SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2000 ------------------ COMMISSION FILE NUMBER 1-7182 ------ MERRILL LYNCH & CO., INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-2740599 - -------------------------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) 4 WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10080 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 449-1000 - -------------------------------------------------------------------------------- Registrant's telephone number, including area code - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 805,326,290 shares of Common Stock and 4,770,616 Exchangeable Shares as of the close of business on November 3, 2000. The Exchangeable Shares, which were issued by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one basis and entitle holders to dividend, voting, and other rights equivalent to Common Stock. PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. Financial Statements - ----------------------------- MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED -------------------------- SEPT. 29, SEPT. 24, PERCENT (in millions, except per share amounts) 2000 1999 INC. (DEC.) -------- -------- ----------- NET REVENUES Commissions $ 1,624 $ 1,444 12.5 % Principal transactions 1,160 1,130 2.7 Investment banking 858 949 (9.6) Asset management and portfolio service fees 1,414 1,183 19.5 Other 318 122 160.7 -------- ------- Subtotal 5,374 4,828 11.3 -------- ------- Interest and dividend revenues 5,479 3,669 49.3 Less interest expense 4,704 3,145 49.6 -------- ------- Net interest profit 775 524 47.9 -------- ------- TOTAL NET REVENUES 6,149 5,352 14.9 -------- ------- NON-INTEREST EXPENSES Compensation and benefits 3,146 2,783 13.0 Communications and technology 542 487 11.3 Occupancy and related depreciation 250 232 7.8 Advertising and market development 205 191 7.3 Brokerage, clearing, and exchange fees 206 193 6.7 Professional fees 147 145 1.4 Goodwill amortization 52 57 (8.8) Other 290 360 (19.4) -------- ------- TOTAL NON-INTEREST EXPENSES 4,838 4,448 8.8 -------- ------- EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,311 904 45.0 Income Tax Expense 378 276 37.0 Dividends on Preferred Securities Issued by Subsidiaries 48 49 (2.0) -------- ------- NET EARNINGS $ 885 $ 579 52.8 ======== ======= NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 875 $ 571 53.2 ======== ======= EARNINGS PER COMMON SHARE Basic $ 1.09 $ 0.75 ======== ======= Diluted $ 0.94 $ 0.67 ======== ======= DIVIDEND PAID PER COMMON SHARE $ 0.16 $ 0.14 ======== ======= AVERAGE SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE Basic 805.9 757.9 ======== ======= Diluted 929.0 855.3 ======== ======= - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 2 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE NINE MONTHS ENDED -------------------------- SEPT. 29, SEPT. 24, PERCENT (in millions, except per share amounts) 2000 1999 INC. (DEC.) -------- -------- ----------- NET REVENUES Commissions $ 5,431 $ 4,613 17.7 % Principal transactions 4,746 3,831 23.9 Investment banking 2,941 2,489 18.2 Asset management and portfolio service fees 4,217 3,451 22.2 Other 849 442 92.1 -------- -------- Subtotal 18,184 14,826 22.6 -------- -------- Interest and dividend revenues 15,025 11,095 35.4 Less interest expense 12,690 9,643 31.6 -------- -------- Net interest profit 2,335 1,452 60.8 -------- -------- TOTAL NET REVENUES 20,519 16,278 26.1 -------- -------- NON-INTEREST EXPENSES Compensation and benefits 10,572 8,363 26.4 Communications and technology 1,710 1,508 13.4 Occupancy and related depreciation 762 698 9.2 Advertising and market development 713 546 30.6 Brokerage, clearing, and exchange fees 672 563 19.4 Professional fees 462 407 13.5 Goodwill amortization 162 170 (4.7) Other 1,057 1,024 3.2 -------- -------- TOTAL NON-INTEREST EXPENSES 16,110 13,279 21.3 -------- -------- EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 4,409 2,999 47.0 Income Tax Expense 1,356 953 42.3 Dividends on Preferred Securities Issued by Subsidiaries 146 146 - -------- -------- NET EARNINGS $ 2,907 $ 1,900 53.0 ======== ======== NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 2,878 $ 1,872 53.7 ======== ======== EARNINGS PER COMMON SHARE Basic $ 3.63 $ 2.49 ======== ======== Diluted $ 3.18 $ 2.19 ======== ======== DIVIDENDS PAID PER COMMON SHARE $ 0.45 $ 0.39 ======== ======== AVERAGE SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE Basic 793.7 752.4 ======== ======== Diluted 905.0 854.7 ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 3 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPT. 29, DEC. 31, (dollars in millions) 2000 1999 - -------------------------------------------------------------------------------- -------- -------- ASSETS CASH AND CASH EQUIVALENTS $ 12,833 $ 10,962 CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR DEPOSITED WITH CLEARING ORGANIZATIONS 5,763 6,078 RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES BORROWED TRANSACTIONS 107,709 100,473 MARKETABLE INVESTMENT SECURITIES 40,357 10,145 TRADING ASSETS, AT FAIR VALUE Equities and convertible debentures 24,283 23,674 Corporate debt and preferred stock 18,485 20,348 Contractual agreements 17,219 22,701 U.S. Government and agencies 14,426 15,376 Non-U.S. governments and agencies 10,676 4,892 Mortgages, mortgage-backed, and asset-backed 8,938 7,394 Municipals and money markets 3,328 2,429 -------- -------- 97,355 96,814 Securities received as collateral, net of securities pledged as collateral 12,728 10,005 -------- -------- Total 110,083 106,819 -------- -------- SECURITIES PLEDGED AS COLLATERAL 9,485 9,699 -------- -------- OTHER RECEIVABLES Customers (net of allowance for doubtful accounts of $77 in 2000 and $55 in 1999) 45,449 40,034 Brokers and dealers 13,041 9,204 Interest and other 7,211 7,513 -------- -------- Total 65,701 56,751 -------- -------- INVESTMENTS OF INSURANCE SUBSIDIARIES 4,043 4,096 LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $176 in 2000 and $146 in 1999) 14,093 11,188 OTHER INVESTMENTS 3,633 3,415 EQUIPMENT AND FACILITIES (net of accumulated depreciation and amortization of $4,530 in 2000 and $4,079 in 1999) 3,242 3,140 GOODWILL (net of accumulated amortization of $662 in 2000 and $543 in 1999) 4,391 4,952 OTHER ASSETS 2,571 1,836 -------- -------- TOTAL ASSETS $383,904 $329,554 ======== ========
4 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPT. 29, DEC. 31, (dollars in millions, except per share amount) 2000 1999 - -------------------------------------------------------------------------------- -------- -------- LIABILITIES PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS $ 85,972 $ 72,211 COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 14,725 25,596 DEMAND AND TIME DEPOSITS 50,001 17,602 TRADING LIABILITIES, AT FAIR VALUE Contractual agreements 18,411 27,030 Equities and convertible debentures 22,022 20,259 U.S. Government and agencies 11,653 10,816 Non-U.S. governments and agencies 7,026 6,311 Corporate debt, preferred stock, and other 5,553 3,404 -------- -------- Total 64,665 67,820 -------- -------- OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 22,213 19,704 -------- -------- OTHER PAYABLES Customers 22,863 23,166 Brokers and dealers 12,159 11,439 Interest and other 20,862 18,702 -------- -------- Total 55,884 53,307 -------- -------- LIABILITIES OF INSURANCE SUBSIDIARIES 3,964 4,086 LONG-TERM BORROWINGS 66,589 53,499 -------- -------- TOTAL LIABILITIES 364,013 313,825 -------- -------- PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,720 2,725 -------- -------- STOCKHOLDERS' EQUITY PREFERRED STOCKHOLDERS' EQUITY 425 425 -------- -------- COMMON STOCKHOLDERS' EQUITY Shares exchangeable into common stock 74 118 Common stock, par value $1.33 1/3 per share; authorized: 1,000,000,000 shares; issued: 2000 - 962,533,498 shares; 1999 - 964,779,105 shares 1,283 1,286 Paid-in capital 2,641 1,156 Accumulated other comprehensive loss (net of tax) (421) (390) Retained earnings 15,418 12,887 -------- -------- 18,995 15,057 Less: Treasury stock, at cost: 2000 - 160,364,905 shares; 1999 - 212,278,192 shares 1,331 1,835 Employee stock transactions 918 643 -------- -------- TOTAL COMMON STOCKHOLDERS' EQUITY 16,746 12,579 -------- -------- TOTAL STOCKHOLDERS' EQUITY 17,171 13,004 ======== ======== TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $383,904 $329,554 ======== ======== - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 5 MERRILL LYNCH & CO., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED ------------------------------- (dollars in millions) SEPT. 29, SEPT. 24, 2000 1999 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 2,907 $ 1,900 Noncash items included in earnings: Depreciation and amortization 615 519 Policyholder reserves 145 154 Goodwill amortization 162 170 Amortization of stock-based compensation 373 312 Other 286 261 (Increase) decrease in operating assets(a): Trading assets (642) 9,098 Cash and securities segregated for regulatory purposes or deposited with clearing organizations 315 1,615 Receivables under resale agreements and securities borrowed transactions (7,236) (8,350) Customer receivables (5,437) (4,748) Brokers and dealers receivables (3,837) (1,359) Other (714) 530 Increase (decrease) in operating liabilities(a): Trading liabilities (3,155) 3,407 Payables under repurchase agreements and securities loaned transactions 13,761 2,885 Customer payables (303) (3,100) Brokers and dealers payables 720 2,788 Other 2,376 (726) -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 336 5,356 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from (payments for): Maturities of available-for-sale securities 11,484 3,460 Sales of available-for-sale securities 5,348 2,344 Purchases of available-for-sale securities (47,029) (6,693) Maturities of held-to-maturity securities 584 709 Purchases of held-to-maturity securities (439) (744) Loans, notes, and mortgages (2,929) (1,350) Acquisitions, net of cash acquired - (20) Other investments and other assets (1,133) (350) Equipment and facilities (717) (773) -------- -------- CASH USED FOR INVESTING ACTIVITIES (34,831) (3,417) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (payments for): Commercial paper and other short-term borrowings (10,871) (4,999) Demand and time deposits 32,399 4,391 Issuance and resale of long-term borrowings 26,025 12,800 Settlement and repurchase of long-term borrowings (11,397) (14,433) Issuance of subsidiaries' preferred securities - 96 Issuance of treasury stock 566 182 Other common and preferred stock transactions 20 (179) Dividends (376) (319) -------- -------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 36,366 (2,461) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,871 (522) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,962 12,638 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,833 $ 12,116 ======== ======== (a) Net of effects of acquisitions. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for: Income taxes $ 525 $ 693 Interest 12,011 9,622 - ------------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 6 MERRILL LYNCH & CO., INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 29, 2000 (dollars in millions, except per share amounts) - -------------------------------------------------------------------------------- NOTE 1. BASIS OF PRESENTATION - -------------------------------------------------------------------------------- The Consolidated Financial Statements include the accounts of Merrill Lynch & Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All material intercompany balances have been eliminated. The December 31, 1999 unaudited consolidated balance sheet was derived from the audited financial statements, as restated for the pooling-of-interests (See Note 2). The interim consolidated financial statements for the three- and nine-month periods are unaudited; however, in the opinion of Merrill Lynch management, all adjustments necessary for a fair statement of the results of operations have been included. These unaudited financial statements should be read in conjunction with the audited financial statements included in Merrill Lynch's Annual Report included as an exhibit to Form 10-K for the year ended December 31, 1999. The nature of Merrill Lynch's business is such that the results of any interim period are not necessarily indicative of results for a full year. Certain reclassifications have also been made to prior period financial statements, where appropriate, to conform to the current period presentation. - -------------------------------------------------------------------------------- NOTE 2. MERGER WITH HERZOG, HEINE, GEDULD, INC. - -------------------------------------------------------------------------------- On July 14, 2000, Merrill Lynch acquired Herzog, Heine, Geduld, Inc. ("Herzog"), a leading Nasdaq market maker, through an exchange offer followed by a merger of a wholly-owned subsidiary of Merrill Lynch & Co. Inc, with and into Herzog. Pursuant to the offer and the merger, each Herzog shareholder, after giving effect to the two-for-one common stock split, was entitled to receive 283.75502 shares of ML & Co. common stock for each share held. A total of 17,100,602 shares of ML & Co. common stock were issued in connection with this transaction. In addition, as specified in the merger agreement, Herzog treasury shares (2,449,090 shares of ML & Co. common stock) were cancelled and retired upon consummation of the merger. The merger has been accounted for as a pooling-of-interests, and accordingly, prior period financial statements and footnotes have been restated to reflect the results of operations, financial position, and cash flows as if Merrill Lynch and Herzog had always been combined. The effect of combining Herzog into the results of operations, financial position, and cash flows of Merrill Lynch was not material. - -------------------------------------------------------------------------------- NOTE 3. COMMON STOCK SPLIT - -------------------------------------------------------------------------------- On July 18, 2000, Merrill Lynch's Board of Directors declared a two-for-one common stock split, effected in the form of a 100% stock dividend. The new shares were distributed on August 31, 2000 to stockholders of record on August 4, 2000. The par value of ML & Co. common stock remained at $1.33 1/3 per share. Accordingly, an adjustment totaling $680 from Paid-in-capital to Common stock and Exchangeable shares was required to preserve the par value of the post-split shares. All share and per share data in these financial statements have been restated for the effect of the split. 7 - -------------------------------------------------------------------------------- NOTE 4. SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- Short-term borrowings at September 29, 2000 and December 31, 1999 are presented below:
- ------------------------------------------------------------------------------------------- SEPT. 29, DEC. 31, 2000 1999 -------- ------- PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS Repurchase agreements $ 73,750 $64,955 Securities loaned transactions 12,222 7,256 -------- ------- Total $ 85,972 $72,211 ======== ======= COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS Commercial paper $ 12,101 $24,198 Bank loans and other 2,624 1,398 -------- ------- Total $ 14,725 $25,596 ======== ======= DEMAND AND TIME DEPOSITS Demand $ 3,388 $ 3,498 Time 46,613 14,104 -------- ------- Total $ 50,001 $17,602 ======== ======= - -------------------------------------------------------------------------------------------
8 - -------------------------------------------------------------------------------- NOTE 5. SEGMENT INFORMATION - -------------------------------------------------------------------------------- In reporting to management, Merrill Lynch's operating results are categorized into three business segments: the Corporate and Institutional Client Group ("CICG"), the Private Client Group ("PCG") and Merrill Lynch Investment Managers ("MLIM"). Prior period amounts have been restated to conform to the current period presentation. For information on each segment's activities, see Management's Discussion and Analysis - Business Segments and the 1999 Annual Report included as an exhibit to Form 10-K. Operating results by business segment follow:
- ------------------------------------------------------------------------------------------------------------------------ CORPORATE CICG PCG MLIM ITEMS TOTAL -------- -------- ------- --------- -------- THREE MONTHS ENDED SEPTEMBER 29, 2000 Non-interest revenues $ 2,383 $ 2,434 $ 587 $ (30)(a) $ 5,374 Net interest revenue(b) 379 407 17 (28)(c) 775 -------- -------- ------- ------- -------- Net revenues 2,762 2,841 604 (58) 6,149 Non-interest expenses 1,923 2,439 461 15 (d) 4,838 -------- -------- ------- ------- -------- Earnings (loss) before income taxes and dividends on preferred securities issued by subsidiaries 839 402 143 (73) 1,311 Income tax expense (benefit) 207 145 47 (21) 378 Dividends on preferred securities issued by subsidiaries - - - 48 48 -------- -------- ------- ------- -------- Net earnings (loss) $ 632 $ 257 $ 96 $ (100) $ 885 ======== ======== ======= ======= ======== Total assets $277,441 $ 99,837 $ 2,235 $ 4,391 $383,904 ======== ======== ======= ======= ======== - ------------------------------------------------------------------------------------------------------------------------
(a) Represents the elimination of intersegment revenues. (b) Management views interest income net of interest expense in evaluating results. (c) Represents costs associated with the acquisition of Mercury Asset Management Group. (d) Represents goodwill amortization of $52 million, net of elimination of intersegment expenses of $37 million. 9
- --------------------------------------------------------------------------------------------------------------------- CORPORATE CICG PCG MLIM ITEMS TOTAL -------- -------- ------- --------- -------- THREE MONTHS ENDED SEPTEMBER 24, 1999 Non-interest revenues $ 2,157 $ 2,196 $ 516 $ (41)(a) $ 4,828 Net interest revenue(b) 296 259 (3) (28)(c) 524 -------- -------- ------- ------- -------- Net revenues 2,453 2,455 513 (69) 5,352 Non-interest expenses 1,831 2,176 429 12 (d) 4,448 -------- -------- ------- ------- -------- Earnings (loss) before income taxes and dividends on preferred securities issued by subsidiaries 622 279 84 (81) 904 Income tax expense (benefit) 167 101 32 (24) 276 Dividends on preferred securities issued by subsidiaries - - - 49 49 -------- -------- ------- ------- -------- Net earnings (loss) $ 455 $ 178 $ 52 $ (106) $ 579 ======== ======== ======= ======= ======== Total assets $251,487 $ 55,622 $ 2,135 $ 5,081 $314,325 ======== ======== ======= ======= ======== - ---------------------------------------------------------------------------------------------------------------------
(a) Represents the elimination of intersegment revenues. (b) Management views interest income net of interest expense in evaluating results. (c) Represents costs associated with the acquisition of Mercury Asset Management Group. (d) Represents goodwill amortization of $57 million, net of elimination of intersegment expenses of $45 million. 10
- ------------------------------------------------------------------------------------------------------------------------ CORPORATE CICG PCG MLIM ITEMS TOTAL -------- -------- ------- --------- -------- NINE MONTHS ENDED SEPTEMBER 29, 2000 Non-interest revenues $ 8,536 $ 8,032 $ 1,775 $ (159)(a) $ 18,184 Net interest revenue(b) 1,240 1,145 35 (85)(c) 2,335 -------- -------- ------- ------- -------- Net revenues 9,776 9,177 1,810 (244) 20,519 Non-interest expenses 6,640 8,018 1,436 16 (d) 16,110 -------- -------- ------- ------- -------- Earnings (loss) before income taxes and dividends on preferred securities issued by subsidiaries 3,136 1,159 374 (260) 4,409 Income tax expense (benefit) 892 418 126 (80) 1,356 Dividends on preferred securities issued by subsidiaries - - - 146 146 -------- -------- ------- ------- -------- Net earnings (loss) $ 2,244 $ 741 $ 248 $ (326) $ 2,907 ======== ======== ======= ======= ======== - ------------------------------------------------------------------------------------------------------------------------ CORPORATE CICG PCG MLIM ITEMS TOTAL -------- -------- ------- --------- -------- NINE MONTHS ENDED SEPTEMBER 24, 1999 Non-interest revenues $ 6,570 $ 6,877 $ 1,537 $ (158)(a) $ 14,826 Net interest revenue(b) 833 728 (7) (102)(c) 1,452 -------- -------- ------- ------- -------- Net revenues 7,403 7,605 1,530 (260) 16,278 Non-interest expenses 5,386 6,600 1,288 5 (d) 13,279 -------- -------- ------- ------- -------- Earnings (loss) before income taxes and dividends on preferred securities issued by subsidiaries 2,017 1,005 242 (265) 2,999 Income tax expense (benefit) 576 372 89 (84) 953 Dividends on preferred securities issued by subsidiaries - - - 146 146 -------- -------- ------- ------- -------- Net earnings (loss) $ 1,441 $ 633 $ 153 $ (327) $ 1,900 ======== ======== ======= ======= ======== - ------------------------------------------------------------------------------------------------------------------------
(a) Represents the elimination of intersegment revenues. (b) Management views interest income net of interest expense in evaluating results. (c) Represents costs associated with the acquisition of Mercury Asset Management Group. (d) Represents goodwill amortization of $162 million and $170 million, net of elimination of intersegment expenses of $146 million and $165 million, for the nine months ended September 29, 2000 and September 24, 1999, respectively. 11 - -------------------------------------------------------------------------------- NOTE 6. COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- The components of comprehensive income are as follows:
- --------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ------------------------ -------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, 2000 1999 2000 1999 -------- -------- -------- -------- Net earnings $ 885 $ 579 $ 2,907 $ 1,900 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Currency translation adjustment (22) 41 (89) (118) Net unrealized gain (loss) on investment securities available-for-sale 1 (25) 58 (63) -------- -------- -------- -------- Total other comprehensive income (loss), net (21) 16 (31) (181) -------- -------- -------- -------- Comprehensive income $ 864 $ 595 $ 2,876 $ 1,719 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- NOTE 7. EARNINGS PER COMMON SHARE - -------------------------------------------------------------------------------- Information relating to earnings per common share computations follows:
- ----------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- --------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, 2000 1999 2000 1999 -------- -------- -------- -------- Net earnings $ 885 $ 579 $ 2,907 $ 1,900 Preferred stock dividends 10 8 29 28 -------- -------- -------- -------- Net earnings applicable to common stockholders $ 875 $ 571 $ 2,878 $ 1,872 ======== ======== ======== ======== (shares in thousands) Weighted-average shares outstanding 805,855 757,862 793,716 752,449 -------- -------- -------- -------- Effect of dilutive instruments(1): Employee stock options 75,208 54,210 67,650 58,614 FCCAAP shares 30,602 32,391 29,384 32,922 Restricted units 17,353 10,817 14,164 10,595 ESPP shares 30 68 79 109 -------- -------- -------- -------- Dilutive potential common shares 123,193 97,486 111,277 102,240 -------- -------- -------- -------- Total weighted-average diluted shares 929,048 855,348 904,993 854,689 ======== ======== ======== ======== - ----------------------------------------------------------------------------------------------------------------- Basic earnings per common share $ 1.09 $ 0.75 $ 3.63 $ 2.49 Diluted earnings per common share $ 0.94 $ 0.67 $ 3.18 $ 2.19 - -----------------------------------------------------------------------------------------------------------------
(1) See Note 11 to Consolidated Financial Statements in the 1999 Annual Report included as an exhibit to Form 10-K for a description of these instruments. 12 - -------------------------------------------------------------------------------- NOTE 8. DERIVATIVES, COMMITMENTS, AND OTHER CONTINGENCIES - -------------------------------------------------------------------------------- Merrill Lynch enters into various derivative contracts to meet clients' needs and to manage its own market risks. Derivative contracts often involve future commitments to exchange interest payment streams or currencies (such as interest rate and currency swaps or foreign exchange forwards) or to purchase or sell other financial instruments at specified terms on a specified date. Options, for example, can be purchased or written on a wide range of financial instruments such as securities, currencies, futures, and various market indices. The notional or contractual amounts of derivatives provide only a measure of involvement in these types of transactions and represent neither the amounts subject to the various types of market risk nor the future cash requirements under these instruments. The notional or contractual amounts of derivatives used for trading purposes and included in trading inventory by type of risk follow:
- ------------------------------------------------------------------------------------------------------ INTEREST EQUITY COMMODITY (in billions) RATE(1)(2) CURRENCY(3) PRICE PRICE - ------------------------------------------------------------------------------------------------------ SEPTEMBER 29, 2000 - ------------------ Swap agreements $ 2,628 $ 167 $ 10 $ 26 Forward contracts 145 154 1 1 Futures contracts 204 5 9 - Options purchased 39 131 70 8 Options written 38 76 60 1 DECEMBER 31, 1999 - ----------------- Swap agreements $ 2,470 $ 175 $ 27 $ 3 Forward contracts 94 153 3 1 Futures contracts 224 3 12 3 Options purchased 216 102 53 2 Options written 270 71 53 4 - ------------------------------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the credit spread risk of the underlying financial instrument. (2) Forward contracts subject to interest rate risk principally represent "To Be Announced" mortgage pools that bear interest rate as well as principal prepayment risk. (3) Included in the currency risk category are certain contracts that are also subject to interest rate risk. 13 The notional or contractual amounts of non-trading derivatives used to hedge market risk exposures on non-trading assets and liabilities at September 29, 2000 and December 31, 1999 follow:
- -------------------------------------------------------------------------------- SEPT. 29, DEC. 31, (in billions) 2000 1999 - -------------------------------------------------------------------------------- Borrowings: Interest rate risk (1) $ 41 $ 44 Currency risk 1 1 Equity risk 9 3 Investment securities (2) 22 11 Resale and repurchase agreements (2) 10 6 Customer receivables (2) 5 6 Investment in non-U.S. subsidiaries (3) 4 3 Other 8 3 - --------------------------------------------------------------------------------
(1) Includes $9 billion and $10 billion of instruments that also contain currency risk at September 29, 2000 and December 31, 1999, respectively, and $3 billion and $4 billion of instruments that also contain equity risk at September 29, 2000 and December 31, 1999, respectively. (2) Primarily hedging interest rate risk. (3) Hedging currency risk. Most of these derivatives are entered into with Merrill Lynch's derivative dealer subsidiaries, which hedge interest rate, currency, and equity risks in the normal course of their trading activities. Realized gains and losses on early terminations of derivatives are deferred over the remaining lives of the hedged assets or liabilities. At September 29, 2000, there were $7 in deferred gains relating to a derivative contract terminated during 1999. In the normal course of business, Merrill Lynch enters into underwriting commitments and commitments to extend credit. Settlement of these commitments as of September 29, 2000 would not have a material effect on the consolidated financial condition of Merrill Lynch. As of September 29, 2000, Merrill Lynch has been named as parties in various actions, some of which involve claims for substantial amounts. Although the results of legal actions cannot be predicted with certainty, it is the opinion of management that the resolution of these actions will not have a material adverse effect on Merrill Lynch's financial condition; however, such resolution could have a material adverse impact on quarterly operating results in future periods, depending in part on the results for such periods. - -------------------------------------------------------------------------------- NOTE 9. REGULATORY REQUIREMENTS - -------------------------------------------------------------------------------- Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under the alternative method permitted by this rule, the minimum required net capital, as defined, shall not be less than 2% of aggregate debit items arising from customer transactions. At September 29, 2000, MLPF&S's regulatory net capital of $3.4 billion was 12% of aggregate debit items, and its regulatory net capital in excess of the minimum required was $2.8 billion. Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject to the capital requirements of the Financial Services Authority ("FSA"). Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At September 29, 2000, MLI's financial resources were $4.5 billion and exceeded the minimum requirement by $1.0 billion. 14 Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S. Government securities, is subject to the capital adequacy requirements of the Government Securities Act of 1986. This rule requires dealers to maintain liquid capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At September 29, 2000, MLGSI's liquid capital of $1.6 billion was 367% of its total market and credit risk, and liquid capital in excess of the minimum required was $1.1 billion. 15 INDEPENDENT ACCOUNTANTS' REPORT - ------------------------------- To the Board of Directors and Stockholders of Merrill Lynch & Co., Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of September 29, 2000, and the related condensed consolidated statements of earnings for the three- and nine-month periods ended September 29, 2000 and September 24, 1999, and the consolidated statements of cash flows for the nine-month periods ended September 29, 2000 and September 24, 1999. These financial statements are the responsibility of Merrill Lynch's management. The accompanying condensed consolidated financial statements give retroactive effect to the merger of Merrill Lynch and Herzog, Heine, Geduld, Inc. ("Herzog"), which has been accounted for as a pooling-of-interests, as described in Note 2 to the condensed consolidated financial statements. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America (hereinafter referred to as "generally accepted auditing standards"), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Merrill Lynch as of December 31, 1999, and the related consolidated statements of earnings, changes in stockholders' equity, comprehensive income and cash flows for the year then ended (not presented herein); and in our report dated February 28, 2000, we expressed an unqualified opinion and included an explanatory paragraph for the change in accounting method in 1998 for certain internal-use software development costs to conform with Statement of Position 98-1. We also audited the adjustments, related to the pooling-of-interets, as mentioned in the first paragraph above, that were applied to restate the consolidated balance sheet of Merrill Lynch as of December 31, 1999(not presented herein). In our opinion, such adjustments are appropriate and have been properly applied and the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999 is fairly stated, in all material respects, in relation to the restated consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP New York, New York November 13, 2000 16 - -------------------------------------------------------------------------------- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries and affiliates, provides investment, financing, advisory, insurance, and related services worldwide. Merrill Lynch conducts its businesses in global financial markets that are influenced by numerous unpredictable factors including economic conditions, monetary policies, liquidity, international and regional political events, regulatory developments, the competitive environment, and investor sentiment. These conditions or events can significantly affect the volatility of financial markets. While greater volatility increases risk, it may also increase order flow in businesses such as trading and brokerage. Revenues and net earnings may vary significantly from period to period due to these unpredictable factors and the resulting market volatility. The financial services industry continues to be affected by the intensifying competitive environment, as demonstrated by consolidation through mergers and acquisitions, as well as diminishing margins in many mature products and services, and competition from new entrants as well as established competitors. In addition, the passage of the Gramm-Leach-Bliley Act in November of 1999 represented a significant accomplishment in the effort to modernize the financial services industry in the U.S. by repealing anachronistic laws that separated commercial banking, investment banking and insurance activities. In addition to providing historical information, Merrill Lynch may make or publish forward-looking statements about management expectations, strategic objectives, business prospects, anticipated financial performance, and other similar matters. A variety of factors, many of which are beyond its control, affect the operations, performance, business strategy, and results of Merrill Lynch and could cause actual results and experience to differ materially from the expectations expressed in these statements. These factors include, but are not limited to, the factors listed in the previous paragraphs, as well as actions and initiatives taken by both current and potential competitors, the impact of pending and future legislation and regulation throughout the world, and the other risks detailed in the following sections. MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS. - -------------------------------------------------------------------------------- BUSINESS ENVIRONMENT - -------------------------------------------------------------------------------- A difficult operating environment existed in the third quarter, as market indices declined globally. After a series of modest summertime rallies, stock markets began to struggle due to a number of factors, including a plunging euro, rising oil prices, and U.S. election uncertainties. Equity underwriting activity, however, was not impacted by the underperforming indices, as domestic IPO's raised nearly 50% more in equity capital than in the third quarter of 1999. Long-term U.S. interest rates, as measured by the yield on the 10-year U.S. Treasury note, declined from the end of the second quarter, ending the third quarter at approximately 5.8%. Short-term U.S. rates, after climbing steadily since June of 1999, remained unchanged during the 2000 third quarter. Short-term interest rates in Europe generally increased during the third quarter due to growing inflation caused by higher oil prices and a weak euro. Credit spreads, which represent the risk premium over the risk-free rate paid by an issuer (based on the issuer's perceived creditworthiness), continued to widen in the third quarter of 2000. 17 U.S. equity indices, which achieved extraordinary gains in 1999, continued to experience the volatility that began in the second quarter of 2000. Investor concern over slower corporate earnings growth, together with the previously mentioned factors, led to weak market performance. The Nasdaq Composite Index ended the third quarter down 7.4% for the three month period, but up 33.7% from the 1999 third quarter, as technology, media, and telecommunications stocks were among the poorest performers due to an increased level of negative pre-earnings announcements from established companies. The Dow Jones Industrial Average gained only 1.9% during the quarter, and 3.0% from the end of the third quarter of 1999. During the 2000 third quarter, the S&P 500 fell slightly from the end of the second quarter, but advanced 12.0% from the end of the corresponding 1999 period. Global equity markets, as measured by the Dow Jones World Index, dropped 7.7% during the quarter, but were up 3.4% since the end of the third quarter of 1999. However, rising oil prices benefited Latin America, where Mexico and Venezuela are major oil exporters. Tokyo stocks fell 8% in U.S. dollar terms and 7% in yen terms resulting from slower progress in corporate restructuring efforts in the region. European markets also suffered due to a more depressed telecommunications industry and inflationary pressures which led the European Central Bank to raise short-term interest rates by a quarter percentage point. The Federal Reserve, the European Central Bank, and the Bank of Japan intervened in the foreign exchange market after the euro hit a historic low point during the quarter. Global debt underwriting volume declined from $723 billion in the third quarter of 1999, to $648 billion in the third quarter of 2000, but was up from $642 billion in the second quarter of 2000, according to Thomson Financial Securities Data, as interest rate worries dissipated during the quarter. Equity underwriting was stronger in the 2000 third quarter, particularly in the IPO market. IPOs in the U.S. raised $18 billion in the quarter, almost 50% higher than the third quarter of 1999. In the first nine months of 2000, initial public offerings have already raised more than the full-year record set in 1999. Merger and acquisition activity was more balanced among industry sectors in the third quarter, as the focus shifted away from the technology sector. Global announced merger and acquisition volume was $792 billion, slightly higher than both the third quarter of 1999 and the second quarter of 2000, according to Thomson Financial Securities Data. In the U.S., announced merger volume was $521 billion, up from $338 billion in the third quarter of 1999, and $315 billion in the second quarter of 2000. Consolidation in the financial services sector and an increased level of purchases of U.S. companies by European acquirers contributed to the strong quarter. Merrill Lynch continually evaluates its businesses for profitability and performance under varying market conditions and, in light of the evolving conditions in its competitive environment, for alignment with its long-term strategic objectives. Maintaining long-term client relationships, closely monitoring costs and risks, diversifying revenue sources, growing fee-based revenues, and expanding strategically, all contribute to mitigating the effects of market volatility on Merrill Lynch's business as a whole. 18 - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED % INC. (DEC.) ---------------------------------- 3Q00 VERSUS SEPT. 29, JUNE 30, SEPT. 24, ---------------- (dollars in millions, except per share amounts) 2000 2000 1999 2Q00 3Q99 - ---------------------------------------------------------------------------------------------------------------------- Total revenues $ 10,853 $11,050 $ 8,497 (2)% 28 % Net revenues 6,149 6,846 5,352 (10) 15 Pre-tax earnings 1,311 1,413 904 (7) 45 Net earnings 885 921 579 (4) 53 Net earnings applicable to common stockholders 875 912 571 (4) 53 Earnings per common share Basic 1.09 1.15 0.75 (5) 45 Diluted 0.94 1.01 0.67 (7) 40 Annualized return on average common stockholders' equity 21.6 % 24.4 % 20.2 % Pre-tax profit margin 21.3 20.6 16.9 - -----------------------------------------------------------------------------------------------------------------------
Merrill Lynch's net earnings were $885 million for the 2000 third quarter, up 53% from the $579 million earned in the same quarter a year ago. Earnings per common share were $1.09 basic and $0.94 diluted, compared with $0.75 basic and $0.67 diluted in the 1999 third quarter. Net revenues were $6.1 billion, up 15% from the 1999 third quarter with record asset management and portfolio service fees and strong revenues from commissions and net interest. The pre-tax profit margin for the quarter was 21.3%, up significantly from the 16.9% achieved in the 1999 third quarter. Annualized return on average common equity was 21.6%, compared with 20.2% in the third quarter of 1999. Net earnings for the first nine months of 2000 reached a record $2.9 billion, 53% higher than the corresponding 1999 period. The associated pre-tax margin of 21.5% is the highest for the first nine months of any year since 1993. Year-to-date earnings per common share were $3.63 basic and $3.18 diluted, compared with $2.49 basic and $2.19 diluted in the comparable period a year ago. Annualized return on average common equity was approximately 25.9% for the nine-month period, up from 23.5% in the same period last year. 19 Commissions revenues are summarized as follows:
- -------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED --------------------- ------------------------ SEPT. 29, SEPT. 24, % SEPT. 29, SEPT. 24, % (in millions) 2000 1999 INC.(DEC.) 2000 1999 INC.(DEC.) - -------------------------------------------------------------------------------------------------------------------- Listed and over-the-counter $ 901 $ 807 12 % $3,069 $2,611 18 % Mutual funds 518 422 23 1,704 1,374 24 Other 205 215 (5) 658 628 5 ------ ------ ------ ------ Total $1,624 $1,444 12 $5,431 $4,613 18 ====== ====== ====== ====== - --------------------------------------------------------------------------------------------------------------------
Commissions revenues were $1.6 billion, up 12% from the 1999 third quarter, driven by increased trading of listed securities on exchanges outside the U.S. and higher mutual fund sales. Net trading revenues, representing principal transactions revenues and related net interest, are presented in the table below. Interest revenue and expense amounts are based on management's assessment of the cost to finance trading positions, after consideration of the underlying liquidity of these positions. Trading and related hedging and financing activities affect the recognition of both principal transactions revenues and net interest and dividend revenues. In assessing the profitability of its trading activities, Merrill Lynch aggregates net interest and principal transactions revenues. For financial reporting purposes, however, realized and unrealized gains and losses on trading positions, including hedges, are recorded in principal transactions revenues. The net interest carry (i.e., the spread representing interest earned less financing costs) for trading positions, including hedges, is recorded either as principal transactions revenues or net interest revenues, depending on the nature of the specific instruments. Changes in the composition of trading inventories and hedge positions can cause the recognition of revenues within these categories to fluctuate.
- -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL TRANSACTIONS NET INTEREST NET TRADING REVENUES REVENUES REVENUES ----------------------- ---------------------- ---------------------- Sept. 29, Sept. 24, Sept. 29, Sept. 24, Sept. 29, Sept. 24, (in millions) 2000 1999 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED Equities and equity derivatives $ 594 $ 504 $ 53 $ 66 $ 647 $ 570 Debt and debt derivatives 566 626 95 50 661 676 ------ ------ ----- ----- ------ ------ Total $1,160 $1,130 $ 148 $ 116 $1,308 $1,246 ====== ====== ===== ===== ====== ====== NINE MONTHS ENDED Equities and equity derivatives $2,929 $1,791 $ 252 $ 221 $3,181 $2,012 Debt and debt derivatives 1,817 2,040 271 129 2,088 2,169 ------ ------ ----- ----- ------ ------ Total $4,746 $3,831 $ 523 $ 350 $5,269 $4,181 ====== ====== ===== ===== ====== ====== - --------------------------------------------------------------------------------------------------------------------------
Net trading revenues were $1.3 billion, up 5% from $1.2 billion in the 1999 third quarter, primarily as a result of higher revenues from equities. Equities and equity derivatives net trading revenues were $647 million, up 14% from the third quarter of 1999, primarily driven by an increase in U.S. and international equities trading. Debt and debt derivatives net trading revenues decreased 2% from the 1999 third quarter to $661 million due to lower trading revenues from sovereign debt and mortgages. 20 Investment banking revenues were $858 million in the third quarter of 2000, a 10% decline from the strong third quarter a year ago, primarily as a result of lower strategic advisory service revenues associated with merger and acquisition activity. A summary of Merrill Lynch's investment banking revenues follows:
- -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- ------------------------ SEPT. 29, SEPT. 24, % SEPT. 29, SEPT. 24, % (in millions) 2000 1999 INC.(DEC.) 2000 1999 INC.(DEC.) - -------------------------------------------------------------------------------------------------------------------------- Underwriting $ 580 $ 566 2 % $1,923 $1,586 21 % Strategic advisory services 278 383 (27) 1,018 903 13 ----- ----- ------ ------ Total $ 858 $ 949 (10) $2,941 $2,489 18 ===== ===== ====== ====== - --------------------------------------------------------------------------------------------------------------------------
Merrill Lynch retained its position as leading underwriter of total debt and equity offerings in the U.S. and global markets during the third quarter of 2000. In addition, Merrill Lynch remained number one in U.S. and global debt underwriting. Merrill Lynch's underwriting market share information based on transaction value follows:
- ------------------------------------------------------------------------------- THREE MONTHS ENDED -------------------------------------- SEPTEMBER 2000 SEPTEMBER 1999 -------------- -------------- MARKET MARKET SHARE RANK SHARE RANK - ------------------------------------------------------------------------------- U.S. PROCEEDS Debt 16.0 % 1 16.9 % 1 Equity 15.9 2 12.7 2 Debt and equity 15.9 1 16.8 1 GLOBAL PROCEEDS Debt 14.1 1 13.3 1 Equity 18.8 2 13.8 2 Debt and equity 14.6 1 13.5 1 - -------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to book manager. Strategic advisory services fees declined 27% from the 1999 third quarter to $278 million, primarily as a result of lower fees from mergers and acquisitions, both in the U.S. and Europe. Merrill Lynch's merger and acquisition market share information based on transaction value follows: 21
- ---------------------------------------------------------------------------------- THREE MONTHS ENDED -------------------------------------------- SEPTEMBER 2000 SEPTEMBER 1999 -------------- -------------- MARKET MARKET SHARE RANK SHARE RANK - ---------------------------------------------------------------------------------- COMPLETED TRANSACTIONS U.S. 20.6 % 4 19.1 % 4 Global 18.8 6 21.9 3 ANNOUNCED TRANSACTIONS U.S. 14.4 4 21.8 3 Global 13.8 5 32.8 3 - ----------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to both target and acquiring companies' advisors. A summary of asset management and portfolio service fees is as follows:
- ---------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED --------------------- ---------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 1999 % INC. 2000 1999 % INC. - ---------------------------------------------------------------------------------------------------------- Asset management fees $ 578 $ 546 6 % $1,813 $1,617 12 % Portfolio service fees 567 385 47 1,596 1,079 48 Account fees 127 124 2 395 381 4 Other fees 142 128 11 413 374 10 ------ ------ ------ ------ Total $1,414 $1,183 20 $4,217 $3,451 22 ====== ====== ====== ====== - ----------------------------------------------------------------------------------------------------------
Asset management and portfolio service fees rose 20% from the 1999 third quarter to a new quarterly high of $1.4 billion. Asset management fees increased 6% from a year ago, as a result of the growth in assets under management, which reached $571 billion at quarter end, and a shift in assets from older, lower fee mutual funds to new higher fee mutual funds. Excluding the impact of money transferred to Merrill Lynch bank deposits, assets under management grew 8% from the end of the 1999 third quarter. This growth was attributable to a net inflow of customer assets as well as asset appreciation, partially offset by a reduction in assets under management due to foreign currency translation. Portfolio service fees increased 47% from the comparable period last year, as assets in asset-priced accounts continued to accumulate, driven by growth in Unlimited Advantage (Service Mark) and Merrill Lynch Consults (Registered Trademark). The majority of the revenues associated with these accounts are included in portfolio service fees. Total assets in Private Client accounts or under management increased $254 billion, or 17% from the end of the 1999 third quarter to $1.8 trillion at September 29, 2000, including $1.6 trillion in Private Client accounts. Assets under management, the majority of which are included in Private Client accounts, totaled $571 billion at the end of the third quarter of 2000, an increase of $18 billion from the end of the 1999 third quarter. The changes in these balances are noted as follows: 22
- ---------------------------------------------------------------------------------------------------------- NET CHANGES DUE TO --------------------------- SEPT. 24, NET NEW ASSET SEPT. 29, (in billions) 1999 MONEY(1) APPRECIATION 2000 - ---------------------------------------------------------------------------------------------------------- Total assets in Private Client accounts or under management $ 1,514 $ 160 $ 94 $ 1,768 Total assets under management 553 14(2) 4 (3) 571 - ----------------------------------------------------------------------------------------------------------
1. Includes reinvested dividends. 2. Includes net outflows of $26 billion of retail money market funds to bank deposits at Merrill Lynch's U.S. banks. 3. Includes foreign exchange translation adjustments of $(24) billion. Other revenues reached a record $318 million, an increase of $196 million from the third quarter of 1999, driven by gains from sales of private equity investments. Significant components of interest and dividend revenues and interest expense follow:
- ------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED ----------------------- -------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND REVENUES Resale agreements and securities borrowed transactions $ 1,936 $ 1,399 $ 5,496 $ 4,188 Trading assets 901 788 2,521 2,529 Margin lending 1,275 704 3,548 2,077 Dividends 180 141 632 456 Marketable investment securities and other 1,187 637 2,828 1,845 ------- ------- -------- ------- Total 5,479 3,669 15,025 11,095 ------- ------- -------- ------- INTEREST EXPENSE Repurchase agreements and securities loaned transactions 1,726 1,224 4,679 3,718 Borrowings, including demand and time deposits 1,961 1,088 4,940 3,310 Trading liabilities 401 402 1,259 1,353 Other 616 431 1,812 1,262 ------- ------- -------- ------- Total 4,704 3,145 12,690 9,643 ------- ------- -------- ------- NET INTEREST AND DIVIDEND PROFIT $ 775 $ 524 $ 2,335 $ 1,452 ======= ======= ======== ======= - ------------------------------------------------------------------------------------------------------------
Interest and dividend revenues and expenses are a function of the level and mix of interest-earning assets and interest-bearing liabilities and the prevailing level, term structure, and volatility of interest rates. Net interest and dividend profit was $775 million in the third quarter of 2000, up $251 million from the third quarter a year ago. This increase was due to higher customer-lending balances and changes in asset/liability composition. (For further information on balance sheet composition, see Average Assets and Liabilities.) Merrill Lynch hedges certain of its long- and short-term borrowings, primarily with interest rate and currency swaps, to better match the interest rate and currency characteristics of the borrowings to the assets funded by borrowing proceeds. The effect of this hedging activity, which is included in "Borrowings" in the previous table, increased/(decreased) interest expense by $48 million and $(69)million for the 2000 and 1999 third quarters, respectively, and by $84 million and $(234) million for the 2000 and 1999 nine months, respectively. 23 - - Merrill Lynch's non-interest expenses are summarized below:
- ------------------------------------------------------------------------------------------------------------------------------ THREE MONTHS ENDED NINE MONTHS ENDED -------------------------------------- --------------------- SEPT. 29, JUNE 30, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 2000 1999 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ Compensation and benefits $ 3,146 $ 3,508 $ 2,783 $10,572 $ 8,363 ------- ------- ------- ------- ------- Non-interest expenses, excluding compensation and benefits: Communications and technology 542 584 487 1,710 1,508 Occupancy and related depreciation 250 259 232 762 698 Advertising and market development 205 263 191 713 546 Brokerage, clearing, and exchange fees 206 233 193 672 563 Professional fees 147 168 145 462 407 Goodwill amortization 52 54 57 162 170 Other 290 364 360 1,057 1,024 ------- ------- ------- ------- ------- Total non-interest expenses, excluding compensation and benefits 1,692 1,925 1,665 5,538 4,916 ------- ------- ------- ------- ------- Total non-interest expenses $ 4,838 $ 5,433 $ 4,448 $16,110 $13,279 ======= ======= ======= ======= ======= Compensation and benefits as a percentage of net revenues 51.2% 51.2% 52.0% 51.5% 51.4% Compensation and benefits as a percentage of pre-tax earnings before compensation and benefits 70.6 71.3 75.5 70.6 73.6 - ------------------------------------------------------------------------------------------------------------------------------
Compensation and benefits, the largest expense category, rose 13% from the 1999 third quarter to $3.1 billion as increased profitability led to higher incentive compensation, but these expenses were down 10% from the second quarter of 2000. Compensation and benefits as a percentage of net revenues was 51.2% for the third quarter of 2000, compared with 52.0% in the third quarter of last year and unchanged from the previous quarter. These expenses include $70 million associated with staff reductions in the U.S. private client business during the 2000 third quarter. Non-interest expenses, excluding compensation and benefits, were virtually unchanged from the 1999 third quarter and were reduced by 12% from the 2000 second quarter. These expenses declined to 27.5% of net revenues for the third quarter of 2000, down from 31.1% for the comparable quarter in 1999. These decreases in the quarter compared with the second quarter of 2000 were across all segments and every business line. Communications and technology expenses were $542 million, down 7% from the second quarter of 2000, primarily due to lower systems consulting costs, but up 11% from the third quarter of 1999. The increase from the 1999 third quarter is mainly due to higher technology-related depreciation and increased communication costs. Occupancy and related depreciation expense was $250 million in the third quarter of 2000, slightly lower than the 2000 second quarter and up 8% from the 1999 third quarter. Advertising and market development expenses declined 22% from the previous quarter to $205 million, due to lower spending on advertising and promotional programs. The 7% increase from the 1999 third quarter is a result of higher sales promotion and travel costs associated with increased business activity. Brokerage, clearing, and exchange fees were $206 million, a decrease of 12% from the second quarter of 2000 due to lower transaction volume, but an increase of 7% year-over-year, partially as a result of increased transaction volume. Professional fees were $147 million, down 13% from the 2000 second quarter due to reduced legal and consulting fees, and virtually unchanged from a year ago. 24 Goodwill amortization was $52 million in the third quarter of 2000, virtually unchanged from the second quarter of 2000 and down 9% from the third quarter of 1999. Other expenses were $290 million, 20% lower than the 2000 second quarter and 19% lower than the 1999 third quarter, due to a decline in provisions for various business matters. The year-to-date effective tax rate was 30.8% for the first nine months of 2000, compared with 31.8% in the corresponding 1999 period. - -------------------------------------------------------------------------------- BUSINESS SEGMENTS - -------------------------------------------------------------------------------- Merrill Lynch reports the results of its business within three business segments: Corporate and Institutional Client Group ("CICG"), Private Client Group ("PCG"), and Merrill Lynch Investment Managers ("MLIM"). CICG's activities primarily involve providing services to corporate, institutional, and governmental clients throughout the world. PCG provides investment, financing, insurance, tax, and other financial services and products to retail clients globally. MLIM provides investment management services to a wide variety of retail and institutional clients globally. For further information on services provided to clients within these segments, see the 1999 Form 10-K and the 1999 Annual Report included as an exhibit thereto. Certain MLIM and CICG products are distributed by PCG distribution networks, and to a more limited extent, certain MLIM products are distributed through the distribution capabilities of CICG. Expenses and revenues associated with these intersegment activities are recognized in each segment and eliminated at the corporate level. - -------------------------------------------------------------------------------- CORPORATE AND INSTITUTIONAL CLIENT GROUP - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- -------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------- Net revenues $2,762 $2,453 $9,776 $7,403 Pre-tax earnings 839 622 3,136 2,017 Pre-tax profit margin 30.4% 25.4% 32.1% 27.2% - ----------------------------------------------------------------------------------------------
CICG achieved solid results for the quarter in a seasonally slower business environment. Net revenues were $2.8 billion for the quarter, representing a 13% increase from the third quarter of 1999, and pre-tax earnings were $839 million, a 35% increase from the 1999 third quarter. Pre-tax profit margin in the quarter expanded to 30.4%, up 5 percentage points from 25.4% in the third quarter a year ago, while the year-to-date pre-tax margin was 32.1%, up from 27.2% in the first nine months of 1999. CICG posted a strong performance in both equity trading and equity origination, as Merrill Lynch's global market share increased to 18.8% from 13.8% in the third quarter of 1999, according to Thomson Financial Securities Data. Revenues from the strategic advisory business were down compared with the strong 1999 third quarter due to a decline in revenues in the U.S. and Europe. Revenues from the Debt Markets business decreased compared with the third quarter of 1999, due to lower industry-wide debt underwriting activity. Merrill Lynch retained its position as the leading underwriter of total debt and equity securities, both in the U.S. and globally, as well as the #1 position in U.S. and global debt underwriting, according to Thomson Financial Securities Data. CICG continued to make progress on several strategic initiatives during the quarter. The merger with Herzog, Heine, Geduld, Inc. was completed during the quarter and, as a result of integration, the internalization of Nasdaq orders is increasing. As part of its efforts to build its private equity business, Merrill Lynch launched, with partners, a $300 million venture capital fund to invest primarily in mobile Internet ventures and technologies in Europe and North America. In addition, Merrill Lynch collaborated with other financial firms to create TheMarkets.com, a portal for institutional investors offering equity research, equity new issue information, and news and market data. 25 - -------------------------------------------------------------------------------- PRIVATE CLIENT GROUP - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- -------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------- Net revenues $2,841 $2,455 $9,177 $7,605 Pre-tax earnings 402 279 1,159 1,005 Pre-tax profit margin 14.1% 11.4% 12.6% 13.2% - --------------------------------------------------------------------------------------
Net revenues for PCG were $2.8 billion in the third quarter of 2000, up 16% from $2.5 billion in the 1999 third quarter. In the U.S., net revenues for the third quarter were up 15% from the year ago period, and internationally, net revenues were up 21%. Pre-tax earnings for the quarter were $402 million, an increase of 44% from the 1999 third quarter. The pre-tax margin in the quarter rose to 14.1%, an increase from 11.4% in third quarter of 1999. During the third quarter, actions were taken to realign and strengthen the U.S. private client business, which included both the reallocation and reduction of staff. Third quarter 2000 expenses declined from the preceding quarter, primarily as a result of lower volume-related transaction costs, reduced advertising spending, staff reductions, and other actions taken to generate efficiencies. The overall decrease in expenses is after recording $70 million of compensation and benefits expenses associated with staff reductions. Approximately 445 new Financial Consultants were added during the quarter, including 400 domestically, and 45 outside the U.S. Producing office managers in the U.S. and Canada are now included in the Financial Consultant headcount. Total assets in U.S. client accounts remained essentially unchanged from the second quarter at $1.4 trillion, with net new money inflows of $27 billion during the quarter. Outside the U.S., client assets reached $148 billion, with $7 billion of net new money inflows during the 2000 third quarter. Total assets in asset-priced accounts grew 5% from the 2000 second quarter to $218 billion, an increase of 66% from a year ago. Unlimited Advantage, Merrill Lynch's fee-based, non-discretionary brokerage service continued to grow, with client assets in those accounts reaching $93 billion at the end of the quarter, with $2 billion of net new money during the quarter. Additionally, client assets in ML Direct, the online investing service for self-directed investors, grew 15% during the quarter to $3.1 billion. Over 735,000 clients now have on-line access to their accounts through ML Online and ML Direct, as more than 70,000 accounts were activated for online servicing during the third quarter. In June of 2000, Merrill Lynch began to redirect cash inflows from certain Cash Management Accounts ("CMA") and other types of accounts from taxable money market funds which are included in assets under management, to bank deposits at Merrill Lynch banks. As a result, U.S. bank deposits included in Demand and time deposits on the consolidated balance sheet grew to $38 billion from $5 billion at the end of the 1999 third quarter and $19 billion at the end of the second quarter of 2000. In April 2000, Merrill Lynch announced a 50/50 joint venture with HSBC to create the first global online banking and investment services company, serving individual customers outside the U.S. The venture currently employs 300 people and is expected to launch in the U.K. this year, and in Canada and Australia over the next few months. 26 - -------------------------------------------------------------------------------- MERRILL LYNCH INVESTMENT MANAGERS - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- -------------------------- SEPT. 29, SEPT. 24, SEPT. 29, SEPT. 24, (in millions) 2000 1999 2000 1999 - -------------------------------------------------------------------------------------- Net revenues $604 $513 $1,810 $1,530 Pre-tax earnings 143 84 374 242 Pre-tax profit margin 23.7% 16.4% 20.7% 15.8% - --------------------------------------------------------------------------------------
Quarterly earnings for MLIM continued their upward trend as MLIM continued to achieve solid investment performance across all product lines. Net revenues and pre-tax earnings were $604 million and $143 million, respectively, in the third quarter of 2000, up 18% and 70% from $513 million and $84 million in the 1999 third quarter. The pre-tax profit margin for the quarter expanded to 23.7%, up from 16.4% in the 1999 third quarter. Assets under management reached $571 billion at the end of the quarter, up 3% from the end of the 1999 third quarter. Excluding the impact of net outflows to Merrill Lynch's U.S. banks, assets under management grew 8% from the same period last year. During the quarter, MLIM had net new money of $1.3 billion. - -------------------------------------------------------------------------------- CAPITAL ADEQUACY AND LIQUIDITY - -------------------------------------------------------------------------------- The primary objectives of Merrill Lynch's capital structure and funding policies are to: 1. Ensure sufficient equity capital to absorb losses, 2. Support the business strategies, and 3. Assure liquidity at all times, across market cycles, and through periods of financial stress. These objectives and Merrill Lynch's capital structure and funding policies are discussed more fully in the 1999 Annual Report included as an exhibit to Form 10-K. Among U.S. institutions engaged primarily in the global securities business, Merrill Lynch is one of the most highly capitalized, with $16.7 billion in common equity, $425 million in preferred stock, and $2.7 billion of preferred securities issued by subsidiaries at September 29, 2000. Preferred securities issued by subsidiaries consist primarily of Trust Originated Preferred Securities(Service Mark) ("TOPrS"(Service Mark)). Based on various analyses and criteria, management believes that Merrill Lynch's equity capital base of $19.9 billion is adequate. Merrill Lynch's leverage ratios were as follows:
- ------------------------------------------------------------------- ADJUSTED LEVERAGE LEVERAGE RATIO(1) RATIO(2) - ------------------------------------------------------------------- PERIOD END September 29, 2000 19.3x 12.8x December 31, 1999 21.0x 13.3x AVERAGE (3) Nine months ended September 29, 2000 20.3x 12.9x Year ended December 31, 1999 23.0x 14.2x - -------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued by subsidiaries. (2) Total assets less (a) securities received as collateral, net of securities pledged as collateral, (b) securities pledged as collateral, and (c) receivables under resale agreements and securities borrowed transactions, to total stockholders' equity and preferred securities issued by subsidiaries. (3) Computed using month-end balances. An asset-to-equity leverage ratio does not reflect the risk profile of assets, hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not rely on overall leverage ratios to assess risk-based capital adequacy. 27 Commercial paper outstanding totaled $12.1 billion at September 29, 2000 and $24.2 billion at December 31, 1999, which was equal to 3.2% and 7.3% of total assets at September 29, 2000 and year-end 1999, respectively. Outstanding long-term borrowings increased to $66.6 billion at September 29, 2000 from $53.5 billion at December 31, 1999. Major components of the change in long-term borrowings during the first nine months of 2000 follow:
- ---------------------------------------------- (in billions) - ---------------------------------------------- Balance at December 31, 1999 $53.5 Issuances 26.0 Maturities (11.4) Other, net (1.5) ----- Balance at September 29, 2000 (1) $66.6 ===== - ----------------------------------------------
(1) At September 29, 2000, $48.4 billion of long-term borrowings had maturity dates beyond one year. In addition to equity capital sources, Merrill Lynch views long-term debt as a stable funding source for its core balance sheet assets. Another source of liquidity is an $8.0 billion committed, senior, unsecured bank credit facility that, at September 29, 2000, was not drawn upon. Additionally, Merrill Lynch maintains access to significant uncommitted credit lines, both secured and unsecured, from a large group of banks. The cost and availability of unsecured financing generally are dependent on credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and TOPrS were rated by several recognized credit rating agencies at September 29, 2000 as follows:
- --------------------------------------------------------------------------------------------- SENIOR PREFERRED STOCK DEBT AND TOPrS RATING AGENCY RATINGS RATINGS - --------------------------------------------------------------------------------------------- Dominion Bond Rating Service Ltd AA(Low) Not Rated Fitch AA AA- Moody's Investors Service, Inc. Aa3 aa3 Rating and Investment Information, Inc. AA A+ Standard & Poor's Rating Service AA- A Thomson Financial BankWatch, Inc. AA+ Not Rated - ---------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- AVERAGE ASSETS AND LIABILITIES - -------------------------------------------------------------------------------- Merrill Lynch monitors changes in its balance sheet using average daily balances that are determined on a settlement date basis and reported for management information purposes. For financial statements and risk management purposes, balances are recorded on a trade date basis. The following discussion compares changes in settlement date average daily balances. For the first nine months of 2000, average total assets were $366 billion, up 10% from $334 billion for the 1999 fourth quarter. Average total liabilities increased 9% to $348 billion from $319 billion for the 1999 fourth quarter. The major components in the changes in average total assets and liabilities for the first nine months of 2000 as compared with the fourth quarter of 1999 are summarized as follows: 28
- ---------------------------------------------------------------------------------------------------- (in millions) INCREASE (DECREASE) CHANGE - ---------------------------------------------------------------------------------------------------- AVERAGE ASSETS Marketable investment securities $ 10,271 138 % Customer receivables 8,117 16 Trading assets 7,655 7 Receivables from brokers and dealers 5,679 46 Receivables under resale agreements and securities borrowed transactions 2,914 3 Securities pledged as collateral (3,483) (26) AVERAGE LIABILITIES Demand and time deposits $ 10,336 63 % Long-term borrowings 6,290 12 Trading liabilities 5,284 8 Customer payables 4,104 18 Commercial paper and other short-term borrowings 3,948 23 - ----------------------------------------------------------------------------------------------------
The significant growth in demand and time deposits in the first nine months of 2000 reflects the redirection of cash inflows from certain CMA and other types of accounts from taxable money market funds which are included in assets under management to bank deposits at Merrill Lynch's U.S. banks. This increase in deposits was used to fund the growth in marketable investment securities. Higher trading volume during the first nine months of 2000, as compared with the fourth quarter of 1999, caused an increase in trading assets and liabilities, as well as the average customer receivable and payable balances. Additionally, securities borrowed and securities loaned transactions rose due to increased matched-book activity. In addition to the increase in demand and time deposits and securities loaned transactions, the growth in average assets was funded by increases in commercial paper and long-term borrowings, particularly medium-term notes. - -------------------------------------------------------------------------------- NON-INVESTMENT GRADE HOLDINGS - -------------------------------------------------------------------------------- Non-investment grade holdings, which include transactions with highly leveraged counterparties, involve risks related to the creditworthiness of the issuers or counterparties and the liquidity of the market for such investments. Merrill Lynch recognizes these risks and, whenever possible, employs strategies to mitigate exposures. The specific components and overall level of non-investment grade positions may vary significantly from period to period as a result of inventory turnover, investment sales, and asset redeployment. In the normal course of business, Merrill Lynch underwrites, trades, and holds non-investment grade cash instruments in connection with its investment banking, market-making, and derivative structuring activities. Non-investment grade holdings have been defined as debt and preferred equity securities rated as BB+ or lower, or equivalent ratings by recognized credit rating agencies, sovereign debt in emerging markets, amounts due under derivative contracts from non-investment grade counterparties, and other instruments that, in the opinion of management, are non-investment grade. 29 In addition to the amounts included in the following table, derivatives may also expose Merrill Lynch to credit risk related to the underlying security where a derivative contract can either synthesize ownership of the underlying security (e.g., long total return swaps) or potentially force ownership of the underlying security (e.g., short put options). At September 29, 2000, Merrill Lynch had derivatives with notionals of approximately $700 million with non-investment grade credit exposure. Derivatives may also subject Merrill Lynch to credit spread or issuer default risk, in that changes in credit spreads or in the credit quality of the underlying securities may adversely affect the derivatives' fair values. Merrill Lynch seeks to manage these risks by engaging in various hedging strategies to reduce its exposure associated with non-investment grade positions, such as purchasing an option to sell the related security or entering into other offsetting derivative contracts. At September 29, 2000, Merrill Lynch had derivatives with notionals of approximatley $900 million that hedged non-investment grade credit exposure. Merrill Lynch provides financing and advisory services to, and invests in, companies entering into leveraged transactions, which may include leveraged buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides extensions of credit to leveraged companies in the form of senior and subordinated debt, as well as bridge financing on a select basis. In addition, Merrill Lynch syndicates loans for non-investment grade companies or in connection with highly leveraged transactions and may retain a residual portion of these loans. Merrill Lynch holds direct equity investments in leveraged companies and interests in partnerships that invest in leveraged transactions. Merrill Lynch has also committed to participate in limited partnerships that invest in leveraged transactions. Future commitments to participate in limited partnerships and other direct equity investments will be made on a select basis. - -------------------------------------------------------------------------------- TRADING EXPOSURES - -------------------------------------------------------------------------------- The following table summarizes Merrill Lynch's non-investment grade trading exposures:
- ---------------------------------------------------------------------------- SEPT. 29, DEC. 31, (in millions) 2000 1999 - ---------------------------------------------------------------------------- Trading assets: Cash Instruments $ 5,699 $ 5,630 Derivatives 3,109 4,033 Trading liabilities - cash instruments (962) (997) Collateral on derivative assets (1,774) (1,344) ------- ------- Net trading asset exposure $ 6,072 $ 7,322 ======= ======= - ----------------------------------------------------------------------------
Among the trading exposures included in the preceding table are debt and equity securities and bank loans of companies in various stages of bankruptcy proceedings or in default. At September 29, 2000, the carrying value of such debt and equity securities totaled $261 million, of which 98% resulted from Merrill Lynch's market-making activities in such securities. This compared with $133 million at December 31, 1999, of which 89% related to market-making activities. Also included are distressed bank loans with a carrying value totaling $133 million and $86 million at September 29, 2000 and December 31, 1999, respectively. 30 - -------------------------------------------------------------------------------- NON-TRADING EXPOSURES - -------------------------------------------------------------------------------- The following table summarizes Merrill Lynch's non-investment grade non-trading exposures:
- -------------------------------------------------------------------------------- SEPT. 29, DEC. 31, (in millions) 2000 1999 - -------------------------------------------------------------------------------- Marketable investment securities $ 172 $ 58 Investments of insurance subsidiaries 123 108 Loans (net of allowance for loan losses): Bridge loans(1) 568 68 Other loans(2) 2,086 1,331 Other investments: Partnership interests (3) 1,298 1,368 Other equity investments (4) 291 369 - --------------------------------------------------------------------------------
(1) Increases since December 31, 1999 are primarily due to new loans to several telecommunications companies. Subsequent to the end of the third quarter, these loans were reduced by approximately $140 million. (2) Represents outstanding loans to 131 and 115 companies at September 29, 2000 and December 31, 1999, respectively. (3) Includes $581 million and $599 million in investments at September 29, 2000 and December 31, 1999, respectively, related to deferred compensation plans, for which the default risk of the investments generally rests with the participating employees. (4) Includes investments in 71 and 62 enterprises at September 29, 2000 and December 31, 1999, respectively. The following table summarizes Merrill Lynch's commitments with exposure to non-investment grade counterparties:
- ------------------------------------------------------------------------------------- SEPT. 29, DEC. 31, (in millions) 2000 1999 - ------------------------------------------------------------------------------------- Additional commitments to invest in partnerships $ 312 $ 200 Unutilized revolving lines of credit and other lending commitments 2,569(1) 2,462 - -------------------------------------------------------------------------------------
(1) Subsequent to the end of the third quarter, these commitments were reduced by $66 million. - -------------------------------------------------------------------------------- NEW ACCOUNTING PRONOUNCEMENT - -------------------------------------------------------------------------------- In June 1999, the Financial Accounting Standards Board deferred for one year the effective date of the accounting and reporting requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133"). SFAS No.133 requires Merrill Lynch to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. If the derivative qualifies for hedge accounting, depending on the nature of the hedge accounting relationship, changes in the fair value of the derivative will either be offset by the change in fair value of the hedged asset, liability, or firm commitment item through earnings, or recorded in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative hedging instrument will be immediately recognized in earnings. Derivatives that do not qualify for hedge accounting must be recorded at fair value, with changes in value reported in earnings. Upon adoption of SFAS No. 133, all existing hedge relationships must be designated anew, with transition adjustments recorded either in earnings or other comprehensive income, as appropriate. Currently, the majority of Merrill Lynch's derivatives are recognized at fair value in trading assets and liabilities, as they are entered into in a dealing capacity. However, Merrill Lynch also enters into derivatives to hedge its exposures relating to non-trading assets and liabilities, some of which, depending on the nature of the derivative and the related hedged item, are not carried at fair value. 31 Merrill Lynch will adopt the provisions of SFAS No. 133 on January 1, 2001, and has undertaken initiatives to implement this standard. Merrill Lynch has determined that the new standard will primarily impact the accounting for derivatives used to hedge borrowings. Merrill Lynch currently expects that the majority of its derivatives used to hedge borrowings will qualify for the assumption of "no hedge ineffectiveness" under the criteria detailed in SFAS No. 133, and therefore expects that for these derivatives there will be no net impact on earnings from the adoption of the statement. A smaller population of derivatives that effectively shorten the maturity of floating rate borrowings, or effectively convert the currency of the borrowings, will not qualify for hedge accounting and the fair value of this portfolio will be recorded as a transition adjustment. Derivatives that are embedded in non-trading liabilities will be recorded at fair value with transition adjustments recorded in earnings; these amounts are expected to be offset by the adjustments to record the offsetting derivative instruments related to these liabilities at fair value. Merrill Lynch is currently evaluating the impact of adoption on earnings; however, the ultimate effect of the new standard on earnings is dependent upon a number of factors including changing market conditions, the Company's funding needs, hedge designation strategies, and actions taken in response to these conditions. Due to the interdependent nature of these variables, and the inability to predict market conditions at year-end, the Company believes that providing a meaningful estimated range of the impact of adopting this standard at year-end 2000 is not possible at this time. 32
- ----------------------------------------------------------------------------------------------------------------------- STATISTICAL DATA - ----------------------------------------------------------------------------------------------------------------------- 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR. 1999 1999 2000 2000 2000 --------- --------- --------- --------- --------- CLIENT ASSETS (in billions): U.S. Client Assets $ 1,212 $ 1,360 $ 1,446 $ 1,436 $ 1,437 Non-U.S. Client Assets 302 336 346 336 331 -------- -------- -------- -------- -------- Total Assets in Private Client Accounts or Under Management $ 1,514 $ 1,696 $ 1,792 $ 1,772 $ 1,768 ======== ======== ========= ======== ======== U.S. BANK DEPOSITS $ 5 $ 6 $ 7 $ 19 $ 38 ASSETS UNDER MANAGEMENT: $ 553 $ 594 $ 602 $ 585 $ 571 Retail 291 300 307 283 274 Institutional 226 255 253 257 252 Private Accounts 36 39 42 45 45 Equity 301 333 334 335 330 Fixed-Income 108 110 110 111 108 Money Market 144 151 158 139 133 U.S. 340 358 364 356 351 Non-U.S. 213 236 238 229 220 ASSETS IN ASSET-PRICED ACCOUNTS $ 131 $ 168 $ 203 $ 208 $ 218 - ----------------------------------------------------------------------------------------------------------------------- UNDERWRITING: Global Debt and Equity: Volume (in billions) $ 108 $ 86 $ 104 $ 90 $ 108 Market Share 13.5% 14.0% 11.2% 12.1% 14.6% U.S. Debt and Equity: Volume (in billions) $ 86 $ 67 $ 83 $ 73 $ 73 Market Share 16.8% 16.7% 14.0% 15.3% 15.9% - ----------------------------------------------------------------------------------------------------------------------- FULL-TIME EMPLOYEES: U.S. 48,700 49,700 50,900 52,300 52,700 Non-U.S. 17,900 18,200 18,500 19,200 20,000 -------- -------- -------- -------- -------- Total 66,600 67,900 69,400 71,500 72,700 ======== ======== ======== ======== ======== Financial Consultants and Other Investment Professionals 19,200 19,500 19,900 20,600 21,000 - ----------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT: Net Earnings (in millions) $ 579 $ 793 $ 1,101 $ 921 $ 885 Annualized Return on Average Common Stockholders' Equity 20.2% 24.3% 32.4% 24.4% 21.6% Earnings per Common Share: Basic $ 0.75 $ 1.03 $ 1.40 $ 1.15 $ 1.09 Diluted 0.67 0.91 1.24 1.01 0.94 - ----------------------------------------------------------------------------------------------------------------------- BALANCE SHEET (in millions): Total Assets $314,325 $329,554 $366,388 $356,985 $383,904 Total Stockholders' Equity 12,276 13,004 14,733 16,014 17,171 Book Value Per Common Share 15.62 16.49 18.13 19.47 20.70 - ----------------------------------------------------------------------------------------------------------------------- SHARE INFORMATION (in thousands): Weighted-Average Shares Outstanding: Basic 757,862 760,841 780,220 795,070 805,855 Diluted 855,348 858,122 881,681 904,246 929,048 Common Shares Outstanding 758,716 762,649 789,057 800,863 809,069 - -----------------------------------------------------------------------------------------------------------------------
Note: Certain prior period amounts have been restated to conform to the current period presentation and to reflect the merger with Herzog, Heine, Geduld, Inc., as required under pooling-of-interests accounting. 33 PART II - OTHER INFORMATION --------------------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ----------------------------------------- ML & Co. issued unregistered common stock in connection with the Herzog, Heine, Geduld, Inc. ("Herzog") merger, as described in ML & Co.'s Form 10-Q for the 2000 second quarter and Note 2 to the Consolidated Financial Statements in this report. Since the filing of the second quarter Form 10-Q, ML & Co. has filed a registration statement under the Securities Act of 1933 to register the resale of the ML & Co. shares by the Herzog shareholders. The registration statement became effective on October 16, 2000. ITEM 5. OTHER INFORMATION ----------------- The 2001 Annual Meeting of Stockholders will be held at 10:00 a.m. on Friday, April 27, 2001 at the Merrill Lynch & Co., Inc. Conference and Training Center, 800 Scudders Mill Road, Plainsboro, New Jersey. Any stockholder of record entitled to vote generally for the election of directors may nominate one or more persons for election as a director at such meeting only if proper written notice of such stockholder's intent to make such nomination or nominations, in accordance with the provisions of ML & Co.'s Certificate of Incorporation, has been given to the Secretary of ML & Co., 222 Broadway, 17th Floor, New York, New York 10038, no earlier than February 9, 2001 and no later than March 8, 2001. In addition, in accordance with provisions of ML & Co.'s By-Laws, any stockholder intending to bring any other business before the meeting must provide proper written notice to ML & Co. of the stockholder's intent to do so on or before March 8, 2001. In order to be included in ML & Co.'s proxy statement, stockholder proposals had to be received by ML & Co. at its principal executive offices not later than November 9, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits (4) Instruments defining the rights of security holders, including indentures: Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML & Co. hereby undertakes to furnish to the Securities and Exchange Commission, upon request, copies of the instruments defining the rights of holders of long-term debt securities of ML & Co. that authorize an amount of securities constituting 10% or less of the total assets of ML & Co. and its subsidiaries on a consolidated basis. (10)Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan, as amended on July 24, 2000. (11)Statement re: computation of per common share earnings (12)Statement re: computation of ratios (15)Letter re: unaudited interim financial information (27)Financial Data Schedule (b) Reports on Form 8-K The following Current Reports on Form 8-K were filed by ML & Co. with the Securities and Exchange Commission during the quarterly period covered by this report: (i) Current Report dated July 18, 2000 for the purpose of filing ML & Co.'s Preliminary Unaudited Earnings Summary for the three- and six-month periods ended June 30, 2000. (ii) Current Report dated August 2, 2000 for the purpose of filing ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet as of June 30, 2000. 34 (iii)Current Report dated August 4, 2000 for the purpose of filing the forms of ML & Co.'s Callable Nasdaq-100(Registered Trademark) Market Index Target-Term Securities(Registered Trademark) due August 3, 2007 and Callable Market Index Target-Term Securities due August 3, 2007 based upon Biotech HOLDRS(Service Mark). (iv) Current Report dated September 13, 2000 for the purpose of filing the form of ML & Co.'s Callable Market Index Target-Term Securities due September 13, 2007 based upon Broadband HOLDRS. 35 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MERRILL LYNCH & CO., INC. -------------------------------- (Registrant) Date: November 13, 2000 By: /s/ Thomas H. Patrick -------------------------------- Thomas H. Patrick Executive Vice President and Chief Financial Officer 36 INDEX TO EXHIBITS Exhibits 10 Merrill Lynch & Co., Inc. Long-Term Incentive Compensation Plan, as amended on July 24, 2000. 11 Statement re: computation of per common share earnings. 12 Statement re: computation of ratios. 15 Letter re: unaudited interim financial information. 27 Financial Data Schedule.