Exhibit 13
FINANCIAL TABLE OF CONTENTS
- ---------------------------
27 SELECTED FINANCIAL DATA
28 MANAGEMENT'S DISCUSSION AND ANALYSIS
28 Business Environment
29 Results of Operations
30 Commissions
30 Principal Transactions
31 Investment Banking
32 Asset Management and Portfolio Service Fees
32 Other Revenues
33 Interest and Dividends
33 Non-Interest Expenses
34 Income Taxes
35 Strategic Business Initiatives
36 Business Segments
39 Global Operations
42 Balance Sheet
45 Capital Adequacy and Liquidity
47 Capital Projects and Expenditures
47 Risk Management
51 Non-Investment Grade Holdings and
Highly Leveraged Transactions
52 Cash Flows
52 Litigation
52 Recent Developments
53 MANAGEMENT'S DISCUSSION OF
FINANCIAL RESPONSIBILITY
54 INDEPENDENT AUDITORS' REPORT
55 CONSOLIDATED FINANCIAL STATEMENTS
55 Consolidated Statements of Earnings
56 Consolidated Balance Sheets
58 Consolidated Statements of Changes in
Stockholders' Equity
60 Consolidated Statements of Comprehensive Income
61 Consolidated Statements of Cash Flows
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
62 NOTE 1. Summary of Significant Accounting Policies
66 NOTE 2. Other Significant Events
67 NOTE 3. Trading and Related Activities
71 NOTE 4. Investments
72 NOTE 5. Borrowings
73 NOTE 6. Fair Value Information and Non-Trading
Derivatives
74 NOTE 7. Preferred Securities Issued by Subsidiaries
75 NOTE 8. Stockholders' Equity and Earnings Per Share
76 NOTE 9. Commitments and Contingencies
77 NOTE 10. Employee Benefit Plans
80 NOTE 11. Employee Incentive Plans
83 NOTE 12. Income Taxes
84 NOTE 13. Regulatory Requirements and
Dividend Restrictions
84 NOTE 14. Segment, Product, and Geographic Information
88 SUPPLEMENTAL FINANCIAL INFORMATION
88 Quarterly Information
88 Dividends Per Common Share
88 Stockholder Information
26
SELECTED FINANCIAL DATA
- -----------------------
(dollars in millions, except per share amounts)
Year Ended Last Friday in December
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
OPERATING RESULTS
Total Revenues $ 34,879 $ 34,574 $ 31,209 $ 25,043 $ 21,501
Less Interest Expense 13,010 17,027 14,953 11,422 10,886
-------- -------- -------- -------- --------
Net Revenues 21,869 17,547 16,256 13,621 10,615
Non-Interest Expenses 17,791 15,451 13,145 10,993 8,779
-------- -------- -------- -------- --------
Earnings Before Income Taxes and
Dividends on Preferred
Securities Issued by
Subsidiaries 4,078 2,096 3,111 2,628 1,836
Income Tax Expense 1,265 713 1,129 980 710
Dividends on Preferred Securities Issued by Subsidiaries 195 124 47 - -
-------- -------- -------- -------- --------
Net Earnings $ 2,618 $ 1,259 $ 1,935 $ 1,648 $ 1,126
======== ======== ======== ======== ========
Net Earnings Applicable to Common Stockholders(a) $ 2,580 $ 1,220 $ 1,896 $ 1,602 $ 1,078
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $328,071 $299,804 $296,980 $217,266 $179,452
Short-Term Borrowings(b) $114,775 $ 98,267 $123,400 $103,009 $ 86,663
Long-Term Borrowings $ 53,465 $ 57,563 $ 43,143 $ 26,206 $ 17,389
Preferred Securities Issued by Subsidiaries $ 2,725 $ 2,627 $ 627 $ 327 $ 51
Total Stockholders' Equity $ 12,802 $ 10,132 $ 8,539 $ 7,067 $ 6,288
- -----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA(C)
(in thousands, except per share amounts)
Earnings Per Share:
Basic $ 7.00 $ 3.43 $ 5.57 $ 4.63 $ 2.98
======== ======== ======== ======== ========
Diluted $ 6.17 $ 3.00 $ 4.79 $ 4.08 $ 2.68
======== ======== ======== ======== ========
Weighted-Average Shares Outstanding:
Basic 368,718 355,589 340,096 346,043 361,193
Diluted 418,131 406,262 395,855 392,990 402,852
Shares Outstanding at Year End(d) 367,765 356,284 339,259 332,349 346,953
Shares Repurchased(e) - - 13,301 36,606 39,861
Average Share Repurchase Price - - $ 48.91 $ 31.30 $ 23.48
Book Value Per Share $ 33.20 $ 26.89 $ 23.63 $ 19.24 $ 16.25
Dividends Paid Per Share $ 1.05 $ 0.92 $ 0.75 $ 0.58 $ 0.505
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pre-tax Margin(f) 18.6% 11.9% 19.1% 19.3% 17.3%
Profit Margin(g) 12.0% 7.2% 11.9% 12.1% 10.6%
Common Dividend Payout Ratio 15.0% 26.3% 13.4% 12.5% 17.0%
Return on Average Assets 0.8% 0.3% 0.7% 0.7% 0.5%
Return on Average Common Stockholders' Equity 23.5% 13.4% 26.5% 26.6% 19.8%
Average Leverage(h) 23.2x 32.9x 35.3x 33.3x 32.1x
Average Adjusted Leverage(i) 14.4x 19.2x 21.3x 19.8x 19.4x
- -----------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STATISTICS
Full-Time Employees:
U.S. 49,000 46,500 45,800 42,100 39,250
Non-U.S. 18,200 17,300 13,900 10,500 9,250
-------- -------- -------- -------- --------
Total 67,200 63,800 59,700 52,600 48,500
======== ======== ======== ======== ========
Financial Consultants and Other Investment Professionals 19,000 18,100 16,600 15,600 14,900
- -----------------------------------------------------------------------------------------------------------------------------
(a) Net earnings less preferred stock dividends.
(b) Consists of Payables under repurchase agreements and securities loaned
transactions,Commercial paper and other short-term borrowings,and Demand
and time deposits.
(c) All share and per share data have been restated for the 1997 two-for-one
common stock split (see Note 8 to the Consolidated Financial Statements).
(d) Does not include 4,009, 4,506, 4,718, 4,134, and 3,932 shares exchangeable
into common stock (see Note 8 to the Consolidated Financial Statements) at
year-end 1999, 1998, 1997, 1996, and 1995, respectively. Also does not
include 3,078, and 8,026 unallocated reversion shares held in the Employee
Stock Ownership Plan at year-end 1996 and 1995, respectively,which are not
considered outstanding for accounting purposes.
(e) Does not include shares either (i) owned by employees and used to pay for
the exercise of stock options or (ii) stock withheld from employee stock
option exercises to pay associated taxes.
(f) Earnings Before Income Taxes and Dividends on Preferred Securities Issued
by Subsidiaries to Net Revenues.
(g) Net Earnings to Net Revenues.
(h) Average Total assets to average Total stockholders'equity and Preferred
securities issued by subsidiaries.
(i) Average Total assets less average (a) Securities received as collateral,net
of securities pledged as collateral,(b) Securities pledged as
collateral,(c) Receivables under resale agreements and securities borrowed
transactions,to average Total stockholders'equity and Preferred securities
issued by subsidiaries.
Selected Financial Data 27
TABLE OF CONTENTS
28 Business Environment
29 Results of Operations
30 Commissions
30 Principal Transactions
31 Investment Banking
32 Asset Management and
Portfolio Service Fees
32 Other Revenues
33 Interest and Dividends
33 Non-Interest Expenses
34 Income Taxes
35 Strategic Business Initiatives
36 Business Segments
39 Global Operations
42 Balance Sheet
45 Capital Adequacy and Liquidity
47 Capital Projects and Expenditures
47 Risk Management
51 Non-Investment Grade Holdings
and Highly Leveraged
Transactions
52 Cash Flows
52 Litigation
52 Recent Developments
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co.") is a holding company that, through its
subsidiaries and affiliates, (therein "Merrill Lynch") provides investment,
financing, advisory, insurance, and related services worldwide. 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, investment banking, and insurance activities, which
together with other recent changes in the financial services industry, have
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, 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 detailed in the following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
BUSINESS ENVIRONMENT
- --------------------
Global financial markets rebounded significantly in 1999, after a very volatile
second half of 1998. Markets benefited from tightening credit spreads, which
represent the risk premium paid by an issuer over the risk-free rate (based on
the issuer's credit rating or perceived creditworthiness), increased investor
demand, and improved liquidity in debt markets. U.S. equity indices continued to
advance to record levels for the fifth consecutive year, despite a midsummer
downturn in the stock market, a series of interest rate hikes by the Federal
Reserve beginning in June, and weakness in the U.S. dollar versus the Japanese
yen. Most non-U.S. markets recovered sharply in 1999, posting significant gains
in equity indices during the first six months of the year, but retreating
somewhat in the third quarter due to U.S. interest rate concerns. Following the
Federal Reserve's November 1999 announcement of a neutral bias toward interest
28
rates, global market indices soared, contributing to record trading and
commissions revenues industrywide for 1999.
U.S. bond rates steadily increased throughout 1999, as inflationary fears
led the Federal Reserve to increase the overnight lending rate by twenty-five
basis points three times, in June, August, and November. The yield on the
30-year U.S. Treasury bond reached 6.48% at year-end, up from 5.10% at the
beginning of 1999. In Europe, a decline in industrial production and exports led
the European Central Bank and the Bank of England to reduce short-term rates by
fifty and twenty-five basis points, respectively. Long-term rates in Europe,
however, increased modestly throughout 1999. Credit spreads generally tightened
throughout 1999, with the exception of the 1999 third quarter, when spreads
reached their widest point since the 1998 Russian debt crisis.
U.S. equity markets experienced extraordinary gains during 1999, led by an
unprecedented demand for communications and technology stocks. The Nasdaq
advanced a record 85.6% in 1999, with more than half of the gain recorded during
the last two months of the year. Despite a series of interest rate increases, a
midsummer downturn in the stock market, and Year 2000 concerns, both the Dow
Jones Industrial Average and S&P 500 reached record levels, up 25.2% and 19.5%,
respectively, in 1999. Performances within these indices were mixed, however, as
67% of equities within these indices were down 20% or more from their fifty-two
week highs.
Global equity indices significantly advanced in 1999, as world markets
recovered from the credit crisis that occurred during the latter half of 1998.
Emerging market indices produced the biggest rally, led primarily by Brazil,
South Korea, and Mexico, which all rose more than 80% in local currency terms.
International Monetary Fund support, as well as a reduction in interest rates,
helped Brazilian markets recover from a currency devaluation. The South Korean
economy benefited from low interest rates and strong corporate earnings, while
an increase in exports and investment from abroad fueled markets in Mexico.
Demand by foreign investors for Japanese equities, in addition to government
intervention to control the rise in the yen, contributed to the advance in
Japanese market indices, which rose 50% in local currency terms during 1999.
European markets, which experienced sluggish growth during most of the year,
rebounded in the 1999 fourth quarter, led by an increase in manufacturing levels
and exports in Germany. The euro, however, continued to weaken throughout most
of 1999, sinking below $1 in December and declining 14% against the U.S. dollar
in 1999.
Global underwriting volume reached near record levels during 1999, led by
record activity in equity underwriting and initial public offerings. Equity
issuances totaled $173 billion during 1999, representing a 50% increase over
1998 levels and surpassing the previous record of $124 billion set in 1997.
Initial public offerings surged to $69 billion during the year, a 38% increase
from the record $50 billion recorded in 1996. Contributing to the increased
volume was record demand for technology, media, and telecommunications
offerings, which accounted for two-thirds of all new stock issues in 1999.
Concerns over U.S. interest rates and inflation led to a modest decline in debt
issuances during 1999. As a result, proceeds from U.S. debt issuances decreased
4% overall from 1998 to $1.9 trillion in 1999, representing the first year-over-
year decline in debt underwriting since 1995.
Strategic advisory services activities reached record levels in 1999,
reflecting a continuation of the high level of merger and acquisition activity
experienced during 1998. Companies continued to seek strategic alliances to
increase earnings growth, better compete in existing markets, and expand into
new markets and businesses. While announced mergers and acquisitions in the U.S.
increased over 7% from 1998 to a record $1.8 trillion, European deals advanced
to over $1.2 trillion, more than double the 1998 level. During 1999, the largest
announced merger and acquisition deal ever and the largest announced
cross-border transaction ever both occurred in Europe, contributing to the surge
in activity for the year.
Merrill Lynch continually evaluates its businesses for profitability and
performance under varying market conditions and, in light of the evolving
conditions in its competitive environment, for alignment with its long-term
strategic objectives. Maintaining long-term client relationships, closely
monitoring costs and risks, diversifying revenue sources, and expanding
strategically, all contribute to mitigating the effects of volatility on Merrill
Lynch's business as a whole.
RESULTS OF OPERATIONS
- ---------------------
- --------------------------------------------------------------------------------
(in millions, except per share amounts)
1999 vs.
---------------
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Total revenues $34,879 $34,574 $31,209 0.9% 11.8%
Net revenues 21,869 17,547 16,256 24.6 34.5
Earnings before income
taxes and dividends
on preferred securities
issued by subsidiaries 4,078 2,096 3,111 94.6 31.1
Net earnings 2,618 1,259 1,935 107.9 35.3
Net earnings applicable to
common stockholders 2,580 1,220 1,896 111.5 36.1
Earnings per common share:
Basic 7.00 3.43 5.57 104.1 25.7
Diluted 6.17 3.00 4.79 105.7 28.8
Return on average common
stockholders' equity 23.5% 13.4% 26.5%
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 29
During 1999, record revenues were achieved in all revenue categories,
including commissions, principal transactions, investment banking, asset
management and portfolio service fees, and net interest profit. These revenues
were partially offset by increased costs related to compensation and benefits,
advertising and market development, and communications and technology.
Merrill Lynch reported 1999 net earnings of $2.6 billion, or $6.17 per
diluted share with a return on average common stockholders' equity of 23.5%.
This compares with $1.3 billion or $3.00 per diluted share reported in 1998,
which included a $288 million after-tax provision for costs related to staff
reductions. Excluding this provision, 1998 net earnings were $1.5 billion, or
$3.71 per diluted share. Return on average common stockholders' equity on this
basis was 16.4% in 1998. In 1997, Merrill Lynch reported net earnings of $1.9
billion, or $4.79 per diluted share. Return on average common stockholders'
equity for 1997 was 26.5%.
On a cash basis, which excludes goodwill amortization, earnings were $2.8
billion, up from $1.8 billion in 1998 excluding the staff reduction provision.
On the same basis, diluted earnings per share were $6.71 versus $4.27 in 1998,
and return on average common stockholders' equity in 1999 was 24.4%. In 1997,
earnings on a cash basis were $2.0 billion, or $4.95 per diluted share.
The 1999 results reflected record results in the equity markets and
investment banking businesses, and a substantial increase in profitability from
debt-related activities versus the difficulties encountered in the 1998
fixed-income markets. The Private Client and Asset Management businesses each
recorded strong results on record revenues in Commissions and Asset management
and portfolio service fees.
The following discussion provides details of major revenue and expense
categories and other pertinent information on Merrill Lynch's business
activities, financial condition, liquidity, and risks. Certain prior year
amounts have been restated to conform with the current year presentation.
COMMISSIONS
- -----------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Listed and over-the-counter $3,597 $3,185 $2,759
Mutual funds 1,868 1,871 1,594
Other 869 743 642
------ ------ ------
Total $6,334 $5,799 $4,995
====== ====== ======
- --------------------------------------------------------------------------------
Commissions revenues advanced 9% in 1999 to a record $6.3 billion,
primarily due to increases in global listed securities volume and
over-the-counter securities transactions. Commissions from listed securities
were up 11% from 1998 as a result of higher trading volumes, particularly on
non-U.S. exchanges. Mutual fund commissions were virtually unchanged, and other
commissions revenues advanced 17% in 1999, primarily due to increased sales of
money market instruments and third party annuity contracts.
Commissions revenues rose 16% in 1998. Increased volume led to higher
listed and over-the-counter securities transaction revenues, while strong sales
of U.S. and non-U.S. mutual funds increased mutual fund commissions.
PRINCIPAL TRANSACTIONS
- ----------------------
The table that follows provides information on trading revenues, including
related net interest. Interest revenue and expense amounts are based on
management's assessment of the cost to finance trading positions, after
consideration of the underlying liquidity of these positions.
Trading and related hedging and financing activities affect the recognition
of both principal transactions revenues and net interest and dividend revenues.
In assessing the profitability of its trading activities, Merrill Lynch
aggregates net interest and principal transactions revenues. For financial
reporting purposes, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest revenues, depending on the
nature of the specific instruments. Changes in the composition of trading
inventories and hedge positions can cause the recognition of revenues within
these categories to fluctuate.
- --------------------------------------------------------------------------------
(in millions)
Principal Net Net
Transactions Interest Trading
Revenues Revenues Revenues(1)
- --------------------------------------------------------------------------------
1999
Equities and equity derivatives $ 1,989 $ 226 $ 2,215
Debt and debt derivatives 2,170 282 2,452
Mortgages (5) 255 250
Foreign exchange 207 - 207
------- ------- -------
Total $ 4,361 $ 763 $ 5,124
======= ======= =======
- --------------------------------------------------------------------------------
1998
Equities and equity derivatives $ 1,593 $ 9 $ 1,602
Debt and debt derivatives 890 (37) 853
Mortgages (33) 259 226
Foreign exchange 201 (3) 198
------- ------- -------
Total $ 2,651 $ 228 $ 2,879
======= ======= =======
- --------------------------------------------------------------------------------
1997
Equities and equity derivatives $ 1,290 $ (54) $ 1,236
Debt and debt derivatives 2,335 35 2,370
Mortgages 28 160 188
Foreign exchange 174 1 175
------- ------- -------
Total $ 3,827 $ 142 $ 3,969
======= ======= =======
- --------------------------------------------------------------------------------
(1) Excludes commissions. For further information on trading results, see Note
3 to the Consolidated Financial Statements.
30 Management's Discussion and Analysis
Net trading revenues were $5.1 billion in 1999, up 78% from 1998 due to
significantly improved global market conditions in 1999 compared with 1998.
Market conditions were generally favorable in 1999, including rising U.S. stock
prices and narrowing credit spreads.
Equities and equity derivatives net trading revenues advanced 38% from 1998
to $2.2 billion, due to significantly higher revenues from both U.S. and
non-U.S. equities as well as convertibles. The increase in revenues was largely
due to an increase in trading volumes in global markets, particularly in Europe
and Japan, and higher market share. Net revenues from global convertibles
benefited from improved market conditions, especially in the U.S.
Debt and debt derivatives net trading revenues were $2.5 billion, up
sharply from 1998, when revenues suffered from significant uncertainty in global
debt markets, and an unprecedented widening of credit spreads and the absence of
liquidity in debt markets led to severe losses in the third and fourth quarters.
Increased volume, tightening credit spreads and a more stable global environment
led to increased revenues in 1999, particularly in the U.S.
Net revenues from mortgages were $250 million in 1999, up 11% from 1998.
Foreign exchange net trading revenues remained virtually unchanged for the year.
In 1998, net trading revenues were down 27% from 1997 due to the
significant volatility in global debt markets. An increase in volume of non-U.S.
equities and equity derivative transactions led to advances in equities and
equity derivatives net trading revenues (up 30%). Debt and debt derivatives net
trading revenues were $853 million compared to $2.4 billion in 1997, as
valuations of corporate and emerging market bonds were significantly impacted by
widening credit spreads and reduced liquidity in the third quarter of 1998. In
addition, 1998 results reflect credit losses on emerging market-related debt
derivatives in the latter half of the year. A more favorable mortgage
environment led to increased net revenues (up 20%). Fluctuations in the U.S.
dollar versus various currencies led to higher net foreign exchange revenues (up
13%).
INVESTMENT BANKING
- ------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Underwriting revenues $2,301 $2,162 $2,079
Strategic advisory services revenues 1,313 1,102 797
------ ------ ------
Total $3,614 $3,264 $2,876
====== ====== ======
- --------------------------------------------------------------------------------
Investment banking revenues rose 11% in 1999 to a record $3.6 billion,
benefiting from increased revenues from underwriting and from record merger and
acquisition advisory fees.
Underwriting
Increased equity underwriting revenues were partly offset by lower corporate
bond and high yield underwriting revenues. Merrill Lynch retained its position
as the leading underwriter of total debt and equity securities for the 12th
consecutive year in the U.S. and for the 11th consecutive year globally. Merrill
Lynch's underwriting market share information based on transaction value
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Market Market Market
Share Rank Share Rank Share Rank
- --------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 16.0% 1 14.9% 1 14.9% 1
Equity 12.5 3 15.8 1 14.8 1
Debt and Equity 15.8 1 15.4 1 15.1 1
GLOBAL PROCEEDS
Debt 12.4% 1 13.1% 1 12.7% 1
Equity 12.2 3 13.4 2 13.2 2
Debt and Equity 12.6 1 13.5 1 13.0 1
- --------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic Advisory Services
Strategic advisory services fees rose 19% in 1999 to a record $1.3 billion,
benefiting from strong merger and acquisition activity, particularly in Europe.
Merrill Lynch's merger and acquisition market share information based on
transaction value follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Market Market Market
Share Rank Share Rank Share Rank
- --------------------------------------------------------------------------------
COMPLETED
TRANSACTIONS
U.S. 22.8% 3 33.0% 1 28.3% 1
Global 22.4 3 25.3 2 18.9 3
ANNOUNCED
TRANSACTIONS
U.S. 27.6% 3 31.5% 2 28.0% 1
Global 32.0 3 25.1 3 18.7 3
- --------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies'advisors.
Investment banking revenues in 1998 increased 13% from 1997 due to
increased underwriting revenues and strong merger and acquisition advisory fees.
Management's Discussion and Analysis 31
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
- -------------------------------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Asset management fees $2,263 $2,075 $1,232
Portfolio service fees 1,479 1,150 826
Account fees 499 451 422
Other fees 512 526 522
------ ------ ------
Total $4,753 $4,202 $3,002
====== ====== ======
- --------------------------------------------------------------------------------
Revenues from asset management and portfolio service fees rose 13% in 1999
to a record $4.8 billion, primarily due to strong growth in assets under
management and assets in fee-based accounts.
Asset management fees increased 9% in 1999 due to growth in assets under
management attributable to market appreciation and net inflows of new money.
Portfolio service fees were up 29% in 1999, benefiting from significant growth
in client accounts and assets in fee-based accounts, including Merrill Lynch
Consults(Registered Trademark) and Unlimited Advantage(Service Mark), Merrill
Lynch's new total access fee-based account which was introduced in 1999. Account
fees rose 11%, principally as a result of increases in the number of Working
Capital Management Accounts ("WCMA(Registered Trademark)") and Cash Management
Accounts ("CMA(Registered Trademark)").
In 1998, asset management and portfolio service fees advanced 40% from
1997, primarily due to the December 1997 acquisition of Mercury Asset Management
Group ("Mercury") and growth in assets under management, which benefited from
significant growth in both client accounts and assets in fee-based accounts.
Merrill Lynch's year-end assets in Private Client accounts or under
management for 1999, 1998, and 1997 are summarized as follows:
- --------------------------------------------------------------------------------
(in billions)
1999 vs.
-------------
1999 1998 1997 1998 1997
- --------------------------------------------------------------------------------
ASSETS IN PRIVATE CLIENT
ACCOUNTS OR UNDER
MANAGEMENT(1)
U.S. $1,338 $1,164 $ 979 15% 37%
Non-U.S 358 282 250 27 43
------ ------ ------
Total $1,696 $1,446 $1,229 17 38
====== ====== ======
ASSETS UNDER
MANAGEMENT
Retail $ 291 $ 276 $ 240 5 21
Institutional 266 225 208 18 28
------ ------ ------
Total $ 557 $ 501 $ 448 11 24
====== ====== ======
U.S.FEE-BASED
PROGRAM ASSETS(2) $ 151 $ 84 $ 60 80 152
401(K) ASSETS $ 111 $ 99 $ 74 12 50
- --------------------------------------------------------------------------------
(1) Includes certain assets that are also included in Assets Under Management.
(2) Including Unlimited Advantage, Merrill Lynch Consults, Private Portfolio
Group, and Mutual Fund Advisor(Service Mark).
Changes in assets in Private Client accounts or under management from
year-end 1998 to year-end 1999 are described below:
- --------------------------------------------------------------------------------
(in billions)
NET CHANGES DUE TO
-----------------------
YEAR-END NEW ASSET YEAR-END
1998 MONEY(1) APPRECIATION 1999
- --------------------------------------------------------------------------------
Assets in Private Client
accounts or under
management $1,446 $ 104 $ 146 $1,696
Assets under management 501 18 38 557
- --------------------------------------------------------------------------------
(1) Includes reinvested dividends of $11 billion.
OTHER REVENUES
- --------------
Other revenues were $720 million in 1999, up 16% from 1998. Other revenues
include investment and real estate gains and losses, and partnership
distributions. The increase in other revenues during 1999 was primarily
attributable to higher investment gains and partnership revenues.
In 1998, other revenues increased 25% from 1997 to $623 million,
principally due to a pre-tax gain of approximately $100 million from the sale of
Merrill Lynch's New York Stock Exchange specialist business.
32 Management's Discussion and Analysis
INTEREST AND DIVIDENDS
- ----------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $ 5,761 $ 7,694 $ 6,831
Trading assets 3,931 5,218 5,240
Margin lending 2,982 2,757 2,207
Other 2,423 2,366 1,731
------- ------- -------
15,097 18,035 16,009
------- ------- -------
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 4,830 7,134 6,016
Borrowings 4,606 5,500 4,623
Trading liabilities 1,743 2,619 2,983
Other 1,831 1,774 1,331
------- ------- -------
13,010 17,027 14,953
------- ------- -------
NET INTEREST AND DIVIDEND PROFIT $ 2,087 $ 1,008 $ 1,056
======= ======= =======
- --------------------------------------------------------------------------------
Interest and dividend revenues and expenses are a function of the level and
mix of interest-earning assets and interest-bearing liabilities, and the
prevailing level and volatility of interest rates. Net interest and dividend
profit was up sharply from 1998, principally due to increases in interest
spreads attributable to a steepening yield curve and efficiencies in financing.
In 1998, interest and dividend profit was down 5% from 1997, largely due to
additional financing costs related to the December 1997 Mercury acquisition.
Merrill Lynch hedges its long- and short-term borrowings, primarily with
interest rate and currency swaps, to better match the interest rate and currency
characteristics of the borrowings to the assets funded by borrowing proceeds.
The effect of this hedging activity, which is included in "Borrowings" above,
decreased interest expense for 1999, 1998, and 1997 by $269 million, $62
million, and $81 million, respectively (see Note 5 to the Consolidated Financial
Statements).
NON-INTEREST EXPENSES
- ---------------------
Merrill Lynch's non-interest expenses are summarized as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits $11,153 $ 9,199 $ 8,333
------- ------- -------
Non-interest expenses,excluding
compensation and benefits:
Communications and technology 2,038 1,749 1,255
Occupancy and related depreciation 941 867 736
Advertising and market development 779 688 613
Brokerage,clearing,and exchange fees 678 683 525
Professional fees 567 552 520
Goodwill amortization 227 226 65
Provision for costs related to staff
reductions - 430 -
Other 1,408 1,057 1,098
------- ------- -------
Total non-interest expenses,excluding
compensation and benefits 6,638 6,252 4,812
------- ------- -------
Total non-interest expenses $17,791 $15,451 $13,145
======= ======= =======
Compensation and benefits as a
percentage of net revenues 51.0% 52.4% 51.3%
Compensation and benefits as a
percentage of pre-tax earnings
before compensation and benefits 73.2% 78.5%(1) 72.8%
- --------------------------------------------------------------------------------
(1) Excluding provision for costs related to staff reductions.
Non-interest expenses were $17.8 billion in 1999, compared with $15.5
billion in 1998. The largest expense category, compensation and benefits, was up
21% from 1998 due to higher incentive and Financial Consultant compensation,
resulting from increased profitability and strong business volume. An increase
in the number of full-time employees also contributed to this increase,
including a full year of Merrill Lynch Japan Securities Co. ("MLJS") staff
operating costs. The number of full-time employees was 67,200 at year-end 1999,
up approximately 3,400 since the end of 1998. This increase is attributable to
strategic business expansion, primarily in the Private Client Group and growth
in existing businesses.
Communications and technology expense rose 17% in 1999 to $2.0 billion due
to higher technology-related depreciation and communication maintenance and
support, partly related to new strategic online initiatives implemented in 1999.
Occupancy and related depreciation increased 9% to $941 million as a result of
continued global expansion.
Advertising and market development expense was $779 million, up 13% from
1998 because of increased costs related to new advertising campaigns launched
during the year, including those related to the new online initiatives.
Brokerage, clearing, and exchange fees remained virtually unchanged from the
prior year. Professional fees rose 3% to $567 million due in part to higher
employment service fees. Goodwill amortization was substantially unchanged at
$227 million for the year, and other
Management's Discussion and Analysis 33
expenses rose 33% from 1998 due in part to higher provisions related to various
business, operational, and legal matters and unfavorable foreign exchange
movements related to the Japanese yen versus the U.S. dollar.
Non-interest expenses in 1998 were up 18% compared to 1997. Approximately
60% of this increase was attributable to the acquisition of Mercury, the
start-up of MLJS, and a 1998 staff reduction provision. In the 1998 third
quarter, Merrill Lynch recorded a $430 million ($288 million after-tax)
provision for costs related to staff reductions aimed at reducing fixed and
semi-fixed costs and resizing certain debt trading businesses. The staff
reduction provision covered primarily severance costs, as well as costs to
terminate long-term contracts and leases related to personnel reductions and
resized businesses (see Note 2 to the Consolidated Financial Statements).
Compensation and benefits rose 10% in 1998 due to an increase in the number
of full-time employees and higher Financial Consultant compensation, slightly
offset by lower incentive compensation. Communications and technology expense
advanced 39% in 1998, primarily due to increased systems consulting costs
related to various initiatives, including Year 2000. Occupancy costs increased
18%, as a result of continued global expansion, particularly associated with
MLJS and Mercury. Advertising and market development expense rose 12%, partly
due to the start-up of MLJS and the Roth IRA campaign, and higher recognition
program costs. Brokerage, clearing, and exchange fees were up 30%, principally
due to custody and clearing costs for Mercury. Professional fees rose 6% due to
higher costs for strategic market studies and one-time integration costs for
Midland Walwyn Inc. ("Midland Walwyn"). Goodwill amortization increased $161
million to $226 million as a result of the Mercury acquisition. Other expenses
were down 4% from 1997 due to reductions in provisions for various business
activities and legal matters.
The following bar graph illustrates fee-based revenues as a percentage of
fixed and semi-fixed expenses for the past five years.
- -------------------------------------------------------------------------------
FEE-BASED REVENUES AS A PERCENTAGE OF
FIXED AND SEMI-FIXED EXPENSES
($ in millions)
FIXED AND
FEE-BASED SEMI-FIXED
REVENUES(2) EXPENSES %
----------- ---------- -----
1999 $6,842 $8,812 78
1998 6,042 7,930 76(1)
1997 4,364 6,569 66
1996 3,703 5,584 66
1995 3,188 4,671 68
(1) The increase in this percentage compared to 1997 is primarily due to higher
fee-based revenues resulting from the Mercury acquisition.
(2) Fee-based revenues principally include asset management and portfolio
service fees and net margin interest.
- -------------------------------------------------------------------------------
INCOME TAXES
- ------------
Merrill Lynch's 1999 income tax provision was $1.3 billion, representing a 31.0%
effective tax rate compared with 34.0% in 1998 and 36.3% in 1997. The decline in
the 1999 effective tax rate was primarily attributable to additional lower-taxed
non-U.S. income, higher tax-exempt income, and additional tax-advantaged
financing. The 1998 decline was primarily attributable to higher tax-exempt
income and additional tax-advantaged financing.
Deferred tax assets and liabilities are recorded for the effects of
temporary differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Merrill Lynch assessed its ability
to realize deferred tax assets primarily based on a strong earnings history and
the absence of negative evidence as discussed in Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. During the
last 10 years, average pre-tax earnings were $2.1 billion. Accordingly,
management believes that it is more likely than not that deferred tax assets,
net of related valuation allowances, will be realized (see Note 12 to the
Consolidated Financial Statements).
34 Management's Discussion and Analysis
STRATEGIC BUSINESS INITIATIVES
- ------------------------------
Among Merrill Lynch's strategic initiatives were e-commerce developments in our
evolving business model for the delivery of information and products and
services to our clients. In the Private Client Group ("PCG"), this change means
that online services and research may be combined with the personalized advice
of a Merrill Lynch Financial Consultant. In the Corporate and Institutional
Client Group ("CICG"), this change means the introduction of an enhanced
business model for institutional debt and equity issuance, trading, and client
activities. Examples of these, and other recent strategic initiatives, include
the following:
. Launched in July, Unlimited Advantage, 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 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 ("AMG") 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.
In 1998, Merrill Lynch executed its global business strategy by:
. Opening 33 retail offices in Japan through MLJS, which resulted in $12
billion in client assets held by Merrill Lynch in Japan at year-end 1999,
. Merging with Midland Walwyn, one of Canada's premier securities firms,
. Purchasing a majority interest in Phatra Securities Company Limited,
Thailand's leading investment bank, for $65 million,
. Acquiring Howard Johnson & Co., a U.S. employee benefits consulting firm,
for $27 million, and
. Divesting a majority interest in Lender's Service, Inc., a residential real
estate service subsidiary, and a 100% interest in Merrill Lynch's New York
Stock Exchange specialist subsidiary.
Acquisitions made in 1997 included Mercury, for which approximately $5.3
billion was paid, and MasterWorks, a 401(k) service provider, for which $13
million was paid. In addition, Merrill Lynch hired the employees of Centaurus
Corporate Finance Group, a strategic advisor in Australia.
Management's Discussion and Analysis 35
BUSINESS SEGMENTS
- -----------------
Merrill Lynch reports the results of its business within three business
segments: CICG, PCG, and AMG. CICG's activities primarily involve providing
services to corporate, institutional, and government clients throughout the
world. PCG provides investment, financing, insurance, tax, and other financial
services and products to its clients, globally. AMG provides investment
management services to a wide variety of retail and institutional clients.
Certain AMG and CICG products are distributed by PCG distribution networks,
and to a more limited extent, certain AMG products are distributed through the
distribution capabilities of CICG. Costs and revenues associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. In addition, revenue sharing agreements for shared activities
are in place and the results of each segment reflect the agreed upon portion of
these activities. The following segment operating results, which exclude certain
corporate items, represent the information that is relied upon by management in
its decision-making processes. In relying upon these numbers, management
understands that restatements will occur to reflect reallocations of revenues
and expenses which result from changes in Merrill Lynch's business strategy (see
Note 14 to the Consolidated Financial Statements).
CORPORATE AND INSTITUTIONAL CLIENT GROUP
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 9,328 $ 6,549 $ 6,789
Net earnings 1,906 961 1,186
- --------------------------------------------------------------------------------
Total employees 11,138 10,723 10,553
- --------------------------------------------------------------------------------
CICG provides investment banking and strategic merger and acquisition
advisory services, as well as equity and debt trading and capital markets
services to corporations, financial institutions, and governments around the
world. CICG raises capital for its clients on favorable terms through securities
underwriting, private placements, and loan syndications. CICG trades securities,
currencies, and other products and contracts over-the-counter derivatives to
satisfy customer demand for these instruments. With more than 2,000 equity
research, sales, trading, and capital markets professionals and equity trading
activities in 28 countries, Merrill Lynch maintains one of the most powerful
equity trading and underwriting capabilities of any firm in the world. Through
its expertise in government and corporate debt trading, CICG is also the leader
in global distribution of new issue and secondary debt securities. CICG's
client-focused strategy provides investors with opportunities to diversify their
portfolios, manage risk, and enhance returns by tailoring investments and
structuring derivatives to meet clients' customized needs. In line with the
firmwide strategic initiative in e-commerce, in 1999, CICG established Direct
Markets which will enhance existing CICG businesses by serving as a vehicle for
creating the "next generation" business model for institutional debt and equity
issuance, trading, and servicing activities and for capitalizing on the
opportunities created by the Internet to reach institutional clients and
investors.
In 1999, CICG's net earnings were $1.9 billion, up nearly 100% from 1998
and 61% from 1997 levels. CICG's net revenues increased 42% from 1998 to $9.3
billion, primarily due to a significant improvement in global market conditions.
In 1998, the highly volatile global markets, particularly in the latter half of
the year, negatively impacted financial markets, especially debt markets.
Revenues from CICG equity products were a record $4.7 billion in 1999 due
to increased client demand for equities and equity derivatives in both the U.S.
and Europe. CICG's global equities business has grown substantially over the
last few years. In addition, CICG has substantially grown its equity derivatives
and portfolio trading activities during this period. As a result, equity
revenues, both trading and underwriting, have grown substantially since 1995,
with 56% of 1999 revenues from non-U.S. locations.
Debt trading revenues were significantly higher in 1999 compared to 1998,
primarily due to a recovery from the global market turmoil experienced in the
second half of 1998, when the unprecedented movement in credit spreads led to
valuation and counterparty losses that significantly impacted certain of Merrill
Lynch's debt trading businesses.
Merrill Lynch's investment banking and strategic advisory services
activities reached record levels in 1999. Merrill Lynch remained the leading
underwriter of global debt and equity securities for the 11th consecutive year,
with a 12.6% market share in 1999, according to Thomson Financial Securities
Data. Origination revenues for debt and equity securities were $1.6 billion, up
14% from 1998 and 10% from 1997. Through the strengthening of its client
relationships, CICG has increased its revenues from strategic advisory services
by 17% and 66% as compared with 1998 and 1997, respectively.
PRIVATE CLIENT GROUP
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 10,688 $ 9,596 $ 8,532
Net earnings 925 949 730
- --------------------------------------------------------------------------------
Total employees 44,946 42,543 38,856
- --------------------------------------------------------------------------------
During 1999, PCG announced evolutionary changes to its retail business,
introducing major e-commerce initiatives, tailored by region, designed to
provide clients greater choice and flexi-
36 Management's Discussion and Analysis
bility, together with a wide range of products and services to meet their
diverse financial needs. Major components of PCG's 1999 initiatives include:
. The July, 1999 launch of Unlimited Advantage, a U.S. fee-based financial
service that empowers Financial Consultants to compete aggressively for a
total financial relationship with clients. Since its inception, Unlimited
Advantage has been successful in its asset-gathering strategy, attracting
assets at a rate more than 20 times faster than previous fee-based
products. At year-end 1999, Unlimited Advantage accounts totaled over
260,000 with assets of $63 billion, of which $9 billion represented new
money. Assets include approximately 81,000 ML Financial Advantage(Service
Mark)and Asset Power(Service Mark)accounts containing $24 billion in total
assets, which were converted to Unlimited Advantage accounts during the
year. Over time, this initiative will lead to a shift from commissions
revenues to asset management and portfolio service fees. However, we cannot
predict with certainty the impact that this initiative will have on
revenues or earnings.
. The October, 1999 introduction of the international versions of Unlimited
Advantage, International Asset Power in most regions, and Asset Partner in
Canada.
. The December, 1999 introduction of ML Direct, an online investing service
for self-directed investors in the U.S. At year-end 1999, more than 5,300
ML Direct accounts had been opened with more than $300 million in assets.
Due to the short time period since the inception of ML Direct, we cannot
predict with certainty the impact that this initiative will have on
revenues or earnings.
The formation of MLJS in 1998 has proved essential in establishing Merrill
Lynch's presence in Japan. During 1998, Merrill Lynch began offering individual
investors in Japan the same consultative approach employed elsewhere in the
world and became the first U.S. firm to operate a nationwide retail securities
network within the country. In addition, PCG's global presence and position in
Canada have strengthened since the 1998 merger with Midland Walwyn. Rebounding
from the severe global market turmoil in 1998, Midland Walwyn client assets
increased 24% in 1999 to $33 billion at year end.
PCG provides a wide range of other fee-based products and services that
assist clients around the world to build financial assets and maximize returns
in relation to risk tolerance and investment objectives. These products and
services include retail brokerage, asset and liability management, retail and
private banking, trust and generational planning services, and insurance
products. Outside the U.S., PCG's products and services also include private
banking services, which provide high-net-worth individuals with a host of
products and services to meet their financial objectives, including investing
and borrowing strategies, investment management, trust and personal holding
company services, and currency management. PCG products and services are
provided to individual investors, corporations, and institutions through various
distribution networks, including approximately 18,200 Financial Consultants in
nearly 1,000 Private Client offices in 36 countries.
Financial Consultants and other investment professionals work with
individual investors, small and medium-sized corporations, and other
organizations to address clients' financial concerns by matching the numerous
products offered by Merrill Lynch with the clients' customized needs. These
products include:
. The CMA and CBA(Registered Trademark) accounts for individuals, WCMA
account for small and mid-sized businesses, and EMA(Service Mark)account
for foundations and non-profit organizations, all of which are types of
flexible central asset accounts for securities transactions, money sweeps,
electronic funds-transfer capabilities, debit card access, and many other
financial management features.
. A wide array of global mutual fund portfolios covering a cross section of
industries and regions of the world.
. Various advisory services and brokerage pricing alternatives, including
Merrill Lynch Consults, Mutual Fund Advisor, and Global Funds
Advisor(Service Mark).
. Other services provided include mortgages and other consumer loans, margin
lending, commercial financing, annuity and life products, trust and other
estate planning techniques, and advisory and administrative activities for
defined contribution, defined benefit, and various stock plans.
Total Private Client customer assets reached $1.5 trillion at year-end
1999, up 17% for the year. Assets in U.S. Private Client fee-based programs were
up 80% in 1999 to $151 billion on strong gains in ML Consults and Unlimited
Advantage.
Net earnings for PCG were $925 million in 1999, down 3% from $949 million
in 1998 and up 27% from $730 million in 1997. Net revenues were $10.7 billion,
up 11% and 25% from 1998 and 1997, respectively. Increased trading volumes on
global exchanges and the continued growth in fee-based revenues have led to
record revenues in both Commissions revenues and Asset management and portfolio
service fees during 1999. The profitability of the PCG business decreased
slightly in 1999 as a result of higher technology expenses and increased
advertising expenses, including those related to Unlimited Advantage, ML Direct,
and MLJS. PCG results in 1998 included start-up and integration costs associated
with MLJS and Midland Walwyn, respectively.
Management's Discussion and Analysis 37
ASSET MANAGEMENT GROUP
- -------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- -------------------------------------------------------------------------------
Net revenues $ 2,268 $ 1,979 $ 1,239
Net earnings 335 292 264
- -------------------------------------------------------------------------------
Total employees 3,535 3,202 2,924
- -------------------------------------------------------------------------------
AMG provides investment management services to a diverse global clientele
of institutions, including pension plans and corporations, high-net-worth
individuals, mutual funds, and other investment vehicles. The December 1997
acquisition of Mercury has proved critical to Merrill Lynch's global asset-
gathering strategy and, in combination with Merrill Lynch Asset Management
("MLAM"), is essential to the success of AMG's business. During 1999, AMG
integrated its business into a single global organization with three regional
operating units serving a wide variety of clients, with a special focus in the
U.S., Japan, and Europe. In line with this realignment and focus, AMG expanded
its products and services as well as its distribution channels. AMG services are
now offered under three distinct brand names around the world, Merrill Lynch
Asset Management, Merrill Lynch Mercury Asset Management, and Hotchkis and
Wiley. In the U.S., Merrill Lynch branded products are available primarily
through the PCG distribution channel, while the Mercury and Hotchkis and Wiley
products are available through both PCG and third-party distribution networks.
Outside the U.S., Merrill Lynch, Mercury, and Atlas (offered in Canada only)
branded products are available through both the Merrill Lynch distribution
network and other financial intermediaries.
In 1999, the introduction of new senior management, including new chief
investment and marketing officers, senior portfolio managers, and an experienced
quantitative management team, contributed to improved investment performance
across retail and institutional products and permitted enhanced product
distribution. The U.S. retail mutual fund offerings were expanded to include
greater representation in growth areas, particularly technology. In addition,
quantitative management capabilities were enhanced with the formation of Merrill
Lynch Quantitative Advisors, a management unit offering products that utilize
quantitative techniques designed to provide consistent and high investment
returns. AMG's sales capabilities through third-party and internal distribution
channels also strengthened during 1999, particularly through increased wholesale
product offerings.
At year-end 1999, assets under management were a record $557 billion, up
11% during 1999, with increases across virtually all asset classes, client
bases, and client locations. Of particular note were the increases in assets
under management in Japan and Australia, two of AMG's target non-U.S. markets.
Based on assets under management, Merrill Lynch is one of the largest investment
managers in the world.
Presented are three pie charts illustrating Merrill Lynch's assets under
management in terms of Client Base, Client Location and Asset Class at year-end
1999.
- --------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT AT YEAR-END 1999
- --------------------------------------------------------------------------------
CLIENT BASE
Retail 52%
Institutional 48%
CLIENT LOCATION
U.S. 58%
Non-U.S. 42%
ASSET CLASS
Equity and Balanced 55%
Fixed Income - Medium and Long Duration 17%
Fixed Income - Short Duration 28%
- --------------------------------------------------------------------------------
AMG's assets under management for each of the last three years were
comprised of the following:
- --------------------------------------------------------------------------------
(in billions)
1999 1998 1997
- --------------------------------------------------------------------------------
Equity and balanced $ 306 $ 267 $ 252
Fixed income:
Medium and long duration 95 90 81
Short duration 156 144 115
- --------------------------------------------------------------------------------
Total assets under management $ 557 $ 501 $ 448
- --------------------------------------------------------------------------------
Net earnings for AMG were $335 million in 1999, up 15% from $292 million in
1998 and up 27% from $264 million in 1997. Results in 1999 include an after-tax
investment gain of approximately $45 million. Net revenues were $2.3 billion, up
15% and 83% from 1998 and 1997, respectively. The 1998 increase reflects the
December 1997 purchase of Mercury. Profitability of the AMG business also
improved from 1998 and 1997 because of robust markets, increased productivity,
and expanded product lines.
38 Management's Discussion and Analysis
GLOBAL OPERATIONS
- -----------------
Merrill Lynch's non-U.S. operations are organized into six geographic regions:
. Europe, Middle East, and Africa,
. Asia Pacific,
. Australia and New Zealand,
. Japan,
. Canada, and
. Latin America.
The following summary of regional operating results excludes goodwill
amortization, financing costs for the Mercury acquisition, and the 1998 staff
reduction provision.
EUROPE, MIDDLE EAST, AND AFRICA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 4,222 $ 2,844 $ 1,949
Earnings before income taxes 1,290 452 328
- --------------------------------------------------------------------------------
Total full-time employees 7,658 7,178 6,477
- --------------------------------------------------------------------------------
Merrill Lynch operates in Europe, the Middle East, and Africa as a dealer
in a wide array of equity and debt products, as well as providing asset
management, investment banking, private banking, and research services. In line
with its strategy of becoming a global leader with a strong local presence in
key markets, Merrill Lynch now has 45 offices in 20 countries in the region.
As a result of the December 1997 acquisition of Mercury, Merrill Lynch has
preeminent asset management capabilities in this region. The asset management
group is the largest active fund manager in Europe, with assets under management
of $288 billion at year-end 1999. Merrill Lynch Mercury received a number of
prestigious awards in Europe, including #1 Asset Management Group according to
the 1999 Primark/Extel Survey, and #1 Fund Management Group as ranked by the
1999 Reuters UK Larger Companies Survey.
All of the region's businesses achieved record results in 1999, with
notable contributions from equity markets and investment banking. Merrill Lynch
has established itself as the leading equities house in the region, and was
ranked #1 Research House by Reuters and #1 All-Europe Research Team by the 1999
Institutional Investor Survey. 1999 was the most successful year ever for
investment banking in Europe, as Merrill Lynch participated in a number of top
deals in the region, including winning "Best M&A Deal of the Year" and "Best
Buyout Deal of the Year" from Corporate Finance Magazine. Merrill Lynch was also
awarded the #1 position in European IPOs after acting as lead manager on the
"European IPO of the Year", as ranked by IFR Magazine. In addition, the
international version of Unlimited Advantage, International Asset Power, was
launched in October 1999, and in 2000 Merrill Lynch aims to establish leadership
in e-commerce in Europe through aggressive development of a regional Direct
Markets Group. Customers in this region will also have access to online trading
in 2000.
In 1999, net revenues for the region increased 48% from 1998, primarily due
to higher investment banking and equity trading revenues, as well as increased
asset management fees. Debt trading revenues also contributed to the increase,
as market conditions stabilized compared to the second half of 1998.
The $838 million increase from 1998 in earnings before income taxes was
primarily attributable to significantly increased revenues resulting primarily
from investment banking activities, partially offset by a rise in compensation
costs.
In 1998, net revenues for the region increased 46% from 1997, primarily
attributable to asset management fees relating to Mercury, as well as higher
investment banking and equity trading revenues, partly offset by lower debt
trading revenues. Earnings before income taxes increased 38% from 1997.
ASIA PACIFIC
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 813 $ 333 $ 478
Earnings (loss) before income taxes 230 (182) (26)
- --------------------------------------------------------------------------------
Total full-time employees 1,605 1,516 1,624
- --------------------------------------------------------------------------------
Merrill Lynch serves a broad retail and institutional client base
throughout the Asia Pacific region and offers a full range of Private Client,
Asset Management, and CICG products. Merrill Lynch operates from offices in the
People's Republic of China and its special administrative Hong Kong region,
Singapore, Taiwan, South Korea, Thailand, Malaysia, Indonesia, India, and the
Philippines. Merrill Lynch has an established trading presence and exchange
memberships in all major financial markets in the region. The Private Client
business operates seven Private Client offices throughout the Asia Pacific
region, including two offices in the Western U.S., offering investment services
and wealth management products to its clients.
After a year of financial turbulence in 1998, Merrill Lynch had its best
year ever in terms of financial performance in the region. Merrill Lynch
completed deals across most Asian markets and was associated with some of the
most complex and high profile transactions in the region. IFR Magazine ranked
Merrill Lynch Asia Pacific Equity House of the Year and Asia Pacific Bond House
of the Year. Merrill Lynch was also named Best Securities Firm in Asia by
Euromoney, Best Bank for Equity Origination by Global Finance, and Institutional
Investor Magazine ranked Merrill Lynch #1 in Asian Equity and Fixed Income
Research.
Net revenues in the region were up $480 million in 1999 as global markets
stabilized. The increase resulted from strong revenues from equities and equity
derivatives and record Private
Management's Discussion and Analysis 39
Client revenues, as well as increased asset management fees, with a 20% increase
in assets under management. Earnings before income taxes rose $412 million to
$230 million, primarily as a result of increased equity and debt trading
activity.
In 1998, net revenues in the region were down 30% from 1997, as economic
turmoil adversely impacted debt markets. However, solid equity trading results
and Private Client revenues enabled Merrill Lynch to strengthen its leading
position in these businesses across the region.
AUSTRALIA AND NEW ZEALAND
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 253 $ 221 $ 163
Earnings before income taxes 32 22 12
- --------------------------------------------------------------------------------
Total full-time employees 865 827 852
- --------------------------------------------------------------------------------
In the Australia and New Zealand region, Merrill Lynch provides a broad mix
of Private Client, Asset Management, and CICG products. Assets under management
grew 77% during the year, with total net inflows tripling over 1998 levels. The
increase in Private Client assets was due to an increased product range, a more
focused and expanded sales force, and improved market conditions. The Private
Client Group continued to focus on gathering client assets, resulting in a 62%
increase in total client assets. In the third quarter of 1999, Merrill Lynch
became the first U.S. asset manager to offer U.S.-registered mutual funds in
Australia. International equities and mutual funds were introduced to Australian
investors during the year, and three new fee-based products were offered in
1999, including the international version of Unlimited Advantage. In New
Zealand, the International CMA account was successfully introduced, and
customers in Australia will have access to self-directed Internet trading in
early 2000.
Merrill Lynch's Investment Banking team strengthened its role in the region
as a preeminent strategic and financial advisor to Australian and New Zealand
corporations in 1999. Merrill Lynch is one of the region's leading strategic
advisors to listed companies, and advised on the two largest completed public
company M&A transactions. Debt markets, which had its most profitable year ever,
is recognized as a leading provider of structured and credit products, in
addition to more traditional strengths in cross border origination. Equity
markets also continued to perform well, characterized by structural innovation
and landmark transactions, including the first major Australian Internet
offering. Merrill Lynch was named Best Foreign Securities House in Australia by
Finance Asia Magazine and Best Investment Bank in Australia and New Zealand by
the Greenwich Survey.
Net revenues for the region increased 14% from 1998 and 55% from 1997. The
increase primarily resulted from growth in the Private Client and Asset
Management businesses. Earnings before income taxes increased 45% from 1998 and
nearly tripled since 1997.
JAPAN
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 1,062 $ 592 $ 433
Earnings (loss) before income taxes 20 (108) 62
- --------------------------------------------------------------------------------
Total full-time employees 3,160 2,881 766
- --------------------------------------------------------------------------------
Following the establishment of MLJS and Merrill Lynch Mercury Asset
Management Japan ("MLMJ") in 1998, Merrill Lynch continued to enhance its
presence in the region during 1999 with the successful alignment of its various
businesses in Japan. The firm now provides an integrated range of Private
Client, Asset Management, and CICG products and services to individual, small to
mid-sized corporate, and institutional clients. In 1999, synergies between CICG
and Private Client resulted in the successful distribution of five notable
public offerings through MLJS, in addition to numerous new products introduced
and distributed by MLJS to the retail market.
The firm's CICG business, which operates under the name Merrill Lynch Japan
("MLJ") continued to improve its performance in 1999, with record revenues in
its debt, equity, and advisory businesses. Merrill Lynch has significantly
expanded its origination activities and presence in Japan, ranking #2 in
Japanese announced M&A, and #1 in foreign underwriting for both Japanese equity
and debt issuances, according to Thomson Financial Securities Data. MLJ also
became the first foreign financial institution in Japan to be a lead manager on
a domestic equity new issuance, and has seized business opportunities arising
from the ongoing restructuring of Japanese financial institutions.
In 1999, MLJS began to capitalize on the shift in personal assets in Japan,
from low-yielding deposits to equities, professionally managed funds, and higher
yielding products, while operating under an environment of a more variable
compensation structure for Financial Consultants, continued deregulation,
innovative products, and robust equity markets. Client assets reached $12
billion at year-end 1999, an increase of $10 billion since year-end 1998, and
the number of client accounts more than doubled during the year.
MLMJ, one of the leading managers of Japanese pension funds and a provider
of a wide range of mutual funds, is poised to capitalize on the continuing
deregulation of the Japanese asset management industry. Assets under management
continued to grow rapidly in both the institutional and retail areas while
Japanese equity accounts managed in Tokyo for overseas clients also grew
significantly due to strong performance.
40 Management's Discussion and Analysis
Net revenues in the Japan region were up 79% from 1998, reflecting strong
performance in all businesses. These higher revenues were offset by a full year
of fixed expenses and higher production-related compensation costs associated
with MLJS.
Net revenues in the Japan region in 1998 were up 37% from 1997, primarily
due to improved profitability from corporate bond trading, higher assets under
management, and increased services provided to financial institutions resulting
from regulatory reform. The pre-tax loss in 1998 was primarily the result of the
start-up costs associated with MLJS.
CANADA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 619 $ 642 $ 708
Earnings before income taxes 65 25 99
- --------------------------------------------------------------------------------
Total full-time employees 3,744 3,703 3,288
- --------------------------------------------------------------------------------
In 1998, Merrill Lynch merged with Midland Walwyn, one of Canada's premier
securities firms. With this transaction, Merrill Lynch significantly expanded
its capabilities in Canada beyond its traditional strengths in investment
banking and debt markets. Today, Merrill Lynch is a full-service firm in the
region with a growing presence, serving individual and institutional clients, as
well as corporate and government issuers.
Merrill Lynch's Private Client business in Canada made significant progress
in 1999. The company's Private Client business ranks as the third largest in
Canada, with a team of more than 1,250 investment professionals serving
approximately 600,000 individuals. MLAM Group Canada, which now includes Merrill
Lynch Mercury, reached $4.8 billion in assets under management, an increase of
55% from the end of 1998. MLAM Group Canada also launched 17 new mutual funds
and introduced a managed wrap program. In October 1999, Merrill Lynch introduced
Asset Partner, the Canadian version of the Unlimited Advantage account.
In CICG, Merrill Lynch was ranked the #1 Investment Bank and #1 in research
by 174 Canadian-based corporations who took part in the 1999 Reuters Survey. The
Debt Markets group jointly led a $2 billion Government Debt Offering which was
voted "Sovereign Deal of the Year" by Euroweek, and also earned "Canadian Deal
of the Year" from Euroweek as joint lead on a debt offering for a Canadian
province.
Net revenues for the region were down slightly from 1998. However, Merrill
Lynch Canada gained significant market share within the Canadian market, and is
positioned to build on this momentum if equity markets improve. Earnings before
income taxes increased 160% from 1998, primarily due to costs incurred in 1998
due to the Midland Walwyn merger.
Net revenues in 1998 declined 9% from 1997, due to decreased underwriting,
debt trading, and commissions revenues caused by uncertainties in global
markets. These declines were partially offset by strong growth in merger and
acquisition advisory revenues and asset management fees. Earnings before income
taxes dropped significantly from 1997 because of a decline in revenues and $40
million in merger and integration-related expenses.
LATIN AMERICA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 614 $ 412 $ 523
Earnings (loss) before income taxes 137 (53) 123
- --------------------------------------------------------------------------------
Total full-time employees 1,172 1,192 904
- --------------------------------------------------------------------------------
In Latin America, Merrill Lynch provides various brokerage and investment
services, including financial planning, investment banking, research, and asset
management, including a newly established asset management presence in Brazil.
Included in this region are certain U.S. offices that primarily serve Latin
American clients.
Volatility stemming from the fourth quarter 1998 emerging market crisis
continued in the first quarter of 1999; high interest rates and increased
foreign capital outflow resulted in a 70% devaluation in the Brazilian real in
the first quarter of 1999. The devaluation had a ripple effect throughout all
Latin American economies, as Brazil is the largest economy in the region.
Subsequent to the first quarter of 1999, the Latin American economy rebounded
due to political and structural changes, as well as robust global markets.
In the second quarter of 1999, Merrill Lynch was appointed by the largest
oil company in Spain as advisor on the significant acquisition of YPF, the large
Argentine oil company. Merrill Lynch continued to receive high honors in
numerous categories, including best M&A firm in Latin America according to
Euromoney, and for the third consecutive year, Merrill Lynch received first
place in Institutional Investor's 1999 Latin America Research Team.
Merrill Lynch's private banking efforts in the region were significant in
1999, as assets in the region grew 20%. In early 2000, Santander Securities
Corporation purchased Merrill Lynch's retail brokerage business in Puerto Rico.
Net revenues for the region increased 49% from 1998 as trading and
investment banking revenues were negatively impacted by volatile global markets
throughout most of 1998. Pre-tax earnings rose $190 million from 1998 due to
significantly improved performance by the debt markets group.
Net revenues in 1998 decreased 21% from 1997 as trading and investment
banking activities were adversely affected by the market turbulence that
occurred throughout most of 1998. The pre-tax loss in 1998 resulted from
increased variable compensation, brokerage, clearing, and exchange costs, and
communication and technology expenses.
Management's Discussion and Analysis 41
BALANCE SHEET
- -------------
OVERVIEW
Management continually monitors and evaluates on a daily basis the level and
composition of the balance sheet.
In 1999, average total assets were $331 billion, down 12% from $376 billion
in 1998. Average total liabilities in 1999 decreased 13% to $317 billion from
$365 billion in 1998. The major components of the decrease in average total
assets and liabilities are summarized as follows:
- --------------------------------------------------------------------------------
(in millions)
INCREASE (DECREASE) CHANGE
- --------------------------------------------------------------------------------
AVERAGE ASSETS
Receivables under resale agreements and
securities borrowed transactions $ (20,331) (16)%
Trading assets (29,979) (21)
Securities pledged as collateral (5,584) (31)
Customer receivables 5,982 14
Loans,notes,and mortgages 2,361 35
AVERAGE LIABILITIES
Payables under repurchase agreements and
securities loaned transactions $ (27,394) (22)%
Commercial paper and other short-term
borrowings (17,726) (57)
Obligation to return securities received
as collateral (10,251) (32)
Long-term borrowings 5,806 11
Demand and time deposits 2,529 23
- --------------------------------------------------------------------------------
Balance sheet levels were, on average, lower in 1999 compared to 1998.
Year-end 1999 balances, however, were higher compared with year-end 1998
balances, primarily resulting from increases in secured financing transactions,
customer receivables, marketable investment securities, and commercial paper and
other short term borrowings. The discussion that follows analyzes the changes in
year-end financial statement balances of major asset and liability categories.
TRADING-RELATED ASSETS AND LIABILITIES
Trading-related balances primarily consist of trading assets and liabilities,
receivables under resale agreements and securities borrowed transactions,
payables under repurchase agreements and securities loaned transactions, and
certain receivable/payable balances that result from trading activities. At
December 31, 1999 total trading-related assets and liabilities were $251 billion
and $174 billion, respectively. Presented are two pie charts illustrating
trading-related balances as a percentage of total assets and liabilities,
excluding collateral recognized under SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
- --------------------------------------------------------------------------------
ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
TRADING-RELATED ASSETS:
Trading Assets 32%
Resale Agreements and Securities Borrowed 32
Receivables 18
---
82
NON-TRADING-RELATED ASSETS 18
---
100%
===
TRADING-RELATED LIABILITIES:
Trading Liabilities 23%
Repurchase Agreements and Securities Loaned 24
Payables 12
---
59
NON-TRADING-RELATED LIABILITIES 41
---
100%
===
- --------------------------------------------------------------------------------
Although trading-related balances comprise a significant portion of the
balance sheet, the magnitude of these balances does not necessarily convey a
sense of the risk profile assumed by Merrill Lynch. The market and credit risks
associated with trading-related balances are mitigated through various hedging
strategies, as discussed in the following sections (see Note 3 to the
Consolidated Financial Statements for descriptions of market and credit risks).
Merrill Lynch reduces a significant portion of the credit risk associated
with trading-related receivables by requiring counterparties to post cash or
securities as collateral in accordance with collateral maintenance policies. The
bar graph that follows depicts the value of collateral maintained at December
31, 1999 for trading-related assets to reduce counterparty credit risk.
42 Management's Discussion and Analysis
- --------------------------------------------------------------------------------
COLLATERALIZED TRADING-RELATED RECEIVABLES
(in billions)
- --------------------------------------------------------------------------------
TRADING-RELATED COLLATERAL
RECEIVABLES MAINTAINED
--------------- ----------
Derivative Contract Receivables(a) $ 28 $ 4
Receivables under Resale Agreements 58 62
Receivables under Securities Borrowed Transactions 42 41
Other Receivables(b) 56 39
- --------------------------------------------------------------------------------
(a) Included in trading assets. Collateral is not maintained for securities and
other cash instruments.
(b) Collateral presented does not include over collateralization, i.e., Merrill
Lynch maintains collateral in excess of customer margin loan receivables.
Trading Assets and Liabilities
Trading inventory principally represents securities purchased ("long"
positions), securities sold but not yet purchased ("short" positions), and the
fair value of derivative contracts (see Note 1 to the Consolidated Financial
Statements). These positions are primarily the result of market-making, hedging,
and proprietary activities.
Merrill Lynch acts as a market-maker in a wide range of securities,
resulting in a significant amount of trading inventory to facilitate customer
transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary
trading inventory in seeking to profit from existing or projected market
opportunities.
Merrill Lynch uses both cash instruments and derivatives to manage trading
inventory market risks. As a result of these hedging techniques, a significant
portion of trading assets and liabilities represents hedges of other trading
positions. Long U.S. Government securities, for example, may be hedged with
short interest rate futures contracts. These hedging techniques, which are
generally initiated at the trading unit level, are supplemented by corporate
risk management policies and procedures (see the Risk Management section for a
description of risk management policies and procedures).
Trading assets at year-end 1999, including the $10 billion of collateral
recognized under SFAS No. 125, were down 1% from year-end 1998. Collateral
recognized under SFAS No. 125 and contractual agreements increased, while
non-U.S. Government and agencies securities declined. Trading liabilities
increased from $64 billion to $68 billion, primarily as a result of higher
levels of contractual agreements and U.S. Government and agencies, partially
offset by declines in non-U.S. governments and agencies and equities and
convertible debentures.
Resale/Repurchase Agreements and Securities Borrowed/Loaned Transactions
Repurchase agreements and, to a lesser extent, securities loaned transactions
are used to fund a significant portion of trading assets. Likewise, Merrill
Lynch uses resale agreements and securities borrowed transactions to obtain the
securities needed for delivery on short positions. These transactions are
typically short-term in nature since a significant portion are entered into on
an overnight or open basis. Resale and repurchase agreements entered into on a
term basis typically mature within 90 days.
Merrill Lynch also enters into these transactions to meet customers' needs.
These "matched-book" repurchase and resale agreements or securities borrowed and
loaned transactions are entered into with different customers using the same
underlying securities, generating a spread between the interest revenue on the
resale agreements or securities borrowed transactions and the interest expense
on the repurchase agreements or securities loaned transactions. Exposures on
these transactions are limited by their typically short-term nature and
collateral maintenance policies.
Presented is a bar graph illustrating the nature of resale/repurchase
agreements and securities borrowed/loaned transactions, differentiating between
matched-book and non-matched-book for total resale agreements, repurchase
agreements, securities borrowed, and securities loaned balances of $58,034
million, $64,954 million, $41,707 million, and $6,624 million, respectively.
- --------------------------------------------------------------------------------
RESALE/REPURCHASE AGREEMENTS AND
SECURITIES BORROWED/LOANED TRANSACTIONS
- --------------------------------------------------------------------------------
MATCHED-BOOK NON-MATCHED-BOOK
------------ ----------------
Resale Agreements 51% 49%
Repurchase Agreements 46 54
Securities Borrowed 11 89
Securities Loaned 71 29
- --------------------------------------------------------------------------------
Receivables under resale agreements and securities borrowed transactions
and payables under repurchase agreements and securities loaned transactions in
1999
Management's Discussion and Analysis 43
increased 14% and 7% from year-end 1998, respectively, as a result of higher
matched book activity.
Other Trading-Related Receivables and Payables
Securities trading may lead to various customer or broker-dealer balances.
Broker-dealer balances may also result from recording trading inventory on a
trade date basis. Certain receivable and payable balances also arise when
customers or broker-dealers fail to pay for securities purchased or fail to
deliver securities sold, respectively. These receivables are generally fully
collateralized by the securities that the customer or broker-dealer purchased
but did not receive. Customer receivables also include margin loans
collateralized by customer-owned securities held by Merrill Lynch. Collateral
policies significantly limit Merrill Lynch's credit exposure to customers and
broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will
sell securities that have not been paid for, or purchase securities sold but not
delivered, after a relatively short period of time, or will require additional
margin collateral, as necessary. These measures reduce market risk exposure
related to these balances.
Interest receivable and payable balances related to trading inventory are
principally short-term in nature. Interest balances for resale and repurchase
agreements, securities borrowed and loaned transactions, and customer margin
loans are generally considered when determining the collateral requirements
related to these transactions.
Trading-related receivables in 1999 were up $9 billion from 1998, primarily
due to increases in margin and other collateralized loans. Trading-related
payables increased $5 billion during 1999 due to heightened customer activity
and a net payable that results from recording inventory on a trade date basis.
NON-TRADING ASSETS
Investments
Merrill Lynch's investments, which includes Investments of Insurance
Subsidiaries, primarily consist of holdings of liquid debt and equity securities
for liquidity and asset/liability matching purposes, merchant banking and
venture capital investments, including technology investments, such as
Electronic Communications Networks, and investments to hedge deferred
compensation liabilities (see Note 4 to the Consolidated Financial Statements
for further information). Investments grew from $11.7 billion at year-end 1998
to $17.7 billion at year-end 1999, as a result of increases in most categories.
Loans, Notes, and Mortgages
Merrill Lynch's portfolio of loans, notes, and mortgages includes mortgage loans
on residences, working capital loans to small and medium-sized businesses, and
syndicated loans. Merrill Lynch generally maintains collateral on these
extensions of credit in the form of securities, liens on real estate, perfected
security interests in other assets of the borrower, and guarantees. Loans,
notes, and mortgages rose $3.5 billion in 1999 to $11.2 billion due to increased
consumer lending activities. Merrill Lynch maintained collateral of $6.8 billion
at December 31, 1999 to reduce related default risk.
Other
Other non-trading assets, which include goodwill (related primarily to the
Mercury acquisition), equipment and facilities, and other assets, were up
slightly from year-end 1998 levels.
NON-TRADING LIABILITIES
Borrowings
Portions of trading and non-trading assets are funded through borrowings,
primarily commercial paper and long-term borrowings (see the Capital Adequacy
and Liquidity section for more information on funding sources).
Commercial paper increased from $16.8 billion at year-end 1998 to $24.2
billion at year-end 1999. Demand and time deposits increased $5.1 billion in
1999 as a result of higher customer deposits in banking subsidiaries.
Outstanding long-term borrowings decreased to $53.5 billion at December 31, 1999
from $57.6 billion at December 25, 1998. Major components of the change in
long-term borrowings for 1999 and 1998 follow:
- --------------------------------------------------------------------------------
(dollars in billions)
1999 1998
- --------------------------------------------------------------------------------
Beginning of year $ 57.6 $ 43.1
Issuances 15.1 29.3
Maturities (18.6) (15.8)
Other (.6) 1.0
------ ------
End of year(1) $ 53.5 $ 57.6
====== ======
Average maturity in years of long-term
borrowings, when measured to:
Maturity 4.8 4.4
Earlier of the call or put date 4.2 4.0
- --------------------------------------------------------------------------------
(1) At year-end 1999 and 1998, $45.0 billion and $43.9 billion of long-term
borrowings had maturity dates beyond one year,respectively.
Other
Other non-trading liabilities, which include liabilities of insurance
subsidiaries and other payables, increased slightly from year-end 1998 levels.
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
Preferred securities issued by subsidiaries consist primarily of Trust
Originated Preferred Securities(Service Mark) ("TOPrS"(Service Mark)) (see Note
7 to the Consolidated Financial Statements for further information). TOPrS
proceeds are utilized as part of general balance sheet funding (see the Capital
Adequacy and Liquidity section
Management's Discussion and Analysis 44
for more information). Preferred securities issued by subsidiaries rose $98
million during 1999 as a result of a yen-denominated TOPrS issuance.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1999 increased 26% to $12.8 billion from
$10.1 billion at year-end 1998. The 1999 increase resulted from net earnings and
the net effect of employee stock transactions, partially offset by dividends.
At December 31, 1999, total common shares outstanding, excluding shares
exchangeable into common stock, were 367.8 million, 3% higher than the 356.3
million shares outstanding at December 25, 1998. The increase was attributable
principally to employee stock grants and option exercises.
Total shares exchangeable into common stock at year-end 1999, issued in
connection with the Midland Walwyn merger, were 4.0 million, compared with 4.5
million at year-end 1998. As a result of the merger, Merrill Lynch also issued
4.2 million shares of common stock.
There were no common stock repurchases during 1999. In 1998, Merrill Lynch
rescinded its share repurchase authority in order to facilitate pooling-of-
interests accounting for the Midland Walwyn merger.
CAPITAL ADEQUACY AND LIQUIDITY
- ------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
. Ensure sufficient equity capital to absorb losses,
. Support the business strategies, and
. Assure liquidity at all times, across market cycles, and through periods
of financial stress.
CAPITAL ADEQUACY
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $12.4 billion in
common equity, $425 million in preferred stock, and $2.7 billion of TOPrS at
December 31, 1999.
Merrill Lynch continually reviews overall equity capital needs to ensure
that its equity capital base can support the estimated risks and needs of its
businesses, as well as the regulatory and legal capital requirements of its
subsidiaries. Merrill Lynch uses statistically based risk models, developed in
conjunction with risk management practices, to estimate potential losses arising
from market and credit risks. Equity capital needs are determined based on these
models, which dynamically capture changes in risk profile. Merrill Lynch also
assesses the need for equity capital to support business risks that may not be
adequately measured through these risk models, as well as the potential use of
equity capital to support growth. Merrill Lynch determines the appropriateness
of its equity capital composition, which includes common stock, preferred stock,
and TOPrS, taking into account the perpetual nature of its preferred stock and
TOPrS. Based on these analyses and criteria, management believes that Merrill
Lynch's equity capital base of $15.5 billion is adequate.
Merrill Lynch operates in many regulated businesses that require various
minimum levels of capital (see Note 13 to the Consolidated Financial Statements
for further information). Merrill Lynch's broker-dealer, banking, insurance, and
futures commission merchant activities are subject to regulatory requirements
that may restrict the free flow of funds to affiliates. Regulatory approval is
generally required for paying dividends in excess of certain established levels
and making affiliated investments.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------------
PERIOD-END
December 31,1999 21.1x 13.4x
December 25,1998 23.5x 15.5x
AVERAGE(3)
Year ended December 31,1999 23.2x 14.4x
Year ended December 25,1998 32.9x 19.2x
- --------------------------------------------------------------------------------
(1) Total assets to Total stockholders' equity and Preferred securities issued
by subsidiaries.
(2) Total assets less (a) Securities received as collateral, net of securities
pledged as collateral,(b) Securities pledged as collateral,(c) Receivables
under resale agreements and securities borrowed transactions, to Total
stockholders' equity and Preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of
assets, hedging strategies, or off-balance-sheet exposures. Thus, Merrill Lynch
does not rely on overall leverage ratios to assess risk-based capital adequacy.
LIQUIDITY
Liquidity risk occurs when there are timing differences between cash inflows
from the businesses and cash outflows for business needs and maturing debt
obligations. Merrill Lynch's liquidity policy is to maintain alternative funding
sources such that all unsecured debt obligations maturing within one year can be
repaid when due without issuing new unsecured debt or liquidating business
assets. Primary alternative funding sources to unsecured borrowings are
repurchase agreements, securities loaned, and secured bank loans, which require
pledging unhypothecated marketable securities held for trading or liquidity
purposes. Other funding sources include liquidating cash equivalents;
securitizing loan assets; and drawing on a committed, senior, unsecured bank
credit facility that, at December 31,
Management's Discussion and Analysis 45
1999, totaled $8 billion and was not drawn upon. Merrill Lynch maintains a
contingency funding plan, which out-lines actions that would be taken in the
event of a severe funding disruption.
Merrill Lynch regularly reviews the level and mix of its assets and
liabilities to assess its ability to conduct core business activities without
issuing new unsecured debt or drawing upon its bank credit facilities. The mix
of assets and liabilities provides flexibility in managing liquidity since a
significant portion of assets turns over frequently and is typically match-
funded with liabilities having similar maturities and cash flow characteristics.
At December 31, 1999, a significant portion of Merrill Lynch's assets was
considered readily marketable by management.
Merrill Lynch typically concentrates its unsecured, general-purpose funding
at the ML & Co. level, except where tax regulations, time zone differences, or
other business considerations make this impractical. The benefits of this
strategy are enhanced control, reduced financing costs, wider name recognition
by creditors, and greater flexibility to meet variable funding requirements of
subsidiaries.
Merrill Lynch strives to expand and diversify its funding programs,
markets, and investor and creditor base. Merrill Lynch benefits by distributing
a significant portion of its liabilities and equity through its own sales force
to a large, diversified global client base. Available funding sources include:
. repurchase agreements and securities loaned transactions,
. U.S., Canadian, Euro, Japanese, and Australian commercial paper programs,
. letters of credit,
. master notes,
. demand and time deposits issued through Merrill Lynch's banking
subsidiaries,
. bank loans,
. long-term debt,
. TOPrS,
. preferred stock, and
. common stock.
Additionally, Merrill Lynch maintains access to significant uncommitted
credit lines, both secured and unsecured, from a large group of banks.
Commercial paper represented 7% and 6% of total assets at year-end 1999 and
1998, respectively. Merrill Lynch maintains strict concentration standards for
commercial paper and other short-term borrowings, including limits for any
single investor.
In addition to equity capital sources, Merrill Lynch views long-term debt
as a stable funding source for its core balance sheet assets. Long-term, less
liquid assets are fully funded with long-term sources of capital, which include
the non-current portion of long-term debt, TOPrS, preferred stock, and common
equity. Generally, trading and other current assets are financed with a
combination of short-term funding, long-term debt, and equity capital.
As part of an overall liquidity management strategy, Merrill Lynch's
insurance subsidiaries regularly review the funding requirements of their
contractual obligations for in-force, fixed-rate life insurance and annuity
contracts as well as expected future acquisition and maintenance expenses for
all contracts. The insurance subsidiaries develop and market primarily variable
life insurance and variable annuity products. These products are not subject to
the interest rate, asset/liability matching, or credit risks attributable to
fixed-rate products, thereby reducing the insurance subsidiaries' risk profile
and liquidity demands. At December 31, 1999, approximately 84% of invested
assets of insurance subsidiaries were considered liquid by management.
Asset and Liability Management
The relationship between assets and liabilities is managed on a consolidated
basis across businesses and subsidiaries. Merrill Lynch routinely issues debt in
a variety of maturities and currencies to achieve the lowest cost financing
possible. Merrill Lynch uses derivative transactions, including interest rate
swaps, to more closely match the duration of these borrowings to the duration of
the assets being funded to minimize interest rate risk. Merrill Lynch also
enters into currency swaps, to ensure that foreign-currency denominated assets
are funded with like-currency denominated liabilities (to the extent that the
currency cannot be sourced more efficiently through a direct debt issuance).
Merrill Lynch uses swaps for asset and liability management to reduce its
interest expense and effective borrowing rate.
Credit Ratings
The cost and availability of unsecured financing generally are dependent on
credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and
TOPrS were rated by several recognized credit rating agencies at December 31,
1999 as follows:
- --------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND
RATING AGENCY RATINGS TOPrS RATINGS
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA,Inc. AA AA-
Japan Rating & Investment Information,Inc. AA A+
Moody's Investors Service,Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch,Inc. AA+ Not Rated
- --------------------------------------------------------------------------------
Approximately $78.1 billion of indebtedness at December 31, 1999 is
considered senior indebtedness as defined under various indentures.
46 Management's Discussion and Analysis
CAPITAL PROJECTS AND EXPENDITURES
- ---------------------------------
Merrill Lynch continually prepares for the future by expanding its operations
and investing in new technology to improve service to clients. To support
business expansion, for example, Merrill Lynch is building a new European
headquarters in London, for approximately $650 million; approximately $180
million has been spent to date.
Significant technology initiatives include decimalization, the Securities
and Exchange Commission's mandated initiative, extended hours trading, and
numerous other projects related to Merrill Lynch's e-commerce initiatives across
all businesses. The decimalization project involves systems application
alterations and upgrades in order to comply with the industry-mandated
conversion of listed equities and options from fractional to decimal pricing
beginning in July 2000. Extended hours trading involves systems remediations,
and extended availability of online systems.
YEAR 2000 COMPLIANCE INITIATIVE
In 1999 Merrill Lynch completed its efforts to address the Year 2000 issue (the
"Y2K issue"). The Y2K issue was the result of a widespread programming technique
that caused computer systems to identify a date based on the last two numbers of
a year, with the assumption that the first two numbers of the year are "19." As
a result, the year 2000 would be stored as "00,"causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K issue may have caused
serious failures in information technology systems and other systems.
In 1995 Merrill Lynch established the Year 2000 Compliance Initiative to
address the internal and external risks associated with the Y2K issue. The
Initiative consisted of six phases, completed by the millennium: planning,
pre-renovation, renovation, production testing, certification, and integration
testing. Contingency plans were established in the event of any failures or
disruptions.
Through the date of this report, there have been no material failures or
disruptions of systems or services at Merrill Lynch attributable to the Y2K
issue. Similarly we have not been notified of any material failure or
disruption of systems or services affecting third parties in their capacity to
transact business with Merrill Lynch or in Merrill Lynch's capacity to transact
business with others. Merrill Lynch continues to monitor the performance of its
systems for any possible future failures or disruptions attributable to the Y2K
issue.
As of December 31, 1999 the total estimated expenditure of existing and
incremental resources for the Year 2000 Compliance Initiative was approximately
$510 million, including $102 million of occupancy, communications, and other
related overhead expenditures, as Merrill Lynch is applying a fully costed
pricing methodology for this project. At December 31, 1999, of the total
estimated expenditures, approximately $12 million, related to continued testing,
contingency planning, risk management, and the wind down of the efforts, had not
yet been spent.
RISK MANAGEMENT
- ---------------
RISK MANAGEMENT PHILOSOPHY
Risk-taking is an integral part of Merrill Lynch's business. Through its
operating activities, Merrill Lynch is exposed to a variety of risks, including
market, credit, liquidity, and process risk. Merrill Lynch's business segments
remain primarily accountable for managing the risks of their business
activities.
To ensure that these risks are effectively identified, evaluated,
monitored, and managed, Merrill Lynch has established a comprehensive risk
management process. Key components include:
. a formal risk governance framework which defines the firm's risk
oversight process,
. review of the risk oversight process by the Audit and Finance Committee
of the Board of Directors,
. segregation of risk oversight responsibilities between Merrill Lynch's
executive, business, and control functions and active communication and
coordination among these functions,
. clearly articulated risk tolerance levels, set by the Executive
Management Committee ("EMC") and reviewed continually with the goal of
ensuring that Merrill Lynch's risks are consistent with its strategies
and capabilities, as well as current and anticipated business and market
conditions,
. risk policies and procedures, and
. advanced analytic tools.
The ultimate goal of the process is to ensure that Merrill Lynch's
exposures are identified, acknowledged, and understood at the appropriate levels
within the firm and that, to the extent possible, risk-related losses occur
within acceptable, predetermined tolerance levels.
Risk management is a dynamic function, influenced by industry, technology,
regulatory, and market forces, and Merrill Lynch is continually refining its
internal risk management processes. Enhancements are being created in a number
of areas, including process risk management, scenario analysis, leveraged
counterparty risk management, country risk management, stress testing, and
risk-adjusted performance measurement. As the environment changes, Merrill Lynch
will strive to maintain innovative policies and procedures in the management of
its risk.
The overall effectiveness of Merrill Lynch's risk management process is
illustrated by analyzing actual net trading-related revenues over time. Merrill
Lynch's trading-related activities, largely a client order flow-driven business,
combined with its risk management strategies, help to reduce earnings
volatility. Presented is a bar graph illustrating the distribution of weekly net
trading-related revenues by revenue band for 1997, 1998, and 1999.
Management's Discussion and Analysis 47
- --------------------------------------------------------------------------------
DISTRIBUTION OF WEEKLY NET TRADING-RELATED REVENUES BY YEAR
(dollars in millions)
- --------------------------------------------------------------------------------
Number of weeks
----------------------
1997 1998 1999
---- ---- ----
Less than $0 - 5 -
$0-50 4 7 1
$50-100 12 9 5
$100-150 31 17 21
Over $150 5 14 26
--- --- ---
52 52 53
=== === ===
- --------------------------------------------------------------------------------
Risk Governance Structure
Merrill Lynch's risk governance structure involves the Audit and Finance
Committee of the Board of Directors, the EMC, the Risk Oversight Committee
("ROC"), the business segments, Corporate Risk Management ("CRM"), and various
corporate governance committees.
. The Audit and Finance Committee of the Board of Directors, comprised
entirely of external directors, has authorized the ROC to establish
Merrill Lynch's risk management policies.
. The EMC establishes risk tolerance for the firm and authorizes changes in
Merrill Lynch's risk profile. It also ensures that the risks assumed by
Merrill Lynch are managed within these tolerance levels, verifies that
Merrill Lynch has implemented appropriate policies for the effective
management of risks, and approves substantive changes to risk policies,
including those proposed by the ROC. Particular attention is paid to risk
concentration and illiquidity.
. The ROC, comprised of senior business and control managers and chaired by
the Head of CRM, oversees Merrill Lynch's risks, ensures that the
business units create and implement processes to identify, measure, and
monitor risks, assists the EMC in determining risk tolerance levels for
Merrill Lynch's business units, monitors the activities of Merrill
Lynch's corporate governance committees, and reports significant issues
and transactions to the EMC and the Audit and Finance Committee.
. Corporate governance committees exist to create policy, review activity,
and ensure new and existing business initiatives remain within
established risk tolerance levels. These committees include the New
Product Review Committee, Debt and Equity Capital Commitment Committees,
Reserve Committee, and Special Transactions Review Committee.
Representatives of the principal independent control functions
participate as voting members of these committees. These committees
report regularly to the ROC.
Risk Framework
Merrill Lynch has developed a mechanism known as the Risk Framework to define
and communicate its tolerance for risk and raise as exceptions certain areas of
risk concentration. Risks are measured against Framework limits on a continuous
basis, and exceptions and violations are reported, investigated, and addressed
at the appropriate level of management. The Framework has been approved by the
EMC and the risk parameters utilized by the Framework have been reviewed by the
Audit and Finance Committee. The EMC reviews the Framework annually and approves
material changes; the ROC reports substantive Framework changes to the Audit and
Finance Committee. The Framework establishes broad risk limits for Merrill
Lynch. Market risk limits are intended to constrain exposure to specific classes
of market risk and Value-at-Risk ("VaR"). VaR is a statistical measure of the
potential loss in the fair value of a portfolio due to adverse movements in
underlying risk factors. Credit risk limits are intended to constrain the
magnitude and duration of exposure to individual counterparties, types of
counterparties, countries, and financing collateral. The Risk Framework has been
established for CICG and is in the process of being expanded to other business
units and Treasury.
Business Segments
Business segments are responsible for ensuring that appropriate processes are in
place to identify, monitor, manage, and report the risks of their businesses
working within the confines of the Risk Framework.
Corporate Risk Management
CRM is an independent control function responsible for Merrill Lynch's risk
management process. The group is headed by a member of the EMC who reports to
the Chief Financial Officer; the Head of CRM also chairs the ROC. CRM manages
Merrill Lynch's market risks (representing the potential change in value of
trading instruments caused by fluctuations in interest and currency exchange
rates, equity and commodity prices, credit spreads or other risks) and credit
risks (representing the potential for loss that can occur as a result of an
impairment in the credit-worthiness of an issuer or counterparty or a default by
an issuer or counterparty on its contractual obligations). CRM also provides
48 Management's Discussion and Analysis
the firm with an overview of risks on a portfolio basis and develops systems and
tools to facilitate the risk management process.
CRM is comprised of the following groups:
. The CICG Market Risk Management Group defines the products and markets in
which CICG can transact, identifies and quantifies the market risks to
which businesses are exposed, establishes limits within the CICG Risk
Framework to constrain concentrations of risk, and monitors exposures
against these limits. The Group also has a dedicated unit which reviews,
tests, and stresses the mathematical models used by Merrill Lynch's
business and control units and performs revaluations, stress tests, and
hedging analyses.
. The CICG Credit Risk and Capital Commitments Group assesses and rates the
creditworthiness of potential and existing institutional counterparties and
establishes credit limits within the Framework based on counterparty/issuer
credit quality and the potential risk of transactions. The Group reviews
and approves credit exposures and commitments to specific
counterparties/issuers within CICG, and works with business managers to
structure transactions in order to mitigate and/or manage credit risk
within acceptable tolerance levels.
. The Private Client Credit Group assesses the creditworthiness of potential
and existing Private Client business unit counterparties, establishes
credit limits within the Framework based on credit quality, risk, and
diversification factors, reviews and approves credit exposures to specific
clients within the PCG, and works with business managers to structure
transactions in order to mitigate and/or manage credit risk within
acceptable tolerance levels.
. The Portfolio Risk Management Group integrates the disciplines of credit,
market, and process risk management into a single framework that identifies
and controls risks at a firmwide level. The Group develops management tools
that guide judgement on the sources/magnitudes of risk and the use of
capital in support of such risk, and creates and maintains a firmwide
management control framework for process risk. The Portfolio Group also
oversees market risk within Merrill Lynch's Treasury and PCG units and is
responsible for developing and managing the firm's country risk process.
. The Risk Infrastructure Group provides CRM with the technology, analytics,
and resources to quantify, monitor, and manage Merrill Lynch's market,
credit, and portfolio risks. The Group develops systems and analytic tools
to facilitate the collation, aggregation, and analysis of transactions,
positions, and exposures, and designs and implements methodologies for
measuring and managing credit and market risks.
MARKET RISK
Merrill Lynch uses several mathematical techniques to assess the risk of its
positions and portfolios. In particular, CRM quantifies the sensitivities of
Merrill Lynch's trading portfolio to changes in market parameters and utilizes
these sensitivities, together with historical data on benchmark market
parameters, to estimate distributions of the potential earnings and losses that
the portfolio would have incurred had it been subject to the market movements
which occurred during the historic period. From these distributions are derived
a number of risk statistics including VaR.
VaR estimates the amount that Merrill Lynch could lose, with a specified
degree of confidence, over a given time interval. The VaR statistic for a
particular risk category represents the amount that Merrill Lynch could lose due
to market movements in that risk category. The VaR for Merrill Lynch's portfolio
is less than the sum of the VaRs for individual risk categories because
movements in different risk categories occur at different times and,
historically, extreme movements have not occurred in all risk categories
simultaneously. The difference between the sum of the VaRs for individual risk
categories and the VaR calculated for all the risk categories is shown in the
following tables and may be viewed as a measure of the diversification within
Merrill Lynch's portfolio. CRM believes that the tabulated risk measures provide
some guidance as to the amount Merrill Lynch could lose in future periods. Like
all statistics, however, they need to be interpreted with a clear understanding
of their assumptions and limitations. For these disclosures, Merrill Lynch uses
a historical simulation approach to estimate value-at-risk using a 99%
confidence level and a two-week holding period for trading and non-trading
instruments. Sensitivities to market risk factors are aggregated and combined
with a database of historical biweekly changes in market factors to simulate a
series of profits and losses. The level of loss that is exceeded in that series
1% of the time is used as the estimate for the 99% confidence level VaR.
The overall total VaR amounts are presented across major risk categories,
including exposure to volatility risk found in certain products, e.g., options.
The table that follows presents Merrill Lynch's VaR for trading instruments at
year-end 1999 and 1998 and the 1999 average VaR calculated on a quarterly basis.
In late 1999, CRM enhanced its VaR model and thus for comparison purposes, year-
end 1998 amounts have been restated. In addition, for purposes of calculating
the 1999 average, the quarter-end data for the first three quarters of 1999 have
also been restated.
Management's Discussion and Analysis 49
- --------------------------------------------------------------------------------
(in millions)
Year-end Year-end Average
1999 1998 1999
- --------------------------------------------------------------------------------
TRADING VALUE-AT-RISK(1)
Interest rate and credit spread $ 111 $ 136 $ 114
Equity 34 28 44
Commodity 12 3 9
Currency 11 26 12
Volatility 53 24 39
-------- ------- -------
221 217 218
Diversification benefit (69) (75) (73)
-------- ------- -------
Overall(2) $ 152 $ 142 $ 145
======== ======= =======
- --------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$19 million and $32 million at year-end 1999 and 1998, respectively.
During 1999, overall VaR increased, primarily due to increases in the
equity, commodity, and volatility VaR, partially offset by a decrease in
interest rate and credit spread and currency VaR.
The table that follows presents Merrill Lynch's VaR for non-trading
instruments at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
Year-end Year-end
1999 1998
- --------------------------------------------------------------------------------
NON-TRADING VALUE-AT-RISK(1)
Interest rate and credit spread $ 20 $ 75
Currency 52 77
Equity 26 10
Volatility 1 -
---- -----
99 162
Diversification benefit (35) (49)
---- ----
Overall $ 64 $ 113
==== =====
- --------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrS at year-end 1999 and
1998 was $102 million and $119 million, respectively. TOPrS, which are
fixed-rate perpetual preferred securities, are considered a component of Merrill
Lynch's equity capital and, therefore, the associated interest rate sensitivity
is not hedged.
The decrease in non-trading interest rate VaR is primarily due to a
decrease in interest rate and credit spread risk (see the Capital Adequacy and
Liquidity section for further information).
CREDIT RISK
Credit risk represents the loss that Merrill Lynch would incur if a counterparty
or issuer failed to perform its contractual obligations. Policies and procedures
have been established with the objective of protecting against unacceptable
credit losses, including: reviewing and establishing limits for credit
exposures, further mitigating counterparty credit exposures through various
techniques, including maintaining collateral and obtaining the right to
terminate transactions or collect collateral in the event of a credit rating
downgrade, and continually assessing the credit-worthiness of counterparties and
issuers.
Credit exposures related to Merrill Lynch's retail customer business,
including mortgages and home equity lines of credit, customer margin accounts,
and working capital facilities to small businesses, are continually monitored.
Merrill Lynch enters into International Swaps and Derivatives Association,
Inc. master agreements or their equivalent ("master netting agreements") with
each of its derivative counterparties whenever possible. Master netting
agreements provide protection in bankruptcy in certain circumstances and, in
some cases, enable receivables and payables with the same counterparty to be
offset on the Consolidated Balance Sheets, providing for a more meaningful
balance sheet presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally U.S. Government and agencies securities, on certain derivative
transactions. From an economic standpoint, Merrill Lynch evaluates default risk
exposures net of related collateral. The following is a summary of counterparty
credit ratings for the replacement cost (net of $4.2 billion of collateral) of
trading derivatives in a gain position by maturity at December 31, 1999.
- --------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
CREDIT ------------------------------- MATURITY
RATING(1) 0-3 3-5 5-7 OVER 7 NETTING(2) TOTAL
- --------------------------------------------------------------------------------
AAA $ 753 $ 288 $ 91 $ 174 $ (288) $ 1,018
AA+/AA 2,013 597 208 528 (341) 3,005
AA- 4,115 2,626 1,106 3,467 (4,530) 6,784
A+/A 3,133 1,509 560 1,100 (1,840) 4,462
A- 1,656 895 414 400 (268) 3,097
BBB 1,600 876 335 204 (224) 2,791
BB+ 1,049 298 214 109 (498) 1,172
Other 808 215 369 198 (73) 1,517
-------- ------- ------- ------- -------- --------
Total $ 15,127 $ 7,304 $ 3,297 $ 6,180 $ (8,062) $ 23,846
======== ======= ======= ======= ======== ========
- --------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent.
(2) Represents netting of payable balances with receivable balances for the
same counterparty across maturity band categories.Receivable and payable
balances with the same counterparty in the same maturity category, however,
are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch mitigates default risk
on derivatives whenever possible by entering into transactions with provisions
that enable Merrill Lynch to terminate or reset the terms of the derivative
contract.
PROCESS RISK
Process risk is the risk of direct or indirect loss resulting from
inadequate controls or business disruption relating to people, internal
processes, systems, or external events. Examples of process risks faced by the
firm could be systems failure, human error, fraud, major fire, or other
disasters.
Merrill Lynch manages process risks in many ways including maintaining a
comprehensive system of internal controls, using technology, employing
experienced personnel, maintaining backup facilities, conducting internal
audits, and emphasiz-
50 Management's Discussion and Analysis
ing the importance of management oversight. In addition, Merrill Lynch has
established a new process risk management function within CRM to focus on
further enhancing the management of these risks. This new Group is charged with
developing a firm-wide process risk management framework, as well as policies
and procedures aimed at establishing a consistent approach to identify, monitor,
and manage process risks across all business lines. The Group recognizes a
variety of risk management tools and techniques to reinforce the firm's strong
risk management culture. These include summarizing and monitoring process risk
related losses on a regular basis, developing risk indicators to facilitate
proactive risk management capabilities, and self-assessments to identify risks,
corresponding controls, and measures for improvement.
OTHER RISKS
Liquidity risk arises in the course of Merrill Lynch's general funding
activities and in the management of the balance sheet. This risk includes both
the risk of being unable to raise funding with appropriate maturity and interest
rate characteristics and the risk of being unable to liquidate an asset in a
timely manner at a reasonable price. For more information on how Merrill Lynch
manages liquidity risk, see the Capital Adequacy and Liquidity section.
Other risks Merrill Lynch encounters include political, tax, and regulatory
risks. These risks revolve around the impact that changes in local laws,
regulatory requirements, or tax statutes would have on the viability,
profitability, or cost-effectiveness of existing or future transactions. To help
mitigate the effects of these risks, Merrill Lynch constantly reviews new and
pending legislation and regulations by employing professionals in the
jurisdictions in which the company operates to actively follow these issues and
participate in related interest groups.
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
- ---------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and
holds non-investment grade cash instruments in connection with its investment
banking, market-making, and derivative structuring activities. Non-investment
grade holdings have been defined as debt and preferred equity securities rated
as BB+ or lower or equivalent ratings by recognized credit rating agencies,
sovereign debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
In addition to the amounts included in the following table, derivatives may
also expose Merrill Lynch to credit risk related to the underlying security
where a derivative contract can either synthesize ownership of the underlying
security (e.g., long total return swaps) or potentially force ownership of the
underlying security (e.g., short put options). At year-end 1999 and 1998,
Merrill Lynch had derivatives with notionals of $2.9 billion and $1.6 billion,
respectively, with non-investment grade credit exposure. Derivatives may also
subject Merrill Lynch to credit spread or issuer default risk, in that changes
in credit spreads or in the credit quality of the underlying securities may
adversely affect the derivatives' fair values. Merrill Lynch seeks to manage
these risks by engaging in various hedging strategies to reduce its exposure
associated with non-investment grade positions, such as purchasing an option to
sell the related security or entering into other offsetting derivative
contracts. At year-end 1999 and 1998, Merrill Lynch had derivatives with
notionals of $3.8 billion and $4.7 billion, respectively, that hedge non-
investment grade credit exposure.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies, in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies, or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will continue to be made on a
select basis.
TRADING EXPOSURES
The following table summarizes trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 5,279 $ 7,462
Derivatives 4,033 4,675
Trading liabilities - cash instruments (997) (920)
Collateral on derivative assets (1,344) (2,192)
------- -------
Net trading asset exposure $ 6,971 $ 9,025
======= =======
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 51
Included in the preceding table are debt and equity securities and bank
loans of companies in various stages of bankruptcy proceedings or in default. At
December 31, 1999, the carrying value of such debt and equity securities totaled
$64 million, of which 78% resulted from Merrill Lynch's market-making activities
in such securities. This compared with $72 million at December 25, 1998, of
which 86% related to market-making activities. In addition, Merrill Lynch held
distressed bank loans totaling $86 million and $156 million at year-end 1999 and
1998, respectively.
NON-TRADING EXPOSURES
The following table summarizes non-trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Marketable investment securities $ 58 $ 39
Investments of insurance subsidiaries 108 148
Loans (net of allowance for loan losses):
Bridge loans(1) 68 66
Other loans(2) 1,169 1,058
Other investments:
Partnership interests(3)(4) 1,368 852
Other equity investments(5) 369 459
- --------------------------------------------------------------------------------
(1) Subsequent to year-end, $40 million of this loan was repaid. In addition,
Merrill Lynch extended a $56 million bridge loan to a counterparty in
connection with an acquisition transaction.
(2) Represents outstanding loans to 129 and 80 companies at year-end 1999 and
1998, respectively.
(3) Includes $599 million and $279 million in investments at year-end 1999 and
1998, respectively, related to deferred compensation plans, for which the
default risk of the investments rests with the participating employees.
(4) Includes a $3 million and $300 million investment in the hedge fund Long
Term Capital Portfolio, L.P. at year-end 1999 and 1998, respectively.
(5) Includes investments in 62 and 89 enterprises at year-end 1999 and 1998,
respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly leveraged counterparties at year-end 1999 and
1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 200 $ 227
Unutilized revolving lines of credit and
other lending commitments 2,585(1) 1,678
- --------------------------------------------------------------------------------
(1) Subsequent to year-end 1999, $900 million of these commitments were
terminated.
At December 31, 1999, the largest industry exposure was to the financial
services sector, which accounted for 34% of total non-investment grade positions
and highly leveraged transactions.
CASH FLOWS
- ----------
During 1998, Merrill Lynch disbursed $5.3 billion to acquire the outstanding
shares of Mercury. This purchase was financed primarily with proceeds from
long-term borrowings.
LITIGATION
- ----------
Certain actions have been filed against Merrill Lynch in connection with Merrill
Lynch's business activities. Although the ultimate outcome of these actions
cannot be ascertained at this time and the results of legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these actions will not have a material adverse effect on Merrill Lynch's
financial condition; however, such resolution could have a material adverse
impact on quarterly operating results in future periods, depending in part on
the results for such periods.
RECENT DEVELOPMENTS
- -------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board deferred for one year the
effective date of the accounting and reporting requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
Merrill Lynch to recognize all derivatives as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value.
Currently, the majority of Merrill Lynch's derivatives are recognized at fair
value in trading assets and liabilities, as they are entered into in a dealing
capacity. However, Merrill Lynch also enters into derivatives to hedge its
exposures relating to non-trading assets and liabilities, some of which are not
carried at fair value depending on the nature of the derivative and the related
hedged item.
Merrill Lynch will adopt the provisions of SFAS No. 133 on January 1, 2001,
which will primarily impact the accounting for derivatives used to hedge
borrowings. Merrill Lynch has undertaken ongoing initiatives to address the
adoption of SFAS No. 133. This evaluation includes the impact of implementation
guidance under development. As the impact of adoption is largely dependent on
the derivative positions existing at year-end 2000, Merrill Lynch is unable to
quantify the impact of adoption at this time.
52 Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY
- ---------------------------------------------------
Management of Merrill Lynch & Co., Inc. is responsible for preparing the
financial statements and related notes contained in this Annual Report. The
consolidated financial statements and notes are prepared in accordance with
generally accepted accounting principles. Other financial data included in the
Annual Report are consistent with those in the financial statements.
Management recognizes the importance of safeguarding Merrill Lynch's assets
and integrity. Therefore, Management devotes considerable attention to
understanding the risks of its businesses, promoting the highest standards of
ethical conduct, exercising responsible stewardship over Merrill Lynch's assets,
and presenting fair financial statements.
Merrill Lynch regularly reviews its framework of internal controls, taking
into account changing circumstances. Corrective actions are taken to address
control deficiencies, and other opportunities for improvement are implemented
when cost effective.
The framework of internal control includes policies, procedures, and
organizational structures that are overseen by a predominantly independent Board
of Directors. Several committees of the Board actively participate in setting
policy and monitoring controls. The Audit and Finance Committee, which consists
of five independent directors, examines Merrill Lynch's compliance with
acceptable business standards and ethics in accordance with its written charter
of responsibilities and duties. It also reviews significant financial issues and
recommends overall policies regarding market and credit risk, as well as funding
requirements. The Management Development and Compensation Committee, also
composed entirely of independent directors, oversees procedures for developing
and assessing the performance of Merrill Lynch's employees with an emphasis on
ethical business behavior.
Oversight is provided by independent units within Merrill Lynch, working
together to maintain Merrill Lynch's internal control standards.
Corporate Audit reports directly to the Audit and Finance Committee,
providing independent appraisals of Merrill Lynch's internal accounting controls
and compliance with established policies and procedures.
Finance establishes accounting policies and procedures, measures and
monitors financial risk, and prepares financial statements that fairly present
the underlying transactions and events of Merrill Lynch. Corporate Risk
Management is both independent from business line management and has oversight
responsibility for Merrill Lynch's market and credit risks. This group has clear
authority to enforce trading and credit limits using various systems and
procedures to monitor positions and risks.
Law and Compliance serves in a counseling and advisory role to Management.
In this role, the group develops policies; monitors compliance with internal
policies, external rules, and industry regulations; assesses litigation risk
exposure; and provides support in connection with the execution of various
transactions.
The independent auditors, Deloitte & Touche LLP, perform annual audits of
Merrill Lynch's financial statements in accordance with generally accepted
auditing standards, including a review of the internal accounting control
system. The independent auditors openly discuss with the Audit and Finance
Committee their views on the quality of the financial statements and related
disclosures and the adequacy of Merrill Lynch's internal accounting controls.
Quarterly review reports on the interim financial statements are also issued by
Deloitte & Touche LLP. Merrill Lynch's independent auditors are appointed each
year by the Audit and Finance Committee and are given unrestricted access to all
financial records and related data, including minutes of meetings of
stockholders, Board of Directors, and committees of the Board.
/s/ David H. Komansky
David H. Komansky
Chairman of the Board and Chief Executive Officer
/s/ Thomas H. Patrick
Thomas H. Patrick
Executive Vice President and Chief Financial Officer
Management's Discussion and Analysis 53
[LOGO OF DELOITTE & TOUCHE]
INDEPENDENT AUDITORS' REPORT
- ----------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MERRILL LYNCH & CO., INC.:
We have audited the accompanying consolidated balance sheets of Merrill Lynch &
Co., Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and
December 25, 1998 and the related consolidated statements of earnings, changes
in stockholders' equity, comprehensive income, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of Merrill Lynch's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Merrill Lynch at December 31,
1999 and December 25, 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1998
Merrill Lynch changed its method of accounting for certain internal-use software
development costs to conform with Statement of Position 98-1.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
54
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------
(dollars in millions, except per share amounts)
Year Ended Last Friday in December
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(53 weeks) (52 weeks) (52 weeks)
NET REVENUES
Commissions $ 6,334 $ 5,799 $ 4,995
Principal transactions 4,361 2,651 3,827
Investment banking 3,614 3,264 2,876
Asset management and portfolio service fees 4,753 4,202 3,002
Other 720 623 500
---------- ---------- ----------
Subtotal 19,782 16,539 15,200
Interest revenue and dividends 15,097 18,035 16,009
Less interest expense 13,010 17,027 14,953
---------- ---------- ----------
Net interest profit 2,087 1,008 1,056
---------- ---------- ----------
TOTAL NET REVENUES 21,869 17,547 16,256
---------- ---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 11,153 9,199 8,333
Communications and technology 2,038 1,749 1,255
Occupancy and related depreciation 941 867 736
Advertising and market development 779 688 613
Brokerage, clearing, and exchange fees 678 683 525
Professional fees 567 552 520
Goodwill amortization 227 226 65
Provision for costs related to staff reductions - 430 -
Other 1,408 1,057 1,098
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSES 17,791 15,451 13,145
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 4,078 2,096 3,111
Income Tax Expense 1,265 713 1,129
Dividends on Preferred Securities Issued by Subsidiaries 195 124 47
---------- ---------- ----------
NET EARNINGS $ 2,618 $ 1,259 $ 1,935
========== ========== ==========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 2,580 $ 1,220 $ 1,896
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic $ 7.00 $ 3.43 $ 5.57
========== ========== ==========
Diluted $ 6.17 $ 3.00 $ 4.79
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 55
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(dollars in millions, except per share amounts)
DECEMBER 31, 1999 DECEMBER 25, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
CASH AND CASH EQUIVALENTS $ 10,827 $ 12,530
---------- ----------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR
DEPOSITED WITH CLEARING ORGANIZATIONS 5,880 6,590
---------- ----------
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES
BORROWED TRANSACTIONS 99,741 87,713
---------- ----------
MARKETABLE INVESTMENT SECURITIES 10,145 4,605
---------- ----------
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 23,593 25,318
Contractual agreements 22,701 21,979
Corporate debt and preferred stock 20,346 21,166
U.S. Government and agencies 15,376 15,421
Mortgages, mortgage-backed, and asset-backed 7,394 7,023
Non-U.S. governments and agencies 4,892 7,474
Municipals and money markets 2,427 3,358
---------- ----------
96,729 101,739
Securities received as collateral, net of securities pledged as collateral 10,005 6,106
---------- ----------
Total 106,734 107,845
---------- ----------
SECURITIES PLEDGED AS COLLATERAL 9,699 8,184
---------- ----------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $56 in 1999 and $48 in 1998) 39,850 29,559
Brokers and dealers 9,095 8,872
Interest and other 7,505 9,278
---------- ----------
Total 56,450 47,709
---------- ----------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,097 4,485
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $146 in 1999 and
$124 in 1998) 11,187 7,684
OTHER INVESTMENTS 3,410 2,590
EQUIPMENT AND FACILITIES (net of accumulated depreciation and amortization
of $4,069 in 1999 and $3,482 in 1998) 3,117 2,761
GOODWILL (net of accumulated amortization of $543 in 1999 and $338 in 1998) 4,952 5,364
OTHER ASSETS 1,832 1,741
---------- ----------
TOTAL ASSETS $ 328,071 $ 299,804
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
56 Consolidated Financial Statements
DECEMBER 31,1999 DECEMBER 25,1998
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS $ 71,578 $ 67,127
---------- ----------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 25,595 18,679
---------- ----------
DEMAND AND TIME DEPOSITS 17,602 12,461
---------- ----------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 27,030 23,840
Equities and convertible debentures 20,231 21,558
U.S. Government and agencies 10,816 7,939
Non-U.S. governments and agencies 6,311 7,245
Corporate debt, preferred stock, and other 3,405 3,132
---------- ----------
Total 67,793 63,714
---------- ----------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 19,704 14,290
---------- ----------
OTHER PAYABLES
Customers 22,722 22,255
Brokers and dealers 11,397 7,899
Interest and other 18,601 18,738
---------- ----------
Total 52,720 48,892
---------- ----------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,087 4,319
LONG-TERM BORROWINGS 53,465 57,563
---------- ----------
TOTAL LIABILITIES 312,544 287,045
---------- ----------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,725 2,627
---------- ----------
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, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, AND STOCKHOLDERS'
EQUITY $ 328,071 $ 299,804
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 57
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
- ----------------------------------------------------------
(dollars in millions)
Year Ended Last Friday in December
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
PREFERRED STOCKHOLDERS' EQUITY
9% CUMULATIVE PREFERRED STOCK, SERIES A
Balance, beginning and end of year $ 425 $ 425 $ 425
====== ====== ======
REMARKETED PREFERRED STOCK, SERIES C
Balance, beginning of year - - 194
Redeemed - - (194)
------ ------ ------
Balance, end of year - - -
------ ------ ------
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 425 $ 425 $ 425
====== ====== ======
COMMON STOCKHOLDERS' EQUITY
SHARES EXCHANGEABLE INTO COMMON STOCK
Balance, beginning of year $ 66 $ 66 $ 46
Net activity - 5 20
Exchanges (7) (5) -
------ ------ ------
Balance, end of year 59 66 66
====== ====== ======
COMMON STOCK
Balance, beginning and end of year 630 630 630
====== ====== ======
PAID-IN CAPITAL
Balance, beginning of year 1,427 1,001 925
Issuance of stock:
To employees 440 430 76
Other (4) (4) -
------ ------ ------
Balance, end of year 1,863 1,427 1,001
====== ====== ======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustment (net of tax)
Balance, beginning of year (138) (85) 7
Translation adjustment (164) (53) (92)
------ ------ ------
Balance, end of year (302) (138) (85)
------ ------ ------
Net Unrealized Gains (Losses) on Investment Securities
Available-for-Sale (net of tax)
Balance, beginning of year 16 38 9
Net unrealized gains (losses) on investment securities
available-for-sale (223) (60) 34
Other adjustments(a) 120 38 (5)
------ ------ ------
Balance, end of year (87) 16 38
------ ------ ------
Balance, end of year $ (389) $ (122) $ (47)
====== ====== ======
- ---------------------------------------------------------------------------------------------------------
58 Consolidated Financial Statements
Year Ended Last Friday in December
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year $ 10,475 $ 9,579 $ 7,938
Net earnings 2,618 1,259 1,935
Cash dividends declared:
9% Cumulative Preferred stock (38) (38) (38)
Remarketed Preferred stock - - (1)
Common stock (388) (325) (255)
-------- -------- -------
Balance, end of year 12,667 10,475 9,579
======== ======== =======
TREASURY STOCK, AT COST
Balance, beginning of year (2,101) (2,677) (2,769)
Treasury stock purchased - - (644)
Issued out of treasury (net of reacquisitions):
Employees 273 556 736
Other 11 20 -
-------- -------- -------
Balance, end of year (1,817) (2,101) (2,677)
======== ======== =======
UNALLOCATED ESOP REVERSION SHARES, AT COST
Balance, beginning of year - - (24)
Allocation of shares to participants - - 24
-------- -------- -------
Balance, end of year - - -
======== ======== =======
EMPLOYEE STOCK TRANSACTIONS
Balance, beginning of year (668) (438) (314)
Net issuance of employee stock grants (380) (599) (351)
Amortization of employee stock grants 406 359 218
Repayment of employee loans 6 10 9
-------- -------- -------
Balance, end of year (636) (668) (438)
======== ======== =======
TOTAL COMMON STOCKHOLDERS' EQUITY $ 12,377 $ 9,707 $ 8,114
======== ======== =======
TOTAL STOCKHOLDERS' EQUITY $ 12,802 $ 10,132 $ 8,539
======== ======== =======
- -----------------------------------------------------------------------------------------------------------------
(a) Other adjustments relate to policyholder liabilities, deferred policy acquisition costs, and income taxes.
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 59
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------
(dollars in millions)
Year Ended Last Friday in December
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
NET EARNINGS $ 2,618 $ 1,259 $ 1,935
======= ======= =======
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment:
Foreign currency translation losses, net of gains (116) (131) (96)
Income taxes (48) 78 4
------- ------- -------
Total (164) (53) (92)
------- ------- -------
Net unrealized gains (losses) on investment securities
available-for-sale:
Net unrealized holding gains (losses) arising
during the period (229) (10) 50
Reclassification adjustment for (gains) losses
included in net earnings 6 (50) (16)
------- ------- -------
Net unrealized gains (losses) on investment securities (223) (60) 34
Adjustments for:
Policyholder liabilities 35 16 10
Deferred policy acquisition costs 35 4 -
Income taxes 50 18 (15)
------- ------- -------
Total (103) (22) 29
------- ------- -------
Total Other Comprehensive Loss (267) (75) (63)
------- ------- -------
COMPREHENSIVE INCOME $ 2,351 $ 1,184 $ 1,872
======= ======= =======
- ---------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
60 Consolidated Financial Statements
CONSOLIDATED 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:
Depreciation and amortization 718 585 473
Policyholder reserves 205 227 240
Goodwill amortization 227 226 65
Amortization of stock-based compensation 406 359 218
Other 626 (34) 1,036
(Increase) decrease in operating assets:(a)
Trading assets 4,177 6,332 (31,246)
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations 710 (1,233) (2,242)
Receivables under resale agreements and securities borrowed (12,028) 19,940 (22,373)
transactions
Customer receivables (10,304) (2,229) (7,957)
Brokers and dealers receivables (223) (3,690) 1,132
Other 1,100 126 (4,068)
Increase (decrease) in operating liabilities:(a)
Trading liabilities 4,079 (7,474) 26,770
Payables under repurchase agreements and securities loaned 4,451 (12,040) 12,346
transactions
Customer payables 467 3,922 5,091
Brokers and dealers payables 3,498 3,675 399
Other (546) 873 2,356
------- ------- -------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 181 10,824 (15,825)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Maturities of available-for-sale securities 4,155 3,983 3,376
Sales of available-for-sale securities 3,071 3,426 2,198
Purchases of available-for-sale securities (11,802) (8,676) (6,383)
Maturities of held-to-maturity securities 995 831 1,081
Purchases of held-to-maturity securities (1,015) (877) (752)
Loans, notes, and mortgages (3,541) (3,405) (989)
Acquisitions, net of cash acquired (20) (5,235) (13)
Sales of subsidiaries, net of cash disposed - 202 -
Other investments and other assets (855) (1,398) (240)
Equipment and facilities (1,074) (1,231) (863)
------- ------- -------
CASH USED FOR INVESTING ACTIVITIES (10,086) (12,380) (2,585)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for):
Commercial paper and other short-term borrowings 6,916 (15,661) 7,019
Demand and time deposits 5,141 2,568 976
Issuance and resale of long-term borrowings 15,057 29,269 25,087
Settlement and repurchase of long-term borrowings (18,598) (15,833) (8,242)
Issuance of subsidiaries' preferred securities 98 2,000 300
Issuance of treasury stock 213 194 154
Other common and preferred stock transactions (199) (161) (848)
Dividends (426) (363) (294)
------- ------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 8,202 2,013 24,152
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,703) 457 5,742
CASH AND CASH EQUIVALENTS,BEGINNING OF YEAR 12,530 12,073 6,331
------- ------- -------
CASH AND CASH EQUIVALENTS,END OF YEAR $ 10,827 $ 12,530 $ 12,073
======= ======= =======
- ---------------------------------------------------------------------------------------------------------
(a) Net of effects of acquisitions and divestitures.
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Income taxes $ 633 $ 579 $ 910
Interest 13,118 17,078 14,119
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
TABLE OF CONTENTS
62 NOTE 1. Summary of Significant
Accounting Policies
66 NOTE 2. Other Significant Events
67 NOTE 3. Trading and Related
Activities
71 NOTE 4. Investments
72 NOTE 5. Borrowings
73 NOTE 6. Fair Value Information and
Non-Trading Derivatives
74 NOTE 7. Preferred Securities
Issued by Subsidiaries
75 NOTE 8. Stockholders' Equity and
Earnings Per Share
76 NOTE 9. Commitments and
Contingencies
77 NOTE 10. Employee Benefit Plans
80 NOTE 11. Employee Incentive Plans
83 NOTE 12. Income Taxes
84 NOTE 13. Regulatory Requirements
and Dividend Restrictions
84 NOTE 14. Segment, Product, and
Geographic Information
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
DESCRIPTION OF BUSINESS
Merrill Lynch & Co., Inc. ("ML & Co.") provides investment, financing,
insurance, and related services to individuals and institutions on a global
basis through its broker, dealer, banking, insurance, and other financial
services subsidiaries. Its principal subsidiaries include:
. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
U.S.-based broker-dealer in securities;
. Merrill Lynch International ("MLI"), a U.K.-based broker-dealer in
securities and dealer in equity derivatives;
. Merrill Lynch Government Securities Inc. ("MLGSI"), a dealer in U.S.
Government securities;
. Merrill Lynch Capital Services, Inc., a dealer in interest rate,
currency, and credit derivatives;
. Merrill Lynch Asset Management, LP, a U.S.-based asset management
company; and
. Merrill Lynch Mercury Asset Management, a U.K.-based asset management
company.
Services provided to clients by ML & Co. and subsidiaries (collectively,
"Merrill Lynch") include:
. securities brokerage, trading, and underwriting;
. investment banking, strategic services, and other corporate finance
advisory activities, including loan syndication;
. asset management and other investment advisory and recordkeeping
services;
. dealing and brokerage of swaps, options, forwards, futures, and other
derivatives;
. securities clearance services;
. debt, equity, and economic research activities;
. banking, trust, and lending services; and
. insurance sales and underwriting services.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Merrill Lynch and
are presented in accordance with U.S. generally accepted accounting principles
and prevailing industry practices. All material intercompany transactions and
balances have been eliminated.
Certain reclassifications and format changes have been made to prior year
amounts to conform to the current year presentation. All 1997 amounts have been
restated to reflect the 1998 merger of Midland Walwyn Inc. ("Midland Walwyn")
with Merrill Lynch, which has been accounted for as a pooling-of-interests (see
Note 2 for further information).
The Consolidated Financial Statements are presented in U.S. dollars. Many
non-U.S. subsidiaries have a functional currency (i.e., the currency in which
activities are primarily conducted) that is other than the U.S. dollar, often
the currency of the country in which a subsidiary is domiciled. Subsidiaries'
assets and liabilities are translated to U.S. dollars at year-end exchange
rates, while revenues and expenses are translated at average exchange rates
during the year. Adjustments that result from translating amounts in a
subsidiary's functional currency, net of hedging gains or losses and related tax
effects, are reported in stockholders' equity as a component of Accumulated
other comprehensive loss. All other translation adjustments are included in
earnings.
In presenting the Consolidated Financial Statements, management makes
estimates regarding certain trading inventory valuations, the outcome of
litigation, the carrying amount of
62
goodwill, the realization of deferred tax assets and insurance deferred
acquisition costs, and other matters that affect the reported amounts and
disclosure of contingencies in the financial statements. Estimates, by their
nature, are based on judgment and available information. Therefore, actual
results could differ materially from those estimates.
Merrill Lynch defines cash equivalents as short-term, highly liquid
securities and interest-earning deposits with original maturities of 90 days or
less, other than those used for trading purposes. For purposes of the
Consolidated Statements of Cash Flows, cash flows from derivatives are
classified in operating activities.
At December 31, 1999 and December 25, 1998, substantially all financial
instrument assets and the majority of financial instrument liabilities are
carried at fair value or amounts that approximate fair value. Fair values of
financial instruments are disclosed in Note 6.
TRADING ACTIVITIES
Merrill Lynch's trading activities consist primarily of securities brokerage,
trading, and underwriting; derivatives dealing and brokerage; and securities
financing transactions. Trading assets and trading liabilities consist of cash
instruments (such as securities) and derivative instruments used for trading
purposes or for hedging other trading inventory.
Securities
Trading securities and other cash instruments (e.g., loans held for trading
purposes) are reported on a trade date basis at fair value. Included in trading
liabilities are securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date ("short sales"). Changes in
fair value (i.e., unrealized gains and losses) are recognized as principal
transactions revenues in the current period. Realized gains and losses and any
related interest amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the instrument.
Fair values of trading securities are based on quoted market prices,
pricing models (utilizing indicators of general market conditions or other
economic measurements), or management's estimates of amounts to be realized on
settlement, assuming current market conditions and an orderly disposition over a
reasonable period of time.
Derivatives
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument or index such as a futures, forward, swap, or option
contract, or other financial instrument with similar characteristics. Derivative
contracts often involve future commitments to exchange interest payment streams
or currencies based on a notional or contractual amount (e.g., interest rate
swaps or currency forwards) or to purchase or sell other financial instruments
at specified terms on a specified date (e.g., options to buy or sell securities
or currencies).
Derivatives are often referred to as off-balance-sheet instruments since
neither their notional amounts nor the underlying instruments are reflected on
the balance sheet; however, the fair values of trading derivatives are recorded
in trading assets and liabilities. Derivatives are reported separately as assets
and liabilities unless a legal right of setoff exists under a master netting
agreement enforceable at law. Balances related to swap and forward transactions
and foreign currency options are included in Contractual agreements on the
Consolidated Balance Sheets. All other derivative balances are recorded in the
related cash instrument caption. The fair value of equity options purchased, for
example, is recorded in the Equities and convertible debentures trading asset
caption.
Changes in fair values of derivatives are recorded as principal
transactions revenues in the current period. Fair values for certain
exchange-traded derivatives, principally futures and certain options, are based
on quoted market prices. Fair values for over-the-counter ("OTC") derivative
financial instruments, principally forwards, options, and swaps, represent
amounts that would be received from or paid to a third party in settlement of
these instruments. These amounts are determined using pricing models based on
the present value of estimated future cash flows employing mid-market valuations
with appropriate adjustments. These adjustments are integral components of the
mark-to-market process and relate to credit quality and concentration, market
liquidity, and exposure close-out costs associated with unmatched positions.
Adjustments are also made for administrative costs incurred to service periodic
cash flows and to maintain hedges over the life of the contract. A portion of
income related to long-term contracts is recognized as the related
administrative costs are incurred.
New, complex instruments may have immature or limited markets. The
precision of the pricing model for a complex product, which involves multiple
variables and assumptions, will evolve over time. As the markets for these
products develop, Merrill Lynch continually refines its pricing models based on
experience to correlate more closely to the market risk of these instruments.
Securities Financing Transactions
Merrill Lynch enters into repurchase and resale agreements and securities
borrowed and loaned transactions to accommodate customers (i.e., matched-book),
finance firm inventory positions, and obtain securities for settlement. Merrill
Lynch also engages in securities financing for customers through margin lending
(see Customer Transactions).
Notes to Consolidated Financial Statements 63
Resale and repurchase agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts plus
accrued interest. Merrill Lynch's policy it to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
resale agreements. To ensure that the market value of the underlying collateral
remains sufficient, collateral is valued daily, and Merrill Lynch may require
counterparties to deposit additional collateral or return collateral pledged,
when appropriate. Substantially all repurchase and resale activities are
transacted under master netting agreements that give Merrill Lynch the right, in
the event of default, to liquidate collateral held and to offset receivables and
payables with the same counterparty. Merrill Lynch offsets certain repurchase
and resale agreement balances with the same counterparty on the Consolidated
Balance Sheets.
Securities borrowed and loaned transactions are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions require
Merrill Lynch to provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives collateral in the
form of cash or other securities for securities loaned transactions. For these
transactions, the fees received or paid by Merrill Lynch are recorded as
interest revenue or expense. On a daily basis, Merrill Lynch monitors the market
value of securities borrowed or loaned against the collateral value. Although
substantially all securities borrowing and lending activities are transacted
under master netting agreements, such receivables and payables with the same
counterparty are not set off on the Consolidated Balance Sheets.
Merrill Lynch recognizes collateral received or provided in certain resale
and repurchase agreements in the following balance sheet captions:
. Securities received as collateral, net of securities pledged as
collateral;
. Securities pledged as collateral; and
. Obligation to return securities received as collateral.
The balances reported under these captions primarily represent securities
received as collateral in matched-book term resale and repurchase agreements for
which the collateral provider does not have the explicit contractual right to
substitute.
Interest rate swaps may be used to modify the interest rate characteristics
of long-term resale and repurchase agreements. These swaps are accounted for on
an accrual basis, with amounts to be paid or received recognized as adjustments
to interest expense or revenue. (See the Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives.)
INVESTMENT BANKING AND ADVISORY SERVICES
Underwriting revenues and fees for merger and acquisition advisory services are
accrued when services for the transactions are substantially completed.
Transaction-related expenses are deferred to match revenue recognition.
CUSTOMER TRANSACTIONS
Customer securities and commodities transactions are recorded on a
settlement date basis. Receivables from and payables to customers include
amounts due on cash and margin transactions. Securities owned by customers,
including those that collateralize margin or other similar transactions, are not
reflected on the Consolidated Balance Sheets.
Commissions charged for executing customer transactions are accrued on a
trade date basis and are included in current period earnings. Financial
Consultant compensation and benefits expense is accrued in the same period as
revenue is recognized.
Mutual fund distribution fee revenues are accrued as earned, and redemption
fee revenues are recognized upon receipt. Certain compensation costs related to
sales of rear-load open-end mutual funds are deferred to match revenue
recognition.
INVESTING ACTIVITIES
Merrill Lynch's non-broker-dealer subsidiaries hold debt and equity investments,
which are primarily classified as available-for-sale.
Debt and marketable equity securities classified as available-for-sale are
reported at fair value. Unrealized gains or losses on these securities are
reported in stockholders' equity as a component of Accumulated other
comprehensive loss, net of applicable income taxes and other related items.
Debt securities that Merrill Lynch has the positive intent and ability to
hold to maturity are classified as held-to-maturity. These investments are
recorded at amortized cost unless a decline in value is deemed other than
temporary, in which case the carrying value is reduced. The amortization of
premiums or accretion of discounts and any unrealized losses deemed other than
temporary are included in current period earnings.
Debt and marketable equity securities purchased principally for the purpose
of resale in the near-term are classified as trading investments and are
reported at fair value. Unrealized gains or losses on these investments are
included in current period earnings.
Restricted equity investment securities or equity investment securities
without available market quotations are reported at the lower of cost or
estimated net realizable value. Adjustments in carrying values are included in
current period earnings.
Realized gains and losses on investments are included in current period
earnings. The cost basis of each investment sold
64 Notes to Consolidated Financial Statements
is specifically identified for purposes of computing realized gains and losses.
Derivative contracts may be used to modify interest rate characteristics of
available-for-sale securities. Merrill Lynch also uses derivatives to manage the
currency exposure arising from investments in non-U.S. subsidiaries (see Basis
of Presentation for accounting policy for these investments). Unrealized gains
and losses on these derivatives are reported net of tax in stockholders' equity
as a component of Accumulated other comprehensive loss, along with unrealized
gains and losses from the hedged items. (See Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives).
LENDING ACTIVITIES
Merrill Lynch's lending activities include loan originations, syndications,
securitizations, and servicing. Merrill Lynch also engages in secondary market
loan trading and margin lending (see Trading Activities and Customer
Transactions, respectively).
Loans held for investment purposes, including consumer and small business
loans and the residual portion of commercial loans syndicated by Merrill Lynch,
are carried at their principal amount outstanding. The allowance for loan losses
is established through provisions that are based on management's assessment of
the collectibility of the loan portfolio. Loans are charged off against the
allowance for loan losses when management determines that collection of
principal is unlikely.
Loans held for sale, which include certain residential mortgage and home
equity loans, are reported at the lower of cost (less allowance for loan losses)
or estimated fair value determined on a portfolio basis. Mortgage servicing
assets and residual interests in mortgage loans underlying Real Estate Mortgage
Investment Conduits and revolving trusts are (1) recognized upon sales of loans
when servicing is retained, and (2) amortized into income in proportion to and
over the estimated life of the net servicing revenue. Mortgage servicing assets
are recognized at the present value of future cash flows, periodically evaluated
for impairment, and included in Other assets on the Consolidated Balance Sheets.
Residual interests are categorized as available-for-sale (see Investing
Activities) and reported in Other investments on the Consolidated Balance
Sheets.
BORROWING ACTIVITIES
Merrill Lynch's unsecured general-purpose funding is principally obtained from
commercial paper and long-term borrowings. Commercial paper, which is issued at
a discount, is recorded at the proceeds received and accreted to its par value.
Long-term borrowings are carried at the principal amount borrowed, net of
unamortized discounts or premiums.
Merrill Lynch uses derivatives to manage the interest rate, currency, and
equity risk exposures of its borrowings. Derivatives that hedge the interest
rate risk on borrowings are generally accounted for on an accrual basis, with
amounts to be paid or received recognized as adjustments to the related interest
expense. Unrealized gains and losses on other financing derivatives are
recognized currently. (See following Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives.)
NON-TRADING DERIVATIVES
As part of its overall risk management strategy, Merrill Lynch uses derivatives
to manage its market risk exposures arising from non-trading assets and
liabilities. These exposures include interest rate, currency, equity and other
risks. Derivatives used for hedging borrowings and other non-trading assets and
liabilities must be effective at reducing the risk being managed and be
designated as a hedge at inception.
Realized gains and losses on early terminations of derivatives are deferred
over the remaining lives of the hedged assets or liabilities. At December 31,
1999, there was $27 million in deferred gains relating to a derivative contract
terminated during 1999. At December 25, 1998, there were no such deferred
amounts.
INSURANCE ACTIVITIES
Insurance liabilities are future benefits payable under annuity and
interest-sensitive life insurance contracts and include deposits received plus
interest credited during the contract accumulation period, the present value of
future payments for contracts which have annuitized, and a mortality provision
for certain products. Certain policyholder liabilities are also adjusted for
those investments classified as available-for-sale. Liabilities for unpaid
claims consist of the mortality benefit for reported claims and an estimate of
unreported claims based upon prior experience.
Substantially all security investments of insurance subsidiaries are
classified as available-for-sale and recorded at fair value. These investments
support Merrill Lynch's in-force, universal life-type contracts. Merrill Lynch
records adjustments to deferred acquisition costs and policyholder account
balances which, when combined, are equal to the adjustment that would have been
recorded if those available-for-sale investments had been sold at their
estimated fair values and the proceeds reinvested at current yields. The
corresponding credits or charges for these adjustments are recorded in
stockholders' equity as a component of Accumulated other comprehensive loss, net
of applicable income taxes.
Certain variable costs related to the sale or acquisition of new and
renewal insurance contracts have been deferred, to the extent deemed
recoverable, and amortized over the
Notes to Consolidated Financial Statements 65
estimated lives of the contracts in proportion to the estimated gross profit for
each group of contracts.
Merrill Lynch maintains separate accounts representing segregated funds
held for purposes of funding variable life and annuity contracts. Separate
account assets are accounted for as customer assets since the contract holders
bear the risk of ownership, consistent with Merrill Lynch's other investment
products. Accordingly, separate account assets and the related liabilities are
not consolidated with the assets and liabilities of Merrill Lynch.
STOCK-BASED COMPENSATION
Merrill Lynch accounts for stock-based compensation in accordance with the
intrinsic value-based method in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, rather than the fair value-based
method in Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Compensation expense for stock options
is not recognized since Merrill Lynch grants stock options without any intrinsic
value. Compensation expense related to other stock-based compensation plans is
recognized over the vesting period. For certain stock-based compensation grants,
the unamortized portion of the grant value is reflected as a reduction of
stockholders' equity in Employee stock transactions on the Consolidated Balance
Sheets.
GOODWILL
Goodwill, which represents the cost of acquired businesses in excess of fair
value of the related net assets at acquisition, is amortized on a straight-line
basis. Goodwill associated with the purchase of the Mercury Asset Management
Group ("Mercury") is amortized over 30 years (see Note 2 for additional
information). Goodwill related to other acquisitions is amortized over periods
generally not exceeding fifteen years.
Goodwill is evaluated for impairment upon occurrence of an event that leads
to a significant reduction in expected future cash flows associated with the
acquired entity. These events could include, but are not limited to, the loss of
a major client, the loss of market share, an unanticipated reduction in the
revenue stream, or an unanticipated increase in the entity's cost structure.
Once it has been determined that conditions for potential impairment exist,
impairment assessment will be determined by comparing the carrying value of
goodwill to its estimated value based on a discounted cash flow valuation model.
Impairment is determined to occur when the estimated value of the goodwill falls
significantly below its recorded value. This analysis is based on appropriate
assumptions, including a discount rate that reflects the acquired entity's
weighted average cost of capital.
EQUIPMENT AND FACILITIES
Equipment and facilities primarily consist of technology hardware and software,
leasehold improvements, and owned facilities. Equipment and facilities are
reported at historical cost, net of accumulated depreciation and amortization,
except for land, which is reported at historical cost.
Depreciation and amortization are computed using the straight-line method.
Equipment is depreciated over its estimated useful life, while leasehold
improvements are amortized over the lesser of the improvement's estimated
economic useful life or the term of the lease. Maintenance and repair costs are
expensed as incurred.
Included in the Occupancy and related depreciation expense category was
depreciation and amortization of $205 million, $190 million, and $167 million in
1999, 1998, and 1997, respectively. Depreciation and amortization recognized in
the Communications and technology expense category was $513 million, $395
million, and $306 million for 1999, 1998, and 1997, respectively.
In 1998, Merrill Lynch also began capitalizing certain costs incurred in
the development of internal-use software (see Note 2). These amounts are
amortized over the useful life of the developed software, generally not
exceeding three years.
INCOME TAXES
ML & Co. and certain of its wholly owned subsidiaries file a consolidated U.S.
federal income tax return.
Merrill Lynch uses the asset and liability method in providing income taxes
on all transactions that have been recognized in the Consolidated Financial
Statements. The asset and liability method requires that deferred taxes be
adjusted to reflect the tax rates at which future taxable amounts are expected
to be settled or realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other changes in income tax
laws, are recognized in net earnings in the period such changes are enacted.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
NOTE 2. OTHER SIGNIFICANT EVENTS
- --------------------------------
ACCOUNTING CHANGES
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires
capitalization of certain internal-use software development costs. The SOP was
adopted early for 1998 and resulted in the capitalization of software
development costs of $146 million in 1999 and $72 million in 1998.
66 Notes to Consolidated Financial Statements
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities, which requires that all start-up costs be expensed as
incurred. Closed-end mutual fund distribution costs, previously deferred and
amortized by Merrill Lynch over a four-year period, are required to be expensed
under the SOP. The SOP was adopted early as of the beginning of 1998, and the
impact of adoption was not material.
MERGERS, ACQUISITIONS, AND DIVESTITURES
In August 1998, Merrill Lynch acquired the outstanding shares of Midland Walwyn,
a Canadian broker-dealer, in a share exchange. Each Midland Walwyn shareholder
received either 0.24 shares of ML & Co. common stock or 0.24 exchangeable shares
of Merrill Lynch & Co., Canada Ltd. for every Midland Walwyn share held (see
Note 8). The merger was accounted for as a pooling-of-interests; the
Consolidated Financial Statements reflect the results of operations, financial
position, changes in stockholders' equity, and cash flows as if the two
companies had always been combined.
During 1998, Merrill Lynch acquired Howard Johnson & Co., a U.S. employee
benefits consulting firm and a majority interest in a non-U.S. investment bank
in transactions accounted for as purchases. Aggregate consideration of $92
million was paid, and goodwill of $56 million was recorded in connection with
these acquisitions. In addition, Merrill Lynch sold a U.S. residential real
estate services subsidiary and a New York Stock Exchange specialist subsidiary,
recognizing pre-tax gains totaling $138 million.
At year-end 1997, Merrill Lynch recorded the acquisition of Mercury, a
U.K.-based global asset manager. In 1998, approximately $5.3 billion in cash was
paid as consideration. Goodwill of approximately $4.8 billion was recorded
related to the acquisition. In 1997, Merrill Lynch also acquired a 401(k)
service provider for $13 million, recognizing goodwill of $10 million.
For acquisitions accounted for as purchases, the operating results of
acquired companies are included in Merrill Lynch's results of operations
commencing with the acquisition date.
PROVISION FOR COSTS RELATED TO STAFF REDUCTIONS
During the 1998 third quarter, Merrill Lynch recognized a $430 million provision
for costs related to staff reductions ($288 million after-tax). The provision
covered primarily severance costs, but also included costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. The staff reduction program included reductions, through termination
and attrition, of approximately 3,400 personnel, or about 5% of the global
workforce.
At December 31, 1999, the remaining liability was $54 million, which
primarily represents remaining severance payments for personnel receiving
periodic payments. All staff reductions were fully completed during 1999 and all
severance payments will be completed in 2000.
NOTE 3. TRADING AND RELATED ACTIVITIES
- --------------------------------------
As part of its trading activities, Merrill Lynch provides to clients brokerage,
dealing, financing, and underwriting services for a broad range of products.
While trading activities are primarily generated by client order flow, Merrill
Lynch also takes selective proprietary positions based on expectations of future
market movements and conditions. Merrill Lynch's trading strategies rely on the
integrated management of its client-driven and proprietary positions, along with
the related hedging and financing.
Interest revenue and expense are integral components of trading activities.
In assessing the profitability of trading activities, Merrill Lynch views net
interest and principal transactions revenues in the aggregate. For further
information on Merrill Lynch's net trading results, see Management's Discussion
and Analysis (unaudited) - Principal Transactions.
Certain trading activities expose Merrill Lynch to market and credit risks.
These risks are managed in accordance with established risk management policies
and procedures that are described in Management's Discussion and Analysis
(unaudited) - Risk Management.
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, credit spreads, or other risks. The level of market risk is influenced
by the volatility and the liquidity in the markets in which financial
instruments are traded.
Merrill Lynch seeks to mitigate market risk associated with trading
inventories by employing hedging strategies that correlate rate, price, and
spread movements of trading inventories and related financing and hedging
activities. Merrill Lynch uses a combination of cash instruments and derivatives
to hedge its market exposures. The following discussion describes the types of
market risk faced by Merrill Lynch.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. Interest rate swap agreements,
Eurodollar futures, and U.S. Treasury securities and futures are common interest
rate risk management tools. The decision to manage interest rate risk using
futures or swap contracts, as opposed to buying or selling short U.S. Treasury
or other securities, depends on current market conditions and funding
considerations.
Notes to Consolidated Financial Statements 67
Interest rate swap agreements used by Merrill Lynch include caps, collars,
floors, basis swaps, and leveraged swaps. Interest rate caps and floors provide
the purchaser protection against rising and falling interest rates,
respectively. Interest rate collars combine a cap and a floor, providing the
purchaser with a predetermined interest rate range. Basis swaps are a type of
interest rate swap agreement where variable rates are received and paid, but are
based on different index rates. Leveraged swaps are another type of interest
rate swap where changes in the variable rate are multiplied by a contractual
leverage factor, such as four times three-month LIBOR (London Interbank Offered
Rate). Merrill Lynch's exposure to interest rate risk resulting from these
leverage factors is typically hedged with other financial instruments.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange
rates will impact the value of financial instruments. Merrill Lynch's trading
assets and liabilities include both cash instruments denominated in and
derivatives linked to over 70 currencies, including the euro, Japanese yen,
German mark, Swiss franc, British pound, and Italian lira. Currency forwards and
options are commonly used to manage currency risk associated with these
instruments. Currency swaps may also be used in situations where a long-dated
forward market is not available or where the end-user needs a customized
instrument to hedge a foreign currency cash flow stream. Typically, parties to a
currency swap initially exchange principal amounts in two currencies, agreeing
to exchange interest payments and to re-exchange the currencies at a future date
and exchange rate.
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will
fluctuate, affecting the value of equity securities and other instruments that
derive their value from a particular stock, a defined basket of stocks, or a
stock index. Instruments typically used by Merrill Lynch to manage equity price
risk include equity options, warrants, and baskets of equity securities. Equity
options, for example, can require the writer to purchase or sell a specified
stock or to make a cash payment based on changes in the market price of that
stock, basket of stocks, or stock index.
Credit Spread Risk
Credit spread risk arises from the possibility that changes in credit spreads
will affect the value of financial instruments. Credit spreads represent the
credit risk premiums required by market participants for a given credit quality,
i.e., the additional yield that a debt instrument issued by a AA-rated entity
must produce over a risk-free alternative (e.g., U.S. Treasury instrument).
Certain instruments are used by Merrill Lynch to manage this type of risk. Swaps
and options, for example, can be designed to mitigate losses due to changes in
credit spreads, as well as the credit downgrade or default of the issuer. Credit
risk resulting from default on counterparty obligations is discussed in the
Credit Risk section.
Commodity Price and Other Risks
Merrill Lynch views its commodity contracts as financial instruments since they
are generally settled in cash and not by delivery of the underlying commodity.
Commodity price risk results from the possibility that the price of the
underlying commodity may rise or fall. Cash flows from commodity contracts are
based on the difference between an agreed-upon fixed price and a price that
varies with changes in a specified commodity price or index. Commodity contracts
held by Merrill Lynch principally relate to energy, precious metals, and base
metals.
Merrill Lynch is also a party to financial instruments that contain risks
not correlated to typical financial risks. Securities or derivatives, for
example, may be linked to the occurrence of certain weather conditions or
natural catastrophes. Merrill Lynch generally mitigates the risk associated with
these transactions by entering into offsetting derivative transactions.
CREDIT RISK
Merrill Lynch is exposed to risk of loss if an issuer or a counter-party fails
to perform its obligations under contractual terms and the collateral held, if
any, is deemed worthless ("default risk"). Both cash instruments and derivatives
expose Merrill Lynch to default risk. Credit risk arising from changes in credit
spreads was previously discussed in the Market Risk section.
Merrill Lynch has established policies and procedures for mitigating credit
risk on principal transactions, including reviewing and establishing limits for
credit exposure, maintaining collateral, and continually assessing the
creditworthiness of counterparties. For further information, see Management's
Discussion and Analysis (unaudited) - Risk Management - Credit Risk.
In the normal course of business, Merrill Lynch executes, settles, and
finances various customer securities transactions. Execution of these
transactions includes the purchase and sale of securities by Merrill Lynch.
These activities may expose Merrill Lynch to default risk arising from the
potential that customers or counterparties may fail to satisfy their
obligations. In these situations, Merrill Lynch may be required to purchase or
sell financial instruments at unfavorable market prices to satisfy obligations
to other customers or counterparties. In addition, Merrill Lynch seeks to
control the risks associated with its customer margin activities by requiring
customers to maintain collateral in compliance with regulatory and internal
guidelines.
68 Notes to Consolidated Financial Statements
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired, and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, Merrill
Lynch may purchase the underlying security in the market and seek reimbursement
for losses from the counterparty.
Concentrations of Credit Risk
Merrill Lynch's exposure to credit risk (both default and credit spread)
associated with its trading and other activities is measured on an individual
counterparty basis, as well as by groups of counterparties that share similar
attributes. Concentrations of credit risk can be affected by changes in
political, industry, or economic factors. To reduce the potential for risk
concentration, credit limits are established and monitored in light of changing
counterparty and market conditions.
At December 31, 1999, Merrill Lynch's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration
consists of both direct and indirect exposures. Direct exposure, which primarily
results from trading asset and investment security positions in instruments
issued by the U.S. Government and its agencies, amounted to $17.0 billion and
$17.4 billion at December 31, 1999 and December 25, 1998, respectively. Merrill
Lynch's indirect exposure results from maintaining U.S. Government and agencies
securities as collateral for resale agreements and securities borrowed
transactions. Merrill Lynch's direct credit exposure on these transactions is
with the counterparty; thus Merrill Lynch has credit exposure to the U.S.
Government and its agencies only in the event of the counterparty's default.
Securities issued by the U.S. Government or its agencies held as collateral for
resale agreements and securities borrowed transactions at December 31, 1999 and
December 25, 1998 totaled $43.8 billion and $54.8 billion, respectively.
At December 31, 1999, Merrill Lynch had concentrations of credit risk with
other counterparties, including a corporate counterparty rated AAA by recognized
credit rating agencies. Total unsecured exposure to this counterparty was $857
million, or 0.3% of total assets.
Merrill Lynch's most significant industry credit concentration is with
financial institutions. Financial institutions include other brokers and
dealers, commercial banks, finance companies, insurance companies, and
investment companies. This concentration arises in the normal course of Merrill
Lynch's brokerage, trading, financing, and underwriting activities. Merrill
Lynch also monitors credit exposures worldwide by region. Within these regions,
sovereign governments represent the most significant concentration, followed by
financial institutions.
In the normal course of business, Merrill Lynch purchases, sells,
underwrites, and makes markets in non-investment grade instruments. In
conjunction with merchant banking activities, Merrill Lynch also provides
extensions of credit and makes equity investments to facilitate leveraged
transactions. These activities expose Merrill Lynch to a higher degree of credit
risk than is associated with trading, investing in, and underwriting investment
grade instruments and extending credit to investment grade counterparties. See
Management's Discussion and Analysis (unaudited) - Non-Investment Grade Holdings
and Highly Leveraged Transactions for further information.
TRADING DERIVATIVES
Merrill Lynch's trading derivatives consist of derivatives provided to customers
and derivatives entered into for proprietary trading strategies or risk
management purposes.
The fair values of derivatives used in trading activities at year-end 1999
and 1998 follow:
- --------------------------------------------------------------------------------
(in millions)
December 31, 1999 December 25, 1998
--------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Swap agreements $ 19,984 $ 24,204 $ 17,938 $ 19,747
Forward contracts 2,232 2,385 2,882 2,822
Options 5,785 7,823 8,841 12,195
- --------------------------------------------------------------------------------
The following table presents the average fair values of Merrill Lynch's
trading derivatives for 1999 and 1998, calculated using month-end balances:
- --------------------------------------------------------------------------------
(in millions)
Average Fair Value
------------------------------------------------
1999 1998
--------------------- ---------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Swap agreements $ 16,724 $ 20,575 $ 19,096 $ 17,272
Forward contracts 2,030 2,127 3,227 3,178
Options 7,358 8,333 8,551 11,420
- --------------------------------------------------------------------------------
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments.
The notional or contractual amounts of derivatives used for trading purposes
by type of risk follow:
Notes to Consolidated Financial Statements 69
- --------------------------------------------------------------------------------
(in billions)
RISK
----------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE(1)(2) CURRENCY(3) PRICE AND OTHER
-------------- ----------- ------ ---------
DECEMBER 31, 1999
Swap agreements $ 2,470 $ 175 $ 27 $ 3
Forward contracts 94 153 3 1
Futures contracts 224 3 12 3
Options purchased 216 102 53 2
Options written 270 71 53 4
DECEMBER 25, 1998
Swap agreements $ 2,006 $ 170 $ 19 $ 5
Forward contracts 62 229 - 6
Futures contracts 184 2 10 3
Options purchased 254 93 71 4
Options written 192 96 58 6
- --------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent "To
Be Announced" mortgage pools that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
Most of Merrill Lynch's trading derivative transactions are relatively
short-term in duration with a weighted-average maturity of approximately 2.9
years at December 31, 1999 and December 25, 1998. For trading derivatives
outstanding at December 31, 1999, the following table presents the notional or
contractual amounts of derivatives expiring in future years based on contractual
expiration:
- --------------------------------------------------------------------------------
(in billions)
After
2000 2001 2002 2003 2003 Total
-------- ----- ----- ----- ------- -------
Swap agreements $ 657 $ 373 $ 325 $ 243 $ 1,077 $ 2,675
Forward contracts 221 27 - - 3 251
Futures contracts 91 48 32 33 38 242
Options purchased 249 18 19 12 75 373
Options written 268 33 24 16 57 398
-------- ----- ----- ----- ------- -------
Total $ 1,486 $ 499 $ 400 $ 304 $ 1,250 $ 3,939
======== ===== ===== ===== ======= =======
- --------------------------------------------------------------------------------
The notional or contractual values of derivatives do not represent default
risk exposure. Default risk is limited to the current cost of replacing
derivative contracts in a gain position. Default risk exposure varies by type of
derivative. Swap agreements and forward contracts are generally OTC-transacted
and thus are exposed to default risk to the extent of their replacement cost.
Since futures contracts are exchange-traded and usually require daily cash
settlement, the related risk of accounting loss is generally limited to a one-
day net positive change in market value. Option contracts can be exchange-traded
or OTC-transacted. Purchased options have default risk to the extent of their
replacement cost. Written options represent a potential obligation to
counterparties and, accordingly, do not subject Merrill Lynch to default risk.
Merrill Lynch enters into International Swaps and Derivatives Association,
Inc. master agreements or their equivalent ("master netting agreements") with
each of its counterparties, whenever possible. Master netting agreements provide
protection in bankruptcy in certain circumstances and, in some cases, enable
receivables and payables with the same counterparty to be offset on the
Consolidated Balance Sheets, providing for a more meaningful balance sheet
presentation of credit exposure.
To reduce default risk, Merrill Lynch requires collateral, principally U.S.
Government and agencies securities, on certain derivative transactions. From an
economic standpoint, Merrill Lynch evaluates default risk exposures net of
related collateral. At December 31, 1999, such collateral amounted to $4.2
billion. In addition to obtaining collateral, Merrill Lynch attempts to mitigate
default risk on derivatives by entering into transactions with provisions that
enable Merrill Lynch to terminate or reset the terms of the derivative contract.
See Management's Discussion and Analysis (unaudited) - Risk Management - Credit
Risk for further information on credit risk related to derivatives.
SECURITIES FINANCING TRANSACTIONS
Merrill Lynch enters into secured borrowing and lending transactions to finance
trading inventory positions, obtain securities for settlement, and to meet
customers' needs (see Management's Discussion and Analysis (unaudited) - Balance
Sheet for further information). Outstanding receivables and payables under
resale and repurchase agreements and securities borrowed and loaned transactions
at year-end 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
-------- --------
RECEIVABLES UNDER:
Resale agreements $ 58,034 $ 50,188
Securities borrowed transactions 41,707 37,525
-------- --------
Total $ 99,741 $ 87,713
======== ========
- --------------------------------------------------------------------------------
PAYABLES UNDER:
Repurchase agreements $ 64,954 $ 59,501
Securities loaned transactions 6,624 7,626
-------- --------
Total $ 71,578 $ 67,127
======== ========
- --------------------------------------------------------------------------------
Under these agreements and transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and agencies, asset-backed,
corporate debt, equity, and non-U.S. governments and agencies securities. When
providing collateral for these transactions, Merrill Lynch delivers its own
securities, securities borrowed from counterparties, and securities owned by
customers collateralizing margin loans and other obligations. The market value
of securities owned by Merrill Lynch that have been loaned or pledged to
counterparties as collateral for obligations of Merrill Lynch, primarily related
to repurchase agreements, were
70 Notes to Consolidated Financial Statements
$31,731 million and $35,762 million at December 31, 1999 and December 25, 1998,
respectively.
Merrill Lynch hedges interest rate risk exposures on long-dated resale and
repurchase agreements (see Note 6).
NOTE 4. INVESTMENTS
- -------------------
Merrill Lynch has several broad categories of investments on its Consolidated
Balance Sheets, including Marketable investment securities, Investments of
insurance subsidiaries, and Other investments.
Marketable investment securities consist of highly liquid debt and equity
securities, including those held for liquidity management purposes and those
held by a subsidiary for credit rating agency purposes. Investments of insurance
subsidiaries, primarily debt securities, are used to fund policyholder
liabilities. Other investments consist of equity and debt securities, including
those acquired in connection with merchant banking activities. Certain merchant
banking investments are subject to restrictions that may limit Merrill Lynch's
ability to realize its investment until such restrictions expire.
Marketable investment securities and certain investments of insurance
subsidiaries and other investments are classified as available-for-sale,
held-to-maturity, or trading as described in Note 1. Investment securities
reported on the Consolidated Balance Sheets at December 31, 1999 and
December 25, 1998 are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
MARKETABLE INVESTMENT SECURITIES
Available-for-sale $ 9,484 $ 4,070
Held-to-maturity 362 354
Trading 299 181
------- -------
Total $10,145 $ 4,605
======= =======
- --------------------------------------------------------------------------------
INVESTMENTS OF INSURANCE SUBSIDIARIES
Available-for-sale $ 2,499 $ 2,917
Trading 22 17
Non-qualifying(1)(2) 1,576 1,551
------- -------
Total $ 4,097 $ 4,485
======= =======
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
Available-for-sale $ 494 $ 435
Held-to-maturity 312 290
Non-qualifying(1)(3) 2,604 1,865
------- -------
Total $ 3,410 $ 2,590
======= =======
- --------------------------------------------------------------------------------
(1) Non-qualifying for SFAS No. 115 purposes.
(2) Primarily consists of insurance policy loans.
(3) Includes merchant banking investments and investments hedging deferred
compensation liabilities.
Information regarding investment securities subject to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, follows:
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
December 31, 1999 December 25, 1998
------------------------------------------------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
AVAILABLE-FOR-SALE
Corporate debt $ 4,976 $ 10 $ (178) $ 4,808 $ 2,771 $ 61 $ (31) $ 2,801
U.S.Government and agencies 974 1 (18) 957 658 7 (1) 664
Municipals 2,120 7 (5) 2,122 1,721 15 (13) 1,723
Mortgage-backed securities 3,808 16 (26) 3,798 1,572 18 (2) 1,588
Other debt securities 293 - (6) 287 183 1 (4) 180
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total debt securities 12,171 34 (233) 11,972 6,905 102 (51) 6,956
Equity securities 528 12 (35) 505 447 26 (7) 466
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total $ 12,699 $ 46 $ (268) $ 12,477 $ 7,352 $ 128 $ (58) $ 7,422
========= ========== ========== ========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
December 31, 1999 December 25, 1998
------------------------------------------------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
HELD-TO-MATURITY
Corporate debt $ - $ - $ - $ - $ 38 $ 1 $ - $ 39
U.S.Government and agencies 405 17 - 422 263 29 - 292
Municipals 66 12 (51) 27 144 64 (2) 206
Mortgage-backed securities 68 - (1) 67 87 - - 87
Other debt securities 135 - - 135 112 - (2) 110
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total $ 674 $ 29 $ (52) $ 651 $ 644 $ 94 $ (4) $ 734
========= ========== ========== ========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 71
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, for available-for-sale and held-to-maturity
investments follow:
- --------------------------------------------------------------------------------
(in millions)
Available-for-Sale Held-to-Maturity
---------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year
or less $ 2,807 $ 2,807 $ 231 $ 231
Due after one year
through five years 1,846 1,816 197 205
Due after five years
through ten years 1,003 962 29 11
Due after ten years 2,707 2,589 149 137
--------- --------- --------- ---------
8,363 8,174 606 584
Mortgage-backed
securities 3,808 3,798 68 67
--------- --------- --------- ---------
Total(1) $12,171 $11,972 $ 674 $ 651
========= ========= ========= =========
- --------------------------------------------------------------------------------
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
The proceeds and gross realized gains (losses) from the sale of
available-for-sale investments are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ------- -------
Proceeds $ 3,071 $ 3,426 $ 2,198
Gross realized gains 22 74 27
Gross realized losses (28) (27) (11)
- --------------------------------------------------------------------------------
Net unrealized gains (losses) from investment securities classified as
trading included in the 1999, 1998, and 1997 Consolidated Statements of Earnings
were $46 million, $6 million, and $(21) million, respectively.
Merrill Lynch hedges interest rate risk exposures on certain investments
(see Note 6 for further information).
NOTE 5. BORROWINGS
- ------------------
Merrill Lynch issues U.S. and non-U.S. dollar-denominated debt instruments with
both variable and fixed interest rates, primarily at the ML & Co. level. These
borrowing activities may create exposure to market risk, most notably interest
rate and currency risk. Merrill Lynch typically uses derivatives to better match
the interest rate and currency characteristics of assets and liabilities,
thereby reducing risk exposures. Derivatives used most frequently include swap
agreements that:
. convert fixed-rate interest payments into variable payments,
. change the underlying interest rate basis or reset frequency, and
. convert non-U.S. dollar payments into U.S. dollars.
Merrill Lynch also issues debt whose repayment terms are linked to the
performance of an equity or other index (e.g., S&P 500), basket of securities,
or an individual security. The contingent components of these indexed debt
obligations are hedged with derivatives (see Note 6 for further information).
Borrowings at December 31, 1999 and December 25, 1998 are presented below:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS
Commercial paper $24,198 $16,758
Other 1,397 1,921
------- -------
Total $25,595 $18,679
======= =======
- --------------------------------------------------------------------------------
DEMAND AND TIME DEPOSITS
Demand $ 3,498 $ 3,171
Time 14,104 9,290
------- -------
Total $17,602 $12,461
======= =======
- --------------------------------------------------------------------------------
LONG-TERM BORROWINGS
Fixed-rate obligations:(1)
U.S.dollar-denominated $13,150 $12,595
Non-U.S. dollar-denominated 1,287 1,189
Variable-rate obligations:(2)(3)
U.S.dollar-denominated 3,338 4,077
Non-U.S.dollar-denominated 1,918 1,303
Medium-term notes:(3)(4)
U.S.dollar-denominated 22,166 24,916
Non-U.S.dollar-denominated 11,606 13,483
------- -------
Total $53,465 $57,563
======= =======
- --------------------------------------------------------------------------------
(1) At December 31, 1999, U.S.dollar-denominated fixed-rate obligations are due
between 2000 and 2028 at interest rates ranging from 6.0% to 8.4%;
non-U.S. dollar-denominated fixed-rate obligations are due between 2000 and
2002 at interest rates ranging from 2.6% to 9.3%.
(2) Variable interest rates are generally based on rates such as LIBOR, the
U.S. Treasury Bill Rate, or the Federal Funds Rate.
(3) Included are various equity-linked or other indexed instruments.
(4) The medium-term note program provides for issuances that may bear fixed or
variable interest rates and may have maturities that range from nine months
to 30 years from the date of issue.
Long-term borrowings at December 31, 1999, based on their contractual terms,
mature as follows:
- --------------------------------------------------------------------------------
(in millions)
2000 $ 8,448
2001 9,280
2002 7,971
2003 5,825
2004 3,549
2005 and thereafter 18,392
-------
Total $53,465
=======
- --------------------------------------------------------------------------------
Certain long-term borrowing agreements contain provisions whereby the
borrowings are redeemable at the option of the holder at specified dates prior
to maturity.
72 Notes to Consolidated Financial Statements
Management believes, however, that a significant portion of such borrowings will
remain outstanding beyond their earliest redemption date.
The effective weighted-average interest rates for borrowings, which include
the impact of hedges, at December 31, 1999 and December 25, 1998 were:
- --------------------------------------------------------------------------------
1999 1998
---- ----
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS 5.94% 5.28%
DEMAND AND TIME DEPOSITS 4.34 4.54
LONG-TERM BORROWINGS
Fixed-rate obligations 6.90 6.69
Variable-rate obligations 6.14 5.46
Medium-term notes 6.21 5.52
- --------------------------------------------------------------------------------
Subsequent to year-end 1999 and through February 25, 2000, long-term
borrowings, net of repayments and repurchases, decreased approximately $505
million.
Borrowing Facilities
Merrill Lynch has obtained a committed, senior unsecured revolving credit
facility aggregating $8 billion under an agreement with a bank. The agreement
contains covenants requiring, among other things, that Merrill Lynch maintain
specified levels of net worth, as defined in the agreement, on the date of an
advance. At December 31, 1999, this credit facility was not drawn upon.
The credit quality, amounts, and terms of this credit facility are
continually monitored and modified as warranted by business conditions. Under
the existing agreement, the credit facility will mature in May 2000. At
maturity, Merrill Lynch may convert amounts borrowed, if any, into term loans
that would mature in two years.
NOTE 6. FAIR VALUE INFORMATION AND NON-TRADING DERIVATIVES
- ----------------------------------------------------------
FAIR VALUE INFORMATION
The following information is presented to help the reader gain an
understanding of the relationship between the amounts reported in Merrill
Lynch's financial statements and the related fair values. Specific accounting
policies are discussed in Note 1.
At December 31, 1999, $299 billion or 91% of Merrill Lynch's total assets
and $229 billion or 73% of Merrill Lynch's total liabilities were carried at
fair value or at amounts that approximate fair value. At December 25, 1998, $276
billion, or 92%, of Merrill Lynch's total assets and $204 billion, or 71%, of
Merrill Lynch's liabilities were carried at fair value or at amounts that
approximate such values. Financial instruments that are carried at fair value
include cash and cash equivalents, cash segregated for regulatory purposes or
deposited with clearing organizations, trading assets and liabilities,
available-for-sale and trading securities included in marketable investment
securities, certain investments of insurance subsidiaries, and certain other
investments. (See Notes 3 and 4 for information related to these instruments).
Financial instruments recorded at amounts that approximate fair value
include most receivables under resale agreements and securities borrowed
transactions, receivables, payables under repurchase agreements and securities
loaned, commercial paper and other short-term borrowings, demand deposits, and
other payables. The fair value of these items is not materially sensitive to
shifts in market interest rates because of the limited term to maturity of many
of these instruments and/or their variable interest rates.
The following table shows financial instruments with carrying values that
differ from their fair values.
- --------------------------------------------------------------------------------
(in millions)
Assets Liabilities
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- -------- -------
DECEMBER 31, 1999
Held-to-maturity
investments $ 674 $ 651
Merchant banking and
other financial instruments(1) 2,605 2,917
Loans,notes,and mortgages 11,187 11,211
Long-term borrowings $53,465 $53,063
Non-trading derivatives 1,220 1,514 2,191 2,669
- --------------------------------------------------------------------------------
DECEMBER 25, 1998
Held-to-maturity
investments $ 644 $ 734
Merchant banking and other
financial instruments(1) 1,834 1,891
Loans,notes,and mortgages 7,687 7,712
Long-term borrowings $57,563 $58,237
Non-trading derivatives 1,429 2,725 794 1,269
- --------------------------------------------------------------------------------
(1) Merchant banking equity investments are non-qualifying for SFAS No. 115
purposes.
Fair value for merchant banking equity investments, including partnership
interests (included in Other investments on the Consolidated Balance Sheets), is
estimated using a number of methods, including earnings multiples, cash flow
analyses, and review of underlying financial conditions and other market
factors. These instruments may be subject to restrictions (e.g., consent of
other investors) that may limit Merrill Lynch's ability to realize currently the
estimated fair value. Accordingly, Merrill Lynch's current estimate of fair
value and the ultimate realization on these instruments may differ. Included in
merchant banking and other financial instruments in the previous table is
Merrill Lynch's investment in Long Term Capital Portfolio, L.P. ("LTCP"). In
1998, in conjunction with 13 other
Notes to Consolidated Financial Statements 73
financial institutions, Merrill Lynch made a $300 million capital infusion to
LTCP, a hedge fund significantly affected by the 1998 third quarter market
turmoil. At December 31, 1999, this investment has been substantially repaid.
In addition to investments noted in the previous table, Merrill Lynch also
holds a passive minority interest in Bloomberg, L.P., a privately held limited
partnership that provides information services to financial institutions. The
fair value of the investment is not readily determinable as of December 31,
1999. Management believes, however, that the fair value of this instrument may
significantly exceed its carrying value of $28 million.
Fair value for loans made in connection with merchant banking activities,
consisting primarily of senior and subordinated debt, is estimated using
discounted cash flows. Merrill Lynch's estimate of fair value for other loans,
notes, and mortgages is determined based on loan characteristics. For certain
homogeneous categories of loans, including residential mortgages and home equity
loans, fair value is estimated using market price quotations or previously
executed transactions for securities backed by similar loans, adjusted for
credit risk and other individual loan characteristics. For Merrill Lynch's
variable-rate loan receivables, carrying value approximates fair value.
The fair values of long-term borrowings and related hedges are estimated
using current market prices and pricing models.
The fair value of outstanding third party guarantees was $41 million and
$54 million at December 31, 1999 and December 25, 1998, respectively.
NON-TRADING DERIVATIVES
The notional or contractual amounts of non-trading derivatives used to hedge
market risk exposures on non-trading assets and liabilities at December 31, 1999
and December 25, 1998 follow:
- --------------------------------------------------------------------------------
(in billions)
1999 1998
---- ----
Borrowings:
Interest rate risk(1) $ 44 $ 54
Currency risk 1 -
Equity risk 3 1
Investment securities(2) 11 6
Resale and repurchase agreements(2) 6 8
Customer loans(2) 6 2
Investments in non-U.S.subsidiaries(3) 3 4
Other 3 4
- --------------------------------------------------------------------------------
(1) Includes $10 billion and $12 billion of instruments which also contain
currency risk and $4 billion and $1 billion of instruments that also
contain equity risk at year-end 1999 and 1998, respectively.
(2) Primarily hedging interest rate risk.
(3) Hedging currency risk.
The combined fair value of hedged items and related derivative hedges
approximates their combined carrying value at year-end 1999 and 1998. Most of
these derivatives are entered into with Merrill Lynch's derivative dealer
subsidiaries, which hedge interest rate, currency, and equity risks in the
normal course of their trading activities.
NOTE 7. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
- ---------------------------------------------------
Preferred securities issued by subsidiaries, which represent preferred minority
interests in consolidated subsidiaries, primarily consist of perpetual trust-
issued preferred securities.
Trust Originated Preferred Securities(Service Mark) ("TOPrS"(Service Mark))
are issued to investors by trusts created by Merrill Lynch. Using the issuance
proceeds, the trusts purchase Partnership Preferred Securities, representing
limited partnership interests. Using the purchase proceeds, the limited
partnerships extend loans to ML & Co. and one or more subsidiaries of ML & Co.
The trusts and partnerships are consolidated subsidiaries of Merrill Lynch. ML &
Co. has guaranteed, on a subordinated basis, the payment in full of all
distributions and other payments on the TOPrS to the extent that the trusts have
funds legally available. This guarantee and a similar partnership distribution
guarantee are subordinated to all other liabilities of ML & Co. and rank equally
with preferred stock of ML & Co.
The table below presents data related to the issuance of TOPrS by Merrill
Lynch Capital Trust I, II, III, IV, and V. All TOPrS issued have a liquidation
value of $25 per security, have a perpetual life, and can be redeemed at the
option of the trusts, in whole or in part, at the liquidation value on or after
their respective optional redemption dates. Distributions are payable from the
date of original issuance and are payable quarterly if, as, and when the trusts
have funds available for payment.
- --------------------------------------------------------------------------------
(in millions)
Annual Optional
Distribution Issue Redemption Liquidation
TOPrS Rate Date Date Value
- ----- ------------ --------- ---------- -----------
I 7.75% Dec. 1996 Dec. 2006 $ 275
II 8.00 Feb. 1997 Mar. 2007 300
III 7.00 Jan. 1998 Mar. 2008 750
IV 7.12 Jun. 1998 Jun. 2008 400
V 7.28 Nov. 1998 Sep. 2008 850
Other(1) 2.70 Jul. 1999 Jun. 2004 98
-------
$ 2,673
=======
- -------------------------------------------------------------------------------
(1) Represents Yen-denominated TOPrS issued by Merrill Lynch Yen TOPrS Trust I.
In addition, $52 million of preferred securities of other subsidiaries were
outstanding at year-end 1999 and 1998.
74 Notes to Consolidated Financial Statements
NOTE 8. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
- ---------------------------------------------------
PREFERRED EQUITY
ML & Co. is authorized to issue 25,000,000 shares of undesignated preferred
stock, $1.00 par value per share. All shares of currently outstanding preferred
stock constitute one and the same class that have equal rank and priority over
common stockholders as to dividends and in the event of liquidation.
9% Cumulative Preferred Stock, Series A
ML & Co. has issued 17,000,000 Depositary Shares, each representing a one-four-
hundredth interest in a share of 9% Cumulative Preferred Stock, Series A,
liquidation preference value of $10,000 per share ("9% Preferred Stock"). The 9%
Preferred Stock is a single series consisting of 42,500 shares with an aggregate
liquidation preference of $425 million, all of which was outstanding at year-end
1999, 1998, and 1997.
Dividends on the 9% Preferred Stock are cumulative from the date of
original issue and are payable quarterly when declared by the authority of the
Board of Directors. The 9% Preferred Stock is perpetual and redeemable on or
after December 30, 2004 at the option of ML & Co., in whole or in part, at a
redemption price equal to $10,000 per share, plus accrued and unpaid dividends
(whether or not declared) to the date fixed for redemption.
Remarketed Preferred(Service Mark) Stock, Series C
During 1997, all outstanding shares of Remarketed Preferred Stock, Series C were
redeemed. Dividend rates in effect prior to redemption ranged from 3.80% to
4.15% per annum.
COMMON STOCK
In 1999, ML & Co. issued 54,601 shares of common stock to certain non-U.S.
employees in connection with an employee incentive plan grant, thereby
increasing issued shares to 472,714,925.
In 1998, stockholders approved the proposal to amend ML & Co.'s certificate
of incorporation to increase the authorized number of shares of common stock
from 500 million to 1 billion.
In 1997, the Board of Directors declared a two-for-one common stock split
effected in the form of a 100% stock dividend. The par value of the common stock
remained at $1.33 1/3 per share. Accordingly, a transfer from paid-in capital to
common stock of $315 million was made to preserve the par value of the
post-split shares. All share and per share data have been restated for the
effect of the split. Dividends paid on common stock were $1.05, $.92, and $.75
per share in 1999, 1998, and 1997, respectively.
The following table summarizes the activity in outstanding common stock for
1999, 1998, and 1997:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
BEGINNING OF YEAR
Issued 472,660,324 472,660,324 472,660,324
Shares in treasury (116,376,259) (133,400,971) (137,234,132)
ESOP reversion shares - - (3,077,556)
------------ ------------ ------------
Outstanding 356,284,065 339,259,353 332,348,636
------------ ------------ ------------
ACTIVITY
Common stock issued 54,601 - -
Shares purchased - - (13,301,100)
Shares issued from treasury:
To employees(1)(2) 10,930,248 16,291,477 20,211,817
Share exchanges 496,416 325,459 -
Acquisition - 407,776 -
------------ ------------ ------------
Net activity 11,481,265 17,024,712 6,910,717
------------ ------------ ------------
END OF YEAR
Issued 472,714,925 472,660,324 472,660,324
Shares in treasury (104,949,595) (116,376,259) (133,400,971)
------------ ------------ ------------
Outstanding 367,765,330 356,284,065 339,259,353
============ ============ ============
- --------------------------------------------------------------------------------
(1) Net of reacquisitions from employees of 177,066, 348,466, and 440,016 in
1999, 1998, and 1997, respectively.
(2) See Note 11 for a description of employee incentive plans.
SHARES EXCHANGEABLE INTO COMMON STOCK
In 1998, Merrill Lynch & Co., Canada Ltd. issued 4,831,224 Exchangeable Shares
in connection with Merrill Lynch's merger with Midland Walwyn (see Note 2).
Holders of Exchangeable Shares have dividend, voting, and other rights
equivalent to those of ML & Co. common stockholders. Exchangeable Shares may be
exchanged at any time, at the option of the holder, on a one-for-one basis for
ML & Co. common stock. Merrill Lynch may redeem all outstanding Exchangeable
Shares for ML & Co. common stock after January 31, 2011, or earlier under
certain circumstances.
During 1999 and 1998, 496,416 and 325,459 Exchangeable Shares, respectively,
were converted to ML & Co. common stock. At year-end 1999, 4,009,349
Exchangeable Shares were outstanding, compared with 4,505,765 at year-end 1998.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss represents net cumulative gains and losses
on items that are not reflected in earnings. The components at December 31, 1999
and December 25, 1998 are as follows:
Notes to Consolidated Financial Statements 75
- --------------------------------------------------------------------------------
(in millions)
1999 1998
----- -----
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Unrealized losses,net of gains $(357) $(241)
Income taxes 55 103
----- -----
Total (302) (138)
----- -----
UNREALIZED GAINS (LOSSES) ON INVESTMENT
SECURITIES AVAILABLE-FOR-SALE
Net unrealized gains (losses) (167) 56
Adjustments for:
Policyholder liabilities (3) (38)
Deferred policy acquisition costs 35 -
Income taxes 48 (2)
----- -----
Total (87) 16
----- -----
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $(389) $(122)
===== =====
- --------------------------------------------------------------------------------
STOCKHOLDER RIGHTS PLAN
In 1997, the Board of Directors approved and adopted the amended and restated
Stockholder Rights Plan. The amended and restated Stockholder Rights Plan
provides for the distribution of preferred purchase rights ("Rights") to common
stockholders. The Rights separate from the common stock ten days following the
earlier of: (a) an announcement of an acquisition by a person or group
("acquiring party") of 15% or more of the outstanding common shares of ML & Co.,
or (b) the commencement of a tender or exchange offer for 15% or more of the
common shares outstanding. One Right is attached to each outstanding share of
common stock and will attach to all subsequently issued shares. Each Right
entitles the holder to purchase 1/100 of a share (a "Unit") of Series A Junior
Preferred Stock, par value $1.00 per share, at an exercise price of $300 per
Unit at any time after the distribution of the Rights. The Units are
nonredeemable and have voting privileges and certain preferential dividend
rights. The exercise price and the number of Units issuable are subject to
adjustment to prevent dilution.
If, after the Rights have been distributed, either the acquiring party
holds 15% or more of ML & Co.'s outstanding shares or ML & Co. is a party to a
business combination or other specifically defined transaction, each Right
(other than those held by the acquiring party) will entitle the holder to
receive, upon exercise, a Unit of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of the
Right. The Rights expire in 2007, and are redeemable at the option of a majority
of the directors of ML & Co. at $.01 per Right at any time until the tenth day
following an announcement of the acquisition of 15% or more of ML & Co.'s common
stock.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding.
Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential
issuance of common shares. The following table presents the computations of
basic and diluted EPS:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------ ------ ------
Net earnings $2,618 $1,259 $1,935
Preferred stock dividends 38 39 39
------ ------ ------
Net earnings applicable to
common stockholders $2,580 $1,220 $1,896
====== ====== ======
- --------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares
outstanding (basic shares)(1) 368,718 355,589 340,096
------- ------- -------
Effect of dilutive instruments(2)
Employee stock options 27,850 29,184 29,748
FCCAAP shares 15,947 16,548 20,574
Restricted units 5,569 4,895 5,258
ESPP shares 47 46 45
Convertible debt - - 134
------- ------- -------
Dilutive potential common shares 49,413 50,673 55,759
------- ------- -------
Diluted shares(3) 418,131 406,262 395,855
======= ======= =======
- --------------------------------------------------------------------------------
Basic EPS $7.00 $3.43 $5.57
Diluted EPS 6.17 3.00 4.79
- --------------------------------------------------------------------------------
(1) Includes shares exchangeable into common stock.
(2) See Note 11 for a description of these instruments and issuances subsequent
to December 31, 1999.
(3) At year-end 1999, 1998, and 1997, there were 1,575, 486, and 7 instruments,
respectively, that were considered antidilutive and thus were not included
in the above calculations.
NOTE 9. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
LITIGATION
At December 31, 1999, Merrill Lynch has been named as parties in various
actions, some of which involve claims for substantial amounts. Although the
results of legal actions cannot be predicted with certainty, it is the opinion
of management that the resolution of these actions will not have a material
adverse effect on Merrill Lynch's financial condition; however, such resolution
could have a material adverse impact on quarterly operating results in future
periods, depending in part on the results for such periods.
LENDING AND GUARANTEES
Merrill Lynch enters into commitments to extend credit, predominantly at
variable interest rates, in connection with certain merchant banking and loan
syndication transactions. Customers may also be extended loans or lines of
credit collateralized by first and second mortgages on real estate, certain
liquid assets of small businesses, or securities. Merrill Lynch also issues
various guarantees to counterparties in connection with certain leasing,
securitization, and other transactions. These commit-
76 Notes to Consolidated Financial Statements
ments and guarantees usually have a fixed expiration date and are contingent on
certain contractual conditions that may require payment of a fee by the
counterparty. Once commitments are drawn upon or guarantees are issued, Merrill
Lynch may require the counterparty to post collateral depending upon
creditworthiness and market conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements, as commitments and guarantees may expire without being drawn upon.
At December 31, 1999 and December 25, 1998, Merrill Lynch had the following
commitments and guarantees:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
---- ----
Commitments to extend credit $ 14,871 $ 15,937
Third party guarantees 1,739 17,842
- --------------------------------------------------------------------------------
LEASES
Merrill Lynch has entered into various noncancelable long-term lease agreements
for premises that expire through 2025. Merrill Lynch has also entered into
various noncancelable short-term lease agreements, which are primarily
commitments of less than one year under equipment leases.
At December 31, 1999, future noncancelable minimum rental commitments under
leases with remaining terms exceeding one year are as follows:
- --------------------------------------------------------------------------------
(in millions)
WFC(1) Other Total
------ ------ ------
2000 $ 144 $ 346 $ 490
2001 145 313 458
2002 150 272 422
2003 158 217 375
2004 179 176 355
2005 and thereafter 1,564 671 2,235
------ ------ ------
Total $2,340 $1,995 $4,335
====== ====== ======
- --------------------------------------------------------------------------------
(1) World Financial Center Headquarters.
The minimum rental commitments shown above have not been reduced by $674
million of minimum sublease rentals to be received in the future under
noncancelable subleases. Certain leases contain renewal or purchase options or
escalation clauses providing for increased rental payments based upon
maintenance, utility, and tax increases.
Net rent expense for each of the last three years is presented below:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
Rent expense $ 585 $ 537 $ 468
Sublease revenue (101) (112) (104)
----- ----- -----
Net rent expense $ 484 $ 425 $ 364
===== ===== =====
- --------------------------------------------------------------------------------
OTHER COMMITMENTS
In the normal course of business, Merrill Lynch enters into commitments for
underwriting transactions. Settlement of these transactions as of December 31,
1999, would not have a material effect on the consolidated financial condition
of Merrill Lynch.
In connection with trading activities, Merrill Lynch had commitments at
December 31, 1999 and December 25, 1998 to enter into resale and repurchase
agreements as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
Resale agreements $ 850 $ 5,392
Repurchase agreements 1,624 4,456
- --------------------------------------------------------------------------------
Merrill Lynch also obtains letters of credit from issuing banks to satisfy
various counterparty collateral requirements in lieu of depositing cash or
securities collateral. Letters of credit aggregated $2,585 million and $2,222
million at December 31, 1999 and December 25, 1998, respectively.
In connection with merchant banking activities, Merrill Lynch has committed
to purchase $252 million and $369 million of partnership interests at December
31, 1999 and December 25, 1998, respectively.
Merrill Lynch has entered into agreements with providers of market data,
communications, and systems consulting services. At December 31, 1999, minimum
fee commitments over the remaining life of these agreements aggregated $223
million.
NOTE 10. EMPLOYEE BENEFIT PLANS
- -------------------------------
Merrill Lynch provides retirement and other postemployment benefits to its
employees worldwide through defined contribution and defined benefit pension
plans and other postretirement benefit plans. Merrill Lynch reserves the right
to amend or terminate these plans at any time.
In 1999, Merrill Lynch changed its measurement date for both its defined
benefit pension and other postretirement benefit plans from year-end to
September quarter-end. Prior period information has not been restated since the
impact of the change is not material.
Notes to Consolidated Financial Statements 77
DEFINED CONTRIBUTION PENSION PLANS
The U.S. defined contribution plans consist of the Retirement Accumulation Plan
("RAP"), the Employee Stock Ownership Plan ("ESOP"), and the 401(k) Savings &
Investment Plan ("401K"). The RAP, ESOP, and 401K cover substantially all U.S.
employees who have met service requirements.
Merrill Lynch established the RAP and the ESOP, collectively known as the
"Retirement Program," for the benefit of employees with one year of service. A
separate retirement account is maintained for each participant.
In 1989, the ESOP trust purchased from Merrill Lynch 47,851,236 shares of ML
& Co. common stock with residual funds from a terminated defined benefit pension
plan ("Reversion Shares") and loan proceeds from a subsidiary of Merrill Lynch
("Leveraged Shares").
Merrill Lynch credited a participant's account and recorded pension expense
under the Retirement Program based on years of service and eligible
compensation. This expense is funded by quarterly allocations of Leveraged and
Reversion Shares and, when necessary, cash, to participants' accounts based on a
specified formula. Leveraged and Reversion Shares are released in accordance
with the terms of the ESOP. Reversion Shares were allocated to participants'
accounts over a period of eight years, ending in 1997. Leveraged Shares were
allocated to participants' accounts as principal was repaid on the loan to the
ESOP, which matured in 1999. Principal and interest on the loan were payable
quarterly upon receipt of dividends on certain shares of common stock or other
cash contributions. At December 31, 1999, all Reversion and Leveraged Shares had
been allocated.
Additional information on ESOP activity follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
---- ---- ----
Compensation costs funded
with ESOP shares $ 49 $ 49 $ 193
Dividends used for debt service(1) 2 7 7
- --------------------------------------------------------------------------------
(1) Dividends on all Leveraged Shares were used for debt service on the ESOP
loan through April 1, 1999. Dividends on unallocated Leveraged Shares only
were used for this purpose through the end of the 1999 third quarter, when
the loan was repaid.
Employees can participate in the 401K by contributing, on a tax-deferred
basis, up to 15% of their eligible compensation, but not more than the maximum
annual amount allowed by law. Merrill Lynch's contributions are equal to
one-half of the first 4% of each participant's eligible compensation contributed
to the 401K, up to a maximum of fifteen hundred dollars annually. No corporate
contributions are made for participants who are also Employee Stock Purchase
Plan participants (see Note 11).
Merrill Lynch also sponsors various non-U.S. defined contribution plans.
The costs of benefits under the RAP, 401K, and non-U.S. plans are expensed
during the related service period.
DEFINED BENEFIT PENSION PLANS
Merrill Lynch has purchased a group annuity contract that guarantees the payment
of benefits vested under a U.S. defined benefit plan that was terminated in
accordance with the applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). At year-end 1999 and 1998, a substantial portion
of the assets supporting the annuity contract was invested in U.S. Government
and agencies securities. Merrill Lynch, under a supplemental agreement, may be
responsible for, or benefit from, actuarial experience and investment
performance of the annuity assets. Merrill Lynch also maintains supplemental
defined benefit plans for certain U.S. employees.
Employees of certain non-U.S. subsidiaries participate in various local
defined benefit plans. These plans provide benefits that are generally based on
years of credited service and a percentage of the employee's eligible
compensation during the final years of employment. Merrill Lynch's funding
policy has been to contribute annually the amount necessary to satisfy local
funding standards.
The following table provides a summary of the changes in the plans'
benefit obligations, assets, and funded status for the nine-month period ended
September 24, 1999 and the year ended December 25, 1998 and the amounts
recognized in the Consolidated Balance Sheets at year-end 1999 and 1998:
78 Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
PROJECTED BENEFIT OBLIGATIONS
Balance, beginning of year $ 2,090 $ 1,928
Service cost 49 54
Interest cost 114 122
Net actuarial (gain) loss (170) 55
Benefits paid (68) (77)
Other (28) 8
------- -------
Balance, end of period 1,987 2,090
------- -------
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year 2,410 2,151
Actual return on plan assets (156) 282
Contributions 55 46
Benefits paid (68) (77)
Other (25) 8
------- -------
Balance, end of period 2,216 2,410
------- -------
FUNDED STATUS 229 320
Unrecognized net actuarial gains (103) (215)
Unrecognized prior service cost (benefit) (1) 3
Unrecognized net transition obligation 2 2
Fourth quarter activity net 11 -
------- -------
NET AMOUNT RECOGNIZED $ 138 $ 110
======= =======
Assets $ 265 $ 234
Liabilities (127) (124)
------- -------
NET AMOUNT RECOGNIZED $ 138 $ 110
======= =======
- --------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $119 million, $103 million, and $57 million,
respectively, as of September 24, 1999, and $111 million, $96 million, and $50
million, respectively, as of December 25, 1998. These plans primarily represent
U.S. supplemental plans not subject to ERISA or non-U.S. plans where funding
strategies vary due to legal requirements and local practices.
The actuarial assumptions used in calculating the projected benefit
obligation at September 24, 1999 and December 25, 1998 are as follows:
- --------------------------------------------------------------------------------
1999 1998
---- ----
Discount rate 6.5% 5.5%
Rate of compensation increase 4.0 5.7
Expected rate of return on plan assets 6.7 6.2
- --------------------------------------------------------------------------------
Pension cost included the following components:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
DEFINED CONTRIBUTION PLAN COST $ 234 $ 177 $ 218
----- ----- -----
DEFINED BENEFIT PLANS
Service cost for benefits earned
during the year 49 54 32
Interest cost on projected
benefits obligation 114 122 109
Expected return on plan assets (136) (141) (121)
Deferral and amortization
of unrecognized items - 7 -
----- ----- -----
Total defined benefit plan cost 27 42 20
----- ----- -----
TOTAL PENSION COST $ 261 $ 219 $ 238
===== ===== =====
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Merrill Lynch provides health and life insurance benefits to retired employees
under a plan that covers substantially all U.S. employees who have met age and
service requirements. The health care component is contributory, with certain
retiree contributions adjusted periodically; the life insurance component of the
plan is noncontributory. The accounting for costs of health care benefits
anticipates future changes in cost-sharing provisions. Merrill Lynch pays claims
as incurred. Full-time employees of Merrill Lynch become eligible for these
benefits upon attainment of age 55 and completion of ten years of service.
Merrill Lynch also sponsors similar plans that provide health care benefits to
retired employees of certain non-U.S. subsidiaries. At December 31, 1999, none
of these plans had been funded.
The following table provides a summary of the changes in the plans' benefit
obligations, assets, and funded status for the nine-month period ended September
24, 1999 and the year-ended December 25, 1998, and the amounts recognized in the
Consolidated Balance Sheets at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
----- -----
ACCUMULATED BENEFIT OBLIGATIONS
Balance, beginning of year $ 214 $ 211
Service cost 9 8
Interest cost 14 13
Net actuarial gain (33) (12)
Benefits paid (8) (7)
Other (2) 1
----- -----
Balance, end of period 194 214
----- -----
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year - -
Contributions 8 7
Benefits paid (8) (7)
----- -----
Balance, end of period - -
----- -----
FUNDED STATUS (194) (214)
Unrecognized net actuarial gain (37) (3)
Unrecognized prior service cost - (1)
Fourth quarter activity, net 2 -
----- -----
ACCRUED BENEFIT LIABILITIES $(229) $(218)
===== =====
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 79
The actuarial assumptions used in calculating the postretirement
accumulated benefit obligations at September 24, 1999 and December 25, 1998 are
as follows:
- --------------------------------------------------------------------------------
1999 1998
---- ----
Discount rate 7.5% 6.3%
Health care cost trend rates(1)
Initial 8.4 7.0
2012 and thereafter 5.0 5.5
- --------------------------------------------------------------------------------
(1) Assumed to decrease gradually until 2012 and remain constant thereafter.
Other postretirement benefits cost included the following components:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
---- ---- ----
Service cost $ 9 $ 8 $ 6
Interest cost 14 13 11
Other (4) - -
---- ---- ----
Total other postretirement benefits cost $ 19 $ 21 $ 17
==== ==== ====
- --------------------------------------------------------------------------------
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plans. A one percent change in the assumed
health care cost trend rate would have the following effects:
- --------------------------------------------------------------------------------
(in millions)
1% INCREASE 1% DECREASE
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Effect on:
Other postretirement
benefits cost $ 5 $ 4 $ (4) $ (4)
Accumulated benefit
obligation 29 35 (24) (30)
- --------------------------------------------------------------------------------
POSTEMPLOYMENT BENEFITS
Merrill Lynch provides certain postemployment benefits for employees on extended
leave due to injury or illness and for terminated employees. Employees who are
disabled due to non-work-related illness or injury are entitled to disability
income, medical coverage, and life insurance. Merrill Lynch also provides
severance benefits to terminated employees. In addition, Merrill Lynch is
mandated by U.S. state and federal regulations to provide certain other
postemployment benefits. Merrill Lynch funds these benefits through a
combination of self-insured and insured plans.
Merrill Lynch recognized $33 million, $439 million, and $30 million in 1999,
1998, and 1997, respectively, of postemployment benefits expense, which
included severance costs for terminated employees of $26 million, $424 million,
and $18 million in 1999, 1998, and 1997, respectively. The severance costs for
1998 include amounts related to the staff reduction provision (see Note 2).
Although all full-time employees are eligible for severance benefits, no
additional amounts were accrued as of December 31, 1999 since future severance
costs are not estimable.
NOTE 11. EMPLOYEE INCENTIVE PLANS
- ---------------------------------
To align the interests of employees with those of stockholders, Merrill Lynch
sponsors several employee compensation plans that provide eligible employees
with stock or options to purchase shares. The total compensation cost recognized
in earnings for stock-based compensation plans for 1999, 1998, and 1997 was $463
million, $453 million, and $318 million, respectively. Merrill Lynch also
sponsors deferred cash compensation plans for eligible employees.
LONG-TERM INCENTIVE COMPENSATION PLANS ("LTIC PLANS") AND EQUITY CAPITAL
ACCUMULATION PLAN ("ECAP")
LTIC Plans and ECAP provide for grants of equity and equity-related instruments
to certain employees. LTIC Plans provide for the issuance of Restricted Shares,
Restricted Units, and Nonqualified Stock Options, as well as Incentive Stock
Options, Performance Shares, Performance Units, Performance Options, Stock
Appreciation Rights, and other securities of Merrill Lynch. ECAP provides for
the issuance of Restricted Shares, as well as Performance Shares. As of December
31, 1999, no instruments other than Restricted Shares, Restricted Units,
Nonqualified Stock Options, and Performance Options had been granted.
Restricted Shares and Units
Restricted Shares are shares of ML & Co. common stock carrying voting and
dividend rights. A Restricted Unit is deemed equivalent in fair market value to
one share of common stock, is payable in cash or shares of common stock, and
receives cash payments equivalent to dividends. Under these plans, such shares
and units are restricted from sale, transfer, or assignment until the end of the
restricted period, and such shares and units are subject to forfeiture during
the vesting period for grants under LTIC Plans or the restricted period for
grants under ECAP.
The activity for Restricted Shares and Units under these plans during 1999
and 1998 follows:
80 Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
LTIC Plans ECAP
----------------------- ----------
Restricted Restricted Restricted
Shares Units Shares
---------- ---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 31, 1999 240,000,000 N/A 52,400,000
December 25, 1998 240,000,000 N/A 52,400,000
- --------------------------------------------------------------------------------
AVAILABLE FOR ISSUANCE AT:(1)
December 31, 1999 38,638,551 N/A 2,889,840
December 25, 1998 69,342,410 N/A 2,985,313
- --------------------------------------------------------------------------------
OUTSTANDING, END OF 1997 9,846,146 9,897,742 3,880,565
Granted - 1998 4,389,218 4,641,545 6,443
Paid, forfeited, or released
from contingencies (519,246) (3,680,398) (68,398)
---------- ---------- ----------
OUTSTANDING, END OF 1998 13,716,118 10,858,889 3,818,610
Granted - 1999 181,785 5,012,283 207,900
Paid, forfeited, or released
from contingencies (777,753) (3,288,730) (195,713)
---------- ---------- ----------
OUTSTANDING, END OF 1999(2) 13,120,150 12,582,442 3,830,797
========== ========== ==========
- --------------------------------------------------------------------------------
(1) Includes shares reserved for issuance upon the exercise of stock options.
(2) In February 2000, 100,836 and 6,774,239 Restricted Shares and Units under
LTIC Plans, respectively, were granted to eligible employees.
The weighted-average fair value per share or unit for 1999, 1998, and 1997
grants follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
LTIC Plans
Restricted Shares $ 75.80 $ 65.95 $ 46.31
Restricted Units 74.98 64.77 44.47
ECAP Restricted Shares 85.36 81.78 66.99
- --------------------------------------------------------------------------------
Merrill Lynch sponsors other plans similar to LTIC Plans in which
restricted shares and units are granted to employees and non-employee directors.
The accompanying table summarizes information related to restricted shares and
units for these other plans:
- --------------------------------------------------------------------------------
Restricted Restricted
Shares Units
---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 31, 1999 6,300,000 400,000
December 25, 1998 6,300,000 400,000
OUTSTANDING AT:
December 31, 1999 269,909 37,936
December 25, 1998 316,823 40,051
- --------------------------------------------------------------------------------
Nonqualified Stock Options
Nonqualified Stock Options granted under LTIC Plans in 1989 through 1995
generally become exercisable over four years in equal installments commencing
one year after the date of grant. Options granted in 1996 and thereafter
generally are exercisable over five years. The exercise price of these options
is equal to 100% of the fair market value (as defined in LTIC Plans) of a share
of ML & Co. common stock on the date of grant. Nonqualified Stock Options expire
ten years after their grant date.
In 1999, Merrill Lynch granted performance options under the LTIC plan.
These options vest based on Merrill Lynch's achievement of performance criteria
over a period not exceeding nine years.
At consummation of Merrill Lynch's merger with Midland Walwyn (see Note
2), each Midland Walwyn optionholder received 0.24 options on ML & Co. common
stock, with the vesting period and contractual life identical to the terms of
the original grant.
The activity for Nonqualified Stock Options and Performance Options under
LTIC Plans and Midland Walwyn options for 1999, 1998, and 1997 follows:
- --------------------------------------------------------------------------------
Weighted-
Options Average
Outstanding Exercise Price
----------- --------------
OUTSTANDING, BEGINNING OF 1997 64,500,802 $ 16.84
Granted - 1997 15,564,256 42.15
Exercised (9,226,197) 12.46
Forfeited (1,387,935) 31.25
----------
OUTSTANDING, END OF 1997 69,450,926 22.78
Granted - 1998 12,119,989 62.76
Exercised (7,968,828) 15.82
Forfeited (708,303) 44.88
----------
OUTSTANDING, END OF 1998 72,893,784 29.97
Granted - 1999 29,924,940 72.00
Exercised (7,485,120) 17.90
Forfeited (2,818,160) 63.89
----------
OUTSTANDING, END OF 1999(1) 92,515,444 55.97
==========
- --------------------------------------------------------------------------------
(1) In January 2000, 19,825,344 Nonqualified Stock Options were granted to
eligible employees.
At year-end 1999, 1998, and 1997, options exercisable were 41,784,354,
38,810,615, and 36,665,520, respectively.
The table below summarizes information related to outstanding and
exercisable options at year-end 1999.
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Remaining Number Exercise
Exercise Price Outstanding Price Life (years)(1) Exercisable Price
- --------------- ----------- --------- --------------- ----------- ---------
$5.00 - $19.99 22,870,268 $ 13.57 2.88 22,870,268 $ 13.57
$20.00 - $39.99 17,439,967 25.37 5.42 12,300,933 24.49
$40.00 - $71.99 23,898,079 51.41 7.64 6,550,257 40.63
$72.00 - $89.99 28,307,130 72.55 9.20 62,896 89.53
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Based on original contractual life of ten years.
Notes to Consolidated Financial Statements 81
The weighted-average fair value of options granted in 1999, 1998, and 1997
was $24.78, $21.43, and $14.63 per option, respectively. Fair value is
estimated as of the grant date based on a Black-Scholes option pricing model
using the following weighted-average assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
------ ------ ------
Risk-free interest rate 4.67% 5.81% 6.74%
Expected life 5 yrs. 6 yrs. 6 yrs.
Expected volatility 40.89% 28.10% 26.86%
Dividend yield 1.33% 1.28% 1.47%
- --------------------------------------------------------------------------------
See Pro Forma Compensation Expense in the following Employee Stock Purchase
Plans section for additional information.
EMPLOYEE STOCK PURCHASE PLANS ("ESPP")
ESPP plans allow eligible employees to invest from 1% to 10% of their eligible
compensation to purchase ML & Co. common stock at a price generally equal to 85%
of its fair market value. These purchases are made on four quarterly investment
dates through payroll deductions. Up to 50,300,000 shares of common stock have
been authorized for issuance under ESPP. The activity in ESPP during 1999, 1998,
and 1997 follows:
- --------------------------------------------------------------------------------
1999 1998 1997
--------- --------- ---------
Available,beginning of year 5,990,095 7,251,343 8,267,360
Authorized during year - - 300,000
Purchased through plan (1,376,274) (1,261,248) (1,316,017)
--------- --------- ---------
Available,end of year 4,613,821 5,990,095 7,251,343
========= ========= =========
- --------------------------------------------------------------------------------
The weighted-average fair value of ESPP stock purchase rights exercised by
employees in 1999, 1998, and 1997 was $12.50, $11.31, and $7.66 per right,
respectively.
Pro Forma Compensation Expense
No compensation expense has been recognized for Merrill Lynch's grants of stock
options under LTIC Plans or ESPP purchase rights (see Note 1 for accounting
policy). Pro forma compensation expense associated with option grants is
recognized over the vesting period. Based on the fair value of stock options and
purchase rights, Merrill Lynch would have recognized compensation expense, net
of taxes, of $292 million, $95 million, and $56 million for 1999, 1998, and
1997, respectively, resulting in pro forma net earnings and earnings per share
as follows:
- --------------------------------------------------------------------------------
(in millions, except per share amounts)
1999 1998 1997
-------- -------- --------
NET EARNINGS
As reported $ 2,618 $ 1,259 $ 1,935
Pro forma 2,326 1,164 1,879
EARNINGS PER SHARE
As reported:
Basic $ 7.00 $ 3.43 $ 5.57
Diluted 6.17 3.00 4.79
Pro forma:
Basic 6.21 3.16 5.41
Diluted 5.47 2.77 4.65
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT CAPITAL ACCUMULATION AWARD PLANS ("FCCAAP")
Under FCCAAP, eligible employees in Private Client are granted awards generally
based upon their prior year's performance. Payment for an award is contingent
upon continued employment for a period of time and is subject to forfeiture
during that period. The award is generally payable ten years from the date of
grant in a fixed number of shares of ML & Co. common stock unless the fair
market value of such shares is less than a specified minimum value plus
interest, in which case the minimum value is paid in cash. Eligible participants
may defer awards beyond the scheduled payment date. FCCAAP may also provide for
the issuance of Restricted Shares that vest ten years from the date of the
original award and carry voting and dividend rights. Only shares of common stock
held as treasury stock may be issued under FCCAAP.
At December 31, 1999, shares subject to outstanding awards totaled
28,262,763, while 15,518,581 shares were available for issuance through future
awards. The fair value of awards granted under FCCAAP during 1999, 1998, and
1997 was $71.44, $67.94, and $42.09 per award, respectively.
INCENTIVE EQUITY PURCHASE PLAN ("IEPP")
IEPP allowed selected employees to purchase shares of ML & Co. common stock
("Book Value Shares") at a price equal to book value per common share. Book
Value Shares, which otherwise may not be resold, may be sold back to Merrill
Lynch at book value or exchanged at any time for a specified number of freely
transferable common shares. Book Value Shares outstanding under IEPP were
1,743,500 at December 31, 1999. In 1995, IEPP was amended to reduce the
authorized shares to zero and prohibit the reuse of any surrendered shares. No
further offerings will be made under this plan.
MERRILL LYNCH INVESTMENT CERTIFICATE PROGRAM ("MLICP")
Under MLICP, eligible employees in Private Client are issued investment
certificates based on their performance. The certificates mature ten years from
the date issued and are
82 Notes to Consolidated Financial Statements
payable in cash if certain performance criteria are achieved and the employee is
continuously employed for the ten-year period, with certain exceptions. The
certificates bear interest commencing with the date on which the performance
requirements are achieved. At year-end 1999 and 1998, $409 million and $353
million, respectively, were accrued under this plan.
OTHER DEFERRED COMPENSATION PLANS
Merrill Lynch sponsors other deferred compensation plans in which eligible
employees may participate. Generally, contributions to the plans are made on a
tax-deferred basis by participants. Contributions are invested by Merrill Lynch
in mutual funds and other funds sponsored by Merrill Lynch, and the plans may
include a leverage feature. The plans' investments and the amounts accrued by
Merrill Lynch under the plans are both included in the Consolidated Balance
Sheets. Plan investments totaled $1.2 billion and $648 million, respectively, at
December 31, 1999 and December 25, 1998. Accrued liabilities at those dates were
$1.0 billion and $587 million, respectively.
NOTE 12. INCOME TAXES
- ---------------------
Income tax provisions (benefits) on earnings consisted of:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ----- -------
U.S. FEDERAL
Current $ 773 $ 673 $ 856
Deferred (80) (180) (94)
U.S.STATE AND LOCAL
Current (34) 105 (15)
Deferred (42) 10 7
NON-U.S.
Current 617 412 400
Deferred 31 (307) (25)
------- ----- -------
TOTAL $ 1,265 $ 713 $ 1,129
======= ===== =======
- --------------------------------------------------------------------------------
The corporate statutory tax rate was 35.0% for the three years presented. A
reconciliation of statutory U.S. federal income taxes to Merrill Lynch's income
tax provisions for earnings follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ----- -------
U.S.federal income tax at
statutory rate $ 1,427 $ 734 $ 1,089
U.S.state and local income taxes,net(1) (49) 74 (5)
Non-U.S.operations (80) (71) 1
Tax-exempt interest (64) (51) (26)
Dividends received deduction (28) (30) (33)
Other,net 59 57 103
------- ----- -------
Income tax expense $ 1,265 $ 713 $ 1,129
======= ===== =======
- --------------------------------------------------------------------------------
(1) Includes adjustments to prior year accruals.
Deferred income taxes are provided for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
Consolidated Balance Sheets. These temporary differences result in taxable or
deductible amounts in future years. Details of Merrill Lynch's deferred tax
assets and liabilities follow:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ------- -------
DEFERRED TAX ASSETS
Deferred compensation $ 1,020 $ 679 $ 478
Valuation and other reserves(1) 782 1,225 940
Employee benefits 185 120 109
Other 621 375 116
------- ------- -------
Gross deferred tax assets 2,608 2,399 1,643
Valuation allowances(2) (82) (42) (26)
------- ------- -------
Total deferred tax assets 2,526 2,357 1,617
------- ------- -------
DEFERRED TAX LIABILITIES
Lease transactions 143 148 116
Employee benefits 74 64 58
Other 295 207 204
------- ------- -------
Total deferred tax liabilities 512 419 378
------- ------- -------
NET DEFERRED TAX ASSETS $ 2,014 $ 1,938 $ 1,239
======= ======= =======
- --------------------------------------------------------------------------------
(1) Primarily related to Trading assets and Other payables.
(2) Related to net operating loss carryforwards not expected to be realized.
At December 31, 1999, Merrill Lynch had U.S. net operating loss
carryforwards of $310 million and non-U.S. net operating loss carryforwards of
$370 million. The U.S. amounts are primarily state carryforwards expiring in
various years after 2005 and the non-U.S. amounts are primarily Japanese
carryforwards expiring in various years after 2002.
Income tax benefits of $281 million, $336 million, and $173 million were
allocated to stockholders' equity related to employee compensation transactions
for 1999, 1998, and 1997, respectively.
Earnings before income taxes included approximately $1,447 million, $44
million, and $805 million of earnings attributable to non-U.S. subsidiaries for
1999, 1998, and 1997, respectively. Cumulative undistributed earnings of
non-U.S. subsidiaries not previously taxed in the U.S. were approximately $3.3
billion at December 31, 1999. No deferred U.S. federal income taxes have been
provided for the undistributed earnings to the extent that they are permanently
reinvested in Merrill Lynch's non-U.S. operations. Merrill Lynch estimates that
approximately $160 million of non-U.S. withholding taxes and, assuming
utilization of foreign tax credits, approximately $300 million of U.S. federal
income taxes would be incurred on the repatriation of such earnings.
Notes to Consolidated Financial Statements 83
NOTE 13. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
- ----------------------------------------------------------
MLPF&S, a U.S. registered broker-dealer, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under
the alternative method permitted by this rule, the minimum required net capital,
as defined, shall not be less than 2% of aggregate debit items arising from
customer transactions. At December 31, 1999, MLPF&S's regulatory net capital of
$3,352 million was 12% of aggregate debit items, and its regulatory net capital
in excess of the minimum required was $2,780 million.
MLI, a U.K. registered broker-dealer, is subject to capital requirements of
the Financial Services Authority ("FSA"). Financial resources, as defined, must
exceed the total financial resources requirement of the FSA. In 1997, MLI became
Merrill Lynch's primary global equity derivatives dealer (previously Merrill
Lynch Capital Markets PLC). At December 31, 1999, MLI's financial resources were
$3,747 million, exceeding the minimum requirement by $492 million.
MLGSI, a primary dealer in U.S. Government securities, is subject to the
capital adequacy requirements of the Government Securities Act of 1986. This
rule requires dealers to maintain liquid capital in excess of market and credit
risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 31,
1999, MLGSI's liquid capital of $1,739 million was 481% of its total market and
credit risk, and liquid capital in excess of the minimum required was $1,305
million.
Merrill Lynch's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. At
December 31, 1999, $444 million, representing 88% of the insurance subsidiaries'
net assets, was unavailable for distribution to Merrill Lynch.
Approximately 80 other subsidiaries are subject to regulatory and other
requirements of the jurisdictions in which they operate. These regulatory
restrictions may limit the amounts that these subsidiaries can pay in dividends
or advance to Merrill Lynch. At December 31, 1999, restricted net assets of
these subsidiaries were $5.3 billion.
In addition, to satisfy rating agency standards, a credit intermediary
subsidiary of Merrill Lynch must also meet certain minimum capital requirements.
At December 31, 1999, this minimum capital requirement was $288 million.
With the exception of regulatory restrictions on subsidiaries' abilities to
pay dividends, there are no restrictions on ML & Co.'s present ability to pay
dividends on common stock, other than (1) ML & Co.'s obligation to make payments
on its TOPrS, and (2) the governing provisions of the Delaware General
Corporation Law.
NOTE 14. SEGMENT, PRODUCT, AND GEOGRAPHIC INFORMATION
- -----------------------------------------------------
SEGMENT INFORMATION
In reporting to management during 1999, Merrill Lynch's operating results were
categorized into three business segments: the Corporate and Institutional Client
Group ("CICG"), the Private Client Group ("PCG") and the Asset Management Group
("AMG"). Prior period amounts have been restated to conform to the 1999
presentation. For information on each segment's activities, see Management's
Discussion and Analysis (unaudited) - Business Segments.
The principal methodology used in preparing the segment results in the
table that follows is:
. Revenues and expenses are assigned to segments where directly
attributable.
. Principal transaction and investment banking revenues and related costs
resulting from the client activities of PCG are allocated among CICG and
PCG based on production credits, share counts, trade counts, and other
measures which estimate relative value.
. Revenues and expenses related to certain retail money market funds are
assigned to PCG.
. The 401(k) business is reported as a 50/50 joint venture between AMG and
PCG.
. Revenues and expenses related to mutual fund shares bearing a contingent
deferred sales charge are reflected in segment results as if AMG and PCG
were unrelated entities.
. Interest (cost of carry) is allocated based on management's assessment of
the relative risk of segment assets and liabilities.
. Goodwill amortization, Mercury financing costs, and the staff reduction
provision are not attributed to segments because management excludes
these items from segment operating results in evaluating segment
performance. The elimination of intersegment revenues and expenses is
also included in Corporate items (including intersegment eliminations).
. Residual revenues and expenses (i.e., those related to overhead and
support units) are attributed to segments based on specific methodologies
(e.g., headcount, square footage, intersegment agreements).
. Income taxes are attributed based on tax rates in the tax jurisdictions
in which the segment activity takes place.
84 Notes to Consolidated Financial Statements
Management believes that the following information by business segment
provides a reasonable representation of each segment's contribution to the
consolidated amounts:
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
CORPORATE ITEMS
(INCLUDING
INTERSEGMENT
CICG PCG AMG ELIMINATIONS) TOTAL
-------------- ----------- ----------- ------------------- -------------
1999
All other revenues $ 8,303 $ 9,450 $ 2,223 $ (194)(1) $ 19,782
Net interest revenue(2) 1,025 1,238 45 (221)(3) 2,087
---------- ---------- ---------- --------- ---------
Net revenues 9,328 10,688 2,268 (415) 21,869
Non-interest expenses 6,760 9,265 1,752 14(4) 17,791
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 2,568 1,423 516 (429) 4,078
Income tax expense (benefit) 662 498 181 (76) 1,265
Dividends on preferred
securities issued by subsidiaries - - - 195 195
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 1,906 $ 925 $ 335 $ (548) $ 2,618
========== ========== ========== ========= =========
Year-end total assets $ 264,130 $ 56,579 $ 2,410 $ 4,952 $ 328,071
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1998
All other revenues $ 6,177 $ 8,678 $ 1,955 $ (271)(1) $ 16,539
Net interest revenue(2) 372 918 24 (306)(3) 1,008
---------- ---------- ---------- --------- ---------
Net revenues 6,549 9,596 1,979 (577) 17,547
Non-interest expenses,excluding
staff reduction provision 5,453 8,101 1,529 (62)(4) 15,021
Provision for costs related to
staff reduction - - - 430(5) 430
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,096 1,495 450 (945) 2,096
Income tax expense (benefit) 135 546 158 (126) 713
Dividends on preferred securities
issued by subsidiaries - - - 124 124
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 961 $ 949 $ 292 $ (943) $ 1,259
========== ========== ========== ========= =========
Year-end total assets $ 247,646 $ 44,691 $ 2,103 $ 5,364 $ 299,804
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1997
All other revenues $ 6,557 $ 7,706 $ 1,241 $ (304)(1) $ 15,200
Net interest revenue(2) 232 826 (2) - 1,056
---------- ---------- ---------- --------- ---------
Net revenues 6,789 8,532 1,239 (304) 16,256
Non-interest expenses 5,166 7,374 834 (229)(4) 13,145
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,623 1,158 405 (75) 3,111
Income tax expense 437 428 141 123 1,129
Dividends on preferred securities
issued by subsidiaries - - - 47 47
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 1,186 $ 730 $ 264 $ (245) $ 1,935
========== ========== ========== ========= =========
Year-end total assets $ 252,587 $ 38,061 $ 865 $ 5,467 $ 296,980
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Represents the elimination of intersegment revenues.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents Mercury financing costs.
(4) Represents goodwill amortization of $227, $226, and $65, net of elimination
of intersegment expenses $213, $288, and $294 for 1999, 1998, and 1997,
respectively.
(5) Had this amount been allocated to segments, $259, $88, and $83 would have
been allocated to CICG, PCG, and AMG, respectively.
Notes to Consolidated Financial Statements 85
PRODUCT INFORMATION
Merrill Lynch delivers a wide variety of products to clients:
. Brokerage: Executing or facilitating security and commodity trades for
retail clients and assisting clients in allocating their assets.
(Includes commissions, net interest, and principal transactions).
. Asset management and portfolio services: Offering customers access to a
wide array of asset management services and other fee-based products.
. Lending: Serving investors' liability management needs by providing margin
lending, mortgage and other consumer loans, and commercial financing.
. Trading: Satisfying institutional customer demand for securities,
currencies, and other products by maintaining securities inventories and
writing over-the-counter derivatives. Through structured notes and
derivatives, investors are provided with opportunities to diversify their
portfolios, manage risk, and enhance returns. Also included are revenues
related to proprietary positions. (Includes commissions, principal
transactions revenues, and net interest).
. Origination: Raising capital for clients through securities underwritings,
private placements, and loan syndications.
. Strategic advisory services: Providing advice on mergers and acquisitions,
sales, divestitures, and joint ventures.
The following table summarizes Merrill Lynch's net revenues by product.
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
-------- -------- -------
CICG
Trading:
Debt $ 2,397 $ 899 $ 2,232
Equity 3,638 2,722 2,052
-------- -------- -------
Total 6,035 3,621 4,284
-------- -------- -------
Origination:
Debt 450 484 587
Equity 1,104 884 820
-------- -------- -------
Total 1,554 1,368 1,407
-------- -------- -------
Strategic advisory services 1,270 1,081 765
Other 469 479 333
-------- -------- -------
Total CICG 9,328 6,549 6,789
-------- -------- -------
PCG
Brokerage 6,741 6,221 5,755
-------- -------- -------
Fee-based services:
Portfolio service fees 1,459 1,134 805
Asset management fees 583 589 402
Other fees 1,042 988 944
-------- -------- -------
Total 3,084 2,711 2,151
-------- -------- -------
Lending 731 577 477
Other 132 87 149
-------- -------- -------
Total Private Client 10,688 9,596 8,532
-------- -------- -------
AMG
Fee-based services:
Asset management fees 1,680 1,486 830
Other fees 3 - 21
-------- -------- -------
Total 1,683 1,486 851
-------- -------- -------
Other 585 493 388
-------- -------- -------
Total Asset Management 2,268 1,979 1,239
-------- -------- -------
CORPORATE ITEMS
(INCLUDING INTERSEGMENT
ELIMINATIONS) (415) (577) (304)
-------- -------- -------
Total $ 21,869 $ 17,547 $ 16,256
======== ======== =======
- --------------------------------------------------------------------------------
86 Notes to Consolidated Financial Statements
GEOGRAPHIC INFORMATION
Merrill Lynch operates in both U.S. and non-U.S. markets. Merrill Lynch's
non-U.S. business activities are conducted through offices in six regions:
. Europe, Middle East, and Africa,
. Asia Pacific,
. Australia and New Zealand,
. Japan,
. Canada, and
. Latin America.
For further information on activities in these regions, see Management's
Discussion and Analysis (unaudited) - Global Operations.
The principal methodology used in preparing the geographic data in the
table that follows is:
. Commissions revenues are recorded based on the location of the sales
force,
. Trading revenues are principally recorded based on the location of the
trader,
. Investment banking revenues are recorded based on the location of the
client,
. Asset management and portfolio service fees are recorded based on the
location of the fund manager,
. Earnings before income taxes include the allocation of certain shared
expenses among regions, and
. Intercompany transfers are based primarily on service agreements.
The information that follows, in management's judgment, provides a
reasonable representation of each region's contribution to the consolidated
amounts.
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
-------- -------- --------
NET REVENUES
Europe, Middle East, and Africa $ 4,222 $ 2,844 $ 1,949
Asia Pacific 813 333 478
Australia and New Zealand 253 221 163
Japan 1,062 592 433
Canada 619 642 708
Latin America 614 412 523
-------- -------- --------
Total Non-U.S. 7,583 5,044 4,254
U.S. 14,507 12,809 12,002
Corporate (221) (306) -
-------- -------- --------
Total $ 21,869 $ 17,547 $ 16,256
======== ======== ========
- --------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND DIVIDENDS ON
PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES
Europe,Middle East,and Africa $ 1,290 $ 452 $ 328
Asia Pacific 230 (182) (26)
Australia and New Zealand 32 22 12
Japan 20 (108) 62
Canada 65 25 99
Latin America 137 (53) 123
-------- -------- --------
Total Non-U.S. 1,774 156 598
U.S. 2,733 2,885 2,588
Corporate (429) (945) (75)
-------- -------- --------
Total $ 4,078 $ 2,096 $ 3,111
======== ======== ========
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 87
SUPPLEMENTAL FINANCIAL INFORMATION
- ----------------------------------
QUARTERLY INFORMATION
The unaudited quarterly results of operations of Merrill Lynch for 1999 and 1998
are prepared in conformity with generally accepted accounting principles and
reflect all adjustments (which consist of normal recurring accruals and a
provision for costs related to staff reductions) that are, in the opinion of
management, necessary for a fair presentation of the results of operations for
the periods presented. Results of any interim period are not necessarily
indicative of results for a full year.
- ---------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
For the Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------
DEC.31, SEPT.24, JUNE 25, MAR.26, DEC.25, SEPT.25, JUNE 26, MAR.27,
1999 1999 1999 1999 1998 1998 1998 1998
------- ------- ------- ------- ------- -------- -------- -------
Total Revenues $ 9,270 $ 8,412 $ 8,630 $ 8,567 $ 7,845 $ 8,345 $ 9,321 $ 9,062
Interest Expense 3,375 3,144 3,190 3,301 3,764 4,496 4,466 4,300
------- ------- ------- ------- ------- -------- -------- -------
Net Revenues 5,895 5,268 5,440 5,266 4,081 3,849 4,855 4,762
Non-Interest Expenses 4,735 4,377 4,409 4,270 3,562 4,054(1) 3,940 3,895
------- ------- ------- ------- ------- -------- -------- -------
Earnings (Loss) Before Income Taxes
and Dividends on Preferred
Securities Issued by Subsidiaries 1,160 891 1,031 996 519 (205) 915 867
Income Tax Expense (Benefit) 346 271 310 338 119 (75) 339 330
Dividends on Preferred Securities
Issued by Subsidiaries 50 48 48 49 41 33 27 23
------- ------- ------- ------- ------- -------- -------- -------
Net Earnings (Loss) $ 764 $ 572 $ 673 $ 609 $ 359 $ (163) $ 549 $ 514
======= ======= ======= ======= ======= ======== ======== =======
Earnings (Loss) Per Common Share
Basic $ 2.03 $ 1.52 $ 1.80 $ 1.65 $ .97 $ (.48) $ 1.52 $ 1.44
Diluted 1.80 1.34 1.57 1.44 .86 (.48) 1.31 1.26
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes a $430 million provision for costs related to staff reductions.
DIVIDENDS PER COMMON SHARE
- --------------------------------------------------------------------------------
(declared and paid)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999 $ .24 $ .27 $ .27 $ .27
1998 .20 .24 .24 .24
- --------------------------------------------------------------------------------
With the exception of regulatory restrictions on subsidiaries' abilities to pay
dividends, there are no restrictions on ML & Co.'s present ability to pay
dividends on common stock, other than (a) ML & Co.'s obligation to make payments
on its preferred stock and subsidiaries' preferred securities, and (b) the
governing provisions of the Delaware General Corporation Law. Certain
subsidiaries' ability to declare dividends may also be limited (see Note 13 to
the Consolidated Financial Statements).
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified calendar
quarters are noted below.
- --------------------------------------------------------------------------------------------------------------
(at calendar period-end)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-------------------- -------------------- -------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- -------- -------- ---------
1999 $ 94 1/2 $ 65 5/8 $ 102 1/2 $ 66 1/16 $ 81 7/16 $ 62 $ 88 7/16 $ 62 3/8
1998 $ 87 1/2 $ 60 7/16 $ 100 $ 82 1/4 $ 109 1/8 $ 45 5/8 $ 80 $ 35 3/4
- --------------------------------------------------------------------------------------------------------------
The approximate number of record holders of ML & Co. common stock as of February
18, 2000 was 16,600. As of February 25, 2000, the closing price of ML & Co.
common stock as reported on the Consolidated Transaction Reporting System was
$95 7/8.
88
BOARD OF DIRECTORS
- ------------------
W.H. CLARK
Corporate Director...former Chairman of the Board and Chief Executive Officer of
Nalco Chemical Company, a producer of specialty chemicals...67 years
old...elected a Director of Merrill Lynch in 1995.
JILL K. CONWAY
Visiting Scholar, Massachusetts Institute of Technology... President of Smith
College from 1975 to 1985...65 years old...elected a Director of Merrill Lynch
in 1978.
STEPHEN L. HAMMERMAN
Vice Chairman of the Board of Merrill Lynch...62 years old... joined Merrill
Lynch in 1978.
GEORGE B. HARVEY
Corporate Director...former Chairman of the Board, President and Chief Operating
Officer of Pitney Bowes Inc., a provider of mailing, office and logistics
systems and management and financial services...68 years old...elected a
Director of Merrill Lynch in 1993.
WILLIAM R. HOOVER
Chairman of the Executive Committee of, Consultant to, and former Chairman of
the Board, Chief Executive Officer and President of, Computer Sciences
Corporation, a provider of information technology consulting, systems
integration and outsourcing to industry and government...70 years old...elected
a Director of Merrill Lynch in 1995.
DAVID H. KOMANSKY
Chairman of the Board and Chief Executive Officer of Merrill Lynch...60 years
old...joined Merrill Lynch in 1968.
ROBERT P. LUCIANO
Corporate Director...Director, Chairman Emeritus and former Chairman of the
Board and Chief Executive Officer of Schering-Plough Corporation, a health and
personal care products company...66 years old...elected a Director of Merrill
Lynch in 1989.
DAVID K. NEWBIGGING
Chairman of the Board of Friends' Provident Life Office, a United Kingdom-based
life assurance company...former Chairman of the Board of Equitas Holdings
Limited...former Chairman of the Board and Senior Managing Director of Jardine,
Matheson & Co. Limited...66 years old...elected a Director of Merrill Lynch in
1996.
AULANA L. PETERS
Partner in the law firm of Gibson, Dunn & Crutcher LLP...former Commissioner of
the U.S. Securities and Exchange Commission...58 years old...elected a Director
of Merrill Lynch in 1994.
JOHN J. PHELAN, JR.
Corporate Director...former Chairman and Chief Executive Officer of the New York
Stock Exchange, Inc....Senior Adviser, Boston Consulting Group...member of the
Council on Foreign Relations... former President of the International Federation
of Stock Exchanges...68 years old...elected a Director of Merrill Lynch in
1991.
JOHN L. STEFFENS
Vice Chairman of the Board and Chairman of U.S. Private Client Group of Merrill
Lynch...58 years old...joined Merrill Lynch in 1963.
WILLIAM L. WEISS
Corporate Director...Chairman Emeritus and former Chairman of the Board and
Chief Executive Officer of Ameritech Corporation, a provider of communications
and information services...70 years old...elected a Director of Merrill Lynch in
1993.
Board of Directors 89
EXECUTIVE MANAGEMENT
- --------------------
On February 14, 2000, Merrill Lynch announced the following management changes.
Merrill Lynch Vice Chairman John L. (Launny) Steffens was named Chairman of the
U.S. Private Client Group. Executive Vice President E. Stanley O'Neal, who had
been serving as Merrill Lynch's Chief Financial Officer, was named to succeed
Mr. Steffens as President of U.S. Private Client Group. Mr. O'Neal will be
succeeded as Chief Financial Officer by Executive Vice President Thomas H.
Patrick, who had been serving as Chairman, Special Advisory Services.
[PHOTO]
DAVID H. KOMANSKY
Chairman of the Board and Chief Executive Officer
[PHOTO]
JOHN L. STEFFENS
Vice Chairman of the Board and Chairman of U.S. Private Client Group
[PHOTO]
STEPHEN L. HAMMERMAN
Vice Chairman of the Board
[PHOTO]
PAUL W. CRITCHLOW
Senior Vice President Communications and Public Affairs
[PHOTO]
THOMAS W. DAVIS
Executive Vice President and President of Corporate and Institutional Client
Group
[PHOTO]
RICHARD A. DUNN
Senior Vice President and Head of Corporate Risk Management
[PHOTO]
BARRY S. FRIEDBERG
Executive Vice President and Chairman of Corporate and Institutional Client
Group
90 Executive Management
[PHOTO]
CAROL GALLEY
Chief Operating Officer Asset Management Group
[PHOTO]
EDWARD L. GOLDBERG
Executive Vice President Operations Services Group
[PHOTO]
JAMES P. GORMAN
Executive Vice President and Chief Marketing Officer
[PHOTO]
JEROME P. KENNEY
Executive Vice President Corporate Strategy and Research
[PHOTO]
MICHAEL J.P. MARKS
Executive Chairman of Merrill Lynch Europe, Middle East & Africa
[PHOTO]
JOHN A. MCKINLEY, JR.
Executive Vice President and Chief Technology Officer
[PHOTO]
E. STANLEY O'NEAL
Executive Vice President and President of U.S. Private Client Group
[PHOTO]
THOMAS H. PATRICK
Executive Vice President and Chief Financial Officer
[PHOTO]
JEFFREY M. PEEK
Executive Vice President and President of Asset Management Group
[PHOTO]
WINTHROP H. SMITH, JR.
Executive Vice President and Chairman, Merrill Lynch International Inc. and
President of International Private Client Group
[PHOTO]
MARY E. TAYLOR
Senior Vice President Human Resources
[PHOTO]
STEPHEN A. ZIMMERMAN
Chief Operating Officer Asset Management Group
Executive Management 91
MERRILL LYNCH & CO., INC.
- -------------------------
EXECUTIVE OFFICES
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, New York 10281-1332
COMMON STOCK
Exchange Listings
The common stock of Merrill Lynch (trading symbol MER) is listed on the New York
Stock Exchange, Chicago Stock Exchange, Pacific Exchange, Paris Bourse, London
Stock Exchange and Tokyo Stock Exchange.
Transfer Agent and Registrar
Merrill Lynch & Co., Inc. is the principal transfer agent for its own common
stock. Questions from registered stockholders on dividends, lost and stolen
certificates, changes of legal or dividend addresses, and other matters relating
to registered stockholder status should be sent to:
Merrill Lynch & Co., Inc.
P.O. Box 20, Church Street Station
New York, NY 10277-1004
Attn: Darryl W. Colletti, Assistant Secretary
However, registered stockholders wishing to transfer their stock should continue
to do so through the following transfer agent and registrar:
ChaseMellon Shareholder Services
P.O. Box 3310
South Hackensack, NJ 07606-1910
1-800-851-9677
PREFERRED STOCK
Exchange Listing
Depositary Shares representing 1/400 of a share of 9% Cumulative Preferred
Stock, Series A, are listed on the New York Stock Exchange.
Transfer Agent and Registrar
Citibank, N.A.
111 Wall Street, Fifth Floor
New York, NY 10043
Attn: Corporate Trust Department
FORM 10-K ANNUAL REPORT FOR 1999
This Annual Report of Merrill Lynch & Co., Inc. contains much of the financial
information that will be included in the 1999 Annual Report on Form 10-K to be
filed with the U.S. Securities and Exchange Commission. Merrill Lynch will
furnish a copy of its 1999 Annual Report on Form 10-K (including financial
statements and financial schedules but excluding other exhibits), without
charge, to any person upon request addressed to Andrea L. Dulberg, Corporate
Secretary, Merrill Lynch & Co., Inc., 222 Broadway, 17th Floor, New York, NY
10038.
EQUAL EMPLOYMENT OPPORTUNITY
Merrill Lynch is committed to Equal Employment Opportunity and to attracting and
retaining the most qualified employees, regardless of race, national origin,
religion, gender, age, or disability. For more information, write to Westina
Matthews Shatteen, First Vice President, Corporate Responsibility, Merrill Lynch
& Co., Inc., World Financial Center, North Tower, New York, NY 10281-1331.
CHARITABLE CONTRIBUTIONS
A summary of the Corporation's charitable contributions is available upon
written request to the Secretary.
ANNUAL MEETING
The 2000 Annual Meeting of Merrill Lynch & Co., Inc. stockholders will take
place at the Merrill Lynch Conference and Training Center, 800 Scudders Mill
Road, Plainsboro, New Jersey. The meeting is scheduled for Tuesday, April 18,
2000, beginning at 10:00 a.m. (local time).
Designed by DeSola Group, Inc.
Executive portrait photography by Chris Jones
VISIT OUR WEBSITE AT WWW.ML.COM
92 Corporate Information