EXHIBIT 13
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FINANCIAL HIGHLIGHTS
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(Dollars in Thousands, Year Ended Last Friday in December
Except Per Share Amounts) 1990 1991 1992 1993 1994
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(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
OPERATING RESULTS
Total Revenues $ 11,147,229 $ 12,352,812 $ 13,412,668 $ 16,588,177 $ 18,233,091
Net Revenues $ 5,783,329 $ 7,246,468 $ 8,577,401 $ 10,558,230 $ 9,624,521
Net Earnings $ 191,856 $ 696,117 $ 893,825 $ 1,358,939 $ 1,016,761
Pretax Margin (a) 4.9% 14.0% 18.9% 23.0% 18.0%
Profit Margin (b) 3.3% 9.6% 11.1% 13.2% 10.6%
Return on Average Common
Stockholders' Equity 5.8% 20.8% 22.0% 27.3% 18.6%
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FINANCIAL POSITION
Total Assets $ 68,129,527 $ 86,259,343 $107,024,173 $152,910,362 $163,749,327
Total Stockholders' Equity $ 3,225,430 $ 3,818,088 $ 4,569,104 $ 5,485,913 $ 5,817,545
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PER COMMON SHARE
Primary Earnings $ .80 $ 3.01 $ 3.92 $ 5.98 $ 4.75
Fully Diluted Earnings $ .80 $ 2.95 $ 3.91 $ 5.95 $ 4.74
Dividends Paid $ .50 $ .50 $ .575 $ .70 $ .89
Book Value $ 14.99 $ 17.88 $ 21.37 $ 26.17 $ 28.87
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OTHER STATISTICS(c)
Assets Under Management $110,000,000 $124,000,000 $139,000,000 $161,000,000 $164,000,000
Assets in Domestic Private
Client Accounts $361,000,000 $422,000,000 $463,000,000 $527,000,000 $537,000,000
Assets in Worldwide Private
Client Accounts $377,000,000 $440,000,000 $487,000,000 $557,000,000 $568,000,000
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COMMON SHARES
OUTSTANDING(d) 199,669,270 205,443,636 207,202,688 203,989,691 181,479,127
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(a) Earnings Before Income Taxes and Cumulative Effect of Changes in Accounting
Principles to Net Revenues.
(b) Earnings Before Cumulative Effect of Changes in Accounting Principles to Net
Revenues.
(c) Client accounts have been redefined to include certain institutional private
portfolio accounts.
(d) Does not include 16,071,968, 13,636,820, 11,201,672, 8,932,332, and
6,427,091 unallocated reversion shares held in the Employee Stock Ownership
Plan at year-end 1990, 1991, 1992, 1993, and 1994, respectively, which are
not considered outstanding for accounting purposes.
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Graph titled "NET EARNINGS AND PER SHARE AMOUNTS"
Presented is side by side bar graphs (in millions, except per share amounts)
showing Merrill Lynch & Co., Inc.'s earnings per share amounts of $0.80, $3.01,
$3.92, $5.98, and $4.75 for the years ended 1990 through 1994, respectively and
Merrill Lynch & Co., Inc.'s net earnings of $192, $696, $894, $1,359, and $1,017
for the years ended 1990 through 1994, respectively.
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Graph titled "BOOK VALUE PER COMMON SHARE"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s book value per
common share for the past five years of $14.99, $17.88, $21.37, $26.17, and
$28.87 at year-end 1990 through 1994, respectively.
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1
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SELECTED FINANCIAL DATA
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Year Ended Last Friday in December
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(Dollars in Thousands, Except Per Share Amounts) 1994 1993 1992 1991 1990
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(52 Weeks) (53 Weeks) (52 Weeks) (52 Weeks) (52 Weeks)
OPERATING RESULTS
Revenues $ 18,233,091 $ 16,588,177 $ 13,412,668 $ 12,352,812 $ 11,147,229
Interest Expense 8,608,570 6,029,947 4,835,267 5,106,344 5,363,900
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Net Revenues 9,624,521 10,558,230 8,577,401 7,246,468 5,783,329
Non-Interest Expenses 7,894,917 8,133,422 6,956,012 6,229,050 5,501,001
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Earnings Before Income Taxes and Cumulative Effect
of Changes in Accounting Principles 1,729,604 2,424,808 1,621,389 1,017,418 282,328
Income Tax Expense 712,843 1,030,449 668,984 321,301 90,472
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Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 1,016,761 $ 1,394,359 $ 952,405 $ 696,117 $ 191,856
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Net Earnings $ 1,016,761 $ 1,358,939 $ 893,825 $ 696,117 $ 191,856
============ ============ ============ ============ ============
Net Earnings Applicable to Common Stockholders $ 1,004,050 $ 1,353,558 $ 887,486 $ 678,392 $ 167,932
============ ============ ============ ============ ============
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FINANCIAL POSITION
Total Assets $163,749,327 $152,910,362 $107,024,173 $ 86,259,343 $ 68,129,527
Short-Term Borrowings (a) $ 78,304,239 $ 79,632,477 $ 51,179,530 $ 38,697,544 $ 27,340,915
Long-Term Borrowings $ 14,863,383 $ 13,468,900 $ 10,871,100 $ 7,964,424 $ 6,341,559
Total Stockholders' Equity $ 5,817,545 $ 5,485,913 $ 4,569,104 $ 3,818,088 $ 3,225,430
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TAX INFORMATION
Other Taxes, Principally Payroll and Property $ 254,862 $ 223,377 $ 221,930 $ 191,291 $ 169,457
Total Taxes (b) $ 967,705 $ 1,253,826 $ 890,914 $ 512,592 $ 259,929
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COMMON SHARE DATA
Primary:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 4.75 $ 6.14 $ 4.18 $ 3.01 $ .80
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Net Earnings $ 4.75 $ 5.98 $ 3.92 $ 3.01 $ .80
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Fully Diluted:
Earnings Before Cumulative Effect of Changes in
Accounting Principles $ 4.74 $ 6.11 $ 4.17 $ 2.95 $ .80
============ ============ ============ ============ ============
Net Earnings $ 4.74 $ 5.95 $ 3.91 $ 2.95 $ .80
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Weighted Average Shares Outstanding:
Primary 211,241,000 226,331,000 226,402,000 225,350,000 211,052,000
Fully Diluted 211,695,000 227,480,000 226,854,000 229,916,000 211,052,000
Shares Outstanding at Year-End (c) 181,479,127 203,989,691 207,202,688 205,443,636 199,669,270
Shares Repurchased 29,988,523 16,345,568 10,653,858 5,919,852 11,779,712
Average Share Repurchase Price $ 37.96 $ 42.55 $ 24.36 $ 19.70 $ 10.32
Book Value $ 28.87 $ 26.17 $ 21.37 $ 17.88 $ 14.99
Total Taxes (b) $ 4.58 $ 5.54 $ 3.94 $ 2.27 $ 1.23
Dividends Paid $ .89 $ .70 $ .575 $ .50 $ .50
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FINANCIAL RATIOS
Pretax Margin (d) 18.0% 23.0% 18.9% 14.0% 4.9%
Profit Margin (e) 10.6% 13.2% 11.1% 9.6% 3.3%
Common Dividend Payout Ratio 17.5% 10.9% 13.5% 15.2% 61.8%
Return on Average Assets 0.6% 1.0% 0.8% 0.8% 0.3%
Return on Average Common Stockholders' Equity 18.6% 27.3% 22.0% 20.8% 5.8%
Leverage 32.0x 27.4x 25.1x 24.1x 22.9x
Adjusted Leverage (f) 18.9x 16.6x 15.9x 16.3x 15.3x
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OTHER STATISTICS
Number of Full-Time Employees 43,800 41,900 40,100 38,300 39,000
Number of Financial Consultants and Account
Executives 13,400 13,100 12,700 12,100 11,800
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(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.
(c) Does not include 6,427,091, 8,932,332, 11,201,672, 13,636,820, and
16,071,968 unallocated reversion shares held in the Employee Stock
Ownership Plan at year-end 1994, 1993, 1992, 1991, and 1990, respectively,
which are not considered outstanding for accounting purposes.
(d) Earnings Before Income Taxes and Cumulative Effect of Changes in Accounting
Principles to Net Revenues.
(e) Earnings Before Cumulative Effect of Changes in Accounting Principles to
Net Revenues.
(f) Average total assets less resale agreements and securities borrowed, to
average total stockholders' equity.
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2
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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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 and market
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 may also increase order flow, which drives many of the Corporation's
businesses. Other global 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.
Financial markets, strong from 1991 through the first six weeks of
1994, changed significantly after inflationary fears prompted the Federal
Reserve to increase short-term interest rates in February 1994. As the U.S.
economy continued to expand, the Federal Reserve acted to further curb
inflation and to moderate growth by increasing short-term interest rates five
additional times during the year. The combination of rising interest rates, a
falling U.S. dollar, unsettled global stock, bond, and currency markets,
reduced foreign investment in U.S. financial markets, and overall investor
caution contributed to lower earnings for most U.S. securities firms.
Institutional trading results were affected by rising interest rates and
volatility in world currency and securities markets. Trading in interest-
sensitive products and equities, particularly convertible securities, was
generally lower industrywide. Foreign exchange trading decreased due to a
weakening in the U.S. dollar versus other major currencies. Values of emerging
market inventories declined due primarily to higher interest rates, increased
political uncertainty, and the devaluation of the Mexican peso in the 1994
fourth quarter. Trading in swaps and other derivative products continued at
relatively strong levels as global investors continued to use these instruments
to manage exposure to changes in interest rates and currency values. Reaction to
highly publicized losses, however, resulted in reduced activity in certain
complex or structured derivatives transactions.
Investment banking results were mixed in 1994. Underwriting volumes were
down sharply, while merger and acquisition and advisory assignments increased,
approaching the record transaction value levels of 1988. Domestic underwriting
volumes for debt and equity securities declined to their lowest levels since
1991. In 1994, new domestic stock and bond issuance volume fell 33% to $711
billion industrywide, with initial public offerings down 41% from last year.
Worldwide, aggregate underwriting volume for new stock and bond issues decreased
27% from 1993.
Strategic services revenues were strong in 1994 and benefited from
increased merger and acquisition and advisory services activity, primarily in
the healthcare, communication, defense, and financial services industries.
Companies seeking strategic alliances were helped by a stronger economy, higher
cash flows related to recent balance sheet restructurings and improved operating
results, and attractive market values of target companies. Many European
multinational companies continued to increase their presence in the U.S. through
acquisition or joint venture activities. Cross-border merger and acquisition
activity, particularly in Europe, increased as global financial markets
developed and trade liberalization continued. Frontier barriers were lowered
within Europe and Latin America, the European Union expanded to 15 countries,
and the North American Free Trade Agreement entered its second year. Further
development of global financial markets improved the access to capital. The
privatization of state-run enterprises by a record number of countries continued
to provide financing for reinvestment to stimulate economic growth.
Institutional and individual investors continued to diversify their
portfolios, but remained cautious as market conditions changed. As interest
rates increased throughout 1994, investors redirected assets from longer-term
bond funds to stock funds and more liquid investments, such as short-term U.S.
Treasury securities and money market instruments. Foreign investors were less
active in U.S. markets, while international mutual funds continued to attract
new U.S. investors.
The financial services industry is cyclical. As a result, the
Corporation's businesses are evaluated across market cycles for profitability
and alignment with long-term strategic objectives. Fiscal 1994 was
characterized by adverse financial markets and changing economic conditions.
The Corporation seeks to mitigate the effect of market cycles by closely
monitoring costs and risks, continuing to diversify revenue sources, and
expanding its global presence.
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RESULTS OF OPERATIONS
Unsettled global financial markets in 1994 contributed to reduced volumes for
many of the Corporation's businesses. These business conditions contributed to
progressively lower quarterly net earnings for the Corporation in 1994. Net
earnings for 1994 were $1.02 billion or $4.75 per common share primary ($4.74
fully diluted), down 25% from record 1993 earnings of $1.36 billion or $5.98 per
common share primary ($5.95 fully diluted). In 1992, net earnings were $893.8
million or $3.92 per common share primary ($3.91 fully diluted).
The 1993 results included the 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 net
earnings by $35.4 million 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 included 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 the World
Financial Center Headquarters ("Headquarters") facility. This space was sublet
during 1994.
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3
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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 net 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 in 1994 were $1.73 billion, down 29% from $2.42 billion
reported in 1993. In 1992, pretax earnings were $1.62 billion. The pretax profit
margin on net revenues was 18.0% in 1994, compared with 23.0% in 1993 and 18.9%
in 1992.
Total revenues for 1994 were $18.23 billion, up 10% and 36%, respectively,
from the previous record levels of 1993 and 1992. In 1994, net revenues
(revenues after interest expense) totaled $9.62 billion, down 9% from $10.56
billion in 1993. Net revenues in 1992 were $8.58 billion.
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Graph titled "NET REVENUE CATEGORIES AND COMPENSATION AND BENEFITS"
Presented are side by side bar graphs 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 $5.8, $7.2, $8.6, $10.6, and $9.6 for the years ended 1990 through
1994, respectively, and compensation and benefits of $3.1, $3.9, $4.4, $5.3, and
$5.0 for the years ended 1990 through 1994, respectively.
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Non-interest expenses were $7.89 billion in 1994, down 3% from 1993
and up 13% from 1992. Excluding the non-recurring 1993 pretax lease
charge of $103.0 million, non-interest expenses declined 2% from 1993. In
1994, many expense categories decreased as business activity slowed.
Incentive compensation declined due to lower profitability, while production-
related Financial Consultant compensation and advertising expenses were affected
by lower business volumes. Occupancy costs benefited from relocations to lower-
cost facilities and last year's decision to vacate and sublet additional
Headquarters space.
The Corporation actively manages its expense structure by monitoring the
mix of variable and fixed expenses. In 1994, certain discretionary projects were
reduced based on market conditions.
The after-tax profit margin in 1994 was 10.6%, compared with 13.2%
(12.9% after the cumulative effect of accounting change) in 1993 and
11.1% (10.4% after the cumulative effect of accounting changes) in 1992. The
Corporation's return on average common stockholders' equity was 18.6% in 1994,
compared with 27.3% and 22.0% in 1993 and 1992, respectively.
The 1994 financial statements contain limited reclassification and
format changes. 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 provides details of major categories of revenues
and expenses and other pertinent information regarding the Corporation's
business activities, financial condition, liquidity, and risks.
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COMMISSIONS
Commission revenues were $2.87 billion in 1994, virtually unchanged from
$2.89 billion reported in 1993. Higher commission revenues from mutual funds
and commodity transactions were offset by lower revenues from money market
instruments, particularly medium-term notes, and listed securities
transactions.
Mutual fund commissions increased 4% in 1994 to $879 million due primarily
to higher distribution and redemption fees offset by lower levels of mutual fund
sales. Revenues from front-end mutual funds were down 31% to $343 million. As
stock and bond mutual fund net asset values declined during 1994, investors
became more conservative, directing both existing and new funds into alternative
short-term investments such as U.S. Treasury bills and other money market
instruments. For the first time since 1974, both stock and bond funds fell in
value, on average, in the same year. U.S. stock funds, including dividends, lost
1.69% in value and taxable bond funds fell 3.70%, industrywide. For global
investors, stock funds declined 0.71% and bond funds fell 7.45% in 1994.
Distribution fees from deferred-charge funds increased 58% to $460 million based
on increased asset levels primarily attributable to strong fund sales in prior
periods. Redemption fees increased 34% to $76 million as clients repositioned
invested assets.
Commissions from listed securities were $1.36 billion, down 3% from 1993.
Although volume was up on domestic stock exchanges, the Corporation's domestic
listed securities commission revenues were 5% lower in 1994. This decline
reflects a change in the relative amount of transactions by institutional
clients versus retail clients. In 1994, domestic stock market activity, as
measured by New York Stock Exchange ("NYSE") average daily trading volume, was
291 million shares. This average daily trading volume was 10% higher than 1993.
The Dow Jones Industrial Average ("DJIA") daily closing index for 1994 averaged
3,794, 8% above the 1993 daily average close. Revenues from listed
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4
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
securities on international stock exchanges increased as a result of higher
demand and the Corporation's expanded presence in financial markets
worldwide.
Commissions on commodities transactions increased 21% to $217 million
due to an increase in commodity-related hedge activities. Commissions on money
market instruments declined 34% in 1994 to $109 million primarily due to
lower demand for higher commission products. The continued rise in interest
rates during the period led investors to seek liquidity and principal
protection in shorter-term instruments.
Other commission revenues, consisting primarily of over-the-counter,
option, and insurance products, increased 2% to $305 million from $300 million
in 1993.
In 1993, commission revenues advanced 19% from 1992 due primarily to
the continued growth of listed securities transactions and increased sales of
mutual funds, regulated commodities contracts, and over-the-counter
securities. Listed securities commissions benefited from increased market
participation as investors repositioned their investment portfolios to enhance
potential yield and growth opportunities. Mutual fund commissions rose as
individual investors shifted maturing certificates of deposit and other
low-yielding cash investments into domestic and global equity mutual funds
and, to a lesser extent, fixed-income mutual funds. Other commission revenues
advanced 9% from 1992 levels.
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INTEREST AND DIVIDENDS
Significant components of interest and dividend revenues and interest expense
for 1994, 1993, and 1992, follow:
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(IN MILLIONS) 1994 1993 1992
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Interest and dividend revenues:
Trading assets $3,431 $2,493 $2,007
Securities borrowed 2,285 1,521 823
Resale agreements 1,807 1,161 1,066
Margin lending 1,018 779 598
Other 1,037 1,145 1,312
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Subtotal 9,578 7,099 5,806
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Interest expense:
Borrowings 3,381 2,515 1,697
Repurchase agreements 2,414 1,383 1,225
Trading liabilities 1,997 1,252 931
Other 817 880 982
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Subtotal 8,609 6,030 4,835
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Net interest and dividend profit $ 969 $1,069 $ 971
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Included in the "Borrowings" caption above is interest related to hedges
on the Corporation's borrowings. As part of the Corporation's asset,
liability, and liquidity management strategies, substantially all fixed-rate,
long-term borrowings are swapped into floating interest rates, while virtually
all foreign currency-denominated fixed-rate obligations are swapped into U.S.
dollar variable rate liabilities. These liability hedges are in the form of
interest rate and currency swap agreements. Interest obligations on variable
rate debt may also be modified through swap agreements that change the
underlying interest rate basis or reset frequency. Contractual agreements used
to modify payment obligations, principally related to long-term borrowings,
reduced interest expense for 1994, 1993, and 1992 by $153 million, $326 million,
and $246 million, respectively.
Interest and dividend revenues increased 35% in 1994 to $9.58 billion
due to higher average levels of interest-earning assets, principally
inventories and resale agreements, as well as increased interest rates.
Interest expense, which includes dividend expense, increased 43% to $8.61
billion due to increased levels of interest-bearing liabilities, primarily
related to the Corporation's funding and hedging activities, and higher
interest rates. Net interest and dividend profit declined 9% to $969 million
as a significant increase in short-term interest rates, year over year, led to
a substantial flattening of the yield curve. The change in the yield curve,
the relationship between interest rates and maturities, resulted from
short-term interest rates rising faster than long-term interest rates during
1994. The one-year U.S. Treasury bill rate, for example, increased from
3.58% at December 31, 1993 to 7.16% at December 30, 1994, while the
30-year U.S. Treasury bond yield increased from 6.35% to 7.88% during the
same period. As a result, interest spreads declined, while financing and
hedging costs increased from 1993.
In 1993, net interest and dividend profit increased 10% over 1992 to
$1.07 billion. Contributing to this increase 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.
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PRINCIPAL TRANSACTIONS
Principal transactions revenues fell 20% from 1993 record levels to $2.33
billion in 1994. Rising interest rates, a declining U.S. dollar, and
volatile world financial markets led to lower trading results in many
products. Revenues from taxable fixed-income securities, equities and equity
derivatives, and foreign exchange and commodities decreased, while interest
rate and currency swaps, and municipal securities revenues increased.
Taxable fixed-income trading revenues declined 52% in 1994 to $462
million as higher interest rates, wider credit spreads, and uncertainty in
emerging markets led to reduced demand and lower inventory values. U.S.
Government and agencies securities revenues were down 7% to $253 million.
Corporate bonds and preferred stock revenues, in the aggregate, decreased 72%
to $111 million and were affected by wider credit spreads and lower
trading volume. Non-U.S. governments and agencies revenues were down 89% to
$20 million due primarily to increased interest rates, political uncertainty,
and the devaluation of the Mexican peso in the 1994 fourth quarter.
High-yield bond revenues declined 61% to $27 million. Rising interest rates
reduced inventory values and market liquidity, and renewed credit concerns
related to lower quality issues.
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5
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Equities and equity derivatives trading revenues were $627 million, 28%
lower than 1993. Trading revenues were down in virtually all categories,
including convertible securities, which reported a $66 million loss for the
year. Rising interest rates combined with falling equity values contributed to
the loss. Approximately 40% of this loss occurred in the 1994 fourth quarter
as the Corporation reduced inventory levels to limit exposure to interest rate
volatility. Lower revenues were also reported for foreign and over-the-counter
equities.
Foreign exchange and commodities revenues, in the aggregate, declined
31% to $109 million. Weakness in the U.S. dollar versus other major
currencies depressed foreign exchange trading, while commodities trading
revenues benefited from increased volume.
Revenues from interest rate and currency swaps rose 24% to $749 million
due to the continued growth of these products as effective risk management
tools, enhanced market liquidity, and increased global demand. (See discussion
of Derivative Financial Instruments.) The revenue increase is primarily
attributable to U.S. dollar-denominated swap trading activities. U.S.
dollar-denominated swap trading revenues increased as institutional clients
continued to use these instruments to manage interest rate risk, which
included the restructuring of existing contracts as the interest rate
environment changed. Non-dollar swap trading revenues declined due to currency
and interest rate volatility, particularly in European markets, partially
offset by higher volume.
Municipal securities revenues increased 20% to $388 million due to strong
retail investor demand for tax-exempt investments. Higher interest rates led
to increased after-tax returns for this product in 1994.
In 1993, principal transactions revenues reached record levels, up 35%
from 1992 to $2.92 billion. Taxable fixed-income trading revenues increased
31% due to favorable market conditions for corporate bonds and preferred
stocks, and non-U.S. governments and agencies securities. Revenues from
interest rate and currency swaps advanced 55%, benefiting from increased
volume and market growth, as well as an expanding product base. Equities and
equity derivatives revenues rose 42% principally on the strength of increases
in revenues from international equities and improvement in revenues from U.S.
over-the-counter markets. Municipal securities revenues increased 20% based on
increased client demand for tax-exempt securities.
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 (i.e., 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 "to be announced" mortgage pools, have interest components
built into their market value; any change in 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 are based on financial
reporting categories. Interest revenue and expense components are based on
financial reporting categories and management's assessment of the cost to
finance trading positions, which considers the underlying liquidity of these
positions.
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PRINCIPAL NET INTEREST NET
TRANSACTIONS REVENUE TRADING
(IN MILLIONS) REVENUE (EXPENSE) REVENUE
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1994
Taxable fixed-income $ 462 $371 $ 833
Interest rate and currency
swaps 749 (24) 725
Equities and equity derivatives 627 (107) 520
Municipals 388 7 395
Foreign exchange and
commodities 109 (9) 100
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TOTAL $2,335 $238 $2,573
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1993
Taxable fixed-income $ 964 $412 $1,376
Interest rate and currency
swaps 605 28 633
Equities and equity derivatives 871 (45) 826
Municipals 322 -- 322
Foreign exchange and
commodities 158 (1) 157
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TOTAL $2,920 $394 $3,314
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1992
Taxable fixed-income $ 736 $366 $1,102
Interest rate and currency
swaps 390 75 465
Equities and equity derivatives 614 (23) 591
Municipals 268 (1) 267
Foreign exchange and
commodities 158 2 160
------ ---- ------
TOTAL $2,166 $419 $2,585
====== ==== ======
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVESTMENT BANKING
Investment banking revenues were $1.24 billion in 1994, down 32% from
record 1993 levels. Market conditions were significantly different in 1994
compared with the prior two
--------------------
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
years. In 1992 and 1993, low interest rates were the key factor behind the
surge in underwriting activity. As interest rates moved higher and share
prices fell, issuers and investors became more selective, leading to reduced
volumes for most products. As a result, underwriting of domestic debt and
equity securities declined industrywide to the lowest level since 1991.
Underwriting revenues declined in almost all categories, with significant
decreases in equities, corporate bonds and preferred stock, and convertible
securities. Partially offsetting these declines were higher underwriting
revenues from asset-backed securities. Equity issuances, especially initial
public stock offerings, were adversely affected by reduced demand attributable
primarily to investor caution. Higher interest rates curtailed debt issuance,
particularly refinancings. In 1994, new stocks and bonds issued in domestic
markets totaled $711 billion, a 33% decline from 1993. Domestic initial public
offerings were 41% lower in 1994 compared with 1993.
Despite unfavorable market conditions and lower volumes, the Corporation
retained its position as top underwriter for the seventh consecutive year
domestically and sixth consecutive year globally. The Corporation's domestic
and global share of underwriting volume in 1994 was 16.5% and 12.6%,
respectively, versus 16.4% and 12.8% in the year-earlier period, according
to Securities Data Co.
Foreign issuers continued to access U.S. capital markets in 1994. New
issues from outside the U.S. accounted for more than 30% of equities sold in
domestic markets industrywide. International underwriting activity also
benefited from privatizations of state-owned industries in Europe and Latin
America. In 1994, international equity underwritings represented 16% of
the Corporation's total equity underwritings, compared with 5% in 1993.
Strategic services revenues, which include fees for debt restructuring,
merger and acquisition activity, and other advisory services, increased 36% to
$251 million. Companies worldwide sought strategic partners to capitalize on
business opportunities attributable to lower trade barriers and to promote
growth and financial strength. In 1994, the volume of announced global
mergers and acquisitions advisory deals reached $534 billion industrywide. The
Corporation's market share of announced global deals was 10.3% in 1994, up
from 7.9% in 1993, according to Securities Data Co.
In 1993, investment banking revenues increased 23% from 1992 to a record
$1.83 billion, as lower interest rates and higher share prices spurred
underwriting activity. These favorable conditions led to significant balance
sheet refinancings and reissuance of debt by corporate treasurers, and increased
demand for equity securities. Strategic services revenues grew 5% to $184
million in 1993.
- --------------------------------------------------------------------------------
ASSET MANAGEMENT AND
PORTFOLIO SERVICE FEES
Revenues from asset management and portfolio service fees rose 12% in 1994
to a record $1.74 billion as a result of higher fees earned from asset
management activities and other fee-based services.
Asset management fees, which include fees earned on mutual funds sponsored
by the Corporation and third parties, increased 12% from 1993 to $794 million.
In 1994, approximately 90% of asset management fees were attributable to Merrill
Lynch-sponsored funds. During the period, assets under management increased in
money market and equity funds, but decreased in bond funds as investors
redeployed assets. Despite lower asset values, assets under management by
Merrill Lynch Asset Management ("MLAM") increased due principally to new money
investments in 1994.
The Corporation's strategy of advising clients to (i) prepare a plan to
establish financial objectives; (ii) begin saving early and methodically to
achieve short- and long-term financial goals; (iii) use mutual funds as long-
term investments; and (iv) allocate assets by type (i.e., stocks, bonds, cash)
and by region (i.e., domestic and international) to achieve greater after-tax
returns and diversification, contributed to increased levels of assets under
management.
Assets under management by MLAM increased 2%, or $3 billion, to $164
billion. As indicated earlier, the increase was attributable to money market
and stock funds, which grew by $8 billion to $104 billion. Bond funds,
representing 22% of assets under management, declined $6 billion in 1994 to
$36 billion. Assets under management also include private portfolio assets of
$20 billion and investments of insurance subsidiaries totaling $4 billion.
Private portfolio assets represent funds related to privately managed
individual and institutional accounts. Investments of insurance subsidiaries
support the insurance liabilities for fixed-rate life insurance and annuity
products.
Portfolio service fees increased 19% in 1994 to $438 million based on the
continued growth of products offering multiple investment services. Fees from
Merrill Lynch Consults (Registered Trademark) ("ML Consults"), a portfolio
management service, increased 4% in 1994 to $306 million due primarily to higher
asset levels during the 1994 first quarter. Fee levels during the remainder of
the year declined due to a reduction in asset levels and a decrease in the
number of accounts. At December 30, 1994, asset values for ML Consults were
$14.4 billion, down 15% from 1993. The approximate number of accounts totaled
78,500, compared with 87,000 at year-end 1993. Fee revenues also advanced in
Mutual Fund Advisor ("MFA (Service Mark)"), a personalized portfolio management
service, and Asset Power (Registered Trademark), a product with fees and
transaction limits based on asset levels. Combined revenues from MFA and Asset
Power accounts increased 177% to $36 million. Assets under management for these
products totaled $3 billion representing approximately 22,900 accounts. Other
portfolio service fees, principally insurance and trust fees, increased 57% to
$96 million.
Other fee-based revenues were up 5% from 1993 to $508 million due primarily
to increased revenues from transfer agency, CMA (Registered Trademark), IRA, and
Keogh fees.
Total client assets in worldwide private client accounts were $568 billion
at year-end 1994 compared with $557 billion at year-end 1993. In 1994, client
accounts were redefined to include certain institutional private portfolio
accounts
--------------------
7
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
managed by the Corporation. Prior years' client account assets have been
restated.
In 1993, asset management and portfolio service fee revenues rose 24% to
$1.56 billion, principally as a result of increased fees earned from asset
management activities, the ML Consults portfolio management service, and other
fee-based services. Asset management fees increased 21% to $706 million due
principally to growth in stock and bond funds. In 1993, revenues from ML
Consults advanced 66% to $294 million as the total number of accounts grew 36%
to 87,000. Other fee-based revenues were up 8% to $483 million due to
increased revenues from mortgage servicing, insurance, and custodial fees for
retirement accounts.
- --------------------------------------------------------------------------------
OTHER REVENUES
Other revenues increased 65% in 1994 to $471 million. Other revenues
include investment gains and losses, transaction processing fees, and proxy
activities.
In 1994, net realized investment gains related to merchant banking
activities were $81 million, compared with $133 million of net investment
losses a year ago. In certain instances, sales of merchant banking positions
are subject to restrictions, limiting the Corporation's ability to dispose of
these investments until required holding periods expire. In 1994, restrictions
applicable to certain investments lapsed and market conditions changed,
enabling the Corporation to dispose of certain merchant banking investments.
Merchant banking positions are carried at the lower of cost or estimated net
realizable value. Loss provisions related to these investments are established,
as appropriate, to reduce the carrying value to estimated net realizable value.
(See discussion of Non-Investment Grade Holdings and Highly Leveraged
Transactions.) Revenues generated from transaction processing, proxy services,
and other activities declined 7% in 1994 to $390 million.
In 1993, other revenues were up 1% to $285 million due primarily to
higher fees generated from growth in home equity loan activity, partially
offset by higher net investment losses related primarily to provisions for
merchant banking investments.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
Non-interest expenses declined 3% in 1994 to $7.89 billion. Excluding the 1993
first quarter non-recurring lease charge of $103.0 million, non-interest
expenses declined 2%.
Compensation and benefits, the largest expense, declined 6% to $4.95
billion as lower incentive and production-related Financial Consultant
compensation was partially offset by increases in base wages, severance, and
Financial Consultant up-front hiring bonuses. Incentive compensation decreased
with lower profitability, while production-related compensation was down due to
volume declines in certain products.
The Corporation regularly evaluates its staffing levels given business
conditions. At year-end 1994, full-time personnel totaled 43,800 compared with
41,900 at year-end 1993. Hirings in 1994 consisted primarily of producers and
selected support staff in private client and international business areas. The
increase in personnel was concentrated in early 1994 with nearly 70% of the
hirings occurring before July. In the second half of 1994, approximately 53% of
the additional hirings were recent graduates, the result of the annual
recruiting cycle. Selected reductions in personnel related to overall business
contraction contributed to a charge for severance expense totaling $66 million
in 1994. Compensation and benefits, as a percentage of net revenues, was 51.5%
compared with 49.8% in 1993. The Corporation's ratio of support employees and
sales assistants to producers increased to 1.46 to 1 in 1994, from 1.43 to 1 in
1993.
Occupancy costs declined 24% (7% excluding the non-recurring lease
charge), benefiting from continued relocation of support staff to lower-cost
facilities and reduced space requirements at the Headquarters facility.
Communications and equipment rental expenses were 12% higher in 1994 due
to increased use of market data, news, and statistical services. Depreciation
and amortization expense rose 5% due primarily to the acquisition of
technology-related equipment that is depreciated over shorter useful
lives.
Advertising and market development expenses were down 1% with
discretionary costs decreasing as business conditions became less favorable.
Lower sales promotion costs and a reduction in advertising campaigns were
partially offset by increased travel related to international business
activities.
Professional fees increased 26% from a year ago, due primarily to the use
of system and management consultants to upgrade technology and processing
capabilities in trading, credit, and customer systems, as well as higher legal
fees.
Brokerage, clearing, and exchange fees increased 20% from 1993 due to
higher international equity volume and expanded risk management activities
related to volatile global market conditions. Other expenses were up 1% due
primarily to an increase in office supplies and postage costs.
In 1993, non-interest expenses increased 17% to $8.13 billion. Excluding
the 1993 first quarter non-recurring lease charge, non-interest expenses rose
15%. Favorable markets, increased business volumes, and record profitability
contributed to a 20% increase in compensation and benefits expense. Occupancy
costs rose 20% as a result of the non-recurring lease charge (down 2% excluding
the non-recurring lease charge). Communications and equipment rental expense
increased 5% due to the expanded use of telephone, market data, and news
services. Depreciation and amortization expense rose 10% due to replacement of
technology-related equipment. Advertising and market development expenses rose
25% reflecting higher sales promotion costs, recognition programs, and business
travel. Professional fees increased 13% due to increased use of system and
management consultants, and higher employment agency fees. Brokerage, clearing,
and exchange fees were up 1% as a result of increased trading volume. Other
expenses rose 5% in 1993 principally as a result of additions to loss provisions
related to litigation and claims, offset by a reduction in loss provisions
related to specific business activities.
--------------------
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
INCOME TAXES
The Corporation's 1994 income tax provision was $713 million and
represented a 41.2% effective tax rate. In 1993 and 1992, income tax
provisions were $1.03 billion and $669 million, respectively, representing
effective tax rates of 42.5% in 1993 and 41.3% in 1992. The effective
tax rate in 1994 decreased primarily as a result of lower state income
taxes. In 1993, the effective tax rate was higher as legislation increased
the Federal statutory tax rate from 34.0% to 35.0%.
The Corporation records deferred tax assets for the effects of temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. To recognize these deferred tax assets,
the Corporation anticipates future taxable income. The Corporation assessed
its ability to realize its deferred tax assets primarily on a strong earnings
history and the absence of negative evidence as discussed in SFAS No. 109,
"Accounting for Income Taxes." During the last 12 years, average
pretax earnings were $788 million per year. Accordingly, the Corporation
believes it is more likely than not that its deferred tax asset will be
realized.
In 1992, the Corporation adopted SFAS No. 109. 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. All available alternative minimum tax credits and net operating loss
tax benefit carryforwards from prior years were utilized by the end of
1992.
- --------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Stockholders' equity at December 30, 1994 increased 6% to $5.82 billion from
$5.49 billion at year-end 1993. The increase in 1994 was principally the result
of net earnings and the issuance of $425 million 9% Preferred Stock, Series A
(see Stockholders' Equity in the Notes to Consolidated Financial Statements).
These advances were primarily offset by an increase in treasury stock related to
the Corporation's share repurchase program, common and preferred dividends
declared by the Corporation, and a fair value adjustment related to SFAS No.
115, "Accounting for Investments in Certain Debt and Equity Securities."
In 1994, the Corporation repurchased approximately 30 million common shares
at an average price of $37.96 per share to meet share requirements under
employee benefit plans, to make appropriate adjustments to the Corporation's
capital structure, and for other general corporate purposes.
The Corporation granted a total of approximately 1.4 million shares of
common stock during 1994 to certain employees under the Long-Term Incentive
Compensation Plan and the Equity Capital Accumulation Plan.
In 1993, the Corporation adopted SFAS No. 115, which increased
stockholders' equity 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 shares from 200 million to 500 million shares. In addition, 1,637,314
shares of common stock were issued in 1993 under certain employee benefit plans.
At December 30, 1994, total common shares outstanding, excluding the
unallocated Employee Stock Ownership Plan ("ESOP") reversion common shares,
amounted to 181.5 million, 11% lower than the 204.0 million shares
outstanding at December 31, 1993. The decrease was principally
attributable to common stock repurchases. Including unallocated ESOP reversion
shares, total outstanding common shares were 187.9 million at the end of
1994. Total outstanding common shares, including unallocated ESOP reversion
shares, and commitments for shares related to employee benefit plans (whether
or not specific awards of such shares have been made) approximated 300.6
million at December 30, 1994. Subsequent to year-end, the Corporation
amended the Incentive Equity Purchase Plan by reducing the number of shares
authorized to zero. This amendment reduced committed amounts by approximately
24 million shares.
- --------------------------------------------------------------------------------
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, obtains committed, unsecured, revolving credit facilities
(the "Credit Facilities"), issues term debt, concentrates debt issuance
through Merrill Lynch & Co., Inc. (the "Parent"), and pursues expansion and
diversification of funding sources.
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 principally
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 restrictions on upstreaming cash from regulated 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 include liquidating cash equivalents, securitizing additional
home equity and other mortgage loan assets, and drawing on Credit Facilities.
At December 30, 1994, the Credit Facilities totaled $5.3 billion and have
not been drawn upon.
As an additional measure, the Corporation regularly reviews the level and
mix of its assets and liabilities to ascertain its ability to conduct core
businesses beyond one year
--------------------
9
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
without reliance on issuing new unsecured debt or drawing upon Credit
Facilities. The composition of the Corporation's asset mix provides a great
degree of flexibility in managing liquidity. The Corporation's liquidity
position is enhanced since most of the Corporation's assets turn over
frequently or are match-funded with a liability whose cash flow
characteristics closely match those of the asset. At December 30, 1994,
approximately 3% of the Corporation's assets, principally certain other
investments, and fixed and other assets, were considered not readily
marketable by management. The Corporation monitors the liquidity of assets,
the quality of Credit Facilities, and the overall level of equity and 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 borrowings at the Parent level, except where
tax regulations, time differences, or other business considerations make this
impractical. The benefits of this strategy are: a) lower financing costs from
the reduced risks of a diversified asset and business base; b) simplicity,
control, and wider name recognition by banks, creditors, and rating agencies;
and c) flexibility to meet varying funding requirements within subsidiaries.
The third element is to expand and diversify the Corporation's funding
instruments and its investor and creditor base. The Corporation maintains
strict concentration standards for short-term lenders, which include limits
for any single investor. The Corporation's funding programs benefit from the
ability to market commercial paper through its own sales force to a large,
diversified customer base and the financial creativity of the Corporation's
capital markets and private client operations. Commercial paper remains the
Corporation's major source of short-term general purpose funding. Commercial
paper outstanding totaled $14.8 billion at December 30, 1994 and $14.9
billion at December 31, 1993, which represented 9% and 10% of total
assets at year-end 1994 and 1993, respectively.
Total term debt issuance in 1994 exceeded 1993 levels as the Corporation
continued to be active in both domestic debt markets and Euro markets through
public issues and private placements. Foreign currency denominations and
interest rate indices were hedged, as required, to match the economic
characteristics of the Corporation's assets. Outstanding term debt at December
30, 1994 grew to $14.9 billion from $13.5 billion at December 31, 1993.
At December 30, 1994, the Corporation's senior long-term debt was rated
by seven recognized credit rating agencies, as follows:
- --------------------------------------------------------------------------------
RATING AGENCY RATING
- ------------- ------
Duff & Phelps Credit Rating Co. AA-
Fitch Investors Service, Inc. AA
IBCA Ltd. AA-
The Japan Bond Research Institute AA
Moody's Investors Service, Inc. A1
Standard & Poor's Ratings Group A+
Thomson BankWatch, Inc. AA
- --------------------------------------------------------------------------------
The Corporation issued $8.5 billion of long-term debt during 1994.
During the same period, maturities and repurchases were $6.9 billion. In
addition, approximately $1.9 billion of the Corporation's securities held by
subsidiaries were sold and $2.2 billion were purchased. At December 30,
1994, $6.1 billion of term debt had maturity dates in 1995 and $8.8
billion of term debt had maturity dates beyond one year. The average maturity
on all outstanding term debt was 3.0 years, compared with 2.9 years at
year-end 1993. Approximately $30.5 billion of the Corporation's indebtedness
at December 30, 1994 is considered senior indebtedness as defined under
various indentures.
As part of the Corporation's overall liquidity program, its insurance
subsidiaries regularly review the funding requirements of their contractual
obligations for in-force, fixed-rate life insurance and annuity contracts and
expected future acquisition and maintenance expenses for all contracts. The
liquidity and duration of the fixed-rate asset and liability portfolios are
closely monitored.
During the past few years, the Corporation's insurance subsidiaries have
changed the mix of products offered to policyholders. Currently, variable life
insurance and variable annuity products are actively marketed. These products
do not subject the insurance subsidiaries to the interest rate,
asset/liability matching, and credit risks attributable to fixed-rate
products, thereby reducing the risk profile and liquidity demands on the
insurance subsidiaries. The insurance subsidiaries maintain predominantly high
quality, liquid investment portfolios to fund their various business activities.
At December 30, 1994, approximately 81% of invested assets of insurance
subsidiaries were considered liquid by management.
- --------------------------------------------------------------------------------
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 $5.82 billion at December 30,
1994, including $5.20 billion in common equity supplemented by $619 million in
preferred stock. The Corporation's average leverage ratios, computed as the
ratio of average month-end assets to average month-end stockholders' equity,
were 32.0x and 27.4x for 1994 and 1993, respectively. The Corporation's leverage
ratios at the end of 1994 and 1993 were 28.1x and 27.9x, respectively. During
1994, leverage ratios were affected by the adoption of Financial Accounting
Standards Board Interpretation ("Interpretation") No. 39, "Offsetting of Amounts
Related to Certain Contracts," as modified by Interpretation No. 41, "Offsetting
of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements." The
effect of these Interpretations increased assets by approximately $8.5 billion
at December 30, 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 ratios were 18.9x and 16.6x for
1994 and 1993, respectively. The Corporation's adjusted leverage ratios at
the end of 1994 and 1993 were 16.9x and 17.5x, respectively.
--------------------
10
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Corporation operates in many regulated businesses that require various
minimum levels of capital to conduct business (see Regulatory Requirements and
Dividend Restrictions in the Notes to Consolidated Financial Statements). The
Corporation's broker-dealer, insurance, and futures commission merchant
activities are subject to regulatory requirements which may restrict the free
flow of funds to affiliates. Regulatory approval is required for certain
transactions, including payment of dividends in excess of certain established
levels, making affiliated investments, and entering into management and service
agreements with affiliated companies.
The Corporation's overall capital needs are continually reviewed to ensure
that its capital base can support the estimated risks 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 continually. The Corporation monitors and manages the change of its
balance sheet using point-in-time average daily balances. Average daily
balances are 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 those
underlying changes in year-end balances.
The increase in average balance sheet levels in 1994 was attributable to
many factors, including the effect of Interpretation No. 39, expanded
match-funding of repurchase and resale agreements, and increased trading
activity, particularly in the 1994 first quarter. In 1994, average daily
assets were $182 billion, up 29% from $141 billion in 1993. Average daily
liabilities in 1994 rose 30% to $177 billion from $137 billion in 1993.
Excluding the effect of Interpretation No. 39, average assets and liabilities
increased by approximately $28 billion, or 20%, in 1994. Interpretation No. 39
primarily affected balances related to contractual agreements and resale and
repurchase agreements. Although average asset and liability levels have
increased year over year, these balances have each declined 4% from first
quarter 1994 peak levels. The decrease corresponds with lower levels of business
activity after the 1994 first quarter.
The major components in the growth of average daily assets and liabilities
are summarized as follows:
- --------------------------------------------------------------------------------
INCREASE
IN AVERAGE PERCENT
DAILY ASSETS INCREASE
-------------- --------
(IN MILLIONS)
Resale agreements $17,856 48%
Trading assets 17,217 37
Securities borrowed 2,489 11
Customer receivables 2,397 21
- --------------------------------------------------------------------------------
INCREASE
IN AVERAGE PERCENT
DAILY LIABILITIES INCREASE
----------------- --------
Repurchase agreements $20,345 39%
Trading liabilities 12,393 56
Commercial paper and other
short-term borrowings 3,142 14
Long-term borrowings 2,941 23
- --------------------------------------------------------------------------------
In managing its balance sheet, the Corporation strives to match-fund its
interest-earning assets with interest-bearing liabilities having similar
maturities. The Corporation match-funds its repurchase agreements/resale
agreements and its securities borrowed/securities loaned business, for example,
earning an interest spread on these transactions. Repurchase and resale
agreements rose during 1994 as a result of an increase in match-funded
transactions involving foreign securities and an increase in collateralized
lending activities to facilitate client demand.
In 1994, inventory levels were up due to the effect of Interpretation
No. 39 and increases in trading activity. On-balance-sheet hedges included in
trading liabilities also advanced due, in part, to increased market volatility
during 1994. The Corporation uses hedges principally to reduce risk in
connection with its trading activities. Securities borrowed increased primarily
to facilitate deliveries to customers. Customer receivables also advanced as
trading volume, on average, was higher.
The Corporation's assets, based on liquidity and maturity characteristics,
are funded through diversified sources which include repurchase agreements,
commercial paper and other short-term borrowings, long-term borrowings, and
equity.
- --------------------------------------------------------------------------------
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 investment
banking, market-making, and derivative structuring activities. During the past
three years, the Corporation increased its non-investment grade trading
inventories to satisfy client demand for higher-yielding investments,
including emerging market and other international securities.
--------------------
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Non-investment grade securities have been defined as debt and preferred
equity securities rated as BB+ or lower, or equivalent ratings by recognized
credit rating agencies, certain sovereign debt in emerging markets, amounts due
under various derivative contracts from non-investment grade counterparties, and
non-rated securities which, in the opinion of management, are non-investment
grade. At December 30, 1994, long and short non-investment grade inventories
accounted for 4.3% of aggregate consolidated trading inventories, compared with
4.6% at year-end 1993 and 4.2% at year-end 1992. Non-investment grade trading
inventories are carried at fair value.
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. The Corporation provides extensions of credit to leveraged
companies in the form of senior and subordinated debt, as well as bridge
financing on a select and limited basis. In addition, the Corporation
syndicates loans for non-investment grade counterparties or counterparties
engaged in highly leveraged transactions. 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 year-end 1994,
1993, and 1992, no bridge loans were outstanding.
The Corporation holds non-investment grade securities, direct equity
investments in leveraged companies, and interests in partnerships that invest
in leveraged transactions. 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. Prior to July 1,
1994, the Corporation had 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. Future commitments
to participate in limited partnerships and other direct equity investments
will be determined on a select and limited basis.
The Corporation's involvement in non-investment grade securities and
highly leveraged transactions 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, whenever possible, employs strategies
to mitigate exposures.
The specific components and overall level of non-investment grade and
highly leveraged positions may vary significantly from period to period as a
result of inventory turnover, investment sales, and asset redeployment. The
Corporation continually 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. The Corporation also uses certain non-investment grade
trading inventories, principally non-U.S. governments and agencies securities,
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 to support fixed-rate liabilities. As a percentage of total
insurance investments, non-investment grade securities were 5.5% at year-end
1994, compared with 5.8% at year-end 1993 and 4.5% at year-end 1992.
Non-investment grade securities of insurance subsidiaries are classified as
available-for-sale and 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 at year-end 1994, 1993, and 1992 follows:
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(IN MILLIONS) 1994 1993 1992
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Non-investment grade
trading assets $3,309 $3,129 $1,723
Non-investment grade
trading liabilities 456 214 209
Non-investment grade investments
of insurance subsidiaries 314 458 409
Loans (net of allowance for loan
losses) (a) 257 435 822
Equity investments (b) 289 276 360
Partnership interests 93 92 120
- --------------------------------------------------------------------------------
Additional commitments to invest
in partnerships $ 80 $ 19 $ 27
Additional co-investment
commitments -- 49 89
Unutilized revolving lines of credit
and other lending commitments 50 49 75
- --------------------------------------------------------------------------------
(a) Represented outstanding loans to 35, 42, and 50 medium-sized companies at
year-end 1994, 1993, and 1992, respectively.
(b) Invested in 80, 82, and 103 enterprises at year-end 1994, 1993, and 1992,
respectively.
At December 30, 1994, the largest non-investment grade concentration
consisted of various issues of a South American sovereign totaling $235
million, of which $60 million represented on-balance-sheet hedges for
off-balance-sheet instruments. No one industry sector accounted for more than
21% of total non-investment grade positions. Included in the table above are
debt and equity securities of issuers in various stages of bankruptcy
proceedings or in default. At December 30, 1994, the carrying value of these
securities totaled $292 million, of which 71% resulted from the
Corporation's market-making activities in such securities.
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CASH FLOWS
The Statements of Consolidated Cash Flows classifies the flow of cash into
three broad activities: operating, investing, and financing. The Corporation's
net cash flows are principally associated with operating and financing
activities, which
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12
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
support the Corporation's trading, customer, and investment banking activities.
Cash flows from investing activities are primarily related to the Corporation's
insurance business.
The Corporation's cash and cash equivalents totaled $2.3 billion at
December 30, 1994, an increase of $0.5 billion and $1.1 billion, respectively,
from the end of 1993 and 1992.
Cash flows from operating activities in 1994 totaled $7.4 billion. Cash
was provided from an increase in trading liabilities totaling $5.6 billion,
primarily related to hedge activities, and a decrease in trading assets
consistent with business levels, totaling $6.6 billion. Trading assets and
trading liabilities exclude the effect of Interpretation No. 39. Net earnings
adjusted for noncash items also provided cash of $2.4 billion. Cash used for
remaining operating assets and liabilities totaled $7.2 billion and related
primarily to securities borrowed transactions, insurance liabilities, and
customer-related activity.
Cash flows from investing activities in 1994 totaled $0.3 billion. Cash
of $1.1 billion, principally related to net proceeds from sales and
maturities of investment securities, was provided from investing activities.
Cash used to acquire property, leasehold improvements, equipment, and other
assets totaled $0.8 billion.
The Corporation's financing activities used cash of $7.2 billion in
1994. Cash of $12.1 billion was used for payments under repurchase
agreements, net of resale agreements, repurchases of common stock, and stock
dividend payments. Offsetting these amounts was cash totaling $4.9 billion
provided by proceeds from commercial paper and issuance of long-term
borrowings and preferred stock.
In 1993, cash and cash equivalents increased $0.5 billion to $1.8 billion.
Cash used for operating activities totaled $17.1 billion, cash provided by
investing activities totaled $0.4 billion, and cash provided by financing
activities totaled $17.2 billion. In 1993, the decrease in cash from operating
activities reflected net increases in operating assets consistent with an
increase in the level of business activity. Cash provided from investing
activities represented a reduction in insurance investments offset by net
purchases of marketable investment securities, property, leasehold improvements,
and equipment, and other assets. Cash provided from financing activities was
used to fund the growth in the Corporation's balance sheet to accommodate
business levels. Cash was provided from repurchase agreements, net of resale
agreements, commercial paper, and other short- and long-term borrowings.
Financing activities used cash for share repurchases and stock dividends.
Cash and cash equivalents increased $0.2 billion to $1.3 billion in 1992.
Cash used for operating activities totaled $5.2 billion, while financing
activities provided cash of $5.4 billion. Cash from investing activities was
virtually unchanged.
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RECENT DEVELOPMENTS
New Accounting Pronouncements
In May 1993, the Financial Accounting Standards Board ("FASB") 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.
In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures." SFAS No. 118 amends
SFAS No. 114 to allow creditors to use existing methods for recognizing interest
income on an impaired loan, rather than the method originally required by SFAS
No. 114.
The Corporation has evaluated the impact of these pronouncements on its
financial statements as of December 30, 1994 and has determined that the
effect is not material.
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Business
As disclosed in the Corporation's Current Report on Form 8-K dated January 12,
1995 filed pursuant to the Securities Exchange Act of 1934, certain actions have
been filed against the Corporation by Orange County, California and The Orange
County Investment Pools as well as by others in connection with the
Corporation's business activities with Orange County or from the purchase of
debt instruments issued by Orange County that were underwritten by the
Corporation's subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The information set forth under the caption "Litigation" in the Notes to
Consolidated Financial Statements is incorporated by reference herein. Although
the ultimate outcome of these actions cannot be ascertained at this time and the
results of legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these actions will not have a
material adverse effect on the financial condition or the results of operations
of the Corporation as set forth in the consolidated financial statements
contained herein. The Corporation does not believe that the Orange County matter
will have a material impact on its business activities.
- --------------------------------------------------------------------------------
GLOBAL OPERATIONS
The Corporation has continued to strategically expand its international
business activities in 1994 to capitalize on the further globalization of
financial markets, the increase in cross-border transactions, and the demand
for global investments. The Corporation's international activities are
organized as follows: Europe and the Middle East, Latin America and Canada,
and the Asia Pacific region which includes Japan and Australia. In 1994, the
Corporation's international businesses were influenced by market conditions
comparable to those that negatively affected the Corporation's U.S. operating
results, including rising interest rates, volatile world currency and
securities markets, and investor sentiment. Accordingly, international results
in each of the Corporation's primary geographic regions decreased from 1993
levels. (See Industry and Global Operations in the Notes to Consolidated
Financial Statements.)
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Europe and the Middle East
The Corporation operates in Europe and the Middle East as a dealer in
fixed-income securities, swaps and other derivatives, foreign exchange,
equities, commodities, and Eurobonds. The Corporation also provides investment
banking, private banking, and research services.
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13
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Corporation continued to expand its businesses in Europe and the
Middle East. In 1994, the Corporation's capital market activities spread to the
emerging markets of Eastern Europe, Russia, Portugal, Greece, and South Africa.
These markets will require additional capital and investment, providing
financing opportunities for the Corporation. The Corporation has also expanded
its trading and banking activities in Western Europe through memberships on
major European exchanges such as the London, Frankfurt, and Zurich stock
exchanges, and the Paris and German futures exchanges. Moreover, the Corporation
became a gilt-edged market-maker in the United Kingdom and established a French
government bond trading presence in Paris during the year.
In 1994, total revenues for Europe and the Middle East were $3.5 billion,
up 11% from 1993. Net revenues totaled $1.1 billion, down 16% from 1993. The
region's earnings before income taxes were $176 million for 1994, compared with
$481 million in 1993, a decrease of 63%.
Trading results for the region declined from 1993. Fixed-income securities
were negatively affected by rising interest rates. Losses were recorded in
structured money market products and equity-linked warrants. Partially
offsetting these declines were higher revenues from commodities trading
activities. Investment banking revenues were virtually unchanged although volume
in sovereign and equity issuances increased.
The decrease in earnings before income taxes is attributable to higher
financing and other trading-related costs and an increase in compensation and
benefits expense. The number of full-time employees increased from 2,449 at
year-end 1993 to 2,857 at the end of 1994 to support business expansion.
In 1993, total revenues were $3.1 billion, up 67% from $1.9 billion
in 1992, while net revenues were $1.4 billion, up 42% from $953 million in
1992. Earnings before income taxes were $481 million in 1993 compared with $181
million in 1992, an increase of 166%.
In 1993, this region benefited from market volatility in Europe and falling
interest rates. As a result, corporate debt, government bonds, and swaps and
other derivatives trading revenues increased. Customer lending revenues,
portfolio management fees, and commissions also rose during the period. In 1993,
the Corporation increased staffing by 14% to support strategic expansion in this
region.
- --------------------------------------------------------------------------------
Canada and Latin America
In Canada, the Corporation provides investment banking and research,
securities and commodities brokerage, and market-making services, particularly
in corporate and government bonds and money market instruments. In Latin
America, the Corporation provides international banking, brokerage, trust, and
investment banking services. Included in the Latin America region are certain
offices located in the U.S. which primarily service Latin American clients.
Latin America has been a region of growth for the Corporation. The Corporation
has expanded its presence in this region primarily through increased private
client, investment banking, and equity trading activities.
Total revenues for Canada and Latin America increased to $617 million for
1994, up 17% from $526 million in 1993, while net revenues decreased 12% to $333
million in 1994. Earnings before income taxes were $137 million, down 2% from
1993. Investment banking activities in Latin America were lower than a year ago
due to market and political uncertainties in the region. The devaluation of the
Mexican peso affected securities valuations and investor demand, particularly in
the 1994 fourth quarter. This trend continued into the 1995 first quarter. The
region benefited from the continued growth of matched-book activity and fixed-
income trading in Canada, as well as equity sales to private banking clients in
Latin America. Staffing increased from 751 at year-end 1993 to 834 at December
30, 1994. The staffing increase was primarily in Latin America, which continued
to expand its range of products and client services. Certain of these hires
represented the foundation for an expanded equity trading operation, which
commenced in Brazil during early 1995.
In 1993, total revenues were $526 million, up 39% from $378 million in
1992. Net revenues were $377 million in 1993, up 46% from $259 million in
1992. Earnings before income taxes were $139 million versus $89 million in
1992, a 56% increase. Most of the growth was in principal transactions
revenues, primarily Canadian government bonds, as well as increases in
commission revenues related to private banking clients in Latin America.
Staffing increased to 751 in 1993, compared with 663 in 1992 to
facilitate expansion.
- --------------------------------------------------------------------------------
Asia Pacific
In the Asia Pacific region, the Corporation has a variety of operating centers
serving a broad retail and institutional client base. In Japan and China, the
focus is principally on institutional business opportunities, while in other
locations, such as Taiwan, Korea, Hong Kong, Singapore, and Australia, both
retail and institutional businesses are conducted. The Corporation has
securities and futures exchange memberships in the major financial centers and
has increased its trading and product capacity in Tokyo, Hong Kong, and
Singapore. Moreover, the Corporation recently expanded its presence in India,
Indonesia, and Thailand through strategic investments and joint ventures.
Total revenues for the Asia Pacific region in 1994 were $963 million, up
10% from 1993. Net revenues and earnings before income taxes were $554 million
and $75 million, down 19% and 61% from 1993, respectively. Trading results in
this region were mixed, with higher revenues from non-dollar swaps, equity
derivatives, and Australian debt offset by lower revenues from Japanese
Government Bonds ("JGB"). The decline in JGB trading revenues was attributable
to rising interest rates which also affected net interest profit in 1994.
In 1994, the number of full-time employees increased 17% to 1,383.
This strategic growth increased expense levels during 1994 contributing to
lower earnings before income taxes.
Total revenues for 1993 were $879 million versus $374 million in 1992.
Net revenues were $683 million in 1993
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14
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
compared with $309 million in 1992. Earnings before income taxes were $191
million in 1993 versus a $3 million loss in 1992. Higher revenues in 1993,
primarily in equity arbitrage and JGB and Australian debt trading, contributed
to these improved results.
- --------------------------------------------------------------------------------
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation, as a dealer, trades derivatives and provides clients with
customized products. These transactions allow clients to manage their exposure
to interest rate, currency, and security and commodity price risks. The
Corporation also uses derivative financial instruments to manage and hedge its
own interest rate, currency, and other risks related to its proprietary
trading strategies, client transactions, and non-trading activities.
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," defines derivative financial instruments as
futures, forwards, swaps, or option contracts, or other financial instruments
with similar characteristics.
The definition excludes all on-balance-sheet receivables and payables,
including those that "derive" their values or contractually required cash flows
from the price of some other security or index, such as mortgage-backed
securities, interest-only and principal-only obligations, and indexed debt
instruments. Derivative financial instruments, unlike non-derivative (or cash)
financial instruments, have both on- and off-balance-sheet implications,
depending upon the nature of the contract. Forward contracts, for example, are
treated as off-balance-sheet in terms of notional amounts, with only unrealized
gains and losses included in trading assets or liabilities. Derivatives can be
traded on an exchange or negotiated in the over-the-counter markets. Futures
contracts and certain options are examples of exchange-listed derivatives traded
or issued by the Corporation. Swap contracts, including swap options, caps,
collars, and floors, forward contracts, and certain equity derivatives are
examples of over-the-counter derivatives traded, issued, and used by the
Corporation.
The Corporation conducts derivative activities through a number of wholly
owned subsidiaries as part of its client-driven and proprietary business
transactions. Merrill Lynch Capital Services, Inc. ("MLCS") is the Corporation's
principal swaps dealer. Merrill Lynch Capital Markets PLC ("MLCM") is the
primary equity derivatives dealer of the Corporation. Merrill Lynch Derivative
Products, Inc., a "AAA" rated entity, is the Corporation's swap subsidiary which
provides credit intermediation for interest rate and currency swaps, options,
and similar transactions between highly rated counterparties and MLCS. In
connection with these derivative activities, certain of these subsidiaries
purchase and sell interest-bearing and equity securities for hedging purposes.
The Corporation, directly or through its subsidiaries, enters into
derivatives transactions to hedge certain trading positions, including other
derivatives. As an end-user, the Corporation also hedges its fixed-rate and
foreign currency-denominated debt issuances by entering into variable interest
rate swaps and foreign currency agreements with MLCS. MLCS then enters into
other contracts with third parties as part of the Corporation's trading and risk
management strategies. The Corporation also hedges equity-related exposures
embedded in certain of its debt instruments with equity derivatives transacted
primarily through MLCM.
Derivatives facilitate risk transfer and enhance liquidity in the
marketplace. For issuers, derivatives provide cost-effective funding
alternatives, while for investors, derivatives provide alternative investment
options and the ability to hedge risk. Market participants include dealers, such
as banks and other financial institutions, and end-users such as corporations,
governments, pension funds, government agencies, and other institutions.
Increased market participation and competition has helped to increase
liquidity in conventional derivatives, such as interest rate swaps. Widespread
acceptance has also contributed to the development of more complex products
structured for specific clients. Rapid growth, complexity, and highly
publicized losses have contributed to a perception that these products possess
additional risk to users and to financial markets. Although different in form,
both derivative and non-derivative financial instruments are subject to market,
credit, operational, and other similar risks. Credit considerations, for
example, exist for a corporate bond and an interest rate swap. In addition, both
of these instruments are sensitive to market risk due to movements in interest
rates which affect their respective pricing. The risks inherent in both types of
instruments need to be managed in a manner consistent with a company's overall
risk management policies.
- --------------------------------------------------------------------------------
Management Review
Management plays an important role in monitoring the Corporation's derivative
activities by setting market risk and credit limits, reviewing new products,
and establishing accounting, credit, and risk policies. Similar to other
financial products, presentations on derivatives are made to senior management
and the Board of Directors. These presentations include reviews of pricing
models and may 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 and Valuation
Notional amounts of derivative contracts provide a common basis for compiling
outstanding transactions. Notional amounts are not recorded on the balance
sheet and do not represent a measure of the Corporation's risk. Derivatives
used in a dealer capacity and to hedge other trading positions are
marked-to-market. The unrealized gain or loss is recorded in trading assets or
liabilities on the Consolidated Balance Sheets with the related income or loss
reported in principal transactions revenues. Derivatives used to hedge the
issuance of borrowings by the Corporation are generally recorded on an accrual
basis. Interest is accrued into income or expense over the life of the
contract, which generally matches the maturity of the related debt issue.
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15
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The fair value of a derivative contract represents the amount the
Corporation would have to pay a third party to assume its obligations under the
contract or the amount a third party would pay to receive the Corporation's
benefits under the contract. The Corporation's derivative transactions are
generally marked-to-market by pricing models based on the present value of
future cash flows using mid-market valuations with adjustments, as required, for
credit, liquidity, and ongoing costs. These adjustments are integral components
of the mark-to-market process.
Certain products may require additional market valuation adjustments. New,
complex products, where no established two-way market exists, may create a
need for liquidity adjustments. Modeling a complex product involves multiple
variables and assumptions, the precision of which will evolve over time. The
Corporation does not recognize the market value of these contracts determined
solely by the pricing model during the early stages of a product's life. Due
to limited markets for certain new, complex products, the pricing model may
not have the precision associated with a model for an existing product. As
these products develop, pricing models will be refined and hedging strategies
modified, based on experience, to more closely correlate the market movement
of these instruments.
Further valuation adjustments are recorded for significant derivative
product positions. These adjustments acknowledge the difficulty in disposing
of any large trading position in a short time period.
Most of the Corporation's derivative products are relatively short-term in
nature. At year-end 1994, the weighted average maturity of the Corporation's
derivative contracts, based on notional or contractual amounts, was 2.29
years, compared with 2.62 years at year-end 1993. Administrative costs are
incurred to service periodic cash streams and maintain hedges over the life of
the contract. A portion of income related to longer-term contracts is
recognized as the costs related to these contracts are incurred.
Sources of derivative revenues and their related components are regularly
reviewed by product, with profitability measured net of related hedging
activities.
The Corporation has an independent Global Risk Management Group which
develops pricing and risk management models to measure market risk. (See Risk
Management discussion.)
Operational risks for derivative instruments require ongoing review. These
instruments reset periodically based on variable interest rates, amortizing
principals, or variations in other factors. The Corporation ensures that
periodic payments/receipts on these instruments are based on appropriate
variables and that 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 and collateral requirements and for monitoring credit exposures.
Corporate Credit works with the business units to develop and refine credit risk
measurement models, analyze potential credit exposures for complex transactions,
and establish credit enhancement provisions. Credit enhancements protect the
Corporation against counterparty credit difficulties. Such provisions generally
require counterparties to post additional collateral if the counterparty credit
rating is downgraded, or if certain key ratios or covenants are not met.
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, if
any, was deemed worthless. The Corporation, however, requires collateral from
its counterparties to mitigate credit risk, when appropriate. From an economic
standpoint, credit risk is evaluated net of 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 estimates of future
replacement costs over the remaining life of the contract. Credit exposure
considerations are embedded in the mark-to-market process.
Whenever possible, the Corporation executes the International Swaps and
Derivatives Association, Inc. master agreement, or its equivalent, which
contains netting provisions ("master netting agreements"). Master netting
agreements help reduce overall credit exposure to counterparties. Master
netting agreements provide, in certain instances, protection in bankruptcy and
may 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 of credit exposure. 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.
Derivative credit exposures are aggregated with credit exposures related
to non-derivative transactions to assess the total exposure to each
counterparty and compliance with country, industry, and product limits.
Specific reserves may be required for exposures to weaker counterparties, as
appropriate, and are reviewed as part of the Corporation's Reserve Committee
process.
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RISK MANAGEMENT
The Corporation operates in dynamic businesses that are subject to many risks
that are continually monitored and evaluated. The Corporation's management has
developed corporate governance policies and procedures that require specific
areas and units to assist in the identification, assessment, and control of
these risks. The Corporation's independent Global Risk Management Group
("Risk Management") is primarily responsible for monitoring market exposure,
trading limits, and concentration levels (see Market Risk below). Credit risk
is monitored primarily by Corporate
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16
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Credit in conjunction with business unit personnel (see Credit Risk below).
Other units, including Finance, Corporate Audit, Operations, and Law and
Compliance ("Units"), perform oversight reviews, each critical to managing
risk.
In addition to independent risk management responsibilities, senior
management from these Units takes an active role in the oversight of the risk
management process through, among other things, the Reserve Committee of Senior
Management ("Reserve Committee"). The Reserve Committee monitors valuation and
certain other risks associated with assets and liabilities. The Corporation
establishes reserves in the Consolidated Balance Sheets for existing conditions,
events, or circumstances that may reduce the carrying value of an asset or incur
a liability. The Reserve Committee, chaired by the Chief Financial Officer,
reviews and approves firmwide reserve levels, as well as reserve methodologies.
The Reserve Committee meets monthly to review current market conditions and act
on specific issues brought to its attention by Finance, Corporate Credit, Risk
Management, and business unit personnel.
The Corporation's reserves take into account management's judgment and are
generally recorded based on (i) specific identification of risks and exposures,
(ii) formulas, (iii) aging, concentration, and liquidity analyses, or (iv)
combinations of these three methods.
Finance personnel, who report to the Chief Financial Officer, work closely
with business managers to establish appropriate levels of reserves commensurate
with business risks and activities. Reserves may be established as a result of
changes in counterparty credit rating or status, market volatility, the
liquidity of a product in a particular market, significant product
concentration, or the age of an inventory position. Trading inventories are
monitored for aging and concentration levels in specific issues and issuers.
Finance personnel independently review the pricing of trading inventories
and contractual arrangements, as well as monitor other asset and liability
valuations. Any specific issues requiring action are brought to the attention of
trading management and, as appropriate, the Reserve Committee.
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.
Within the Law and Compliance Division, Compliance establishes procedures
and policies encompassing conduct, ethics, and business practices. The
Corporation also maintains policies governing external regulatory requirements.
Law and Compliance conducts education programs, monitors the Corporation's
businesses, evaluates supervisory procedures, and recommends internal
disciplinary action when necessary. The Corporation's training and awareness
programs emphasize protection of clients' interests and preservation of the
Corporation's integrity. Law and Compliance reports to the Vice Chairman and
General Counsel.
Legal counsel within the organization are responsible for establishing
reserves for potential litigation exposures based on specific reviews of cases
or claims and consultations with outside counsel. The Corporation evaluates
potential claims and assesses the likelihood of loss. Other loss contingencies
are evaluated individually with reserves estimated based on the Corporation's
assessment of probable loss exposure.
- --------------------------------------------------------------------------------
Market Risk
The Corporation incurs market risk primarily in connection with its trading
activities. Disclosing methods for assessing and managing risk provide useful
information on market risk exposures. Disclosures of derivatives alone, however,
do not provide users of financial statements with a complete analysis of market
risk. Derivative and cash financial instruments are subject to similar market
and credit risks and are used together as part of trading and risk management
strategies.
Market risk affects trading inventory values through changes in interest
rates, credit spreads, equity, commodity, and currency prices, liquidity, and
market volatility. The Corporation's trading activities are primarily client
order flow driven rather than proprietary, with hedging transactions executed
when appropriate. This strategy helps reduce market risk and volatility in
principal transactions revenues.
Risk Management monitors the Corporation's exposure to potential losses in
the value of its trading inventories due to adverse market movements. Risk
Management is headed by a Senior Vice President, who is a member of the
Executive Management Committee and reports directly to the President and Chief
Operating 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 changes in limits and 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. Trading systems and complementary risk monitoring systems allow these
professionals to track established limit levels and exposures. Certain classes
of transactions, including new financial products, proposed equity, emerging
market, and high-yield underwritings, and bridge loans are subject to prior
approval from Risk Management.
Trading limits are customized for each product. Existing trading positions
are regularly compared with limits established by Risk Management. In addition,
individual product areas have established more specific trading limits. Risk
Management information systems monitor compliance with trading limits.
Trading systems are designed to assist traders in mitigating market and
other risks prevalent in trading. Risk Management also has access to trading
systems to allow for monitoring of positions and for performing computerized
analytics on various market situations and conditions.
Risk Management uses an analytical technique known as stress simulations
to measure and monitor exposure to market risk across all trading areas.
Stress simulations estimate gains or losses each trading area could experience
under both moderate and severe market movements.
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17
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MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Each simulation considers a specific change in interest rates, credit
spreads, equity prices, foreign exchange rates, commodity prices, or
volatilities, holding all other variables constant. Each trading area provides
Risk Management with daily information on the expected gain or loss from these
different stress scenarios. Based on these simulations, market risks can be
monitored firmwide and portfolios rebalanced, as necessary.
Stress simulations provide hypothetical results under different market
scenarios. The Corporation, however, views actual results as the best
indicator of risk management performance. Analyzing actual net product
revenues over time best illustrates the Corporation's tolerance for risk and
the effectiveness of its risk management strategies. The nature of the
Corporation's trading-related activities, principally client order flow,
combined with its risk management strategies, helps reduce volatility in net
product revenues. A distribution of weekly net product revenues (primarily
principal transactions revenues, net interest, and selling concessions) for the
last two years prior to the balance sheet date is presented in the graph below.
- --------------------------------------------------------------------------------
Graph titled "DISTRIBUTION OF WEEKLY NET REVENUES BY PRODUCT"
Presented is a bar graph showing Merrill Lynch & Co. Inc.'s distribution of
weekly net product revenues by product for the past two years. The graph
illustrates the number of weeks that net product revenues (primarily principal
transactions revenues, net interest, and selling concessions) fell within the
specified dollar ranges for each product presented below.
$(10)-0 $0-20 $20-40 $40-60 over $60
Foreign Exchange & Commodities 16 89 0 0 0
Municipals 2 103 0 0 0
Interest Rate & Currency Swaps 3 91 11 0 0
Equities & Equity Derivatives 0 6 57 34 8
Taxable Fixed-Income 1 11 53 30 10
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Credit Risk
Credit risk, the risk that a counterparty will fail to perform under its
contractual commitments, is monitored primarily by Corporate Credit in
conjunction with business unit personnel. 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 due diligence meetings with counterparties. Many types of
transactions, including most derivatives, are reviewed and subject to prior
approval from Corporate Credit.
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
Directors of Credit and the Chief Credit Officer.
The credit system tracks information from automated and manual sources.
This system aggregates credit exposure with each counterparty for various
legal entities and maintains overall counterparty limits, specific product
limits, and identifies limit review dates by counterparty. Detailed
information on firmwide inventory positions and transactions executed,
including current and potential credit exposure, is updated frequently 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, in conjunction with the business units, to monitor
counterparty, product, industry, country, and credit quality
concentrations.
Corporate Credit also monitors credit exposures related to the
Corporation's loan services, including mortgages and home equity lines of
credit, customer margin accounts, extensions of credit to high-net-worth
individuals, and working capital facilities to small businesses, as well as
merchant banking-related activities from prior periods. Reserves are estimated
based on specific identification of exposures, formulas, and aging
analyses.
--------------------
18
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
- --------------------------------------------------------------------------------
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. In recent years, the Corporation has diversified its revenue sources
to ensure that it is less dependent on any single financial product, customer
base, or market to generate revenues.
- --------------------------------------------------------------------------------
Graph titled "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 $3,392, $3,338, $3,656, $4,103,
and $4,320 for the years ended 1990 through 1994 respectively. Fee-based
revenues as a percentage of fixed and semi-fixed expenses are expressed as lines
across the bars and were 43%, 51%, 55%, 59%, and 68% for the years ended 1990
through 1994, respectively. Fee-based revenues include principally asset
management and portfolio service fees and net margin interest.
- --------------------------------------------------------------------------------
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.
Central to management of its operational risk, the Corporation maintains
backup facilities worldwide. 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 compete effectively 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
provide support and control for trading, clearance, and settlement activities,
and perform custodial functions for customer and proprietary assets.
Operations personnel who are responsible for entering trades report to an
operations or business manager, not to the traders.
Reserves for operational errors are established based on the nature of the
transaction and specific identification of exposure. Many of these reserves
are based on an aging analysis. Reserves on dividend and interest receivables,
for example, gradually accrete to 100% over specified time frames in accordance
with internal guidelines. Other operational exposures related to processing
errors are analyzed for potential reserves on a case-by-case basis.
--------------------
19
================================================================================
STATEMENTS OF CONSOLIDATED EARNINGS
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
-------------------------------------
(Dollars in Thousands,
Except Per Share Amounts) 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------
(52 Weeks) (53 Weeks) (52 Weeks)
REVENUES
Commissions $ 2,870,541 $ 2,894,228 $ 2,422,084
Interest and dividends 9,577,561 7,099,155 5,806,710
Principal transactions 2,334,924 2,920,439 2,165,725
Investment banking 1,239,465 1,831,253 1,484,067
Asset management and portfolio service fees 1,739,452 1,557,778 1,252,829
Other 471,148 285,324 281,253
----------- ----------- -----------
Total Revenues 18,233,091 16,588,177 13,412,668
Interest Expense 8,608,570 6,029,947 4,835,267
----------- ----------- -----------
NET REVENUES 9,624,521 10,558,230 8,577,401
----------- ----------- -----------
NON-INTEREST EXPENSES
Compensation and benefits 4,951,839 5,255,258 4,364,454
Occupancy 436,168 572,936 477,754
Communications and equipment rental 432,214 385,809 366,161
Depreciation and amortization 325,121 308,499 281,228
Advertising and market development 374,619 376,881 301,146
Professional fees 367,003 290,324 256,887
Brokerage, clearing, and exchange fees 337,512 280,712 277,166
Other 670,441 663,003 631,216
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSES 7,894,917 8,133,422 6,956,012
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGES
IN ACCOUNTING PRINCIPLES 1,729,604 2,424,808 1,621,389
Income tax expense 712,843 1,030,449 668,984
----------- ----------- -----------
EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 1,016,761 1,394,359 952,405
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 $ 1,016,761 $ 1,358,939 $ 893,825
=========== =========== ===========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,004,050 $ 1,353,558 $ 887,486
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
PRIMARY EARNINGS PER COMMON SHARE
Earnings Before Cumulative Effect of Changes in Accounting Principles $ 4.75 $ 6.14 $ 4.18
Cumulative Effect of Changes in Accounting Principles -- (.16) (.26)
----------- ----------- -----------
NET EARNINGS $ 4.75 $ 5.98 $ 3.92
=========== =========== ===========
FULLY DILUTED EARNINGS PER COMMON SHARE
Earnings Before Cumulative Effect of Changes in Accounting Principles $ 4.74 $ 6.11 $ 4.17
Cumulative Effect of Changes in Accounting Principles -- (.16) (.26)
----------- ----------- -----------
NET EARNINGS $ 4.74 $ 5.95 $ 3.91
=========== =========== ===========
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
--------------------
20
================================================================================
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 30, December 31,
-------------------------------
(Dollars in Thousands,
Except Per Share Amounts) 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
CASH AND CASH EQUIVALENTS $ 2,311,743 $ 1,783,408
------------ ------------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR DEPOSITED WITH CLEARING
ORGANIZATIONS 4,953,062 4,069,424
------------ ------------
MARKETABLE INVESTMENT SECURITIES 2,325,453 1,749,254
------------ ------------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock 14,818,157 15,758,207
Contractual agreements 9,519,105 1,005,877
U.S. Government and agencies 8,196,584 7,287,081
Non-U.S. governments and agencies 6,468,341 9,260,725
Equities and convertible debentures 6,263,492 6,806,539
Mortgages and mortgage-backed 5,223,809 6,486,464
Municipals 1,291,688 1,606,097
Money markets 957,589 3,337,839
------------ ------------
TOTAL 52,738,765 51,548,829
------------ ------------
RESALE AGREEMENTS 44,459,036 38,137,528
------------ ------------
SECURITIES BORROWED 20,993,302 19,001,061
------------ ------------
RECEIVABLES
Customers (net of allowance for doubtful accounts of $42,290 in 1994 and
$47,953 in 1993) 14,030,466 13,242,875
Brokers and dealers 6,486,879 7,292,332
Interest and other 4,360,693 2,758,768
------------ ------------
TOTAL 24,878,038 23,293,975
------------ ------------
INVESTMENTS OF INSURANCE SUBSIDIARIES 5,719,345 7,841,444
LOANS, NOTES, AND MORTGAGES (NET OF ALLOWANCE FOR LOAN LOSSES OF $180,799 IN 1994 AND
$142,414 IN 1993) 1,586,718 2,083,553
OTHER INVESTMENTS 887,626 873,806
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT (NET OF ACCUMULATED DEPRECIATION AND
AMORTIZATION OF $1,867,476 IN 1994 AND $1,677,334 IN 1993) 1,587,639 1,506,964
OTHER ASSETS 1,308,600 1,021,116
------------ ------------
TOTAL ASSETS $163,749,327 $152,910,362
============ ============
- -----------------------------------------------------------------------------------------------------------------------
--------------------
21
================================================================================
- --------------------------------------------------------------------------------
December 30, December 31,
-------------------------------
1994 1993
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
REPURCHASE AGREEMENTS $ 51,864,594 $ 56,418,148
------------ ------------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 26,439,645 23,214,329
------------ ------------
TRADING LIABILITIES, AT FAIR VALUE
U.S. Government and agencies 15,989,928 12,183,271
Contractual agreements 8,381,946 351,025
Non-U.S. governments and agencies 4,009,757 1,762,154
Equities and convertible debentures 3,990,146 3,953,850
Corporate debt and preferred stock 2,564,192 3,226,031
Municipals 165,906 184,041
------------ ------------
TOTAL 35,101,875 21,660,372
------------ ------------
CUSTOMERS 11,608,891 13,571,379
INSURANCE 5,689,513 7,405,673
BROKERS AND DEALERS 4,637,957 4,862,584
OTHER LIABILITIES AND ACCRUED INTEREST 7,725,924 6,823,064
LONG-TERM BORROWINGS 14,863,383 13,468,900
------------ ------------
TOTAL LIABILITIES 157,931,782 147,424,449
------------ ------------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity 618,800 193,800
------------ ------------
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 1,196,093 1,156,367
Foreign currency translation adjustment 3,703 (18,305)
Net unrealized (losses) gains on investment securities available-for-sale (net of
applicable income tax (benefit) expense of $(30,924) in 1994 and $12,493 in 1993) (56,957) 21,355
Retained earnings 5,605,616 4,777,142
------------ ------------
Subtotal 7,063,560 6,251,664
Less:
Treasury stock, at cost:
1994--48,423,944 shares
1993--23,408,139 shares 1,627,108 695,788
Unallocated ESOP reversion shares, at cost:
1994-- 6,427,091 shares
1993-- 8,932,332 shares 101,227 140,684
Employee stock transactions 136,480 123,079
------------ ------------
TOTAL COMMON STOCKHOLDERS' EQUITY 5,198,745 5,292,113
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,817,545 5,485,913
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $163,749,327 $152,910,362
============ ============
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
--------------------
22
================================================================================
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
--------------------------------------
(Dollars in Thousands,
Except Per Share Amounts) 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKHOLDERS' EQUITY
9% CUMULATIVE PREFERRED STOCK, SERIES A
$10,000 LIQUIDATION PREFERENCE PER SHARE
Balance, beginning of year $ -- $ -- $ --
Issued (42,500 shares in 1994) 425,000 -- --
---------- ---------- ----------
BALANCE, END OF YEAR (42,500 SHARES IN 1994) 425,000 -- --
---------- ---------- ----------
REMARKETED PREFERRED STOCK, SERIES C
$100,000 LIQUIDATION PREFERENCE PER SHARE
Balance, beginning and end of year (3,000 shares in 1994,
1993, and 1992) 300,000 300,000 300,000
---------- ---------- ----------
REMARKETED PREFERRED TREASURY STOCK, AT COST
Balance, beginning of year (1,062 shares in 1994 and 1993;
945 shares in 1992) (106,200) (106,200) (94,500)
Treasury stock purchased (117 shares in 1992) -- -- (11,700)
---------- ---------- ----------
BALANCE, END OF YEAR (1,062 SHARES IN 1994, 1993,
AND 1992) (106,200) (106,200) (106,200)
---------- ---------- ----------
BALANCE, END OF YEAR 193,800 193,800 193,800
---------- ---------- ----------
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 618,800 $ 193,800 $ 193,800
========== ========== ==========
COMMON STOCKHOLDERS' EQUITY
COMMON STOCK, PAR VALUE $1.33 1/3
Balance, beginning of year (236,330,162 shares in 1994;
234,692,848 in 1993 and 1992) $ 315,105 $ 312,922 $ 312,922
Issued for employee benefit plans (1,637,314 shares in 1993) -- 2,183 --
---------- ---------- ----------
BALANCE, END OF YEAR (236,330,162 SHARES IN 1994
AND 1993; 234,692,848 IN 1992) $ 315,105 $ 315,105 $ 312,922
========== ========== ==========
PAID-IN CAPITAL
Balance, beginning of year $1,156,367 $1,081,469 $999,612
Issuance of stock:
To employees (9,290) (2,456) (6,116)
For other activity, including employee stock grants 12,827 13,645 56,326
To ESOP (including allocation of shares in 1994, 1993,
and 1992) 36,189 63,709 31,647
---------- ---------- ----------
BALANCE, END OF YEAR $1,196,093 $1,156,367 $1,081,469
========== ========== ==========
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Balance, beginning of year $ (18,305) $ (6,129) $ 10,219
Translation adjustment (a) 22,008 (12,176) (16,348)
---------- ---------- ----------
BALANCE, END OF YEAR $ 3,703 $ (18,305) $ (6,129)
========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------
--------------------
23
================================================================================
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
--------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
NET UNREALIZED (LOSSES) GAINS ON INVESTMENT SECURITIES
AVAILABLE-FOR-SALE (NET OF APPLICABLE INCOME TAXES)
Balance, beginning of year $ 21,355 $ -- $ --
Net unrealized (losses) gains on investment securities
available-for-sale (410,068) 254,030 --
Other adjustments (b) 331,756 (232,675) --
----------- ---------- ----------
BALANCE, END OF YEAR $ (56,957) $ 21,355 $ --
=========== ========== ==========
RETAINED EARNINGS
Balance, beginning of year $ 4,777,142 $3,570,980 $2,803,392
Net earnings 1,016,761 1,358,939 893,825
Cash dividends declared:
9% Cumulative Preferred stock (6,163) -- --
Remarketed Preferred stock (6,391) (5,290) (6,745)
Common stock ($.89 per share in 1994; $.70 in 1993;
$.575 in 1992) (175,733) (147,487) (119,492)
----------- ---------- ----------
BALANCE, END OF YEAR $ 5,605,616 $4,777,142 $3,570,980
=========== ========== ==========
COMMON TREASURY STOCK, AT COST
Balance, beginning of year (23,408,139 shares in 1994;
16,288,488 in 1993; 15,612,392 in 1992) $ (695,788) $ (286,599) $ (167,507)
Treasury stock purchased (29,988,523 shares in 1994;
16,345,568 in 1993; 10,653,858 in 1992) (1,138,467) (695,431) (259,526)
Issued out of treasury (net of reacquisitions):
Employees (1,026,321 shares in 1994; 955,391 in 1993;
1,272,014 in 1992) 42,509 33,299 34,421
Employee stock grants (3,946,397 shares in 1994;
8,270,526 in 1993; 8,705,748 in 1992) 164,638 252,943 106,013
----------- ---------- ----------
BALANCE, END OF YEAR (48,423,944 SHARES IN 1994;
23,408,139 IN 1993; 16,288,488 IN 1992) $(1,627,108) $ (695,788) $ (286,599)
=========== ========== ==========
UNALLOCATED ESOP REVERSION SHARES, AT COST
Balance, beginning of year (8,932,332 shares in 1994;
11,201,672 in 1993; 13,636,820 in 1992) $ (140,684) $ (176,426) $ (214,780)
Allocation of shares to participants (2,505,241 shares in 1994;
2,269,340 in 1993; 2,435,148 in 1992) 39,457 35,742 38,354
----------- ---------- ----------
BALANCE, END OF YEAR (6,427,091 SHARES IN 1994;
8,932,332 IN 1993; 11,201,672 IN 1992) $ (101,227) $ (140,684) $ (176,426)
=========== ========== ==========
EMPLOYEE STOCK TRANSACTIONS
Balance, beginning of year $ (123,079) $ (120,913) $ (131,270)
Net issuance of employee stock grants (120,512) (115,251) (105,342)
Amortization of employee stock grants 100,367 106,867 109,908
Repayment of employee loans 6,744 6,218 5,791
----------- ---------- ----------
BALANCE, END OF YEAR $ (136,480) $ (123,079) $ (120,913)
=========== ========== ==========
TOTAL COMMON STOCKHOLDERS' EQUITY $ 5,198,745 $5,292,113 $4,375,304
=========== ========== ==========
TOTAL STOCKHOLDERS' EQUITY $ 5,817,545 $5,485,913 $4,569,104
=========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------
(a) Net of income tax (expense) benefit of $(7,513) in 1994, $(1,837) in 1993,
and $386 in 1992.
(b) Other adjustments consist of policyholder liabilities, deferred policy
acquisition costs, and deferred income taxes.
See Notes to Consolidated Financial Statements
--------------------
24
================================================================================
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
------------------------------------------
(Dollars in Thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings $ 1,016,761 $ 1,358,939 $ 893,825
Noncash items included in earnings:
Cumulative effect of changes in accounting principles -- 35,420 58,580
Depreciation and amortization 325,121 308,499 281,228
Policyholder reserves 353,871 516,741 624,012
Other 658,372 683,276 795,220
(Increase) decrease in operating assets:
Trading assets 6,610,064 (19,829,640) (6,794,804)
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations (883,638) (644,713) (70,120)
Securities borrowed (1,992,241) (5,435,258) (1,734,088)
Customers (826,440) (3,481,056) (2,409,415)
Maturities and sales of trading investment securities 197,376 -- --
Purchases of trading investment securities (213,040) -- --
Other (272,544) (3,708,028) (550,705)
Increase (decrease) in operating liabilities:
Trading liabilities 5,641,503 7,088,268 4,977,122
Customers (1,962,488) 3,673,980 (340,505)
Insurance (1,855,494) (2,028,539) (1,221,883)
Other 607,296 4,354,789 276,785
------------ ------------ ------------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 7,404,479 (17,107,322) (5,214,748)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 2,609,577 -- --
Sales of available-for-sale securities 1,377,234 -- --
Purchases of available-for-sale securities (2,296,355) -- --
Maturities of held-to-maturity securities 1,964,580 -- --
Purchases of held-to-maturity securities (2,536,824) -- --
Maturities and sales of investments by insurance subsidiaries -- 3,983,077 3,904,587
Purchases of investments by insurance subsidiaries -- (2,438,571) (3,304,652)
Marketable investment securities -- (575,284) (828,647)
Other investments and other assets (390,651) (176,322) 344,263
Property, leasehold improvements, and equipment (405,796) (406,348) (131,246)
------------ ------------ ------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 321,765 386,552 (15,695)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements (10,875,062) 10,872,443 (1,770,519)
Commercial paper and other short-term borrowings 3,225,316 4,445,206 4,593,854
Issuance and resale of long-term borrowings 10,352,802 7,861,813 6,773,739
Settlement and repurchases of long-term borrowings (9,089,491) (5,263,104) (3,861,745)
Issuance of 9% Cumulative Preferred stock 425,000 -- --
Repurchases of Remarketed Preferred stock -- -- (11,700)
Common stock transactions (1,048,187) (510,975) (189,301)
Dividends (188,287) (152,777) (126,237)
------------ ------------ ------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (7,197,909) 17,252,606 5,408,091
------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 528,335 531,836 177,648
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,783,408 1,251,572 1,073,924
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,311,743 $ 1,783,408 $ 1,251,572
============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Income taxes totaled $1,189,999 in 1994, $1,031,980 in 1993, and $590,481 in
1992.
Interest totaled $8,452,103 in 1994, $5,788,218 in 1993, and $4,753,336 in 1992.
See Notes to Consolidated Financial Statements
--------------------
25
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
================================================================================
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Merrill Lynch & Co., Inc. has established comprehensive accounting policies for
the parent company and its subsidiaries. These policies, which incorporate
prevailing industry practices, are in accordance with generally accepted
accounting principles and provide guidance on the recognition of revenues and
expenses, the valuation of assets, and the recording of liabilities and
reserves. A description of significant accounting policies follows.
- --------------------------------------------------------------------------------
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.
Certain limited classification and format changes have been implemented in
the 1994 consolidated financial statements. Prior years' financial statements
have been reclassified to conform to the 1994 presentation.
- --------------------------------------------------------------------------------
Trading Instruments
Trading assets and trading liabilities, including commitments for securities
sold but not yet purchased, are recorded on a trade date basis at fair value.
Fair value is based on quoted market prices, pricing models (utilizing
indicators of general market conditions or other economic measurements), or
management's estimates of amounts to be realized on settlement, assuming
current market conditions and an orderly disposition over a reasonable period of
time.
Derivative financial instruments include futures, forwards, options, and
swaps including swap options, caps, collars, and floors. Derivatives held for
trading or to hedge trading inventory positions are marked-to-market daily.
Market values for exchange-traded derivatives, principally futures and certain
options, are based on quoted market prices. Market values for over-the-counter
("OTC") derivative financial instruments, principally forwards, options, and
swaps, are based on pricing models using mid-market valuations adjusted, as
required, to reflect amounts which would be received from or paid to a third
party in settlement of the contracts. These adjustments are integral components
of the mark-to-market process and relate to credit spreads, market liquidity,
concentrations, close-out costs associated with unmatched positions, and funding
and administrative costs incurred over the life of the instrument.
Unrealized gains and losses from derivative transactions are reported
separately as assets and liabilities unless a legal right of setoff exists under
a master netting arrangement enforceable at law. Balances related to swap and
forward transactions and foreign currency options are included in "Contractual
agreements" on the Consolidated Balance Sheets. All other contract balances are
recorded with the related trading asset or liability. The fair value of equity
options purchased, for example, is recorded in the "Equities and convertible
debentures" trading asset caption.
The Corporation enters into when-issued and delayed delivery transactions.
Unrealized gains and losses from these transactions are recorded in the related
trading asset or liability account, respectively.
Principal transactions revenues are recognized on a trade date basis and
include net unrealized gains or losses from marking-to-market trading
instruments, including derivative contracts, when-issued and delayed delivery
transactions, and hedge positions related to trading activities. Realized
trading gains and losses and the interest amounts on the related instruments are
also included in current period earnings as principal transactions revenues and
interest revenues and expenses, respectively.
- --------------------------------------------------------------------------------
Financing and Related Activities
The Corporation's objective is to match-fund the interest sensitivity of its
assets and liabilities. Funding is principally obtained from commercial paper,
repurchase agreements, and long-term borrowings. The Corporation uses derivative
financial instruments to manage interest rate, foreign currency, and other
exposures. Derivatives which modify the interest rate characteristics of
specified assets and liabilities are accounted for on an accrual basis, with
amounts to be paid or received recognized as adjustments to interest income or
expense. Realized gains and losses on early terminations of interest rate
contracts are deferred and amortized over the remaining lives of the hedged
assets or liabilities. Unrealized gains and losses on all other derivatives are
recognized currently. At December 30, 1994, there were no deferred amounts
related to terminated contracts.
Repurchase and resale agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts, plus
accrued interest. The Corporation's policy is to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
resale agreements. Collateral is valued daily and the Corporation may require
counterparties to deposit additional collateral or return collateral pledged,
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. 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. For
cash and noncash collateral transactions, the fee received or paid by the
Corporation is recorded in the Statements of Consolidated Earnings as interest
income or interest expense. The Corporation monitors the market value of
securities borrowed or loaned against the collateral value daily.
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 purposes, the
--------------------
26
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
Corporation offsets certain receivables and payables with the same counterparty
on the Consolidated Balance Sheets.
- --------------------------------------------------------------------------------
Investment Securities
The Corporation holds debt and equity investments principally in non-broker-
dealer subsidiaries. These investments are classified as held-to-maturity,
trading, or available-for-sale. 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 recorded as trading investments 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 taxes and other
related items.
Restricted equity investment securities or equity investment securities
without available market quotations are reported at the lower of cost or
estimated net realizable value. Realized gains and losses and unrealized losses
resulting from adjustments in carrying values are included in current period
earnings.
The Corporation periodically reviews its investment securities for
appropriate classification. Investment securities transferred among categories,
although infrequent, are recorded at fair value. The cost basis of each
investment sold is specifically identified for purposes of computing realized
gains and losses.
- --------------------------------------------------------------------------------
Commissions and Related Expenses
Commissions charged for executing customer transactions are accrued on a trade
date basis and included in current period earnings. Production-related
compensation and benefits expense is accrued to match revenue recognition.
- --------------------------------------------------------------------------------
Investment Banking
Underwriting revenues and fees for mergers and acquisitions and advisory
assignments are recorded when services for the transaction are substantially
completed. Deal-related expenses are deferred and later expensed to match
revenue recognition.
- --------------------------------------------------------------------------------
Income Taxes
Merrill Lynch & Co., Inc. and certain of its wholly owned subsidiaries file a
consolidated Federal income tax return. The Corporation uses the asset and
liability method in providing income taxes on all transactions that have been
recognized in the consolidated financial statements. The asset and liability
method requires that 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 assets, 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 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. Most of
the Corporation's fixed assets are technology-based and have shorter lives,
generally three to five years. Maintenance and repair costs are expensed as
incurred.
Facilities-related depreciation and amortization expense was $135,485,
$140,340, and $130,448 in 1994, 1993, and 1992, respectively. Non-facilities-
related depreciation and amortization expense for 1994, 1993, and 1992 was
$189,636, $168,159, and $150,780, respectively.
- --------------------------------------------------------------------------------
Insurance
Insurance liabilities are future benefits payable under annuity and interest-
sensitive life contracts and include 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 that follows).
Interest crediting rates range from 2.8% 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.
These investments support the Corporation's in-force, universal life-type
contracts as defined by Statement of Financial Accounting Standards ("SFAS")
No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-
Duration Contracts and for Realized Gains and Losses from the Sale of
Investments." 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
--------------------
27
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
fair values and the proceeds reinvested at current yields. The corresponding
credits or charges for these adjustments are recorded as unrealized gains or
losses in stockholders' equity, net of applicable income tax expense or benefit.
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 resulting from the effect of exchange rate
changes on 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 securities and interest-
earning deposits with original maturities of less than 90 days.
- --------------------------------------------------------------------------------
Interest Expense
Interest expense includes payments in lieu of dividends of $22,738, $21,436, and
$12,556 in 1994, 1993, and 1992, respectively.
================================================================================
OTHER SIGNIFICANT EVENTS
Accounting Changes
On January 1, 1994, the Corporation adopted FASB Interpretation ("Interpreta-
tion") 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 Consolidated Balance Sheets 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 enforceable
at law. To offset unconditional contracts, such as resale and repurchase
agreements, net cash settlement of the related receivable and payable balances
is also required by Interpretation No. 39, as modified by Interpretation No. 41,
"Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase
Agreements."
Prior to the adoption of these Interpretations, 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 Consolidated Balance Sheets by contract type,
while certain receivables and payables related to resale and repurchase
agreements were reported net by counterparty. At December 30, 1994, assets and
liabilities increased approximately $8,500,000 for the effect of these
Interpretations.
In 1993, the Corporation adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits," and SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities."
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. The cumulative
effect of this change in accounting principle reported in the 1993 Statement of
Consolidated Earnings resulted in a charge of $35,420 (net of applicable income
tax benefits of $25,075). The incremental effect of adopting SFAS No. 112 on the
1993 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: held-to-maturity, trading, or
available-for-sale. Prior to adoption, these subsidiaries recorded investments
in debt securities at amortized cost and investments in equity securities at the
lower of cost or estimated net realizable value. 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 SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting for
Income Taxes."
SFAS No. 106 requires accrual accounting for postretirement benefits,
primarily health care and life insurance benefits. The cumulative effect of this
change in accounting principle, reported in the 1992 Statement 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 changed the conditions under which deferred tax assets are
recognized. The cumulative effect of this change in accounting principle
reported in the 1992
--------------------
28
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
Statement of Consolidated Earnings was an increase to earnings 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 sublease the
unused space to third parties. This space was sublet in 1994.
================================================================================
TRADING ACTIVITIES
The Corporation trades both derivative and cash financial instruments. While
trading activities are primarily generated by client order flow, the Corporation
also takes proprietary positions in interest rate, foreign exchange, debt,
equity, and commodity instruments based on expectations of future market
movements and conditions. The Corporation's trading strategies rely on the joint
management of its client-driven and proprietary transactions, along with the
hedging and financing of these positions.
Detailed information on principal transactions revenues by product category
follows/(1)/:
========================================================================
(In Millions) 1994 1993 1992
- ------------------------------------------------------------------------
Interest rate and currency swaps $ 749 $ 605 $ 390
Equities and equity derivatives 627 871 614
Taxable fixed-income 462 964 736
Municipals 388 322 268
Foreign exchange and commodities 109 158 158
------ ------ ------
TOTAL $2,335 $2,920 $2,166
====== ====== ======
- ------------------------------------------------------------------------
/(1)/ The revenue amounts presented include gains and losses from cash
instruments and related derivatives, including swaps, forwards, futures,
and options.
Interest revenues and expense are integral components of trading
activities. In assessing the profitability of financial instruments, the
Corporation views net interest and principal transactions activity in the
aggregate. (See "Principal Transactions" section of Management's Discussion
and Analysis-unaudited for further information on the Corporation's net trading
results.)
================================================================================
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Certain trading-related financial instruments have market and/or credit risk in
excess of amounts recorded on the Consolidated Balance Sheets. Financial
instruments with off-balance-sheet risk include derivatives, securities sold but
not yet purchased, and certain commitments.
SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments," defines a derivative as a futures, forward,
swap, or option contract, or other financial instrument with similar
characteristics. The SFAS No. 119 definition excludes all on-balance-sheet
receivables and payables, including those that "derive" their values or
contractually required cash flows from the price of some other security or
index, such as mortgage-backed securities, interest-only and principal-only
obligations, and indexed debt instruments. It also excludes option features
embedded in on-balance-sheet receivables or payables. Conversion features and
call provisions embedded in a convertible bond, for example, would not qualify
as a derivative under the SFAS No. 119 definition.
Derivative contracts often involve future commitments to exchange 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. Options can require the writer to purchase
or sell a specified financial instrument or commodity, or to make a cash payment
based on changes in a reference index or interest rate. Different forward
commitment and option terms can also be combined to meet specialized needs.
Interest rate caps and floors provide the purchaser with protection against
rising and falling interest rates, respectively. Interest rate collars combine a
cap and a floor, providing the purchaser with a predetermined interest rate
range. Swap options provide the purchaser with an option to enter into or to
cancel an existing swap contract in the future. The Corporation enters into
various derivative financial instruments to meet clients' needs and to manage
its own interest rate, currency, and market risks. (See "Derivative Financial
Instruments" and "Risk Management" sections of Management's Discussion and
Analysis-unaudited.)
- --------------------------------------------------------------------------------
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. The level of market risk is influenced by the volatility and
liquidity in the markets in which financial instruments are traded.
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. In many cases, derivative financial instruments
are used to hedge other on- and off-balance-sheet transactions. 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.
A discussion of market risk related to derivative financial instruments
used for trading purposes by risk type and class of instrument as of December
30, 1994 follows.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. Interest rate swap contracts are
a common interest rate risk management tool. Eurodollar and U.S. Treasury
securities
--------------------
29
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
futures are also effective in managing interest rate risk. The decision to
manage interest rate risk using futures or swap contracts, as opposed to buying
or selling short U.S. Treasury securities, depends on current market conditions
and funding considerations.
The table that follows summarizes the Corporation's derivative financial
instruments with interest rate risk:
================================================================
(In Billions) NOTIONAL AMOUNT
- ----------------------------------------------------------------
Swap agreements $653
Futures contracts $172
Options held $ 75
Options written $ 74
Forward contracts $ 29
- ----------------------------------------------------------------
Included in interest rate swap agreements are caps, collars, and floors,
swap options, basis swaps, and leveraged swap contracts. Basis swaps are a type
of interest rate swap agreement where rates received and paid are variable based
on different index rates. Leveraged swaps are another type of interest rate swap
where changes in the variable rate are multiplied by a contractual leverage
factor, such as four times three-month LIBOR (London Interbank Offered Rate).
The Corporation's exposure to interest rate risk resulting from these leverage
factors is hedged with other financial instruments.
The forward contracts category principally contains "To Be Announced"
mortgage pools which bear interest rate as well as principal prepayment risk.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange
rates will affect the value of financial instruments. Foreign exchange forwards
and options are commonly used to manage currency risk. Currency swaps are also
used primarily in situations where a long-dated forward market is not available
or where the end-user needs a customized instrument to hedge a foreign currency
cash flow stream. Parties to a currency swap initially exchange principal
amounts in two currencies, agreeing to exchange interest payments and to re-
exchange the currencies at a future date and agreed-upon rate.
The Corporation's derivative financial instruments with currency risk are
presented below:
===============================================================
(In Billions) NOTIONAL AMOUNT
- ---------------------------------------------------------------
Forward contracts $103
Swap agreements $ 73
Options held $ 22
Options written $ 22
- ---------------------------------------------------------------
A number of the Corporation's foreign currency contracts included above are
subject to both interest rate and currency risk. The Corporation's foreign
exchange contracts relate primarily to major currencies such as the Japanese
yen, German mark, and British pound.
Equity Price Risk
Equity price risk arises from the possibility that equity prices will fluctuate,
affecting the value of contracts which derive their value from a stock index, a
particular stock, or a defined basket of stocks.
The notional amounts of derivative financial instruments subject to equity
price risk follow:
===============================================================
(In Billions) NOTIONAL AMOUNT
- ---------------------------------------------------------------
Options held $22
Options written $21
Swap agreements $ 2
Futures contracts $ 2
- ---------------------------------------------------------------
Commodity Price Risk
The Corporation views its commodity contracts as financial instruments since
they are generally settled in cash and not by delivery of the underlying
commodity. Market risk results from the possibility that the price of the
underlying commodity may rise or fall. The notional amounts of derivative
financial instruments subject to commodity price risk are summarized as follows:
===============================================================
(In Billions) NOTIONAL AMOUNT
===============================================================
Options held $12
Options written $ 7
Forward contracts $ 7
Swap agreements $ 2
Futures contracts $ 2
- ---------------------------------------------------------------
Cash flows from commodity swaps are based on the difference between an
agreed-upon fixed price, and a price that varies with changes in a specified
commodity index. Commodity contracts held relate principally to natural
resources and base metals.
Most of the Corporation's off-balance-sheet derivative trading transactions
are short-term with a weighted average maturity of approximately 2.29 years as
of December 30, 1994 and 2.62 years as of December 31, 1993. The remaining
maturities for notional or contractual amounts outstanding for swaps, futures,
forwards, and other derivatives follow:
- --------------------------------------------------------------------------------
Graph titled "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
swaps and derivatives comprised of swap contracts, futures contracts, forward
contracts, options written, and options purchased. Remaining maturities for
these products in the aggregate total $1,300, $729, $511, $359, $251, $169,
$136, and $103 at year-end December 1994 through December 2000, and after 2000,
respectively.
- --------------------------------------------------------------------------------
30
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
At December 31, 1993, the notional amount of swap agreements including swap
options, caps, collars, and floors was $560 billion. Notional amounts of
forward, futures, and written option contracts were $154 billion, $105 billion,
and $72 billion, respectively, at December 31, 1993.
In addition to futures, forward, swap, and option contracts, the
Corporation enters into commitments to sell securities not yet purchased which
are recorded as trading 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.
================================================================================
FINANCING AND OTHER NON-TRADING ACTIVITIES
The Corporation issues dollar and foreign currency-denominated debt with both
variable and fixed-rate interest payment obligations. The Corporation enters
into swap agreements to convert fixed-rate interest payments on its debt
obligations into variable rate payments, while virtually all foreign currency-
denominated fixed-rate obligations are swapped into variable rate dollar
liabilities. Interest obligations on variable rate long-term debt and commercial
paper may also be modified through basis swaps, which change the underlying
interest rate basis or reset frequency. The Corporation also issues callable
debt and debt which is linked to the performance of an equity or commodity index
(e.g., S&P 500 or ENMET (Service Mark)) or an industry basket of stocks (e.g.,
telecommunication stocks). These features in a debt instrument are often
referred to as embedded options. The contingent components of these indexed and
callable debt issuances and the related hedges are recorded at amounts which
approximate fair value.
For other non-trading activities, the Corporation uses interest rate swaps
to modify the interest rate characteristics of specified repurchase, resale, and
certain customer transactions. The Corporation also uses currency swaps to hedge
investments in and loans to international subsidiaries.
The notional amounts of derivative financial instruments used by the
Corporation for purposes other than trading as of December 30, 1994 follow:
========================================================
(In Billions) NOTIONAL AMOUNT
- --------------------------------------------------------
Interest rate swap contracts/(1)/ $22
Foreign exchange swap contracts/(1)/ $ 3
Equity options held $ 1
- --------------------------------------------------------
/(1)/ Includes options embedded in swap contracts on callable debt totaling
$1 billion notional.
Most of the above transactions are entered into with the Corporation's
swaps and foreign exchange dealer subsidiaries which intermediate the interest
rate and currency risk with third parties in the normal course of their trading
activities.
================================================================================
CREDIT RISK AND CONCENTRATIONS OF CREDIT RISK
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, if any, was deemed worthless. From an economic standpoint,
however, credit risk is evaluated net of collateral. The Corporation also
attempts to control credit risk by monitoring credit exposures, limiting
transactions with specific counterparties, and continually assessing the
creditworthiness of counterparties.
Credit risk is limited to the current cost of replacing those contracts in
a gain position (i.e., the accounting loss). The notional or contractual values
of futures, forward, and swap contracts do not represent exposure to credit
risk. 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 are exchange-traded and require daily cash settlement, the
related risk of accounting loss is limited to a one-day net positive change in
market value. Option contracts can be exchange-traded or OTC contracts.
Purchased options have credit risk to the extent of their replacement cost.
Written options represent a potential obligation of the Corporation and,
accordingly, do not subject the Corporation to credit risk.
At December 30, 1994, credit risk related to trading derivatives is
recorded on the Consolidated Balance Sheet. At December 31, 1993, prior to the
adoption of Interpretation No. 39, $6.7 billion of credit risk was not required
to be recorded on the Consolidated Balance Sheet.
To reduce credit risk, the Corporation requires collateral, principally
U.S. Government and agencies securities, on certain derivative transactions.
Presented below is a table of counterparty credit ratings for the replacement
cost (net of $863,000 collateral) of derivatives contracts in a gain position by
maturity at December 30, 1994.
================================================================================
Years to Maturity CROSS-
--------------------------------- MATURITY
(In Millions) 0-3 3-5 5-7 Over 7 NETTING/(1)/ TOTAL
- --------------------------------------------------------------------------------
CREDIT
RATING/(2)/
AAA $ 602 $ 337 $ 10 $ 7 $ (60) $ 896
AA+/AA 448 125 84 288 (177) 768
AA- 1,307 467 237 625 (163) 2,473
A+/A 842 1,022 314 531 (251) 2,458
A- 770 204 142 543 (309) 1,350
BBB 483 215 32 82 (31) 781
BB+ 290 53 230 82 (85) 570
Other 155 15 5 9 (1) 183
------ ------ ------ ------ ------- ------
TOTAL $4,897 $2,438 $1,054 $2,167 $(1,077) $9,479
====== ====== ====== ====== ======= ======
- --------------------------------------------------------------------------------
/(1)/ Represents netting of payable balances with receivable balances for the
same counterparty across maturity year categories. Receivable and payable
balances with the same counterparty in the same maturity category,
however, are net within the maturity category.
/(2)/ Represents rating agency equivalent.
--------------------
31
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
At December 30, 1994, 92% of such contracts were with investment grade
counterparties. Counterparty credit ratings for the replacement cost (net of
collateral) of contracts in a gain position, after consideration of master
netting agreements, are summarized by contract in the graph that follows:
- --------------------------------------------------------------------------------
Graph titled "CREDIT QUALITY OF DERIVATIVE COUNTERPARTIES"
Presented is a bar graph showing Merrill Lynch & Co., Inc.'s credit quality of
derivatives counterparties. The graph, presented in millions is comprised of the
replacement cost of swap contracts, forward contracts, and options purchased at
year-end 1994 totaling $896, $768, $2,473, $2,458, $1,350, $781, $570, and $183
with counterparties rated AAA (rating agency equivalent), AA+/AA, AA-, A+/A, A-,
BBB, BB+, and other, respectively.
- --------------------------------------------------------------------------------
In the normal course of business, the Corporation incurs credit risk when
executing, settling, and financing various customer security and commodity
transactions. Execution of these transactions includes 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. In these
situations, the Corporation 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.
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 Corporation 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, securities transactions are financed through resale
and repurchase agreements, generally collateralized by U.S. Government and
agencies securities, medium-term notes, asset-backed securities, or certain non-
U.S. governments and agencies securities.
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 30, 1994 and December
31, 1993, was $37,350,000, and $45,373,000, respectively.
The Corporation is also exposed to off-balance-sheet credit risk from
various commitments and guarantees. In the normal course of business, the
Corporation enters into commitments to extend credit, predominantly at variable
interest rates, in connection with certain merchant banking and loan syndication
transactions. Customers may also be extended lines of credit collateralized by
first and second mortgages on real estate, certain liquid assets of small
businesses, or securities. The Corporation also issues various guarantees to
counterparties in connection with certain leasing, securitization, and other
transactions. These commitments and guarantees usually have a fixed expiration
date and are contingent on certain contractual conditions that may require
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 creditworthiness 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 guarantees and commitments may expire
without being drawn upon.
At December 30, 1994 and December 31, 1993, the Corporation had the
following commitments and guarantees:
==================================================================
(In Millions) 1994 1993
- ------------------------------------------------------------------
Commitments to extend credit $2,072 $1,248
Third party guarantees $ 520 $ 587
- ------------------------------------------------------------------
The fair value of the outstanding guarantees was $22,000 at December 30,
1994 and $39,000 at December 31, 1993.
- --------------------------------------------------------------------------------
Concentrations of Credit Risk
The Corporation provides brokerage, investment, financing, insurance, and
related services to a diverse group of domestic and foreign clients that
includes governments, corporations, and institutional and individual investors.
As a market-maker, the Corporation takes principal positions in U.S. and non-
U.S. government securities and corporate obligations.
The Corporation measures its exposure to credit risk associated with these
transactions 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 monitored in light of changing counterparty and market conditions.
At December 30, 1994, the Corporation's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration
arises from trading and holding investment securities. Total holdings of U.S.
--------------------
32
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
Government and agencies securities were $8,648,000 or 5% of total assets at
December 30, 1994 and $8,533,000 or 6% of total assets at December 31, 1993.
At December 30, 1994, the Corporation had concentrations of credit risk
with other counterparties including an Asian and two European sovereigns, each
rated AA or above, or having equivalent ratings by recognized credit rating
agencies. The total exposure to these counterparties, excluding collateral held,
was $2,615,000 or 1.6% of total assets. In addition, at December 30, 1994, the
Corporation had concentrations of credit risk related to resale agreements with
two financial institutions and two pension programs totaling $2,401,000 and
$1,988,000, respectively. The Corporation held collateral, consisting of U.S.
Government and agencies securities, with market values in excess of contractual
amounts. Excluding the collateral, these concentrations represented 2.7% of
total assets.
At December 31, 1993, the Corporation had concentrations of credit risk
with an Asian, a European, and a Latin American sovereign totaling $3,498,000 or
2.3% of total assets, excluding collateral held.
In addition to these specific exposures, the Corporation's most significant
industry credit concentration is domestic and foreign financial institutions.
Financial institutions include other brokers and dealers, commercial banks,
automobile financing companies, 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 collateralized by whole loans totaling $1,900,000 and
$3,400,000 with mortgage bankers, banks, and thrifts at December 30, 1994 and
December 31, 1993, respectively. The collateral had a market value of $2,100,000
at December 30, 1994 and $3,800,000 at December 31, 1993.
Additionally, the Corporation monitors regional exposures worldwide. Within
these regions, sovereign governments represent the most significant credit
concentration, followed by financial and non-financial institutions.
In conjunction with its investment and merchant banking activities, the
Corporation, from time to time, provides short-term bridge financing, other
extensions of credit, and equity investments to facilitate leveraged
transactions. In the normal course of business, the Corporation also purchases,
sells, and makes markets in non-investment grade securities. 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 30, 1994, 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 $4,848,000. (See "Non-Investment Grade Holdings and Highly Leveraged
Transactions" section of Management's Discussion and Analysis-unaudited.)
================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 30, 1994 and December 31, 1993, approximately 99% and 98% of
financial instrument assets 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, other short-term borrowings, customers, brokers and dealers, and
other liabilities and accrued interest, are carried at amounts which approximate
fair value.
Trading assets and liabilities, including derivative financial instruments,
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.
The table below presents the 1994 12-month average fair values for the
Corporation's derivative financial instruments used for trading purposes:
- ---------------------------------------------------------
AVERAGE
FAIR VALUE
----------------------
(In Millions) ASSETS LIABILITIES
- ---------------------------------------------------------
Swap agreements $8,349 $7,023
Forward contracts $1,358 $1,365
Options $1,714 $1,643
- ---------------------------------------------------------
Derivative financial instruments used to hedge borrowings and other non-
trading activities are recorded on an accrual basis. The fair value of these
instruments and the related hedges is estimated using current market prices and
pricing models. At December 30, 1994, the carrying and fair values of these
instruments were as follows:
=========================================================
(In Thousands) CARRYING VALUE FAIR VALUE
- ---------------------------------------------------------
Long-term borrowings $14,863,383 $14,368,524
Related derivative assets (133,343) (168,371)
Related derivative liabilities 65,703 546,884
----------- -----------
TOTAL $14,795,743 $14,747,037
=========== ===========
Commercial paper $14,758,830 $14,754,630
Related derivative liabilities (144) 6,116
----------- -----------
TOTAL $14,758,686 $14,760,746
=========== ===========
Other non-trading liabilities $ 1,634,800 $ 1,605,477
Related derivative assets 282 (3,587)
Related derivative liabilities (3,237) 23,337
----------- -----------
TOTAL $ 1,631,845 $ 1,625,227
=========== ===========
- ---------------------------------------------------------
The fair value of derivative assets hedging matched-book financing activity
was $966 and exceeded the carrying value by $1,467 at December 30, 1994.
--------------------
33
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
At December 31, 1993, the combined fair value of each non-trading activity,
including related hedges, approximated their combined carrying value.
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 30, 1994 and December 31, 1993,
carrying value approximated fair value.
Insurance subsidiaries' investments are carried at fair value, which is
generally estimated by market quotes obtained from exchanges for listed
securities or dealers for unlisted securities.
Other financial instruments with carrying values different than fair values
are presented below:
====================================================================================================
DECEMBER 30, 1994 DECEMBER 31, 1993
------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
Merchant banking equity and debt portfolio $ 556,458 $ 763,524 $ 780,665 $ 996,581
Loans, notes, and mortgages (excluding loans
related to merchant banking) $ 1,417,202 $ 1,428,412 $ 1,628,225 $ 1,639,551
Excess mortgage servicing rights $ 107,022 $ 154,207 $ 72,117 $ 117,823
- ----------------------------------------------------------------------------------------------------
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 various methods including earnings multiples, cash flow analyses, and
review of underlying financial conditions and other market factors. These
instruments may be subject to restrictions (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 variable 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 rates.
The Corporation holds a passive minority interest in a privately-held
limited partnership that provides information services. Due to the lack of a
ready market for this investment and contractual restrictions on the disposition
of the Corporation's interest, the fair value of this investment is not readily
determinable as of December 30, 1994. It is the opinion of management, however,
that the fair value of this investment significantly exceeds the carrying value
of $38,513.
================================================================================
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 primarily 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.
A reconciliation of the Corporation's investment securities to those
reported on the Consolidated Balance Sheets follows:
======================================================================
DECEMBER 30, DECEMBER 31,
1994 1993
- ----------------------------------------------------------------------
Investments of
insurance subsidiaries:
Available-for-sale $4,189,653 $6,088,443
Trading -- 164,620
Non-qualifying 1,529,692 1,588,381
---------- ----------
TOTAL $5,719,345 $7,841,444
========== ==========
Marketable investment
securities:
Available-for-sale $ 486,071 $ 471,862
Trading 32,139 --
Held-to-maturity 1,807,243 1,277,392
---------- ----------
TOTAL $2,325,453 $1,749,254
========== ==========
Other investments:
Available-for-sale $ 105,665 $ 151,801
Held-to-maturity 26,377 16,635
Non-qualifying 755,584 705,370
---------- ----------
TOTAL $ 887,626 $ 873,806
========== ==========
- ----------------------------------------------------------------------
--------------------
34
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
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
- --------------------------------------------------------------------------------
1994
Corporate debt $3,009,029 $21,194 $(142,926) $2,887,297
U.S. Government and agencies 365,055 1,260 (6,473) 359,842
Municipals 225,034 7,587 (11,174) 221,447
Mortgage-backed securities 1,239,498 11,897 (40,592) 1,210,803
Foreign government debt 4,198 -- (213) 3,985
Other debt securities 49,427 990 -- 50,417
---------- ------- --------- ----------
Total debt securities 4,892,241 42,928 (201,378) 4,733,791
Equity securities 45,186 6,181 (3,769) 47,598
---------- ------- --------- ----------
TOTAL $4,937,427 $49,109 $(205,147) $4,781,389
========== ======= ========= ==========
- --------------------------------------------------------------------------------
================================================================================
HELD-TO-MATURITY
- --------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
1994
Corporate debt $1,187,784 $ 179 $(17,138) $1,170,825
U.S. Government and agencies 104,127 18 (1,146) 102,999
Municipals 783 10 -- 793
Foreign government debt 27,725 -- (429) 27,296
Mortgage-backed securities 496,679 5 (15,608) 481,076
Other debt securities 16,522 6 -- 16,528
---------- ------ -------- ----------
TOTAL $1,833,620 $ 218 $(34,321) $1,799,517
========== ====== ======== ==========
- --------------------------------------------------------------------------------
================================================================================
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
U.S. Government 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
Foreign government debt -- -- -- --
Other debt securities -- -- -- --
---------- -------- -------- ----------
Total debt securities 6,412,142 278,124 (27,065) 6,663,201
Equity securities 45,934 6,591 (3,620) 48,905
---------- -------- -------- ----------
TOTAL $6,458,076 $284,715 $(30,685) $6,712,106
========== ======== ======== ==========
- --------------------------------------------------------------------------------
================================================================================
HELD-TO-MATURITY
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
1993
Corporate debt $ 601,452 $ 1,455 $ (648) $ 602,259
U.S. Government 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 847 41 (1) 887
---------- ------- ------ ----------
TOTAL $1,294,027 $ 9,715 $ (691) $1,303,051
========== ======= ====== ==========
- --------------------------------------------------------------------------------
--------------------
35
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
The carrying value and estimated fair value of debt securities at December
30, 1994 by contractual maturity for available-for-sale and held-to-maturity
investment securities follow:
=========================================================================================
AVAILABLE-FOR-SALE HELD-TO-MATURITY
----------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Due in one year or less $ 424,562 $ 425,091 $ 783,695 $ 775,635
Due after one year through five years 1,491,434 1,449,079 551,271 540,831
Due after five years through ten years 1,332,579 1,260,251 181 181
Due after ten years 404,168 388,567 1,794 1,794
---------- ---------- ---------- ----------
Subtotal 3,652,743 3,522,988 1,336,941 1,318,441
Mortgage-backed securities 1,239,498 1,210,803 496,679 481,076
---------- ---------- ---------- ----------
TOTAL/(1)/ $4,892,241 $4,733,791 $1,833,620 $1,799,517
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------
/(1)/ Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
For registrants subject to the information reporting requirements of the
Securities Exchange Act of 1934, there are additional requirements under SFAS
No. 115. The Corporation's insurance subsidiaries are required to adjust
deferred acquisition costs and certain policyholder liabilities associated with
investments classified as available-for-sale. These investments primarily
support in-force, universal life-type contracts under SFAS No. 97. These
adjustments are recorded in stockholders' equity and assume that the unrealized
gain or loss on available-for-sale securities were realized. The table that
follows provides the components of the amount recorded in stockholders' equity
for available-for-sale investments.
================================================================================
1994 1993
- --------------------------------------------------------------------------------
Net unrealized (losses) gains on investment securities
available-for-sale $(410,068) $ 254,030
Adjustments for policyholder liabilities 214,537 (205,495)
Adjustments for deferred policy acquisition costs 73,802 (14,687)
Deferred income tax benefit (expense) 43,417 (12,493)
--------- ---------
Net activity (78,312) 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 year $ (56,957) $ 21,355
========= =========
- --------------------------------------------------------------------------------
During 1994, certain available-for-sale investments were sold. The gross
proceeds from the sale of these investments were $1,377,234 with gross realized
gains and losses totaling $30,593 and $33,737, respectively. At December 30,
1994, the Corporation had $32,139 of trading investment securities which were
recorded at fair value. The Corporation's insurance subsidiaries hold policy
loans and other non-qualifying investments totaling $1,529,692. The estimated
fair value of all investments of insurance subsidiaries was $5,719,345 at
December 30, 1994, with gross unrealized gains of $33,439 and gross unrealized
losses of $190,752. Net unrealized losses from trading investment securities
included in the 1994 Statement of Consolidated Earnings was $7,331.
================================================================================
STOCKHOLDERS' EQUITY
Preferred Equity
The Corporation is authorized to issue 25,000,000 shares of undesignated
preferred stock, $1.00 par value per share. In 1994, the Corporation's Board of
Directors (the "Board") delegated to the Executive Committee of the Board the
authority to authorize the issuance, from time to time, of up to 100,000 shares
of previously undesignated preferred stock having an aggregate liquidation
preference not to exceed $600,000.
- --------------------------------------------------------------------------------
9% Cumulative Preferred Stock, Series A
In the 1994 fourth quarter, the Corporation issued 17,000,000 Depositary Shares,
each representing a one-four-hundredth interest in a share of 9% Cumulative
Preferred Stock, Series A, $10,000 liquidation preference per share ("9%
Preferred Stock"). The 9% Preferred Stock is a single series consisting of
42,500 shares with an aggregate liquidation preference of $425,000. At December
30, 1994, 42,500 shares, represented by 17,000,000 Depositary Shares, were
outstanding. At December 30, 1994, Depositary Shares held by the Corporation for
market-making purposes were not material.
Dividends on the 9% Preferred Stock are cumulative from the date of
original issue and are payable quarterly when declared by the authority of the
Board. Total dividends declared on the 9% Preferred Stock in 1994 were $6,163.
The 9% Preferred Stock is redeemable on or after December 30, 2004 at the option
of the Corporation. The Corporation may redeem the 9% Preferred Stock, in whole
or in part, at a redemption price equal to $10,000 per share, plus accrued and
unpaid dividends (whether or not declared), to the date fixed for redemption.
--------------------
36
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Remarketed Preferred(Service Mark) Stock, Series C
The Corporation previously issued 3,000 shares of Remarketed Preferred
("RP(Registered Trademark)") stock, Series C of which 1,938 shares were
outstanding as of December 30, 1994.
At the end of each dividend period, the RP stock 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 of generally seven or
49 days with a maximum dividend rate payable dependent on the credit rating
assigned to the RP stock. Dividends on the RP stock are cumulative and payable
when declared by the authority of the Board. Dividend rates in effect during
1994 on the RP stock ranged from 2.40% to 5.20% per annum. The maximum dividend
rate on the RP stock ranges from 115% to 250% of the "AA" Composite Commercial
Paper Rate based on the Standard & Poor's Ratings Group and Moody's Investors
Service, Inc. credit ratings on the date on which the dividend rate is reset.
Total dividends declared in 1994 on shares of RP stock were $6,391. The
Corporation may redeem the RP stock, in whole or in part, on any dividend
payment date at a redemption price of $100,000 per share, plus accumulated
dividends.
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 30, 1994, the RP stock held by MLPF&S for the
purpose of resale was not material.
- --------------------------------------------------------------------------------
Stockholder Rights Plan
The Corporation's Stockholder Rights Plan provides for the distribution of
preferred purchase rights ("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 or
exchange offer for 30% or more of the common shares outstanding. One-half of a
Right is attached to each outstanding share of common stock and will attach to
all subsequently issued shares. The 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 are
nonredeemable and have voting privileges and 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 either the acquiring party holds
25% or more of the Corporation's outstanding shares or 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 stock.
Shares outstanding and balances for each issue of preferred stock are
presented below:
=================================================================================
SHARES OUTSTANDING BALANCE AT
- ---------------------------------------------------------------------------------
DEC. 30, DEC. 31, DEC. 30, DEC. 31,
1994 1993 1994 1993
- ---------------------------------------------------------------------------------
9% Cumulative Preferred Stock, Series A 42,500 -- $425,000 $ --
Remarketed Preferred Stock, Series C 1,938 1,938 193,800 193,800
------ ----- -------- --------
TOTAL 44,438 1,938 $618,800 $193,800
====== ===== ======== ========
- ---------------------------------------------------------------------------------
All shares of currently outstanding preferred stock constitute one and the
same class and have equal rank and priority over common stockholders as to
dividends and in the event of liquidation.
- --------------------------------------------------------------------------------
Common Equity
On October 11, 1993, the Board declared a two-for-one common stock split,
effected in the form of a 100% 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 reflect the effect of the split.
In 1993, 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.
================================================================================
PER COMMON SHARE COMPUTATION
The Corporation computed earnings per common share 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 anti-dilutive) 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.
Primary earnings per common share is computed by dividing net earnings,
after deducting preferred stock dividend requirements of $12,711, $5,381, and
$6,339 for 1994, 1993, and 1992, 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).
--------------------
37
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
The weighted average number of common shares and incremental shares
included in the primary and fully diluted per common share computations follow:
================================================================================
1994 1993 1992
- --------------------------------------------------------------------------------
Primary:
Weighted average common shares 195,661,000 209,276,000 207,730,000
Incremental shares 15,580,000 17,055,000 18,672,000
----------- ----------- -----------
TOTAL 211,241,000 226,331,000 226,402,000
=========== =========== ===========
Fully Diluted:
Weighted average common shares 195,661,000 209,276,000 207,730,000
Incremental shares 16,034,000 18,204,000 19,124,000
----------- ----------- -----------
TOTAL 211,695,000 227,480,000 226,854,000
=========== =========== ===========
- --------------------------------------------------------------------------------
================================================================================
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings at December 30, 1994 and
December 31, 1993 are presented below:
================================================================================
1994 1993
- --------------------------------------------------------------------------------
Commercial paper $14,758,830 $14,895,540
Demand and time deposits 7,577,492 5,946,244
Securities loaned 2,180,186 1,047,059
Bank loans and other 1,923,137 1,325,486
----------- -----------
TOTAL $26,439,645 $23,214,329
=========== ===========
- --------------------------------------------------------------------------------
The Corporation's weighted average interest rate on commercial paper and
other short-term borrowings, including repurchase agreements, was 4.74% in 1994
and 4.20% in 1993.
The weighted average interest rate on these borrowings modified through
swap agreements was 4.76% and 4.18% in 1994 and 1993, respectively.
================================================================================
LONG-TERM BORROWINGS
Long-term borrowings at December 30, 1994 and December 31, 1993 consisted of the
following:
================================================================================
1994 1993
- --------------------------------------------------------------------------------
U.S. dollar-denominated fixed-rate obligations
due 1995 to 2019 at interest rates ranging
from 4.75% to 10.375% $ 4,982,736 $ 5,814,146
Foreign currency-denominated fixed-rate obligations
due 1995 to 2001 at interest rates ranging from
4.40% to 12.10% 725,425 684,637
U.S. dollar-denominated variable rate obligations 890,457 782,055
Foreign currency-denominated variable rate obligations 110,058 97,554
U.S. dollar-denominated medium-term notes 6,934,075 5,983,837
Foreign currency-denominated medium-term notes 1,220,632 106,671
----------- -----------
TOTAL $14,863,383 $13,468,900
=========== ===========
- --------------------------------------------------------------------------------
Rates and maturities presented are as of December 30, 1994.
Maturities of long-term borrowings at December 30, 1994 consisted of the
following:
=================================================
MATURITIES
- -------------------------------------------------
1995 $ 6,136,504
1996 1,466,360
1997 1,300,051
1998 722,806
1999 2,187,600
2000 and thereafter 3,050,062
-----------
TOTAL $14,863,383
===========
- -------------------------------------------------
At December 30, 1994, variable interest rates were obtained through
interest rate and foreign currency swap contracts on $5,623,511 or 99% of the
Corporation's $5,708,161 total U.S. dollar-denominated and foreign currency-
denominated fixed-rate obligations. The effective weighted average interest rate
on these fixed-rate obligations swapped into variable rate obligations was 4.54%
in 1994. The Corporation's remaining fixed-rate long-term obligation totaled
$84,650 and had an interest rate of 11.93% in 1994.
Included in U.S. dollar-denominated variable rate obligations are various
equity-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 effective weighted average interest rates on the Corporation's U.S.
dollar-denominated variable rate
--------------------
38
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
obligations and the Corporation's foreign currency-denominated variable rate
obligations were 4.53% and 4.54%, respectively, in 1994. Variable interest rates
are generally based on rates such as LIBOR, the "AA" Commercial Paper
Composite Rate, the U.S. Treasury Bill Rate, or the Federal Funds Rate ("Fed
Funds").
The effective weighted average interest rate on all medium-term notes was
4.40% in 1994. Maturities of medium-term notes currently range from nine months
to 30 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 may be
redeemed prior to maturity in 1995 and 1996 total $159,500 and $24,764,
respectively. Management believes, however, that a significant portion of such
borrowings may remain outstanding beyond their earliest redemption date.
Subsequent to year-end 1994 and through February 21, 1995, long-term
borrowings, net of new issuances and resales, decreased approximately $417,770.
(See Financing and Other Non-Trading Activities Note to the Consolidated
Financial Statements.)
================================================================================
INCOME TAXES
Income tax provisions (benefits) on earnings before the cumulative effect of
changes in accounting principles consisted of:
===========================================================================
1994 1993 1992
- ---------------------------------------------------------------------------
Federal: Current $ 679,816 $ 877,903 $ 435,093
Deferred (149,925) (274,517) (59,007)
State and
Local: Current 158,287 376,085 252,498
Deferred 2,332 (57,760) (20,868)
Foreign: Current 4,603 163,690 65,271
Deferred 17,730 (54,952) (4,003)
--------- ---------- ---------
TOTAL $ 712,843 $1,030,449 $ 668,984
========= ========== =========
- --------------------------------------------------------------------------------
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:
===========================================================================
1994 1993 1992
- ---------------------------------------------------------------------------
Federal income tax at statutory rates $605,361 $ 848,683 $551,272
State and local income taxes, net 104,402 206,911 152,876
Tax-exempt interest (18,351) (16,228) (13,706)
Dividends received deduction (17,284) (8,249) (23,730)
Foreign operations 22,663 2,704 5,636
Pension plan transaction 14,445 13,705 14,885
Other, net 1,607 (17,077) (18,249)
-------- ---------- --------
TOTAL $712,843 $1,030,449 $668,984
======== ========== ========
- ---------------------------------------------------------------------------
The Omnibus Budget Reconciliation Act of 1993 increased the corporate
statutory tax rate to 35.0% retroactive to January 1, 1993.
For financial reporting purposes, the Corporation had no unrecognized net
operating loss or alternative minimum tax benefit carryforwards at December 30,
1994.
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. Details of the Corporation's deferred tax
assets and liabilities follow:
===========================================================================
1994 1993 1992
- ---------------------------------------------------------------------------
DEFERRED TAX ASSETS:
Valuation of inventory, investments,
and receivables $ 638,448 $ 658,768 $ 441,656
Deferred compensation 192,245 91,200 114,390
Other 337,449 246,682 148,047
---------- ---------- ----------
Subtotal 1,168,142 996,650 704,093
Valuation allowance -- (2,500) --
---------- ---------- ----------
Deferred tax asset net of valuation
allowance 1,168,142 994,150 704,093
---------- ---------- ----------
DEFERRED TAX LIABILITIES:
Lease transactions 112,956 74,445 141,149
Accelerated tax depreciation 92,048 113,578 137,881
Unrealized gains on trading inventory 29,007 35,707 41,019
Other 73,398 87,409 136,461
---------- ---------- ----------
Subtotal 307,409 311,139 456,510
---------- ---------- ----------
Net deferred tax asset $ 860,733 $ 683,011 $ 247,583
========== ========== ==========
- --------------------------------------------------------------------------------
Income tax benefits of $5,095, $75,150, and $114,487 were allocated to
stockholders' equity related to employee compensation transactions for 1994,
1993, and 1992, respectively.
Earnings before income taxes include approximately $48,000, $395,000, and
$130,000 of earnings attributable to foreign entities for 1994, 1993, and 1992,
respectively. Cumulative undistributed earnings of foreign subsidiaries were
approximately $674,000 at December 30, 1994. 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 $86,000 of Federal income taxes and $28,000 of foreign withholding
taxes would be incurred on the repatriation of the foreign subsidiaries'
earnings.
================================================================================
REVOLVING CREDIT FACILITIES
The Corporation has obtained committed, unsecured, revolving credit facilities
aggregating $5,330,000 under agreements with 85 banks. The agreements contain
covenants that require, among other things, that the Corporation maintain
specified levels of net worth, as defined in the agreements, on
--------------------
39
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
the date of an advance. To date, there have never been any borrowings under
current or prior revolving credit facilities.
The credit quality, amounts, and terms of the credit facilities are
continually monitored and modified as warranted by business conditions. Under
the existing agreements, the credit facilities mature as follows: $1,060,000 in
March 1995; $1,325,000 in May 1995; $1,230,000 in June 1995; and $1,715,000 in
October 1995. At maturity, the Corporation may convert amounts then borrowed, if
any, into term loans which would mature in two years.
================================================================================
REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
MLPF&S, a registered broker-dealer, is subject to Net Capital Rule 15c3-1
under the Securities Exchange Act of 1934 ("SEA"). 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 30, 1994, MLPF&S's regulatory net capital of
$1,422,766 was 12% of aggregate debit items, and its regulatory net
capital in excess of the minimum required was $1,178,873.
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 $168,148,
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 SEA 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 under 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 30, 1994,
MLGSI's liquid capital of $931,869 was 307% of its total market and credit risk,
and liquid capital in excess of the minimum required was $568,117.
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 total financial resources requirement of the SFA. At December 30,
1994, MLIL's regulatory capital was $1,325,054, and exceeded the minimum
requirement by $382,422.
The Corporation's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. As
of December 30, 1994, $489,513, representing 85% of the insurance subsidiaries'
net assets, was unavailable for distribution to the Corporation.
In addition, 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 can pay in dividends or advance to the
Corporation. At December 30, 1994, restricted net assets of all subsidiaries
were $4,190,608. In addition, to satisfy rating agency standards, a subsidiary
of the Corporation must also meet certain minimum capital requirements. At
December 30, 1994, this minimum capital requirement was $368,111.
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 cover substantially all U.S.
employees who have met the age and service requirements.
In 1989, the Corporation established the RAP and the ESOP, collectively
known as the "Retirement Program," for the benefit of eligible employees. An
employee becomes eligible for participation and is automatically enrolled in the
Retirement Program as of the enrollment date coincident with, or next following,
the attainment of age 21 and the completion of one year of service. A separate
retirement account is maintained for each participant. Participants become
vested upon completion of five years of service or upon attaining age 65.
Vesting also occurs immediately upon death or disability.
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 from a terminated
defined benefit pension plan ("Reversion Shares") and loan proceeds from a
subsidiary of the Corporation ("Leveraged Shares").
The Corporation credits a participant's account and records pension expense
in conjunction with the Retirement Program based on years of service, age, and
eligible compensation. Allocations to participants' accounts of Leveraged
Shares, Reversion Shares, and cash, if necessary, are made quarterly to fund
this expense. Quarterly ESOP allocations are based on participants' receipt of
Basic and Supplemental Credits under the Retirement Program, multiplied by the
fair market value of the shares released. In addition, certain participants are
eligible to receive Additional Supplemental Credits which are provided only
through cash contributions to the RAP. Leveraged and Reversion Shares are
released in accordance with the terms of the ESOP. If the fair market value of
ESOP shares released does not fund the Retirement Program liability, cash
contributions are made to the RAP. Generally, only cash contributions are
deductible for tax
--------------------
40
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
purposes. Reversion Shares held in the ESOP are being allocated to participants'
accounts over a period of not more than eight years, ending in 1997. Leveraged
Shares held in the ESOP are allocated to participants' accounts as principal on
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.
ESOP shares are considered allocated, committed, or unallocated. Allocated
shares have been assigned to individual participants' accounts, committed shares
will be released at a future scheduled date and are not legally released at the
date of the balance sheet, and unallocated shares have not been released,
committed, or allocated to participants' accounts. As of December 30, 1994, the
ESOP had 13,082,396 allocated, 387,539 committed, and 6,427,091 unallocated
Reversion Shares. In addition, the ESOP had 1,812,906 allocated, 92,958
committed, and 2,538,580 unallocated Leveraged Shares. The unallocated portion
of shares purchased with the remaining residual funds of $101,227 from the
terminated defined benefit pension plan and the $39,835 outstanding loan to the
ESOP trust, which is included in employee stock transactions, are included as
reductions to stockholders' equity.
Interest incurred on the ESOP debt during 1994, 1993, and 1992 amounted to
$3,977, $4,675, and $5,119, respectively. Dividends on all Leveraged and
unallocated and committed Reversion ESOP shares used for debt service amounted
to $10,531, $10,044, and $9,678 in 1994, 1993, and 1992, respectively. Dividends
on allocated Reversion ESOP shares are credited to participants' accounts. Com-
pensation costs funded with ESOP shares amounted to $109,463, $109,655, and
$77,451 in 1994, 1993, and 1992, respectively.
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 has 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 30, 1994, a substantial portion of the assets of Metropolitan
supporting the annuity were invested in U.S. Government and agencies 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:
================================================================================
1994 1993 1992
- --------------------------------------------------------------------------------
Defined benefit plans/(1)/:
Service cost for benefits earned during
the year/(2)/ $ 16,345 $ 12,328 $ 11,333
Interest cost on projected benefit
obligation 91,529 89,115 84,366
Actual return on plan assets 146,134 (281,022) (107,549)
Deferral and amortization of
unrecognized items (243,702) 188,700 21,441
--------- --------- ---------
Total defined benefit plan cost 10,306 9,121 9,591
Defined contribution plan cost 164,025 146,148 133,264
--------- --------- ---------
Total pension cost/(3)/ $ 174,331 $ 155,269 $ 142,855
========= ========= =========
- --------------------------------------------------------------------------------
/(1)/ The following actuarial assumptions were used in calculating the defined
benefit cost (credit) and benefit obligations. Weighted average rates as
of the beginning of the year are:
================================================================================
1995 1994 1993
- --------------------------------------------------------------------------------
Discount rate 8.1% 6.7% 7.9%
Rate of compensation increase (not
applicable to terminated plan) 6.0% 5.9% 6.3%
Expected long-term rate of return
on plan assets 8.2% 6.7% 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.
--------------------
41
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
The funded status of the defined benefit plans (including the terminated plan)
follows:
=========================================================================================================
1994 1993
------------------------ ------------------------
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 $(1,189,096) $(32,826) $(1,266,994) $(33,072)
Non-vested accumulated benefit obligation (1,817) (4,024) (3,903) (4,877)
----------- -------- ----------- --------
Accumulated benefit obligation (1,190,913) (36,850) (1,270,897) (37,949)
Effect of assumed increase in compensation levels (13,291) (18,369) (17,430) (17,309)
----------- -------- ----------- --------
Projected benefit obligation (1,204,204) (55,219) (1,288,327) (55,258)
Plan assets at fair value 1,284,467 14,630 1,445,016 12,503
----------- -------- ----------- --------
Plan assets in excess of (less than) projected
benefit obligation 80,263 (40,589) 156,689 (42,755)
Unrecognized net liability at transition 3,542 2,707 3,460 1,368
Unrecognized net loss (gain) 73,872 3,335 (13,526) 13,224
Unrecognized prior service cost (benefit) 4,369 (1,612) (2,833) (1,594)
----------- -------- ----------- --------
Prepaid (accrued) benefit cost $ 162,046 $(36,159) $ 143,790 $(29,757)
=========== ======== =========== ========
- ---------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Supplemental Retirement and Other Benefit Plans
The Corporation also has supplemental retirement and other benefit plans. The
unfunded projected benefit obligation was $7,987 and $8,959 in 1994 and 1993,
respectively. Supplemental retirement and other benefit plan costs were $1,408,
$1,469, and $1,305 in 1994, 1993, and 1992, 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 pays claims as incurred. Full-time
employees of the Corporation become eligible for these benefits upon attainment
of age 55 and completion of ten years of service. The Corporation reserves the
right to amend or terminate these programs at any time. As of December 30, 1994,
the plan had not been funded. Net periodic postretirement benefit expense
included the following components:
============================================================
1994 1993
- ------------------------------------------------------------
Service cost $ 3,947 $ 4,593
Amortization of unrecognized gain (235) --
Interest cost on accumulated
postretirement benefit obligation 9,074 11,254
------- -------
TOTAL $12,786 $15,847
======= =======
- ------------------------------------------------------------
The amounts recognized for the Corporation's postretirement benefit plans
follow:
================================================================================
1994 1993
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 52,486 $ 58,597
Fully eligible active plan participants 34,627 36,769
Other active plan participants 40,749 42,254
-------- --------
Subtotal 127,862 137,620
Unrecognized net gain from past experience
different from that assumed and from
changes in assumptions 31,660 16,900
-------- --------
Postretirement benefits accrued liability $159,522 $154,520
======== ========
- --------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the
postretirement benefit cost and obligations. Rates as of the beginning of the
year are:
===========================================================================
1995 1994
- ---------------------------------------------------------------------------
Discount rate 8.2% 6.8%
Health care cost trend rates (assumed to decrease
gradually until the year 2000 and remain constant
thereafter):
Pre-65 11.0%- 12.0%-
6.0% 5.5%
Post-65 9.0%- 10.0%-
6.0% 4.5%
- ---------------------------------------------------------------------------
--------------------
42
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
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 30, 1994 and December 31, 1993 by $16,807 and $19,312,
respectively, and increase the aggregate of service and interest costs for 1994
and 1993 by $1,948 and $2,659, respectively.
- --------------------------------------------------------------------------------
Postemployment Benefits
The Corporation provides certain postemployment benefits for employees on
extended leave due to injury or illness and for terminated employees. 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. Employees that are disabled due to non-
work-related illness or injury are entitled to salary continuation, medical
coverage, and life insurance. Federal law requires the Corporation to offer
continued medical coverage to all terminated employees for up to 18 months. The
Corporation also provides severance benefits to terminated employees. Full-time
employees are eligible for all of these benefits as of their first day of
employment. Nevertheless, the Corporation reserves the right to amend or
terminate its internal plans at any time. The Corporation funds these benefit
requirements through a combination of self-insured and insured plans.
The Corporation recognized $75,703 and $79,199 in 1994 and 1993,
respectively (excluding the 1993 cumulative effect adjustment), of
postemployment benefits expense, which included severance costs for terminated
employees of $65,763 in 1994 and $59,500 in 1993. Although all full-time
employees are eligible for severance benefits, no additional amounts were
accrued as of December 30, 1994 since future severance costs are not reasonably
estimable.
================================================================================
EMPLOYEE STOCK PLANS
The Corporation's primary employee incentive stock plans are: (i) the Merrill
Lynch & Co., Inc. Long-Term Incentive Compensation Plan ("LTICP"); (ii) the
Merrill Lynch & Co., Inc. Equity Capital Accumulation Plan ("ECAP"); and (iii)
the Financial Consultant Capital Accumulation Award Plan ("FCCAAP"). The
Corporation also offers its employees the option of purchasing shares of common
stock under the Merrill Lynch & Co., Inc. Employee Stock Purchase Plan
("ESPP").
- --------------------------------------------------------------------------------
LTICP AND ECAP
Restricted Shares and Units
LTICP and ECAP provide for grants of equity and equity-related instruments to
certain key employees of the Corporation. LTICP provides for the issuance of,
among other instruments, Restricted Shares and Restricted Units. ECAP provides
for the issuance of, among other instruments, Restricted Shares. Restricted
Shares and Restricted Units are restricted from being sold, transferred, or
assigned until the end of a restricted period and are subject to forfeiture
during a vesting period for LTICP grants or the restricted period for ECAP
grants. Restricted Shares, which may be issued under LTICP and ECAP, are shares
of common stock of the Corporation and are subject to identical restrictions.
Restricted Units, which are issued under LTICP, are also subject to these
restrictions and are payable in cash. Each Restricted Unit is deemed equivalent
in fair market value to one share of common stock of the Corporation. Restricted
Shares are entitled to the same dividends as other shares of common stock of the
Corporation. Amounts equivalent to cash dividends payable on Restricted Shares
are payable to holders of Restricted Units. LTICP also allows for the issuance
of Nonqualified Stock Options (discussion to follow), Incentive Stock Options,
Performance Shares, Performance Units, Stock Appreciation Rights, and other ML &
Co. Securities. As of December 30, 1994, no grants of these additional
instruments, other than Nonqualified Stock Options, had been granted under
LTICP. ECAP also provides for the issuance of Performance Shares. At December
30, 1994 and December 31, 1993, there were no ECAP Performance Shares
outstanding.
Up to 80,000,000 shares of the Corporation's common stock and 80,000,000
units payable in cash had been authorized for issuance under LTICP and up to
26,200,000 shares of the Corporation's common stock had been authorized for
issuance under ECAP. At December 30, 1994, there were 25,818,379 shares
available (net of shares reserved for issuance upon the exercise of stock
options) for issuance under LTICP. At December 30, 1994, there were 3,342,439
shares available for issuance to employees under ECAP. The activity with respect
to Restricted Shares and Restricted Units for LTICP and Restricted Shares for
ECAP for the years ended December 30, 1994 and December 31, 1993 follows:
===================================================================================
LTICP ECAP
---------------------- ----------
RESTRICTED RESTRICTED RESTRICTED
SHARES UNITS SHARES
- -----------------------------------------------------------------------------------
Outstanding, beginning of 1993 4,918,230 5,083,318 6,962,698
Granted--1993 1,720,818 1,765,306 67,638
Paid, forfeited, or released from
contingencies (4,906,894) (4,950,356) (4,938,546)
--------- --------- ---------
Outstanding, end of 1993 1,732,154 1,898,268 2,091,790
Granted--1994 1,355,638 1,495,948 6,360
Paid, forfeited, or released from
contingencies (136,991) (180,822) (157,654)
--------- --------- ---------
Outstanding, end of 1994 2,950,801 3,213,394 1,940,496
========= ========= =========
- -----------------------------------------------------------------------------------
In 1995, 1,677,394 and 1,692,028 LTICP Restricted Shares and Units,
respectively, and 39,588 ECAP Restricted Shares were granted to eligible
employees.
--------------------
43
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
Stock Options
LTICP also provides for the issuance of Nonqualified Stock Options. Stock
Options granted in 1989 through 1994 generally become exercisable over four
years in equal installments commencing one year after the date of grant. The
exercise price of these options is equal to 100% of the fair market value of a
share of common stock on the date of grant. The Stock Options expire ten years
after their grant date.
At December 30, 1994, 14,301,246 options were exercisable at prices ranging
from $10.6875 to $40.6250. During 1994, the fair market value of shares acquired
by the exercise of Stock Options ranged from $33.000 to $44.625. The activity
for Nonqualified Stock Options under LTICP for the years ended December 30, 1994
and December 31, 1993 was as follows:
============================================================
SHARES SUBJECT TO OPTION
------------------------
1994 1993
- ------------------------------------------------------------
Balance, beginning of year 27,004,771 27,408,324
Granted 4,527,100 5,862,666
Exercised (2,649,411) (5,742,374)
Forfeited or surrendered (474,527) (523,845)
---------- ----------
Balance, end of year 28,407,933 27,004,771
========== ==========
- ------------------------------------------------------------
In January 1995, eligible participants were granted Nonqualified Stock Options
for 5,330,212 common shares.
- --------------------------------------------------------------------------------
FCCAAP
Under FCCAAP and its predecessor plans, eligible employees in the Corporation's
private client group are granted awards generally based upon their prior year's
performance. Payment for an award is contingent upon continued employment for a
period of time and is subject to forfeiture during that period. The award is
payable ten years from the date of grant in either common shares of the
Corporation or in cash, whichever is greater, based on the market value of the
Corporation's common stock. Although the first grant is scheduled to be paid in
1996, under certain circumstances partially vested grants may be partially paid,
but only in cash, prior to the scheduled payment dates.
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 and predecessor plans may only be from shares held as treasury stock.
At December 30, 1994, shares subject to awards made to eligible employees
totaled 14,302,494 under such plans, with 5,589,439 shares available for
issuance.
- --------------------------------------------------------------------------------
ESPP
ESPP allows eligible employees to invest from 1% to 10% of their eligible
compensation to purchase the Corporation's common stock at a price equal to 85%
of its fair market value. These purchases are made on four quarterly investment
dates through payroll deductions. Up to 25,000,000 shares of the Corporation's
common stock have been authorized for issuance under ESPP.
The activity in ESPP for the two most recent fiscal years was as follows:
- ------------------------------------------------------------
ESPP SHARES
---------------------
1994 1993
- ------------------------------------------------------------
Available, beginning of year 6,930,356 7,914,788
Purchased through plan (1,072,907) (984,432)
---------- ---------
Available, end of year 5,857,449 6,930,356
========== =========
- ------------------------------------------------------------
- --------------------------------------------------------------------------------
Incentive Equity Purchase Plan
The Incentive Equity Purchase Plan ("IEPP") allows selected employees to
purchase shares of the Corporation's common stock ("Book Value Shares") at a
price equal to book value per share (as of a valuation date preceding the
purchase date). These shares, once held for six months, may be sold back to the
Corporation at book value (adjusted for certain nonrecurring events) as of a
date preceding the sale, or exchanged at any time for a specified number of
freely transferable shares of common stock of the Corporation, the number of
which is determined by the ratio of book value to market value at the time of
the purchase. Up to 30,000,000 shares of the Corporation's common stock have
been authorized for issuance under IEPP. At December 30, 1994, 23,967,799 shares
of the Corporation's common stock were available for purchase under IEPP. Book
Value Shares outstanding as of December 30, 1994 and December 31, 1993 were
1,372,700 and 1,464,900, respectively. Subsequent to year-end, the Corporation
amended IEPP by reducing the remaining number of shares authorized to zero. In
addition, Book Value Shares surrendered under IEPP, including Book Value Shares
resold to the Corporation and any net difference between Book Value Shares
surrendered and market shares received, may not be reused under IEPP. No further
offerings under IEPP will be made; however, Book Value Shares outstanding under
IEPP remain unaffected by the amendment.
================================================================================
COMMITMENTS AND CONTINGENCIES
Litigation
There are numerous civil actions, arbitration proceedings, and claims pending
against the Corporation as of December 30, 1994, some of which involve claims
for substantial amounts.
In addition, on January 12, 1995, an action was commenced in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court") by Orange County, California (the "County") and The Orange County
Investment Pools (the "Pools"), both of which filed bankruptcy petitions in
the Bankruptcy Court on December 6, 1994, against the Corporation and certain of
its subsidiaries in connection with the Corporation's business activities with
the County.
The County and the Pools seek relief totaling in excess of $2 billion in
connection with various securities transactions between the County and/or the
Pools and the Corporation
--------------------
44
================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in Thousands, Except Per Share Amounts)
and its subsidiaries. The complaint alleges, among other things, that these
transactions violated California law and should be adjudged null and void, that
the Corporation and its subsidiaries violated Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and that the
Corporation and its subsidiaries breached a fiduciary duty owed to the County
and/or the Pools.
In addition, other actions have been brought against the Corporation and/or
certain of its officers, directors, and employees and certain of its
subsidiaries in the United States District Court for the Central District of
California, the United States District Court for the Southern District of New
York, and in the state courts in California and New York. These include class
actions and stockholder derivative actions brought by persons alleging harm to
themselves or to the Corporation arising out of the Corporation's dealings with
the County and the Pools, or from the purchase of debt instruments issued by the
County that were underwritten by the Corporation's subsidiary, MLPF&S.
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 contained herein. Item 3, "Legal Proceedings," in the
Corporation's 1994 Annual Report on Form 10-K, which is unaudited and available
upon request after filing, contains additional information concerning pending
lawsuits.
- --------------------------------------------------------------------------------
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 ("WFC") headquarters. 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:
1995 $ 124,553 $181,826 $ 306,379
1996 $ 125,067 $174,137 $ 299,204
1997 $ 125,580 $156,350 $ 281,930
1998 $ 129,766 $139,735 $ 269,501
1999 $ 142,503 $125,746 $ 268,249
Thereafter $2,303,293 $621,554 $2,924,847
- --------------------------------------------------------------------
Total minimum rental commitments have not been reduced by $1,086,576 of
minimum sublease rentals to be received in the future under noncancelable
subleases.
Rent expense after sublease revenue for each of the last three years is
presented below:
====================================================================
1994 1993 1992
- --------------------------------------------------------------------
Rent expense $394,782 $412,623 $416,692
Less: sublease revenue (78,634) (60,239) (55,988)
-------- -------- --------
Net rent expense $316,148 $352,384 $360,704
======== ======== ========
- --------------------------------------------------------------------
================================================================================
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 30, 1994, 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 $1,161,093 at December 30, 1994.
The Corporation provides an investment certificate program for Financial
Consultants. Under this program, Financial Consultants meeting minimum
production and asset gathering criteria are issued an investment certificate
with a face amount of $100. Such certificates mature ten 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 ten-year period results, with certain exceptions, in the
certificates expiring. The certificates bear interest commencing with the date
the performance 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 30, 1994, the
Corporation had $147,372 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 30,
1994, minimum fee commitments under these contracts aggregated $54,600.
================================================================================
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 business activities operate through regional offices
in the Americas, including Latin America and Canada; Europe and the Middle
--------------------
45
================================================================================
East; and Asia Pacific. 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
customers.
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, Australia, Hong Kong, Singapore, and China.
The Corporation has exchange memberships in the region's major financial
centers. 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 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. In addition, intercompany transfers are based primarily on
service agreements.
The information presented below, in management's judgment, provides a
reasonable representation of each region's contribution to the consolidated
amounts.
=================================================================================================
GLOBAL
OPERATIONS 1994 1993 1992 1994 1993 1992
- -------------------------------------------------------------------------------------------------
(In Millions) TOTAL REVENUES NET REVENUES
-------------- ------------
Canada and Latin America $ 617 $ 526 $ 378 $ 333 $ 377 $ 259
Europe and Middle East 3,464 3,111 1,867 1,134 1,358 953
Asia Pacific 963 879 374 554 683 309
------- ------- ------- -------- -------- --------
Subtotal 5,044 4,516 2,619 2,021 2,418 1,521
United States 13,754 13,475 11,685 7,703 9,309 7,833
Eliminations (565) (1,403) (891) (99) (1,169) (777)
------- ------- ------- -------- -------- --------
TOTAL $18,233 $16,588 $13,413 $ 9,625 $ 10,558 $ 8,577
======= ======= ======= ======== ======== ========
EARNINGS BEFORE
INCOME TAXES TOTAL ASSETS
--------------- ------------
Canada and Latin America $ 137 $ 139 $ 89 $ 4,216 $ 5,658 $ 2,145
Europe and Middle East 176 481 181 44,297 37,107 15,645
Asia Pacific 75 191 (3) 11,389 8,546 2,865
------- ------- ------- -------- -------- --------
Subtotal 388 811 267 59,902 51,311 20,655
United States 1,342 1,614 1,354 108,147 106,132 88,835
Eliminations -- -- -- (4,300) (4,533) (2,466)
------- ------- ------- -------- -------- --------
TOTAL $ 1,730 $ 2,425 $ 1,621 $163,749 $152,910 $107,024
======= ======= ======= ======== ======== ========
- -------------------------------------------------------------------------------------------------
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 30, 1994 and December 31, 1993 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 30, 1994. 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 30, 1994 and December 31, 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 1994 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 & Touche LLP
New York, New York
February 27, 1995
--------------------
46
================================================================================
FIVE-YEAR FINANCIAL SUMMARY
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
-----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1990 1991 1992 1993 1994
- ---------------------------------------------------------------------------------------------------------------------------------
REVENUES (52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
COMMISSIONS
Listed securities $ 840,650 7.6% $1,064,977 8.6% $1,147,142 8.6% $1,404,110 8.5% $1,361,144 7.5%
Mutual funds 389,524 3.5 519,089 4.2 667,519 5.0 846,213 5.1 878,741 4.8
Commodities 144,916 1.3 146,704 1.2 142,509 1.1 178,733 1.1 216,613 1.2
Money market instruments 189,963 1.7 175,980 1.4 190,525 1.4 165,028 1.0 109,278 0.6
Other 204,101 1.8 259,551 2.1 274,389 2.0 300,144 1.8 304,765 1.7
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 1,769,154 15.9 2,166,301 17.5 2,422,084 18.1 2,894,228 17.5 2,870,541 15.8
INTEREST AND DIVIDENDS 5,944,706 53.3 5,761,061 46.7 5,806,710 43.3 7,099,155 42.8 9,577,561 52.5
PRINCIPAL TRANSACTIONS
Interest rate and currency
swaps 170,430 1.5 239,895 2.0 389,460 2.9 605,293 3.7 749,167 4.1
Equities and equity
derivatives 332,380 3.0 533,763 4.3 614,445 4.6 870,603 5.2 626,293 3.4
Taxable fixed-income 594,970 5.4 818,841 6.6 735,724 5.5 963,847 5.8 462,450 2.6
Municipals 258,370 2.3 246,605 2.0 268,020 2.0 322,543 1.9 387,735 2.1
Foreign exchange and
commodities 102,831 0.9 66,624 0.5 158,076 1.1 158,153 1.0 109,279 0.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 1,458,981 13.1 1,905,728 15.4 2,165,725 16.1 2,920,439 17.6 2,334,924 12.8
INVESTMENT BANKING
Underwriting 534,835 4.8 1,020,310 8.2 1,308,787 9.8 1,646,960 9.9 988,454 5.4
Strategic services 260,609 2.3 155,682 1.3 175,280 1.3 184,293 1.1 251,011 1.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total 795,444 7.1 1,175,992 9.5 1,484,067 11.1 1,831,253 11.0 1,239,465 6.8
ASSET MANAGEMENT AND
PORTFOLIO SERVICE FEES 815,739 7.3 1,003,904 8.1 1,252,829 9.3 1,557,778 9.4 1,739,452 9.5
OTHER 363,205 3.3 339,826 2.8 281,253 2.1 285,324 1.7 471,148 2.6
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
TOTAL REVENUES 11,147,229 100.0 12,352,812 100.0 13,412,668 100.0 16,588,177 100.0 18,233,091 100.0
INTEREST EXPENSE 5,363,900 48.1 5,106,344 41.3 4,835,267 36.0 6,029,947 36.4 8,608,570 47.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
NET REVENUES 5,783,329 51.9 7,246,468 58.7 8,577,401 64.0 10,558,230 63.6 9,624,521 52.8
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
NON-INTEREST
EXPENSES
Compensation and
benefits 3,077,485 53.2 3,867,849 53.4 4,364,454 50.9 5,255,258 49.8 4,951,839 51.5
Occupancy 519,156 9.0 473,562 6.5 477,754 5.6 572,936 5.4 436,168 4.5
Communications and
equipment rental 375,432 6.5 356,850 4.9 366,161 4.3 385,809 3.6 432,214 4.5
Depreciation and
amortization 289,361 5.0 276,125 3.8 281,228 3.3 308,499 2.9 325,121 3.4
Advertising and market
development 225,712 3.9 249,844 3.5 301,146 3.5 376,881 3.6 374,619 3.9
Professional fees 233,565 4.0 235,344 3.3 256,887 3.0 290,324 2.7 367,003 3.8
Brokerage, clearing, and
exchange fees 234,031 4.1 239,828 3.3 277,166 3.2 280,712 2.7 337,512 3.5
Other 546,259 9.4 529,648 7.3 631,216 7.3 663,003 6.3 670,441 6.9
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
TOTAL NON-INTEREST EXPENSES 5,501,001 95.1 6,229,050 86.0 6,956,012 81.1 8,133,422 77.0 7,894,917 82.0
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
EARNINGS BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 282,328 4.9 1,017,418 14.0 1,621,389 18.9 2,424,808 23.0 1,729,604 18.0
Income Tax Expense 90,472 1.6 321,301 4.4 668,984 7.8 1,030,449 9.8 712,843 7.4
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
EARNINGS BEFORE CUMULATIVE
EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 191,856 3.3 696,117 9.6 952,405 11.1 1,394,359 13.2 1,016,761 10.6
Cumulative Effect of
Changes in Accounting
Principles, Net of
Income Taxes -- -- -- -- (58,580) (.7) (35,420) (.3) -- --
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
NET EARNINGS $ 191,856 3.3% $ 696,117 9.6% $ 893,825 10.4% $1,358,939 12.9% $1,016,761 10.6%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
- --------------------------------------------------------------------------------
*Revenues and Interest Expense are presented as a percentage of Total Revenues.
Non-Interest Expenses, Cumulative Effect of Changes in Accounting Principles,
and Earnings are presented as a percentage of Net Revenues.
--------------------
47
================================================================================
STATISTICAL DATA
Selected statistical data for the last five fiscal years is presented for
informational purposes below.
- --------------------------------------------------------------------------------
Year Ended Last Friday in December
----------------------------------------------------------------------
(Dollars in Millions) 1990 1991 1992 1993 1994
- ----------------------------------------------------------------------------------------------------------------------------
(52 Weeks) (52 Weeks) (52 Weeks) (53 Weeks) (52 Weeks)
PRIVATE CLIENT ACCOUNTS (a):
Assets in Worldwide Private Client Accounts $377,000 $440,000 $487,000 $557,000 $568,000
Assets in Domestic Private Client Accounts $361,000 $422,000 $463,000 $527,000 $537,000
Assets under Professional Management:
Money Markets $ 66,000 $ 67,000 $ 67,000 $ 66,000 $ 67,000
Equities 9,000 12,000 16,000 30,000 37,000
Fixed Income 20,000 27,000 35,000 42,000 36,000
Private Portfolio 8,000 11,000 13,000 17,000 20,000
Insurance 7,000 7,000 8,000 6,000 4,000
-------- -------- -------- -------- --------
Subtotal 110,000 124,000 139,000 161,000 164,000
ML Consults 2,100 5,200 12,200 16,900 14,400
-------- -------- -------- -------- --------
TOTAL $112,100 $129,200 $151,200 $177,900 $178,400
======== ======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
UNDERWRITING (b):
Global Debt and Equity:
Volume $ 60,600 $110,500 $151,000 $193,200 $137,800
Market Share 11.5% 12.7% 13.0% 12.8% 12.6%
U.S. Domestic Debt and Equity:
Volume $ 55,000 $100,300 $140,600 $173,800 $117,000
Market Share 17.5% 17.0% 16.5% 16.4% 16.5%
- ----------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
Domestic 35,323 34,721 36,111 37,513 38,726
International 3,677 3,579 3,989 4,387 5,074
-------- -------- -------- -------- --------
TOTAL 39,000 38,300 40,100 41,900 43,800
======== ======== ======== ======== ========
Financial Consultants and Account Executives
Worldwide 11,800 12,100 12,700 13,100 13,400
COMPENSATION MEASURES:
Support Personnel to Producer Ratio (c) 1.55 1.47 1.44 1.43 1.46
Net Revenues per Employee (d) $148 $189 $214 $252 $220
Pretax Earnings per Employee (d) $ 7 $ 27 $ 40 $ 58 $ 39
Compensation and Benefits Expense as a % of
Net Revenues 53.2% 53.4% 50.9% 49.8% 51.5%
Compensation and Benefits Expense as a % of
Total Non-Interest Expenses 55.9% 62.1% 62.7% 64.6% 62.7%
- ----------------------------------------------------------------------------------------------------------------------------
(a) Client accounts have been redefined to include certain institutional
private portfolio accounts.
(b) Full credit to book manager. All market share data is derived from
Securities Data Co.
(c) Support personnel includes sales assistants.
(d) Dollars in thousands.
--------------------
48
================================================================================
QUARTERLY INFORMATION
- --------------------------------------------------------------------------------
Presented below are the unaudited results of operations of the Corporation by
quarter for 1994 and 1993. The first quarter of 1993 has been restated for the
adoption of Statement of Financial Accounting Standards No. 112 (see Accounting
Changes in the Notes to 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 the 1993 first quarter non-recurring
$103,000 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. 30, SEPT. 30, JULY 1, APRIL 1, DEC. 31, SEPT. 24, JUNE 25, MAR. 26,
Except Per Share Amounts) 1994 1994 1994 1994 1993 1993 1993 1993
- ----------------------------------------------------------------------------------------------------------------------------------
(13 Weeks) (13 Weeks) (13 Weeks) (13 Weeks) (14 Weeks) (13 Weeks) (13 Weeks) (13 Weeks)
Total Revenues $4,483,757 $4,530,223 $4,480,300 $4,738,811 $4,526,136 $4,140,048 $3,963,009 $3,958,984
Interest Expense 2,391,028 2,227,978 2,082,581 1,906,983 1,768,139 1,506,428 1,408,512 1,346,868
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Revenues 2,092,729 2,302,245 2,397,719 2,831,828 2,757,997 2,633,620 2,554,497 2,612,116
Non-Interest Expenses 1,837,517 1,912,723 1,965,057 2,179,620 2,160,717 1,991,321 1,959,589 2,021,795
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle 255,212 389,522 432,662 652,208 597,280 642,299 594,908 590,321
Income Tax Expense 93,598 157,943 180,853 280,449 250,041 282,612 249,861 247,935
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Earnings Before Cumulative Effect
of Change in Accounting Principle 161,614 231,579 251,809 371,759 347,239 359,687 345,047 342,386
Cumulative Effect of Change in
Accounting Principle (Net of
Applicable Income Taxes) -- -- -- -- -- -- -- (35,420)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Earnings $ 161,614 $ 231,579 $ 251,809 $ 371,759 $ 347,239 $ 359,687 $ 345,047 $ 306,966
========== ========== ========== ========== ========== ========== ========== ==========
==================================================================================================================================
Earnings Per Common Share:
Primary $ .76 $ 1.10 $ 1.18 $ 1.68 $ 1.53 $ 1.57 $ 1.52 $ 1.35
========== ========== ========== ========== ========== ========== ========== ==========
Fully Diluted $ .75 $ 1.10 $ 1.18 $ 1.68 $ 1.53 $ 1.56 $ 1.51 $ 1.35
========== ========== ========== ========== ========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------------------
The 1993 first quarter includes the cumulative effect of a change in accounting
principle of $(.16) per common share primary and fully diluted.
================================================================================
DIVIDENDS PER COMMON SHARE
(Declared and paid)
==============================================================================
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
- ------------------------------------------------------------------------------
1994 $.20 $.23 $.23 $.23
- ------------------------------------------------------------------------------
1993 $.15 $.175 $.175 $.20
- ------------------------------------------------------------------------------
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 (see Regulatory Requirements and Dividend
Restrictions in the Notes to Consolidated Financial Statements).
================================================================================
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified calendar
quarters are noted below.
================================================================================
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------
1994 $45 5/8 $36 1/2 $40 1/2 $34 1/4 $40 7/8 $34 1/4 $41 1/8 $32 1/4
- ----------------------------------------------------------------------------------------------------
1993 $37 1/16 $28 $40 15/16 $33 5/8 $50 7/8 $39 9/16 $51 3/16 $41 3/4
- ----------------------------------------------------------------------------------------------------
The approximate number of record holders of common stock as of February 3, 1995
was 12,160.
--------------------
49