Merrill Lynch's cash flows are principally associated with operating and financing activities, which support Merrill Lynch's trading, customer, and investment banking activities. Merrill Lynch's cash and cash equivalents totaled $3.4 billion at December 27, 1996, up $284 million and $1.1 billion, respectively, from 1995 and 1994.

Cash flows of $8.7 billion in 1996 were used for operating activities, primarily to fund higher net trading assets generated by increased levels of business activity. Merrill Lynch's investing activities used cash of $593 million in 1996, primarily to acquire technology-related equipment and other assets.

Financing activities provided Merrill Lynch with $9.6 billion of cash in 1996, reflecting proceeds from net issuances of long-term debt and commercial paper, partially offset by increases in net resale/repurchase agreements.

In 1995, cash and cash equivalents increased $779 million to $3.1 billion. Cash used for operating and investing activities totaled $7.9 billion and $873 million, respectively, while cash provided by financing activities totaled $9.5 billion.

Cash and cash equivalents increased $529 million to $2.3 billion in 1994. Cash provided by operating and investing activities totaled $7.4 billion and $322 million, respectively, while cash used for financing activities totaled $7.2 billion.

Certain actions have been filed against Merrill Lynch by Orange County, California and others in connection with Merrill Lynch's business activities with the Orange County Treasurer-Tax Collector or from the purchase of debt instruments issued by Orange County that were underwritten by Merrill Lynch's subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated. The information set forth under the caption "Litigation" in Note 7 to the Consolidated Financial Statements is incorporated by reference herein. Although the ultimate outcome of these actions cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these actions will not have a material adverse effect on the financial condition or the results of operations of Merrill Lynch as set forth in the Consolidated Financial Statements contained herein.

In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which is effective for transactions occurring after December 31, 1996. SFAS No. 125 provides guidance for determining whether a transfer of a financial asset is treated as a sale versus a financing. Additionally, if a transfer qualifies as a financing transaction, the statement contains provisions that may require the recognition of collateral received or provided, in addition to the financing balance.

In December 1996, the FASB issued SFAS No. 127, Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125, which defers for one year the effective date of the collateral provisions for all transactions and the sale provisions for repurchase agreement, securities lending, and similar transactions. These provisions will be applied prospectively to transactions entered into after December 31, 1997; accordingly, the expected impact of adopting such provisions on Merrill Lynch's results of operations cannot be determined.

The provisions of SFAS No. 125 not deferred by SFAS No. 127 have been adopted as of January 1, 1997. Since these provisions are only applicable to future transactions, the impact of adoption cannot be quantified.