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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 25, 1998 Commission file number 1-7182
Merrill Lynch & Co., Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-2740599
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
World Financial Center--North Tower
250 Vesey Street
New York, New York 10281
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (212) 449-1000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.33 1/3 and New York Stock Exchange;
attached Rights to Purchase Series A Junior Chicago Stock Exchange;
Preferred Stock Pacific Exchange; Paris Stock
Exchange; London Stock
Exchange; and Tokyo Stock
Exchange
Depositary Shares representing 1/400th share New York Stock Exchange
of 9% Cumulative Preferred Stock, Series A
European Portfolio Market Index Target-Term New York Stock Exchange
Securities ("MITTS") due June 30, 1999; S&P
500 MITTS due May 10, 2001; Technology MITTS
due August 15, 2001; Healthcare/Biotechnology
Portfolio MITTS due October 31, 2001; Nikkei
225 MITTS due June 14, 2002; S&P 500 MITTS
due September 16, 2002; Merrill Lynch's MITTS
based upon the Dow Jones Industrial Average
due January 14, 2003; Top Ten Yield MITTS due
August 15, 2006; S&P 500 MITTS due September
28, 2005; S&P 500 Inflation Adjusted MITTS
due September 24, 2007; Stock Market Annual
Reset Term Notes ("SMART Notes") due December
31, 1999 (Series A); Equity Participation
Securities with Minimum Return Protection due
June 30, 1999; 5% STock Return Income DEbt
Securities ("STRIDES") due June 1, 2000; 6%
Structured Yield Product Exchangeable for
Stock ("STRYPES") due June 1, 1999; 7 1/4%
STRYPES due June 15, 1999; 7 7/8% STRYPES due
February 1, 2001; 6 1/4% STRYPES due July 1,
2001.
Japan Index Equity Participation Securities American Stock Exchange
with Minimum Return Protection due January
31, 2000; AMEX Oil Index SMART Notes due
December 29, 2000; AMEX Hong Kong 30 Index
Equity Participation Notes due February 16,
1999; Major 8 European Index MITTS due August
30, 2002; Major 11 International MITTS due
December 6, 2002; Russell 2000 Index MITTS
due September 30, 2004; S&P 500 MITTS due
July 1, 2005; EuroFund MITTS due February 28,
2006; Medium-Term Notes, Series B, 3% Stock-
Linked Notes due June 10, 2000; Medium-Term
Notes, Series B, 5% Stock-Linked Notes due
July 3, 2000; Medium-Term Notes, Series B,
1.5% Principal Protected Notes due December
15, 2005; Oracle Corporation Indexed Callable
Protected Growth Security due March 31, 2003;
Telebras Indexed Callable Protected Growth
Security due May 19, 2005.
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of the close of business on February 24, 1999, there were 359,808,565 shares
of Common Stock and 4,414,794 Exchangeable Shares outstanding. The Exchangeable
Shares, which were issued by Merrill Lynch & Co., Canada Ltd. in connection
with the merger with Midland Walwyn Inc., are exchangeable at any time into
Common Stock on a one-for-one basis and entitle holders to dividend, voting,
and other rights equivalent to Common Stock.
As of the close of business on February 24, 1999, the aggregate market value of
the voting stock, comprising the Common Stock and the Exchangeable Shares, held
by non-affiliates of the Registrant was approximately $27 billion.
Documents Incorporated By Reference: Merrill Lynch & Co., Inc. 1998 Annual
Report to Stockholders and Merrill Lynch & Co., Inc. Proxy Statement for its
1999 Annual Meeting of Stockholders dated March 5, 1999, each incorporated by
reference in Parts I-IV in this Form 10-K.
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TABLE OF CONTENTS
Part I.
Item 1 Business....................................................... 1
Overview....................................................... 1
Business Environment........................................... 2
Description of Business Activities............................. 3
Competition.................................................... 11
Regulation..................................................... 12
Item 2 Properties..................................................... 14
Item 3 Legal Proceedings.............................................. 15
Item 4 Matters Submitted to a Vote of Securityholders................. 17
Executive Officers of Merrill Lynch & Co., Inc. ............... 17
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 19
Item 6 Selected Financial Data........................................ 19
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 19
Item 7A Quantitative and Qualitative Disclosures About Market Risk..... 19
Item 8 Financial Statements and Supplementary Data.................... 19
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 19
Part III.
Item 10 Directors and Executive Officers of the Registrant............. 19
Item 11 Executive Compensation......................................... 20
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................... 20
Item 13 Certain Relationships and Related Transactions................. 20
Part IV.
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... 20
PART I
Item 1. Business
Overview
Merrill Lynch & Co., Inc.,* a Delaware corporation formed in 1973, is a
holding company that, through its subsidiaries and affiliates, provides
investment, financing, advisory, insurance, and related products and services
on a global basis, including:
. securities brokerage, trading, and underwriting
. investment banking, strategic services, including mergers and
acquisitions, and other corporate finance advisory activities
. asset management and other investment advisory and recordkeeping
services
. brokerage and related activities in swaps, options, forwards,
futures, and other derivatives
. securities clearance services
. equity, debt and economic research
. banking, trust, and lending services, including mortgage lending
and related services
. insurance sales and underwriting services
Merrill Lynch provides these products and services to a wide array of
clients, including individual investors, small businesses, corporations,
governments and governmental agencies, and financial institutions.
Merrill Lynch's business has two segments that comprise its four
strategic priorities: Wealth Management and Corporate and Institutional Client.
Wealth Management comprises three of the four strategic priorities--U.S.
Private Client, International Private Client, and Asset Management--each of
which provides services related to the accumulation and management of wealth.
The Corporate and Institutional Client segment, the fourth strategic priority,
provides investment banking and strategic advisory services as well as equity
and debt trading and capital markets services, and equity, debt and economic
research. Merrill Lynch provides these financial services worldwide through a
number of highly integrated subsidiaries and affiliates that frequently
participate in the facilitation and consummation of a single transaction. This
organizational structure is designed to enhance services to Merrill Lynch's
diverse global client base and position it for worldwide growth. Merrill Lynch
has organized its operations outside the United States into six regions:
. Europe, Middle East, and Africa
. Asia Pacific
. Australia and New Zealand
. Japan
. Canada
. Latin America
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* Unless the context otherwise requires, the term "Merrill Lynch" means
Merrill Lynch & Co., Inc. and includes the consolidated subsidiaries of
Merrill Lynch & Co., Inc. The term "ML & Co." is used herein where
appropriate to refer to Merrill Lynch & Co., Inc., the parent holding
company.
1
Merrill Lynch conducts its global business from various locations
throughout the world. Its world headquarters facility is located at the World
Financial Center in New York City and its other principal U.S. business and
operational centers are in New Jersey, Colorado, Florida, and California.
Merrill Lynch has a presence in more than 45 countries outside the U.S.,
including offices in Buenos Aires, Dublin, Frankfurt, Geneva, Hong Kong,
Johannesburg, London, Madrid, Mexico City, Milan, Paris, Sao Paulo, Singapore,
Sydney, Toronto, Tokyo and Zurich.
Merrill Lynch employed 63,800 people at the end of 1998.
At the end of 1998, total assets in client accounts or under management
were more than $1.4 trillion. In 1998, according to Securities Data Co.,
Merrill Lynch achieved the top ranking in U.S. debt and equity underwriting,
and ranked first in U.S. completed, and second in U.S. announced, mergers and
acquisitions. Globally, Merrill Lynch was the leading debt and equity
underwriter and ranked second in mergers and acquisitions for both announced
and completed transactions.
Financial information concerning Merrill Lynch for each of the three
fiscal years ended on the last Friday in December of 1998, 1997, and 1996,
including the amount of total revenue contributed by classes of similar
products or services that accounted for 10% or more of its consolidated
revenues in any one of these fiscal periods, as well as information with
respect to Merrill Lynch's operations by segment and geographic area is set
forth in Merrill Lynch's Consolidated Financial Statements and the Notes
thereto in the Merrill Lynch & Co., Inc. 1998 Annual Report to Stockholders
(the "Annual Report") included as an exhibit to this Form 10-K.
Business Environment
The financial services industry, in which Merrill Lynch is a leading
participant, is highly competitive and highly regulated. This industry and the
global financial markets are influenced by numerous uncontrollable factors.
These factors include economic conditions, monetary policies, the liquidity of
global markets, international and regional political events, regulatory
developments, the competitive environment, and investor sentiment. These
conditions or events can significantly affect the volatility of financial
markets. While greater volatility increases risk, it may also increase order
flow in businesses such as trading and brokerage. Revenues and net earnings may
vary significantly from period to period due to these unpredictable factors and
the resulting market volatility.
The financial services industry continues to be affected by the
intensifying competitive environment, as demonstrated by consolidation through
mergers and acquisitions, as well as diminishing margins in many mature
products and services, and competition from new entrants, such as Internet
broker-dealers. In addition, the recent relaxation of banks' barriers to entry
into the securities industry and expansion by insurance companies into
traditional brokerage products, coupled with the potential repeal of the laws
separating commercial and investment banking activities, 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, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but are
not limited to, the factors listed in the previous paragraph, as well as
actions and initiatives taken by both current and potential competitors, the
effect of current, pending, and future legislation and regulation both in the
United States and throughout the world, and the other risks and uncertainties
detailed in Competition and Regulation below and in Management's Discussion and
Analysis in the Annual Report. Merrill Lynch undertakes no responsibility to
update or revise any forward-looking statements.
2
Description of Business Activities
The business activities of certain significant U.S. and non-U.S. Merrill
Lynch subsidiaries comprising its Wealth Management and Corporate and
Institutional Client segments are described below. These subsidiaries may
provide both Wealth Management and Corporate and Institutional Client products
and services. See Management's Discussion and Analysis and the Notes to the
Consolidated Financial Statements in the Annual Report for further information
about Merrill Lynch's business activities and policies, its business segments,
products and services, and the geographic markets within which it operates.
Wealth Management
Brokerage and Related Activities:
In the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") is a broker (i.e., agent) for individual clients, as well as
corporate, institutional and governmental clients, in the purchase and sale of
corporate securities, primarily equity and debt securities traded on exchanges
or in the over-the-counter markets. MLPF&S also acts as a broker for investors
in the purchase and sale of mutual funds, money market instruments, government
securities, high-yield bonds, municipal securities, futures, and options,
including option contracts for the purchase and sale of various types of
securities.
MLPF&S has established commission rates or fixed charges for all
brokerage services that it performs. For accounts that are actively traded,
however, MLPF&S's policy is to negotiate commissions based on economies of
scale and the complexity of the particular trading transaction and,
additionally, for its institutional customers, based on the competitive
environment and trading opportunities. MLPF&S customers participating in the
BlueprintSM program can trade certain equity securities and mutual funds at a
lower cost due to order processing efficiencies.
MLPF&S provides financing to clients, including margin lending and other
extensions of credit. In a margin-based transaction, MLPF&S extends credit for
a portion of the market value of the securities in the client's account up to
the limit imposed by internal MLPF&S policies and applicable margin rules and
regulations. Since MLPF&S may have financial exposure if a client fails to meet
a margin call, any margin loan made by MLPF&S is collateralized by securities
in the client's margin account. Financial reviews, margin procedures, and other
credit standards have been implemented in an effort to limit any exposures
resulting from this margin lending activity. Interest on margin loans is an
important source of revenue for MLPF&S. To finance margin loans, MLPF&S uses
funds on which it pays interest (including parent company borrowings), funds on
which it does not pay interest (including its own capital), funds derived from
client's free credit balances to the extent permitted by regulations, and funds
derived from securities loaned.
Merrill Lynch, through Merrill Lynch Futures Inc. ("MLF") and other
subsidiaries, acts as a broker for the purchase and sale of futures contracts
and options on such futures contracts, as described below under Corporate and
Institutional Client--Brokerage and Related Activities.
Merrill Lynch Investment Partners Inc. ("MLIP") serves principally as the
sponsor and commodity pool operator of publicly and privately offered commodity
pools for which MLF acts as commodity broker and MLPF&S or an affiliate act as
selling agent. MLIP also structures and sponsors managed futures and hedge fund
products to meet a variety of client objectives. MLIP is one of the largest
managed futures sponsors in the world as measured by assets under its
management and by its financial resources. MLIP is an integrated business, the
capabilities of which include research, trading services, finance, systems,
operations, administration, sales, and marketing. MLIP's responsibilities
include selecting and monitoring trading advisors, as well as allocating and
reallocating capital among them. At the end of 1998, more than $2.5 billion in
equity was invested or was to be invested in 40 U.S. and non-U.S. commodity
futures or hedge fund products that MLIP has sponsored or has been selected to
manage.
3
In 1998, MLPF&S sold more than $55.5 billion of mutual funds, including
income, balanced, and growth funds, of which approximately $22.5 billion
represented sales of mutual funds advised by Merrill Lynch Asset Management or
Merrill Lynch Mercury Asset Management.
MLPF&S sponsors the Defined Asset FundsSM product. This product consists
of a series of funds that are unit investment trusts registered under the
Investment Company Act of 1940 and that have invested in U.S. and non-U.S.
equity securities, municipal, corporate, and U.S. Government and non-U.S. debt
obligations. At the end of 1998, approximately $25.5 billion of client funds
were invested in Defined Asset Funds.
MLPF&S provides a wide range of client services, including effecting
trades in equity, fixed-income and other securities through its securities
account services, such as its Cash Management Account(R) financial services
program (the "CMA(R) account"). At the end of 1998, there were more than 1.9
million CMA accounts held by Merrill Lynch's U.S. customers with aggregate
assets of approximately $525 billion and there were approximately 53,000 CMA
accounts held by Merrill Lynch's non-U.S. clients with aggregate assets of
approximately $28 billion. MLPF&S offers various other products such as the
Capital BuilderSM Account, Merrill Lynch Consults(R), the Asset PowerSM, the
Merrill Lynch Mutual Fund AdvisorSM program, the Merrill Lynch Mutual Fund
Advisor SelectsSM program, the Financial Foundation(R) report, and Merrill
Lynch Financial AdvantageSM.
Outside the United States, Merrill Lynch International and its affiliates
provide comprehensive investment, financing, and related products and services
on a global basis to individual investors, as described below under Corporate
and Institutional Client Group--Brokerage and Related Activities.
Group Employee Services and Retirement, Investment and Custody Services:
Through its Group Employee Services division, MLPF&S is one of the
largest bundled service providers of 401(k) plans in the United States. MLPF&S
provides a wide variety of retirement plan products, particularly benefits
consulting, administration, investment, employee education, and communication
services to 401(k) and other benefit plans. At the end of 1998, it provided
these services to approximately 29,000 401(k) plans, representing over $90
billion in plan assets. Its services to this market were enhanced by Merrill
Lynch's 1998 acquisition of Howard Johnson & Company, a benefits and actuarial
consulting firm which administers plans for more than 275 companies and has
more than one million participants and approximately $25 billion in assets.
Merrill Lynch is also a leading provider of administrative services for stock
option and stock purchase plans.
MLPF&S provides custodial services to individual investors in connection
with the investors' maintenance of Individual Retirement Accounts (IRAs),
including IRAs established under Simplified Employee Pension and SIMPLE plans
pursuant to Section 408 of the Internal Revenue Code and related Treasury
Department regulations. At the end of 1998, there were approximately $162
billion in customer assets in more than 2 million Merrill Lynch IRAs.
MLPF&S is actively marketing the new Roth and Education IRAs, created by
the Taxpayer Relief Act of 1997. Contributions to the new IRAs were permitted
to be made beginning in January 1998, the effective date for these provisions.
At the end of 1998, MLPF&S had approximately 268,360 Roth and Education IRAs
representing more than $3.5 billion in client assets.
Business Financial Services:
Through Merrill Lynch Business Financial Services Inc. ("MLBFS"), Merrill
Lynch provides financing services to small- and medium-sized businesses in
conjunction with the Working Capital
4
ManagementSM account ("WCMA(R) account"), which MLPF&S markets to business
clients. The WCMA account combines business checking, borrowing, investment,
and electronic funds transfer services into one account for participating
business clients. At the end of 1998, there were more than 143,000 WCMA
accounts that, in the aggregate, had investment assets of more than $92
billion. MLBFS also provides business advisory services, including strategic
services to middle market companies.
In addition to providing qualifying clients with short-term working
capital financing through the WCMA commercial line of credit, MLBFS offers
assistance to business clients with their term lending, equipment, and other
asset-based financing needs, as well as financing for owner-occupied commercial
real estate. In 1998, MLBFS originated more than $1.5 billion in new commercial
loans for business customers and, at the end of 1998, total outstanding loans
were more than $1.8 billion, of which approximately 97% were secured by
tangible assets pledged by customers.
Insurance Activities:
Merrill Lynch's operations in insurance services consist of the
underwriting of life insurance and annuity products by Merrill Lynch Life
Insurance Company ("MLLIC") and ML Life Insurance Company of New York ("ML
Life") and of the sale of proprietary and non-proprietary life insurance and
annuity products through Merrill Lynch Life Agency Inc. and other insurance
agencies affiliated or associated with MLPF&S operating in the United States
and Canada.
MLLIC, an Arkansas stock life insurance company, is authorized to
underwrite insurance and annuities products in 49 states, the District of
Columbia, Guam, and the U.S. Virgin Islands. These products are marketed to
MLPF&S customers. Although authorized to do so, it does not presently
underwrite accident and health insurance. At year-end 1998, MLLIC had
approximately $13 billion of life insurance in force. At year-end 1998, MLLIC
had annuity contracts in force of more than $8.5 billion in value.
ML Life, a New York stock life insurance company, is authorized to
underwrite life insurance, annuities, and accident and health insurance in nine
states; however, it does not presently underwrite accident and health
insurance. At year-end 1998, ML Life had approximately $2 billion of life
insurance in force, which amount included approximately $1 billion reinsured
from yearly renewable term insurance of an unaffiliated insurer. At year-end
1998, ML Life had annuity contracts in force of approximately $696 million in
value.
Through agency agreements, licensed affiliate insurance agencies and
other insurance agencies associated with MLPF&S sell life and health insurance
and annuities products. A significant portion of these sales consists of
products underwritten by MLLIC and ML Life.
Banking, Trust, Mortgage Lending and Related Activities:
Merrill Lynch Bank & Trust Co. ("MLBT") and Merrill Lynch Bank USA
("MLBUSA"), both of which are state chartered depository institutions, insured
by the Federal Deposit Insurance Corporation, accept certificates of deposit
and money market deposits (including deposit accounts offered through the
Insured SavingsSM Account program for the CMA service), originate and purchase
secured loans, and issue VISA(R) cards.
Merrill Lynch provides personal trust, employee benefit trust, and
custodial services to clients in the U.S. through eight state-chartered trust
institutions and a federally chartered savings bank. Trust services outside of
the United States are provided by Merrill Lynch Bank and Trust Company (Cayman)
Limited ("MLBT Cayman").
Merrill Lynch Credit Corporation ("MLCC") offers a broad selection of
real estate-based lending products enabling clients to purchase and refinance
their homes as well as to manage their other personal credit
5
needs. MLCC, through Merrill Lynch's financial consultants, offers a variety of
adjustable-rate and fixed-rate first mortgage loans throughout the United
States, including the PrimeFirst(R) mortgage program. In addition, MLCC
originates and services home equity credit lines and other mortgage loans as
well as services mortgage loans for affiliated and unaffiliated financial
institutions. MLCC uses a variety of financing techniques to fund its loan
portfolio, including securitizing its mortgages for sale into the secondary
marketplace. MLCC also provides securities-based lending through its OmegaSM
account, a personal line of credit using eligible securities as collateral that
is accessible by VISA(R) card and by check.
Merrill Lynch International Bank Limited ("MLIB Limited"), a United
Kingdom bank with non-U.K. branch offices in Germany, Singapore, Bahrain,
Luxembourg, and Italy provides foreign exchange trading and collateralized
lending and letter of credit services and accepts deposits. Merrill Lynch Bank
(Suisse) S.A., a Swiss bank, provides loans, deposits, portfolio management
services, and individual client services to international private banking
clients.
Asset Management Activities:
Merrill Lynch's asset management activities are conducted through its
Asset Management Group ("AMG") using, principally, the Merrill Lynch, Mercury
and Hotchkis and Wiley brand names. The principal subsidiaries engaged in these
activities are Merrill Lynch Asset Management LP ("MLAM") and Merrill Lynch
Mercury Asset Management ("MLMAM"). AMG is one of the largest asset management
organizations in the world having at the end of 1998 total assets under
management of approximately $501 billion compared with approximately $448
billion at year-end 1997.
At the end of 1998, through portfolio managers located in the United
States, the United Kingdom, Japan, Australia, Hong Kong, Canada, Switzerland
and Singapore, AMG managed a wide variety of investment products. These ranged
from money market funds and other forms of short-term fixed-income investments
to long-term taxable and tax-exempt fixed-income funds or portfolios, along a
broad spectrum of quality ratings and maturities. AMG also manages a wide
variety of equity and balanced funds or portfolios that invest in most
significant markets globally.
AMG's open-end funds offered in the United States (except for its money-
market funds) are generally offered pursuant to the Merrill Lynch Select
PricingSM system, which allows investors four pricing alternatives. The
Hotchkis and Wiley brand of mutual funds are sold to clients on a no-load
basis. AMG offers a family of unit trusts in the United Kingdom under the
Mercury brand. During 1998, Merrill Lynch introduced the Mercury Asset
Management brand of mutual funds that were distributed through Merrill Lynch's
distribution network both inside and outside the United States. Both Merrill
Lynch and Mercury branded mutual funds are offered to clients in other global
markets through both the Merrill Lynch distribution network and directly
through unaffiliated financial intermediaries. At the end of 1998, AMG managed
approximately $252 billion globally of mutual funds or their non-U.S.
equivalent.
AMG provides separate account investment management services to a widely
geographically diversified client base that includes pension funds,
corporations, governments, supranational organizations, central banks and other
institutions. Marketing offices in over 15 countries further support these
services. At the end of 1998, the total assets under management of such
services were approximately $211 billion. AMG offers similarly structured
separate account investment management services for private clients both in the
United States, the United Kingdom and globally. The total assets under
management for these services were $38 billion at the end of 1998.
In the third quarter of 1998, AMG introduced a new family of 17 mutual
funds that were distributed through Merrill Lynch Japan Securities Co., Ltd.
Merrill Lynch now manages more than $17 billion of assets for Japanese
individual, corporate and institutional investors.
6
Corporate and Institutional Client
Brokerage and Related Activities:
In the United States, MLPF&S and certain of its affiliates provide many
of the same products and services for corporate, institutional, and
governmental clients as they do for individual clients as described above under
Wealth Management--Brokerage and Related Activities.
As part of its brokerage activities, MLPF&S, as a futures commission
merchant, introduces customers to MLF for the purchase and sale of futures
contracts and options on futures contracts in substantially all exchange-traded
commodity and financial futures products. MLPF&S and certain of its affiliates
may also take proprietary market positions in futures and futures options in
certain instances. MLF holds memberships on all major commodity and financial
futures exchanges and clearing associations in the United States and it also
carries positions reflecting trades executed on exchanges outside of the United
States. Other Merrill Lynch subsidiaries also hold memberships on major
commodity and financial futures exchanges and clearing associations outside the
U.S. and may also carry positions in proprietary and customer accounts.
All futures and futures options transactions are executed, cleared
through and/or carried by MLF and other Merrill Lynch subsidiaries engaged in
futures activities. On certain exchanges, third party brokers are utilized to
execute and/or clear trades. Where MLF or other Merrill Lynch subsidiaries
maintain memberships in the clearing associations of various futures exchanges,
these entities have potentially significant financial exposure in the event
that other members of futures clearing houses default materially in their
obligations to such clearing houses. In addition, as with any margin
transaction, the risk of loss to Merrill Lynch and its customers from the
trading of futures contracts is greater than the risk in cash securities
transactions, primarily as a result of the low initial margin requirements
(good faith deposits) relative to the value of the actual futures contracts.
Merrill Lynch may have financial exposure if a client fails to meet a margin
call. Net worth requirements, financial reviews, margin procedures, and other
credit standards established for a client's futures accounts are intended to
limit any exposure to Merrill Lynch resulting from its client's trading in
futures accounts.
Outside the United States, Merrill Lynch International and its affiliates
("MLI") provides comprehensive investment, financing, and related products and
services on a global basis to sovereign governments, corporations, and
institutional clients, as well as to individual investors. MLI companies are
members of various non-U.S. stock and futures exchanges. The investment,
financing, and market-making operations of MLI are conducted through a network
of offices, including representative and liaison offices, located in more than
40 countries outside the United States. This office network services major
"money center" institutions as well as thousands of regional institutions and
individual investors.
The worldwide trading operations of MLI, particularly in London and
Tokyo, make it one of the largest traders of equities and dealers in Eurobonds
and other globally traded securities and a significant participant in the over-
the-counter equity derivatives business. MLI also engages in foreign exchange
transactions (including options on non-U.S. currencies) as a dealer and
consequently assumes proprietary positions in numerous currencies and related
options.
Merrill Lynch Capital Markets Bank Limited, an Irish bank with branch
offices in Frankfurt, Johannesburg, Labuan (Malaysia), Milan, and Tokyo,
engages in capital markets activities such as underwriting, foreign exchange,
and swap and other derivative transactions, lending, and institutional equity
and debt sales.
Merrill Lynch International Bank, an Edge Act corporation ("MLIB"),
provides foreign exchange trading services to corporations and institutions.
7
Investment Banking Activities:
MLPF&S is a leading investment banking firm that participates in every
aspect of investment banking for corporate, institutional, and governmental
clients and acts in principal, agency, and advisory capacities. Advisory
services include advice on strategic matters, including mergers and
acquisitions, divestitures, spin-offs, restructurings, leveraged buyouts, and
defensive projects. MLPF&S advises on capital structuring and provides a wide
variety of financial services, including underwriting the sale of securities to
the public, privately placing securities with investors, providing structured
and derivative financings, including project financing, mortgage and lease
financing.
MLPF&S, either directly or through affiliates, provides advice, valuation
services, and financing assistance and engages in the underwriting and private
placement of high-yield securities in connection with, among other things,
leveraged buyouts and other acquisition-related transactions. MLPF&S and its
affiliates have, from time to time, taken principal positions in transactions
and its affiliates have extended credit to clients in the form of senior and
subordinated debt, as well as provided bridge financing on a select basis, and
syndicated loans. Before MLPF&S and its affiliates engage in any of these
financing activities, an analysis is performed to ascertain the underlying
creditworthiness of the particular client and the liquidity of the market for
securities that may be issued in connection with any such financings and to
determine the likelihood of refinancing within a reasonable period.
Additionally, MLPF&S and its affiliates occasionally acquire equity interests
in the subject companies as part of, or in connection with, such activities.
Merrill Lynch, through various subsidiaries and affiliates, including ML
Global Partners, Inc. ("MLGP") and Merrill Lynch Capital Partners, Inc.
("MLCP"), has made investments in equity and debt securities issued in
acquisition transactions. MLGP provides management services for Merrill Lynch
Partners, L.P., an international private equity fund. MLCP provides management
services for two leveraged buyout funds. The limited partners of the MLGP and
MLCP funds are primarily private investors. Merrill Lynch, through MLPF&S and
its other subsidiaries, may underwrite, trade, invest, and make markets in
certain securities of companies in which the MLGP and MLCP funds have invested,
and may also provide financial advisory services to these companies.
Securities Dealing Activities:
MLPF&S regularly makes a market in the equity securities of approximately
550 U.S. corporations. In addition, it engages in transactions in approximately
5400 securities of non-U.S. issuers traded in the over-the-counter markets, and
conducts market-making activities with clients and other dealers. MLPF&S is
also a dealer in municipal, mortgage-backed, asset-backed, and corporate fixed-
income securities.
As an adjunct to its trading activities, MLPF&S places its capital at
risk by engaging in block positioning to facilitate transactions in large
blocks of listed and over-the-counter securities and by engaging, from time to
time, in arbitrage transactions for its own account. In its block positioning
activities, MLPF&S purchases securities, or sells securities short for its own
account, without having full commitments for their resale or covering purchase,
thereby employing its capital to effect large transactions. Such positioning
activities are undertaken after analyzing a given security's marketability, and
any position taken typically is liquidated as soon as practicable. In addition,
MLPF&S facilitates various trading strategies involving the purchase and sale
of financial futures contracts and options and, in connection with this
activity, it may establish positions for its own account and risk.
Merrill Lynch Government Securities Inc. ("MLGSI") is a primary dealer in
obligations issued or guaranteed by the United States Government and by Federal
agencies and other government-sponsored entities, including Government National
Mortgage Association, Federal National Mortgage Association, and Federal Home
Loan Mortgage Corporation and is a dealer in mortgage-backed-pass-through
certificates issued by certain of these entities, and also deals in related
futures, options, and forward contracts for its own account, to
8
hedge its own risk, and to facilitate customers' transactions. It is one of 30
primary government securities dealers that daily report positions and
activities to the Federal Reserve Bank of New York.
MLGSI's transactions in obligations of the United States Government,
Federal agencies and government-sponsored entities involve large dollar amounts
and small dealer spreads. As an integral part of its business, MLGSI enters
into repurchase agreements whereby it obtains funds by pledging its own
securities as collateral. The repurchase agreements provide financing for
MLGSI's dealer inventory and serve as short-term investments for MLGSI's
customers, which include certain of MLGSI's affiliates. MLGSI also enters into
reverse repurchase agreements whereby it provides funds against the pledge of
collateral by customers. Such agreements provide MLGSI with needed collateral
and provide MLGSI's customers with temporary liquidity for their investments in
United States Government and agency securities.
Derivative Dealing Activities:
Merrill Lynch Capital Services, Inc. ("MLCS") and Merrill Lynch
Derivative Products AG ("MLDP") are Merrill Lynch's primary derivative product
dealers and act as intermediaries and principals in a variety of interest rate,
currency, and other over-the-counter derivative transactions.
MLCS primarily acts as a counterparty for certain derivative financial
products, including interest rate and currency swaps, caps and floors, currency
options, and credit derivatives. MLCS maintains positions in interest-bearing
securities, financial futures, and forward contracts primarily to hedge its
derivative exposures. In the normal course of its business, MLCS enters into
repurchase and resale agreements with certain affiliated companies. MLCS also
engages in certain commodity-related transactions as a principal, and has
become licensed as a power marketer by the Federal Energy Regulatory
Commission.
MLDP acts as an intermediary for certain derivative products, including
interest rate and currency swaps, between MLCS and counterparties that are
highly rated or otherwise acceptable to MLDP. Its activities address the desire
of certain swap customers to limit their trading to those dealers having the
highest credit quality. MLDP has been assigned the Aaa, AAA, and AAA
counterparty rating by the rating agencies, Moody's Investors Service, Inc.,
Standard & Poor's, and Fitch IBCA, Inc., respectively. Customers meeting
certain credit criteria enter into swaps with MLDP and, in turn, MLDP enters
into offsetting mirror swaps with MLCS. However, MLCS is required to provide
MLDP with collateral to meet certain exposures MLDP may have to MLCS.
As mentioned above, MLI engages in the equity and credit derivatives
business in the over-the-counter markets, and Merrill Lynch Capital Markets
Bank Limited is a credit intermediary and conducts part of Merrill Lynch's non-
dollar swap activities.
Mortgage Dealing Activities:
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is a dealer in whole loan
mortgages, mortgage loan participations, mortgage servicing, and corporate bank
loans. MLMCI, through its CMO PassportSM service, provides dealers and
investors with general indicative information and analytic capability with
respect to collateralized mortgage obligations, mortgage pass-through
certificates, and asset-backed securities. As an integral part of its business,
MLMCI enters into repurchase agreements whereby it obtains funds by pledging
its own whole loans as collateral. The repurchase agreements provide financing
for MLMCI's inventory and serve as short-term investments for MLMCI's
customers. MLMCI also enters into resale agreements through which it provides
funds to customers collateralized by whole loan mortgages, thereby providing
them with temporary liquidity. MLMCI also has a mortgage conduit that purchases
commercial and multi-family mortgage loans from lenders and securitizes these
loans for sale to investors. In addition, MLMCI provides to its clients short-
term financing secured by performing and non-performing commercial real estate.
MLMCI also makes proprietary equity investments in U.S. and non-U.S. companies
owning performing and non-performing real estate and mortgages.
9
Money Markets Activities:
Merrill Lynch, through Merrill Lynch Money Markets Inc. ("MLMMI"),
provides a full range of origination, trading, and marketing services with
respect to money market instruments such as commercial paper, bankers'
acceptances, and institutional certificates of deposit. MLMMI also provides
services in connection with the origination of medium-term notes issued by U.S.
and non-U.S. corporations and short-and medium-term bank notes issued by
financial institutions, and through MLPF&S, it trades and markets such notes.
MLMMI is also a commercial paper dealer for U.S. and non-U.S. corporations and
financial institutions. MLMMI also acts as a dealer for U.S. and non-U.S.
financial institutions in the certificate of deposit and bankers' acceptance
markets and in connection with the purchase of certificates of deposit from
Federally-insured depository institutions. Such instruments are resold to
certain institutional customers such as banks, insurance companies, investment
companies, pension plans, and state and local governments. MLMMI, in
cooperation with MLPF&S, originates certificates of deposit issued by bank and
thrift institutions that are sold to a broad range of individual investors of
MLPF&S.
Research Services:
The Global Securities Research & Economics Group provides equity, fixed-
income, and economic research services on a global basis to Merrill Lynch's
institutional and individual client sales forces and their customers. This
group covers and distributes fundamental equity and fixed-income research,
technical market and quantitative analyses, convertible securities analyses,
investment and fixed-income strategy recommendations, high-yield debt
securities research, credit research on municipal securities, and futures
research information.
Merrill Lynch consistently ranks among the leading research providers in
the industry, and its analysts and other professionals cover more than 3800
companies located in 26 countries, with more than half of the staff now
dedicated to non-U.S. research activities. Current information and investment
opinions on these companies, as well as on industry sectors and countries, are
available to Merrill Lynch's individual and institutional customers through
their financial consultants and account executives, and through Merrill Lynch's
public website, www.ml.com.
Securities Clearing Services:
MLPF&S provides securities clearing services through its subsidiaries,
Broadcort Capital Corp. ("BCC") and Merrill Lynch Professional Clearing Corp.
("MLPCC"). BCC provides these services to approximately 117 unaffiliated
broker-dealers. Those utilizing BCC's clearing services may also execute
transactions through BCC's fixed-income desk and participate in underwritings
of Defined Asset Funds sponsored by MLPF&S. While the introducing broker-dealer
firm retains all sales functions with their customers, BCC services the
customers' accounts and handles all settlement and credit aspects of
transactions. MLPCC clears transactions for specialists and market-makers on
various national and regional stock exchanges; clears commodities futures
transactions for clients through a divisional clearing arrangement with MLF;
and clears transactions of arbitrageurs, customers, and other professional
trading entities.
Strategic Initiatives
During 1998, Merrill Lynch expanded its non-U.S. presence through
strategic acquisitions and initiatives. In the third quarter of 1998, Merrill
Lynch Japan Securities Co., Ltd. opened to serve individual investors in Japan
through a network of 33 branch offices throughout the country. Merrill Lynch
Japan Securities offers private clients a diversified selection of global
investment choices including funds, Japanese and foreign equities, convertible
bonds, and fixed-income securities, including Japanese government, domestic,
and foreign currency bonds.
10
Also during the third quarter, Merrill Lynch acquired the shares of
Midland Walwyn Inc., Canada's largest independent full-service securities firm.
This acquisition strengthens Merrill Lynch's presence in Canada, gives Canadian
investors greatly expanded product offerings and access to global
opportunities, and brings Canadian corporations broad distribution of their
securities both domestically and globally.
Through the acquisition of a majority interest in Phatra Securities
Company Limited, a Thai investment bank, Merrill Lynch furthered its commitment
to the Asia Pacific region. Phatra Securities provides corporate finance,
research, asset management, portfolio management, and secondary market
services. Phatra's research group is Thailand's largest, covering more than 100
companies in Thailand.
In the U.S., Merrill Lynch enhanced its group employee services business
through the acquisition of Howard Johnson & Company, a benefits and actuarial
consulting firm. Merrill Lynch divested Merrill Lynch Specialists Inc., a non-
core equities business that conducts a specialist business in stocks traded on
the floor of the New York Stock Exchange, and a majority interest in Lender's
Service Inc., which provides real estate appraisal, title, and closing
management services for the residential lending community, including for MLCC.
Competition
All aspects of Merrill Lynch's business are intensely competitive,
particularly in the underwriting, trading, and advisory activities, and have
been affected by the entry of several new and non-traditional competitors such
as commercial banks and insurance companies and Internet broker-dealers, and by
the consolidation of others. Merrill Lynch competes for clients, market share,
and human talent in every aspect of its business. It competes directly on a
worldwide basis with other U.S. and non-U.S. trading, investment banking and
financial advisory service firms, brokers and dealers in securities and
futures. It also competes with commercial banks and their affiliates in these
businesses and particularly in its derivatives and capital markets businesses.
Many of Merrill Lynch's non-U.S. competitors may have competitive advantages in
their home markets. Merrill Lynch's competitive position depends to an extent
on prevailing worldwide economic conditions and U.S. and non-U.S. governmental
policies.
Through its subsidiaries and affiliates, Merrill Lynch also competes for
investment funds with mutual fund management companies, insurance companies,
finance and investment advisory companies, banks, and trust companies and
institutions. Merrill Lynch competes for its individual and institutional
clients on the basis of price, the range of products that it offers, the
quality of its services, its financial resources, and product and service
innovation. Financial services companies also compete to attract and retain
successful financial consultants and other revenue-producing personnel. Merrill
Lynch's insurance businesses operate in highly competitive environments. Many
insurance companies, both stock and mutual, are older and larger and have more
substantial financial resources and larger agency relationships than do Merrill
Lynch's insurance subsidiaries.
Certain U.S. judicial and regulatory actions in recent years concerning,
among other things, the authority of bank affiliates to engage in securities
underwriting and brokerage activities have resulted in increased competition in
those aspects of Merrill Lynch's business. The proposed Financial Services Act
of 1998, H.R.10, represented a significant accomplishment in the effort to
modernize the financial services industry in the U.S. by proposing the repeal
of statutes that limit the securities, insurance, and other non-banking
activities of any company that controls an insured bank. The bill was passed in
the House of Representatives but the Senate adjourned for 1998 before
completing action on the bill. Nevertheless, H.R.10 came closer to passage than
any financial modernization bill to date and resolved bank-insurance, bank-
securities, and other issues that had long stood as obstacles to the progress
of prior modernization bills. This legislation was reintroduced in the House of
Representatives in January 1999.
11
Regulation
Certain aspects of Merrill Lynch's business, as that of its competitors
and the financial services industry in general, are subject to stringent
regulation by U.S. Federal and state regulatory agencies and securities
exchanges and by various non-U.S. governmental agencies or regulatory bodies,
securities exchanges, and central banks, each of which have been charged with
the protection of the financial markets and the interests of those
participating in those markets. These regulatory agencies in the United States
include, among others, the Securities and Exchange Commission ("SEC"),
Commodity Futures Trading Commission ("CFTC"), Federal Deposit Insurance
Corporation ("FDIC"), Municipal Securities Rulemaking Board ("MSRB"), and
Office of Thrift Supervision ("OTS"). In other areas of the world, these
regulators include The Financial Services Authority ("FSA"), The Securities and
Futures Authority ("SFA"), the Bank of England and the Investment Management
Regulatory Organization ("IMRO") in the U.K., the Central Bank of Ireland, the
Federal Banking Supervisory Authority in Germany, the Japanese Ministry of
Finance, The Monetary Authority of Singapore, the Office of Superintendent of
Financial Institutions in Canada, the Central Bank of Brazil, the Central Bank
of Argentina, the Central Bank of Mexico, and the Securities and Futures
Commission in Hong Kong, among many others.
Additional legislation and regulations and changes in rules promulgated
by the SEC or other U.S. Federal and state governmental regulatory authorities
and self-regulatory organizations and by non-U.S. governments and governmental
regulatory agencies may directly affect the manner of operation and
profitability of Merrill Lynch.
United States Regulatory Oversight and Supervision:
MLPF&S and certain other subsidiaries of ML & Co. are registered as
broker-dealers with the SEC and as such are subject to regulation by the SEC
and by self-regulatory organizations, such as the National Association of
Securities Dealers, Inc. (the "NASD") and the securities exchanges of which
each is a member. Certain Merrill Lynch subsidiaries and affiliates, including
MLPF&S, MLAM, and MLIP, are registered as investment advisers with the SEC.
MLPF&S and MLAM are registered as investment advisers in those states requiring
such registration.
Those Merrill Lynch entities that are broker-dealers registered with the
SEC and members of U.S. national securities exchanges are subject to Rule 15c3-
1 under the Securities Exchange Act of 1934 (the "Exchange Act") which is
designed to measure the general financial condition and liquidity of a broker-
dealer. Under this rule, they are required to maintain the minimum net capital
deemed necessary to meet broker-dealers' continuing commitments to customers
and others. Under certain circumstances, this rule limits the ability of ML&Co.
to withdraw capital from such broker-dealers. Additional information regarding
certain net capital requirements is set forth in Note 12 to the Consolidated
Financial Statements in the Annual Report.
Certain Merrill Lynch subsidiaries are also subject to the risk
assessment rules adopted by the SEC under the Market Reform Act of 1990, which
require, among other things, that certain broker-dealers maintain and preserve
records and other information, describe risk management policies and
procedures, and report on the financial condition of certain affiliates whose
financial and securities activities are reasonably likely to have a material
impact on the financial and operating condition of the broker-dealer.
Broker-dealers are also subject to other regulations covering the
operations of their business, including sales and trading practices, use of
client funds and securities, and conduct of directors, officers, and employees.
Broker-dealers are also subject to regulation by state securities
administrators in those states where they do business. Violations of the
stringent regulations governing the actions of a broker-dealer can result in
the revocation of broker-dealer licenses, the imposition of censures or fines,
the issuance of cease and desist orders,
12
and the suspension or expulsion from the securities business of a firm, its
officers, or employees. The SEC and the national securities exchanges emphasize
in particular the need for supervision and control by broker-dealers of their
employees.
The SEC, various banking regulators, the Financial Accounting Standards
Board, and Congressional committees, among others, have launched a number of
initiatives which have the effect of increasing regulation, and requiring
greater disclosure, of financial instruments, including derivatives positions
and activities. Merrill Lynch, along with certain other major U.S. securities
firms, has implemented a voluntary oversight framework to address issues
related to capital, management controls, and counterparty relationships arising
out of the over-the-counter derivatives activities of unregulated affiliates of
SEC-registered broker-dealers and CFTC-registered futures commission merchants.
Merrill Lynch formed its Risk Control Committee as an extension of its risk
management process to provide general oversight of risk management for all of
its institutional trading activities and to monitor compliance with its
commitments respecting this voluntary oversight initiative.
MLGSI is subject to regulation by the NASD and the Chicago Board of Trade
and is required to maintain minimum net capital pursuant to rules of the U.S.
Department of the Treasury. Merrill Lynch's municipal finance professionals are
subject to various trading and underwriting regulations of the MSRB. Merrill
Lynch's registered futures commission merchants are regulated by the CFTC, the
National Futures Association ("NFA"), and the commodity exchanges of which each
is a member. The CFTC and the NFA impose net capital requirements on these
companies. MLIP is registered with the CFTC as a commodity pool operator and a
commodity trading advisor and is a member of the NFA in such capacities.
Merrill Lynch's banking and lending activities are supervised and
regulated by a number of different Federal and state regulatory agencies. MLBT
is regulated primarily by the State of New Jersey and by the FDIC. Certain of
the activities of MLBFS and MLCC are regulated by the New Jersey Department of
Banking. In addition to New Jersey, MLCC is also licensed or registered to
conduct its lending activities in 35 other states and MLBFS is licensed or
registered in 7 states, subjecting each to regulation and examination by the
appropriate authorities in those states.
MLBUSA is regulated primarily by the State of Utah and by the FDIC. MLIB
is regulated by the Federal Reserve Bank of New York. Merrill Lynch's U.S.
trust institutions are subject to regulation by the OTS in the case of the
federal savings bank and by the bank regulatory agencies in the states where
the state-chartered institutions are incorporated.
Merrill Lynch's insurance subsidiaries are subject to state insurance
regulatory supervision. ML Life is subject to regulation and supervision by the
New York State Insurance Department. MLLIC is subject to regulation and
supervision by the Insurance Department of the State of Arkansas. Both MLLIC
and ML Life are subject to similar regulation in the other states in which they
are licensed.
Non-U.S. Regulatory Oversight and Supervision:
Merrill Lynch's business is also subject to extensive regulation by
various non-U.S. governments, securities exchanges, central banks, and
regulatory bodies, particularly in those countries where it has established an
office. Certain Merrill Lynch subsidiaries, including Merrill Lynch
International, are regulated as broker-dealers under the laws of the
jurisdictions in which they operate.
Merrill Lynch International, a registered broker-dealer in the United
Kingdom, is regulated by the SFA and is subject to its capital requirements.
Merrill Lynch Capital Markets Bank Limited, which engages in the derivatives
business, is regulated by the Central Bank of Ireland and the New York State
Banking Department. Merrill Lynch's activities in Australia are regulated by
the Australian Securities and Investment Commission,
13
and its Hong Kong and Singapore operations are regulated and supervised by the
Hong Kong Securities and Futures Commission and The Monetary Authority of
Singapore, respectively. Merrill Lynch's Japanese business is subject to the
regulation of the Financial Supervisory Agency as well as other Japanese
regulatory authorities. Merrill Lynch Phatra Securities is regulated primarily
by the Securities and Exchange Commission of Thailand and the Stock Exchange of
Thailand.
Merrill Lynch Canada is an investment dealer in Canada and is regulated
under the laws of the Canadian provinces by securities commissions and by the
Investment Dealers Association of Canada. It is also a member of all major
Canadian exchanges and is subject to their rules and regulations.
The business of MLAM and MLMAM is regulated by a number of non-U.S.
regulatory agencies or bodies. Their activities in the United Kingdom are
reported by IMRO and the Personal Investment Authority and, in other
jurisdictions, by local regulators.
Merrill Lynch's subsidiaries engaged in banking and trust activities
outside the United States are regulated by various governmental entities in the
particular jurisdiction where they are chartered, incorporated, and/or conduct
their business activities. In addition to being regulated by the New York State
Banking Department, MLIB Limited is regulated by the FSA and The Monetary
Authority of Singapore. Merrill Lynch Bank (Suisse) S.A. is regulated by the
Swiss Federal Banking Commission. MLBT Cayman is regulated by the Cayman
Monetary Authority and the Florida Department of Banking.
Item 2. Properties
Merrill Lynch has a number of offices throughout the world. Other than
those described below as being owned, substantially all offices of Merrill
Lynch subsidiaries throughout the world are located in leased premises.
Facilities owned or occupied by Merrill Lynch are believed to be adequate for
the purposes for which they are currently used and are well maintained. Set
forth below is a brief description and the approximate square footage of the
principal facilities of Merrill Lynch. The information regarding Merrill
Lynch's property lease commitments is set forth in Note 8 to the Consolidated
Financial Statements under the caption Leases in the Annual Report.
Principal Facilities in the United States:
Merrill Lynch's executive offices and principal administrative offices
are located in leased premises at the World Financial Center in New York City.
In 1998, separate Merrill Lynch affiliates leased both the North Tower
(1,800,000 square feet) and the South Tower (2,500,000 square feet); both
leases expire in 2013. Merrill Lynch occupies the entire North Tower and
approximately half the South Tower. Another Merrill Lynch affiliate is a
partner in the partnership that holds the ground lessee's interest in the North
Tower.
In New York City, MLPF&S also holds a lease for 662,000 square feet in
lower Manhattan expiring in 2007. In 1998, Merrill Lynch began partial
occupancy of a 760,000 square foot building at 222 Broadway, which was
purchased by a subsidiary in 1997; as third party leases expire, Merrill Lynch
intends to occupy the entire building. In New Jersey, Merrill Lynch affiliates
own a 400,000 square foot hotel, conference and training center, a 700,000
square foot office building in Plainsboro, and a 414,000 square foot building
on 34 acres at 300 Davidson Avenue in Somerset. MLPF&S holds a 590,000 square
foot lease at 101 Hudson Street in Jersey City. In 1998, Merrill Lynch
continued to pursue a plan to purchase land and build a new facility in
Hopewell, New Jersey to consolidate existing operations and allow for future
expansion. Merrill Lynch affiliates own a 54-acre campus in Jacksonville,
Florida, with four buildings, and a 70-acre campus in Englewood, Colorado with
two buildings.
14
Principal Facilities Outside the United States:
In London, Merrill Lynch leases 250,000 square feet at Ropemaker Place
with a cancellation right in 2002. In 1998, Merrill Lynch purchased a site in
the City of London to construct a new headquarters complex of 2,550,000 square
feet. The new headquarters will replace the Ropemaker facility and, is expected
to be occupied in 2001. An additional 170,000 square feet of office space is
also leased at Farringdon Road. This lease, which has a 25 year term, commenced
in 1990. Merrill Lynch also leases approximately 140,000 square feet under a
lease expiring in 2014 on King William Street, where Merrill Lynch Mercury
Asset Management's operations are headquartered. In 1998, with the acquisition
of Midland Walwyn, Merrill Lynch added 114 offices, mostly in Canada, and with
the opening of Merrill Lynch Japan Securities, Merrill Lynch added 36 locations
in Japan. Merrill Lynch leases a total of 737 business locations in the United
States and 285 outside the United States.
Item 3. Legal Proceedings
ML & Co., certain of its subsidiaries, including MLPF&S, and other
persons have been named as parties in civil actions and arbitration
proceedings, including those described below. Each of the following actions is
reported as of March 1, 1999.
Orange County Litigation
In June 1998, Merrill Lynch settled the following two actions in the
United States District Court for the Central District of California (the
"District Court") alleging violations of Federal and California law in
connection with its business activities with the Treasurer-Tax Collector of
Orange County, California ("Orange County"): County of Orange, et al. v.
Merrill Lynch & Co., Inc., et al. instituted January 12, 1995 (the "Orange
County Action"); and Irvine Ranch Water District v. Merrill Lynch & Co., Inc.
instituted December 20, 1996. Under the settlement terms, ML & Co. undertook to
pay $400 million to Orange County, approximately $17 million to Irvine Ranch
Water District, and to return approximately $20 million of excess collateral to
Orange County. On November 30, 1998, the District Court found that the
settlement of the Orange County Action was in good faith, thereby barring any
potential claims for contribution, indemnity or similar relief by non-settling
parties. Payment by ML & Co. will be due approximately five business days after
May 3, 1999, the first business day following the expiration of the time for
any party to appeal from this District Court finding of good faith.
The following actions filed against ML & Co. in connection with Merrill
Lynch's business activities with the Treasurer-Tax Collector of Orange County
remain outstanding:
DeLeon v. Merrill Lynch, Pierce, Fenner & Smith Inc., et al., instituted
December 13, 1994, was brought against MLPF&S, an affiliate, and an employee of
Merrill Lynch as a purported class action in the Superior Court of the State of
California, Orange County, on behalf of individuals whose funds were invested
by the Orange County Treasurer-Tax Collector, alleging breaches of fiduciary
duties and acts of professional negligence in connection with Merrill Lynch's
business activities with the Orange County Treasurer-Tax Collector. Damages,
including punitive damages, in unspecified amounts are sought. On May 10, 1996,
the court stayed this action pending final resolution of the Orange County
Action.
City of Atascadero, et al. v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
et al., instituted September 15, 1995, was brought in the Superior Court of the
State of California, San Francisco County by 14 California public entities
against ML & Co., and certain of its subsidiaries and employees. The complaint
alleges, among other things, that the defendants committed fraud, deceit, and
negligent misrepresentation; conspired to commit fraud; breached fiduciary
duties; aided and abetted breaches of fiduciary duty; and violated California
Penal Code Section 496 and the Racketeer Influenced and Corrupt Organizations
Act in connection with Merrill Lynch's business activities with the Orange
County Treasurer-Tax Collector. Damages, including punitive
15
damages and treble damages, in unspecified amounts are sought. By decision
dated December 7, 1998 and modified on January 6, 1999, the California Court of
Appeal reversed a lower court dismissal of this action. An action in the
District Court by the same 14 entities making substantially the same
allegations and seeking the same damages has been stayed pending final
resolution of the state court action or until further order of the District
Court.
Balan v. Merrill Lynch & Co., Inc., et al., instituted December 16, 1994,
was brought as a purported class action in the United States District Court for
the Southern District of New York on behalf of purchasers of ML & Co.'s common
stock between March 31, 1994 and December 6, 1994 alleging, among other things,
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder by ML & Co. and two of its present or former directors
and officers in connection with Merrill Lynch's disclosure with respect to its
business activities with the Orange County Treasurer-Tax Collector. Damages in
an unspecified amount are sought.
NASDAQ Litigation
In the Matter of Certain Market Making Activities on Nasdaq, instituted
and settled without a hearing or an admission of or denial of findings on
January 11, 1999, was an SEC administrative action that found that on certain
occasions in 1994 traders at MLPF&S improperly coordinated their quotes with
traders at other firms. MLPF&S agreed to pay a fine of $472,500, to submit some
of its procedures for review by an independent consultant, and to an
administrative cease and desist order prohibiting Merrill Lynch from violating
certain provisions of the securities laws. Twenty-seven other market makers and
51 traders at other firms settled related SEC administrative actions at the
same time.
In re Nasdaq Market-Makers Antitrust Litigation, a consolidated class
action instituted December 16, 1994 in the United States District Court for the
Southern District of New York, was brought against more than 35 market makers,
including MLPF&S, alleging that they engaged in a conspiracy with respect to
the spread between bid and ask prices for certain securities traded on Nasdaq
by, among other things, refusing to quote bid and ask prices in odd eighths. On
November 13, 1998, judgment was entered granting final approval to a settlement
without a hearing on the merits of the claims or finding of liability; MLPF&S
paid approximately $100 million to settle the action.
Shareholder Derivative Litigation
In each of the following shareholder derivative actions ML & Co. is named
as a nominal defendant because the action purports to be brought on behalf of
ML & Co. and any recovery obtained by plaintiffs would be for the benefit of ML
& Co.:
Miller v. Schreyer, et al. , a consolidated derivative action instituted
October 11, 1991 in the Supreme Court of the State of New York, New York
County, alleges, among other things, breach of fiduciary duty against certain
present or former ML & Co. directors, and against Transmark USA, Inc. and one
of its principals in connection with securities trading transactions that
occurred at year-end 1984, 1985, 1986, and 1988 between subsidiaries of ML &
Co. and a subsidiary of Transmark USA, Inc., Guarantee Security Life Insurance
Company, which was later liquidated. Damages in an unspecified amount are
sought. On January 5, 1999, the New York State Supreme Court, Appellate
Division, reversed a lower court dismissal of this action.
Miller v. Peters, et al., a derivative action instituted October 13, 1998
in the Supreme Court of the State of New York, New York County, alleges, among
other things, that 15 present or former ML & Co. directors breached their
fiduciary duties by failing to prevent ML & Co. from engaging in excessively
risky business transactions with hedge funds. Damages in an unspecified amount
are sought.
16
ML & Co. believes it has strong defenses to, and, where appropriate, will
vigorously contest the actions described above that have not already been
settled. Although the ultimate outcome of the actions described above and other
civil actions, arbitration proceedings, and claims pending against ML & Co. or
its subsidiaries as of March 1, 1999, cannot be ascertained at this time and
the results of legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these actions will not have a
material adverse effect on the financial condition or the results of operations
of Merrill Lynch as set forth in the Consolidated Financial Statements of
Merrill Lynch included in the Annual Report.
Item 4. Matters Submitted to a Vote of Securityholders
There were no matters submitted to a vote of security holders during the
1998 fourth quarter.
----------------
EXECUTIVE OFFICERS OF MERRILL LYNCH & CO., INC.
The following table sets forth the name, age, present title, principal
occupation, and certain biographical information for the past five years for ML
& Co.'s executive officers, all of whom have been elected by the ML & Co. Board
of Directors and have been appointed as members of the Merrill Lynch Executive
Management Committee. Unless otherwise indicated, the officers listed are of ML
& Co. Under ML & Co.'s by-laws, elected officers are elected annually to hold
office until their successors are elected and qualify or until their earlier
resignation or removal.
David H. Komansky, 59
Chairman of the Board since April 1997; Chief Executive Officer since December
1996; President and Chief Operating Officer from January 1995 to April 1997;
Executive Vice President, Debt and Equity Markets Group from May 1993 to
January 1995; Executive Vice President, Debt Markets Group from June 1992 to
April 1993.
Herbert M. Allison, Jr., 55
President and Chief Operating Officer since April 1997; Executive Vice
President, Corporate and Institutional Client Group from January 1995 to April
1997; Executive Vice President, Investment Banking Group from May 1993 to
January 1995; Executive Vice President, Finance and Administration from October
1990 to April 1993.
Thomas W. Davis, 45
Executive Vice President and Head of Corporate and Institutional Client Group
since March 1998; Executive Vice President and Co-Head of Corporate and
Institutional Client Group from April 1997 to March 1998; Managing Director and
Co-Head of Investment Banking Group from April 1995 to April 1997; Co-Head of
Equity Markets Group from 1993 to April 1995; Head of Global Equity Capital
Markets from 1991 to 1993.
Edward L. Goldberg, 58
Executive Vice President, Operations Services Group since January 1999;
Executive Vice President, Operations, Services and Technology from April 1991
to January 1999.
Stephen L. Hammerman, 61
Vice Chairman of the Board since April 1992; General Counsel since October
1984.
17
Jerome P. Kenney, 57
Executive Vice President, Corporate Strategy and Research since October 1990;
Executive Vice President, Corporate Credit from May 1993 to May 1995.
John A. McKinley, Jr., 41
Head of the Technology Group since January 1999; Senior Vice President and
Chief Technology Officer since October 1998. Joined Merrill Lynch in October
1998. Prior, Chief Technology and Information Officer, General Electric Capital
Services, October 1995 to October 1998; Partner, Ernst & Young LLP, October
1992 to November 1995.
E. Stanley O'Neal, 47
Executive Vice President and Chief Financial Officer since March 1998;
Executive Vice President and Co-Head of Corporate and Institutional Client
Group from April 1997 to March 1998; Managing Director and Head of Global
Capital Markets Group from April 1995 to April 1997; Managing Director,
Investment Banking and Head of Financing Services Group from June 1993 to April
1995.
Jeffrey M. Peek, 52
Executive Vice President, Head of Asset Management Group and President and
Chief Executive Officer of MLAM since December 1997; Managing Director and Co-
Head of Investment Banking Group from March 1997 to December 1997; Senior Vice
President and Director, Global Securities Research & Economics from April 1995
to March 1997; Head of Global Industries Group from 1993 to March 1995.
Winthrop H. Smith, Jr., 49
Executive Vice President and Head of International Private Client Group since
April 1997; Chairman, Merrill Lynch International Incorporated since April
1993; Executive Vice President, International from June 1992 to April 1997.
John L. Steffens, 57
Vice Chairman of the Board since April 1997; Head of U.S. Private Client Group
since October 1990.
----------------
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the principal market in which the Registrant's
Common Stock is traded, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal years, the approximate
number of holders of record of Common Stock, and the frequency and amount of
any cash dividends declared for the two most recent fiscal years is set forth
under the captions "Dividends Per Common Share" and "Stockholder Information"
on page 94 of the Annual Report and such information is incorporated herein by
reference.
Item 6. Selected Financial Data
Selected financial data for the Registrant and its subsidiaries for each
of the last five fiscal years is set forth in the financial table "Selected
Financial Data" on page 25 of the Annual Report (excluding for this purpose the
financial ratio, leverage, and employee information set forth under the
headings "Financial Ratios" and "Employee Statistics"). Such information is
incorporated herein by reference and should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto on pages 57 to 93 in
the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results
of Operations is set forth on pages 26 to 54 of the Annual Report under the
caption "Management's Discussion and Analysis" and is incorporated herein by
reference. All of such information should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto on pages 57 to 93 in
the Annual Report.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosure about market risk is set forth on
pages 49 to 51 of the Annual Report under the caption "Management's Discussion
and Analysis" and in Note 3 to the Consolidated Financial Statements, and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Registrant and its
subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the Annual Report on pages 56 to 93, and are
incorporated herein by reference. In addition, the information on page 94 of
the Annual Report under the caption "Quarterly Information" is incorporated
herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last two fiscal years.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" on
pages 4 to 7 of ML & Co.'s Proxy Statement dated March 5, 1999 for its 1999
Annual Meeting of Stockholders (the "1999 Proxy
19
Statement") is incorporated herein by reference. For a list of the members of
the ML & Co. Board of Directors and of the ML & Co. executive officers, see
pages 95 to 97, of the Annual Report.
Item 11. Executive Compensation
Information relating to ML & Co. executive officer and director
compensation set forth on pages 13 to 24 and page 26 of the 1999 Proxy
Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial
owners of ML & Co. Common Stock on pages 1 and 2 of the 1999 Proxy Statement
and the information concerning the security ownership of ML & Co. directors and
executive officers on pages 9 and 10 of the 1999 Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions set
forth under the caption "Certain Transactions" on pages 24 to 25 of the 1999
Proxy Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, And Reports On Form 8-K
(a) Documents filed as part of this Report:
1.Consolidated Financial Statements
The consolidated financial statements required to be filed hereunder
are listed on page F-1 hereof by reference to the corresponding page
number in the Annual Report.
2.Financial Statement Schedule
The financial statement schedule required to be filed hereunder is
listed on page F-1 hereof and the schedule included herewith appears
on pages F-2 through F-6 hereof.
3.Exhibits
Certain of the following exhibits were previously filed as exhibits to
other reports or registration statements filed by the Registrant and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate
report reference date or registration statement number. For
convenience, Quarterly Reports on Form 10-Q, Annual Reports on Form
10-K, Current Reports on Form 8-K, and Registration Statements on Form
S-3 are designated herein as "10-Q", "10-K", "8-K", and "S-3",
respectively.
20
(3) Articles of Incorporation and By-Laws
(i)(a) Restated Certificate of Incorporation of ML & Co., effective as of
April 28, 1998 (Exhibit (3)(i) to 10-Q for the quarter ended March 27,
1998 ("First Quarter 1998 10-Q")).
(b) Form of certificate representing the 9% Cumulative Preferred Stock,
Series A, par value $1.00 per share, of ML & Co. (the "9% Preferred
Stock") (Exhibit 3(i) to First Quarter 1998 10-Q).
(c) Form of Depositary Receipt evidencing the Depositary Shares for the 9%
Preferred Stock (Exhibit 4(ii) to 10-Q for the quarter ended September
30, 1994 ("Third Quarter 1994 10-Q")).
(d) Certificate of Designation of ML & Co. establishing the rights,
preferences, privileges, qualifications, restrictions, and limitations
relating to the 9% Preferred Stock (Exhibit 4(iii) to Third Quarter
1994 10-Q).
(e) Deposit Agreement dated as of November 3, 1994 among ML & Co.,
Citibank, N.A. as Depositary, and the holders from time to time of the
Depositary Receipts (Exhibit 4(iv) to Third Quarter 1994 10-Q).
(f) Certificate of Designation dated December 17, 1987 for Series A Junior
Preferred Stock (Exhibit 3(f) to S-3 (File No. 33-19975)).
(g) Certificate of Designation dated August 20, 1998 for Special Voting
Stock, relating to ML & Co.'s Restated Certificate of Incorporation
effective as of April 28, 1998 (incorporated by reference to Exhibit
(3) to 10-Q for the quarter ended September 25, 1998 ("Third Quarter
1998 10-Q")).
(h) Form of Amended and Restated Rights Agreement dated as of December 2,
1997 between ML & Co. and ChaseMellon Shareholder Services, L.L.C.
(Exhibit 4 to 8-K dated December 2, 1997).
(ii) By-Laws of ML & Co., effective as of April 15, 1997 (Exhibit 3(i) to
1997 10-Q for the quarter ended March 28, 1997 ("First Quarter 1997 10-
Q")).
(4) Instruments defining the rights of security holders, including indentures
ML & Co. hereby undertakes to furnish to the SEC, upon request, copies
of any unfiled agreements defining the rights of holders of long-term
debt securities of ML & Co., none of which authorize an amount of
securities that exceed 10% of the total assets of ML & Co.
(i) Senior Indenture dated as of April 1, 1983, as amended and restated as
of April 1, 1987, between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (the "1983 Senior Indenture") and
the Supplemental Indenture thereto dated as of March 15, 1990 (Exhibit
3 to ML & Co.'s Registration Statement on Form 8A dated July 20, 1992).
(ii) Supplemental Indenture dated as of October 25, 1993 to the 1983 Senior
Indenture (Exhibit 4(b)(ii) to S-3 (File No. 33-61559)).
(iii) Twelfth Supplemental Indenture to the 1983 Senior Indenture dated as of
September 1, 1998 between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (Exhibit 4(a) to 8-K dated October
21, 1998).
*(iv) Senior Indenture dated as of October 1, 1993 between ML & Co. and The
Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank
N.A.) (the "1993 Senior Indenture").
(v) First Supplemental Indenture to the 1993 Senior Indenture, dated as of
June 1, 1998, between ML & Co. and The Chase Manhattan Bank (successor
by merger to The Chase Manhattan Bank N.A.) (Exhibit 4(a) to 8-K dated
July 2, 1998).
- --------
* Filed herewith
21
(10) Material Contracts
(i) Form of ML & Co. 1978 Equity Purchase Plan as amended through January
16, 1995 (Exhibit 10(i) to 10-K for the fiscal year ended December 30,
1994 ("1994 10-K")).
(ii) Form of ML & Co. Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, as amended through
November 10, 1994 (Exhibit 10(ii) to 1994 10-K).
(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended through
July 27, 1998 (Exhibit 10(i) to 10-Q for the quarter ended June 29,
1998 ("Second Quarter 1998 10-Q")).
(iv) ML & Co. Equity Capital Accumulation Plan, as amended through October
21, 1996 (Exhibit 10(ii) to Third Quarter 1996 10-Q).
(v) ML & Co. Executive Officer Compensation Plan (Exhibit 10(i) to ML &
Co.'s Proxy Statement for the 1994 Annual Meeting of Stockholders
contained in ML & Co.'s Schedule 14A filed on March 14, 1994).
(vi) Written description of Retirement Program for Non-Employee Directors
of ML & Co., as amended June 29, 1988 (Pages 23 to 24 of ML & Co.'s
Proxy Statement for the 1999 Annual Meeting of Stockholders contained
in ML & Co.'s Schedule 14A filed on March 4, 1998 ("1999 Proxy
Statement")).
(vii) Form of Severance Agreement between ML & Co. and certain of its
directors and executive officers (Exhibit 10(x) to 10-K for fiscal
year ended December 29, 1995).
*(viii) Form of Indemnification Agreement entered into with all current
directors of ML & Co. and to be entered into with all future directors
of ML & Co.
*(ix) Written description of ML & Co.'s incentive compensation programs.
(x) Written description of ML & Co.'s compensation policy for executive
officers and directors (Pages 13 to 15 and pages 22 to 24 of ML &
Co.'s Proxy Statement for the 1999 Annual Meeting of Stockholders
contained in ML & Co.'s Schedule 14A filed on March 5, 1999).
(xi) Merrill Lynch KECALP Growth Investments Limited Partnership 1983
(Exhibit 1(b) to Registration Statement on Form N-2 (File No. 2-
81619)).
(xii) Merrill Lynch KECALP L.P. 1984 (Exhibit 1(b) to Registration Statement
on Form N-2 (File No. 2-87962)).
(xiii) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration Statement
on Form N-2 (File No. 2-99800)).
(xiv) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration Statement
on Form N-2 (File No. 33-11355)).
(xv) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration Statement
on Form N-2 (File No. 33-26561)).
(xvi) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration Statement
on Form N-2 (File No. 33-39489)).
(xvii) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 33-51825)).
(xviii) Merrill Lynch KECALP L.P. 1997 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 333-15035)).
(xix) ML & Co. Deferred Restricted Unit Plan for Executive Officers (Exhibit
10(xxiii) to 10-K for fiscal year ended December 27, 1996 ("1996 10-
K")).
- --------
* Filed herewith
22
(xx) ML & Co. 1995 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(xxii) to 1994 10-K).
(xxi) ML & Co. Fee Deferral Plan for Non-Employee Directors, as amended
through April 15, 1997 (Exhibit 10 to First Quarter 1997 10-Q).
(xxii) ML & Co. 1996 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 29, 1995).
(xxiii) ML & Co. 1997 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(xxvii) to 1996 10-K).
(xxiv) ML & Co., Inc. 1999 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10 to Third Quarter 1998 10-Q).
(xxv) ML & Co. 1997 KECALP Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended June
27, 1997).
(xxvi) ML & Co. Deferred Unit and Stock Unit Plan for Non-Employee Directors
(Exhibit 10 to First Quarter 1998 10-Q).
(xxvii) ML & Co. Long-Term Incentive Compensation Plan for Managers and
Producers (Exhibit 10(ii) to Second Quarter 1998 10-Q).
(xxviii) Executive Annuity Agreement dated as of January 27, 1997 by and
between ML & Co. and David H. Komansky (Exhibit 10(xxxi) to 1996 10-
K).
(xxix) Amendment dated September 18, 1996 to Deferred Compensation Plans
(amending the Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, the ML & Co. 1995
Deferred Compensation Plan for a Select Group of Eligible Employees,
and the ML & Co. 1996 Deferred Compensation Plan for a Select Group
of Eligible Employees) (Exhibit 10(xxxii) to 1996 10-K).
(xxx) ML & Co. 1998 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 26, 1997 (the "Third Quarter 1997 10-Q")).
(xxxi) ML & Co. Program for the Deferral of Stock Option Gains for a Select
Group of Eligible Employees (Exhibit 10(iv) to Third Quarter 1997 10-
Q).
(xxxii) Amendment dated February 12, 1998 to the ML & Co. Deferred
Compensation Plans for a Select Group of Eligible Employees for the
years 1994, 1995, 1996, and 1997 (Exhibit 10.32 to 10-K for the
fiscal year ended December 26, 1997 ("1997 10-K")).
(xxxiii) Amendment dated February 12, 1998 to the ML & Co. Deferred Restricted
Unit Plan for Executive Officers (Exhibit 10.33 to 1997 10-K).
*(11) Statement re computation of per share earnings.
*(12) Statement re computation of ratios.
*(13) Excerpt of 1998 Annual Report to Stockholders.
*(21) Subsidiaries of ML & Co.
*(23) Consent of Independent Auditors, Deloitte & Touche LLP.
*(27) Financial Data Schedule.
*(99) Additional Exhibits.
(i) Opinion of Deloitte & Touche LLP with respect to the Ratio of
Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends, which is included in
Exhibit 12.
(ii) Opinion of Deloitte & Touche LLP with respect to certain information
in the Selected Financial Data, which is incorporated by reference in
Part II, Item 6.
- --------
* Filed herewith
23
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the Registrant
during the fourth quarter of 1998 with the Commission under the caption
"Item 5. Other Events":
(i) Current Report on Form 8-K dated September 29, 1998 for the purpose of
filing the form of Merrill Lynch & Co., Inc.'s S&P 500 Market Index
Target-Term SecuritiesSM due September 28, 2005.
(ii) Current Report on Form 8-K dated October 13, 1998 for the purpose of
filing ML & Co.'s Preliminary Unaudited Earnings Summary for the three-
and nine-month periods ended September 25, 1998.
(iii) Current Report on Form 8-K dated October 21, 1998 for the purpose of
filing the Twelfth Supplemental Indenture, between ML & Co. and The
Chase Manhattan Bank, dated as of September 1, 1998.
(iv) Current Report on Form 8-K dated October 28, 1998 for the purpose of
filing the form of Merrill Lynch & Co., Inc.'s 6 3/8% Notes due October
15, 2008.
(v) Current Report on Form 8-K dated October 28, 1998 for the purpose of
filing ML & Co.'s Preliminary Unaudited Consolidated Balance Sheet as
of September 25, 1998.
(vi) Current Report on Form 8-K dated November 3, 1998 for the purpose of
filing the Consent of Deloitte & Touche LLP with respect to the
Prospectus of Merrill Lynch Preferred Capital Trust V.
(vii) Current Report on Form 8-K dated November 24, 1998 for the purpose of
filing:
(a) Form of ML & Co.'s 6% Notes due November 15, 2004; and
(b) Form of ML & Co.'s 6 7/8% Notes due November 15, 2018.
(viii) Current Report on Form 8-K dated December 1, 1998 for the purpose of
filing the form of ML & Co.'s 5 3/4% STock Return Income Debt
SecuritiesSM due June 1, 2000.
(vix) Current Report on Form 8-K dated December 10, 1998 for the purpose of
filing audited consolidated financial statements for ML & Co. for its
1997 fiscal year, restated to reflect the merger with Midland Walwyn
Inc.
24
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEMS 14(A)(1) AND 14(A)(2)
Page Reference
-----------------------
1998 Annual
Report to
Form 10-K Stockholders
--------- ------------
Consolidated Financial Statements
- ---------------------------------
Independent Auditors' Report 56
Consolidated Statements of Earnings 57
Consolidated Balance Sheets 58-59
Consolidated Statements of Changes in Stockholders'
Equity 60-61
Consolidated Statements of Comprehensive Income 62
Consolidated Statements of Cash Flows 63
Notes to Consolidated Financial Statements 64-93
Financial Statements Schedule
- -----------------------------
Schedule I--Condensed Financial Information of
Registrant F-2 to F-6
Condensed Statements of Earnings F-2
Condensed Balance Sheets F-3
Condensed Statements of Cash Flows F-4
Notes to Condensed Financial Statements F-5
Independent Auditors' Report F-6
Specifically incorporated elsewhere herein by
reference are certain portions of the following
unaudited items:
(i) Selected Financial Data 25
(ii) Management's Discussion and Analysis 26-54
(iii) Quarterly Information 94
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the
Consolidated Financial Statements and Notes thereto in the 1998 Annual Report
to Stockholders, which are incorporated herein by reference.
F-1
CONDENSED STATEMENTS OF EARNINGS (Parent Company Only)
(dollars in millions)
Year Ended Last
Friday
in December
---------------------
1998 1997 1996
------ ------ ------
REVENUES
Interest (principally from affiliates)................. $4,476 $3,937 $2,507
Management service fees (from affiliates).............. 321 296 258
Other.................................................. 109 4 33
------ ------ ------
Total Revenues......................................... 4,906 4,237 2,798
Interest Expense....................................... 4,942 4,077 2,598
------ ------ ------
Net Revenues........................................... (36) 160 200
------ ------ ------
NON-INTEREST EXPENSES
Compensation and benefits.............................. 236 281 285
Other.................................................. 394 307 288
------ ------ ------
Total Non-Interest Expenses............................ 630 588 573
------ ------ ------
Equity in Earnings of Affiliates......................... 1,727 2,222 1,878
------ ------ ------
EARNINGS BEFORE INCOME TAXES............................. 1,061 1,794 1,505
Income Tax Benefit....................................... 198 141 143
------ ------ ------
NET EARNINGS............................................. $1,259 $1,935 $1,648
------ ------ ------
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS........... $1,220 $1,896 $1,602
------ ------ ------
See Notes to Condensed Financial Statements
F-2
CONDENSED BALANCE SHEETS (Parent Company Only)
(dollars in millions, except per share amount)
December 25, December 26,
1998 1997
------------ ------------
ASSETS
Cash and cash equivalents........................... $ -- $ 187
Loans to, receivables from, and preference
securities of affiliates........................... 80,492 79,201
Investments in affiliates........................... 9,745 8,172
Equipment and facilities (net of accumulated
depreciation and amortization of $289 in 1998 and
$267 in 1997)...................................... 160 155
Other receivables and assets........................ 2,197 1,974
------- -------
Total Assets........................................ $92,594 $89,689
======= =======
LIABILITIES
Commercial paper and other short-term borrowings.... $16,986 $30,607
Loans from and payables to affiliates............... 4,046 3,063
Other liabilities and accrued interest.............. 4,301 4,492
Long-term borrowings................................ 57,129 42,988
------- -------
Total Liabilities................................... 82,462 81,150
------- -------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity...................... 425 425
------- -------
Common Stockholders' Equity
Shares exchangeable into common stock............. 66 66
Common stock (par value $1.33 1/3 per share;
authorized: 1,000,000,000 shares; issued:
472,660,324 shares).............................. 630 630
Paid-in capital................................... 1,427 1,001
Accumulated other comprehensive loss (net of tax). (122) (47)
Retained earnings................................. 10,475 9,579
------- -------
12,476 11,229
Less: Treasury stock, at cost:
1998--116,376,259 shares; 1997--133,400,971
shares......................................... 2,101 2,677
Employee stock transactions..................... 668 438
------- -------
Total Common Stockholders' Equity................... 9,707 8,114
------- -------
Total Stockholders' Equity.......................... 10,132 8,539
------- -------
Total Liabilities and Stockholders' Equity.......... $92,594 $89,689
======= =======
See Notes to Condensed Financial Statements
F-3
CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only)
(dollars in millions)
Year Ended Last Friday in December
----------------------------------
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings........................... $ 1,259 $ 1,935 $ 1,648
Noncash items included in earnings:
Equity in earnings of affiliates..... (1,727) (2,222) (1,878)
Depreciation and amortization........ 30 30 31
Other................................ (183) 103 50
(Increase) decrease in operating
assets, net of operating liabilities.. -- (216) 907
Dividends and partnership distributions
from affiliates ...................... 868 1,126 1,367
----------- ----------- -----------
Cash Provided by Operating
Activities.......................... 247 756 2,125
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Loans to affiliates, net of
payments............................ 774 (22,164) (17,299)
Investments in affiliates, net of
dispositions........................ (436) (60) (129)
Equipment and facilities............. (35) (54) (18)
----------- ----------- -----------
Cash Provided by (Used for) Investing
Activities.......................... 303 (22,278) (17,446)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for):
Commercial paper and other short-term
borrowings.......................... (13,621) 5,770 7,499
Issuance and resale of long-term
borrowings.......................... 27,153 23,592 15,019
Settlement and repurchase of long-
term borrowings..................... (13,933) (6,665) (6,070)
Repurchase of Remarketed Preferred
Stock............................... -- (194) --
Common stock transactions............ 27 (500) (919)
Dividends to shareholders............ (363) (294) (245)
----------- ----------- -----------
Cash (Used for) Provided by Financing
Activities.......................... (737) 21,709 15,284
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents........................... (187) 187 (37)
Cash and cash equivalents, beginning of
year.................................. 187 -- 37
----------- ----------- -----------
Cash and cash equivalents, end of
year.................................. $ -- $ 187 $ --
=========== =========== ===========
Supplemental Disclosure
Cash paid for:
Income taxes......................... $ 280 $ 555 $ 949
Interest............................. 4,906 3,904 2,517
See Notes to Condensed Financial Statements
F-4
NOTES TO CONDENSED FINANCIAL STATEMENTS (Parent Company Only)
Note 1. Basis of Presentation
The condensed unconsolidated financial statements of Merrill Lynch & Co.,
Inc. ("ML & Co." or the "Parent Company") should be read in conjunction with
the Consolidated Financial Statements of Merrill Lynch & Co., Inc. and
subsidiaries (collectively, "Merrill Lynch") and the Notes thereto in the
Merrill Lynch 1998 Annual Report to Stockholders (the "Annual Report") included
as an exhibit to this Form 10-K. Certain reclassification and format changes
have been made to prior year amounts to conform to the current year
presentation. Prior year amounts have also been restated to reflect the merger
of Midland Walwyn with ML & Co. (see Note 2 to the Consolidated Financial
Statements in the Annual Report).
Investments in affiliates are accounted for in accordance with the equity
method.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements within the Annual Report.
.Long-term borrowings (Note 5)
.Stockholders' equity (Note 7)
.Commitments and contingencies (Note 8)
.Employee incentive plans (Note 10)
The Parent Company hedges certain risks arising from long-term borrowing
payment obligations and investments in and loans to foreign subsidiaries. See
Notes 5 and 4 to the Consolidated Financial Statements, respectively, for
additional information.
Note 2. Guarantees
ML & Co. issues guarantees of counterparty obligations in connection with
certain activities of subsidiaries (see Note 8 to the Consolidated Financial
Statements for further information).
The Parent Company also guarantees certain obligations of subsidiaries,
including obligations associated with foreign exchange forward contracts and
interest rate swap transactions.
ML & Co. also guarantees obligations related to Trust Originated
Preferred Securities(Service Mark) issued by subsidiaries (see Note 6 to the
Consolidated Financial Statements).
F-5
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries ("Merrill Lynch") as of December 25, 1998 and December
26, 1997, and for each of the three years in the period ended December 25,
1998, and have issued our report thereon dated February 22, 1999, which report
expresses an unqualified opinion and includes an explanatory paragraph for the
change in accounting method for certain internal-use software development
costs. Such consolidated financial statements and our report are included in
your 1998 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of Merrill
Lynch, listed in Item 14, of this Annual Report on Form 10-K. Such financial
statement schedule is the responsibility of Merrill Lynch's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 22, 1999
F-6
- -------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on the 5th day of March,
1999.
Merrill Lynch & Co., Inc.
Registrant
/s/ Andrea L. Dulberg
--------------------------------------------------------------
ANDREA L. DULBERG Andrea L. Dulberg
Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 5th day of March, 1999.
/s/ David H. Komansky
--------------------------------------------------------------
DAVID H. KOMANSKY David H. Komansky
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ E. Stanley O'Neal
--------------------------------------------------------------
E. STANLEY O'NEAL E. Stanley O'Neal
Executive Vice President
Chief Financial Officer
(Principal Financial Officer)
/s/ Michael J. Castellano
--------------------------------------------------------------
MICHAEL J. CASTELLANO Michael J. Castellano
Senior Vice President
and Controller
(Principal Accounting Officer)
/s/ Herbert M. Allison, Jr.
--------------------------------------------------------------
HERBERT M. ALLISON, JR. Herbert M. Allison, Jr.
Director
/s/ W. H. Clark
--------------------------------------------------------------
W.H. CLARK W. H. Clark
Director
/s/ Jill K. Conway
--------------------------------------------------------------
JILL K. CONWAY Jill K. Conway
Director
/s/ Stephen L. Hammerman
--------------------------------------------------------------
STEPHEN L. HAMMERMAN Stephen L. Hammerman
Director
/s/ Earle H. Harbison, Jr.
--------------------------------------------------------------
EARLE H. HARBISON, JR. Earle H. Harbison, Jr.
Director
/s/ George B. Harvey
--------------------------------------------------------------
GEORGE B. HARVEY George B. Harvey
Director
/s/ William R. Hoover
--------------------------------------------------------------
WILLIAM R. HOOVER William R. Hoover
Director
/s/ Robert P. Luciano
--------------------------------------------------------------
ROBERT P. LUCIANO Robert P. Luciano
Director
/s/ David K. Newbigging
--------------------------------------------------------------
DAVID K. NEWBIGGING David K. Newbigging
Director
/s/ Aulana L. Peters
--------------------------------------------------------------
AULANA L. PETERS Aulana L. Peters
Director
/s/ John J. Phelan, Jr.
--------------------------------------------------------------
JOHN J. PHELAN, JR. John J. Phelan, Jr.
Director
/s/ John L. Steffens
--------------------------------------------------------------
JOHN L. STEFFENS John L. Steffens
Director
/s/ William L. Weiss
--------------------------------------------------------------
WILLIAM L. WEISS William L. Weiss
Director
II-1