SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 26, 1998 ------------- COMMISSION FILE NUMBER 1-7182 ------ MERRILL LYNCH & CO., INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2740599 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) WORLD FINANCIAL CENTER, NORTH TOWER, NEW YORK, NEW YORK 10281-1332 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 449-1000 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 348,250,990 shares of Common Stock (as of the close of business on July 31, 1998) PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. Financial Statements -------------------- MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE THREE MONTHS ENDED ------------------ (Dollars in Millions, JUNE 26, JUNE 27, PERCENT(1) Except Per Share Amounts) 1998 1997 INC./(DEC.) -------- -------- ----------- REVENUES Commissions $1,386 $1,078 28.6% Interest and dividends 4,948 4,330 14.3 Principal transactions 972 1,151 (15.6) Investment banking 869 625 39.0 Asset management and portfolio service fees 1,022 670 52.5 Other 184 157 17.6 ------ ------ ----- Total Revenues 9,381 8,011 17.1 Interest Expense 4,672 4,044 15.5 ------ ------ ----- Net Revenues 4,709 3,967 18.7 ------ ------ ----- NON-INTEREST EXPENSES (2) Compensation and benefits 2,378 2,004 18.7 Communications and technology 408 294 38.6 Occupancy and related depreciation 207 174 19.1 Professional fees 151 131 15.5 Advertising and market development 195 156 25.1 Brokerage, clearing, and exchange fees 161 112 44.4 Goodwill amortization 56 16 N/M Other 246 296 (16.8) ------ ------ ----- Total Non-Interest Expenses 3,802 3,183 19.5 ------ ------ ----- EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 907 784 15.6 Income Tax Expense 336 290 15.7 Dividends on Preferred Securities Issued by Subsidiaries 26 13 106.3 ------ ------ ----- NET EARNINGS $ 545 $ 481 13.1% ====== ====== ===== NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 535 $ 472 13.4% ====== ====== ===== EARNINGS PER COMMON SHARE Basic $ 1.55 $ 1.43 ====== ====== Diluted $ 1.33 $ 1.25 ====== ====== DIVIDEND PAID PER COMMON SHARE $ .24 $ .20 ====== ====== AVERAGE SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE Basic 346.3 329.9 ====== ====== Diluted 402.0 378.9 ====== ====== (1) Percentages are based on actual numbers before rounding. (2) Certain prior period non-interest expenses have been reclassified to conform to the current period presentation. See Notes to Consolidated Financial Statements 2 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) FOR THE SIX MONTHS ENDED ------------------ (Dollars in Millions, JUNE 26, JUNE 27, PERCENT(1) Except Per Share Amounts) 1998 1997 INC./(DEC.) -------- -------- ----------- REVENUES Commissions $2,763 $2,193 26.0% Interest and dividends 9,690 8,178 18.5 Principal transactions 2,123 2,215 (4.1) Investment banking 1,670 1,233 35.4 Asset management and portfolio service fees 1,993 1,316 51.4 Other 308 327 (5.9) ------ ------ ----- Total Revenues 18,547 15,462 20.0 Interest Expense 9,236 7,654 20.7 ------ ------ ----- Net Revenues 9,311 7,808 19.3 ------ ------ ----- NON-INTEREST EXPENSES (2) Compensation and benefits 4,753 3,991 19.1 Communications and technology 773 571 35.2 Occupancy and related depreciation 399 344 16.2 Professional fees 316 265 19.5 Advertising and market development 367 300 22.4 Brokerage, clearing, and exchange fees 311 230 35.5 Goodwill amortization 111 31 N/M Other 500 525 (4.8) ------ ------ ----- Total Non-Interest Expenses 7,530 6,257 20.4 ------ ------ ----- EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,781 1,551 14.8 Income Tax Expense 668 581 14.9 Dividends on Preferred Securities Issued by Subsidiaries 50 23 119.5 ------ ------ ----- NET EARNINGS $1,063 $ 947 12.3% ====== ====== ===== NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $1,044 $ 927 12.6% ====== ====== ===== EARNINGS PER COMMON SHARE Basic $ 3.04 $ 2.80 ====== ====== Diluted $ 2.63 $ 2.41 ====== ====== DIVIDENDS PAID PER COMMON SHARE $ .44 $ .35 ====== ====== AVERAGE SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE Basic 343.4 330.5 ====== ====== Diluted 396.5 384.3 ====== ====== (1) Percentages are based on actual numbers before rounding. (2) Certain prior period non-interest expenses have been reclassified to conform to the current period presentation. See Notes to Consolidated Financial Statements 3 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in Millions, Except Per Share Amounts) JUNE 26, DECEMBER 26, ASSETS 1998 1997 - ------------------------------------------------------ -------- -------- CASH AND CASH EQUIVALENTS $ 6,281 $ 5,032 -------- -------- CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR DEPOSITED WITH CLEARING ORGANIZATIONS 11,933 12,384 -------- -------- MARKETABLE INVESTMENT SECURITIES 4,176 3,309 -------- -------- TRADING ASSETS, AT FAIR VALUE Corporate debt and preferred stock 32,589 32,501 Equities and convertible debentures 30,054 23,617 Contractual agreements 24,765 21,205 U.S. Government and agencies 10,245 9,832 Non-U.S. governments and agencies 11,409 9,755 Mortgages, mortgage-backed, and asset-backed 11,196 7,312 Other 4,281 2,556 -------- -------- 124,539 106,778 Securities received as collateral, net of securities pledged as collateral 12,162 - -------- -------- Total 136,701 106,778 -------- -------- SECURITIES PLEDGED AS COLLATERAL 15,694 - -------- -------- RECEIVABLES UNDER RESALE AGREEMENTS 77,828 70,262 -------- -------- RECEIVABLES UNDER SECURITIES BORROWED TRANSACTIONS 42,876 35,366 -------- -------- OTHER RECEIVABLES Customers (net of allowance for doubtful accounts of $50 in 1998 and 1997) 30,398 26,529 Brokers and dealers 7,114 5,100 Interest and other 8,915 8,114 -------- -------- Total 46,427 39,743 -------- -------- INVESTMENTS OF INSURANCE SUBSIDIARIES 4,590 4,833 LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $138 in 1998 and $130 in 1997) 7,621 4,310 OTHER INVESTMENTS 1,970 1,826 PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT (net of accumulated depreciation and amortization of $3,146 in 1998 and $2,910 in 1997) 2,295 2,074 GOODWILL (net of accumulated amortization of $234 in 1998 and $131 in 1997) 5,368 5,455 OTHER ASSETS 1,691 1,447 -------- -------- TOTAL ASSETS $365,451 $292,819 ======== ======== See Notes to Consolidated Financial Statements 4 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in Millions, Except Per Share Amounts) LIABILITIES, PREFERRED SECURITIES ISSUED BY JUNE 26, DECEMBER 26, SUBSIDIARIES, AND STOCKHOLDERS' EQUITY 1998 1997 - ---------------------------------------------------- -------- ----------- LIABILITIES PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS $ 99,710 $ 77,875 --------- --------- COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 50,891 44,850 --------- --------- TRADING LIABILITIES, AT FAIR VALUE Contractual agreements 21,547 20,632 U.S. Government and agencies 14,652 18,182 Equities and convertible debentures 20,641 15,724 Non-U.S. governments and agencies 11,444 9,720 Corporate debt, preferred stock, and other 5,383 5,818 --------- --------- Total 73,667 70,076 --------- --------- OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 27,856 - --------- --------- OTHER PAYABLES Customers 18,900 16,519 Brokers and dealers 5,540 4,112 Interest and other 20,857 22,625 --------- --------- Total 45,297 43,256 --------- --------- LIABILITIES OF INSURANCE SUBSIDIARIES 4,487 4,716 LONG-TERM BORROWINGS 52,075 43,090 --------- --------- TOTAL LIABILITIES 353,983 283,863 --------- --------- PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,777 627 --------- --------- STOCKHOLDERS' EQUITY PREFERRED STOCKHOLDERS' EQUITY 425 425 --------- --------- COMMON STOCKHOLDERS' EQUITY Common stock, par value $1.33 1/3 per share; authorized: 1,000,000,000; issued: 472,660,324 shares 630 630 Paid-in capital 1,438 1,065 Accumulated other comprehensive income (net of tax) (23) (34) Retained earnings 10,377 9,485 --------- --------- 12,422 11,146 Less: Treasury stock, at cost: 1998-125,416,789 shares; 1997-137,578,035 shares 2,371 2,804 Employee stock transactions 785 438 --------- --------- TOTAL COMMON STOCKHOLDERS' EQUITY 9,266 7,904 --------- --------- TOTAL STOCKHOLDERS' EQUITY 9,691 8,329 --------- --------- TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $ 365,451 $ 292,819 ========= ========= BOOK VALUE PER COMMON SHARE $ 26.72 $ 23.64 ========= ========= See Notes to Consolidated Financial Statements 5 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED ------------------------ (Dollars in Millions) JUNE 26, JUNE 27, 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 1,063 $ 947 Noncash items included in earnings: Depreciation and amortization 260 213 Policyholder reserves 115 122 Goodwill amortization 111 31 Other 406 559 (Increase) decrease in operating assets: Trading assets (17,761) (28,710) Cash and securities segregated for regulatory purposes or deposited with clearing organizations 451 (4,079) Receivables under securities borrowed transactions (7,510) (11,595) Customer receivables (3,867) (4,506) Sales of trading investment securities 689 501 Purchases of trading investment securities (728) (431) Other (6,551) (2,504) Increase (decrease) in operating liabilities: Trading liabilities 3,591 15,868 Payables under securities loaned transactions 4,273 4,262 Liabilities of insurance subsidiaries (339) (251) Customer payables 2,381 1,919 Other 5,074 5,197 -------- -------- CASH USED FOR OPERATING ACTIVITIES (18,342) (22,457) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (payments for): Maturities of available-for-sale securities 1,953 1,551 Sales of available-for-sale securities 1,346 1,063 Purchases of available-for-sale securities (3,916) (3,283) Maturities of held-to-maturity securities 360 556 Purchases of held-to-maturity securities (446) (320) Acquisition, net of cash acquired (5,220) - Other investments and other assets (631) (247) Property, leasehold improvements, and equipment (481) (400) -------- -------- CASH USED FOR INVESTING ACTIVITIES (7,035) (1,080) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments for): Repurchase agreements, net of resale agreements 10,205 3,343 Commercial paper and other short-term borrowings 6,041 13,836 Issuance and resale of long-term borrowings 17,174 11,874 Settlement and repurchase of long-term borrowings (7,771) (3,868) Issuance of subsidiaries' preferred securities 1,150 300 Redemption of remarketed preferred stock - (194) Common stock transactions (2) (465) Dividends (171) (136) -------- -------- CASH PROVIDED BY FINANCING ACTIVITIES 26,626 24,690 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 1,249 1,153 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,032 3,375 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,281 $ 4,528 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Income taxes $ 307 $ 413 Interest 8,894 7,294 See Notes to Consolidated Financial Statements 6 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 26, 1998 (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ================================================================================ Basis of Presentation - -------------------------------------------------------------------------------- The Consolidated Financial Statements include the accounts of Merrill Lynch & Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All material intercompany balances have been eliminated. The December 26, 1997 consolidated balance sheet was derived from the audited financial statements. The interim consolidated financial statements for the three- and six-month periods are unaudited; however, in the opinion of Merrill Lynch management, all adjustments, consisting only of normal recurring accruals, necessary for a fair statement of the results of operations have been included. These unaudited financial statements should be read in conjunction with the audited financial statements included in Merrill Lynch's Annual Report on Form 10-K for the year ended December 26, 1997. The nature of Merrill Lynch's business is such that the results of any interim period are not necessarily indicative of results for a full year. Prior period financial statements have been reclassified, where appropriate, to conform to the 1998 presentation. ================================================================================ New Accounting Pronouncements - -------------------------------------------------------------------------------- Merrill Lynch adopted Statement of Financial Accounting Standards ("SFAS") No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", which requires balance sheet recognition of collateral related to certain secured financing transactions entered into after December 31, 1997. The adoption of such provisions creates the following additional captions on Merrill Lynch's balance sheet: o Securities received as collateral, net of securities pledged as collateral; o Securities pledged as collateral; and o Obligation to return securities received as collateral. The balances recognized in these captions primarily represent securities received as collateral in term resale and repurchase agreements for which the collateral provider does not have the explicit contractual right to substitute. In March 1998, the AICPA's Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain internal use software costs. The SOP, which would have been effective for Merrill Lynch beginning in 1999, was early adopted by Merrill Lynch and was not material to the results of operations for the three- and six-month periods ended June 26, 1998. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and for Hedging Activities", which requires all derivatives to be recorded on the balance sheet at fair value. SFAS No. 133 is effective for years beginning after June 15, 1999. The expected impact of adoption on Merrill Lynch's results of operations has not yet been determined. 7 ================================================================================ Earnings Per Common Share - -------------------------------------------------------------------------------- Information relating to earnings per common share computations follows:
- ---------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ---------------------- -------------------- JUNE 26, JUNE 27, JUNE 26, JUNE 27, 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- Net earnings $ 545 $ 481 $ 1,063 $ 947 Preferred stock dividends 10 9 19 20 -------- -------- -------- -------- Net earnings applicable to common stockholders $ 535 $ 472 $ 1,044 $ 927 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------- (shares in thousands) Weighted-average shares outstanding 346,299 329,901 343,435 330,529 -------- -------- -------- -------- Effect of dilutive instruments(1)(2): Employee stock options 33,250 25,518 31,099 28,184 FCCAAP shares 17,066 19,003 16,948 20,597 Restricted units 5,323 4,439 4,910 4,888 ESPP shares 34 40 62 66 -------- -------- -------- -------- Dilutive potential common shares 55,673 49,000 53,019 53,735 -------- -------- -------- -------- Total weighted-average diluted shares 401,972 378,901 396,454 384,264 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------- Basic earnings per share $ 1.55 $ 1.43 $ 3.04 $ 2.80 Diluted earnings per share 1.33 1.25 2.63 2.41 - ----------------------------------------------------------------------------------------
(1) At June 26, 1998, there were 3,163 instruments that were considered antidilutive and were not included in the above computations. (2) See Note 9 in the Notes to Consolidated Financial Statements in the 1997 Annual Report for further description of these instruments. ================================================================================ Comprehensive Income - -------------------------------------------------------------------------------- The components of comprehensive income are as follows:
- --------------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JUNE 26, JUNE 27, JUNE 26, JUNE 27, 1998 1997 1998 1997 - --------------------------------------------------------------------------------------- Net earnings $545 $481 $1,063 $947 ---- ---- ------ ---- Other comprehensive income, net of tax: Foreign currency translation adjustment (4) (3) 11 (5) Net unrealized gains on investment securities available-for-sale 6 18 - 22 ---- ---- ------ ---- Total other comprehensive income, net 2 15 11 17 ---- ---- ------ ---- Comprehensive income $547 $496 $1,074 $964 ==== ==== ====== ==== - --------------------------------------------------------------------------------------
8 ================================================================================ Short-Term Borrowings - -------------------------------------------------------------------------------- Short-term borrowings at June 26, 1998 and December 26, 1997 are presented below: - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, 1998 1997 - -------------------------------------------------------------------------------- PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS Repurchase agreements $88,606 $71,044 Securities loaned transactions 11,104 6,831 ------- ------- Total $99,710 $77,875 ======= ======= COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS Commercial paper $34,873 $30,379 Demand and time deposits 11,642 10,531 Bank loans and other 4,376 3,940 ------- ------- Total $50,891 $44,850 ======= ======= - -------------------------------------------------------------------------------- ================================================================================ Preferred Securities Issued by Subsidiaries - -------------------------------------------------------------------------------- In January and June 1998, Merrill Lynch Preferred Capital Trust III and IV (the "Trusts"), subsidiaries of ML & Co., issued $750 and $400 of Trust Originated Preferred Securities (Service Mark), respectively. The Trusts hold preferred securities of limited partnerships, which are also subsidiaries of ML & Co. The assets of the limited partnerships consist primarily of debt securities of ML & Co. and certain of its subsidiaries. ML & Co. has guaranteed, on a subordinated basis, certain payments by the Trusts and the limited partnerships. ================================================================================ Common Stock - -------------------------------------------------------------------------------- On April 14, 1998, stockholders approved the proposal to amend ML & Co.'s certificate of incorporation to increase the authorized number of shares of common stock from 500 million to 1 billion. ================================================================================ Derivatives and Other Commitments - -------------------------------------------------------------------------------- Merrill Lynch enters into various derivative contracts to meet clients' needs and to manage its own market risks. Derivative contracts often involve future commitments to exchange interest payment streams or currencies (such as interest rate and currency swaps or foreign exchange forwards) or to purchase or sell other financial instruments at specified terms on a specified date. Options, for example, can be purchased or written on a wide range of financial instruments such as securities, currencies, futures, and various market indices. 9 The notional or contractual amounts of derivatives provide only a measure of involvement in these types of transactions and represent neither the amounts subject to the various types of market risk nor the future cash requirements under these instruments. The notional or contractual amounts of derivatives used for trading purposes by type of risk follow: - -------------------------------------------------------------------------------- INTEREST EQUITY COMMODITY RATE CURRENCY PRICE PRICE (in billions) RISK(1)(2) RISK(3) RISK RISK - -------------------------------------------------------------------------------- JUNE 26, 1998 - ------------- Swap agreements $1,671 $166 $11 $ 5 Forward contracts 100 239 - 4 Futures contracts 280 5 27 3 Options purchased 213 97 71 3 Options written 184 101 53 5 DECEMBER 26, 1997 - ----------------- Swap agreements $1,482 $159 $17 $ 2 Forward contracts 59 196 1 15 Futures contracts 202 1 15 2 Options purchased 99 71 60 3 Options written 133 73 44 3 - -------------------------------------------------------------------------------- (1) Certain derivatives subject to interest rate risk are also exposed to the credit spread risk of the underlying financial instrument. (2) Forward contracts subject to interest rate risk principally represent "To Be Announced" mortgage pools that bear interest rate as well as principal prepayment risk. (3) Included in the currency risk category are certain contracts that are also subject to interest rate risk. The notional or contractual amounts of derivatives used to hedge exposure related to borrowings or other non-trading activities follow: - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, (in billions) 1998 1997 - -------------------------------------------------------------------------------- Interest rate derivatives(1) $62 $53 Currency derivatives(l) 18 10 Equity derivatives 4 3 - -------------------------------------------------------------------------------- (1) Includes swap contracts totaling $2 billion in notional amount that contain embedded options hedging callable debt at both dates. Most of these derivatives are entered into with Merrill Lynch's derivative dealer subsidiaries, which intermediate interest rate, currency, and equity risks with third parties in the normal course of their trading activities. In the normal course of business, Merrill Lynch enters into underwriting commitments, when-issued transactions, and commitments to extend credit. Settlement of these commitments as of June 26, 1998 would not have a material effect on the consolidated financial condition of Merrill Lynch. 10 ================================================================================ Regulatory Requirements - -------------------------------------------------------------------------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered broker-dealer and a subsidiary of ML & Co., is subject to the net capital requirements of Rule 15c3-1 of the Securities Exchange Act of 1934. Under the alternative method permitted by this rule, the minimum required net capital, as defined, shall not be less than 2% of aggregate debit items arising from customer transactions. At June 26, 1998, MLPF&S's regulatory net capital of $2,179 was 9% of aggregate debit items, and its regulatory net capital in excess of the minimum required was $1,683. Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S. Government securities and a subsidiary of ML & Co., is subject to the capital adequacy requirements of the Government Securities Act of 1986. This rule requires dealers to maintain liquid capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At June 26, 1998, MLGSI's liquid capital of $1,352 was 201% of its total market and credit risk, and liquid capital in excess of the minimum required was $543. Merrill Lynch International ("MLI"), a registered U.K. broker-dealer and a subsidiary of Merrill Lynch, is subject to capital requirements of the Securities and Futures Authority ("SFA"). Financial resources, as defined, must exceed the total financial resources requirement of the SFA. At June 26, 1998, MLI's financial resources were $3,940 and exceeded the minimum requirement by $1,054. ================================================================================ Interest Expense - -------------------------------------------------------------------------------- Interest expense includes payments in lieu of dividends of $7.8 and $6.2 for the second quarters of 1998 and 1997, respectively. For the six-month periods ended June 26, 1998 and June 27, 1997, payments in lieu of dividends were $12.8 and $8.3, respectively. ================================================================================ Litigation Matters - -------------------------------------------------------------------------------- An action is pending in the United States District Court for the Central District of California by Orange County, California, which filed a bankruptcy petition in the United States Bankruptcy Court for the Central District of California on December 6, 1994, against ML & Co. and certain of its subsidiaries in connection with Merrill Lynch's business activities with the Orange County Treasurer-Tax Collector. On June 2, 1998, an agreement to settle this action was reached, which had no impact on the 1998 second quarter results of operations. See Item 1, "Legal Proceedings," in Part II of this Quarterly Report on Form 10-Q. 11 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of June 26, 1998, and the related condensed consolidated statements of earnings for the three- and six-month periods ended June 26, 1998 and June 27, 1997 and consolidated cash flows for the six-month periods ended June 26, 1998 and June 27, 1997. These financial statements are the responsibility of the management of Merrill Lynch. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Merrill Lynch as of December 26, 1997, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 23, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 26, 1997 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. August 7, 1998 /s/ Deloitte & Touche LLP New York, New York 12 ================================================================================ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance, and related services worldwide. Merrill Lynch conducts its businesses in global financial markets that are influenced by numerous unpredictable factors including economic conditions, monetary policies, the liquidity of global markets, international and regional political events, regulatory developments, the competitive environment, and investor sentiment. These conditions or events can significantly affect the volatility of financial markets. While greater volatility increases risk, it may also increase order flow in businesses such as trading and brokerage. Revenues and net earnings may vary significantly from period to period due to these unpredictable factors and the resulting market volatility. The financial services industry continues to be affected by the intensifying competitive environment, as demonstrated by consolidation through mergers and acquisitions, as well as diminishing margins in many mature products and services. In addition, the recent relaxation of banks' barriers to entry into the securities industry and expansion by insurance companies into traditional brokerage products, coupled with the possible repeal of the Glass-Steagall Act separating commercial and investment banking activities, have increased the number of companies competing for a similar customer base. Global financial markets, which were generally strong during 1997, had mixed performances during the first half of 1998. U.S. and European markets continued to advance, led by stable economies and low interest rates and inflation. Record volumes on many U.S. and European stock exchanges pushed commissions revenues to new highs during the 1998 second quarter. Asian markets steadily weakened throughout the 1998 second quarter after partially recovering from 1997 third and fourth quarter declines earlier this year. Devaluations of certain Asian currencies led to declines in many global equity markets, particularly in June, when the Japanese yen fell to an eight-year low against the dollar. U.S. bond prices increased during the 1998 second quarter as the yield on 30-year U.S. Treasury bonds fell to a record low of 5.56%. The decreases in U.S. interest rates during the 1998 and 1997 second quarters were attributable to continued low inflation and record low levels of unemployment. Global interest rates, following the U.S. trend, were generally lower than the 1998 first quarter and the 1997 second quarter. Credit spreads, which represent the risk premiums paid by issuers based on credit rating or perception, widened considerably on a global basis during the 1998 second quarter relative to the corresponding 1997 period. U.S. equity markets advanced in 1998 to record price levels through April, encouraged by continued low interest rates and inflation, but retreated in May and June, due to uncertainties surrounding Asia and concerns over corporate earnings. Despite these uncertainties and concerns, blue-chip stock indices ended the quarter higher, with the Dow Jones Industrial Average and S&P 500 (Registered Trademark) up 1.7% and 2.9%, respectively, from the end of the 1998 first quarter and 16.7% and 28.1%, respectively, from the end of the 1997 second quarter. In contrast, prices for small capitalization issues declined during the 1998 second quarter, with the Russell 2000 Index down 4.9% from the end of the 1998 first quarter. Global equity markets rose approximately 2% during the 1998 second quarter, as measured by the Dow Jones World Index (Registered Trademark). A favorable interest rate and moderate economic growth environment drove many European markets to record highs during the 1998 second quarter. Asian markets continued to struggle during the 1998 second quarter as worries over the yen's declining value, the pace of corporate restructurings, and political unrest in certain Asian countries led to significant volatility and reduced investor confidence. Lingering concerns over Asian market turmoil, as well as investor preference for higher credit quality instruments, led to further declines in Latin American markets during the 1998 second quarter. 13 Strong issuer activity in the 1998 second quarter led to increased underwriting volume, generating near record revenues from both equity and debt issuances. Investor demand for equities and higher credit quality debt instruments and issuers' reaction to low interest rates led to record underwriting volume and fees for the 1998 first half. Strategic services activities remained strong during the 1998 second quarter, reflecting the record level of merger and acquisition volume experienced during the 1998 first half. Driven by a generally favorable stock market, ongoing industry consolidations, and other competitive and economic factors, companies continued to seek strategic alliances to increase earnings growth and expand into new markets and businesses. Due to the volatility of the financial services industry, Merrill Lynch continually evaluates its businesses across varying market conditions for profitability and alignment with long-term strategic objectives. Merrill Lynch seeks to mitigate the effects of market downturns by expanding its global presence, developing and maintaining long-term client relationships, closely monitoring costs and risks, and continuing to diversify revenue sources. ================================================================================ Results of Operations - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED INCREASE ----------------------------- 2Q98 VERSUS (dollars in millions, JUNE 26, MARCH 27, JUNE 27, ------------- except per share amounts) 1998 1998 1997 1Q98 2Q97 - -------------------------------------------------------------------------------- Total revenues $9,381 $9,166 $8,011 2.3% 17.1% Net revenues 4,709 4,602 3,967 2.3 18.7 Pretax earnings 907 874 784 3.8 15.6 Net earnings 545 518 481 5.1 13.1 Net earnings applicable to common stockholders 535 509 472 5.2 13.4 Earnings per common share Basic 1.55 1.49 1.43 4.0 8.4 Diluted 1.33 1.30 1.25 2.3 6.4 Return on average common stockholders' equity 23.9% 24.8% 28.5% Effective tax rate 37.0% 38.0% 37.0% - -------------------------------------------------------------------------------- The following discussion emphasizes the comparison between the second quarters of 1998 and 1997 and presents additional information comparing the six-month periods where appropriate. Merrill Lynch's net earnings were a record $545 million in the 1998 second quarter, up 5% from the previous record of $518 million in the 1998 first quarter and 13% above the $481 million in the 1997 second quarter. These earnings included $75 million (after-tax) of pre-opening costs related to Merrill Lynch Japan Securities Co. ("MLJS"), which reduced diluted earnings by 19 cents per common share. Record revenues were achieved in commissions, investment banking, and asset management and portfolio service fees. Increases in revenues were partially offset by increased costs related primarily to higher variable compensation and technology-related expenses. Net earnings excluding the effect of goodwill amortization were $601 million in the 1998 second quarter, 21% above the 1997 second quarter results. On the same basis, diluted earnings per share were $1.47 in the 1998 second quarter, up 14% from $1.29 in the 1997 period. Return on average common equity excluding goodwill amortization was 25.8% for the 1998 second quarter, compared with 28.9% in the corresponding 1997 period. 14 For the 1998 first half, net earnings reached a record $1.1 billion, up 12% from the previous record of $947 million in the 1997 first half. Year-to-date earnings per common share were $3.04 basic and $2.63 diluted, compared with $2.80 basic and $2.41 diluted for the corresponding 1997 period. Annualized return on common equity was 24.4% for the 1998 six months versus 28.3% in the 1997 six months. Earnings excluding goodwill amortization increased 20% to $1.2 billion for the 1998 six months. Return on equity excluding goodwill amortization was 26.3% and 28.8%, respectively, for the 1998 and 1997 six-month periods. Non-U.S. net revenues continued to increase to approximately 28% of Merrill Lynch's total net revenues in the 1998 second quarter, compared with approximately 24% in the 1997 second quarter. In the 1998 second quarter, Merrill Lynch continued to expand its non-U.S. presence with the following initiatives: o a commitment to acquire Midland Walwyn Inc., Canada's largest independent full-service securities firm; o the start-up of MLJS, the new Private Client business in Japan; and o an agreement to purchase 51% interest in Phatra Securities Company Limited, Thailand's leading investment bank, which was consummated subsequent to the 1998 second quarter end. These measures will further enhance Merrill Lynch's global presence, and, combined with the acquisitions of Mercury Asset Management ("Mercury"), Smith New Court PLC, and McIntosh Securities Limited, are expected to benefit Merrill Lynch's key strategic priorities. The percentage of net revenues for the 1998 second quarter by strategic priority was as follows: - -------------------------------------------------------------------------------- PERCENTAGE OF NET REVENUES BY STRATEGIC PRIORITY - -------------------------------------------------------------------------------- [THE FOLLOWING TABLE WAS PRESENTED AS A PIE CHART IN THE PRINTED MATERIAL] Corporate and Institutional Client 42% U.S. Private Client 42% International Private Client 5% Asset Management 11% - -------------------------------------------------------------------------------- Commissions revenues are summarized as follows: - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------- JUNE 26, JUNE 27, % JUNE 26, JUNE 27, % (in millions) 1998 1997 INC. 1998 1997 INC. - -------------------------------------------------------------------------------- Listed and over-the-counter $ 730 $ 605 21% $1,501 $1,230 22% Mutual funds 476 321 48 906 665 36 Other 180 152 19 356 298 19 ------ ------ ------ ------ Total $1,386 $1,078 29 $2,763 $2,193 26 ====== ====== ====== ====== - -------------------------------------------------------------------------------- Commissions revenues from mutual funds increased primarily due to strong sales of U.S. funds. Listed securities revenues rose as a result of increased trading volumes on the New York Stock Exchange, NASDAQ, and many European exchanges. 15 Significant components of interest and dividend revenues and interest expense follow: - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------- ------------------ JUNE 26, JUNE 27, JUNE 26, JUNE 27, (in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- INTEREST AND DIVIDEND REVENUES Trading assets $1,403 $1,329 $2,715 $2,555 Resale agreements 1,389 1,155 2,748 2,086 Securities borrowed 874 931 1,768 1,763 Margin lending 721 507 1,382 958 Other 561 408 1,077 816 ------ ------ ------ ------ Total 4,948 4,330 9,690 8,178 ------ ------ ------ ------ INTEREST EXPENSE Repurchase agreements 1,609 1,302 3,150 2,366 Borrowings 1,431 1,087 2,792 2,067 Trading liabilities 711 738 1,471 1,490 Securities loaned 468 612 952 1,146 Other 453 305 871 585 ------ ------ ------ ------ Total 4,672 4,044 9,236 7,654 ------ ------ ------ ------ NET INTEREST AND DIVIDEND PROFIT $ 276 $ 286 $ 454 $ 524 ====== ====== ====== ====== - -------------------------------------------------------------------------------- Interest and dividend revenues and expenses are a function of the level and mix of interest-earning assets and interest-bearing liabilities and the prevailing level, term structure, and volatility of interest rates. Net interest and dividend profit decreased 4% from the 1997 second quarter, as additional financing costs related to the Mercury acquisition were partially offset by higher interest income from certain products. Merrill Lynch hedges certain of its long- and short-term borrowings, primarily with interest rate and currency swaps, to better match the interest rate characteristics of the borrowings to the assets funded by borrowing proceeds. The effect of this hedging activity, which is included in "Borrowings" above, increased interest expense by $39 million and $7 million for the 1998 and 1997 second quarters and by $68 million and $1 million for the 1998 and 1997 six months, respectively. 16 Principal transactions revenues decreased 16% from the 1997 second quarter to $972 million as revenues continued to be affected by volatility in the Asian and Latin American markets, particularly in June. Lower revenues from most fixed income products and foreign exchange instruments were partially offset by higher revenues from non-U.S. equities, which more than doubled from the 1997 second quarter. Non-U.S. trading revenues accounted for 56% and 42% of total principal transactions revenues in the 1998 and 1997 second quarters, respectively. The following table provides information on aggregate trading revenues, including related net interest. Interest revenue and expense amounts are based on financial reporting categories and management's assessment of the cost to finance trading positions, after consideration of the underlying liquidity of these positions.
- ---------------------------------------------------------------------------------------- PRINCIPAL NET INTEREST NET TRANSACTIONS REVENUES TRADING REVENUES (EXPENSES) REVENUES --------------- ---------------- --------------- (in millions) 1998 1997 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- SECOND QUARTER - -------------- Taxable fixed-income $ 125 $ 342 $ 66 $ 95 $ 191 $ 437 Equities and equity derivatives 428 391 (3) (1) 425 390 Interest rate and currency swaps 315 287 (34) (73) 281 214 Municipals 77 84 6 3 83 87 Foreign exchange and commodities 27 47 42 2 69 49 ------ ------ ------ ------ ------ ------ Total $ 972 $1,151 $ 77 $ 26 $1,049 $1,177 ====== ====== ====== ====== ====== ====== FIRST HALF - ---------- Taxable fixed-income $ 307 $ 667 $ 125 $ 166 $ 432 $ 833 Equities and equity derivatives 868 707 (39) (37) 829 670 Interest rate and currency swaps 710 597 (101) (89) 609 508 Municipals 141 167 11 7 152 174 Foreign exchange and commodities 97 77 45 6 142 83 ------ ------ ------ ------ ------ ------ Total $2,123 $2,215 $ 41 $ 53 $2,164 $2,268 ====== ====== ====== ====== ====== ====== - ----------------------------------------------------------------------------------------
Trading and related hedging and financing activities affect the recognition of both principal transactions revenues and net interest and dividend profit. In assessing the profitability of its trading activities, Merrill Lynch aggregates net interest and principal transactions revenues. 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 less financing costs) for trading positions, including hedges, is recorded either as principal transactions revenues or net interest profit, depending on the nature of the specific instruments. Changes in the composition of trading inventories and hedge positions can cause the recognition of revenues within these categories to fluctuate. Taxable fixed-income trading revenues in the 1998 second quarter were down 63% to $125 million as a result of lower trading revenues from corporate bonds, money market instruments, non-U.S. government and agencies securities, and mortgage products. Corporate bond revenues were lower due to significant volatility in Asian markets combined with movements in credit spreads, which expanded considerably compared to the year-ago period. Money market instruments revenues, which include medium-term notes, decreased primarily as a result of weakening in certain Asian positions. Modest losses in non-U.S. governments and agencies securities were attributable primarily to weak economic conditions in certain Latin American and Eastern European markets; lower revenues in mortgage products resulted from higher loan prepayments driven by the low U.S. interest rate environment, as well as lower transaction volume. 17 Equities and equity derivatives trading revenues were $428 million, up 10% from the 1997 second quarter due to significantly higher revenues from non-U.S. equities. Increased transaction volume, resulting from favorable European market conditions, contributed to the growth in non-U.S. equities revenues. Interest rate and currency swap trading revenues rose 10% to $315 million as favorable market conditions in Europe led to increased customer demand for complex derivative products. Municipal securities trading revenues were down 8% to $77 million due to lower margins on sales of shorter term instruments. Foreign exchange and commodities trading revenues decreased 43% to $27 million, due primarily to losses on certain currency positions, which were more than offset by related interest income. A summary of Merrill Lynch's investment banking revenues follows: - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------ -------------------- JUNE 26, JUNE 27, % JUNE 26, JUNE 27, % (in millions) 1998 1997 INC. 1998 1997 INC. - -------------------------------------------------------------------------------- Underwriting $626 $452 38% $1,214 $ 904 34% Strategic services 243 173 41 456 329 39 ---- ---- ------ ------ Total $869 $625 39 $1,670 $1,233 35 ==== ==== ====== ====== - -------------------------------------------------------------------------------- Underwriting revenues in the 1998 second quarter were a record $626 million, up 38% from 1997 second quarter levels due to increased fees from defined asset funds, convertibles, high yield debt, and equity issuances. As a result of continued high levels of underwriting volume, Merrill Lynch maintained its position as the leading underwriter of total U.S. and global debt and equity offerings. Merrill Lynch's underwriting market share information based on transaction value follows: - -------------------------------------------------------------------------------- THREE MONTHS ENDED ------------------------------------- JUNE 26, 1998 JUNE 27, 1997 --------------- --------------- MARKET MARKET SHARE RANK SHARE RANK - -------------------------------------------------------------------------------- U.S. PROCEEDS Debt 18.6% 1 16.2% 1 Equity 15.6 2 12.5 3 Debt and Equity 18.5 1 16.5 1 GLOBAL PROCEEDS Debt 15.4 1 13.7 1 Equity 13.0 2 12.1 3 Debt and Equity 15.4 1 13.9 1 - -------------------------------------------------------------------------------- Source: Securities Data Co. ("SDC") statistics based on full credit to book manager. For the 1998 first half, Merrill Lynch ranked No. 1 in both U.S. and global debt and equity underwritings. 18 Strategic services revenues advanced to $243 million in the 1998 second quarter, benefiting from record merger and acquisition activity attributable to consolidations in various industries. Merrill Lynch's merger and acquisition market share information for the 1998 and 1997 second quarters based on transaction value follows: - -------------------------------------------------------------------------------- THREE MONTHS ENDED ------------------------------------- JUNE 26, 1998 JUNE 27, 1997 --------------- --------------- MARKET MARKET SHARE RANK SHARE RANK - -------------------------------------------------------------------------------- COMPLETED TRANSACTIONS U.S. 28.8% 1 25.4% 2 Global 25.4 2 19.6 3 ANNOUNCED TRANSACTIONS U.S. 23.4 3 23.6 2 Global 21.7 2 14.1 4 - -------------------------------------------------------------------------------- Source: SDC statistics based on full credit to both target and acquiring companies' advisors. For the 1998 first half, Merrill Lynch ranked No. 1 and No. 2, respectively, in U.S. completed and announced mergers and acquisitions. Merrill Lynch's asset management and portfolio service fees are summarized below: - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ------------------ -------------------- JUNE 26, JUNE 27, % JUNE 26, JUNE 27, % (in millions) 1998 1997 INC. 1998 1997 INC. - -------------------------------------------------------------------------------- Asset management fees(1) $ 521 $291 79% $1,033 $ 575 80% Portfolio service fees 289 190 52 540 367 47 Account fees 115 107 7 228 212 7 Other fees 97 82 18 192 162 18 ------ ---- ------ ------ Total $1,022 $670 53 $1,993 $1,316 51 ====== ==== ====== ====== - -------------------------------------------------------------------------------- (1) Approximately three-quarters of the increases in asset management fees is attributable to the Mercury acquisition. Total assets in client accounts or under management reached an industry record $1.4 trillion at the end of the 1998 second quarter. The changes in these balances are described as follows: - -------------------------------------------------------------------------------- NET CHANGES DUE TO ----------------------- JUNE 27, NEW ASSET JUNE 26, (in billions) 1997 MONEY(1) APPRECIATION 1998 - -------------------------------------------------------------------------------- Total assets in client accounts or under management $940 $283(2) $129 $1,352 Total assets under management 257 202 30 489 - -------------------------------------------------------------------------------- (1) Includes $167 billion of assets related to the fourth quarter 1997 acquisition of Mercury. (2) Includes $17 billion of assets related to the third quarter 1997 acquisition of MasterWorks, a 401(k) service provider. 19 Asset management fees significantly increased from the 1997 second quarter due to growth in assets under management, primarily from the acquisition of Mercury, strong inflows of client assets, and net asset appreciation. Assets under management rose $1 billion from the end of the 1998 first quarter to $489 billion at the end of the 1998 second quarter, reflecting a net increase in non-Mercury assets under management partially offset by a net decrease in Mercury assets under management. Portfolio service fees were considerably higher than the corresponding 1997 period due to increases in the number of accounts and asset levels from various fee-based products including Merrill Lynch Consults (Registered Trademark), Mutual Fund Advisor (Service Mark), Asset Power (Registered Trademark), and Financial Advantage (Service Mark). Account fees rose due to an increase in the number of customer and custodial accounts. Other fee-based revenues were up due primarily to higher revenues from transfer agency activities. Other revenues were $184 million, up 18% from the 1997 second quarter due primarily to gains from investment activities. Merrill Lynch's non-interest expenses are summarized below. Certain of these expenses have been reclassified from prior periods to conform to the current period presentation. - -------------------------------------------------------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED ----------------- ---------------- JUNE 26, JUNE 27, JUNE 26, JUNE 27, (in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------- Compensation and benefits $2,378 $2,004 $4,753 $3,991 ------ ------ ------ ------ Non-interest expenses, excluding compensation and benefits: Communications and technology 408 294 773 571 Occupancy and related depreciation 207 174 399 344 Professional fees 151 131 316 265 Advertising and market development 195 156 367 300 Brokerage, clearing, and exchange fees 161 112 311 230 Goodwill amortization 56 16 111 31 Other 246 296 500 525 ------ ------ ------ ------ Total non-interest expenses, excluding compensation and benefits 1,424 1,179 2,777 2,266 ------ ------ ------ ------ Total non-interest expenses $3,802 $3,183 $7,530 $6,257 ====== ====== ====== ====== Compensation and benefits as a percentage of net revenues 50.5% 50.5% 51.0% 51.1% Compensation and benefits as a percentage of pretax earnings before compensation and benefits 72.4% 71.9% 72.7% 72.0% - -------------------------------------------------------------------------------- Non-interest expenses increased 19% from the 1997 second quarter to $3.8 billion. Excluding the pre-opening costs related to MLJS and goodwill amortization from acquisitions, non-interest expenses rose 16%. The largest expense category, compensation and benefits expense, rose 19% from the 1997 second quarter to $2.4 billion due to higher incentive and production-related compensation and increased headcount. Incentive compensation was up attributable to improved profitability, while production-related compensation rose as a result of strong business volume. Headcount increased by approximately 7,900 employees since the end of the 1997 second quarter, resulting in 60,300 employees at the end of the 1998 second quarter. This increase is attributable to Merrill Lynch's recent acquisitions, strategic business expansion, and growth in existing businesses. The ratio of support employees and sales assistants to producers increased to 1.58 at the end of the 1998 second quarter from 1.54 at the end of the 1997 second quarter. 20 Communications and technology expense was up 39% to $408 million because of increased systems consulting costs, primarily associated with continued progress on the Year 2000 and various Private Client initiatives, as well as higher technology-related depreciation. Occupancy and related depreciation expense rose 19% to $207 million due to global expansion, including a combined total of $21 million associated with MLJS and Mercury. Professional fees increased 16% to $151 million due in part to costs related to various strategic initiatives. Advertising and market development expense was up 25% to $195 million due in part to increased business development and higher global travel costs. Brokerage, clearing, and exchange fees rose 44% to $161 million as a result of $24 million in custody and clearing costs for Mercury and higher trading volume. Goodwill amortization, a non-cash charge, increased $40 million to $56 million due to the Mercury acquisition. Other expenses were down 17% to $246 million primarily as a result of non-recurring loss provisions in the 1997 second quarter totaling $75 million. Income tax expense was $336 million in the 1998 second quarter, up 16% from the same period a year ago. The effective tax rate was 37.0%, unchanged from the 1997 second quarter. A tax benefit for MLJS pre-opening costs was not recognized in the 1998 second quarter since the ultimate deductibility of these costs is not yet certain. ================================================================================ Liquidity and Liability Management - -------------------------------------------------------------------------------- The primary objective of Merrill Lynch's funding policies is to assure liquidity at all times. Merrill Lynch's liquidity management strategy has three key components: 1. Maintain alternative funding sources such that all debt obligations maturing within one year can be repaid when due without issuing new unsecured debt or liquidating any business assets; 2. Concentrate unsecured, general purpose borrowings at the ML & Co. level; and 3. Expand and diversify Merrill Lynch's funding programs. Merrill Lynch's primary alternative funding sources to unsecured borrowings are repurchase agreements and secured bank loans, which require pledging unhypothecated marketable securities. Other funding alternatives include liquidating cash equivalents; securitizing loan assets; and drawing on committed, unsecured bank credit facilities that, at June 26, 1998, totaled $6.9 billion and were not drawn upon. To finance the purchase of Mercury, Merrill Lynch obtained additional short-term bank credit facilities totaling 2.0 billion British pounds (approximately $3.3 billion), which were drawn upon and repaid in full during the 1998 first half from the proceeds of long-term financings. Merrill Lynch regularly reviews the level and mix of its assets and liabilities to assess its ability to conduct core business activities without issuing new unsecured debt or drawing upon its bank credit facilities. The mix of assets and liabilities provides flexibility in managing liquidity since a significant portion of assets turns over frequently and is typically match-funded with liabilities having similar maturities and cash flow characteristics. At June 26, 1998, substantially all of Merrill Lynch's assets were considered readily marketable by management. Merrill Lynch concentrates its unsecured, general purpose borrowings at the ML & Co. level, except where tax regulations, time zone differences, or other business considerations make this impractical. The benefits of this strategy are enhanced control, reduced financing costs, wider name recognition by creditors, and enhanced flexibility to meet variable funding requirements of subsidiaries. Merrill Lynch also strives to expand and diversify its funding programs and investor and creditor base. Merrill Lynch benefits by distributing most of its debt through its own sales force to a large, diversified customer base. Additionally, Merrill Lynch maintains strict concentration standards for short-term borrowings, including limits for any single investor. 21 Commercial paper is the major source of short-term general purpose funding. Commercial paper outstanding totaled $34.9 billion at June 26, 1998 and $30.4 billion at December 26, 1997, which was equal to 10% of total assets at second quarter-end 1998 and year-end 1997, respectively. Outstanding long-term debt at June 26, 1998 increased to $52.1 billion from $43.1 billion at December 26, 1997. Major components of the change in long-term debt for the 1998 six months follow: - -------------------------------------------------------------------------------- (in millions) - -------------------------------------------------------------------------------- Balance at December 26, 1997 $43,090 Issuances and resales 17,174 Settlements and repurchases (7,771) Other (418) ------- Balance at June 26, l998(1) $52,075 ======= - -------------------------------------------------------------------------------- (1) At the end of the 1998 second quarter, $37.8 billion of long-term debt had maturity dates beyond one year. Approximately $90.2 billion of indebtedness at June 26, 1998 is considered senior indebtedness as defined under various indentures. At June 26, 1998, Merrill Lynch's senior long-term debt, preferred stock, and Trust Originated Preferred Securities (Service Mark) ("TOPrS" (Registered Trademark)) were rated by recognized credit rating agencies as follows: - -------------------------------------------------------------------------------- SENIOR PREFERRED STOCK DEBT AND TOPrS RATING AGENCY RATINGS RATINGS - -------------------------------------------------------------------------------- Duff & Phelps Credit Rating Co. AA AA- Fitch IBCA, Inc. AA AA- Japan Rating & Investment Information, Inc.(1) AA Not Rated Moody's Investors Service, Inc. Aa3 aa3 Standard & Poor's AA- A Thomson BankWatch, Inc. AA+ Not Rated - -------------------------------------------------------------------------------- (1) Effective April 1, 1998, the Japan Bond Research Institute merged with Nippon Investors Service to form the Japan Rating & Investment Information, Inc. As part of an overall liquidity management strategy, Merrill Lynch's insurance subsidiaries regularly review the funding requirements of their contractual obligations for in-force, fixed-rate life insurance and annuity contracts as well as expected future acquisition and maintenance expenses for all contracts. The insurance subsidiaries market primarily variable life insurance and variable annuity products. These products are not subject to the interest rate, asset/liability matching, or credit risks attributable to fixed-rate products, thereby reducing the insurance subsidiaries' risk profile and liquidity demands. At June 26, 1998, approximately 79% of invested assets of insurance subsidiaries were considered liquid by management. 22 ================================================================================ Capital Resources and Capital Adequacy - -------------------------------------------------------------------------------- Among U.S. institutions engaged primarily in the global securities business, Merrill Lynch is one of the most highly capitalized, with $9.3 billion in common equity and $425 million in preferred stock at June 26, 1998. In January and June 1998, certain subsidiaries of ML & Co. issued $750 million and $400 million of perpetual TOPrS, respectively. These subsidiary-issued preferred securities, in addition to $627 million in outstanding preferred securities of other subsidiaries, further strengthen Merrill Lynch's equity capital base. Merrill Lynch's leverage ratios were as follows: - -------------------------------------------------------------------------------- ADJUSTED LEVERAGE LEVERAGE RATIO(1) RATIO(2) - -------------------------------------------------------------------------------- PERIOD-END June 26, 1998 31.9x 18.9x December 26, 1997 32.7x 20.9x AVERAGE(3) Six months ended June 26, 1998 36.1x 20.3x Year ended December 26, 1997 35.5x 21.5x - -------------------------------------------------------------------------------- (1) Total assets to total stockholders' equity and preferred securities issued by subsidiaries. (2) Total assets less (a) securities received as collateral, net of securities pledged as collateral, (b) securities pledged as collateral, (c) receivables under (i) resale agreements and (ii) securities borrowed transactions, to total stockholders' equity and preferred securities issued by subsidiaries. (3) Computed using month-end balances. Overall capital needs are continually reviewed to ensure that Merrill Lynch's capital base can support the estimated risks of its businesses as well as the regulatory and legal capital requirements of its subsidiaries. Statistic-based product risk models are used to estimate potential losses arising from market and credit risks. These dynamic models incorporate changes in business risk into Merrill Lynch's equity requirements. Based upon these analyses and other criteria, management believes that Merrill Lynch's capital base of $11.5 billion is adequate. No common stock repurchases were made during the 1998 three- and six-month periods; Merrill Lynch repurchased 5.6 and 13.2 million shares of common stock during the corresponding 1997 periods. At June 26, 1998, remaining authority to repurchase shares under the share repurchase program was 10.0 million shares. Subsequent to quarter end, Merrill Lynch rescinded its share repurchase authority in order to facilitate pooling-of-interests accounting. Merrill Lynch operates in many regulated businesses that require various minimum levels of capital (see "Regulatory Requirements" section in Notes to the Consolidated Financial Statements - Unaudited). Merrill Lynch's broker-dealer, banking, insurance, and futures commission merchant activities are subject to regulatory requirements that may restrict the free flow of funds to affiliates. Regulatory approval is generally required for paying dividends in excess of certain established levels, making affiliated investments, and entering into management and service agreements with affiliated companies. 23 ================================================================================ Capital Projects and Expenditures - -------------------------------------------------------------------------------- Merrill Lynch continually prepares for the future by expanding its operations and investing in new technology to improve service to clients. To support business expansion, for example, Merrill Lynch plans to build a new European headquarters in London with expected costs of approximately $650 million; $115 million has been spent to date related primarily to land. Completion of this facility is expected to occur in 2001. During 1997, Merrill Lynch approved a plan to construct an office complex in central New Jersey to consolidate certain operations. Construction costs are estimated at approximately $325 million, and completion of this facility is anticipated in 2000. Significant technology initiatives include Trusted Global Advisor (Service Mark) ("TGA" (Service Mark)) and Year 2000 systems compliance. The TGA system, a technology platform for Financial Consultants, is expected to be available to virtually all U.S. Financial Consultants by the end of the 1998 third quarter. In addition, new system applications will continue to be added to the platform. The projected remaining expenditures for development and installation of the TGA system as of June 26, 1998 are approximately $150 million. The modifications for Year 2000 systems compliance are proceeding according to plan and are expected to be completed in early 1999. Merrill Lynch's recent acquisitions, continued global expansion, and higher-than-expected systems consulting costs have increased the total projected expense from $300 million to approximately $375 million. Based on information currently available, the remaining costs are estimated at $200 million and will cover hardware and software upgrades, systems consulting, and computer maintenance. These expenditures are not expected to have a material adverse impact on Merrill Lynch's financial position, results of operations, or cash flows in future periods. However, the failure of securities exchanges, clearing organizations, vendors, clients, or regulators to resolve their own processing issues in a timely manner could result in a material financial risk to the company. Merrill Lynch is devoting necessary resources, including contacting vendors, to address all Year 2000 issues in a timely manner. As of January 1, 1999, the "euro" is expected to be adopted as the national currency of participating member states of the EMU. Since participating member states' local currencies will continue to be legal tender until July 2002, conversion issues between the euro and the existing local currencies must be addressed. Remaining costs to assess the strategic implications of the EMU and to ensure EMU systems capability are estimated at approximately $65 million. Merrill Lynch expects to be EMU-capable during the 1998 fourth quarter. 24 ================================================================================ Average Assets and Liabilities - -------------------------------------------------------------------------------- Merrill Lynch monitors changes in its balance sheet using average daily balances that are determined on a settlement date basis and reported for management information purposes. Financial statement balances are recorded on a trade date basis as required under generally accepted accounting principles. The following discussion compares changes in settlement date average daily balances. These changes were consistent with the growth in the financial statement balances from fourth quarter 1997 to second quarter 1998. For the first six months of 1998, average total assets were $380 billion, up 27% from $299 billion for the 1997 fourth quarter. Average total liabilities rose 27% to $369 billion from $290 billion for the 1997 fourth quarter. The major components in the growth of average total assets and liabilities for the first half of 1998 are summarized as follows: - -------------------------------------------------------------------------------- (in millions) INCREASE GROWTH - -------------------------------------------------------------------------------- AVERAGE ASSETS: Trading assets $34,923 31% Securities pledged as collateral 19,255 N/M Receivables under resale agreements and securities borrowed transactions 17,348 15 Goodwill 4,872 N/M - -------------------------------------------------------------------------------- AVERAGE LIABILITIES: Obligation to return securities received as collateral $39,097 N/M Payables under repurchase agreements and securities loaned transactions 18,744 19% Trading liabilities 12,398 20 Long-term borrowings 5,511 13 - -------------------------------------------------------------------------------- N/M -- Not meaningful. Statement of Financial Accounting Standards ("SFAS") No. 127 requires Merrill Lynch to recognize collateral on certain resale and repurchase agreements. Due to the adoption of SFAS No. 127, trading assets and securities pledged as collateral increased $20 billion and $19 billion, respectively. The offset to the growth in average assets was a $39 billion increase in the obligation to return securities received as collateral (for more information on SFAS No. 127, see "New Accounting Pronouncements" section in Notes to the Consolidated Financial Statements - Unaudited). In addition, during the first half of 1998, trading assets and liabilities (which include on-balance-sheet hedges used to manage trading risks) rose as volume increased, benefiting from higher customer demand. Receivables under resale agreements and securities borrowed transactions and payables under repurchase agreements and securities loaned transactions rose to meet higher funding requirements for increased trading activity. These transactions increased as a result of expanded matched-book activity, primarily involving non-U.S. governments and agencies. Goodwill was higher primarily as a result of the Mercury acquisition. Assets are funded through diversified sources which include repurchase agreements and securities loaned transactions, commercial paper and other unsecured short-term borrowings, long-term borrowings, preferred securities issued by subsidiaries, and equity. In addition to the increase in repurchase agreements and securities loaned transactions, the growth in average assets was funded by higher long-term borrowings, particularly medium-term notes. 25 ================================================================================ Non-Investment Grade Holdings and Highly Leveraged Transactions - -------------------------------------------------------------------------------- Non-investment grade holdings and highly leveraged transactions involve risks related to the creditworthiness of the issuers or counterparties and the liquidity of the market for such investments. Merrill Lynch recognizes these risks and, whenever possible, employs strategies to mitigate exposures. The specific components and overall level of non-investment grade and highly leveraged positions may vary significantly from period to period as a result of inventory turnover, investment sales, and asset redeployment. - -------------------------------------------------------------------------------- Non-Investment Grade Holdings In the normal course of business, Merrill Lynch underwrites, trades, and holds non-investment grade cash instruments in connection with its investment banking, market-making, and derivative structuring activities. Non-investment grade trading inventories have continued to increase to satisfy growing client demand for higher-yielding investments, including emerging market and other non-U.S. securities. Non-investment grade holdings have been defined as debt and preferred equity securities rated as BB+ or lower, or equivalent ratings by recognized credit rating agencies, certain sovereign debt in emerging markets, amounts due under derivative contracts from non-investment grade counterparties, and other instruments that, in the opinion of management, are non-investment grade. The following table summarizes positions with non-investment grade issuers (for cash instruments) or counterparties (for derivatives in a gain position), which are carried at fair value. - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Trading assets: Cash instruments $13,236 $12,993 Derivatives(1) 3,499 3,079 Trading liabilities - cash instruments 2,462 2,962 Marketable investment securities 610 648 Insurance subsidiaries' investments 225 192 - -------------------------------------------------------------------------------- (1) Collateral of $774 and $599 was obtained at June 26, 1998 and December 26, 1997, respectively, to reduce risk related to these derivative balances. Included in the preceding table are debt and equity securities and bank loans of companies in various stages of bankruptcy proceedings or in default. At June 26, 1998, the carrying value of such debt and equity securities totaled $51 million, of which 35% resulted from Merrill Lynch's market-making activities in such securities. This compared with $142 million at December 26, 1997, of which 56% related to market-making activities. In addition, Merrill Lynch held distressed bank loans totaling $209 million and $432 million at June 26, 1998 and December 26, 1997, respectively. Derivatives may also expose Merrill Lynch to credit risk related to the underlying security where a derivative contract can either synthesize ownership of the underlying security (e.g., long total return swap) or potentially force ownership of the underlying security (e.g., short put option). In addition, derivatives may subject Merrill Lynch to credit spread risk, in that changes in credit quality of the underlying securities may offset the derivatives' fair values. 26 A summary of exposures related to derivatives with non-investment grade underlying securities follows: - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Derivative fair values: Trading assets(1) $ 33 $ 62 Trading liabilities 413 62 Derivative notionals (off-balance-sheet)(2) 3,519 3,257 - -------------------------------------------------------------------------------- (1) The preceding table includes $15 and $42 at June 26, 1998 and December 26, 1997, respectively, of credit risk exposures to non-investment grade counterparties. (2) Represents amount subject to strike or reference price. Merrill Lynch engages in hedging strategies to reduce its exposure associated with non-investment grade positions by purchasing an option to sell the related security or by entering into other offsetting derivative contracts. Merrill Lynch also uses non-investment grade trading inventories, principally non-U.S. governments and agencies securities, to hedge the exposure arising from structured derivative transactions. A summary of derivatives used to hedge the credit risk of non-investment grade positions follows: - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Derivative notionals (off-balance-sheet)(1) $6,264 $5,548 - -------------------------------------------------------------------------------- (1) Represents amount subject to strike or reference price. At June 26, 1998, the largest non-investment grade concentration consisted of various sovereign and corporate issues of a South American country totaling $1.1 billion. - -------------------------------------------------------------------------------- Highly Leveraged Transactions Merrill Lynch provides financing and advisory services to, and invests in, companies entering into leveraged transactions, which may include leveraged buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides extensions of credit to leveraged companies in the form of senior and subordinated debt, as well as bridge financing on a select basis. In addition, Merrill Lynch syndicates loans for non-investment grade companies or in connection with highly leveraged transactions and may retain a residual portion of these loans. 27 Merrill Lynch holds direct equity investments in leveraged companies and interests in partnerships that invest in leveraged transactions. Merrill Lynch has also committed to participate in limited partnerships that invest in leveraged transactions. Future commitments to participate in limited partnerships and other direct equity investments will be made on a select basis. A summary of loans, investments, and commitments related to highly leveraged transactions follows: - -------------------------------------------------------------------------------- JUNE 26, DECEMBER 26, (in millions) 1998 1997 - -------------------------------------------------------------------------------- Loans (net of allowance for loan losses)(1) $ 896 $467 Equity investments(2) 181 170 Partnership interests 494 82 Bridge loans 95 - Additional commitments to invest in partnerships 63 60 Unutilized revolving lines of credit and other lending commitments(3) 786 485 - -------------------------------------------------------------------------------- (1) Represented outstanding loans to 73 and 48 companies at June 26, 1998 and December 26, 1997, respectively. (2) Invested in 56 and 72 enterprises at June 26, 1998 and December 26, 1997, respectively. (3) Subsequent to quarter end Merrill Lynch entered into a $350 million bridge loan commitment to a counterparty in connection with a proposed acquisition transaction. If extended, Merrill Lynch intends to syndicate a significant portion of the loan. At June 26, 1998, the largest industry exposure was to the financial services sector which accounted for 32% of total non-investment grade positions and highly leveraged transactions. 28
=================================================================================================== Statistical Data - --------------------------------------------------------------------------------------------------- 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 1997 1997 1997 1998 1998 -------- -------- -------- -------- -------- CLIENT ACCOUNTS (in billions): U.S. Client Assets $ 886 $ 960 $ 979 $ 1,086 $ 1,110 Non-U.S. Client Assets 54 58 225 242 242 -------- -------- -------- -------- -------- Total Assets in Client Accounts or Under Management $ 940 $ 1,018 $ 1,204 $ 1,328 $ 1,352 ======== ======== ======== ======== ======== Assets Under Management: MLAM(a): Money Market $ 98 $ 105 $ 107 $ 117 $ 118 Equity 68 73 72 80 77 Fixed-Income 45 46 48 53 54 Private Portfolio 43 45 49 55 58 Insurance 3 3 3 3 3 -------- -------- -------- -------- -------- Total $ 257 $ 272 $ 279 $ 308 $ 310 Mercury - - 167 180 179 -------- -------- -------- -------- -------- Total Assets Under Management $ 257 $ 272 $ 446 $ 488 $ 489 ======== ======== ======== ======== ======== ML Consults (Registered Trademark) $ 24 $ 26 $ 27 $ 31 $ 33 Mutual Fund Advisor (Service Mark) and Asset Power (Registered Trademark) $ 12 $ 14 $ 15 $ 18 $ 19 401(k) Assets $ 51 $ 71 $ 74 $ 80 $ 82 - --------------------------------------------------------------------------------------------------- UNDERWRITING(b): Global Debt and Equity: Volume (in billions) $ 62 $ 68 $ 64 $ 92 $ 105 Market Share 13.9% 14.0% 15.4% 14.2% 15.4% U.S. Debt and Equity: Volume (in billions) $ 50 $ 59 $ 56 $ 78 $ 92 Market Share 16.5% 16.1% 17.2% 16.5% 18.5% - --------------------------------------------------------------------------------------------------- FULL-TIME EMPLOYEES: U.S. 43,500 45,000 45,800 46,100 47,100 Non-U.S. 8,900 9,200 10,800 11,100 13,200 -------- -------- -------- -------- -------- Total 52,400 54,200 56,600 57,200 60,300 ======== ======== ======== ======== ======== Financial Consultants and Account Executives Worldwide 14,800 15,200 15,300 15,300 16,300 Support Personnel to Producer Ratio(c) 1.54 1.53 1.57 1.58 1.58 - --------------------------------------------------------------------------------------------------- INCOME STATEMENT: Net Earnings (in millions) $ 481 $ 493 $ 466 $ 518 $ 545 Annualized Return on Average Common Stockholders' Equity 28.5% 27.3% 23.9% 24.8% 23.9% Earnings per Common Share: Basic $ 1.43 $ 1.46 $ 1.37 $ 1.49 $ 1.55 Diluted $ 1.25 $ 1.25 $ 1.17 $ 1.30 $ 1.33 - --------------------------------------------------------------------------------------------------- BALANCE SHEET (in millions): Total Assets $268,036 $288,430 $292,819 $353,424 $365,451 Total Stockholders' Equity $ 7,268 $ 7,797 $ 8,329 $ 9,001 $ 9,691 - --------------------------------------------------------------------------------------------------- SHARE INFORMATION (in thousands): Weighted Average Shares Outstanding: Basic 329,901 330,958 333,853 340,571 346,299 Diluted 378,901 387,643 390,822 390,936 401,972 Common Shares Outstanding 329,048 332,352 335,082 344,731 347,244 Shares Repurchased(d) 5,588 240 - - - - ---------------------------------------------------------------------------------------------------
(a) Merrill Lynch Asset Management. (b) Full credit to book manager. Market share data derived from Securities Data Co. (c) Support personnel includes sales assistants. (d) Does not include shares either (i) owned by employees and used to pay for the exercise of stock options or (ii) stock withheld from employee stock option exercises to pay associated taxes. 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings Since the filing of ML & Co.'s 1997 Form 10-K (the "1997 Form 10-K") and ML & Co.'s Quarterly Report on Form 10-Q for the quarter ended March 27, 1998 (the "First Quarter 1998 Form 10-Q"), the following events have taken place with respect to several of the actions reported therein. Capitalized terms used herein without definition have the meanings set forth in the 1997 Form 10-K. Orange County Litigation. As reported in ML & Co.'s Current Report on Form 8-K dated June 2, 1998, ML & Co. reached a settlement to end its litigation with Orange County, California, John M.W. Moorlach in his official capacity as Orange County Treasurer-Tax Collector, and the Litigation Representative appointed pursuant to the terms of the Modified Second Amended Plan of Adjustment for the County of Orange approved by order of the United States Bankruptcy Court on June 12, 1996 (collectively, the "County"). Under the terms of the settlement, ML & Co. will pay $400 million to the County. ML & Co. also will return to the County approximately $20 million of excess collateral that it has been holding. In addition, ML & Co. reached an agreement to settle a lawsuit brought by the Irvine Ranch Water District for $17.1 million. On June 18, 1998, the Supreme Court of the State of New York, Appellate Division, First Department, affirmed the dismissal of the complaint in the Wilson Action. Item 4. Submission of Matters to a Vote of Security Holders. On April 14, 1998, ML & Co. held its Annual Meeting of Stockholders. Further details concerning matters submitted for vote of security holders can be found in the First Quarter 1998 Form 10-Q. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (4) Instruments defining the rights of security holders, including indentures: Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML & Co. hereby undertakes to furnish to the Securities and Exchange Commission (the "Commission"), upon request, copies of the instruments defining the rights of holders of long-term debt securities of ML & Co. that authorize an amount of securities constituting 10% or less of the total assets of ML & Co. and its subsidiaries on a consolidated basis. (10)(i) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan, as amended on July 27, 1998. 30 (ii) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan for Managers and Producers, as amended on July 27, 1998. (11) Statement re: computation of per common share earnings. (12) Statement re: computation of ratios. (15) Letter re: unaudited interim financial information. (27) Financial Data Schedule. (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed by ML & Co. with the Commission during the quarterly period covered by this Report: (i) Current Report dated April 13, 1998 for the purpose of filing the Preliminary Unaudited Earnings Summary of ML & Co. for the three-month period ended March 27, 1998. (ii) Current Report dated April 29, 1998 for the purpose of filing the Preliminary Unaudited Consolidated Balance Sheet of ML & Co. as of March 27, 1998. (iii) Current Report dated May 19, 1998 for the purpose of filing the Telebras Indexed Callable Protected Growth (Service Mark) Securities due May 19, 2005 of ML & Co. (iv) Current Report dated June 2, 1998 for the purpose of reporting on the settlement of certain litigation arising out of ML & Co.'s business dealings with Orange County, California. (v) Current Report dated June 3, 1998 for the purpose of filing ML & Co.'s 6 3/4% Notes due June 1, 2028. (vi) Current Report dated June 15, 1998 for the purpose of filing the Independent Auditors' Consent of Deloitte & Touche L.L.P. in connection with Registration Statements on Form S-3 (File Nos. 333-42859 and 333-44173) filed by ML & Co. (vii) Current Report dated June 24, 1998 for the purpose of filing ML & Co.'s Floating Rate Notes due June 24, 2003. (viii) Current Report dated June 26, 1998 for the purpose of filing ML & Co.'s S&P 500 Market Index Target-Term Securities (Service Mark) due July 1, 2005. 31 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MERRILL LYNCH & CO., INC. ------------------------- (Registrant) Date: August 7, 1998 By: /s/ E. Stanley O'Neal ------------------------- E. Stanley O'Neal Executive Vice President and Chief Financial Officer 32 INDEX TO EXHIBITS Exhibits 10(i) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan, as amended on July 27, 1998. 10(ii) Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan for Managers and Producers, as amended on July 27, 1998. 11 Statement re: computation of per common share earnings 12 Statement re: computation of ratios 15 Letter re: unaudited interim financial information 27 Financial Data Schedule