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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 19, 1999
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Merrill Lynch & Co., Inc.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 1-7182 13-2740599
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(State or Other (Commission (I.R.S. Employer
Jurisdiction of File Number) Identification No.)
Incorporation)
World Financial Center, North Tower, New York, New York 10281-1332
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 449-1000
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(Former Name or Former Address, if Changed Since Last Report.)
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Item 5. Other Events
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Filed herewith is the Preliminary Unaudited Earnings Summary, as contained in
a press release dated January 19, 1999, for Merrill Lynch & Co., Inc.
("Merrill Lynch") for the three months and the year ended December 25, 1998.
The results of operations set forth therein for such periods are unaudited.
All adjustments, consisting only of normal recurring accruals, that are in the
opinion of management, necessary for a fair presentation of the results of
operations for the periods presented, have been included. The nature of Merrill
Lynch's business is such that the results for any interim period are not
necessarily indicative of the results for a full year.
Preferred stockholders' equity, common stockholders' equity, long-term
borrowings, preferred securities issued by subsidiaries, and book value per
common share as of December 25, 1998 were approximately $425 million, $9.7
billion, $57.5 billion, $2.6 billion, and $26.87, respectively.
On January 19, 1999, Merrill Lynch reported fourth quarter net earnings of
$359 million, down 23% from last year's fourth quarter. These results
represent a $234 million increase from 1998 third quarter earnings of $125
million before a provision for costs related to staff reductions.
Earnings per common share were $.97 basic and $.86 diluted, compared with
$1.34 basic and $1.15 diluted in the 1997 fourth quarter and $.32 basic and
$.28 diluted in the 1998 third quarter, excluding the staff reduction
provision. Fourth quarter earnings on a cash basis, which exclude goodwill
amortization, were $420 million, or $1.01 per diluted share.
Earnings for 1998, excluding the staff reduction provision ($288 million
after-tax) and a $5 million after-tax charge for the cumulative effect of a
change in accounting principle, were $1.6 billion or $3.73 per diluted share,
down 20% from the $1.9 billion, or $4.79 per diluted share reported in 1997.
Including these one-time items, 1998 net earnings were $1.3 billion or $3.00
per diluted share.
Earnings on a cash basis before the one-time items were $1.8 billion, down
from $2.0 billion in 1997. On the same basis, diluted earnings per share were
$4.28 versus $4.95 in 1997.
Annualized return on average common equity was approximately 14.8% for the
1998 fourth quarter, and on a cash basis, 16.7%. Return on average common
equity was 16.5% for 1998 before the one-time items, and on a similar cash
basis, 18.4%.
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Net revenues rose 2% from the 1997 fourth quarter to $4.1 billion, primarily
due to strong revenues from asset management and portfolio service fees,
commissions, and near record strategic services fees.
Commission revenues were $1.4 billion, up 9% from the 1997 fourth quarter,
primarily as a result of increases in global listed securities volume.
Principal transactions revenues declined 66% from a year ago to $211 million.
Debt trading revenues remained under pressure, as certain inventory positions
were reduced during the quarter. Continuing wide credit spreads and reduced
liquidity, particularly in October, contributed to losses in corporate and
high-yield bonds and mortgage-backed securities. Revenues from interest rate
and currency swaps also declined. Equities and equity derivatives revenues
rose sharply from the 1997 fourth quarter.
Investment banking revenues decreased 4% to $824 million. Strategic services
fees benefited from strong merger and acquisition activity. A slowdown of new
issuance resulting from global market volatility led to lower underwriting
revenues, particularly from equity and high-yield products. Merrill Lynch was
the leading equity underwriter during the quarter, with common equity market
share more than doubling from the 1998 third quarter.
Asset management and portfolio service fees were $1.0 billion, up 29% from
the 1997 fourth quarter. Continued growth in assets under management,
primarily driven by the acquisition of Mercury Asset Management and by
fee-based products such as Merrill Lynch Consults (Registered Trademark),
Mutual Fund Advisor (Service Mark), and Financial Advantage (Service Mark), led
to the increase. During the fourth quarter, funds increased by $18.1 billion
at Merrill Lynch Asset Management and $15.9 billion at Merrill Lynch Mercury
Asset Management, as both experienced net cash inflows in addition to market
appreciation.
On an annualized basis, fee-based revenues now cover over 70% of fixed and
semi-fixed expenses, up from 65% for full-year 1997.
Other revenues increased 64% from a year ago to $256 million, primarily as a
result of a $100 million gain from the sale of Merrill Lynch's New York Stock
Exchange specialist business. Net interest profit increased 21% to $320
million due in part to an overall reduction in funding costs.
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Non-interest expenses increased 9% from the 1997 fourth quarter to $3.6
billion, but were down 2% from the 1998 third quarter, excluding the staff
reduction provision. Non-compensation expenses significantly benefited from
cost savings initiatives, and were down $271 million, or 17%, from the 1998
third quarter, excluding the staff reduction provision.
Compensation and benefits, the largest expense category, was up 8% to $2.2
billion, with over 60% of this increase attributable to new operations
outside the US, including Mercury Asset Management and Merrill Lynch Japan
Securities. Also contributing to the increase were higher Financial
Consultant productivity and increased salary and benefit costs, partly offset
by lower incentive compensation.
Communications and technology expense rose 31% from the 1997 fourth quarter
to $438 million. Increased systems consulting costs associated with the Year
2000 and European Monetary Union initiatives, higher technology-related
depreciation and expanded use of market data services contributed to this
advance. Occupancy and related depreciation increased 19% to $222 million as
a result of global expansion, primarily in Japan and Europe.
Advertising and market development expense was down 32% to $107 million, due
in part to reductions in global travel, sales promotion, and recognition
program costs. Brokerage, clearing, and exchange fees rose 23% to $174
million, primarily attributable to custody and clearing costs for Merrill
Lynch Mercury Asset Management. Professional fees decreased 24% to $93
million because of lower management consulting costs and legal and employment
services fees.
Goodwill amortization increased $42 million from the 1997 fourth quarter to
$61 million, primarily as a result of the Mercury Asset Management
acquisition. Other expenses were down 5% to $249 million.
The 1998 fourth quarter effective tax rate was 22.8%, compared with 34.6% a
year ago, due primarily to the recognition of tax benefits for cumulative
losses incurred in connection with the start-up of the new Private Client
business in Japan. The annual effective tax rate was 34.1%.
Net earnings for 1998 also included the effect of early adoption of a change
in accounting principle related to distribution costs for closed-end mutual
funds. This change included a $5 million cumulative effect retroactive to the
beginning of 1998 and an $11 million after-tax reduction of 1998 earnings for
costs that previously were deferred and are now expensed. Previously reported
1998 quarterly results have been restated.
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Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
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(c) Exhibits
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(99) Additional Exhibits
(i) Preliminary Unaudited Earnings Summary for the three
months and the year ended December 25, 1998.
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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.
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(Registrant)
By: /s/ E. Stanley O'Neal
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E. Stanley O'Neal
Executive Vice President and
Chief Financial Officer
Date: January 19, 1999
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EXHIBIT INDEX
Exhibit No. Description Page
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(99) Additional Exhibits
(i) Preliminary Unaudited Earnings Summary for the 7-8
three months and the year ended December 25,
1998.
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<TABLE>
<CAPTION>
Exhibit 99(i)
MERRILL LYNCH & CO., INC.
PRELIMINARY UNAUDITED EARNINGS SUMMARY
For the Three Months Ended Percent Inc / (Dec)(3)
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December 25, September 25,(1) December 26,(2) 4Q98 vs. 4Q98 vs.
(in millions, except per share amounts) 1998 1998 1997 3Q98 4Q97
------------ ---------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES
Commissions $1,424 $1,449 $1,304 (1.7) % 9.2 %
Interest and dividends 4,411 5,079 4,565 (13.1) (3.4)
Principal transactions 211 279 615 (24.3) (65.7)
Investment banking 824 711 862 15.9 (4.4)
Asset management and portfolio service fees 1,046 1,043 809 0.3 29.3
Other 256 151 156 69.2 63.7
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TOTAL REVENUES 8,172 8,712 8,311 (6.2) (1.7)
Interest expense 4,091 4,863 4,301 (15.9) (4.9)
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NET REVENUES 4,081 3,849 4,010 6.0 1.8
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NON-INTEREST EXPENSES
Compensation and benefits 2,218 2,009 2,052 10.4 8.1
Communications and technology 438 487 335 (10.1) 31.0
Occupancy and related depreciation 222 227 187 (2.2) 18.5
Advertising and market development 107 203 158 (47.2) (32.1)
Brokerage, clearing, and exchange fees 174 186 142 (6.6) 22.6
Professional fees 93 165 121 (43.7) (23.8)
Goodwill amortization 61 55 19 9.6 N/M
Provision for costs related to staff reductions - 430 - N/M N/M
Other 249 292 261 (14.8) (4.5)
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TOTAL NON-INTEREST EXPENSES 3,562 4,054 3,275 (12.2) 8.8
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EARNINGS (LOSS) BEFORE INCOME TAXES AND DIVIDENDS
ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 519 (205) 735 N/M (29.4)
Income tax expense (benefit) 119 (75) 254 N/M (53.4)
Dividends on preferred securities issued by subsidiaries 41 33 12 27.7 235.3
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NET EARNINGS (LOSS) $ 359 $ (163) $ 469 N/M (23.4)
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Preferred stock dividends $ 10 $ 10 $ 10 - -
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NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 349 $ (173) $ 459 N/M (23.9)
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EARNINGS (LOSS) PER COMMON SHARE
Basic $ 0.97 $(0.48) $ 1.34 N/M (27.6)
Diluted $ 0.86 $(0.48) $ 1.15 N/M (25.2)
AVERAGE SHARES
Basic 359.9 357.6 342.7 0.6 5.0
Diluted 404.9 357.6 400.1 13.2 1.2
</TABLE>
(1) Amounts have been restated to reflect the early adoption of a change in
accounting principle related to distribution costs for closed-end mutual
funds.
(2) Amounts have been restated to reflect the Midland Walwyn Inc. merger as
required under pooling-of-interests accounting.
(3) Percentages are based on actual numbers before rounding.
Note: Certain revenues have been reclassified to conform to the current
presentation.
N/M Not meaningful.
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<TABLE>
<CAPTION>
Exhibit 99(i)
MERRILL LYNCH & CO., INC.
PRELIMINARY UNAUDITED EARNINGS SUMMARY
For the Year Ended
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December 25, December 26,(1) Percent(2)
(in millions, except per share amounts) 1998 1997 Inc / (Dec)
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<S> <C> <C> <C>
REVENUES
Commissions $ 5,799 $ 4,995 16.1 %
Interest and dividends 19,314 17,299 11.6
Principal transactions 2,651 3,827 (30.7)
Investment banking 3,264 2,876 13.5
Asset management and portfolio service fees 4,202 3,002 40.0
Other 623 500 24.6
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TOTAL REVENUES 35,853 32,499 10.3
Interest expense 18,306 16,243 12.7
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NET REVENUES 17,547 16,256 7.9
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NON-INTEREST EXPENSES
Compensation and benefits 9,191 8,333 10.3
Communications and technology 1,749 1,255 39.4
Occupancy and related depreciation 867 736 17.9
Advertising and market development 687 613 12.1
Brokerage, clearing, and exchange fees 683 525 30.0
Professional fees 552 520 6.1
Goodwill amortization 226 65 246.0
Provision for costs related to staff reductions 430 - N/M
Other 1,057 1,098 (3.7)
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TOTAL NON-INTEREST EXPENSES 15,442 13,145 17.5
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EARNINGS BEFORE INCOME TAXES, DIVIDENDS
ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 2,105 3,111 (32.4)
Income tax expense 717 1,129 (36.5)
Dividends on preferred securities issued by subsidiaries 124 47 161.1
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EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,264 1,935 (34.7)
Cumulative effect of change in accounting principle 5 - N/M
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NET EARNINGS $ 1,259 $ 1,935 (34.9)
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Preferred stock dividends $ 39 $ 39 (2.4)
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NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,220 $ 1,896 (35.6)
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EARNINGS PER COMMON SHARE
Basic $ 3.43 $ 5.57 (38.4)
Diluted $ 3.00 $ 4.79 (37.4)
AVERAGE SHARES
Basic 355.6 340.1 4.6
Diluted 406.3 395.9 2.6
</TABLE>
(1) Amounts have been restated to reflect the Midland Walwyn Inc. merger as
required under pooling-of-interests accounting.
(2) Percentages are based on actual numbers before rounding.
Note: Certain revenues have been reclassified to conform to the current
presentation.
N/M Not meaningful.
8
