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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------------------
For the fiscal year ended December 26, 1997
Merrill Lynch Preferred Capital Trust I
(Exact name of Registrant as specified in its certificate of trust)
Commission File No.: 1-7182-01
Delaware 13-7102991
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center
North Tower
New York, New York 10281
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (212) 449-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
7-3/4% Trust Originated Preferred New York Stock Exchange
Securities ("TOPrS")
(and the related guarantee)
Securities registered pursuant to Section 12(g) of the Act: None
Merrill Lynch Preferred Funding I, L.P.
(Exact name of Registrant as specified in its
certificate of limited partnership)
Commission File No.: 1-7182-02
Delaware 13-3917686
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center
North Tower
New York, New York 10281
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (212) 449-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
7-3/4% Partnership Preferred Securities New York Stock Exchange
(and the related guarantee)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants' knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 20, 1998, no voting stock was held by non-affiliates of the
Registrants.
Documents Incorporated By Reference:
Prospectus, dated December 11, 1996, filed pursuant to Rule 424(b) in connection
with Registration Statement on Form S-3 (No. 333-16603) filed by the Registrants
and Merrill Lynch & Co., Inc. - Incorporated by reference in Part I
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PART I
ITEM 1. Business
Merrill Lynch Preferred Capital Trust I
Merrill Lynch Preferred Capital Trust I (the "Trust") is a statutory
business trust formed under the Delaware Business Trust Act, as amended,
pursuant to a declaration of trust and the filing of a certificate of trust with
the Secretary of State on November 20, 1996, which was subsequently amended by
an amended and restated declaration of trust dated as of December 11, 1996. The
Trust exists for the exclusive purposes of (i) issuing trust securities,
consisting of 7-3/4% Trust Originated Preferred Securities (the "TOPrS") and
trust common securities (the "Trust Common Securities"), representing undivided
beneficial ownership interests in the assets of the Trust, (ii) investing the
gross proceeds of the trust securities in 7-3/4% Partnership Preferred
Securities (the "Partnership Preferred Securities") issued by Merrill Lynch
Preferred Funding I, L.P. (the "Partnership"), and (iii) engaging in only those
other activities necessary or incidental thereto.
Merrill Lynch Preferred Funding I, L.P.
The Partnership is a limited partnership formed under the Delaware Revised
Uniform Limited Partnership Act, as amended, pursuant to an agreement of limited
partnership and the filing of a certificate of limited partnership with the
Secretary of State on November 20, 1996, which was subsequently amended by an
amended and restated agreement of limited partnership dated December 17, 1996.
Merrill Lynch & Co., Inc. (the "Company") is the sole general partner of the
Partnership. The Partnership is managed by the general partner and exists for
the exclusive purposes of (i) issuing its partnership interests, consisting of
the Company's general partner interest and the Partnership Preferred Securities,
(ii) investing the proceeds thereof in certain eligible securities of the
Company and wholly owned subsidiaries of the Company (the "Affiliate Investment
Instruments") and certain eligible debt securities, and (iii) engaging in only
those other activities necessary or incidental thereto.
The information set forth under the headings "Merrill Lynch Preferred
Capital Trust I", "Merrill Lynch Preferred Funding I, L.P.", "Description of the
Trust Preferred Securities", "Description of the Trust Guarantee", "Description
of the Partnership Preferred Securities", "Description of the Partnership
Guarantee", and "Use of Proceeds" in the Prospectus dated December 11, 1996 of
the Trust and the Partnership is incorporated by reference herein.
ITEM 2. Properties
Not Applicable.
ITEM 3. Legal Proceedings
The Registrants know of no material legal proceedings involving the Trust,
the Partnership or the assets of either of them.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of holders of any securities of the
Trust or the Partnership during the fiscal year covered by this report.
1
PART II
ITEM 5. Market for Registrants' Common Equity and Related Stockholder Matters
(a) There is no established public market for the Trust Common Securities
or the general partnership interest in the Partnership.
(b) All of the Trust Common Securities and the entire general partnership
interest in the Partnership are owned of record and beneficially by the Company.
(c) The Company, as holder of the Trust Common Securities, is entitled to
receive cumulative cash distributions accumulating from December 17, 1996 and
payable quarterly in arrears on each March 30, June 30, September 30 and
December 30, commencing December 30, 1996, at an annual rate of 7-3/4% of the
liquidation amount per annum. Distributions not paid on the scheduled payment
date will accumulate and compound quarterly at a rate per annum equal to 7-3/4%.
The certificate of limited partnership of the Partnership does not require any
regular periodic distributions to be made to the general partner; however, to
the extent that aggregate payments to the Partnership on the Affiliate
Investment Instruments and on certain eligible debt securities exceed
distributions accumulated or payable with respect to the Partnership Preferred
Securities, the Partnership may at times have excess funds which shall be
allocated to and may, in the general partner's sole discretion, be distributed
to the general partner.
ITEM 6. Selected Financial Data
The Registrant's activities are limited to issuing securities and
investing the proceeds as described in ITEM 1. - Business above. Accordingly,
the financial statements included herein in response to ITEM 8. - Financial
Statements and Supplementary Data are incorporated by reference in response to
this item.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Registrant's activities are limited to issuing securities and
investing the proceeds as described in ITEM 1. - Business above. Since the Trust
was organized on November 20, 1996, its activities, as specified in its
declaration of trust, have been limited to the issuance of the TOPrS and the
Trust Common Securities, the investing of the proceeds in the Partnership
Preferred Securities, and the payment of distributions on the TOPrS and the
Trust Common Securities in accordance with their terms. Since the Partnership
was organized on November 20, 1996, its activities, as specified in its
agreement of limited partnership, have been limited to the issuance of the
Partnership Preferred Securities, the receipt of a capital contribution from the
Company, as general partner, the investment of the proceeds in Affiliate
Investment Instruments and certain eligible debt securities, and the payment of
distributions on the Partnership Preferred Securities.
ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
On December 17, 1996, the Trust invested the gross proceeds from the sale
of the Trust Common Securities and the TOPrS in the Partnership Preferred
Securities (the "Trust Assets"). The Partnership, in turn, invested the proceeds
from the sale of the Partnership Preferred Securities and a capital contribution
from ML & Co. in certain Affiliate Investment Instruments and eligible
securities (the "Partnership Assets"). To the extent the Partnership has funds
available from the Partnership Assets, the general partner of the Partnership
may declare distributions to the Trust, as holder of the Partnership Preferred
Securities. The Trust's ability to pay distributions to the holders of the TOPrS
is dependent on its receipt of distributions on the Trust Assets from the
Partnership. Therefore, upon the receipt by the Partnership of payments from the
Partnership Assets and the distribution thereof to the Trust, the Trust will
pass through such payments to the holders of the TOPrS.
2
ITEM 8. Financial Statements and Supplementary Data
In response to this ITEM 8, the financial statements and notes thereto and
the independent auditors' reports set forth on pages F-1 through F-15 are
incorporated by reference herein.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Trustees of the Trust are as follows:
Regular Trustees: Theresa Lang
Stanley Schaefer
Property Trustee: The Chase Manhattan Bank
Delaware Trustee: Chase Manhattan Bank Delaware
Theresa Lang is Senior Vice President and Treasurer of the Company. Stanley
Schaefer is the Company's Director of Corporate Taxation. Each of them has
served in that or another capacity with the Company for the last five years.
Each Trustee has served since the Trust was organized on November 20, 1996. The
Trustees serve at the pleasure of the Company, as the holder of the Trust Common
Securities.
The Partnership has no directors or executive officers.
ITEM 11. Executive Compensation
Neither the Trust nor the Partnership has any executive officers. No
employee of the Company receives any compensation for serving as a Regular
Trustee or acting in any capacity for the Trust or the Partnership separate from
his or her compensation as an employee of the Company.
3
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information in ITEM 1. - Business and ITEM 5. - Market for
Registrants' Common Equity and Related Stockholder Matters with respect to
ownership of the Trust Common Securities is incorporated by reference in
response to this item.
ITEM 13. Certain Relationships and Related Transactions
None.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements
The contents of the financial statements are listed on page F-1
hereof, and the financial statements and accompanying independent
auditors' reports appear on pages F-2 through F-15.
2. Financial Statement Schedules
None.
3. Exhibits
Certain of the following exhibits were previously filed as exhibits
to other reports or registration statements filed by the Registrants and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate report
reference date or registration statement number.
4.1 Certificate of Trust dated November 20, 1996, of the Trust
(incorporated by reference to Exhibit 4.1 to Registration Statement
on Form S-3 (No. 333-16603) (the "Registration Statement"))
4.2 Amended and Restated Declaration of Trust of the Trust, dated as of
December 11, 1996 (incorporated by reference to Exhibit 4.2 to the
Trust's Annual Report on Form 10-K for the fiscal year ended
December 27, 1996 (File No. 1-7182-01))
4.3 Certificate of Limited Partnership, dated as of November 20, 1996,
of the Partnership (incorporated by reference to Exhibit 4.3 to
Registration Statement)
4.4 Amended and Restated Agreement of Limited Partnership of the
Partnership (incorporated by reference to Exhibit 4.4 to the
Partnership's Annual Report on Form 10-K for the fiscal year ended
December 27, 1996 (File No. 1-7182-02))
4.5 Form of Trust Preferred Securities Guarantee Agreement between the
4
Company and The Chase Manhattan Bank, as guarantee trustee
(incorporated by reference to Exhibit 4.5 to the Registration
Statement)
4.6 Form of Partnership Preferred Securities Guarantee Agreement between
the Company and The Chase Manhattan Bank, as guarantee trustee
(incorporated by reference to Exhibit 4.6 to the Registration
Statement)
4.7 Form of Subordinated Debenture Indenture between the Company and The
Chase Manhattan Bank, as trustee (incorporated by reference to
Exhibit 4.7 to the Registration Statement)
4.8 Form of Affiliate Debenture Guarantee Agreement between the Company
and The Chase Manhattan Bank, as guarantee trustee (incorporated by
reference to Exhibit 4.8 to the Registration Statement)
4.9 Form of Trust Preferred Security (included in Exhibit 4.2 above)
4.10 Form of Partnership Preferred Security (included in Exhibit 4.4
above)
4.11 Form of Subordinated Debenture (incorporated by reference to Exhibit
4.11 to the Registration Statement)
12 Computation of Ratios of Earnings to Combined Fixed Charges and
Preferred Securities Distributions
23 Consent of Deloitte & Touche LLP
24 Powers of Attorney
27 Financial Data Schedules. The Financial Data Schedules to be
contained in Exhibit 27 are required to be submitted only in the
Registrants' electronic filing of this Form 10-K by means of the
EDGAR system.
(b) Reports on Form 8-K
None.
5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrants have duly caused this report to be signed on their
behalf by the undersigned, thereunto duly authorized on the 23rd day of March,
1998.
MERRILL LYNCH PREFERRED CAPITAL TRUST I*
By: /s/ Theresa Lang
-----------------------------------
Name: Theresa Lang
Title: Regular Trustee
By: /s/ Stanley Schaefer
-----------------------------------
Name: Stanley Schaefer
Title: Regular Trustee
MERRILL LYNCH PREFERRED FUNDING I, L.P.*
By: MERRILL LYNCH & CO., INC., as General
Partner
By: /s/ Theresa Lang
------------------------------------
Name: Theresa Lang
Title: Senior Vice President and Treasurer,
and as Attorney-in-Fact for a
majority of the Board of Directors**
- ----------
* There is no principal executive officer(s), principal financial officer,
controller, principal accounting officer or board of directors of the
Registrant. The Trustees of the Registrant (which include the Regular
Trustees, the Property Trustee and the Delaware Trustee) together exercise
all powers and perform all functions with respect to the Registrant.
** Pursuant to Powers of Attorney filed as Exhibits hereto, for Herbert M.
Allison, Jr., William O. Bourke, W.H. Clark, Jill K. Conway, Stephen L.
Hammerman, Earle H. Harbison, Jr., George B. Harvey, William R. Hoover,
David H. Komansky, Robert P. Luciano, David K. Newbigging, Aulana L.
Peters, John J. Phelan, Jr., John L. Steffens, and William L. Weiss,
directors of Merrill Lynch & Co., Inc.
INDEX TO FINANCIAL STATEMENTS
ITEM 14(a)(1)
FINANCIAL STATEMENTS PAGE
- -------------------- ----
MERRILL LYNCH PREFERRED CAPITAL TRUST I
Balance Sheets, December 26, 1997 and December 27, 1996 F-2
Statements of Earnings, Year Ended December 26, 1997 and for the
Period December 17, 1996 to December 27, 1996 F-3
Statements of Changes in Stockholders' Equity, Year Ended December 26,
1997 and for the Period December 17, 1996 to December 27, 1996 F-4
Statements of Cash Flows, Year Ended December 26, 1997 and for the
Period December 17, 1996 to December 27, 1996 F-5
Notes to Financial Statements F-6
Independent Auditors' Report F-8
MERRILL LYNCH PREFERRED FUNDING I, L.P.
Balance Sheets, December 26, 1997 and December 27, 1996 F-9
Statements of Earnings, Year Ended December 26, 1997 and for the
Period December 17, 1996 to December 27, 1996 F-10
Statements of Changes in Partners' Capital, Year Ended December 26,
1997 and for the Period December 17, 1996 to December 27, 1996 F-11
Statements of Cash Flows, Year Ended December 26, 1997 and for the
Period December 17, 1996 to December 27, 1996 F-12
Notes to Financial Statements F-13
Independent Auditors' Report F-15
F-1
MERRILL LYNCH PREFERRED CAPITAL TRUST I
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 26, 1997 DECEMBER 27, 1996
----------------- -----------------
ASSETS
Investment in partnership preferred
securities $283,505,200 $283,505,200
Income receivable 5,492,913 671,356
------------ ------------
Total Assets $288,998,113 $284,176,556
============ ============
LIABILITY AND STOCKHOLDERS' EQUITY
Distributions payable $ 5,492,913 $ 671,356
------------ ------------
Stockholders' equity:
Preferred securities (7 3/4% Trust
Originated Preferred Securities;
11,000,000 authorized, issued, and
outstanding; $25 liquidation amount
per security) 275,000,000 275,000,000
Common securities (7 3/4% Trust Common
Securities; 340,208 authorized, issued,
and outstanding; $25 liquidation amount
per security) 8,505,200 8,505,200
------------ ------------
Total stockholders' equity 283,505,200 283,505,200
------------ ------------
Total Liability and Stockholders' Equity $288,998,113 $284,176,556
============ ============
See Notes to Financial Statements
F-2
MERRILL LYNCH PREFERRED CAPITAL TRUST I
STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
EARNINGS:
Income on partnership preferred
securities $22,094,110 $ 671,356
=========== ===========
See Notes to Financial Statements
F-3
MERRILL LYNCH PREFERRED CAPITAL TRUST I
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
PREFERRED SECURITIES
Balance, beginning of year $ 275,000,000 $ --
Issuance of preferred securities -- 275,000,000
------------- -------------
Balance, end of year 275,000,000 275,000,000
------------- -------------
COMMON SECURITIES
Balance, beginning of year 8,505,200 --
Issuance of common securities -- 8,505,200
------------- -------------
Balance, end of year 8,505,200 8,505,200
------------- -------------
UNDISTRIBUTED EARNINGS
Balance, beginning of year -- --
Distribution paid in excess of amount
accrued at December 27, 1996 (122,458) --
Earnings 22,094,110 671,356
Distributions (16,478,739) --
Distributions payable (5,492,913) (671,356)
------------- -------------
Balance, end of the year -- --
------------- -------------
Total Stockholders' Equity $ 283,505,200 $ 283,505,200
============= =============
See Notes to Financial Statements
F-4
MERRILL LYNCH PREFERRED CAPITAL TRUST I
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
EARNINGS $ 22,094,110 $ 671,356
CASH FLOWS FROM OPERATING ACTIVITIES:
Increase in income receivable (4,821,557) (671,356)
------------- -------------
Cash provided by operating activities 17,272,553 --
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of partnership preferred
securities -- (283,505,200)
------------- -------------
Cash used for investing activities -- (283,505,200)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred
securities -- 275,000,000
Proceeds from the issuance of common
securities -- 8,505,200
Distributions (17,272,553) --
------------- -------------
Cash (used for) provided by financing
activities (17,272,553) 283,505,200
------------- -------------
NET CHANGE IN CASH -- --
CASH, BEGINNING OF PERIOD -- --
------------- -------------
CASH, END OF PERIOD $ -- $ --
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Preferred and common distributions of $5,328,125 and $164,788, respectively,
were accrued at December 26, 1997. Preferred and common distributions of
$651,215 and $20,141, respectively, were accrued at December 27, 1996.
See Notes to Financial Statements
F-5
MERRILL LYNCH PREFERRED CAPITAL TRUST I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 26, 1997 AND DECEMBER 27, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PURPOSE
Merrill Lynch Preferred Capital Trust I (the "Trust") is a statutory
business trust formed under the laws of the State of Delaware on November
20, 1996 for the exclusive purposes of (i) issuing its preferred and
common securities (the "Trust Preferred Securities" and the "Trust Common
Securities", respectively), (ii) purchasing partnership preferred
securities (the "Partnership Preferred Securities"), representing the
limited partnership interest of Merrill Lynch Preferred Funding I, L.P.
(the "Partnership"), with the proceeds from the sale of Trust Preferred
and Common Securities, and (iii) engaging in only those other activities
necessary or incidental thereto.
Merrill Lynch & Co., Inc. (the "Company") has paid compensation to the
underwriters of the offering of the Trust Preferred Securities. The
Company also has agreed to (i) pay all fees and expenses related to the
organization and operations of the Trust (including taxes, duties,
assessments, or government charges of whatever nature (other than
withholding taxes) imposed by the United States or any other domestic
taxing authority upon the Trust) and the offering of the Trust Preferred
Securities and (ii) be responsible for all debts and other obligations of
the Trust (other than with respect to the Trust Preferred and Common
Securities). The Company has agreed to indemnify the trustees and certain
other persons.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented in accordance with generally
accepted accounting principles, which require management to make estimates
that affect reported amounts and disclosure of contingencies in the
financial statements. As such, actual results could differ from those
estimates.
INVESTMENT
The investment in Partnership Preferred Securities represents a limited
partnership interest in the Partnership and is recorded at cost. As of
year end, the carrying value of the investment approximates its fair
value. Income on the Partnership Preferred Securities is accrued when
earned.
INCOME TAXES
The Trust does not incur any income tax liabilities. Such liabilities are
incurred directly by the security holders.
F-6
MERRILL LYNCH PREFERRED CAPITAL TRUST I
NOTES TO FINANCIAL STATEMENTS
DECEMBER 26, 1997 AND DECEMBER 27, 1996
- --------------------------------------------------------------------------------
3. INVESTMENT IN PARTNERSHIP PREFERRED SECURITIES
The Trust holds 11,340,208 7 3/4% Partnership Preferred Securities, $25
liquidation preference per security. The interest payment dates and
redemption provisions of the Partnership Preferred Securities, which are
redeemable after December 30, 2006 at the option of the Partnership,
correspond to the distribution payment dates and redemption provisions of
the Trust Preferred Securities. Upon any redemption of the Partnership
Preferred Securities, the Trust Preferred Securities will be redeemed. The
Company has guaranteed, on a subordinated basis, the payment of
distributions by the Partnership on the Partnership Preferred Securities
if, as, and when declared out of funds legally available and payments upon
liquidation of the Partnership or the redemption of the Partnership
Preferred Securities to the extent of funds legally available.
4. STOCKHOLDERS' EQUITY
TRUST PREFERRED SECURITIES
The Trust issued 11,000,000 7 3/4% Trust Preferred Securities, $25
liquidation amount per security in a public offering on December 17, 1996.
The Trust Preferred Securities are redeemable on or after December 30,
2006 at the option of the Trust, in whole or in part, at a redemption
price equal to $25 per security. Distributions on the Trust Preferred
Securities are cumulative from the date of original issue and are payable
quarterly if, as, and when the Trust has funds available for payment.
Holders of the Trust Preferred Securities have limited voting rights and
are not entitled to vote to appoint, remove, or replace, or to increase or
decrease the number of, trustees, which voting rights are vested
exclusively in the holder of the Trust Common Securities. Under certain
circumstances, the Trust Preferred Securities have preferential rights to
payment relative to the Trust Common Securities.
The Company has guaranteed, on a subordinated basis, the payment in full
of all distributions and other payments on the Trust Preferred Securities
to the extent that the Trust has funds legally available. This guarantee
and the partnership distribution guarantee are subordinated to all other
liabilities of the Company and rank pari passu with the most senior
preferred stock of the Company.
TRUST COMMON SECURITIES
The Trust issued 340,208 7 3/4% Trust Common Securities, $25 liquidation
amount per security, to the Company on December 17, 1996. The Trust Common
Securities are redeemable on or after December 30, 2006 at the option of
the Trust, in whole or in part, at a redemption price equal to $25 per
security.
F-7
INDEPENDENT AUDITORS' REPORT
To the Trustees of
Merrill Lynch Preferred Capital Trust I
We have audited the accompanying balance sheets of Merrill Lynch Preferred
Capital Trust I (the "Trust") as of December 26, 1997 and December 27, 1996, and
the related statements of earnings, changes in stockholders' equity and cash
flows for the periods then ended. These financial statements are the
responsibility of the Trust's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Trust at December 26, 1997 and December
27, 1996, and the results of its operations, and its cash flows for the periods
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 20, 1998
F-8
MERRILL LYNCH PREFERRED FUNDING I, L.P.
BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 26, 1997 DECEMBER 27, 1996
----------------- -----------------
ASSETS
Cash $ -- $ 8,805
------------ ------------
Investments:
Affiliate debentures 330,055,000 330,055,000
U.S. Treasury bills 3,677,796 3,476,024
------------ ------------
Total investments 333,732,796 333,531,024
Interest receivable 6,394,816 781,589
------------ ------------
Total Assets $340,127,612 $334,321,418
============ ============
LIABILITY AND PARTNERS' CAPITAL
Distributions payable $ 6,394,816 $ 671,356
------------ ------------
Partners' capital:
Limited partnership interest 283,505,200 283,505,200
General partnership interest 50,227,596 50,144,862
------------ ------------
Total partners' capital 333,732,796 333,650,062
------------ ------------
Total Liability and Partners' Capital $340,127,612 $334,321,418
============ ============
See Notes to Financial Statements
F-9
MERRILL LYNCH PREFERRED FUNDING I, L.P.
STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
Interest income:
Affiliate debentures $25,721,764 $ 781,589
U.S. Treasury bills 192,967 4,229
----------- -----------
Earnings $25,914,731 $ 785,818
=========== ===========
See Notes to Financial Statements
F-10
MERRILL LYNCH PREFERRED FUNDING I, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
- -------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
LIMITED PARTNER'S CAPITAL
Balance, beginning of year $ 283,505,200 $ 283,505,200
Net income allocated to limited partner 22,094,110 671,356
Distribution in excess of amount accrued
at December 27, 1996 (122,458) --
Distributions (16,478,739) --
Distribution payable (5,492,913) (671,356)
------------- -------------
Balance at December 26, 1997 283,505,200 283,505,200
------------- -------------
GENERAL PARTNER'S CAPITAL
Balance at December 27, 1996 50,144,862 50,030,400
Net income allocated to general partner 3,820,621 114,462
Distributions (2,835,984) --
Distribution payable (901,903) --
------------- -------------
Balance at December 26, 1997 50,227,596 50,144,862
------------- -------------
TOTAL PARTNERS' CAPITAL $ 333,732,796 $ 333,650,062
============= =============
See Notes to Financial Statements
F-11
MERRILL LYNCH PREFERRED FUNDING I, L.P.
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
FOR THE FOR THE PERIOD
YEAR ENDED DECEMBER 17, 1996
DECEMBER 26, 1997 TO DECEMBER 27, 1996
----------------- --------------------
EARNINGS $ 25,914,731 $ 785,818
CASH FLOWS FROM OPERATING ACTIVITIES:
Accretion of U.S. Treasury bills (192,967) (4,229)
Increase in interest receivable (5,613,227) (781,589)
------------ -------------
Cash provided by operating activities 20,108,537 --
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of affiliate debentures -- (330,055,000)
Purchase of investment securities (8,805) (3,471,795)
------------ -------------
Cash used for investing activities (8,805) (333,526,795)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred
securities -- 283,505,200
Capital contribution - general partner -- 50,030,400
Distributions to limited partner (17,272,553) --
Distributions to general partner (2,835,984) --
------------ -------------
Cash (used for) provided by financing
activities (20,108,537) 333,535,600
------------ -------------
NET CHANGE IN CASH (8,805) 8,805
CASH, BEGINNING OF PERIOD 8,805 --
------------ -------------
CASH, END OF PERIOD $ -- $ 8,805
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Distributions of $6,394,816 and $671,356 were accrued at December 26, 1997 and
December 27, 1996, respectively.
See Notes to Financial Statements
F-12
MERRILL LYNCH PREFERRED FUNDING I, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 26, 1997 AND DECEMBER 27, 1996
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PURPOSE
Merrill Lynch Preferred Funding I, L.P. (the "Partnership") is a limited
partnership that was formed under the Delaware Revised Uniform Limited
Partnership Act on November 20, 1996 for the exclusive purpose of
purchasing certain eligible debt instruments of Merrill Lynch & Co., Inc.
(the "Company") and wholly owned subsidiaries of the Company with the
proceeds from the sale of (i) its preferred securities (the "Partnership
Preferred Securities"), representing a limited partner interest, to
Merrill Lynch Preferred Capital Trust I (the "Trust") and (ii) a capital
contribution from the Company in exchange for the general partnership
interest in the Partnership.
The Company, in its capacity as sole general partner of the Partnership,
has agreed to (i) pay all fees and expenses related to the organization
and operations of the Partnership (including taxes, duties, assessments,
or government charges (other than withholding taxes) imposed by the United
States or any other domestic taxing authority upon the Partnership) and
(ii) be responsible for all debts and other obligations of the Partnership
(other than with respect to the Partnership Preferred Securities). The
Company has also agreed to indemnify certain officers and agents of the
Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements are presented in accordance with generally
accepted accounting principles, which require management to make estimates
that affect reported amounts and disclosure of contingencies in the
financial statements. As such, actual results could differ from those
estimates.
INVESTMENTS
The Partnership's investments in affiliate debentures and U.S. Treasury
bills are classified as held-to-maturity and are recorded at accreted
cost. As of year end, the carrying value of these investments approximates
their fair value.
INCOME TAXES
The Partnership does not incur any income tax liabilities. Such
liabilities are incurred directly by the partners.
F-13
MERRILL LYNCH PREFERRED FUNDING I, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 26, 1997 AND DECEMBER 27, 1996
- --------------------------------------------------------------------------------
3. INVESTMENT IN AFFILIATE DEBENTURES
The Partnership holds debentures of the Company and a wholly owned
subsidiary of the Company. The debentures have a term of approximately 20
years and bear interest at 7 3/4% per annum. The interest payment dates
and redemption provisions of the debentures, which are redeemable at the
option of the Company and its subsidiary on or after December 30, 2006,
correspond to the distribution payment dates and redemption provisions of
the Partnership Preferred Securities. Interest and redemption payments on
the subsidiary debenture are guaranteed by the Company on a subordinated
basis.
4. PARTNERS' CAPITAL
The Partnership issued 11,340,208 7 3/4% Partnership Preferred Securities,
$25 liquidation preference per security, to the Trust on December 17,
1996. Distributions on the Partnership Preferred Securities are cumulative
from the date of original issue and are payable quarterly if, as, and when
declared by the general partner. The Partnership Preferred Securities are
redeemable on or after December 30, 2006 at the option of the Partnership,
at a redemption price equal to $25 per security. Except as provided in the
Limited Partnership Agreement and Partnership Preferred Securities
Guarantee Agreement, and as otherwise provided by law, the holders of the
Partnership Preferred Securities have no voting rights.
The Company has guaranteed the payment of distributions by the Partnership
on the Partnership Preferred Securities if, as, and when declared out of
funds legally available and payments upon liquidation of the Partnership
or the redemption of the Partnership Preferred Securities to the extent of
funds legally available. This guarantee is subordinated to all other
liabilities of the Company and ranks pari passu with the most senior
preferred stock of the Company.
F-14
INDEPENDENT AUDITORS' REPORT
To the General Partner and Limited Partner of
Merrill Lynch Preferred Funding I, L.P.
We have audited the accompanying balance sheets of Merrill Lynch Preferred
Funding I, L.P. (the "Partnership") as of December 26, 1997 and December 27,
1996, and the related statements of earnings, changes in partners' capital and
cash flows for the periods then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership at December 26, 1997 and
December 27, 1996, and the results of its operations, and its cash flows for the
periods then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
New York, New York
March 20, 1998
F-15