SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 28, 2001
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Commission File Number 1-7182
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MERRILL LYNCH & CO., INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-2740599
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(State of incorporation) (I.R.S. Employer Identification No.)
4 World Financial Center
New York, New York 10080
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(Address of principal executive offices) (Zip Code)
(212) 449-1000
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Registrant's telephone number, including area code
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
842,126,885 shares of Common Stock and 4,195,407 Exchangeable Shares as of the
close of business on November 2, 2001. The Exchangeable Shares, which were
issued by Merrill Lynch & Co., Canada Ltd. in connection with the merger with
Midland Walwyn Inc., are exchangeable at any time into Common Stock on a
one-for-one basis and entitle holders to dividend, voting, and other rights
equivalent to Common Stock.
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
- -----------------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------
SEPT. 28, SEPT. 29, PERCENT
(in millions, except per share amounts) 2001 2000 INC. (DEC.)
-------- -------- ----------
NET REVENUES
Commissions $ 1,204 $ 1,624 (25.9)%
Principal transactions 759 1,160 (34.6)
Investment banking
Underwriting 543 590 (8.0)
Strategic advisory 294 268 9.7
Asset management and portfolio service fees 1,337 1,414 (5.4)
Other 129 318 (59.4)
-------- --------
Subtotal 4,266 5,374 (20.6)
-------- --------
Interest and dividend revenues 4,663 5,474 (14.8)
Less interest expense 3,784 4,704 (19.6)
-------- --------
Net interest profit 879 770 14.2
-------- --------
TOTAL NET REVENUES 5,145 6,144 (16.3)
-------- --------
NON-INTEREST EXPENSES
Compensation and benefits 2,757 3,146 (12.4)
Communications and technology 529 542 (2.4)
Occupancy and related depreciation 280 251 11.6
Advertising and market development 165 205 (19.5)
Brokerage, clearing, and exchange fees 219 206 6.3
Professional fees 115 147 (21.8)
Goodwill amortization 53 52 1.9
Other 253 284 (10.9)
September 11th - related 88 - N/M
-------- --------
TOTAL NON-INTEREST EXPENSES 4,459 4,833 (7.7)
-------- --------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 686 1,311 (47.7)
Income tax expense 216 378 (42.9)
Dividends on preferred securities issued by subsidiaries 48 48 -
-------- --------
NET EARNINGS $ 422 $ 885 (52.3)
======== ========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 412 $ 875 (52.9)
======== ========
EARNINGS PER COMMON SHARE
Basic $ 0.49 $ 1.09
======== ========
Diluted $ 0.44 $ 0.94
======== ========
DIVIDEND PAID PER COMMON SHARE $ 0.16 $ 0.16
======== ========
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 845.8 805.9
======== ========
Diluted 934.5 929.0
======== ========
- -------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------
SEPT. 28, SEPT. 29, PERCENT
(in millions, except per share amounts) 2001 2000 INC. (DEC.)
-------- -------- ----------
NET REVENUES
Commissions $ 4,071 $ 5,431 (25.0)%
Principal transactions 3,410 4,746 (28.2)
Investment banking
Underwriting 1,834 1,994 (8.0)
Strategic advisory 891 947 (5.9)
Asset management and portfolio service fees 4,072 4,217 (3.4)
Other 446 849 (47.5)
-------- --------
Subtotal 14,724 18,184 (19.0)
-------- --------
Interest and dividend revenues 16,459 15,007 9.7
Less interest expense 14,055 12,690 10.8
-------- --------
Net interest profit 2,404 2,317 3.8
-------- --------
TOTAL NET REVENUES 17,128 20,501 (16.5)
-------- --------
NON-INTEREST EXPENSES
Compensation and benefits 8,978 10,572 (15.1)
Communications and technology 1,695 1,710 (0.9)
Occupancy and related depreciation 820 762 7.6
Advertising and market development 575 713 (19.4)
Brokerage, clearing, and exchange fees 697 672 3.7
Professional fees 408 462 (11.7)
Goodwill amortization 156 162 (3.7)
Other 822 1,039 (20.9)
September 11th - related 88 - N/M
-------- --------
TOTAL NON-INTEREST EXPENSES 14,239 16,092 (11.5)
-------- --------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,889 4,409 (34.5)
Income tax expense 906 1,356 (33.2)
Dividends on preferred securities issued by subsidiaries 146 146 -
-------- --------
NET EARNINGS $ 1,837 $ 2,907 (36.8)
======== ========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,808 $ 2,878 (37.2)
======== ========
EARNINGS PER COMMON SHARE
Basic $ 2.15 $ 3.63
======== ========
Diluted $ 1.93 $ 3.18
======== ========
DIVIDEND PAID PER COMMON SHARE $ 0.48 $ 0.45
======== ========
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 839.8 793.7
======== ========
Diluted 938.8 905.0
======== ========
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See Notes to Consolidated Financial Statements
3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPT. 28, DEC. 29,
(dollars in millions) 2001 2000
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ASSETS
CASH AND CASH EQUIVALENTS $ 20,201 $ 23,205
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 4,382 6,092
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES BORROWED TRANSACTIONS 133,705 114,581
MARKETABLE INVESTMENT SECURITIES 72,856 49,251
TRADING ASSETS, AT FAIR VALUE
Contractual agreements 25,527 20,361
Corporate debt and preferred stock 18,129 17,377
Equities and convertible debentures 16,030 20,232
U.S. Government and agencies 11,700 17,519
Mortgages, mortgage-backed, and asset-backed 9,899 8,225
Municipals and money markets 8,826 2,791
Non-U.S. governments and agencies 5,993 5,009
-------- --------
96,104 91,514
SECURITIES PLEDGED AS COLLATERAL 12,416 9,097
-------- --------
SECURITIES RECEIVED AS COLLATERAL 2,730 -
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $81 in 2001 and $68 in 2000) 46,621 41,613
Brokers and dealers 11,568 26,421
Interest and other 9,491 8,879
-------- --------
67,680 76,913
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,083 4,002
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $285 in 2001 and $176 in 2000) 18,391 17,472
OTHER INVESTMENTS 5,329 4,938
EQUIPMENT AND FACILITIES (net of accumulated depreciation and
amortization of $5,002 in 2001 and $4,658 in 2000) 3,472 3,444
GOODWILL (net of accumulated amortization of $864 in 2001 and $720 in 2000) 4,212 4,407
OTHER ASSETS 3,045 2,284
-------- --------
TOTAL ASSETS $448,606 $407,200
======== ========
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPT. 28, DEC. 29,
(dollars in millions, except per share amount) 2001 2000
- ---------------------------------------------------------------------------------------------- -------- --------
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $106,909 $103,883
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 5,096 15,183
DEPOSITS 83,667 67,648
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 23,050 21,587
U.S. Government and agencies 19,964 14,466
Equities and convertible debentures 19,957 18,535
Non-U.S. governments and agencies 6,299 7,135
Corporate debt, municipals and preferred stock 6,127 7,134
-------- --------
75,397 68,857
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 2,730 -
-------- --------
OTHER PAYABLES
Customers 35,328 24,762
Brokers and dealers 13,597 9,514
Interest and other 18,423 22,204
-------- --------
67,348 56,480
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 3,809 3,908
LONG-TERM BORROWINGS 79,849 70,223
-------- --------
TOTAL LIABILITIES 424,805 386,182
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,711 2,714
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY (42,500 shares issued, liquidation preference $10,000 per share) 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 62 68
Common stock (par value $1.33 1/3 per share; authorized: 2001 - 3,000,000,000 shares,
2000 - 1,000,000,000 shares; issued: 2001 and 2000 - 962,533,498 shares) 1,283 1,283
Paid-in capital 4,256 2,843
Accumulated other comprehensive loss (net of tax) (506) (345)
Retained earnings 17,560 16,156
-------- --------
22,655 20,005
Less: Treasury stock, at cost: 2001 - 121,467,652 shares; 2000 - 154,578,945 shares 970 1,273
Employee stock transactions 1,020 853
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 20,665 17,879
-------- --------
TOTAL STOCKHOLDERS' EQUITY 21,090 18,304
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $448,606 $407,200
======== ========
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
5
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED
-------------------------------
(dollars in millions) SEPT. 28, SEPT. 29,
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,837 $ 2,907
Noncash items included in earnings:
Depreciation and amortization 668 615
Policyholder reserves 139 145
Goodwill amortization 156 162
Amortization of stock-based compensation 544 373
Other 497 287
Changes in operating assets and liabilities:
Trading assets and securities pledged as collateral (7,932) (642)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations 1,710 315
Receivables under resale agreements and securities borrowed transactions (19,124) (6,755)
Customer receivables (5,022) (5,439)
Brokers and dealers receivables 14,853 (3,837)
Trading liabilities 6,540 (3,155)
Payables under repurchase agreements and securities loaned transactions 3,026 13,761
Customer payables 10,566 (303)
Brokers and dealers payables 4,083 720
Other, net (3,291) 1,662
-------- --------
Cash provided by operating activities 9,250 816
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 25,618 11,484
Sales of available-for-sale securities 10,214 5,348
Purchases of available-for-sale securities (59,005) (47,029)
Maturities of held-to-maturity securities 511 584
Purchases of held-to-maturity securities (517) (439)
Loans, notes, and mortgages (1,021) (2,929)
Other investments and other assets (1,480) (1,133)
Equipment and facilities (696) (717)
-------- --------
Cash used for investing activities (26,376) (34,831)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings (10,087) (10,871)
Deposits 16,019 32,399
Issuance and resale of long-term borrowings 28,022 26,025
Maturities and repurchases of long-term borrowings (19,508) (11,397)
Issuance of treasury stock 463 566
Other common stock transactions (354) 20
Dividends (433) (376)
-------- --------
Cash provided by financing activities 14,122 36,366
-------- --------
(Decrease) Increase in cash and cash equivalents (3,004) 2,351
Cash and cash equivalents, beginning of year 23,205 12,155
-------- --------
Cash and cash equivalents, end of period $ 20,201 $ 14,506
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 545 $ 525
Interest 14,671 12,011
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See Notes to Consolidated Financial Statements
6
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 28, 2001
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 29, 2000
unaudited Consolidated Balance Sheet was derived from the audited financial
statements. The interim consolidated financial statements for the three- and
nine- month periods are unaudited; however, in the opinion of Merrill Lynch
management, all adjustments necessary for a fair statement of the consolidated
financial statements have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report included
as an exhibit to Form 10-K for the year ended December 29, 2000. The nature of
Merrill Lynch's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
New Accounting Pronouncements
On the first day of fiscal year 2001, Merrill Lynch adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"). On adoption, all
existing hedge relationships were designated anew. Merrill Lynch recorded a
pre-tax loss of $32 million ($22 million after-tax) in interest expense upon
adoption of SFAS No. 133.
SFAS No.133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts ("embedded derivatives"), and for hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
Consolidated Balance Sheet and measure those instruments at fair value. The
accounting for changes in fair value of a derivative instrument depends on its
intended use and the resulting designation.
The portion of Merrill Lynch's derivatives which are entered into in a dealing
capacity, are recognized at fair value as trading assets and liabilities. As
part of its trading activities, Merrill Lynch uses derivatives to facilitate
customer transactions, to take proprietary positions and as a means of risk
management. The Corporate Risk Management group monitors and manages these risks
in accordance with established risk management policies and procedures that
include risk tolerance levels. For further information on Merrill Lynch's risk
management see the Annual Report on Form 10-K for the year ended December 29,
2000.
As part of its overall risk management strategy, Merrill Lynch uses derivatives
to manage its risk exposures arising from non-trading assets and liabilities,
some of which, depending on the nature of the derivative and the related hedged
item, were not previously carried at fair value. These derivatives are typically
designated as fair-value hedges, to manage the interest rate and non-U.S. dollar
exposure on long-term borrowings and marketable investment securities. These
derivatives generally include interest rate and currency swap agreements that
are primarily used to convert fixed rate assets and liabilities into U.S.
dollar-based floating rate instruments.
7
Merrill Lynch also uses derivatives and foreign-currency-denominated debt to
manage its exposure to foreign exchange rate movements related to investments in
non-U.S. operations. These derivatives generally include forward exchange
contracts and cross currency interest rate swaps.
For the three and nine month periods ended September 28, 2001, $(137) million
and $173 million, respectively, of net losses and net gains related to non-U.S.
dollar net investment hedges were included in "Accumulated other comprehensive
loss" on the Consolidated Balance Sheet. These amounts were principally offset
by net gains and losses, on these investments.
Merrill Lynch issues long-term obligations whose repayment terms are linked to
the performance of equity or other indexes (e.g., S&P 500), baskets of
securities, or individual securities. The contingent components of these indexed
debt obligations may be embedded derivatives. If the contingent component is
determined to be a derivative it is separated from the underlying obligation and
carried at fair value. The separated embedded derivative is reported in
long-term borrowings on the Consolidated Balance Sheet with the underlying
obligation. The embedded derivatives are hedged with derivatives that are
carried at fair value.
In addition, Merrill Lynch enters into cash flow hedges to hedge interest rate
risk, which primarily arises from Merrill Lynch's marketable investment
securities portfolio. All of these hedges qualify for the "short-cut method" as
defined by SFAS No. 133. As such, no ineffectiveness related to these hedges is
reported in earnings.
Derivative instruments are reported on a net-by-counterparty basis on the
Consolidated Balance Sheet where management believes a legal right of setoff
exists under an enforceable netting agreement. The fair value of derivative
instruments is set forth below:
(dollars in millions)
- ------------------------------------------------------------------------------------------------------
SEPT. 28, 2001 DEC. 29, 2000
--------------------------- ----------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
Swap agreements $23,596 $21,241 $17,283 $18,819
Forwards and options 7,852 15,235 8,339 11,922
- ------------------------------------------------------------------------------------------------------
In September 2000, the Financial Accounting Standards Board released SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, a replacement of SFAS No. 125, which revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. On April 1, 2001, Merrill Lynch adopted the provisions of
this statement that were required to be adopted in the second quarter of 2001.
These provisions changed the accounting for certain securities lending
transactions. Under the new provisions, when Merrill Lynch acts as the lender in
a securities lending agreement and receives securities as collateral that can be
pledged or sold, it recognizes on the Consolidated Balance Sheet the securities
received as well as an obligation to return the securities lent. Accordingly,
Merrill Lynch's accompanying Consolidated Balance Sheet as of September 28, 2001
separately reflects these assets and liabilities.
In July 2001, the Financial Accounting Standards Board released SFAS No. 141,
Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires all business combinations initiated after June 30, 2001,
to be accounted for using the purchase method. Merrill Lynch adopted the
provisions of SFAS No. 141 on July 1, 2001. Under SFAS No. 142, intangible
assets with indefinite lives and goodwill will no longer be amortized. Instead,
these assets will be tested annually for impairment. Merrill Lynch will adopt
the provisions of SFAS No. 142 at the beginning of fiscal year 2002. The full
impact of adoption is yet to be determined; however, annual reported
pre-tax amortization expense related to these assets approximates $200 million.
8
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NOTE 2. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings at September 28, 2001 and December 29, 2000 are presented
below:
(dollars in millions)
- ---------------------------------------------------------------------------------------
SEPT. 28, DEC. 29,
2001 2000
-------- -------
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $101,180 $ 89,901
Securities loaned transactions 5,729 13,982
-------- --------
Total $106,909 $103,883
======== ========
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 4,487 $ 14,022
Other 609 1,161
-------- --------
Total $ 5,096 $ 15,183
======== ========
DEPOSITS
U.S. $ 70,354 $ 54,887
Non-U.S. 13,313 12,761
-------- --------
Total $ 83,667 $ 67,648
======== ========
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9
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NOTE 3. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: the Corporate and Institutional Client Group
("CICG"), the Private Client Group ("PCG") and Merrill Lynch Investment Managers
("MLIM"). Prior period amounts have been restated to conform to the current
period presentation. For information on each segment's activities, see the
portions of the 2000 Annual Report included as an exhibit to Form 10-K.
Operating results by business segment follow:
(dollars in millions)
- --------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS (1) TOTAL
-------- -------- ------ --------- --------
THREE MONTHS ENDED
SEPTEMBER 28, 2001
Non-interest revenues $ 1,866 $ 1,952 $ 500 $ (52)(2) $ 4,266
Net interest revenue(3) 382 500 15 (18)(4) 879
-------- -------- ------ ------ --------
Net revenues 2,248 2,452 515 (70) 5,145
Non-interest expenses 1,763 2,178 424 94 (5) 4,459
-------- -------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 485 $ 274 $ 91 $ (164) $ 686
======== ======== ====== ====== ========
Quarter-end total assets $305,494 $136,688 $2,212 $4,212 $448,606
======== ======== ====== ====== ========
- --------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS (1) TOTAL
-------- -------- ------ --------- --------
THREE MONTHS ENDED
SEPTEMBER 29, 2000
Non-interest revenues $ 2,391 $ 2,432 $ 592 $ (41)(2) $ 5,374
Net interest revenue(3) 352 413 23 (18)(4) 770
-------- -------- ------ --------- --------
Net revenues 2,743 2,845 615 (59) 6,144
Non-interest expenses 1,896 2,457 465 15 (6) 4,833
-------- -------- ------ --------- --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 847 $ 388 $ 150 $ (74) $ 1,311
======== ======== ====== ========= ========
Quarter-end total assets $255,228 $ 99,837 $2,235 $ 4,391 $361,691
======== ======== ====== ========= ========
- --------------------------------------------------------------------------------------------
(1) Including intersegment eliminations.
(2) Primarily represents the elimination of intersegment revenues.
(3) Management views interest income net of interest expense in evaluating
results.
(4) Represents Mercury financing costs.
(5) Represents goodwill amortization of $53 million and September 11th - related
expenses of $88 million, net of elimination of intersegment expenses of
$47 million.
(6) Represents goodwill amortization of $52 million, net of elimination of
intersegment expenses of $37 million.
10
(dollars in millions)
- --------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS (1) TOTAL
-------- -------- ------ --------- --------
NINE MONTHS ENDED
SEPTEMBER 28, 2001
Non-interest revenues $ 6,926 $ 6,402 $1,600 $ (204)(2) $ 14,724
Net interest revenue(3) 1,064 1,335 45 (40)(4) 2,404
-------- -------- ------ --------- --------
Net revenues 7,990 7,737 1,645 (244) 17,128
Non-interest expenses 6,015 6,800 1,344 80 (5) 14,239
-------- -------- ------ --------- --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 1,975 $ 937 $ 301 $ (324) $ 2,889
======== ======== ====== ========= ========
- --------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS (1) TOTAL
-------- -------- ------ --------- --------
NINE MONTHS ENDED
SEPTEMBER 29, 2000
Non-interest revenues $ 8,504 $ 8,064 $1,790 $ (174)(2) $ 18,184
Net interest revenue(3) 1,156 1,178 57 (74)(4) 2,317
-------- -------- ------ --------- --------
Net revenues 9,660 9,242 1,847 (248) 20,501
Non-interest expenses 6,619 8,014 1,444 15 (6) 16,092
-------- -------- ------ --------- --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries $ 3,041 $ 1,228 $ 403 $ (263) $ 4,409
======== ======== ====== ========= ========
- ----------------------------------------------------------------------------------------------------------------------
(1) Including intersegment eliminations.
(2) Primarily represents the elimination of intersegment revenues.
(3) Management views interest income net of interest expense in evaluating
results.
(4) Represents Mercury financing costs.
(5) Represents goodwill amortization of $156 million and September 11th -
related expenses of $88 million, net of elimination of intersegment
expenses of $164 million.
(6) Represents goodwill amortization of $162 million, net of elimination of
intersegment expenses of $147 million.
11
- --------------------------------------------------------------------------------
NOTE 4. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -----------------------
SEPT. 28, SEPT. 29, SEPT. 28, SEPT. 29,
2001 2000 2001 2000
-------- -------- -------- --------
Net earnings $ 422 $ 885 $ 1,837 $ 2,907
------ ----- ------- -------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (36) (22) (47) (89)
Net unrealized gain (loss) on investment
securities available-for-sale (202) 1 (209) 58
Deferred gain on cash flow hedges 56 - 95 -
------- ----- ------- -------
Total other comprehensive loss, net of tax (182) (21) (161) (31)
------- ----- ------- -------
Comprehensive income $ 240 $ 864 1,676 $ 2,876
======= ===== ======= =======
- ------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5. EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------------
SEPT. 28, SEPT. 29, SEPT. 28, SEPT. 29,
2001 2000 2001 2000
-------- -------- -------- --------
Net earnings $ 422 $ 885 $ 1,837 $ 2,907
Preferred stock dividends 10 10 29 29
-------- -------- -------- --------
Net earnings applicable to
common stockholders $ 412 $ 875 $ 1,808 $ 2,878
======== ======== ======== ========
(shares in thousands)
Weighted-average shares outstanding 845,841 805,855 839,810 793,716
-------- -------- -------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 46,547 75,208 56,995 67,650
FCCAAP shares 26,947 30,602 27,435 29,384
Restricted Units 15,090 17,353 14,449 14,164
ESPP shares 44 30 64 79
-------- -------- -------- --------
Dilutive potential common shares 88,628 123,193 98,943 111,277
-------- -------- -------- --------
Total weighted-average diluted shares 934,469 929,048 938,753 904,993
======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.49 $ 1.09 $ 2.15 $ 3.63
Diluted earnings per common share $ 0.44 $ 0.94 $ 1.93 $ 3.18
- ---------------------------------------------------------------------------------------------------------
(1) During the 2001 and 2000 third quarter there were 52 million and 0
instruments, respectively, that were considered antidilutive and not
included in the above computations.
(2) See Note 11 to Consolidated Financial Statements in the 2000 Annual Report
included as an exhibit to Form 10-K for a description of these instruments.
12
- --------------------------------------------------------------------------------
NOTE 6. COMMITMENTS AND OTHER CONTINGENCIES
- --------------------------------------------------------------------------------
In the normal course of business, Merrill Lynch enters into underwriting
commitments and commitments to extend credit. At September 28, 2001, Merrill
Lynch had commitments to extend credit of $32.0 billion, compared to $31.1
billion at December 29, 2000. Included in these amounts are $14.9 billion and
$11.1 billion, respectively of liquidity facilities related to certain
structured products. The remainder is comprised of commercial paper back-up
lines of credit, syndicated loans, mortgages and other institutional and retail
commitments to extend credit.
As of September 28, 2001, Merrill Lynch has been named as parties in various
actions, some of which involve claims for substantial amounts. Although the
results of legal actions cannot be predicted with certainty, it is the opinion
of management that the resolution of these actions will not have a material
adverse effect on the financial condition of Merrill Lynch as set forth in the
Consolidated Financial Statements, but may be material to Merrill Lynch's
operating results for any particular period. Refer to Part II - Other
Information for additional information on legal proceedings.
- --------------------------------------------------------------------------------
NOTE 7. REGULATORY REQUIREMENTS
- --------------------------------------------------------------------------------
Certain U.S. and non-U.S. subsidiaries are subject to various securities,
banking and insurance regulations and capital adequacy requirements promulgated
by the regulatory and exchange authorities of the countries in which they
operate. Merrill Lynch's principal regulated subsidiaries are discussed below.
Securities Regulation
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a U.S. registered
broker-dealer, is subject to the net capital requirements of 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 September 28,
2001, MLPF&S's regulatory net capital of $2,870 million was 15% of aggregate
debit items, and its regulatory net capital in excess of the minimum required
was $2,489 million.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject
to capital requirements of the Financial Services Authority ("FSA"). Financial
resources, as defined, must exceed the total financial resources requirement of
the FSA. At September 28, 2001, MLI's financial resources were $4,780 million,
exceeding the minimum requirement by $1,057 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, is subject to the capital adequacy requirements of the
Government Securities Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At September 28, 2001, MLGSI's liquid capital of
$1,263 million was 207% of its total market and credit risk, and liquid capital
in excess of the minimum required was $530 million.
Banking Regulation
Two of the direct subsidiaries of ML & Co., Merrill Lynch Bank USA ("MLBUSA"),
an FDIC-insured Utah chartered depository institution, and Merrill Lynch Bank &
Trust Co. ("MLB&T"), an FDIC-insured New Jersey chartered depository
institution, are each subject to certain minimum aggregate capital requirements
under applicable federal banking laws. Among other things, Part 325 of the FDIC
regulations establishes levels of Risk Based Capital ("RBC") each institution
must maintain. RBC is defined as the ratio of (i) Tier 1 capital or Total
capital to (ii) risk-weighted assets, as those terms are defined in the FDIC
regulations. At September 28, 2001, MLBUSA had a Tier I
13
RBC ratio of 11.12% and a Total RBC ratio of 11.84% and MLB&T had a Tier I RBC
ratio of 12.67% and a Total RBC ratio of 12.68%. At September 28, 2001 MLBUSA
had Tier I capital of $3,553 million and MLB&T had Tier I capital of $1,030
million.
MLBUSA and MLB&T have each entered into a synthetic securitization of specified
reference portfolios of asset-backed securities ("ABS") owned by each
institution totaling in aggregate up to $20 billion. MLBUSA has also entered
into a second synthetic securitization of a specified reference portfolio of ABS
owned by the institution of up to $20 billion. All the ABS in the reference
portfolios are rated AAA and all are further insured as to principal and
interest payments by an insurer rated AAA. The synthetic securitizations have
allowed MLBUSA and MLB&T to reduce the credit risk on the respective reference
portfolios by means of credit default swaps with bankruptcy-remote special
purpose vehicles ("SPV"). In turn, each of the SPVs has issued a $20 million
credit linked note ($40 million in total) to unaffiliated buyers. These
transactions have resulted in reductions in each institution's risk-weighted
assets. MLBUSA has retained a first risk of loss equity tranche of $1 million in
each of these transactions ($2 million in total).
As a result of these transactions, MLBUSA has been able to reduce risk-weighted
assets by $20,186 million at September 28, 2001, thereby increasing its Tier I
and Total RBC ratios by 431 basis points and 458 basis points, respectively.
MLB&T has been able to reduce risk-weighted assets by $2,091 million at
September 28, 2001, thereby increasing its Tier I and Total RBC ratios by 259
basis points. These structures have not resulted in a material change in the
distribution or concentration of risk in the retained portfolio.
- --------------------------------------------------------------------------------
NOTE 8. SEPTEMBER 11 - TERRORIST ATTACKS
- --------------------------------------------------------------------------------
On September 11th terrorists attacked the World Trade Center complex, which
subsequently collapsed and damaged surrounding buildings, including some
occupied by Merrill Lynch. These events precipitated the temporary relocation of
approximately 9,000 employees from Merrill Lynch's global headquarters in the
North Tower of the World Financial Center, and from offices at 222 Broadway and
the South Tower of the World Financial Center.
Merrill Lynch is in the process of reoccupying and reestablishing business
operations in the North Tower, has reoccupied 222 Broadway, and is restoring the
South Tower. Although some of Merrill Lynch's businesses were temporarily
disrupted, all its businesses are now functioning and serving clients worldwide.
In certain instances, Merrill Lynch is utilizing temporary locations and backup
infrastructures.
During the quarter ended September 28, 2001, Merrill Lynch recorded September
11th - related expenses of $88 million ($53 million after-tax), which are net of
an insurance receivable of $50 million. These expenses include costs related to
the write-off of real estate leases and damaged assets; the purchase of some
replacement equipment; and employee relocation, which required reconfiguring
alternative office facilities, technology, and telecommunications and providing
transportation. Merrill Lynch continues to incur additional September 11th -
related expenses, including the purchase of additional equipment and the
restoration of facilities. Therefore, the full financial impact to Merrill Lynch
cannot be currently determined.
Merrill Lynch is insured for loss caused by physical damage to property. This
includes repair or replacement of property and lost profits due to business
interruption, including costs related to lack of access to facilities. During
the fourth quarter, Merrill Lynch received its first insurance payment related
to September 11th. Merrill Lynch expects to recognize additional insurance
receivables in future periods. Insurance payments are based on cash
expenditures, which will vary from expense recognition under generally accepted
accounting principles.
14
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of September 28,
2001, and the related condensed consolidated statements of earnings for the
three-month and nine-month periods ended September 28, 2001 and September 29,
2000, and the condensed consolidated statements of cash flows for the nine-month
periods ended September 28, 2001 and September 29, 2000. These financial
statements are the responsibility of Merrill Lynch's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Merrill Lynch as of December 29, 2000, and the related consolidated statements
of earnings, changes in stockholders' equity, comprehensive income and cash
flows for the year then ended (not presented herein); and in our report dated
February 26, 2001, 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 29, 2000 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ Deloitte & Touche LLP
November 9, 2001
15
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, advisory, insurance, and related
services worldwide. The financial services industry, in which Merrill Lynch is a
leading participant, is highly competitive and highly regulated. This industry
and the global financial markets are influenced by numerous uncontrollable
factors. These factors include economic conditions, monetary and fiscal
policies, the liquidity of global markets, international and regional political
events, regulatory developments, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility of
financial markets and the order flow and revenues in businesses such as
brokerage and trading.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions and competition from new entrants as well as established
competitors using the Internet or other technology to establish or expand their
businesses, and diminishing margins in many mature products and services. The
Gramm-Leach-Bliley Act, passed in 1999, which repealed laws that separated
commercial banking, investment banking and insurance activities, together with
changes to the industry resulting from previous reforms, has increased the
number of companies competing for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations and objectives expressed in these statements. These factors
include, but are not limited to, the factors listed in the previous two
paragraphs, as well as actions and initiatives taken by both current and
potential competitors, the effect of current, pending, and future legislation
and regulation both in the United States and throughout the world, and the other
risks detailed in Merrill Lynch's 2000 Form 10-K and in this Form 10-Q.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
- --------------------------------------------------------------------------------
The weakness in global financial markets during the first half of 2001 worsened
during the third quarter. Prior to September 11th the financial markets
reflected the usual summer slowdown, a global economic downturn as well as
decreased corporate profits. The September 11th attack on the World Trade Center
resulted in the closure of the U.S. equity markets for four consecutive business
days. In the immediate aftermath of the market close, trading volumes increased,
but these volumes have not been sustained and the economic outlook has
deteriorated as evidenced by a decrease in consumer confidence levels and
declines in corporate earnings.
Long-term U.S. interest rates, as measured by the yield on the 10-year U.S.
Treasury bond, slipped from 5.40% to 4.59% during the quarter. The yield on the
longer-term 30-year Treasury bond fell to 5.43% during the quarter, from 5.75%
at the end of the 2001 second quarter. The U.S. Federal Reserve Bank cut 75
basis points off both the federal funds rate and the discount rate during the
2001 third quarter, including a 50 basis point decrease following the events of
September 11th. Credit spreads, which represent the risk premium over the
risk-free rate paid by an issuer (based on the issuer's perceived
creditworthiness), widened in the third quarter of 2001.
16
U.S. equity indexes declined across the board, as the U.S. economy remained
weak. The Nasdaq Composite Index declined 30.7% in the third quarter and 59.2%
from the same period a year ago. The Dow Jones Industrial Average was down 15.8%
in the third quarter, and 16.9% from the end of the third quarter 2000. The S&P
500 declined 15% in the third quarter, and dropped 27.5% from the end of the
2000 third quarter.
The Dow Jones World Index declined 15.6% in the third quarter of 2001, and 30.4%
since the same period a year ago. The stock market in Japan, as measured by the
Dow Jones Global Index, was down 21.5% in yen terms during the 2001 third
quarter. Central banks in the United States, European Union, the United Kingdom
and Switzerland cut interest rates during the quarter in an attempt to revive
their economies.
Global stock and debt issuance volumes were virtually unchanged from the
year-ago quarter, but were down 24.2% from the second quarter of 2001. Global
debt underwriting volume was up 8.1% from the 2000 third quarter level, but was
down 21.1% from the strong second quarter of 2001. Global equity underwriting
volume declined approximately 49% from the 2000 third quarter and 2001 second
quarter. Falling stock prices and lack of investor demand following September
11th contributed to the decline.
Merger and acquisition activity remained at low levels in the third quarter as a
result of the global economic slowdown. In addition, the events of September
11th slowed deal-making to a near standstill. Both global and U.S. announced
merger and acquisition volumes dropped approximately 46% from the third quarter
of 2000, according to Thomson Financial Securities Data.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
----------------------------- --------------------------
(dollars in millions, SEPT. 28, SEPT. 29, SEPT. 28, SEPT. 29,
except per share amounts) 2001 2000 2001 2000
- ----------------------------------------------------------------------------------------------------------
Total revenues $ 8,929 $ 10,848 $ 31,183 $ 33,191
Net revenues 5,145 6,144 17,128 20,501
Pre-tax operating earnings(1) 774 1,311 2,977 4,409
Operating earnings, before September
11th- related expenses 475 885 1,890 2,907
Net earnings 422 885 1,837 2,907
Operating earnings per common share:(1)
Basic 0.55 1.09 2.21 3.63
Diluted 0.50 0.94 1.99 3.18
Earnings per common share:
Basic 0.49 1.09 2.15 3.63
Diluted 0.44 0.94 1.93 3.18
Annualized return on average common
stockholders' equity - operating basis(1) 9.1 % 21.6 % 12.6 % 25.9 %
Operating pre-tax profit margin(1) 15.0 21.3 17.4 21.5
- ----------------------------------------------------------------------------------------------------------
(1) Excludes the impact of September 11th-related expenses.
Merrill Lynch's net earnings were $422 million for the 2001 third quarter, 52%
lower than the $885 million reported in the third quarter of 2000. Earnings per
common share were $0.49 basic and $0.44 diluted, compared with $1.09 basic and
$0.94 diluted in the 2000 third quarter. Third quarter 2001 results include $152
million of severance expenses, compared to $70 million of such expenses in the
2000 third quarter. Third quarter 2001 earnings were reduced by six cents per
diluted share as a result of $88 million of pre-tax expenses ($53 million
after-tax) related to the September 11th attack on the World Trade Center.
Details of these expenses are discussed in Non-Interest Expenses.
17
Operating earnings, which are earnings excluding September 11th - related
expenses, were $475 million, or $0.50 per diluted share, compared with $885
million or $0.94 per diluted share in last year's third quarter. The operating
pre-tax profit margin for the quarter, on the same basis, was 15.0%, down from
21.3% in the third quarter of 2000.
Net revenues for the 2001 third quarter were $5.1 billion, 16% below the third
quarter of 2000. The decline in revenues was due primarily to lower commissions
resulting from a decline in client transaction volumes as well as reduced equity
trading revenues. Compensation and benefits expenses, which were 53.6% of net
revenues in the third quarter of 2001, included severance costs of $152 million.
Excluding severance costs in 2001 and 2000, compensation and benefits expenses
were 50.6% of net revenues in the 2001 third quarter, compared with 50.1% in
last year's third quarter. Excluding September 11th-related expenses,
non-compensation expenses were $1.6 billion in the 2001 third quarter, down 4%
from the comparable period a year ago.
For the first nine months of 2001, net earnings were $1.8 billion, compared to
$2.9 billion for the corresponding period in 2000. Net revenues were $17.1
billion, down 16% from the first nine months of 2000. Year-to-date operating
earnings were $1.9 billion, 35% lower than the first nine months of 2000.
Included in these results are severance expenses of $281 million and $70
million, respectively, for the first nine months of 2001 and 2000. The effect of
declining revenues on operating earnings was limited by a 12% reduction in
year-to-date expenses, including a 6% reduction in non-compensation costs.
Year-to-date earnings per common share were $2.15 basic and $1.93 diluted,
compared with $3.63 basic and $3.18 diluted for the first nine months of 2000.
Excluding the impact of September 11th-related expenses, basic and diluted
earnings per common share were $2.21 and $1.99, respectively and annualized
year-to-date return on average common stockholder's equity was 12.6%.
As a result of current market conditions, management has announced its intention
to accelerate actions throughout all businesses to respond to the current
environment. Business reviews are underway to determine the appropriate sizing
of each business and to identify opportunities to increase productivity and
earnings through improved allocation of resources. These reviews are expected to
be completed by the end of 2001 and may result in additional expenses.
- --------------------------------------------------------------------------------
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Merrill Lynch reports its results in three business segments: Corporate and
Institutional Client Group ("CICG"), Private Client Group ("PCG"), and Merrill
Lynch Investment Managers ("MLIM"). CICG provides investment banking and capital
market services to corporate, institutional, and governmental clients throughout
the world. PCG provides wealth management services and products to individuals,
small- to mid-size businesses and employee benefit plans for clients globally.
MLIM provides investment management services to a wide variety of retail and
institutional clients. For further information on services provided to clients
within these segments, see the 2000 Form 10-K and the portions of the 2000
Annual Report included as an exhibit thereto.
Certain MLIM and CICG products are distributed by PCG distribution channels, and
to a lesser extent, certain MLIM products are distributed through the
distribution capabilities of CICG. Revenues and expenses associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. In addition, revenue and expense sharing agreements for shared
activities are in place and the results of each segment reflect the agreed upon
portion of these activities. The operating results of the segments exclude
certain corporate items and represent the information that is relied upon by
management in their decision-making processes. Restatements occur to reflect
reallocations of revenues and expenses, which result from changes in Merrill
Lynch's business strategy and structure.
18
Severance costs are included in the results of each business segment. September
11th - related expenses are included in the Corporate segment.
- --------------------------------------------------------------------------------
CORPORATE AND INSTITUTIONAL CLIENT GROUP
- --------------------------------------------------------------------------------
CICG'S RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 28, SEPT. 29, % SEPT. 28, SEPT. 29, %
(dollars in millions) 2001 2000 (Dec.) 2001 2000 (Dec.)
- -----------------------------------------------------------------------------------------------------------------
Commissions $ 496 $ 584 (15)% $ 1,655 $ 1,933 (14)%
Principal transactions and
net interest profit 905 1,138 (20) 3,562 4,720 (25)
Investment banking 748 758 (1) 2,416 2,417 -
Other revenues 99 263 (62) 357 590 (39)
-------- -------- -------- --------
Total net revenues $ 2,248 $ 2,743 (18) $ 7,990 $ 9,660 (17)
-------- -------- -------- --------
Pre-tax earnings $ 485 $ 847 (43) $ 1,975 $ 3,041 (35)
-------- -------- -------- --------
Pre-tax profit margin 21.6% 30.9% 24.7% 31.5 %
- -----------------------------------------------------------------------------------------------------------------
CICG faced a difficult operating environment in the third quarter of 2001,
characterized by continued weak equity markets and reduced underwriting
activity. Partially offsetting these factors were favorable conditions in the
secondary fixed income markets, following reductions of interest rates by the
Federal Reserve. Also contributing to the decline on net revenues was the
absence of gains on investments compared to the year ago quarter. Net revenues
were $2.2 billion for the quarter, compared with $2.7 billion in the third
quarter of 2000. CICG's pre-tax earnings were $485 million in the third quarter
of 2001, down 43% from the third quarter of 2000. The pre-tax profit margin was
21.6%, compared to 30.9% in the 2000 third quarter.
CICG's year-to-date net revenues were $8.0 billion, down 17% from the comparable
period a year ago and year-to-date pre-tax earnings were $2.0 billion, down 35%
from the first nine months of 2000. CICG's year-to-date pre-tax margin was
24.7%, down from 31.5% in the same period last year.
CLIENT FACILITATION AND TRADING
Commissions
Commissions revenue primarily arises from agency transactions in listed and
over-the-counter equity securities and commodities, money market instruments and
options.
Commissions fell 15% to $496 million in the third quarter of 2001, compared to
the year-ago period. On a year-to-date basis, commissions revenues decreased 14%
to $1.7 billion, compared to the first nine months of 2000. These declines are
due primarily to lower equity trading volumes.
Principal transactions and net interest profit
- ---------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 28, SEPT. 29, % INC. SEPT. 28, SEPT. 29, % INC.
(dollars in millions) 2001 2000 (DEC.) 2001 2000 (DEC.)
- ---------------------------------------------------------------------------------------------------------------------
Equities and equity derivatives $ 278 $ 656 (58)% $ 1,459 $ 3,099 (53)%
Debt and debt derivatives 627 482 30 2,103 1,621 30
-------- -------- -------- --------
Total $ 905 $ 1,138 (20) $ 3,562 $ 4,720 (25)
- ---------------------------------------------------------------------------------------------------------------------
Principal transactions and net interest profit includes realized and unrealized
gains and losses from the purchase and sale of securities in which Merrill Lynch
acts as principal. Changes in the composition of trading inventories and hedge
positions can cause the recognition of principal transactions and net interest
profit to fluctuate.
19
Net interest profit is a function of the level and mix of total assets and
liabilities, including financial instruments owned, reverse repurchase and
repurchase agreements, trading strategies associated with CICG's institutional
securities business, and the prevailing level, term structure and volatility of
interest rates. Net interest profit is an integral component of trading
activity. In assessing the profitability of its client facilitation and trading
activities, Merrill Lynch views net interest profit and principal transactions
in the aggregate.
Principal transactions and net interest profit were $905 million in the third
quarter of 2001, down 20% from $1.1 billion in the third quarter of 2000. The
decline in revenues was due primarily to reduced equity trading revenues, which
was partially offset by an increase in debt trading revenues. Equity trading
revenues declined as a result of lower transaction volumes, due in part to the
closure of markets and business disruption in the aftermath of September 11th.
Revenues were also impacted by reduced volatility before September 11th and the
continued effect of lower stock prices on revenues from principal-traded
markets. Debt trading revenues in the third quarter increased due primarily to
derivatives and government bonds, as both businesses benefited from a steepening
yield curve and declining interest rates. These increases were partially offset
by markdowns in selected non-investment grade assets.
On a year-to-date basis, principal transactions and net interest profit were
down 25% compared to the same period a year ago, as a significant decrease in
equity and equity derivatives revenues more than offset the 30% increase in debt
trading revenues. Debt trading revenues benefited from improved results in debt
derivatives, investment grade and government debt trading, partially offset by
reductions in emerging markets trading revenues. Results also reflect the
positive impact of the first quarter 2001 sale of certain energy-trading assets.
Investment Banking
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 28, SEPT. 29, % INC. SEPT. 28, SEPT. 29, % INC.
(dollars in millions) 2001 2000 (DEC.) 2001 2000 (DEC.)
- ---------------------------------------------------------------------------------------------------------------
Debt underwriting $ 136 $ 131 4% $ 503 $ 306 64%
Equity underwriting 318 359 (11) 1,022 1,166 (12)
-------- -------- -------- --------
Total underwriting 454 490 (7) 1,525 1,472 4
Strategic advisory services 294 268 10 891 945 (6)
-------- -------- -------- --------
Total $ 748 $ 758 (1) $ 2,416 $ 2,417 -
- ---------------------------------------------------------------------------------------------------------------
Underwriting
- ------------
Underwriting revenues represent fees earned from the underwriting of debt and
equity securities as well as loan syndication and commitment fees.
Underwriting revenues in the third quarter of 2001 were $454 million, down 7%
from $490 million in the third quarter of 2000. This decrease was due primarily
to a 11% decline in equity underwriting revenues, which resulted from an
industry-wide slowdown in equity issuances. Despite lower revenues, Merrill
Lynch continued to demonstrate leadership in debt and equity origination,
ranking #1 in both global debt and global equity and equity-linked underwriting
for the third quarter of 2001. In global equity underwriting, gains in market
share during the third quarter were driven by leadership in equity-linked
products, the global diversity of issuing clients and by Merrill Lynch's global
distribution capability. Merrill Lynch also benefited from strong market shares
in Europe and Asia.
Year-to-date underwriting revenues increased 4% from the comparable year-ago
period to $1.5 billion. Significant increases in debt underwriting revenues more
than offset the decrease in equity underwriting revenues. Merrill Lynch had
year-to-date market shares of 11.9% and 15.5% in global debt and equity and
global equity and equity-linked underwriting, respectively. Merrill Lynch's
underwriting market share information based on transaction value follows:
20
- --------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
SEPT. 2001 SEPT. 2000
----------------------- -----------------------
MARKET MARKET
SHARE RANK SHARE RANK
------ ---- ------ ----
GLOBAL PROCEEDS
Debt and equity 11.4% 1 13.3% 1
Debt 10.4 1 13.0 1
Equity and equity-linked 23.5 1 14.1 2
U.S. PROCEEDS
Debt and equity 12.4% 1 15.2% 1
Debt 11.4 1 15.1 1
Equity and equity-linked 25.3 1 8.2 4
- --------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
- --------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
-----------------------------------------------------------
SEPT. 2001 SEPT. 2000
----------------------- -----------------------
MARKET MARKET
SHARE RANK SHARE RANK
------ ---- ------ ----
GLOBAL PROCEEDS
Debt and equity 11.9% 1 11.6% 1
Debt 11.5 1 11.9 1
Equity and equity-linked 15.5 1 9.2 4
U.S. PROCEEDS
Debt and equity 14.0% 1 14.6% 1
Debt 13.4 1 14.4 1
Equity and equity-linked 19.2 1 9.8 5
- --------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic Advisory Services
- ---------------------------
Strategic advisory services revenues, which include merger and acquisition and
other advisory fees, were $294 million in the third quarter of 2001, up 10% from
the third quarter of 2000. On a year-to-date basis, Merrill Lynch ranked #2 with
a market share of 26.5% in global announced transactions while advising on 12 of
the top 25 transactions so far this year. Merrill Lynch improved its market
share in U.S. completed transactions, with a 38.2% market share in the first
nine months of 2001. Merrill Lynch's merger and acquisition market share
information based on transaction value follows:
- --------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
-----------------------------------------------------------
SEPT. 2001 SEPT. 2000
--------------------- -----------------------
MARKET MARKET
SHARE RANK SHARE RANK
------- ---- ------ ----
COMPLETED TRANSACTIONS
Global 25.7% 3 26.1% 3
U.S. 28.9 3 19.3 4
ANNOUNCED TRANSACTIONS
Global 38.8% 2 14.9% 6
U.S. 51.5 2 12.5 7
- --------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
21
- --------------------------------------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
-----------------------------------------------------------
SEPT. 2001 SEPT. 2000
--------------------- -----------------------
MARKET MARKET
SHARE RANK SHARE RANK
------- ---- ------ ----
COMPLETED TRANSACTIONS
Global 29.9% 2 35.3% 3
U.S. 38.2 2 32.1 3
ANNOUNCED TRANSACTIONS
Global 26.5% 2 22.2% 4
U.S. 33.2 3 27.9 3
- --------------------------------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
Other Revenues
Other revenues, which include investment gains and losses and partnership
distributions, declined 62% to $99 million in the third quarter of 2001,
compared with the 2000 third quarter. On a year-to-date basis, other revenues
declined 39%, compared to the comparable period in 2000. These declines are due
primarily to lower gains on investments.
- --------------------------------------------------------------------------------
PRIVATE CLIENT GROUP
- --------------------------------------------------------------------------------
PCG'S RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- --------------------------
SEPT. 28, SEPT. 29, % INC. SEPT. 28, SEPT. 29, % INC.
(dollars in millions) 2001 2000 (DEC.) 2001 2000 (DEC.)
- --------------------------------------------------------------------------------------------------------------------
Commissions $ 667 $ 978 (32)% $ 2,301 $ 3,348 (31)%
Principal transactions and
new issue revenue 328 458 (28) 1,199 1,685 (29)
Asset management and
portfolio service fees 915 946 (3) 2,756 2,803 (2)
Net interest profit 500 413 21 1,335 1,178 13
Other revenues 42 50 (16) 146 228 (36)
--------- -------- -------- --------
Total net revenues $ 2,452 $ 2,845 (14) $ 7,737 $ 9,242 (16)
--------- -------- -------- --------
Pre-tax earnings $ 274 $ 388 (29) $ 937 $ 1,228 (24)
--------- -------- -------- --------
Pre-tax profit margin 11.2% 13.6% 12.1% 13.3%
- --------------------------------------------------------------------------------------------------------------------
PCG continued to be impacted by reduced client transaction volumes for much of
the third quarter due to the uncertain market environment and the usual summer
slowdown. Third quarter 2001 net revenues for PCG were $2.5 billion, 14% below
the third quarter of last year and pre-tax earnings were $274 million, 29% lower
than the third quarter of 2000. PCG's pre-tax margin was 11.2%, compared to
13.6% in the year-ago quarter. PCG's results were stronger in the United States
than outside. In the United States, PCG's pre-tax earnings for the 2001 third
quarter were $314 million, 17% below year-ago levels, on net revenues that were
11% below the 2000 third quarter. Outside the United States, PCG posted a
pre-tax loss of $40 million in the third quarter of 2001, compared with a
pre-tax profit of $11 million in the year-ago quarter. The decrease in non-U.S.
quarterly earnings was due to the inclusion of Merrill Lynch's share of the loss
on the Merrill Lynch HSBC joint venture in the 2001 third quarter as well as a
decline in global trading volumes.
22
PCG's year-to-date net revenues were $7.7 billion, down 16% from the
corresponding period in 2000 and pre-tax earnings were $937 million, 24% lower
than the first nine months of 2000. PCG's year-to-date pre-tax margin was 12.1%,
compared with 13.3% in the same period a year ago. In the United States, PCG's
pre-tax earnings for the first nine months of 2001 were $988 million, 8% below
year-ago levels, on net revenues that were 13% below the first nine months of
2000. Outside the United States, PCG posted a pre-tax loss of $51 million in the
first nine months of 2001, compared with a pre-tax profit of $155 million in the
year-ago period. The decline in non-U.S. pre-tax earnings in the 2001 period was
the result of lower global trading volumes and the inclusion of Merrill Lynch's
share of the loss on the Merrill Lynch HSBC joint venture.
PCG employed approximately 18,000 financial advisors at the end of the 2001
third quarter, down from 20,200 at the end of 2000. The reduction is the result
of attrition, significantly reduced hiring and the consolidation of offices.
Commissions
Commissions revenue primarily arises from agency transactions in listed and
over-the-counter equity securities, as well as sales of mutual funds, insurance
products, and options.
Commissions revenue declined 32% to $667 million in the third quarter of 2001
from $978 million in the third quarter of 2000. Commissions revenue for the
first nine months of 2001 were $2.3 billion, 31% lower than the comparable
period in 2000. These decreases were primarily due to a global decline in client
transaction volumes, particularly in equities and mutual funds. In addition, as
assets have moved from traditional transaction-priced accounts to asset-priced
services, there has been a shift in revenue from commissions to portfolio
service fees.
Principal transactions and new issue revenues
PCG's principal transactions and new issue revenues primarily represent
bid-offer revenues in over-the-counter equity securities, government bonds and
municipal securities as well as selling concessions on debt and equity products.
Principal transactions and new issue revenues declined 28% to $328 million in
the 2001 third quarter, as trading and equity new issue volume declined in a
less favorable market environment, compared to the third quarter of 2000.
Year-to-date revenues similarly decreased from $1.7 billion in 2000 to $1.2
billion in 2001.
Asset management and portfolio service fees
Asset management and portfolio service fees include asset management fees from
taxable and tax-exempt money market funds as well as portfolio fees from
fee-based accounts such as Unlimited Advantage (Service Mark) and Merrill Lynch
Consults(Registered Trademark) and servicing fees related to such accounts.
Asset management and portfolio service fees declined 3% in the third quarter and
2% in the first nine months of 2001 compared to the year-ago periods. These
declines are due primarily to a market-driven decline in assets in asset-priced
accounts.
An analysis of changes in assets in Private Client accounts from September 29,
2000 to September 28, 2001 is detailed below:
- ---------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
--------------------------------------
SEPT. 29, NEW ASSET SEPT. 28,
(dollars in billions) 2000 MONEY DEPRECIATION 2001
- ---------------------------------------------------------------------------------------------------
Assets in Private Client accounts $ 1,565 $ 84 $(351) $ 1,298
- ---------------------------------------------------------------------------------------------------
23
Total assets in U.S. Private Client accounts declined 17% from the end of the
2000 third quarter, to $1.2 trillion, as a result of market-driven declines,
partially offset by net new money inflows of $67 billion. Outside the United
States, client assets were $127 billion, with $3 billion of net new money in the
2001 third quarter and $17 billion since the end of the 2000 third quarter.
Total assets in asset-priced accounts were $189 billion at the end of the 2001
third quarter, a decrease of 14% from the third quarter of 2000.
Net interest profit
Interest revenue for PCG is derived primarily from interest earned on the
investment portfolio, primarily related to Merrill Lynch's U.S. banks, as well
as interest earned on margin and other loans. Interest expense consists of
interest paid on bank deposits and other borrowings.
Net interest profit was $500 million in the 2001 third quarter, up 21% from $413
million in the third quarter of 2000. Net interest profit for the first nine
months of 2001 was $1.3 billion, 13% higher than in the comparable period of
2000. The increases in net interest profit resulted from growth in deposits and
the related investment portfolios at Merrill Lynch's U.S. banks as well as an
increase in investment portfolio spreads, particularly following the rate cuts
by the Federal Reserve.
Other revenues
Other revenues, which is primarily comprised of investment gains, decreased 16%
from the 2000 third quarter to $42 million in the third quarter of 2001. For the
first nine months of 2001, other revenues were $146 million, compared to $228
million in the year-ago period.
- --------------------------------------------------------------------------------
MERRILL LYNCH INVESTMENT MANAGERS
- --------------------------------------------------------------------------------
MLIM'S RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 28, SEPT. 29, % SEPT. 28, SEPT. 29, %
(dollars in millions) 2001 2000 (DEC.) 2001 2000 (DEC.)
- ----------------------------------------------------------------------------------------------------------------------
Commissions $ 68 $ 102 (33)% $ 227 $ 324 (30)%
Asset management fees 416 462 (10) 1,301 1,399 (7)
Other revenues 31 51 (39) 117 124 (6)
-------- -------- -------- -------
Total net revenues $ 515 $ 615 (16) $ 1,645 $ 1,847 (11)
-------- -------- -------- -------
Pre-tax earnings $ 91 $ 150 (39) $ 301 $ 403 (25)
-------- -------- -------- -------
Pre-tax profit margin 17.7% 24.4% 18.3% 21.8%
- ----------------------------------------------------------------------------------------------------------------------
MLIM's financial results were affected by a market-driven decline in assets
under management. Net revenues in the 2001 third quarter were $515 million, 16%
below the third quarter of last year. Pre-tax earnings were $91 million in the
third quarter of 2001, 39% lower than the 2000 third quarter. The pre-tax profit
margin was 17.7%, compared with 24.4% in the third quarter of 2000.
Year-to-date, MLIM's net revenues were $1.6 billion, down 11% from the year-ago
period and pre-tax earnings were $301 million, 25% lower than the first nine
months of 2000. MLIM's year-to-date pre-tax margin was 18.3%, down from 21.8%
for the same period last year.
Commissions
Commissions for MLIM predominately consist of distribution fees and redemption
fees related to mutual funds. The distribution fees represent fees for promoting
and distributing mutual funds ("12b-1 fees").
Commissions revenues declined 33% to $68 million in the 2001 third quarter due
to the impact of lower market values of mutual funds. Year-to-date 2001,
commissions revenues decreased 30% from the same period a year ago.
24
Asset management fees
Asset management fees primarily consist of fees earned from the management and
administration of funds as well as performance fees earned by MLIM.
Asset management fees were $416 million, a decline of 10% from the third quarter
of 2000 due primarily to a market-driven decline in assets under management.
Assets under management totaled $507 billion at the end of the third quarter,
down 11% from the third quarter of 2000. MLIM's assets under management include
taxable and tax-exempt money market funds. Predominately all of the revenue for
these funds is included in the results of PCG. These funds totaled $81 billion
at September 28, 2001. MLIM attracted $4 billion and $15 billion of net new
money into assets under management during the third quarter and nine months of
2001, respectively. On a year-to-date basis, asset management fees decreased 7%
to $1.3 billion.
An analysis of changes in assets under management from September 29, 2000 to
September 28, 2001 is as follows:
- --------------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
--------------------------------------------
SEPT. 29, NEW ASSET SEPT. 28,
(dollars in billions) 2000 MONEY DEPRECIATION (1) OTHER(2) 2001
- --------------------------------------------------------------------------------------------------------
Assets under management $ 571 $ 27 $ (80) $ (11) $ 507
- --------------------------------------------------------------------------------------------------------
(1) Includes ($2) billion impact of foreign exchange.
(2) Includes reinvested dividends of $10 billion and net outflows of $21 billion
of retail money market funds which were transferred to bank deposits at
Merrill Lynch's U.S. banks.
Other Revenues
Other revenues, which primarily include net interest profit and investment
gains, decreased 39% from the third quarter of 2000 to $31 million in the third
quarter of 2001. On a year-to-date basis, other revenues decreased 6% to $117
million.
25
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES
- --------------------------------------------------------------------------------
Merrill Lynch's non-interest expenses are summarized below:
- -------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 28, SEPT. 29, SEPT. 28, SEPT. 29,
(dollars in millions) 2001 2000 2001 2000
-------- -------- -------- --------
Compensation and benefits $ 2,757 $ 3,146 $ 8,978 $ 10,572
-------- -------- -------- --------
Non-compensation expenses:
Communications and technology 529 542 1,695 1,710
Occupancy and related depreciation 280 251 820 762
Advertising and market development 165 205 575 713
Brokerage, clearing, and exchange fees 219 206 697 672
Professional fees 115 147 408 462
Goodwill amortization 53 52 156 162
Other 253 284 822 1,039
-------- -------- -------- --------
Total non-compensation expenses, excluding
September 11th-related expenses 1,614 1,687 5,173 5,520
September 11th-related expenses 88 - 88 -
-------- -------- -------- --------
Total non-compensation expenses 1,702 1,687 5,261 5,520
-------- -------- -------- --------
Total non-interest expenses $ 4,459 $ 4,833 $ 14,239 $ 16,092
======== ======== ======== ========
Compensation and benefits
as a percentage of net revenues 53.6% 51.2% 52.4% 51.6%
Non-compensation expenses, excluding
September 11th-related expenses, as a
percentage of net revenues 31.4 27.5 30.2 26.9
- -------------------------------------------------------------------------------------------------------------
Compensation and benefits decreased 12% from the 2000 third quarter to $2.8
billion. Included in these amounts are severance expenses of $152 million and
$70 million in the third quarters of 2001 and 2000, respectively. Compensation
and benefits as a percentage of net revenues was 53.6% for the third quarter of
2001 (50.6% excluding severance costs), compared to 51.2% in the year ago
quarter (50.1% excluding severance costs). Non-compensation expenses, excluding
the September 11th - related costs were 4% lower than the 2000 third quarter.
The decrease in expenses is the result of lower business activity as well as
actions initiated in the second half of 2000 to contain expenses, consolidate
offices, and more effectively allocate resources.
Communications and technology expenses were $529 million, down 2% from the third
quarter of 2000 due primarily to reduced systems consulting costs.
Occupancy and related depreciation expense was $280 million, up 12% from the
third quarter of 2000 resulting from the new London headquarters building.
Advertising and market development expenses declined $40 million from the 2000
third quarter due to reduced spending on travel and advertising. Travel expenses
fell during the quarter due to normal seasonality, curtailment of non-essential
travel after September 11th and other actions taken to reduce travel costs.
26
Brokerage, clearing, and exchange fees were $219 million, up $13 million from
the year-ago period.
Professional fees decreased 22% to $115 million primarily due to reduced
spending on employment and consulting services.
Goodwill amortization was $53 million in the third quarter of 2001, virtually
unchanged from the 2000 third quarter. Other expenses were $253 million, 11%
lower than the 2000 third quarter.
September 11th - related expenses of $88 million, which are net of an insurance
receivable of $50 million, include estimated costs related to the write-off of
damaged assets in lower Manhattan; the purchase of replacement equipment; and
the temporary relocation of approximately 9,000 employees, which required
reconfiguring technology, telecommunications and alternative office facilities,
and providing transportation.
The year-to-date effective tax rate was 31.4%, up from the full-year 2000 rate
of 30.4%. The increase in the effective tax rate was primarily attributable to a
decrease in lower-taxed non-U.S income.
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Management continually monitors and evaluates on a daily basis the level and
composition of the balance sheet.
For the first nine months of 2001, average total assets were $427 billion, up
15% from $371 billion for the full-year 2000. Average total liabilities
increased 15% to $404 billion from $352 billion for the full-year 2000. The
major components in the changes in average total assets and liabilities for the
first nine months of 2001 as compared to the full-year 2000 are summarized as
follows:
- --------------------------------------------------------------------------------------------
(dollars in millions) INCREASE/(DECREASE) CHANGE
- --------------------------------------------------------------------------------------------
AVERAGE ASSETS
Marketable investment securities $37,068 149%
Receivables under resale agreements and securities
borrowed transactions 15,139 14
Loans, notes and mortgages (net) 6,268 48
AVERAGE LIABILITIES
Deposits $44,585 129%
Long-term borrowings 14,361 23
Commercial paper and other short-term borrowings (12,669) (53)
Payables under repurchase agreements and
securities loaned transactions 15,198 16
- --------------------------------------------------------------------------------------------
The significant growth in deposits in the first nine months of 2001 reflects the
cash inflows from certain CMA(Registered Trademark) and other types of accounts
from taxable money market funds, which are included in assets under management,
to bank deposits at Merrill Lynch's U.S. banks. This increase in deposits was
used by the U.S. banks to fund the growth in marketable investment securities.
Additionally, receivables under resale agreements and securities borrowed
transactions rose due to increased matched-book activity.
27
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND LIQUIDITY
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
1. Ensure sufficient equity capital to absorb losses,
2. Support the business strategies, and
3. Assure liquidity at all times, across market cycles, and through periods of
financial stress.
These objectives and Merrill Lynch's capital structure and funding policies are
discussed more fully in the Annual Report on Form 10-K for the year ended
December 29, 2000.
At September 28, 2001, Merrill Lynch's equity capital was comprised of $20.7
billion in common equity, $425 million in preferred stock, and $2.7 billion of
preferred securities issued by subsidiaries. Preferred securities issued by
subsidiaries consist primarily of Trust Originated Preferred Securities (Service
Mark) ("TOPrS"(Service Mark)). Based on various analyses and criteria,
management believes that Merrill Lynch's equity capital base of $23.8 billion is
adequate.
Merrill Lynch's leverage ratios were as follows:
- ---------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- ---------------------------------------------------------------------
PERIOD-END
September 28, 2001 18.8x 13.1x
December 29, 2000 19.4x 13.9x
AVERAGE(3)
Nine months ended September 28, 2001 18.8x 13.3x
Year ended December 29, 2000 19.0x 13.2x
- ---------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less (a) receivables under resale agreements and securities
borrowed transactions and (b) securities received as collateral to total
stockholders' equity and preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of assets,
hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not
rely on overall leverage ratios to assess risk-based capital adequacy.
Commercial paper outstanding totaled $4.5 billion at September 28, 2001 and
$14.0 billion at December 29, 2000, which was 1% and 3% of total assets at
September 28, 2001 and year-end 2000, respectively. Deposits at Merrill Lynch's
banking subsidiaries have increased from $67.6 billion at year-end 2000 to $83.7
billion at September 28, 2001, including $70.4 billion at Merrill Lynch's U.S.
banks. The U.S. bank deposits were primarily invested in high quality marketable
investment securities. Outstanding long-term borrowings increased to $79.8
billion at September 28, 2001 from $70.2 billion at December 29, 2000. In the
second quarter of 2001, Merrill Lynch issued Liquid Yield Option(Trademark)
Notes ("LYONs"(Registered Trademark)) due in 2031 totaling $2.4 billion at
September 28, 2001. LYONs are zero-coupon senior debt instruments convertible
into Merrill Lynch common stock at a premium under certain defined terms and
conditions. Major components of the change in long-term borrowings during the
first nine months of 2001 follow:
- ---------------------------------------------
(dollars in billions)
- ---------------------------------------------
Balance at December 29, 2000 $70.2
Issuances 28.0
Maturities (19.5)
Other, net 1.1
-----
Balance at September 28, 2001 (1) $79.8
=====
- ---------------------------------------------
(1) At September 28, 2001, $54.0 billion of long-term borrowings had maturity
dates beyond one year.
28
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its core balance sheet assets. As a further
enhancement to liquidity, the firm maintains a portfolio of unencumbered U.S.
government and agency obligations, and asset-backed securities of high credit
quality which was valued at $8.0 billion at September 28, 2001, and $7.5 billion
at December 29, 2000. These assets may be sold or pledged to provide immediate
liquidity even during periods of adverse market conditions and are in addition
to other highly liquid securities that the firm holds for business
purposes. Another source of liquidity is a committed, senior, unsecured bank
credit facility which at September 28, 2001 totaled $7 billion and was not drawn
upon. Additionally, Merrill Lynch maintains access to significant uncommitted
credit lines, both secured and unsecured, from a large group of banks.
The cost and availability of unsecured financing generally are dependent on
credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and
TOPrS were rated by several recognized credit rating agencies at September 28,
2001 as indicated below. These ratings do not reflect outlooks that may be
expressed by the rating agencies from time to time, some of which are currently
negative.
- ----------------------------------------------------------------------------------------------------------------
SENIOR
DEBT PREFERRED STOCK TOPRS
RATING AGENCY RATINGS RATINGS RATINGS
- ----------------------------------------------------------------------------------------------------------------
Dominion Bond Rating Service Ltd AA (Low) Not Rated Not Rated
Fitch AA AA- AA-
Moody's Investors Service, Inc. Aa3 A2 A1
Rating and Investment Information, Inc. AA A+ A+
Standard & Poor's Rating Service AA- A A
- ----------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Risk-taking is an integral part of Merrill Lynch's core business activities. In
the course of conducting its business operations, Merrill Lynch is exposed to a
variety of risks. These risks include market, credit, liquidity, process, and
other risks that are material and require comprehensive controls and management.
The responsibility and accountability for these risks remain primarily with the
individual business units. For a full discussion of Merrill Lynch's risk
management, see the Annual Report on Form 10-K for the year ended December 29,
2000.
Market Risk
Value-at-risk ("VaR") is an estimate of the amount that Merrill Lynch's present
portfolios could lose with a specified degree of confidence over a given time
interval. The VaR for Merrill Lynch's overall portfolios is less than the sum of
the VaRs for individual risk categories because movements in different risk
categories occur at different times and, historically, extreme movements have
not occurred in all risk categories simultaneously. The difference between the
sum of the VaRs for individual risk categories and the VaR calculated for all
risk categories is shown in the following tables and may be viewed as a measure
of the diversification within Merrill Lynch's portfolios. Merrill Lynch believes
that the tabulated risk measures provide some guidance as to the amount Merrill
Lynch could lose in future periods and it works continuously to improve the
methodology and measurement of its VaR. However, like all statistical measures,
especially those that rely heavily on historical data, VaR needs to be
interpreted with a clear understanding of its assumptions and limitations.
The Merrill Lynch VaR system uses a historical simulation approach to estimate
value-at-risk using a 99% confidence level and a two-week holding period for
trading and non-trading portfolios. Sensitivities to market risk factors are
aggregated and combined with a database of historical biweekly changes in market
factors to simulate a series of profits and losses. The level of loss that is
exceeded in that series 1% of the time is used as the estimate for the 99%
confidence level VaR. In
29
addition to the overall VaR, which reflects diversification in the portfolio,
VaR amounts are presented for major risk categories, including exposure to
volatility risk found in certain products, e.g., options. The table that follows
presents Merrill Lynch's VaR for its trading portfolios at September 28, 2001
and December 29, 2000 as well as daily average VaR for the three months ended
September 28, 2001. Additionally, high and low VaR for the third quarter of 2001
is presented independently for each risk category and overall.
- ------------------------------------------------------------------------------------------------
DAILY
SEPT. 28, DEC. 29, AVERAGE HIGH LOW
(dollars in millions) 2001 2000 3Q01 3Q01 3Q01
- ------------------------------------------------------------------------------------------------
Trading value-at-risk(1)
Interest rate and credit spread $ 56 $ 81 $ 78 $ 121 $ 52
Equity 67 77 61 83 48
Commodity - 9 1 5 -
Currency 11 14 8 17 1
Volatility 27 34 28 39 22
-------------------------------------------------------
161 215 176
Diversification benefit (51) (116) (84)
-------------------------------------------------------
Overall(2) $ 110 $ 99 $ 92 $ 122 $ 76
=======================================================
- ------------------------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$14 million at September 28, 2001 compared with $20 million at
December 29, 2000.
Due to systems limitations immediately following September 11th, certain data
supporting the daily average VaR was unavailable or only partially available.
Overall VaR at September 28, 2001 was higher than the year-end level as a
decrease in the diversification benefit more than offset decreases in all risk
categories.
Merrill Lynch's energy trading business, for which VaR has severe limitations as
a risk measure, has been excluded from the table above. During the first quarter
of 2001, Merrill Lynch sold the majority of its energy-trading assets. Although
Merrill Lynch entered into a thirty-month non-compete covenant in connection
with this asset sale, some energy-trading positions remain.
The following table presents Merrill Lynch's VaR for its non-trading portfolios
(excluding U.S. banks):
- -------------------------------------------------------------------
SEPT. 28, DEC. 29,
(dollars in millions) 2001 2000
- -------------------------------------------------------------------
Non-trading value-at-risk(1)
Interest rate and credit spread $ 70 $ 67
Currency 18 23
Equity 47 47
Volatility 8 3
-------- -------
143 140
Diversification benefit (49) (44)
-------- -------
Overall $ 94 $ 96
======== =======
- ---------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
Non-trading VaR does not include risk related to Merrill Lynch's $2.4 billion of
outstanding LYONs since management expects that the LYONs will be converted to
common stock and will not be replaced by fixed income securities. Non-trading
VaR decreased slightly since year-end 2000.
30
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrS at September 28, 2001
and December 29, 2000 was $88 million and $138 million, respectively. TOPrS,
which are fixed-rate perpetual preferred securities, are considered a component
of Merrill Lynch's equity capital and, therefore, the associated interest rate
sensitivity is not hedged.
Beginning in 2000, cash flows from client funds in certain CMA and other types
of accounts were redirected from taxable money market funds to bank deposits at
Merrill Lynch's U.S. banks. This increase in deposits was used to fund the
growth in high credit quality marketable investment securities. The overall VaR
for the U.S. banks, driven largely by these securities and based on a 99%
confidence interval and a two-week holding period, was $210 million and $113
million at September 28, 2001 and December 29, 2000, respectively. The increase
in the banks' VaR is primarily due to the growth in asset levels.
Credit Risk
Merrill Lynch enters into International Swaps and Derivatives Association, Inc.
master agreements or their equivalent ("master netting agreements") with each of
its derivative counterparties as soon as possible. Master netting agreements
provide protection in bankruptcy in certain circumstances and, in some cases,
enable receivables and payables with the same counterparty to be offset on the
Consolidated Balance Sheets, providing for a more meaningful balance sheet
presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally U.S. Government and agency securities, on certain derivative
transactions. From an economic standpoint, Merrill Lynch evaluates default risk
exposures net of related collateral. The following is a summary of counterparty
credit ratings for the replacement cost (net of $6.9 billion of collateral) of
trading derivatives in a gain position by maturity at September 28, 2001.
(Please note that the following table is inclusive of credit exposure from
derivative transactions only and does not include other credit exposures, which
may be material).
- ---------------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
CREDIT --------------------------------------------------- MATURITY
RATING(1) 0-3 3-5 5-7 OVER 7 NETTING(2) TOTAL
- ---------------------------------------------------------------------------------------
AAA $ 4,541 $ 1,489 $ 1,124 $ 3,038 $ (1,017) $ 9,175
AA 4,076 2,457 1,210 1,669 (3,107) 6,305
A 3,523 1,764 678 1,387 (1,479) 5,873
BBB 1,110 482 261 521 (361) 2,013
Other 656 513 200 263 (403) 1,229
-------------------------------------------------------------------------
Total $13,906 $ 6,705 $ 3,473 $ 6,878 $ (6,367) $24,595
- ---------------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent of internal credit ratings.
(2) Represents netting of payable balances with receivable balances for the same
counterparty across maturity band categories. Receivable and payable
balances with the same counterparty in the same maturity category, however,
are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate its
default risk on derivatives whenever possible by entering into transactions with
provisions that enable Merrill Lynch to terminate or reset the terms.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and
highly-leveraged positions may vary significantly from period to period as a
result of inventory turnover, investment sales, and asset redeployment.
31
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated as BB+
or lower, or equivalent ratings by recognized credit rating agencies, sovereign
debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
In addition to the amounts included in the following table, derivatives may also
expose Merrill Lynch to credit risk related to the underlying security where a
derivative contract either synthesizes ownership of the underlying security
(e.g., long total return swaps) or can potentially force ownership of the
underlying security (e.g., short put options). Derivatives may also subject
Merrill Lynch to credit spread or issuer default risk, in that changes in credit
spreads or in the credit quality of the underlying securities may adversely
affect the derivatives' fair values. Merrill Lynch seeks to manage these risks
by engaging in various hedging strategies to reduce its exposure associated with
non-investment grade positions, such as purchasing an option to sell the related
security or entering into other offsetting derivative contracts.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
- --------------------------------------------------------------------------------
TRADING EXPOSURES
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's trading exposure to
non-investment grade or highly-leveraged issuers or counterparties:
- --------------------------------------------------------------------------------
(dollars in millions) Sept. 28, Dec. 29,
2001 2000
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 4,100 $ 5,227
Derivatives 3,793 3,982
Trading liabilities - cash instruments (992) (1,087)
Collateral on derivative assets (2,564) (1,796)
------- -------
Net trading asset exposure $ 4,337 $ 6,326
======= =======
- --------------------------------------------------------------------------------
32
Included in the preceding table are debt and equity securities and bank loans of
companies in various stages of bankruptcy proceedings or in default. At
September 28, 2001, the carrying value of such debt and equity securities
totaled $53 million, of which 67% resulted from Merrill Lynch's market-making
activities in such securities. This compared with $43 million at December 29,
2000, of which 64% related to market-making activities. Also included are
distressed bank loans totaling $255 million and $122 million at September 28,
2001 and December 29, 2000, respectively.
- --------------------------------------------------------------------------------
NON-TRADING EXPOSURES
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's non-trading exposures to
non-investment grade or highly leveraged corporate issuers or counterparties:
- ----------------------------------------------------------------------------------------
Sept. 28, Dec. 29,
(dollars in millions) 2001 2000
- ----------------------------------------------------------------------------------------
Marketable investment securities $ 237 $ 199
Investments of insurance subsidiaries 119 136
Loans (net of allowance for loan losses):
Bridge loans 195 524
Other loans(1) 2,639 2,741
Other investments:
Partnership interests (2) 1,405 993
Other equity investments (3) 149 284
- ----------------------------------------------------------------------------------------
(1) Represents outstanding loans to 140 and 135 companies at September 28, 2001
and December 29, 2000, respectively.
(2) Includes $883 million and $504 million in investments at September 28, 2001
and December 29, 2000, respectively, related to deferred compensation plans,
for which the default risk of the investments generally rests with the
participating employees.
(3) Includes investments in 78 and 98 enterprises at September 28, 2001 and
December 29, 2000, respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly-leveraged counterparties:
- ---------------------------------------------------------------------------------------
SEPT. 28, DEC. 29,
(dollars in millions) 2001 2000
- ---------------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 315 $ 467
Unutilized revolving lines of credit and other
lending commitments 2,743 3,664
- ---------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In September 2000, the Financial Accounting Standards Board released SFAS No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, a replacement of SFAS No. 125, which revises the
standards for accounting for securitizations and other transfers of financial
assets and collateral. On April 1, 2001, Merrill Lynch adopted the provisions of
this statement that were required to be adopted in the second quarter of 2001.
These provisions changed the accounting for certain securities lending
transactions. Under the new provisions, when Merrill Lynch acts as the lender in
a securities lending agreement and receives securities as collateral that can be
pledged or sold, it recognizes on the Consolidated Balance Sheet, the securities
received as well as an obligation to return the securities lent. Accordingly,
Merrill Lynch's accompanying Consolidated Balance Sheet as of September 28, 2001
separately reflects these assets and liabilities.
33
In July 2001, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations and No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires all business
combinations initiated after June 30, 2001, to be accounted for using the
purchase method. Merrill Lynch adopted the provisions of SFAS No. 141 on July 1,
2001. Under SFAS No. 142, intangible assets with indefinite lives and goodwill
will no longer be amortized. Instead, these assets will be tested annually for
impairment. Merrill Lynch will adopt the provisions of SFAS No. 142 at the
beginning of fiscal year 2002. The full impact of adoption is yet to be
determined, however, annual reported amortization expense related to these
assets approximates $200 million.
34
- ------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
- ------------------------------------------------------------------------------------------------------------------------
3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
2000 2000 2001 2001 2001
------- ------- ------- ------- -------
CLIENT ASSETS (dollars in billions):
Private Client
U.S. $ 1,417 $ 1,337 $ 1,254 $ 1,318 $ 1,171
Non-U.S. 148 140 131 136 127
-------- -------- -------- -------- --------
Total Private Client Assets 1,565 1,477 1,385 1,454 1,298
MLIM direct sales(1) 203 204 179 181 170
-------- -------- -------- -------- --------
Total Client Assets $ 1,768 $ 1,681 $ 1,564 $ 1,635 $ 1,468
======== ======== ======== ======== ========
ASSETS IN ASSET-PRICED ACCOUNTS $ 220 $ 209 $ 193 $ 208 $ 189
ASSETS UNDER MANAGEMENT:
Retail $ 269 $ 250 $ 233 $ 230 $ 214
Institutional 257 262 250 260 252
Private Investors(2) 45 45 42 43 41
Equity 337 321 282 286 253
Fixed-income 101 108 118 118 119
Money market 133 128 125 129 135
U.S. 350 333 319 325 310
Non-U.S. 221 224 206 208 197
U.S. BANK DEPOSITS $ 38 $ 55 $ 66 $ 67 $ 70
- ------------------------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (dollars in billions) $ 109 $ 79 $ 134 $ 125 $ 93
Market share 13.3% 11.6% 12.5% 11.5% 11.4%
U.S. debt and equity:
Volume (dollars in billions) $ 77 $ 55 $ 113 $ 102 $ 76
Market share 15.2% 13.0% 16.1% 13.5% 12.4%
- ------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 52,700 51,800 50,400 49,100 47,300
Non-U.S. 20,000 20,200 19,900 19,100 18,600
-------- -------- -------- -------- --------
Total 72,700 72,000 70,300 68,200 65,900
======== ======== ======== ======== ========
Private Client Financial Advisors 20,200 20,200 19,500 18,600 18,000
- ------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT - OPERATING BASIS:(3)
Operating earnings (dollars in millions) $ 885 $ 877 $ 874 $ 541 $ 475
Annualized return on average
common stockholders' equity 21.6% 20.0% 18.4% 10.7% 9.1%
Earnings per common share:
Basic $ 1.09 $ 1.07 $ 1.04 $ 0.63 $ 0.55
Diluted 0.94 0.93 0.92 0.56 0.50
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (dollars in millions):
Total assets $361,691 $407,200 $431,604 $423,071 $448,606
Total stockholders' equity $ 17,171 $ 18,304 $ 19,939 $ 20,691 $ 21,090
Book value per common share $ 20.70 $ 21.95 $ 23.28 $ 24.02 $ 24.38
SHARE INFORMATION (in thousands):
Weighted-average shares outstanding:
Basic 805,855 811,943 832,195 841,394 845,841
Diluted 929,048 930,688 937,954 943,836 934,469
Common shares outstanding 809,069 814,572 838,389 843,772 847,538
- ------------------------------------------------------------------------------------------------------------------------
(1) Reflects funds managed by MLIM not sold through Private Client channels.
(2) Represents segregated portfolios for individuals, small corporations and
institutions.
(3) Excluding September 11th - related expenses.
35
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
IPO Allocation Cases. On October 22, 2001, the parties entered into a
Stipulation of Dismissal to dismiss without prejudice the purported shareholder
derivative action described in ML & Co.'s Form 10-Q for the quarter ended June
29, 2001.
Research Cases. Merrill Lynch is one of numerous financial services firms that
have been named as defendants in a number of purported class actions involving
challenges to the independence of research recommendations issued by firms that
both issue research and conduct investment banking. The complaints seek
unspecified damages and other relief. Merrill Lynch intends to defend itself
vigorously against these actions.
Unilever Case. On October 16, 2001, a trial began in the Commercial Division of
the High Court in London, England involving a claim by Unilever Superannuation
Trustees Limited as corporate trustee of the Unilever Superannuation Fund (the
"Fund") alleging that Mercury Asset Management Ltd ("Mercury") invested assets
of the Fund negligently between January 1997 and March 1998. Merrill Lynch
acquired Mercury in December 1997 and Mercury's name was changed to Merrill
Lynch Investment Managers Limited, which is the defendant in the action. The
Fund is seeking (pound)130 million (approximately $190 million at current
exchange rates) in damages. The defendant is defending itself vigorously against
this action.
Although the ultimate outcome of these actions cannot be predicted with
certainty, it is the opinion of management that the resolution of these actions
will not have a material adverse effect on the financial condition of Merrill
Lynch, but may be material to Merrill Lynch's operating results for any
particular period.
ITEM 5. OTHER INFORMATION
-----------------
The 2002 Annual Meeting of Stockholders will be held at 10:00 a.m. on Friday,
April 26, 2002 at the Merrill Lynch Conference and Training Center, 800 Scudders
Mill Road, Plainsboro, New Jersey. Any stockholder of record entitled to vote
generally for the election of directors may nominate one or more persons for
election at the Annual Meeting only if proper written notice, as set forth in ML
& Co.'s Certificate of Incorporation, has been given to the Secretary of ML &
Co., 222 Broadway, 17th Floor, New York, New York 10038, no earlier than
February 8, 2002 and no later than March 7, 2002. In addition, any stockholder
intending to bring any other business before the meeting must provide proper
written notice, as set forth in ML & Co.'s By-Laws, to the Secretary of ML & Co.
on or before March 7, 2002. In order to be included in ML & Co.'s proxy
statement, stockholder proposals must be received by ML & Co. no later than
November 16, 2001.
36
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML & Co. hereby
undertakes to furnish to the Securities and Exchange Commission, upon
request, copies of the instruments defining the rights of holders of
long-term debt securities of ML & Co. that authorize an amount of
securities constituting 10% or less of the total assets of ML & Co.
and its subsidiaries on a consolidated basis.
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed with or furnished
to the Securities and Exchange Commission during the quarterly period
covered by this report:
(i) Current Report dated July 5, 2001 for the purpose of filing the form
of ML & Co.'s Strategic Return Notes linked to the Institutional
Holdings Index due June 28, 2006.
(ii) Current Report dated July 11, 2001 for the purpose of furnishing
notice of a webcast of a conference call scheduled for July 17, 2001
to review ML & Co.'s operating results.
(iii)Current Report dated July 17, 2001 for the purpose of filing ML &
Co.'s Preliminary Unaudited Earnings Summary for the three- and
six-month periods ended June 29, 2001.
(iv) Current Report dated July 24, 2001 for the purpose of announcing the
election of E. Stanley O'Neal as president and chief operating officer
of ML & Co.
(v) Current Report dated August 1, 2001 for the purpose of filing ML &
Co.'s Preliminary Unaudited Consolidated Balance Sheet as of June 29,
2001.
(vi) Current Report dated August 3, 2001 for the purpose of filing the form
of ML & Co.'s Strategic Return Notes linked to the Select Ten Index
due July 31, 2006.
37
(vii)Current Report dated August 31, 2001 for the purpose of filing the
form of ML & Co.'s S&P 500 Market Index Target-Term Securities due
August 29, 2008.
(viii) Current Report dated September 4, 2001 for the purpose of furnishing
notice of a webcast of a presentation by ML & Co.'s chairman and chief
executive officer scheduled for September 10, 2001.
(ix) Current Report dated September 11, 2001 for the purpose of disclosing
the temporary disruption of the securities markets and certain of
Merrill Lynch's businesses.
(x) Current Report dated September 28, 2001 for the purpose of filing the
form of ML & Co.'s Market Index Target-Term Securities based upon the
Dow Jones Industrial Average due September 29, 2008.
38
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
---------------------------
(Registrant)
Date: November 9, 2001 By: /s/ Thomas H. Patrick
---------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
39
INDEX TO EXHIBITS
Exhibits
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
40