurance subsidiaries classified as trading
or available-for-sale are carried at fair value.
A summary of the Corporation's highly leveraged transactions and non-investment
grade holdings is provided below:
APRIL 1, DECEMBER 31,
(Dollars in millions) 1994 1993
- - -------------------------------------------------------------------
Non-investment grade trading inventories $3,378 $3,129
Non-investment grade commitments for
securities sold but not yet purchased 522 214
Non-investment grade investments
of insurance subsidiaries 457 458
Loans (net of allowance for
loan losses) (A) 323 435
Equity investments (B) 296 276
Partnership interests 99 92
- - -------------------------------------------------------------------
Additional commitments to invest in
partnerships (C) $ 18 $ 19
Additional co-investment commitments 30 49
Unutilized revolving lines of
credit and other lending
commitments 56 49
- - -------------------------------------------------------------------
21
(A) Represented outstanding loans to 39 and 42 medium-sized companies at April
1, 1994 and at December 31, 1993, respectively.
(B) Invested in 81 and 82 enterprises at April 1, 1994 and at December 31,
1993, respectively.
(C) The Corporation has committed to invest up to $50 million in a partnership
which is expected to be funded by the end of the 1994 second quarter.
At April 1, 1994, the largest non-investment grade concentration consisted of
various issues of a Latin American sovereign totaling $480 million, of which
$166 million represented on-balance sheet hedges. No one industry sector
accounted for more than 17% 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 April 1, 1994, the carrying
value of these securities totaled $293 million, of which 61% resulted from the
Corporation's market-making activities.
RECENT ACCOUNTING DEVELOPMENTS
Accounting by Creditors for Impairment of a Loan
- - ------------------------------------------------
In May 1993, the Financial Accounting Standards Board issued SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." SFAS No. 114, effective for
fiscal years beginning after December 15, 1994, establishes accounting standards
for creditors to measure the impairment of certain loans. A loan is impaired
when it is probable that a creditor will be unable to collect all amounts due
under the terms of the loan agreement. Impairment is measured based on the
present value of expected future cash flows discounted at the loan's effective
interest rate, or the observable market price, or the fair value of the
underlying collateral if the loan is collateral dependent. The Corporation is
currently in the process of evaluating the impact of this statement on its
financial condition, although the effect is not expected to be material.
22
PART II - OTHER INFORMATION
---------------------------
ITEM 5. OTHER INFORMATION
-----------------
At the Annual Meeting of Stockholders, held on April 19, 1994, the holders
of Common Stock, par value $1.33 1/3 per share, of the Registrant elected the
slate of five directors recommended by the Board of Directors. The holders also
approved performance goals governing, and eligibility requirements for, certain
annual bonuses and grants of restricted shares and units.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
(i) Form of Registrant's Constant Maturity Treasury Rate Indexed
Medium-Term Notes, Series B.
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the
Registrant hereby undertakes to furnish to the Securities and
Exchange Commission (the "Commission"), upon request, copies of
the instruments defining the rights of holders of long-term debt
securities of the Registrant that authorize an amount of
securities constituting 10% or less of the total assets of the
Registrant and its subsidiaries on a consolidated basis. However,
to supplement its debt securities registration statements, the
Registrant hereby files as exhibits those forms of each long-term
security issued by the Registrant during the quarterly period
covered by this Report that have not previously been filed with
the Commission.
(10) Material Contracts:
(i) Form of Merrill Lynch & Co., Inc. 1994 Deferred Restricted
Unit Agreement for Executive Officers.
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios.
(15) Letter re unaudited interim financial information.
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed
23
by the Registrant with the Commission:
(i) Current Report, dated January 20, 1994, for the purpose of
filing the form of Registrant's 6 1/4% Notes due January 15,
2006 and the opinion of counsel relating thereto.
(ii) Current Report, dated January 24, 1994, for the purpose of
filing the Preliminary Unaudited Earnings Summary of the
Registrant for the three months and year ended December 31,
1993.
(iii) Current Report, dated January 27, 1994, for the purpose of
filing the form of Registrant's Japan Index (Service Mark)
Equity Participation Securities with Minimum Return Protection
due January 31, 2000 and the opinion of counsel relating
thereto.
(iv) Current Report, dated January 27, 1994, for the purpose of
filing the unaudited summary of restated financial information
of the Registrant for the three-, six- and nine-month periods
in fiscal year 1993 related to the adoption of Statement of
Financial Accounting Standards No. 112.
(v) Current Report, dated February 3, 1994, for the purpose of
filing the form of Registrant's Warrant Agreement dated as of
February 3, 1994 and the opinion of counsel relating thereto.
(vi) Current Report, dated March 9, 1994, for the purpose of filing
the audited financial statements of the Registrant for its 1993
fiscal year.
(vii) Current Report, dated March 24, 1994, for the purpose of filing
the form of Registrant's Constant Maturity Treasury Rate
Indexed Notes due March 24, 1997 and the opinion of counsel
relating thereto.
(viii) Current Report, dated March 30, 1994, for the purpose of filing
the form of Registrant's 6 3/8% Notes due March 30, 1999 and
the opinion of counsel relating thereto.
(ix) Current Report, dated March 31, 1994, for the purpose of filing
the form of Registrant's AMEX Oil Index (Registered Service
Mark) Stock Market Annual Reset Term Notes (Service Mark) due
December 29, 2000 and the opinion of counsel relating thereto.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
---------------------------
(Registrant)
/s/ Joseph T. Willett
Date: May 13, 1994 By: _____________________________
Joseph T. Willett
Senior Vice President and
Chief Financial Officer
25
INDEX TO EXHIBITS
Exhibits
(4) Instruments defining the rights of security holders, including indentures:
(i) Form of Registrant's Constant Maturity Treasury Rate Indexed Medium-
Term Notes, Series B.
(10) Material Contracts:
(i) Form of Merrill Lynch & Co., Inc. 1994 Deferred Restricted Unit
Agreement for Executive Officers.
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios.
(15) Letter re unaudited interim financial information.
26