SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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COMMISSION FILE NUMBER 1-7182
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MERRILL LYNCH & CO., INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
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(State of incorporation) (I.R.S. Employer Identification No.)
4 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080
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(Address of principal executive offices) (Zip Code)
(212) 449-1000
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Registrant's telephone number, including area code
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
385,241,585 shares of Common Stock and 2,634,634 Exchangeable Shares as of the
close of business on May 5, 2000. The Exchangeable Shares, which were issued by
Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland
Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one
basis and entitle holders to dividend, voting, and other rights equivalent to
Common Stock.
PART I. FINANCIAL INFORMATION
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ITEM 1. Financial Statements
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MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
FOR THE THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 26, PERCENT
(dollars in millions, except per share amounts) 2000 1999 INC. (DEC.)
-------- ------- ----------
NET REVENUES
Commissions $ 2,152 $ 1,567 37.3 %
Principal transactions 1,787 1,444 23.8
Investment banking 996 633 57.3
Asset management and portfolio service fees 1,390 1,110 25.2
Other 238 132 80.3
-------- -------
Subtotal 6,563 4,886 34.3
Interest and dividend revenues 4,463 3,681 21.2
Less interest expense 3,779 3,301 14.5
-------- -------
Net interest profit 684 380 80.0
-------- -------
TOTAL NET REVENUES 7,247 5,266 37.6
-------- -------
NON-INTEREST EXPENSES
Compensation and benefits 3,808 2,762 37.9
Communications and technology 578 480 20.4
Occupancy and related depreciation 250 227 10.1
Advertising and market development 244 152 60.5
Brokerage, clearing, and exchange fees 192 154 24.7
Professional fees 147 117 25.6
Goodwill amortization 56 57 (1.8)
Other 397 321 23.7
-------- -------
TOTAL NON-INTEREST EXPENSES 5,672 4,270 32.8
-------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,575 996 58.1
Income Tax Expense 489 338 44.7
Dividends on Preferred Securities Issued by Subsidiaries 49 49 -
-------- -------
NET EARNINGS $ 1,037 $ 609 70.3
======== =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,028 $ 599 71.6
======== =======
EARNINGS PER COMMON SHARE
Basic $ 2.69 $ 1.65
======== =======
Diluted $ 2.38 $ 1.44
======== =======
DIVIDEND PAID PER COMMON SHARE $ 0.27 $ 0.24
======== =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 381.6 364.0
======== =======
Diluted 432.4 415.7
======== =======
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See Notes to Consolidated Financial Statements
2
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31,
(dollars in millions) 2000 1999
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ASSETS
CASH AND CASH EQUIVALENTS $ 9,738 $ 10,827
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 6,077 5,880
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES BORROWED TRANSACTIONS 117,147 99,741
MARKETABLE INVESTMENT SECURITIES 13,030 10,145
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 27,011 23,593
Corporate debt and preferred stock 22,075 20,346
Contractual agreements 21,614 22,701
U.S. Government and agencies 14,323 15,376
Non-U.S. governments and agencies 10,309 4,892
Mortgages, mortgage-backed, and asset-backed 7,554 7,394
Municipals and money markets 2,815 2,427
-------- --------
105,701 96,729
Securities received as collateral, net of securities pledged as collateral 12,364 10,005
-------- --------
Total 118,065 106,734
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SECURITIES PLEDGED AS COLLATERAL 9,031 9,699
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OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $63 in 2000 and $56 in 1999) 45,902 39,850
Brokers and dealers 8,740 9,095
Interest and other 7,673 7,505
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Total 62,315 56,450
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,087 4,097
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $170 in 2000 and $146 in 1999) 11,308 11,187
OTHER INVESTMENTS 3,363 3,410
EQUIPMENT AND FACILITIES (net of accumulated depreciation and
amortization of $4,223 in 2000 and $4,069 in 1999) 3,152 3,117
GOODWILL (net of accumulated amortization of $591 in 2000 and $543 in 1999) 4,845 4,952
OTHER ASSETS 1,786 1,832
-------- --------
TOTAL ASSETS $363,944 $328,071
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3
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, DECEMBER 31,
(dollars in millions, except per share amount) 2000 1999
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LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $ 84,995 $ 71,578
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 28,782 25,595
DEMAND AND TIME DEPOSITS 18,323 17,602
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 26,521 27,030
Equities and convertible debentures 22,404 20,231
U.S. Government and agencies 13,968 10,816
Non-U.S. governments and agencies 8,066 6,311
Corporate debt, preferred stock, and other 4,384 3,405
-------- --------
Total 75,343 67,793
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OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 21,395 19,704
-------- --------
OTHER PAYABLES
Customers 25,161 22,722
Brokers and dealers 12,632 11,397
Interest and other 19,206 18,601
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Total 56,999 52,720
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LIABILITIES OF INSURANCE SUBSIDIARIES 4,038 4,087
LONG-TERM BORROWINGS 56,877 53,465
-------- --------
TOTAL LIABILITIES 346,752 312,544
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,725 2,725
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 44 59
Common stock, par value $1.33 1/3 per share; authorized: 1,000,000,000 shares;
issued: 2000 - 472,716,448 ; 1999 - 472,714,925 630 630
Paid-in capital 2,814 1,863
Accumulated other comprehensive loss (net of tax) (388) (389)
Retained earnings 13,591 12,667
-------- --------
16,691 14,830
Less: Treasury stock, at cost: 2000 - 90,755,904 shares; 1999 - 104,949,595 shares 1,526 1,817
Employee stock transactions 1,123 636
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 14,042 12,377
-------- --------
TOTAL STOCKHOLDERS' EQUITY 14,467 12,802
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $363,944 $328,071
======== ========
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See Notes to Consolidated Financial Statements
4
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED
-------------------------------
(dollars in millions) MARCH 31, MARCH 26,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,037 $ 609
Noncash items included in earnings:
Depreciation and amortization 192 162
Policyholder reserves 48 54
Goodwill amortization 56 57
Amortization of stock-based compensation 119 113
Other 491 104
(Increase) decrease in operating assets(a):
Trading assets (9,070) 3,772
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (197) 733
Receivables under resale agreements and securities borrowed transactions (17,406) (14,006)
Customer receivables (6,059) (1,566)
Brokers and dealers receivables 355 3,818
Other (501) (861)
Increase (decrease) in operating liabilities(a):
Trading liabilities 7,550 2,796
Payables under repurchase agreements and securities loaned transactions 13,417 2,885
Customer payables 2,439 (4,151)
Brokers and dealers payables 1,235 9,318
Other 698 (785)
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CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (5,596) 3,052
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 1,146 1,563
Sales of available-for-sale securities 667 951
Purchases of available-for-sale securities (4,884) (2,533)
Maturities of held-to-maturity securities 1,550 205
Purchases of held-to-maturity securities (1,292) (222)
Loans, notes, and mortgages (244) (782)
Acquisitions, net of cash acquired - (20)
Other investments and other assets 90 (424)
Equipment and facilities (227) (202)
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CASH USED FOR INVESTING ACTIVITIES (3,194) (1,464)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings 3,187 (7,248)
Demand and time deposits 721 1,092
Issuance and resale of long-term borrowings 8,961 8,914
Settlement and repurchase of long-term borrowings (5,265) (5,921)
Issuance of treasury stock 196 75
Other common and preferred stock transactions 14 (171)
Dividends (113) (98)
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CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 7,701 (3,357)
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,089) (1,769)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,827 12,530
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,738 $10,761
======= =======
(a) Net of effects of acquisitions.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 130 $ 111
Interest 3,357 3,253
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See Notes to Consolidated Financial Statements
5
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(dollars in millions, except per share amounts)
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NOTE 1. BASIS OF PRESENTATION
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The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 31, 1999
consolidated balance sheet was derived from the audited financial statements.
The interim consolidated financial statements for the three-month periods are
unaudited; however, in the opinion of Merrill Lynch management, all adjustments,
consisting only of normal recurring accruals, necessary for a fair statement of
the results of operations have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report included
as an exhibit to Form 10-K for the year ended December 31, 1999. The nature of
Merrill Lynch's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
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NOTE 2. SHORT-TERM BORROWINGS
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Short-term borrowings at March 31, 2000 and December 31, 1999 are presented
below:
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MARCH 31, DEC. 31,
2000 1999
--------- ---------
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $ 73,656 $ 64,954
Securities loaned transactions 11,339 6,624
-------- --------
Total $ 84,995 $ 71,578
======== ========
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 27,240 $ 24,198
Bank loans and other 1,542 1,397
-------- --------
Total $ 28,782 $ 25,595
======== ========
DEMAND AND TIME DEPOSITS
Demand $ 3,587 $ 3,498
Time 14,736 14,104
-------- --------
Total $ 18,323 $ 17,602
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NOTE 3. COMMON STOCK
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In February 2000, ML & Co. issued 1,523 shares of common stock to certain
non-U.S. employees in connection with an employee incentive plan grant, thereby
increasing issued shares to 472,716,448.
6
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NOTE 4. SEGMENT INFORMATION
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In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: the Corporate and Institutional Client Group
("CICG"), the Private Client Group ("PCG") and the Asset Management Group
("AMG"). Prior period amounts have been restated to conform to the 2000
presentation. For information on each segment's activities, see Management's
Discussion and Analysis-Business Segments and the 1999 Annual Report included as
an exhibit to Form 10-K.
Operating results by business segment follow:
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CORPORATE
CICG PCG AMG ITEMS TOTAL
-------- ------- ------ --------- --------
THREE MONTHS ENDED
MARCH 31, 2000
Net interest revenue(a) $ 314 $ 407 $ 19 $ (56)(b) $ 684
All other revenues 3,047 3,009 599 (92)(c) 6,563
-------- ------- ------ ------ --------
Net revenues 3,361 3,416 618 (148) 7,247
Non-interest expenses 2,255 2,928 502 (13)(d) 5,672
-------- ------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,106 488 116 (135) 1,575
Income tax expense (benefit) 315 184 40 (50) 489
Dividends on preferred securities
issued by subsidiaries - - - 49 49
-------- ------- ------ ------ --------
Net earnings (loss) $ 791 $ 304 $ 76 $ (134) $ 1,037
======== ======= ====== ====== ========
Total assets $294,493 $61,985 $2,621 $4,845 $363,944
======== ======= ====== ====== ========
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7
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CORPORATE
CICG PCG AMG ITEMS TOTAL
-------- ------- --------- --------- --------
THREE MONTHS ENDED
MARCH 26, 1999
Net interest revenue(a) $ 173 $ 269 $ 4 $ (66)(b) $ 380
All other revenues 2,116 2,342 491 (63)(c) 4,886
-------- ------- ------ ------ --------
Net revenues 2,289 2,611 495 (129) 5,266
Non-interest expenses 1,622 2,223 433 (8)(d) 4,270
-------- ------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 667 388 62 (121) 996
Income tax expense (benefit) 194 145 21 (22) 338
Dividends on preferred securities
issued by subsidiaries - - - 49 49
-------- ------- ------ ------ --------
Net earnings (loss) $ 473 $ 243 $ 41 $ (148) $ 609
======== ======= ====== ====== ========
Total assets $259,393 $47,652 $2,401 $5,174 $314,620
======== ======= ====== ====== ========
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(a) Management views interest income net of interest expense in evaluating
results.
(b) Represents Mercury financing costs.
(c) Represents the elimination of intersegment revenues.
(d) Represents goodwill amortization of $56 million and $57 million, net of
elimination of intersegment expenses of $69 million and $65 million, for
the three months ended March 31, 2000 and March 26, 1999, respectively.
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NOTE 5. COMPREHENSIVE INCOME
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The components of comprehensive income are as follows:
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THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 26,
2000 1999
-------- --------
Net earnings $1,037 $ 609
------ -----
Other comprehensive income (loss), net of tax:
Currency translation adjustment (9) (117)
Net unrealized gain (loss) on investment
securities available-for-sale 10 (33)
------ -----
Total other comprehensive income (loss), net 1 (150)
------ -----
Comprehensive income $1,038 $ 459
====== =====
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8
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NOTE 6. EARNINGS PER COMMON SHARE
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Information relating to earnings per common share computations follows:
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THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 26,
2000 1999
--------- --------
Net earnings $ 1,037 $ 609
Preferred stock dividends 9 10
-------- --------
Net earnings applicable to
common stockholders $ 1,028 $ 599
======== ========
(shares in thousands)
Weighted-average shares outstanding 381,641 364,039
-------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 30,964 29,833
FCCAAP shares 14,108 16,548
Restricted units 5,581 5,161
ESPP shares 78 81
-------- --------
Dilutive potential common shares 50,731 51,623
-------- --------
Total weighted-average diluted shares 432,372 415,662
======== ========
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Basic earnings per common share $ 2.69 $ 1.65
Diluted earnings per common share $ 2.38 $ 1.44
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(1) During the 2000 first quarter and the 1999 first quarter, there were
76 thousand and 469 thousand instruments, respectively, that were
considered antidilutive and were not included in the above computations.
(2) See Note 11 to Consolidated Financial Statements in the 1999 Annual Report
included as an exhibit to Form 10-K for a description of these instruments.
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NOTE 7. DERIVATIVES, COMMITMENTS, AND OTHER CONTINGENCIES
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Merrill Lynch enters into various derivative contracts to meet clients' needs
and to manage its own market risks. Derivative contracts often involve future
commitments to exchange interest payment streams or currencies (such as interest
rate and currency swaps or foreign exchange forwards) or to purchase or sell
other financial instruments at specified terms on a specified date. Options, for
example, can be purchased or written on a wide range of financial instruments
such as securities, currencies, futures, and various market indices.
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments. The notional or contractual amounts of derivatives used
for trading purposes and included in trading inventory by type of risk follow:
9
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INTEREST EQUITY COMMODITY
RATE CURRENCY PRICE PRICE
(in billions) RISK(1)(2) RISK(3) RISK RISK
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MARCH 31, 2000
- --------------
Swap agreements $ 2,540 $ 143 $ 30 $ 4
Forward contracts 92 164 - 1
Futures contracts 227 2 13 2
Options purchased 169 98 39 2
Options written 254 83 49 4
DECEMBER 31, 1999
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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
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(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.
The notional or contractual amounts of non-trading derivatives used to hedge
market risk exposures on non-trading assets and liabilities at March 31, 2000
and December 31, 1999 follow:
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MARCH 31, DEC. 31,
(in billions) 2000 1999
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Borrowings:
Interest rate risk (1) $ 39 $ 44
Currency risk 1 1
Equity risk 6 3
Investment securities (2) 11 11
Resale and repurchase agreements (2) 6 6
Customer receivables (2) 7 6
Investment in non-U.S. subsidiaries (3) 4 3
Other 3 3
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(1)Includes $10 billion of instruments which also contain currency risk and $4
billion of instruments that also contain equity risk at both March 31, 2000
and December 31, 1999.
(2)Primarily hedging interest rate risk.
(3)Hedging currency risk.
Most of these derivatives are entered into with Merrill Lynch's derivative
dealer subsidiaries, which hedge interest rate, currency, and equity risks in
the normal course of their trading activities. Realized gains and losses on
early terminations of derivatives are deferred over the remaining lives of the
hedged assets or liabilities. At March 31, 2000, there was $20 million in
deferred gains relating to a derivative contract terminated during 1999.
10
In the normal course of business, Merrill Lynch enters into underwriting
commitments and commitments to extend credit. Settlement of these commitments as
of March 31, 2000 would not have a material effect on the consolidated financial
condition of Merrill Lynch.
As of March 31, 2000, Merrill Lynch has been named as parties in various
actions, some of which involve claims for substantial amounts. Although the
results of legal actions cannot be predicted with certainty, it is the opinion
of management that the resolution of these actions will not have a material
adverse effect on Merrill Lynch's financial condition; however, such resolution
could have a material adverse impact on quarterly operating results in future
periods, depending in part on the results for such periods. Refer to Part II -
Other Information for additional information on legal proceedings.
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NOTE 8. REGULATORY REQUIREMENTS
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Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under
the Securities Exchange Act of 1934. Under the alternative method permitted by
this rule, the minimum required net capital, as defined, shall not be less than
2% of aggregate debit items arising from customer transactions. At March 31,
2000, MLPF&S's regulatory net capital of $3,188 million was 11% of aggregate
debit items, and its regulatory net capital in excess of the minimum required
was $2,586 million.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject
to the capital requirements of the Financial Services Authority ("FSA").
Financial resources, as defined, must exceed the total financial resources
requirement of the FSA. At March 31, 2000, MLI's financial resources were $4,617
million and exceeded the minimum requirement by $1,091 million.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, is subject to the capital adequacy requirements of the
Government Securities Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At March 31, 2000, MLGSI's liquid capital of $1,472
million was 313% of its total market and credit risk, and liquid capital in
excess of the minimum required was $908 million.
11
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of March 31,
2000, and the related condensed consolidated statements of earnings and cash
flows for the three-month periods ended March 31, 2000 and March 26, 1999. These
financial statements are the responsibility of Merrill Lynch's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America (hereinafter referred to as "generally accepted auditing standards"),
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch as of December 31,
1999, and the related consolidated statements of earnings, changes in
stockholders' equity, comprehensive income and cash flows for the year then
ended (not presented herein); and in our report dated February 28, 2000, we
expressed an unqualified opinion and included an explanatory paragraph for the
change in accounting method in 1998 for certain internal-use software
development costs to conform with Statement of Position 98-1. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
May 12, 2000
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, advisory, insurance, and related
services worldwide. Merrill Lynch conducts its businesses in global financial
markets that are influenced by numerous unpredictable factors including economic
conditions, monetary policies, liquidity, international and regional political
events, regulatory developments, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility of
financial markets. While greater volatility increases risk, it may also increase
order flow in businesses such as trading and brokerage. Revenues and net
earnings may vary significantly from period to period due to these unpredictable
factors and the resulting market volatility.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as diminishing margins in many mature products and
services, and competition from new entrants as well as established competitors
using the internet to establish or expand their businesses. In addition, the
passage of the Gramm-Leach-Bliley Act in November of 1999 represented a
significant accomplishment in the effort to modernize the financial services
industry in the U.S. by repealing anachronistic laws that separated commercial
banking, investment banking and insurance activities. The Gramm-Leach-Bliley
Act, together with other changes in the financial services industry made
possible by previous reforms, has increased the number of companies competing
for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but are
not limited to, the factors listed in the previous paragraphs, as well as
actions and initiatives taken by both current and potential competitors, the
impact of current pending and future legislation and regulation throughout the
world, and the other risks detailed in the following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
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BUSINESS ENVIRONMENT
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Global financial markets experienced volatility in the first quarter of 2000,
after a stellar performance in 1999. Uncertainty regarding the direction of U.S.
interest rates, weakness in the U.S. dollar versus the Japanese yen, and
increased investor concern regarding continued economic growth contributed to
lower debt underwriting activity industry-wide. Investor and issuer demand in
the equity markets was up significantly from the 1999 first quarter, as investor
demand led to surging trading volumes.
Long-term U.S. interest rates, as measured by the yield on the 30-year U.S.
Treasury bond declined during the first quarter of 2000. Short-term U.S. rates,
however, increased twice during the quarter, in February and March, when the
Federal Reserve Board raised the overnight lending rate twenty-five basis points
on each occasion in an effort to slow economic growth and hold down inflationary
pressures. Long-term interest rates in Europe generally increased during the
first quarter, and were higher compared with the 1999 first quarter. Credit
spreads, which represent the risk premium over the risk-free rate paid by an
issuer (based on the issuer's perceived creditworthiness), widened in the first
quarter of 2000.
U.S. equity indices, which experienced extraordinary gains during 1999, were
turbulent in the first quarter of 2000. The Federal Reserve Board's decision to
raise the overnight lending rate on two separate occasions, in addition to
investor concern about the direction of interest rates, inflation, and continued
economic growth contributed to little or no growth in most equity indices.
13
Widely watched market indicators demonstrated the volatility that occurred
during the quarter. The Nasdaq Composite Index experienced both its single
biggest point drop and its record high during the quarter, ending the period up
12.4%. This represents an increase of 85.8% from the first quarter of 1999,
fueled by investor demand for technology stocks. The Dow Jones Industrial
Average fell 5.0% during the quarter, demonstrating a lack of investor interest
in blue chip stocks, but was up 11.6% from the end of the first quarter of 1999.
The S&P 500 advanced 2.0% in the quarter, and 16.5% since the end of the 1999
first quarter.
Global equity markets, as measured by the Dow Jones World Index, advanced only
1.0% during the quarter, and 22.2% since the end of the first quarter of 1999.
The renewed strength of the Japanese yen and concern over rising U.S. interest
rates prevented many global equity markets from achieving the significant gains
recorded in the first three months of 1999. During the quarter, Tokyo stocks
fell 4% in both U.S. dollar and local currency terms as the Bank of Japan's
monetary policy remained unchanged. Virtually all other Asian equity markets
suffered declines during the quarter, with the exception of Malaysia, which led
all Dow Jones country indices with a 20% return for the quarter. Latin American
equity markets were primarily unchanged from the 1999 year-end, due to lack of
investor interest. European markets generally improved in the quarter, led by
gains in the media and technology sectors, which rose 30% and 18%, respectively.
The best overall performer in Europe was Germany, with a 9.5% increase, sparked
by increased merger and acquisition activity.
Concerns over U.S. interest rates contributed to a decrease in global debt
underwriting volume during the first quarter of 2000, which declined to $754
billion from $916 billion in the 1999 first quarter, according to Thomson
Financial Securities Data. In the fourth quarter of 1999, global debt
underwriting volume was $489 billion. A widening in corporate bond yield
spreads, due to rising interest rates, caused a decline in volume of new issues.
Equity underwriting, driven by technology, telecommunications, and healthcare,
was more robust, as IPO underwriting in the U.S. reached $24 billion, down
from a record $29 billion in the fourth quarter of 1999, but up sharply from
the $9 billion reported in the 1999 first quarter.
Strategic advisory services activities remained healthy during the 2000 first
quarter, reflecting a continuation of the high level of merger and acquisition
activity experienced in 1999. Global announced mergers and acquisitions totalled
$1.2 trillion in the 2000 first quarter, up from $1.1 trillion in the fourth
quarter of 1999, and $685 billion in the year-ago period, according to Thomson
Financial Securities Data. Continued consolidations in the technology and
telecommunications sectors and international mergers contributed to the
increased activity.
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.
14
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED INCREASE
------------------------------------ 1Q00 VERSUS
MARCH 31, DEC. 31, MARCH 26, ---------------
(dollars in millions, except per share amounts) 2000 1999 1999 4Q99 1Q99
- ------------------------------------------------------------------------------------------------------------------------
C>
Total revenues $11,026 $9,270 $8,567 19% 29%
Net revenues 7,247 5,895 5,266 23 38
Pre-tax earnings 1,575 1,160 996 36 58
Net earnings 1,037 764 609 36 70
Net earnings applicable
to common stockholders 1,028 755 599 36 72
Earnings per common share
Basic 2.69 2.03 1.65 33 63
Diluted 2.38 1.80 1.44 32 65
Annualized return on average common
stockholders' equity 31.1% 23.8% 24.6%
Effective tax rate 31.0 29.8 33.9
- --------------------------------------------------------------------------------------------------------------------------
The following discussion compares the first quarters of 2000 and 1999 and, where
appropriate, contrasts the first quarter of 2000 with the fourth quarter of
1999.
Merrill Lynch's net earnings were a record $1.037 billion for the first quarter
of 2000, up 70% from $609 million reported in the 1999 first quarter, and
surpassing the previous record of $764 million set in the 1999 fourth quarter.
Earnings per common share were $2.69 basic and $2.38 diluted, compared with
$1.65 basic and $1.44 diluted in the 1999 first quarter.
Net revenues reached a record $7.2 billion, up 38% from the 1999 first quarter,
as new highs were achieved in most revenue categories, including commissions,
principal transactions, asset management and portfolio service fees, and net
interest.
Annualized return on common equity was approximately 31.1% compared with 24.6%
in the first quarter a year ago. The pre-tax profit margin for the first quarter
of 2000 was 21.7%, the highest level reported since the full year 1993 and the
first quarter of 1994.
Commissions revenues are summarized as follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999 % INCREASE
- --------------------------------------------------------------------------------
Listed and over-the-counter $ 1,253 $ 882 42 %
Mutual funds 661 483 37
Other 238 202 18
------- -------
Total $ 2,152 $ 1,567 37
======= =======
- --------------------------------------------------------------------------------
Commissions revenues were a record $2.2 billion, up 37% from the 1999 first
quarter, due to increased trading volume of listed securities, primarily on
non-U.S. exchanges, and higher proprietary and non-proprietary mutual fund
sales.
Net trading revenues, representing principal transactions revenues and related
net interest, are presented in the table below. Interest revenue and expense
amounts are based on management's assessment of the cost to finance trading
positions, after consideration of the underlying liquidity of these positions.
15
Trading and related hedging and financing activities affect the recognition of
both principal transactions revenues and net interest and dividend revenues. In
assessing the profitability of its trading activities, Merrill Lynch aggregates
net interest and principal transactions revenues. For financial reporting
purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest revenues, depending on the
nature of the specific instruments. Changes in the composition of trading
inventories and hedge positions can cause the recognition of revenues within
these categories to fluctuate.
- --------------------------------------------------------------------------------------------------------------------------
PRINCIPAL TRANSACTIONS NET INTEREST NET TRADING
REVENUES REVENUES REVENUES
THREE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
------------------------ ------------------------- -----------------------
MAR. 31, MAR. 26, MAR. 31, MAR. 26, MAR. 31, MAR. 26,
(in millions) 2000 1999 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Equities and equity derivatives $ 1,185 $ 667 $ 47 $ 5 $ 1,232 $ 672
Debt and debt derivatives 537 671 75 81 612 752
Mortgages 12 51 55 68 67 119
Foreign exchange 53 55 2 (1) 55 54
------- ------- ------- ------- ------- -------
Total $ 1,787 $ 1,444 $ 179 $ 153 $ 1,966 $ 1,597
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------------------------------------------------
Net trading revenues were $2.0 billion, up 23% from $1.6 billion in the 1999
first quarter, driven by record revenues in equity and equity derivatives
trading, partially offset by a decline in debt and debt derivatives and
mortgages net trading revenues.
Equities and equity derivatives net trading revenues were a record $1.2 billion,
up 83% from the 1999 first quarter, and far exceeding the previous best quarter,
driven by exceptionally high trading volume in both secondary cash and
equity-linked products in the U.S. and global markets.
Debt and debt derivatives net trading revenues were $612 million, down 19% from
the record reported in the 1999 first quarter, partly due to decreases in
corporate debt and Japanese and Latin American debt trading, compared with the
corresponding period a year ago.
Mortgage net trading revenues decreased 44% from first quarter 1999 to $67
million, partially due to lower customer demand. Foreign exchange net trading
revenues were $55 million, up 2% from the first quarter of 1999.
Investment banking revenues rose 57% from the 1999 first quarter to $996 million
in the first quarter of 2000, as equity underwriting revenues more than doubled
from the 1999 first quarter. Strategic advisory service revenues also increased
from the 1999 first quarter due to higher levels of activity, particularly in
Europe. A summary of Merrill Lynch's investment banking revenues follows:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999 % INCREASE
- ----------------------------------------------------------------------------
Underwriting $ 623 $ 427 46 %
Strategic services 373 206 81
-------- --------
Total $ 996 $ 633 57
======== ========
- --------------------------------------------------------------------------------
Merrill Lynch remained the leading underwriter of total debt and equity
offerings in both the U.S. and global markets during the first quarter of 2000.
In addition, Merrill Lynch retained its number one position in U.S. and global
debt underwriting. Merrill Lynch's underwriting market share information based
on transaction value follows:
16
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED
- -------------------------------------------------------------------------------------
MARCH 31, 2000 MARCH 26, 1999
---------------- ----------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 15.2 % 1 15.1 % 1
Equity 9.2 5 16.3 2
Debt and equity 14.3 1 15.6 1
GLOBAL PROCEEDS
Debt 11.4 1 11.5 1
Equity 10.6 3 11.2 3
Debt and equity 11.4 1 11.8 1
- -------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic services fees increased 81% from the 1999 first quarter to $373
million, benefiting from higher levels of merger and acquisition activity,
particularly in Europe. Merrill Lynch's merger and acquisition market share
information for the 2000 and 1999 first quarters based on transaction value
follows:
- -------------------------------------------------------------------------------------
THREE MONTHS ENDED
- -------------------------------------------------------------------------------------
MARCH 31, 2000 MARCH 26, 1999
---------------- --------------------
MARKET MARKET
SHARE RANK SHARE RANK
- -------------------------------------------------------------------------------------
COMPLETED TRANSACTIONS
U.S. 15.7% 5 35.9% 3
Global 32.9 3 26.2 3
ANNOUNCED TRANSACTIONS
U.S. 44.2 3 26.2 3
Global 28.3 3 21.9 3
- --------------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
Asset management and portfolio service fees reached a record $1.4 billion, a 25%
increase from a year ago. A summary of asset management and portfolio service
fees is as follows:
- ----------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999 % INCREASE
- ----------------------------------------------------------------------------------
Asset management fees $ 639 $ 526 21 %
Portfolio service fees 483 333 45
Account fees 134 127 6
Other fees 134 124 8
-------- --------
Total $ 1,390 $ 1,110 25
======== ========
- ----------------------------------------------------------------------------------
17
Asset management fees increased 21% from the 1999 first quarter, as a result of
a 10% growth in assets under management, which reached a record $568 billion at
the end of the first quarter. The growth in assets under management was
attributable to a net inflow of customer assets as well as asset appreciation.
Record portfolio service fees were achieved during the first quarter as assets
in fee-based accounts rose 21% from the end of 1999, driven by strong growth in
Unlimited Advantage (Service Mark) and ML Consults (Registered Trademark). The
majority of the revenues associated with these accounts is included in portfolio
service fees, with the remainder in asset management fees.
Total assets in Private Client accounts or under management were a record $1.8
trillion at the end of the first quarter of 2000, representing an increase of
$307 billion, or 21%, from the end of the first quarter a year ago. Assets under
management, which are included in total assets in Private Client accounts or
under management, totaled $568 billion at the end of the first quarter of 2000,
an increase of $53 billion from the end of the 1999 first quarter, as discussed
in the previous paragraph. The changes in these balances are noted as follows:
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
--------------------------------------
MARCH 26, NET NEW ASSET MARCH 31,
(in billions) 1999 MONEY (1) APPRECIATION (2) 2000
- -----------------------------------------------------------------------------------------------------------------------------
Total assets in Private Client accounts
or under management $ 1,484 $ 140 $ 167 $ 1,791
Total assets under management 515 16 37 568
- -----------------------------------------------------------------------------------------------------------------------------
1. Includes reinvested dividends.
2. Includes foreign exchange translation adjustments of $(4) billion.
Other revenues were up 80% from the 1999 first quarter to $238 million,
primarily as a result of higher income from partnership investments and net
investment gains.
Significant components of interest and dividend revenues and interest expense
follow:
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999
- -------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $ 1,677 $ 1,367
Trading assets 961 1,030
Margin lending 1,061 683
Other 764 601
-------- --------
Total 4,463 3,681
-------- --------
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 1,350 1,237
Borrowings 1,379 1,111
Trading liabilities 448 526
Other 602 427
-------- --------
Total 3,779 3,301
-------- --------
NET INTEREST AND DIVIDEND PROFIT $ 684 $ 380
======== ========
- --------------------------------------------------------------------------------
18
Interest and dividend revenues and expenses are a function of the level and mix
of interest-earning assets and interest-bearing liabilities and the prevailing
level, term structure, and volatility of interest rates. Net interest and
dividend profit in the first quarter of 2000 was up 80% from the first quarter
of 1999, mainly due to higher customer lending, changes in asset/liability
composition, and higher dividends.
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate and
currency characteristics of the borrowings to the assets funded by borrowing
proceeds. The effect of this hedging activity, which is included in "Borrowings"
in the previous table, decreased interest expense by $8 million and $79 million
for the 2000 and 1999 first quarters, respectively.
Merrill Lynch's non-interest expenses are summarized below:
- -------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999
- -------------------------------------------------------------------------------------------------
Compensation and benefits $ 3,808 $ 2,762
-------- --------
Non-interest expenses,
excluding compensation and benefits:
Communications and technology 578 480
Occupancy and related depreciation 250 227
Advertising and market development 244 152
Brokerage, clearing, and exchange fees 192 154
Professional fees 147 117
Goodwill amortization 56 57
Other 397 321
-------- --------
Total non-interest expenses,
excluding compensation and benefits 1,864 1,508
-------- --------
Total non-interest expenses $ 5,672 $ 4,270
======== ========
Compensation and benefits
as a percentage of net revenues 52.5% 52.4%
Compensation and benefits as a percentage of
pre-tax earnings before compensation and benefits 70.7 73.5
- -------------------------------------------------------------------------------------------------
Non-interest expenses, excluding compensation costs, were up 24% from the 1999
first quarter. Non-interest expenses, excluding compensation costs, were 25.7%
of net revenues for the first quarter of 2000, a record low, down from 28.6% in
the first quarter of 1999.
Compensation and benefits, the largest expense category, were $3.8 billion, up
38% from the 1999 first quarter, as increased profitability led to higher
incentive compensation. Compensation and benefits as a percentage of net
revenues was 52.5% for the first quarter of 2000, virtually unchanged from the
first quarter of 1999.
Communications and technology expenses were $578 million, up 20% from the 1999
first quarter, partly due to increased systems consulting costs related to
various initiatives, including Direct Markets and ML Direct. Higher
technology-related depreciation and increased webhosting service costs related
to online initiatives also contributed to the overall increase.
Occupancy and related depreciation expense was $250 million in the first quarter
of 2000, up 10% from the comparable period in 1999.
Advertising and market development expense rose 61% from the 1999 first quarter
to $244 million, as a result of increased advertising costs related to the
launch of new products and a new corporate branding campaign. The increase
19
was also driven by higher travel and entertainment expenses and sales promotion
costs associated with increased business activity.
Brokerage, clearing, and exchange fees increased 25% to $192 million due to
increased global transaction volume.
Professional fees were $147 million, up 26% from the 1999 first quarter,
primarily due to higher legal, consulting, and employment service fees.
Goodwill amortization was $56 million in the first quarter of 2000, virtually
unchanged from the first quarter a year ago. Other expenses were $397 million,
up 24% from the first quarter of 1999, due in part to higher provisions related
to various legal and business matters and increased business activity.
For the first quarter of 2000, the effective tax rate was 31.0%, compared to
33.9% in the first quarter of 1999.
- --------------------------------------------------------------------------------
BUSINESS SEGMENTS
- --------------------------------------------------------------------------------
Merrill Lynch reports the results of its business within three business
segments: Corporate and Institutional Client Group ("CICG"), Private Client
Group ("PCG"), and Asset Management Group ("AMG"). CICG's activities primarily
involve providing services to corporate, institutional, and governmental clients
throughout the world. PCG provides investment, financing, insurance, tax, and
other financial services and products to retail clients globally. AMG provides
investment management services to a wide variety of retail and institutional
clients. For further information on services provided to clients within these
segments, see the 1999 Form 10-K and the 1999 Annual Report included as an
exhibit thereto.
Certain 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. Expenses and revenues associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. Expenses of $69 million and $65 million and revenues of $92
million and $63 million for the 2000 and 1999 first quarters, respectively, were
eliminated. 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 segment operating results exclude certain corporate items, which
reduced net earnings for the 2000 and 1999 first quarters by $134 million and
$148 million, respectively. (See Note 4 to Consolidated Financial Statements -
Unaudited.)
- --------------------------------------------------------------------------------
CORPORATE AND INSTITUTIONAL CLIENT GROUP
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999
- --------------------------------------------------------
Net revenues $3,361 $2,289
Net earnings 791 473
- --------------------------------------------------------
CICG had its best quarter ever for both net revenues and earnings, benefiting
from strong performances across all regions and businesses. Net revenues were
$3.4 billion, representing a 47% increase from the first quarter of 1999, and
net earnings were $791 million, up 67% from the 1999 first quarter level. Equity
trading and origination revenues were both up sharply from the first quarter of
1999, due to a favorable environment for equity issuances, specifically within
the technology sector. The strategic advisory business also posted strong
results for the quarter, with revenues 81% above the first quarter of 1999, and
only 9% below the record posted in the fourth quarter of 1999. Revenues from the
Debt Markets business were slightly lower than the first quarter of 1999, as
rising interest rates during the quarter led to decreased industry-wide debt
underwriting activity. Merrill Lynch retained its position as the leading
underwriter of total debt and equity securities, both in the U.S. and globally,
as well as the #1 position in U.S. and global debt underwriting.
20
- --------------------------------------------------------------------------------
PRIVATE CLIENT GROUP
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999
- ----------------------------------------------------
Net revenues $3,416 $2,611
Net earnings 304 243
- ----------------------------------------------------
Net revenues and net earnings for PCG were $3.4 billion and $304 million,
respectively, in the first quarter of 2000, up 31% and 25% from $2.6 billion and
$243 million reported in the 1999 first quarter. Record revenues in both
Commissions and portfolio service fees resulted from increased trading volume
and growth in fee-based accounts. Also included in the first quarter 2000
results is an after-tax gain of approximately $15 million from the sale of
Merrill Lynch's retail brokerage business in Puerto Rico.
Total assets in U.S. client accounts grew 6% during the first quarter of 2000,
to a record $1.4 trillion with net new money inflows of $48 billion. Outside the
U.S., client assets reached $149 billion, with net new money of $11 billion
during the quarter. Total assets in fee-based accounts rose to $203 billion,
more than double the level from a year ago, and up 21% from the end of 1999.
Unlimited Advantage, Merrill Lynch's total access fee-based account, introduced
in June 1999, contributed to the segment's strong results, with an increase in
revenues of more than 50% from the fourth quarter of 1999. Client assets in
Unlimited Advantage accounts grew to $88 billion, representing an increase of
40% from year-end. In addition, client assets in ML Direct, the online investing
service for self-directed investors, grew from $300 million at the end of 1999
to more than $2 billion during its first full quarter in operation. ML Direct
was named as one of the "Best of the Web" among online brokers by Forbes
magazine, and received a four-star rating in Barron's annual survey of online
brokers.
In April 2000, Merrill Lynch and HSBC Holdings plc announced a new company to
create the first global online banking and investment services company, serving
individual customers (except in the U.S.). The new company, headquartered in
London, will be launched later this year in the United Kingdom, followed by
offices in Australia, Canada, Germany, Hong Kong, and Japan, with other parts of
the world to follow.
- --------------------------------------------------------------------------------
ASSET MANAGEMENT GROUP
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
-------------------------
MARCH 31, MARCH 26,
(in millions) 2000 1999
- ----------------------------------------------------
Net revenues $618 $495
Net earnings 76 41
- ----------------------------------------------------
Net revenues and net earnings for AMG were $618 million and $76 million,
respectively, in the first quarter of 2000, up 25% and 85% from $495 million and
$41 million in the 1999 first quarter. Assets under management reached a record
$568 billion, up 10% from the end of the 1999 first quarter, on strong net
inflows of new money for the second straight quarter. AMG launched several new
funds during the quarter, including two U.S. retail offerings which collectively
raised over $2.3 billion.
Internationally, AMG also performed well, with net new money in all regions,
except Europe. The move to open architecture, with increased third party
distribution arrangements in Europe continued, and sales of Mercury Select Trust
Funds totaled nearly $2 billion for the quarter. In addition, Merrill Lynch
Quantitative Advisors, the quantitative investment team formed in 1999, won
significant mandates from New York City, the impact of which is not included in
this quarter's results.
21
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND LIQUIDITY
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
1. Ensure sufficient equity capital to absorb losses,
2. Support the business strategies, and
3. Assure liquidity at all times, across market cycles, and through periods of
financial stress.
These objectives and Merrill Lynch's capital structure and funding policies are
discussed more fully in the 1999 Annual Report included as an exhibit to Form
10-K.
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $14.0 billion in
common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries at March 31, 2000. Preferred securities issued
by subsidiaries consist primarily of Trust Originated Preferred Securities
(Service Mark)("TOPrS"(Service Mark)). Based on various analyses and criteria,
management believes that Merrill Lynch's equity capital base of $17.2 billion is
adequate.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------
PERIOD END
March 31, 2000 21.2x 13.1x
December 31, 1999 21.1x 13.4x
AVERAGE (3)
Quarter ended March 31, 2000 21.8x 13.4x
Year ended December 31, 1999 23.2x 14.4x
- --------------------------------------------------------------------
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less (a) securities received as collateral, net of securities
pledged as collateral, (b) securities pledged as collateral, and (c)
receivables under resale agreements and securities borrowed transactions, to
total stockholders' equity and preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of assets,
hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not
rely on overall leverage ratios to assess risk-based capital adequacy.
Commercial paper outstanding totaled $27.2 billion at March 31, 2000 and $24.2
billion at December 31, 1999, which was equal to 7.5% and 7.4% of total assets
at March 31, 2000 and year-end 1999, respectively. Outstanding long-term
borrowings increased to $56.9 billion at March 31, 2000 from $53.5 billion at
December 31, 1999. Major components of the change in long-term borrowings during
the 2000 first quarter follow:
- ----------------------------------------------
(in billions)
- ----------------------------------------------
Balance at December 31, 1999 $53.5
Issuances 9.0
Maturities (5.3)
Other, net (0.3)
-----
Balance at March 31, 2000(1) $56.9
=====
- ----------------------------------------------
(1) At the end of the 2000 first quarter, $44.7 billion of long-term borrowings
had maturity dates beyond one year.
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its core balance sheet assets. Other sources of
liquidity include a committed, senior, unsecured bank credit facility that, at
March 31, 2000, totaled $8.0 billion and was not drawn upon. Additionally,
Merrill Lynch maintains access to significant uncommitted credit lines, both
secured and unsecured, from a large group of banks.
22
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 March 31, 2000
as follows:
- -------------------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPRS
RATING AGENCY RATINGS 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 Financial BankWatch, Inc. AA+ Not Rated
- -------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Merrill Lynch monitors changes in its balance sheet using average daily balances
that are determined on a settlement date basis and reported for management
information purposes. Financial statement balances are recorded on a trade date
basis as required under generally accepted accounting principles. The following
discussion compares changes in settlement date average daily balances.
For the first three months of 2000, average total assets were $356 billion, up
7% from $333 billion for the 1999 fourth quarter. Average total liabilities
increased 7% to $339 billion from $318 billion for the 1999 fourth quarter. The
major components in the growth in average total assets and liabilities for the
first three months of 2000 are summarized as follows:
- ----------------------------------------------------------------------------------------------------------
(in millions) INCREASE (DECREASE) CHANGE
- ----------------------------------------------------------------------------------------------------------
AVERAGE ASSETS
Trading assets $ 8,492 8 %
Receivables under resale agreements and securities
borrowed transactions 7,398 7
Customer receivables 5,709 11
Securities pledged as collateral (3,719) (28)
AVERAGE LIABILITIES
Trading liabilities $ 7,694 11 %
Commercial paper and other short-term borrowings 7,606 44
Customer payables 5,356 24
Payables under repurchase agreements and
securities loaned transactions 2,387 3
- ---------------------------------------------------------------------------------------------------------
During the first quarter of 2000, trading assets and liabilities rose as volume
increased, benefiting from higher customer demand. Additionally, receivables
under resale agreements and securities borrowed transactions, and payables under
repurchase agreements and securities loaned transactions rose both to meet
higher funding requirements resulting from increased trading activity, and from
increased matched-book activity. Higher trading volume during the quarter, as
compared with the fourth quarter of 1999, also caused an increase in the average
customer receivable and payable balances. The growth in average assets was
partly funded by increased issuances of commercial paper during the quarter.
23
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
- --------------------------------------------------------------------------------
Non-investment grade holdings, which include transactions with highly leveraged
counterparties, involve risks related to the creditworthiness of the issuers or
counterparties and the liquidity of the market for such investments. Merrill
Lynch recognizes these risks and, whenever possible, employs strategies to
mitigate exposures. The specific components and overall level of non-investment
grade positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated as BB+
or lower, or equivalent ratings by recognized credit rating agencies, sovereign
debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
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 March 31, 2000, Merrill Lynch had
derivatives with notionals of $4.0 billion 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 March 31, 2000, Merrill Lynch had
derivatives with notionals of $900 million 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 be made on a select basis.
- --------------------------------------------------------------------------------
TRADING EXPOSURES
The following table summarizes Merrill Lynch's non-investment grade trading
exposures:
- ----------------------------------------------------------------------------
MARCH 31, DEC. 31,
(in millions) 2000 1999
- ----------------------------------------------------------------------------
Trading assets:
Cash instruments $6,168 $5,630
Derivatives 4,604 4,033
Trading liabilities - cash instruments (913) (997)
Collateral on derivative assets (1,779) (1,344)
------ ------
Net trading asset exposure $8,080 $7,322
====== ======
- ---------------------------------------------- --------------- -------------
24
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 March
31, 2000, the carrying value of such debt and equity securities totaled $153
million, of which 96% resulted from Merrill Lynch's market-making activities in
such securities. This compared with $133 million at December 31, 1999, of which
89% related to market-making activities. In addition Merrill Lynch held
distressed bank loans totaling $137 million and $86 million at March 31, 2000
and December 31, 1999, respectively.
NON-TRADING EXPOSURES
The following table summarizes Merrill Lynch's non-investment grade non-trading
exposures:
- ---------------------------------------------------------------------------------------
MARCH 31, DEC. 31,
(in millions) 2000 1999
- ---------------------------------------------------------------------------------------
Marketable investment securities $ 214 $ 58
Investments of insurance subsidiaries 115 108
Loans (net of allowance for loan losses):
Bridge loans 131 68
Other loans(1) 1,204 818
Other investments:
Partnership interests (2) 1,362 1,368
Other equity investments (3) 203 369
- --------------------------------------------------------------------------------------
(1) Represents outstanding loans to 137 and 106 companies at March 31, 2000 and
December 31, 1999, respectively.
(2) Includes $691 and $599 million in investments at March 31, 2000 and December
31, 1999, respectively, related to deferred compensation plans, for which
the default risk of the investments generally rests with the participating
employees.
(3) Includes investments in 59 and 62 enterprises at March 31, 2000 and December
31, 1999, respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade counterparties:
- ---------------------------------------------------------------------------------------------
MAR. 31, DEC. 31,
(in millions) 2000 1999
- ---------------------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 281 $ 200
Unutilized revolving lines of credit and other
lending commitments 3,402(1) 2,462
- ---------------------------------------------------------------------------------------------
(1) Subsequent to the end of the first quarter, these commitments were
reduced by $688 million.
25
- --------------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
- --------------------------------------------------------------------------------------------------------------------------------
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR.
1999 1999 1999 1999 2000
------- -------- ------- ------- -------
CLIENT ASSETS (in billions):
U.S. Client Assets $ 1,186 $ 1,226 $ 1,191 $ 1,338 $ 1,424
Non-U.S. Client Assets 298 304 323 358 367
-------- -------- -------- -------- --------
Total Assets in Private Client
Accounts or Under Management $ 1,484 $ 1,530 $ 1,514 $ 1,696 $ 1,791
======== ======== ======== ======== ========
ASSETS UNDER MANAGEMENT: $ 515 $ 516 $ 514 $ 557 $ 568
Retail 274 275 275 291 303
Institutional 241 241 239 266 265
Equity 267 272 271 301 303
Fixed-Income/Other 248 244 243 256 265
U.S. 306 310 304 325 335
Non-U.S. 209 206 210 232 233
FEE-BASED PROGRAM ASSETS(a) $ 98 $ 116 $ 131 $ 168 $ 203
- ---------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (in billions) $ 116 $ 107 $ 108 $ 85 $ 101
Market Share 11.8% 11.7% 13.6% 13.9% 11.4%
U.S. Debt and Equity:
Volume (in billions) $ 97 $ 83 $ 86 $ 67 $ 82
Market Share 15.6% 14.0% 16.8% 16.8% 14.3%
- ---------------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 46,100 46,700 48,000 49,000 50,100
Non-U.S. 17,000 17,300 18,000 18,200 18,500
-------- -------- -------- -------- -------
Total 63,100 64,000 66,000 67,200 68,600
======== ======== ======== ======== =======
Financial Consultants and
Other Investment Professionals 18,000 18,400 18,700 19,000 19,400
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (in millions) $ 609 $ 673 $ 572 $ 764 $ 1,037
Annualized Return on Average
Common Stockholders' Equity 24.6% 25.4% 20.2% 23.8% 31.1%
Earnings per Common Share:
Basic $ 1.65 $ 1.80 $ 1.52 $ 2.03 $ 2.69
Diluted 1.44 1.57 1.34 1.80 2.38
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $314,620 $324,740 $312,936 $328,071 $363,944
Total Stockholders' Equity 10,692 11,446 12,100 12,802 14,467
Book Value Per Common Share 28.05 29.87 31.49 33.20 36.37
- ---------------------------------------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted-Average Shares Outstanding:
Basic 364,039 368,273 370,347 371,962 381,641
Diluted 415,662 421,267 419,090 420,603 432,372
Common Shares Outstanding 366,168 368,960 370,777 372,839 386,071
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Certain prior period amounts have been restated to conform to the current
period presentation.
26
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
JAS Securities Litigation. Since the filing of ML & Co.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999, the following events have
taken place with respect to the JAS Securities Litigation described therein.
Plaintiff has filed an amended complaint for breach of contract alleging
damages in excess of $82 million plus interest. Merrill Lynch has moved to
dismiss the amended complaint and plaintiff has moved for partial summary
judgment on its claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 18, 2000, ML & Co. held its Annual Meeting of Stockholders, at which
85.0% of the shares of ML & Co. common stock outstanding and eligible to vote,
either in person or by proxy, were represented, constituting a quorum. At the
Annual Meeting, the following matters were voted upon: (i) the election of four
directors to the Board of Directors to hold office for a term of three years;
(ii) a proposal for a new performance formula governing annual bonuses and
grants of restricted shares and units for certain executive officers; and (iii)
a stockholder proposal concerning cumulative voting in the election of
directors. Proxies for the Annual Meeting of Stockholders were solicited by the
Board of Directors pursuant to Regulation 14A of the Securities Exchange Act of
1934.
The stockholders elected all four nominees to the Board of Directors as set
forth in ML & Co.'s Proxy Statement. There was no solicitation in opposition to
such nominees. The votes cast for or withheld from the election of directors
were as follows: W.H. Clark received 324,647,680 votes in favor and 4,169,700
votes were withheld; Stephen L. Hammerman received 324,691,965 votes in favor
and 4,125,415 votes were withheld; Aulana L. Peters received 323,424,369 votes
in favor and 5,393,011 votes were withheld; and John J. Phelan, Jr. received
324,872,300 votes in favor and 3,945,080 votes were withheld.
The stockholders approved the proposal for a new performance formula governing
annual bonuses and grants of restricted shares and units for certain executive
officers. The votes cast for and against, as well as the number of abstentions
for this proposal were as follows: 287,469,737 votes in favor, 37,297,953 votes
against, and 4,049,690 shares abstained.
The stockholders did not approve the stockholder proposal concerning cumulative
voting in the election of directors. The votes cast for and against, as well as
the number of abstentions and broker non-votes for this proposal were as
follows: 81,346,817 votes in favor, 168,485,371 votes against, 5,306,536 shares
abstained, and 73,678,656 shares represented broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments defining the rights of security holders, including
indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, ML & Co. hereby
undertakes to furnish to the Securities and Exchange Commission, upon
request, copies of the instruments defining the rights of holders of
long-term debt securities of ML & Co. that authorize an amount of
securities constituting 10% or less of the total assets of ML & Co. and
its subsidiaries on a consolidated basis.
(11) Statement re: computation of per share earnings
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
27
(27) Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by ML & Co.
with the Securities and Exchange Commission during the quarterly
period covered by this Report:
(i) Current Report dated January 25, 2000, for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summary for the three months
and the year ended December 31, 1999.
(ii) Current Report dated March 3, 2000, for the purpose of filing the
form of ML & Co.'s Callable Market Index Target-Term Securities
(Registered Trademark)due March 5,2007 based upon Internet HOLDRs
(Service Mark).
(iii) Current Report dated March 31,2000 for the purpose of filing the
form of ML & Co.'s Nikkei 225 Market Index Target-Term Securities due
March 30, 2007.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-----------------------------------
(Registrant)
Date: May 12, 2000 By: /s/ Thomas H. Patrick
-----------------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
29
INDEX TO EXHIBITS
Exhibits
11 Statement re: computation of per share earnings
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
27 Financial Data Schedule