<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1995
-------------
COMMISSION FILE NUMBER 1-7182
-------------
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
WORLD FINANCIAL CENTER, NORTH TOWER,
NEW YORK, NEW YORK 10281-1332
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
176,006,422 shares of Common Stock*
(as of the close of business on August 4, 1995)
* Does not include 4,809,014 unallocated reversion shares held in the Employee
Stock Ownership Plan that are not considered outstanding for accounting
purposes.
<PAGE>
Part I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------- PERCENT
JUNE 30, JULY 1, INCREASE
1995 1994 (DECREASE)
(In Thousands, Except Per Share Amounts) ------------ ------------ ----------
<S> <C> <C> <C>
REVENUES
Commissions................................ $ 765,012 $ 690,533 11 %
Interest and dividends..................... 3,295,255 2,317,691 42
Principal transactions..................... 614,677 560,867 10
Investment banking......................... 335,346 322,006 4
Asset management and portfolio
service fees.............................. 464,495 431,930 8
Other...................................... 110,209 157,273 (30)
---------- ---------- ---
Total Revenues............................. 5,584,994 4,480,300 25
Interest Expense......................... 3,035,802 2,082,581 46
---------- ---------- ---
Net Revenues............................... 2,549,192 2,397,719 6
---------- ---------- ---
NON-INTEREST EXPENSES
Compensation and benefits.................. 1,308,755 1,216,450 8
Occupancy.................................. 109,473 108,574 1
Communications and equipment rental........ 116,854 107,922 8
Depreciation and amortization.............. 88,638 80,595 10
Advertising and market development......... 95,942 99,145 (3)
Professional fees.......................... 105,448 87,225 21
Brokerage, clearing, and exchange fees..... 93,888 87,465 7
Other...................................... 165,894 177,681 (7)
---------- ---------- ---
Total Non-Interest Expenses................ 2,084,892 1,965,057 6
---------- ---------- ---
EARNINGS BEFORE INCOME TAXES............... 464,300 432,662 7
Income tax expense......................... 181,504 180,853 -
---------- ---------- ---
NET EARNINGS............................... $ 282,796 $ 251,809 12 %
========== ========== ===
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS.............................. $ 270,883 $ 250,270 8 %
========== ========== ===
EARNINGS PER COMMON SHARE:
Primary.................................. $ 1.40 $ 1.18 19 %
========== ========== ===
Fully diluted............................ $ 1.39 $ 1.18 18 %
========== ========== ===
DIVIDEND PAID PER COMMON SHARE............. $ .26 $ .23
========== ==========
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE:
Primary.................................. 193,267 212,489
========== ==========
Fully diluted............................ 195,159 212,489
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------ PERCENT
JUNE 30, JULY 1, INCREASE
1995 1994 (DECREASE)
(In Thousands, Except Per Share Amounts) ------------ ---------- ----------
<S> <C> <C> <C>
REVENUES
Commissions................................ $ 1,450,307 $1,558,777 (7)%
Interest and dividends..................... 6,324,774 4,517,227 40
Principal transactions..................... 1,289,433 1,227,544 5
Investment banking......................... 583,843 766,401 (24)
Asset management and portfolio
service fees.............................. 912,932 876,158 4
Other...................................... 227,582 273,004 (17)
----------- ---------- ----
Total Revenues............................. 10,788,871 9,219,111 17
Interest Expense......................... 5,819,194 3,989,564 46
----------- ---------- ----
Net Revenues............................... 4,969,677 5,229,547 (5)
----------- ---------- ----
NON-INTEREST EXPENSES
Compensation and benefits.................. 2,578,643 2,646,967 (3)
Occupancy.................................. 219,362 221,582 (1)
Communications and equipment rental........ 228,591 211,446 8
Depreciation and amortization.............. 174,637 154,766 13
Advertising and market development......... 182,253 197,750 (8)
Professional fees.......................... 204,278 181,302 13
Brokerage, clearing, and exchange fees..... 177,733 173,955 2
Other...................................... 361,088 356,909 1
----------- ---------- ----
Total Non-Interest Expenses................ 4,126,585 4,144,677 -
----------- ---------- ----
EARNINGS BEFORE INCOME TAXES............... 843,092 1,084,870 (22)
Income tax expense......................... 333,021 461,302 (28)
----------- ---------- ----
NET EARNINGS............................... $ 510,071 $ 623,568 (18)%
=========== ========== ====
NET EARNINGS APPLICABLE TO COMMON
STOCKHOLDERS.............................. $ 486,217 $ 620,693 (22)%
=========== ========== ====
EARNINGS PER COMMON SHARE:
Primary.................................. $ 2.48 $ 2.87 (14)%
=========== ========== ====
Fully diluted............................ $ 2.46 $ 2.87 (14)%
=========== ========== ====
DIVIDENDS PAID PER COMMON SHARE............ $ .49 $ .43
=========== ==========
AVERAGE SHARES USED IN COMPUTING EARNINGS
PER COMMON SHARE:
Primary.................................. 196,223 216,561
=========== ==========
Fully diluted............................ 197,537 216,561
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts) JUNE 30, DEC. 30,
ASSETS 1995 1994
- -------------------------------------------------------- ------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS............................... $ 3,327,658 $ 2,311,743
------------ ------------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS............... 6,158,072 4,953,062
------------ ------------
MARKETABLE INVESTMENT SECURITIES........................ 2,486,560 2,325,453
------------ ------------
TRADING ASSETS, AT FAIR VALUE
Corporate debt and preferred stock...................... 15,008,898 14,818,157
Contractual agreements.................................. 13,257,433 9,519,105
U.S. Government and agencies............................ 5,822,573 8,196,584
Non-U.S. governments and agencies....................... 10,270,239 6,468,341
Equities and convertible debentures..................... 5,639,587 6,263,492
Mortgages and mortgage-backed........................... 4,536,167 5,223,809
Municipals.............................................. 1,129,075 1,291,688
Money markets........................................... 1,101,246 957,589
------------ ------------
Total................................................... 56,765,218 52,738,765
------------ ------------
RESALE AGREEMENTS....................................... 45,301,994 44,459,036
------------ ------------
SECURITIES BORROWED..................................... 21,752,624 20,993,302
------------ ------------
RECEIVABLES
Customers (net of allowance for doubtful accounts of
$47,922 in 1995 and $42,290 in 1994)................... 13,420,179 14,030,466
Brokers and dealers..................................... 9,745,775 6,486,879
Interest and other...................................... 4,445,044 4,360,693
------------ ------------
Total................................................... 27,610,998 24,878,038
------------ ------------
INVESTMENTS OF INSURANCE SUBSIDIARIES................... 5,780,049 5,719,345
LOANS, NOTES, AND MORTGAGES (NET OF ALLOWANCE FOR
LOAN LOSSES OF $173,694 IN 1995 AND $180,799 IN 1994).. 1,868,958 1,586,718
OTHER INVESTMENTS....................................... 966,627 887,626
PROPERTY, LEASEHOLD IMPROVEMENTS, AND EQUIPMENT
(NET OF ACCUMULATED DEPRECIATION AND AMORTIZATION
OF $2,031,859 IN 1995 AND $1,867,476 IN 1994).......... 1,575,984 1,587,639
OTHER ASSETS............................................ 1,257,791 1,308,600
------------ ------------
TOTAL ASSETS............................................ $174,852,533 $163,749,327
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts) JUNE 30, DEC. 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- --------------------------------------------------- ------------- -------------
<S> <C> <C>
LIABILITIES
REPURCHASE AGREEMENTS.............................. $ 52,491,110 $ 51,864,594
------------ ------------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS... 29,397,404 26,439,645
------------ ------------
TRADING LIABILITIES, AT FAIR VALUE
U.S. Government and agencies....................... 8,902,382 15,989,928
Contractual agreements............................. 12,718,056 8,381,946
Non-U.S. governments and agencies.................. 7,820,197 4,009,757
Equities and convertible debentures................ 4,310,127 3,990,146
Corporate debt and preferred stock................. 2,168,189 2,564,192
Municipals......................................... 147,475 165,906
------------ ------------
Total.............................................. 36,066,426 35,101,875
------------ ------------
CUSTOMERS.......................................... 11,521,207 11,608,891
INSURANCE.......................................... 5,571,440 5,689,513
BROKERS AND DEALERS................................ 9,418,677 4,637,957
OTHER LIABILITIES AND ACCRUED INTEREST............. 8,799,437 7,725,924
LONG-TERM BORROWINGS............................... 15,703,594 14,863,383
------------ ------------
TOTAL LIABILITIES.................................. 168,969,295 157,931,782
------------ ------------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY..................... 618,800 618,800
------------ ------------
COMMON STOCKHOLDERS' EQUITY
Common stock, par value $1.33 1/3 per share;
authorized: 500,000,000 shares;
issued: 1995 and 1994 - 236,330,162 shares........ 315,105 315,105
Paid-in capital.................................... 1,218,576 1,196,093
Foreign currency translation adjustment............ 17,680 3,703
Net unrealized losses on investment securities
available-for-sale (net of applicable income tax
benefit of $6,695 in 1995 and $30,924 in 1994).... (11,928) (56,957)
Retained earnings.................................. 6,003,846 5,605,616
------------ ------------
Subtotal......................................... 7,543,279 7,063,560
Less:
Treasury stock, at cost:
1995 - 56,061,348 shares;
1994 - 48,423,944 shares........................ 1,968,076 1,627,108
Unallocated ESOP reversion shares, at cost:
1995 - 4,809,014 shares;
1994 - 6,427,091 shares......................... 75,782 101,227
Employee stock transactions....................... 234,983 136,480
------------ ------------
TOTAL COMMON STOCKHOLDERS' EQUITY.................. 5,264,438 5,198,745
------------ ------------
TOTAL STOCKHOLDERS' EQUITY......................... 5,883,238 5,817,545
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $174,852,533 $163,749,327
============ ============
BOOK VALUE PER COMMON SHARE........................ $ 30.21 $ 28.87
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------
JUNE 30, JULY 1,
(In Thousands) 1995 1994
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings............................................. $ 510,071 $ 623,568
Noncash items included in earnings:
Depreciation and amortization.......................... 174,637 154,766
Policyholder reserves.................................. 151,983 194,175
Other.................................................. 294,425 483,026
(Increase) decrease in operating assets:
Trading assets......................................... (3,981,867) (7,771,859)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations.............. (1,205,010) (1,501,721)
Securities borrowed.................................... (759,322) (1,214,542)
Customers.............................................. 595,442 (1,193,585)
Maturities and sales of trading investment securities.. - 20,129
Purchases of trading investment securities............. - (27,928)
Other.................................................. (3,312,261) (967,046)
Increase (decrease) in operating liabilities:
Trading liabilities.................................... 964,551 13,145,019
Customers.............................................. (87,684) (405,220)
Insurance.............................................. (396,217) (1,348,699)
Other.................................................. 5,830,060 4,082,718
----------- -----------
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES......... (1,221,192) 4,272,801
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities............ 818,652 1,509,357
Sales of available-for-sale securities................. 679,500 866,020
Purchases of available-for-sale securities............. (1,579,072) (1,169,067)
Maturities of held-to-maturity securities.............. 588,834 1,005,146
Purchases of held-to-maturity securities............... (634,691) (1,335,942)
Other investments and other assets..................... (87,464) (263,895)
Property, leasehold improvements, and equipment........ (162,982) (219,560)
----------- -----------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES......... (377,223) 392,059
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Repurchase agreements, net of resale agreements........ (216,442) (4,152,282)
Commercial paper and other short-term borrowings....... 2,957,759 (132,623)
Issuance and resale of long-term borrowings............ 4,849,538 6,715,316
Settlement and repurchase of long-term borrowings...... (4,327,252) (5,012,226)
Common stock transactions.............................. (537,430) (466,154)
Dividends.............................................. (111,843) (90,030)
----------- -----------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES......... 2,614,330 (3,137,999)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS.................... 1,015,915 1,526,861
Cash and cash equivalents, beginning of year............. 2,311,743 1,783,408
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 3,327,658 $ 3,310,269
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes totaled $136,016 in 1995 and $812,676 in 1994.
Interest totaled $5,694,573 in 1995 and $3,851,008 in 1994.
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1995
BASIS OF PRESENTATION
The consolidated financial statements, prepared in accordance with generally
accepted accounting principles, include the accounts of Merrill Lynch & Co.,
Inc. and all significant subsidiaries (collectively referred to as the
"Corporation"). All material intercompany balances and transactions have been
eliminated. The December 30, 1994 consolidated balance sheet was derived from
the audited financial statements. The interim consolidated financial
statements for the three- and six-month periods ended June 30, 1995 are
unaudited; however, in the opinion of the management of the Corporation, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the results of operations have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in the Corporation's Annual Report on
Form 10-K for the year ended December 30, 1994 ("1994 10-K"). The nature of
the Corporation's business is such that the results of any interim period are
not necessarily indicative of results for a full year. Prior period financial
statements have been reclassified, where appropriate, to conform to the 1995
presentation.
ACCOUNTING CHANGES
In the second quarter of 1995, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Servicing
Rights." SFAS No. 122 amends SFAS No. 65, "Accounting for Certain Mortgage
Banking Activities," to require that a mortgage banking enterprise recognize
rights to service mortgage loans as separate assets for originated as well as
purchased mortgages. Additionally, SFAS No. 122 requires that a mortgage
banking enterprise assess its capitalized mortgage servicing rights for
impairment based on the fair value of those rights. The impact of this
pronouncement on the Corporation's financial statements as of June 30, 1995 was
not material.
In the first quarter of 1995, the Corporation adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS
No. 114 establishes accounting standards for creditors to measure the
impairment of certain loans. SFAS No. 118 amends SFAS No. 114 to allow
creditors to use existing methods for recognizing interest income on an
impaired loan, rather than the method originally required by SFAS No. 114. The
impact of these pronouncements on the Corporation's financial statements as of
June 30, 1995 was not material.
7
<PAGE>
INVESTMENTS
The Corporation's investments in debt and certain equity securities are
classified as trading, available-for-sale, or held-to-maturity. Investments
that are classified as trading and available-for-sale are recorded at fair
value. Investments in debt securities classified as held-to-maturity are
carried at amortized cost. Restricted equity investment securities are
reported at the lower of cost or net realizable value.
The table that follows provides the components of the net unrealized gains
(losses) recorded in stockholders' equity for available-for-sale investments:
<TABLE>
<CAPTION>
June 30, Dec. 30,
(In thousands) 1995 1994
- -------------- ---------- ----------
<S> <C> <C>
Net unrealized gains (losses) on investment
securities available-for-sale $ 259,936 $(410,068)
Adjustments for policyholder liabilities (126,161) 214,537
Adjustments for deferred policy acquisition costs (64,517) 73,802
Deferred income tax (expense) benefit (24,229) 43,417
--------- ---------
Net activity 45,029 (78,312)
Net unrealized (losses) gains on investment
securities classified as available-for-sale,
beginning of year (56,957) 21,355
--------- ---------
Net unrealized losses on investment
securities classified as available-for-sale,
end of period $ (11,928) $ (56,957)
========= =========
</TABLE>
The Corporation's insurance subsidiaries are required to adjust deferred
acquisition costs and certain policyholder liabilities associated with
investments classified as available-for-sale. These investments primarily
support in-force, universal life-type contracts under SFAS No. 97, "Accounting
and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and
for Realized Gains and Losses from the Sale of Investments." These adjustments
are recorded in stockholders' equity and assume that the unrealized gain or loss
on available-for-sale securities was realized.
In the 1995 second quarter, gross realized gains and losses related to
available-for-sale investment securities were $6.6 million and $0.8 million,
respectively, compared to $0.9 million and $2.1 million, respectively, in the
1994 second quarter. For the six-month period ended June 30, 1995, gross
realized gains and losses related to available-for-sale investment securities
were $12.0 million and $10.5 million, respectively, compared to $6.3 million and
$7.7 million, respectively, for the six-month period ended July 1, 1994. The
cost basis of each investment sold is specifically identified for purposes of
computing realized gains and losses. Net unrealized gains from trading
investment securities included in the 1995 three- and six-month Statements of
Consolidated Earnings were $0.2 million and $23 thousand, respectively, compared
to losses of $4.3 million and $11.5 million, respectively, for the 1994 three-
and six-month periods.
INTEREST AND DIVIDEND EXPENSE
Interest expense includes payments in lieu of dividends of $3.8 million and $7.2
million for the second quarters of 1995 and 1994, respectively. For the six-
month periods ended June 30, 1995 and July 1, 1994, payments in lieu of
dividends were $6.2 million and $14.7 million, respectively.
8
<PAGE>
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS
Commercial paper and other short-term borrowings at June 30, 1995 and December
30, 1994 follow:
<TABLE>
<CAPTION>
June 30, Dec. 30,
(In millions) 1995 1994
------------- -------- --------
<S> <C> <C>
Commercial paper $14,976 $14,759
Demand and time deposits 8,050 7,578
Securities loaned 3,614 2,180
Bank loans and other 2,757 1,923
------- -------
Total $29,397 $26,440
======= =======
</TABLE>
COMMITMENTS
The Corporation enters into certain contractual agreements, referred to as
"derivatives" or off-balance-sheet financial instruments, involving futures,
forwards (including mortgage-backed securities requiring forward settlement),
options, and swap transactions, including swap options, caps, collars, and
floors. The Corporation uses derivatives in conjunction with on-balance-sheet
financial instruments to facilitate customer transactions, manage its own
interest rate, currency, and equity and commodity price risk, and to meet
trading and financing needs. Derivative contracts often involve commitments to
swap future interest payment streams, to purchase or sell financial instruments
or commodities at specified terms on a specified date, or to exchange
currencies. In addition, the Corporation purchases and writes options on a
wide range of financial instruments such as securities, currencies, futures,
and various market indices.
The contractual or notional amounts of derivative financial instruments provide
only a measure of involvement in these types of transactions and do not
represent the amounts subject to the various risks set forth below. The
contractual or notional amounts of these instruments used for trading purposes
by type of risk follow:
<TABLE>
<CAPTION>
(In billions)
-------------
Interest Rate Currency Equity Price Commodity Price
June 30, 1995 Risk (a) Risk (a) Risk Risk
------------- --------------- ---------- ------------- -----------------
<S> <C> <C> <C> <C>
Swap agreements $691 $ 89 $10 $ 6
Futures contracts $184 $ 1 $ 3 $ -
Options held $ 62 $ 30 $28 $ 8
Options written $ 79 $ 34 $26 $ 8
Forward contracts $ 37 $125 $ - $44
December 30, 1994
-----------------
Swap agreements $653 $ 73 $ 2 $ 2
Futures contracts $172 $ - $ 2 $ 2
Options held $ 75 $ 22 $22 $12
Options written $ 74 $ 22 $21 $ 7
Forward contracts $ 29 $103 $ - $ 7
</TABLE>
(a) A number of the Corporation's foreign currency contracts are subject to both
interest rate and currency risk.
9
<PAGE>
The contractual or notional amounts of derivative financial instruments used
for purposes other than trading follow:
<TABLE>
<CAPTION>
(In billions) June 30, December 30,
- ------------- 1995 1994
-------- ------------
<S> <C> <C>
Interest rate swap contracts $28 $22
Foreign exchange contracts $ 3 $ 3
Equity options held $ 1 $ 1
</TABLE>
Most of the above transactions are entered into with the Corporation's swaps
and foreign exchange dealer subsidiaries which intermediate interest rate and
currency risk with third parties in the normal course of their trading
activities.
In the normal course of business, the Corporation obtains letters of credit to
satisfy various collateral requirements in lieu of the Corporation depositing
securities or cash. At June 30, 1995, letters of credit aggregating
$1,074 million were used for this purpose.
In the normal course of business, the Corporation also enters into underwriting
commitments, when-issued transactions, and commitments to extend credit.
Settlement of these commitments as of June 30, 1995 would not have a material
effect on the consolidated financial condition of the Corporation.
REGULATORY REQUIREMENTS
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer and a subsidiary of the Corporation, is subject to Net Capital
Rule 15c3-1 under the Securities Exchange Act of 1934. Under the alternative
method permitted by this rule, the minimum required net capital, as defined,
shall not be less than 2% of aggregate debit items arising from customer
transactions. At June 30, 1995, MLPF&S's regulatory net capital of $1,615
million was 12% of aggregate debit items, and its regulatory net capital in
excess of the minimum required was $1,347 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities and a subsidiary of the Corporation, is subject to the
Capital Adequacy Rule under the Government Securities Act of 1986. This rule
requires dealers to maintain liquid capital in excess of market and credit
risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At June 30,
1995, MLGSI's liquid capital of $901 million was 306% of its total market and
credit risk, and liquid capital in excess of the minimum required was $548
million.
Merrill Lynch International Limited ("MLIL"), a United Kingdom registered
broker-dealer and a subsidiary of the Corporation, is subject to capital
requirements of the Securities and Futures Authority ("SFA"). Regulatory
capital, as defined, must exceed the total financial resources requirement of
the SFA. At June 30, 1995, MLIL's regulatory capital was $1,040 million and
exceeded the minimum requirement by $322 million.
10
<PAGE>
LITIGATION MATTER
On January 12, 1995, an action was commenced in the United States Bankruptcy
Court for the Central District of California by Orange County, California
("Orange County") and The Orange County Investment Pools (the "Pools"), both of
which filed bankruptcy petitions in that Court on December 6, 1994, against the
Corporation and certain of its subsidiaries in connection with the Corporation's
business activities with Orange County. In addition, other actions have been
brought against the Corporation and/or certain of its officers, directors, and
employees and certain of its subsidiaries in Federal and state courts in
California and New York. These include class actions and stockholder derivative
actions brought by persons alleging harm to themselves or to the Corporation
arising out of the Corporation's dealings with Orange County and the Pools, or
from the purchase of debt instruments issued by Orange County that were
underwritten by MLPF&S. See "Commitments and Contingencies" in the notes to the
audited consolidated financial statements contained in the 1994 10-K as well as
Item 1 "Legal Proceedings" in Part II of the Corporation's 1995 quarterly
reports on Form 10-Q.
SUBSEQUENT EVENT
On July 21, 1995, the Corporation and Smith New Court PLC ("Smith New Court"), a
U.K.-based global securities firm, announced the terms of a cash offer under
which the Corporation expects to acquire the share capital of Smith New Court
for approximately $842 million. The transaction is conditioned on, among other
things, receipt of regulatory approvals and is expected to be completed late in
the third quarter or early in the fourth quarter of 1995.
11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries as of June 30, 1995, and the related
condensed statements of consolidated earnings for the three- and six-month
periods ended June 30, 1995 and July 1, 1994 and consolidated cash flows for the
six-month periods ended June 30, 1995 and July 1, 1994. These financial
statements are the responsibility of the management of Merrill Lynch & Co., Inc.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch & Co., Inc. and
subsidiaries as of December 30, 1994, and the related statements of consolidated
earnings, changes in consolidated stockholders' equity and consolidated cash
flows for the year then ended (not presented herein); and in our report dated
February 27, 1995, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 30, 1994 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
August 11, 1995
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
----------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Merrill Lynch & Co., Inc. and its subsidiaries (collectively referred to as the
"Corporation") conduct their businesses in global financial markets that are
influenced by a number of factors including economic and market conditions,
political events, and investor sentiment. The reaction of issuers and investors
to a particular condition or event is unpredictable and can create volatility in
the marketplace. While higher volatility can increase risk, it may also
increase order flow, which drives many of the Corporation's businesses. Other
global market and economic conditions, including the liquidity of secondary
markets, the level and volatility of interest rates, currency and security
valuations, competitive conditions, and the size, number, and timing of
transactions may also affect earnings. As a result, revenues and net earnings
can vary significantly from year to year, and from quarter to quarter.
Financial markets, which were particularly weak during the last half of 1994,
improved during the first half of 1995 as a result of a steadying U.S. economy,
declining interest rates, and heightened investor activity. Inflationary fears
continued to ease in the 1995 second quarter after key U.S. economic statistics
indicated that the economy was stabilizing and a decrease in interest rates by
the Federal Reserve appeared possible for the first time since February 1994.
Subsequent to quarter-end, the Federal Reserve lowered the federal funds rate.
Investors reacted favorably to these events, and were more active in stock and
bond markets during the 1995 first-half, particularly in the second quarter.
Retail and institutional investor activity increased as long-term interest rates
declined in the 1995 second quarter and domestic equity markets advanced to
record levels. As a result, commission revenues and asset management and
portfolio service fees increased industrywide. Sales of mutual funds benefited
from strong U.S. equity markets and a shift from foreign to domestic stock
funds. Heightened investor activity and appreciated asset values also
contributed to increased fee-based revenues during the period.
The Dow Jones Industrial Average ("DJIA") daily closing index for the 1995
second quarter averaged 4,385, 20% above the 1994 second quarter average closing
index and 11% above the 1995 first quarter average close. The DJIA reached a
record high during the 1995 second quarter and closed at 4,556 at quarter-end.
The New York Stock Exchange ("NYSE") average daily trading volume was a record
340 million shares in the 1995 second quarter, 22% above the volume in the 1994
second quarter and 2% above the volume in the 1995 first quarter. In the bond
market, the price of the 30-year U.S. Treasury bond was up, with the yield
falling to 6.62% at the end of the 1995 second quarter, compared with 7.61% at
the end of the 1994 second quarter and 7.43% at the end of the 1995 first
quarter.
Underwriting volume was up industrywide in the 1995 second quarter to $190.8
billion, with domestic issuances of stocks and bonds increasing 31% from the
1995 first quarter and 17% from the 1994 second quarter, according to Securities
Data Co. Investment banking revenues, particularly underwritings, benefited from
increased issuer activity in the 1995 second quarter attributable to robust
stock and bond markets and heightened demand. Issuances of investment-grade debt
increased due to favorable bond yields, while common stock issuances benefited
from higher equity valuations when compared with the 1995 first quarter.
Underwriting activity in mortgage-
13
<PAGE>
backed securities remained depressed, while issuances of high-yield securities
declined industrywide in the 1995 second quarter.
Strategic services revenues continued to improve due to increased mergers and
acquisitions activity in various industries, including health care, financial
services, manufacturing, and media and entertainment.
Trading volumes were higher in the 1995 second quarter as compared to the 1994
second quarter, although trading results were mixed due primarily to widening
credit spreads in taxable fixed-income products. Trading results in equity
securities, however, improved industrywide from the 1994 second quarter due to
higher volumes and a recovery in the convertible securities market. Convertible
securities benefited from declining interest rates, rising stock prices, and
increased demand. Trading revenues from interest rate and currency swaps
increased, particularly in Asian markets, while revenues from municipal
securities decreased as discussions on possible tax law changes reduced investor
demand for tax-exempt investments.
The Corporation's 1995 second quarter net earnings were up 12% from second
quarter levels of a year ago, and up 24% from the 1995 first quarter. These
improved results were attributable to favorable markets and the Corporation's
diversified global revenue base, appropriate risk management activities, and
continued efforts to control fixed expenses and discretionary costs.
SECOND QUARTER 1995 VERSUS SECOND QUARTER 1994
The discussion that follows emphasizes the comparison between the second
quarters of 1995 and 1994 and presents additional information on the comparison
between the six-month periods, when relevant. In addition, as financial markets
have improved, comparisons between the first and second quarters of 1995 will be
presented, where appropriate.
Net earnings for the 1995 second quarter were $282.8 million, up $31.0 million
(12%) from the $251.8 million reported in last year's second quarter. Second
quarter earnings per common share were $1.40 primary and $1.39 fully diluted,
compared with $1.18 primary and fully diluted in the 1994 second quarter. After
deducting preferred stock dividends, net earnings applicable to common
stockholders in the 1995 second quarter totaled $270.9 million, up $20.6 million
(8%) from $250.3 million in the prior year's quarter. In recent periods, the
Corporation's weighted average shares outstanding have declined due to share
repurchases. The Corporation repurchased 3.6 million shares of its common stock
in the 1995 second quarter, compared with 6.3 million common shares in the
comparable 1994 period.
For the first six months of 1995, net earnings were $510.1 million, down $113.5
million (18%) from the $623.6 million reported in the prior year period.
Earnings per common share were $2.48 primary and $2.46 fully diluted, compared
to $2.87 primary and fully diluted in the comparable 1994 period. The
Corporation repurchased 12.9 million and 13.3 million shares of its common stock
in the first six months of 1995 and 1994, respectively. After deducting
preferred stock dividends, net earnings applicable to common stockholders in the
first half of 1995 totaled $486.2 million, down $134.5 million (22%) from $620.7
million in the comparable 1994 period.
The Corporation's pretax profit margin in the 1995 second quarter was 18.2%
versus 18.0% in the year-ago period. The net profit margin increased to 11.1%
in the 1995 second quarter, compared with 10.5% in the 1994 second quarter.
14
<PAGE>
Total revenues increased 25% from the 1994 second quarter to $5,585 million,
with increases in all operating revenue categories. Revenues after interest
expense (net revenues) increased 6% from the year-ago period to $2,549 million.
Non-interest expenses totaled $2,085 million in the 1995 second quarter, up 6%
from the year-earlier period as increased business activity and profitability
led to higher levels of compensation and benefits expense.
Net earnings in the 1995 second quarter were up 24% from $227.3 million in the
1995 first quarter with primary earnings per common share increasing 30% during
the same period. Total revenues and net revenues increased 7% and 5%,
respectively, from the 1995 first quarter with advances in investment banking,
commissions, and asset management and portfolio service fees. Non-interest
expenses increased 2% from the 1995 first quarter.
Commission revenues were $765 million, up 11% from the 1994 second quarter.
Commissions from listed securities increased 18% to $386 million as a result of
higher volumes. Mutual fund commissions were up 5% from the year-ago period to
$217 million as strong prior period sales led to higher distribution fees in the
1995 second quarter. Other commission revenues increased 3% from the 1994 second
quarter to $162 million due primarily to increased commissions for over-the-
counter and insurance products, partially offset by lower commissions from
commodities transactions. For the 1995 six-month period, commission revenues
were down 7% from the corresponding 1994 period, which included strong mutual
fund sales in the 1994 first quarter.
Net interest and dividend profit rose 10% from the 1994 second quarter to $259
million as a result of higher levels of interest-earning assets relative to
interest-bearing liabilities. Interest and dividend revenues advanced 42% over
the year-ago period to $3,295 million due to growth in collateralized lending
activities and higher levels of fixed-income inventories, partially offset by
declining interest rates. Interest expense, which includes dividend expense,
rose 46% from the 1994 second quarter to $3,036 million as a result of increased
levels of interest-bearing liabilities primarily related to the Corporation's
funding and hedging activities, partially offset by a decrease in interest
rates. For the 1995 first-half, net interest profit declined 4% to $506 million
due primarily to a more significant increase in interest-bearing liabilities
relative to the increase in interest-earning assets during the period, as well
as the continued flattening of the yield curve.
15
<PAGE>
Significant components of interest and dividend revenues and interest expense
for the three- and six-month periods ended June 30, 1995 and July 1, 1994
follow:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
(In millions) June 30, July 1, June 30, July 1,
- ------------- 1995 1994 1995 1994
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Interest and
dividend revenues:
Trading assets $1,071 $ 878 $2,010 $1,740
Resale agreements 770 398 1,541 711
Securities borrowed 826 553 1,512 1,103
Margin lending 334 237 659 452
Other 294 252 603 511
------ ------ ------ ------
Total 3,295 2,318 6,325 4,517
------ ------ ------ ------
Interest expense:
Borrowings 1,126 791 2,137 1,602
Repurchase agreements 1,015 573 1,971 1,016
Trading liabilities 626 512 1,201 958
Other 269 207 510 413
------ ------ ------ ------
Total 3,036 2,083 5,819 3,989
------ ------ ------ ------
Net interest and
dividend profit $ 259 $ 235 $ 506 $ 528
====== ====== ====== ======
</TABLE>
Included in the "Borrowings" caption above is interest related to hedges on the
Corporation's long-term borrowings. As part of the Corporation's asset,
liability, and liquidity management strategies, substantially all fixed-rate,
long-term borrowings are swapped into floating interest rates, while virtually
all foreign currency denominated fixed-rate obligations are swapped into
variable rate liabilities. These liability hedges are in the form of interest
rate and currency swap agreements. Interest obligations on variable rate debt
may also be modified through swap agreements that change the underlying interest
rate basis or reset frequency. Contractual agreements used to modify payment
obligations, principally related to long-term borrowings, decreased interest
expense by approximately $21 million for the 1995 second quarter and
approximately $41 million for the 1994 second quarter.
Principal transactions revenues increased 10% from the 1994 second quarter to
$615 million. Taxable fixed-income trading revenues totaled $130 million,
virtually unchanged from a year ago. High-yield debt trading revenues increased
due to higher revenues from bank loan trading as well as improvements in credit
ratings of certain issuers. Trading revenues from corporate bonds and preferred
stock advanced due primarily to higher demand for fixed-rate preferred issues.
Non-U.S. governments and agencies securities benefited from higher trading
revenues in European and Asian government instruments. Taxable fixed-income
principal transactions revenues were negatively affected by a loss in mortgage-
backed products due to reduced market liquidity. Nevertheless, trading results
from mortgage-backed products, which include net interest revenues, were
positive. Trading revenues in U.S. Government and agencies securities were down
from a year ago as lower interest rates in the current quarter reduced
volatility.
16
<PAGE>
Interest rate and currency swap revenues increased 22% from the 1994 second
quarter to $195 million on higher trading revenues from non-U.S. dollar
denominated transactions, particularly in Asian markets. Municipal securities
revenues declined 60% from last year's second quarter to $51 million as
discussions of possible tax law changes weakened retail investor demand for tax-
exempt investments.
Equities and equity derivatives trading revenues increased 67% from the 1994
second quarter to $228 million due principally to higher trading revenues in
convertible and over-the-counter securities and international equities,
partially offset by lower revenues from equity derivatives activities.
Foreign exchange and commodities trading revenues increased 34% from the 1994
second quarter to $11 million due to trading gains in European currencies,
partially offset by a decrease in commodities trading revenues.
Principal transactions revenues declined 9% from 1995 first quarter levels due
primarily to lower revenues from taxable fixed-income products, interest rate
and currency swaps, and municipal securities, partially offset by higher
revenues from equities and equity derivatives.
Trading, hedging, and financing activities affect the recognition of both
principal transactions revenues and net interest and dividend profit. In
assessing the profitability of financial instruments, the Corporation views net
interest and principal transactions components in the aggregate. For financial
reporting purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned versus
financing costs on financial instruments) for trading positions, including
hedges, is recorded either as principal transactions revenues or net interest
profit, depending on the nature of the specific position. Interest income or
expense on a U.S. Treasury security, for example, is reflected in net interest,
while any realized or unrealized gain or loss is included in principal
transactions. Financial instruments requiring forward settlement, such as "to be
announced" mortgage pools, have interest components built into their market
value; any change in the market value, however, is recorded in principal
transactions revenues. Changes in the composition of trading inventories and
hedge positions can cause the recognition of revenues within these categories to
fluctuate. Consequently, net interest and principal transactions revenue
components should be evaluated collectively.
The table that follows provides information on aggregate trading profits,
including net interest for the three- and six-months ended June 30, 1995 and
July 1, 1994. Principal transactions revenues are based on financial reporting
categories. Interest revenue and expense components are based on financial
reporting categories and management's assessment of the cost to finance trading
positions, which considers the underlying liquidity of these positions.
17
<PAGE>
<TABLE>
<CAPTION>
Principal Net Interest Net
(In millions) Transactions Revenue Trading
- ------------ Revenue (Expense) Revenue
------------------ ------------------ ------------------
Three Months 1995 1994 1995 1994 1995 1994
- ------------ -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Taxable fixed-income $ 130 $ 130 $ 85 $ 96 $ 215 $ 226
Interest rate and currency
swaps 195 159 (16) 1 179 160
Equity and equity
derivatives 228 137 (21) (30) 207 107
Municipals 51 127 - 1 51 128
Foreign exchange and
commodities 11 8 2 1 13 9
------ ------ ----- ----- ------ ------
Total $ 615 $ 561 $ 50 $ 69 $ 665 $ 630
====== ====== ===== ===== ====== ======
Six Months
- ----------
Taxable fixed-income $ 294 $ 258 $ 169 $ 214 $ 463 $ 472
Interest rate and currency
swaps 429 352 (37) 16 392 368
Equity and equity
derivatives 393 391 (47) (53) 346 338
Municipals 141 177 (2) 3 139 180
Foreign exchange and
commodities 32 50 - 1 32 51
------ ------ ----- ----- ------ ------
Total $1,289 $1,228 $ 83 $ 181 $1,372 $1,409
====== ====== ===== ===== ====== ======
</TABLE>
Investment banking revenues were $335 million, up 35% from the 1995 first
quarter and 4% from the 1994 second quarter. Underwriting revenues for the 1995
second quarter were $251 million, down 1% from the 1994 second quarter as
declines in equity and high-yield underwritings were substantially offset by
higher revenues from convertible securities and corporate bond and preferred
stock issuances. Although down from the 1994 second quarter, underwriting
revenues increased 55% over the 1995 first quarter as higher underwriting
revenues were reported in most categories, including convertible securities,
corporate bonds and preferred stock, equities, and high-yield debt.
The Corporation remained the top underwriter of total debt and equity
securities, in the aggregate, with a 1995 second quarter market share of 14.3%
domestically and 11.8% worldwide, and a six-month 1995 market share of 15.4%
domestically and 11.9% worldwide, according to Securities Data Co.
Strategic services revenues rose 24% from the 1994 second quarter to $84
million, benefiting from increased merger and acquisition advisory assignments
primarily in the energy, health care, and manufacturing sectors.
Investment banking revenues were $584 million for the 1995 six-month period,
down 24% from the comparable 1994 period, as domestic and global industrywide
underwriting volume declined 24% and 22%, respectively, compared to volumes in
the 1994 first-half. Underwriting revenues were lower, particularly in equities
and high-yield securities. Strategic services revenues, strong throughout 1995,
advanced 28% over the year-ago period due to increased merger and acquisition
activity.
18
<PAGE>
Asset management and portfolio service fees increased 8% from the 1994 second
quarter to a record $464 million. Increases in asset management activities,
mutual fund transfer agency fees, and variable annuity products were offset by a
decline in fees from Merrill Lynch Consults (Registered Trademark) ("ML
Consults").
Asset management fees increased 7% from the 1994 second quarter to $209 million
due primarily to growth in stock and money market funds. Assets under
management by Merrill Lynch Asset Management, L.P. ("MLAM") rose 12% to $180
billion at quarter-end, compared with $161 billion at the close of the 1994
second quarter. Inflows of client assets and higher portfolio values,
particularly during the latter part of the 1995 second quarter, contributed to
the advance. Assets under management by MLAM rose 6% from the end of the 1995
first quarter with increased asset levels in money market, stock, and fixed-
income funds.
Mutual fund transfer agency fees rose 40% from the 1994 second quarter to $34
million due to increases in both the number of accounts and the average annual
fees generated per account. Fees from variable annuities increased 31% to $17
million.
Revenues from ML Consults declined 9% from the 1994 second quarter to $70
million as the number of accounts decreased 12% to approximately 75,000 at
quarter-end. Asset levels for ML Consults were $15.7 billion, up 3% from the
1994 second quarter and 5% from the 1995 first quarter. Fees earned on the ML
Consults product are based on a percentage of assets in investor portfolios,
valued as of the end of the previous quarter.
Other revenues were $110 million, down 30% from $157 million reported in the
1994 second quarter. The 1995 second quarter included $9 million of net
realized investment gains, compared with $52 million in the 1994 second quarter.
Non-interest expenses were $2,085 million, up 6% from the 1994 second quarter.
Compensation and benefits expense increased 8% from the 1994 second quarter to
$1,309 million, due primarily to higher incentive and production-related
compensation as well as higher base salaries. Incentive compensation increased
with improved profitability, while production-related compensation was up due to
strong volumes in many businesses. The increase in base salaries, which
remained level when compared to the 1995 first quarter, is primarily
attributable to merit increases and the selective addition of producer personnel
from the year-ago period. Total headcount, however, was virtually unchanged from
the end of the 1994 second quarter and was down by approximately 300 employees
from the end of the 1995 first quarter, to approximately 43,300 at the end of
the 1995 second quarter. The support to producer ratio also improved to 1.41
to 1 from 1.47 to 1 at the end of the 1994 second quarter. Compensation and
benefits expense as a percentage of net revenues was 51.3% for the 1995 second
quarter as compared with 50.7% in the year-ago period.
Occupancy costs increased 1% from the 1994 second quarter to $109 million.
Communications and equipment rental expense was up 8% to $117 million due
primarily to growth in global business activity and increased use of market
information services. Depreciation and amortization expense rose 10% from the
1994 second quarter to $89 million due to purchases of technology-related assets
over the past year.
Advertising and market development expense decreased 3% to $96 million as a
result of reduced travel and recognition program costs, partially offset by
increases in certain advertising programs. Professional fees increased 21% to
$105 million due to higher legal fees. Brokerage, clearing, and exchange fees
were up 7% to $94 million as a result of higher volumes, particularly in
international markets. Other expenses totaled $166 million, down 7% from the
19
<PAGE>
1994 second quarter due, in part, to lower loss provisions related to customer
activities.
Income tax expense was $182 million in the 1995 second quarter. The effective
tax rate in the 1995 second quarter was 39.1%, compared with 41.8% in the year-
ago period. The decrease in the effective tax rate was primarily attributable
to lower state income taxes, higher tax-exempt interest, increased deductions
for dividends received, and expanded international business activities.
The reasons underlying changes in expense categories for the first half of 1995
are similar to those noted for the 1995 second quarter, unless otherwise noted
herein. Compensation and benefits expense for the first six months of 1995
decreased 3% from the comparable 1994 period due primarily to lower production
levels and earnings in the 1995 first-half. Other expenses increased 1% from the
1994 first-half and included a $26 million charge for the write-off of an asset
related to a technology contract in the 1995 first quarter.
LIQUIDITY AND LIABILITY MANAGEMENT
The primary objective of the Corporation's funding policies is to assure
liquidity at all times. To strengthen liquidity, the Corporation maintains a
strong capital base, obtains committed, unsecured, revolving credit facilities
(the "Credit Facilities"), issues term debt, concentrates debt issuance through
Merrill Lynch & Co., Inc. (the "Parent"), and pursues expansion and
diversification of funding sources.
There are three key elements to the Corporation's liquidity strategy. The first
is to maintain alternative funding sources such that all debt obligations
maturing within one year, including commercial paper and the current portion of
term debt, can be funded when due without issuing new unsecured debt or
liquidating any business assets. The most significant alternative funding
sources are the proceeds from executing repurchase agreements ("repos") and
obtaining secured bank loans, both principally employing unencumbered
investment-grade marketable securities. The calculation of proceeds available
from repos and secured bank loans takes into account both a conservative
estimate of excess collateral required by secured lenders and restrictions on
upstreaming cash from subsidiaries to the Parent. The ability to execute this
secured funding is demonstrated by the Corporation's routine use of repo markets
to finance inventory and by periodic tests of secured borrowing procedures with
banks. Other alternative funding sources include liquidating cash equivalents,
securitizing additional home equity and other mortgage loan assets, and drawing
on Credit Facilities. At June 30, 1995, the Credit Facilities totaled $5.5
billion and have not been drawn upon.
As an additional measure, the Corporation regularly reviews the level and mix of
its assets and liabilities to ascertain its ability to conduct core businesses
beyond one year without reliance on issuing new unsecured debt or drawing upon
Credit Facilities. The composition of the Corporation's asset mix provides
flexibility in managing liquidity, since most of the Corporation's assets turn
over frequently and are generally match-funded with a liability whose cash flow
characteristics closely match those of the asset. At June 30, 1995,
approximately 3% of the Corporation's assets, principally certain other
investments, and fixed and other assets, were considered not readily marketable
by management. The Corporation monitors the liquidity of assets, the quality of
Credit Facilities, and the overall level of equity and term debt in assessing
financial strength and capital adequacy at any point in time.
20
<PAGE>
The second element of the Corporation's liquidity strategy is to concentrate all
general purpose borrowing at the Parent level, except where tax regulations,
time differences, or other business considerations dictate otherwise. The
benefits of this strategy are: a) lower financing costs from the reduced risks
of a diversified asset and business base; b) simplicity, control, and wider name
recognition for banks, creditors, and rating agencies; and c) flexibility to
meet varying funding requirements within subsidiaries.
The third element is to expand and diversify the Corporation's funding
instruments and its investor and creditor base. The Corporation maintains strict
concentration standards for short-term lenders, which include limits for any
single investor. The Corporation's funding programs benefit from the ability to
market commercial paper through its own sales force to a large, diversified
customer base and the financial creativity of the Corporation's capital markets
and private client operations. Commercial paper remains the Corporation's major
source of short-term general purpose funding. Commercial paper outstanding
totaled $15.0 billion and $14.8 billion at June 30, 1995 and December 30, 1994,
respectively, which represented 9% of total assets at both second quarter-end
1995 and year-end 1994, respectively.
At June 30, 1995, total long-term debt was $15.7 billion compared with $14.9
billion at year-end 1994. At June 30, 1995, the Corporation's senior long-term
debt was rated by seven recognized credit rating agencies, as follows:
<TABLE>
<CAPTION>
Rating Agency Rating
------------- ------
<S> <C>
Duff & Phelps Credit Rating Co. AA-
Fitch Investors Service, Inc. AA
IBCA Ltd. AA-
Japan Bond Research Institute AA
Moody's Investors Service, Inc. A1
Standard & Poor's Ratings Group A+
Thomson BankWatch, Inc. AA
</TABLE>
During the first six months of 1995, the Corporation issued $4.1 billion in
long-term debt. During the same period, maturities and repurchases were $3.7
billion. In addition, approximately $753 million of the Corporation's
securities held by subsidiaries were sold and $607 million were purchased.
Expected maturities of long-term debt over the next 12 months are $6.2 billion
as of June 30, 1995.
Approximately $31.7 billion of the Corporation's indebtedness at June 30, 1995
is considered senior indebtedness as defined under various indentures.
As part of the Corporation's overall liquidity program, its insurance
subsidiaries regularly review the funding requirements of their contractual
obligations for in-force, fixed-rate life insurance and annuity contracts and
expected future acquisition and maintenance expenses for all contracts. The
liquidity and duration of the fixed-rate asset and liability portfolios are
closely monitored.
During the past few years, the Corporation's insurance subsidiaries have changed
the mix of products offered to policyholders. Currently, variable life
insurance and variable annuity products are actively marketed. These products
do not subject the insurance subsidiaries to the interest rate, asset/liability
matching, and credit risks attributable to fixed-rate products, thereby reducing
the risk profile and liquidity demands on the insurance subsidiaries. The
21
<PAGE>
insurance subsidiaries maintain predominantly high quality, liquid investment
portfolios to fund various business activities. At June 30, 1995, approximately
86% of invested assets of insurance subsidiaries were considered liquid by
management.
In the 1995 six-month period, the Corporation's cash and cash equivalents
increased by approximately $1,016 million to $3,328 million. Cash of $2,614
million was provided from financing activities in the first six months of 1995.
During the same period, the Corporation used $1,221 million and $377 million for
operating and investing activities, respectively.
CAPITAL RESOURCES AND CAPITAL ADEQUACY
The Corporation remains one of the most highly capitalized institutions in the
U.S. securities industry with an equity base of $5.9 billion at June 30, 1995,
including $5.3 billion in common equity, supplemented by $0.6 billion in
preferred equity. The Corporation's average leverage ratio, computed as the
ratio of average month-end assets to average month-end stockholders' equity, was
32.7x and 32.3x for the first six months of 1995 and 1994, respectively. The
Corporation's leverage ratio at the end of the 1995 and 1994 second quarters was
29.7x and 30.9x, respectively.
To compute the Corporation's average adjusted leverage ratio, resale agreements
and securities borrowed transactions are subtracted from total assets. The
average adjusted leverage ratio was 19.0x and 19.4x for the first six months of
1995 and 1994, respectively. The Corporation's adjusted leverage ratio at the
end of the 1995 and 1994 second quarters was 18.3x and 19.2x, respectively.
The Corporation operates in many regulated businesses that require various
minimum levels of capital to conduct business. (See Regulatory Requirements Note
to the Consolidated Financial Statements - Unaudited.) The Corporation's broker-
dealer, insurance, and futures commission merchant activities are subject to
regulatory requirements which may restrict the free flow of funds to affiliates.
Regulatory approval is required for certain transactions, including payment of
dividends in excess of certain established levels, making affiliated
investments, and entering into management and service agreements with affiliated
companies.
The Corporation's overall capital needs are continually reviewed to ensure that
its capital base can support the estimated risks of its businesses as well as
the regulatory and legal capital requirements of subsidiaries. Based upon these
analyses, management believes that the Corporation's equity base is adequate.
ASSETS AND LIABILITIES
The Corporation manages its balance sheet and risk limits according to market
conditions and business needs, subject to profitability and control of risk.
Asset and liability levels are primarily determined by order flow and fluctuate
daily, sometimes significantly, depending upon volume and demand. The liquidity
and maturity characteristics of assets and liabilities are monitored
continuously. The Corporation monitors and manages changes in its balance sheet
using point-in-time and average daily balances. Average daily balances are
derived from the Corporation's management information system which summarizes
balances on a settlement date basis. Financial statement balances, as required
under generally accepted accounting principles, are recorded on a trade date
basis. The discussion that follows compares the changes in settlement date
22
<PAGE>
average daily balances, not quarter-end balances. The increase in average
balance sheet levels during the first six months of 1995 was attributable to
many factors, including increased trading and related hedging and funding
activities.
For the first six months of 1995, average assets were $191 billion, up 6% versus
$180 billion for the 1994 fourth quarter. Average liabilities rose 6% to $186
billion from $175 billion for the 1994 fourth quarter.
The major components of the net growth of average assets and liabilities are
summarized in the table below:
<TABLE>
<CAPTION>
Increase in
(In millions) Average Assets Percent Increase
- ------------- -------------- ----------------
<S> <C> <C>
Trading assets $ 5,614 10 %
Securities borrowed $ 5,161 20 %
Resale agreements $ 1,540 3 %
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) in Percent Increase
Average Liabilities (Decrease)
---------------------- ----------------
<S> <C> <C>
Repurchase agreements $ 9,056 14 %
Trading liabilities $ 3,389 10 %
Securities loaned $(1,653) (27)%
</TABLE>
In managing its balance sheet, the Corporation strives to match-fund its
interest-earning assets with interest-bearing liabilities having similar
maturities. The Corporation generally match-funds its repurchase
agreements/resale agreements and its securities borrowed/securities loaned
business, for example, earning an interest spread on these transactions. In the
first six months of 1995, inventory levels were higher due to increases in
trading activity. On-balance-sheet hedges, included in trading assets and
liabilities, were also up due, in part, to increased market activity during
1995. The Corporation uses hedges principally to reduce risk in connection with
its trading activities. Repurchase and resale agreements rose during the first
six months of 1995 as a result of an increase in match-funded transactions
involving mainly U.S. Government and agency securities. Increased use of
repurchase agreements as an alternate funding source for trading assets also led
to higher repurchase agreement balances. Securities loaned balances were down
primarily due to a decrease in match-funded activity. Securities borrowed
balances increased due primarily to higher levels of trading liabilities and
customer short positions, partially offset by lower match-funded activity. In
addition, at June 30, 1995 and December 30, 1994 there were $2.8 billion and
$1.1 billion, respectively, of securities borrowed/loaned with the same
counterparties that the Corporation did not offset. In practice, the application
of Interpretation No. 39, "Offsetting of Amounts Related to Certain Contracts,"
varies among financial institutions with some entities offsetting these
balances.
The Corporation's assets, based on liquidity and maturity characteristics, are
funded through diversified sources which include repurchase agreements,
commercial paper and other short-term borrowings, long-term borrowings, and
equity.
23
<PAGE>
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
In the normal course of business, the Corporation underwrites, trades, and holds
non-investment grade securities in connection with its investment banking,
market-making, and derivative structuring activities. During the past four
years, the Corporation has increased its non-investment grade trading
inventories to satisfy client demand for higher-yielding investments, including
emerging markets and other international securities.
Non-investment grade securities have been defined as debt and preferred equity
securities rated as BB+ or lower, or equivalent ratings by recognized credit
rating agencies, certain sovereign debt in emerging markets, amounts due under
various derivative contracts from non-investment grade counterparties, and those
non-rated securities that, in the opinion of management, are non-investment
grade. At June 30, 1995, long and short non-investment grade trading inventories
accounted for 4.8% of aggregate consolidated trading inventories, compared with
4.3% at year-end 1994. Non-investment grade trading inventories are carried at
fair value.
The Corporation provides financing and advisory services to, and invests in,
companies entering into leveraged transactions. Examples of leveraged
transactions may include leveraged buyouts, recapitalizations, and mergers and
acquisitions. The Corporation provides extensions of credit to leveraged
companies in the form of senior and subordinated debt, as well as bridge
financing on a select and limited basis. In addition, the Corporation syndicates
loans for non-investment grade counterparties or counterparties engaged in
highly leveraged transactions. In connection with these syndications, the
Corporation may retain a residual portion of these loans. Loans to highly
leveraged companies are carried at unpaid principal balances less a reserve for
estimated losses. The allowance for loan losses is estimated based on a review
of each loan, and considerations of economic, market, and credit conditions. At
June 30, 1995 and December 30, 1994, there were no bridge loans outstanding.
The Corporation holds non-investment grade securities, direct equity investments
in leveraged companies, and interests in partnerships that invest in leveraged
transactions. Equity investments in privately held companies for which sale is
restricted by government or contractual requirements are carried at the lower of
cost or estimated net realizable value. The Corporation 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 determined on a select and limited basis.
The Corporation's involvement in non-investment grade securities and highly
leveraged transactions is subject to risks related to the creditworthiness of
the issuers of and the liquidity of the market for such securities, in addition
to the usual risks associated with investing in, financing, underwriting, and
trading investment grade instruments. The Corporation recognizes such risks
and, whenever possible, employs strategies to mitigate exposures.
The specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment. The Corporation
continually monitors credit risk by individual issuer and industry
concentration.
In addition, valuation policies provide for recognition of market liquidity, as
well as the trading pattern of specific securities. In certain instances, the
24
<PAGE>
Corporation will hedge the exposure associated with owning a high-yield or non-
investment grade position by selling short the related equity security. The
Corporation also uses certain non-investment grade trading inventories,
principally non-U.S. governments and agencies securities, to hedge the exposure
arising from structured derivative transactions. Collateral, consisting
principally of U.S. Government securities, may be obtained to reduce credit risk
related to these transactions.
The Corporation's insurance subsidiaries hold non-investment grade securities to
support fixed-rate liabilities. As a percentage of total insurance investments,
non-investment grade securities were 4.8%, compared with 5.5% at year-end 1994.
Non-investment grade securities of insurance subsidiaries are classified as
available-for-sale and are carried at fair value.
A summary of the Corporation's non-investment grade holdings and highly
leveraged transactions is provided below:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 30,
(In millions) 1995 1994
- ------------------------------------------------------------------
<S> <C> <C>
Non-investment grade trading assets $4,036 $3,309
Non-investment grade trading liabilities 455 456
Non-investment grade investments
of insurance subsidiaries 279 314
Loans (net of allowance for
loan losses) (a) 246 257
Equity investments (b) 238 289
Partnership interests 102 93
- ------------------------------------------------------------------
Additional commitments to invest in
partnerships $ 87 $ 80
Unutilized revolving lines of
credit and other lending
commitments 96 50
- ------------------------------------------------------------------
</TABLE>
(a) Represented outstanding loans to 37 and 35 medium-sized companies at
June 30, 1995 and December 30, 1994, respectively.
(b) Invested in 72 and 80 enterprises at June 30, 1995 and December 30, 1994,
respectively.
At June 30, 1995, the largest non-investment grade concentration consisted of
government and corporate obligations of a Latin American sovereign totaling $267
million, of which $47 million represented on-balance-sheet hedges for off-
balance-sheet instruments. No one industry sector accounted for more than 19%
of total non-investment grade positions. Included in the table above are debt
and equity securities of issuers in various stages of bankruptcy proceedings or
in default. At June 30, 1995, the carrying value of these securities totaled
$344 million, of which 88% resulted from the Corporation's market-making
activities in such securities.
OTHER DEVELOPMENTS
On July 21, 1995, the Corporation and Smith New Court PLC ("Smith New Court"),
a U.K.-based global securities firm, announced the terms of a cash offer under
which the Corporation expects to acquire Smith New Court. In the proposed
transaction, a wholly-owned subsidiary of the Corporation has offered to acquire
all outstanding capital shares of Smith New Court for cash, with the aggregate
offer valued at approximately $842 million. The transaction is conditioned on,
among other things, the receipt of all required regulatory approvals and is
expected to be completed late in the third quarter or early in the fourth
quarter of 1995.
25
<PAGE>
STATISTICAL DATA
Selected statistical data for the last five quarters is presented below for
informational purposes:
<TABLE>
<CAPTION>
(Dollars in millions, 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr.
except per share amounts) 1994 1994 1994 1995 1995
- --------------------------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
PRIVATE CLIENT ACCOUNTS (a):
Assets in Worldwide
Private Client Accounts $553,000 $571,000 $568,000 $603,000 $643,000
Assets in Domestic
Private Client Accounts $523,000 $539,000 $537,000 $571,000 $608,000
Assets under Professional
Management:
Money Markets $ 65,000 $ 67,000 $ 67,000 $ 71,000 $ 76,000
Equities 35,000 38,000 37,000 38,000 42,000
Fixed Income 39,000 38,000 36,000 37,000 38,000
Private Portfolio 17,000 19,000 20,000 20,000 20,000
Insurance 5,000 5,000 4,000 4,000 4,000
-------- -------- -------- -------- --------
Subtotal 161,000 167,000 164,000 170,000 180,000
ML Consults 15,300 15,400 14,400 14,900 15,700
-------- -------- -------- -------- --------
TOTAL $176,300 $182,400 $178,400 $184,900 $195,700
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------
UNDERWRITING (b):
Global Debt and Equity:
Volume $ 34,000 $ 30,200 $ 21,300 $ 27,600 $ 32,400
Market Share 13.8% 13.0% 10.0% 12.2% 11.8%
U.S. Domestic Debt and
Equity:
Volume $ 28,200 $ 24,600 $ 18,000 $ 24,000 $ 27,200
Market Share 17.2% 16.7% 15.3% 16.9% 14.3%
- -----------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. Domestic 38,400 38,650 38,700 38,550 38,200
International 4,800 5,000 5,100 5,050 5,100
-------- -------- -------- -------- --------
TOTAL 43,200 43,650 43,800 43,600 43,300
======== ======== ======== ======== ========
Financial Consultants and
Account Executives
Worldwide 13,200 13,300 13,400 13,500 13,600
Support Personnel to Producer
Ratio (c) 1.47 1.46 1.46 1.44 1.41
INCOME STATEMENT:
Net Earnings $ 251.8 $ 231.6 $ 161.6 $ 227.3 $ 282.8
Annualized Return on
Average Common
Stockholders' Equity 18.5% 16.9% 11.5% 16.7% 21.0%
Earnings Per Common Share:
Primary $ 1.18 $ 1.10 $ .76 $ 1.08 $ 1.40
Fully Diluted $ 1.18 $ 1.10 $ .75 $ 1.08 $ 1.39
BALANCE SHEET:
Total Assets $174,007 $168,395 $163,749 $176,733 $174,853
Total Stockholders'
Equity $ 5,628 $ 5,705 $ 5,818 $ 5,704 $ 5,883
SHARE INFORMATION
(in thousands):
Weighted Average Shares
Outstanding:
Primary 212,489 209,030 203,157 199,178 193,267
Fully Diluted 212,489 209,030 203,618 199,178 195,159
Common Shares
Outstanding(d) 195,982 192,812 181,479 176,521 175,460
Shares Repurchased 6,325 4,058 12,512 9,309 3,571
- -----------------------------------------------------------------------------------
</TABLE>
(a) Client accounts were redefined in 1994 to include certain
institutional private portfolio accounts.
(b) Full credit to book manager. All market share data is derived from
Securities Data Co.
(c) Support personnel includes sales assistants.
(d) Does not include 7,255,040, 6,816,714, 6,427,091, 5,306,924, and 4,809,014
unallocated reversion shares held in the Employee Stock Ownership Plan at
period end July 1, 1994, September 30, 1994, December 30, 1994, March 31,
1995, and June 30, 1995, respectively, which are not considered
outstanding for accounting purposes.
26
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
Since the filing of the Corporation's 1994 10-K and of the Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 (the "First
Quarter 1995 10-Q"), the following events have taken place with respect to
several of the actions reported therein. Capitalized terms used herein without
definition have the meanings set forth in the 1994 10-K.
Orange County Litigation. The following developments have occurred since the
- -------------------------
filing of the First Quarter 1995 10-Q with respect to the civil actions filed
against or on behalf of the Corporation arising out of the Corporation's
business activities with Orange County related to transactions entered into on
behalf of Orange County and the Pools.
In the Orange County Action that commenced on January 12, 1995, the Bankruptcy
Court issued a Memorandum Opinion dated May 22, 1995 granting the defendants'
motion to dismiss the Pools' bankruptcy petition. In addition, on June 6, 1995,
Orange County filed an amended complaint adding claims under Sections 362, 502,
510, 549 and 922 of the Bankruptcy Code with respect to the Corporation's
liquidation of certain securities, asserting as counterclaims all claims
asserted by it in its original complaint, and asserting additional counterclaims
for alleged violations of Sections 1709-10 of the California Civil Code, Section
182 of the California Penal Code and for aiding and abetting breach of fiduciary
duty.
In the Darling Action, on July 6, 1995, the Superior Court of the State of
California, County of Orange, dismissed all claims asserted against a subsidiary
of the Corporation named as a defendant in that action.
The Lewis Action was dismissed on June 6, 1995 by the Superior Court of the
State of California, Los Angeles County, on the basis of the forum non
conveniens doctrine. On June 9, 1995, the plaintiff in that case filed a new
action in the Supreme Court of the State of New York, New York County, naming as
defendants 27 present or past directors and/or officers of the Corporation or
certain of its subsidiaries, with the Corporation and certain of its
subsidiaries being nominal defendants. This action has been consolidated with
the Wilson Actions.
In the Smith Action, the United States District Court for the Central District
of California entered an order on July 17, 1995 approving a stipulation among
the parties dismissing the plaintiffs' claims brought under Sections 25400,
25401, 25500, 25501 and 25504.1 of the California Corporations Code without
prejudice to the refiling of those claims in state court. This order further
provided that the plaintiffs will not refile these claims in state court prior
to 60 days after entry of the order and that certain tolling provisions shall
govern any statute of limitations applicable to these claims.
GSLIC Litigation. The following developments have occurred since the filing of
- -----------------
the First Quarter 1995 10-Q with respect to the GSLIC Litigation. On July 14,
1995, an agreement was signed among the Receiver, MLPF&S, MLGSI and a former
managing director of MLPF&S, along with certain
27
<PAGE>
other named defendants, to settle the Receiver Action. On July 17, 1995, the
Fourth Judicial Circuit Court in Duval County, Florida entered an order in the
Receiver Action severing for purposes of trial the claims against the settling
defendants and otherwise staying all further proceedings in respect of such
defendants. Following the execution of final settlement documentation and
receipt of court approval in respect thereof, on the terms set forth in the
settlement, the Corporation will pay $45 million to the Receiver, and the
Receiver's claims against MLPF&S, MLGSI and a former managing director of MLPF&S
will be dismissed in their entirety.
On August 10, 1995, an agreement was signed among the RTC, MLPF&S, MLGSI and a
former managing director of MLPF&S to settle the RTC Action, as well as all
other pending litigations brought by the RTC against the Corporation or its
affiliates. Under the agreement, the Corporation will pay $4.5 million to the
RTC in respect of the RTC Action, and the RTC's claims against MLPF&S, MLGSI and
a former director of MLPF&S will be dismissed in their entirety.
For more detailed information regarding litigation matters involving the
Corporation, see "Item 3. - Legal Proceedings" in the 1994 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Corporation
hereby undertakes to furnish to the Securities and Exchange Commission
(the "Commission"), upon request, copies of the instruments defining
the rights of holders of long-term debt securities of the Corporation
that authorize an amount of securities constituting 10% or less of the
total assets of the Corporation and its subsidiaries on a consolidated
basis.
(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. (The Financial Data Schedule to be contained
in this Exhibit 27 is required to be submitted only in the
Corporation's electronic filing of this Quarterly Report on Form 10-Q
by means of the EDGAR System.)
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by the Corporation
with the Commission during the quarterly period covered by this Report:
28
<PAGE>
(i) Current Report dated April 18, 1995 for the purpose of filing the
Preliminary Unaudited Earnings Summary of the Corporation for the
three-month period ended March 31, 1995.
(ii) Current Report dated May 2, 1995 for the purpose of filing the
Preliminary Unaudited Consolidated Balance Sheet of the Corporation
as of March 31, 1995.
(iii) Current Report dated May 23, 1995 for the purpose of filing the form
of Registrant's Warrant Agreement relating to the Corporation's
Greater of U.S. Dollar/Deutsche Mark - U.S. Dollar/Japanese Yen Put
Currency Warrants, expiring May 15, 1997.
29
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-------------------------
(Registrant)
Date: August 11, 1995 By: /s/ Joseph T. Willett
-------------------------
Joseph T. Willett
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
30
<PAGE>
INDEX TO EXHIBITS
Exhibits
(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. (The Financial Data Schedule to be contained in
this Exhibit 27 is required to be submitted only in the Corporation's
electronic filing of this Quarterly Report on Form 10-Q by means of the
EDGAR System.)
<PAGE>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF PER COMMON SHARE EARNINGS
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
-------------------- ------------------
June 30, July 1, June 30, July 1,
1995(A) 1994(A) 1995(A) 1994(A)
-------- ------- -------- -------
<S> <C> <C> <C> <C>
PRIMARY:
Net earnings.................................... $282,796 $251,809 $510,071 $623,568
Preferred stock dividends....................... (11,913) (1,539) (23,854) (2,875)
-------- -------- -------- --------
Net earnings applicable to common stockholders.. $270,883 $250,270 $486,217 $620,693
======== ======== ======== ========
Weighted average shares outstanding:
Common stock................................... 175,638 198,224 178,017 200,499
Assuming issuance of shares relating to
employee incentive plans...................... 17,629 14,265 18,206 16,062
-------- -------- -------- --------
Total shares.................................... 193,267 212,489 196,223 216,561
======== ======== ======== ========
Per common share amounts:
Net earnings.................................... $ 1.40 $ 1.18 $ 2.48 $ 2.87
======== ======== ======== ========
FULLY DILUTED:
Net earnings.................................... $282,796 $251,809 $510,071 $623,568
Preferred stock dividends....................... (11,913) (1,539) (23,854) (2,875)
-------- -------- -------- --------
Net earnings applicable to common stockholders.. $270,883 $250,270 $486,217 $620,693
======== ======== ======== ========
Weighted average shares outstanding:
Common stock................................... 175,638 198,224 178,017 200,499
Assuming issuance of shares relating to
employee incentive plans...................... 19,521 14,265 19,520 16,062
-------- -------- -------- --------
Total shares.................................... 195,159 212,489 197,537 216,561
======== ======== ======== ========
Per common share amounts:
Net earnings.................................... $ 1.39 $ 1.18 $ 2.46 $ 2.87
======== ======== ======== ========
</TABLE>
(A) In accordance with Accounting Principles Board Opinion No. 15, the modified
treasury stock method was used to calculate per common share earnings.
<PAGE>
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Dollars In Thousands)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended Ended
---------------------- ----------------------
June 30, July 1, June 30, July 1,
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Pretax earnings from continuing operations... $ 464,300 $ 432,662 $ 843,092 $1,084,870
Deduct equity in undistributed net earnings
of unconsolidated subsidiaries............. - (9,400) - (12,448)
---------- ---------- ---------- ----------
Total pretax earnings from continuing
operations................................. 464,300 423,262 843,092 1,072,422
---------- ---------- ---------- ----------
Add:
Fixed Charges
Interest (A).............................. 3,031,992 2,075,400 5,813,001 3,974,827
Other (B)................................. 33,636 34,645 68,816 70,740
---------- ---------- ---------- ----------
Total fixed charges........................ 3,065,628 2,110,045 5,881,817 4,045,567
---------- ---------- ---------- ----------
Preferred stock dividend requirements...... 19,562 2,644 39,428 5,000
---------- ---------- ---------- ----------
Total combined fixed charges and
preferred stock dividends................. 3,085,190 2,112,689 5,921,245 4,050,567
---------- ---------- ---------- ----------
Pretax earnings before fixed charges......... $3,529,928 $2,533,307 $6,724,909 $5,117,989
========== ========== ========== ==========
Pretax earnings before combined fixed
charges and preferred stock dividends........$3,549,490 $2,535,951 $6,764,337 $5,122,989
========== ========== ========== ==========
Ratio of earnings to fixed charges........... 1.15 1.20 1.14 1.27
========== ========== ========== ==========
Ratio of earnings to combined fixed charges
and preferred stock dividends................ 1.15 1.20 1.14 1.26
========== ========== ========== ==========
</TABLE>
(A) There was no capitalized interest for the 1995 and 1994 periods.
(B) Other fixed charges consist of the interest factor in rentals, amortization
of debt expense, and preferred stock dividend requirements of majority-
owned subsidiaries.
<PAGE>
Exhibit 15
August 11, 1995
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, N.Y. 10281
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim consolidated
financial information of Merrill Lynch & Co., Inc. and subsidiaries as of June
30, 1995 and for the three- and six-month periods ended June 30, 1995 and July
1, 1994 as indicated in our report dated August 11, 1995; because we did not
perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, is
incorporated by reference in the following documents, as amended:
Filed on Form S-8:
Registration Statement No. 33-41942 (1986 Employee Stock Purchase Plan)
Registration Statement No. 33-17908 (Incentive Equity Purchase Plan)
Registration Statement No. 33-33336 (Long Term Incentive Compensation
Plan)
Registration Statement No. 33-51831 (Long Term Incentive Compensation
Plan)
Registration Statement No. 33-51829 (401(k) Savings and Investment Plan)
Registration Statement No. 33-54154 (Non-Employee Directors' Equity Plan)
<PAGE>
Registration Statement No. 33-54572 (401(k) Savings and Investment Plan
(Puerto Rico))
Registration Statement No. 33-56427 (1994 Deferred Compensation Plan for a
Select Group of Eligible Employees)
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan for a
Select Group of Eligible Employees)
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan for a
Select Group of Eligible Employees)
Filed on Form S-3:
Debt Securities
Registration Statement No. 33-54218
Registration Statement No. 2-78338
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
Registration Statement No. 33-17965
Registration Statement No. 33-27512
Registration Statement No. 33-35456
Registration Statement No. 33-42041
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
<PAGE>
Medium Term Notes
Registration Statement No. 2-96315
Registration Statement No. 33-03079
Registration Statement No. 33-05125
Registration Statement No. 33-09910
Registration Statement No. 33-16165
Registration Statement No. 33-19820
Registration Statement No. 33-23605
Registration Statement No. 33-27594
Registration Statement No. 33-38879
Other Securities
Registration Statement No. 33-19975 (Remarketed Preferred Stock, Series C)
Registration Statement No. 33-33335 (Common Stock)
Registration Statement No. 33-45777 (Common Stock)
Registration Statement No. 33-55363 (Preferred Stock)
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERRILL
LYNCH & CO., INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30,
1995.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1995
<PERIOD-START> DEC-31-1994
<PERIOD-END> JUN-30-1995
<CASH> 3,327,658
<RECEIVABLES> 27,610,998
<SECURITIES-RESALE> 45,301,994
<SECURITIES-BORROWED> 21,752,624
<INSTRUMENTS-OWNED> 67,716,787<F1>
<PP&E> 1,575,984
<TOTAL-ASSETS> 174,852,533
<SHORT-TERM> 25,783,252
<PAYABLES> 20,939,884
<REPOS-SOLD> 52,491,110
<SECURITIES-LOANED> 3,614,152
<INSTRUMENTS-SOLD> 36,066,426
<LONG-TERM> 15,703,594
<COMMON> 315,105
0
618,800
<OTHER-SE> 4,949,333
<TOTAL-LIABILITY-AND-EQUITY> 174,852,533
<TRADING-REVENUE> 1,289,433
<INTEREST-DIVIDENDS> 6,324,774
<COMMISSIONS> 1,450,307
<INVESTMENT-BANKING-REVENUES> 583,843
<FEE-REVENUE> 912,932
<INTEREST-EXPENSE> 5,819,194
<COMPENSATION> 2,578,643
<INCOME-PRETAX> 843,092
<INCOME-PRE-EXTRAORDINARY> 510,071
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 510,071
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.46
<FN>
<F1> Financial instruments owned includes commodity contracts but excludes
physical commodities and real estate owned totaling $150,625.
</FN>
</TABLE>
