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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 27, 2003
Commission File Number 1-7182
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(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
- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
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.
935,038,958 shares of Common Stock and 3,113,596 Exchangeable Shares as of the
close of business on August 1, 2003. The Exchangeable Shares, which were issued
by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland
Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one
basis and entitle holders to dividend, voting, and other rights equivalent to
Common Stock.
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Three Months Ended
-----------------------------
June 27, June 28, Percent
(in millions, except per share amounts) 2003 2002 Inc. (Dec.)
------- ------- ----------
NET REVENUES
Commissions $1,044 $1,212 (13.9)%
Principal transactions 1,100 728 51.1
Investment banking
Underwriting 565 501 12.8
Strategic advisory 133 194 (31.4)
Asset management and portfolio service fees 1,154 1,298 (11.1)
Other 271 219 23.7
------ ------
Subtotal 4,267 4,152 2.8
------ ------
Interest and dividend revenues 3,028 3,198 (5.3)
Less interest expense 1,976 2,399 (17.6)
------ ------
Net interest profit 1,052 799 31.7
------ ------
TOTAL NET REVENUES 5,319 4,951 7.4
------ ------
NON-INTEREST EXPENSES
Compensation and benefits 2,678 2,569 4.2
Communications and technology 357 412 (13.3)
Occupancy and related depreciation 221 228 (3.1)
Brokerage, clearing, and exchange fees 169 172 (1.7)
Advertising and market development 113 151 (25.2)
Professional fees 140 132 6.1
Office supplies and postage 50 65 (23.1)
Other 186 163 14.1
Research settlement-related expenses - 111 (100.0)
Net recoveries related to September 11 (61) - N/M
------ ------
TOTAL NON-INTEREST EXPENSES 3,853 4,003 (3.7)
------ ------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,466 948 54.6
Income tax expense 398 267 49.1
Dividends on preferred securities issued by subsidiaries 47 47 -
------ ------
NET EARNINGS $1,021 $ 634 61.0
====== ======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $1,011 $ 624 62.0
====== ======
EARNINGS PER COMMON SHARE
Basic $ 1.13 $ 0.72
====== ======
Diluted $ 1.05 $ 0.66
====== ======
DIVIDEND PAID PER COMMON SHARE $ 0.16 $ 0.16
====== ======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 897.2 861.7
====== ======
Diluted 965.3 942.6
====== ======
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
For the Six Months Ended
----------------------------
June 27, June 28, Percent
(in millions, except per share amounts) 2003 2002 Inc. (Dec.)
------- ------- ----------
NET REVENUES
Commissions $2,113 $2,454 (13.9)%
Principal transactions 2,110 1,605 31.5
Investment banking
Underwriting 933 967 (3.5)
Strategic advisory 258 377 (31.6)
Asset management and portfolio service fees 2,281 2,591 (12.0)
Other 476 438 8.7
------ ------
Subtotal 8,171 8,432 (3.1)
------ ------
Interest and dividend revenues 6,049 6,482 (6.7)
Less interest expense 4,047 4,873 (17.0)
------ ------
Net interest profit 2,002 1,609 24.4
------ ------
TOTAL NET REVENUES 10,173 10,041 1.3
------ ------
NON-INTEREST EXPENSES
Compensation and benefits 5,174 5,215 (0.8)
Communications and technology 760 886 (14.2)
Occupancy and related depreciation 437 466 (6.2)
Brokerage, clearing, and exchange fees 339 370 (8.4)
Advertising and market development 234 301 (22.3)
Professional fees 284 262 8.4
Office supplies and postage 108 134 (19.4)
Other 410 336 22.0
Research settlement-related expenses - 111 (100.0)
Net recoveries related to September 11 (61) - N/M
------ ------
TOTAL NON-INTEREST EXPENSES 7,685 8,081 (4.9)
------ ------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,488 1,960 26.9
Income tax expense 687 583 17.8
Dividends on preferred securities issued by subsidiaries 95 96 (1.0)
------ ------
NET EARNINGS $1,706 $1,281 33.2
====== ======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $1,687 $1,262 33.7
====== ======
EARNINGS PER COMMON SHARE
Basic $ 1.89 $ 1.47
====== ======
Diluted $ 1.77 $ 1.33
====== ======
DIVIDEND PAID PER COMMON SHARE $ 0.32 $ 0.32
====== ======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 892.4 858.2
====== ======
Diluted 952.3 945.9
====== ======
- -------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 27, Dec. 27,
(dollars in millions) 2003 2002
- ----------------------------------------------------------------------------------- -------- --------
ASSETS
CASH AND CASH EQUIVALENTS $ 14,046 $ 10,211
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 7,212 7,375
SECURITIES FINANCING TRANSACTIONS
Receivables under resale agreements 75,482 75,292
Receivables under securities borrowed transactions 50,917 45,543
-------- --------
126,399 120,835
TRADING ASSETS, AT FAIR VALUE (includes securities pledged as collateral of
$18,050 in 2003 and $11,344 in 2002)
Contractual agreements 40,601 38,728
Corporate debt and preferred stock 23,892 18,569
Mortgages, mortgage-backed, and asset-backed 20,306 14,987
Equities and convertible debentures 14,646 13,530
Non-U.S. governments and agencies 13,708 10,095
U.S. Government and agencies 10,540 10,116
Municipals and money markets 4,936 5,535
-------- --------
128,629 111,560
INVESTMENT SECURITIES 77,124 81,787
SECURITIES RECEIVED AS COLLATERAL 2,794 2,020
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $62 in 2003 and $79 in 2002) 41,185 35,317
Brokers and dealers 9,126 8,485
Interest and other 9,248 10,581
-------- --------
59,559 54,383
-------- --------
LOANS, NOTES, AND MORTGAGES (net of allowances of $297 in 2003 and $265 in 2002) 38,485 34,735
SEPARATE ACCOUNTS ASSETS 14,572 13,042
EQUIPMENT AND FACILITIES (net of accumulated depreciation and amortization
of $4,921 in 2003 and $4,671 in 2002) 2,650 3,080
GOODWILL (net of accumulated amortization of $1,005 in 2003 and $984 in 2002) 4,570 4,446
OTHER ASSETS 5,035 4,454
-------- --------
TOTAL ASSETS $481,075 $447,928
======== ========
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 27, Dec. 27,
(dollars in millions, except per share amount) 2003 2002
- ------------------------------------------------------------------------------------- -------- --------
LIABILITIES
SECURITIES FINANCING TRANSACTIONS
Payables under repurchase agreements $ 92,967 $ 85,378
Payables under securities loaned transactions 9,726 7,640
-------- --------
102,693 93,018
-------- --------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 5,517 5,353
DEPOSITS 80,468 81,842
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 44,593 45,202
U.S. Government and agencies 18,101 14,678
Non-U.S. governments and agencies 12,099 7,952
Corporate debt, municipals and preferred stock 10,032 6,500
Equities and convertible debentures 8,536 4,864
-------- --------
93,361 79,196
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 2,794 2,020
OTHER PAYABLES
Customers 34,519 28,569
Brokers and dealers 17,439 16,541
Interest and other 19,750 20,724
-------- --------
71,708 65,834
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 3,459 3,566
SEPARATE ACCOUNTS LIABILITIES 14,572 13,042
LONG-TERM BORROWINGS 79,062 78,524
-------- --------
TOTAL LIABILITIES 453,634 422,395
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,660 2,658
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY (42,500 shares issued and outstanding, 425 425
liquidation preference $10,000 per share)
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 46 58
Common stock (par value $1.33 1/3 per share; authorized: 3,000,000,000 shares;
issued: 2003 - 1,047,824,694 shares; 2002 - 983,502,078 shares) 1,397 1,311
Paid-in capital 6,093 5,315
Accumulated other comprehensive loss (net of tax) (505) (570)
Retained earnings 19,464 18,072
-------- --------
26,495 24,186
Less: Treasury stock, at cost: 2003 - 116,923,484 shares; 2002 - 116,211,158 shares 1,191 961
Unamortized employee stock grants 948 775
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 24,356 22,450
-------- --------
TOTAL STOCKHOLDERS' EQUITY 24,781 22,875
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $481,075 $447,928
======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
5
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended
------------------------------
(dollars in millions) June 27, June 28,
2003 2002
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,706 $ 1,281
Noncash items included in earnings:
Depreciation and amortization 285 335
Policyholder reserves 80 85
Amortization of stock-based compensation 333 320
Deferred taxes 392 56
Other (36) 10
Changes in operating assets and liabilities:
Trading assets (17,162) (1,762)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations 163 (2,150)
Receivables under resale agreements (194) (4,002)
Receivables under securities borrowed transactions (5,374) (4,344)
Customer receivables (5,850) 1,963
Brokers and dealers receivables (641) (6,506)
Trading liabilities 14,165 5,358
Payables under repurchase agreements 7,589 14,851
Payables under securities loaned transactions 2,086 (2,502)
Customer payables 5,950 669
Brokers and dealers payables 898 2,572
Other, net (854) 4,395
-------- --------
Cash provided by operating activities 3,536 10,629
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 13,088 14,350
Sales of available-for-sale securities 32,018 17,065
Purchases of available-for-sale securities (37,239) (23,516)
Maturities of held-to-maturity securities 238 88
Purchases of held-to-maturity securities (754) (228)
Loans, notes, and mortgages (4,202) (7,367)
Other investments and other assets (1,033) (423)
Equipment and facilities 145 (608)
-------- --------
Cash provided by (used for) investing activities 2,261 (639)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings 164 823
Deposits (1,374) (4,709)
Issuance and resale of long-term borrowings 13,880 15,449
Settlement and repurchases of long-term borrowings (14,594) (17,756)
Issuance of common stock 243 182
Issuance of treasury stock 10 3
Other common stock transactions 23 (41)
Dividends (314) (297)
-------- --------
Cash used for financing activities (1,962) (6,346)
-------- --------
Increase in cash and cash equivalents 3,835 3,644
Cash and cash equivalents, beginning of year 10,211 11,070
-------- --------
Cash and cash equivalents, end of period $ 14,046 $ 14,714
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ (11) $ 217
Interest 3,923 5,041
- -------------------------------------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements
6
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 27, 2003
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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
For a complete discussion of Merrill Lynch's accounting policies, refer to the
excerpt of the Annual Report included as an exhibit to Form 10-K for the year
ended December 27, 2002 ("2002 Annual Report").
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Merrill
Lynch & Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch").
All material intercompany balances have been eliminated. The interim
consolidated financial statements for the three-and six-month periods are
unaudited; however, in the opinion of Merrill Lynch management, all adjustments
(consisting of normal recurring accruals) necessary for a fair statement of the
consolidated financial statements have been included.
These unaudited Condensed Consolidated Financial Statements should be read in
conjunction with the audited consolidated financial statements included in the
2002 Annual Report. The December 27, 2002 unaudited Condensed Consolidated
Balance Sheet was derived from the audited 2002 financial statements. The nature
of Merrill Lynch's business is such that the results of any interim period are
not necessarily indicative of results for a full year. In presenting the
Condensed Consolidated Financial Statements, management makes estimates that
affect the reported amounts and disclosures in the financial statements.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on the Condensed Consolidated Financial Statements, and it is
possible that such changes could occur in the near term. Certain
reclassifications have been made to prior period financial statements, where
appropriate, to conform to the current period presentation.
New Accounting Pronouncements
On July 7, 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts. The SOP provides guidance on accounting and reporting by
insurance companies for certain nontraditional long-duration contracts and for
separate accounts. The SOP is effective for financial statements for Merrill
Lynch beginning in 2004. The SOP requires the establishment of a liability for
contracts that contain death or other insurance benefits using a specified
reserve methodology that is different from the methodology that Merrill Lynch
currently employs. Depending on market conditions at the time of adoption, the
impact of implementing this reserve methodology may have a material impact on
the Condensed Consolidated Statement of Earnings.
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 changes the accounting for certain financial instruments,
including mandatorily redeemable preferred stock and certain freestanding equity
derivatives, which under previous guidance were accounted for as equity. SFAS
No. 150 requires that mandatorily redeemable preferred shares, written put
options and physically settled forward purchase contracts on an issuer's shares,
and certain financial instruments that must be settled by issuing a variable
number of an issuer's shares, be classified as liabilities in the Condensed
Consolidated Balance Sheets.
7
SFAS No. 150 must be applied immediately to instruments entered into or modified
after May 31, 2003 and to all other instruments that exist beginning in the
third quarter of this year. Application to pre-existing contracts is recognized
as a cumulative effect of a change in accounting principle. Merrill Lynch does
not expect the adoption of SFAS No. 150 to have a material impact on the
Condensed Consolidated Financial Statements.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
new guidance amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group ("DIG") process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In addition,
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Merrill Lynch is currently
assessing the impact of SFAS No. 149 on the Condensed Consolidated Financial
Statements.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
which clarifies when an entity should consolidate another entity known as a
Variable Interest Entity ("VIE"), more commonly referred to as an SPE. A VIE is
an entity in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties, and may include many types of SPEs. FIN 46 requires
that an entity consolidate a VIE if that enterprise has a variable interest that
will absorb a majority of the VIE's expected losses, receive a majority of the
VIE's expected residual returns, or both. FIN 46 does not apply to qualifying
special purpose entities ("QSPEs"), the accounting for which is governed by SFAS
No. 140. FIN 46 is effective for VIEs created on or after February 1, 2003 and
for existing VIEs as of the third quarter of 2003. See Note 8 to the
Consolidated Financial Statements in the 2002 Annual Report for disclosures
regarding the expected impact of adoption of FIN 46 on Merrill Lynch's
Consolidated Balance Sheets. Also, see Note 5 to the Condensed Consolidated
Financial Statements for additional FIN 46 disclosure.
On December 31, 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation. SFAS No. 148 permits three
alternative methods for a voluntary transition to the fair value based method of
accounting for employee stock-based compensation. SFAS No. 148 continues to
permit prospective application for companies that adopt this standard prior to
the beginning of fiscal year 2004. SFAS No. 148 also allows for a modified
prospective application, which requires the fair value of all unvested awards to
be amortized over the remaining service period, as well as restatement of prior
years' expense. The transition guidance and disclosure provisions of SFAS No.
148 were effective for fiscal years ending after December 15, 2002. See Note 11
to the Condensed Consolidated Financial Statements for these disclosures.
On November 25, 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements Nos. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. FIN 45 requires guarantors to
disclose their obligations under certain guarantees. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosures were
effective for financial statements of interim or annual periods ending after
December 15, 2002. See Note 10 to the Condensed Consolidated Financial
Statements for these disclosures.
8
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces
the guidance provided by EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Merrill Lynch adopted SFAS No. 146
as of January 1, 2003, which had no material impact on the Condensed
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
NOTE 2. OTHER SIGNIFICANT EVENTS
- --------------------------------------------------------------------------------
Restructuring and Other Charges
During the fourth quarter of 2001, Merrill Lynch's management formally committed
to a restructuring plan designed to position Merrill Lynch for improved
profitability and growth, which included the resizing of selected businesses and
other structural changes. As a result, Merrill Lynch incurred a fourth quarter
2001 pre-tax charge to earnings of $2.2 billion, which included restructuring
costs of $1.8 billion and other charges of $396 million. Utilization of the
restructuring reserve and a rollforward of staff reductions at June 27, 2003 is
as follows:
(dollars in millions)
- -------------------------------------------------------------------------------------------------------------------
Utilized in
------------------------------ Balance
Initial June 27,
Balance 2001 2002(1) 2003 2003
- -------------------------------------------------------------------------------------------------------------------
Category:
Severance costs $ 1,133 $ (214) $ (874) $(23) 22
Facilities costs 299 - (15) (50) 234
Technology and fixed asset write-offs 187 (187) - - -
Other Costs 178 - (119) - 59
------- ------ ------- ---- ----
$ 1,797 $ (401) $(1,008) $(73) $315
------- ------ ------- ---- ----
Staff Reductions 6,205 (749) (5,233) (71) 152
- -------------------------------------------------------------------------------------------------------------------
(1) The 2002 utilization included changes in estimates which are attributable to
differences in actual costs from initial estimates in implementing the original
restructuring plan. As a result of changes in estimates, net reserves of $9
million were reversed in 2002. Refer to Note 3 in the 2002 Annual Report for
additional information.
9
- --------------------------------------------------------------------------------
NOTE 3. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: the Global Markets and Investment Banking Group
("GMI"), Global Private Client ("GPC") 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 business activities, see
the 2002 Annual Report.
Operating results by business segment are as follows:
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
Corporate
THREE MONTHS ENDED GMI GPC MLIM Items Total
JUNE 27, 2003 -------- ------- ------ --------- ---------
Non-interest revenues $ 2,154 $ 1,795 $ 325 $ (7) (1) $ 4,267
Net interest profit(2) 732 333 5 (18) (3) 1,052
-------- ------- ------ ------ ---------
Net revenues 2,886 2,128 330 (25) 5,319
Non-interest expenses 1,773 1,787 263 30 (4) 3,853
-------- ------- ------ ------ ---------
Pre-tax earnings (loss) $ 1,113 $ 341 $ 67 $ (55) $ 1,466
======== ======= ====== ====== =========
Quarter-end total assets $408,967 $62,480 $5,058 $4,570 $ 481,075
======== ======= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------
Corporate
GMI GPC MLIM Items Total
-------- ------- ------ --------- ---------
THREE MONTHS ENDED
JUNE 28, 2002
Non-interest revenues $ 1,848 $ 1,922 $ 406 $ (24) (1) $ 4,152
Net interest profit(2) 462 346 5 (14) (3) 799
-------- ------- ------ ------ ---------
Net revenues 2,310 2,268 411 (38) 4,951
Non-interest expenses 1,663 1,928 322 90 (4) 4,003
-------- ------- ------ ------ ---------
Pre-tax earnings (loss) $ 647 $ 340 $ 89 $ (128) $ 948
======== ======= ====== ====== =========
Quarter-end total assets $381,810 $62,104 $5,667 $4,253 $ 453,834
======== ======= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------
(1) Primarily represents the elimination of intersegment revenues and expenses.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents acquisition financing costs and other corporate interest.
(4) Represents elimination of intersegment revenues and expenses. 2003 includes
September 11-related expenses and a litigation provision. 2002 included
research settlement-related expenses.
10
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
Corporate
SIX MONTHS ENDED GMI GPC MLIM Items TOTAL
JUNE 27, 2003 -------- ------------ ------ --------- ---------
Non-interest revenues $ 3,961 $ 3,574 $ 655 $ (19) (1) $ 8,171
Net interest profit(2) 1,386 655 12 (51) (3) 2,002
-------- ------- ------ ------ ---------
Net revenues 5,347 4,229 667 (70) 10,173
Non-interest expenses 3,445 3,621 554 65 (4) 7,685
-------- ------- ------ ------ ---------
Pre-tax earnings (loss) $ 1,902 $ 608 $ 113 $ (135) $ 2,488
======== ======= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------
Corporate
GMI GPC MLIM Items Total
-------- ------- ------ --------- ---------
SIX MONTHS ENDED
JUNE 28, 2002
Non-interest revenues $ 3,756 $ 3,875 $ 845 $ (44) (1) $ 8,432
Net interest profit(2) 938 692 9 (30) (3) 1,609
-------- ------- ------ ------ ---------
Net revenues 4,694 4,567 854 (74) 10,041
Non-interest expenses 3,403 3,956 651 71 (4) 8,081
-------- ------- ------ ------ ---------
Pre-tax earnings (loss) $ 1,291 $ 611 $ 203 $ (145) $ 1,960
======== ======= ====== ====== =========
- --------------------------------------------------------------------------------------------------------------------
(1) Primarily represents the elimination of intersegment revenues and expenses.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents acquisition financing costs and other corporate interest.
(4) Represents elimination of intersegment revenues and expenses. 2003 includes
September 11-related expenses and a litigation provision. 2002 included
research settlement-related expenses.
11
- --------------------------------------------------------------------------------
NOTE 4. INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Investment securities at June 27, 2003 and December 27, 2002 are presented
below:
(dollars in millions)
- --------------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- --------------------------------------------------------------------------------------
INVESTMENT SECURITIES
Available-for-sale $65,181 $72,229
Trading 4,221 3,337
Held-to-maturity 1,179 638
Non-qualifying: (1)
Deferred compensation hedges (2) 1,694 1,927
Other (3) 4,849 3,656
------- -------
Total $77,124 $81,787
- --------------------------------------------------------------------------------------
(1) Non-qualifying for SFAS No. 115 purposes.
(2) Represents investments economically hedging deferred compensation
liabilities.
(3) Includes insurance policy loans, merchant banking investments
and other non-qualifying investments.
As of June 27, 2003, certain available-for-sale securities had suffered a
decline in value of approximately $100 million. Accordingly, this amount was
charged to Accumulated other comprehensive loss on the Condensed Consolidated
Balance Sheet. These investments will continue to be monitored for impairment,
and should it be determined that the impairment to these investments is other
than temporary, a charge will be made to earnings.
- --------------------------------------------------------------------------------
NOTE 5. SECURITIZATION TRANSACTIONS
- --------------------------------------------------------------------------------
In the normal course of business, Merrill Lynch securitizes commercial and
residential mortgage and home equity loans; municipal, government, and corporate
bonds; and other types of financial assets. SPEs are often used when entering
into or facilitating securitization transactions. Merrill Lynch's involvement
with SPEs used to securitize financial assets includes: establishing SPEs;
selling assets to SPEs; underwriting, distributing, making loans to SPEs; making
markets in securities issued by SPEs; engaging in derivative transactions with
SPEs; owning notes or certificates issued by SPEs; and/or providing liquidity
facilities and other guarantees to SPEs.
Merrill Lynch securitized assets of $32.3 billion for the six months ended June
27, 2003. For the six months ended June 27, 2003 and June 28, 2002, Merrill
Lynch received $32.8 billion and $19.2 billion, respectively, of proceeds, and
other cash inflows, from new securitization transactions, and recognized net
securitization gains, excluding gains on related derivative transactions, of
$25.6 million and $47.6 million, respectively in Merrill Lynch's Condensed
Consolidated Statements of Earnings. Merrill Lynch generally records assets
prior to securitization at fair value.
For the first six months of 2003 and 2002, cash inflows from securitizations
related to the following asset types:
12
(dollars in millions)
- --------------------------------------------------------------------------------------
June 27, 2003 June 28, 2002
- --------------------------------------------------------------------------------------
Asset category
Residential mortgage loans $24,457 $12,019
Municipal bonds 5,577 3,222
Corporate and government bonds 768 1,365
Commercial loans and other 2,045 2,578
------- -------
$32,847 $19,184
- --------------------------------------------------------------------------------------
Retained interests in SPEs were approximately $3.0 billion and $3.3 billion at
June 27, 2003 and December 27, 2002, respectively, which related primarily to
residential mortgage loan and municipal bond securitization transactions. The
majority of the retained interest balance consists of mortgage-backed securities
that have observable market prices. These retained interests include
mortgage-backed securities that Merrill Lynch has committed to purchase and
expects to sell to investors in the normal course of its underwriting activity.
Approximately 71% and 77% at June 27, 2003 and December 27, 2002, respectively,
of residential mortgage loan retained interests consists of interests in U.S.
Government agency sponsored securitizations, which are guaranteed with respect
to principal and interest. In addition, $611 million and $851 million at June
27, 2003 and December 27, 2002, respectively, of the retained interest balance
relates to municipal bond transactions where observable market prices are
available for the underlying assets, which provide the inputs and parameters
used to calculate the fair value of the retained interest.
The following table presents information on retained interests, excluding the
offsetting benefit of financial instruments used to hedge risks, held by Merrill
Lynch as of June 27, 2003 arising from Merrill Lynch's residential mortgage
loan, commercial mortgage loan, and municipal bond securitization transactions.
The sensitivity of the current fair value of the retained interests to immediate
10% and 20% adverse changes in those assumptions and parameters is also shown.
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------
Residential Municipal
Mortgage Loans Bonds Other
- ------------------------------------------------------------------------------------------------------------
Retained interest amount $2,348 $ 611 $ 89
Weighted average life (in years) 3.5 4.4 N/A
Range 0.0 - 19.0 0.0 - 8.0 N/A
Weighted average credit losses (rate per annum) 0.5% 0% 0.7%
Range 0.0 - 3.5% 0% 0.0 - 3.6%
Impact on fair value of 10% adverse change $ (4) $ - $ (1)
Impact on fair value of 20% adverse change $ (8) $ - $ (3)
Weighted average discount rate 5.5% 2.8% 7.1%
Range 0.0 - 75.0% 1.2 - 6.4% 1.6 - 21.7%
Impact on fair value of 10% adverse change $ (39) $ (52) $ (1)
Impact on fair value of 20% adverse change $ (66) $(101) $ (3)
Weighted average prepayment speed (CPR) 19.5% 15.5% N/A
Range 0.0 - 65.0% 6.0 - 30.0% N/A
Impact on fair value of 10% adverse change $ (20) $ (2) N/A
Impact on fair value of 20% adverse change $ (30) $ (3) N/A
- ------------------------------------------------------------------------------------------------------------
N/A=Not Applicable
CPR=Constant Prepayment Rate
13
The preceding table does not include the offsetting benefit of financial
instruments that Merrill Lynch utilizes to hedge risks including credit,
interest rate, and prepayment risk that are inherent in the retained interests.
Merrill Lynch employs hedging strategies that are structured to take into
consideration the hypothetical stress scenarios above such that they would be
effective in principally offsetting Merrill Lynch's exposure to loss in the
event these scenarios occur. In addition, the sensitivity analysis is
hypothetical and should be used with caution. In particular, the effect of a
variation in a particular assumption on the fair value of the retained interest
is calculated independent of changes in any other assumption; in practice,
changes in one factor may result in changes in another, which might magnify or
counteract the sensitivities. Further, changes in fair value based on a 10% or
20% variation in an assumption or parameter generally cannot be extrapolated
because the relationship of the change in the assumption to the change in fair
value may not be linear.
The assumptions and parameters used initially to value retained interests
relating to securitizations effected in 2003 that were still held by Merrill
Lynch as of June 27, 2003 are as follows:
- ------------------------------------------------------------------------------------------------------------
Residential Municipal
Mortgage Loans Bonds Other
- ------------------------------------------------------------------------------------------------------------
Weighted average life (in years) 4.9 0.0 - 8.0 N/A
Credit losses (rate per annum) 0.1% 0% 0.9-1.4%
Weighted average discount rate 6.2% 1.5 -6.8% 2.6-15.0%
Prepayment speed assumption (CPR) 12.1% 6.0 - 24.0% N/A
- ------------------------------------------------------------------------------------------------------------
N/A=Not Applicable
CPR=Constant Prepayment Rate
For residential mortgage loan and other securitizations, the investors and the
securitization trust have no recourse to Merrill Lynch's other assets for
failure of mortgage holders to pay when due.
For municipal bond securitization SPEs, in the normal course of dealer
market-making activities, Merrill Lynch acts as liquidity provider.
Specifically, the holders of beneficial interests issued by municipal bond
securitization SPEs have the right to tender their interests for purchase by
Merrill Lynch on specified dates at a specified price. Beneficial interests that
are tendered are then sold by Merrill Lynch to investors through a best efforts
remarketing where Merrill Lynch is remarketing agent. If the beneficial
interests are not successfully remarketed, the holders of beneficial interests
are paid from funds drawn under a standby liquidity letter of credit issued by
Merrill Lynch.
Merrill Lynch also provides default protection or credit enhancement to
investors in securities issued by certain municipal bond securitization SPEs.
Interest and principal payments on beneficial interests issued by these SPEs are
secured by a guarantee issued by Merrill Lynch. In the event that the issuer of
the underlying municipal bond defaults on any payment of principal and/or
interest when due, the payments on the bonds will be made to beneficial interest
holders from an irrevocable guarantee by Merrill Lynch.
The maximum commitment under these liquidity and default guarantees totaled
$16.8 billion and $13.7 billion at June 27, 2003 and December 27, 2002,
respectively. The fair value of the commitments approximated $37 million and $69
million at June 27, 2003 and December 27, 2002, respectively, which is reflected
in the Condensed Consolidated Financial Statements. Of these arrangements, $3.3
billion and $2.3 billion at June 27, 2003 and December 27, 2002, respectively,
represent agreements where the guarantee is provided to the SPE by a third party
financial intermediary and Merrill Lynch enters into a reimbursement agreement
with the financial intermediary. In these arrangements, if the financial
intermediary incurs losses, Merrill Lynch has up to one year to fund those
losses. Additional information regarding these commitments is provided in Note
10 to the Condensed Consolidated Financial Statements and in Note 14 in the 2002
Annual Report.
14
The following table summarizes principal amounts outstanding, delinquencies, and
net credit losses of securitized financial assets as of June 27, 2003 and
December 27, 2002.
(dollars in millions)
- ------------------------------------------------------------------------------------------------------------
Residential Municipal
Mortgage Loans Bonds Other
- ------------------------------------------------------------------------------------------------------------
June 27, 2003
Principal Amount Outstanding $37,438 $23,380 $3,983
Delinquencies 69 - -
Net Credit Losses 2 - 16
- ------------------------------------------------------------------------------------------------------------
December 27, 2002
Principal Amount Outstanding $23,107 $18,379 $2,476
Delinquencies 90 - 3
Net Credit Losses 5 - 44
- ------------------------------------------------------------------------------------------------------------
In January 2003, the FASB issued FIN 46, which clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements, for
enterprises that have interests in entities that meet the definition of a VIE. A
VIE is an entity in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. Merrill Lynch adopted FIN 46 on February 1, 2003 for
VIEs with which Merrill Lynch became involved after January 31, 2003.
In the normal course of business, Merrill Lynch acts as a transferor, derivative
counterparty, investor, arranger, structurer, underwriter, market-maker,
guarantor, and/or liquidity provider to many VIEs. In addition, Merrill Lynch
also acts as transferor to entities that meet the requirements of qualifying
special purpose entities as defined in SFAS No. 140.
Upon adoption of FIN 46, Merrill Lynch has entered into transactions with a
number of VIEs of which it was deemed the primary beneficiary and therefore must
consolidate the VIE. Certain of these VIEs hold convertible bonds purchased from
Merrill Lynch, and Merrill Lynch maintains a call option to repurchase the
convertible bonds from the VIE. Assets held by these VIEs, totaling $246
million, are reported in Equities and convertible debentures. Holders of the
beneficial interest in these VIEs have no recourse to the general credit of
Merrill Lynch; rather their investment is paid exclusively from the convertible
bonds held by the VIE. Other VIEs largely relate to maturity shortening
transactions where Merrill Lynch has the obligation to repurchase some of the
underlying securities at the maturity date of the VIE. Assets held by these
VIEs, totaling $251 million, are reported in Corporate debt and preferred stock.
The beneficial interest holders in these VIEs have recourse to Merrill Lynch of
up to $68 million to the extent that the underlying assets that Merrill Lynch is
required to repurchase have declined in value from the initial transaction date.
15
In addition, subsequent to the adoption of FIN 46, Merrill Lynch entered into
transactions that gave rise to significant variable interest in certain VIEs.
Most of these VIEs include transactions where Merrill Lynch is a derivative
counterparty to a VIE that serves to synthetically expose investors to a
specific credit risk. As of January 31, 2003, Merrill Lynch created these types
of SPEs that held a total of $564 million in assets. As of June 27, 2003,
Merrill Lynch's maximum exposure to loss as a result of this activity was $25
million, which is fully reflected on the Condensed Consolidated Financial
Statements. Also, Merrill Lynch has made loans to VIEs that invest in loan
receivable assets. These VIEs are primarily designed to provide temporary
financing to clients that are accumulating assets (typically loan receivables)
prior to a securitization. Merrill Lynch has a significant variable interest in
VIEs that hold real estate assets totaling $30 million. Merrill Lynch is exposed
to maximum losses of $16 million, which relates to a loan to the VIEs and is
fully reflected on the Condensed Consolidated Financial Statements.
- --------------------------------------------------------------------------------
NOTE 6. LOANS, NOTES, AND MORTGAGES AND RELATED COMMITMENTS TO EXTEND CREDIT
- --------------------------------------------------------------------------------
Loans, Notes, and Mortgages and related commitments to extend credit at June 27,
2003 and December 27, 2002, are presented below:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------
Loans Commitments
------------------------------- -----------------------------
June 27, 2003 Dec. 27, 2002 June 27, 2003(1) Dec. 27, 2002
- ------------------------------------------------------------------------- --------------------------------
Consumer and small and middle-market
business - secured $ 28,226 $ 23,749 $ 10,470 $ 8,318
Commercial:
Secured 8,127 6,873 7,820 4,450
Unsecured investment grade 1,719 3,434 13,983 10,882
Unsecured non-investment
grade 413 679 356 293
-------- -------- -------- --------
Total $ 38,485 $ 34,735 $ 32,629 $ 23,943
- -------------------------------------------------------------------------------------------------------------------
(1) See Note 10 for a maturity profile of these commitments.
The loan amounts are net of an allowance for loan losses of $297 million and
$265 million as of June 27, 2003 and December 27, 2002, respectively.
Consumer and small and middle-market business loans, which are substantially
secured, consisted of approximately 164,000 individual loans at June 27, 2003
and include residential mortgages, home equity loans, small and middle-market
business loans, and other loans to individuals for household, family, or other
personal expenditures. Commercial loans, which at June 27, 2003 consisted of
approximately 5,000 individual loans, include syndicated loans and other loans
to corporations and other businesses. Secured loans and commitments include
lending activities made in the normal course of Merrill Lynch's securities and
financing businesses. The investment grade and non-investment grade
categorization is determined using the credit rating agency equivalent of
internal credit ratings. Non-investment grade counterparties are those rated
lower than BBB. Merrill Lynch enters into credit default swaps to mitigate
credit exposure primarily related to funded and unfunded unsecured commercial
loans. The notional value of these swaps totaled $4.1 billion and $3.8 billion
at June 27, 2003 and December 27, 2002, respectively.
16
The above amounts include $6.8 billion and $6.2 billion of loans held for sale
at June 27, 2003 and December 27, 2002, respectively. Loans held for sale are
loans which management expects to sell prior to maturity. At June 27, 2003, such
loans consisted of $4.9 billion of consumer loans, primarily residential
mortgages, and $1.9 billion of commercial loans, approximately 36% of which are
to investment grade counterparties. At December 27, 2002, such loans consisted
of $3.2 billion of consumer loans, primarily residential mortgages, and $3.0
billion of commercial loans, approximately 49% of which were to investment grade
counterparties. For information on the accounting policy related to loans, notes
and mortgages, see Note 1 in the 2002 Annual Report.
- --------------------------------------------------------------------------------
NOTE 7. SHORT-TERM BORROWINGS AND DEPOSITS
- --------------------------------------------------------------------------------
Short-term borrowings and Deposits at June 27, 2003 and December 27, 2002 are
presented below:
(dollars in millions)
- --------------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- --------------------------------------------------------------------------------------
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 4,816 $ 3,966
Other 701 1,387
-------- --------
Total $ 5,517 $ 5,353
-------- --------
DEPOSITS
U.S. $ 66,422 $ 68,550
Non U.S. 14,046 13,292
-------- --------
Total $ 80,468 $ 81,842
- --------------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
NOTE 8. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
(dollars in millions)
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------ --------------------
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
------- ------- ------- -------
Net Earnings $1,021 $634 $1,706 $1,281
------ ---- ------ ------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (1) (9) 4 (24)
Net unrealized gain on investment
securities available-for-sale 49 19 67 36
Deferred gain (loss) on cash flow hedges (13) 21 (6) (14)
------ ---- ------ ------
Total other comprehensive income (loss),
net of tax 35 31 65 (2)
------ ---- ------ ------
Comprehensive income $1,056 $665 $1,771 $1,279
- -------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 9. EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
The computation of earnings per common share is as follows:
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------ --------------------------
June 27, June 28, June 27, June 28,
2003 2002 2003 2002
-------- -------- -------- --------
Net Earnings $ 1,021 $ 634 $ 1,706 $ 1,281
Preferred stock dividends 10 10 19 19
-------- -------- -------- --------
Net earnings applicable to common stockholders $ 1,011 $ 624 $ 1,687 $ 1,262
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares outstanding 897,202 861,742 892,377 858,241
-------- -------- -------- --------
Effect of dilutive instruments(1) (2):
Employee stock options 25,783 32,176 22,118 38,599
Financial Advisor Capital Accumulation
Award Plan shares 21,969 24,438 21,171 24,676
Restricted shares and units 20,277 24,139 16,500 24,255
Employee Stock Purchase Plan shares 57 65 88 90
-------- -------- -------- --------
Dilutive potential common shares 68,086 80,818 59,877 87,620
-------- -------- -------- --------
Total weighted-average diluted shares 965,288 942,560 952,254 945,861
-------- -------- -------- --------
- --------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.13 $ 0.72 $ 1.89 $ 1.47
Diluted earnings per common share $ 1.05 $ 0.66 $ 1.77 $ 1.33
- --------------------------------------------------------------------------------------------------------------------
(1) During the 2003 and 2002 second quarter there were 122 million and 100
million instruments, respectively, that were considered antidilutive and
not included in the above computations.
(2) See Note 16 to the 2002 Annual Report for a description of these instruments.
18
- --------------------------------------------------------------------------------
NOTE 10. COMMITMENTS, CONTINGENCIES AND GUARANTEES
- --------------------------------------------------------------------------------
Litigation
Merrill Lynch has been named as a defendant in various legal actions, including
arbitrations, class actions, and other litigation arising in connection with its
activities as a global diversified financial services institution. The general
decline of equity securities prices that began in 2000 has resulted in increased
legal actions against many firms, including Merrill Lynch, and will likely
result in higher professional fees and litigation expenses than those incurred
in the past.
Some of the legal actions include claims for substantial compensatory and/or
punitive damages or claims for indeterminate amounts of damages. In some cases,
the issuers who would otherwise be the primary defendants in such cases are
bankrupt or otherwise in financial distress. Merrill Lynch is also involved in
investigations and/or proceedings by governmental and self-regulatory agencies.
The number of these investigations has also increased in recent years with
regard to many firms, including Merrill Lynch.
Given the number of these legal actions, investigations and proceedings, some
are likely to result in adverse judgments, settlements, penalties, injunctions,
fines, or other relief. Merrill Lynch believes it has strong defenses to, and
where appropriate, will vigorously contest these actions. In view of the
inherent difficulty of predicting the outcome of such matters, particularly in
cases in which claimants seek substantial or indeterminate damages, Merrill
Lynch often cannot predict what the eventual loss or range of loss related to
such matters will be. Merrill Lynch believes, based on information available to
it, 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 Condensed
Consolidated Financial Statements, but may be material to Merrill Lynch's
operating results or cash flows for any particular period and may impact ML &
Co.'s credit ratings.
Commitments
At June 27, 2003, Merrill Lynch commitments had the following expirations:
(dollars in millions)
- ----------------------------------------- -------------- -------------------------------------------------------
Commitment expiration
-------------------------------------------------------
Less than
Total 1 year 1- 3 years 3+ - 5 years Over 5 years
- ----------------------------------------- -------------- -------------- ------------- -------------- ------------
Commitments to extend credit(1) $32,629 $16,755 $4,453 $6,746 $4,675
Binding margin commitments 3,244 3,244 - - -
Partnership interests 506 235 21 112 138
Other commitments 6,448 5,433 531 352 132
Operating leases 4,061 526 1,014 861 1,660
Resale agreements 17,826 17,826 - - -
Repurchase agreements 12,595 12,595 - - -
------- ------- ------ ------ ------
Total $77,309 $56,614 $6,019 $8,071 $6,605
- ----------------------------------------------------------------------------------------------------------------
(1) See Note 6 to the Condensed Consolidated Financial Statements and Note 14 in
the 2002 Annual Report for additional details.
19
Other Commitments
Merrill Lynch also obtains commercial letters of credit from issuing banks to
satisfy various counterparty collateral requirements in lieu of depositing cash
or securities collateral. Commercial letters of credit aggregated $285 million
and $434 million at June 27, 2003 and December 27, 2002, respectively.
Merrill Lynch has entered into agreements with providers of market data,
communications, and systems consulting services. Minimum fee commitments over
the remaining life of these agreements aggregated $525 million and $527 million
at June 27, 2003 and December 27, 2002, respectively. Merrill Lynch has entered
into purchasing and other commitments totaling $5.8 billion and $1.4 billion at
June 27, 2003 and December 27, 2002, respectively.
Leases
Merrill Lynch has entered into various noncancellable long-term lease agreements
for premises that expire through 2024. Merrill Lynch has also entered into
various noncancellable short-term lease agreements, which are primarily
commitments of less than one year under equipment leases.
In 1999 and 2000, Merrill Lynch established two SPEs to finance its Hopewell,
New Jersey campus and an aircraft. Merrill Lynch leased the facilities and the
aircraft from the SPEs. The total amount of funds raised by the SPEs to finance
these transactions was $383 million. These SPEs were not consolidated by Merrill
Lynch pursuant to accounting guidance, which was then in effect. In the second
quarter of 2003, the facilities and aircraft owned by these SPEs were acquired
by a newly created limited partnership, which is unaffiliated with Merrill
Lynch. The limited partnership acquired the assets subject to the leases with
Merrill Lynch as well as the existing indebtedness incurred by the original
SPEs. The proceeds from the sale of the assets to the limited partnership, net
of the debt assumed by the limited partnership, were used to repay the equity
investors in the original SPEs. After the transaction was completed, the
original SPEs were dissolved. The limited partnership has also entered into
leases with third parties unrelated to Merrill Lynch.
The leases with the limited partnership mature in 2005 and 2006, and each lease
has a renewal term to 2008. In addition, Merrill Lynch has entered into
guarantees with the limited partnership, whereby if Merrill Lynch does not renew
the lease or purchase the assets under its lease at the end of either the
initial or the renewal lease term, the underlying assets will be sold to a third
party, and Merrill Lynch has guaranteed that the proceeds of such sale will
amount to at least 84% of the acquisition cost of the assets. The maximum
exposure to Merrill Lynch as a result of this residual value guarantee is
approximately $325 million as of June 27, 2003, and the fair value of the
guarantee is approximately $33 million at the inception of the transaction and
as of June 27, 2003, and is recorded in the Condensed Consolidated Financial
Statements. Merrill Lynch's residual value guarantee does not comprise more than
half of the limited partnership's assets. Merrill Lynch had entered into a
similar residual value guarantee with the previous SPEs; the maximum exposure
under the previous guarantee was approximately $325 million as of December 27,
2002.
The limited partnership does not meet the definition of a variable interest
entity as defined in FIN 46. Merrill Lynch does not have a partnership or other
interest in the new limited partnership. Accordingly, Merrill Lynch is not
required to consolidate the limited partnership in its financial statements. The
leases with the limited partnership are accounted for as operating leases.
20
Guarantees
Merrill Lynch issues various guarantees to counterparties in connection with
certain leasing, securitization and other transactions. In addition, Merrill
Lynch enters into certain derivative contracts that meet the accounting
definition of a guarantee under FIN 45. FIN 45 defines guarantees to include
derivative contracts that contingently require a guarantor to make payment to a
guaranteed party based on changes in an underlying (such as changes in the value
of interest rates, security prices, currency rates, commodity prices, indices,
etc.) that relate to an asset, liability or equity security of a guaranteed
party. Derivatives that meet the FIN 45 definition of guarantees include certain
written options and credit default swaps (contracts that require Merrill Lynch
to pay the counterparty the par value of a referenced security if that
referenced security defaults). Merrill Lynch does not track, for accounting
purposes, whether its clients enter into these derivative contracts for
speculative or hedging purposes. Accordingly, Merrill Lynch has disclosed
information about all credit default swaps and certain types of written options
that can potentially be used by clients to protect against changes in an
underlying, regardless of how the contracts are used by the client.
For certain derivative contracts such as written interest rate caps and written
currency options, the maximum payout is not quantifiable, because, for example,
the rise in interest rates or changes in foreign exchange rates could
theoretically be unlimited. In addition, Merrill Lynch does not monitor its
exposure to derivatives in this manner. As such, rather than including the
maximum payout, the notional value of these contracts has been included to
provide information about the magnitude of involvement with these types of
contracts. However, it should be noted that the notional value overstates
Merrill Lynch's exposure to these contracts.
Merrill Lynch records all derivative transactions at fair value on its Condensed
Consolidated Balance Sheets. As previously noted, Merrill Lynch does not monitor
its exposure to derivative contracts in terms of maximum payout. Instead, a risk
framework is used to define risk tolerances and establish limits to ensure that
certain risk-related losses occur within acceptable, predefined limits. Merrill
Lynch economically hedges its exposure to these contracts by entering into a
variety of offsetting derivative contracts and security positions. See the
Derivatives section of Note 1 in the 2002 Annual Report for further discussion
of risk management of derivatives.
Merrill Lynch also provides guarantees to SPEs in the form of liquidity
facilities, credit default protection and residual value guarantees for
equipment leasing entities.
The liquidity facilities and credit default protection relate primarily to
municipal bond securitization SPEs. Merrill Lynch acts as liquidity provider to
municipal bond securitization SPEs. Specifically, the holders of beneficial
interests issued by these SPEs have the right to tender their interests for
purchase by Merrill Lynch on specified dates at a specified price. If the
beneficial interests are not successfully remarketed, the holders of beneficial
interests are paid from funds drawn under a standby facility issued by Merrill
Lynch (or by third party financial institutions where Merrill Lynch has agreed
to reimburse the financial institution if a draw occurs). If the standby
facility is drawn, Merrill Lynch may claim the underlying assets held by the
SPEs. In general, standby facilities that are not coupled with default
protection are not exercisable in the event of a downgrade below investment
grade or default of the assets held by the SPEs. In addition, the value of the
assets held by the SPE plus any additional collateral pledged to Merrill Lynch
exceeds the amount of beneficial interests issued, which provides additional
support to Merrill Lynch in the event that the standby facility is drawn. The
assets to which Merrill Lynch has recourse are on a deal-by-deal basis and are
not part of a cross collateralized pool. As of June 27, 2003, the value of the
municipal bond assets to which Merrill Lynch has recourse in the event of a draw
was $18.5 billion and the maximum payout if the standby facilities are drawn was
$14.1 billion.
21
In certain instances, Merrill Lynch also provides default protection in addition
to liquidity facilities. Specifically, in the event that an issuer of a
municipal bond held by the SPE defaults on any payment of principal and/or
interest when due, the payments on the bonds will be made to beneficial interest
holders from an irrevocable guarantee by Merrill Lynch (or by third party
financial institutions where Merrill Lynch has agreed to reimburse the financial
institution if losses occur). If the default protection is drawn, Merrill Lynch
may claim the underlying assets held by the SPEs. As of June 27, 2003, the value
of the assets to which Merrill Lynch has recourse in the event that an issuer of
a municipal bond held by the SPE defaults on any payment of principal and/or
interest when due, was $4.5 billion; the maximum payout if an issuer defaults
was $2.6 billion. As described in the preceding paragraph, the assets to which
Merrill Lynch has recourse are not part of a cross collateralized pool.
Further, to protect against declines in the value of the assets held by SPEs for
which Merrill Lynch provides either liquidity facilities or default protection,
ML economically hedges its exposure though derivative positions that principally
offset the risk of loss arising from these guarantees.
Merrill Lynch also provides residual value guarantees to leasing SPEs where
either Merrill Lynch or a third party is the lessee. For transactions where
Merrill Lynch is not the lessee, the guarantee provides loss coverage for any
shortfalls in the proceeds from assets sales beyond 75 - 90% of the current book
value of the asset to which the guarantee pertains. As of June 27, 2003, the
value of the assets for which Merrill Lynch provides residual value guarantees
and is not the lessee was $557 million. Where Merrill Lynch is the lessee, it
provides a guarantee that any proceeds from the sale of the assets will amount
to at least 84% of the acquisition cost of the assets.
Merrill Lynch also enters into reimbursement agreements in conjunction with
sales of loans originated under its Mortgage 100SM program. Under this program,
borrowers can pledge marketable securities in lieu of making a cash down
payment. Upon sale of these mortgage loans, purchasers may require a surety bond
that reimburses for certain shortfalls in the borrowers' securities accounts.
Merrill Lynch provides this reimbursement through a financial intermediary.
Merrill Lynch requires borrowers to meet daily collateral calls to ensure that
the securities pledged as down payment are sufficient at all times. Merrill
Lynch believes that its potential for loss under these arrangements is remote.
Accordingly, no liability is recorded in the Condensed Consolidated Financial
Statements.
In addition, Merrill Lynch makes guarantees to counterparties in the form of
standby letters of credit. Merrill Lynch holds marketable securities of $269
million as collateral to secure these guarantees. In addition, standby letters
of credit include $55 million of financial guarantees for which Merrill Lynch
has recourse to the guaranteed party upon draw down.
These guarantees and their expiration are summarized at June 27, 2003 as
follows:
(dollars in millions)
- --------------------------------------------------------------------------------------------------------------------
Maximum
Payout/ Less than 1 - 3 3+ - 5 Over 5 Carrying
Notional 1 year years years years Value
- --------------------------------------------------------------------------------------------------------------------
Derivative contracts(1) $844,359 $290,146 $259,031 $157,926 $137,256 $22,294
Liquidity facilities with SPEs(2) 14,125 13,155 970 - - 37
Liquidity and default facilities
with SPEs 2,658 2,215 170 1 272 -
Residual value guarantees(3)(4) 1,712 70 54 355 1,233 -
Standby letters of credit and other
performance guarantees(5) 494 348 44 15 87 1
- --------------------------------------------------------------------------------------------------------------------
22
(1) As noted above, the notional value of derivative contracts is provided
rather than the maximum payout amount, although the notional value should
not be considered as a substitute for maximum payout.
(2) Amounts relate primarily to facilities provided to municipal bond
securitization SPEs. Includes $3.3 billion of guarantees provided to SPEs by
third party financial institutions where Merrill Lynch has agreed to
reimburse the financial institution if losses occur, and has up to one year
to fund losses.
(3) Includes residual value guarantees associated with the Hopewell campus and
aircraft leases of $325 million.
(4) Includes $787 million of reimbursement agreements with the Mortgage 100SM
program.
(5) Marketable securities are posted as collateral.
See Note 14 in the 2002 Annual Report for additional information on guarantees.
- --------------------------------------------------------------------------------
NOTE 11. EMPLOYEE INCENTIVE PLANS
- --------------------------------------------------------------------------------
Stock-Based Compensation
Merrill Lynch accounts for stock-based compensation in accordance with the
intrinsic value-based method in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, rather than the fair value-based
method in SFAS No. 123, Accounting for Stock-Based Compensation. Refer to Note 1
in the 2002 Annual Report for accounting policy. Merrill Lynch changed the
vesting period for stock options from six months, for 2002 grants, to four
years, for 2003 grants. For the six-month periods ended June 27, 2003 and June
28, 2002, $407 million ($252 million after-tax) and $395 million ($245 million
after-tax), respectively, of pre-tax compensation expense related to employee
stock compensation awards was recorded in earnings. Compensation expense for
stock options is not recognized since Merrill Lynch grants stock options that
have no intrinsic value. Had Merrill Lynch adopted the provisions of SFAS No.
123 and accounted for all employee stock awards at fair value, Merrill Lynch
would have recognized additional pre-tax compensation expense related to
employee stock awards of $124 million ($77 million after-tax) and $958 million
($594 million after-tax), respectively, for the six-month periods ended June 27,
2003 and June 28, 2002, respectively. This decrease reflects the change in
vesting period. Pro forma net earnings and earnings per share are as follows:
(dollars in millions, except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------- -----------------
June 27, 2003 June 28, 2002 June 27, 2003 June 28, 2002
------------- ------------- ------------- -------------
Net Earnings, as reported $1,021 $ 634 $1,706 $1,281
Less: stock-based compensation determined
under Black-Scholes method, net of taxes (41) (343) (77) (594)
------ ----- ------ ------
Pro forma net earnings $ 980 $ 291 $1,629 $ 687
------ ----- ------ ------
EARNINGS PER SHARE
As reported:
Basic $ 1.13 $0.72 $ 1.89 $ 1.47
Diluted 1.05 0.66 1.77 1.33
Pro forma:
Basic 1.09 0.33 1.81 0.78
Diluted 1.01 0.30 1.69 0.71
- ----------------------------------------------------------------------------------------------------------------------
23
- --------------------------------------------------------------------------------
NOTE 12. REGULATORY REQUIREMENTS
- --------------------------------------------------------------------------------
Certain U.S. and non-U.S. subsidiaries are subject to various securities and
banking regulations and capital adequacy requirements promulgated by the
regulatory and exchange authorities of the countries in which they operate.
Merrill Lynch's principal regulated subsidiaries are discussed below.
Securities Regulation
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a U.S. registered
broker-dealer and futures commission merchant, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 and the
capital requirements of the Commodities Futures Trading Commission ("CFTC").
Under the alternative method permitted by Rule 15c3-1, the minimum required net
capital, as defined, shall not be less than 2% of aggregate debit items ("ADI")
arising from customer transactions. The CFTC also requires that minimum net
capital should not be less than 4% of segregated and secured requirements. At
June 27, 2003, MLPF&S's regulatory net capital of $2,582 million was
approximately 18.6% of ADI, and its regulatory net capital in excess of the
minimum required was $2,305 million at 2% of ADI.
Merrill Lynch International ("MLI"), a U.K. regulated investment firm, is
subject to capital requirements of the Financial Services Authority ("FSA").
Financial resources, as defined, must exceed the total financial resources
requirement of the FSA. At June 27, 2003, MLI's financial resources were $5,577
million, exceeding the minimum requirement by $1,147 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, is subject to the capital adequacy requirements of the
Government Securities Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At June 27, 2003, MLGSI's liquid capital of $3,022
million was 200% of its total market and credit risk, and liquid capital in
excess of the minimum required was $1,213 million.
Banking Regulation
Two of the subsidiaries of ML & Co., Merrill Lynch Bank USA ("MLBUSA") and
Merrill Lynch Bank & Trust Co. ("MLB&T"), are each subject to certain minimum
aggregate capital requirements under applicable federal banking laws. Among
other things, Part 325 of the FDIC Regulations establishes levels of Risk-Based
Capital ("RBC") each institution must maintain and identifies the possible
actions the federal supervisory agency may take if a bank does not maintain
certain capital levels. RBC is defined as the ratios of (i) Tier I Capital or
Total Capital to (ii) average assets or risk-weighted assets. The following
table presents the actual capital ratios and amounts for MLBUSA and MLB&T at
June 27, 2003 and December 27, 2002.
24
As shown below, MLBUSA and MLB&T each exceed the minimum bank regulatory
requirement for classification as a well-capitalized bank for Tier I leverage --
5%, Tier I capital -- 6% and Total capital -- 10%:
(dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- ------------------------------------------------------------------------- -------------------------------------------
Actual Ratio Amount Actual Ratio Amount
------------ ------ ------------ ------
Tier I leverage (to average assets)
MLBUSA 6.42% $4,323 5.35% $3,740
MLB&T 5.58 820 5.42 848
Tier I capital (to risk-weighted assets)
MLBUSA 12.06 4,323 11.48 3,740
MLB&T 19.10 820 20.53 848
Total capital (to risk-weighted assets)
MLBUSA 12.60 4,519 12.04 3,924
MLB&T 19.17 823 20.54 848
- ---------------------------------------------------------------------------------------------------------------------
25
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of June 27,
2003, and the related condensed consolidated statements of earnings for the
three-month and six-month periods ended June 27, 2003 and June 28, 2002, and the
condensed consolidated statements of cash flows for the six-month periods ended
June 27, 2003 and June 28, 2002. 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 27, 2002, 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 24, 2003, we expressed an unqualified opinion on those consolidated
financial statements and included an explanatory paragraph for the change in
accounting method for goodwill amortization to conform to Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 27, 2002 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ Deloitte & Touche
New York, New York
August 7, 2003
26
- --------------------------------------------------------------------------------
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,
"Merrill Lynch") is a holding company that, through its subsidiaries, provides
broker-dealer, investment banking, financing, advisory, wealth management,
asset management, insurance, lending, and related products and services on a
global basis. In addition, Merrill Lynch makes principal investments for
market making on behalf of its clients and for its own account. 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 unpredictable factors. These factors
include economic conditions, monetary and fiscal policies, the liquidity of
global markets, international and regional political events, acts of war or
terrorism, changes in applicable laws and regulations, the competitive
environment, and investor sentiment. In addition to these factors, Merrill
Lynch and other financial services companies may be affected by the regulatory
and legislative initiatives which may affect the conduct of its business,
including increased regulation, and by the outcome of legal and regulatory
proceedings. These conditions or events can significantly affect the
volatility of the financial markets as well as the volumes and revenues in
businesses such as brokerage, trading, investment banking, wealth management
and asset management. Revenues and net earnings may vary significantly from
period to period due to these unpredictable factors and the resulting market
volatility and trading volumes.
The financial services industry continues to be affected by an intensifying
competitive environment, as demonstrated by consolidation through mergers,
competition from new and established competitors using the internet or other
technology to provide financial services and diminishing margins in many
mature products and services. Commercial and investment bank consolidations,
which were made possible by the enactment of the Gramm-Leach-Bliley Act, have
also increased the competition for investment banking business in part through
the extension of credit in conjunction with investment banking and capital
raising activities. In 2002, the U.S. Congress passed the Sarbanes-Oxley Act
of 2002 which is a broad overhaul of existing corporate and securities laws.
In addition, various Federal and state securities regulators, self-regulatory
organizations (including the New York Stock Exchange) and industry
participants reviewed and in many cases adopted sweeping changes to their
established rules including rules in the areas of corporate governance,
research analyst conflicts of interest and auditor independence. Changes
pertaining to the role of research analysts in connection with providing
financial services may also affect how financial services companies interact
with their clients and the cost structure for such services. Outside the
United States, there is continued focus by regulators and legislators on
regulatory supervision of both banks and investment firms on a consolidated
and individual basis, especially in the area of risk management.
Certain statements contained in this Report may be considered forward-looking,
including statements about management expectations, strategic objectives,
business prospects, anticipated expense savings and financial results,
anticipated results of litigation and regulatory proceedings, and other
similar matters. These forward-looking statements are not statements of
historical fact and represent only Management's beliefs regarding future
events, which are inherently uncertain. There are a variety of factors, many
of which are beyond Merrill Lynch's control, which affect its operations,
performance, business strategy and results and could cause its actual results
and experience to differ materially from the expectations and objectives
expressed in any forward-looking statements. These factors include, but are
not limited to, the factors listed in the previous two paragraphs, as well as
actions and initiatives taken by both current and potential competitors, the
effect of current, pending and future legislation and regulation, and the
other risks and uncertainties detailed in Merrill Lynch's Form 10-K and in the
following sections. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on
which they are made. Merrill Lynch does not undertake to update
forward-looking statements to reflect the impact of circumstances or events
that arise after the dates the forward-looking statements are made. The reader
should, however, consult any further disclosures Merrill Lynch may make in its
Annual Reports on Form 10-K, its Quarterly Reports on Form 10-Q and its
Current Reports on Form 8-K.
27
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
- --------------------------------------------------------------------------------
During the second quarter of 2003, conditions were exceptional in the fixed
income markets. Global equity indices also rose during the second quarter of
2003 despite the uncertain economic and political outlook. Despite the strong
stock market performance this quarter, many investors continued to seek an
alternative in bonds. Treasury prices continued to rally in the second quarter
amid slow global economic growth and with unemployment inching higher. Long-term
interest rates, as measured by the 10-year U.S. Treasury bond, ended the quarter
at 3.51%, down from 3.80% at the end of the first quarter of 2003. The U.S.
Federal Reserve Bank cut its target for the federal funds rate by a
quarter-percentage point during the quarter, to 1.00%. While these conditions
in the fixed income markets were highly favorable to our debt markets business,
there can be no assurance that they will be repeated in future periods.
Better-than-expected corporate earnings and the winding down of the war in Iraq
overshadowed general economic and political uncertainty, and offered a catalyst
for U.S. equity indices to post gains during the second quarter of 2003. The Dow
Jones Industrial Average was up 12.4% in the second quarter, but down 2.8% from
the end of the second quarter of 2002. This was the strongest quarterly
percentage gain since the fourth quarter of 2001. The volatile NASDAQ Composite,
dominated by large-cap technology stocks, rose 21.0% during the quarter, and was
up 10.9% from the 2002 second quarter level. The Standard & Poor's 500 stock
index rose 14.9% during the second quarter, its largest quarterly increase since
the last three months of 1998.
Due to factors similar to those that drove the U.S. equity markets, global
equity indices also rose in the second quarter of 2003. The Dow Jones World
Index, excluding the United States, was up 18.9% in the second quarter of 2003
but was still down 6.4% from the second quarter of 2002. European stocks enjoyed
some of the largest gains in the second quarter. In Japan, the Nikkei Stock
Average Index increased 14% for the quarter. In Hong Kong, the Hang Seng Index
increased 10.9% for the quarter. Emerging markets continued to outperform most
developed markets during the second quarter as the top 20 stock markets had
returns of 20% or better.
Global debt and equity issuances increased 16% in the first half of 2003 from
the comparable period of 2002, but disclosed underwriting fees fell 21%
according to Thomson Financial Securities Data. With companies wanting to
refinance at ever-lower interest rates, global debt issuance was up 20% in the
first half of this year. However, global equity and equity-related issues fell
31% to $145 billion as a result of a decline in Initial Public Offerings. In the
United States, with only 10 IPOs in the first half of 2003, IPO volume fell to
its lowest six-month level since 1975, according to Thomson Financial Securities
Data.
Global merger and acquisition activity continued to decline in the second
quarter of 2003 and remained below second quarter 2002 levels. According to
Thomson Financial Securities Data, the value of global announced deals in the
second quarter of 2003 was $293 billion, down 11% from $328 billion in the
comparable period of 2002. Merger and acquisition activity was equally weak in
the United States, where the value of announced deals was down 12% from the
second quarter of 2002.
Merrill Lynch continually evaluates its businesses for profitability and
performance under varying market conditions and, in light of the evolving
conditions in its competitive environment, for alignment with its long-term
strategic objectives. The strategy of maintaining long-term client
relationships, closely monitoring costs and risks, diversifying revenue sources,
and growing fee-based revenues all continue as objectives to mitigate the
effects of a volatile market environment on Merrill Lynch's business as a whole.
28
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- -------------------------------------------------------------------------------------------------------------------------
June 27, June 28, June 27, June 28,
(dollars in millions, except per share amounts) 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------------------
Net Revenues
Commissions $1,044 $1,212 $ 2,113 $ 2,454
Principal transactions 1,100 728 2,110 1,605
Investment banking
Underwriting 565 501 933 967
Strategic advisory 133 194 258 377
Asset management and portfolio service fees 1,154 1,298 2,281 2,591
Other 271 219 476 438
------ ------ ------- -------
Subtotal 4,267 4,152 8,171 8,432
Interest and dividend revenues 3,028 3,198 6,049 6,482
Less interest expense 1,976 2,399 4,047 4,873
------ ------ ------- -------
Net interest profit 1,052 799 2,002 1,609
------ ------ ------- -------
Total Net Revenues 5,319 4,951 10,173 10,041
------ ------ ------- -------
Non-interest expenses:
Compensation and benefits 2,678 2,569 5,174 5,215
Communications and technology 357 412 760 886
Occupancy and related depreciation 221 228 437 466
Brokerage, clearing, and exchange fees 169 172 339 370
Advertising and market development 113 151 234 301
Professional fees 140 132 284 262
Office supplies and postage 50 65 108 134
Other 186 163 410 336
Research settlement-related expenses - 111 - 111
Net recoveries related to September 11 (61) - (61) -
------ ------ ------- -------
Total non-interest expenses 3,853 4,003 7,685 8,081
------ ------ ------- -------
Earnings before income taxes and dividends on
preferred securities issued by subsidiaries $1,466 $ 948 $ 2,488 $ 1,960
====== ====== ======= =======
Net earnings $1,021 $ 634 $ 1,706 $ 1,281
====== ====== ======= =======
Earnings per common share:
Basic $ 1.13 $ 0.72 $ 1.89 $ 1.47
Diluted 1.05 0.66 1.77 1.33
Annualized return on average common
stockholders' equity 17.0 % 12.0 % 14.4 % 12.3 %
Pre-tax profit margin 27.6 19.1 24.5 19.5
- ----------------------------------------------------------------------------------------------------------------------------
Compensation and benefits
as a percentage of net revenues 50.3 % 51.9 % 50.9 % 51.9 %
Non-compensation expenses
as a percentage of net revenues 22.1 29.0 24.7 28.5
- ----------------------------------------------------------------------------------------------------------------------------
29
Quarterly Results of Operations
Merrill Lynch's net earnings were $1.0 billion for the 2003 second quarter, 61%
higher than the $634 million reported in the second quarter of 2002. Earnings
per common share were $1.13 basic and $1.05 diluted, compared with $0.72 basic
and $0.66 diluted in the 2002 second quarter. Second quarter 2003 net earnings
include $61 million ($36 million after-tax, or $0.04 per diluted share)
attributable to a September 11-related net insurance recovery. Second quarter
2002 net earnings included $111 million ($78 million after-tax, or $0.09 per
diluted share) of research settlement-related expenses.
Net revenues were $5.3 billion in the second quarter of 2003, 7% higher than the
2002 second quarter. Commissions revenues were $1.0 billion, 14% below the 2002
second quarter due primarily to reduced mutual fund and listed equity revenues
from private clients. Principal transactions revenues increased 51% from the
second quarter of 2002 to $1.1 billion, due principally to increased debt
markets trading revenues. Underwriting revenues were $565 million, 13% higher
than the 2002 second quarter, reflecting higher levels of both equity and debt
underwriting revenues, which are reflected in GMI underwriting revenues and GPC
principal transactions and new issue revenues. Strategic advisory revenues
declined 31% to $133 million from the 2002 second quarter due to reduced market
activity levels. Asset management and portfolio service fees were $1.2 billion,
down 11% from the second quarter of 2002 primarily as a result of market-driven
declines in equity assets under management and a reduction in portfolio
servicing fees, a large portion of which are calculated on beginning-of-period
asset values. Other revenues were $271 million, up 24% from the 2002 second
quarter due primarily to increased realized gains related to sales of mortgages.
Net interest profit was $1.1 billion, up 32% from the 2002 second quarter due
primarily to a favorable yield curve environment.
Compensation and benefits expenses were 50.3% of net revenues for the second
quarter of 2003, compared to 51.9% in the year-ago quarter. Compensation and
benefits expenses were $2.7 billion in the second quarter of 2003, an increase
of 4% from the 2002 second quarter. This increase is due primarily to higher
incentive compensation accruals reflecting increased profitability.
Non-compensation expenses were $1.2 billion in the second quarter of 2003, a
decrease of $259 million, or 18%, from the 2002 second quarter (a decline of 7%
excluding the September 11-related net recovery in 2003 and research
settlement-related expenses in 2002). Communications and technology costs were
$357 million, down 13% from the second quarter of 2002 due primarily to reduced
communications costs and lower technology equipment depreciation and rental
costs. Advertising and market development expenses were $113 million, down 25%
from the second quarter of 2002 due primarily to reduced spending on travel and
lower levels of advertising. Office supplies and postage were $50 million in the
2003 second quarter, a decrease of 23% from the year-ago quarter, due to
efficiency initiatives. Other expenses were $186 million in the 2003 second
quarter, an increase of 14% from the 2002 second quarter due to higher legal
provisions.
The September 11-related net recovery in the second quarter of 2003 includes a
partial pre-tax insurance reimbursement of $75 million, offset by September
11-related costs of $14 million. The insurance reimbursement represents a
partial business interruption settlement for GMI and is recorded as a reduction
of expenses in that segment. The costs were related to ongoing refurbishment of
the World Financial Center and were recorded in the Corporate segment. Research
settlement-related expenses in the 2002 second quarter included the $100 million
payment agreed to as part of the settlement agreement with the New York State
Attorney General, and related costs.
30
Year-to-date Results of Operations
For the first six months of 2003, net earnings were $1.7 billion, up 33% from
$1.3 billion for the corresponding period in 2002, on net revenues that were
essentially unchanged, at $10.2 billion. Compensation and benefits expenses for
the first six months of 2003 were essentially unchanged from the year-ago
period, at $5.2 billion as higher earnings-related compensation was offset by
lower staffing levels. Non-compensation expenses totaled $2.5 billion for the
first six months of 2003, a decline of 12% from the year-ago period (a decline
of 7% excluding the September 11-related net insurance recovery in 2003 and
research settlement-related expenses in 2002). This decrease reflects the
results of the 2001 restructuring program and continued operating discipline in
managing costs. Year-to-date earnings per common share were $1.89 basic and
$1.77 diluted, compared with $1.47 basic and $1.33 diluted in the first six
months of 2002. The pre-tax profit margin for the first six months of 2003 was
24.5%, up from 19.5% in the year-ago period. Annualized return on average common
stockholder's equity was 14.4% for the first six months of 2003 compared to
12.3% for the comparable period in 2002.
Merrill Lynch's year-to-date effective tax rate was 27.6%. The full year 2002
effective tax rate was 28.0%.
- --------------------------------------------------------------------------------
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Merrill Lynch reports its results in three business segments: the Global Markets
and Investment Banking Group ("GMI"), Global Private Client ("GPC"), and Merrill
Lynch Investment Managers ("MLIM"). GMI provides capital markets and investment
banking services to corporate, institutional, and governmental clients around
the world. GPC provides global wealth management products and services to
individuals, small- to mid-size businesses, and employee benefit plans. MLIM
provides asset management services to individual, institutional and corporate
clients.
Certain MLIM and GMI products are distributed through GPC distribution
channels, and, to a lesser extent, certain MLIM products are distributed through
GMI. Revenues and expenses associated with these inter-segment activities are
recognized in each segment and eliminated at the corporate level. In addition,
revenue and expense sharing agreements for shared activities between segments
are in place and the results of each segment reflect the agreed-upon portion of
these activities. The following segment results represent the information that
is relied upon by management in its decision-making processes. These results
exclude items reported in the Corporate segment. Business segment results are
restated to reflect reallocations of revenues and expenses, which result from
changes in Merrill Lynch's business strategy and structure.
- --------------------------------------------------------------------------------
GLOBAL MARKETS AND INVESTMENT BANKING
- --------------------------------------------------------------------------------
GMI'S RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- -----------------------------------------------------------------------------------------------------------
June 27, June 28, % Inc. June 27, June 28, % Inc.
(dollars in millions) 2003 2002 (Dec.) 2003 2002 (Dec.)
- -----------------------------------------------------------------------------------------------------------
Commissions $ 476 $ 531 (10) $ 987 $1,073 (8)
Principal transactions and
net interest profit 1,653 951 74 3,082 2,052 50
Investment banking 532 624 (15) 965 1,215 (21)
Other revenues 225 204 10 313 354 (12)
------ ------ ------ ------
Total net revenues 2,886 2,310 25 5,347 4,694 14
------ ------ ------ ------
Non-interest expenses 1,773 1,663 7 3,445 3,403 1
------ ------ ------ ------
Pre-tax earnings $1,113 $ 647 72 $1,902 $1,291 47
------ ------ ------ ------
Pre-tax profit margin 38.6 % 28.0 % 35.6 % 27.5 %
- -----------------------------------------------------------------------------------------------------------
31
In an environment characterized by continued exceptional conditions for fixed
income, but also improving equity markets, GMI demonstrated the benefits of
diverse revenue sources that leverage its extensive client relationships and
product capabilities while maintaining a selective approach to risk-taking. GMI
achieved a record pre-tax profit margin during both the second quarter and six
month periods of 2003. Also evident in the quarter were GMI's scale and
distribution advantages in secondary equities, and Merrill Lynch's ability to
structure and deliver innovative solutions for clients by integrating expertise
from across the firm. Contributions from the European debt markets business and
the European and Pacific Rim equity businesses were particularly strong.
Net revenues were $2.9 billion in the 2003 second quarter, an increase of 25%
from the year-ago quarter. GMI's second quarter pre-tax earnings were $1.1
billion, 72% higher than the 2002 second quarter. The 2003 second quarter
results include a September 11-related $75 million partial pre-tax insurance
reimbursement, which was recorded as a reduction of non-interest expenses. GMI's
pre-tax profit margin was 38.6%, as compared to 28.0% in the second quarter of
2002. Excluding the insurance recovery, GMI's pre-tax earnings were $1.0 billion
and the pre-tax margin was 36.0%. Total non-interest expenses were $1.8 billion,
up from $1.7 billion in the 2002 second quarter, due primarily to higher
incentive compensation accruals associated with increased earnings.
For the first six months of 2003, GMI pre-tax earnings were $1.9 billion, up 47%
from the prior year period, on net revenues that rose 14%, to $5.3 billion. The
year-to-date pre-tax profit margin increased to 35.6%, compared with 27.5% in
the same period last year. Excluding the insurance recovery, GMI's year-to-date
pre-tax earnings were $1.8 billion and the pre-tax margin was 34.2%.
CLIENT FACILITATION AND TRADING
Commissions
Commissions revenues primarily arise from agency transactions in listed and
over-the-counter equity securities, money market instruments, options and
commodities.
Commissions revenues in the second quarter of 2003 decreased 10% compared to the
year-ago quarter, to $476 million, primarily as a result of a global decline in
equity trading volumes and prices. Year-to-date commissions revenues decreased
8% compared to the first six months of 2002, to $1.0 billion.
Principal transactions and net interest profit
- ------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- ------------------------------------------------------------------------------------------------------------------
June 27, June 28, June 27, June 28, % Inc.
(dollars in millions) 2003 2002 % Inc. 2003 2002 (Dec.)
- ------------------------------------------------------------------------------------------------------------------
Debt and debt derivatives $ 1,372 $ 826 66 $ 2,597 $ 1,546 68
Equities and equity derivatives 281 125 125 485 506 (4)
------- ----- ------- -------
Total $ 1,653 $ 951 74 $ 3,082 $ 2,052 50
- ------------------------------------------------------------------------------------------------------------------
Principal transactions revenues include realized gains and losses from the
purchase and sale of securities in which Merrill Lynch acts as principal, and
unrealized gains and losses on trading assets and liabilities. In addition,
principal transactions revenues include unrealized gains related to equity
investments held by Merrill Lynch's broker-dealers.
Net interest profit is a function of the level and mix of total assets and
liabilities, including trading assets owned, the investment portfolio of
Merrill Lynch's U.S. banks, financing and lending transactions, trading
strategies associated with GMI's institutional securities business, and the
prevailing level, term structure, and volatility of interest rates. Net
interest profit is an integral component of trading activity.
32
In assessing the profitability of its client facilitation and trading
activities, Merrill Lynch views principal transactions and net interest profit
in the aggregate as net trading revenues. Changes in the composition of
trading inventories and hedge positions can cause the mix of principal
transactions and net interest profit to fluctuate. Net trading revenues were
$1.7 billion in the second quarter of 2003, up 74% from $951 million in the
second quarter of 2002. Debt and debt derivatives net trading revenues were
$1.4 billion, up 66% from the second quarter of 2002, reflecting increased
trading of interest rate and credit products due to a favorable yield curve
environment and proprietary positioning. Equities and equity derivatives net
trading revenues increased 125% from the second quarter of 2002 to $281
million, due primarily to higher equity-linked trading revenues.
On a year-to-date basis, net trading revenues increased 50% from to the first
six months of 2002, to $3.1 billion, due primarily to an increase of 68% in
debt and debt derivatives revenues.
Investment Banking
- ---------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- ---------------------------------------------------------------------------------------------------------------
June 27, June 28, % Inc. June 27, June 28, % Inc.
(dollars in millions) 2003 2002 (Dec.) 2003 2002 (Dec.)
- ---------------------------------------------------------------------------------------------------------------
Debt underwriting $ 228 $ 194 18 $ 404 $ 295 37
Equity underwriting 167 236 (29) 299 543 (45)
----- ----- ----- ------
Total underwriting 395 430 (8) 703 838 (16)
Strategic advisory services 137 194 (29) 262 377 (31)
----- ----- ----- ------
Total $ 532 $ 624 (15) $ 965 $1,215 (21)
- ---------------------------------------------------------------------------------------------------------------
Underwriting
------------
Underwriting revenues represent fees earned from the underwriting of debt and
equity and equity-linked securities as well as loan syndication and commitment
fees.
Underwriting revenues in the 2003 second quarter were $395 million, down 8%
from the $430 million recorded in the second quarter of 2002. An increase in
debt underwriting revenues of 18% was more than offset by lower equity
underwriting revenues due to a lower volume of transactions. Merrill Lynch
ranked fourth in global debt and sixth in global equity and equity-linked
underwriting in the second quarter of 2003 with a 6.6% and 7.8% market share,
respectively. Merrill Lynch's debt underwriting focus has shifted toward
higher margin businesses and away from the achievement of aggregate market
share goals; however debt transactions are highly competitive and not all
transactions are profitable.
Year-to-date underwriting revenues decreased 16% to $703 million from $838
million in the first six months of 2002, as a 37% increase in debt
underwriting revenues was more than offset by a decrease in equity
underwriting revenues. Merrill Lynch's underwriting market share information
based on transaction value follows:
33
- ----------------------------------------------------------------------------------------
For the Three Months Ended
-------------------------------------------------
June 2003 June 2002
---------------- -----------------
Market Market
Share Rank Share Rank
- ----------------------------------------------------------------------------------------
GLOBAL PROCEEDS
Debt and Equity 6.6% 4 8.4% 2
Debt 6.6 4 8.3 3
Equity and equity-linked 7.8 6 9.4 3
U.S. PROCEEDS
Debt and Equity 8.6% 4 10.7% 2
Debt 8.4 4 10.5 2
Equity and equity-linked 11.0 5 14.5 2
- ----------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to book manager.
- ----------------------------------------------------------------------------------------
For the Six Months Ended
-------------------------------------------------
June 2003 June 2002
---------------- -----------------
Market Market
Share Rank Share Rank
- ----------------------------------------------------------------------------------------
GLOBAL PROCEEDS
Debt and Equity 6.9% 3 8.7% 2
Debt 6.9 3 8.4 2
Equity and equity-linked 7.9 5 11.8 3
U.S. PROCEEDS
Debt and Equity 8.9% 2 11.1% 2
Debt 8.7 2 10.6 2
Equity and equity-linked 11.9 5 17.1 2
- ----------------------------------------------------------------------------------------
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 $137 million in the second quarter of 2003, down 29%
from the second quarter of 2002 as industry-wide completed mergers and
acquisitions activity continued to contract and market share globally declined.
Year-to-date strategic advisory services revenues similarly decreased from the
year-ago period by 31%, to $262 million. Merrill Lynch's merger and acquisition
market share information based on transaction value is as follows:
- ----------------------------------------------------------------------------------------
For the Three Months Ended
------------------------------------------------
June 2003 June 2002
--------------- ----------------
Market Market
Share Rank Share Rank
- ----------------------------------------------------------------------------------------
COMPLETED TRANSACTIONS
Global 10.4 % 8 19.8 % 4
U.S. 9.8 6 13.8 6
ANNOUNCED TRANSACTIONS
Global 17.8 % 3 9.2 % 10
U.S. 26.3 2 7.4 8
- ----------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to both target
and acquiring companies' advisors.
34
- ----------------------------------------------------------------------------------------
For the Six Months Ended
------------------------------------------------
June 2003 June 2002
--------------- ----------------
Market Market
Share Rank Share Rank
- ----------------------------------------------------------------------------------------
COMPLETED TRANSACTIONS
Global 12.8 % 6 20.8 % 3
U.S. 16.3 5 17.2 6
ANNOUNCED TRANSACTIONS
Global 16.1 % 4 15.2 % 5
U.S. 18.7 4 10.4 7
- ----------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to both target
and acquiring companies' advisors.
Other Revenues
Other revenues, which include realized investment gains and losses and
distributions on equity investments, were $225 million in the second quarter
of 2003 as compared to $204 million in the year-ago quarter. Year-to-date
other revenues were $313 million, down from $354 million in the year-ago
period. Included in the year-to-date 2002 other revenues was a $45 million
pre-tax gain on the sale of the Securities Pricing Services business.
- --------------------------------------------------------------------------------
GLOBAL PRIVATE CLIENT
- --------------------------------------------------------------------------------
GPC'S RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- -----------------------------------------------------------------------------------------------------------------------
June 27, June 28, % Inc. June 27, June 28, % Inc.
(dollars in millions) 2003 2002 (Dec.) 2003 2002 (Dec.)
- -----------------------------------------------------------------------------------------------------------------------
Commissions $ 541 $ 653 (17) $1,079 $1,320 (18)
Principal transactions and
new issue revenues 352 317 11 652 632 3
Asset management and
portfolio service fees 833 936 (11) 1,645 1,849 (11)
Net interest profit 333 346 (4) 655 692 (5)
Other revenues 69 16 331 198 74 168
------ ------ ------ ------
Total net revenues 2,128 2,268 (6) 4,229 4,567 (7)
------ ------ ------ ------
Non-interest expenses 1,787 1,928 (7) 3,621 3,956 (8)
------ ------ ------ ------
Pre-tax earnings $ 341 $ 340 0 $ 608 $ 611 (0)
------ ------ ------ ------
Pre-tax profit margin 16.0 % 15.0 % 14.4 % 13.4 %
- -----------------------------------------------------------------------------------------------------------------------
GPC's second quarter 2003 pre-tax earnings were $341 million, essentially
unchanged from the 2002 second quarter. Non-interest expenses declined $141
million, or 7%, from the second quarter of 2002, to $1.8 billion. This reduction
in non-interest expenses offsets a 6% decline in net revenues from the year ago
quarter, to $2.1 billion. GPC's pre-tax margin was 16.0%, one percentage point
higher than the year-ago quarter.
GPC's year-to-date net revenues were $4.2 billion, down 7% from the
corresponding period of 2002. Pre-tax earnings were $608 million, essentially
unchanged from the first six months of 2002. GPC's year-to-date pre-tax margin
was 14.4%, up from 13.4% in the year-ago period.
GPC employed approximately 13,300 Financial Advisors at the end of the 2003
second quarter, down from 14,000 at the end of 2002 due to attrition combined
with reduced hiring in the United States.
35
Commissions
Commissions revenues primarily arise from agency transactions in listed and
over-the-counter equity securities, as well as sales of mutual funds, insurance
products, and options.
Commissions revenues declined 17% to $541 million in the second quarter of 2003
from $653 million in the second quarter of 2002. Commissions revenues for the
first half of 2003 were $1.1 billion, 18% lower than the first half of 2002.
These decreases are due primarily to a global decline in transaction volumes,
particularly in mutual funds and listed equities.
Principal transactions and new issue revenues
GPC's principal transactions and new issue revenues primarily represent
bid-offer revenues in over-the-counter equity securities, government bonds and
municipal securities, as well as selling concessions on underwriting of debt and
equity products. GPC does not take any significant principal trading risk
positions.
Principal transactions and new issue revenues were $352 million, 11% higher than
the 2003 second quarter due to an increase in new issue revenues. Year-to-date
revenues were $652 million, up 3% from the year year-ago period.
Asset management and portfolio service fees
Asset management and portfolio service fees include asset management fees from
taxable and tax-exempt money market funds which totaled $64.5 billion and $69.0
billion on an average basis for the quarters ended June 27, 2003 and June 28,
2002, respectively. Also included are portfolio fees from fee-based accounts
such as Unlimited AdvantageSM and Merrill Lynch Consults(R) as well as servicing
fees related to these accounts, and certain other account-related fees.
Asset management and portfolio service fees totaled $833 million, down 11% from
the $936 million recorded in the second quarter of 2002. On a year-to-date
basis, asset management and portfolio service fees totaled $1.6 billion, also
down 11% from the year-ago period. These declines result from the market-driven
decline in the value of asset-priced accounts at the beginning of the quarter,
when a large portion of these fees are calculated.
An analysis of changes in assets in GPC accounts from June 28, 2002 to June 27,
2003 is detailed below:
- --------------------------------------------------------------------------------------------
Net Changes Due To
----------------------------
June 28, New Asset June 27,
(dollars in billions) 2002 Money Depreciation 2003
- --------------------------------------------------------------------------------------------
Assets in GPC accounts
U.S. $1,076 $8 $(8) $1,076
Non U.S. 94 (2) - 92
--------------------------------------------------------
Total $1,170 $6 $(8) $1,168
- --------------------------------------------------------------------------------------------
Total assets in GPC accounts in the United States were unchanged from the end of
the 2002 first quarter, at $1.1 trillion at June 27, 2003. Net new money inflows
of $8 billion were entirely offset by asset depreciation. Outside the United
States, client assets were $92 billion, down from $94 billion at the end of the
year-ago quarter. Total assets in asset-priced accounts were $200 billion at the
end of the 2003 second quarter, up 4% from $192 billion at the end of the 2002
second quarter.
36
Net interest profit
Net interest profit for GPC includes GPC's allocation of the interest spread
earned in Merrill Lynch's banks for deposits as well as interest earned on
margin and other loans.
Net interest profit was $333 million in the 2003 second quarter, down 4% from
$346 million in the second quarter of 2002. Net interest profit for the first
six months of 2003 was $655 million, 5% lower than the comparable period of
2002. These decreases in net interest profit resulted from lower margin balances
and a reduction in the related interest rates.
Other revenues
Other revenues were $69 million in the second quarter of 2003, compared to $16
million in the year-ago period. Other revenues for the first half of 2003
increased to $198 million from $74 million in the same period in 2002. These
increases are due primarily to increased realized gains related to sales of
mortgages.
- --------------------------------------------------------------------------------
MERRILL LYNCH INVESTMENT MANAGERS
- --------------------------------------------------------------------------------
MLIM'S RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
- ------------------------------------------------------------------------------------------------------------------------
June 27, June 28, June 27, June 28,
(dollars in millions) 2003 2002 % (Dec.) 2003 2002 (Dec.)
- ------------------------------------------------------------------------------------------------------------------------
Commissions $ 35 $ 51 (31) $ 67 $ 105 (36)
Asset management fees 309 356 (13) 609 723 (16)
Other revenues (14) 4 (450) (9) 26 (135)
----- ---- ---- -----
Total net revenues 330 411 (20) 667 854 (22)
Non-interest expenses 263 322 (18) 554 651 (15)
----- ---- ---- -----
Pre-tax earnings $ 67 $ 89 (25) $113 $ 203 (44)
----- ---- ---- -----
Pre-tax profit margin 20.3 % 21.7 % 16.9 % 23.8 %
- ------------------------------------------------------------------------------------------------------------------------
MLIM continued to demonstrate superior relative investment performance for the
1-, 3- and 5-year periods ended June 2003. For each of these periods, more than
70% of MLIM's global assets under management were ahead of their benchmark or
category median. The decline in equity market values over the past year
adversely affected MLIM's second quarter results as compared to the prior year.
MLIM's pre-tax earnings in the 2003 second quarter were $67 million, down 25%
from $89 million in the 2002 second quarter as net revenues decreased 20% from
the year ago period to $330 million, primarily reflecting a market-driven
decline in equity assets under management as well as the shift of assets by
clients from higher fee equity funds to lower fee fixed income and money market
funds. The net revenue decrease was partially offset by a reduction in
non-interest expenses, which declined 18% from the year ago period, to $263
million. Within its overall cost savings, MLIM's favorable year-over-year
expense comparison included increased litigation expenses, which were partially
offset by a reduction in charges for corporate shared services. Net revenues are
dependent on levels of assets under management, and, accordingly, are
susceptible to a decline in equity market valuations. The pre-tax margin was
20.3% in the second quarter of 2003 compared to 21.7% in the year-ago quarter.
Year-to-date, MLIM's pre-tax earnings were $113 million, 44% lower than for the
first six months of 2002 on net revenues that were 22% lower at $667 million.
MLIM's year-to-date pre-tax margin was 16.9%, compared with 23.8% for the same
period last year. MLIM's year-to-date 2002 results included a pre-tax gain of
$17 million related to the sale of its Canadian asset management business.
37
Commissions
Commissions for MLIM principally consist of distribution fees and redemption
fees related to mutual funds. The distribution fees represent revenues earned
for promoting and distributing mutual funds ("12b-1 fees"). As a result of lower
transaction volumes and the impact of lower market values, commissions decreased
31% to $35 million in the 2003 second quarter from the year-ago quarter.
Year-to-date commissions similarly decreased 36%, to $67 million.
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 on separately
managed accounts. Asset management fees were $309 million, a decline of 13% from
the second quarter of 2002 primarily as a result of market-driven declines in
the value of equity assets under management as well as the shift of assets by
clients from higher yielding equity funds to lower yielding fixed income and
money market funds. At the end of the second quarter of 2003, assets under
management totaled $471 billion, compared with $499 billion at the end of the
second quarter of 2002. On a year-to-date basis, asset management fees decreased
16% to $609 million.
An analysis of changes in assets under management from June 28, 2002 to June 27,
2003 is as follows:
- ----------------------------------------------------------------------------------------------------
Net Changes Due To
---------------------------------------------
June 28, New Asset June 27,
(dollars in billions) 2002 Money Depreciation Other (1) 2003
- ----------------------------------------------------------------------------------------------------
Assets under management $499 $(15) $(14) $1 $471
- ----------------------------------------------------------------------------------------------------
(1) Includes reinvested dividends, the impact of foreign exchange movements, net
outflows of retail money market funds and other changes.
Other Revenues
Other revenues, which primarily include net interest profit and investment gains
and losses, totaled $(14) million and $4 million for the second quarter of 2003
and 2002, respectively. Other revenues in the second quarter of 2003 reflect the
write-down of certain assets. Other revenues for the first six months of 2002
included a $17 million pre-tax gain on the sale of the Canadian retail asset
management business.
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Management continually monitors and evaluates the level and composition of the
balance sheet.
For the first six months of 2003, average total assets were $486 billion, up 5%
from $462 billion for the full-year 2002. Average total liabilities increased 5%
to $460 billion from $438 billion for the full-year 2002. Average total assets
and liabilities for the first six months of 2003 include the following changes
as compared to the full-year 2002:
38
- -----------------------------------------------------------------------------------------
Increase/
(dollars in millions) (Decrease) Change
- -----------------------------------------------------------------------------------------
AVERAGE ASSETS
Trading assets $11,071 11 %
Loans, notes and mortgages (net) 9,028 32
Receivables under resale agreements 8,183 11
Receivables under securities borrowed transactions (4,635) (7)
AVERAGE LIABILITIES
Payables under repurchase agreements $12,291 12 %
Trading liabilities 6,987 9
- -----------------------------------------------------------------------------------------
Loans, notes and mortgages were up substantially from 2002 due to increased GPC
mortgage and small and middle market business loan originations by Merrill Lynch
Bank USA and its subsidiaries. Additionally, securities financing transactions
rose primarily due to increased inventory financing.
- --------------------------------------------------------------------------------
OFF BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS AND CONTINGENT
LIABILITIES AND COMMITMENTS
- --------------------------------------------------------------------------------
As a part of its normal operating strategy, Merrill Lynch enters into various
contractual obligations, contingent liabilities and commitments, which may
require future payments. The table below outlines the significant contractual
obligations, contingent liabilities, and commitments, as well as the future
expiration as of June 27, 2003:
(dollars in millions)
- ----------------------------------------------------------------------------------------------------------------
Commitment expiration
----------------------------------------------------------------
Less than 1 - 3 3+ - 5 Over 5
Total 1 year years years years
- ----------------------------------------------------------------------------------------------------------------
Total commitments (Note 10) $77,309 $56,614 $ 6,019 $ 8,071 $ 6,605
Long-term borrowings 79,062 20,859 24,864 11,264 22,075
Short-term borrowings 5,517 5,517 - - -
Contractual agreements(1) 44,593 6,630 11,576 5,882 20,505
Liquidity and facilities with SPEs(2)(3) 14,125 13,155 970 - -
Liquidity and default facilities with
SPEs 2,658 2,215 170 1 272
Residual value guarantees(4) 1,712 70 54 355 1,233
Standby letters of credit and other
performance guarantees 494 348 44 15 87
- ----------------------------------------------------------------------------------------------------------------
(1) Represents the liability balance of contractual agreements at June 27,
2003.
(2) Amounts relate primarily to facilities provided to municipal bond
securitization SPEs.
(3) Includes $3.3 billion of guarantees provided to SPEs by third party
financial institutions where Merrill Lynch has agreed to reimburse the
financial institution if losses occur, and has up to one year to
fund losses.
(4) Includes residual value guarantees associated with the Hopewell campus and
aircraft leases of $325 million.
Refer to Note 10 to the Condensed Consolidated Financial Statements for
additional information.
39
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND FUNDING
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to support the successful execution of the firm's business strategies while
ensuring:
o sufficient equity capital to absorb losses and,
o 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 27, 2002.
Capital Adequacy
At June 27, 2003, Merrill Lynch's equity capital was comprised of $24.4 billion
in common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries. Preferred securities issued by subsidiaries
are Trust Originated Preferred SecuritiesSM ("TOPrS"SM). Based on the risks and
equity needs of its businesses, Merrill Lynch believes that its equity capital
base of $27.4 billion is adequate.
Funding
Commercial paper outstanding totaled $4.8 billion at June 27, 2003 and $4.0
billion at December 27, 2002, which was approximately 6% and 5% of total
unsecured borrowings at June 27, 2003 and year-end 2002, respectively. Deposits
at Merrill Lynch's banking subsidiaries totaled $80.5 billion at June 27, 2003,
down from $81.8 billion at year-end 2002. Of the $80.5 billion of deposits in
Merrill Lynch banking subsidiaries as of June 27, 2003, $66.4 billion were in
U.S. banks. Outstanding long-term borrowings increased to $79.1 billion at June
27, 2003 from $78.5 billion at December 27, 2002. Major components of the change
in long-term borrowings during the first six months of 2003 are as follows:
(dollars in billions)
- -------------------------------------------------------
Balance at December 27, 2002 $78.5
Issuances 13.9
Maturities (14.6)
Other, net 1.3
-----
Balance at June 27, 2003 (1) $79.1
- -------------------------------------------------------
(1) At June 27, 2003, $58.2 billion of long-term borrowings had maturity dates
beyond one year.
As a part of its overall liquidity risk management practices, Merrill Lynch
seeks to ensure availability of sufficient alternative funding sources to enable
the repayment of all unsecured debt obligations maturing within one year without
issuing new unsecured debt or requiring liquidation of business assets. The main
alternative funding sources to unsecured borrowings are repurchase agreements,
securities loaned, and other secured borrowings, which require pledging
unencumbered securities held for trading or investment purposes.
Merrill Lynch also maintains a separate liquidity portfolio of U.S. Government
and agency obligations and asset-backed securities of high credit quality that
is funded with debt with an average maturity greater than one year. The carrying
value of this portfolio, net of related hedges, was $14.2 billion and $12.6
billion at June 27, 2003 and December 27, 2002, respectively. These assets may
be sold or pledged to provide immediate liquidity to ML & Co. to repay maturing
debt obligations. In addition to this portfolio, the firm monitors the extent to
which other unencumbered assets are available as a source of funds during a
liquidity event.
Merrill Lynch also maintained a committed, multi-currency, unsecured bank credit
facility that totaled $3.0 billion at June 27, 2003 and $3.5 billion at December
27, 2002 and was not drawn upon. On May 8, 2003, Merrill Lynch renewed the bank
credit facility in the amount of $3.0 billion for 364 days. Merrill Lynch
elected to reduce the amount of the facility considering the company's funding
profile and the availability of the liquidity portfolio of segregated securities
that may be sold or pledged to provide immediate liquidity.
40
Credit Ratings
The cost and availability of unsecured funding are impacted by credit ratings
and market conditions. In addition, credit ratings are important when competing
in certain markets and when seeking to engage in long-term transactions
including over-the-counter derivatives. Factors that influence Merrill Lynch's
credit ratings include the rating agencies' assessment of the general operating
environment, Merrill Lynch's relative positions in the markets in which it
competes, reputation, level and volatility of earnings, risk management
policies, liquidity and capital management.
Merrill Lynch's senior long-term debt, preferred stock, and TOPrSSM were rated
by several recognized credit rating agencies at August 6, 2003 as indicated
below. These ratings do not reflect outlooks that may be expressed by the rating
agencies from time to time, which are currently stable or negative.
- --------------------------------------------------------------------------------------------------------------------
Preferred Stock TOPrSSM
Rating Agency Senior Debt Ratings Ratings Ratings
- --------------------------------------------------------------------------------------------------------------------
Dominion Bond Rating Service Ltd AA(Low) Not Rated Not Rated
Fitch Ratings AA- A+ A+
Moody's Investors Service, Inc. Aa3 A2 A1
Rating and Investment Information, Inc. (1) AA A+ A+
Standard & Poor's Ratings Services A+ A- A-
- --------------------------------------------------------------------------------------------------------------------
(1) Located in Japan
- --------------------------------------------------------------------------------
RISK MANAGEMENT
- --------------------------------------------------------------------------------
Risk-taking is an integral part of Merrill Lynch's core business activities. In
the course of conducting its business operations, Merrill Lynch is exposed to a
variety of risks. These risks include market, credit, liquidity, process, and
other risks that are material and require comprehensive controls and management.
The responsibility and accountability for these risks remain primarily with the
individual business units. For a full discussion of Merrill Lynch's risk
management framework, see the Annual Report on Form 10-K for the year ended
December 27, 2002.
Market Risk
Value-at-risk ("VaR") is an estimate within a specified degree of confidence of
the amount that Merrill Lynch's present portfolios could lose over a given time
interval. Merrill Lynch's overall VaR 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.
41
The Merrill Lynch VaR system uses a historical simulation approach to estimate
VaR across several confidence levels and holding periods. Sensitivities to
market risk factors are aggregated and combined with a database of historical
weekly changes in market factors to simulate a series of profits and losses. The
level of loss that is exceeded in that series 5% of the time is used as the
estimate for the 95% confidence level VaR. The tables below show VaR using a 95%
confidence level and a weekly holding period for trading and non-trading
portfolios. In addition to the overall VaR, which reflects diversification in
the portfolio, VaR amounts are presented for major risk categories, including
exposure to volatility risk found in certain products, e.g., options. The table
that follows presents Merrill Lynch's VaR for its trading portfolios at June 27,
2003 and December 27, 2002 as well as daily average VaR for the three months
ended June 27, 2003. Additionally, high and low VaR for the second quarter of
2003 is presented independently for each risk category and overall.
- ------------------------------------------------------------------------------------------------------------------
June 27, Dec. 27, High Low Average Average
(dollars in millions) 2003 2002 2Q03 2Q03 2Q03 1Q03
- ------------------------------------------------------------------------------------------------------------------
Trading value-at-risk(1)
Interest rate and credit spread $ 62 $ 42 $ 75 $ 38 $ 52 $ 59
Equity 38 36 38 23 29 36
Commodity 2 - 2 - - -
Currency 1 3 7 - 2 4
Volatility 27 19 34 20 24 19
--------------------------------------------------------------------
130 100 107 118
Diversification benefit (59) (48) (48) (54)
------------------- ----------------
Overall(2) $ 71 $ 52 $ 83 $ 40 $ 59 $ 64
=================== ================
- ------------------------------------------------------------------------------------------------------------------
(1) Based on a 95% confidence level and a one-week holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$29 million at June 27, 2003 and $25 million at year-end 2002.
The following table presents Merrill Lynch's VaR for its non-trading portfolios
(including Merrill Lynch's U.S. banks and Merrill Lynch's LYONS(R)):
- --------------------------------------------------------------------------
June 27, Dec. 27,
(dollars in millions) 2003 2002
- --------------------------------------------------------------------------
Non-trading value-at-risk(1)
Interest rate and credit spread $ 92 $ 89
Equity 26 27
Currency 4 3
Volatility 13 13
------- -------
135 132
Diversification benefit (32) (42)
------- -------
Overall $ 103 $ 90
======= =======
- --------------------------------------------------------------------------
(1) Based on a 95% confidence level and a one-week holding period.
42
Credit Risk
Merrill Lynch enters into International Swaps and Derivatives Association, Inc.
master agreements or their equivalent ("master netting agreements") with
substantially all of its derivative counterparties as soon as possible. The
agreements are negotiated with each counterparty and are complex in nature.
While every effort is taken to execute such agreements, it is possible that a
counterparty may be unwilling to sign such an agreement, and as a result, would
subject Merrill Lynch to additional credit risk. 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. However, the enforceability of master netting
agreements under bankruptcy laws in certain countries or in certain industries
is not free from doubt and receivables and payables with counterparties in these
countries or industries are accordingly recorded on a gross basis.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally cash and 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 $13.0 billion of
collateral) of trading derivatives in a gain position by maturity at June 27,
2003. (Please note that the following table is inclusive of credit exposure from
derivative transactions only and does not include other material credit
exposures).
(dollars in millions)
- -----------------------------------------------------------------------------------------
Credit Years to Maturity Cross-
-------------------------------------------------- Maturity
Rating(1) 0-3 3+- 5 5+- 7 Over 7 Netting(2) Total
- -----------------------------------------------------------------------------------------
AAA $ 1,541 $ 831 $ 653 $ 2,192 $ (548) $ 4,669
AA 3,487 2,238 1,224 3,258 (3,065) 7,142
A 5,770 1,464 1,459 3,810 (2,059) 10,444
BBB 1,555 1,152 469 1,214 (978) 3,412
Other 1,096 424 228 317 (103) 1,962
---------------------------------------------------------------------------
Total $ 13,449 $ 6,109 $ 4,033 $ 10,791 $ (6,753) $ 27,629
- -----------------------------------------------------------------------------------------
(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 of its
derivative contracts.
In March 2003, Merrill Lynch invested approximately $1 billion in UFJ Strategic
Partner Co., Ltd., a subsidiary of UFJ Holdings (one of the four largest
Japanese banks) created to hold, manage, and resolve various non-performing and
sub-performing UFJ loans. This investment will be carried under the equity
method of accounting and no profit or loss was recognized in the 2003 second
quarter.
43
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
- --------------------------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes that
these risks are inherent in the business and may employ strategies to mitigate
exposures. The specific components and overall level of non-investment grade and
highly-leveraged positions may vary significantly from period to period as a
result of inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated lower
than BBB, 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 may seek to mitigate these
risks in certain circumstances by engaging in various hedging strategies to
reduce its exposure associated with non-investment grade positions, such as
purchasing an option to sell the related security or entering into other
offsetting derivative contracts.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch may syndicate loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
44
- --------------------------------------------------------------------------------
TRADING EXPOSURES
- --------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's trading exposure to
non-investment grade or highly leveraged issuers or counterparties:
(dollars in millions)
- ---------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- ---------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 6,550 $ 4,825
Derivatives 4,304 5,016
Trading liabilities - cash instruments (1,698) (1,352)
Collateral on derivative assets (2,342) (2,581)
-------- -------
Net trading asset exposure $ 6,814 $ 5,908
- ---------------------------------------------------------------------------------
Included in the preceding table are debt and equity securities and bank loans of
companies in various stages of bankruptcy proceedings or in default. At June 27,
2003, the carrying value of such debt and equity securities totaled $191
million, of which 30% resulted from Merrill Lynch's market-making activities in
such securities. This compared with $140 million at December 27, 2002, of which
29% related to market-making activities. Also included are distressed bank loans
totaling $122 million and $203 million at June 27, 2003 and December 27, 2002,
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:
(dollars in millions)
- --------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- --------------------------------------------------------------------------------
Investment securities $ 218 $ 300
Commercial loans (net of allowance for loan
losses):
Bridge loans 132 131
Other loans(1) 2,434 2,740
Other investments:
Partnership interests(2) 1,729 1,749
Other equity investments(3) 805 583
- --------------------------------------------------------------------------------
(1) Includes accrued interest.
(2) Includes $851 million and $877 million in investments at June 27, 2003 and
December 27, 2002, respectively, related to deferred compensation plans,
for which a portion of the default risk of the investments rests with the
participating employees.
(3) Includes investments in 111 and 130 enterprises at June 27, 2003 and
December 27, 2002, respectively.
45
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly-leveraged counterparties:
(dollars in millions)
- ---------------------------------------------------------------------------------
June 27, 2003 Dec. 27, 2002
- ---------------------------------------------------------------------------------
Additional commitments to invest in $ 506 $ 500
partnerships (1)
Unutilized revolving lines of credit and
other lending commitments 2,581 1,550
- ---------------------------------------------------------------------------------
(1) Includes $110 million at June 27, 2003 and December 27, 2002, related to
deferred compensation plans.
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
- --------------------------------------------------------------------------------
The following is a summary of Merrill Lynch's critical accounting policies. For
a full description of these and other accounting policies see Note 1 to the
Consolidated Financial Statements in the 2002 Annual Report.
Use of Estimates
In presenting the Condensed Consolidated Financial Statements, Management makes
estimates regarding certain trading inventory valuations, the outcome of
litigation, the carrying amount of goodwill, the allowance for loan losses, the
realization of deferred tax assets, tax reserves, insurance reserves, recovery
of insurance deferred acquisition costs, and other matters that affect the
reported amounts and disclosure of contingencies in the financial statements.
Estimates, by their nature, are based on judgment and available information.
Therefore, actual results could differ from those estimates and could have a
material impact on the Condensed Consolidated Financial Statements, and it is
possible that such changes could occur in the near term. For more information
regarding the specific methodologies used in determining estimates, refer to Use
of Estimates in Note 1 of the 2002 Annual Report.
Valuation of Financial Instruments
Fair values for exchange traded securities and certain exchange-traded
derivatives, principally futures and certain options, are based on quoted market
prices. Fair values for OTC derivative financial instruments, principally
forwards, options, and swaps, represent amounts estimated to be received from or
paid to a third party in settlement of these instruments. These derivatives are
valued using pricing models based on the net present value of estimated future
cash flows, and directly observed prices from exchange-traded derivatives, other
OTC trades, or external pricing services. Obtaining the fair value for OTC
derivative contracts requires the use of management judgment and estimates.
New and/or complex instruments may have immature or limited markets. As a
result, the pricing models used for valuation often incorporate significant
estimates and assumptions, which may impact the level of precision in the
financial statements. For long-dated and illiquid contracts, extrapolation
methods are applied to observed market data in order to estimate inputs and
assumptions that are not directly observable. This enables Merrill Lynch to mark
all positions consistently when only a subset of prices are directly observable.
Values for non-exchange-traded derivatives are verified using observed
information about the costs of hedging out the risk and other trades in the
market. As the markets for these products develop, Merrill Lynch continually
refines its pricing models based on experience to correlate more closely to the
market risk of these instruments. Unrealized gains for these instruments are not
recognized unless the valuation model incorporates significant observable market
inputs.
46
Merrill Lynch holds investments that may have quoted market prices but that are
subject to restrictions (e.g., consent of other investors to sell) that may
limit Merrill Lynch's ability to realize the quoted market price. Accordingly,
Merrill Lynch estimates the fair value of these securities based on management's
best estimate which incorporates pricing models based on projected cash flows,
earnings multiples, comparisons based on similar market transactions and/or
review of underlying financial conditions and other market factors.
Valuation adjustments are an integral component of the mark-to-market process
and are taken for individual positions where either the sheer size of the trade
or other specific features of the trade or particular market (such as
counterparty credit quality, concentration or market liquidity) requires more
than the simple application of the pricing models.
Assets recorded on the balance sheet can therefore be broadly categorized as
follows:
1. highly liquid cash and derivative instruments for which quoted market
prices are readily available (for example, exchange-traded equity
securities and derivatives such as listed options)
2. liquid instruments, including
a) cash instruments for which quoted prices are available but which
may trade less frequently such that there is not complete pricing
transparency for these instruments across all market cycles (for
example, corporate and municipal bonds);
b) derivative instruments that are valued using a model, where
inputs to the model are directly observable in the market (for
example, U.S. dollar interest rate swaps);
c) instruments that are priced with reference to comparable
financial instruments whose parameters can be directly observed;
and
d) all consumer and small and middle-market business loans as
well as performing commercial loans held for investment purposes
(which are carried at their principal amount outstanding)
3. less liquid instruments that are valued using management's best estimate of
fair value, and instruments which are valued using a model, where either
the inputs to the model and/or the models themselves require significant
judgement by management (for example, private equity investments, long
dated or complex derivatives such as certain foreign exchange options and
credit default swaps, distressed debt, aged inventory positions, including
aged commercial loans held for sale (which are reported at the lower of
cost or estimated fair value) and non-performing commercial loans held for
investment purposes).
Merrill Lynch continually refines the process used to determine the appropriate
categorization of its assets and liabilities. At June 27, 2003, assets and
liabilities on the Condensed Consolidated Balance Sheets can be categorized as
follows:
(dollars in millions)
- ------------------------------------------------------------------------------------------------
Category 1 Category 2 Category 3 Total
- ------------------------------------------------------------------------------------------------
Assets
Trading assets, excluding
contractual agreements $41,579 $45,140 $1,309 $88,028
Contractual agreements 2,377 34,561 3,663 40,601
Loans, notes, and mortgages (net) - 37,185 1,300 38,485
Investment securities 7,686 65,077 4,361 77,124
- ------------------------------------------------------------------------------------------------
Liabilities
Trading liabilities, excluding
contractual agreements $36,202 $11,524 $1,042 $48,768
Contractual agreements 3,880 36,952 3,761 44,593
- ------------------------------------------------------------------------------------------------
47
In addition, other trading-related assets recorded in the Condensed Consolidated
Balance Sheet at June 27, 2003 include $126.4 billion of securities financing
transactions (receivables under resale agreements and receivables under
securities borrowed transactions) which are recorded at their contractual
amounts plus accrued interest and for which little or no estimation is required
by management.
During the second quarter of 2003, Merrill Lynch changed its estimated valuation
for a Category 3 privately held equity investment held by a Merrill Lynch
broker-dealer by using a discounted cash flow method. The carrying value of this
investment increased $60 million in the second quarter of 2003. This investment
is carried on the Condensed Consolidated Balance Sheet at estimated fair market
value, with changes in valuation being recorded in principal transactions
revenues.
- --------------------------------------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
On July 7, 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts. The SOP provides guidance on accounting and reporting by
insurance companies for certain nontraditional long-duration contracts and for
separate accounts. The SOP is effective for financial statements for Merrill
Lynch beginning in 2004. The SOP requires the establishment of a liability for
contracts that contain death or other insurance benefits using a specified
reserve methodology that is different from the methodology that Merrill Lynch
currently employs. Depending on market conditions at the time of adoption, the
impact of implementing this reserve methodology may have a material impact on
the Condensed Consolidated Statement of Earnings.
On May 15, 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 changes the accounting for certain financial instruments,
including mandatorily redeemable preferred stock and certain freestanding equity
derivatives, which under previous guidance were accounted for as equity. SFAS
No. 150 requires that mandatorily redeemable preferred shares, written put
options and physically settled forward purchase contracts on an issuer's shares,
and certain financial instruments that must be settled by issuing a variable
number of an issuer's shares, be classified as liabilities in the Condensed
Consolidated Balance Sheets.
SFAS No. 150 must be applied immediately to instruments entered into or modified
after May 31, 2003 and to all other instruments that exist beginning in the
third quarter of this year. Application to pre-existing contracts is recognized
as a cumulative effect of a change in accounting principle. Merrill Lynch does
not expect the adoption of SFAS No. 150 to have a material impact on the
Condensed Consolidated Financial Statements.
On April 30, 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS No. 133. The
new guidance amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group ("DIG") process that effectively required amendments to
SFAS No. 133, and decisions made in connection with other FASB projects dealing
with financial instruments and in connection with implementation issues raised
in relation to the application of the definition of a derivative and
characteristics of a derivative that contains financing components. In addition,
it clarifies when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. Merrill Lynch is currently
assessing the impact of SFAS No. 149 on the Condensed Consolidated Financial
Statements.
48
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
which clarifies when an entity should consolidate another entity known as a
Variable Interest Entity ("VIE"), more commonly referred to as an SPE. A VIE is
an entity in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties, and may include many types of SPEs. FIN 46 requires
that an entity consolidate a VIE if that enterprise has a variable interest that
will absorb a majority of the VIE's expected losses, receive a majority of the
VIE's expected residual returns, or both. FIN 46 does not apply to qualifying
special purpose entities ("QSPEs"), the accounting for which is governed by SFAS
No. 140. FIN 46 is effective for VIEs created on or after February 1, 2003 and
for existing VIEs as of the third quarter of 2003. See Note 8 to the
Consolidated Financial Statements in the 2002 Annual Report for disclosures
regarding the expected impact of adoption of FIN 46 on Merrill Lynch's
Consolidated Balance Sheets. Also, see Note 5 to the Condensed Consolidated
Financial Statements for additional FIN 46 disclosure.
On December 31, 2002 the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123, Accounting for Stock-Based Compensation. SFAS No. 148 permits three
alternative methods for a voluntary transition to the fair value based method of
accounting for employee stock-based compensation. SFAS No. 148 continues to
permit prospective application for companies that adopt this standard prior to
the beginning of fiscal year 2004. SFAS No. 148 also allows for a modified
prospective application, which requires the fair value of all unvested awards to
be amortized over the remaining service period, as well as restatement of prior
years' expense. The transition guidance and disclosure provisions of SFAS No.
148 were effective for fiscal years ending after December 15, 2002. See Note 11
to the Condensed Consolidated Financial Statements for these disclosures.
On November 25, 2002, the FASB issued FIN 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an Interpretation of FASB Statements Nos. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. FIN 45 requires guarantors to
disclose their obligations under certain guarantees. It also requires a
guarantor to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The disclosures were
effective for financial statements of interim or annual periods ending after
December 15, 2002. See Note 10 to the Condensed Consolidated Financial
Statements for these disclosures.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces
the guidance provided by EITF Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Merrill Lynch adopted SFAS No. 146
as of January 1, 2003, which had no material impact on the Condensed
Consolidated Financial Statements.
49
- --------------------------------------------------------------------------------
STATISTICAL DATA
- --------------------------------------------------------------------------------
2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr.
CLIENT ASSETS (DOLLARS IN BILLIONS) 2002 2002 2002 2003 2003
-------- -------- -------- -------- --------
GPC:
U.S. $ 1,076 $ 997 $ 1,021 $ 1,009 $ 1,076
Non-U.S. 94 87 89 86 92
-------- -------- -------- -------- --------
Total GPC Assets 1,170 1,084 1,110 1,095 1,168
MLIM direct sales 233 205 201 193 205
-------- -------- -------- -------- --------
Total Client Assets $ 1,403 $ 1,289 $ 1,311 $ 1,288 $ 1,373
======== ======== ======== ======== ========
ASSETS IN ASSET-PRICED ACCOUNTS $ 192 $ 177 $ 182 $ 181 $ 200
ASSETS UNDER MANAGEMENT:
Retail $ 203 $ 182 $ 189 $ 187 $ 195
Institutional 257 234 235 220 239
Private Investors(1) 39 36 38 35 37
U.S. 319 305 313 303 320
Non-U.S. 180 147 149 139 151
Equity 234 190 191 183 209
Fixed-income 121 119 122 108 108
Money market 144 143 149 151 154
- -----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING (DOLLARS IN BILLIONS):
Global Equity and Equity-Linked:
Volume $ 10 $ 3 $ 6 $ 4 $ 8
Market share 9.4 % 5.9 % 10.5 % 8.0 % 7.8%
Global debt:
Volume $ 86 $ 65 $ 59 $ 95 $ 84
Market share 8.3 % 7.7 % 6.5 % 7.1 % 6.6%
- -----------------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 42,400 41,800 40,000 39,200 38,200
Non-U.S. 12,000 11,400 10,900 10,400 10,100
-------- -------- -------- -------- --------
Total 54,400 53,200 50,900 49,600 48,300
======== ======== ======== ======== ========
PRIVATE CLIENT FINANCIAL ADVISORS 15,100 14,600 14,000 13,600 13,300
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (dollars in millions,
except per share amounts)
Total assets $453,834 $452,140 $447,928 $455,587 $481,075
Total stockholders' equity $ 21,592 $ 22,299 $ 22,875 $ 23,639 $ 24,781
Book value per common share $ 24.46 $ 25.17 $ 25.69 $ 24.97 $ 26.04
SHARE INFORMATION (in thousands)
Weighted-average shares outstanding:
Basic 861,742 864,629 868,160 887,553 897,202
Diluted 942,560 934,477 942,893 939,220 965,288
Common shares outstanding 865,398 869,019 873,780 929,768 935,152
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Represents segregated portfolios for individuals, small corporations and
institutions.
50
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The information under the caption Item 2. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Risk Management" above in
this Report is incorporated herein by reference.
Item 4. CONTROLS AND PROCEDURES
-----------------------
In 2002, ML & Co. formed a Disclosure Committee to assist with the monitoring
and evaluation of our disclosure controls and procedures. ML & Co.'s Chief
Executive Officer, Chief Financial Officer and Disclosure Committee have
evaluated the effectiveness of ML & Co.'s disclosure controls and procedures as
of the end of the period covered by this Form 10-Q. Based on this evaluation, ML
& Co.'s Chief Executive Officer and Chief Financial Officer have concluded that
ML & Co.'s disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) are effective. There have
been no significant changes in ML & Co.'s internal control over financial
reporting that occurred during the period covered by this Form 10-Q that have
materially affected, or are reasonably likely to materially affect, ML & Co.'s
internal control over financial reporting.
51
PART II - OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS
- --------------------------
The following supplements the discussion in ML & Co.'s Annual Report on Form
10-K for the fiscal year ended December 27, 2002 and Current Reports on Form 8-K
dated March 17, 2003 and April 28, 2003:
Research-Related Class Actions.
- ------------------------------
On June 30, 2003, and July 2, 2003, the United States District Court for the
Southern District of New York granted Merrill Lynch's motions to dismiss three
class actions challenging the independence and objectivity of Merrill Lynch's
research recommendations and related disclosures. These decisions involved
research recommendations related to 24/7 Real Media, Inc. and Interliant, Inc.,
as well as claims involving Merrill Lynch Global Technology Fund, Inc. Although
the outcome cannot be predicted with certainty, Merrill Lynch's present
intention is to move to dismiss the remaining class actions in stages based
largely on the reasoning of the courts' June 30 and July 2 decisions. Plaintiffs
have moved for reconsideration of the court's decisions and, in addition, have
the right to appeal the decisions dismissing their claims to the United States
Court of Appeals for the Second Circuit.
Enron-Related Litigation
- ------------------------
On or about May 28, 2003, United States District Court Judge Melinda Harmon and
U.S. Bankruptcy Judge Arthur Gonzales ordered the investment bank defendants in
certain of the Enron-related matters, including Merrill Lynch, to participate in
non-binding mediation. The outcome of the mediation cannot be predicted.
IPO Allocation Class Actions
- ----------------------------
On or about June 25, 2003, plaintiffs announced that they had entered into a
Memorandum of Understanding with the issuer defendants and the issuers' present
and former officers and directors. Under the terms of the Memorandum of
Understanding, the insurers of the issuers would guarantee recovery of at least
$1 billion by the class members. To the extent that plaintiffs recover from the
underwriter defendants, this amount would be reduced. Over 50 underwriters,
including Merrill Lynch, remain as defendants in the actions.
IPO Underwriting Spread Litigation
- ----------------------------------
On or about June 27, 2003, the United States District Court for the Southern
District of New York denied defendants' motion to dismiss based on implied
immunity. Defendants' motion to dismiss on other grounds is pending.
Boston Chicken Litigation
- -------------------------
Merrill Lynch is one of the defendants in Gerald K. Smith as Trustee for and on
behalf of the Estates of Boston Chicken, Inc. v Arthur Andersen LLP, et al., an
action pending in the United States District Court for the District of Arizona.
In that action, the Plan Reorganization Trustee has claimed, among other things,
that the defendants (including Merrill Lynch) damaged Boston Chicken by
allegedly contributing to Boston Chicken's decisions to incur more than a
billion dollars in obligations over a five-year period (1993-1998), during which
the Trustee claims Boston Chicken was insolvent. No trial date has been set.
Merrill Lynch is vigorously defending the action and anticipates filing a motion
for summary judgment in January 2004.
52
Shareholder Derivative Action
- -----------------------------
In the following shareholder derivative action ML & Co. is named as a nominal
defendant because the action purports to be brought on behalf of ML & Co. and
any recovery obtained by plaintiffs would be for the benefit of ML & Co.:
Mullin v. Komansky, et al., a derivative action instituted on or
about June 19, 2003, in the Supreme Court of the State of New York, County of
New York, alleges breach of fiduciary duty by ML & Co. directors in connection
with, among other things, allegedly failing to establish internal controls
sufficient to ensure that the company's research activities were carried out in
a lawful manner. The case is similar to Spear v. Conway, et al., previously
disclosed in ML & Co.'s Form 10-K for the year ended December 27, 2002, in which
Merrill Lynch has filed a motion to dismiss. Merrill Lynch intends to move to
dismiss this action as well.
Other
- -----
Merrill Lynch has been named as a defendant in various other legal actions,
including arbitrations, class actions, and other litigation arising in
connection with its activities as a global diversified financial services
institution. The general decline of equity securities prices that began in 2000
has resulted in increased legal actions against many firms, including Merrill
Lynch, and will likely result in higher professional fees and litigation
expenses than those incurred in the past.
Some of the legal actions include claims for substantial compensatory and/or
punitive damages or claims for indeterminate amounts of damages. In some cases,
the issuers who would otherwise be the primary defendants in such cases are
bankrupt or otherwise in financial distress. Merrill Lynch is also involved in
investigations and/or proceedings by governmental and self-regulatory agencies.
The number of these investigations has also increased in recent years with
regard to many firms, including Merrill Lynch.
Given the number of these legal actions, investigations and proceedings, some
are likely to result in adverse judgments, settlements, penalties, injunctions,
fines, or other relief. Merrill Lynch believes it has strong defenses to, and
where appropriate, will vigorously contest these actions. In view of the
inherent difficulty of predicting the outcome of such matters, particularly in
cases in which claimants seek substantial or indeterminate damages, Merrill
Lynch often cannot predict what the eventual loss or range of loss related to
such matters will be. Merrill Lynch believes, based on information available to
it, 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 Condensed
Consolidated Financial Statements, but may be material to Merrill Lynch's
operating results or cash flows for any particular period and may impact ML &
Co.'s credit ratings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 28, 2003, ML & Co. held its Annual Meeting of Stockholders. Further
details concerning matters submitted for stockholder vote can be found in ML &
Co.'s Quarterly Report on Form 10-Q for the quarterly period ended March 28,
2003.
53
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.
10 Written description of ML & Co.'s compensation policy for
directors effective May 1, 2003.
12 Statement re: computation of ratios.
15 Letter re: unaudited interim financial information.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.1 Charter of the Public Policy and Responsibility Committee of
the ML & Co. Board of Directors.
(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 April 3, 2003 for the purpose of filing
the form of ML & Co.'s 8% Callable STock Return Income DEbt
Securities SM due April 5, 2005, payable at maturity with
Comcast Corporation Class A common stock.
(ii) Current Report dated April 9, 2003 for the purpose of
furnishing notice of a webcast of a conference call scheduled
for April 16, 2003 to review ML & Co.'s operating results.
(iii) Current Report dated April 16, 2003 for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summaries for the
three months ended March 28, 2003.
(iv) Current Report dated April 28, 2003 for the purpose of
reporting the announcement by the Securities and Exchange
Commission, New York Stock Exchange, National Association of
Securities Dealers, and state securities regulators that the
settlements-in-principle that the regulators had disclosed on
December 20, 2002 related to alleged conflicts of interest
affecting research analysts had been reduced to final
settlements with regard to ten securities firms, including
Merrill Lynch.
54
(v) Current Report dated April 29, 2003 for the purpose of filing
the form of ML & Co.'s 9% Callable STock Return Income DEbt
SecuritiesSM due April 29, 2005, payable at maturity with Best
Buy Co., Inc. common stock.
(vi) Current Report dated May 2, 2003 for the purpose of filing
the form of ML & Co.'s Global Currency Basket Notes due
May 3, 2004.
(vii) Current Report dated May 2, 2003 for the purpose of filing the
form of ML & Co.'s Market Recovery NotesSM Linked to the
Nasdaq-100 Index(R) due July 22, 2004.
(viii) Current Report dated May 2, 2003 for the purpose of filing the
form of ML & Co.'s 9% Callable STock Return Income DEbt
SecuritiesSM due May 9, 2005, payable at maturity with Nextel
Communications, Inc. Class A common stock.
(ix) Current Report dated May 6, 2003 for the purpose of furnishing
notice of a webcast of a presentation by the president of ML &
Co.'s Global Private Client Group scheduled for May 13, 2003.
(x) Current Report dated May 30, 2003 for the purpose of filing
the form of ML & Co.'s Multi-Currency Notes due May 31, 2005.
(xi) Current Report dated June 3, 2003 for the purpose of filing
the form of ML & Co.'s S&P 500(R) Market Index Target-Term
Securities(R) due June 3, 2010.
(xii) Current Report dated June 3, 2003 for the purpose of filing
the form of ML & Co.'s SUMmation SecuritiesSM Linked to the
Performance of the S&P 500(R) Index due September 3, 2008.
(xiii) Current Report dated June 10, 2003 for the purpose of filing
the form of ML & Co.'s Warrant Agreement dated as of
June 10, 2003 between ML & Co. and JPMorgan Chase Bank.
(xiv) Current Report dated June 27, 2003 for the purpose of filing
the form of ML & Co.'s Strategic Return Notes(R) Linked to the
Select Ten Index due June 27, 2008.
55
SIGNATURES
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 thereunto duly authorized.
MERRILL LYNCH & CO., INC.
----------------------------------------------------
(Registrant)
By: /s/ Ahmass L. Fakahany
-----------------------------------------------
Ahmass L. Fakahany
Executive Vice President and
Chief Financial Officer
By: /s/ John J. Fosina
-----------------------------------------------
John J. Fosina
Controller
Principal Accounting Officer
Date: August 7, 2003
56
INDEX TO EXHIBITS
Exhibits
10 Written description of ML & Co.'s compensation policy for directors
effective May 1, 2003.
12 Statement re: computation of ratios.
15 Letter re: unaudited interim financial information.
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1 Charter of the Public Policy and Responsibility Committee of the
ML & Co. Board of Directors.
57