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 SEPTEMBER 25, 1998
------------------
COMMISSION FILE NUMBER 1-7182
------
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
WORLD FINANCIAL CENTER, NORTH TOWER,
NEW YORK, NEW YORK 10281-1332
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
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Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
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.
354,712,004 shares of Common Stock and 4,618,013 Exchangeable Shares as of
the close of business on October 30, 1998. 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 (restated for the Midland Walwyn merger)
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
FOR THE THREE MONTHS ENDED
-------------------------------
SEPTEMBER 25, SEPTEMBER 26, PERCENT (1)
(dollars in millions, except per share amounts) 1998 1997 INC. (DEC.)
------------ ------------- -----------
REVENUES
Commissions $ 1,449 $ 1,328 9.2%
Interest and dividends 5,079 4,447 14.2
Principal transactions 279 964 (71.1)
Investment banking 711 724 (1.8)
Asset management and portfolio service fees 995 731 36.0
Other 199 144 38.4
------ ------ ----
Total Revenues 8,712 8,338 4.5
Interest Expense 4,863 4,196 15.9
------ ------ ----
Net Revenues 3,849 4,142 (7.1)
------ ------ ----
NON-INTEREST EXPENSES
Compensation and benefits 2,010 2,101 (4.3)
Communications and technology 487 328 48.7
Occupancy and related depreciation 227 188 20.7
Professional fees 165 131 25.3
Advertising and market development 203 148 36.7
Brokerage, clearing, and exchange fees 186 143 30.5
Goodwill amortization 55 16 N/M
Provision for costs related to staff reductions 430 - N/M
Other 292 298 (2.0)
------ ------ ----
Total Non-Interest Expenses 4,055 3,353 20.9
------ ------ ----
EARNINGS (LOSS) BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES (206) 789 (126.2)
Income Tax Expense (Benefit) (75) 275 (127.4)
Dividends on Preferred Securities Issued by Subsidiaries 33 12 162.6
------- ------- ------
NET EARNINGS (LOSS) $ (164) $ 502 (132.6)%
======= ======= ======
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ (173) $ 493 (135.2)%
======= ======= ======
EARNINGS (LOSS) PER COMMON SHARE
Basic $ (.49) $ 1.45
======= =======
Diluted $ (.49) $ 1.24
======= =======
DIVIDEND PAID PER COMMON SHARE $ .24 $ .20
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS (LOSS) PER COMMON SHARE
Basic 357.6 339.8
======= =======
Diluted 357.6 396.9
======= =======
- ------------------------------------------------------
(1) Percentages are based on actual numbers before rounding.
N/M Not meaningful.
See Notes to Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
FOR THE NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 25, SEPTEMBER 26, PERCENT (1)
(dollars in millions, except per share amounts) 1998 1997 INC. (DEC.)
------------- ------------- -------------
REVENUES
Commissions $ 4,375 $ 3,691 18.5%
Interest and dividends 14,903 12,734 17.0
Principal transactions 2,439 3,211 (24.0)
Investment banking 2,440 2,015 21.1
Asset management and portfolio service fees 3,013 2,063 46.0
Other 511 474 7.8
------- ------- -----
Total Revenues 27,681 24,188 14.4
Interest Expense 14,215 11,942 19.0
------- ------- -----
Net Revenues 13,466 12,246 10.0
------- ------- -----
NON-INTEREST EXPENSES
Compensation and benefits 6,956 6,281 10.7
Communications and technology 1,311 920 42.4
Occupancy and related depreciation 645 548 17.7
Professional fees 459 398 15.2
Advertising and market development 580 456 27.3
Brokerage, clearing, and exchange fees 509 383 32.8
Goodwill amortization 165 47 N/M
Provision for costs related to staff reductions 430 - N/M
Other 809 837 (3.4)
------- ------- -----
Total Non-Interest Expenses 11,864 9,870 20.2
------- ------- -----
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,602 2,376 (32.6)
Income Tax Expense 605 875 (30.8)
Dividends on Preferred Securities Issued by Subsidiaries 82 35 134.8
------- ------- -----
NET EARNINGS $ 915 $ 1,466 (37.6)%
======= ======= =====
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 887 $ 1,437 (38.3)%
======= ======= =====
EARNINGS PER COMMON SHARE
Basic $ 2.50 $ 4.24
======= =======
Diluted $ 2.18 $ 3.64
======= =======
DIVIDENDS PAID PER COMMON SHARE $ .68 $ .55
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 354.1 339.2
======= =======
Diluted 406.7 394.4
======= =======
- ----------------------------------------------------------
(1) Percentages are based on actual numbers before rounding.
N/M Not meaningful.
See Notes to Consolidated Financial Statements
3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in millions, except per share amounts)
SEPTEMBER 25, DECEMBER 26,
ASSETS 1998 1997
------------------------------------------------------------------ ------------- ------------
CASH AND CASH EQUIVALENTS $ 8,965 $ 5,046
-------- --------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 12,583 12,384
-------- --------
MARKETABLE INVESTMENT SECURITIES 4,213 3,309
-------- --------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock 26,908 32,537
Equities and convertible debentures 28,326 24,031
Contractual agreements 25,491 21,205
U.S. Government and agencies 14,139 9,848
Non-U.S. governments and agencies 9,001 10,221
Mortgages, mortgage-backed, and asset-backed 10,529 7,312
Other 3,542 2,937
-------- --------
117,936 108,091
Securities received as collateral, net of securities pledged as collateral 5,202 -
-------- --------
Total 123,138 108,091
-------- --------
SECURITIES PLEDGED AS COLLATERAL 18,386 -
-------- --------
RECEIVABLES UNDER RESALE AGREEMENTS 73,125 71,904
-------- --------
RECEIVABLES UNDER SECURITIES BORROWED TRANSACTIONS 43,176 35,539
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of
$55 in 1998 and $50 in 1997) 29,881 27,319
Brokers and dealers 7,319 5,182
Interest and other 9,096 8,185
-------- --------
Total 46,296 40,686
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,507 4,833
LOANS, NOTES, AND MORTGAGES (net of allowance for
loan losses of $148 in 1998 and $130 in 1997) 7,161 4,310
OTHER INVESTMENTS 2,144 1,829
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(net of accumulated depreciation and amortization
of $3,338 in 1998 and $2,955 in 1997) 2,570 2,099
GOODWILL (net of accumulated amortization of
$284 in 1998 and $131 in 1997) 5,413 5,467
OTHER ASSETS 1,742 1,483
-------- --------
TOTAL ASSETS $353,419 $296,980
======== ========
See Notes to Consolidated Financial Statements
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in millions, except per share amounts)
LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, SEPTEMBER 25, DECEMBER 26,
AND STOCKHOLDERS' EQUITY 1998 1997
------------------------------------------------------------------------------- ------------- ------------
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $100,174 $ 79,167
-------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 43,409 45,052
-------- --------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 22,733 20,632
U.S. Government and agencies 10,572 18,186
Equities and convertible debentures 19,677 15,817
Non-U.S. governments and agencies 10,893 10,460
Corporate debt, preferred stock, and other 6,049 6,119
-------- --------
Total 69,924 71,214
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 23,588 -
-------- --------
OTHER PAYABLES
Customers 20,727 17,514
Brokers and dealers 5,772 4,224
Interest and other 18,785 22,784
-------- --------
Total 45,284 44,522
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,404 4,716
LONG-TERM BORROWINGS 55,064 43,143
-------- --------
TOTAL LIABILITIES 341,847 287,814
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,777 627
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 71 66
Common stock, par value $1.33 1/3 per share;
authorized: 1,000,000,000 shares; issued: 472,660,324 shares 630 630
Paid-in capital 1,405 1,001
Accumulated other comprehensive loss (net of tax) (59) (47)
Retained earnings 10,227 9,579
-------- --------
12,274 11,229
Less: Treasury stock, at cost:
1998 - 119,242,755 shares; 1997 - 133,400,971 shares 2,190 2,677
Employee stock transactions 714 438
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 9,370 8,114
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,795 8,539
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $353,419 $296,980
======== ========
BOOK VALUE PER COMMON SHARE $ 26.16 $ 23.63
======== ========
See Notes to Consolidated Financial Statements
5
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED
------------------------------------
(dollars in millions) SEPTEMBER 25, SEPTEMBER 26,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 915 $ 1,466
Noncash items included in earnings:
Depreciation and amortization 428 347
Policyholder reserves 171 180
Goodwill amortization 165 47
Other 403 936
(Increase) decrease in operating assets:
Trading assets (9,845) (35,092)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (199) (4,978)
Receivables under securities borrowed transactions (7,637) (11,397)
Customer receivables (2,564) (7,197)
Sales of trading investment securities 1,220 59
Purchases of trading investment securities (964) (22)
Other (5,539) (5,583)
Increase (decrease) in operating liabilities:
Trading liabilities (1,290) 20,063
Payables under securities loaned transactions 4,394 5,172
Customer payables 3,213 3,333
Liabilities of insurance subsidiaries (485) (372)
Other 2,947 5,939
---------- ----------
CASH USED FOR OPERATING ACTIVITIES (14,667) (27,099)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 3,011 2,330
Sales of available-for-sale securities 2,227 1,447
Purchases of available-for-sale securities (6,204) (4,623)
Maturities of held-to-maturity securities 628 868
Purchases of held-to-maturity securities (643) (569)
Acquisitions, net of cash acquired (5,227) -
Property, leasehold improvements, and equipment (888) (624)
Other investments and other assets (724) (391)
---------- ----------
CASH USED FOR INVESTING ACTIVITIES (7,820) (1,562)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements 15,603 2,031
Commercial paper and other short-term borrowings (1,643) 14,072
Issuances and resales of long-term borrowings 22,611 19,768
Settlements and repurchases of long-term borrowings (11,052) (5,566)
Issuances of subsidiaries' preferred securities 1,150 300
Redemption of remarketed preferred stock - (194)
Common stock transactions 4 (358)
Dividends (267) (216)
---------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 26,406 29,837
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 3,919 1,176
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,046 3,395
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,965 $ 4,571
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 432 $ 621
Interest 13,642 10,708
See Notes to Consolidated Financial Statements
6
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
SEPTEMBER 25, 1998
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
Note 1. Basis of Presentation
- --------------------------------------------------------------------------------
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 26, 1997
consolidated balance sheet was derived from the audited financial statements, as
restated for a pooling-of-interests (see Note 2). The interim consolidated
financial statements for the three- and nine-month periods are unaudited;
however, in the opinion of Merrill Lynch management, all adjustments, consisting
only of normal recurring accruals and a provision for costs related to staff
reductions, necessary for a fair statement of the results of operations have
been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report on Form
10-K for the year ended December 26, 1997. The nature of Merrill Lynch's
business is such that the results of any interim period are not necessarily
indicative of results for a full year. Prior period financial statements have
been reclassified, where appropriate, to conform to the 1998 presentation.
- --------------------------------------------------------------------------------
Note 2. Midland Walwyn Merger
- --------------------------------------------------------------------------------
In August 1998, Merrill Lynch acquired the outstanding shares of Midland Walwyn
Inc. ("Midland") in a share exchange. Each Midland shareholder received either
0.24 shares of ML & Co. common stock or 0.24 exchangeable shares of Merrill
Lynch & Co., Canada Ltd. ("Exchangeable Shares") for every Midland share held
(see Note 6). In the exchange, Merrill Lynch issued 4,177,064 shares of ML & Co.
common stock and 4,831,224 Exchangeable Shares.
The merger has been accounted for as a pooling-of-interests, and accordingly,
prior period financial statements and footnotes have been restated to
reflect the results of operations, financial position, and cash flows as if
Merrill Lynch and Midland had always been combined. The effect of combining
Midland into the results of operations, financial position, and cash flows of
Merrill Lynch was not material.
- --------------------------------------------------------------------------------
Note 3. New Accounting Pronouncements
- --------------------------------------------------------------------------------
Merrill Lynch adopted Statement of Financial Accounting Standards ("SFAS") No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125", which requires balance sheet recognition of collateral related to certain
secured financing transactions entered into after December 31, 1997. The
adoption of such provisions creates the following additional captions on Merrill
Lynch's balance sheet:
- - Securities received as collateral, net of securities pledged as collateral;
- - Securities pledged as collateral; and
- - Obligation to return securities received as collateral.
The balances recognized in these captions primarily represent securities
received as collateral in term resale and repurchase agreements for which the
collateral provider does not have the explicit contractual right to substitute.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use". SOP
98-1 requires capitalization of certain internal use software costs. The SOP,
which would have been effective for Merrill Lynch beginning in 1999, was early
adopted by Merrill Lynch and was not material to the results of operations for
the three- and nine-month periods ended September 25, 1998.
7
In April 1998, the AICPA also issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that all start-up costs be expensed as
incurred. Closed-end mutual fund distribution costs, previously deferred and
amortized by Merrill Lynch over a four-year period, should be expensed under
the SOP. Merrill Lynch is currently evaluating the effect of adopting SOP
98-5.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and for Hedging Activities", which
requires all derivatives to be recorded on the balance sheet at fair value.
SFAS No. 133 is effective for years beginning after June 15, 1999. The
expected impact of adoption on Merrill Lynch's results of operations has not
yet been determined.
- --------------------------------------------------------------------------------
Note 4. Short-Term Borrowings
- --------------------------------------------------------------------------------
Short-term borrowings at September 25, 1998 and December 26, 1997 are
presented below:
- -----------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
1998 1997
- -----------------------------------------------------------------------------------------------
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $ 88,740 $72,127
Securities loaned transactions 11,434 7,040
-------- -------
Total $100,174 $79,167
======== =======
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 27,247 $30,379
Demand and time deposits 13,642 10,712
Bank loans and other 2,520 3,961
-------- -------
Total $ 43,409 $45,052
======== =======
- -----------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 5. Preferred Securities Issued by Subsidiaries
- --------------------------------------------------------------------------------
In January and June 1998, Merrill Lynch Preferred Capital Trust III and IV
(the "Trusts"), subsidiaries of ML & Co., issued $750 and $400 of Trust
Originated Preferred Securities(Service Mark), respectively. The Trusts hold
preferred securities of limited partnerships, which are also subsidiaries of
ML & Co. The assets of the limited partnerships consist primarily of debt
securities of ML & Co. and certain of its subsidiaries. ML & Co. has
guaranteed, on a subordinated basis, certain payments by the Trusts and the
limited partnerships.
Subsequent to quarter end, Merrill Lynch Preferred Capital Trust V issued $850
of Trust Originated Preferred Securities.
- --------------------------------------------------------------------------------
Note 6. Shares Exchangeable into Common Stock
- --------------------------------------------------------------------------------
In August 1998, Merrill Lynch & Co., Canada Ltd. issued 4,831,224
Exchangeable Shares in connection with Merrill Lynch's merger with Midland
(see Note 2). Holders of Exchangeable Shares receive dividend, voting, and
other rights equivalent to those of ML & Co. common stockholders.
Exchangeable Shares are exchangeable at any time, at the option of the
holder, on a one-for-one basis into ML & Co. common stock. Merrill Lynch may
redeem all outstanding Exchangeable Shares for ML & Co. common stock after
January 31, 2011, or earlier under certain circumstances.
8
- --------------------------------------------------------------------------------
Note 7. Common Stock
- --------------------------------------------------------------------------------
On April 14, 1998, stockholders approved an amendment of ML & Co.'s
certificate of incorporation to increase the authorized number of shares of
common stock from 500 million to 1 billion.
- --------------------------------------------------------------------------------
Note 8. Provision for Costs Related to Staff Reductions
- --------------------------------------------------------------------------------
Merrill Lynch recognized a $430 provision for costs related to staff
reductions ($288 after-tax) during the 1998 third quarter. The provision
covers primarily severance costs, but also includes costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. The staff reduction program includes reductions in the workforce
of approximately 3,400 personnel, or about 5% of the global workforce.
Approximately 25% of these reductions are producers in certain debt markets
and other Corporate and Institutional Client Group businesses. The remaining
reductions are in direct business support staff. In addition, full-time
equivalent consultants, mainly involved in technology projects, are being
reduced by approximately 900.
- --------------------------------------------------------------------------------
Note 9. Interest Expense
- --------------------------------------------------------------------------------
Interest expense includes payments in lieu of dividends of $2.8 and $5.2 for the
third quarters of 1998 and 1997, respectively. For the nine-month periods ended
September 25, 1998 and September 26, 1997, payments in lieu of dividends were
$15.6 and $13.4, respectively.
- --------------------------------------------------------------------------------
Note 10. Comprehensive Income
- --------------------------------------------------------------------------------
The components of comprehensive income (loss) are as follows:
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(164) $502 $915 $1,466
----- ---- ---- ------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (8) (44) (3) (52)
Net unrealized gains (losses) on investment
securities available-for-sale (9) 5 (9) 27
----- ---- ---- ------
Total other comprehensive loss, net (17) (39) (12) (25)
----- ---- ---- ------
Comprehensive income (loss) $(181) $463 $903 $1,441
===== ==== ==== ======
- ---------------------------------------------------------------------------------------------------------------------------
9
- --------------------------------------------------------------------------------
Note 11. Earnings Per Common Share
- --------------------------------------------------------------------------------
Information relating to earnings (loss) per common share computations
follows:
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ------------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (164) $ 502 $ 915 $ 1,466
Preferred stock dividends 9 9 28 29
-------- ------- ------- --------
Net earnings (loss) applicable to
common stockholders $ (173) $ 493 $ 887 $ 1,437
======== ======= ======= ========
- --------------------------------------------------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares outstanding 357,620 339,799 354,134 339,214
-------- ------- ------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 29,546 30,575 30,853 29,167
FCCAAP shares 16,232 21,124 16,710 20,773
Restricted units 5,023 5,352 4,947 5,043
ESPP shares 32 26 52 53
Convertible debt - - - 180
------- ------- ------- --------
Dilutive potential common shares 50,833 57,077 52,562 55,216
------- ------- ------- --------
Total weighted-average diluted shares 408,453 (3) 396,876 406,696 394,430
======= ======= ======= =======
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share $ (.49) $ 1.45 $ 2.50 $ 4.24
Diluted earnings (loss) per share (.49) (3) 1.24 2.18 3.64
- -----------------------------------------------------------------------------------------------------------------------------
(1) At September 25, 1998, there were 19,497 instruments that were considered
antidilutive and were not included in the above computations.
(2) See Note 9 in the Notes to Consolidated Financial Statements in the 1997
Annual Report for a description of these instruments.
(3) Since accounting principles require that a net loss not be diluted by
potential common shares, diluted loss per share for the 1998 third quarter
is calculated using weighted-average shares outstanding only.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Note 12. Derivatives and Other Commitments
- --------------------------------------------------------------------------------
Merrill Lynch enters into various derivative contracts to meet clients' needs
and to manage its own market risks. Derivative contracts often involve future
commitments to exchange interest payment streams or currencies (such as interest
rate and currency swaps or foreign exchange forwards) or to purchase or sell
other financial instruments at specified terms on a specified date. Options, for
example, can be purchased or written on a wide range of financial instruments
such as securities, currencies, futures, and various market indices.
10
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments. The notional or contractual amounts of derivatives used
for trading purposes by type of risk follow:
- -----------------------------------------------------------------------------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE CURRENCY PRICE PRICE
(in billions) RISK (1)(2) RISK (3) RISK RISK
- ------------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, 1998
------------------
Swap agreements $1,823 $172 $18 $ 5
Forward contracts 91 246 - 5
Futures contracts 256 5 7 3
Options purchased 223 119 76 3
Options written 178 122 65 4
DECEMBER 26, 1997
-----------------
Swap agreements $1,482 $159 $17 $ 2
Forward contracts 59 196 1 15
Futures contracts 202 1 15 2
Options purchased 99 71 60 3
Options written 133 73 44 3
- -----------------------------------------------------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread or default risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent "To
Be Announced" mortgage pools that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
- ----------------------------------------------------------------------------------------------------------------------------
The notional or contractual amounts of derivatives used to hedge exposure
related to borrowings or other non-trading activities follow:
- --------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in billions) 1998 1997
- --------------------------------------------------------------------------------------------------
Interest rate derivatives(1) $66 $53
Currency derivatives(1) 23 10
Equity derivatives 4 3
- --------------------------------------------------------------------------------------------------
(1) Includes swap contracts totaling $2 billion in notional amount that contain
embedded options hedging callable debt at both dates.
Most of these derivatives are entered into with Merrill Lynch's derivative
dealer subsidiaries, which intermediate interest rate, currency, and equity
risks with third parties in the normal course of their trading activities.
In the normal course of business, Merrill Lynch enters into underwriting
commitments, when-issued transactions, and commitments to extend credit.
Settlement of these commitments as of September 25, 1998 would not have a
material effect on the consolidated financial condition of Merrill Lynch.
11
- --------------------------------------------------------------------------------
Note 13. Regulatory Requirements
- --------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer and a subsidiary of ML & Co., is subject to the net capital
requirements of Rule 15c3-1 of the Securities Exchange Act of 1934. Under the
alternative method permitted by this rule, the minimum required net capital, as
defined, shall not be less than 2% of aggregate debit items arising from
customer transactions. At September 25, 1998, MLPF&S's regulatory net capital of
$3,263 was 14% of aggregate debit items, and its regulatory net capital in
excess of the minimum required was $2,796.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities and a subsidiary of ML & Co., is subject to the capital
adequacy requirements of the Government Securities Act of 1986. This rule
requires dealers to maintain liquid capital in excess of market and credit risk,
as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At September 25, 1998,
MLGSI's liquid capital of $1,484 was 217% of its total market and credit risk,
and liquid capital in excess of the minimum required was $661.
Merrill Lynch International ("MLI"), a registered U.K. broker-dealer and a
subsidiary of Merrill Lynch, is subject to the capital requirements of the
Securities and Futures Authority ("SFA"). Financial resources, as defined, must
exceed the total financial resources requirement of the SFA. At September 25,
1998, MLI's financial resources were $3,529 and exceeded the minimum requirement
by $904.
- --------------------------------------------------------------------------------
Note 14. Litigation Matters
- --------------------------------------------------------------------------------
An action was brought in the United States District Court for the Central
District of California by Orange County, California, which filed a bankruptcy
petition in the United States Bankruptcy Court for the Central District of
California on December 6, 1994, against ML & Co. and certain of its
subsidiaries in connection with Merrill Lynch's business activities with the
Orange County Treasurer-Tax Collector. In June 1998, an agreement to settle
this action was reached, which had no impact on the 1998 nine-month results
of operations. Execution of the terms of the settlement agreement, including
dismissal of the action, is conditioned upon court approval of an order
barring certain claims for contribution and indemnity. See Item 1, "Legal
Proceedings," in Part II of ML & Co.'s Quarterly Report on Form 10-Q for the
quarter ended June 26, 1998.
12
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 September
25, 1998, and the related condensed consolidated statements of earnings for
the three- and nine-month periods ended September 25, 1998 and September 26,
1997, and condensed consolidated statements of cash flows for the nine-month
periods ended September 25, 1998 and September 26, 1997. These financial
statements are the responsibility of the management of Merrill Lynch. The
accompanying condensed consolidated financial statements give retroactive
effect to the 1998 merger of Merrill Lynch and Midland Walwyn Inc., which has
been accounted for as a pooling-of-interests, as described in Note 2 to the
condensed consolidated financial statements.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch as of December 26,
1997, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 23, 1998, we expressed an
unqualified opinion on those consolidated financial statements. We also have
previously audited the consolidated financial statements of Midland Walwyn
Inc. for the year ended December 31, 1997, and in our report
dated February 17, 1998 we expressed an unqualified opinion on those
consolidated financial statements (not presented herein). We also audited the
adjustments to the condensed statements that were applied to restate the
December 26, 1997 consolidated balance sheet of Merrill Lynch (not presented
herein). In our opinion, such adjustments are appropriate and have been
properly applied and the information set forth in the accompanying condensed
consolidated balance sheet as of December 26, 1997 is fairly stated, in all
material respects, in relation to the restated consolidated balance sheet
from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
November 9, 1998
13
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, advisory,
insurance, and related services worldwide. Merrill Lynch conducts its
businesses in global financial markets that are influenced by numerous
unpredictable factors including economic conditions, monetary policies, the
liquidity of global markets, international and regional political events,
regulatory developments, the competitive environment, and investor sentiment.
These conditions or events can significantly affect the volatility of
financial markets. While greater volatility increases risk, it may also
increase order flow in businesses such as trading and brokerage. Revenues and
net earnings may vary significantly from period to period due to these
unpredictable factors and the resulting market volatility.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but
are not limited to, the factors listed in the previous paragraph hereof,
actions and initiatives taken by both current and potential competitors, the
impact of current, pending, and future legislation and regulation both in the
United States and throughout the world, and the other risks and uncertainties
detailed in the following sections. MERRILL LYNCH UNDERTAKES NO
RESPONSIBILITY TO UPDATE PUBLICLY OR REVISE ANY FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
Business Environment
- --------------------------------------------------------------------------------
Global financial markets experienced significant turmoil during the 1998 third
quarter, particularly in August and September, after mixed performances during
the first six months of the year. The collapse of the Russian economy, combined
with currency controls in Malaysia and delays in International Monetary Fund
support for Brazil, led to a "flight to quality" by investors. This credit
quality movement resulted in a significant increase in credit risk premiums, a
general absence of liquidity in emerging and other debt markets, and defaults by
certain highly leveraged counterparties, including hedge funds. These adverse
conditions significantly affected global debt markets, which suffered declines
during the 1998 third quarter and into the 1998 fourth quarter.
Credit spreads, which represent the risk premiums paid by issuers based on
credit rating or perception, widened significantly during the 1998 third quarter
relative to the corresponding 1997 period. The unprecedented movement in credit
spreads during the 1998 third quarter led to large valuation losses on debt
instruments in many global markets. These valuation losses were not offset by
the typical hedge for these instruments, U.S. Treasury securities, because the
market volatility reduced the effectiveness of these hedges.
Long-term U.S. interest rates, as evidenced by the yield on 30-year U.S.
Treasury bond, decreased during the 1998 third quarter to 4.96%, marking the
first time since 1967 that this rate fell below 5%. This decline resulted from
continued low inflation and the flight to quality, as well as low levels of
unemployment. Similar to long-term U.S. interest rates, European and Japanese
interest rates declined during the 1998 third quarter and were lower relative
to the 1997 third quarter.
14
During the 1998 third quarter, U.S. equity markets suffered their worst price
declines since 1990, primarily due to declining corporate earnings in certain
sectors and global financial unrest. These events precipitated a Dow Jones
Industrial Average market correction of 6.4%, or 513 points, on August 31,
the second largest point loss on record. Volatile market conditions
throughout the 1998 third quarter also led to record net outflows from mutual
funds in August, the first month in almost a decade when withdrawals exceeded
purchases. As a result of reduced investor confidence and market volatility,
the Dow Jones Industrial Average and Nasdaq Composite fell 12.4% and 10.6%,
respectively, from the end of the 1998 second quarter. Despite the U.S.
market volatility, commissions revenues industrywide were strong during the
1998 third quarter, reflecting near-record volumes.
Security prices in many global equity markets declined during the 1998 third
quarter, with the Dow Jones World Index (Registered Trademark) falling 12.6%
from the end of the 1998 second quarter and 4.3% from the corresponding 1997
period. Slower global earnings growth, combined with the collapse of the
Russian economy, led to continued declines in most non-U.S. markets,
particularly Russia, Asia, and Latin America. European markets, which had
strong performances throughout the first six months of 1998, also declined as
a result of these events. Despite third quarter declines, most European
markets were up significantly from the end of the 1997 third quarter.
Global underwriting volume decreased significantly during the 1998 third
quarter from first half 1998 levels as volatile market conditions led to a
significant decline in bond and equity issuances during the latter half of
August and throughout September. Despite this slowdown, underwriting fees for
the 1998 third quarter were higher compared with the corresponding 1997
period, due to strong debt and equity issuances in July.
Strategic services activities declined during the 1998 third quarter,
particularly in late August and throughout September, as deteriorating market
conditions made financing mergers and acquisitions more difficult.
Industrywide disclosed fees for mergers and acquisitions were down 50% from
the 1998 second quarter; 1998 third quarter industrywide revenues, however,
surpassed the amount recorded in the comparable 1997 period due to an
increase in the number of completed deals.
Subsequent to quarter end, a group of 14 financial institutions, including
Merrill Lynch, recapitalized Long-Term Capital Portfolio, L.P., a highly
leveraged hedge fund. The aggregate recapitalization of $3.6 billion, of which
Merrill Lynch contributed $300 million, was undertaken to avoid immediate
liquidation of the hedge fund's positions in an illiquid market and the likely
resulting market disruptions.
Due to the volatility of the financial services industry, Merrill Lynch
continually evaluates its businesses across varying market conditions for
profitability and alignment with long-term strategic objectives. Merrill Lynch
seeks to mitigate the effects of market downturns by expanding its global
presence, developing and maintaining long-term client relationships, monitoring
costs and risks, and continuing to diversify revenue sources.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as diminishing margins in many mature products and
services. In addition, the recent relaxation of banks' barriers to entry into
the securities industry and expansion by insurance companies into traditional
brokerage products, coupled with the potential repeal of the laws separating
commercial and investment banking activities in the future, have increased the
number of companies competing for a similar customer base.
15
- --------------------------------------------------------------------------------
Results of Operations
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED INCREASE (DECREASE)
---------------------------------------- 3Q98 VERSUS
SEPTEMBER 25, JUNE 27, SEPTEMBER 26, -------------------
(dollars in millions, except per share amounts) 1998 1998(1) 1997(1) 2Q98 3Q97
- -------------------------------------------------------------------------------------------------------------------------
Total revenues $8,712 $9,581 $8,338 (9.1)% 4.5%
Net revenues 3,849 4,855 4,142 (20.7) (7.1)
Pre-tax earnings (loss) (206) 918 789 (122.5) (126.2)
Net earnings (loss) (164) 551 502 (129.8) (132.6)
Net earnings (loss) applicable
to common stockholders (173) 541 493 (132.1) (135.2)
Earnings (loss) per common share
Basic (.49) 1.52 1.45 (132.2) (133.8)
Diluted (.49) 1.32 1.24 (137.1) (139.5)
- -------------------------------------------------------------------------------------------------------------------------
(1) Amounts have been restated to reflect the Midland Walwyn merger as
required under pooling-of-interests accounting.
The following discussion emphasizes the comparison between the third quarters of
1998 and 1997 and presents additional information comparing the nine-month
periods where appropriate.
Merrill Lynch reported a 1998 third quarter net loss of $164 million, which
included an after-tax provision for costs related to staff reductions of $288
million ($430 million pre-tax). Excluding the staff reduction provision, 1998
third quarter net earnings were $124 million. These results compare with net
earnings of $502 million in the 1997 third quarter and $551 million in the 1998
second quarter.
Excluding the staff reduction provision, earnings per common share were $.32
basic and $.28 diluted. Return on average common equity excluding the provision
was 4.8%. Earnings excluding the effects of goodwill amortization and the
after-tax staff reduction provision were $179 million for the 1998 third
quarter, or $.42 per diluted share.
The staff reduction program is designed to reduce expenses and selectively
resize certain Merrill Lynch businesses; management anticipates annual
savings of $500 million from the annualized level of fixed and semi-fixed
costs experienced during the 1998 third quarter. The program includes
reductions in the workforce through severance and attrition of approximately
3,400 personnel, or about 5% of Merrill Lynch's global workforce of
approximately 65,000. Approximately 25% of these reductions are producers in
certain debt markets and other Corporate and Institutional Client Group
businesses. The remaining reductions are in direct business support staff. In
addition, full-time equivalent consultants, mainly involved in technology
projects, are being reduced by approximately 900. The staff reduction
provision covers primarily severance costs, as well as costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. Despite these near-term staff reductions, Merrill Lynch will
continue to hire Financial Consultants and other producers in certain
business lines.
For the 1998 nine months, net earnings were $915 million, compared with $1.5
billion for the corresponding 1997 period. Nine-month earnings before the staff
reduction provision were $1.2 billion, down 18% from the 1997 nine months.
Year-to-date earnings per common share including and excluding the staff
reduction provision were $2.18 and $2.89, respectively, down from $3.64 in the
comparable 1997 period.
16
Despite difficult market conditions during the 1998 third quarter, Merrill Lynch
continued to execute its global strategy with the following initiatives:
- - the merger with Midland Walwyn Inc., Canada's largest independent
full-service securities firm;
- - the opening of 33 retail offices in Japan;
- - the purchase of a 51% interest in Phatra Securities Company Limited,
Thailand's leading investment bank; and
- - the announcement of an agreement to purchase Howard Johnson & Co., a
benefits consulting and actuarial firm, which was consummated subsequent to
quarter end.
These measures continue to enhance Merrill Lynch's global presence, and,
combined with other acquisitions including Mercury Asset Management ("Mercury"),
Smith New Court PLC, and McIntosh Securities Limited, are expected to further
Merrill Lynch's key strategic priorities.
Non-U.S. net revenues were approximately 21% of Merrill Lynch's total net
revenues in the 1998 third quarter, compared with approximately 27% in the 1997
third quarter, reflecting the volatility that has adversely affected most
non-U.S. markets. The percentage of net revenues for the 1998 third quarter and
nine months by strategic priority was as follows:
- --------------------------------------------------------------------------------
PERCENTAGE OF NET REVENUES BY STRATEGIC PRIORITY
- --------------------------------------------------------------------------------
[PIE CHARTS]
1998 1998
Third Quarter Nine Months
------------- -----------
U.S. Private Client 50% 43%
Corporate and
Institutional Client 28% 38%
Asset Management 13% 11%
International
Private Client 9% 8%
- --------------------------------------------------------------------------------
Commissions revenues are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
Listed and over-the-counter $ 818 $ 730 12% $2,386 $2,044 17%
Mutual funds 445 430 4 1,442 1,170 23
Other 186 168 11 547 477 15
------ ------ ------ ------
Total $1,449 $1,328 9 $4,375 $3,691 19
====== ====== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
Commissions revenues remained at near-record levels as a result of record global
listed securities volume and increased mutual fund activity. Listed securities
revenues benefited from increased trading volumes on most European and U.S.
stock exchanges.
17
Significant components of interest and dividend revenues and interest expense
follow:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- --------------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Trading assets $1,392 $1,352 $ 4,126 $ 3,925
Resale agreements 1,550 1,191 4,298 3,277
Securities borrowed 786 853 2,643 2,683
Margin lending 712 601 2,105 1,569
Other 639 450 1,731 1,280
------ ------ ------- -------
Total 5,079 4,447 14,903 12,734
------ ------ ------- -------
INTEREST EXPENSE
Repurchase agreements 1,887 1,409 5,037 3,774
Borrowings 1,458 1,264 4,250 3,331
Trading liabilities 673 761 2,160 2,271
Securities loaned 389 408 1,428 1,616
Other 456 354 1,340 950
------ ------ ------- -------
Total 4,863 4,196 14,215 11,942
------ ------ ------- -------
NET INTEREST AND DIVIDEND PROFIT $ 216 $ 251 $ 688 $ 792
====== ====== ======= =======
- -------------------------------------------------------------------------------------------------------------------------
Interest and dividend revenues and expenses are a function of the level and mix
of interest-earning assets and interest-bearing liabilities and the prevailing
level, term structure, and volatility of interest rates. Net interest and
dividend profit decreased 14% from the 1997 third quarter, primarily due to
additional financing costs related to the Mercury acquisition.
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate and
currency characteristics of the borrowings to the assets funded by borrowing
proceeds. The effect of this hedging activity, which is included in "Borrowings"
above, increased interest expense by $52 million and $14 million for the 1998
and 1997 third quarters and by $120 million and $15 million for the 1998 and
1997 nine months, respectively.
Principal transactions revenues were $279 million in the 1998 third quarter,
down 71% from the 1997 corresponding period, reflecting significant economic
turmoil in global debt markets. Losses in most fixed-income and credit-sensitive
products and lower revenues in interest rate and currency swaps and foreign
exchange contracts were partially offset by higher revenues from non-U.S.
equities.
18
The following table provides information on aggregate trading revenues,
including related net interest. Interest revenue and expense amounts are based
on financial reporting categories and management's assessment of the cost to
finance trading positions, after consideration of the underlying liquidity of
these positions.
- -------------------------------------------------------------------------------------------------------------------------
PRINCIPAL NET INTEREST NET
TRANSACTIONS REVENUES TRADING
REVENUES (EXPENSES) REVENUES
---------------- --------------- ---------------
(in millions) 1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
THIRD QUARTER
- -------------
Taxable fixed-income $ (368) $ 216 $ 14 $ 38 $ (354) $ 254
Equities and equity derivatives 341 327 (27) (26) 314 301
Interest rate and currency swaps 179 297 (56) (52) 123 245
Municipals 83 73 3 3 86 76
Foreign exchange and commodities 44 51 2 2 46 53
------ ------ ----- ----- ------ ------
Total $ 279 $ 964 $ (64) $ (35) $ 215 $ 929
====== ====== ===== ===== ====== ======
NINE MONTHS
- -----------
Taxable fixed-income $ (48) $ 876 $ 155 $ 203 $ 107 $1,079
Equities and equity derivatives 1,233 1,079 (81) (73) 1,152 1,006
Interest rate and currency swaps 889 894 (179) (153) 710 741
Municipals 224 239 15 11 239 250
Foreign exchange and commodities 141 123 47 7 188 130
------ ------ ----- ----- ------ ------
Total $2,439 $3,211 $ (43) $ (5) $2,396 $3,206
====== ====== ===== ===== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
Trading and related hedging and financing activities affect the recognition of
both principal transactions revenues and net interest and dividend profit. In
assessing the profitability of its trading activities, Merrill Lynch aggregates
net interest and principal transactions revenues. For financial reporting
purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest profit, depending on the nature
of the specific instruments. Changes in the composition of trading inventories
and hedge positions can cause the recognition of revenues within these
categories to fluctuate.
Taxable fixed-income trading losses were $368 million during the 1998 third
quarter, down 270% from the 1997 third quarter revenues, primarily due to
lower revenues from corporate and emerging market bonds and non-U.S.
governments and agencies securities. Many of these instruments were
significantly impacted by an unprecedented widening of credit spreads and a
virtual absence of liquidity. Revenues from these instruments were also
affected by the reduced effectiveness of U.S. Treasury hedges caused by
market volatility. Slightly offsetting these decreases were positive results
in U.S. Government and agencies revenues as investors sought higher quality
debt instruments.
Equities and equity derivatives trading revenues were $341 million, up 4% from
the 1997 third quarter due to sharply higher revenues from non-U.S. equities,
particularly in Europe. Revenues from U.S. equities declined modestly from the
1997 third quarter, but were up from the 1998 second quarter.
Interest rate and currency swap trading revenues declined 40% to $179 million
as a result of credit losses, including counterparty default, on emerging
market and credit derivatives. Municipal securities trading revenues were up
14% to $83 million due to higher customer demand. Foreign exchange and
commodities trading revenues declined 15% to $44 million, primarily due to
fluctuations in the U.S. dollar versus the Malaysian ringgit, Indonesian
rupiah, and Thai baht.
19
Investment banking revenues were down 2% from the 1997 third quarter to $711
million in the 1998 third quarter as a decline in underwriting was substantially
offset by an increase in strategic services fees. A summary of Merrill Lynch's
investment banking revenues follows:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. (DEC.) 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
Underwriting $384 $473 (19)% $1,648 $1,431 15%
Strategic services 327 251 31 792 584 36
---- ---- ------ ------
Total $711 $724 (2) $2,440 $2,015 21
==== ==== ====== ======
- -----------------------------------------------------------------------------------------------------------------------
Underwriting revenues in the 1998 third quarter were $384 million, down 19% from
1997 third quarter levels. An industrywide slowdown in debt and equity issuances
resulting from global market volatility led to lower revenues, particularly from
high-yield and equity products. Merrill Lynch maintained its position as the
leading underwriter of total U.S. and global debt and equity offerings for the
1998 third quarter. Merrill Lynch's underwriting market share information based
on transaction value follows:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
-------------------- --------------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 14.8% 1 16.0% 1
Equity 12.3 2 12.8 2
Debt and Equity 15.2 1 15.8 1
GLOBAL PROCEEDS
Debt 13.4 1 13.4 1
Equity 9.5 4 10.5 3
Debt and Equity 13.6 1 13.3 1
- -------------------------------------------------------------------------------------------------------------------------
Source: Securities Data Co. ("SDC") statistics based on full credit to book
manager.
For the 1998 nine months, Merrill Lynch ranked No. 1 in both U.S. and global
debt and equity underwritings.
Strategic services fees advanced to a record $327 million in the 1998 third
quarter, benefiting from an increase in completed merger and acquisition
transactions compared to the corresponding 1997 period. Merrill Lynch
continued to lead the industry in U.S. completed mergers and acquisitions for
both the 1998 third quarter and year-to-date periods.
20
Merrill Lynch's merger and acquisition market share information for the 1998 and
1997 third quarters based on transaction value follows:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------
SEPTEMBER 25, 1998 SEPTEMBER 26, 1997
------------------ ------------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------------------------------------------
COMPLETED TRANSACTIONS
U.S. 41.5% 1 38.8% 1
Global 29.9 2 25.6 1
ANNOUNCED TRANSACTIONS
U.S. 47.1 2 24.1 2
Global 33.5 2 14.5 4
- -------------------------------------------------------------------------------------------------------------------------
Source: SDC statistics based on full credit to both target and acquiring
companies' advisors.
Merrill Lynch's asset management and portfolio service fees are summarized
below:
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 25, SEPTEMBER 26, % SEPTEMBER 25, SEPTEMBER 26, %
(in millions) 1998 1997 INC. (DEC.) 1998 1997 INC.
- -------------------------------------------------------------------------------------------------------------------------
Asset management fees(1) $501 $319 57% $1,553 $ 903 72%
Portfolio service fees 310 219 41 850 586 45
Account fees 110 104 5 344 322 7
Other fees 74 89 (17) 266 252 6
---- ---- ------ -----
Total $995 $731 36 $3,013 $2,063 46
==== ==== ====== ======
- -------------------------------------------------------------------------------------------------------------------------
(1) Approximately three-quarters of the increases in asset management fees is
attributable to the Mercury acquisition.
Total assets in client accounts or under management increased $275 billion from
the end of the 1997 third quarter to $1.3 trillion at the end of the 1998 third
quarter. The changes in these balances are described as follows:
- -------------------------------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
-------------------------
SEPTEMBER 26, NEW ASSET SEPTEMBER 25,
(in billions) 1997 MONEY(1) DEPRECIATION 1998
- -------------------------------------------------------------------------------------------------------------------------
Total assets in client accounts or
under management $1,044 $ 276 $ (1) $1,319
Total assets under management 274 205 (12) 467
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes $167 billion of assets related to the fourth quarter 1997
acquisition of Mercury.
Asset management fees significantly increased from the 1997 third quarter due
to growth in assets under management, primarily from the acquisition of
Mercury. Both assets under management and total assets in client accounts or
under management increased sharply from the end of the 1997 third quarter,
but were down from the end of the 1998 second quarter due to declines in net
asset values caused by global market downturns. Portfolio service fees were
considerably higher than the corresponding 1997 period due to increased
revenues from various fee-based products including Merrill Lynch
Consults(Registered Trademark), Financial Advantage(Service Mark), Mutual
Fund Advisor(Service Mark), and Asset Power(Registered Trademark). Account
fees rose due to an increase in the number of customer accounts. Other
fee-based revenues were down primarily due to lower revenues from
mortgage-related activities, attributable in part to the sale of a
controlling interest in a real estate services subsidiary (see discussion in
the next paragraph).
21
Other revenues were up 38% from the 1997 third quarter to $199 million in the
1998 third quarter, attributable in part to a gain on the sale of a majority
interest in Lender's Service, Inc., a residential real estate services
provider.
Merrill Lynch's non-interest expenses are summarized below. Certain of these
expenses have been reclassified from prior periods to conform to the current
period presentation.
- -------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------ ----------------------------
SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26,
(in millions) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Compensation and benefits $2,010 $2,101 $ 6,956 $6,281
------ ------ ------- ------
Non-interest expenses,
excluding compensation and benefits:
Communications and technology 487 328 1,311 920
Occupancy and related depreciation 227 188 645 548
Professional fees 165 131 459 398
Advertising and market development 203 148 580 456
Brokerage, clearing, and exchange fees 186 143 509 383
Goodwill amortization 55 16 165 47
Provision for costs related to staff reductions 430 - 430 -
Other 292 298 809 837
------ ------ ------- ------
Total non-interest expenses,
excluding compensation and benefits 2,045 1,252 4,908 3,589
------ ------ ------- ------
Total non-interest expenses $4,055 $3,353 $11,864 $9,870
====== ====== ======= ======
Compensation and benefits
as a percentage of net revenues 52.2% 50.7% 51.7% 51.3%
Compensation and benefits as a percentage of
pre-tax earnings before compensation and benefits 90.0%(1) 72.7% 77.4%(1) 72.6%
- -------------------------------------------------------------------------------------------------------------------------
(1) Excludes provision for costs related to staff reductions.
Non-interest expenses increased 21% from the 1997 third quarter to $4.1
billion. Excluding the staff reduction provision, $78 million of costs
related to the launch of Merrill Lynch Japan Securities Co. ("MLJS"), and
goodwill amortization, non-interest expenses rose 5%. Non-interest expenses
excluding the staff reduction provision decreased 8% from the 1998 second
quarter.
Compensation and benefits, the largest expense category, was down 4% from the
1997 third quarter to $2.0 billion. Lower incentive compensation from reduced
profitability was partially offset by higher Financial Consultant
productivity and increased headcount attributable in part to recent
acquisitions. Compensation and benefits expense was 52.2% of net revenues in
the 1998 third quarter, compared with 50.7% in the corresponding 1997 period.
Headcount increased by approximately 7,500 employees since the end of the
1997 third quarter, resulting in 64,800 employees at the end of the 1998
third quarter. This increase, which does not reflect staff reductions
associated with business resizing, is attributable to Merrill Lynch's recent
acquisitions and strategic business expansion.
Communications and technology expense was $487 million, up 49% from the 1997
third quarter because of increased systems consulting costs related to the Year
2000 and European Monetary Union initiatives, and higher technology-related
depreciation. Occupancy and related depreciation expense rose 21% to $227
million as a result of global expansion, including a combined total of $23
million associated with MLJS and Mercury.
22
Professional fees increased 25% to $165 million due in part to higher costs for
various strategic market studies and one-time integration costs for Midland
Walwyn. Advertising and market development expense was $203 million, up 37% from
the 1997 third quarter as a result of higher sales promotion and recognition
program costs and increased travel. Brokerage, clearing, and exchange fees rose
31% to $186 million, primarily due to $28 million in custody and clearing costs
for Mercury. Goodwill amortization, a non-cash expense, increased from $16
million in the 1997 third quarter to $55 million in the 1998 third quarter as a
result of the Mercury acquisition. Other expenses were $292 million in the 1998
third quarter, down 2% from the comparable 1997 period.
The income tax benefit was $75 million for the 1998 third quarter as compared
with expense of $275 million in the year-ago period. The effective tax rate was
36.4% in the 1998 third quarter compared with 34.8% in the corresponding 1997
period.
Subsequent to quarter end, Merrill Lynch announced that it entered into an
agreement to sell its New York Stock Exchange specialist business. The sale,
subject to various regulatory approvals and other conditions, is expected to
be completed in the 1998 fourth quarter.
- --------------------------------------------------------------------------------
Liquidity and Liability Management
- --------------------------------------------------------------------------------
The primary objective of Merrill Lynch's funding policies is to assure liquidity
at all times. Merrill Lynch's liquidity management strategy has three key
objectives:
1. Maintain alternative funding sources such that all debt obligations
maturing within one year can be repaid when due without issuing new
unsecured debt or liquidating any business assets;
2. Concentrate unsecured, general purpose borrowings at the ML & Co. level;
and
3. Expand and diversify Merrill Lynch's funding programs.
Merrill Lynch's primary alternative funding sources to unsecured borrowings
are repurchase agreements and secured bank loans, which require pledging
unhypothecated marketable securities. Other funding alternatives include
liquidating cash equivalents; securitizing loan assets; and drawing on
committed, unsecured bank credit facilities that, at September 25, 1998,
totaled $6.9 billion and were not drawn upon. To finance the purchase of
Mercury, Merrill Lynch obtained additional short-term bank credit facilities
totaling 2.0 billion British pounds (approximately $3.3 billion), which were
drawn upon and repaid in full during the 1998 first half from the proceeds of
long-term financings.
Merrill Lynch regularly reviews the level and mix of its assets and
liabilities to assess its ability to conduct core business activities without
issuing new unsecured debt or drawing upon its bank credit facilities. The
mix of assets and liabilities provides flexibility in managing liquidity
since a significant portion of assets turns over frequently and is typically
match-funded with liabilities having similar maturities and cash flow
characteristics. At September 25, 1998, a significant portion of Merrill
Lynch's assets were considered readily marketable by management.
Merrill Lynch concentrates its unsecured, general purpose borrowings at the
ML & Co. level, except where tax regulations, time zone differences, or other
business considerations make this impractical. The benefits of this strategy
are enhanced control, reduced financing costs, wider name recognition by
creditors, and enhanced flexibility to meet variable funding requirements of
subsidiaries.
Merrill Lynch also strives to expand and diversify its funding programs and
investor and creditor base. Merrill Lynch benefits by distributing most of
its debt through its own sales force to a large, diversified customer base.
Additionally, Merrill Lynch maintains strict concentration standards for
short-term borrowings, including limits for any single investor.
23
Commercial paper is the major source of short-term general purpose funding.
Commercial paper outstanding totaled $27.2 billion at September 25, 1998 and
$30.4 billion at December 26, 1997, which was equal to 8% and 10% of total
assets at third quarter-end 1998 and year-end 1997, respectively. Commercial
paper outstanding at September 25, 1998 decreased $8 billion from the end of the
1998 second quarter as a result of the increased use of repurchase agreements,
securities loaned transactions, and long-term borrowings, combined with reduced
asset levels.
Outstanding long-term debt at September 25, 1998 increased to $55.1 billion from
$43.1 billion at December 26, 1997. Major components of the change in long-term
debt for the 1998 nine months follow:
- --------------------------------------------------------------------------------
(in millions)
- --------------------------------------------------------------------------------
Balance at December 26, 1997 $ 43,143
Issuances and resales 22,611
Settlements and repurchases (11,052)
Other 362
--------
Balance at September 25, 1998 (1) $ 55,064
========
- ------------------------------------------------------------------------------
(1) At the end of the 1998 third quarter, $41.8 billion of long-term debt had
maturity dates that extend beyond one year.
Approximately $83.7 billion of indebtedness at September 25, 1998 is considered
senior indebtedness as defined under various indentures.
At September 25, 1998, Merrill Lynch's senior long-term debt, preferred
stock, and Trust Originated Preferred Securities (Service Mark)
("TOPrS" (Registered Trademark)) were rated by recognized credit rating agencies
as follows:
- -------------------------------------------------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPRS
RATING AGENCY RATINGS RATINGS
- -------------------------------------------------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA, Inc. AA AA-
Japan Rating & Investment Information, Inc. AA Not Rated
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- -------------------------------------------------------------------------------------------------------------------------
As part of an overall liquidity management strategy, Merrill Lynch's insurance
subsidiaries regularly review the funding requirements of their contractual
obligations for in-force, fixed-rate life insurance and annuity contracts as
well as expected future acquisition and maintenance expenses for all contracts.
The insurance subsidiaries market primarily variable life insurance and variable
annuity products. These products are not subject to the interest rate,
asset/liability matching, or credit risks attributable to fixed-rate products,
thereby reducing the insurance subsidiaries' risk profile and liquidity demands.
At September 25, 1998, approximately 81% of invested assets of insurance
subsidiaries were considered readily marketable by management.
24
- --------------------------------------------------------------------------------
Capital Resources and Capital Adequacy
- --------------------------------------------------------------------------------
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $9.4 billion in
common equity and $425 million in preferred stock at September 25, 1998. In
January and June 1998, certain subsidiaries of ML & Co. issued $750 million
and $400 million of perpetual TOPrS, respectively. These subsidiary-issued
preferred securities, in addition to $627 million in outstanding preferred
securities of other subsidiaries, further strengthen Merrill Lynch's equity
capital base. Subsequent to the 1998 third quarter end, $850 million of
perpetual TOPrS were issued by a subsidiary.
During the 1998 third quarter, Merrill Lynch acquired the outstanding shares of
Midland Walwyn. A combination of ML & Co. common stock and exchangeable
shares of a subsidiary was issued as consideration, resulting in a $210 million
increase to common equity (see Notes 2 and 6 to the Consolidated Financial
Statements - Unaudited for further information).
Merrill Lynch's leverage ratios were as follows:
- -------------------------------------------------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO (1) RATIO (2)
- -------------------------------------------------------------------------------------------------------------------------
PERIOD-END
September 25, 1998 30.5x 18.5x
December 26, 1997 32.4x 20.7x
AVERAGE (3)
Nine months ended September 25, 1998 35.0x 20.0x
Year ended December 26, 1997 35.3x 21.3x
- -------------------------------------------------------------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less (a) securities received as collateral, net of securities
pledged as collateral, (b) securities pledged as collateral, (c)
receivables under (i) resale agreements and (ii) securities borrowed
transactions, to total stockholders' equity and preferred securities issued
by subsidiaries.
(3) Computed using month-end balances.
Overall capital needs are continually reviewed to ensure that Merrill Lynch's
capital base can support the estimated risks of its businesses as well as the
regulatory and legal capital requirements of its subsidiaries. Statistic-based
product risk models are used to estimate potential losses arising from market
and credit risks. These models incorporate changes in business risk into Merrill
Lynch's equity requirements. Based upon these analyses and other criteria,
management believes that Merrill Lynch's capital base of $11.6 billion is
adequate.
There were no common stock repurchases during the 1998 three- and nine-month
periods; Merrill Lynch repurchased 0.2 and 13.6 million shares of common stock
during the corresponding 1997 periods. In July 1998, Merrill Lynch rescinded its
share repurchase authority in order to facilitate pooling-of-interests
accounting for the Midland Walwyn merger.
Merrill Lynch operates in many regulated businesses that require various minimum
levels of capital (see Note 13 to the Consolidated Financial Statements -
Unaudited). Merrill Lynch's broker-dealer, banking, insurance, and futures
commission merchant activities are subject to regulatory requirements that may
restrict the free flow of funds to affiliates. Regulatory approval is generally
required for paying dividends in excess of certain established levels, making
affiliated investments, and entering into management and service agreements with
affiliated companies.
25
- --------------------------------------------------------------------------------
Capital Projects and Expenditures
- --------------------------------------------------------------------------------
Merrill Lynch continually prepares for the future by expanding its operations
and investing in new technology to improve service to clients. To support
business expansion, for example, Merrill Lynch is building a new European
headquarters in London with expected costs of approximately $650 million; $125
million has been spent to date related primarily to land. Completion of this
facility is expected to occur in 2001. During 1997, Merrill Lynch approved a
plan to construct an office complex in central New Jersey to consolidate certain
operations. Construction costs are estimated at approximately $325 million, and
completion of this facility is anticipated in 2000.
Significant technology initiatives include Trusted Global Advisor (Service
Mark) ("TGA" (Service Mark)) and Year 2000 and European Economic and Monetary
Union systems compliance. The TGA system, a technology platform which is now
available to virtually all Financial Consultants, was completed during the
1998 third quarter. In the future, new system applications and system
upgrades will continue to be added to the platform as necessary.
- --------------------------------------------------------------------------------
Year 2000 Compliance
As the millennium approaches, Merrill Lynch has undertaken initiatives to
address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly interpret the year
as 1900. Left uncorrected, the Y2K problem may cause information technology
systems (e.g., computer databases) and non-information technology systems
(e.g., elevators) to produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal Y2K
problem and that the company is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. Merrill Lynch
expects the renovation phase (as discussed below) of its Year 2000 efforts to
be substantially completed by January 31, 1999, thereby allowing the company
to focus on additional testing efforts and integration of the Year 2000
programs of recent acquisitions during the remainder of the year. In order to
focus attention on the Y2K problem, management has deferred certain other
technology projects; however this deferral is not expected to have a material
adverse effect on the company's business, rseults of operations, or financial
condition.
The failure of Merrill Lynch's technology systems relating to a Y2K problem
would likely have a material adverse effect on the company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies,
and other assets. The Y2K problem could also increase Merrill Lynch's
exposure to risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative, which
is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been
organized into six segments or phases: planning, pre-renovation, renovation,
production testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000 Compliance
Initiative, including its annual budget and strategy, and determining the
level of expert knowledge available within Merrill Lynch regarding particular
systems or applications. The pre-renovation phase involved developing a
detailed enterprisewide inventory of applications and systems, identifying
the scope of necessary renovations to each application or system, and
establishing a conversion schedule. During the renovation phase, source
codes are
26
actually converted, date fields are expanded or windowed (windowing is used
on an exception basis only), test data is prepared, and each system or
application is tested using a variety of Year 2000 scenarios. The production
testing phase validates that a renovated system is functionally the same as
the existing production version, that renovation has not introduced defects,
and that expanded or windowed date fields continue to handle current dates
properly. The certification phase validates that a system can run
successfully in a Year 2000 environment. Finally, the integration testing
phase, which will occur throughout 1999, validates that a system can
successfully interface with both internal and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has
been accomplished by Merrill Lynch employees, with the assistance of
consultants where necessary.
As part of the production testing and certification phases, Merrill Lynch has
performed, and will continue to perform, both internal and external Year 2000
testing intended to address the risks from the Y2K problem. In July 1998,
Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates
in December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also participated in a test sponsored by the Bank
of England's Central Gilts Office.
Each business area within Merrill Lynch also continues to develop specific
contingency plans, with the particular choice of contingency action dependent
on the severity of the problem being addressed, the availability of
alternative products, and the level of importance of the business activity
supported by the problematic system. As part of the Year 2000 Compliance
Initiative, Merrill Lynch has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order to
develop plans to reduce risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with whom it has
important relationships that may be associated with information technology Y2K
problems, as well as parties with whom it has important relationships that may
be associated with non-information technology Y2K problems, such as landlords.
Management is unable, at this point, to ascertain whether all such third
parties will successfully address the Y2K problem, particularly parties
outside the U.S., where it is believed that remediation efforts relating to
the Y2K problem may be less advanced than in the U.S. Merrill Lynch will
continue to monitor third parties' Year 2000 readiness to determine whether
additional or alternative measures are necessary. Such measures may include
the selection of alternate third parties or other efforts designed to mitigate
some of the effects of a third party's noncompliance. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation efforts will be
successful. The failure of securities exchanges, clearing organizations,
vendors, clients, or regulators to resolve their own processing issues in a
timely manner could have a material adverse effect on Merrill Lynch's business,
results of operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated to the
Year 2000 Compliance Initiative. As of the end of the 1998 third quarter, the
total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160
million is remaining. The majority of these remaining expenditures are
expected to cover software remediation, testing, and contingency planning.
There can be no assurance that the costs associated with such remediation
efforts will not exceed those currently anticipated by Merrill Lynch, or that
the costs associated with the remediation efforts or the possible failure of
27
such remediation efforts would not have a material adverse effect on Merrill
Lynch's business, results of operations, or financial condition.
- ------------------------------------------------------------------------------
European Economic and Monetary Union ("EMU") Initiatives
As of January 1, 1999, the "euro" will be adopted as the common legal
currency of participating member states of the EMU. The euro and
participating member currencies will co-exist through July 1, 2002, with the
euro gradually replacing member national currencies. The introduction of and
conversion to the euro is expected to have significant implications for the
business, as well as the computer systems and operational processes, of
Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the European financial markets, including the
creation of a unified, more liquid capital market in Europe. As financial
markets in EMU member states converge and local barriers are removed,
competition is expected to increase. Merrill Lynch does not expect the
introduction of the euro to have a negative effect on its business, currency
risk, or competitive positioning in the European markets. The International
Swaps and Derivatives Association, Inc. has established an EMU protocol
agreement that parties to derivatives contracts may use to amend their
agreements to ensure continuity of contract during the conversion period.
Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to the
euro and the associated systems and operational implications and challenges
has been divided into three phases: analysis, mobilization, and
implementation. The analysis phase began in the third quarter of 1997 and
focused upon analyzing the likely implications of the EMU and assessing the
operational and systems impact on Merrill Lynch. During this phase, a
database containing the primary compliance challenges of the EMU was
developed, and working groups were established to drive the EMU preparation
effort within the different product lines and principal operating locations.
The mobilization phase began in the fourth quarter of 1997 and focused upon
developing project plans and establishing an organizational and project
structure to address various business requirements. The implementation phase,
which began in December 1997, is concerned with implementing the operational
and systems changes identified as necessary to ensure Merrill Lynch's
compliance with EMU. The implementation phase is expected to continue into
the first quarter of 1999 to resolve any post-conversion issues.
With respect to operational and systems matters, the introduction of the euro
will affect all Merrill Lynch facilities that transact, distribute, or
provide custody or recordkeeping for securities or cash denominated in the
currency of a participating member state. Merrill Lynch systems or procedures
that handle such securities or cash may require modification. The procedural
and systems modifications that Merrill Lynch has identified as necessary for
conversion to the euro include, but are not limited to, such activities as:
- modification of application systems to enable the systems to recognize
and process the euro on an ongoing basis;
- conversion of data, which will require updates to master files to
reflect redenomination;
- alteration of transaction data that includes converting trading and
cash positions from member currency to the euro;
- procedural modifications to reflect the replacement of member currency
bank accounts and settlement instructions with euro equivalents; and
- development of the capability for certain business functions to
translate member currencies into euro at a fixed exchange rate until
July 2002.
28
The introduction of the euro exposes Merrill Lynch to operational and systems
risks in that the necessary systems modifications will affect clearance,
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper
accounting for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent on
the euro-compliance of third parties, such as trading counterparties,
financial intermediaries (for example, securities and commodities exchanges,
depositories, clearing organizations, and commercial banks), and vendors.
Merrill Lynch will monitor risks associated with third parties on a regular
basis, including, for example, performing assessments of counterparties'
readiness.
In anticipation of the introduction of the euro, the financial authorities
and securities exchanges of certain of the EMU member states are conducting
market tests to assess euro-conversion readiness. Merrill Lynch is
participating in such testing procedures as required, and to date the outcome
of each of those tests has been satisfactory. In addition to participating in
the testing procedures of the EMU member states' financial authorities and
securities exchanges, Merrill Lynch also is implementing its own internal
testing procedures, including four systemwide practice sessions, to prepare
for the conversion. The purpose of these practice sessions is to better
ensure that the conversion plans are comprehensive and that the schedule is
acceptable. The results of such practice sessions will be evaluated and used
to identify those areas in which further modification or remediation is
necessary. While Merrill Lynch will engage in these testing procedures,
certain elements of the conversion process can only be undertaken for the
first time during the conversion. Accordingly, there can be no assurances
that the tests will identify all system deficiencies and necessary
modifications prior to the conversion.
Due to the unprecedented scale of change, including the volume and magnitude
of transactions affected and the number of third parties involved, market
participants are anticipating a period of some disruption immediately
following the conversion. Merrill Lynch has developed, and is continuing to
develop, contingency plans in an effort to reduce the impact of such
disruptions on its business.
As of the end of the 1998 third quarter, the total estimated expenditures
associated with the introduction of and conversion to the euro are expected
to be approximately $79 million, of which approximately $20 million is
remaining (of these amounts, $71 million and $19 million, respectively,
pertain to 1998). These remaining expenditures are expected to be spent on
EMU compliance efforts and project administration. Merrill Lynch expects to
become fully EMU-compliant during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those systems and
operational modifications necessary for the conversion to the euro and is in
the process of implementing the identified modifications. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will
not have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
29
- --------------------------------------------------------------------------------
Risk Management
- --------------------------------------------------------------------------------
As discussed more fully in Merrill Lynch's 1997 Annual Report on Form 10-K,
Merrill Lynch's Global Risk Management Group and Credit Division provide
independent risk management oversight to supplement the risk management
procedures performed at the business unit level.
The turmoil in global debt markets during the 1998 third quarter resulted in
unprecedented volatility, as noted in the preceding sections of this
Management's Discussion and Analysis. Unprecedented volatility reduces the
effectiveness of risk measurement models that predict current market risk
exposure based on historical volatilities and statistical analysis, such as
value-at-risk.
For instance, prior to this recent market volatility, the largest widening of
credit spreads in emerging markets ever experienced over a period of
approximately one month was approximately 200 basis points, including during
the peso crisis in 1994. In contrast, emerging markets spreads recently
widened by approximately 900 basis points in a three-week period. A common
risk measurement tool such as value-at-risk, even using a 99% confidence
level, would only have considered a widening of approximately 200 basis
points.
Merrill Lynch continuously reviews and assesses its risk management policies
and procedures and risk measurement models in order to improve firmwide risk
management capabilities. Subsequent to quarter end, management of the Global
Risk Management Group and the Credit Division has been consolidated under a
single head of Global Risk and Credit Management.
- --------------------------------------------------------------------------------
Average Assets and Liabilities
- --------------------------------------------------------------------------------
Merrill Lynch monitors changes in its balance sheet using average daily balances
that are determined on a settlement date basis and reported for management
information purposes. Financial statement balances are recorded on a trade date
basis as required under generally accepted accounting principles. The following
discussion compares changes in settlement date average daily balances. These
changes were consistent with the growth in the financial statement balances from
fourth quarter 1997 to third quarter 1998.
For the first nine months of 1998, average total assets were $387 billion, up
27% from $304 billion for the 1997 fourth quarter. Average total liabilities
rose 27% to $375 billion from $295 billion for the 1997 fourth quarter. The
major components in the growth of average total assets and liabilities for the
first nine months of 1998 are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------
(in millions) INCREASE GROWTH
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE ASSETS
Trading assets $32,170 28%
Securities pledged as collateral 19,179 N/M
Receivables under resale agreements
and securities borrowed transactions 16,924 14
Goodwill 4,882 N/M
- -------------------------------------------------------------------------------------------------------------------------
AVERAGE LIABILITIES
Obligation to return securities
received as collateral $36,221 N/M
Payables under repurchase agreements
and securities loaned transactions 22,282 22%
Trading liabilities 8,792 14
Long-term borrowings 7,465 18
- -------------------------------------------------------------------------------------------------------------------------
N/M - Not meaningful.
30
Statement of Financial Accounting Standards ("SFAS") No. 127 requires Merrill
Lynch to recognize collateral on certain resale and repurchase agreements. Due
to the adoption of SFAS No. 127, trading assets and securities pledged as
collateral increased $17 billion and $19 billion, respectively. The offset to
the growth in average assets was a $36 billion increase in the obligation to
return securities received as collateral (for more information on SFAS No. 127,
see Note 3 to the Consolidated Financial Statements - Unaudited).
In addition, during the nine months of 1998, trading assets and liabilities
(which include on-balance-sheet hedges used to manage trading risks) rose as
volume increased, benefiting from higher customer demand. Receivables under
resale agreements and securities borrowed transactions and payables under
repurchase agreements and securities loaned transactions rose to meet higher
funding requirements for increased trading activity. These transactions also
increased as a result of expanded matched-book activity, primarily involving
non-U.S. governments and agencies securities. Goodwill was higher primarily
as a result of the Mercury acquisition.
Assets are funded through diversified sources which include repurchase
agreements and securities loaned transactions, commercial paper and other
unsecured short-term borrowings, long-term borrowings, preferred securities
issued by subsidiaries, and equity. In addition to the increase in repurchase
agreements and securities loaned transactions, the growth in average assets was
funded by higher long-term borrowings, particularly medium-term notes.
- --------------------------------------------------------------------------------
Non-Investment Grade Holdings and Highly Leveraged Transactions
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
- --------------------------------------------------------------------------------
Non-Investment Grade Holdings
In the normal course of business, Merrill Lynch underwrites, trades, and
holds non-investment grade cash instruments in connection with its investment
banking, market-making, and derivative structuring activities. Non-investment
grade trading inventories have generally continued to increase to satisfy
growing client demand for higher-yielding investments, including emerging
market and other non-U.S. securities. During the 1998 third quarter, these
exposures were intentionally reduced as a result of market volatility.
Non-investment grade holdings have been defined as debt and preferred equity
securities rated as BB+ or lower, or equivalent ratings by recognized credit
rating agencies, certain sovereign debt in emerging markets, amounts due
under derivative contracts from non-investment grade counterparties, and
other instruments that, in the opinion of management, are non-investment
grade.
31
The following table summarizes positions with non-investment grade issuers (for
cash instruments) or counterparties (for derivatives in a gain position), which
are carried at fair value.
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Trading assets:
Cash instruments $10,885 $12,993
Derivatives(1) 5,489 3,079
Trading liabilities - cash instruments 2,898 2,962
Marketable investment securities 198 648
Insurance subsidiaries' investments 186 192
- -------------------------------------------------------------------------------------------------------------------------
(1) Collateral of $2,597 and $599 was held at September 25, 1998 and
December 26, 1997, respectively, to reduce risk related to these
derivative balances.
Included in the preceding table are debt and equity securities and bank loans
of companies in various stages of bankruptcy proceedings or in default. At
September 25, 1998, the carrying value of such debt and equity securities
totaled $58 million, of which 93% resulted from Merrill Lynch's market-making
activities in such securities. This compared with $142 million at December
26, 1997, of which 56% related to market-making activities. In addition,
Merrill Lynch held distressed bank loans totaling $207 million and $432
million at September 25, 1998 and December 26, 1997, respectively.
At September 25, 1998, the largest non-investment grade counterparty
concentration was to Long-Term Capital Portfolio, L.P. totaling
$1.4 billion, which is primarily comprised of derivative contract receivables
and is fully collateralized.
Derivatives may also expose Merrill Lynch to credit risk related to the
underlying security where a derivative contract can either synthesize
ownership of the underlying security (e.g., long total return swap) or
potentially force ownership of the underlying security (e.g., short put
option). In addition, derivatives may subject Merrill Lynch to credit spread
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.
A summary of exposures related to derivatives with non-investment grade
underlying securities follows:
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Derivative fair values:
Trading assets(1) $ 89 $ 62
Trading liabilities 27 62
Derivative notionals (off-balance-sheet)(2) 1,987 3,257
- ------------------------------------------------------------------------------------------------------------------------
(1) The preceding table includes $28 and $42 at September 25, 1998 and
December 26, 1997, respectively, of credit risk exposures to
non-investment grade counterparties.
(2) Represents amount subject to strike or reference price.
Merrill Lynch engages in 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 also uses non-investment grade trading inventories,
principally non-U.S. governments and agencies securities, to hedge the
exposure arising from structured derivative transactions.
32
A summary of derivatives used to hedge the credit risk of non-investment grade
positions follows:
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Derivative notionals (off-balance-sheet)(1) $4,339 $5,548
- -------------------------------------------------------------------------------------------------------------------------
(1) Represents amount subject to strike or reference price.
- --------------------------------------------------------------------------------
Highly Leveraged Transactions
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
A summary of loans, investments, and commitments related to highly leveraged
transactions follows:
- -------------------------------------------------------------------------------------------------------------------------
SEPTEMBER 25, DECEMBER 26,
(in millions) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Loans (net of allowance for loan losses)(1) $717 $467
Equity investments(2) 372 170
Partnership interests 567 82
Bridge loan 65 -
Additional commitments to invest in partnerships 490(3) 60
Unutilized revolving lines of credit and other
lending commitments 2,251(4) 485
- -------------------------------------------------------------------------------------------------------------------------
(1) Represented outstanding loans to 81 and 48 companies at September 25, 1998
and December 26, 1997, respectively.
(2) Invested in 79 and 72 enterprises at September 25, 1998 and December 26,
1997, respectively.
(3) Included in this amount is a $300 commitment related to the
recapitalization of the hedge fund Long-Term Capital Portfolio, L.P.
This commitment was funded subsequent to quarter end.
(4) Included in this amount is a $1,210 senior secured loan commitment and a
$350 bridge loan commitment to a counterparty in connection with a
proposed acquisition transaction. If extended, Merrill Lynch intends to
syndicate a significant portion of these loans. Also included is a $50
bridge loan commitment to another counterparty that was funded subsequent
to quarter end.
At September 25, 1998 the largest industry exposure was to the financial
services sector which accounted for 46% of total non-investment grade positions
and highly leveraged transactions.
33
- --------------------------------------------------------------------------------
Statistical Data (restated for the Midland Walwyn merger)
- --------------------------------------------------------------------------------
3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
1997 1997 1998 1998 1998
-------- -------- --------- --------- --------
CLIENT ACCOUNTS (in billions):
U.S. Client Assets $ 960 $ 985 $ 1,086 $ 1,110 $ 1,066
Non-U.S. Client Assets 84 244 269 269 253
-------- -------- -------- -------- --------
Total Assets in Client Accounts or
Under Management $ 1,044 $ 1,229 $ 1,355 $ 1,379 $ 1,319
======== ======== ======== ======== ========
Assets Under Management:
MLAM (a):
Money Market $ 105 $ 107 $ 117 $ 118 $ 125
Equity 73 72 80 77 65
Fixed-Income 46 48 53 54 53
Private Portfolio 45 49 55 58 50
Insurance 3 3 3 3 3
-------- -------- -------- -------- --------
Total $ 272 $ 279 $ 308 $ 310 $ 296
Mercury - 167 180 179 169
Atlas Funds (b) 2 2 2 2 2
-------- -------- -------- -------- --------
Total Assets Under Management $ 274 $ 448 $ 490 $ 491 $ 467
======== ======== ======== ======== ========
ML Consults(Registered Trademark) $ 26 $ 27 $ 31 $ 33 $ 31
Mutual Fund Advisor(Service Mark) and
Asset Power(Registered Trademark) $ 14 $ 15 $ 18 $ 19 $ 18
401(k) Assets $ 71 $ 74 $ 80 $ 82 $ 75
- ------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (in billions) $ 68 $ 64 $ 93 $ 109 $ 72
Market Share 13.3% 14.6% 12.7% 15.3% 13.6%
U.S. Debt and Equity:
Volume (in billions) $ 59 $ 56 $ 79 $ 96 $ 60
Market Share 15.8% 16.7% 15.5% 18.5% 15.2%
- -------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 45,000 45,800 46,000 47,000 47,700
Non-U.S. 12,300 13,900 14,300 16,600 17,100
------ ------ ------ ------ ------
Total 57,300 59,700 60,300 63,600 64,800
====== ====== ====== ====== ======
Financial Consultants and
Account Executives Worldwide 16,400 16,600 16,600 17,600 17,800
- ------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (Loss) (in millions) $ 502 $ 469 $ 528 $ 551 $ (164)
Annualized Return on Average
Common Stockholders' Equity 27.1% 23.4% 24.7% 23.6% (7.3)%
Earnings (Loss) per Common Share:
Basic $ 1.45 $ 1.34 $ 1.48 $ 1.52 $ (.49)
Diluted $ 1.24 $ 1.15 $ 1.30 $ 1.32 $ (.49)
- -------------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $ 293,602 $ 296,980 $ 358,919 $ 370,597 $ 353,419
Total Stockholders' Equity $ 8,012 $ 8,539 $ 9,223 $ 9,913 $ 9,795
- ------------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted Average Shares Outstanding:
Basic 339,799 342,740 349,495 355,289 357,620
Diluted 396,876 400,132 400,249 411,385 357,620
Common Shares Outstanding 341,226 343,977 353,680 356,280 358,492
Shares Repurchased (c) 240 - - - -
- ------------------------------------------------------------------------------------------------------
(a) Merrill Lynch Asset Management.
(b) Managed by Midland Walwyn.
(c) Does not include shares either (i) owned by employees and used to pay for
the exercise of stock options or (ii) stock withheld from employee stock
option exercises to pay associated taxes.
34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
NASDAQ Antitrust Litigation. Since the filing of ML & Co.'s Annual Report on
Form 10-K for 1997, the following events have taken place with respect to the
NASDAQ Antitrust Litigation described therein. On August 6, 1998, the United
States Court of Appeals for the Second Circuit affirmed the district court's
order approving the settlement of the civil antitrust action filed by the
Antitrust Division of the United States Department of Justice.
October 1998 Derivative Action. On October 13, 1998, a derivative action
purportedly brought on behalf of ML & Co. was filed by stockholder Charles
Miller in the Supreme Court of the State of New York, New York County. Named
as defendants are 15 present or former ML & Co. directors. ML & Co. is
named as a nominal defendant. The complaint alleges, among other things, that
the defendants breached their fiduciary duties in that they allegedly failed
to prevent ML & Co. from engaging in excessively risky business transactions
with hedge funds. Damages in an unspecified amount are sought.
Item 5. Other Information
The 1999 Annual Meeting of Stockholders will be held at 10:00 a.m. on Wednesday,
April 14, 1999 at the Merrill Lynch & Co., Inc. Conference and Training Center,
800 Scudders Mill Road, Plainsboro, New Jersey. Any stockholder of record
entitled to vote generally for the election of directors may nominate one or
more persons for election as a director at such meeting only if proper written
notice of such stockholder's intent to make such nomination or nominations, in
accordance with the provisions of ML & Co.'s Certificate of Incorporation, has
been given to the Secretary of ML & Co., 100 Church Street, 12th Floor, New
York, New York 10080-6512, no earlier than January 29, 1999 and no later than
February 23, 1999. In addition, in accordance with provisions of ML & Co.'s
By-laws, any stockholder intending to bring any other business before the
meeting must advise ML & Co. in writing of the stockholder's intent to do so on
or before February 23, 1999. In order to be included in ML & Co.'s proxy
statement, stockholder proposals must have been submitted in writing to ML & Co.
on or before November 5, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) Articles of Incorporation and By-laws
Certificate of Designation dated August 20, 1998 for
Special Voting Stock, relating to ML & Co.'s Restated
Certificate of Incorporation effective as of April 28,
1998 (incorporated by reference to Exhibit (3)(i) to ML
& Co.'s Quarterly Report on Form 10-Q for the period
ended March 27, 1998)
(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 SEC, 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.
35
(10) Merrill Lynch & Co., Inc. 1999 Deferred Compensation
Plan for a Select Group of Eligible Employees
(11) Statement re: computation of per common share earnings
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
(27) Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by ML & Co. with
the SEC during the quarterly period covered by this Report:
(i) Current Report dated July 2, 1998 for the purpose of filing
the First Supplemental Indenture, between ML & Co. and the
Chase Manhattan Bank, dated as of June 1, 1998, and the form
of ML & Co.'s Medium-Term Notes, Series B due July 3, 2000,
linked to the common stock of Travelers Group, Inc.
(ii) Current Report dated July 14, 1998 for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summary for the
three- and six-month periods ended June 26, 1998.
(iii) Current Report dated July 15, 1998 for the purpose of filing
the forms of ML & Co.'s 6% Notes due July 15, 2005 and ML &
Co.'s 6 1/2% Notes due July 15, 2018.
(iv) Current Report dated July 29, 1998 for the purpose of filing
ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet
as of June 26, 1998.
(v) Current Report dated September 3, 1998 for the purpose of
filing the form of ML & Co.'s Merrill Lynch EuroFund Market
Index Target-Term Securities (Service Mark) due
February 28, 2006.
(vi) Current Report dated September 8, 1998 for the purpose of
reporting ML & Co.'s net earnings for July and August, 1998.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-------------------------
(Registrant)
Date: November 9, 1998 By: /s/ E. Stanley O'Neal
-------------------------------
E. Stanley O'Neal
Executive Vice President and
Chief Financial Officer
37
INDEX TO EXHIBITS
Exhibits
3 Certificate of Designation dated August 20, 1998 for Special Voting
Stock
10 Merrill Lynch & Co., Inc. 1999 Deferred Compensation Plan for a
Select Group of Eligible Employees
11 Statement re: computation of per common share earnings
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
27 Financial Data Schedule