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 28, 2002
Commission File Number 1-7182
MERRILL LYNCH & CO., INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2740599
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(State of incorporation) (I.R.S. Employer Identification No.)
4 World Financial Center
New York, New York 10080
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(Address of principal executive offices) (Zip Code)
(212) 449-1000
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Registrant's telephone number, including area code
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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.
861,172,600 shares of Common Stock and 4,161,820 Exchangeable Shares as of the
close of business on August 2, 2002. The Exchangeable Shares, which were issued
by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland
Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one
basis and entitle holders to dividend, voting, and other rights equivalent to
Common Stock.
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
MERRILL LYNCH & Co., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Threee Months Ended
-----------------------------
June 28, June 29, Percent
(in millions, except per share amounts) 2002 2001 Inc. (Dec.)
------- ------- ----------
NET REVENUES
Commissions $ 1,204 $ 1,362 (11.6)%
Principal transactions 728 888 (18.0)
Investment banking
Underwriting 511 685 (25.4)
Strategic advisory 194 313 (38.0)
Asset management and portfolio service fees 1,298 1,356 (4.3)
Other 219 153 43.1
------- -------
Subtotal 4,154 4,757 (12.7)
------- -------
Interest and dividend revenues 3,198 5,563 (42.5)
Less interest expense 2,401 4,747 (49.4)
------- -------
Net interest profit 797 816 (2.3)
------- -------
TOTAL NET REVENUES 4,951 5,573 (11.2)
------- -------
NON-INTEREST EXPENSES
Compensation and benefits 2,569 2,977 (13.7)
Communications and technology 412 568 (27.5)
Occupancy and related depreciation 228 270 (15.6)
Brokerage, clearing, and exchange fees 172 243 (29.2)
Advertising and market development 151 202 (25.2)
Professional fees 132 151 (12.6)
Office supplies and postage 65 92 (29.3)
Goodwill amortization - 51 (100.0)
Other 274 167 64.1
------- -------
TOTAL NON-INTEREST EXPENSES 4,003 4,721 (15.2)
------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 948 852 11.3
Income tax expense 267 262 1.9
Dividends on preferred securities issued by subsidiaries 47 49 (4.1)
------- -------
NET EARNINGS $ 634 $ 541 17.2
======= =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 624 $ 532 17.3
======= =======
EARNINGS PER COMMON SHARE
Basic $ 0.72 $ 0.63
======= =======
Diluted $ 0.66 $ 0.56
======= =======
DIVIDEND PAID PER COMMON SHARE $ 0.16 $ 0.16
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 861.7 841.4
======= =======
Diluted 942.6 943.8
======= =======
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Six Months Ended
-----------------------------
June 28, June 29, Percent
(in millions, except per share amounts) 2002 2001 Inc. (Dec.)
------- ------- ----------
Net Revenues
Commissions $ 2,433 $ 2,867 (15.1)%
Principal transactions 1,605 2,605 (38.4)
Investment banking
Underwriting 989 1,337 (26.0)
Strategic advisory 377 597 (36.9)
Asset management and portfolio service fees 2,591 2,735 (5.3)
Other 438 317 38.2
------- -------
Subtotal 8,433 10,458 (19.4)
------- -------
Interest and dividend revenues 6,482 11,796 (45.0)
Less interest expense 4,874 10,271 (52.5)
------- -------
Net interest profit 1,608 1,525 5.4
------- -------
TOTAL NET REVENUES 10,041 11,983 (16.2)
------- -------
NON-INTEREST EXPENSES
Compensation and benefits 5,215 6,221 (16.2)
Communications and technology 886 1,166 (24.0)
Occupancy and related depreciation 466 540 (13.7)
Brokerage, clearing, and exchange fees 370 478 (22.6)
Advertising and market development 301 410 (26.6)
Professional fees 262 293 (10.6)
Office supplies and postage 134 188 (28.7)
Goodwill amortization - 103 (100.0)
Other 447 381 17.3
------- -------
TOTAL NON-INTEREST EXPENSES 8,081 9,780 (17.4)
------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,960 2,203 (11.0)
Income tax expense 583 690 (15.5)
Dividends on preferred securities issued by subsidiaries 96 98 (2.0)
------- --------
NET EARNINGS $ 1,281 $ 1,415 (9.5)
======= =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,262 $ 1,396 (9.6)
======= =======
EARNINGS PER COMMON SHARE
Basic $ 1.47 $ 1.67
======= =======
Diluted $ 1.33 $ 1.48
======= =======
DIVIDEND PAID PER COMMON SHARE $ 0.32 $ 0.32
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 858.2 836.8
======= =======
Diluted 945.9 940.9
======= =======
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 28, Dec. 28,
(dollars in millions) 2002 2001
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ASSETS
CASH AND CASH EQUIVALENTS $ 14,714 $ 11,070
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 6,617 4,467
SECURITIES FINANCING TRANSACTIONS
Receivables under resale agreements 75,298 71,296
Receivables under securities borrowed transactions 59,274 54,930
-------- --------
134,572 126,226
INVESTMENT SECURITIES 77,430 87,672
TRADING ASSETS, AT FAIR VALUE (includes securities pledged as collateral
of $7,949 in 2002 and $10,490 in 2001)
Contractual agreements 30,354 31,040
Corporate debt and preferred stock 21,029 19,147
Mortgages, mortgage-backed, and asset-backed 14,821 11,526
Equities and convertible debentures 13,252 16,894
U.S. Government and agencies 11,252 12,998
Non-U.S. governments and agencies 9,588 6,207
Municipals and money markets 4,270 5,561
-------- --------
104,566 103,373
SECURITIES RECEIVED AS COLLATERAL 3,982 3,234
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $67 in 2002 and $81 in 2001) 37,896 39,856
Brokers and dealers 13,374 6,868
Interest and other 9,670 8,226
-------- --------
60,940 54,950
-------- --------
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $455 in 2002 and $425 in 2001) 26,308 19,005
EQUIPMENT AND FACILITIES (net of accumulated depreciation and amortization
of $4,535 in 2002 and $4,910 in 2001) 3,145 2,873
GOODWILL (net of accumulated amortization of $955 in 2002 and $924 in 2001) 4,253 4,071
OTHER ASSETS 2,899 2,478
-------- --------
TOTAL ASSETS $439,426 $419,419
======== ========
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 28, Dec. 28,
(dollars in millions, except per share amount) 2002 2001
- ----------------------------------------------------------------------------------------------- -------- --------
LIABILITIES
SECURITIES FINANCING TRANSACTIONS
Payables under repurchase agreements $ 89,746 $74,895
Payables under securities loaned transactions 9,789 12,291
-------- --------
99,535 87,186
-------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 5,964 5,141
DEPOSITS 81,110 85,819
TRADING LIABILITES, AT FAIR VALUE
Contractual agreements 35,542 36,679
U.S. Government and agencies 17,847 18,674
Equities and convertible debentures 10,746 9,911
Non-U.S. governments and agencies 9,541 5,857
Corporate debt, municipals and preferred stock 7,599 4,796
-------- --------
81,275 75,917
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 3,982 3,234
-------- --------
OTHER PAYABLES
Customers 29,373 28,704
Brokers and dealers 14,504 11,932
Interest and other 20,222 18,474
-------- --------
64,099 59,110
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 3,666 3,737
LONG-TERM BORROWINGS 75,546 76,572
-------- --------
TOTAL LIABILITES 415,177 396,716
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,657 2,695
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY (42,500 SHARES ISSUED, LIQUIDATION PREFERENCE $10,000 PER SHARE) 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 61 62
Common stock (par value $1.33 1/3 per share; authorized: 3,000,000,000 shares;
issued: 2002 - 975,241,575 shares; 2001 - 962,533,498 shares) 1,300 1,283
Paid-in capital 5,158 4,209
Accumulated other comprehensive loss (net of tax) (370) (368)
Retained earnings 17,135 16,150
-------- --------
23,284 21,336
Less: Treasury stock, at cost: 2002 - 116,669,821 shares; 2001 - 119,059,651 shares 967 977
Unamortized employee stock grants 1,150 776
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 21,167 19,583
-------- --------
TOTAL STOCKHOLDERS' EQUITY 21,592 20,008
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $439,426 $419,419
======== ========
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
5
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
-----------------------------
(dollars in millions) June 28, June 29,
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,281 $ 1,415
Noncash items included in earnings:
Depreciation and amortization 335 438
Policyholder reserves 85 93
Goodwill amortization - 103
Amortization of stock-based compensation 320 335
Deferred taxes 56 (308)
Other 10 (27)
Changes in operating assets and liabilities (a):
Trading assets (1,762) (3,615)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (2,150) 1,137
Receivables under resale agreements (4,002) (1,642)
Receivables under securities borrowed transactions (4,344) (9,220)
Customer receivables 1,963 197
Brokers and dealers receivables (6,506) 13,154
Trading liabilities 5,358 9,491
Payables under repurchase agreements 14,851 (7,831)
Payables under securities loaned transactions (2,502) (4,615)
Customer payables 669 1,444
Brokers and dealers payables 2,572 3,822
Other, net 4,395 (5,139)
-------- --------
Cash provided by (used for) operating activities 10,629 (768)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 14,350 15,217
Sales of available-for-sale securities 17,065 8,804
Purchases of available-for-sale securities (23,516) (41,964)
Maturities of held-to-maturity securities 88 385
Purchases of held-to-maturity securities (228) (356)
Loans, notes, and mortgages (7,367) (1,578)
Other investments and other assets (423) 1,087
Equipment and facilities (608) (508)
-------- --------
Cash used for investing activities (639) (18,913)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings 823 (8,328)
Deposits (4,709) 11,783
Issuance and resale of long-term borrowings 15,449 25,133
Settlement and repurchases of long-term borrowings (17,756) (15,469)
Issuance of common stock 182 -
Issuance of treasury stock 3 403
Other common stock transactions (41) (353)
Dividends (297) (281)
-------- --------
Cash provided by (used for) financing activities (6,346) 12,888
-------- --------
Increase/(Decrease) in cash and cash equivalents 3,644 (6,793)
Cash and cash equivalents, beginning of year 11,070 23,205
-------- --------
Cash and cash equivalents, end of period $ 14,714 $ 16,412
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 217 $ 272
Interest 5,041 10,719
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(a) Net of effects of acquisitions and divestitures.
See Notes to Condensed Consolidated Financial Statements
6
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 28, 2002
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The Condensed 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 28, 2001
unaudited Condensed Consolidated Balance Sheet was derived from the audited
financial statements. The interim Condensed Consolidated Financial Statements
for the three- and six- month periods are unaudited; however, in the opinion of
Merrill Lynch management, all adjustments necessary for a fair statement of the
Condensed Consolidated Financial Statements have been included.
These unaudited Condensed Consolidated Financial Statements should be read in
conjunction with the audited consolidated financial statements included in
Merrill Lynch's Annual Report included as an exhibit to Form 10-K for the year
ended December 28, 2001. 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. In presenting the Condensed Consolidated Financial Statements,
management makes estimates that affect the reported amounts and disclosures in
the financial statements. Estimates, by their nature, are based on judgment and
available information. Therefore, actual results could differ from those
estimates and could have a material impact on the Condensed Consolidated
Financial Statements and it is possible that such changes in estimates could
occur in the near term. Certain reclassifications have been made to prior period
financial statements, where appropriate, to conform to the current period
presentation.
New Accounting Pronouncements
Subsequent to June 28, 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". This standard requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 will replace the existing guidance provided by EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Merrill Lynch has not yet
determined the impact of adoption.
In August 2001, the FASB released Statement of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and the accounting and reporting provisions of Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions," for the disposal of
a segment of the business as previously defined in that opinion. SFAS No. 144
also amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" to eliminate the exception to consolidation for a subsidiary for
which control is likely to be temporary. SFAS No. 144 provides guidance on the
financial accounting and reporting for the impairment or disposal of long-lived
assets. Merrill Lynch adopted the provisions of SFAS No. 144 in the first
quarter of 2002. The impact upon adoption was not material.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, intangible assets with indefinite lives and
goodwill will no longer be amortized. Instead, these assets will be tested
annually for impairment. Merrill Lynch adopted the provisions of SFAS No. 142 at
the beginning of fiscal year 2002. Prior year amortization expense related to
goodwill totaled $51 million and $103 million for the three-month and six-month
periods ended June 29, 2001.
During the second quarter of 2002, Merrill Lynch completed its review of
goodwill in accordance with SFAS No. 142 and determined that the fair value of
the reporting units to which goodwill relates exceeds the carrying value of such
reporting units. Accordingly, no goodwill impairment loss was recognized.
The following table presents a reconciliation of reported net earnings and
earnings per share to the amounts adjusted for the exclusion of goodwill
amortization, net of related income tax effects.
7
(dollars in millions, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
--------------------------- ------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
------- ------- ------- -------
NET EARNINGS:
Reported amount $ 634 $ 541 $1,281 $1,415
Goodwill amortization, net of taxes - 34 - 69
----- ----- ------ ------
Adjusted $ 634 $ 575 $1,281 $1,484
===== ===== ====== ======
BASIC EARNINGS PER SHARE:
Reported amount $0.72 $0.63 $ 1.47 $ 1.67
Goodwill amortization - 0.04 - 0.08
----- ----- ------ ------
Adjusted $0.72 $0.67 $ 1.47 $ 1.75
===== ===== ====== ======
DILUTED EARNINGS PER SHARE:
Reported amount $0.66 $0.56 $ 1.33 $ 1.48
Goodwill amortization - 0.04 - 0.08
----- ----- ------ ------
Adjusted $0.66 $0.60 $ 1.33 $ 1.56
===== ===== ====== ======
- ---------------------------------------------------------------------------------------------------------------
Derivatives
Merrill Lynch's policies relating to derivatives are discussed fully in the
portion of Merrill Lynch's Annual Report included as an exhibit to Form 10-K for
the year ended December 28, 2001. For the three- and six- month periods ended
June 28, 2002, net losses of $259 million and $251 million, respectively,
related to non-U.S. dollar hedges of investments in non-U.S. dollar subsidiaries
were included in "Accumulated other comprehensive loss" on the Condensed
Consolidated Balance Sheets. For the three- and six- month periods ended June
29, 2001, $114 million and $310 million, respectively, of net gains were
recorded for these same derivatives. These amounts were substantially offset by
net gains and losses on the hedged investments.
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NOTE 2. OTHER SIGNIFICANT EVENTS
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New York Attorney General Settlement
On May 21, 2002, Merrill Lynch executed an agreement with the New York Attorney
General ("NYAG") regarding alleged conflicts of interest between Merrill Lynch's
Research and Investment Banking groups. As part of the agreement, the Attorney
General terminated his investigation and Merrill Lynch agreed to implement
changes to further insulate the Research Department from Investment Banking. In
addition, in order to reach a resolution and settlement with all of the states,
Puerto Rico, and the District of Columbia, Merrill Lynch has agreed to make a
civil payment of $48 million to New York State and an additional $52 million to
settle the matter with all other states, Puerto Rico, and the District of
Columbia. Both payments are contingent on acceptance of the agreement by all
other states, Puerto Rico, and the District of Columbia. Merrill Lynch admitted
to no wrongdoing or liability as part of this agreement.
Restructuring and Other Charges
During the fourth quarter of 2001, Merrill Lynch's management formally committed
to a restructuring plan designed to position Merrill Lynch for improved
profitability and growth, which included the resizing of selected businesses and
other structural changes. As a result, Merrill Lynch incurred a fourth quarter
pre-tax charge to earnings of $2.2 billion, which included restructuring costs
of $1.8 billion and other charges of $396 million. These other charges
primarily related to write-offs, which were recorded in 2001.
8
In addition, a charge of approximately $135 million of deferred tax expense was
recorded related to losses of the Private Client operations in Japan that are
not expected to be utilized during the carry forward period.
Restructuring Charge
Restructuring charges related primarily to severance costs of $1.1 billion,
facilities costs of $299 million, technology and fixed asset write-offs of $187
million and other costs of $178 million, including legal, technology and other
costs. Structural changes included workforce reductions of 6,205 through a
combination of involuntary and voluntary separations across all business groups.
At December 28, 2001, the majority of employee separations were completed or
announced, and all had been identified. The $1.1 billion of severance costs
included non-cash charges related to accelerated amortization for stock grants
associated with employee separations totaling $135 million. Facilities-related
costs include the closure or subletting of excess space, and the consolidation
of Private Client offices in the United States, Europe, Asia Pacific and Japan.
Management expects both the remaining branch closings and employee separations
to be completed in 2002 and anticipates that substantially all of the cash
payments related to real estate and severance will be funded by cash from
operations. Asset write-offs primarily reflected the write-off of technology
assets and furniture and equipment which resulted from management's decision to
close Private Client branch offices. Utilization of the restructuring reserve at
June 28, 2002 is as follows:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------
Utilized in Utilized in Balance
Initial Balance 2001 2002 June 28, 2002
- ---------------------------------------------------------------------------------------------------------------------------
Category:
Severance costs $ 1,133 $ (214) $ (708) $ 211
Facilities costs 299 - (62) 237
Technology and fixed asset write-offs 187 (187) - -
Other Costs 178 - (60) 118
------- ------ ------ -----
$ 1,797 $ (401) $ (830) $ 566
------- ------ ------ -----
Head Count(1) 6,205 (749) (4,764) 692
- ---------------------------------------------------------------------------------------------------------------------------
(1) Includes full-time employees until completion of the salary continuation period.
9
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NOTE 3. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities at June 28, 2002 and December 28, 2001 are presented
below:
(dollars in millions)
- -------------------------------------------------------------------------------------------
June 28, Dec. 28,
2002 2001
------- -------
INVESTMENT SECURITIES
Available-for-sale $67,021 $74,356
Trading 4,545 7,842
Held-to-maturity 593 434
Non-qualifying (1) 5,271 5,040
------- -------
Total $77,430 $87,672
======= =======
- -------------------------------------------------------------------------------------------
(1) Non-qualifying for SFAS No. 115 purposes. Includes merchant banking investments, investments
economically hedging deferred compensation liabilities, and insurance policy loans.
- --------------------------------------------------------------------------------
NOTE 4. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings at June 28, 2002 and December 28, 2001 are presented
below:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------
June 28, Dec. 28,
2002 2001
------- -------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper $ 2,941 $ 2,950
Other 3,023 2,191
------- -------
Total $ 5,964 $ 5,141
======= =======
DEPOSITS
U.S. $68,470 $73,555
Non-U.S. 12,640 12,264
------- -------
Total $81,110 $85,819
======= =======
- ----------------------------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
NOTE 5. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: Global Markets and Investment Banking ("GMI"), the
Private Client Group ("Private Client") and Merrill Lynch Investment Managers
("MLIM"). Beginning in the first quarter of 2002, GMI's results include income
generated by the investment portfolio of Merrill Lynch's U.S. banks which was
previously recorded in the Private Client segment. This change follows a
transfer in responsibility for this activity, which was made to better align
functional and management responsibilities. In addition, MLIM's results now
include a share of the income generated from the assets under management in
money market funds sold through Private Client. Previously, this income was
recorded entirely in Private Client. The Private Client business will continue
to earn a spread for selling the funds, while revenues and expenses associated
with management of the funds are recorded in MLIM. Revenues and expenses
associated with these intersegment activities are recognized in each segment and
eliminated at the corporate level. Prior period amounts have been restated to
conform to the current period presentation. For information on each segment's
activities, see the portions of the 2001 Annual Report included as an exhibit to
Form 10-K.
Operating results by business segment follow:
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
PRIVATE CORPORATE
THREE MONTHS ENDED GMI CLIENT MLIM ITEMS TOTAL
JUNE 28, 2002 -------- -------- ------ --------- --------
Non-interest revenues $ 1,868 $ 1,919 $ 413 $ (46)(1) $ 4,154
Net interest income(2) 463 349 6 (21)(3) 797
-------- -------- ------ ------ --------
Net revenues 2,331 2,268 419 (67) 4,951
Non-interest expenses 1,684 1,929 323 67 (4) 4,003
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 647 $ 339 $ 96 $ (134) $ 948
======== ======== ====== ====== ========
Quarter-end total assets $382,024 $ 50,832 $2,317 $4,253 $439,426
======== ======== ====== ====== ========
- --------------------------------------------------------------------------------------------------------------------
PRIVATE CORPORATE
GMI CLIENT MLIM ITEMS TOTAL
-------- -------- ------ --------- --------
THREE MONTHS ENDED
JUNE 29, 2001
Non-interest revenues $ 2,223 $ 2,115 $ 494 $ (75) (1) $ 4,757
Net interest income(2) 468 358 6 (16) (3) 816
-------- -------- ------ ------ --------
Net revenues 2,691 2,473 500 (91) 5,573
Non-interest expenses 2,011 2,301 419 (10) (4) 4,721
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 680 $ 172 $ 81 $ (81) $ 852
======== ======== ====== ====== ========
Quarter-end total assets $362,327 $ 54,337 $2,312 $4,095 $423,071
======== ======== ====== ====== ========
- --------------------------------------------------------------------------------------------------------------------
(1) Primarily represents the elimination of intersegment revenues and expenses.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents Mercury financing costs.
(4) In 2002, represents provision for the payment to NYAG and related costs of
$111 million, net of elimination of intersegment expenses of $44 million and
in 2001, represents goodwill amortization of $51 million, net of elimination
of intersegment expenses of $61 million.
11
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
PRIVATE CORPORATE
SIX MONTHS ENDED GMI CLIENT MLIM ITEMS TOTAL
JUNE 28, 2002 -------- -------- ------ --------- --------
Non-interest revenues $ 3,803 $ 3,868 $ 856 $ (94) (1) $ 8,433
Net interest income(2) 939 697 11 (39) (3) 1,608
-------- -------- ------ ------ --------
Net revenues 4,742 4,565 867 (133) 10,041
Non-interest expenses 3,451 3,959 652 19 (4) 8,081
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 1,291 $ 606 $ 215 $ (152) $ 1,960
======== ======== ====== ====== ========
- --------------------------------------------------------------------------------------------------------------------
PRIVATE CORPORATE
GMI CLIENT MLIM ITEMS TOTAL
-------- -------- ------ --------- --------
SIX MONTHS ENDED
JUNE 29, 2001
Non-interest revenues $ 5,211 $ 4,403 $1,011 $ (167) (1) $ 10,458
Net interest income(2) 808 744 10 (37) (3) 1,525
-------- -------- ------ ------ --------
Net revenues 6,019 5,147 1,021 (204) 11,983
Non-interest expenses 4,279 4,688 849 (36) (4) 9,780
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 1,740 $ 459 $ 172 $ (168) $ 2,203
======== ======== ====== ====== ========
- --------------------------------------------------------------------------------------------------------------------
(1) Primarily represents the elimination of intersegment revenues and expenses.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents Mercury financing costs.
(4) In 2002, represents provision for the payment to NYAG and related costs of
$111 million, net of elimination of intersegment expenses of $92 million and
in 2001, represents goodwill amortization of $103 million, net of
elimination of intersegment expenses of $139 million.
12
- --------------------------------------------------------------------------------
NOTE 6. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
---------------------- -----------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
------- ------- ------- -------
Net earnings $ 634 $ 541 $ 1,281 $ 1,415
------- ------- ------- -------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (9) (49) (24) (11)
Net unrealized gain (loss) on investment
securities available-for-sale 19 (6) 36 (7)
Deferred gain (loss) on cash flow hedges 21 18 (14) 39
------- ------- ------- -------
Total other comprehensive income (loss), net of tax 31 (37) (2) 21
------- ------- ------- -------
Comprehensive income $ 665 $ 504 $ 1,279 $ 1,436
======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 7. EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
(dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------ ------------------------
June 28, June 29, June 28, June 29,
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 634 $ 541 $ 1,281 $ 1,415
Preferred stock dividends 10 9 19 19
-------- -------- -------- --------
Net earnings applicable to
common stockholders $ 624 $ 532 $ 1,262 $ 1,396
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares outstanding 861,742 841,394 858,241 836,794
-------- -------- -------- --------
Effect of dilutive instruments(1) (2):
Employee stock options 32,176 60,058 38,599 62,219
Financial Advisor Capital Accumulation Award Plan shares 24,438 27,669 24,676 27,679
Restricted shares and units 24,139 14,671 24,255 14,129
Employee Stock Purchase Plan shares 65 44 90 74
-------- -------- -------- --------
Dilutive potential common shares 80,818 102,442 87,620 104,101
-------- -------- -------- --------
Total weighted-average diluted shares 942,560 943,836 945,861 940,895
======== ======== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.72 $ 0.63 $ 1.47 $ 1.67
Diluted earnings per common share $ 0.66 $ 0.56 $ 1.33 $ 1.48
- ----------------------------------------------------------------------------------------------------------------------------
(1) During the 2002 and 2001 second quarter there were 100 million and 49
million instruments, respectively, that were considered antidilutive and
not included in the above computations.
(2) See Note 14 to Consolidated Financial Statements in the 2001 Annual Report
included as an exhibit to Form 10-K for a description of these instruments.
13
- --------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND OTHER CONTINGENCIES
- --------------------------------------------------------------------------------
Merrill Lynch enters into commitments to extend credit, predominantly at
variable interest rates, in connection with corporate finance and loan
syndication transactions. Customers may also be extended loans or lines of
credit collateralized by first and second mortgages on real estate, certain
liquid assets of small businesses, or securities. Merrill Lynch 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, Merrill Lynch 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 defaults,
and the value of the existing collateral becomes worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements, as commitments and guarantees may expire without being drawn upon.
At June 28, 2002 and December 28, 2001, Merrill Lynch had the following
commitments and guarantees with commitment expirations as follows:
(dollars in millions)
- -------------------------------------------------------------------------------------------------------------
Expiration Total Commitments
-------------------------------------- -----------------------
Less
than 1-3 4-5 Over 5 June 28, Dec. 28,
1 year years years years 2002 2001
------ ----- ----- ------ ------- -------
Commitments to extend credit $15,240 $6,459 $5,671 $4,858 $32,228 (1) $17,833 (1)
Third-party guarantees 122 109 5 35 271 316
SPE-related commitments 12,937 75 665 543 14,220 12,647
- -------------------------------------------------------------------------------------------------------------
(1) Approximately $11.7 billion and $5.4 billion at June 28, 2002 and December
28, 2001, respectively, relate to secured lending activities.
14
The commitments to extend credit are comprised of commercial paper back-up lines
of credit, syndicated loans, mortgages and other institutional and retail
commitments to extend credit. The commitments do not include any amounts for
commitments related to margin lending.
SPE-related commitments include liquidity facilities and default protection to
investors in securities issued by Special Purpose Entities ("SPEs") totaling $14
billion and $12 billion at June 28, 2002 and December 28, 2001, respectively.
These commitments relate to collateralized lending and are substantially over
collateralized, therefore the fair value of these commitments approximates zero
as of June 28, 2002. Merrill Lynch also provides guarantees to holders of notes
issued by SPEs relating to the residual value of property and equipment lease
assets held by the SPEs.
As of June 28, 2002, Merrill Lynch has been named as party in various legal
actions, some of which involve claims for substantial amounts. Although the
results of legal actions 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 position of Merrill Lynch as set forth in the
Condensed Consolidated Financial Statements, but may be material to Merrill
Lynch's operating results for any particular period. See Part II, Item 1. Legal
Proceedings for additional information.
- --------------------------------------------------------------------------------
NOTE 9. REGULATORY REQUIREMENTS
- --------------------------------------------------------------------------------
Certain U.S. and non-U.S. subsidiaries are subject to various securities,
banking and insurance regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which they
operate. Merrill Lynch's principal regulated subsidiaries are discussed below.
Securities Regulation
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a U.S. registered
broker-dealer and futures commission merchant, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 and
capital requirements of the Commodities Futures Trading Commission ("CFTC").
Under the alternative method permitted by Rule 15c3-1, the minimum required net
capital, as defined, shall not be less than 2% of aggregate debit items ("ADI")
arising from customer transactions. The CFTC also requires that minimum net
capital should not be less than 4% of segregated and secured requirements. At
June 28, 2002, MLPF&S's regulatory net capital of $2,498 million was
approximately 16% of ADI, and its regulatory net capital in excess of the
minimum required was $2,177 million at 2% of ADI.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject
to capital requirements of the Financial Services Authority ("FSA"). Financial
resources, as defined, must exceed the total financial resources requirement of
the FSA. At June 28, 2002, MLI's financial resources were $5,176 million,
exceeding the minimum requirement by $951 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, 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 28, 2002, MLGSI's liquid capital of $1,627
million was 196% of its total market and credit risk, and liquid capital in
excess of the minimum required was $632 million.
15
Banking Regulation
Two of the subsidiaries of ML & Co., Merrill Lynch Bank USA ("MLBUSA"), and
Merrill Lynch Bank & Trust Co. ("MLB&T") are each subject to certain minimum
aggregate capital requirements under applicable federal banking laws. Among
other things, Part 325 of the FDIC Regulations establishes levels of Risk-Based
Capital ("RBC") each institution must maintain and identifies the possible
actions the federal supervisory agency may take if a bank does not maintain
certain capital levels. RBC is defined as the ratios of (i) Tier I Capital or
Total Capital to (ii) average assets or risk-weighted assets. The following
table presents the actual capital ratios and amounts, for MLBUSA and MLB&T at
June 28, 2002 and December 28, 2001.
As shown below, MLBUSA and MLB&T each exceed the minimum bank regulatory
requirement for classification as a well-capitalized bank for Tier 1 leverage --
5%, Tier 1 capital -- 6% and Total capital -- 10%:
(dollars in millions)
- -----------------------------------------------------------------------------------------
June 28, 2002 Dec. 28, 2001
- -----------------------------------------------------------------------------------------
Actual Actual
Ratio Amount Ratio Amount
- -----------------------------------------------------------------------------------------
TIER 1 LEVERAGE
(TO AVERAGE ASSETS)
MLBUSA 5.47 % $3,435 5.61 % $3,576
MLB&T 5.57 811 6.90 1,047
TIER 1 CAPITAL
(TO RISK-WEIGHTED ASSETS)
MLBUSA 12.33 3,435 14.30 3,576
MLB&T 16.75 811 20.47 1,047
TOTAL CAPITAL
(TO RISK-WEIGHTED ASSESTS)
MLBUSA 13.59 3,786 15.44 3,860
MLB&T 16.76 812 20.48 1,048
- -----------------------------------------------------------------------------------------
In April 2001, MLBUSA entered into a synthetic securitization of specified
reference portfolios of asset-backed securities ("ABS") owned by MLBUSA
totaling in aggregate up to $20 billion. All of the ABS in the reference
portfolios were rated AAA and all were further insured as to principal and
interest payments by an insurer rated AAA. This synthetic securitization allowed
MLBUSA to reduce the credit risk on the respective reference portfolios by means
of credit default swaps with a bankruptcy remote SPE. In turn, the SPE issued a
$20 million credit linked note to unaffiliated buyers. MLBUSA retained a first
risk of loss equity tranche of $1 million in the transaction. As a result of the
April 2001 transaction, MLBUSA was able to reduce risk-weighted assets by $211
million at December 28, 2001, thereby increasing its Tier I and Total RBC ratios
by 12 basis points and 13 basis points, respectively. This structure did not
result in a material change in the distribution or concentration risk in the
retained portfolio. This synthetic securitization was fully terminated on May
15, 2002.
16
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 28,
2002, and the related condensed consolidated statements of earnings for the
three-month and six-month periods ended June 28, 2002 and June 29, 2001, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 28, 2002 and June 29, 2001. These financial statements are the
responsibility of Merrill Lynch's management.
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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Merrill Lynch as of December 28, 2001, and the related consolidated statements
of earnings, changes in stockholders' equity, comprehensive income and cash
flows for the year then ended (not presented herein); and in our report dated
February 25, 2002, 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 28, 2001 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
August 9, 2002
17
- --------------------------------------------------------------------------------
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. The financial services industry, in which Merrill Lynch is a
leading participant, is highly competitive and highly regulated. This industry
and the global financial markets are influenced by numerous uncontrollable
factors. These factors include economic conditions, monetary and fiscal
policies, the liquidity of global markets, international and regional political
events, regulatory and legislative developments, the competitive environment,
and investor sentiment. In addition to these factors, Merrill Lynch and other
financial services companies may be affected by the outcome of legal and
regulatory proceedings, including those described in Part II, Item 1. Legal
Proceedings. These conditions or events can significantly affect the volatility
of financial markets and the order flow and revenues in businesses such as
brokerage, trading, and investment management.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions and competition from new entrants as well as established
competitors using the Internet or other technology to establish or expand their
businesses, and diminishing margins in many mature products and services. The
Gramm-Leach-Bliley Act, passed in 1999, which repealed laws that separated
commercial banking, investment banking and insurance activities, together with
changes to the industry resulting from previous reforms, has increased the
number of companies competing for a similar customer base.
Certain statements contained in this Report may constitute forward-looking
statements, including, for example, statements about management expectations,
strategic objectives, business prospects, anticipated expense savings and
financial results, anticipated results of litigation and regulatory proceedings,
and other similar matters. These forward-looking statements are not statements
of historical facts and represent only Merrill Lynch's beliefs regarding future
events, which are inherently uncertain. There are a variety of factors, many of
which are beyond Merrill Lynch's control, which affect its operations,
performance, business strategy and results and could cause its actual results
and experience to differ materially from the expectations and objectives
expressed in any forward-looking statements. These factors include, but are not
limited to, the factors listed in the previous two paragraphs, as well as
actions and initiatives taken by both current and potential competitors, the
effect of current, pending and future legislation and regulation both in the
United States and throughout the world, and the other risks detailed in Merrill
Lynch's 2001 Form 10-K and in this Form 10-Q. Accordingly, readers are cautioned
not to place undue reliance on forward-looking statements, which speak only as
of the date on which they are made. Merrill Lynch does not undertake to update
forward-looking statements to reflect the impact of circumstances or events that
arise after the date the forward-looking statement was made. The reader should,
however, consult any further disclosures of a forward-looking nature Merrill
Lynch may make in its Annual Reports on Form 10-K, its Quarterly Reports on Form
10-Q and its Current Reports on Form 8-K.
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
- --------------------------------------------------------------------------------
Global equity market conditions deteriorated in the second quarter of 2002, as a
lack of confidence brought about by weak corporate earnings, corporate
governance concerns, several accounting scandals, and fear of terrorist attacks
affected investor sentiment and transaction activity levels.
Long-term U.S. interest rates, as measured by the yield on the 10-year U.S.
Treasury bond, fell from 5.39% to 4.80% during the quarter. The U.S. Federal
Reserve Bank kept the federal funds rate and the discount rate unchanged during
the 2002 second quarter. Credit spreads, which represent the risk premium over
the risk-free rate paid by an issuer (based on the issuer's perceived
creditworthiness), narrowed for highly-rated counterparties and widened for
lower-rated counterparties during the second quarter of 2002.
18
U.S. equity indices were down during the second quarter of 2002. The Dow Jones
Industrial Average fell 8% in the second quarter and 12% from year-ago levels.
The NASDAQ Composite Index declined 21% during the quarter and 32% from year-ago
levels.
The Dow Jones World Index, excluding the United States, fell 10% from the second
quarter of last year. All major European markets declined in the second quarter
of 2002. The Dow Jones Stoxx Index, which measures 600 European blue-chip
companies, dropped 16% during the quarter. In Japan, the Nikkei 225 Index fell
4% during the quarter. Emerging markets, as measured by the MSCI Emerging Market
Free Index, also dropped 9% during the quarter, as strength in Asia was offset
by weakness in Latin America, particularly in Brazil.
Global debt and equity issuance volumes dropped 11% from the first quarter of
2002. In the United States, debt and equity issuance volumes decreased 15% from
the 2002 first quarter. The U.S. equity underwriting markets showed some signs
of recovery as 38 companies had initial public offerings in the second quarter
of 2002, up from 17 in the 2002 first quarter, but only $5.7 billion was raised
as compared to $15.9 billion in the same period of 2001.
According to Thomson Financial Securities Data, global announced merger and
acquisition volume grew 28% in the second quarter of 2002 as compared to a weak
first quarter, but dropped 28% from the level in the second quarter of 2001.
Announced merger and acquisition volume in the United States increased 22% in
the second quarter from the first quarter of 2002, but declined 35% from the
second quarter of 2001.
Merrill Lynch continually evaluates its businesses for profitability and
performance under varying market conditions and, in light of the evolving
conditions in its competitive environment, for alignment with its long-term
strategic objectives. The strategy of maintaining long-term client
relationships, closely monitoring costs and risks, diversifying revenue sources,
and growing fee-based revenues all continue as objectives to mitigate the
effects of a volatile market environment on Merrill Lynch's business as a whole.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
----------------------------------------------------------------------------
June 28, June 29, June 28, June 29,
(dollars in millions, except per share amounts) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------
Total revenues $7,352 $10,320 $14,915 $22,254
Net revenues 4,951 5,573 10,041 11,983
Pre-tax earnings 948 852 1,960 2,203
Net earnings 634 541 1,281 1,415
Earnings per common share:
Basic 0.72 0.63 1.47 1.67
Diluted 0.66 0.56 1.33 1.48
Annualized return on average common
stockholders' equity 12.0% 10.7% 12.3% 14.5%
Pre-tax profit margin 19.1 15.3 19.5 18.4
- -----------------------------------------------------------------------------------------------------------------
19
Merrill Lynch's net earnings were $634 million for the 2002 second quarter, 17%
higher than the $541 million reported in the second quarter of 2001. Earnings
per common share were $0.72 basic and $0.66 diluted, compared with $0.63 basic
and $0.56 diluted in the 2001 second quarter. Net revenues were $5.0 billion,
11% lower than the 2001 second quarter. Non-compensation expenses were $1.4
billion, 18% lower than the 2001 second quarter. The pre-tax profit margin for
the quarter was 19.1%, up from 15.3% in the 2001 second quarter. These results
include a provision for the $100 million payment related to the
previously-announced settlement agreement with the NYAG and related expenses of
$11 million (included in the Corporate segment).
For the first half of 2002, net earnings were $1.3 billion, compared to $1.4
billion for the corresponding period in 2001. Net revenues were $10.0 billion,
down 16% from the first six months of 2001. The effect of declining revenues on
earnings was limited by reduced compensation costs and a 19%, or nearly $700
million, reduction in year-to-date non-compensation expenses. Year-to-date
earnings per common share were $1.47 basic and $1.33 diluted, compared with
$1.67 basic and $1.48 diluted in the first half of 2001. The pre-tax margin for
the first half of 2002 was 19.5%, up from 18.4% in the year-ago period.
Annualized return on average common stockholder's equity was 12.3% for the first
six months of 2002.
Merrill Lynch continues to remain cautious on the revenue outlook for the
remainder of 2002. Merrill Lynch doubts that net revenues for the second half of
2002 will be as strong as the first half due to seasonal factors. In four of the
past six fiscal years, Merrill Lynch's revenues were lower in the second half of
the year than in the first half. In addition, the financial services industry
continues to experience higher financing premiums, which if sustained, could
adversely impact financing costs.
Restructuring and other charges
In the fourth quarter of 2001, Merrill Lynch recorded a pre-tax charge of $2.2
billion ($1.7 billion after-tax) related to the resizing of selected businesses
and other structural changes. This charge was recorded as Restructuring and
other charges on the Condensed Consolidated Statements of Earnings. The charge
was the result of a detailed review of all businesses, with a focus on improving
profit margins and aligning capacity with opportunities for future growth. These
actions were expected to result in pre-tax annual expense savings of
approximately $1.4 billion, a portion of which was to be reinvested in priority
growth initiatives, including foreign exchange and prime brokerage for GMI,
small business lending and banking services for Private Client, and alternative
investments for MLIM. Merrill Lynch remains on target to achieve these annual
savings in 2002.
Non-compensation expenses were expected to represent approximately 40% of the
total savings. Merrill Lynch has achieved this level of non-compensation savings
related to the fourth quarter 2001 charge. Opportunities exist to reduce
non-compensation expenses further, although much of the savings realized going
forward will be reinvested into these growth initiatives. For the first six
months of 2002, non-compensation expenses declined $693 million, or 19% from the
year-ago period, primarily reflecting actions taken throughout the past year to
reduce costs, in particular the fourth quarter 2001 restructuring.
Non-compensation expenses in 2002 include the provision for payment to the NYAG
and related costs amounting to $111 million and also reflect a reduction from
the six months of 2001 of $103 million related to the elimination of goodwill
amortization (see Note 1 to the Condensed Consolidated Financial Statements for
additional information). For further information regarding the details of
restructuring and other charges see Note 2 to the Condensed Consolidated
Financial Statements.
20
- --------------------------------------------------------------------------------
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Merrill Lynch reports its results in three business segments: Global Markets and
Investment Banking ("GMI"), the Private Client Group ("Private Client"), and
Merrill Lynch Investment Managers ("MLIM"). GMI provides investment banking and
capital markets services to corporate, institutional, and governmental clients
around the world. Private Client provides global wealth management services and
products to individuals, small- to mid-size businesses, and employee benefit
plans. MLIM provides investment management services to retail and institutional
clients.
Certain MLIM and GMI products are distributed through Private Client
distribution channels, and, to a lesser extent, certain MLIM products are
distributed through GMI. Revenues and expenses associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. In addition, revenue and expense sharing agreements for shared
activities between segments are in place and the results of each segment reflect
the agreed-upon portion of these activities. The following segment results
represent the information that is relied upon by management in its
decision-making processes. These results exclude items reported in the Corporate
segment. Business segment results are restated to reflect reallocations of
revenues and expenses which result from changes in Merrill Lynch's business
strategy and structure.
- --------------------------------------------------------------------------------
GLOBAL MARKETS AND INVESTMENT BANKING
- --------------------------------------------------------------------------------
GMI'S RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
------------------------------------------------------------------------------
June 28, June 29, % Inc. June 28, June 29, % Inc.
(dollars in millions) 2002 2001 (Dec.) 2002 2001 (Dec.)
-------------------------------------------------------------------------------------------------------------
Commissions $ 527 $ 546 (3) % $ 1,064 $ 1,153 (8) %
Principal transactions and
net interest profit 948 1,040 (9) 2,049 2,771 (26)
Investment banking 633 923 (31) 1,237 1,748 (29)
Other revenues 223 182 23 392 347 13
------- ------- ------- -------
Total net revenues $ 2,331 $ 2,691 (13) $ 4,742 $ 6,019 (21)
------- ------- ------- -------
Pre-tax earnings $ 647 $ 680 (5) $ 1,291 $ 1,740 (26)
------- ------- ------- -------
Pre-tax profit margin 27.8% 25.3% 27.2% 28.9%
- -------------------------------------------------------------------------------------------------------------
Market conditions continued to be difficult during the second quarter for the
industry as a whole. Most equity indices worldwide declined by double digit
percentages from the end of the 2002 first quarter, and global merger and
acquisition and securities origination volumes continued to be subdued amid
market and issuer uncertainty. However, fixed income trading conditions remained
strong, benefiting from low interest rates and a favorable U.S. dollar yield
curve environment. GMI's second quarter results reflect its focus on increasing
the contribution of higher margin activities, diversifying sources of revenue,
and continued management discipline in improving productivity and reducing
expenses.
GMI's second quarter pre-tax earnings were $647 million, 5% below the 2001
second quarter, on net revenues that were 13% lower, at $2.3 billion. GMI's
pre-tax margin increased to 27.8%, more than two percentage points above the
year-ago quarter. This improvement is due in part to a 25% reduction in
non-compensation expenses from the 2001 second quarter.
GMI's year-to-date pre-tax earnings were $1.3 billion, 26% lower than the 2001
first half. Year-to-date net revenues were $4.7 billion, a decline of 21% from
the year-ago period. GMI's year-to-date pre-tax margin was 27.2%, compared with
28.9% in the same period last year.
21
Client Facilitation and Trading
Commissions
Commissions revenues primarily arise from agency transactions in listed and
over-the-counter equity securities, money market instruments, options and
commodities. In addition, in late 2001 Merrill Lynch instituted a program for
providing enhanced brokerage services to its customers with large size Nasdaq
orders in exchange for an agreed upon commission in lieu of the traditional
spread. Nearly all Nasdaq institutional client trades are now done on an agency,
rather than a principal, basis.
Commissions revenues decreased 3% to $527 million in the second quarter of 2002,
compared to the year-ago quarter as a result of a global decline in equity
trading volumes. Year-to-date commissions revenues decreased by 8% to $1.1
billion as compared to the first half of 2001.
Principal transactions and net interest profit
- ------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
---------------------------------- ---------------------------------
June 28, June 29, % Inc. June 28, June 29, % Inc.
(dollars in millions) 2002 2001 (Dec.) 2002 2001 (Dec.)
------------------------------------------------------------------------------
Debt and debt derivatives $ 831 $ 577 44 % $ 1,611 $ 1,623 (1) %
Equities and equity derivatives 117 463 (75) 438 1,148 (62)
----- ------- ------- -------
Total $ 948 $ 1,040 (9) $ 2,049 $ 2,771 (26)
- -------------------------------------------------------------------------------------------------------------------
Principal transactions and net interest profit includes realized gains and
losses from the purchase and sale of securities in which Merrill Lynch acts as
principal, and unrealized gains and losses on trading assets and liabilities. In
addition, principal transactions and net interest profit includes unrealized
gains related to equity investments held by Merrill Lynch's broker-dealers as
well as unrealized gains and losses on marketable investment securities,
classified as trading securities, held by Merrill Lynch's U.S. banks. Changes in
the composition of trading inventories and hedge positions can cause principal
transactions and net interest profit to fluctuate.
Net interest profit is a function of the level and mix of total assets and
liabilities, including trading assets owned, repurchase and resale agreements,
trading strategies associated with GMI's institutional securities business, and
the prevailing level, term structure, and volatility of interest rates. Net
interest profit is an integral component of trading activity. Beginning in the
first quarter of 2002, GMI's net interest profit included income generated by
the investment portfolio of Merrill Lynch's U.S. banks which was previously
recorded in the Private Client segment. This change follows a transfer in
responsibility for this activity, which was made to better align functional and
management responsibilities. The prior year segment results have been restated
to reflect this change. In assessing the profitability of its client
facilitation and trading activities, Merrill Lynch views net interest profit and
principal transactions in the aggregate.
Net trading revenues, which include principal transactions and net interest
profit, were $948 million in the second quarter of 2002, down 9% from $1.0
billion in the second quarter of 2001. Debt and debt derivatives net trading
revenues were $831 million, up 44% from the second quarter of 2001, reflecting
increased trading of interest rate and other products from the year-ago quarter.
Principal transactions revenues in the 2002 second quarter included $70 million
related to the sale of certain energy trading assets in 2001, which was
principally offset by write-downs of credit positions, principally in the
telecommunications sector. Equities and equity derivatives net trading revenues
decreased 75% from the second quarter of 2001 to $117 million, primarily due to
reduced customer flow and lower volatility during much of the quarter. Equity
trading revenues have also been adversely affected by the shift to commissions
in Nasdaq trading.
22
On a year-to-date basis, principal transactions and net interest revenues were
down 26% compared to the first half of 2001, due to the significant decrease in
equity and equity derivatives revenues. Debt trading revenues were essentially
unchanged from the prior year. The 2001 first quarter results included the gain
on the sale of certain energy-trading assets.
- --------------------------------------------------------------------------------
Investment Banking
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
----------------------------------- --------------------------------------
June 28, June 29, % Inc. June 28, June 29,
(dollars in millions) 2002 2001 (Dec.) 2002 2001 % (Dec.)
----------------------------------------------------------------------------------------
Debt underwriting $ 239 $ 223 7 % $ 368 $ 482 (24)%
Equity underwriting 200 387 (48) 492 669 (26)
----- ----- ------ ------
Total underwriting 439 610 (28) 860 1,151 (25)
Strategic advisory services 194 313 (38) 377 597 (37)
----- ----- ------ ------
Total $ 633 $ 923 (31) $1,237 $1,748 (29)
- ----------------------------------------------------------------------------------------------------------------------------
Underwriting
- ------------
Underwriting revenues represent fees earned from the underwriting of debt and
equity and equity-linked securities as well as loan syndication and commitment
fees.
Underwriting revenues were $439 million, down 28% from the $610 million recorded
in the second quarter of 2001. An increase in debt underwriting revenues of 7%
was more than offset by sharply lower equity underwriting revenues, due to a
lower volume of transactions. Merrill Lynch ranked third in both global debt and
global equity and equity-linked underwriting in the second quarter of 2002 with
an 8.7% and 9.6% market share, respectively. Merrill Lynch's debt underwriting
focus has shifted toward higher margin businesses and away from the achievement
of aggregate market share goals.
Year-to-date underwriting revenues decreased 25% to $860 million from $1.2
billion in the first half of 2001, due to decreases in both debt and equity
underwriting revenues. Merrill Lynch's underwriting market share information
based on transaction value follows:
- --------------------------------------------------------------------------------------------------------------
For the Three Months Ended
-----------------------------------------------------------
June 2002 June 2001
----------------------- -----------------------
Market Market
Share Rank Share Rank
-----------------------------------------------------------
GLOBAL PROCEEDS
Debt and equity 8.8% 3 11.5% 1
Debt 8.7 3 11.3 1
Equity and equity-linked 9.6 3 13.4 2
U.S. PROCEEDS
Debt and equity 10.8% 2 13.6% 1
Debt 10.5 3 13.2 1
Equity and equity-linked 14.4 2 16.9 2
- --------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to book manager.
23
- --------------------------------------------------------------------------------------------------------------
For the Six Months Ended
--------------------------------------------------------------
June 2002 June 2001
-------------------------- -----------------------
Market Market
Share Rank Share Rank
--------------------------------------------------------------
GLOBAL PROCEEDS
Debt and equity 9.0% 2 12.0% 1
Debt 8.7 2 11.9 1
Equity and equity-linked 12.2 3 13.1 2
U.S. PROCEEDS
Debt and equity 11.0% 2 14.7% 1
Debt 10.5 2 14.4 1
Equity and equity-linked 17.9 2 18.1 1
- ---------------------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to book manager.
Strategic Advisory Services
- ---------------------------
Strategic advisory services revenues, which include merger and acquisition and
other advisory fees, were $194 million in the second quarter of 2002, down 38%
from the second quarter of 2001. Year-to-date strategic advisory services
revenues decreased 37% from the first half of 2001, to $377 million as poor
market conditions continue to have a negative impact on global merger and
acquisition activity. Merrill Lynch's merger and acquisition market share
information based on transaction value follows:
- -----------------------------------------------------------------------------------------------------
For the Three Months Ended
-----------------------------------------------------------
June 2002 June 2001
--------------------- ----------------------
Market Market
Share Rank Share Rank
-----------------------------------------------------------
COMPLETED TRANSACTIONS
Global 21.6% 4 22.5% 3
U.S. 15.4 5 22.0 3
ANNOUNCED TRANSACTIONS
Global 9.3% 10 23.2% 2
U.S. 6.7 8 17.7 4
- -----------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to both target
and acquiring companies' advisors.
For the Six Months Ended
-----------------------------------------------------------
June 2002 June 2001
--------------------- ----------------------
Market Market
Share Rank Share Rank
-----------------------------------------------------------
COMPLETED TRANSACTIONS
Global 21.8% 3 30.9% 2
U.S. 18.4 6 40.9 2
ANNOUNCED TRANSACTIONS
Global 15.4% 7 21.1% 3
U.S. 9.6 7 19.7 4
- -----------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to both target
and acquiring companies' advisors.
24
Other Revenues
Other revenues, which include realized investment gains and losses and
distributions on a passive minority investment in a securities-related business,
increased $41 million in the second quarter of 2002 from the year-ago quarter,
to $223 million. Other revenues in the second quarter of 2002 reflect increased
realized gains on the investment portfolio of Merrill Lynch's U.S. banks,
partially offset by write-downs of private equity investments. Year-to-date
other revenues increased 13% to $392 million, and include a $45 million pre-tax
gain on the sale of the Securities Pricing Services business recorded in the
first quarter of 2002.
- --------------------------------------------------------------------------------
PRIVATE CLIENT GROUP
- --------------------------------------------------------------------------------
PRIVATE CLIENT'S RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 28, June 29, % Inc. June 28, June 29, % Inc.
(dollars in millions) 2002 2001 (Dec.) 2002 2001 (Dec.)
-------------------------------------------------------------------------------
Commissions $ 644 $ 785 (18)% $1,307 $1,665 (22)%
Principal transactions and
new issue revenues 319 392 (19) 631 815 (23)
Asset management and
portfolio service fees 932 920 1 1,844 1,864 (1)
Net interest profit 349 358 (3) 697 744 (6)
Other revenues 24 18 33 86 59 46
------ ------ ------ ------
Total net revenues $2,268 $2,473 (8) $4,565 $5,147 (11)
------ ------ ------ ------
Pre-tax earnings $ 339 $ 172 97 $ 606 $ 459 32
------ ------ ------ ------
Pre-tax profit margin 14.9% 7.0% 13.3% 8.9%
- -------------------------------------------------------------------------------------------------------------------
Private Client's second quarter pre-tax earnings were $339 million, 97% higher
than the 2001 second quarter, on net revenues that were down 8%, at $2.3
billion. Private Client's pre-tax margin was 14.9%, compared with 7.0% in the
year-ago quarter. These results reflect significantly improved performance both
inside and outside the United States. Private Client's business in the United
States generated a pre-tax margin of 16.7% in the second quarter of 2002. This
represents an increase of more than seven percentage points from the same period
last year. These improvements were driven primarily by reduced operating
expenses, resulting from the fourth quarter 2001 restructuring and other
initiatives, and increased fee-based and recurring revenues. Also contributing
to the year-over-year improvement was the absence of severance and other
expenses associated with businesses that were outsourced or exited in the 2001
second quarter.
Private Client's year-to-date net revenues were $4.6 billion, down 11% from the
corresponding period of 2001. Pre-tax earnings were $606 million, 32% higher
than the first six months of 2001. Private Client's year-to-date pre-tax margin
was 13.3%, compared with 8.9% for the same period last year.
Private Client employed approximately 15,100 Financial Advisors at the end of
the 2002 second quarter, down from 16,400 at the end of 2001. The decline is
primarily the result of the staffing reductions associated with the re-focusing
of the Private Client business outside the United States.
Commissions
Commissions revenue primarily arises from agency transactions in listed and
over-the-counter equity securities, as well as sales of mutual funds, insurance
products, and options.
Commissions revenues declined 18% to $644 million in the second quarter of 2002
from $785 million in the second quarter of 2001. Commissions revenues for the
first half of 2002 were $1.3 billion, 22% lower than the first half of 2001.
These decreases are primarily due to a global decline in client transaction
volumes, particularly in equities and mutual funds. Commissions are also
affected by the ongoing emphasis on and transition of Private Client assets to
asset-priced accounts.
25
Principal transactions and new issue revenues
Private Client's principal transactions and new issue revenues primarily
represent bid-offer revenues in over-the-counter equity securities, government
bonds and municipal securities as well as selling concessions on underwriting of
debt and equity products. Private Client does not take any significant principal
trading risk positions.
Principal transactions and new issue revenues declined 19% to $319 million in
the 2002 second quarter from the year-ago quarter, as trading and new issue
volume declined in a less favorable market environment. Year-to-date revenues
similarly decreased from $815 million in 2001 to $631 million in 2002.
Asset management and portfolio service fees
Asset management and portfolio service fees include asset management fees from
taxable and tax-exempt money market funds as well as portfolio fees from
fee-based accounts such as Unlimited AdvantageSM and Merrill Lynch Consults(R).
Also included are servicing fees related to these accounts, as well as account
and other fees.
Asset management and portfolio service fees totaled $932 million, essentially
unchanged from the second quarter of 2001. On a year-to-date basis, asset
management and portfolio service fees totaled $1.8 billion, approximately equal
to the year-ago period. These results reflect market driven declines in equity
assets under management offset by increased portfolio service fees as demand for
managed account services continues to grow.
An analysis of changes in assets in Private Client accounts from June 29, 2001
to June 28, 2002 is detailed below:
- ----------------------------------------------------------------------------------------------------
Net Changes Due To
------------------------------------------
June 29, New Asset June 28,
(dollars in billions) 2001 Money Depreciation Other 2002
- ----------------------------------------------------------------------------------------------------
Assets in Private Client accounts:
U.S. $ 1,318 $ 28 $ (242) $ (3) $ 1,101
Non-U.S. 136 6 (13) (35) 94
---------------------------------------------------------
Total $ 1,454 $ 34 $ (255) $ (38) $ 1,195
- ----------------------------------------------------------------------------------------------------
Total assets in Private Client accounts in the United States declined 16% from
the end of the 2001 second quarter, to $1.1 trillion at June 28, 2002 as a
result of market-driven declines, partially offset by net new money inflows of
$28 billion. Outside the United States, client assets were $94 billion, down
from $136 billion at the end of the year-ago quarter, largely due to the sale of
the Canadian Private Client business and market-driven declines. Net new money
inflows, excluding the impact of sold or discontinued businesses, totaled $6
billion over this period. Total assets in asset-priced accounts were $197
billion at the end of the 2002 second quarter, a decrease of 5% from the
year-ago period primarily due to market-driven declines.
Net interest profit
Net interest profit for Private Client includes interest income earned for
originating deposits into Merrill Lynch's U.S. banks as well as interest earned
on margin and other loans. Prior to 2002, Private Client's net interest profit
included all revenues and expenses associated with managing the investment
portfolio of Merrill Lynch's U.S. banks. The revenues and expenses associated
with managing this portfolio are now included in GMI's results. Prior year
segment results have been restated for this change.
Net interest profit was $349 million in the 2002 second quarter, down 3% from
$358 million in the second quarter of 2001. Net interest profit for the six
months of 2002 was $697 million, 6% lower than in the comparable period in 2001.
26
Other revenues
Other revenues, which is primarily comprised of realized and unrealized
investment gains and losses on investments, totaled $24 million in the second
quarter of 2002 as compared to $18 million in the year-ago period. Other
revenues for the first half of 2002 increased to $86 million from $59 million
for the same period in 2001. Other revenues in the first quarter of 2002
included a residual pre-tax gain of $39 million related to the sale of the
Canadian Private Client business. Other revenues in the 2001 first quarter
included a pre-tax gain of $30 million related to the sale of the mortgage
servicing business.
- --------------------------------------------------------------------------------
MERRILL LYNCH INVESTMENT MANAGERS
- --------------------------------------------------------------------------------
MLIM'S RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
June 28, June 29, % Inc. June 28, June 29, % Inc.
(dollars in millions) 2002 2001 (Dec.) 2002 2001 (Dec.)
- ------------------------------------------------------------------------------------------------------------------
Commissions $ 54 $ 68 (21)% $ 105 $ 135 (22)%
Asset management fees 362 427 (15) 733 855 (14)
Other revenues 3 5 (40) 29 31 (6)
----- ----- ----- ------
Total net revenues $ 419 $ 500 (16) $ 867 $1,021 (15)
----- ----- ----- ------
Pre-tax earnings $ 96 $ 81 19 $ 215 $ 172 25
----- ----- ----- ------
Pre-tax profit margin 22.9% 16.2% 24.8% 16.8%
- ------------------------------------------------------------------------------------------------------------------
MLIM's investment performance continued to be strong, and remains MLIM's primary
focus. For the 1- and 3-year periods ending May 2002, nearly 80% of MLIM's U.S.
retail equity assets under management were above their relevant benchmark or
category median. Globally, 69% of MLIM's assets under management were ahead of
their benchmark or median for the same periods.
MLIM's pre-tax earnings in the 2002 second quarter were $96 million, up 19% from
$81 million in the 2001 second quarter. Net revenues decreased 16% from the year
ago period to $419 million primarily reflecting a market-driven decline in
equity assets under management. Net revenues continue to be dependent on levels
of assets under management and accordingly, are susceptible to a decline in
equity market valuations. The pre-tax margin increased nearly seven percentage
points from the year-ago quarter, to 22.9% as the year-over-year decline in
revenues was more than offset by reduced expenses, resulting from the fourth
quarter 2001 restructuring and other initiatives.
Year-to-date, MLIM's pre-tax earnings were $215 million, 25% higher than for the
first six months of 2001 on net revenues that were 15% lower, at $867 million.
MLIM's year-to-date pre-tax margin was 24.8%, compared with 16.8% for the same
period last year.
Commissions
Commissions for MLIM principally consist of distribution fees and redemption
fees related to mutual funds. The distribution fees represent revenues earned
for promoting and distributing mutual funds ("12b-1 fees"). As a result of lower
transaction volumes and the impact of lower market values, commissions decreased
21% to $54 million in the 2002 second quarter from the year-ago quarter.
Year-to-date commissions similarly decreased 22%, to $105 million.
Asset management fees
Asset management fees primarily consist of revenues earned from the management
and administration of funds as well as performance fees earned by MLIM. Asset
management fees were $362 million, a decline of 15% from the second quarter of
2001 due to a decrease in management fees, primarily resulting from the
market-driven decline in equity assets under management. At the end of the
second quarter of 2002, assets under management totaled $499 billion, compared
with $533 billion at the end of the second quarter of 2001. On a year-to-date
basis, asset management fees decreased 14% to $733 million.
27
An analysis of changes in assets under management from June 29, 2001 to June 28,
2002 is as follows:
- --------------------------------------------------------------------------------------------------------------
Net Changes Due To
------------------------------------------------
June 29, New Asset June 28,
(dollars in billions) 2001 Money Depreciation Other (1) 2002
- --------------------------------------------------------------------------------------------------------------
Assets under management $533 $(4) $(47) $17 $499
- --------------------------------------------------------------------------------------------------------------
(1) Includes reinvested dividends of $7 billion, the impact of foreign exchange
movements of $16 billion, net outflows of $(4) billion of retail money
market funds which were transferred to bank deposits at Merrill Lynch's
U.S. banks and other changes of $(2) billion.
Other Revenues
Other revenues, which primarily include net interest profit and investment
gains, totaled $29 million for the first half of 2002, as compared to $31
million in the year-ago period. Other revenues in the 2002 first quarter
included the $17 million pre-tax gain on the sale of the Canadian retail mutual
fund business.
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
Merrill Lynch's non-interest expenses are summarized below:
- ---------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
---------------------------- ----------------------------
June 28, June 29, June 28, June 29,
(dollars in millions) 2002 2001 2002 2001
------------------------------------------------------------------
Compensation and benefits $ 2,569 $ 2,977 $ 5,215 $ 6,221
------- ------- ------- -------
Non-compensation expenses:
Communications and technology 412 568 886 1,166
Occupancy and related depreciation 228 270 466 540
Brokerage, clearing, and exchange fees 172 243 370 478
Advertising and market development 151 202 301 410
Professional fees 132 151 262 293
Office supplies and postage 65 92 134 188
Goodwill amortization - 51 - 103
Other 274 167 447 381
------- ------- ------- -------
Total non-compensation expenses 1,434 1,744 2,866 3,559
------- ------- ------- -------
Total non-interest expenses $ 4,003 $ 4,721 $ 8,081 $ 9,780
======= ======= ======= =======
Compensation and benefits
as a percentage of net revenues 51.9% 53.4% 51.9% 51.9%
Non-compensation expenses
as a percentage of net revenues 29.0 31.3 28.5 29.7
- ---------------------------------------------------------------------------------------------------------------------
Compensation and benefits expenses were $2.6 billion, a decrease of 14% from the
2001 second quarter. Compensation and benefits expenses were 51.9% of net
revenues for the second quarter of 2002, compared to 53.4% in the 2001 second
quarter. The decrease is due primarily to a reduction in staffing and lower
severance expenses. Non-compensation expenses, which included $111 million
related to the NYAG settlement agreement and related costs (included in the
Corporate segment), decreased 18% from the 2001 second quarter.
Communications and technology costs were $412 million, down 27% from the second
quarter of 2001 due to reduced systems consulting costs, lower technology
equipment depreciation and lower communications costs.
28
Occupancy and related depreciation was $228 million in the second quarter of
2002, a decline of 16% from the year-ago period due primarily to lower rental
expenses resulting from the fourth quarter 2001 restructuring initiatives.
Brokerage, clearing, and exchange fees were $172 million, down 29% from the
second quarter of 2001 resulting from lower transaction volumes.
Advertising and market development expenses declined 25% from the second quarter
of 2001 to $151 million, due primarily to reduced spending on travel and
advertising.
Professional fees decreased 13% from the 2001 second quarter, to $132 million,
due largely to reduced spending on consulting services, partially offset by
increased legal fees.
Office supplies and postage decreased 29% from the second quarter of 2001 to $65
million due to lower levels of business activity and efficiency initiatives.
Other expenses were $274 million in the second quarter of 2002, up 64% due to
the $100 million provision for the payment agreed to as part of the settlement
agreement with the NYAG and net expenses related to other legal matters.
Goodwill amortization is no longer being recorded in accordance with SFAS No.
142. Refer to Note 1 to the Condensed Consolidated Financial Statements for
additional information.
The year-to-date effective tax rate was 29.7%, down from the full-year 2001
operating rate of 30.4% and down from 31.2% in the first quarter of 2002. The
decrease in the rate from the first quarter of 2002 resulted from benefits
associated with the wind-down of the Merrill Lynch HSBC joint venture, as well
as from the lower tax rate associated with the net effect of certain foreign
earnings and adjustments to reserves, and tax settlements. Merrill Lynch follows
APB Opinion No. 28 "Interim Financial Reporting" in accounting for interim
period taxes. Pursuant to APB No. 28, the interim period is considered as an
integral part of an annual reporting period.
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Management continually monitors and evaluates the level and composition of the
balance sheet.
For the first six months of 2002, average total assets were $436 billion, up 2%
from $429 billion for the full-year 2001. Average total liabilities also
increased 2% to $412 billion from $406 billion for the full-year 2001. Average
total assets and liabilities for the first six months of 2002 include the
following changes as compared to the full-year 2001:
29
- --------------------------------------------------------------------------------------------
Increase/
(dollars in millions) (Decrease) Change
- --------------------------------------------------------------------------------------------
AVERAGE ASSETS
Receivables under securities borrowed transactions $11,594 38 %
Investment securities 8,542 12
Loans, notes and mortgages (net) 4,536 23
Cash and cash equivalents (7,599) (35)
Customer receivables (6,039) (13)
AVERAGE LIABILITIES
Deposits $ 6,281 8 %
Payables under securities loaned transactions 2,030 26
Commercial paper and other short-term borrowings (4,518) (46)
- --------------------------------------------------------------------------------------------
The growth in average deposits in the first six months of 2002 from the 2001
full-year average resulted from the mid-2000 modification of the cash sweep
options for certain CMA(R) and other types of Merrill Lynch accounts to
generally sweep cash into interest-bearing bank deposits at Merrill Lynch's U.S.
banks, rather than MLIM-managed money market mutual funds. This increase in
deposits was primarily used by the U.S. banks to make loans and purchase
investment securities. Additionally, receivables under securities borrowed
transactions rose due to increased matched-book activity. Merrill Lynch enters
into matched-book transactions to accommodate clients, finance firm inventory
positions, and obtain securities for settlement.
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND FUNDING
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to support the successful execution of the firm's business strategies while
ensuring:
- - sufficient equity capital to absorb losses and,
- - liquidity at all times, across market cycles, and through periods of
financial stress.
These objectives and Merrill Lynch's capital structure and funding policies are
discussed more fully in the Annual Report on Form 10-K for the year ended
December 28, 2001.
Capital Adequacy
At June 28, 2002, Merrill Lynch's equity capital was comprised of $21.2 billion
in common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries. Preferred securities issued by subsidiaries
consist primarily of Trust Originated Preferred SecuritiesSM ("TOPrS"SM).
Management believes that Merrill Lynch's equity capital base of $24.2 billion is
adequate.
30
Merrill Lynch's leverage ratios were as follows:
- -------------------------------------------------------------------
Adjusted
Leverage Leverage
Ratio(1) Ratio(2)
- -------------------------------------------------------------------
PERIOD-END
June 28, 2002 18.1x 12.4x
December 28, 2001 18.5x 12.8x
AVERAGE (3)
Six months ended June 28, 2002 18.6x 12.8x
Year ended December 28, 2001 18.8x 13.1x
- -------------------------------------------------------------------
(1) Total assets to Total stockholders' equity and Preferred securities issued
by subsidiaries.
(2) Total assets less (a) Receivables under resale agreements (b)
Receivables under securities borrowed transactions and (c) Securities
received as collateral to Total stockholders' equity and Preferred
securities issued by subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of assets,
hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not
rely on overall leverage ratios to assess risk-based capital adequacy.
Funding
Commercial paper outstanding totaled $2.9 billion at June 28, 2002 and $3.0
billion at December 28, 2001, which was 4% of total unsecured borrowings at both
June 28, 2002 and year-end 2001. Deposits at Merrill Lynch's banking
subsidiaries totaled $81.1 billion at June 28, 2002, down from $85.8 billion at
year-end 2001. Of the $81.1 billion of deposits in Merrill Lynch banking
subsidiaries as of June 28, 2002, $68.5 billion were in U.S. banks. Outstanding
long-term borrowings decreased to $75.5 billion at June 28, 2002 from $76.6
billion at December 28, 2001. Major components of the change in long-term
borrowings during the first six months of 2002 follow:
- ---------------------------------------------
(dollars in billions)
- ---------------------------------------------
Balance at December 28, 2001 $76.6
Issuances 15.5
Maturities (17.8)
Other, net 1.2
-----
Balance at June 28, 2002 (1) $75.5
- ---------------------------------------------
(1) At June 28, 2002, $50.3 billion of long-term borrowings had maturity dates
beyond one year.
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its balance sheet assets. As a further enhancement to
liquidity, the firm maintains a portfolio of segregated U.S. Government and
agency obligations, and asset-backed securities of high credit quality which had
a carrying value, net of related hedges, of $11.5 billion at June 28, 2002, and
$8.4 billion at December 28, 2001. These assets may be sold or pledged to
provide immediate liquidity even during periods of adverse market conditions.
Another source of liquidity is a committed, senior, unsecured bank credit
facility, which at June 28, 2002 totaled $3.5 billion and was not drawn upon.
The bank credit facility was renewed on May 9, 2002 for 364 days. At renewal,
Merrill Lynch elected to reduce the amount of the bank credit facility from $5.0
billion while increasing the liquidity portfolio of segregated securities that
may be sold or pledged to provide immediate liquidity. Additionally, Merrill
Lynch maintains access to significant uncommitted credit lines, both secured and
unsecured, from a large group of banks.
31
Credit Ratings
The cost and availability of unsecured funding generally are dependent on credit
ratings and market conditions. In addition to the general market conditions
discussed in the Business Environment section, there may be conditions specific
to the financial services industry or Merrill Lynch that impact the cost or
availability of funding. Merrill Lynch's senior long-term debt, preferred stock,
and TOPrSSM were rated by several recognized credit rating agencies at August 9,
2002 as indicated below. These ratings do not reflect outlooks that may be
expressed by the rating agencies from time to time, which are currently
negative.
- ------------------------------------------------------------------------------------------------------------------
Senior
Debt Preferred Stock TOPrSSM
Rating Agency Ratings Ratings Ratings
- ------------------------------------------------------------------------------------------------------------------
Dominion Bond Rating Service Ltd AA (Low) Not Rated Not Rated
Fitch Ratings AA- A+ A+
Moody's Investors Service, Inc. Aa3 A2 A1
Rating and Investment Information, Inc. (1) AA A+ A+
Standard & Poor's Ratings Services AA- A A
- ------------------------------------------------------------------------------------------------------------------
(1) Located in Japan.
On May 17, 2002, Fitch Ratings lowered its long-term debt ratings for Merrill
Lynch & Co., Inc. (senior to "AA-" from "AA" and preferred stock and TOPrSSM to
"A+" from "AA-"). The same day, Fitch also announced rating downgrades for
several other securities firms.
- --------------------------------------------------------------------------------
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Risk-taking is an integral part of Merrill Lynch's core business activities. In
the course of conducting its business operations, Merrill Lynch is exposed to a
variety of risks. These risks include market, credit, liquidity, process, and
other risks that are material and require comprehensive controls and management.
The responsibility and accountability for these risks remain primarily with the
individual business units. For a full discussion of Merrill Lynch's risk
management framework, see the Annual Report on Form 10-K for the year ended
December 28, 2001.
Market Risk
Value-at-risk ("VaR") is an estimate of the amount that Merrill Lynch's present
portfolios could lose with a specified degree of confidence over a given time
interval. The VaR for Merrill Lynch's overall portfolios is less than the sum of
the VaRs for individual risk categories because movements in different risk
categories occur at different times and, historically, extreme movements have
not occurred in all risk categories simultaneously. The difference between the
sum of the VaRs for individual risk categories and the VaR calculated for all
risk categories is shown in the following tables and may be viewed as a measure
of the diversification within Merrill Lynch's portfolios. Merrill Lynch believes
that the tabulated risk measures provide some guidance as to the amount Merrill
Lynch could lose in future periods and it works continuously to improve the
methodology and measurement of its VaR. However, like all statistical measures,
especially those that rely heavily on historical data, VaR needs to be
interpreted with a clear understanding of its assumptions and limitations.
The Merrill Lynch VaR system uses a historical simulation approach to estimate
VaR across several confidence levels and holding periods. Sensitivities to
market risk factors are aggregated and combined with a database of historical
weekly changes in market factors to simulate a series of profits and losses. The
level of loss that is exceeded in that series 5% of the time is used as the
estimate for the 95% confidence level VaR. Beginning in the second quarter of
2002, the firm has enhanced its VaR process to incorporate additional data
points which are symmetrical to the actual historical weekly changes in order to
reflect a more complete representation of potential profit and loss scenarios.
The tables below show VaR using a 95% confidence level and a weekly holding
period for trading and non-trading portfolios. In addition to the overall VaR,
which reflects diversification in the portfolio, VaR amounts are presented for
major risk categories, including exposure to volatility risk found in certain
products, e.g., options. The table that follows presents Merrill Lynch's VaR for
its trading portfolios at June 28, 2002 and December 28, 2001 as well as daily
average VaR for the three months ended June 28, 2002. Additionally, high and low
VaR for the second quarter of 2002 is presented independently for each risk
category and overall.
32
- -------------------------------------------------------------------------------------------------------
Daily
June 28, Dec. 28, Average High Low
(dollars in millions) 2002 2001 2Q02 2Q02 2Q02
- -------------------------------------------------------------------------------------------------------
Trading value-at-risk(1)
Interest rate and credit spread $ 50 $ 45 $ 39 $ 53 $ 26
Equity 35 37 32 38 24
Commodity - 1 - - -
Currency 4 2 4 15 -
Volatility 11 20 17 23 9
--------------------------------------------------------------
100 105 92
Diversification benefit (38) (49) (35)
-------------------------------------
Overall(2) $ 62 $ 56 $ 57 $ 69 $ 42
=====================================
- -------------------------------------------------------------------------------------------------------
(1) Based on a 95% confidence level and a weekly holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$28 million at June 28, 2002 versus $21 million at year-end 2001.
The following table presents Merrill Lynch's VaR for its non-trading portfolios
(excluding U.S. banks):
- --------------------------------------------------------------------------
June 28, Dec. 28,
(dollars in millions) 2002 2001
- --------------------------------------------------------------------------
Non-trading value-at-risk(1)
Interest rate and credit spread $ 33 $ 20
Equity 27 28
Currency 6 7
Volatility 4 6
---- ----
70 61
Diversification benefit (27) (26)
---- ----
Overall $ 43 $ 35
==== ====
- --------------------------------------------------------------------------
(1) Based on a 95% confidence level and a weekly holding period.
Non-trading VaR does not include risk related to Merrill Lynch's $4.7 billion of
outstanding Liquid Yield Option TM Notes ("LYONS" (R)) since management expects
that the LYONs(R) will be converted to common stock and will not be replaced by
fixed income securities.
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrSSM at June 28, 2002 and
December 28, 2001 was $39 million and $33 million, respectively, based on a 95%
confidence level and a weekly holding period. TOPrSSM, which are fixed-rate
perpetual preferred securities, are considered a component of Merrill Lynch's
equity capital and, therefore, the associated interest rate sensitivity is not
hedged.
Cash flows from client funds in certain CMA(R) and other types of accounts were
redirected from taxable money market funds to bank deposits at Merrill Lynch's
U.S. banks during 2000 and 2001. This increase in deposits was used to fund the
growth in high credit quality investment securities. The overall VaR for the
U.S. banks, based on a 95% confidence interval and a weekly holding period, was
$78 million and $79 million at June 28, 2002 and December 28, 2001,
respectively.
33
Credit Risk
Merrill Lynch enters into International Swaps and Derivatives Association, Inc.
master agreements or their equivalent ("master netting agreements") with
substantially all of its derivative counterparties as soon as possible. Master
netting agreements provide protection in bankruptcy in certain circumstances
and, in some cases, enable receivables and payables with the same counterparty
to be offset on the Condensed Consolidated Balance Sheets, providing for a more
meaningful balance sheet presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally U.S. Government and agency securities, as well as cash, on certain
derivative transactions. From an economic standpoint, Merrill Lynch evaluates
default risk exposures net of related collateral. The following is a summary of
counterparty credit ratings for the replacement cost (net of $9.5 billion of
collateral) of trading derivatives in a gain position by maturity at June 28,
2002. (Please note that the following table includes only credit exposure from
derivative transactions and does not include other credit exposures, which may
be material).
(dollars in millions)
- -----------------------------------------------------------------------------------------
Years to Maturity Cross-
Credit --------------------------------------------------- Maturity
Rating(1) 0-3 3+- 5 5+- 7 Over 7 Netting(2) Total
- -----------------------------------------------------------------------------------------
AAA $ 3,430 $ 1,122 $ 952 $ 1,333 $ (670) $ 6,167
AA 4,151 2,363 998 1,452 (1,961) 7,003
A 2,572 1,113 514 884 (631) 4,452
BBB 1,240 523 324 356 (333) 2,110
Other 723 259 131 71 (47) 1,137
---------------------------------------------------------------------------
Total $12,116 $ 5,380 $2,919 $ 4,096 $(3,642) $20,869
- -----------------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent of internal credit ratings.
(2) Represents netting of payable balances with receivable balances for the same
counterparty across maturity band categories. Receivable and payable
balances with the same counterparty in the same maturity category, however,
are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate its
default risk on derivatives whenever possible by entering into transactions with
provisions that enable Merrill Lynch to terminate or reset the terms.
- --------------------------------------------------------------------------------
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 inherent in the business and may employ strategies to mitigate exposures.
The specific components and overall level of non-investment grade and
highly-leveraged positions may vary significantly from period to period as a
result of inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated as BB+
or lower, or equivalent ratings by recognized credit rating agencies, sovereign
debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
34
In addition to the amounts included in the following table, derivatives may also
expose Merrill Lynch to credit risk related to the underlying security where a
derivative contract either synthesizes ownership of the underlying security
(e.g., long total return swaps) or can potentially force ownership of the
underlying security (e.g., short put options). Derivatives may also subject
Merrill Lynch to credit spread or issuer default risk, in that changes in credit
spreads or in the credit quality of the underlying securities may adversely
affect the derivatives' fair values. Merrill Lynch seeks to manage these risks
by engaging in various hedging strategies to reduce its exposure associated with
non-investment grade positions, such as purchasing an option to sell the related
security or entering into other offsetting derivative contracts.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch may syndicate loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
- --------------------------------------------------------------------------------
TRADING EXPOSURES
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's trading exposure to
non-investment grade or highly leveraged issuers or counterparties:
- ---------------------------------------------------------------------------
June 28, Dec. 28,
(dollars in millions) 2002 2001
- ---------------------------------------------------------------------------
Trading assets:
Cash instruments $ 4,317 $ 4,597
Derivatives 4,252 4,478
Trading liabilities - cash instruments (1,481) (1,535)
Collateral on derivative assets (3,115) (2,934)
------- -------
Net trading asset exposure $ 3,973 $ 4,606
- ---------------------------------------------------------------------------
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 28,
2002, the carrying value of such debt and equity securities totaled $129
million, of which 8% resulted from Merrill Lynch's market-making activities in
such securities. This compared with $58 million at December 28, 2001, of which
18% related to market-making activities. Also included are distressed bank
loans, acquired as part of Merrill Lynch's secondary market activities, totaling
$235 million and $245 million at June 28, 2002 and December 28, 2001,
respectively.
35
- --------------------------------------------------------------------------------
NON-TRADING EXPOSURES
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's non-trading exposures to
non-investment grade or highly leveraged corporate issuers or counterparties:
- ---------------------------------------------------------------------------------------
June 28, Dec. 28,
(dollars in millions) 2002 2001
- ---------------------------------------------------------------------------------------
Marketable investment securities $ 151 $ 221
Investments of insurance subsidiaries 141 114
Loans (net of allowance for loan losses):
Bridge loans 150 130
Other loans(1) 3,189 2,578
Other investments:
Partnership interests (2) 1,856 1,551
Other equity investments (3) 152 140
- ---------------------------------------------------------------------------------------
(1) Represents outstanding loans to 139 and 138 companies at June 28, 2002 and
December 28, 2001, respectively.
(2) Includes $924 million and $717 million in investments at June 28, 2002 and
December 28, 2001, respectively, related to deferred compensation plans,
for which a portion of the default risk of the investments rests with the
participating employees.
(3) Includes investments in 106 and 81 enterprises at June 28, 2002 and
December 28, 2001, respectively.
Subsequent to June 28, 2002, a lending syndicate, of which Merrill Lynch is
a member, entered into a Memorandum of Understanding relating to one of
Merrill Lynch's loan counterparties. Under this agreement, the existing
loan would be exchanged for a perpetual convertible security of France
Telecom S.A. Merrill Lynch's funded portion of this credit facility was
approximately $450 million at June 28, 2002. Certain conditions must be met
before this agreement is finalized; failure to complete this agreement
could result in a substantial impairment of this loan.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly leveraged counterparties:
- --------------------------------------------------------------------------------------------
June 28, Dec. 28,
(dollars in millions) 2002 2001
- --------------------------------------------------------------------------------------------
Additional commitments to invest in partnerships (1) $ 512 $ 822
Unutilized revolving lines of credit and other
lending commitments 3,751 1,947
- --------------------------------------------------------------------------------------------
(1) Includes $123 million and $369 million at June 28, 2002 and
December 28, 2001, respectively, related to deferred compensation plans.
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
Subsequent to June 28, 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This standard requires companies
to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 will replace the existing guidance provided by EITF Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. Merrill Lynch has not yet determined the impact of
adoption.
In August 2001, the FASB released SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," for the disposal of a segment of the business as
previously defined in that opinion. SFAS No. 144 also amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements" to eliminate the exception
to consolidation for a subsidiary for which control is likely to be temporary.
SFAS No. 144 provides guidance on the financial accounting and reporting for the
impairment or disposal of long-lived assets. Merrill Lynch adopted the
provisions of SFAS No. 144 in the first quarter of 2002. The impact upon
adoption was not material.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, intangible assets with indefinite lives and
goodwill will no longer be amortized. Instead, these assets will be tested
annually for impairment. Merrill Lynch adopted the provisions of SFAS No. 142 at
the beginning of fiscal year 2002. Prior year amortization expense related to
goodwill totaled $51 million and $103 million for the three-month and six-month
periods ended June 29, 2001.
During the second quarter of 2002, Merrill Lynch completed its review of
goodwill in accordance with SFAS No. 142 and determined that the fair value of
the reporting units to which goodwill relates exceeds the carrying value of such
reporting units. Accordingly, no goodwill impairment loss was recognized.
36
- ------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
- ------------------------------------------------------------------------------------------------------------------------
2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr.
2001 2001 2001 2002 2002
-------- -------- -------- -------- --------
CLIENT ASSETS (dollars in billions):
Private Client
U.S. $ 1,318 $ 1,171 $ 1,185 $ 1,179 $ 1,101
Non-U.S. 136 127 101 96 94
-------- -------- -------- -------- --------
Total Private Client Assets 1,454 1,298 1,286 1,275 1,195
MLIM direct sales (1) 181 170 172 167 158
-------- -------- -------- -------- --------
Total Client Assets $ 1,635 $ 1,468 $ 1,458 $ 1,442 $ 1,353
======== ======== ======== ======== ========
ASSETS IN ASSET-PRICED ACCOUNTS $ 207 $ 189 $ 205 $ 211 $ 197
ASSETS UNDER MANAGEMENT:
Retail $ 230 $ 214 $ 220 $ 215 $ 206
Institutional 260 252 266 262 254
Private Investors(2) 43 41 43 41 39
Equity 286 253 263 257 234
Fixed-income 118 119 119 119 121
Money market 129 135 147 142 144
U.S. 325 310 327 323 319
Non-U.S. 208 197 202 195 180
- ------------------------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Equity and Equity-Linked:
Volume (dollars in billions) $ 17 $ 15 $ 15 $ 15 $ 10
Market share 13.4% 21.3% 12.1% 15.0% 9.6%
Global debt:
Volume (dollars in billions) $ 109 $ 81 $ 67 $ 92 $ 80
Market share 11.3% 9.9% 7.2% 8.6% 8.7%
- ------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 49,100 47,300 43,500 43,200 42,500
Non-U.S. 19,100 18,600 13,900 13,200 12,100
-------- -------- -------- -------- --------
Total 68,200 65,900 57,400 56,400 54,600
======== ======== ======== ======== ========
Private Client Financial Advisors 18,600 18,000 16,400 15,900 15,100
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (dollars in millions):
Total assets $423,071 $448,606 $419,419 $429,167 $439,426
Total stockholders' equity $ 20,691 $ 21,090 $ 20,008 $ 20,906 $ 21,592
Book value per common share $ 24.02 $ 24.38 $ 23.03 $ 23.73 $ 24.46
SHARE INFORMATION (in thousands):
Weighted-average shares outstanding:
Basic 841,394 845,841 845,664 854,815 861,742
Diluted 943,836 934,469 845,664 949,237 942,560
Common shares outstanding 843,772 847,538 850,222 862,946 865,398
- ------------------------------------------------------------------------------------------------------------------------
(1) Reflects funds managed by MLIM not sold through Private Client channels.
(2) Represents segregated portfolios for individuals, small corporations and institutions.
37
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
The following supplements the discussion in ML & Co.'s Annual Report on Form
10-K for the fiscal year ended December 28, 2001 and Quarterly Report on Form
10-Q for the quarter ended March 29, 2002. We also refer the reader to ML &
Co.'s Current Reports on Form 8-K dated April 11, 2002, April 18, 2002, and May
21, 2002, relating to the New York State Attorney General's inquiry pertaining
to Merrill Lynch.
Research-Related Class Actions.
- ------------------------------
Since April 2002, approximately 100 class actions have been filed against
various Merrill Lynch-related entities, including ML & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Merrill Lynch Canada Inc., Merrill Lynch
Funds Distributor, Fund Asset Management, L.P., Merrill Lynch B2B Internet
HOLDRS Trust, Merrill Lynch Internet Infrastructure HOLDRS Trust, Merrill Lynch
Internet Architecture HOLDRS Trust, Merrill Lynch Internet Strategies Fund, and
Merrill Lynch Global Technology Fund, Inc., challenging the independence and
objectivity of Merrill Lynch's research recommendations and related disclosures.
The complaints seek unspecified damages and other relief. Many of these class
actions make virtually identical allegations, and we expect that they will
eventually be consolidated into a much smaller number of actions. Merrill Lynch
is vigorously defending these class actions.
Enron-Related Litigation/Investigations.
- ---------------------------------------
Merrill Lynch, along with other investment banks, has received inquiries and
requests for information from Congressional committees, the Securities and
Exchange Commission, the Department of Justice and others regarding certain
transactions and business relationships with Enron and related entities. We
continue to cooperate with these governmental agencies and bodies reviewing
Enron's activities and believe that Merrill Lynch did not engage in any improper
conduct involving Enron. We were recently informed by the Department of Justice
that Merrill Lynch is not a target or a subject of its investigation of
Enron-related matters. We are, however, in continuing discussions with members
of the SEC staff, who have expressed concerns about Merrill Lynch's role in
certain Enron-related matters. We disagree with the views they have expressed to
us and are in the process of responding to them on these matters.
IPO Allocation Class Actions.
- ----------------------------
On April 19 and 20, plaintiffs filed amended consolidated complaints in the IPO
Allocation cases. As amended, the complaints allege that the defendants
unlawfully (1) required customers who were allocated IPO securities to pay back
some of their profits in the form of higher commissions; (2) required these
customers to buy securities in the aftermarket at inflated prices; and (3)
inflated the price of these securities in the aftermarket by issuing misleading
research reports. The complaints seek unspecified damages and other relief
against all of the major securities firms, including Merrill Lynch, that
underwrite initial public offerings. Approximately 108 of the more than 300
amended consolidated complaints name Merrill Lynch as one of the defendants. The
underwriter defendants, including Merrill Lynch, filed a joint motion to dismiss
on July 1, 2002.
In the normal course of business, Merrill Lynch has been named as a defendant in
various legal actions, including arbitrations, class actions, and other
litigation, arising in connection with its activities as a global diversified
financial services institution. Moreover, the general decline of securities
prices that began in 2000 has resulted in increased legal actions against many
firms, including Merrill Lynch. Some of the legal actions include claims for
substantial compensatory and/or punitive damages or claims for indeterminate
amounts of damages. In some cases, the issuers who would otherwise be the
primary defendants in such cases are bankrupt or otherwise in financial
distress. Merrill Lynch is also involved, from time to time, in investigations
and proceedings by governmental and self-regulatory agencies. The number of
these investigations has also increased in recent years with regard to many
firms, including Merrill Lynch. Some of these legal actions, investigations and
proceedings may result in adverse judgments, penalties or fines. In view of the
inherent difficulty of predicting the outcome of such matters, particularly in
cases in which claimants seek substantial or indeterminate damages, Merrill
Lynch cannot predict what the eventual loss or range of loss related to such
matters will be. Merrill Lynch believes, based on information available to us as
of the date of this report, that the resolution of the actions will not have a
material adverse effect on the financial position of Merrill Lynch as set forth
in the Condensed Consolidated Financial Statements, but may be material to
Merrill Lynch's operating results for any particular period.
38
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 26, 2002, ML & Co. held its Annual Meeting of Stockholders, at which
89.0% of the shares of ML & Co. common stock outstanding and eligible to vote,
either in person or by proxy, were represented, constituting a quorum. At the
Annual Meeting, the following matters were voted upon: (i) the election of four
directors to the Board of Directors to hold office for a term of three years;
and (ii) a stockholder proposal concerning cumulative voting in the election of
directors. Proxies for the Annual Meeting were solicited by the Board of
Directors pursuant to Regulation 14A of the Securities Exchange Act of 1934.
The stockholders elected all four nominees to the Board of Directors as set
forth in ML & Co.'s Proxy Statement. There was no solicitation in opposition to
the nominees. The votes cast for or withheld from the election of directors were
as follows: Jill K. Conway received 748,379,990 votes in favor and 14,639,938
votes were withheld; George B. Harvey received 750,143,275 votes in favor and
12,876,653 votes were withheld; Heinz-Joachim Neuburger received 750,024,022
votes in favor and 12,995,906 votes were withheld; and E. Stanley O'Neal
received 745,608,290 votes in favor and 17,411,638 votes were withheld.
The stockholders did not approve the stockholder proposal concerning cumulative
voting in the election of directors. The votes cast for and against, as well as
the number of abstentions and broker non-votes for this proposal were as
follows: 209,817,204 votes in favor, 398,209,751 votes against, 7,953,247 shares
abstained, and 147,039,726 shares represented broker non-votes.
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, 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.
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
99(i) Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99(ii) Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
39
The following Current Reports on Form 8-K were filed with or furnished
to the Securities and Exchange Commission during the quarterly period
covered by this Report:
(i) Current Report dated April 10, 2002 for the purpose of
furnishing notice of a webcast of a conference call scheduled
for April 17, 2002 to review ML & Co.'s operating results.
(ii) Current Report dated April 11, 2002 for the purpose of
reporting an ex parte proceeding initiated by the New York
State Attorney General against ML & Co. and certain of its
employees concerning Merrill Lynch's research practices.
(iii) Current Report dated April 15, 2002 for the purpose of
furnishing notice of a webcast of a presentation by the
president of Merrill Lynch's U.S. Private Client Group
scheduled for April 22, 2002.
(iv) Current Report dated April 17, 2002 for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summary for the three
months ended March 29, 2002.
(v) Current Report dated April 18, 2002 for the purpose of
reporting an agreement with the New York State Attorney General
concerning its investigation into Merrill Lynch's research
practices.
(vi) Current Report dated April 26, 2002 for the purpose of filing
the form of ML & Co.'s notes due nine months or more from date
of issue.
(vii) Current Report dated May 1, 2002 for the purpose of filing ML &
Co.'s Preliminary Unaudited Consolidated Balance Sheet as of
March 29, 2002.
(viii) Current Report dated May 3, 2002 for the purpose of filing the
form of ML & Co.'s Callable Market Index Target-Term Securities
due May 4, 2009 linked to the Amex Biotechnology Index.
(ix) Current Report dated May 3, 2002 for the purpose of filing the
form of ML & Co.'s S&P 500 Callable Market Index Target-Term
Securities due May 4, 2009.
(x) Current Report dated May 3, 2002 for the purpose of filing the
form of ML & Co.'s Strategic Return Notes linked to the
Industrial 15 Index due May 3, 2007.
(xi) Current Report dated May 3, 2002 for the purpose of filing the
form of ML & Co.'s Strategic Return Notes linked to the Select
Ten Index due May 3, 2007.
(xii) Current Report dated May 7, 2002 for the purpose of filing the
form of ML & Co.'s 6% Callable Stock Return Income Debt
Securities due May 7, 2004, payable at maturity with The Boeing
Company common stock.
40
(xiii) Current Report dated May 7, 2002 for the purpose of furnishing
notice of a webcast of a presentation by ML & Co.'s chairman
and chief executive officer scheduled for May 14, 2002.
(xiv) Current Report dated May 14, 2002 for the purpose of filing the
form of ML & Co.'s 8% Callable Stock Return Income Debt
Securities due May 14, 2004, payable at maturity with Adobe
Systems Incorporated common stock.
(xv) Current Report dated May 17, 2002 for the purpose of reporting
an announcement by Fitch Ratings of downgrades of ML & Co.'s
long-term debt ratings.
(xvi) Current Report dated May 21, 2002 for the purpose of reporting
a settlement with the New York State Attorney General regarding
its inquiry pertaining to Merrill Lynch's research practices.
(xvii) Current Report dated May 28, 2002 for the purpose of filing the
form of ML & Co.'s 1% Convertible Securities Exchangeable into
McDonald's Corporation common stock due May 28, 2009.
(xviii) Current Report dated May 31, 2002 for the purpose of filing the
form of ML & Co.'s Callable Market Index Target-Term Securities
due June 1, 2009 linked to the Amex Defense Index.
(xix) Current Report dated June 11, 2002 for the purpose of filing
the form of ML & Co.'s Strategic Return Notes linked to the
Select European 50 Index due June 11, 2007.
(xx) Current Report dated June 28, 2002 for the purpose of filing
the form of ML & Co.'s S&P 500 Market Index Target-Term
Securities due June 29, 2009.
(xxi) Current Report dated June 28, 2002 for the purpose of filing
the form of ML & Co.'s Strategic Return Notes linked to the
Select Ten Index due June 28, 2007.
41
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)
By: /s/ Thomas H. Patrick
-----------------------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
Principal Financial Officer
By: /s/ John J. Fosina
-----------------------------------------
John J. Fosina
Controller
Principal Accounting Officer
Date: August 9, 2002
42
INDEX TO EXHIBITS
Exhibits
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
99(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
43