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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the fiscal year ended December 31, 1999 Commission file number 1-7182
Merrill Lynch & Co., Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-2740599
(I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
10281
(Zip Code)
World Financial Center--North Tower
250 Vesey Street
New York, New York
(Address of principal executive
offices)
Registrant's telephone number, including area code: (212) 449-1000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.33 1/3 and attached New York Stock Exchange;
Rights to Purchase Series A Junior Preferred Chicago Stock Exchange;
Stock Pacific Exchange; Paris
Stock Exchange; London Stock
Exchange; and Tokyo Stock
Exchange
Depositary Shares representing 1/400th share of New York Stock Exchange
9% Cumulative Preferred Stock, Series A
S&P 500 Market Index Target-Term Securities New York Stock Exchange
("MITTS Securities") due May 10, 2001;
Technology MITTS Securities due August 15,
2001; Healthcare/Biotechnology Portfolio MITTS
Securities due October 31, 2001; Nikkei 225
MITTS Securities due June 14, 2002; S&P 500
MITTS Securities due September 16, 2002; MITTS
Securities based upon the Dow Jones Industrial
Average (the "Dow Jones") due January 14,
2003; S&P 500 MITTS Securities due September
28, 2005; Top Ten Yield MITTS Securities due
August 15, 2006; S&P 500 Inflation Adjusted
MITTS Securities due September 24, 2007; 5
3/4% Stock Return Income DEbt Securities
("STRIDES Securities") due June 1, 2000; 7
7/8% Structured Yield Product Exchangeable for
Stock ("STRYPES") due February 1, 2001; and 6
1/4% STRYPES due July 1, 2001.
Nikkei 225 MITTS Securities due September 20,
2002; Major 8 European MITTS Securities due American Stock Exchange
August 30, 2002; Major 11 International MITTS
Securities due December 6, 2002; Russell 2000
MITTS Securities due September 30, 2004;
Global MITTS Securities due December 22, 2004;
S&P 500 MITTS Securities due July 1, 2005;
Nikkei 225 MITTS Securities due September 21,
2005; Energy Select Sector SPDR Fund MITTS
Securities due February 21, 2006; EuroFund
MITTS Securities due February 28, 2006; S&P
500 MITTS Securities due March 27, 2006;
Consumer Staples Select Sector SPDR Fund MITTS
Securities due April 19, 2006; Select Sector
SPDR Fund Growth Portfolio MITTS Securities
due May 25, 2006; Major 11 International MITTS
Securities due May 26, 2006; MITTS Securities
based upon the Dow Jones due June 26, 2006;
Russell 2000 MITTS Securities due July 21,
2006; Nikkei 225 MITTS Securities due August
4, 2006; S&P 500 MITTS Securities due August
4, 2006; Energy Select Sector SPDR Fund MITTS
Securities due September 20, 2006; Medium-Term
Notes ("MTN"), Series B, 3% Stock-Linked Notes
due June 10, 2000; MTN, Series B, 5% Stock-
Linked Notes due July 3, 2000; MTN, Series B,
Stock-Linked Notes due November 28, 2003; MTN,
Series B, 1% Callable and Exchangeable Stock-
Linked Notes due April 19, 2004; MTN, Series
B, 3.125% Callable Stock-Linked Notes due
January 22, 2005; MTN, Series B, 1.5%
Principal Protected Notes due December 15,
2005; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due February
8, 2006; MTN, Series B, 0.25% Callable and
Exchangeable Portfolio-Linked Notes due April
27, 2006; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due May 10,
2006; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due July 20,
2006; Oracle Corporation Indexed Callable
Protected Growth Securities ("ProGroS
Securities") due March 31, 2003; Telebras
Indexed Callable ProGroS Securities due May
19, 2005; 5 1/4% Nasdaq-100 Index STRIDES
Securities due August 23, 2000; AMEX Oil Index
Stock Market Annual Reset Term Notes ("SMART
Notes") due December 29, 2000; Russell 2000
Index Call Warrants Expiring May 25, 2001; and
Bond Index Notes, Domestic Master Series 1999A
due December 23, 2002.
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of the close of business on February 23, 2000, there were 383,049,771
shares of Common Stock and 4,008,129 Exchangeable Shares outstanding. 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.
As of the close of business on February 23, 2000, the aggregate market value
of the voting stock, comprising the Common Stock and the Exchangeable Shares,
held by non-affiliates of the Registrant was approximately $36 billion.
Documents Incorporated By Reference: Merrill Lynch & Co., Inc. 1999 Annual
Report to Stockholders and Merrill Lynch & Co., Inc. Proxy Statement for its
2000 Annual Meeting of Stockholders dated March 9, 2000, each incorporated by
reference in Parts I-IV in this Form 10-K.
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TABLE OF CONTENTS
Part I.
Item 1 Business.............................................................................................. 1
Overview.............................................................................................. 1
Business Environment.................................................................................. 2
Description of Business Activities.................................................................... 2
Competition........................................................................................... 11
Regulation............................................................................................ 11
Item 2 Properties............................................................................................ 13
Item 3 Legal Proceedings..................................................................................... 14
Item 4 Matters Submitted to a Vote of Securityholders........................................................ 16
Executive Officers of Merrill Lynch & Co., Inc........................................................ 16
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................................. 18
Item 6 Selected Financial Data............................................................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................ 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk............................................ 18
Item 8 Financial Statements and Supplementary Data........................................................... 18
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................................ 18
Part III.
Item 10 Directors and Executive Officers of the Registrant.................................................... 19
Item 11 Executive Compensation................................................................................ 19
Item 12 Security Ownership of Certain Beneficial Owners and Management........................................ 19
Item 13 Certain Relationships and Related Transactions........................................................ 19
Part IV.
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 19
PART I
Item 1. Business
Overview
Merrill Lynch & Co., Inc.,* a Delaware corporation formed in 1973, is a
holding company that, through its subsidiaries and affiliates, provides
investment, financing, advisory, insurance, and related products and services on
a global basis, including:
. securities brokerage, trading, and underwriting
. investment banking, strategic services, including mergers and acquisitions,
and other corporate finance advisory activities
. asset management
. brokerage and related activities in swaps, options, forwards, futures, and
other derivatives
. securities clearance services
. equity, debt and economic research
. banking, trust, and lending services, including mortgage lending and related
services
. insurance sales and underwriting services
. investment advisory and related recordkeeping services
Merrill Lynch provides these products and services to a wide array of
clients, including individual investors, small businesses, corporations,
governments and governmental agencies, and financial institutions.
Merrill Lynch's business has three business segments: the Private Client
Group ("PCG"), the Asset Management Group ("AMG") and the Corporate and
Institutional Client Group ("CICG"). Merrill Lynch provides financial services
worldwide through subsidiaries and affiliates that frequently participate in the
facilitation and consummation of a single transaction. This organizational
structure is designed to enhance the delivery of services to Merrill Lynch's
diverse global client base and position it for worldwide growth. Merrill Lynch
has organized its operations outside the United States into six regions:
Europe, Middle East, and Africa
Asia Pacific
Australia and New Zealand
Japan
Canada
Latin America
Merrill Lynch conducts its global business from various locations
throughout the world. Its world headquarters facility is located at the World
Financial Center in New York City and its other principal U.S. business and
operational centers are in New Jersey, Colorado, Florida, and California.
Merrill Lynch has a presence in 42 countries outside the U.S., including offices
in Buenos Aires, Dubai, Dublin, Frankfurt, Geneva, Hong Kong, Johannesburg,
London, Madrid, Mexico City, Milan, Paris, Sao Paulo, Singapore, Sydney,
Toronto, Tokyo and Zurich.
Merrill Lynch employed 67,200 people at the end of 1999.
At the end of 1999, total assets in client accounts or under management
were nearly $1.7 trillion. In 1999, according to Thomson Financial Services
Data, Merrill Lynch achieved the top ranking in U.S. debt and equity
underwriting, and ranked third in U.S. completed and announced mergers and
acquisitions. Merrill Lynch was the leading
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* Unless the context otherwise requires, the term "Merrill Lynch" means Merrill
Lynch & Co., Inc. and includes the consolidated subsidiaries of Merrill Lynch
& Co., Inc. The term "ML & Co." is used herein where appropriate to refer to
Merrill Lynch & Co., Inc., the parent holding company.
1
global debt and equity underwriter and ranked second in announced and third in
completed non-U.S. mergers and acquisitions transactions.
Financial information concerning Merrill Lynch for each of the three fiscal
years ended on the last Friday in December of 1999, 1998, and 1997, including
the amount of total revenue contributed by classes of similar products or
services that accounted for 10% or more of its consolidated revenues in any one
of these fiscal periods, as well as information with respect to Merrill Lynch's
operations by segment and geographic area is set forth in Merrill Lynch's
Consolidated Financial Statements and the Notes thereto in the Merrill Lynch &
Co., Inc. 1999 Annual Report to Stockholders (the "Annual Report") included as
an exhibit to this Form 10-K.
Business Environment
The financial services industry, in which Merrill Lynch is a leading
participant, is highly competitive and highly regulated. This industry and the
global financial markets are influenced by numerous uncontrollable factors.
These factors include economic conditions, monetary policies, the liquidity of
global markets, 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 using the internet to establish or expand their businesses. 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. The
Gramm-Leach-Bliley Act, together with the other changes in the financial
services industry made possible by previous reforms, has increased the number of
companies competing for a similar customer base.
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 paragraph, as well as actions
and initiatives taken by both current and potential competitors, the effect of
current, pending, and future legislation and regulation both in the United
States and throughout the world, and the other risks and uncertainties detailed
in Competition and Regulation below and in Management's Discussion and Analysis
in the Annual Report. Merrill Lynch undertakes no responsibility to update or
revise any forward-looking statements.
Description of Business Activities
The business activities of certain significant U.S. and non-U.S. Merrill
Lynch subsidiaries comprising its three business segments are described below.
Each subsidiary may provide products and services from some or all of these
business segments. See Management's Discussion and Analysis and the Notes to the
Consolidated Financial Statements in the Annual Report for further information
about Merrill Lynch's business activities and policies, its business segments,
products and services, and the geographic markets within which it operates.
The Private Client Group
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Through offices around the world, the PCG provides products and services
related to the accumulation and management of wealth, including, for example,
brokerage and related activities; retirement, investment and custody services;
insurance; business financial services; and banking, trust services, mortgage
lending and related activities.
2
Brokerage, Dealer and Related Activities:
In the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") is a broker (i.e., agent) for individual clients, as well as
corporate, institutional and governmental clients, and a dealer (i.e. acts for
its own account) in the purchase and sale of corporate securities, primarily
equity and debt securities traded on exchanges or in the over-the-counter
markets. MLPF&S also acts as a broker and a dealer in the purchase and sale of
money market instruments, government securities, high-yield bonds, municipal
securities, futures, and options, including option contracts for the purchase
and sale of various types of securities. In addition, MLPF&S acts as broker
and/or mutual fund selected dealer in the purchase and sale of mutual funds.
MLPF&S has established commission rates or fixed charges for all brokerage
services that it performs. For accounts that are actively traded, however,
MLPF&S's policy is to negotiate commissions based on economies of scale and the
complexity of the particular trading transaction and, additionally, for its
institutional customers, based on the competitive environment and trading
opportunities.
In July 1999, MLPF&S introduced Unlimited Advantage(Service Mark), in
which U.S. clients receive a broad range of Merrill Lynch services for an annual
asset-based fee. At the end of 1999 there were over 260,000 Unlimited Advantage
accounts with aggregate client assets of approximately $63 billion, of which $9
billion represented new client assets. In December 1999, Merrill Lynch launched
ML Direct(Service Mark), an online service offering trading execution and real-
time account position information.
MLPF&S provides financing to clients, including margin lending and other
extensions of credit. In a margin-based transaction, MLPF&S extends credit for a
portion of the market value of the securities in the client's account up to the
limit imposed by internal MLPF&S policies and applicable margin rules and
regulations. Since MLPF&S may have financial exposure if a client fails to meet
a margin call, any margin loan made by MLPF&S is collateralized by securities in
the client's margin account. Financial reviews, margin procedures, and other
credit standards have been implemented in an effort to limit any exposures
resulting from this margin lending activity. Interest on margin loans is an
important source of revenue for MLPF&S. To finance margin loans, MLPF&S uses
funds on which it pays interest (including parent company borrowings), funds on
which it does not pay interest (including its own capital), funds derived from
client's free credit balances to the extent permitted by regulations, and funds
derived from securities loaned.
Merrill Lynch, through Merrill Lynch Futures Inc. ("MLF") and other
subsidiaries, acts as a broker for the purchase and sale of futures contracts
and options on such futures contracts for corporate and institutional clients,
but ceased such activities for individual clients in early 2000. See The
Corporate and Institutional Client Group-Brokerage and Related Activities below.
Merrill Lynch Investment Partners Inc. ("MLIP") sponsors or manages
commodity pools, hedge funds and fund of funds products designed to meet a
variety of client objectives. MLF acts as commodity broker for MLIP-sponsored
funds and MLPF&S or an affiliate acts as selling agent. MLIP is one of the
largest sponsors of managed futures funds in terms of both fund assets and
financial and personnel resources. MLIP is an integrated business which
includes research, finance, operations, systems, administration, sales and
marketing. MLIP's functions include selecting and monitoring trading advisors
and hedge fund managers, as well as allocating and reallocating fund capital
among them. At the end of 1999, approximately $2.3 billion in equity was
invested or was to be invested in 39 U.S. and non-U.S. commodity pools, hedge
funds and fund-of-funds products.
MLPF&S sponsors the Defined Asset Funds(Service Mark) group of funds.
These funds are unit investment trusts registered in the United States under the
Investment Company Act of 1940 and offshore in the Republic of Ireland and the
Cayman Islands under applicable regulations. Defined Asset Funds invest in U.S.
and non-U.S. equity securities, municipal, corporate, and U.S. Government and
non-U.S. debt obligations. At the end of 1999, approximately $20.9 billion of
client funds were invested in Defined Asset Funds worldwide.
MLPF&S provides a wide range of client services, including effecting trades
in equity, fixed-income and other securities through its securities account
services, such as its Cash Management Account(Registered Trademark) financial
services program (the "CMA(Registered Trademark) account"). At the end of 1999,
there were more than 2.0 million CMA accounts held by Merrill Lynch's U.S.
customers with aggregate assets of approximately $550 billion and there were
approximately 61,000 CMA accounts held
3
by Merrill Lynch's non-U.S. clients with aggregate assets of approximately $36.6
billion. MLPF&S offers various other products such as Merrill Lynch
Consults(Registered Trademark), the Merrill Lynch Mutual Fund Advisor(Service
Mark) program, the Merrill Lynch Mutual Fund Advisor Selects(Service Mark)
program, and the Financial Foundation(Registered Trademark) report.
Outside the United States, Merrill Lynch provides comprehensive brokerage
and investment services and related products on a global basis to private
clients. These services and products are made available through a network of
offices located in more than 30 countries outside the United States. The
brokerage and other services provided by MLPF&S are offered on a global basis to
private clients; in addition, in certain countries such as the UK, Japan, Canada
and Australia, clients can open accounts with Merrill Lynch affiliates that are
locally regulated. Banking and trust services, and asset management services,
are also offered globally to private clients, as described below under The
Private Client Group - Banking, Trust, Mortgage Lending and Related Activities
and The Asset Management Group, respectively. In addition, during 1999 an
online account information service was made available to international private
clients.
Group Employee Services and Retirement, Investment and Custody Services:
Through its Group Employee Services division, MLPF&S is one of the largest
bundled service providers of 401(k) plans in the United States. MLPF&S provides
a wide variety of retirement plan products, particularly benefits consulting,
administration, investment, employee education, and communication services to
401(k) and other benefit plans. At the end of 1999, it provided these services
to over 20,000 corporate sponsored 401(k) plans, representing over $111 billion
in plan assets. Its services to this market were enhanced by Merrill Lynch's
1998 acquisition of Howard Johnson & Company, a benefits and actuarial
consulting firm which administers plans for more than 255 companies with more
than one million participants. Merrill Lynch is also a leading provider of
administrative services for stock option and stock purchase plans.
MLPF&S provides custodial services to individual investors in connection
with the investors' maintenance of Individual Retirement Accounts ("IRAs"),
including IRAs established under Simplified Employee Pension and SIMPLE plans.
At the end of 1999, there were approximately $181.5 billion in customer assets
in more than 2.6 million Merrill Lynch IRAs, which includes approximately
358,000 Roth and Education IRAs representing more than $4.4 billion in client
assets.
Business Financial Services:
Merrill Lynch provides financing services to small- and medium-sized
businesses in conjunction with the Working Capital Management(Service Mark)
account ("WCMA(Registered Trademark) account") through Merrill Lynch Business
Financial Services Inc. ("MLBFS"). The WCMA account combines business checking,
borrowing, investment, and electronic funds transfer services into one account
for participating business clients. At the end of 1999, there were more than
142,000 WCMA accounts that, in the aggregate, had investment assets of more than
$106 billion.
In addition to providing qualifying clients with short-term working capital
financing through the WCMA commercial line of credit, MLBFS offers assistance to
business clients with their term lending, equipment, and other asset-based
financing needs, as well as financing for owner-occupied commercial real estate.
In 1999, MLBFS originated more than $1.9 billion in new small business and other
commercial loans and, at the end of 1999, total outstanding loans were more than
$2.6 billion, of which approximately 97% were secured by tangible assets pledged
by customers.
Merrill Lynch also provides business advisory services, including strategic
services to middle market companies.
Insurance Activities:
Merrill Lynch's insurance services consist of the underwriting of life
insurance and annuity products by Merrill Lynch Life Insurance Company ("MLLIC")
and ML Life Insurance Company of New York ("ML Life") and of the sale of
proprietary and non-proprietary life insurance and annuity products through
Merrill Lynch Life Agency Inc. and other insurance agencies affiliated or
associated with MLPF&S operating in the United States and Canada.
MLLIC, an Arkansas stock life insurance company, is authorized to
underwrite insurance and annuities products in 49 states, Puerto Rico, the
District of Columbia, Guam, and the U.S. Virgin Islands. These products are
marketed to
4
MLPF&S customers. Although authorized to do so, it does not presently underwrite
accident and health insurance. At year-end 1999, MLLIC had approximately $14.4
billion of life insurance in force. At year-end 1999, MLLIC had annuity
contracts in force of more than $10.3 billion in value.
ML Life, a New York stock life insurance company, is authorized to
underwrite life insurance, annuities, and accident and health insurance in nine
states; however, it does not presently underwrite accident and health insurance.
At year-end 1999, ML Life had approximately $1.9 billion of life insurance in
force, which amount included approximately $936 million reinsured from yearly
renewable term insurance of an unaffiliated insurer. At year-end 1999, ML Life
had annuity contracts in force of approximately $836 million in value.
Through agency agreements, licensed affiliate insurance agencies and other
insurance agencies associated with MLPF&S sell life and health insurance and
annuity products. A significant portion of these sales consists of products
underwritten by MLLIC and ML Life.
Banking, Trust, Mortgage Lending and Related Activities:
Merrill Lynch Bank & Trust Co. ("MLBT") and Merrill Lynch Bank USA
("MLBUSA"), both of which are state chartered depository institutions insured by
the Federal Deposit Insurance Corporation, offer certificates of deposit, money
market deposit accounts (including deposit accounts offered through the Insured
Savings(Service Mark) Account program for the CMA service, the Retirement Asset
Savings Program(Registered Trademark) for certain Merrill Lynch retirement
accounts and, beginning in December 1999, the Banking Advantage(Registered
Trademark) program for ML Direct accounts) and other deposit accounts, originate
and purchase secured loans, and issue VISA(Registered Trademark) cards.
Merrill Lynch provides personal trust, employee benefit trust, and
custodial services to clients in the U.S. through eight state-chartered trust
institutions and a federally chartered savings bank. Trust services outside of
the United States are provided by Merrill Lynch Bank and Trust Company (Cayman)
Limited ("MLBT Cayman").
Merrill Lynch Credit Corporation ("MLCC") offers a broad selection of real
estate-based lending products enabling clients to purchase and refinance their
homes as well as to manage their other personal credit needs. MLCC offers a
variety of adjustable-rate and fixed-rate first mortgage loans throughout the
United States, including the PrimeFirst(Service Mark) mortgage program. In
addition, MLCC originates and services home equity credit lines and other
mortgage loans as well as services mortgage loans for affiliated and
unaffiliated financial institutions. MLCC uses a variety of financing techniques
to fund its loan portfolio, including securitizing its mortgages for sale into
the secondary marketplace. MLCC also offers securities-based non-purpose lending
through its Omega(Service Mark) account, a personal line of credit using
eligible securities as collateral that is accessible by VISA(Registered
Trademark) card and by check.
Merrill Lynch International Bank Limited ("MLIB Limited"), a United Kingdom
bank provides collateralized lending, letter of credit services and foreign
exchange trading services to, and accepts deposits from, international clients.
Merrill Lynch Bank (Suisse) S.A., a Swiss bank, provides loans, deposits and
portfolio management services, and individual client services to non-U.S.
individual clients.
The Asset Management Group
- --------------------------
Merrill Lynch's asset management activities are conducted through AMG
using, principally, the Merrill Lynch, Mercury and Hotchkis and Wiley brand
names. The principal subsidiaries engaged in these activities are Merrill Lynch
Asset Management LP ("MLAM") and Mercury Asset Management Ltd ("MAM"). AMG is
one of the largest asset management organizations in the world having total
assets under management of approximately $557 billion at the end of 1999
compared with approximately $501 billion at the end of 1998.
At the end of 1999, through portfolio managers located in the United
States, the United Kingdom, Japan, Australia, Hong Kong, Canada, Switzerland and
Singapore, AMG managed a wide variety of investment products. These ranged from
money market funds and other forms of short-term fixed-income investments to
long-term taxable and tax-exempt fixed-income funds or portfolios, along a broad
spectrum of quality ratings and maturities. AMG also manages a wide variety of
equity and balanced funds or portfolios that invest in more than 60 markets
globally.
5
AMG offers a wide array of taxable fixed-income, tax-exempt fixed-income,
equity and balanced open-ended mutual funds in the United States. The MLAM
brand of mutual funds (except for its money-market funds) are generally offered
pursuant to the Merrill Lynch Select Pricing(Service Mark) system, which allows
investors four pricing alternatives. The Hotchkis and Wiley brand of mutual
funds are sold to clients on a no-load basis. The Mercury Asset Management brand
of mutual funds, introduced in 1998, are distributed through Merrill Lynch's
distribution network both inside and outside the United States. AMG also offers
a broad family of unit trusts in the United Kingdom under the Mercury brand. In
1998, AMG introduced a new family of 17 mutual funds with the Merrill Lynch
Mercury Asset Management (Japan) brand that are distributed through Merrill
Lynch Japan Securities Co., Ltd.
AMG offers all of its brands of mutual funds to clients in other global
markets through both the Merrill Lynch distribution network and through
unaffiliated financial intermediaries. Of the more than $63 billion of mutual
funds sold by MLPF&S in 1999, approximately $20 billion represented sales of
mutual funds advised by Merrill Lynch Asset Management or Merrill Lynch Mercury
Asset Management. At the end of 1999, AMG advised approximately $266 billion
globally of mutual funds or their non-U.S. equivalent.
AMG provides separate account investment management services to a
geographically diversified client base that includes pension funds,
corporations, governments, supranational organizations, central banks and other
institutions. Marketing offices in over 15 countries further support these
services. At the end of 1999, the total assets under management of such services
were approximately $247 billion. AMG offers similarly structured separate
account investment management services for individual clients and smaller
institutions and corporations both in the United States, the United Kingdom and
globally. The total assets under management for these services were $44 billion
at the end of 1999.
The Corporate and Institutional Client Group
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The CICG businesses, comprising one of Merrill Lynch's business segments,
provide comprehensive investment banking, financing, and related products and
services to corporations, institutional clients and sovereign governments
throughout the world. These activities are conducted through a network of
subsidiaries, including MLPF&S, Merrill Lynch International ("MLI"), and a
number of other subsidiaries located in and outside the United States. CICG's
activities predominately involve providing investment banking and other
strategic mergers and acquisition advisory services, trading, both as a broker
and as a dealer, in equity and debt securities and derivative instruments,
publishing and disseminating equity, debt and economic research products and
services and providing various other capital markets services, including
securities clearance activities.
CICG's operations in the United States are conducted primarily out of
Merrill Lynch's headquarters in New York City and from offices located
throughout the United States, including Chicago, Houston, Boston, San Francisco,
Palo Alto, and Menlo Park, California. Merrill Lynch's CICG activities outside
the United States are conducted through MLI and the many non-U.S., locally-
established affiliates strategically located throughout the world, and a network
of offices, including representative and liaison offices, located in more than
40 countries outside the United States. This office network services sovereigns,
major "money center" institutions as well as thousands of regional institutions.
Investment Banking Activities:
Merrill Lynch is a leading global investment banking firm that participates
in every aspect of investment banking for corporate, institutional, and
governmental clients and acts in principal, agency, and advisory capacities.
Advisory services include advice on strategic matters, including mergers and
acquisitions, divestitures, spin-offs, restructurings, capital structuring,
leveraged buyouts, and defensive projects. Merrill Lynch provides a wide variety
of financial services, including underwriting the sale of securities to the
public, privately placing securities with investors, providing structured and
derivative financings, including project financing, and mortgage and lease
financing.
Merrill Lynch, either directly or through affiliates, provides advice,
valuation services, and financing assistance and engages in the underwriting and
private placement of high-yield securities in connection with, among other
things, leveraged buyouts and other acquisition-related transactions. It has,
from time to time, taken principal positions in transactions and has extended
credit to clients in the form of senior and subordinated debt, as well as
provided bridge financing on a select basis, and syndicated loans. Before
engaging in any of these financing activities, an analysis is
6
performed to ascertain the underlying creditworthiness of the particular client
and the liquidity of the market for securities that may be issued in connection
with any such financings and to determine the likelihood of refinancing within a
reasonable period. Additionally, equity interests in the subject companies are,
from time to time acquired as part of, or in connection with, such activities.
Merrill Lynch has engaged in the business of making private equity
investments in companies and sponsoring and managing private equity funds that
have invested in equity and debt securities of various companies. The limited
partners of the funds managed by Merrill Lynch affiliates are primarily private
corporate and institutional investors. Merrill Lynch, through MLPF&S, MLI, and
its other subsidiaries, may underwrite, trade, invest, and make markets in
certain securities of companies in which the Merrill Lynch managed funds have
invested, and may also provide financial advisory services to these companies.
Brokerage, Dealer and Related Activities:
In the United States, MLPF&S is a broker for corporate, institutional and
governmental clients, and is a dealer in the purchase and sale of corporate
securities, primarily equity and debt securities traded on exchanges or in the
over-the-counter markets. MLPF&S also acts as a broker and a dealer in the
purchase and sale of mutual funds, money market instruments, government
securities, high-yield bonds, municipal securities, futures, and options,
including option contracts for the purchase and sale of various types of
securities. Merrill Lynch, through MLPF&S, MLI, and various of its subsidiaries
as described below, is a dealer in equity and fixed income securities of a
significant number of U.S. and non-U.S. issuers, in U.S. and other sovereign
government obligations, in U.S. municipal securities, and in mortgage-backed and
asset-backed securities.
As an adjunct to its trading activities conducted by its subsidiaries,
Merrill Lynch places its capital at risk by engaging in block positioning to
facilitate transactions in large blocks of listed and over-the-counter
securities and by engaging, from time to time, in arbitrage transactions for its
own account. In its block positioning activities, securities are purchased, or
are sold short for its own account, without having full commitments for their
resale or covering purchase, thereby employing its capital to effect large
transactions. Such positioning activities are undertaken after analyzing a given
security's marketability, and any position taken typically is liquidated as soon
as practicable. In addition, Merrill Lynch facilitates various trading
strategies involving the purchase and sale of financial futures contracts and
options and, in connection with this activity, it may establish positions for
its own account and risk.
MLPF&S regularly makes a market in the equity securities of approximately
550 U.S. corporations. In addition, it engages in dealer transactions in
approximately 5,400 securities of non-U.S. issuers traded in the over-the-
counter markets, and conducts market-making activities with clients and other
dealers. MLI regularly makes a market and trades in the equity securities of
approximately 2,200 non-U.S. corporations. MLPF&S and MLI are also dealers in
mortgage-backed, asset-backed, and corporate fixed-income securities.
Through its subsidiary, Merrill Lynch Government Securities Inc. ("MLGSI"),
Merrill Lynch is a primary dealer in obligations issued or guaranteed by the
United States Government and regularly makes a market in securities issued by
Federal agencies and other government-sponsored entities, including Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. It deals in mortgage-backed pass-
through certificates issued by certain of these entities, and also in related
futures, options, and forward contracts for its own account, to hedge its own
risk, and to facilitate customers' transactions. As a primary dealer, MLGSI acts
as a counterparty to the Federal Reserve Bank of New York and regularly reports
positions and activities to the Federal Reserve Bank of New York.
An integral part of its business involves entering into repurchase
agreements whereby funds are obtained by the Merrill Lynch subsidiary engaging
in the transaction pledging its own securities as collateral. The repurchase
agreements provide financing for dealer inventory and serve as short-term
investments for customers, which customers include certain Merrill Lynch
affiliates. As part of its business as a dealer in governmental obligations, the
Merrill Lynch affiliate also enters into reverse repurchase agreements whereby
it provides funds against the pledge of collateral by customers. Such agreements
provide the Merrill Lynch affiliate with needed collateral and provide its
customers with temporary liquidity for their investments in United States
Government and agency securities or other non-U.S. government securities.
7
Various non-U.S. Merrill Lynch subsidiaries act as dealers in certain
securities issued or guaranteed by the governments where such subsidiaries are
located.
Derivative Dealing Activities:
Merrill Lynch, through MLPF&S, MLI, as well as Merrill Lynch Capital
Services, Inc. ("MLCS") and Merrill Lynch Derivative Products AG ("MLDP") act as
intermediaries and principals in a variety of interest rate, currency, and other
over-the-counter derivative transactions. MLI engages in the equity and credit
derivatives business in the over-the-counter markets, and Merrill Lynch Capital
Markets Bank Limited ("MLCMBL") is a credit intermediary and conducts part of
Merrill Lynch's non-dollar swap activities. MLCS and MLDP are Merrill Lynch's
primary derivative product dealers.
MLCS primarily acts as a counterparty for certain derivative financial
products, including interest rate and currency swaps, caps and floors, currency
options, and credit derivatives. MLCS maintains positions in interest-bearing
securities, financial futures, and forward contracts primarily to hedge its
derivative exposures. In the normal course of its business, MLCS enters into
repurchase and resale agreements with certain affiliated companies. MLCS also
engages in certain commodity-related transactions as a principal, and is
licensed as a power marketer by the Federal Energy Regulatory Commission.
MLDP acts as an intermediary for certain derivative products, including
interest rate and currency swaps, between MLCS and counterparties that are
highly rated or otherwise acceptable to MLDP. Its activities address the desire
of certain swap customers to limit their trading to those dealers having the
highest credit quality. MLDP has been assigned the Aaa, AAA, and AAA
counterparty rating by the rating agencies, Moody's Investors Service, Inc.,
Standard & Poor's, and Fitch IBCA, Inc., respectively. Customers meeting certain
credit criteria enter into swaps with MLDP and, in turn, MLDP enters into
offsetting mirror swaps with MLCS. However, MLCS is required to provide MLDP
with collateral to meet certain exposures MLDP may have to MLCS.
Merrill Lynch Capital Markets Bank Limited, an Irish bank with branch
offices in Frankfurt, Johannesburg, Labuan (Malaysia), Milan, and Tokyo, acts as
a credit intermediary and conducts part of Merrill Lynch's non-dollar swap
activities. It engages in foreign exchange, and swap and other derivative
transactions, in addition to its underwriting, lending and institutional sales
activities.
Foreign Exchange Activities:
Merrill Lynch provides foreign exchange trading services to corporations
and institutions in various countries through Merrill Lynch International Bank,
an Edge Act corporation ("MLIB"), MLIB Limited and MLCMBL.
Mortgage Dealing Activities:
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is a dealer in whole loan
mortgages, mortgage loan participations, mortgage servicing, and corporate bank
loans. MLMCI, through its CMO Passport(Service Mark) service, provides dealers
and investors with general indicative information and analytic capability with
respect to collateralized mortgage obligations, mortgage pass-through
certificates, and asset-backed securities. As an integral part of its business,
MLMCI enters into repurchase agreements whereby it obtains funds by pledging its
own whole loans as collateral. The repurchase agreements provide financing for
MLMCI's inventory and serve as short-term investments for MLMCI's customers.
MLMCI also enters into reverse repurchase agreements through which it provides
funds to customers collateralized by whole loan mortgages, thereby providing
them with temporary liquidity. MLMCI also has a mortgage conduit that purchases
commercial and multi-family mortgage loans from lenders and securitizes these
loans for sale to investors. In addition, MLMCI provides to its clients short-
term financing secured by performing and non-performing commercial real estate.
MLMCI also makes proprietary equity investments in U.S. and non-U.S. companies
owning performing, sub-performing and non-performing real estate and mortgages.
8
Money Markets Activities:
Merrill Lynch, through various subsidiaries including Merrill Lynch Money
Markets Inc. ("MLMMI"), provides a full range of origination, trading, and
marketing services with respect to money market instruments such as commercial
paper, bankers' acceptances, and institutional certificates of deposit. Merrill
Lynch also provides services in connection with the origination of medium-term
notes issued by U.S. and non-U.S. corporations and short- and medium-term bank
notes issued by financial institutions, and through MLPF&S and MLI, it trades
and markets such notes. MLMMI is also a commercial paper dealer for U.S. and
non-U.S. corporations and financial institutions. MLMMI also acts as a dealer
for U.S. and non-U.S. financial institutions in the certificate of deposit and
bankers' acceptance markets and in connection with the purchase of certificates
of deposit from Federally-insured depository institutions. Such instruments are
resold to certain institutional customers such as banks, insurance companies,
investment companies, pension plans, and state and local governments. MLMMI, in
cooperation with MLPF&S, originates certificates of deposit issued by bank and
thrift institutions that are sold to a broad range of individual investors of
MLPF&S.
Futures Business Activities:
Merrill Lynch's futures business activity is conducted through MLF and
other subsidiaries. MLF holds memberships on all major commodity and financial
futures exchanges and clearing associations in the United States and it also
carries positions reflecting trades executed on exchanges outside of the United
States. Other Merrill Lynch subsidiaries also hold memberships on major
commodity and financial futures exchanges and clearing associations outside the
U.S. and may also carry positions in proprietary and customer accounts. All
futures and futures options transactions are executed, cleared through and/or
carried by MLF and other Merrill Lynch subsidiaries engaged in futures
activities. In certain contracts, or on certain exchanges, third party brokers
are utilized to execute and/or clear trades. As part of its brokerage
activities, MLPF&S, as a futures commission merchant, introduces customers to
MLF for the purchase and sale of futures contracts and options on futures
contracts. MLPF&S and certain of its affiliates may also take proprietary
market positions in futures and futures options in certain instances.
In early 2000, Merrill Lynch refocused its futures activities on financial
futures and options, and discontinued its sales and floor execution activities
for agricultural and metals futures and options contracts.
Research Services:
The Global Securities Research & Economics Group provides equity, fixed-
income, and economic research services on a global basis to Merrill Lynch's
institutional and individual client sales forces and their customers. This group
covers and distributes fundamental equity and fixed-income research, technical
market and quantitative analyses, convertible securities analyses, investment
and fixed-income strategy recommendations, high-yield debt securities research,
credit research on municipal securities, and futures research information.
Merrill Lynch consistently ranks among the leading research providers in
the industry, and its analysts and other professionals cover approximately 3,700
companies located in 26 countries, with approximately half of the staff now
dedicated to non-U.S. research activities. Current information and investment
opinions on these companies, as well as on industry sectors and countries, are
available to Merrill Lynch's individual and institutional customers through
their financial consultants and account executives, and through various
electronic means, including Merrill Lynch's websites.
Securities Clearing Services:
MLPF&S provides securities clearing services through its subsidiaries,
Broadcort Capital Corp. ("BCC") and Merrill Lynch Professional Clearing Corp.
("MLPCC"). BCC provides these services to over 100 unaffiliated broker-dealers.
Those utilizing BCC's clearing services may also execute transactions through
BCC's fixed-income desk and participate in underwritings of Defined Asset Funds
sponsored by MLPF&S. While the introducing broker-dealer firm retains all sales
functions with their customers, BCC services the customers' accounts and handles
all settlement and credit aspects of transactions. MLPCC clears transactions for
specialists and market-makers on various national and regional stock exchanges;
clears commodities futures transactions for clients through a divisional
clearing arrangement with MLF; and clears transactions of arbitrageurs,
customers, and other professional trading entities. Merrill Lynch Canada Inc.
provides securities clearing services to eight unaffiliated Canadian securities
dealers.
9
Significant Strategic Initiatives
Among Merrill Lynch's significant strategic initiatives were e-commerce
developments in our evolving business model for the delivery of information and
products and services to our clients. In PCG, this change means that on-line
services and research may be combined with the personalized advice of a Merrill
Lynch Financial Consultant. In CICG, this change means the introduction of an
enhanced business model for institutional debt and equity issuance, trading, and
servicing activities. Examples of these, and other recent strategic
initiatives, include the following:
. Launched in July, Unlimited Advantage(Service Mark), a nondiscretionary
brokerage service, with asset-based pricing, subject to a minimum annual
charge of $1,500. Percentage rates charged to customers decline as assets
increase. Unlimited Advantage(Service Mark) offers U.S. clients a wide array
of services, including virtually unlimited trading for most investors in most
securities, unlimited enrolled accounts, traditional financial consultant
relationships, a CMA(Registered Trademark) Visa(Registered Trademark)
Signature(Service Mark) card with a travel rewards program, a financial plan,
online capabilities, and access to Merrill Lynch research.
. Introduced in October, International Asset Power(Service Mark) and Asset
Partner (Service Mark), in Canada, the international versions of Unlimited
Advantage.
. Introduced in December, ML Direct(Service Mark), a new Internet account for
U.S. clients preferring a self-directed approach to investing. The online
service addresses investment and cash management needs to guide customer
decision making. In addition to online equity trading for as little as $29.95
per trade, clients can purchase and sell mutual funds, receive Merrill Lynch
research, and purchase fixed-income products. ML Direct also provides access
to the Global Investor Network(Service Mark), Merrill Lynch's multimedia
platform featuring timely audio and video reports from analysts, in addition
to banking services and online shopping.
. Formed the Direct Markets group to develop integrated, electronically-
delivered products and services for CICG clients worldwide, including
research, analytics, investment information, underwriting, trading, and
account reporting. During the 1999 fourth quarter, Direct Markets introduced
its first version of iDeal(Service Mark), a new software platform for
offering all types of debt and equity securities that is designed to increase
the efficiency of the underwriting process, enhance the dissemination of
information, and broaden distribution.
. Announced in December a strategic alliance with Multex.com to co-develop
global research and information web sites for Merrill Lynch's CICG clients,
and to develop technology that will offer clients expanded market data and
news, as well as interactive investor conference calls to give customers
real-time access to Merrill Lynch's research analysts.
. Invested in electronic trading and market systems, such as Primex,
Archipelago and TradeWeb.
. Established an integrated global Asset Management Group with three regional
operating units servicing a diverse worldwide clientele. In addition, the
initiatives included the hire of new senior marketing officers and senior
investment managers, including chief investment officers and senior portfolio
managers, as well as a quantitative management team, Merrill Lynch
Quantitative Advisors. These changes have contributed to expanded product
lines, including both active and quantitative investment funds, improved
investment performance across both retail and institutional funds, and
expanded distribution through Merrill Lynch's sales channels and external
distribution partners.
. In January 2000, announced the expansion of Merrill Lynch's banking
initiatives, which will include new deposit product offerings to be
introduced in the first half of 2000. These new products will include
Federally-insured interest-bearing bank deposits into which cash from certain
Merrill Lynch client accounts, previously swept into money market mutual
funds, will be swept. It is anticipated that the new deposit product
offerings will enhance the deposit base at Merrill Lynch's two FDIC-insured
U.S. banking subsidiaries.
10
Competition
All aspects of Merrill Lynch's business are intensely competitive,
particularly in the underwriting, trading, and advisory activities, and have
been affected by the entry of several new and non-traditional competitors such
as commercial banks and insurance companies and Internet broker-dealers, and by
the consolidation of others. Merrill Lynch competes for clients, market share,
and human talent in every aspect of its business. It competes directly on a
worldwide basis with other U.S. and non-U.S. trading, investment banking and
financial advisory service firms, brokers and dealers in securities and futures.
It also competes with commercial banks and their affiliates in these businesses,
particularly in its derivatives and capital markets businesses. Many of Merrill
Lynch's non-U.S. competitors may have competitive advantages in their home
markets. Merrill Lynch's competitive position depends to an extent on prevailing
worldwide economic conditions and U.S. and non-U.S. governmental policies.
Through its subsidiaries and affiliates, Merrill Lynch also competes for
investment funds with mutual fund management companies, insurance companies,
finance and investment advisory companies, banks, and trust companies and
institutions. Merrill Lynch competes for its individual and institutional
clients on the basis of price, the range of products that it offers, the quality
of its services, its financial resources, and product and service innovation.
Financial services companies also compete to attract and retain successful
financial consultants and other revenue-producing personnel. Merrill Lynch's
insurance businesses operate in highly competitive environments. Many insurance
companies, both stock and mutual, are older and larger and have more substantial
financial resources and larger agency relationships than do Merrill Lynch's
insurance subsidiaries.
For a further discussion of the competitive environment, see Business
Environment above.
Regulation
Certain aspects of Merrill Lynch's business, as that of its competitors and
the financial services industry in general, are subject to stringent regulation
by U.S. Federal and state regulatory agencies and securities exchanges and by
various non-U.S. governmental agencies or regulatory bodies, securities
exchanges, and central banks, each of which have been charged with the
protection of the financial markets and the interests of those participating in
those markets. These regulatory agencies in the United States include, among
others, the Securities and Exchange Commission ("SEC"), Commodity Futures
Trading Commission ("CFTC"), Federal Deposit Insurance Corporation ("FDIC"),
Municipal Securities Rulemaking Board ("MSRB"), the New York State Banking
Department ("NYSBD") and Office of Thrift Supervision ("OTS"). In other areas of
the world, these regulators include, in the United Kingdom, the Financial
Services Authority ("FSA") (which has assumed the banking supervisory role
previously undertaken by the Bank of England) the Securities and Futures
Authority ("SFA"), and the Investment Management Regulatory Organization
("IMRO"), and elsewhere, the Central Bank of Ireland, the Federal Banking
Supervisory Authority in Germany, the Swiss Federal Banking Commission, the
Japanese Financial Supervisory Agency, the Monetary Authority of Singapore, the
Office of Superintendent of Financial Institutions in Canada, the Canadian
Securities Administrators, the Securities Commission in Argentina, the
Securities Commission in Brazil, the Securities Commission in Mexico and the
Securities and Futures Commission in Hong Kong, among many others.
Additional legislation and regulations and changes in rules promulgated by
the SEC or other U.S. Federal and state governmental regulatory authorities and
self-regulatory organizations and by non-U.S. governments and governmental
regulatory agencies may directly affect the manner of operation and
profitability of Merrill Lynch.
United States Regulatory Oversight and Supervision:
MLPF&S and certain other subsidiaries of ML & Co. are registered as broker-
dealers with the SEC and as such are subject to regulation by the SEC and by
self-regulatory organizations, such as the National Association of Securities
Dealers, Inc. (the "NASD") and the securities exchanges of which each is a
member. Certain Merrill Lynch subsidiaries and affiliates, including MLPF&S,
MLAM, and MLIP, are registered as investment advisers with the SEC.
Those Merrill Lynch entities that are broker-dealers registered with the
SEC and members of U.S. national securities exchanges are subject to Rule 15c3-1
under the Securities Exchange Act of 1934 (the "Exchange Act") which is designed
to measure the general financial condition and liquidity of a broker-dealer.
Under this rule, they are required to maintain the minimum net capital deemed
necessary to meet broker-dealers' continuing commitments to customers and
others. Under certain circumstances, this rule limits the ability of ML&Co. to
withdraw capital from such broker-dealers. Additional information regarding
certain net capital requirements is set forth in Note 13 to the Consolidated
Financial Statements in the Annual Report.
11
Certain Merrill Lynch subsidiaries are also subject to the risk assessment
rules adopted by the SEC under the Market Reform Act of 1990, which require,
among other things, that certain broker-dealers maintain and preserve records
and other information, describe risk management policies and procedures, and
report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operating condition of the broker-dealer.
Broker-dealers are also subject to other regulations covering the
operations of their business, including sales and trading practices, use of
client funds and securities, and conduct of directors, officers, and employees.
Broker-dealers are also subject to regulation by state securities administrators
in those states where they do business. Violations of the stringent regulations
governing the actions of a broker-dealer can result in the revocation of broker-
dealer licenses, the imposition of censures or fines, the issuance of cease and
desist orders, and the suspension or expulsion from the securities business of a
firm, its officers, or employees. The SEC and the national securities exchanges
emphasize in particular the need for supervision and control by broker-dealers
of their employees.
The SEC, various banking regulators, the Financial Accounting Standards
Board, and Congressional committees, among others, have launched a number of
initiatives which have the effect of increasing regulation, and requiring
greater disclosure, of financial instruments, including derivatives positions
and activities. Merrill Lynch, along with certain other major U.S. securities
firms, has implemented a voluntary oversight framework to address issues related
to capital, management controls, and counterparty relationships arising out of
the over-the-counter derivatives activities of unregulated affiliates of SEC-
registered broker-dealers and CFTC-registered futures commission merchants.
Merrill Lynch formed its Risk Oversight Committee as an extension of its risk
management process to provide general oversight of risk management for all of
its institutional trading activities and to monitor compliance with its
commitments respecting this voluntary oversight initiative.
MLIP and QA Advisers LLC are registered with the Commodity Futures Trading
Commission as commodity pool operators and commodity trading advisors.
MLGSI is subject to regulation by the NASD and the Chicago Board of Trade
and is required to maintain minimum net capital pursuant to rules of the U.S.
Department of the Treasury. Merrill Lynch's municipal finance professionals are
subject to various trading and underwriting regulations of the MSRB. MLPF&S and
MLF are registered futures commission merchants and regulated by the CFTC, the
National Futures Association ("NFA"), and the commodity exchanges of which each
is a member. The CFTC and the NFA impose net capital requirements on these
companies. MLIP is registered with the CFTC as a commodity pool operator and a
commodity trading advisor and is a member of the NFA in such capacities.
Merrill Lynch's banking and lending activities are supervised and regulated
by a number of different Federal and state regulatory agencies. MLBT is
regulated primarily by the State of New Jersey and by the FDIC. Certain of the
activities of MLBFS and MLCC are regulated by the New Jersey Department of
Banking. In addition to New Jersey, MLCC is also licensed or registered to
conduct its lending activities in 35 other jurisdictions and MLBFS is licensed
or registered in 8 states, subjecting each to regulation and examination by the
appropriate authorities in those states.
MLBUSA is regulated primarily by the State of Utah and by the FDIC. MLIB is
regulated by the Federal Reserve Bank of New York. Merrill Lynch's U.S. trust
institutions are subject to regulation by the OTS in the case of the federal
savings bank and by the bank regulatory agencies in the states where the state-
chartered institutions are incorporated.
Merrill Lynch's insurance subsidiaries are subject to state insurance
regulatory supervision. ML Life is subject to regulation and supervision by the
New York State Insurance Department. MLLIC is subject to regulation and
supervision by the Insurance Department of the State of Arkansas. Both MLLIC and
ML Life are subject to similar regulation in the other states in which they are
licensed.
12
Non-U.S. Regulatory Oversight and Supervision:
Merrill Lynch's business is also subject to extensive regulation by various
non-U.S. governments, securities exchanges, central banks, and regulatory
bodies, particularly in those countries where it has established an office.
Certain Merrill Lynch subsidiaries are regulated as broker-dealers under the
laws of the jurisdictions in which they operate.
MLI and MLIB Limited are regulated in the United Kingdom by the SFA.
Merrill Lynch Capital Markets Bank Limited, which engages in the derivatives
business, is regulated by the Central Bank of Ireland and the New York State
Banking Department. Merrill Lynch's activities in Australia are regulated by the
Australian Securities and Investment Commission or the Australian Prudential
Regulation Authority, and its Hong Kong and Singapore operations are regulated
and supervised by the Hong Kong Securities and Futures Commission and The
Monetary Authority of Singapore, respectively. Merrill Lynch's Japanese business
is subject to the regulation of the Financial Supervisory Agency as well as
other Japanese regulatory authorities. Merrill Lynch Phatra Securities is
regulated primarily by the Securities and Exchange Commission of Thailand and
the Stock Exchange of Thailand.
Merrill Lynch Canada is an investment dealer in Canada and is regulated
under the laws of the Canadian provinces by securities commissions and by the
Investment Dealers Association of Canada. It is also a member of all major
Canadian exchanges and is subject to their rules and regulations.
The business of MLAM and MAM is regulated by a number of non-U.S.
regulatory agencies or bodies. Their activities in the United Kingdom are
regulated by IMRO and the Personal Investment Authority and, in other
jurisdictions, by local regulators.
Merrill Lynch's activities in Mexico are regulated by Securities Commission
in Mexico, its activities in Argentina by the Securities Commission in
Argentina, and its activities in Brazil by the Securities Commission in Brazil.
Merrill Lynch's subsidiaries engaged in banking and trust activities
outside the United States are regulated by various governmental entities in the
particular jurisdiction where they are chartered, incorporated, and/or conduct
their business activities. In addition to being regulated by the NYSBD, MLIB
Limited is regulated by the FSA in respect of its banking activities (previously
by the Bank of England) and The Monetary Authority of Singapore. Merrill Lynch
Bank (Suisse) S.A. is regulated by the Swiss Federal Banking Commission. MLBT
Cayman is regulated by the Cayman Monetary Authority and the Florida Department
of Banking. Banco Merrill Lynch is regulated by the Brazilian Central Bank.
Item 2. Properties
Merrill Lynch has a number of offices throughout the world. Other than
those described below as being owned, substantially all offices of Merrill Lynch
subsidiaries throughout the world are located in leased premises. Facilities
owned or occupied by Merrill Lynch are believed to be adequate for the purposes
for which they are currently used and are well maintained. Set forth below is
a brief description and the approximate square footage of the principal
facilities of Merrill Lynch. Each of these principal facilities support all of
Merrill Lynch's segments, other than the property on King William Street in
London referred to below, which is utilized solely by our Asset Management
Group. The information regarding Merrill Lynch's property lease commitments is
set forth in Note 9 to the Consolidated Financial Statements under the caption
Leases in the Annual Report.
Principal Facilities in the United States:
Merrill Lynch's executive offices and principal administrative offices are
located in leased premises at the World Financial Center in New York City.
Separate Merrill Lynch affiliates lease both the North Tower (1,800,000 square
feet) and the South Tower (2,500,000 square feet); both leases expire in 2013.
Merrill Lynch occupies the entire North Tower and approximately half the South
Tower. Another Merrill Lynch affiliate is a partner in the partnership that
holds the ground lessee's interest in the North Tower.
In New York City, MLPF&S also holds a lease for 662,000 square feet in
lower Manhattan expiring in 2007. In 1998, Merrill Lynch began partial occupancy
of a 760,000 square foot building at 222 Broadway, which was purchased by a
subsidiary in 1997; as third party leases expire, Merrill Lynch intends to
occupy the entire building. In New Jersey, Merrill Lynch affiliates own a
389,000 square foot hotel, conference and training center, a 669,000 square foot
office
13
building in Plainsboro, and a 414,000 square foot building on 34 acres at 300
Davidson Avenue in Somerset. MLPF&S holds a 590,000 square foot lease at 101
Hudson Street in Jersey City. In 1999, Merrill Lynch affiliates leased land and
commenced construction on facilities in Hopewell, New Jersey which will
consolidate existing operations and allow for future expansion. Initial
operations are scheduled to commence in the Fall of 2000. Merrill Lynch
affiliates own a 54-acre campus in Jacksonville, Florida, with four buildings,
and a 70-acre campus in Englewood, Colorado with two buildings.
Principal Facilities Outside the United States:
In London, Merrill Lynch leases 250,000 square feet at Ropemaker Place with
a cancellation right in 2002. In 1998, Merrill Lynch purchased a site in the
City of London and is currently constructing a headquarters complex of 550,000
square feet. The new headquarters will replace the Ropemaker facility, and is
expected to be occupied in 2001. An additional 170,000 square feet of office
space is also leased at Farringdon Road. This lease, which has a 25 year term,
commenced in 1990. Merrill Lynch also leases approximately 140,000 square feet
under a lease expiring in 2014 on King William Street, where Merrill Lynch
Mercury Asset Management's operations are headquartered.
Item 3. Legal Proceedings
ML & Co., certain of its subsidiaries, including MLPF&S, and other persons have
been named as parties in civil actions and arbitration proceedings, including
those described below. Each of the following actions is reported as of March 6,
2000.
Sumitomo Litigation.
In December 1999, Merrill Lynch entered into an agreement in principle with
the plaintiffs to settle two purported class actions in the United States
District Court for the Western District of Wisconsin (Loeb Industries, Inc. v.
Sumitomo Corp., et al., instituted June 7, 1999; Metal Prep Co., Inc. v.
Sumitomo Corp., et al., instituted July 30, 1999) and two purported class
actions in the Superior Court for the County of San Diego (Heliotrope General,
Inc. v. Sumitomo Corp., et al., instituted July 8, 1999; R.W. Strang Mechanical
v. Sumitomo Corp., et al., instituted August 20, 1999) for a total of $20
million. Those actions alleged that Merrill Lynch conspired with Sumitomo
Corporation and others to inflate copper prices. These matters were settled
without an adjudication of the merits of the claims and Merrill Lynch denied
liability in connection with the settlement. The settlement in principle is
subject to the execution of a definitive settlement agreement and court
approval.
JAS Securities Litigation.
JAS Securities LLP v. Merrill Lynch, instituted July 14, 1999, was brought
against Merrill Lynch as a purported class action in the Superior Court of the
State of Delaware, on behalf of beneficial owners of certain exchangeable debt
securities. The complaint alleges breach of contract based on Merrill Lynch's
alleged use of an incorrect formula for redeeming certain exchangeable debt
securities prior to their maturity. Plaintiff has asserted that damages are
approximately $255 million. Merrill Lynch has moved to dismiss the action and
plaintiff has moved for partial summary judgment on its claims.
Orange County Litigation
The following actions filed against ML & Co. in connection with Merrill
Lynch's business activities with the Treasurer-Tax Collector of Orange County,
California ("Orange County") have been settled:
City of Atascadero, et al. v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
et al., instituted September 15, 1995, was brought in the Superior Court of the
State of California, San Francisco County by 14 California public entities
against ML & Co., and certain of its subsidiaries and employees. Plaintiffs
alleged, among other things, that the defendants violated state and federal law
in connection with Merrill Lynch's business activities with the Orange County
Treasurer-Tax Collector. In February 2000, Merrill Lynch and the plaintiffs
agreed to settle the case for $32.5 million and payment was made on March 3,
2000. The matter was settled without an adjudication of the merits of the
claims and Merrill Lynch denied liability in connection with the settlement.
14
DeLeon v. Merrill Lynch, Pierce, Fenner & Smith Inc., et al., instituted
December 13, 1994, was brought against MLPF&S, an affiliate, and an employee of
Merrill Lynch as a purported class action in the Superior Court of the State of
California, Orange County, on behalf of individuals whose funds were invested by
the Orange County Treasurer-Tax Collector, alleging breaches of fiduciary duties
and acts of professional negligence in connection with Merrill Lynch's business
activities with the Orange County Treasurer-Tax Collector. Plaintiffs have
agreed to dismiss the case voluntarily without the payment of any damages by
Merrill Lynch.
The following action filed against ML & Co. in connection with Merrill
Lynch's business activities with Orange County is outstanding:
Balan v. Merrill Lynch & Co., Inc., et al., instituted December 16, 1994,
was brought as a purported class action in the United States District Court for
the Southern District of New York on behalf of purchasers of ML & Co.'s common
stock between March 31, 1994 and December 6, 1994 alleging, among other things,
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder by ML & Co. and two of its present or former directors
and officers in connection with Merrill Lynch's disclosure with respect to its
business activities with the Orange County Treasurer-Tax Collector. Damages in
an unspecified amount are sought. Merrill Lynch has moved to dismiss the
action, and is awaiting decision on its motion.
Shareholder Derivative Litigation
In the following shareholder derivative action ML & Co. is named as a
nominal defendant because the action purports to be brought on behalf of ML &
Co. and any recovery obtained by plaintiffs would be for the benefit of ML &
Co.:
Miller v. Schreyer, et al., a consolidated derivative action instituted
October 11, 1991 in the Supreme Court of the State of New York, New York County,
alleges, among other things, breach of fiduciary duty against certain present or
former ML & Co. directors, and against Transmark USA, Inc. and one of its
principals in connection with securities trading transactions that occurred at
year-end 1984, 1985, 1986, and 1988 between subsidiaries of ML & Co. and a
subsidiary of Transmark USA, Inc., Guarantee Security Life Insurance Company,
which was later liquidated. Damages in an unspecified amount are sought.
Merrill Lynch has moved to dismiss the action, and is awaiting a decision on its
motion.
ML & Co. believes it has strong defenses to, and, where appropriate, will
vigorously contest the actions described above that have not already been
settled. Although the ultimate outcome of the actions described above and other
civil actions, arbitration proceedings, and claims pending against ML & Co. or
its subsidiaries as of March 6, 2000, cannot be ascertained at this time and the
results of legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these actions will not have a
material adverse effect on the financial condition or the results of operations
of Merrill Lynch as set forth in the Consolidated Financial Statements of
Merrill Lynch included in the Annual Report, but may be material to the
Company's operating results for any particular period.
15
Item 4. Matters Submitted to a Vote of Securityholders
There were no matters submitted to a vote of security holders during the
1999 fourth quarter.
EXECUTIVE OFFICERS OF MERRILL LYNCH & CO., INC.
The following table sets forth the name, age, present title, principal
occupation, and certain biographical information for the past five years for ML
& Co.'s executive officers, all of whom have been elected by the ML & Co. Board
of Directors and have been appointed as members of the Merrill Lynch Executive
Management Committee. Unless otherwise indicated, the officers listed are of ML
& Co. Under ML & Co.'s by-laws, elected officers are elected annually to hold
office until their successors are elected and qualify or until their earlier
resignation or removal.
David H. Komansky, 60
Chairman of the Board since April 1997; Chief Executive Officer since December
1996; President and Chief Operating Officer from January 1995 to April 1997;
Executive Vice President, Debt and Equity Markets Group from May 1993 to January
1995.
Thomas W. Davis, 46
Executive Vice President and President of Corporate and Institutional Client
Group since March 1998; Executive Vice President and Co-Head of Corporate and
Institutional Client Group from April 1997 to March 1998; Managing Director and
Co-Head of Investment Banking Group from April 1995 to April 1997; Co-Head of
Equity Markets Group from 1993 to April 1995.
Edward L. Goldberg, 59
Executive Vice President, Operations Services Group since January 1999;
Executive Vice President, Operations, Services and Technology from April 1991 to
January 1999.
Stephen L. Hammerman, 62
Vice Chairman of the Board since April 1992; General Counsel since October 1984.
Jerome P. Kenney, 58
Executive Vice President, Corporate Strategy and Research since October 1990,
concurrently with Executive Vice President, Corporate Credit from May 1993 to
May 1995.
John A. McKinley, Jr., 42
Executive Vice President since January 2000; Head of the Technology Group since
January 1999; Chief Technology Officer since October 1998; Senior Vice President
from October 1998 to January 2000. Joined Merrill Lynch in October 1998. Prior,
Chief Technology and Information Officer, General Electric Capital Services,
October 1995 to October 1998; Partner, Ernst & Young LLP, October 1992 to
November 1995.
E. Stanley O'Neal, 48
Executive Vice President and President of U.S. Private Client Group since
February 2000, Executive Vice President and Chief Financial Officer from March
1998 to February 2000; Executive Vice President and Co-Head of Corporate and
Institutional Client Group from April 1997 to March 1998; Managing Director and
Head of Global Capital Markets Group from April 1995 to April 1997; Managing
Director, Investment Banking and Head of Financing Services Group from June 1993
to April 1995.
16
Thomas H. Patrick, 56
Executive Vice President and Chief Financial Officer since February 2000,
Executive Vice President and Chairman of Special Advisory Services from March
1993 to February 2000.
Jeffrey M. Peek, 53
Executive Vice President, President of Asset Management Group and President and
Chief Executive Officer of MLAM since December 1997; Managing Director and Co-
Head of Investment Banking Group from March 1997 to December 1997; Senior Vice
President and Director, Global Securities Research & Economics from April 1995
to March 1997; Head of Global Industries Group, Investment Banking, from
November 1993 to March 1995.
Winthrop H. Smith, Jr., 50
Executive Vice President and President of International Private Client Group
since April 1997; Chairman, Merrill Lynch International Incorporated since April
1993; Executive Vice President, International from June 1992 to April 1997.
John L. Steffens, 58
Chairman of U.S. Private Client Group since February 2000; Vice Chairman of the
Board since April 1997; President of U.S. Private Client Group from April 1997
to February 2000; Executive Vice President, Private Client Group from October
1990 to April 1997.
____________
17
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the principal market in which the Registrant's
Common Stock is traded, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal years, the approximate number
of holders of record of Common Stock, and the frequency and amount of any cash
dividends declared for the two most recent fiscal years is set forth under the
captions "Dividends Per Common Share" and "Stockholder Information" on page 88
of the Annual Report and such information is incorporated herein by reference.
Item 6. Selected Financial Data
Selected financial data for the Registrant and its subsidiaries for each of
the last five fiscal years is set forth in the financial table "Selected
Financial Data" on page 27 of the Annual Report (excluding for this purpose the
financial ratio, leverage, and employee information set forth under the headings
"Financial Ratios" and "Employee Statistics"). Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto on pages 55 to 87 in the Annual
Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth on pages 28 to 53 of the Annual Report under the caption
"Management's Discussion and Analysis" and is incorporated herein by reference.
All of such information should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto on pages 55 to 87 in the Annual
Report.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosure about market risk is set forth on
pages 49 to 50 of the Annual Report under the caption "Management's Discussion
and Analysis" and in Note 3 to the Consolidated Financial Statements, and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Registrant and its
subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the Annual Report on pages 54 to 87, and are
incorporated herein by reference. In addition, the information on page 88 of the
Annual Report under the caption "Quarterly Information" is incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last two fiscal years.
18
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" on
pages 4 to 7 of ML & Co.'s Proxy Statement dated March 9, 2000 for its 2000
Annual Meeting of Stockholders (the "2000 Proxy Statement") is incorporated
herein by reference. For a list of the members of the ML & Co. Board of
Directors and of the ML & Co. executive officers, see pages 89 to 91, of the
Annual Report.
Item 11. Executive Compensation
Information relating to ML & Co. executive officer and director
compensation set forth on pages 16 to 26 and page 28 of the 2000 Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial owners
of ML & Co. Common Stock on pages 1 and 2 of the 2000 Proxy Statement and the
information concerning the security ownership of ML & Co. directors and
executive officers on pages 10 and 11 of the 2000 Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions set
forth under the caption "Certain Transactions" on page 27 of the 2000 Proxy
Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, And Reports On Form 8-K
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed hereunder
are listed on page F-1 hereof by reference to the corresponding page
number in the Annual Report.
2. Financial Statement Schedule
The financial statement schedule required to be filed hereunder is
listed on page F-1 hereof and the schedule included herewith appears
on pages F-2 through F-6 hereof.
3. Exhibits
Certain of the following exhibits were previously filed as exhibits to
other reports or registration statements filed by the Registrant and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate
report reference date or registration statement number. For
convenience, Quarterly Reports on Form 10-Q, Annual Reports on Form
10-K, Current Reports on Form 8-K, and Registration Statements on Form
S-3 are designated herein as "10-Q", "10-K", "8-K", and "S-3",
respectively.
(3) Articles of Incorporation and By-Laws
19
(i)(a) Restated Certificate of Incorporation of ML & Co., effective as of
April 28, 1998 (Exhibit (3)(i) to 10-Q for the quarter ended March 27,
1998 ("First Quarter 1998 10-Q")).
(b) Form of certificate representing the 9% Cumulative Preferred Stock,
Series A, par value $1.00 per share, of ML & Co. (the "9% Preferred
Stock") (Exhibit 3(i) to First Quarter 1998 10-Q).
*(c) Form of Depositary Receipt evidencing the Depositary Shares for the 9%
Preferred Stock.
(d) Certificate of Designation of ML & Co. establishing the rights,
preferences, privileges, qualifications, Restrictions, and limitations
relating to the 9% Preferred Stock (filed as part of Exhibit (3)(i) to
First Quarter 1998 10-Q).
*(e) Deposit Agreement dated as of November 3, 1994 among ML & Co.,
Citibank, N.A. as Depositary, and The holders from time to time of the
Depositary Receipts.
(f) Certificate of Designation dated December 17, 1987 for Series A Junior
Preferred Stock (Exhibit 3(f) to S-3 (file No. 33-19975)).
(g) Certificate of Designation dated August 20, 1998 for Special Voting
Stock, relating to ML & Co.'s Restated Certificate of Incorporation
effective as of April 28, 1998 (Exhibit (3) to 10-Q for the quarter
ended September 25, 1998 ("Third Quarter 1998 10-Q")).
(h) Form of Amended and Restated Rights Agreement dated as of December 2,
1997 between ML & Co. and ChaseMellon Shareholder Services, L.L.C.
(Exhibit 4 to 8-K dated December 2, 1997).
(ii) By-Laws of ML & Co., effective as of September 24, 1999 (Exhibit 3 to
1999 10-Q for the quarter ended September 24, 1999).
(4) Instruments defining the rights of security holders, including indentures
ML & Co. hereby undertakes to furnish to the SEC, upon request, copies
of any unfiled agreements defining the rights of holders of long-term
debt securities of ML & Co., none of which authorize an amount of
securities that exceed 10% of the total assets of ML & Co.
*(i) Senior Indenture dated as of April 1, 1983, as amended and restated as
of April 1, 1987, between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (the "1983 Senior Indenture") and
the Supplemental Indenture thereto dated as of March 15, 1990.
*(ii) Sixth Supplemental Indenture dated as of October 25, 1993 to the 1983
Senior Indenture.
(iii) Twelfth Supplemental Indenture to the 1983 Senior Indenture dated as of
September 1, 1998 between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (Exhibit 4(a) to 8-K dated October
21, 1998).
(iv) Senior Indenture dated as of October 1, 1993 between ML & Co. and The
Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank
N.A.) (the "1993 Senior Indenture")(Exhibit (4) (iv) to 10-K for fiscal
year ended December 25,1998 ("1998 10-K")).
(v) First Supplemental Indenture to the 1993 Senior Indenture, dated as of
June 1, 1998, between ML & Co. and The Chase Manhattan Bank (successor
by merger to The Chase Manhattan Bank N.A.) (Exhibit 4(a) to 8-K dated
July 2, 1998).
(vi) Form of S&P 500 Market Index Target-Term Security due March 27, 2006
(Exhibit 4 to 8-K dated March 26, 1999).
20
(vii) Form of Consumer Staples Select Sector SPDR Fund Market Index
Target-Term Security due April 19, 2006 (Exhibit 4 to 8-K dated
April 19, 1999).
(viii) Form of Major 11 International Market Index Target-Term Security
due May 26, 2006 (Exhibit 4 to 8-K dated May 26, 1999).
(ix) Form of Russell 2000 Index Call Warrant Expiring May 25, 2001
(Exhibit 4 to 8-K dated May 28, 1999).
(x) Form of Select Sector SPDR Fund Growth Portfolio Market Index
Target-Term Security due May 25, 2006 (Exhibit 4 to 8-K dated May
28, 1999).
(xi) Form of Market Index Target-Term Security based upon the Dow Jones
Industrial Average due June 26, 2006 (Exhibit 4 to 8-K dated June
25, 1999).
(xii) Form of Russell 2000 Market Index Target-Term Security due July 21,
2006 (Exhibit 4 to 8-K dated July 21, 1999).
(xiii) Form of Nikkei 225 Market Index Target-Term Security due August 4,
2006 (Exhibit 4 (b) to 8-K dated August 4, 1999).
(xiv) Form of S&P 500 Market Index Target-Term Security due August 4,
2006 (Exhibit 4 to 8-K dated August 4, 1999).
(xv) Form of Nikkei 225 Market Index Target-Term Security due September
20, 2002 (Exhibit 4 (a) to 8-K dated September 20, 1999).
(xvi) Form of Energy Select Sector SPDR Fund Market Index Target-Term
Security due September 20, 2006 (Exhibit 4 (b) to 8-K dated
September 20, 1999).
(xvii) Form of Bond Index Note, Domestic Master Series 1999A due December
23, 2002 (Exhibit 4 to 8-K dated December 22, 1999).
(xviii) Form of Global Market Index Target-Term Security due December 22,
2004 (Exhibit 4 to 8-K dated December 22, 1999).
(10) Material Contracts
*(i) Form of ML & Co. 1978 Equity Purchase Plan as amended through
January 16, 1995.
*(ii) Form of ML & Co. Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, as amended
through November 10, 1994.
(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended through
July 26, 1999 (Exhibit 10(i) to 10-Q for the quarter ended June 25,
1999 ("Second Quarter 1999 10-Q")).
(iv) ML & Co. Equity Capital Accumulation Plan, as amended through July
26, 1996 (Exhibit 10(iii) to Second Quarter 1999 10-Q).
(v) ML & Co. Executive Officer Compensation Plan.
(vi) Written description of Retirement Program for Non-Employee
Directors of ML & Co., as amended June 29, 1988 (Pages 23 to 24 of
ML & Co.'s Proxy Statement for the 1999 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on March 4,
1998).
21
(vii) Form of Severance Agreement between ML & Co. and certain of its
directors and executive officers (Exhibit 10(x) to 10-K for fiscal
year ended December 29, 1995).
(viii) Form of Indemnification Agreement entered into with all current
directors of ML & Co. and to be Entered into with all future
directors of ML & Co. (Exhibit 10 (viii) to 1998 10-K).
(ix) Written description of ML & Co.'s incentive compensation programs
(Exhibit 10 (ix) to 1998 10-K).
(x) Written description of ML & Co.'s compensation policy for executive
officers and directors (Pages 13 to 15 and pages 22 to 24 of ML &
Co.'s Proxy Statement for the 1999 Annual Meeting of Stockholders
contained in ML & Co.'s Schedule 14A filed on March 5, 1999).
(xi) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
(xii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
(xiii) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
(xiv) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
(xv) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 33-51825)).
(xvi) Merrill Lynch KECALP L.P. 1997 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 333-15035)).
(xvii) Merrill Lynch KECALP L.P. 1999 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 333-59143)).
(xviii) ML & Co. Deferred Restricted Unit Plan for Executive Officers
(Exhibit 10(xxiii) to 10-K for fiscal Year ended December 27, 1996
("1996 10-K")).
*(xix) ML & Co. 1995 Deferred Compensation Plan for a Select Group of
Eligible Employees.
(xx) ML & Co. Fee Deferral Plan for Non-Employee Directors, as amended
through April 15, 1997 (Exhibit 10 to 1997 10-Q for the quarter
ended March 28, 1997).
(xxi) ML & Co. 1996 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 29, 1995).
(xxii) ML & Co. 1997 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(xxvii) to 1996 10-K).
(xxiii) ML & Co. 1999 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10 to Third Quarter 1998 10-Q).
*(xxiv) ML & Co. 2000 Deferred Compensation Plan for a Select Group of
Eligible Employees.
(xxv) ML & Co. 1997 KECALP Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(i) to 10-Q for the
quarter ended June 27, 1997).
22
(xxvi) ML & Co. Deferred Unit and Stock Unit Plan for Non-Employee
Directors (Exhibit 10 to First Quarter 1998 10-Q).
(xxvii) ML & Co. Long-Term Incentive Compensation Plan for Managers and
Producers (Exhibit 10(ii) to Second Quarter 1999 10-Q).
(xxviii) Executive Annuity Agreement dated as of January 27, 1997 by and
between ML & Co. and David H. Komansky (Exhibit 10(xxxi) to 1996
10-K).
(xxix) Amendment dated September 18, 1996 to Deferred Compensation Plans
(amending the Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, the ML & Co.
1995 Deferred Compensation Plan for a Select Group of Eligible
Employees, and the ML & Co. 1996 Deferred Compensation Plan for a
Select Group of Eligible Employees) (Exhibit 10(xxxii) to 1996
10-K).
(xxx) ML & Co. 1998 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 26, 1997 (the "Third Quarter 1997 10-Q")).
(xxxi) ML & Co. Program for the Deferral of Stock Option Gains for a
Select Group of Eligible Employees (Exhibit 10(iv) to Third Quarter
1997 10-Q).
(xxxii) Amendment dated February 12, 1998 to the ML & Co. Deferred
Compensation Plans for a Select Group of Eligible Employees for the
years 1994, 1995, 1996, and 1997 (Exhibit 10.32 to 10-K for the
fiscal year ended December 26, 1997 ("1997 10-K")).
(xxxiii) Amendment dated February 12, 1998 to the ML & Co. Deferred
Restricted Unit Plan for Executive Officers (Exhibit 10.33 to 1997
10-K).
*(11) Statement re computation of per share earnings.
*(12) Statement re computation of ratios.
*(13) Excerpt of 1999 Annual Report to Stockholders.
*(21) Subsidiaries of ML & Co.
*(23) Consent of Independent Auditors, Deloitte & Touche LLP.
*(27) Financial Data Schedule.
*(99) Additional Exhibits.
(i) Opinion of Deloitte & Touche LLP with respect to the Ratio of
Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends, which is included in Exhibit
12.
(ii) Opinion of Deloitte & Touche LLP with respect to certain
information in the Selected Financial Data, which is incorporated
by reference in Part II, Item 6.
23
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the fourth quarter of 1999 with the Commission
under the caption "Item 5. Other Events":
(i) Current Report on Form 8-K dated October 12, 1999 for the purpose of
filing Merrill Lynch & Co.'s Preliminary Unaudited Earnings Summary
for the three and nine-month periods ended September 24, 1999.
(ii) Current Report on Form 8-K dated October 27, 1999 for the purpose of
filing Merrill Lynch & Co.'s Preliminary Unaudited Consolidated
Balance Sheet as of September 24, 1999.
(iii) Current Report on Form 8-K dated December 22, 1999 for the purpose of
filing the form of Merrill Lynch & Co. Bond Index Notes, Domestic
Master Series 1999A due December 23, 2002.
(iv) Current Report on Form 8-K dated December 22, 1999 for the purpose of
filing the form of Merrill Lynch & Co. Global Market Index Target-
Term Securities due December 22, 2004.
* Filed herewith
24
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEMS 14(A)(1) AND 14(A)(2)
Page Reference
--------------
1999 Annual
Report to
Form 10-K Stockholders
--------- ------------
Consolidated Financial Statements
- ---------------------------------
Independent Auditors' Report 54
Consolidated Statements of Earnings 55
Consolidated Balance Sheets 56-57
Consolidated Statements of Changes in Stockholders'
Equity 58-59
Consolidated Statements of Comprehensive Income 60
Consolidated Statements of Cash Flows 61
Notes to Consolidated Financial Statements 62-87
Financial Statements Schedule
- -----------------------------
Schedule I--Condensed Financial Information of
Registrant F-2 to F-6
Condensed Statements of Earnings F-2
Condensed Balance Sheets F-3
Condensed Statements of Cash Flows F-4
Notes to Condensed Financial Statements F-5
Independent Auditors' Report F-6
Specifically incorporated elsewhere herein by
reference are certain portions of the following
unaudited items:
(i) Selected Financial Data 27
(ii) Management's Discussion and Analysis 28-53
(iii) Quarterly Information 88
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the
Consolidated Financial Statements and Notes thereto in the 1999 Annual Report to
Stockholders, which are incorporated herein by reference.
F-1
Condensed Statements of Earnings (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF EARNINGS
(dollars in millions)
YEAR ENDED LAST FRIDAY IN DECEMBER
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
REVENUES
Interest (principally from affiliates) ................... $ 3,693 $ 4,476 $ 3,937
Management service fees (from affiliates) ................ 336 321 296
Other .................................................... 20 109 4
------- ------- -------
Total Revenues ........................................... 4,049 4,906 4,237
Interest Expense ......................................... 4,094 4,942 4,077
------- ------- -------
Net Revenues ............................................. (45) (36) 160
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits ................................ 323 236 281
Other .................................................... 358 394 307
------- ------- -------
Total Non-Interest Expenses .............................. 681 630 588
------- ------- -------
EQUITY IN EARNINGS OF AFFILIATES ........................... 3,104 1,727 2,222
------- ------- -------
EARNINGS BEFORE INCOME TAXES ............................... 2,378 1,061 1,794
Income Tax Benefit ......................................... 240 198 141
------- ------- -------
NET EARNINGS ............................................... $ 2,618 $ 1,259 $ 1,935
======= ======= =======
OTHER COMPREHENSIVE LOSS, NET OF TAX....................... (267) (75) (63)
------- ------- -------
COMPREHENSIVE INCOME....................................... $ 2,351 $ 1,184 $ 1,872
======= ======= =======
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS ....................................... $ 2,580 $ 1,220 $ 1,896
======= ======= =======
- --------------------------------------------------------------------------------------------------
See Notes to Condensed Financial Statements
F-2
Condensed Balance Sheets (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
(dollars in millions, except per share amounts)
DECEMBER 31, DECEMBER 25,
1999 1998
- ------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents .............................................. $ 379 $ --
Marketable investment securities ....................................... 1,197 --
Loans to, receivables from and preference securities
of affiliates ....................................................... 84,538 80,492
Investments in affiliates, at equity ................................... 11,037 9,745
Equipment and facilities (net of accumulated
depreciation and amortization of $330 in 1999 and $289 in 1998) ..... 210 160
Other receivables and assets ........................................... 2,192 2,197
-------- --------
TOTAL ASSETS ........................................................... $ 99,553 $ 92,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Commercial paper and other short-term borrowings ....................... $ 24,057 $ 16,986
Loans from and payables to affiliates .................................. 5,981 4,046
Other liabilities and accrued interest ................................. 4,734 4,301
Long-term borrowings ................................................... 51,979 57,129
-------- --------
Total Liabilities ...................................................... 86,751 82,462
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity ......................................... 425 425
-------- --------
Common Stockholders' Equity:
Shares exchangeable into common stock ............................. 59 66
Common stock, par value $1.33 1/3 per share;
authorized: 1,000,000,000 shares;
issued 1999-472,714,925 shares, 1998-472,660,324 shares.......... 630 630
Paid-in capital ................................................... 1,863 1,427
Accumulated other comprehensive loss (net of tax) ................. (389) (122)
Retained earnings ................................................. 12,667 10,475
-------- --------
14,830 12,476
Less: Treasury stock, at cost: 1999-104,949,595 shares;
1998-116,376,259 shares 1,817 2,101
Employee stock transactions ................................. 636 668
-------- --------
Total Common Stockholders' Equity ...................................... 12,377 9,707
-------- --------
Total Stockholders' Equity ............................................. 12,802 10,132
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 99,553 $ 92,594
======== ========
- ------------------------------------------------------------------------------------------------------
See Notes to Condensed Financial Statements
F-3
Condensed Statements of Cash Flows (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in millions)
YEAR ENDED LAST FRIDAY IN DECEMBER
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings .............................................. $ 2,618 $ 1,259 $ 1,935
Noncash items included in earnings:
Equity in earnings of affiliates ........................ (3,104) (1,727) (2,222)
Depreciation and amortization ........................... 45 30 30
Other ................................................... 15 (183) 103
(Increase) decrease in
Operating assets, net of operating liabilities .......... 123 - (216)
Dividends and partnership distributions from affiliates ... 1,781 868 1,126
-------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES ................... 1,478 247 756
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Loans to affiliates, net of payments .................... (2,257) 774 (22,164)
Sales of available for sale securities .................. 12 - -
Purchases of available for sale securities .............. (1,198) - -
Investments in affiliates, net of dispositions .......... (4) (436) (60)
Equipment and facilities ................................ (95) (35) (54)
-------- -------- --------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES ........ (3,542) 303 (22,278)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings ........ 7,071 (13,621) 5,770
Issuance and resale of long-term borrowings ............. 11,685 27,153 23,592
Settlement and repurchases of long-term borrowings ...... (16,092) (13,933) (6,665)
Repurchase of remarketed preferred stock ................ - - (194)
Common stock transactions ............................... 200 27 (500)
Dividends to shareholders ............................... (421) (363) (294)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........ 2,443 (737) 21,709
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 379 (187) 187
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................ - 187 -
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 379 $ - $ 187
======== ======== ========
- -------------------------------------------------------------------------------------------------------
Supplemental Disclosure
Cash paid for:
Income taxes ........................................... 261 280 555
Interest ............................................... 4,149 4,906 3,904
See Notes to Condensed Financial Statements
F-4
NOTES TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
NOTE 1. BASIS OF PRESENTATION
The condensed unconsolidated financial statements of Merrill Lynch &
Co., Inc. ("ML & Co." or the "Parent Company") should be read in conjunction
with the Consolidated Financial Statements of Merrill Lynch & Co., Inc. and
subsidiaries (collectively, "Merrill Lynch") and the Notes thereto in the
Merrill Lynch 1999 Annual Report to Stockholders (the "Annual Report") included
as an exhibit to this Form 10-K. Certain reclassification and format changes
have been made to prior year amounts to conform to the current year
presentation. Prior year amounts have also been restated to reflect the merger
of Midland Walwyn with ML & Co. (see Note 2 to the Consolidated Financial
Statements in the Annual Report).
Investments in affiliates are accounted for in accordance with the equity
method.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements within the Annual Report.
. Long-term borrowings (Note 5)
. Stockholders' equity (Note 8)
. Commitments and contingencies (Note 9)
. Employee incentive plans (Note 11)
The Parent Company hedges certain risks arising from long-term borrowing
payment obligations and investments in and loans to foreign subsidiaries. See
Notes 5 and 6 to the Consolidated Financial Statements, respectively, for
additional information.
Note 2. Guarantees
ML & Co. issues guarantees of counterparty obligations in connection
with certain activities of subsidiaries (see Note 9 to the Consolidated
Financial Statements for further information).
The Parent Company also guarantees certain obligations of subsidiaries,
including obligations associated with foreign exchange forward contracts and
interest rate swap transactions.
ML & Co. also guarantees obligations related to Trust Originated
Preferred Securities(Service Mark) issued by subsidiaries (see Note 7 to the
Consolidated Financial Statements).
F-5
[LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and December 25,
1998, and for each of the three years in the period ended December 31, 1999, and
have issued our report thereon dated February 28, 2000, which report expresses
an unqualified opinion and includes 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. Such consolidated financial statements
and our report are included in your 1999 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Merrill Lynch, listed in Item 14. Such financial statement
schedule is the responsibility of Merrill Lynch's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
F-6
/s/ W. H. Clark
- ------------------------------------------------ -------------------------
Signatures W.H. CLARK W. H. Clark
Director
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, /s/ Jill K. Conway
the Registrant has duly caused this report to be -------------------------
signed on its behalf by the undersigned, JILL K. CONWAY Jill K. Conway
thereunto duly authorized on the 9th day of Director
March, 2000.
/s/ Stephen L. Hammerman
-------------------------
Merrill Lynch & Co., Inc. STEPHEN L. HAMMERMAN Stephen L. Hammerman
Registrant Director
/s/ Andrea L. Dulberg /s/ George B. Harvey
------------------------- -------------------------
ANDREA L. DULBERG Andrea L. Dulberg GEORGE B. HARVEY George B. Harvey
Secretary Director
Pursuant to the requirements of the Securities /s/ William R. Hoover
Exchange Act of 1934, this report has been -------------------------
signed below by the following persons on behalf WILLIAM R. HOOVER William R. Hoover
of the Registrant in the capacities indicated Director
on the 9th day of March, 2000.
/s/ David H. Komansky /s/ Robert P. Luciano
------------------------- -------------------------
DAVID H. KOMANSKY David H. Komansky ROBERT P. LUCIANO Robert P. Luciano
Director, Director
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) /s/ David K. Newbigging
-------------------------
DAVID K. NEWBIGGING David K. Newbigging
Director
/s/ Thomas H. Patrick
----------------------------- /s/ Aulana L. Peters
THOMAS H. PATRICK Thomas H. Patrick -------------------------
Executive Vice President AULANA L. PETERS Aulana L. Peters
Chief Financial Officer Director
(Principal Financial Officer)
/s/ John J. Phelan, Jr.
-------------------------
JOHN J. PHELAN, JR. John J. Phelan, Jr.
/s/ Ahmass L. Fakahany Director
-----------------------------
AHMASS L. FAKAHANY
Senior Vice President /s/ John L. Steffens
and Controller -------------------------
(Principal Accounting Officer) JOHN L. STEFFENS John L. Steffens
Director
/s/ William L. Weiss
-------------------------
WILLIAM L. WEISS William L. Weiss
Director
II-1