HomeMy WebLinkAbout2002-07-25 - Agendas - FinalFAYETTEVILLE
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THE CRY OF FAYETTEVILLE, ARKANSAS
FIRE PENSION AND RELIEF FUND BOARD
AGENDA
July 25, 2002
l . Approval of the minutes
2. Approval of the pension list
Investment report
4. Other Business
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113 WEST MOUNTAIN 72701 475621-7700
FAX 479-675-8257
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MINUTES OF A MEETING
OF THE
FIREMEN'S PENSION AND RELIEF FUND BORD
June 27, 2002
A meeting of the Firemen's Pension and Relief Fund Board was held on June 27, 2002 at
11:00 a.m. in Room 326 of the City Administration Building located at 113 West
Mountain Street, Fayetteville, Arkansas.
PRESENT: Mayor Dan Coody, Pete Reagan, Robert Johnson, Marion Doss, Danny
Farrar, Ronnie Wood, Gina Robert, Kit Williams.
MINUTES
Mr. Reagan moved to approve the minutes. Mr. Johnson seconded. The motion passed
unanimously.
PENSION LIST
Mr. Reagan moved to approve the pension list. Mr. Johnson seconded. The motion
passed unanimously.
INVESTMENT REPORT
Mr. Gib Weisbecker, Memll Lynch, gave the investment report. Stated interest rates
were near an a forty year low In response to questions, he stated they had no World
Com stock: Ashland in 19999 was 8% over the S&P, in 2000 and 2001 they were down,
but overall in the history of the stock market they looked okay. Mercury was under
performing. In 1999 MIAM was up 5.87%.
OTHER BUSINESS
Ms. Peggy Vice, Purchasing, stated she had sent out the RFP yesterday to thirteen
different firms. She had two more firms to send the request out to. The proposals were
due back on July 12, 2002.
A meeting was set up for July 18 to make a short list of the firms. Interviews were to be
set up on July 24, 2002, thirty minute interviews for each firm.
Mr. Reagan stated he would like Marsha Farthing there at the next meeting to answer
questions about the budget performance report handed out
The meeting adjourned at 12.:05 p.m.
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FIREMEN'S RELIEF AND PENSION FUND
JULY, 2002
THE FOLLOWING ARE THE OBLIGATIONS OF THE FIREMEN'S RELIEF FUND FOR THE
erONTH OF JULY, 2002. YOU ARE HEREBY INSTRUCTED TO ISSUE CHECKS TO THE
AYEES, IN THE AMOUNTS SHOWN, AND FOR THE PURPOSE SO STATED
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DATE OF
EMP# RETIREMENT NAME
79 11/99. ARMSTRONG (DILL), PAMELA
74 3/86 BAIRD, JULIA
2 3/75 BLACKARD, PAUL
63 5/72 BOLAIN, ANN
68 7/99 BONADUCE, MICHAEL
44 9/86 BOUDREY, BETTY MRS.
45 9/86 BOUDREY, HOWARD
49 7/88 BOUDREY, JACK
4 6/67 CARL, FLOYD JR
5 5/72 CASELMAN, ARTHUR
57 5/90 CATE, ROY
6 4/68 CHRISTIE, ARNOLD
84 03/01 CIRCUIT CLERK WASHINGTON CO
85 03/01 CIRCUIT CLERK WASHINGTON CO
8 10/76 COUNTS, WAYNE
61 6/66 DAVIS, BEULAH F.
78 11/99 DILL,GARY JOHN
11 2/76 FARRARALONZO •
38 5/84 FRALEY, JOSEPH G.
91 03/02 GAGE,TOMMY
34 6/79 HARRIS, JAMES E.
70 11/99 HARRIS, MARY RUTH
93 01/03- JENKINS, JOHN
86 07/01 JOHNSON,ROBERT
64 4/95 JORDAN, CHARLIE
76 5/88 JUDY, JAN
37 3/84 KING, ARNOLD D.
54 5/89 KING, ARVIL
12 3/60 LANE, HOPE MRS
13 10/67 LAYER, MERLIN
14 7/74 LEE, HAROLD
51 10/88 LEWIS, CHARLES
60 12/89 LEWIS, MARVIE
55 12/89 LEWIS, ROGER
40 9/85 LOGUE, PAUL D
50 9/88 MASON, LARRY
39 4/85 MC ARTHUR, RONALD A.
35 2182 MC CHRISTIAN, DWAYNE
15 4/77 MC WHORTER, CHARLES
29 8/81 MILLER, DONALD
73 2/00 MILLER,KENNETH
42 2/86 MOORE, JAMES H.
17 2/66 MORRIS, WILKIE MRS.
16 4/64 MORRIS, WILLIAM H.
62 10/68 MORRISON, ELIENE
48 7/88 MULLENS, DENNIS W.
58 9/90 OSBURN, EDWARD
46 5/88 OSBURN, TROY
81 02/01 PHILLIPS,LARRY
53 2/89 POAGE, LARRY
22 4/73 REED, JOE
30 3/81 SCHADER, EARVEL
41 9/85 SCHADER, TROY
82 03/01 SKELTON,KELLY
83 03/01 SKELTON, KIMBERLY
23 4/71 SKELTON, LAWRENCE BURL
66 8/98 SKELTON, PAULINE
36 5/76 SPRINGSTON, CARL
90 03/02 STOUT, IMOGENE W.
25 2/75 STOUT, ORVILLE (DECEASED)
26 3/66 TUNE, BILLIE SUE
6810-9810-5335-0 6810-1112-00
GROSS
1,658.91
1,649:16
55.00
55.00
2,735.14
2267.18
1,911 99
1 507 82
55.00
75.00
1,637.10
55.00
55.00
377 50
1,658.92
914.10
1,618.08
2,376.34
55.00
55.00
3,273.93
2,812.66
2,081 90
1,507.82
1,393.18
1,566.00
55.00
417.50
55.00
1,507.82
790.49
790.50
2,624 88
1,492.83
1,604.92
55.00
1,221.26
1,193.41
2,910.17
55.00
55.00
70.00
80.00
2,005.35
2,248.33
1 738 46
2,530.45
2,147 56
55.00
1,268.40
1,395.58
1,114.17
1,114.17
870.50
390.00
737.78
702.65
0.00
80.00
FED. TAX
300.00
550.00
475.38
30000
287 68
100.00
75.00
200.00
226.00
700.00
500.00
200.00
300.00
130.00
75.00
50.00
325.00
78.16
150.00
30.00
150.00
125.00
160.00
200.00
300.00
57.00
125.00
125.00
70.00
6810-1113-00 6810-0100-00
ST. TAX
100.00
145.00
50.00
50.00
15.00
50.00
200.00
100.00
50.00
200.00
25.00
10.00
75.00
50.00
25.00
38.00
100.00
25.00
25.00
17.00
NET
1,258.91
954.16
55.00
55.00
2,259.76
1,917.18
1,911.99
1,170.14
55.00
75.00
1,637.10
55.00
55.00
377 50
1,558.92
839.10
1,403.08
2,100.34
55.00
55.00
2,373.93
2,212.66
2,081.90
1,257.82
893.18
1,436.00
55.00
417.50
55.00
1,407.82
790.49
730.50
2,224.88
1,414.67
1,404.92
25.00
1,07126
1,043:41
2,910.17
55.00
55.00
70.00
80.00
2,005.35
2,088.33
1,500.46
2,530.45
1,747.56
55.00
1,268.40
1,338.58
964.17
964.17
870.50
390.00
650.78
702.65
0.00
80.00
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27
71
28
59
88
52
3/71
1/00
7/68
5/91
01/02
9/88
TUNE, MILDRED MRS.
WARFORD,THOMAS
WATTS, DONALD
WATTS, WAYNE
WOOD,RONNIE 0
WRIGHT, RANDALL
DROP DATE DROP EMPLOYEES
05/01/98
02/01/99
02/01/99
05/01/99
04/01/00
07/01/00
01/01/01
FREEDLE, LARRY
LEDBEITER, DENNIS
TATE, RALPH
BACHMAN, EDDIE
NAPIER,LONNIE
REAGAN,PETE
DOSS,MARION
80.00
2,290.35
400.00
1,642.10
2,816.02
1,547 82
75,561.20
300.00
130.00
200.00
20.00
25.00
6,994.22
1,395.00
80.00
1,990.35
400.00
1,492.10
2,816.02
1,322.82
67,171.98
NEW BENEFITS
3,492.86
3,455.40
3,356.83
2,396.34
3,219.73
3,235.68
4,920.63
WE, THE UNDERSIGNED, DO SOLEMNLY SWEAR THAT THE ABOVE OBLIGATIONS ARE
JUST AND CORRECT THAT NO PART THEREOF HAS BEEN PREVIOUSLY PAID; THAT
THE PENSION PAYMENTS SO CHARGED ARE IN ACCORDANCE WITH THE ACTIONS OF
THE BOARD OF TRUSTEES OF THE FIREMEN'S RELIEF AND PENSION FUND; THAT
THE SERVICES OR SUPPLIES FURNISHED, AS THE CASE MAY BE, WERE ACTUALLY
RENDERED OR FURNISHED; AND THAT THE CHARGES MADE THEREFORE DO NOT
EXCEED THE AMOUNT ALLOWED BY LAW OR THE CUSTOMARY CHARGE FOR SIMILAR
SERVICES OR SUPPLIES.
SECRETARY CHAIRMAN AND PRESIDENT
ACKNOWLEDGEMENT
STATE OF ARKANSAS )
COUNTY OF WASHINGTON) )SS
•WORN TO AND SUBSCRIBED BEFORE ME THIS DAY OF 2000.
NOTARY PUBLIC
MY COMMISSION EXPIRES:
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Osborn, Carreiro & Associates, Inc.
ACTUARIES • CONSULTANTS • ANALYSTS
July 10, 2002
Ms. Cathyrn Hinshaw, Executive Director
Arkansas Fire and Police Pension Review Board
One Union National Plaza_
124 West Capitol; Suite 1750
Little Rock, AR 72201
Re: Actuarial Valuations
Exhibit 3, page 9
Dear Cathyrn:
One Unlon•National P1ara,Suite 1690
124 West Capitol Avenue
Little Rods, Arkansas 72201
(501)376-8043
We found a calculation error on page 9 which is the GASB disclosure page for some plans. We
have corrected it for all valuations to be completed in the future We have corrected the page for
the 14 plans in which the error occurred
Here are 3 copies of the corrected page 9 for the following plans:
Blytheville Fire
Brinkley Fire
Fayetteville Fire
Helena Police
Jonesboro Police
Little Rock Fire'
Little Rock Police
Magnolia Fire
Magnolia Police
Monticello Fire
Pine Bluff Fire
Pine Bluff Police
`Texarkana Fire
Texarkana Police
If you have any questions or comments please let me know.
Sincerely,
1
Joh Carreiro, A.S.A.
Actuary
dna
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EXHIBIT 3 (Continued)
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Fayetteville Firefighters Pension Fund
Reconciliation of Net Pension Obligation
ACCOUNTING INFORMATION
This page is included to provide the information required by the Governmental Accounting Standards Board
Statement No. 25 and 27. The values below are based on the assumptions contained in Exhibit 8.
The Annual Pension Cost disclosed in this exhibit will almost always differ from the actual cash contribution to
the fund. We must emphasize that these disclosures are shown in the city's financial statements; Sound
actuarial projections should be used to determine the actual cash contribution requirements.
<--r RECONCILIATION OF NET=PENSION OBLIGATION (NPO)
1. Actuarially Required Contribution
2. htterest on NPO
3. Adjustment to (1) .
4. Annual Pension Cost (1)+(2)-(3)
5. Actual Contribution Made
6. Increase in NPO (4)-(5)
7. NPO Beginning of Year
8. NPO End of Year
(a)
Actuarial
Valuation
Date
12/31/1993
12/31/1995
12/31/1997
12/31/1999
12/31/2001
(b)
Market
Value of
Plan Assets*
7,271,255-
8,897,591
11,225,602
12,880,300
11,403,332
* Note:
** Note:
2000
124,741
(109,572)
(251,093)
266,262
506,689
(240,427)
(1,826,196)
(2,066,623)
2001
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124,741
(123,997)
(284,151)
2002
1,279, 840
(130,976)
(392,806)
284,895 1,541,670
401,207
REQUIRED SUPPLEMENTARY INFORMATION
(c)
Entry Age
Actuarial
Accrued
Liability
7,816,034
9,045,983
12,093,450
12,940,843
17,239,942
(d)
Unfunded
Accrued
Liability
(UAL)
(c) -(b)
544,779-
148,392
867,848
60,543
5,836,610
(e)
Funded
Ratio
(b)/(c)
93.0%7-
98.4%
3.0%98.4%
92.8%
99.5%
66.1%
(116,312)
(2,066,623)
(2,182,934)
(2,182,934)
(1) (g)
Annual
Covered
Payroll
UAL as a%
of Covered
Payroll
(d)/(f)
620:1167'7 "7-'87.9%-
676,847
608,602
367,188
234,765
12/31/1993 and 12/31/1995 are at amortized cost value.
21.9%
142.6%
16.5%
2486.1%
For volunteer/part paid members, Annual Covered Payroll is $200 for such
active members
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Revised 07/10/2002
FIRE PENSION AND RELIEF FUND
JULY 18, 2002
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PROPOSED QUESTIONS FOR THE SELECTION OF FUND MANAGER
1. Describe your view of investments for a closed pension plan.
2. What percentage of assets should be in equities?
3. What is your firm's track record on asset preservation of trust funds?
4. What is your firm's corporate policy on investment research and investment
considerations?
5. How did your firm do in predicting the change in market?
6. If you were managing this fund, would you invest in funds / stocks where
your firm is the market maker? If so, under what circumstances? Would you
forego any commissions?
7. Do you have any complaints filed against you at either the State or Federal
level?
8. Because this fund has an unfunded actuarial liability of over four million
dollars, what strategy would you proposed for this gap?
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Keep The Faith
July 2002
Problems, Problems...
Investor sentiment is about as negative as it can
possibly be:
"The world is going to hell in a hand basket."
"Corporate CT' Os are all a bunch of crooks."
"I can't wait on this market forever."
We have been saying for some time that
capitulation is one of the essential ingredients
for a stock market recovery. The above
comments certainly sound like capitulation to
us.
• Buy Low; Sell High
Keep in mind, in early 2000 everything looked
rosy, and everyone was making money in the
market (buy high approach). Now everything is
gloomy terrorist threats, middle -east strife,
Enron, Tyco, Arthur Andersen, WorldCom
Has there ever been a clearer "buy" or at least
"stay" signal? At the moment, investor
psychology (and media headlines) is driving the
market Meanwhile, the economy is improving.
Corporate earnings hit bottom in Q3, 2001 and
are on an upward trend.
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Past Market Rebounds
In the short run, investor psychology can (and
does) drive the market. In the long run, it is
market fundamentals which drive the market.
When things turn around after a weak period,
there is usually a good "pop".
Throwing in the Towel?
S&P 500 Rolling Two -Year Quarterly Returns
70
60
50
40
30
20
10
0
-10
-20
t
30
42 46 50 54 58 62 66 70 74 78 82 86 90 94 98 02
Source: ISI
Corporate Earnings are Bouncing Back
15
5
-5
-15
-25
-35
-45
1Q00
Source: ISI
3Q00
After the Troughs
35
30
25
ti 20
a 15
10
5
0
1Q01
3Q01
1Q02
3 Months 6 Months 12 Months
Source: Salomon Smith Barney. Based on Average
Monthly Index Data Since 1970. 12/79, 7/82,
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Keep The Faith
Page 2
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Don't Bail Out Now •
On the other hand, investors who bail out near
the bottom could face a long chmb back to
breakeven. The S&P has declined 36.8% from
peak to trough.
We've Been There Before
'lherc have been bears in the woods before. After
the bear market of 1973-1974, the Dopy Jones
Industrials stood at 602. The Dow is currently near
9/XM1. Every decade has had its share of bear
markets.
Keep The Faith
In the past three decades we have experienced the
Vietnam \Var, Watergate, the energy crisis, double
digit inflation, the 1987 market crash, fall of the
Berlin \Nall, and two impeachments. Through it all,
investors who followed the four kcv investment
principles did extremely well:
• Stock market demands long tens commitment
• Stay fully invested- dont market time 2 100
• Structure portfolio to meet your long tern
financial goals
• Diversify across: styles, asset classes 10
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How Long Will It Take to Breakeven?
Return* Time Needed to Breakeven
Large Company Stocks 11.2% 4 3 Years
Money Market 3.00/0 15.5 Years
'Rates of return are: 3% Money Market Return;
Large Company Stock Return from 1926-2000
Source: INVESCO
Bad News Bears
-21.2%
1 1 1 1 1 1 1
90 91 92 93 94 95 96 97 98 99
-19.3%
1 mac
-24.10
16m0.
80 81 82 83
-36.1%
I I I I 2ma1
84 85 86 87 88 89
I I
i 71 72
Source: INVESCO
23 mo. i
73 '74 75
-26.9%
pt
T— l /Imo.i -
76 77 78
-16.40/0
19 ma.
79 80
$100 Grew to $3,104
10000
3000
0
o 1000
4A-
500
0
72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02
Source: INVESCO
You can gain insight to our thoughts on the markets and our portfolios through the Portfolio Update Line
1-800-938-2316 (Toll -Free) and our web site at www.managedaecounts.invesco.com
n material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Past performance is not an
._ __.._ ._ __Y. -....w ..• ,.. „N-.... M n. n. �nll ana fi.vnrial men'rents. As with all Investments, there are associated
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Merrill [synch
19 July 2002
Global '
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Global Research Highlights
The Merrill Lynch View
>1
mg
m
d
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0
t9
Watch the Clock
Like people sitting through a bad play, investors arc asking. "When will it be over?" For clues, we
suggest watching the clock. Not a time clock, the "earnings expectations life cycle" clock that chief
U.S. strategist Rich Bernstein uses to help gauge the state of the investment cycle.
We reproduce the clock at thc right. The
labels on the inside of the circle note the
broad, general level of earnings expectations;
those on the outside identify the topics that
arc on investors' minds and that dominate the
"investment buzz" as the cycle progresses.
For example. when earnings expectations are
highest (12 o'clock). investors tend to focus
on growth and to expect it to continue even
though experience shows that thc next move
generally is down.
Where is the clock now in terms of the market as a whole? Rich thinks that it's somewhere near
four. In thc market's current context, that means that investors are very uneasy in thcir thinking
about eamings. and they recognize that expectations need to come down in relation to valuations
and risks (including corporate credibility, accounting problems. and geopolitics). In other words,
Rich continues to think that investors haven't shitted from "realization" (acknowledging that thc
market has problems) to "capitulation" (which often sets thc stage for a recovery). When investors
finally do throw in the towel, we believe that it will be time to adopt a contrarian view, look for
signs of positive earnings surprises, and be in position to take advantage of the next upswing.
While they're waiting, investors need to remember that the expectations clock moves in fits and
starts, not at a steady rate. Don't try to read the clock to the minute. What's important is thc inter-
action between time and expectations—particularly now, when many investors arc tempted to be
out of the market. Despite the current turbulence, bcing out of the market carries a high opportuni-
ty cost because it is impossible to call a tum precisely. We believe that it is more prudent to focus
on the long tern, diversify, and emphasize conservative, higher -quality issues. In the fixed-income
market, we think that investors should avoid extremes; for example, don't move too far down thc
quality spectrum in search of yield. Similarly, the shortest points on the maturity spectrum provide
low returns, while the far end generally doesn't offer enough extra yield to compensate for the
increase in price volatility inherent in long -tern issues. We recommend laddered portfolios of
one -to -five-year issues. premium bonds, and selected callable corporates. In the stock market, the
watchwords remain quality, conservatism, and dividends. and we continue to favor utilities (the
"boring" ones that pay reliable dividends), consumer staples, and industrial issucs (particularly
aerospace/defense).
Looking back, chief market strategist Dick McCabe notes that only twice in the past century has
thc DJIA declined for three consecutive years, and only once (1929-32) did it have a "four -peat."
The record suggests that better times lie ahead.
Refer to important disclosures at the end of this report.
Merrill Lynch Global Securities Research & Economics Group
Equity Research Marketing Services Department
k16883
Steven R. Narker
Director of Research, Private Client
Investors should assume that Merrill Lynch is
seeking or will seek investment banking or other
business relationships with the companies in
this report.
RCk41220009
• Global Research Highlights — 19 July 2002 !' Merrill Lynch
•
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Economic Focus
United States
• The pervasive gloom gripping the equity market threat-
ens to spill over into the real economy. So far, that hasn't
happened, and we remain optimistic that growth will be
reasonably robust during the next few quarters. Nonethe-
less, the massive wealth meltdown of recent months, when
overlaid with the breakdown in trust evident in recent
polls, could feed back to the economy. The Federal
Reserve is well aware of the risks. Based on its current
forecast, we think that the Fed won't tighten monetary
policy this year.
• In delivering his monetary policy report to Congress. Fed
Chairman Alan Greenspan sought to re -assure both Wall
Street and Main Street. We're not sure that he succeeded. We
agree with his claim that "the fundamentals arc in place for a
return to sustained healthy growth" Industrial production and
housing activity for June were strong, the labor market is
slowly improving, and thc economy remains on a solid
upward path. Second-quarter carvings are coming in above
expectations. but the markets don't seem to notice.
• Although we found his economic analysis cogent. we're
uncomfortable with Mr. Greenspan's latest contribution to
Bartlett's Familiar Quotations. In words that will probably
join "irrational exuberance" for posterity, the chairman sternly
spoke of the "infectious greed" that had "gripped much of our
business community." That broad -brush characterization of
business practices plays to the current feeding -frenzy that puts
all of corporate America in the dock, even though only a
handful of companies were involved in dubious practices. By
maximizing thc scale of the problem, Mr. Greenspan may
have further frayed confidence.
• Macro data don't support the case that earnings were
systematically exaggerated during the 1990s. On a GAAP
basis, EPS during the 1990s cycle grcw at exactly the same
pace as they did during the entire post -World War II period—
about 7.5% a year measured from cycle peak to cycle peak.
That's a powerful circumstantial case that, in the aggregate,
earnings were not overstated during the 1990s expansion.
• Even so, investors arc certainly suffering a severe crisis of
confidence. More than $7 trillion of equity wealth has been
wiped out since March 2000, roughly a third of that since the
beginning of this year. However, real-estate wealth has in-
creased by $2.7 trillion since March 2000. Our work shows
that the wealth effect from housing is more than double the
wealth effect from equities. That suggests that, so far, the
negative wealth effect from equities has been largely neutral-
ized. It also suggests that further equity declines would
probably feed into spending.
• The effect that recent events will have on business spending
is difficult to quantify. One possibility: companies may feel a
need to conserve cash and/or pay dividends, which could
delay a pickup in capital spending even as earnings improve.
Another consideration: quality spreads have widened, increas-
ing the cost of capital and clouding the outlook for capital
spending.
2
• In its latest forecast. the Fed assumes that negative wealth
effects and the spillover from corporate accounting scandals
will hold GDP growth below potential during the second half
of 2002; it also expects the economy to grow in-line with
potential during 2003. Looking at the numbers. the Fed
forecasts GDP growth of about 3% during the second half of
this year and 3.54o-4% during 2003. With growth at or below
potential through 2003. the central bank expects inflation to
remain low and steady.
• We agree with thc Fed's broad analysis. "Imbalances in
inventories and capital goods appear largely to have been
worked off; inflation is quite low and is expected to remain
so: and productivity growth has been remarkably strong,
implying considerable underlying support to household and
business spending as well as potential relief from cost and
price pressures." Because we assume that those positives will
more -than offset any negative wealth effects, we expect
growth during the second half to be stronger than the Fed
thinks it will be.
• The latest economic data support our case. Mortgage
applications for home purchases continue to run at a record
pace. Initial unemployment claims fell to a 17 -month low for
the week ended July 13. Industrial production jumped by
0.8% for June, its sixth consecutive increase. Manufacturing
inventories continued to shrink during the second quarter, and
production has yet to catch up to demand.
• The Philadelphia Fed's July index of economic activity in
its region was one negative indicator among thc recent batch.
It showed that activity might have slowed early in July. How-
ever, the index polls 150 companies in only one geographic
area, and it has a history of large month-to-month swings. We
hesitate to read too much significance into its performance.
• Meanwhile, the market's malaise persists, despite the fact
that second-quarter earnings are running ahead of expecta-
tions. Based on reports from roughly one-third of the com-
panies in the S&P 500, operating EPS appear to be more than
$12 on a GAAP basis. That's about 500 more than the bottom-
up consensus and our own top-down projection. More to the
point, operating earnings are up by more than 30% on a year-
to-year basis, and reported EPS are up by more than 100%
from a very -low base that includes large writcoffs.
• Our top-down projection is for S&P 500 operating EPS to
jump by 21% to $47.00 this year and by 19% to $56.00 next
year. With first-half EPS likely to be about $23, the 2002
target appears to be within easy reach, even if the economy
grows more slowly than we currently expect. Despite the
deep market gloom, earnings risks appear to be more to the
upside than the downside.
Bruce Steinberg
Chief Economist •
Refer to important disclosures at the end of this report
•
•
•
Merrill Lynch
Global Research Highlights — 19 July 2002
Strategy Focus
United States
• 1f it's true that "one bad apple doesn't spoil the whole
bunch," it ought to be equally true that "one good apple
doesn't make the whole bunch sweet." The latter sentiment
sums up how we view Dell Computer (DELL; $26.05;
C -I-1-9) and the technology sector. The company is one of
our favorites; the sector isn t. Indeed, we continue to think
that investors should sell tech stocks in general into
strength and re -deploy the funds into other sectors, such
as utilities (the dividend payers), consumer staples, and
industrials (particularly aerospace/defense).
• It is rare that we comment on an individual company, but
recent events seem to warrant such a discussion. Although we
have underweighted the tech sector for some time, we have
consistently favored Dell Computer. The company's recent
announcement regarding its stronger -than -expected funda-
mentals provided a lift to much of the tech sector. However.
we'd caution investors against extrapolating Dell's success to
other tech companies. As we see it, Dell's success night
actually come at the expense of other companies. Dell appears
to be a true "growth company" within a sector of faux
"growth stocks."
• The low cost of capital for tech stocks during thc bubble
provided free money to any company that wanted funding.
History shows that such underpriced funding leads to
tremendous overcapacity in an industry and a predictable
string of events: fragmentation, severe pressure on margins as
companies fight for market share, and consolidation.
• Following that model, the tech sector will probably need to
go through a dramatic consolidation before it can again be
classified as a growth sector. Unfortunately, that's not
happening yet. By and large, the CEOs of tech companies
apparently don't believe that the sector's secular backdrop has
significantly changed. We think that it clearly has.
Number of Technology Companies in the Merrill Lynch Universe
1980 to June 2002
Source: Meant Lynch Quantitative Strategy
• There are hundreds more tech companies now than there
were in 1995 (see chart). In our view, it is safe to say that
increases in tech -related demand will be slower between 2000
and 2005 than it was between 1995 and 2000. That isn't a
good environment for growth.
•
• In our judgment. Michael Dell, founder of Dell Computer,
seems to understand the industry's current business model.
While other CEOs arc attempting to prove to the Street that
their companies are still "growth" companies, Mr. Dell
basically states that everything in technology is becoming a
commodity and that the low-cost producer is the winner in a
commodity industry. His model is not based on finding the
next "killer app." Rather, it emphasizes the "old economy"
concepts of efficient manufacturing and distribution.
• Note that few, if any. tech companies have attempted to
mimic Dell Computer's business model. As a result, they may
be suffering. Referring to Dell's recent announcement, Steve
Fortuna, our PC analyst. wrote on July 12, "Dell's out-
performance for the July quarter is primarily market -share -
driven, and we do not interpret this as an improvement in the
demand environment." The low-cost producer appears to be
winning.
• That brings us to the issue of how growth companies differ
from growth stocks. En the 1950s, Peter Bernstein (no relation)
noted that, although most investors use the terms
interchangeably, the terms have different meanings (sec `
"Growth Companics vs. Growth Stocks," Harvard Business
Review, September/October 1956.)
• Bemstein described a growth stock as a company that
responds to a trend in the economy. The example he used was
the steel group: in the 1950s. the companies were simply
responding to the economy's rising demand for steel. He
described a growth company as one that does much more than
that: it shapes the way business is done. In our view, one
hallmark of a growth company is that it puts its competitors
out of business.
• In recent years, there have been many more "growth stocks"
than "growth companies" in the tech sector. In our view, it
might not be stretching things to say that Dell may be the only
true "growth company" in the tech sector. It is changing the
way business is being done, and it has (and probably will) put
competing companies out of business.
• The market appears to appreciate that distinction. Dell's
stock has significantly outperformed other stocks (not just
tech stocks) since mid -2001. It has declined by about 7%
during the past 12 months vs. 40% for the Merrill Lynch 100
Technology Index, 36% for the Philadelphia Semiconductor
Index (SOX), 34% for the NASDAQ Composite, and 27% for
thc S&P 500. We'd continue to put Dell in a special category
and underweight tech as a whole.
Richard Bernstein
Chief U.S. Strategist
Refer to important disclosures at the end of this report 3
rro
Iso
en
ISO
ZOO
,N
rn
0
SO
Sumba m 1Mlnelwgy W.u9m*tm the
Merrill LTM Universe
M•MM Dahl
n
12
11
M
o
a
41
IS
n
a
n
a n ee 45 a n a n. ea m
Source: Meant Lynch Quantitative Strategy
• There are hundreds more tech companies now than there
were in 1995 (see chart). In our view, it is safe to say that
increases in tech -related demand will be slower between 2000
and 2005 than it was between 1995 and 2000. That isn't a
good environment for growth.
•
• In our judgment. Michael Dell, founder of Dell Computer,
seems to understand the industry's current business model.
While other CEOs arc attempting to prove to the Street that
their companies are still "growth" companies, Mr. Dell
basically states that everything in technology is becoming a
commodity and that the low-cost producer is the winner in a
commodity industry. His model is not based on finding the
next "killer app." Rather, it emphasizes the "old economy"
concepts of efficient manufacturing and distribution.
• Note that few, if any. tech companies have attempted to
mimic Dell Computer's business model. As a result, they may
be suffering. Referring to Dell's recent announcement, Steve
Fortuna, our PC analyst. wrote on July 12, "Dell's out-
performance for the July quarter is primarily market -share -
driven, and we do not interpret this as an improvement in the
demand environment." The low-cost producer appears to be
winning.
• That brings us to the issue of how growth companies differ
from growth stocks. En the 1950s, Peter Bernstein (no relation)
noted that, although most investors use the terms
interchangeably, the terms have different meanings (sec `
"Growth Companics vs. Growth Stocks," Harvard Business
Review, September/October 1956.)
• Bemstein described a growth stock as a company that
responds to a trend in the economy. The example he used was
the steel group: in the 1950s. the companies were simply
responding to the economy's rising demand for steel. He
described a growth company as one that does much more than
that: it shapes the way business is done. In our view, one
hallmark of a growth company is that it puts its competitors
out of business.
• In recent years, there have been many more "growth stocks"
than "growth companies" in the tech sector. In our view, it
might not be stretching things to say that Dell may be the only
true "growth company" in the tech sector. It is changing the
way business is being done, and it has (and probably will) put
competing companies out of business.
• The market appears to appreciate that distinction. Dell's
stock has significantly outperformed other stocks (not just
tech stocks) since mid -2001. It has declined by about 7%
during the past 12 months vs. 40% for the Merrill Lynch 100
Technology Index, 36% for the Philadelphia Semiconductor
Index (SOX), 34% for the NASDAQ Composite, and 27% for
thc S&P 500. We'd continue to put Dell in a special category
and underweight tech as a whole.
Richard Bernstein
Chief U.S. Strategist
Refer to important disclosures at the end of this report 3
• Global Research Highlights — 19 July 2002 Merrill Lynch
•
•
Technical Focus
United States
• Although the summer recovery that we had expected has
yet to materialize, we still believe that it will evolve later in
July or in August. In the meantime, however, there may
be some additional, and volatile, weakness in coming days
before a durable market upturn occurs. Momentum
indicators have compounded their recent oversold
condition, and sentiment measures have continued to
Improve. Setbacks in previously strong stocks often
indicate that the market is in a mature stage of a decline.
• The stock -market averages' accelerating rate of decline. the
market's recent emotional tone, and the media's increasing
emphasis on the negative aspects of the market suggest that it
is quickly approaching a climactic or benchmark low on its
2002 decline. Such a low could serve as the starting point for
at least a mid -to -late -summer bottom and recovery trend.
Getting through the next week or two, however, may be the
most -difficult part of the process.
• One noteworthy aspect of the market's recent decline is that
many of the groups and stocks that had been holding at or
near multi-year or all-time highs have declined as they have
done some "catching up" on the downside, while some of the
previously battered technology stocks have held above their
recent lows. That combination of strong stocks weakening
and weak stocks strengthening has often been a sign of a
maturing market decline that is nearing a low. It is also the
kind of market condition that produces the "no place to hide"
attitudes that tend to characterize a bottom.
• Furthermore, we suspect that, with recent concerns—about
a "double -dip" in the economy, still -high valuations, corpor-
ate earnings prospects, accounting, and corporate governance
scandals—now reaching a fever pitch, a "contrary play" in
terns of an interim stock -market recovery trend could
develop. If there arc no major "new" negative surprises in
coming weeks. the market could tum up from its oversold
condition on the slightest hint of good news.
• From a long-term trend technical perspective. two factors
should provide some encouragement in thc face of growing
gloom in the market. One is that the four-ycar cycle, which
has been one of the most -reliable in the market, is scheduled
to bottom and turn up this year The other is that, with the
ODA down by roughly 20% for the year-to-date, there is a
possibility that 2002 will be the third consecutive down year
for that index. 'However, a "three -peat" has occurred only
twice before, and a "four -peat" once, making another decline
unlikely, in our view.
• We would take advantage of further weakness in groups
with strong underlying bases to accumulate positions. Those
that we favor are aerospace/defense, auto parts, building
products, chemicals, healthcare services. paper and forest
products, and selected retailing issues.
Richard T. McCabe
Chief Market Analyst
Strategy Focus
Global
• So far, the baby is still in the bathtub. That's the
message in our Fund Managers' Survey for July. Despite
another difficult month for world equity markets, the
Merrill Lynch Stock Market Conditions (SMC) Indicator
improved for the second consecutive month—from 12.3
for June to 15.6 for July, its highest level since November
2001. As was the case in June, the equity valuations
component of the SMC indicator again provided the
greatest lift, while a store -positive interest -rate outlook
offset softer profit expectations.
• The SMC's Equity Valuations component rose from +16 for
June to+26 for July. However, there was a slight deterioration
in the Investor Sentiment and Profit Expectations compo-
nents, which fell to I4 and 48 for July from 15 and 51 for
June. respectively. There was also a softening in expectations
of EPS growth—to 10% for the next 12 months from the I I%
forecast in the June survey. On the plus side, thc Interest -Rate
Prospects component improved from -33% for June to -25%
for July.
• The survey also revealed that perceptions of U.S. equities
remain negative: 36% of the panel now believe that the U.S.
has the least -favorable outlook for corporate profits, up from
32% in June. In addition, 34% believe that the American
market has the worst quality of camings (in terms of
volatility, predictability, and transparency), up from 27% in
June, and 57% think that U.S. equities are relatively the most
expensive in die world, although that is a slight improvement
vs. a couple of months ago. As a result. the U.S. equity
market is still the one that most fund managers would be most
likely to underweight. Eurozone and global emerging -market
equities remain the ones that fund managers would be most
likely to overweight.
• Anyone looking for signs of investor capitulation in the
latest survey is likely to be disappointed. Despite a major
decline in global stocks (including a 20% underperformance
in relation to global bonds during the past three months), the
survey does not suggest that a major loss of confidence in
equities as an asset class has yet taken place. Indeed, several
questions elicited responses that we regard as optimistic. For
example, 74% of fund managers still expect equities to be
higher a year from now, and 37% expect them to be `a lot
higher'. Moreover, 67% think it unlikely that bonds will do
better than equities during the coming year. Cash levels arc
4.8%. but they are still significantly below those seen last
year. In addition. although the pro -equity stance has been
reduced, 48% of asset allocators remain overweight equities,
while 49% are underweight bonds.
• Although the number of respondents that regard the U.S.
dollar as overvalued fell from 57% in June to 43% in July,
45% still want to be long the euro and short the dollar—
more-or-less unchanged during the past couple of months.
David Bowers
Chief Global Investment Strategist
4 Refer to important disclosures at the end of this report.
• h Merrill 'synch
•
Global Research Highlights - 19 July 2002
Focus 1 List
Merrill Lynch Research selects one stock each week as its Focus I stock. This focus recommendation either reflects Merrill Lynch's
current economic and investment outlook or an unusual fundamental and/or investinent development. The selected stock remains as
one of our Focus I stocks for a period of 12 months unless the Focus 1 committee. at its discretion. removes the stock in connection
with an analyst downgrade or otherwise. The following shows the Focus 1 selections currently on our actively managed Focus I list.
Focus 1
Company
Affiliated Computer Services
AMB Property Corp.
Amerada Hess
American International Group
AmerisourceBergen
Avon Produces
Boeing
Burlington Resources
Cidgroup
ConAgra
Costco Wholesale
Dell Computer
First Data Corp
Ford Motor
HCA, Inc.
loco Ltd.
Lowe's
Philip Morris
Southwest Airlines
SPX Corp
TXU Corp.
United Parcel Service
Universal Health Services
Viacom
Weatherford International
Weyerhaeuser Co
NOTE: Kroger (KR 119.35; C-1-1-9) was removed from the Focus 1 list on 7(17102 because 1 had exceeded the 12 month tune lima. ACE Limited (ACE: $25.40;13-1-1-7) was removed
from the Focus 1 Est on 7/78/02 because of near term price performance concerns. Barra (BAX: $32.00; B-2.1.7) was removed from the Focus 1 fist on 7/18/02 because of an opinion
downgrade. Johnson & Johnson (JNJ: $49.73: A-2-1-7) was removed from Me Focus 1 list on 709102 because of near -tam price pedomiance concerns.
Investors should review the most recent research report on a company prior to making an investment decision.
-- RESTRICTED. SOLICITATION OF COMMISSION ORDERS 15 PROHIBITED.
[C. FDC, VIA 8] One or more analysts responsible lor covering the securities Si dila report owns such sttvraies.
[SPW. UHS, WFT] MLPF&S or one of its affiliates was a manager of the most recent offering of securities al this company within the lass three years.
IAIG, AVP, BA, C. CAG, FDC. F, N. LUV, TXU, UPSI MLPF&S or an affiliate was a manager of a pubic offering of securities of this company within the last 12 months.
[AIG. CAG, F, HCA, N. JNJ, LOW, LUV, TXU, VIA B. ACE] MLPF&S was a manager of the most recent public offering of securities of this company within the last Three years.
[COST. DELL] The securities of the company are not fisted but trade over-the-counter in the United States. In the US. retail sales and/or disoib lion of this repot may be made only in
stales where these securfies are exempt from registration or have been qualified for sale MLPF&S or its affiliates usually make a market in the securities al this company.
IAIG, ABC. AVP. 8A, BR, C, CAG. FDC, F. HCA, N. JNJ. LOW, LUV, SPW, TXU, UPS, UHS, VIA B, WFT) MLPF&S or an afliate has received compensation for investment banking
services from this company within the past 12 months.
IACS, AMB, AMC, AIG, ABC. AVP. BA, BR. C. CAG. COST. DELL. FDC, F, HCA, N. JNJ, LOW, MO. Ll1V, SPW, TXU, UPS. UHS, VIA B. WFT, WY, ACE, BAX] MLPF&S or an affiliate
expects to receive a intends to seek compensation for investment banking servoes from this company within the next three months.
Current Price
7118102 Symbol Opinion Country
$41.95 ACS B-1-1-9 US
27.55 AMB B-1-1-7 US
73.89 AHC B-1-1-7 US
57.23 AIG A-1-1-7 US
63.29 ABC C-1-1-7 US
44.92 AVP 6-1.1.7 US
4129 BA C-1-1-7 US
35.67 BR B-1-1-7 US
36.90 C B-1-1-7 US
23.75 CAG B-1-1-7 US
33.88 COST B-1.1.9 US
26.05 DELL C-1-1-9 US
34.36 FDC B-1-1-7 U5
12.81 F C-1-1-7 US
44.83 HCA C-1-1-7 US
19.14 N C-1-1.9 Canada
37.85 LOW 8-1-1-7 US
42.45 MO D-1-1-7 US
13.28 LUV B-1-1-7 US
97.98 SPW C-1-1-9 US
40.39 TXU B-1-1-7 US
62.05 UPS 8-1-1-7 US
45.25 UHS C-1-1-9 US
37.30 VIAB 6-1-1-9 U5
41.14 WFT C-1-1-9 U5
56.30 WY 8-1-1-7 US
Date Added to
Focus List
10/3)01
7/9/02
3/18/02
2/7/02
10115101
615/02
4/26/02
4112102
10/22/01
6/26102
12114/01
5/22102
6/6/02
5120102
10/29/01
6/25102
8/27/01
5(28102
1/29102
614/02
11/2/01
11/27(01
5/14/02
215102
2/22/02
5/6/02
Price When
Added
41.83
28.40
75.91
71.11
68.41
51.97
41.51
39.15
47.01
24.89
42.27
27.40
39.40
16.73
39.55
21.86
38.51
55.11
18.23
131.20
46.83
55.00
43.50
37.46
45.14
63.70
Refer to important disclosures at the end of this report 5
•
•
Merrill Lynch
17 July 2002
A.J. Rice
First Vice President
Tom Gallucci
Director
i
United States I
Hospital Management
HCA
Positive Long -Term Vision Outlined in
Meetings
Reason for Report:
Company Update
STRONG BUY
Long Term
STRONG BUY
Symbol:
Price:
12 -Month Price Objective:
HCA
$44.40
$56-58
Estimates (Dec) 2001A
2002E 2003E
EPS:
P/E:
EPS Change (YoY):
Consensus EPS:
(First Call: 17 -Jun -2002)
Q2 EPS (Jun):
Cash Flow/Share:
Price/Cash Flow:
Dividend Rate:
Dividend Yield:
Opinion & Financial Data
$1.94
23.2x
$2.41
18.6x
24.2%
$2.45
50.50 50.62
$6.36
7.0x
$0.08
0.2%
57.05
6.3x
50.08
0.2%
52.80
15.9x
16.2%
$2.86
$7.79
5.7x
50.08
0.2%
Investment Opinion:
Volatility Risk:
Mkt. Value / Shares Outstanding (ran):
Book Value/Share (Mar -2002):
Price/Book Ratio:
ROE 2002E Average:
LT Liability % of Capital:
Est. 5 Year EPS Growth:
Next 5 Year Dividend Growth:
Stock Data
C -I-1-7
Above Average
$23.132.5/521
$10.03
4.5x
21.0%
53.1%
17.5%
5.0%
52 -Week Range:
Symbol / Exchange:
Options:
Institutional Ownership -Vickers:
Brokers Covering (First Call):
552.05-536.44
IICA / NYSE
Chicago
78.5%
24
ML Industry Weightings & Ratings"
Strategy; weighting Rel. to Mkt.:
Income: In Linc
Growth: Overweight
Income & Growth: In Line
Market Analysts; Technical Rating: Above Average
(24 -Oct -2000)
(24 -Oct -20001
(24 -Oct -20001
(13 -Feb -2002)
"•The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
Merrill Lynch Global Securities Research & Economics Group
Global Fundamental Equity Research Department
6 Refer to important disclosures at the end of this report
Highlights:
• In recent meetings with HCA in the United
Kingdom, the company's management was
upbeat about the current tone of business as
well as about the intermediate-term prospects
for the hospital -management industry.
• HCA is scheduled to report Q2 earnings on
July 24. We expect the company to meet, or
probably beat, expectations, which are that
EPS were 62¢ for the quarter vs. 50¢ a year
earlier. We also think that Q2 pricing
increases continued in the mid -to -high single
digits. Same -facility admissions probably
increased by 2 -to -3% year-to-year, and the
improvement in the EBITDA margin was
likely gradual and primarily concentrated on
other operating expenses and, to a lesser
extent, labor costs.
• We reaffirm our Strong Buy ratings on HCA.
Our S56 -to -58 price objective assumes that the
company's stock will be valued at nine times
forward EBITDA during the next year. We
believe that that is reasonable in view of the
high liquidity and visibility that we think HCA
offers. Our price objective would be at risk if
anticipated price and volume gains for the
industry do not materialize.
Stock Performance
u
4e
44
40
32
ID
24
20
16
1990
2001
2002
- HCA Inc
- Rat to SAP Campeslte Index (503)(RIOM Stale)
0.052
0.048
0.040
0.036
0022
0024
0,011
0.012
• `� Merri116ynch
•
•
Global Research Highlights — 19 July 2002
Investment Summary
We reaffirm our Strong Buy ratings on the shares of FICA. a
leading healthcare provider. The company's hospitals,
situated in some of the most -rapidly growing metropolitan
areas, continue to increase their admissions, revenues, and—
because costs arc well-controlled—margins and earnings.
Because pricing probably rose at mid -to -high single -digit
rates during thc sccond quarter, we think that earnings
advanced by at least 24% to 62¢ a share from 500 a year
earlier. We expect annual cam ings increases of at (cast 24%
for 2002. 16% for 2003, and 17 -to -18%, on average, for the
next five years.
Company Description
!ICA (previously Columbia/HCA) is the leading U.S.
provider of healthcare services. The company owns and
operates 180 acute-care hospitals. It also provides diagnostic.
ambulatory surgery, cardiac rehab. physical therapy, and
radiation oncology services.
Reasons for Recommendation
• At our recent meetings with RCA's management, the
company reiterated its long-term financial objectives,
which include annual earnings increases in the mid -to -
high teens for the foreseeable future. That goal is based
on an intcmal revenue -growth projection of 7 -to -9%,
which we think is reasonable if same -facility admissions
continue to run at slightly higher -than -average rates of
about 2 -to -3%. Furthermore, management expects
outpatient volume to increase by 4 -to -6% a year for the
long tern and the EBITDA margin to improve by 10 -to -
30 basis points as a percentage of revenues in each of the
next few years.
• Management attributes the company's ability to generate
above-average volume growth to the fact that its facilities
arc situated in demographically attractive markets. HCA
has the largest or second-largest position in 16 of the 20
fastest-growing U.S. metropolitan markets. In many of
those markets, HCA's facilities arc in the suburbs, where
the population is usually growing even -more rapidly than
in the metropolitan area as a whole.
• Looking ahead, HCA's management reports that the
company has completed the 2003 recontracting cycle
with physicians on about 35% of its managed-care
contracts. So far, prices appear to be up by 6 -to -8%.
about the same rate as for 2002. Roughly 84% of FICA's
managed-care contracts are renewed annually.
• In terms of costs, FICA has completed two-thirds of its
ongoing shared -services initiative, which is designed to
create centralized billing, collections, and supply -cost
management. Management noted that, in addition to thc
direct cost savings, the shared -services program has freed
important local space that can be used to address capacity
issues in certain facilities. During the past two years,
however, the shared -services initiative has required in-
cremental investment that cost the company 40 and 80 a
share in carvings for 2000 and 2001, respectively.
• Labor continues to be HCA's biggest cost item. On the
plus side, there has been an casing of overall wage -rate
growth. During the first half of the year, increases were
running at 5 -to -6%, down from 7 -to -8% a year earlier.
Because of labor shortages for some positions. RCA's
use of contract labor continues to increase. albeit at a
moderating rate. Contract labor is said to represent
roughly 7.5% of total full-time employees today. In
recent years, FICA's year-to-year spending for contract
labor has risen at an average of 25% a year. In the first
half of 2002, its use of contract labor reportedly rose by
9 -to -10%.
• We expect supply costs to remain at about 16% of sales
fot the intermediate term. That includes drug costs,
which arc still increasing by at least 1 S% a year. HCA.
along with the rest of the healthcare industry, has
reported some upward pressure on malpractice costs.
However, as a proportion of revenues, those costs remain
relatively small (about 1.6 -to -1.7% of revenues). FICA
has been able to hold down its rate of increases in
malpractice because it operates a fully funded captive
insurance subsidiary, Health Care Indemnity.
• Meanwhile, HCA has aggressively reinvested a major
portion of its excess cash flow in its existing facilities.
The company allocated SI.4-to-1.5 billion in develop-
ment capital for projects that will begin to come on-line
in the sccond half of 2002. Over time, SI spent for
development capital has contributed $I in incremental
revenue. HCA expects its total capital spending to be
S1.6 billion for 2002 and $1.8 billion for 2001 with the
rise almost entirely attributed to increases in growth -
oriented investments. Development -oriented capital
spending is scheduled to rise from $580 million in 2002
to $1.115 billion in 2003. Ncw construction and expan-
sion are scheduled to add 1,200 new beds to the compa-
ny's total. In addition, HCA has projects under way to
add four de novo facilities and 378 beds during the next
several years. We expect HCA to generate $700 -to -800
million in free cash flow after capital spending, but
bcforc any further outlays to the government to resolve
issues associated with its long-standing investigation.
• Looking at that investigation, prosecutors in the Middle
District of Florida have closed their criminal inquiry
against individual HCA employees. Significantly, that is
where we believe the focus on individual criminal cases
had been centered. The news of the closing would appear
to open the door for both parties to recommence
discovery depositions. By way of background, as part of
the government's investigation, depositions of company
personnel had been taken by federal prosecutors Earlier
this year, depositions were stopped after certain I -ICA
personnel were advised by their personal attorneys not to
grant depositions unless they were clearly told by the
government that they were not personally targets of any
criminal investigation. At this point, the Department of
Justice appears to have indicated that there are no further
criminal targets as part of its investigation. If that is
indeed so, it would likely free HCA executives to provide
depositions to the government.
Refer to important disclosures at the end of this report. 7
• Global Research Highlights — 19 July 2002 � Merrill Lynch
•
•
• HCA executives have generally denied wrongdoing
throughout the process, and we have no reason to believe
that their testimony would be negative for HCA. In fact, a
company spokesman has been quoted as saying, "were
interested in letting these folks toll their story because we
think it will benefit us." Meanwhile, we expect the com-
pany to continuc to negotiate a final settlement with the
government. Essentially, we believe that both sides are
pursuing a two -track strategy: a settlement out of court
(the preferred one) and civil litigation. Of interest, the
government filing indicates that the government is eval-
uating HCA's response proposal for settlement of remain-
ing outstanding issues that was provided on June 20, after
the government's initial settlement offer on May 8.
• We note that two HCA executives in Florida were
indicted on criminal charges several years ago as part of
the government's investigation of HCA; they were
exonerated this year when the government dropped its
criminal probe against them.
• We also note that, as part of its past settlement with the
government, HCA as a company has settled all outstand-
ing criminal issues associated with the government's
investigation of the company. HCA also settled three of
five civil issues, with two broad issucs still unresolved:
claims associated with Medicare cost reports and
physician relations.
• While we await the finalization of outstanding regulatory
issues by HCA, we note that the government's investiga-
tion docs not appear to be affecting the company's day-
to-day operations, and it appears to be essentially a non -
issue from that perspective.
Footnotes: p, s, r please see footnotes on last page.
8 Refer to important disclosures at the end of this report.
•
•
•
Merrill Lynch
15 July 2002
Mark Husson
First Vice President
Monica Aggarwal, CFA
Vice President
United States
Retailing -Wholesale & Logistics
Sysco
Quality Stuff, Everyday Price STRONG I3UY
Reason for Report: Opinion Upgrade
Long Term
STRONG BUY
System:
Price:
12 -Month Price Ob)ective:
SYY
$24.55
$32
Estimates (Jun) 2001A 2002E 2003E
EPS:
PM:
EPS Change (YoY):
Consensus EPS:
(First Call: 05 -Jun -2002)
Q4 EPS (Junk
Cash Flow/Share:
Price/Cash Flow:
Dividend Rate:
Dividend Yield:
Opinion & Financial Data
S0.88
27.9x
50.99
24.8x
12.5%
31.00
S0 26 50.28
S 1.25
19.6x
50.26
1.0%
51.39
I7.6x
5236
1.4%
51.15
21.3x
16.2%
5115
S1.56
15.3x
50.36
1.4
Investment Opinion:
Volatility Risk:
Mkt. Value / Shares Outstanding (mn):
Book Value/Share (Jun -2001):
Price/1300k Ratio:
LT Liability % of Capital:
Est 5 Yctr EPS Growth:
Stock Data
13-3-1-7 to E-1-1-7
Average
516.522.2/ 673
53.17
7.8x
32.1%
13.0%
52 -Week Range:
Symbol / Exchange:
Options:
Institutional Ownership -Vickers:
Brokers Covering (First Call):
530.35-521.75
SYY / NYSE
Chicago
69.2%
12
ML Industry Weightings & Ratings"
Strategy; Weighting Rel. to Mkt.:
Income:
Growth:
Income & Growth:
Not Ratcd
Not Rated
Not Rated
Market Analysis; Technical Rating: Above Average (13 -Feb -2002)
"The views expressed arc those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
Merrill Lynch Global Securities Research & Economics Group
Global Fundamental Equity Research Department
Refer to important disclosures at the end of this report
Highlights:
• We have raised our intermediate-term rating on
Sysco's stock from Neutral to Strong Buy and
reaffirmed our long-term rating of Strong Buy.
• The upgrade reflects our belief that Sysco is a
stable, conservative real -growth company with
visible earnings and strong corporate ethics.
• Sysco has had unbroken growth in sales, earn-
ings, and dividends for more than 26 years We
expect this year to mark 27 years and 2003 28.
• We admire the company's business model,
which generates high -30% ROIC—the highest
in our coverage—and cash. Both are important
quality touchstones in this environment.
• Recent productivity improvements and the
consolidation of the second-, third-, and fourth-
largest companies in the industry into a very
rational Ahold parent company means that
earnings visibility is especially good right now.
• The enactment of pending accounting legislation
to require that options be expensed would
reduce S&P 500 earnings by 10%, but trim
Sysco's earnings by only 2%, in our view.
• We have established a $32 -a -share price objec-
tive, based on a three-year average multiple of
27.5 times forward EPS. SYY has not traded
below current fonvard multiples in the past five
years
Stock Performance
— Sysco Corp
— Rel to SSP Composite Index 1S0]1 Wight Scale)
0.026
0.026
0.024
0022
-0020
o 016
0.016
0.014
0.012
0.010
0.000
9
• Global Research Highlights — 19 July 2002 � Merrill [lynch
•
•
Investment Summary
Sysco is the leader in the $170 billion foodservice industry,
with 13% of the market. Economics of scale in procurement,
private brands. infonnation technology, and client manage-
ment have enabled thc company to record an EBIT margin of
5% or more and to bring acquired companies up to (or dose
to) its standard of profitability. At 20 times our calendar 2003
earnings estimate of $1.23, Sysco's shares have slipped from
their unusually high multiple of 35 in 2000 and are now
trading below their average five-year P/E of 25. We believe
that the current relative P/E of 1.2 is too low in view of the
company's near-term camings visibility and potential for a
cyclical recovery when business picks up at thc white table-
cloth restaurants, hotels. resorts, cruise ships. and airports that
Sysco serves. A return to the stock's three-year average P/E
of 27.5 times our fiscal 2003 camings estimate of $1.15 a
share could produce a 1 2 -month price $32.
Company Description
Houston-based Sysco, the largest foodservice distributor in
North America. markets food and related products to about
325,000 restaurants, hospitals, schools, hotels, and other
customers. It has 72 facilities in 39 states, British Columbia,
and Ontario.
Reasons for Opinion Change
• Sysco's profitability accelerated to new levels in its June
2000 and 2001 fiscal years. The rise to a mid -20% rate of
growth in operating earnings was driven by a number of
factors. The company shifted its mix away from low -
margined chain business to associate -serviced indepen-
dent (`street') business: improved private -brand pene-
tration; benefited. along with the rest of the industry,
from the bankruptcy of a competitor that had disrupted
the pricing environment; got increasing contributions
from high -margined fresh products such as high-quality
steaks; and achieved better control and the sharing of
best practices through new enterprisewide software.
• In addition to those longer-term trends, Sysco is develop-
ing a number of new sales and efficiency initiatives.
First, Sysco aims to improve real sales trends. Sales have
been rising month-to-month, and real internal year-to-
year sales growth for the fourth (June) quarter should be
stronger than the 2.7% level reported for the second
(March) quarter. We believe that, as the economy
recovers, Sysco's internal sales should begin to increase
at mid -to -high single -digit rates beginning in calendar
2003. Overall sales growth probably won't accelerate by
much, however, because of a more -recent deflationary
trend, which is normally good for gross margins.
• Thc second initiative is to improve long-term sales
leverage. Sysco believes that it could leverage high -
single -digit internal sales growth by more than five
percentage points by increasing its 'street' business from
55% of broadlinc sales to 60% and by increasing sales of
companycontrollcd brands.
Footnotes: s v; please see footnotes on last page.
•
• Third, the company intends to boost growth with
acquisitions and foldouts. We expect acquisitions to add
3% to Sysco's annual sales volume. The company has
made about 70 small acquisitions during the past 25
years while maintaining a high return on invested capital.
We believe that Sysco will be able to continue to execute
its business acquisition model.
• The company is aggressively executing its foldout
strategy of adding new distribution facilities to capture
greater volume (in areas where existing warehouse
volume is more than 5140 million and the population
count is more than two million). Recent foldouts have
been in Sacramento, California. and Columbus, South
Carolina; one in Las Vegas. Nevada is expected to be
completed in September or October, with another in
northern Los Angeles next year. Although investments in
foldouts tend to hurt margins and inventory turns in the
near term, they provide significant opportunities to
capture higher sales volume and market share and
generally provide attractive returns on investment.
• Fourth, as part of Sysco's initiative to revamp its supply
chain and distribution network. the company plans to
open its first redistribution facility in the Northeast late
ncxt ycar. That should boost cash flow by making
smaller distribution facilities unnecessary and taking
costs such as procurement, freight. and excess inventory
out of the system and improving service levels.
• As its fifth initiative, Sysco intends to increase customer
penetration and profitability. About 10% of its customers
account for 52% of its profits. With customers that are
less profitable or unprofitable. Sysco plans to reduce the
number of deliveries and increase drop size, add a service
charge of $25 -to -50 for small orders, remove high-cost
marketing -associate service. and, in a small number of
cases, eliminate the customer altogether.
• Sixth, Sysco plans to continue to improve its efficiency
through technology initiatives. The company wants to
reduce its average inventory days from 17.5 by taking
divisions that operate on 22 days down to the level of its
best divisions, which operate on 10 days' inventory.
• Sysco has continued to meet our estimates, despite the
recent sales slowdown. Our forecast for fiscal 2002 is
99¢ a share, 12 -to -13% above 88¢ for fiscal 2001. Our
fourth-quarter earnings estimate of 28¢ (scheduled to be
reported on July 31) represents a year-to-year gain of 8%
and includes the expectation of somewhat lumpy costs
from the soon -to -be -opened foldout warehouses.
• We recently raised our fiscal 2003 forecast by 30 a share
to $1.15 to reflect the change in accounting for goodwill.
Because our forecast assumes internal sales growth of
4.5% and excludes a possible contribution from the re-
cent Serca acquisition in Canada, it could prove to be
conservative. Although our estimates could have consid-
erable upside if the economy improves, prolonged eco-
nomic weakness could impede sales and carvings. How-
ever, industry data point to a month-to-month accelera-
tion in real sales growth. which bodes well for Sysco.
•
10 Refer to important disclosures at the end of this report
• Merrill Lynch
•
•
Global Research Highlights - 19 July 2002
Industry Focus
Tobacco
We believe that tobacco stocks. traditionally defensive
investments, remain attractive for purchase. For the year-to-
date. the S&P and DJIA have fallen by 20% and 14%,
respectively. By contrast, the shares of Philip Morris have
declined by 7.5% and those of R.J. Reynolds Tobacco,
Carolina Group, and UST have retreated by 7%. 8.2%, and
7.9%, respectively. We reaffirm our intermediate-term ratings
of Strong Buy on the shares of Philip Morris (MO; $42.40;
13-1-1-7) and UST (UST; $32.22; C-1-2-7) and of Buy on the
shares of R.I. Reynolds Tobacco (RJR; $52.35; 0-2-2-7)
and Carolina Group (CG; $25.70; D-2-2-7).
Investment Overview
• We consider the earnings -growth potential of the major
tobacco companies to be reliable and attractive for 2002
and 2003, and wc think that their growth is likely to
significantly exceed that of the overall market in both
years. For 2002. we estimate that earnings will rise by
about 10% for Philip Morris, by 6.2% for R.J. Reynolds,
by 4.2% for UST, and by 5.7% for Carolina Group. For
2003, we think that thc rate of earnings growth is likely
to accelerate.
• Much attention has been focused recently on Philip
Morris's second-quarter U.S. domestic shipment
volumes. Although those volumes clearly fell sharply
year-to-year, wc attribute virtually thc entire decline to
issucs associated with trade loading and the timing of
buying patterns. For both the quarter and all of 2002. we
expect the company's four core brands -Marlboro. Par-
liament, Virginia Slims, and Basic -to show, in aggre-
gate, essentially flat -to -modestly rising retail market
shares. Furthermore, the weakness of the U.S. dollar
should provide Philip Morris with significant potential
additional operating income. Whether the company
decides to reinvest that income or to allow it to fall to the
bottom line, we believe that shareholders will benefit
from value creation regardless of the method chosen.
• In our view, the balance sheets of the key tobacco
equities remain conservative and generally underlev-
eraged, especially in relation to the group's strong cash
Bows. For 2002, we expect EBITDA -to -interest -expense
ratios of 16.2 for Philip Morris, 10.2 for R.J. Reynolds,'
6.9 for Carolina Group, and 24.8 for UST.
• We think that shareholder returns arc likely to accelerate
during 2002 and 2003. We expect Philip Morris to raise
its dividend per share in August by 10.3% to $2.56 from
$2.32. In addition, Philip Morris is likely to invest $6.1
billion in its buyback program this year vs. $4 billion in
2001. At the current price, we expect the buyback pro-
gram to absorb about 13.5% of the company's average
daily traded volume.
• In the case of R.J. Reynolds, we expect the company to
invest about S500 million in its buyback program in
2002, compared with $492 million in 2001. At current •
prices, a $500 million buyback represents about 10.2% of
the company's $4.9 -billion market capitalization. Early
in June. the company raised its dividend per share by
8.6% to $3.80.
• We think that UST may initiate a buyback program at a
rate of $150 million annually toward the end of this year.
We expect UST to raise its dividend by 4.2% to $2.00 a
share this December.
• Carolina has no buyback program. Its current dividend
per share of $1.78 provides a yield of 6.9%. We expect
the company to raise its dividend to $2.09 a share in 2003
and to $2.35 in 2004.
• Based on the current price of $42.40 for Philip Morris's
stock, we estimate that thc food businesses 'alue per
Philip Morris share is about $30.35 (using the EV/
EBITDA method and allocating debt across Philip
Morris by division). On that basis, the company's global
tobacco business appears to be trading at 2.3 times our
2002 estimates. By comparison, R.J. Reynolds and
Carolina Group are selling at respective multiples of 3.3
and 4.2 times our 2002 estimates.
• In terms of the industry's litigation situation, we expect
California's Supreme Court to rule soon in the Naegcle/
Myers matter. That claim concerns the immunity statute
that prevented the tobacco industry from being sued in
California between 1988 and 1998. Oral arguments were
on May 7, and a decision is typically published within 90
days of the arguments. Even a partial application of the
immunity statute could aid the industry in both past and
future individual claims in California. At this point, we
believe that thc market is expecting the court to rule
against the tobacco industry. However, we also believe
that current valuations fully reflect the uncertainty asso-
ciated with the West Coast challenges. In other words.
even with the upcoming Bullock trial in California and
the imminent decision in the Naegele/Myers matter, we
believe that tobacco equity valuations should be able to
plateau and then rise.
• Finally, we remind investors that the performance of the
tobacco sector remains inversely correlated to that of the
overall market. To the extent that thc broader market
indexes either continue to fall or remain volatile, we
think that there is a good chance that the tobacco sector
may outperfonn. On the other hand, if the overall market
were to return to rapid growth, the tobacco sector's
superior fundamentals could be less -highly valued by
investors -a scenario that we think is less likely than the
broader market either stabilizing or continuing to slip.
Martin Feldman
Footnotes: CG, g: CG, RJR p; CG, MO, RJR. UST, v; please see footnotes on last page. Stat prices as of7/16/02.
Refer to important disclosures at the end of this report.
1I
• Global Research Highlights - 19 July 2002
•
•
Merrill Lynch
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
_ ReducelSell
Intermediate.Tenn Ratings Distribution: Autos Group (as of 05 July 2002)
Coverage Universe Count Percent
Strong Buy 12 17.14%
Buy 24 • 34.29%
Neutral 31 4429%
Reduce/Sell 3 4.29%
Intermediate -Term Ratings Distribution: Banks Group (as al 05 July 2002)
Coverage Universe Cotmt Percent
Strong Buy 15 8.67%
Buy 62 35.84%
Neutral 83 47.98%
ReducelSell 13 7.51%
Chemicals Group (as of 05 July 2002)
Count Percent Inv. Banking Relationships'
9 13.43% Strong Buy
23 34.33% Buy
32 47.76% Neutral
3 • 4.48% ReducelSell
Aerospace/Defense Electronics Group (as of 05 July 2002)
Count Percent Inv. Banking Relationships'
2 7.41% Strong Buy
19 70.37% Buy
6 22.22% Neutral
0 0.00% ReducelSell
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
ReducelSell
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
ReducelSell
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
ReducelSell
Intermediate -Term Ratings Distribution: Consumer Products Group (as of 05 July 2002)
Coverage Universe Count Percent
Strong Buy 11 16.18%
Buy 32 47.06%
Neutral 23 33.82%
Reduce/Sell.94%
Intermediate -Term Ratings Distribution: Energy Group (as of 05 July 2002)
Coverage Universe Count Percent
39 25.32%
76 49.35%
36 23.38%
3 1.95%
Strong Buy
Buy
Neural
Reduce/Sell
Intermediate -Term Ratings Distribution: Financial Services Group (as of 05 July 2002)
Coverage Universe_ __. Count Percent
�.Sbong Buy
Buy
Neutral
ReducelSell
12
47 27.65%
74 43.53%
7 4.12%
Inv. Banking Relationships'
_
Strong Buy
Buy
Neutral
ReducelSell
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
ReducelSell
Inv. Ranking Relationships'
Strong Buy
Buy
Neutral
ReducelSell
Count
2
Percent
15.38%
9 69.23%
2 15.38%
0 0.00%
Count Percent
4 16.00%
13 52.00%
7 28.00%
1 4.00%
Count
13
31
33
5
Count
4
6
5
0
Count
3
5
3
0
Count
21
24
7
1
Percent
15.85%
37.80%
40.24%
6.10%
Percent
26.67%
40.00%
33.33%
0.00%
Percent
27.27%
45.45%
27.27%
0.00%
Percent
39.62%
45.28%
13.21%
1.89%
Count Percent
24 -.. 30.00%
23 28.75%
• 29 36.25%
4 5.00%
Refer to important disclosures at the end of this report
• .� Merrill Lynch
•
•
Global Research Highlights - 19 July 2002
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Intermediate -Term Ratings Distribution: I
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
ReducelSell
Intermediate -Tom Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
I ntennediate-Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Intermediate -Tern Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell _
hnemrediate-Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce!Setl
hmennediate-Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sef
hiemrediate-Tent Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
Reduce/Sell
Food Group (as or 05 July 2002)
Count Percent
5 9.09%
30 54.55%
19 . 34.55%
1 1.82%
Health Care Group (as of 05 July 2002)
Count Percent
52 25.87%
62 30.85%
73 36.32%
14 6.97%
ndustrials/Mutti-Industry Group (as of 05
Count Percent
11 21.57%
16 31.37%
23 45.10%
1 1.96%
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/Sell
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/Sell
July 2002)
Inv. Banking Relationships
Strong Buy
Buy
Neutral
ReducelSell
Media & Entertainment Group (as 0l 05 July 2002)
Count Percent Inv. Banking Relationships'
28 16.18% Strong Buy
64 36.99% Buy
74 42.77% Neutral
7 4.05% Reduce/Sell
Non -Ferrous Metals, Mining & Minerals Group (as of 05 July 2002)
Count Percent Inv. Banking Relationships'
21 27.27% Strong Buy
32 41.56% Buy
21 27.27% Neutral
3 3.90% Reduce/Sell
Packaging Group (as of 05 July 2002)
Count PercentInv. Banking Relationships'
1 . 25.00% Strong Buy
2 50.00% Buy
1 25.00% Neutral
0 0.00% ReducelSell
Paper/Forest Products Group (as of 05 July 2002)
Count Percent Ira. Banking Relationships'
15 31.25% Strong Buy
20 41.67% Buy
12 25.00% Neutral
1 2.08% Reduce/Sell
REITs meal Estate Investment Trusts) Group (as o105 July 2002)
Count Percent Inv. Banking Relationships'
9 9.0996 Strong Buy
52 52.53% Buy
34 34.34% Neutral
4 4.04% • Reduce/Ser
Restaurants Group (as of 05 July 2002)
Cotmt Percent
5 23.81%
10 47.62%
4 19.05%
2 9.52%
Retailing Group (as of 05 July 2002)
Count Percent
58 32.04%
42 23.20%
70 38.67%
11 6.08%
Technology Group (as of 05 July 2002)
_Cant Percent
45 1613%
88 31.54%
126 45.16%
20 7.17%
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/Sef
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/Sell
Inv. Banking Relationships
Strong Buy
Buy
Neutral
Reduce/Sell
Count Percent
3 2727%
6 54.55%
2 18.18%
0 0.00%
Count Percent
34 53.13%
18 28.13%
11 17.19%
1 1.56%
Count Percent
5 31.25%
5 31.25%
6 37.50%
0 0.00%
Count Percent
12 23.53%
21 4118%
17 33.33%
1 1.96%
Count Percent
8 40.00%
9 45.00%
3 15.00%
0 0.00%
Count Percent
0 0.00%
e 0.00%
0 0.00%
0 0.00%
Carat Percent
7 58.33%
4 33.33%
1 8.33%
0 0.00%
Count Percent
4 9.09%
26 59.09%
12 2727%
2 4.S5%
Count Percent
1 16.67%
4 66.67%
1 1667%
0 0.00%
Count Percent
26 50.98%
10 19.61%
14 2745%
1 1.96%
Count Percent
15 25.00%
24 40.00%
17 28.33%
4 6.67%
Refer to important disclosures at the end of this report. 13
•
Global Research Highlights - 19 July 2002
Merrill Lynch
Intermediate -Term Ratings Distribution: Telecommunications Group (as of 05 July 2002)
Coverage Universe Count Percent • Inv. Banking Relationships'
Strong Buy 17 9.88%
Buy 44 25.58%
Neutral 77 44.77%
Reduce/Sell 34 19.77%
Intermediate -Term Ratings Distribution:
Coverage Universe
Strong Buy
Buy
Neutral
ReducelSell
Strong Buy
Buy
Neutral
Reduce/Sell
Tobacco Group (as al 05 July 2002)
Count Percent Inv. Banking Relationships'
5 38.46% Strong Buy
7 5385% Buy
1 7.69% Neutral
0 0.00% Reduce/Sell
Intermediate -Term Ratings Distribution: Transport/Infrastructure Group (as of 05 July 2002)
Coverage Universe Count Percent Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/Sell
Strong Buy 29 27.62%
Buy 27 25.71%
Neutral 40 38.10%
Reduce/Sell 9 8.57%
Intermediate -Term Ratings Distribution: Utilities Group (as of 05 July 2002)
Coverage Universe Count Percent
13 10.16%
42 32.81%
61 47.66%
Strong Buy
Buy
Neutral
Reduce/Sell 12 9.38%
Intermediate -Term Ratings Distribution: Global Group (as of 05 July 2002)
Coverage Universe Count Percent Inv. Banking Relationships'
Strong Buy 521 1782% Strong Buy
Buy 1048 3584% Buy
Neutral 1163 39.77% Neutral
Reduce!Seli 193 6.60% Reduce/Sell
Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months.
Inv. Banking Relationships'
Strong Buy
Buy
Neutral
Reduce/SeU
Count Percent
7 11.11%
17 26.98%
26 41.27%
13 20.63%
Count Percent
0 0.00%
0 0.00%
0 0.00%
0 0.00%
Count Percent
11 36.67%
8 26.67%
11 36.67%
0 0.00%
Count Percent
4 7.55%
18 33.96%
26 49.06%
5 9.43%
Count Percent
228 25.94%
339 38.57%
267 3038%
45 512%
(CG] MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months.
[CG, HCA, RJR( MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
(DELL) The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report
may be made only in states where these securities are exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market
in the securities of this company.
(HCA, SYYI MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months.
(CG, DELL, HCA, MO, RJR, SYY, UST) MLPF&S or an aflil-iate expects to receive or intends to seek compensation for investment banking services from this
company within the next three months.
In Germany, this repon should be read as (hough Merril Lynch has acted as a member of a consortium which has underwritten the most recent offering of securities
during the last five years for companies covered in this report and holds 1% or more of the share capital of such companies.
The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Merrill Lynch,
including profits derived from investment banking revenues.
OPINION KEY: Opinions include a Volatility Risk Rating, Intermediate -Tenn and Long -Term Investment Ratings and an Income Rating. VOLATILITY RISK RATINGS,
indicators of potential price fluctuation, are: A - Low, B - Average, C - Above Average, D - High. INTERMEDIATE-TERM INVESTMENT RATINGS, indicators of expelled
total retum (price appreciation plus yield) within the 12 -month period1rom the date of the initial rating, are:1 - Strong Buy (minimum 20% more for High Risk securities); 2 -
Buy (minimum 10%) 3 - Neutral (0- 10%): 4 - Reduce/Sell (negative return); 6 - No Rating. LONG-TERM INVESTMENT RATINGS, indicators of fundamental company
factors demonstrat ng potential total retum tor the 3 -year period from the date of the initial rating are: 1 - Strong Buy (aggregate minimum 40%); 2 - Buy (aggregate minimum
20%); 3 - Neutral (aggregate 0.20%); 4 - Reduce/Sell (negative return); 6 - No Rating. INCOME RATINGS, indicators of potential cash dividends are: 7 samelhgher
(dividend considered to be secure); 8 - samellower (dividend not considered be secure); and 9 - pays no cash dividend.
Copyright 2002 Menifl Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). AU nghts reserved. Any unauthorized use or disclosure is prohathed. This report has been
prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited,
which is regulated by the FSA; has been considered and distributed in Australia by Mernfl Lynch Equities (Australia) Lknited (ACN 006 276 795), a licensed securities dealer
under the Australian Corporations Law; is distributed in Hong Kong by Menill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in
Singapore by MemV Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The
information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer. to buy or sell anysecurities or any options, lutures or other
derivatives related to such securities ("related investments'). MLPF&S and its affiliates may trade for their own accounts as od4ot dealer, market maker, block positioner,
specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. MLPF&S. its affiliates, directors,
officers, employees and employee benefit programs may have a long or short position in any securities of this issuers) or in related investments. MLPF&S or los affiliates
may from time to time perform investment banking or other services for, or solicit investment banking or other business from. any entity mentioned in this report.
This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives,
financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of
investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding Inure prospects may riot be
realized. Investors should note that income from such securities, if any, m y fluctuate and that each security's price or value may rise or fall. Accordingly, investors may
receive back less than originally invested. Past performance is not necessary a guide to future pedormance.
Foreign currency rates of exchange may adversely affect the value, price or income of any security or related Investment mentioned in this report. In addition, investors In
securities such as ADRs, whose values are influenced by the currency of the underlying seamy, effectively assume currency risk.
14 Refer to important disclosures at the end of this report.
Osborn, Carreiro & Associates, Inc.
•
•
ACTUARIES • CONSULTANTS • ANALYSTS
•
July 10, 2002
Ms. Cathyrn Hinshaw, Executive Director
Arkansas Fire and Police Pension Review Board
One Union National Plaza
124 West Capitol, Suite 1750
Little Rock, AR 72201
Re: Actuarial Valuations
Exhibit 3, page 9
Dear Cathyrn:
One Unlon.Natkinal Ha a,Sulte 1690
124 West Caplool Avenue
lIttle Rods, Arkansas 72201
(501)376-8043
We found a calculation error on page 9 which is the GASB disclosure page for some plans. We
have corrected it for all valuations to be completed in the future. We have corrected the page for
the 14 plans in which the error occurred.
Here are 3 copies of the corrected page 9 for the following plans:
Blytheville Fire
Brinkley Fire
Fayetteville Fire
Helena Police
Jonesboro Police
Little Rock Fire
Little Rock Police
Magnolia Fire
Magnoha Police
Monticello Fire
Pine Bluff Fire
Pine Bluff Police
Texarkana Fire
Texarkana Police
If you have any questions or comments please let me know.
Sincerely,
Jo Carreiro, A.S.A.
Actuary
•
•
•
EXHIBIT 3 (Continued)
Fayetteville Firefighters Pension Fund
Reconciliation of Net Pension Obligation
ACCOUNTING INFORMATION
This page is included to provide the information required by the Governmental Accounting Standards Board
Statement No. 25 and 27. The values below are based on the assumptions contained in Exhibit 8.
The Annual Pension Cost disclosed in this exhibit will almost always differ from the actual cash contribution to
the fund. We must emphasize that these disclosures are shown in the city's financial statements; Sound
actuarial projections should be used to determine the actual cash contribution requirements.
RECONCILIATION OF NET PENSION OBLIGATION (NPO)
I. Actuarially Required Contribution
2. Interest on NPO
3. Adjustment to (1)
4. Annual Pension Cost (1)+(2)-(3)
5. Actual Contribution Made
6. Increase in NPO (4)-(5)
7. NPO Beginning of Year
8. NPO End of Year
(a)
Actuarial
Valuation
Date
12/31/1993
12/31/1995
12/31/1997
12/31/1999
12/31/2001
(b)
Market
Value of
Plan Assets*
7,271,255
8,897,591
11,225,602
12,880,300
11,403,332
* Note:
*' Note:
•
2000
124,741
(109,572)
(251,093)
266,262
506,689
(240,427)
(1,826,196)
(2,066,623)
REQUIRED SUPPLEMENTARY INFORMATION
(c) (d) (e)
Unfunded
Entry Age Accrued
Actuarial Liability
Accrued (UAL)
Liability (c) -(b)
7,816,034
9,045,983
12,093,450
12,940;843
17,239,942
544,779
148,392
867,848
60,543
5,836,610
Funded
Ratio
(b)/(c)
93.0%
98.4%
92.8%
99.5%
66.1%
2001
124,741
(123,997)
(284,151)
284,895
401,207
(116,312)
(2,066,623)
(2,182,934)
(0
Annual
Covered
Payroll
620,116
676,847
608,602
367,188
234,765
12/31/1993 and 12/31/1995 are at amortized cost value.
2002
1,279,840
(130,976)
(392,806)
1,541,670
(2,182,934)
(g)
UAL as a%
of Covered
Payroll
(d)/(f)
87.9%
21.9%
142.6%
16.5%
2486.1%
For volunteer/part paid members, Annual Covered Payroll is $200 for such
active members
9
Revised 07/10/2002
•
•
•
ASHLAND MANAGEMENT
INCORPORATED
NEW YORK TELEPHONE: (212) 425-2803
NEW YORK FACSIMILE (212) 425-6026
Mr. Richard Yada
Assistant Vice President
Merrill Lynch
2200 Rodney Parham
Suite 300
Little Rock, AR.72212
COPY
DO NOT PAY
On altent ° �%,.4e€ W.4 10004-1405
July 17, 2002
Invoice for Investment Advisory Fees
Fayetteville Fire Pension and Relief Fund
Account #: 563-05G88
Enclosed is the bill for the quarter ended June 30, 2002, covering the investment advisory fee due to
Ashland Management lncorporated.
Please submit payment via wire transfer, with an email aclmowledgment to dgianninina,ashmgmt.com,
instructions as follows:
To: HSBC Bank
ABA No. 021001088
Credit: Ashland Management Incorporated
A/C No: 001-66624-0
Alternatively, you may mail your payment to Ashland Management Incorporated, One Battery Park
Plaza, 26th Floor, New York, N.Y. 10004-1405.
If you have questions with respect to this billing, you may contact your Portfolio Manager or call Ashland
Management Customer Service, Diana Geraci at 212-425-2803.
•
cc: Ms. Heather Woodruff
City Clerk
City of Fayetteville
•
•
•
RELIEF FUND
FAYETTEVILLE FIRE PENSION &
56305G88
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