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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.
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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
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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.
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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.
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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.
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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
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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
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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.
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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.
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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
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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.
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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.
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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.
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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,
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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,
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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.
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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
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
(3) Articles of Incorporation and By-Laws
<TABLE>
<C> <S>
(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).
</TABLE>
- --------
* Filed herewith
21
<PAGE>
(10) Material Contracts
<TABLE>
<C> <S>
(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")).
</TABLE>
- --------
* Filed herewith
22
<PAGE>
<TABLE>
<C> <S>
(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.
</TABLE>
- --------
* Filed herewith
23
<PAGE>
(b) Reports on Form 8-K:
<TABLE>
<C> <S>
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.
</TABLE>
24
<PAGE>
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEMS 14(A)(1) AND 14(A)(2)
<TABLE>
<CAPTION>
Page Reference
-----------------------
1998 Annual
Report to
Form 10-K Stockholders
--------- ------------
<S> <C> <C>
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
</TABLE>
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
<PAGE>
CONDENSED STATEMENTS OF EARNINGS (Parent Company Only)
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended Last
Friday
in December
---------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
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
------ ------ ------
</TABLE>
See Notes to Condensed Financial Statements
F-2
<PAGE>
CONDENSED BALANCE SHEETS (Parent Company Only)
(dollars in millions, except per share amount)
<TABLE>
<CAPTION>
December 25, December 26,
1998 1997
------------ ------------
<S> <C> <C>
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
======= =======
</TABLE>
See Notes to Condensed Financial Statements
F-3
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS (Parent Company Only)
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
----------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
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
</TABLE>
See Notes to Condensed Financial Statements
F-4
<PAGE>
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
<PAGE>
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
<PAGE>
- -------------------------------------------------------------------------------
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
<PAGE>
Exhibit 4(iv)
================================================================================
MERRILL LYNCH & CO., INC.
TO
THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), TRUSTEE
_________
INDENTURE
_________
Dated as of October 1, 1993
SENIOR DEBT SECURITIES
================================================================================
<PAGE>
MERRILL LYNCH & CO., INC.
RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND
INDENTURE, DATED AS OF OCTOBER 1, 1993
<TABLE>
<CAPTION>
TRUST INDENTURE ACT SECTION INDENTURE SECTION
- --------------------------- -----------------
<S> <C>
(S)310(a)(1) ...................................................................................... 608
(a)(2) ...................................................................................... 608
(a)(3) ...................................................................................... Not Applicable
(a)(4) ...................................................................................... Not Applicable
(a)(5) ...................................................................................... 608
(S)311(a) ......................................................................................... 609
(b).......................................................................................... 605
(S)312(a) ......................................................................................... 605, 703
(b).......................................................................................... 701, 702
(c).......................................................................................... 702
(S)313(a).......................................................................................... 703(a)
(b)(1)....................................................................................... Not Applicable
(b)(2)....................................................................................... 703(b)
(c).......................................................................................... 703(c)
(d).......................................................................................... 703(c)
(S)314(a)(1)....................................................................................... 704
(a)(2)....................................................................................... 704
(a)(3)....................................................................................... 704
(a)(4)....................................................................................... 1005
(b).......................................................................................... Not Applicable
(c)(1)....................................................................................... 102
(c)(2)....................................................................................... 102
(c)(3)....................................................................................... Not Applicable
(d).......................................................................................... Not Applicable
(e).......................................................................................... 102
(S)315(a).......................................................................................... 601(a)
(b).......................................................................................... 602
(c).......................................................................................... 601(b)
(d).......................................................................................... 601(c)
(d)(1).......................................................................................601(a)(1),(c)(1)
(d)(2)....................................................................................... 601(c)(2)
(d)(3)....................................................................................... 601(c)(3)
(e).......................................................................................... 514
(S)316(a)(1)(A).................................................................................... 502, 512
(a)(1)(B).................................................................................... 513
(a)(2)....................................................................................... Not Applicable
(b).......................................................................................... 508
(c).......................................................................................... Not Applicable
(S)317(a)(1)....................................................................................... 503
(a)(2)....................................................................................... 504
(b).......................................................................................... 1003
(S)318(a).......................................................................................... 108
</TABLE>
- ------------------
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be a part of the Indenture.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PARTIES........................................................................................................ 1
RECITALS....................................................................................................... 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions................................................................................... 1
Act........................................................................................... 2
Additional Amounts............................................................................ 2
Affiliate..................................................................................... 2
Authenticating Agent.......................................................................... 2
Authorized Newspaper.......................................................................... 2
Bearer Security............................................................................... 2
Board of Directors............................................................................ 2
Board Resolution.............................................................................. 2
Business Day.................................................................................. 2
Commission.................................................................................... 2
Company....................................................................................... 2
Company Request; Company Order................................................................ 2
Controlled Subsidiary......................................................................... 3
Corporate Trust Office........................................................................ 3
corporation................................................................................... 3
coupon........................................................................................ 3
Defaulted Interest............................................................................ 3
Dollars; $.................................................................................... 3
Event of Default.............................................................................. 3
Holder........................................................................................ 3
Indenture..................................................................................... 3
interest...................................................................................... 3
Interest Payment Date......................................................................... 3
Maturity...................................................................................... 3
MLPF&S........................................................................................ 3
Officers'Certificate.......................................................................... 3
Opinion of Counsel............................................................................ 3
Original Issue Discount Security.............................................................. 4
Outstanding................................................................................... 4
Paying Agent.................................................................................. 4
Person........................................................................................ 4
Place of Payment.............................................................................. 4
Predecessor Security.......................................................................... 4
Redemption Date............................................................................... 5
Redemption Price.............................................................................. 5
Registered Security........................................................................... 5
Regular Record Date........................................................................... 5
Responsible Officer........................................................................... 5
Security; Securities.......................................................................... 5
Security Register; Security Registrar......................................................... 5
Special Record Date........................................................................... 5
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Stated Maturity............................................................................... 5
Subsidiary.................................................................................... 5
Trustee....................................................................................... 5
Trust Indenture Act........................................................................... 5
United States................................................................................. 6
United States Alien........................................................................... 6
U.S. Depository; Depository................................................................... 6
Vice President................................................................................ 6
Voting Stock.................................................................................. 6
SECTION 102. Compliance Certificates and Opinions.......................................................... 6
SECTION 103. Form of Documents Delivered to Trustee........................................................ 7
SECTION 104. Acts of Holders............................................................................... 7
SECTION 105. Notices etc. to Trustee and Company........................................................... 9
SECTION 106. Notice to Holders of Securities; Waiver....................................................... 9
SECTION 107. Language of Notices, etc...................................................................... 10
SECTION 108. Conflict with Trust Indenture Act............................................................. 10
SECTION 109. Effect of Headings and Table of Contents...................................................... 10
SECTION 110. Successors and Assigns........................................................................ 10
SECTION 111. Separability Clause........................................................................... 10
SECTION 112. Benefits of Indenture......................................................................... 10
SECTION 113. Governing Law................................................................................. 10
SECTION 114. Legal Holidays................................................................................ 10
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally............................................................................... 11
SECTION 202. Form of Trustee's Certificate of Authentication............................................... 11
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series.......................................................... 11
SECTION 302. Denominations................................................................................. 13
SECTION 303. Execution, Authentication, Delivery and Dating................................................ 13
SECTION 304. Temporary Securities.......................................................................... 14
SECTION 305. Registration, Transfer and Exchange........................................................... 15
SECTION 306. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.............................................. 17
SECTION 307. Payment of Interest; Interest Rights Preserved................................................ 18
SECTION 308. Persons Deemed Owners......................................................................... 19
SECTION 309. Cancellation.................................................................................. 19
SECTION 310. Computation of Interest....................................................................... 20
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture....................................................... 20
SECTION 402. Application of Trust Money.................................................................... 21
</TABLE>
ii
<PAGE>
<TABLE>
ARTICLE FIVE
REMEDIES
<S> <C>
SECTION 501. Events of Default............................................................................. 21
SECTION 502. Acceleration of Maturity; Rescission and Annulment............................................ 22
SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee............................... 23
SECTION 504. Trustee May File Proofs of Claim.............................................................. 23
SECTION 505. Trustee May Enforce Claims Without Possession of Securities or Coupons........................ 24
SECTION 506. Application of Money Collected................................................................ 24
SECTION 507. Limitation on Suits........................................................................... 24
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest..................... 25
SECTION 509. Restoration of Rights and Remedies............................................................ 25
SECTION 510. Rights and Remedies Cumulative................................................................ 25
SECTION 511. Delay or Omission Not Waiver.................................................................. 25
SECTION 512. Control by Holders of Securities.............................................................. 25
SECTION 513. Waiver of Past Defaults....................................................................... 26
SECTION 514. Undertaking for Costs......................................................................... 26
SECTION 515. Waiver of Stay or Extension Laws.............................................................. 26
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities........................................................... 26
SECTION 602. Notice of Defaults............................................................................ 27
SECTION 603. Certain Rights of Trustee..................................................................... 28
SECTION 604. Not Responsible for Recitals or Issuance of Securities........................................ 28
SECTION 605. May Hold Securities........................................................................... 29
SECTION 606. Money Held in Trust........................................................................... 29
SECTION 607. Compensation and Reimbursement................................................................ 29
SECTION 608. Corporate Trustee Required; Eligibility....................................................... 29
SECTION 609. Resignation and Removal; Appointment of Successor............................................. 29
SECTION 610. Acceptance of Appointment by Successor........................................................ 31
SECTION 611. Merger, Conversion, Consolidation or Succession to Business................................... 32
SECTION 612. Appointment of Authenticating Agent........................................................... 32
ARTICLE SEVEN
HOLDERS'LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders..................................... 33
SECTION 702. Preservation of Information; Communications to Holders........................................ 34
SECTION 703. Reports by Trustee............................................................................ 34
SECTION 704. Reports by Company............................................................................ 34
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE
SECTION 801. Consolidations and Mergers of Company and Sales, Leases and Conveyances
Permitted Subject to Certain Conditions.................................................... 35
SECTION 802. Rights and Duties of Successor Corporation.................................................... 35
SECTION 803. Officers'Certificate and Opinion of Counsel................................................... 35
</TABLE>
iii
<PAGE>
<TABLE>
ARTICLE NINE
SUPPLEMENTAL INDENTURES
<S> <C>
SECTION 901. Supplemental Indentures without Consent of Holders........................................... 35
SECTION 902. Supplemental Indentures with Consent of Holders.............................................. 36
SECTION 903. Execution of Supplemental Indentures......................................................... 37
SECTION 904. Effect of Supplemental Indentures............................................................ 37
SECTION 905. Conformity with Trust Indenture Act.......................................................... 37
SECTION 906. Reference in Securities to Supplemental Indentures........................................... 37
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if any, and Interest.......................................... 38
SECTION 1002. Maintenance of Office or Agency.............................................................. 38
SECTION 1003. Money for Securities Payments to be Held in Trust............................................ 39
SECTION 1004. Additional Amounts........................................................................... 40
SECTION 1005. Statement as to Compliance; Notice of Certain Defaults....................................... 40
SECTION 1006. Limitation Upon Creation of Liens on Voting Stock of Certain Subsidiaries.................... 41
SECTION 1007. Limitation on Disposition of Voting Stock of, and Merger and Sale of Assets by, MLPF&S....... 41
SECTION 1008. Waiver of Certain Covenants.................................................................. 41
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article..................................................................... 42
SECTION 1102. Election to Redeem; Notice to Trustee........................................................ 42
SECTION 1103. Selection by Trustee of Securities to be Redeemed............................................ 42
SECTION 1104. Notice of Redemption......................................................................... 42
SECTION 1105. Deposit of Redemption Price.................................................................. 43
SECTION 1106. Securities Payable on Redemption Date........................................................ 43
SECTION 1107. Securities Redeemed in Part.................................................................. 44
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article..................................................................... 44
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities........................................ 44
SECTION 1203. Redemption of Securities for Sinking Fund.................................................... 45
ARTICLE THIRTEEN
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 1301. Applicability of Article..................................................................... 45
</TABLE>
iv
<PAGE>
<TABLE>
ARTICLE FOURTEEN
MEETINGS OF HOLDERS OF SECURITIES
<S> <C>
SECTION 1401. Purposes for Which Meetings May Be Called.................................................... 45
SECTION 1402. Call, Notice and Place of Meetings........................................................... 46
SECTION 1403. Persons Entitled to Vote at Meetings......................................................... 46
SECTION 1404. Quorum; Action............................................................................... 46
SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of Meetings.......................... 47
SECTION 1406. Counting Votes and Recording Action of Meetings.............................................. 47
ARTICLE FIFTEEN
MISCELLANEOUS PROVISIONS
SECTION 1501. Securities in Foreign Currencies............................................................. 48
</TABLE>
v
<PAGE>
INDENTURE, dated as of October 1, 1993, between MERRILL LYNCH & CO., INC.,
a Delaware corporation (hereinafter called the "Company"), having its principal
office at World Financial Center, North Tower, 250 Vesey Street, New York, New
York 10281 and THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), a New York
corporation, as Trustee (hereinafter called the "Trustee") having its Corporate
Trust Office at 4 Chase MetroTech Center, Brooklyn, New York 11245.
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured and
unsubordinated debentures, notes or other evidences of senior indebtedness
(hereinafter called the "Securities"), unlimited as to principal amount, to bear
such rates of interest, to mature at such time or times, to be issued in one or
more series and to have such other provisions as shall be fixed as hereinafter
provided.
The Company has duly authorized the execution and delivery of this
Indenture and all things necessary to make this Indenture a valid agreement of
the Company, in accordance with its terms, have been done.
NOW, THEREFORE, in consideration of the premises and the sum of one dollar
duly paid by the Company to the Trustee, the receipt of which is hereby
acknowledged, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows:
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Securities or of series thereof, as
follows
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as
are generally accepted at the date of such computation; and
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that
Article.
<PAGE>
"Act" when used with respect to any Holder has the meaning specified in
Section 104.
"Additional Amounts" means any additional amounts which are required by a
Security or by or pursuant to a Board Resolution, under circumstances specified
therein, to be paid by the Company in respect of certain taxes imposed on
certain Holders and which are owing to such Holders.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 612 to act on behalf of the Trustee to authenticate Securities of one
or more series.
"Authorized Newspaper" means a newspaper, in an official language of the
country of publication or in the English language, customarily published on each
Business Day, whether or not published on Saturdays, Sundays or holidays, and of
general circulation in the place in connection with which the term is used or in
the financial community of such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day.
"Bearer Security" means any Security in the form established pursuant to
Section 201 which is payable to bearer.
"Board of Directors" means either the Board of Directors of the Company or
the Executive Committee thereof.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" with respect to any Place of Payment means each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in that Place of Payment are authorized or obligated by law to
close, except as may otherwise be provided in the form of Securities of any
particular series pursuant to the provisions of this Indenture.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor corporation shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Request" and "Company Order" mean, respectively, a written request
or order signed in the name of the Company by the Chairman of the Board, the
President, a Vice President or by the Treasurer, and by an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Controlled Subsidiary" means any corporation more than 8090 of the
outstanding Voting Stock, except for qualifying shares, of which shall at the
time be owned directly or indirectly by the Company.
2
<PAGE>
"Corporate Trust Office" means the office of the Trustee at which at any
particular time its corporate trust business shall be administered.
"corporation" includes corporations, associations, companies and business
trusts.
"coupon" means any interest coupon appertaining to a Bearer Security.
"Defaulted Interest" has the meaning specified in Section 307.
"Dollars" or "$" or any similar reference shall mean the currency of the
United States, except as may otherwise be provided in the form of Securities of
any particular series pursuant to the provisions of this Indenture.
"Event of Default" has the meaning specified in Section 501.
"Holder", when used with respect to any Security, means in the case of a
Registered Security, the Person in whose name the Security is registered in the
Security Register and in the case of a Bearer Security, the bearer thereof and,
when used with respect to any coupon, means the bearer thereof.
"Indenture" means this instrument as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof, and shall include each
Officers' Certificate delivered to the Trustee pursuant to Section 303.
"interest", when used with respect to an Original Issue Discount Security
which by its terms bears interest only after Maturity, means interest payable
after Maturity, and, when used with respect to a Security which provides for the
payment of Additional Amounts pursuant to Section 1004, includes such Additional
Amounts.
"Interest Payment Date" means the Stated Maturity of an instalment of
interest on the applicable Securities.
"Maturity" when used with respect to any Security means the date on which
the principal of such Security or an instalment of principal becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption, request for redemption or
otherwise.
"MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
Delaware corporation.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President, a Vice President or the Treasurer, and by an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered
to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may (except as
otherwise expressly provided in this Indenture) be an employee of or counsel for
the Company, or other counsel acceptable to the Trustee.
"Original Issue Discount Security" means a Security issued pursuant to this
Indenture which provides for declaration of an amount less than the principal
thereof to be due and payable upon acceleration pursuant to Section 502.
"Outstanding" when used with respect to Securities means, as of the date of
determination, all Securities theretofore authenticated and delivered under this
Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
3
<PAGE>
(ii) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or
any Paying Agent (other than the Company) in trust or set aside and
segregated in trust by the Company (if the Company shall act as its
own Paying Agent) for the Holders of such Securities and any coupons
thereto appertaining, provided that, if such Securities are to be
redeemed, notice of such redemption has been duly given pursuant to
this Indenture or provision therefor satisfactory to the Trustee has
been made; and
(iii) Securities which have been paid pursuant to Section 306 or
in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by
a bona fide purchaser in whose hands such Securities are valid
obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder or are present at
a meeting of Holders of Securities for quorum purposes, the principal amount of
an Original Issue Discount Security that may be counted in making such
determination and that shall be deemed to be Outstanding for such purposes shall
be equal to the amount of the principal thereof that could be declared to be due
and payable pursuant to the terms of such Original Issue Discount Security at
the time the taking of such action by the Holders of such requisite principal
amount is evidenced to the Trustee as provided in Section 104(a), and, provided
further, that Securities owned beneficially by the Company or any other obligor
upon the Securities or any Affiliate of the Company or such other obligor, other
than Securities purchased in connection with the distribution or trading
thereof, shall be disregarded and deemed not to be Outstanding, except that, in
determining whether the Trustee shall be protected in relying upon any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities which the Trustee knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any other obligor upon the Securities or any Affiliate of
the Company or such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment" when used with respect to the Securities of any series,
means the place or places where the principal of (and premium, if any) and
interest on the Securities of that series are payable as specified as provided
pursuant to Section 301.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
lost, destroyed, mutilated or stolen Security or a Security to which a
mutilated, destroyed, lost or stolen coupon appertains shall be deemed to
evidence the same debt as the lost, destroyed, mutilated or stolen Security or
the Security to which a mutilated, destroyed, lost or stolen coupon appertains.
"Redemption Date" when used with respect to any Security to be redeemed
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Security to be redeemed
means the price at which it is to be redeemed as determined pursuant to the
provisions of this Indenture.
"Registered Security" means any Security established pursuant to Section
201 which is registered in the Security Register.
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"Regular Record Date" for the interest payable on a Registered Security on
any Interest Payment Date means the date, if any, specified in such Security as
the "Regular Record Date".
"Responsible Officer" when used with respect to the Trustee means the
chairman or vice-chairman of the board of directors, the chairman or vice
chairman of the executive committee of the board of directors, the president,
any vice president (whether or not designated by a number or a word or words
added before or after the title "vice president"), the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer, or any other officer of
the Trustee customarily performing functions similar to those performed by any
of the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Security" or "Securities" means any Security or Securities, as the case
may be, authenticated and delivered under this Indenture.
"Security Register" and "Security Registrar" have the respective meanings
specified in Section 305.
"Special Record Date" for the payment of any Defaulted Interest on the
Registered Securities of any series means a date fixed by the Trustee pursuant
to Section 307.
"Stated Maturity" when used with respect to any Security or any instalment
of principal thereof or interest thereon means the date specified in such
Security or a coupon representing such instalment of interest as the fixed date
on which the principal of such Security or such instalment of principal or
interest is due and payable.
"Subsidiary" means any corporation of which at the time of determination
the Company and/or one or more Subsidiaries owns or controls directly or
indirectly more than 50% of the shares of Voting Stock. "Wholly-owned", when
used with reference to a Subsidiary, means a Subsidiary of which all of the
outstanding capital stock (except for qualifying shares) is owned by the Company
or by one or more wholly-owned Subsidiaries.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such with respect to
one or more series of Securities pursuant to the applicable provisions of this
Indenture, and thereafter "Trustee" shall mean each Person who is then a Trustee
hereunder, and if at any time there is more than one such Person, "Trustee" as
used with respect to the Securities of any series shall mean the Trustee with
respect to the Securities of that series.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended,
and any reference herein to the Trust Indenture Act or a particular provision
thereof shall mean such Act or provision, as the case may be, as amended or
replaced from time to time or as supplemented from time to time by rules or
regulations adopted by the Commission under or in furtherance of the purposes of
such Act or provision, as the case may be.
"United States" means the United States of America (including the States
and the District of Columbia), its territories and possessions and other areas
subject to its jurisdiction.
"United States Alien" means any Person who, for United States Federal
income tax purposes, is a foreign corporation, a non-resident alien individual,
a non-resident alien fiduciary of a foreign estate or trust, or a foreign
partnership one or more of the members of which is, for United States Federal
income tax purposes, a foreign corporation, a non-resident alien individual or a
nonresident alien fiduciary of a foreign estate or trust.
"U.S. Depository" or "Depository" means, with respect to the Securities of
any series issuable or issued in whole or in part in the form of one or more
global Securities, the Person designated as U.S. Depository by the Company
pursuant to Section 301, which must be a clearing agency registered under the
Securities Exchange Act of 1934, as amended, and, if so provided pursuant to
Section 301 with respect to the Securities of any series, any successor to such
Person. If at any time there is more than one such Person, "U.S. Depository"
shall mean, with
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respect to any series of Securities, the qualifying entity which has been
appointed with respect to the Securities of that series.
"Vice President" when used with respect to the Company shall mean any Vice
President of the Company whether or not designated by a number or a word or
words added before or after the title "Vice President".
"Voting Stock" means stock of the class or classes having general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such corporation provided that, for the
purposes hereof, stock, which carries only the right to vote conditionally on
the happening of an event shall not be considered voting stock whether or not
such event shall have happened.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(1) a statement that each individual signing such certificate or
opinion has read such condition or covenant and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such condition or covenant
has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
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Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agent
duly appointed in writing. If, but only if, Securities of a series are
issuable as Bearer Securities, any request, demand, authorization,
direction, notice, consent, waiver or other action provided by this
Indenture to be given or taken by Holders of Securities of such series may,
alternatively, be embodied in and evidenced by the record of Holders of
Securities of such series voting in favor thereof, either in person or by
proxies duly appointed in writing, at any meeting of Holders of Securities
of such series duly called and held in accordance with the provisions of
Article Fourteen, or a combination of such instruments and any such record.
Except as herein otherwise expressly provided, such action shall become
effective when such instrument or instruments or record or both are
delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments and any such record (and the
action embodied therein and evidenced thereby) are herein sometimes
referred to as the "Act" of the Holders signing such instrument or
instruments and so voting at any such meeting. Proof of execution of any
such instrument or of a writing appointing any such agent, or of the
holding by any Person of a Security, shall be sufficient for any purpose of
this Indenture and (subject to Section 601) conclusive in favor of the
Trustee and the Company and any agent of the Trustee or the Company, if
made in the manner provided in this Section. The record of any meeting of
Holders of Securities shall be proved in the manner provided in Section
1406.
Without limiting the generality of this Section 104, unless otherwise
established in or pursuant to a Board Resolution or set forth or determined
in an Officers' Certificate, or established in one or more indentures
supplemental hereto, pursuant to Section 301, a Holder, including a U.S.
Depository that is a Holder of a global Security, may make, give or take,
by a proxy, or proxies, duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other action provided
in this Indenture to be made, given or taken by Holders, and a U.S.
Depository that is a Holder of a global Security may provide its proxy or
proxies to the beneficial owners of interests in any such global Security
through such U.S. Depository's standing instructions and customary
practices.
The Trustee shall fix a record date for the purpose of determining the
Persons who are beneficial owners of interest in any permanent global
Security held by a U.S. Depository entitled under the procedures of such
U.S. Depository to make, give or take, by a proxy or proxies duly appointed
in writing, any request, demand, authorization, direction, notice, consent,
waiver or other action provided in this Indenture to be made, given or
taken by Holders. If such a record date is fixed, the Holders on such
record date or their duly appointed proxy or proxies, and only such Persons
shall be entitled to make, give or take such request, demand,
authorization, direction, notice, consent, waiver or other action, whether
or not such Holders remain Holders after such record date. No such
request, demand, authorization, direction, notice, consent, waiver or other
action shall be valid or effective if made, given or taken more than 90
days after such record date.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the
Trustee deems sufficient and in accordance with such reasonable rules as
the Trustee may determine; and the Trustee may in any instance require
further proof with respect to any of the matters referred to in this
Section.
(c) The ownership of Registered Securities and the principal amount
and serial numbers of Registered Securities held by any Person, and the
date of holding the same, shall be proved by the Security Register.
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(d) The principal amount and serial numbers of Bearer Securities held
by any Person, and the date of holding the same, may be proved by the
production of such Bearer Securities or by a certificate executed, as
depositary, by any trust company, bank, banker or other depositary
reasonably acceptable to the Company, wherever situated, if such
certificate shall be deemed by the Trustee to be satisfactory, showing that
at the date therein mentioned such Person had on deposit with such
depositary, or exhibited to it, the Bearer Securities therein described; or
such facts may be proved by the certificate or affidavit of the Person
holding such Bearer Securities, if such certificate or affidavit is deemed
by the Trustee to be satisfactory. The Trustee and the Company may assume
that such ownership of any Bearer Security continues until (1) another
certificate or affidavit bearing a later date issued in respect of the same
Bearer Security is produced, or (2) such Bearer Security is produced to the
Trustee by some other Person, or (3) such Bearer Security is surrendered in
exchange for a Registered Security, or (4) such Bearer Security is no
longer Outstanding. The principal amount and serial numbers of Bearer
Securities held by the Person so executing such instrument or writing and
the date of holding the same may also be proved in any other manner which
the Trustee deems sufficient.
(e) If the Company shall solicit from the Holders of any Registered
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may, at its option, by Board Resolution,
fix in advance a record date for the determination of Holders of Registered
Securities entitled to give such request, demand, authorization, direction,
notice, consent, waiver or other Act, but the Company shall have no
obligation to do so. If such a record date is fixed, such request, demand,
authorization, direction, notice, consent, waiver or other Act may be given
before or after such record date, but only the Holders of Registered
Securities of record at the close of business on such record date shall be
deemed to be Holders for the purposes of determining whether Holders of the
requisite proportion of Outstanding Securities have authorized or agreed or
consented to such request, demand, authorization, direction, notice,
consent, waiver or other Act, and for that purpose the Outstanding
Securities shall be computed as of such record date; provided that no such
authorization, agreement or consent by the Holders of Registered Securities
on such record date shall be deemed effective unless it shall become
effective pursuant to the provisions of this Indenture not later than six
months after the record date.
(f) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued
upon the registration of transfer thereof or in exchange therefor or in
lieu thereof in respect of anything done or suffered to be done by the
Trustee, any Security Registrar, any Paying Agent or the Company in
reliance thereon, whether or not notation of such action is made upon such
Security.
SECTION 105. Notices etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, or
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, first-class postage prepaid, to the Company
addressed to the attention of its Treasurer at the address of its principal
office specified in the first paragraph of this instrument or at any other
address previously furnished in writing to the Trustee by the Company.
SECTION 106. Notice to Holders of Securities; Waiver.
Except as otherwise expressly provided herein or in the form of Securities
of any particular series pursuant to the provisions of this Indenture, where
this Indenture provides for notice to Holders of Securities of any event,
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(1) such notice shall be sufficiently given to Holders of Registered
Securities if in writing and mailed, first-class postage prepaid, to each
Holder of a Registered Security affected by such event, at his address as
it appears in the Security Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such
Notice; and
(2) such notice shall be sufficiently given to Holders of Bearer
Securities, if any, if published in an Authorized Newspaper in The City of
New York and, if the Securities of such series are then listed on any stock
exchange outside the United States, in an Authorized Newspaper in such city
as the Company shall advise the Trustee that such stock exchange so
requires, on a Business Day at least twice, the first such publication to
be not earlier than the earliest date and not later than the latest date
prescribed for the giving of such notice.
In any case where notice to Holders of Registered Securities is given by
mail, neither the failure to mail such notice, nor any defect in any notice so
mailed, to any particular Holder of a Registered Security shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice to Holders of Bearer Securities
given as provided herein. In case by reason of the suspension of regular mail
service or by reason of any other cause it shall be impracticable to give such
notice by mail, then such notification as shall be made with the approval of the
Trustee shall constitute a sufficient notification for every purpose hereunder.
In case by reason of the suspension of publication of any Authorized
Newspaper or Authorized Newspapers or by reason of any other cause it shall be
impracticable to publish any notice to Holders of Bearer Securities as provided
above, then such notification to Holders of Bearer Securities as shall be given
with the approval of the Trustee shall constitute sufficient notice to such
Holders for every purpose hereunder. Neither failure to give notice by
publication to Holders of Bearer Securities as provided above, nor any defect in
any notice so published, shall affect the sufficiency of any notice mailed to
Holders of Registered Securities as provided above.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be equivalent of such notice. Waivers
of notice by Holders of Securities shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.
SECTION 107. Language of Notices, etc.
Any request, demand, authorization, direction, notice, consent, election or
waiver required or permitted under this Indenture shall be in the English
language, except that, if the Company so elects, any published notice may be in
an official language of the country of publication.
SECTION 108. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Indenture by any of
the provisions of the Trust Indenture Act, such required provisions shall
control.
SECTION 109. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 110. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
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SECTION 111. Separability Clause.
In case any provision in this Indenture or in the Securities or coupons
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 112. Benefits of Indenture.
Nothing in this Indenture or in the Securities or coupons, express or
implied, shall give to any Person, other than the parties hereto, any Security
Registrar, any Paying Agent and their successors hereunder and the Holders of
Securities or coupons, any benefit or any legal or equitable right, remedy or
SECTION 113. Governing Law.
This Indenture and the Securities and coupons shall be governed by and
controlled in accordance with the laws of the State of New York.
SECTION 114. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day at any Place of Payment,
then (notwithstanding any other provision of this Indenture or the Securities or
coupons other than a provision in the Securities which specifically states that
such provision shall apply in lieu of this Section) payment of interest or any
Additional Amounts or principal (and premium, if any) need not be made at such
Place of Payment on such date, but may be made on the next succeeding Business
Day at such Place of Payment with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity, and no
interest shall accrue on the amount so payable for the period from and after
such Interest Payment Date, Redemption Date or Stated Maturity, as the case may
be.
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
The Registered Securities, if any, of each series and the Bearer
Securities, if any, of each series, related coupons, if any, and temporary
global Securities, if any, shall be in the form established by or pursuant to a
Board Resolution or in one or more indentures supplemental hereto, shall have
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture or any indenture supplemental hereto and
may have such letters, numbers or other marks of identification and such legends
or endorsements placed thereon as may, consistently herewith, be determined by
the officers executing such Securities, as evidenced by their execution of such
Securities.
Unless otherwise provided as contemplated by Section 301 with respect to
any series of Securities, the Securities of each series shall be issuable in
registered form without coupons. If so provided as contemplated by Section 301,
the Securities of a series also shall be issuable in bearer form, with or
without interest coupons attached.
The definitive Securities and coupons shall be printed, lithographed or
engraved or produced by any combination of these methods on a steel engraved
border or steel engraved borders or may be produced in any other manner, all as
determined by the officers executing such Securities, as evidenced by their
execution of such Securities or coupons.
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SECTION 202. Form of Trustee's Certificate of Authentication.
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
as Trustee
By ________________________________
Authorized Officer
ARTICLE THREE
THE SECURITIES
SECTION 301. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto:
(1) the title of the Securities and the series in which such
Securities shall be included;
(2) any limit upon the aggregate principal amount of the Securities
of such title or the Securities of such series which may be authenticated
and delivered under this Indenture (except for Securities authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu
of, other Securities of the series pursuant to Section 304, 305, 306, 906
or 1107);
(3) whether Securities of the series are to be issuable as Registered
Securities, Bearer Securities (with or without coupons) or both; any
restrictions applicable to the offer, sale or delivery of Bearer Securities
and the terms upon which Bearer Securities of the series may be exchanged
for Registered Securities of the series and vice versa; and whether any
Securities of the series are to be issuable initially in global form and,
if so, (i) whether beneficial owners of interests in any such global
Security may exchange such interests for Securities of such series and of
like tenor of any authorized form and denomination and the circumstances
under which any such exchanges may occur, if other than in the manner
specified in Section 305 and (ii) the name of the depository or the U.S.
Depository, as the case may be, with respect to any global Security;
(4) the date as of which any Bearer Securities of the series and any
temporary global Security representing Outstanding Securities of the series
shall be dated if other than the date of original issuance of the first
Security of the series to be issued;
(5) if Securities of the series are to be issuable as Bearer
Securities, whether interest in respect of any portion of a temporary
Bearer Security in global form (representing all of the Outstanding Bearer
Securities of the series) payable in respect of an Interest Payment Date
prior to the exchange of such temporary Bearer Security for definitive
Securities of the series shall be paid to any clearing organization with
respect to the portion of such temporary Bearer Security held for its
account and, in such event, the terms and conditions (including any
certification requirements) upon which any such interest payment received
by a clearing organization will be credited to the Persons entitled to
interest payable on such Interest Payment Date;
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(6) the date or dates on which the principal of such Securities is
payable;
(7) the rate or rates at which such Securities shall bear interest,
if any, or any method by which such rate or rates shall be determined, the
date or dates from which such interest shall accrue, the Interest Payment
Dates on which such interest shall be payable and the Regular Record Date
for the interest payable on Registered Securities on any Interest Payment
Date, whether and under what circumstances Additional Amounts on such
securities shall be payable in respect of specified taxes, assessments or
other governmental charges withheld or deducted and, if so, whether the
Company has the option to redeem the affected Securities rather than pay
such Additional Amounts, and the basis upon which interest shall be
calculated if other than that of a 360 day year of twelve 30-day months;
(8) the place or places, if any, in addition to or other than the
Borough of Manhattan, The City of New York, where the principal of (and
premium, if any) and interest on or Additional Amounts, if any, payable in
respect of such Securities shall be payable;
(9) the period or periods within which, the price or prices at which
and the terms and conditions upon which such Securities may be redeemed, in
whole or in part, at the option of the Company;
(10) the obligation, if any, of the Company to redeem or purchase such
Securities pursuant to any sinking fund or analogous provisions or at the
option of a Holder thereof and the period or periods within which, the
price or prices at which and the terms and conditions upon which such
Securities shall be redeemed or purchased, in whole or in part, pursuant to
such obligation, and any provisions for the remarketing of such Securities;
(11) the denominations in which Registered Securities of the series,
if any, shall be issuable if other than denominations of $1,000 and any
integral multiple thereof, and the denominations in which Bearer Securities
of the series, if any, shall be issuable if other than the denomination of
$5,000;
(12) if other than the principal amount thereof, the portion of the
principal amount of such Securities which shall be payable upon declaration
of acceleration of the Maturity thereof pursuant to Section 502;
(13) if other than such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public or
private debts, the coin or currency, including composite currencies, in
which payment of the principal of (and premium, if any) and interest, if
any, on, and Additional Amounts in respect of such Securities shall be
payable;
(14) if the principal of (and premium, if any) or interest, if any,
on, and Additional Amounts in respect of, such Securities are to be
payable, at the election of the Company or a Holder thereof, in a coin or
currency, including composite currencies, other than that in which the
Securities are stated to be payable, the period or periods within which,
and the terms and conditions upon which, such election may be made;
(15) if the amount of payments of principal of (and premium, if any)
or interest, if any, on, and Additional Amounts in respect of, such
Securities may be determined with reference to an index, formula or other
method or based on a coin or currency other than that in which the
Securities are stated to be payable, the manner in which such amounts shall
be determined;
(16) if the Securities of such series are to be issuable in definitive
form (whether upon original issue or upon exchange of a temporary Security
of such series) only upon receipt of certain certificates or other
documents or satisfaction of other conditions, then the form and terms of
such certificates, documents or conditions; and
(17) any other terms of such Securities (which terms shall not be
inconsistent with the provisions of this Indenture).
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All Securities of any one series and the coupons appertaining to Bearer
Securities of such series, if any, shall be substantially identical except as to
denomination and the rate or rates of interest, if any, and Stated Maturity, the
date from which interest, if any, shall accrue and except as may otherwise be
provided in or pursuant to such Board Resolution and set forth in such Officers'
Certificate or in any such indenture supplemental hereto. All Securities of any
one series need not be issued at the same time, and unless otherwise provided, a
series may be reopened for issuances of additional Securities of such series.
If any of the terms of the Securities of any series are established by
action taken pursuant to a Board Resolution, a copy of an appropriate record of
such action shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the
Officers' Certificate setting forth the terms of such series.
SECTION 302. Denominations.
Unless other denominations and amounts may from time to time be fixed by or
pursuant to a Board Resolution, the Registered Securities of each series, if
any, shall be issuable in registered form without coupons in denominations of
$1,000 and any integral multiple thereof and the Bearer Securities of each
series, if any, shall be issuable in the denomination of $5,000, or in such
other denominations and amounts as may from time to time be fixed by or pursuant
to a Board Resolution.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chairman
of the Board, President, Vice President serving as Chief Financial Officer or
its Treasurer under its corporate seal reproduced thereon and attested by its
Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Securities may be manual or facsimile. Coupons shall bear the
facsimile signature of the Treasurer or any Assistant Treasurer of the Company.
Securities and coupons bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities of any series, together with any
coupons appertaining thereto, executed by the Company to the Trustee for
authentication, together with the Board Resolution and Officers' Certificate or
supplemental indenture with respect to such Securities referred to in Section
301 and a Company Order for the authentication and delivery of such Securities,
and the Trustee in accordance with the Company Order and subject to the
provisions hereof shall authenticate and deliver such Securities. In
authenticating such Securities, and accepting the additional responsibilities
under this Indenture in relation to such Securities, the Trustee shall be
entitled to receive, and (subject to Section 601) shall be fully protected in
relying upon, an Opinion of Counsel stating,
(a) the form and terms of such Securities and coupons, if any, have
been established in conformity with the provisions of this Indenture;
(b) that all conditions precedent to the authentication and delivery
of such Securities, together with the coupons, if any, appertaining
thereto, have been complied with and that such Securities and coupons, when
authenticated and delivered by the Trustee and issued by the Company in the
manner and subject to any conditions specified in such Opinion of Counsel,
will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting the enforcement of creditors' rights and to general equity
principles,
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(c) that all laws and requirements in respect of the execution and
delivery by the Company of such Securities and coupons, if any, have been
complied with; and
(d) as to such other matters as the Trustee may reasonably request.
The Trustee shall not be required to authenticate such Securities if the
issue of such Securities pursuant to this Indenture will affect the Trustee's
own rights, duties or immunities under the Securities and this Indenture or
otherwise in a manner which is not reasonably acceptable to the Trustee or if
the Trustee being advised by counsel determines that such action may not
lawfully be taken.
Each Registered Security shall be dated the date of its authentication.
Each Bearer Security and any temporary Bearer Security in global form shall be
dated as of the date specified as contemplated by Section 301.
No Security or coupon appertaining thereto shall be entitled to any benefit
under this Indenture or be valid or obligatory for any purpose, unless there
appears on such Security a certificate of authentication substantially in the
form provided for in Section 202 or 615 executed by or on behalf of the Trustee
by the manual signature of one of its authorized signers, and such certificate
upon any Security shall be conclusive evidence, and the only evidence, that such
Security has been duly authenticated and delivered hereunder. Except as
permitted by Section 306 or 307, the Trustee shall not authenticate and deliver
any Bearer Security unless all appurtenant coupons for interest then matured
have been detached and cancelled.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company
may execute and deliver to the Trustee, and upon Company Order the Trustee shall
authenticate and deliver, in the manner provided in Section 303, temporary
Securities of such series which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued, in registered form, or, if authorized, in bearer form with one or
more coupons or without coupons, and with such appropriate insertions,
omissions, substitutions and other variations as the officers executing such
Securities may determine, as evidenced by their execution of such Securities.
In the case of Bearer Securities of any series, such temporary Securities may be
in global form, representing all of the Outstanding Bearer Securities of such
series.
Except in the case of temporary Securities in global form, which shall be
exchanged in accordance with the provisions thereof, if temporary Securities of
any series are issued, the Company will cause definitive Securities of that
series to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities of such series shall be
exchangeable for definitive Securities of such series containing identical terms
and provisions upon surrender of the temporary Securities of such series at an
office or agency of the Company maintained for such purpose pursuant to Section
1002, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities of any series (accompanied by any unmatured coupons
appertaining thereto) the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations of the same series containing
identical terms and provisions; provided, however, that no definitive Bearer
Security, except as provided pursuant to Section 301, shall be delivered in
exchange for a temporary Registered Security; and provided, further, that a
definitive Bearer Security shall be delivered in exchange for a temporary Bearer
Security only in compliance with the conditions set forth therein. Unless
otherwise specified as contemplated by Section 301 with respect to a temporary
global Security, until so exchanged the temporary Securities of any series shall
in all respects be entitled to the same benefits under this Indenture as
definitive Securities of such series.
SECTION 305. Registration, Transfer and Exchange.
With respect to the Registered Securities of each series, if any, the
Company shall cause to be kept at an office or agency of the Company maintained
pursuant to Section 1002, a register (herein sometimes referred to as the
"Security Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall
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provide for the registration of the Registered Securities of each series and of
transfers of the Registered Securities of each series. Such office or agency
shall be the "Security Registrar" for the Registered Securities, if any, of each
series of Securities. In the event that the Trustee shall not be the Security
Registrar, it shall have the right to examine the Security Register at all
reasonable times.
Upon surrender for registration of transfer of any Registered Security of
any series at any office or agency of the Company maintained for that series
pursuant to Section 1002, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Registered Securities of the same series, of any
authorized denominations, of a like aggregate principal amount bearing a number
not contemporaneously outstanding and containing identical terms and provisions.
At the option of the Holder, Registered Securities of any series may be
exchanged for other Registered Securities of the same series containing
identical terms and provisions, in any authorized denominations, and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged at
any such office or agency. Whenever any Registered Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Registered Securities which the holder making the
exchange is entitled to receive.
At the option of the Holder, Bearer Securities of any series may be
exchanged for Registered Securities of the same series containing identical
terms and provisions, of any authorized denominations and aggregate principal
amount, upon surrender of the Bearer Securities to be exchanged at any such
office or agency, with all unmatured coupons and all matured coupons in default
thereto appertaining. If the Holder of a Bearer Security is unable to produce
any such unmatured coupon or coupons or matured coupon or coupons in default,
such exchange may be effected if the Bearer Securities are accompanied by
payment in funds acceptable to the Company and the Trustee in an amount equal to
the face amount of such missing coupon or coupons, or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee if there
is furnished to them such security or indemnity as they may require to save each
of them and any Paying Agent harmless. If thereafter the Holder of such
Security shall surrender to any Paying Agent any such missing coupon in respect
of which such a payment shall have been made, such Holder shall be entitled to
receive the amount of such payment; provided, however, that, except as otherwise
provided in Section 1002, interest represented by coupons shall be payable only
upon presentation and surrender of those coupons at an office or agency located
outside the United States. Notwithstanding the foregoing, in case a Bearer
Security of any series is surrendered at any such office or agency in exchange
for a Registered Security of the same series and like tenor after the close of
business at such office or agency on (i) any Regular Record Date and before the
opening of business at such office or agency on the relevant Interest Payment
Date, or (ii) any Special Record Date and before the opening of business at such
office or agency on the related date for payment of Defaulted Interest, such
Bearer Security shall be surrendered without the coupon relating to such
Interest Payment Date or proposed date of payment, as the case may be (or, if
such coupon is so surrendered with such Bearer Security, such coupon shall be
returned to the person so surrendering the Bearer Security), and interest or
Defaulted Interest, as the case may be, will not be payable on such Interest
Payment Date or proposed date for payment, as the case may be, in respect of the
Registered Security issued in exchange for such Bearer Security, but will be
payable only to the Holder of such coupon when due in accordance with the
provisions of this Indenture.
If expressly provided with respect to the Securities of any series, at the
option of the Holder, Registered Securities of such series may be exchanged for
Bearer Securities upon such terms and conditions as may be provided with respect
to such series.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive.
Notwithstanding the foregoing, except as otherwise specified as
contemplated by Section 301, any global Security shall be exchangeable only if
(i) the Securities Depository is at any time unwilling or unable to continue as
Securities Depository and a successor depository is not appointed by the Company
within 60 days, (ii) the Company executes and delivers to the Trustee a Company
Order to the effect that such global Security shall be so exchangeable, or (iii)
an Event of Default has occurred and is continuing with respect to the
Securities. If the beneficial owners of interests in a global Security are
entitled to exchange such interests for Securities of such series
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and of like tenor and principal amount of any authorized form and denomination,
as specified as contemplated by Section 301, then without unnecessary delay but
in any event not later than the earliest date on which such interests may be so
exchanged, the Company shall deliver to the Trustee definitive Securities of
that series in aggregate principal amount equal to the principal amount of such
global Security, executed by the Company. On or after the earliest date on which
such interests may be so exchanged, such global Securities shall be surrendered
from time to time by the U.S. Depository or such other depository as shall be
specified in the Company Order with respect thereto, and in accordance with
instructions given to the Trustee and the U.S. Depository or such depository, as
the case may be (which instructions shall be in writing but need not comply with
Section 102 or be accompanied by an Opinion of Counsel), as shall be specified
in the Company Order with respect thereto to the Trustee, as the Company's agent
for such purpose, to be exchanged, in whole or in part, for definitive
Securities of the same series without charge. The Trustee shall authenticate and
make available for delivery, in exchange for each portion of such surrendered
global Security, a like aggregate principal amount of definitive Securities of
the same series of authorized denominations and of like tenor as the portion of
such global Security to be exchanged which (unless the Securities of the series
are not issuable both as Bearer Securities and as Registered Securities, in
which case the definitive Securities exchanged for the global Security shall be
issuable only in the form in which the Securities are issuable, as specified as
contemplated by Section 301) shall be in the form of Bearer Securities or
Registered Securities, or any combination thereof, as shall be specified by the
beneficial owner thereof; provided, however, that no such exchanges may occur
during a period beginning at the opening of business 15 days before any
selection of Securities of that series to be redeemed and ending on the relevant
Redemption Date; and provided, further, that (unless otherwise specified as
contemplated by Section 301) no Bearer Security delivered in exchange for a
portion of a global Security shall be mailed or otherwise delivered to any
location in the United States. Promptly following any such exchange in part,
such global Security shall be returned by the Trustee to such depository or the
U.S. Depository, as the case may be, or such other depository or U.S. Depository
referred to above in accordance with the instructions of the Company referred to
above. If a Registered Security is issued in exchange for any portion of a
global Security after the close of business at the office or agency where such
exchange occurs on (i) any Regular Record Date and before the opening of
business at such office or agency on the relevant Interest Payment Date, or (ii)
any Special Record Date and before the opening of business at such office or
agency on the related proposed date for payment of interest or Defaulted
Interest, as the case may be, interest will not be payable on such Interest
Payment Date or proposed date for payment, as the case may be, in respect of
such Registered Security, but will be payable on such Interest Payment Date or
proposed date for payment, as the case may be, only to the Person to whom
interest in respect of such portion of such global Security is payable in
accordance with the provisions of this Indenture.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of
transfer, or for exchange or redemption shall (if so required by the Company or
the Security Registrar for such series of Security presented) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and such Security Registrar duly executed, by the Holder thereof or
his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange, or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or
exchange any Securities of any series during a period beginning at the opening
of business 15 days before the day of the mailing of a notice of redemption of
Securities of that series selected for redemption under Section 1103 and ending
at the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Registered Security so selected for redemption in
whole or in part, except, in the case of any Security to be redeemed in part,
the portion thereof not to be redeemed, or (iii) to exchange any Bearer Security
so selected for redemption except that such a Bearer Security may be exchanged
for a Registered Security of that series, provided that such Registered Security
shall be
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immediately surrendered for redemption with written instruction for payment
consistent with the provisions of this Indenture.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security or a Security with a mutilated coupon
appertaining to it is surrendered to the Trustee, the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a new Security
of the same series containing identical terms and of like principal amount and
bearing a number not contemporaneously outstanding, with coupons corresponding
to the coupons, if any, appertaining to the surrendered Securities.
If there be delivered to the Company and to the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security or coupon,
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security or coupon has been acquired by a
bona fide purchaser, the Company shall execute and upon its request the Trustee
shall authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security or in exchange for the Security to which a destroyed, lost or stolen
coupon appertains (with all appurtenant coupons not destroyed, lost or stolen),
a new Security of the same series containing identical terms and of like
principal amount and bearing a number not contemporaneously outstanding, with
coupons corresponding to the coupons, if any, appertaining to such destroyed,
lost or stolen Security or to the Security to which such destroyed, lost or
stolen coupon appertains.
In case any such mutilated, destroyed, lost or stolen Security or coupon
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security or coupon; provided,
however, that payment of principal of (and premium, if any) and any interest on
Bearer Securities shall, except as otherwise provided in Section 1002, be
payable only at an office or agency located outside the United States and,
unless otherwise specified as contemplated by Section 301, any interest on
Bearer Securities shall be payable only upon presentation and surrender of the
coupons appertaining thereto.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Security of any series, with its coupons, if any, issued pursuant
to this Section in lieu of any destroyed, lost or stolen Security, or in
exchange for a Security to which a destroyed, lost or stolen coupon appertains,
shall constitute an original additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Security and its coupons, if any,
or the destroyed, lost or stolen coupon shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series and their
coupons, if any, duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities or coupons.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Registered Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall, if so provided in
such Security, be paid to the Person in whose name that Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest. In case a Bearer Security of any series is
surrendered in exchange for a Registered Security of such series after the close
of business (at an office of agency in a Place of Payment for such series) on
any Regular Record Date and before the opening of business (at such office or
agency) on the next succeeding Interest Payment Date, such Bearer Security shall
be surrendered without the coupon relating to such Interest Payment Date and
interest will not be payable on such Interest Payment Date in respect of the
Registered Security issued in exchange for such Bearer Security, but will be
payable only to the Holder of such coupon when due in accordance with the
provisions of this Indenture.
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Any interest on any Registered Security of any series which is payable, but
is not punctually paid or duly provided for, on any Interest Payment Date for
such Registered Security (herein called "Defaulted Interest") shall forthwith
cease to be payable to the Holder on the relevant Regular Record Date by virtue
of having been such Holder, and such Defaulted Interest may be paid by the
Company, at its election in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Registered Securities affected (or their
respective Predecessor Securities) are registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest, which
shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each such Registered Security and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest
which shall be not more than 15 days and not less than 10 days prior to the
date of the proposed payment and not less than 10 days after the receipt by
the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the name
and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to
be mailed, first-class postage prepaid, to each Holder of such Registered
Securities at his address as it appears in the Security Register not less
than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company, cause a similar
notice to be published at least once in a newspaper, customarily published
in the English language on each Business Day and of general circulation in
the Borough of Manhattan, The City of New York, but such publication shall
not be a condition precedent to the establishment of such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor having been mailed as aforesaid, such
Defaulted Interest shall be paid to the Persons in whose names such
Registered Securities (or their respective Predecessor Securities) are
registered at the close of business on such Special Record Date and shall
no longer be payable pursuant to the following Clause (2). In case a Bearer
Security of any series is surrendered at the office or agency in a Place of
Payment for such series in exchange for a Registered Security of such
series after the close of business at such office or agency on any Special
Record Date and before the opening of business at such office or agency on
the related proposed date for payment of Defaulted Interest, such Bearer
Security shall be surrendered without the coupon relating to such proposed
date of payment and Defaulted Interest will not be payable on such proposed
date of payment in respect of the Registered Security issued in exchange
for such Bearer Security, but will be payable only to the Holder of such
coupon when due in accordance with the provisions of this Indenture.
(2) The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which such Securities may be listed, and upon such
notice as may be required by such exchange, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this Clause,
such payment shall be deemed practicable by the Trustee.
At the option of the Company, interest on Registered Securities of any
series that bear interest may be paid by mailing a check to the address of the
person entitled thereto as such address shall appear in the Security Register.
Subject to the foregoing provisions of this Section and Section 305, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
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SECTION 308. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Registered Security is registered as the
owner of such Registered Security for the purpose of receiving payment of
principal of (and premium, if any), and (subject to Sections 305 and 307)
interest on and Additional Amounts with respect to, such Registered Security and
for all other purposes whatsoever, whether or not such Registered Security be
overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
The Company, the Trustee and any agent of the Company or the Trustee may
treat the bearer of any Bearer Security and the bearer of any coupon as the
absolute owner of such Security or coupon for the purpose of receiving payment
thereof or on account thereof and for all other purposes whatsoever, whether or
not such Security or coupon be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
SECTION 309. Cancellation.
All Securities and coupons surrendered for payment, redemption,
registration of transfer or exchange or for credit against any sinking fund
payment shall, if surrendered to any Person other than the Trustee, be delivered
to the Trustee, and any such Securities and coupons and Securities and coupons
surrendered directly to the Trustee for any such purpose shall be promptly
cancelled by it. The Company may at any time deliver to the Trustee for
cancellation any Securities previously authenticated and delivered hereunder
which the Company may have acquired in any manner whatsoever, and all Securities
so delivered shall be promptly cancelled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section, except as expressly permitted by this Indenture. All cancelled
Securities and coupons held by the Trustee shall be destroyed by it unless by a
Company Order the Company directs their return to it.
SECTION 310. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 for Securities
of any series, interest on the Securities of each series shall be computed on
the basis of a 360 day year of twelve 30-day months.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
Upon the direction of the Company by a Company Order this Indenture shall
cease to be of further effect (except as to any surviving rights of registration
of transfer or exchange of Securities herein expressly provided for and any
right to receive Additional Amounts, as provided in Section 1004), and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered and
all coupons appertaining thereto (other than (i) coupons appertaining
to Bearer Securities surrendered for exchange for Registered
Securities and maturing after such exchange, whose surrender is not
required or has been waived as provided in Section 305, (ii)
Securities and coupons which have been destroyed, lost or stolen and
which have been replaced or paid as provided in Section 306, (iii)
coupons appertaining to Securities called for redemption and maturing
after the relevant Redemption Date, whose surrender has been waived as
provided in Section 1106, and (iv) Securities and coupons for whose
payment money has theretofore been deposited in trust or
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segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust, as provided in Section
1003) have been delivered to the Trustee for cancellation; or
(B) all such Securities and, in the case of (i) or (ii) below,
any such coupons appertaining thereto not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) if redeemable at the option of the Company, are to be
called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company, and the Company, in the case of (i), (ii) or (iii)
above, has deposited or caused to be deposited with the Trustee
as trust funds in trust for the purpose an amount sufficient to
pay and discharge the entire indebtedness on such Securities and
coupons not theretofore delivered to the Trustee for
cancellation, for principal (and premium, if any) and interest,
and any Additional Amounts with respect thereto, to the date of
such deposit (in the case of Securities which have become due and
payable) or to the Stated Maturity or Redemption Date, as the
case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
In the event there are Securities of two or more series hereunder, the
Trustee shall be required to execute an instrument acknowledging satisfaction
and discharge of this Indenture only if requested to do so with respect to
Securities of all series as to which it is Trustee and if the other conditions
thereto are met. In the event there are two or more Trustees hereunder, then
the effectiveness of any such instrument shall be conditioned upon receipt of
such instrument from all Trustees hereunder.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Securities, the coupons
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and any interest and Additional Amounts for whose payment such money has
been deposited with the Trustee; but such money need not be segregated from
other funds except to the extent required by law.
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ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
"Event of Default", wherever used herein with respect to Securities of any
series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any interest upon or any Additional
Amounts payable in respect of any Security of that series when such
interest or Additional Amounts becomes due and payable, and continuance of
such default for a period of 30 days; or
(2) default in the payment of the principal of (and premium, if any,
on) any Security of that series when it becomes due and payable at
Maturity; or
(3) default in the deposit of any sinking fund payment, when and as
due by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with or which has been expressly included
in this Indenture solely for the benefit of series of Securities other than
that series), and continuance of such default or breach for a period of 60
days after there has been given, by registered or certified mail, to the
Company by the Trustee or to the Company and the Trustee by the Holders of
at least 10% in principal amount of the Outstanding Securities of that
series a written notice specifying such default or breach and requiring it
to be remedied and stating that such notice is a "Notice of Default"
hereunder; or
(5) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Company in an involuntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Company or for any
substantial part of its property, or ordering the winding-up or liquidation
of its affairs, and such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or
(6) the Company shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
shall consent to the entry of an order for relief in an involuntary case
under any such law, or shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or similar official) of the Company or for any substantial
part of its property, or shall make any general assignment for the benefit
of creditors, or shall fail generally to pay its debts as they become due
or shall take any corporate action in furtherance of any of the foregoing;
or
(7) any other Event of Default provided with respect to Securities of
that series.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time
Outstanding occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Securities of that series may declare the principal of all the Securities of
that series, or such lesser amount as may be provided for in the Securities of
that series, to be due and payable immediately, by a notice in
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writing to the Company (and to the Trustee if given by the Holders), and upon
any such declaration such principal or such lesser amount shall become
immediately due and payable.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of a majority in principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue installments of interest on and any Additional
Amounts payable in respect of all Securities of that series,
(B) the principal of (and premium, if any, on) any Securities of
that series which have become due otherwise than by such declaration
of acceleration and interest thereon at the rate or rates borne by or
provided for in such Securities,
(C) to the extent that payment of such interest is lawful,
interest upon overdue installments of interest and Additional Amounts
at the rate or rates borne by or provided for in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel;
and
(2) all Events of Default with respect to Securities of that series,
other than the non-payment of the principal of Securities of that series
which has become due solely by such declaration of acceleration, have been
cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if
(1) default is made in the payment of any instalment of interest on
or any Additional Amounts payable in respect of any Security when such
interest or Additional Amounts shall have become due and payable and such
default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium,
if any, on) any Security at its Maturity.
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities and coupons, the whole amount then due and payable on
such Securities and coupons for principal (and premium, if any) and interest and
Additional Amounts, if any, with interest upon the overdue principal (and
premium, if any) and, to the extent that payment of such interest shall be
legally enforceable, upon overdue installments of interest or any Additional
Amounts, at the rate or rates borne by or provided for in such Securities, and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, and
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may prosecute such proceeding to judgment or final decree, and may enforce the
same against the Company or any other obligor upon such Securities and collect
the moneys adjudged or decreed to be payable in the manner provided by law out
of the property of the Company or any other obligor upon such Securities,
wherever situated.
If an Event of Default with respect to Securities of any series occurs and
is continuing, the Trustee may in its discretion proceed to protect and enforce
its rights and the rights of the Holders of Securities of such series and any
related coupons by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount, or such lesser
amount as may be provided for in the Securities of that series, of
principal (and premium, if any) and interest and any Additional Amounts
owing and unpaid in respect of the Securities and to file such other papers
or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents or counsel)
and of the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any receiver, assignee, trustee, liquidator, sequestrator (or other similar
official) in any such judicial proceeding is hereby authorized by each Holder of
Securities and coupons to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders of Securities and coupons, to pay to the Trustee any amount due to it
for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and any other amounts due the Trustee under
Section 607.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a Security
or coupon any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or coupons or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder of a
Security or coupon in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Securities
or Coupons.
All rights of action and claims under this Indenture or any of the
Securities or coupons may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or coupons or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery or judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders of the Securities and
coupons in respect of which such judgment has been recovered.
SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (and
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premium, if any), interest or any Additional Amounts, upon presentation of the
Securities or coupons, or both, as the case may be, and the notation thereon of
the payment if only partially paid and upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
607;
SECOND: To the payment of the amounts then due and unpaid upon the
Securities and coupons for principal (and premium, if any) and interest and
any Additional Amounts payable in respect of which or for the benefit of
which such money has been collected, ratably, without preference or
priority of any kind, according to the aggregate amounts due and payable on
such Securities and coupons for principal (and premium, if any), interest
and Additional Amounts, respectively;
THIRD: The balance, if any, to the Person or Persons entitled thereto.
SECTION 507. Limitation on Suits.
No Holder of any Security of any series or any related coupons shall have
any right to institute any proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Securities of that
series;
(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been
given to the Trustee during such 60-day period by the Holders of a majority
in principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other such
Holders or Holders of any other series, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all such Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the Holder of any
Security or coupon shall have the right, which is absolute and unconditional, to
receive payment of the principal of (and premium, if any) and (subject to
Sections 305 and 307) interest on and any Additional Amounts in respect of such
Security or payment of such coupon on the respective Stated Maturity or
Maturities expressed in such Security or coupon (or, in the case of redemption,
on the Redemption Date) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder.
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SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security or coupon has instituted any
proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, the Trustee and the Holders of Securities and coupons shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities or coupons in the last paragraph
of Section 306, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders of Securities or coupons is intended to be exclusive
of any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion of employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security or
coupon to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders of Securities or coupons may
be exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders of Securities or coupons, as the case may be.
SECTION 512. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding Securities
of any series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Securities of
such series, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) such direction is not unduly prejudicial to the rights of other
Holders of Securities of such series.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of such series and any related coupons waive any past default
hereunder with respect to such series and its consequences, except a default
(1) in the payment of the principal of (and premium, if any) or
interest on or Additional Amounts payable in respect of any Security of
such series, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security of such series affected.
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Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
SECTION 514. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security or
coupon by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit, other than the Trustee, of an undertaking to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
including the Trustee, having due regard to the merits and good faith of the
claims or defenses made by such party litigant, but the provisions of this
Section shall not apply to any suit instituted by the Company, the Trustee or by
any Holder, or group of Holders, holding in the aggregate more than 10% in
principal amount of the Outstanding Securities of any series, or to any suit
instituted by any Holder of any Security or coupon for the enforcement of the
payment of the principal of (and premium, if any) or interest on or any
Additional Amounts in respect of any Security or the payment of any coupon on or
after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the Redemption Date) or interest on any overdue
principal of any Security.
SECTION 515. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties, and only such
duties, as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture; but in the case of any such certificates or
opinions which by any provisions hereof are specifically required to
be furnished to the Trustee, the Trustee shall be under a duty to
examine the same to determine whether or not they conform to the
requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as
a prudent man would exercise or use under the circumstances in the conduct
of his own affairs.
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(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent
failure to act, or its own wilful misconduct, except that
(1) this Subsection shall not be construed to limit the effect
of Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with
the direction of the Holders of a majority in principal amount of the
Outstanding Securities of any series, relating to the time, method and
place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee,
under this Indenture with respect to the Securities of such series;
and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to
it.
(d) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of
this Section.
SECTION 602. Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with respect
to the Securities of any series, the Trustee shall transmit by mail to all
Holders of Securities of such series entitled to receive reports pursuant to
Section 703(c), notice of such default hereunder known to the Trustee, unless
such default shall have been cured or waived, provided, however, that, except in
the case of a default in the payment of the principal of (and premium, if any)
or interest on, or any Additional Amounts with respect to, any Security of such
series or in the payment of any sinking fund instalment with respect to
Securities of such series, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determine that the withholding of such notice is in the interests of the
Holders of Securities and coupons of such series; and provided, further, that in
the case of any default of the character specified in Section 501(4) with
respect to Securities of such series, no such notice to Holders shall be given
until at least 30 days after the occurrence thereof. For the purpose of this
Section, the term "default" means any event which is, or after notice or lapse
of time or both would become, an Event of Default with respect to Securities of
such series.
SECTION 603. Certain Rights of Trustee.
Except as otherwise provided in Section 601:
(a) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, or other paper or document reasonably believed by it
to be genuine and to have been signed or presented by the proper party or
parties;
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order (other than
delivery of any Security to the Trustee for
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authentication and delivery pursuant to Section 303 which shall be
sufficiently evidenced as provided therein) and any resolution of the Board
of Directors may be sufficiently evidenced by a Board Resolution;
(c) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officers' Certificate;
(d) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders of Securities of any series or any related coupons
pursuant to this Indenture, unless such Holders shall have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which might be incurred by it in compliance with such request
or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture or other paper or document, but the Trustee, in its
discretion, may make such further inquiry or investigation into such facts
or matters as it may see fit, and, if the Trustee shall determine to make
such further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder.
SECTION 604. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificate of authentication, and in any coupons shall be taken as the
statements of the Company, and the Trustee or any Authenticating Agent assumes
no responsibility for their correctness. The Trustee makes no representations
as to the validity or sufficiency of this Indenture or of the Securities or
coupons. The Trustee or any Authenticating Agent shall not be accountable for
the use or application by the Company of Securities or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and coupons and, subject
to Sections 310(b) and 311 of the Trust Indenture Act, may otherwise deal with
the Company with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Security Registrar or such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed with the Company.
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SECTION 607. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursements or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee and its agents for, and to hold them
harmless against, any loss, liability or expense incurred without
negligence or bad faith on their part, arising out of or in connection with
the acceptance or administration of the trust or trusts hereunder,
including the costs and expenses of defending themselves against any claim
or liability in connection with the exercise or performance of any of their
powers or duties hereunder.
As security for the performance of the obligations of the Company under
this Section the Trustee shall have a lien prior to the Securities of any series
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the payment of principal of (or premium, if any) or
interest on Securities.
SECTION 608. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder that is a corporation (or
other person permitted to so act by the Commission permitted by the Trust
Indenture Act to act as trustee under an indenture qualified under the Trust
Indenture Act and that has a combined capital and surplus (computed in
accordance with Section 310(a)(2) of the Trust Indenture Act) of at least
$5,000,000. If at any time the Trustee shall cease to be eligible in accordance
with the provisions of this Section or Section 310(a)(5) of the Trust Indenture
Act, it shall resign immediately in the manner and with the effect hereinafter
specified in this Article.
SECTION 609. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 610.
(b) The Trustee may resign at any time with respect to the Securities
of one or more series giving written notice thereof to the Company. If the
instrument of acceptance by a successor Trustee required by Section 610
shall not have been delivered to the Trustee within 30 days after the
giving of such notice of resignation, the resigning Trustee may petition
any court of competent jurisdiction for the appointment of a successor
Trustee with respect to such series.
(c) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal
amount of the Outstanding Securities of such series, delivered to the
Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the obligations
imposed upon it under Section 310(b) of the Trust Indenture Act with
respect to Securities of any series after written
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request therefor by the Company or by any Holder of a Security who has
been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 608 and
shall fail to resign after written request therefor by the Company or
by any such Holder of a Security, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of
its property shall be appointed or any public officer shall take
charge or control of the Trustee or of its property or affairs for the
purpose of rehabilitation ,conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to all Securities or the Securities of such series, or (ii)
subject to Section 315(e) of the Trust Indenture Act, any Holder of a Security
who has been a bona fide Holder of a Security of any series for at least six
months may, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee with respect to
all Securities of such series and the appointment of a successor Trustee or
Trustees.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause,
with respect to the Securities of one or more series, the Company, by a
Board Resolution, shall promptly appoint a successor Trustee or Trustees
with respect to the Securities of that or those series (it being understood
that any such successor Trustee may be appointed with respect to the
Securities of one or more or all of such series and that at any time there
shall be only one Trustee with respect to the Securities of any particular
series) and shall comply with the applicable requirements of Section 610.
If, within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee with respect to the
Securities of any series shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Securities of such series
delivered to the Company and the retiring Trustee, the successor Trustee so
appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements of Section 610, become the
successor Trustee with respect to the Securities of such series and to that
extent supersede the successor Trustee appointed by the Company. If no
successor Trustee with respect to the Securities of any series shall have
been so appointed by the Company or the Holders of Securities and accepted
appointment in the manner required by Section 610, any Holder of a Security
who has been a bona fide Holder of a Security of such series for at least
six months may, on behalf of himself and all others similarly situated,
petition any court of competent jurisdiction for the appointment of a
successor Trustee with respect to the Securities of such series.
(f) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and
each appointment of a successor Trustee with respect to the Securities of
any series by mailing written notice of such event by first-class mail,
postage prepaid, to the Holders of Registered Securities, if any, of such
series as their names and addresses appear in the Security Register and, if
Securities of such series are issued as Bearer Securities, by publishing
notice of such event once in an Authorized Newspaper in each Place of
Payment located outside the United States. Each notice shall include the
name of the successor Trustee with respect to the Securities of such series
and the address of its Corporate Trust Office.
SECTION 610. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee
an instrument accepting such appointment, and thereupon the resignation or
removal of the retiring Trustee shall become effective and such successor
Trustee, without any further act, deed or conveyance, shall become vested
with all the rights, powers, trusts and duties of the retiring Trustee;
but, on the request of the Company or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an
instrument transferring to such successor Trustee all the rights, powers
and
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trusts of the retiring Trustee and shall duly assign, transfer and deliver
to such successor Trustee all property and money held by such retiring
Trustee hereunder.
(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company,
the retiring Trustee and each successor Trustee with respect to the
Securities of one or more series shall execute and deliver an indenture
supplemental hereto wherein each successor Trustee shall accept such
appointment and which (1) shall contain such provisions as shall be
necessary or desirable to transfer and confirm to, and to vest in, each
successor Trustee all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates, (2) if the retiring Trustee
is not retiring with respect to all Securities, shall contain such
provisions as shall be deemed necessary or desirable to confirm that all
the rights, powers, trusts and duties of the retiring Trustee with respect
to the Securities of that or those series as to which the retiring Trustee
is not retiring shall continue to be vested in the retiring Trustee, and
(3) shall add to or change any of the provisions of this Indenture as shall
be necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, it being understood that nothing herein
or in such supplemental indenture shall constitute such Trustees co-
trustees of the same trust, that each such Trustee shall be trustee of a
trust or trusts hereunder separate and apart from any trust or trusts
hereunder administered by any other such Trustee and that no Trustee shall
be responsible for any notice given to, or received by, or any act or
failure to act on the part of any other Trustee hereunder, and upon the
execution and delivery of such supplemental indenture the resignation or
removal of the retiring Trustee shall become effective to the extent
provided therein, such retiring Trustee shall with respect to the
Securities of that or those series to which the appointment of such
successor Trustee relates have no further responsibility for the exercise
of rights and powers or for the performance of the duties and obligations
vested in the Trustee under this Indenture other than as hereinafter
expressly set forth, and each such successor Trustee without any further
act, deed or conveyance, shall become vested with all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of
that or those series to which the appointment of such successor Trustee
relates; but, on request of the Company or any successor Trustee, such
retiring Trustee shall duly assign, transfer and deliver to such successor
Trustee, to the extent contemplated by such supplemental indenture, the
property and money held by such retiring Trustee hereunder with respect to
the Securities of that or those series to which the appointment of such
successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts
referred to in paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
SECTION 611. Merger, Conversion, Consolidation or Succession to
Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
SECTION 612. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect to
one or more series of Securities which shall be authorized to act on behalf of
the Trustee to authenticate Securities of such series issued
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upon original issue or exchange, registration of transfer or partial redemption
thereof or pursuant to Section 306, and Securities so authenticated shall be
entitled to the benefits of this Indenture and shall be valid and obligatory for
all purposes as if authenticated by the Trustee hereunder. Wherever reference is
made in this Indenture to the authentication and delivery of Securities by the
Trustee or the Trustee's certificate of authentication, such reference shall be
deemed to include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States of America, any State thereof
or the District of Columbia, authorized under such laws to act as Authenticating
Agent, having a combined capital and surplus of not less than $5,000,000 and
subject to supervision or examination by Federal or State authority. If such
Authenticating Agent publishes reports of condition at least annually, pursuant
to law or to the requirements of said supervising or examining authority, then
for the purposes of this Section, the combined capital and surplus of such
Authenticating Agent shall be deemed to be its combined capital and surplus as
set forth in its most recent report of condition so published. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, such Authenticating Agent shall resign immediately
in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice
of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall (i) mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Registered Securities, if any, of the series with respect to which such
Authenticating Agent will serve, as their names and addresses appear in the
Security Register, and (ii) if Securities of the series are issued as Bearer
Securities, publish notice of such appointment at least once in an Authorized
Newspaper in the place where such successor Authenticating Agent has its
principal office if such office is located outside the United States. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
The provisions of Sections 308, 604 and 605 shall be applicable to each
Authenticating Agent.
If an appointment with respect to one or more series is made pursuant to
this Section, the Securities of such series may have endorsed thereon, in
addition to the Trustee's certificate of authentication, an alternate
certificate of authentication in the following form.
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
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______________________________
As Trustee
BY ___________________________
As Authenticating Agent
BY ___________________________
Authorized Signatory
If all of the Securities of any series may not be originally issued at one
time, and if the Trustee does not have an office capable of authenticating
Securities upon original issuance located in a Place of Payment where the
Company wishes to have Securities of such series authenticated upon original
issuance, the Trustee, if so requested in writing (which writing need not comply
with Section 102) by the Company, shall appoint in accordance with this Section
612 an Authenticating Agent having an office in a Place of Payment designated by
the Company with respect to such series of Securities.
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not later than fifteen days after the Regular
Record Date for interest for each series of Securities, a list, in such
form as the Trustee may reasonably require, of the names and addresses of
the Holders of Registered Securities of such series as of such Regular
Record Date, or if there is no Regular Record Date for interest for such
series of Securities, semi-annually, upon such dates as are set forth in
the Board Resolution or indenture supplemental hereto authorizing such
series, and
(b) at such other times as the Trustee may request in writing, within
30 days after the receipt by the Company of any such request, a list of
similar form and content as of a date not more than 15 days prior to the
time such list is furnished,
provided, however, that, so long as the Trustee is the Security Registrar, no
such list shall be required to be furnished.
SECTION 702. Preservation of Information; Communications to Holders.
The Trustee shall comply with the obligations imposed upon it pursuant to
Section 312 of the Trust Indenture Act.
Every Holder of Securities or coupons, by receiving and holding the same,
agrees with the Company and the Trustee that neither the Company, the Trustee,
any Paying Agent or any Security Registrar shall be held accountable by reason
of the disclosure of any information as to the names and addresses of the
Holders of Securities in accordance with Section 312 of the Trust Indenture Act,
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under Section 312(b) of the Trust Indenture Act.
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SECTION 703. Reports by Trustee.
(a) Within 60 days after May 15 of each year commencing with the
first May 15 following the first issuance of Securities pursuant to Section
301, if required by Section 313(a) of the Trust Indenture Act, the Trustee
shall transmit, pursuant to Section 313(c) of the Trust Indenture Act, a
brief report dated as of such May 15 with respect to any of the events
specified in said Section 313(a) which may have occurred since the later of
the immediately preceding May 15 and the date of this Indenture.
(b) The Trustee shall transmit the reports required by Section 313(b)
of the Trust Indenture Act at the times specified therein.
(c) Reports pursuant to this Section shall be transmitted in the
manner and to the Persons required by Sections 313(c) and 313(d) of the
Trust Indenture Act. The Company will notify the Trustee when any series
of Securities are listed on any securities exchange.
SECTION 704. Reports by Company.
The Company shall:
(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) which the Company may be required to file
with the Commission pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934; or, if the Company is not required to file
information, documents or reports pursuant to either of said sections, then
it shall file with the Trustee and the Commission, in accordance with rules
and regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may be
required pursuant to Section 13 of the Securities Exchange Act of 1934 in
respect of a security listed and registered on a national securities
exchange as may be prescribed from time to time in such rules and
regulations;
(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Company with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit within 30 days after the filing thereof with the
Trustee, in the manner and to the extent provided in Section 703(c) with
respect to reports pursuant to Section 703(a), such summaries of any
information, documents and reports required to be filed by the Company
pursuant to paragraphs (1) and (2) of this Section as may be required by
rules and regulations prescribed from time to time by the Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, SALE, LEASE OR CONVEYANCE
SECTION 801. Consolidations and Mergers of Company and Sales, Leases and
Conveyances Permitted Subject to Certain Conditions.
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into any other corporation,
provided that in any such case, (i) either the Company shall be the continuing
corporation, or the successor corporation shall be a corporation organized and
existing under the laws of the United States of America or a State thereof and
such successor corporation shall expressly assume the due and punctual payment
of the principal of (and premium, if any), any interest on, and any Additional
Amounts payable pursuant to Section 1004 with respect to, all the Securities,
according to their tenor, and the due and punctual performance and
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observance of all of the covenants and conditions of this Indenture to be
performed by the Company by supplemental indenture satisfactory to the Trustee,
executed and delivered to the Trustee by such corporation, and (ii) the Company
or such successor corporation, as the case may be, shall not, immediately after
such merger or consolidation, or such sale, lease or conveyance, be in default
in the performance of any such covenant or condition.
SECTION 802. Rights and Duties of Successor Corporation.
In case of any such consolidation, merger, sale, lease or conveyance and
upon any such assumption by the successor corporation, such successor
corporation shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the party of the first part, and the
predecessor corporation, except in the event of a lease, shall be relieved of
any further obligation under this Indenture and the Securities and coupons.
Such successor corporation thereupon may cause to be signed, and may issue
either in its own name or in the name of the Company, any or all of the
Securities and coupons issuable hereunder which theretofore shall not have been
signed by the Company and delivered to the Trustee; and, upon the order of such
successor corporation, instead of the Company, and subject to all the terms,
conditions and limitations in this Indenture prescribed, the Trustee shall
authenticate and shall deliver any Securities and coupons which previously shall
have been signed and delivered by the officers of the Company to the Trustee for
authentication, and any Securities or coupons which such successor corporation
thereafter shall cause to be signed and delivered to the Trustee for that
purpose. All the Securities and coupons so issued shall in all respects have
the same legal rank and benefit under this Indenture as the Securities and
coupons theretofore or thereafter issued in accordance with the terms of this
Indenture as though all of such Securities and coupons had been issued at the
date of the execution hereof.
In case of any such consolidation, merger, sale, lease or conveyance, such
changes in phraseology and form (but not in substance) may be made in the
Securities and coupons thereafter to be issued as may be appropriate.
SECTION 803. Officers' Certificate and Opinion of Counsel.
The Trustee, subject to the provisions of Sections 601 and 603, may receive
an Officers' Certificate and an Opinion of Counsel as conclusive evidence that
any such consolidation, merger, sale, lease or conveyance, and any such
assumption, complies with the provisions of this Article.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders of Securities or coupons, the Company,
when authorized by a Board Resolution, and the Trustee, at any time and from
time to time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another corporation to the Company,
and the assumption by any such successor of the covenants of the Company
herein and in the Securities contained; or
(2) to add to the covenants of the Company, for the benefit of the
Holders of all or any series of Securities (and if such covenants are to be
for the benefit of less than all series of Securities, stating that such
covenants are expressly being included solely for the benefit of such
series) or to surrender any right or power herein conferred upon the
Company; or
(3) to add to or change any of the provisions of this Indenture to
provide that Bearer Securities may be registrable as to principal, to
change or eliminate any restrictions on the payment of principal (or
premium, if any) on Registered Securities or of principal (or premium, if
any) or any interest on Bearer Securities, to permit Registered Securities
to be exchanged for Bearer Securities or to permit the
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issuance of Securities in uncertificated form, provided any such action
shall not adversely affect the interests of the Holders of Securities of
any series or any related coupons in any material respect; or
(4) to establish the form of terms of Securities of any series as
permitted by Sections 201 and 301; or
(5) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this Indenture
as shall be necessary to provide for or facilitate the administration of
the trusts hereunder by more than one Trustee, pursuant to the requirements
of Section 610 (b); or
(6) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent with
the provisions of this Indenture which shall not adversely affect the
interest of the Holders of Securities of any series or any related coupons
in any material respect; or
(7) to add to, delete from or revise the conditions, limitations and
restrictions on the authorized amount, terms or purposes of issue,
authentication and delivery of Securities, as herein set forth; or
(8) to secure the Securities pursuant to Section 1006.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than 66-2/3% in principal
amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company, when authorized by a Board Resolution, and the Trustee may
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or of modifying in any manner the rights of the
Holders of Securities of such series under this Indenture; provided, however,
that no such supplemental indenture shall, without the consent of the Holder of
each Outstanding Security affected thereby,
(1) change the Stated Maturity of the principal of, or any instalment
of interest on, any Security, or reduce the principal amount thereof or the
rate of interest thereon or any Additional Amounts payable in respect
thereof, or any premium payable upon the redemption thereof, or change the
obligation of the Company to pay Additional Amounts pursuant to Section
1004 (except as contemplated by Section 801(i) and permitted by Section
901(1)), or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502, or change any
Place of Payment where, or the coin or currency in which, any Security or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or reduce the requirements of Section 1404 for quorum or voting,
or
(3) modify any of the provisions of this Section, or Section 513, or
Section 1007, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby.
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A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders of Securities under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
and of any coupons appertaining thereto shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities of any series so modified as to conform, in the opinion of the
Trustee and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities of such series.
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if any, and Interest.
The Company covenants and agrees for the benefit of the Holders of each
series of Securities that it will duly and punctually pay the principal of (and
premium, if any), interest on and any Additional Amounts payable in respect of
the Securities of that series in accordance with the terms of such series of
Securities, any coupons appertaining thereto and this Indenture. Any interest
due on and any Additional Amounts payable in respect of Bearer Securities on or
before Maturity, other than Additional Amounts, if any, payable as provided in
Section 1004 in respect of principal of (or premium, if any, on) such a
Security, shall be payable only upon presentation and surrender of the several
coupons for such interest installments as are evidenced thereby as they
severally mature.
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SECTION 1002. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of
Securities an office or agency where Securities of that series (but not Bearer
Securities, except as otherwise provided below, unless such Place of Payment is
located outside the United States) may be presented or surrendered for payment,
where Securities of that series may be surrendered for registration of transfer
or exchange and where notices and demands to or upon the Company in respect of
the Securities of that series and this Indenture may be served. If Securities
of a series are issuable as Bearer Securities, the Company will maintain,
subject to any laws or regulations applicable thereto, an office or agency in a
Place of Payment for such series which is located outside the United States
where Securities of such series and the related coupons may be presented and
surrendered for payment (including payment of any Additional Amounts payable on
Securities of such series pursuant to Section 1004); provided, however, that if
the Securities of such series are listed on The Stock Exchange of the United
Kingdom and the Republic of Ireland or the Luxembourg Stock Exchange or any
other stock exchange located outside the United States and such stock exchange
shall so require, the Company will maintain a Paying Agent in London, Luxembourg
or any other required city located outside the United States, as the case may
be, so long as the Securities of such series are listed on such exchange. The
Company will give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, except that Bearer Securities of that series and the related coupons
may be presented and surrendered for payment (including payment of any
Additional Amounts payable on Bearer Securities of that series pursuant to
Section 1004) at the place specified for the purpose pursuant to Section 301,
and the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
Except as otherwise provided in the form of Bearer Security of any
particular series pursuant to the provisions of this Indenture, no payment of
principal, premium or interest on Bearer Securities shall be made at any office
or agency of the Company in the United States or by check mailed to any address
in the United States or by transfer to an account maintained with a bank located
in the United States; provided, however, payment of principal of and any premium
and interest in U.S. dollars (including Additional Amounts payable in respect
thereof) on any Bearer Security may be made at the Corporate Trust Office of the
Trustee in the Borough of Manhattan, The City of New York if (but only if)
payment of the full amount of such principal, premium, interest or Additional
Amounts at all offices outside the United States maintained for the purpose by
the Company in accordance with this Indenture is illegal or effectively
precluded by exchange controls or other similar restrictions.
The Company may also from time to time designate one or more other offices
or agencies where the Securities of one or more series may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Company of its obligation to maintain an office or agency
in each Place of Payment for Securities of any series for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency. Unless otherwise set forth in a Board Resolution or indenture
supplemental hereto with respect to a series of Securities, the Company hereby
designates as the Place of Payment for each series of Securities the Borough of
Manhattan, The City of New York, and initially appoints the Trustee at its
Corporate Trust Office as the Company's office or agency for each of such
purposes in such City.
SECTION 1003. Money for Securities Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect
to any series of Securities, it will, on or before each due date of the
principal of (and premium, if any), or interest on, any of the Securities of
that series, segregate and hold in trust for the benefit of the Persons entitled
thereto a sum sufficient to pay the principal (and premium, if any) or interest
so becoming due until such sums shall be paid to such Persons or otherwise
disposed of as herein provided, and will promptly notify the Trustee of its
action or failure so to act
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Whenever the Company shall have one or more Paying Agents for any series of
Securities, it will, on or prior to each due date of the principal of (and
premium, if any), or interest on, any Securities of that series, deposit with a
Paying Agent a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal, premium or interest, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of its action
or failure so to act.
The Company will cause each Paying Agent for any series of Securities other
than the Trustee to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities of that series in trust for the
benefit of the Persons entitled thereto until such sums shall be paid to
such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities of that series) in the making of any
payment of principal (and premium, if any) or interest on the Securities of
that series; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or of any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Except as otherwise provided in the form of Securities of any particular
series pursuant to the provisions of this Indenture, any money deposited with
the Trustee or any Paying Agent, or then held by the Company, in trust for the
payment of the principal of (and premium, if any) or interest on any Security of
any series and remaining unclaimed for two years after such principal (and
premium, if any) or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Security or any coupon appertaining
thereto shall thereafter, as an unsecured general creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in an Authorized Newspaper in
each Place of Payment or to be mailed to Holders of Registered Securities, or
both, notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such publication
or mailing, any unclaimed balance of such money then remaining will be repaid to
the Company.
SECTION 1004. Additional Amounts.
If the Securities of a series provide for the payment of Additional
Amounts, the Company will pay to the Holder of any Security of any series or any
coupon appertaining thereto Additional Amounts as provided therein. Whenever in
this Indenture there is mentioned, in any context, the payment of the principal
of (or premium, if any) or interest on, or in respect of, any Security of any
series or any related coupon or the net proceeds received on the sale or
exchange of any Security of any series, such mention shall be deemed to include
mention of the payment of Additional Amounts provided for in this Section to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof pursuant to the provisions of this Section and express
mention of the payment of Additional Amounts (if applicable) in any provisions
hereof shall not be construed as excluding Additional Amounts in those
provisions hereof where such express mention is not made.
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If the Securities of a series provide for the payment of Additional
Amounts, at least 10 days prior to the first Interest Payment Date with respect
to that series of Securities (or if the Securities of that series will not bear
interest prior to Maturity, the first day on which a payment of principal (and
premium, if any) is made), and at least 10 days prior to each date of payment of
principal (and premium, if any) or interest if there has been any change with
respect to the matters set forth in the below-mentioned Officers' Certificate,
the Company will furnish the Trustee and the Company's principal Paying Agent or
Paying Agents, if other than the Trustee, with an Officers' Certificate
instructing the Trustee and such Paying Agent or Paying Agents whether such
payment of principal (and premium, if any) or interest on the Securities of that
series shall be made to Holders of Securities of that series or the related
coupons who are United States Aliens without withholding for or on account of
any tax, assessment or other governmental charge described in the Securities of
that Series. If any such withholding shall be required, then such Officers'
Certificate shall specify by country the amount, if any, required to be withheld
on such payments to such Holders of Securities or coupons and the Company will
pay to the Trustee or such Paying Agent the Additional Amounts required by this
Section. The Company covenants to indemnify the Trustee and any Paying Agent
for, and to hold them harmless against, any loss, liability or expense
reasonably incurred without negligence or bad faith on their part arising out of
or in connection with actions taken or omitted by any of them in reliance on any
Officers' Certificate furnished pursuant to this Section.
SECTION 1005. Statement as to Compliance; Notice of Certain Defaults.
(a) The Company will deliver to the Trustee, within 120 days after
the end of each fiscal year, a written statement, which need not comply
with Section 102, signed by the Chairman of the Board, the President or a
Vice President and by the Treasurer, an Assistant Treasurer, the Controller
or an Assistant Controller of the Company, stating, as to each signer
thereof, that
(1) a review of the activities of the Company during such year
and of performance under this Indenture has been made under his
supervision, and
(2) to the best of his knowledge, based on such review, (a) the
Company has fulfilled all of its obligations under this Indenture
throughout such year, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known
to him and the nature and status thereof, and (b) no event has
occurred and is continuing which is, or after notice or lapse of time
or both would become, an Event of Default, or, if such an event has
occurred and is continuing, specifying each such event known to him
and the nature and status thereof.
(b) The Company will deliver to the Trustee within five days after
the occurrence thereof, written notice of any event which after notice or
lapse of time or both would become an Event of Default pursuant to Clause
(4) of Section 501.
SECTION 1006. Limitation Upon Creation of Liens on Voting Stock of
Certain Subsidiaries.
The Company will not, and it will not permit any Subsidiary at any time
directly or indirectly to, create, assume, incur or permit to exist any
indebtedness for borrowed money secured by a pledge, lien or other encumbrance
(any pledge, lien or other encumbrance being hereinafter in this Section
referred to as a "lien") on the Voting Stock of any Subsidiary (other than a
Subsidiary which, at the time of incurrence of such secured indebtedness, has a
net worth, as determined in accordance with generally accepted accounting
principles, of less than $3,000,000) without making effective provision whereby
the Outstanding Securities and coupons appertaining thereto, if any (and, if the
Company so elects, any other indebtedness ranking on a parity with the
Securities), shall be secured equally and ratably with such secured indebtedness
so long as such other indebtedness shall be so secured; provided, however, that
the foregoing covenant shall not be applicable to liens for taxes or assessments
or governmental charges or levies not then due and delinquent or the validity of
which is being contested in good faith or which are less than $1,000,000 in
amount, liens created by or resulting from any litigation or legal proceeding
which is currently being contested in good faith by appropriate proceedings or
which involve claims of less than $1,000,000, or deposits to secure (or in lieu
of) surety, stay, appeal or customs bonds.
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If the Company shall hereafter be required to secure the Securities and
coupons appertaining thereto, if any, equally and ratably with any other
indebtedness pursuant to this Section, (i) the Company will promptly deliver to
the Trustee an Officers' Certificate stating that the foregoing covenant has
been complied with, and an Opinion of Counsel stating that in the opinion of
such counsel the foregoing covenant has been complied with and that any
instruments executed by the Company or any Subsidiary in the performance of the
foregoing covenant comply with the requirements of the foregoing covenant and
(ii) the Trustee is hereby authorized to enter into an indenture or agreement
supplemental hereto and to take such action, if any, as it may deem advisable to
enable it to enforce the rights of the holders of the Securities and coupons
appertaining thereto, if any, so secured.
SECTION 1007. Limitation on Disposition of Voting Stock of, and Merger and
Sale of Assets by, MLPF&S.
The Company will not:
(a) sell, transfer or otherwise dispose of any shares of Voting Stock
of MLPF&S or permit MLPF&S to issue, sell, or otherwise dispose of any
shares of its Voting Stock, unless, after giving effect to any such
transaction, MLPF&S remains a Controlled Subsidiary; or
(b) permit MLPF&S to
(i) merge or consolidate, unless the surviving company is a
Controlled Subsidiary; or
(ii) convey or transfer its properties and assets
substantially as an entirety to any Person, except to
one or more Controlled Subsidiaries.
SECTION 1008. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term,
provision or condition set forth in Sections 1004 to 1007, inclusive, with
respect to the Securities of any series if before the time for such compliance
the Holders of at least a majority in principal amount of the Outstanding
Securities of such series shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such term,
provision or condition, but no such waiver shall extend to or affect such term,
provision or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company and the duties of
the Trustee in respect of any such term, provision or condition shall remain in
full force and effect.
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Applicability of Article.
Redemption of Securities of any series at the option of the Company as
permitted or required by the terms of such Securities shall be made in
accordance with the terms of such Securities and this Article.
SECTION 1102. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by
a Company Order. In case of any redemption at the election of the Company of
less than all of the Securities of any series with the same issue date, interest
rate and Stated Maturity, the Company shall, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date and of
the principal amount of Securities of such series to be redeemed.
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SECTION 1103. Selection by Trustee of Securities to be Redeemed.
If less than all the Securities of any series with the same issue date,
interest rate and Stated Maturity are to be redeemed, the particular Securities
to be redeemed shall be selected not more than 60 days prior to the Redemption
Date by the Trustee, from the Outstanding Securities of such series not
previously called for redemption, by such method as the Trustee shall deem fair
and appropriate and which may provide for the selection for redemption of
portions of the principal amount of Registered Securities of such series;
provided, however, that no such partial redemption shall reduce the portion of
the principal amount of a Registered Security of such series not redeemed to
less than the minimum denomination for a Security of that series established
pursuant to Section 302.
The Trustee shall promptly notify the Company and the Security Registrar
(if other than itself) in writing of the Securities selected for redemption and,
in the case of any Securities selected for partial redemption, the principal
amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Securities redeemed or to be redeemed only in part, to the portion
of the principal of such Securities which has been or is to be redeemed.
SECTION 1104. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section 106,
not less than 30 nor more than 60 days prior to the Redemption Date, unless a
shorter period is specified in the Securities to be redeemed, to the Holders of
Securities to be redeemed. Failure to give notice by mailing in the manner
herein provided to the Holder of any Registered Securities designated for
redemption as a whole or in part, or any defect in the notice to any such
Holder, shall not affect the validity of the proceedings for the redemption of
any other Securities or portion thereof.
Any notice that is mailed to the Holder of any Registered Securities in the
manner herein provided shall be conclusively presumed to have been duly given,
whether or not such Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities of any series are to be
redeemed, the identification (and, in the case of partial redemption, the
principal amount) of the particular Securities to be redeemed,
(4) in case any Registered Security is to be redeemed in part only,
the notice which relates to such Security shall state that on and after the
Redemption Date, upon surrender of such Security, the Holder of such
Security will receive, without charge, a new Registered Security or
Registered Securities of authorized denominations for the principal amount
thereof remaining unredeemed,
(5) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed, and, if applicable,
that interest thereon shall cease to accrue on and after said date,
(6) the place or places where such Securities, together in the case
of Bearer Securities with all coupons appertaining thereto, if any,
maturing after the Redemption Date, are to be surrendered for payment of
the Redemption Price, and
(7) that the redemption is for a sinking fund, if such is the case.
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A notice of redemption published as contemplated by Section 106 need not
identify particular Registered Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 1105. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on and any Additional
Amounts with respect thereto, all the Securities or portions thereof which are
to be redeemed on that date.
SECTION 1106. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest and the coupons for such
interest appertaining to any Bearer Securities so to be redeemed, except to the
extent provided below, shall be void. Upon surrender of any such Security for
redemption in accordance with said notice, together with all coupons, if any,
appertaining thereto maturing after the Redemption Date, such Security shall be
paid by the Company at the Redemption Price, together with accrued interest (and
any Additional Amounts) to the Redemption Date; provided, however, that
installments of interest on Bearer Securities whose Stated Maturity is on or
prior to the Redemption Date shall be payable only upon presentation and
surrender of coupons for such interest (at an office or agency located outside
the United States except as otherwise provided in Section 1002), and provided,
further, that installments of interest on Registered Securities whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such at
the close of business on the relevant Record Dates according to their terms and
the provisions of Section 307.
If any Bearer Security surrendered for redemption shall not be accompanied
by all appurtenant coupons maturing after the Redemption Date, such Security may
be paid after deducting from the Redemption Price an amount equal to the face
amount of all such missing coupons, or the surrender of such missing coupon or
coupons may be waived by the Company and the Trustee if there be furnished to
them such security or indemnity as they may require to save each of them and any
Paying Agent harmless. If thereafter the Holder of such Security shall
surrender to the Trustee or any Paying Agent any such missing coupon in respect
of which a deduction shall have been made from the Redemption Price, such Holder
shall be entitled to receive the amount so deducted; provided, however, that
interest (and any Additional Amounts) represented by coupons shall be payable
only upon presentation and surrender of those coupons at an office or agency
located outside of the United States except as otherwise provided in Section
1002.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate prescribed therefor in the
Security.
SECTION 1107. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be
surrendered at any office or agency of the Company maintained for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge,
a new Registered Security or Securities of the same series, containing identical
terms and provisions, of any authorized
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denomination as requested by such Holder in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Security so
surrendered. If a Security in global form is so surrendered, the Company shall
execute, and the Trustee shall authenticate and deliver to the U.S. Depository
or other depository for such Security in global form as shall be specified in
the Company Order with respect thereto to the Trustee, without service charge, a
new Security in global form in a denomination equal to and in exchange for the
unredeemed portion of the principal of the Security in global form so
surrendered.
ARTICLE TWELVE
SINKING FUNDS
SECTION 1201. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for
the retirement of Securities of a series, except as otherwise permitted or
required by any form of Security of such series issued pursuant to this
Indenture.
The minimum amount of any sinking fund payment provided for by the terms of
Securities of any series is herein referred to as a "mandatory sinking fund
payment", and any payment in excess of such minimum amount provided for by the
terms of Securities of such series is herein referred to as an "optional sinking
fund payment". If provided for by the terms of Securities of any series, the
cash amount of any sinking fund payment may be subject to reduction as provided
in Section 1202. Each sinking fund payment shall be applied to the redemption
of Securities of any series as provided for by the terms of Securities of such
series.
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities.
The Company may, in satisfaction of all or any part of any sinking fund
payment with respect to the Securities of such series to be made pursuant to the
terms of such Securities as provided for by the terms of such series (1) deliver
Outstanding Securities of such series (other than any of such Securities
previously called for redemption or any of such Securities in respect of which
cash shall have been released to the Company), together in the case of any
Bearer Securities of such series with all unmatured coupons appertaining
thereto, and (2) apply as a credit Securities of such series which have been
redeemed either at the election of the Company pursuant to the terms of such
series of Securities or through the application of permitted optional sinking
fund payments pursuant to the terms of such Securities, provided that such
series of Securities have not been previously so credited. Such Securities
shall be received and credited for such purpose by the Trustee at the Redemption
Price specified in such Securities for redemption through operation of the
sinking fund and the amount of such sinking fund payment shall be reduced
accordingly. If as a result of the delivery or credit of Securities of any
series in lieu of cash payments pursuant to this Section 1202, the principal
amount of Securities of such series to be redeemed in order to exhaust the
aforesaid cash payment shall be less than $100,000, the Trustee need not call
Securities of such series for redemption, except upon Company Request, and such
cash payment shall be held by the Trustee or a Paying Agent and applied to the
next succeeding sinking fund payment, provided, however, that the Trustee or
such Paying Agent shall at the request of the Company from time to time pay over
and deliver to the Company any cash payment so being held by the Trustee or such
Paying Agent upon delivery by the Company to the Trustee of Securities of that
series purchased by the Company having an unpaid principal amount equal to the
cash payment requested to be released to the Company.
SECTION 1203. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any
series of Securities, the Company will deliver to the Trustee an Officers'
Certificate specifying the amount of the next ensuing mandatory sinking fund
payment for that series pursuant to the terms of that series, the portion
thereof, if any, which is to be satisfied by payment of cash and the portion
thereof, if any, which is to be satisfied by delivering and crediting of
Securities of that series pursuant to Section 1202, and the optional amount, if
any, to be added in cash to the next ensuing mandatory sinking fund payment, and
will also deliver to the Trustee any Securities to be so credited and not
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theretofore delivered. If such Officers' Certificate shall specify an optional
amount to be added in cash to the next ensuing mandatory sinking fund payment,
the Company shall thereupon be obligated to pay the amount therein specified.
Not less than 30 days before each such sinking fund payment date the Trustee
shall select the Securities to be redeemed upon such sinking fund payment date
in the manner specified in Section 1103 and cause notice of the redemption
thereof to be given in the name of and at the expense of the Company in the
manner provided in Section 1104. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Sections 1106 and 1107.
ARTICLE THIRTEEN
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 1301. Applicability of Article.
Securities of any series which are repayable at the option of the Holders
thereof before their Stated Maturity shall be repaid in accordance with the
terms of the Securities of such series. The repayment of any principal amount
of Securities pursuant to such option of the Holder to require repayment of
Securities before their Stated Maturity, for purposes of Section 309, shall not
operate as a payment, redemption or satisfaction of the indebtedness represented
by such Securities unless and until the Company, at its option, shall deliver or
surrender the same to the Trustee with a directive that such Securities be
cancelled. Notwithstanding anything to the contrary contained in this Article
Thirteen, in connection with any repayment of Securities, the Company may
arrange for the purchase of any Securities by an agreement with one or more
investment bankers or other purchasers to purchase such Securities by paying to
the Holders of such Securities on or before the close of business on the
repayment date an amount not less than the repayment price payable by the
Company on repayment of such Securities, and the obligation of the Company to
pay the repayment price of such Securities shall be satisfied and discharged to
the extent such payment is so paid by such purchasers.
ARTICLE FOURTEEN
MEETINGS OF HOLDERS OF SECURITIES
SECTION 1401. Purposes for Which Meetings May Be Called.
If Securities of a series are issuable as Bearer Securities, a meeting
of Holders of Securities of such series may be called at any time and from time
to time pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be made, given or taken by Holders of Securities of such
series.
SECTION 1402. Call, Notice and Place of Meetings.
(a) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 1401, to be
held at such time and at such place in the Borough of Manhattan, The City
of New York, or in London as the Trustee shall determine. Notice of every
meeting of Holders of Securities of any series, setting forth the time and
the place of such meeting and in general terms the action proposed to be
taken at such meeting, shall be given, in the manner provided in Section
106, not less than 21 nor more than 180 days prior to the date fixed for
the meeting.
(b) In case at any time the Company, pursuant to a Board Resolution,
or the Holders of at least 10% in principal amount of the Outstanding
Securities of any series shall have requested the Trustee to call a meeting
of the Holders of Securities of such series for any purpose specified in
Section 1401, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee shall not have
the first publication of the notice of such meeting within 21 days after
receipt of such request or shall not thereafter proceed to cause the
meeting to be held as provided herein, then the Company or the Holders of
Securities of such series in the amount above specified, as the case may
be,
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may determine the time and the place in the Borough of Manhattan, The City
of New York, or in London for such meeting and may call such meeting for
such purposes by giving notice thereof as provided in subsection (a) of
this Section.
SECTION 1403. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities of any
series, a Person shall be (1) a Holder of one or more Outstanding Securities of
such series, or (2) a Person appointed by an instrument in writing as proxy for
a Holder or Holders of one or more Outstanding Securities of such series by such
Holder or Holders. The only Persons who shall be entitled to be present or to
speak at any meeting of Holders of Securities of any series shall be the Persons
entitled to vote at such meeting and their counsel, any representatives of the
Trustee and its counsel and any representatives of the Company and its counsel.
SECTION 1404. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
Outstanding Securities of a series shall constitute a quorum for a meeting of
Holders of Securities of such series; provided, however, that if any action is
to be taken at such meeting with respect to a consent or waiver which this
Indenture expressly provides may be given by the Holders of not less than 66-
2/3% in principal amount of the Outstanding Securities of a series, the Persons
entitled to vote 66-2/3% in principal amount of the Outstanding Securities of
such series shall constitute a quorum. In the absence of a quorum within 30
minutes of the time appointed for any such meeting, the meeting shall, if
convened at the request of Holders of Securities of such series, be dissolved.
In any other case the meeting may be adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such meeting. In the absence of a quorum at any such adjourned meeting, such
adjourned meeting may be further adjourned for a period of not less than 10 days
as determined by the chairman of the meeting prior to the adjournment of such
adjourned meeting. Notice of the reconvening of any adjourned meeting shall be
given as provided in Section 1402(a), except that such notice need be given only
once not less than five days prior to the date on which the meeting is scheduled
to be reconvened. Notice of the reconvening of an adjourned meeting shall state
expressly the percentage, as provided above, of the principal amount of the
Outstanding Securities of such series which shall constitute a quorum.
Except as limited by the proviso to Section 902, any resolution presented
to a meeting or adjourned meeting duly reconvened at which a quorum is present
as aforesaid may be adopted only by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Securities of that series;
provided, however, that, except as limited by the proviso to Section 902, any
resolution with respect to any consent or waiver which this Indenture expressly
provides may be given by the Holders of not less than 66-2/3% in principal
amount of the Outstanding Securities of a series may be adopted at a meeting or
an adjourned meeting duly convened and at which a quorum is present as aforesaid
only by the affirmative vote of the Holders of 66-2/3% in principal amount of
the Outstanding Securities of that series; and provided, further, that, except
as limited by the proviso to Section 902, any resolution with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action which this Indenture expressly provides may be made, given or taken by
the Holders of a specified percentage, which is less than a majority, in
principal amount of the Outstanding Securities of a series may be adopted at a
meeting or an adjourned meeting duly reconvened and at which a quorum is present
as aforesaid by the affirmative vote of the Holders of such specified percentage
in principal amount of the Outstanding Securities of that series.
Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and the related coupons,
whether or not present or represented at the meeting.
SECTION 1405. Determination of Voting Rights; Conduct and Adjournment of
Meetings.
(a) Notwithstanding any other provisions of this Indenture, the
Trustee may make such reasonable regulations as it may deem advisable for
any meeting of Holders of Securities of such series in regard to proof of
the holding of Securities of such series and of the appointment of proxies
and in regard to
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the appointment and duties of inspectors of votes, the submission and
examination or proxies, certificates and other evidence of the right to
vote, and such other matters concerning the conduct of the meeting as it
shall deem appropriate. Except as otherwise permitted or required by any
such regulations, the holding of Securities shall be proved in the manner
specified in Section 104 and the appointment of any proxy shall be proved
in the manner specified in Section 104 or by having the signature of the
person executing the proxy witnessed or guaranteed by any trust company,
bank or banker authorized by Section 104 to certify to the holding of
Bearer Securities. Such regulations may provide that written instruments
appointing proxies, regular on their face, may be presumed valid and
genuine without the proof specified in Section 104 or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been
called by the Company or by Holders of Securities as provided in Section
1402(b), in which case the Company or the Holders of Securities of the
series calling the meeting, as the case may be, shall in like manner
appoint a temporary chairman. A permanent chairman and a permanent
secretary of the meeting shall be elected by vote of the Persons entitled
to vote a majority in principal amount of the Outstanding Securities of
such series represented at the meeting.
(c) At any meeting each Holder of a Security of such series or proxy
shall be entitled to one vote for each $1,000 principal amount of
Securities of such series held or represented by him; provided, however,
that no vote shall be cast or counted at any meeting in respect of any
Security challenged as not Outstanding and ruled by the chairman of the
meeting to be not Outstanding. The chairman of the meeting shall have no
right to vote, except as a Holder of a Security of such series or proxy.
(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 1402 at which a quorum is present may be adjourned from
time to time by Persons entitled to vote a majority in principal amount of
the Outstanding Securities of such series represented at the meeting; and
the meeting may be held as so adjourned without further notice.
SECTION 1406. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of such series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in triplicate of all votes cast at the meeting. A record, at least in
triplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 1402 and, if
applicable, Section 1404. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company, and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
ARTICLE FIFTEEN
MISCELLANEOUS PROVISIONS
SECTION 1501. Securities in Foreign Currencies.
Whenever this Indenture provides for (i) any action by, or the
determination of any of the rights of, Holders of Securities of any series in
which not all of such Securities are denominated in the same currency, or (ii)
any distribution to Holders of Securities, in the absence of any provision to
the contrary in the form of Security of any
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particular series, any amount in respect of any Security denominated in a
currency other than United States dollars shall be treated for any such action
or distribution as that amount of United States dollars that could be obtained
for such amount on such reasonable basis of exchange and as of the record date
with respect to Registered Securities of such series (if any) for such action,
determination of rights or distribution (or, if there shall be no applicable
record date, such other date reasonably proximate to the date of such action,
determination of rights or distribution) as the Company may specify in a written
notice to the Trustee or, in the absence of such written notice, as the Trustee
may determine.
* * * * *
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture, dated as
of October 1, 1993 to be duly executed, and their respective corporate seals to
be hereunto affixed and attested, all as of the day and year first above written
MERRILL LYNCH & CO., INC.
[CORPORATE SEAL] By__________________________
Senior Vice President and
Treasurer
Attest:
/s/ GREGORY T. RUSSO
- -----------------------------
Secretary The Chase Manhattan Bank
(National Association)
[CORPORATE SEAL]
By /s/ JAMES D. HEANEY
--------------------------
Vice President
Attest:
/s/ JOSEPHINE MANNINO
- -----------------------------
Assistant Secretary
49
<PAGE>
EXHIBIT 10(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.
AGREEMENT
---------
AGREEMENT, effective as of between Merrill Lynch &
Co., Inc., a Delaware corporation (the "Company"), and
(the "Indemnitee").
WHEREAS, it is essential to the Company to retain and attract as directors
the most capable persons available;
WHEREAS, Indemnitee is a director of the Company;
WHEREAS, both the Company and Indemnitee recognize the increased risk of
litigation and other claims being asserted against directors and officers of
public companies in today's environment;
WHEREAS, basic protection against undue risk of personal liability of
directors and officers heretofore has been provided through insurance coverage
providing reasonable protection at reasonable cost, and Indemnitee is relying on
the availability of such coverage; but as a result of substantial changes in the
marketplace for such insurance it has become increasingly more difficult to
obtain such insurance on terms providing reasonable protection at reasonable
cost; and the Company cannot be assured that it will be able to renew its
present insurance policies, that the cost thereof will not become prohibitive,
or, if its present coverage is not renewed or does become prohibitively
expensive, that similar coverage will be available elsewhere;
WHEREAS, the Restated Certificate of Incorporation (the "Certificate") of
the Company requires the Company to indemnify and advance expenses to its
directors to the full extent authorized or permitted by law and the Indemnitee
has agreed to serve and will continue to serve as a director of the Company in
part in reliance on the Certificate.
WHEREAS, in recognition of Indemnitee's need for substantial protection
against personal liability in order to enhance Indemnitee's continued service to
the Company in an effective manner, the increasing difficulty in obtaining
satisfactory directors' and officers' liability insurance coverage, and
Indemnitee's reliance on the Certificate, and in part to provide Indemnitee with
specific contractual assurance that the protection promised by the Certificate
will be available to Indemnitee (regardless of, among other things, any
amendment to or revocation of the Certificate or any
<PAGE>
change in the composition of the Company's Board of Directors or acquisition
transaction relating to the Company), the Company wishes to provide in this
Agreement for the indemnification of and the advancing of expenses to Indemnitee
to the full extent (whether partial or complete) authorized or permitted by law
and as set forth in this Agreement, and, to the extent insurance is maintained,
for the continued coverage of Indemnitee under the Company's directors' and
officers' liability insurance policies;
NOW, THEREFORE, in consideration of the premises and of Indemnitee
continuing to serve the Company directly or, at its request, another enterprise,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. Basic Indemnification Arrangement.
---------------------------------
(a) In the event Indemnitee was, is or becomes a party to or witness or
other participant in, or is threatened to be made a party to or witness or other
participant in, a Claim by reason of (or arising in part out of) an
Indemnifiable Event, the Company shall indemnify Indemnitee to the full extent
authorized or permitted by law as soon as practicable but in any event no later
than thirty days after written demand is presented to the Company, against any
and all Expenses, judgments, fines, penalties and amounts paid in settlement
(including all interest, assessments and other charges paid or payable in
connection with or in respect of such Expenses, judgments, fines, penalties or
amounts paid in settlement) of such Claim; provided, however, that, except for
-------- -------
proceedings to enforce rights to indemnification, the Company shall not be
obligated to indemnify Indemnitee in connection with a proceeding (or part
thereof) initiated by Indemnitee unless such proceeding (or part thereof) was
authorized in advance, or unanimously consented to, by the Board of Directors of
the Company. If so requested by Indemnitee, the Company shall advance (within
two business days of such request) any and all Expenses to Indemnitee (an
"Expense Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the Company under
Section 1(a) shall be subject to the condition that the Reviewing Party shall
not have determined (in a written opinion, in any case in which the Independent
Legal Counsel referred to in Section 2 hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an Expense Advance pursuant to Section 1(a) shall be
subject to the condition that, if, when and to the extent that the Reviewing
Party determines that Indemnitee would not be permitted to be so indemnified
under applicable law, the Company shall be entitled to be reimbursed by
Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall
<PAGE>
not be binding and Indemnitee shall not be required to reimburse the Company for
any Expense Advance until a final judicial determination is made with respect
thereto (as to which all rights of appeal therefrom have been exhausted or
lapsed). If there has not been a Change in Control, the Reviewing Party shall be
selected by the Company's Board of Directors, and if there has been such a
Change in Control, the Reviewing Party shall be the Independent Legal Counsel
referred to in Section 2 hereof. If there has been no determination by the
Reviewing Party or if the Reviewing Party determines that Indemnitee
substantively would not be permitted to be indemnified in whole or in part under
applicable law, Indemnitee shall have the right to commence litigation in any
court in the States of New York or Delaware having subject matter jurisdiction
thereof and in which venue is proper seeking an initial determination by the
court or challenging any such determination by the Reviewing Party or any aspect
thereof, including the legal or factual bases therefor, and the Company hereby
consents to service of process and to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and binding
on the Company and Indemnitee.
2. Change in Control. The Company agrees that if there is a Change in Control
-----------------
of the Company, then with respect to all matters thereafter arising concerning
the rights of Indemnitee to indemnity payments and Expense Advances under this
Agreement or any other agreement, or any Certificate or by-law provision now or
hereinafter in effect relating to Claims for Indemnifiable Events, the Company
shall seek legal advice only from Independent Legal Counsel selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion
to the Company and Indemnitee as to whether and to what extent the Indemnitee
would be permitted to be indemnified under applicable law. The Company agrees
to pay the reasonable fees of the Independent Legal Counsel referred to above
and to fully indemnify such counsel against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or its engagement pursuant hereto.
3. Establishment of Trust. In the event of a Potential Change in Control, the
----------------------
Company shall, upon written request by Indemnitee, create a trust for the
benefit of Indemnitee and from time to time upon written request of Indemnitee
shall fund such trust in an amount sufficient to satisfy any and all Expenses
reasonably anticipated at the time of each such request to be incurred in
connection with investigating, preparing for and defending any Claim relating to
an Indemnifiable Event, and any and all judgments, fines, penalties and
settlement amounts of any and all Claims relating to an Indemnifiable Event from
time to time actually paid or claimed, reasonably anticipated or proposed to be
paid. The amount or amounts to be deposited in the trust pursuant to the
foregoing funding obligation shall be determined by the Reviewing Party, in any
case in which the Independent Legal Counsel referred to above is involved. The
terms of the trust shall provide that upon a Change in Control (i) the trust
shall not be revoked or the principal thereof invaded,
<PAGE>
without the written consent of the Indemnitee, (ii) the trustee shall advance,
within two business days of a request by the Indemnitee, any and all Expenses to
the Indemnitee (and the Indemnitee hereby agrees to reimburse the trust under
the circumstances under which the Indemnitee would be required to reimburse the
Company under Section 1(b) of this Agreement), (iii) the trust shall continue to
be funded by the Company in accordance with the funding obligation set forth
above, (iv) the trustee shall promptly pay to Indemnitee all amounts for which
Indemnitee shall be entitled to indemnification pursuant to this Agreement or
otherwise, and (v) all unexpended funds in such trust shall revert to the
Company upon a final determination by the Reviewing Party or a court of
competent jurisdiction, as the case may be, that Indemnitee has been fully
indemnified under the terms of this Agreement. The trustee shall be chosen by
Indemnitee. Nothing in this Section 3 shall relieve the Company of any of its
obligations under this Agreement.
4. Indemnification for Additional Expenses. The Company shall indemnify
---------------------------------------
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee for (i) indemnification or
advance payment of Expenses by the Company under this Agreement or any other
agreement, or any Certificate or by-law provision now or hereafter in effect
relating to Claims for Indemnifiable Events and/or (ii) recovery under any
directors' and officers' liability insurance policies maintained by the Company,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
5. Partial Indemnity, Etc. If Indemnitee is entitled under any provision of
----------------------
this Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against all Expenses incurred in
connection therewith.
6. Burden of Proof. In connection with any determination by the Reviewing
---------------
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. No Presumptions. For purposes of this Agreement, the termination of any
---------------
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court approval) or conviction, or upon a plea of nolo contendere, or
its
<PAGE>
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
8. Nonexclusivity, Etc. The rights of the Indemnitee hereunder shall be in
-------------------
addition to any other rights Indemnitee may have under the Certificate or the
Delaware General Corporation Law or otherwise. To the extent that a change in
the Delaware General Corporation Law (whether by statute or judicial decision)
permits greater indemnification by agreement than would be afforded currently
under the Certificate and this Agreement, it is the intent of the parties hereto
that Indemnitee shall enjoy by this Agreement the greater benefits so afforded
by such change.
9. Liability Insurance. To the extent the Company maintains an insurance
-------------------
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. Period of Limitations. No legal action shall be brought and no cause of
---------------------
action shall be asserted by or in the right of the Company against Indemnitee,
Indemnitee's spouse, heirs, executors or personal or legal representatives after
the expiration of two years from the date of accrual of such cause of action,
and any claim or cause of action of the Company shall be extinguished and deemed
released unless asserted by the timely filing of a legal action within such two-
year period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action such shorter period shall
govern.
11. Amendments, Etc. No supplement, modification or amendment of this
----------------
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
12. Subrogation. In the event of payment under this Agreement, the Company
-----------
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
<PAGE>
13. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, the Certificate or otherwise) of the amounts
otherwise indemnifiable hereunder.
14. Binding Effect, Etc. This Agreement shall be binding upon and inure to the
-------------------
benefit of and be enforceable by the parties hereto and their respective
successors, assigns, including any direct or indirect successor by purchase,
merger, consolidation or otherwise to all or substantially all of the business
and/or assets of the Company, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee continues to serve as a director of the Company.
15. Severability. The provisions of this Agreement shall be severable in the
------------
event that any of the provisions hereof (including any provision within a single
section, paragraph or sentence) is held by a court of competent jurisdiction to
be invalid, void or otherwise unenforceable in any respect, and the validity and
enforceability of any such provision in every other respect and of the remaining
provisions hereof shall not be in any way impaired and shall remain enforceable
to the full extent permitted by law.
16. Governing Law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
17. Certain Definitions:
-------------------
(a) Change in Control: a change in control of a nature that would be
-----------------
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not the Company is then subject to such reporting
requirement; provided that, without limitation, a Change in Control shall be
-------- ----
deemed to have occurred if (i) any individual, partnership, firm, corporation,
association, trust, unincorporated organization or other entity, or any
syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange
Act (other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act), directly or indirectly, of securities of
the Company representing 30% or more of the total voting power represented by
the Company's then outstanding Voting Securities; or (ii) during any period of
two (2)
<PAGE>
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors and any new directors, whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least three quarters (3/4) of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the stockholders of the Company approve
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all the Company's assets.
(b) Claim: any threatened, pending or completed action, suit or
-----
proceeding, or any inquiry or investigation, whether instituted by the Company
or any other party, that Indemnitee in good faith believes might lead to the
institution of any such action, suit or proceeding, whether civil, criminal,
administrative, investigative or other.
(c) Expenses: include attorneys' fees and all other costs, expenses and
--------
obligations paid or incurred in connection with investigating, defending, being
a witness in or participating in (including on appeal), or preparing to defend,
be a witness in or participate in any Claim relating to any Indemnifiable Event.
(d) Indemnifiable Event: any event or occurrence related to the fact that
-------------------
Indemnitee is or was a director or officer of the Company, or is or was serving
at the request of the Company as a director, officer or trustee of another
corporation, trust or other enterprise, or by reason of anything done or not
done by Indemnitee in any such capacity.
(e) Independent Legal Counsel: an attorney or firm of attorneys, selected
-------------------------
in accordance with the provisions of Section 2, who shall not have otherwise
performed services for the Company or Indemnitee within the last two years
(other than with respect to matters concerning the rights of Indemnitee under
this Agreement, or of other indemnitees under similar indemnity agreements).
(f) Potential Change in Control: shall be deemed to have occurred if (i)
---------------------------
the Company enters into an agreement, the consummation of which would result in
the occurrence of a Change in Control; (ii) any person (including the Company)
publicly announces an intention to take or to consider taking actions which if
consummated would constitute a Change in Control; (iii) any person, other than a
trustee or other
<PAGE>
fiduciary holding securities under an employee benefit plan of the Company or a
corporation owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
who is or becomes the beneficial owner, directly or indirectly, of securities of
the Company representing 9.5% or more of the combined voting power of the
Company's then outstanding Voting Securities, increases such person's beneficial
ownership of such securities by three percentage points (3%) or more over the
percentage so owned by such person; or (iv) the Board adopts a resolution to the
effect that, for purposes of this Agreement, a Potential Change in Control has
occurred.
(g) Reviewing Party: any appropriate person or body consisting of a member
---------------
or members of the Company's Board of Directors or any other person or body
appointed by the Board who is not a party to the particular Claim for which
Indemnitee is seeking indemnification, or Independent Legal Counsel.
(h) Voting Securities: any securities of the Company which vote generally
-----------------
in the election of directors.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day of
MERRILL LYNCH & CO., INC.
By: _____________________
__________________________
<PAGE>
EXHIBIT 10(ix)
Written Description of ML & Co.'s Incentive Compensation Programs
Cash incentive compensation programs are maintained for key employees of Merrill
Lynch & Co., Inc. ("ML & Co.") and its participating subsidiaries. The
individuals who are to receive awards and the amount of such awards are
determined or approved each year by the Management Development and Compensation
Committee of the Board of Directors of ML & Co. based on the recommendations of
the management of ML & Co. Annual cash incentive awards are based on the overall
performance of ML & Co. or groupings of one or more subsidiaries or units
thereof, and on an employee's rank and performance, during the most recently
completed fiscal year.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(in millions, except per share amounts)
Year Ended Last Friday in December
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net earnings $ 1,259 $ 1,935 $ 1,648 $ 1,126 $ 1,030
Preferred stock dividends (39) (39) (46) (48) (13)
------- ------- ------- ------- -------
Net earnings applicable to common stockholders 1,220 1,896 1,602 1,078 1,017
Interest on convertible debt - - 1 1 1
------- ------- ------- ------- -------
1,220 1,896 1,603 1,079 1,018
======= ======= ======= ======= =======
Weighted-average shares outstanding (basic shares) 355.6 340.1 346.0 361.2 399.2
------ ------ ------ ------ ------
Effect of dilutive instruments:
Employee stock options 29.2 29.7 21.9 19.9 13.6
FCCAAP shares 16.6 20.6 19.6 18.7 14.0
Restricted units 4.9 5.3 4.7 2.4 2.5
ESPP shares - - .1 .1 .1
Convertible debt - .2 .7 .6 .7
------ ------ ------ ------ ------
Dilutive potential common shares 50.7 55.8 47.0 41.7 30.9
------ ------ ------ ------ ------
Diluted shares 406.3 395.9 393.0 402.9 430.1
====== ====== ====== ====== ======
BASIC EARNINGS PER SHARE $ 3.43 $ 5.57 $ 4.63 $ 2.98 $ 2.55
====== ====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 3.00 $ 4.79 $ 4.08 $ 2.68 $ 2.37
====== ====== ====== ====== ======
</TABLE>
Notes: Amounts for 1994-1997 have been restated for Merrill Lynch's 1998 merger
with Midland Walwyn Inc., accounted for as a pooling-of-interests.
Share and per share amounts for 1994-1996 have also been restated for
the 1997 two-for-one common stock split.
Basic and diluted earnings per share are based on actual numbers
before rounding.
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 12
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND
COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(dollars in millions)
Year Ended Last Friday in December
----------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing operations $ 2,096 $ 3,111 $ 2,628 $ 1,836 $ 1,747
Add: Fixed charges (excluding capitalized interest
and preferred security dividend requirements
of subsidiaries) 18,498 16,410 12,266 11,587 8,736
------- ------- ------- ------- -------
Pre-tax earnings before fixed charges 20,594 19,521 14,894 13,423 10,483
======= ======= ======= ======= =======
Fixed charges:
Interest 18,278 16,224 12,083 11,434 8,591
Other (a) 351 236 183 153 145
------- ------- ------- ------- -------
Total fixed charges 18,629 16,460 12,266 11,587 8,736
------- ------- ------- ------- -------
Preferred stock dividend requirements 58 61 73 77 22
------- ------- ------- ------- -------
Total combined fixed charges
and preferred stock dividends $18,687 $16,521 $12,339 $11,664 $ 8,758
======= ======= ======= ======= =======
RATIO OF EARNINGS TO FIXED CHARGES 1.11 1.19 1.21 1.16 1.20
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS 1.10 1.18 1.21 1.15 1.20
</TABLE>
(a) Other fixed charges consist of the interest factor in rentals,
amortization of debt issuance costs, preferred security dividend
requirements of subsidiaries, and capitalized interest.
<PAGE>
EXHIBIT 13
This exhibit contains an excerpt from the ML&Co. 1998 Annual Report to
Stockholders:
Page(s)
-------
Selected Financial Data 25
Management's Discussion and Analysis 26-54
Management's Discussion of Financial
Responsibility 55
Description of Business 56
Independent Auditors' Report 56
Consolidated Financial Statements 57-63
Notes to Consolidated Financial
Statements 64-93
Supplemental Financial Information 94
Board of Directors 95
Executive Management 96-97
Merrill Lynch & Co., Inc. Information 98
<PAGE>
<TABLE>
<CAPTION>
[LOGO]
SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Revenues $ 35,853 $ 32,499 $ 25,713 $ 22,060 $ 18,573
Interest Expense 18,306 16,243 12,092 11,445 8,614
-------- -------- -------- -------- --------
Net Revenues 17,547 16,256 13,621 10,615 9,959
Non-Interest Expenses 15,451 13,145 10,993 8,779 8,212
-------- -------- -------- -------- --------
Earnings Before Income Taxes and Dividends on
Preferred Securities Issued by Subsidiaries 2,096 3,111 2,628 1,836 1,747
Income Tax Expense 713 1,129 980 710 717
Dividends on Preferred Securities Issued by Subsidiaries 124 47 - - -
-------- -------- -------- -------- --------
Net Earnings $ 1,259 $ 1,935 $ 1,648 $ 1,126 $ 1,030
======== ======== ======== ======== ========
Net Earnings Applicable to Common Stockholders $ 1,220 $ 1,896 $ 1,602 $ 1,078 $ 1,017
======== ======== ======== ======== ========
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $299,804 $296,980 $217,266 $179,452 $165,920
Short-Term Borrowings(a) $ 99,550 $124,219 $103,469 $ 86,969 $ 78,735
Long-Term Borrowings $ 57,563 $ 43,143 $ 26,206 $ 17,389 $ 14,911
Preferred Securities Issued by Subsidiaries $ 2,627 $ 627 $ 327 $ 51 $ 51
Total Stockholders' Equity $ 10,132 $ 8,539 $ 7,067 $ 6,288 $ 5,951
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA(b)
(in thousands, except per share amounts)
Earnings Per Share:
Basic $ 3.43 $ 5.57 $ 4.63 $ 2.98 $ 2.55
======== ======== ======== ======== ========
Diluted $ 3.00 $ 4.79 $ 4.08 $ 2.68 $ 2.37
======== ======== ======== ======== ========
Weighted-Average Shares Outstanding:
Basic 355,589 340,096 346,043 361,193 399,209
Diluted 406,262 395,855 392,990 402,852 430,092
Shares Outstanding at Year End(c) 356,284 339,259 332,349 346,953 367,135
Shares Repurchased(d) - 13,301 36,606 39,861 59,790
Average Share Repurchase Price $ - $ 48.91 $ 31.30 $ 23.48 $ 18.98
Book Value Per Share $ 26.89 $ 23.63 $ 19.24 $ 16.25 $ 14.48
Dividends Paid Per Share $ 0.92 $ 0.75 $ 0.58 $ 0.505 $ 0.445
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pre-tax Margin(e) 11.9% 19.1% 19.3% 17.3% 17.5%
Profit Margin(f) 7.2% 11.9% 12.1% 10.6% 10.3%
Common Dividend Payout Ratio 26.3% 13.4% 12.5% 17.0% 17.6%
Return on Average Assets 0.3% 0.7% 0.7% 0.5% 0.6%
Return on Average Common Stockholders' Equity 13.4% 26.5% 26.6% 19.8% 18.4%
Average Leverage(g) 32.9x 35.3x 33.3x 32.1x 31.3x
Average Adjusted Leverage(h) 19.2x 21.3x 19.8x 19.4x 18.6x
- ---------------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STATISTICS
Full-Time Employees:
U.S 46,700 45,800 42,100 39,250 38,750
Non-U.S 17,100 13,900 10,500 9,250 7,550
-------- -------- -------- -------- --------
Total 63,800 59,700 52,600 48,500 46,300
======== ======== ======== ======== ========
Financial Consultants and Other Investment Professionals 18,200 16,600 15,600 14,900 14,500
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Consists of Payables under repurchase agreements and securities loaned
transactions, Commercial paper and other short-term borrowings, and Demand
and time deposits.
(b) All share and per share data have been restated for the 1997 two-for-one
common stock split (see Note 7 to the Consolidated Financial Statements).
(c) Does not include 4,506, 4,718, 4,134, 3,932, and 3,786 shares exchangeable
into common stock (see Note 7 to the Consolidated Financial Statements) at
year-end 1998, 1997, 1996, 1995, and 1994, respectively. Also does not
include 3,078, 8,026, and 12,854 unallocated reversion shares held in the
Employee Stock Ownership Plan at year-end 1996, 1995, and 1994,
respectively, which are not considered outstanding for accounting
purposes.
(d) Does not include shares either (i) owned by employees and used to pay for
the exercise of stock options or (ii) stock withheld from employee stock
option exercises to pay associated taxes.
(e) Earnings before income taxes and Dividends on preferred securities issued
by subsidiaries to Net revenues.
(f) Net earnings to Net revenues.
(g) Average Total assets to average Total stockholders' equity and Preferred
securities issued by subsidiaries.
(h) Average Total assets less average (a) Securities received as collateral,
net of securities pledged as collateral, (b) Securities pledged as
collateral, (c) Receivables under resale agreements and securities
borrowed transactions, to average Total stockholders' equity and Preferred
securities issued by subsidiaries.
25
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- --------------------------------------------------------------------------------
TABLE OF CONTENTS
BUSINESS ENVIRONMENT ................................................... 27
RESULTS OF OPERATIONS .................................................. 28
COMMISSIONS ......................................................... 28
INTEREST AND DIVIDENDS .............................................. 29
PRINCIPAL TRANSACTIONS .............................................. 29
INVESTMENT BANKING .................................................. 30
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES ......................... 31
OTHER REVENUES ...................................................... 32
NON-INTEREST EXPENSES ............................................... 32
INCOME TAXES ........................................................ 33
STRATEGIC BUSINESS INITIATIVES ......................................... 34
BUSINESS SEGMENTS ...................................................... 34
GLOBAL OPERATIONS ...................................................... 37
BALANCE SHEET .......................................................... 40
CAPITAL ADEQUACY AND LIQUIDITY ......................................... 44
CAPITAL PROJECTS AND EXPENDITURES ...................................... 46
RISK MANAGEMENT ........................................................ 48
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS ........ 52
CASH FLOWS ............................................................. 54
LITIGATION ............................................................. 54
RECENT DEVELOPMENTS .................................................... 54
================================================================================
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries
and affiliates, "Merrill Lynch") is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, advisory,
insurance, and related services worldwide. Merrill Lynch conducts its businesses
in global financial markets that are influenced by numerous 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. 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's 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, those listed in the previous paragraphs, as well as:
o actions taken by both current and potential competitors,
o the impact of current and future legislation and regulation throughout the
world, and
o the other risks and uncertainties detailed in the following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
26
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BUSINESS ENVIRONMENT
Global financial markets experienced significant volatility during 1998,
after generally strong performances in 1997 and 1996. Continued low inflation
and falling interest rates led U.S. and European markets to new highs during the
1998 first half. During the 1998 third quarter, however, global markets were
adversely impacted by the collapse of the Russian economy, severe weakening of
several Asian economies, hedge fund liquidity concerns or default, and economic
turmoil in many emerging markets. These events triggered a significant increase
in credit risk premiums and a virtual disappearance of liquidity for emerging
market and many other debt instruments. U.S. and most European markets
subsequently rebounded during the 1998 fourth quarter, as a series of moderate
U.S. interest rate cuts provided market stability that led equity market indices
to record levels and resulted in increased liquidity in credit markets. Russian
and Latin American markets remained weak during the 1998 fourth quarter, while
certain markets in Asia, particularly Korea and Thailand, began to show signs of
recovery.
Long-term U.S. interest rates, as measured by the yield on the 30-year
U.S. Treasury bond, generally declined throughout 1998. The rally in U.S.
Treasuries during the third quarter, precipitated by investors' flight from
lower credit quality instruments, continued low inflation, and deleveraging of
hedge funds, drove long-term rates to their lowest levels since 1967. European
rates, following the U.S. trend, generally decreased during 1998 and were lower
relative to 1997. Interest rates in Latin American countries, particularly
Brazil, increased during the first nine months of 1998, but declined modestly
during the final weeks of the year.
Credit spreads, which represent the risk premium over the risk-free rate
paid by an issuer based on the issuer's credit rating or perceived
creditworthiness, widened to unprecedented levels during 1998. This extreme
movement in credit spreads, which peaked in August and September, led to large
mark-to-market losses on credit-sensitive instruments, particularly high-yield
and emerging market securities. Due to the reduced effectiveness of hedging with
U.S. Treasuries, the typical hedge for corporate debt instruments, these losses
were not offset.
U.S. equity markets experienced significant gains during 1998 as evidenced
by the 16.1% advance in the Dow Jones Industrial Average (the "Dow"). This
increase occurred despite a volatile third quarter, when concerns over global
economic markets and earnings disappointments led to a one-day 513-point drop in
the Dow in August, erasing the gains achieved during the first seven months of
the year. U.S. equity markets posted a strong recovery in the fourth quarter,
aided by a series of modest U.S. interest rate cuts beginning in September. The
Nasdaq Composite and the S&P 500 also advanced 39.6% and 26.7%, respectively,
from year-end 1997.
Global equity markets trended upward during the first quarter of 1998.
European markets flourished due to prospects for strong corporate earnings and
low interest rates, while certain Asian markets slowly recovered from 1997 price
declines. This trend continued through July in Europe, but reversed early in the
second quarter in Asia, as fears over the yen's declining value and political
unrest in certain Asian countries led to significant volatility and reduced
investor confidence. The collapse of the Russian economy and delays in
International Monetary Fund loans to Brazil in the third quarter triggered
further declines in Asian and Latin American markets and adversely impacted
European stock indices. Aided by interest rate cuts, European and certain Asian
markets, including Korea and Thailand, bounced back during the 1998 fourth
quarter, while Russian and Latin American markets continued to struggle. Despite
this severe volatility in many non-U.S. markets during 1998, the Dow Jones World
Index advanced 20.2% from year-end 1997.
Global underwriting volume reached record levels during 1998, as a robust
first six months and strong fourth quarter compensated for the slowdown of new
issuances from mid-August through mid-October. Underwriting fees for 1998 fell
slightly short of a record, however, totaling $8.8 billion industrywide, as debt
offerings, which typically yield lower fees than equity issuances, accounted for
much of the underwriting activity during the year.
Strategic services activities reached record levels in 1998, as merger and
acquisition deal values increased nearly 50% from 1997. Companies continued to
seek strategic alliances to increase earnings growth, better compete in existing
markets, and expand into new markets and businesses.
Merrill Lynch continually evaluates its businesses across varying market
conditions for profitability and alignment with long-term strategic objectives.
Businesses that fail to meet these hurdles over market cycles are resized,
restructured, or exited (e.g., certain debt trading businesses in the
27
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- --------------------------------------------------------------------------------
1998 fourth quarter). Merrill Lynch seeks to mitigate the effect of market
downturns by expanding globally into new markets, developing and maintaining
long-term client relationships, monitoring costs and risks, and diversifying
revenue sources, including the expansion of fee-based revenues.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
1998 vs.
(in millions, except ----------------
per share amounts) 1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
Total revenues $35,853 $32,499 $25,713 10.3% 39.4%
Net revenues 17,547 16,256 13,621 7.9 28.8
Net earnings 1,259 1,935 1,648 (34.9) (23.6)
Net earnings applicable
to common stockholders 1,220 1,896 1,602 (35.6) (23.8)
Earnings per common share:
Basic 3.43 5.57 4.63 (38.4) (25.9)
Diluted 3.00 4.79 4.08 (37.4) (26.5)
Return on average common
stockholders' equity 13.4% 26.5% 26.6%
- --------------------------------------------------------------------------------
During 1998, record revenues were achieved in investment banking,
commissions, and asset management and portfolio service fees. These revenues
were partially offset by a decrease in principal transactions revenues and
increased costs related to compensation and benefits, communications and
technology, and a staff reduction provision.
Merrill Lynch reported 1998 net earnings of $1.3 billion, which included
an after-tax provision for costs related to staff reductions of $430 million
($288 million after-tax). Excluding the staff reduction provision, 1998 net
earnings were $1.5 billion, or $3.71 per diluted share, down 20% from $1.9
billion or $4.79 per diluted share reported in 1997. Return on average common
stockholders' equity on this basis was 16.4%.
Management believes cash earnings, which exclude goodwill amortization,
are the most relevant measure of financial performance because it best
illustrates Merrill Lynch's operating performance and ability to support growth.
Earnings on a cash basis, before the staff reduction provision, were $1.8
billion, down from $2.0 billion in 1997. On the same basis, diluted earnings per
share were $4.27 versus $4.95 in 1997, and return on average common
stockholders' equity was 18.3%.
The staff reduction program and other cost savings initiatives implemented
during the 1998 fourth quarter are expected to reduce annual fixed and
semi-fixed costs by approximately $500 million and selectively resize certain
Merrill Lynch businesses. In the 1998 fourth quarter, Merrill Lynch experienced
a $271 million, or 17%, decrease in all non-compensation expenses compared to
the 1998 third quarter, due to cost savings initiatives including the staff
reduction provision. These programs were instituted to position Merrill Lynch
for 1999 in anticipation of a more challenging business environment (see the
Non-Interest Expenses section for more information).
The following discussion provides details of major revenue and expense
categories and other pertinent information on Merrill Lynch's business
activities, financial condition, liquidity, and risks. Prior year amounts have
been restated to reflect Merrill Lynch's merger with Midland Walwyn (see Note 2
to the Consolidated Financial Statements), as if Merrill Lynch and Midland
Walwyn had always been combined. In addition, certain reclassification and
format changes have been made to prior year amounts to conform with the current
year presentation.
COMMISSIONS
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Listed and over-the-counter $ 3,185 $ 2,759 $ 2,207
Mutual funds 1,871 1,594 1,302
Other 743 642 576
------- ------- -------
Total $ 5,799 $ 4,995 $ 4,085
======= ======= =======
- --------------------------------------------------------------------------------
Commissions revenues advanced 16% in 1998 to a record $5.8 billion,
primarily due to increases in global listed securities volume and mutual fund
commissions. Commissions from listed securities were up 16% from 1997 as a
result of higher trading volumes on the New York Stock Exchange and many
non-U.S. exchanges. Mutual fund commissions revenues rose 17%, benefiting from
strong sales of both U.S. and non-U.S. funds. Other commissions revenues
advanced 16% in 1998, largely due to increased sales of money market
instruments, commodities, and third party annuity contracts.
Commissions revenues in 1997 rose 22% from 1996 levels. Increased trading
volume led to higher listed and over-the-counter securities transaction
revenues, while strong sales of U.S. and non-U.S. mutual funds and higher
distribution fees increased mutual fund commissions.
28
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- --------------------------------------------------------------------------------
INTEREST AND DIVIDENDS
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $ 8,973 $ 8,121 $ 5,930
Trading assets 5,218 5,240 4,208
Margin lending 2,757 2,207 1,556
Other 2,366 1,731 1,431
------- ------- -------
19,314 17,299 13,125
------- ------- -------
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 8,413 7,306 5,508
Borrowings 5,500 4,623 3,064
Trading liabilities 2,619 2,983 2,492
Other 1,774 1,331 1,028
------- ------- -------
18,306 16,243 12,092
------- ------- -------
NET INTEREST AND DIVIDEND PROFIT $ 1,008 $ 1,056 $ 1,033
======= ======= =======
- --------------------------------------------------------------------------------
Interest and dividend revenues and expenses are a function of the level
and mix of interest-earning assets and interest-bearing liabilities and the
prevailing level, term structure, and volatility of interest rates. Net interest
and dividend profit was down 5% from 1997, primarily due to additional financing
costs related to the Mercury Asset Management Group ("Mercury") acquisition.
In 1997, interest and dividend profit was up 2% from 1996 with increases
in net interest-earning assets offset by declining interest spreads due to the
flattening of the yield curve.
Merrill Lynch hedges its long- and short-term borrowings, primarily with
interest rate and currency swaps, to better match the interest rate and currency
characteristics of the borrowings to the assets funded by borrowing proceeds.
The effect of this hedging activity, which is included in "Borrowings" above,
decreased interest expense for 1998, 1997, and 1996 by $62 million, $81 million,
and $127 million, respectively (see Note 5 to the Consolidated Financial
Statements).
PRINCIPAL TRANSACTIONS
The table that follows provides information on trading revenues, including
related net interest. Interest revenue and expense amounts are based on
management's assessment of the cost to finance trading positions, after
consideration of the underlying liquidity of these positions.
Trading and related hedging and financing activities affect the
recognition of both principal transactions revenues and net interest and
dividend revenues. In assessing the profitability of its trading activities,
Merrill Lynch aggregates net interest and principal transactions revenues. For
financial reporting purposes, however, realized and unrealized gains and losses
on trading positions, including hedges, are recorded in principal transactions
revenues. The net interest carry (i.e., the spread representing interest earned
less financing costs) for trading positions, including hedges, is recorded
either as principal transactions revenues or net interest revenues, depending on
the nature of the specific instruments. Changes in the composition of trading
inventories and hedge positions can cause the recognition of revenues within
these categories to fluctuate.
- --------------------------------------------------------------------------------
PRINCIPAL NET NET
TRANSACTIONS INTEREST TRADING
(in millions) REVENUES REVENUES REVENUES(1)
- --------------------------------------------------------------------------------
1998
Equities and equity derivatives $ 1,634 $ 82 $ 1,716
Corporate debt and preferred stock (720) (174) (894)
Debt derivatives 817 (71) 746
Mortgages and municipals 271 266 537
Government and agency obligations 441 74 515
Foreign exchange 208 (4) 204
------- ------- -------
Total $ 2,651 $ 173 $ 2,824
======= ======= =======
- --------------------------------------------------------------------------------
1997
Equities and equity derivatives $ 1,323 $ (10) $ 1,313
Corporate debt and preferred stock 814 (109) 705
Debt derivatives 846 (78) 768
Mortgages and municipals 343 159 502
Government and agency obligations 316 125 441
Foreign exchange 185 (1) 184
------- ------- -------
Total $ 3,827 $ 86 $ 3,913
======= ======= =======
- --------------------------------------------------------------------------------
1996
Equities and equity derivatives $ 1,245 $ (31) $ 1,214
Corporate debt and preferred stock 638 50 688
Debt derivatives 711 (105) 606
Mortgages and municipals 404 114 518
Government and agency obligations 396 93 489
Foreign exchange 137 8 145
------- ------- -------
Total $ 3,531 $ 129 $ 3,660
======= ======= =======
- --------------------------------------------------------------------------------
(1) Excludes commissions. For further information on trading results, see Note
13 to the Consolidated Financial Statements.
29
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- --------------------------------------------------------------------------------
Net trading revenues were $2.8 billion in 1998, down 28% from 1997 due to
significant volatility in global debt markets. This decrease was attributable to
losses from corporate debt and preferred stock and lower revenues from debt
derivatives, partly offset by strong revenues in equities and equity
derivatives, mortgages and municipals, government and agency obligations, and
foreign exchange.
Equities and equity derivatives trading revenues advanced 31% from 1997 to
$1.7 billion, primarily due to significantly higher revenues from non-U.S.
equities as well as equity derivative transactions, partially offset by a
decrease in convertibles. The increase in revenues from non-U.S. equities
resulted primarily from an increase in trading volumes in European markets and
higher market share. The growth in equity derivatives revenues from 1997 was due
to increased customer demand and further synergies from the 1995 Smith New Court
acquisition. The decrease in revenues from convertibles was due to the
significant widening of credit spreads.
Corporate debt and preferred stock losses were $894 million during 1998,
compared with revenues of $705 million in 1997, as valuations of corporate and
emerging market bonds were significantly impacted by the unprecedented widening
of credit spreads during August and September and severely reduced liquidity.
These losses were compounded by the ineffectiveness of related hedges during the
1998 third quarter and into the fourth quarter.
Debt derivatives revenues were $746 million, down 3% from 1997 due in part
to credit losses on emerging market-related derivatives in the latter half of
1998.
Revenues from mortgages and municipals were $537 million, up 7% from 1997.
Higher trading revenues from mortgage products were partly offset by lower
revenues from municipals due to reduced margins on sales of shorter-term
instruments.
Government and agency revenues rose 17% during 1998 to $515 million.
Higher revenues from U.S. Government and agencies, driven by investor demand for
higher quality debt instruments, were partially offset by lower revenues from
non-U.S. governments and agencies, attributable to weak economic conditions in
Latin American, Eastern European, and other emerging markets.
Foreign exchange trading revenues increased 11% to $204 million,
attributable to fluctuations in the U.S. dollar versus various currencies.
In 1997, trading revenues were up 7% from 1996. Increased profitability
from equity derivative transactions, higher transaction volume, and price
appreciation in U.S. and certain non-U.S. equity markets led to advances in
equities and equity derivatives trading revenues (up 8%). Lower interest rates
and improved economic conditions increased demand for corporate debt and
preferred stock (up 2%). Higher revenues from emerging market-related
derivatives, improved customer demand due to market volatility, and increased
activity in credit derivatives led to advances in debt derivatives (up 27%). A
less favorable market environment and reduced margins on sales of shorter-term
instruments led to decreased revenues from mortgages and municipals,
respectively (down 3%). Lower interest rates and reduced market volatility in
certain countries led to a decline in government and agency revenues worldwide
(down 10%). Increased volume attributable to fluctuations in the U.S. dollar
versus the German mark and Japanese yen led to higher foreign exchange revenues
(up 27%).
INVESTMENT BANKING
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Underwriting revenues $ 2,162 $ 2,079 $ 1,592
Strategic services revenues 1,102 797 430
------- ------- -------
Total $ 3,264 $ 2,876 $ 2,022
======= ======= =======
- --------------------------------------------------------------------------------
Investment banking revenues advanced 13% from 1997 to a record $3.3
billion, benefiting from increased revenues from underwriting and record merger
and acquisition advisory fees in 1998. Higher issuances of convertible
securities and Defined Asset Funds (Service Mark) were partially offset by lower
equity and high-yield debt underwriting activity. Merrill Lynch retained its
position as the leading underwriter of total debt and equity securities for the
11th consecutive year in the U.S. and for the 10th consecutive year globally. In
addition, Merrill Lynch gained market share in 1998 for most debt and equity
categories. Merrill Lynch's underwriting market share information based on
transaction value follows:
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
MARKET MARKET MARKET
SHARE RANK SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 16.2% 1 15.8% 1 15.6% 1
Equity 16.6 1 15.3 1 13.5 2
Debt and Equity 16.7 1 16.1 1 16.0 1
GLOBAL PROCEEDS
Debt 13.8% 1 13.1% 1 12.2% 1
Equity 13.2 3 13.2 2 12.2 2
Debt and Equity 14.1 1 13.4 1 12.7 1
- --------------------------------------------------------------------------------
Source: Securities Data Co. ("SDC") statistics based on full credit to book
manager.
Strategic services fees were up 38% from 1997 to a record $1.1 billion,
benefiting from strong merger and acquisition activity. Merrill Lynch also
increased its market share during 1998 in both U.S. and global completed and
announced transactions. Merrill Lynch's merger and acquisition market share
information based on transaction value follows:
- --------------------------------------------------------------------------------
1998 1997 1996
--------------- --------------- ----------------
MARKET MARKET MARKET
SHARE RANK SHARE RANK SHARE RANK
- --------------------------------------------------------------------------------
COMPLETED
TRANSACTIONS
U.S. 33.4% 1 28.6% 1 24.3% 2
Global 25.7 2 19.4 2 15.9 3
ANNOUNCED
TRANSACTIONS
U.S. 31.9% 2 27.9% 1 27.9% 1
Global 25.3 2 18.8 3 18.0 2
- --------------------------------------------------------------------------------
Source: SDC statistics based on full credit to both target and acquiring
companies' advisors.
Investment banking revenues in 1997 increased 42% from 1996 due to higher
levels of equity underwriting and increased merger and acquisition activity
industrywide.
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Asset management fees $ 2,075 $ 1,232 $ 1,010
Portfolio service fees 1,150 826 608
Account fees 451 422 383
Other fees 526 522 430
------- ------- -------
Total $ 4,202 $ 3,002 $ 2,431
======= ======= =======
- --------------------------------------------------------------------------------
Revenues from asset management and portfolio service fees rose 40% in 1998
to a record $4.2 billion, primarily due to the Mercury acquisition and strong
growth in other assets under management. Year-end client assets for 1998, 1997,
and 1996 are summarized as follows:
- --------------------------------------------------------------------------------
1998 vs.
---------------
(in billions) 1998 1997 1996 1997 1996
- --------------------------------------------------------------------------------
ASSETS IN CLIENT ACCOUNTS
OR UNDER MANAGEMENT
U.S. $ 1,164 $ 979(1) $ 792 19% 47%
Non-U.S. 278 250(2) 68 11 309
------- ------- -----
Total $ 1,442 $ 1,229 $ 860 17 68
======= ======= =====
ASSETS UNDER MANAGEMENT
Retail $ 258 $ 240 $ 194 8 33
Institutional 243 208 41 17 493
------- ------- -----
Total $ 501 $ 448(2) $ 235 12 113
======= ======= =====
FEE-BASED PROGRAM ASSETS(3) $ 64 $ 45 $ 30 42 113
401(k) ASSETS $ 99 $ 74 $ 45 34 120
- --------------------------------------------------------------------------------
(1) Includes $17 billion of assets related to the 1997 acquisition of
MasterWorks, a 401(k) service provider.
(2) Includes $167 billion of assets related to the year-end 1997 acquisition
of Mercury.
(3) Includes Merrill Lynch Consults (Registered Trademark), Merrill Lynch
Mutual Fund Advisor (Service Mark), Asset Power (Service Mark), Global
Funds Advisor (Service Mark), and Merrill Lynch Financial Advantage
(Service Mark).
Changes in client assets from year-end 1997 to year-end 1998 are described
below:
- --------------------------------------------------------------------------------
NET CHANGES DUE TO
-----------------------
YEAR-END NEW ASSET YEAR-END
(in billions) 1997 MONEY(1) APPRECIATION 1998
- --------------------------------------------------------------------------------
Assets in client accounts
or under management $ 1,229 $ 98 $ 115 $ 1,442
Assets under management 448 34 19 501
- --------------------------------------------------------------------------------
(1) Includes reinvested dividends of $11 billion.
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- --------------------------------------------------------------------------------
Asset management fees increased 68% in 1998 due to the acquisition of
Mercury and growth in Merrill Lynch Asset Management ("MLAM") assets under
management. Portfolio service fees were up 39% in 1998, benefiting from
significant growth in client accounts and asset levels for various fee-based
products, including Merrill Lynch Consults (Registered Trademark), Merrill Lynch
Mutual Fund Advisor (Service Mark), Asset Power (Service Mark), Global Funds
Advisor (Service Mark), and Merrill Lynch Financial Advantage (Service Mark).
Account fees rose 7% principally as a result of increases in the number of
customer and custodial accounts.
In 1997, asset management and portfolio service fees rose 23% from 1996,
due to increases in MLAM assets under management resulting from market
appreciation and net inflows, as well as growth in client accounts and asset
levels for other fee-based products.
OTHER REVENUES
Other revenues were $623 million in 1998, up 25% from 1997. Other revenues
include investment and real estate gains and losses and partnership
distributions. The increase in other revenues during 1998 was primarily
attributable to a pre-tax gain from the sale of Merrill Lynch's New York Stock
Exchange specialist business of approximately $100 million.
In 1997, other revenues decreased 4% to $500 million primarily due to
lower realized gains in 1997 versus 1996. Realized gains in 1997 resulted from
the sales of (i) merchant banking investments, (ii) Merrill Lynch's proxy
distribution operation, and (iii) securitized mortgages, while the sale of a
portion of Merrill Lynch's interest in Bloomberg L.P. accounted for the realized
gain in 1996.
NON-INTEREST EXPENSES
Merrill Lynch's non-interest expenses are summarized as follows. Certain
of these expenses have been reclassified from prior periods to conform to the
current period presentation.
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Compensation and benefits $ 9,199 $ 8,333 $ 7,012
-------- -------- --------
Non-interest expenses, excluding
compensation and benefits:
Communications and technology 1,749 1,255 1,010
Occupancy and related depreciation 867 736 742
Advertising and market development 688 613 527
Brokerage, clearing, and exchange fees 683 525 433
Professional fees 552 520 385
Goodwill amortization 226 65 50
Provision for costs related to
staff reductions 430 - -
Other 1,057 1,098 834
-------- -------- --------
Total non-interest expenses, excluding
compensation and benefits 6,252 4,812 3,981
-------- -------- --------
Total non-interest expenses $ 15,451 $ 13,145 $ 10,993
======== ======== ========
Compensation and benefits
as a percentage of net revenues 52.4%(1) 51.3% 51.5%
Compensation and benefits as a
percentage of pre-tax earnings
before compensation and benefits 78.5%(1)(2) 72.8% 72.7%
- --------------------------------------------------------------------------------
(1) These ratios, excluding Mercury and MLJS, were 51.5% and 74.8%,
respectively.
(2) Excluding provision for costs related to staff reductions.
Non-interest expenses increased 18% from 1997. Approximately $1.4 billion,
or about 60%, of this increase was attributable to the acquisition of Mercury,
the start-up of Merrill Lynch Japan Securities Co. ("MLJS"), and a staff
reduction provision.
The largest expense category, compensation and benefits, was up 10% from
1997 due to increased headcount and higher production-related compensation,
slightly offset by lower incentive compensation. Headcount of 63,800 employees
at year-end 1998 reflects an increase of approximately 4,100 employees since
year-end 1997. This increase is attributable to strategic business expansion,
including the start-up of MLJS. Production-related compensation was up due to
strong business volume associated with higher Financial Consultant productivity,
while lower profitability led to reduced incentive compensation.
Communications and technology expense rose 39% from 1997 to $1.7 billion.
Increased systems consulting costs associated with the Year 2000, European and
Economic Monetary Union, and Trusted Global Advisor (Service Mark) initiatives
(see the Capital Projects and Expenditures section) and higher technology-
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related depreciation contributed to this advance. Occupancy and related
depreciation increased 18% to $867 million as a result of continued global
expansion, including a total of $74 million associated with MLJS and Mercury.
Advertising and market development expense was $688 million, up 12% from
1997 because of increased advertising costs, partly related to the start-up of
MLJS and the Roth IRA campaign, and higher recognition program costs. Brokerage,
clearing, and exchange fees increased 30% to $683 million, primarily due to
custody and clearing costs for Mercury. Professional fees rose 6% to $552
million due to higher costs for various strategic market studies and one-time
integration costs for Midland Walwyn. Goodwill amortization increased $161
million to $226 million primarily as a result of the Mercury acquisition. Other
expenses were down 4% from 1997, attributable to reductions in provisions for
various business activities and legal matters, partly offset by higher office
and postage costs.
In the 1998 third quarter, Merrill Lynch recorded a $430 million ($288
million after-tax) provision for costs related to staff reductions aimed at
reducing fixed and semi-fixed costs and resizing certain debt trading
businesses. The staff reduction program included reductions in the workforce,
through termination and attrition, of approximately 3,400 personnel, or about 5%
of Merrill Lynch's global workforce, including producers and direct business
support staff in certain Corporate and Institutional Client Group businesses. In
addition, full-time equivalent consultants, mainly involved in technology
projects, were reduced by approximately 900. The staff reduction provision
covered primarily severance costs, as well as costs to terminate long-term
contracts and leases related to personnel reductions and resized businesses (see
Note 2 to the Consolidated Financial Statements). As of year-end 1998, these
headcount reductions had been largely implemented.
Non-interest expenses in 1997 were up 20% over 1996. Higher incentive and
production-related compensation and a 14% growth in full-time employees led to a
19% increase in compensation and benefits. Communications and technology expense
was up 24%, primarily due to increased systems consulting costs related to
various technology projects and higher technology-related depreciation.
Occupancy costs decreased 1%, reflecting a non-recurring pre-tax charge in 1996
of $40 million related to the resolution of Olympia & York's bankruptcy that
affected ML & Co.'s long-term sublease agreement in the World Financial Center,
partially offset by increased costs related to growth outside the U.S.
Advertising and market development expense rose 16%, primarily due to increased
global travel related to business development and client promotion costs.
Brokerage, clearing, and exchange fees were up 21% as a result of higher global
securities trading volume. Professional fees rose 35% attributable in part to
higher management consulting costs related to strategic market studies. Goodwill
amortization increased $15 million to $65 million as a result of recent
acquisitions. Other expenses increased 32% from 1996 due to increases in
provisions for various business activities and legal matters and higher office
and postage costs.
Presented below is a bar graph illustrating fee-based revenues as a
percentage of fixed and semi-fixed expenses for the past five years.
- -----------------------------------------------------------------
FEE-BASED REVENUES AS A PERCENTAGE OF
FIXED AND SEMI-FIXED EXPENSES
($ in millions)
- -----------------------------------------------------------------
FIXED AND
FEE-BASED SEMI-FIXED
REVENUES(2) EXPENSES %
----------- ---------- ----
1998 $5,749 $7,930 73%(1)
1997 4,145 6,569 63
1996 3,562 5,584 64
1995 3,083 4,671 66
1994 2,886 4,385 66
- -----------------------------------------------------------------
(1) The increase in this percentage compared to 1997 is primarily due to higher
fee-based revenues resulting from the Mercury acquisition.
(2) Fee-based revenues principally include asset management and portfolio
service fees and net margin interest.
INCOME TAXES
Merrill Lynch's 1998 income tax provision was $713 million, representing a
34.0% effective tax rate compared with 36.3% in 1997 and 37.3% in 1996. The
decline in the 1998
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effective tax rate was primarily attributable to higher tax-exempt income and
additional tax-advantaged financing. The effective tax rate decreased in 1997
from 1996 due to a reduction in state and local taxes associated with the
settlement of tax audits.
Deferred tax assets are recorded for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
financial statements. Merrill Lynch assessed its ability to realize deferred tax
assets primarily based on a strong earnings history and the absence of negative
evidence as discussed in Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes". During the last 10 years, average pre-
tax earnings were $1.7 billion. Accordingly, management believes that it is more
likely than not that deferred tax assets will be realized.
STRATEGIC BUSINESS INITIATIVES
Merrill Lynch continued to execute its global business strategy in 1998,
which included:
o Opening 33 retail offices in Japan through Merrill Lynch Japan Securities
Co.,
o Merger with Midland Walwyn Inc., one of Canada's premier securities firms,
for which approximately nine million shares of common stock or
exchangeable shares were issued,
o Purchasing a majority interest in Phatra Securities Company Limited,
Thailand's leading investment bank, for $65 million,
o Acquiring Howard Johnson & Co., a U.S. employee benefits consulting firm,
for $27 million, and
o Divesting a majority interest in Lender's Service, Inc., a residential
real estate services subsidiary, and a 100% interest in Merrill Lynch's
New York Stock Exchange specialist subsidiary.
In 1997, Merrill Lynch acquired the Mercury Asset Management Group, the
leading independent U.K. asset management firm, for approximately $5.3 billion.
The acquisition was recorded at year-end 1997 and, as a result, had no effect on
1997 operating results.
Merrill Lynch made other strategic acquisitions in 1997 in acquiring
MasterWorks, a 401(k) service provider, for $13 million and hiring the employees
of the Centaurus Corporate Finance Group, a strategic advisor in Australia.
Acquisitions made or substantially completed in 1996 included McIntosh
Securities Limited and Hotchkis and Wiley, for which aggregate consideration of
$232 million was paid. See Note 2 to the Consolidated Financial Statements for
further information on acquisitions.
BUSINESS SEGMENTS
Merrill Lynch reports the results of its four strategic business
priorities within two business segments: Wealth Management and Corporate and
Institutional Client. Wealth Management comprises Merrill Lynch's U.S. Private
Client, International Private Client, and Asset Management strategic priorities,
all of which provide services related to the accumulation and management of
wealth. The Corporate and Institutional Client Group ("CICG"), Merrill Lynch's
other strategic priority, is reported as a separate business segment due to the
distinct nature of the products it provides and the clients it serves. CICG's
activities predominantly involve providing investment banking and strategic
merger and acquisition advisory services, as well as other capital markets
services to corporate, institutional, and governmental clients throughout the
world.
Certain CICG products are distributed by the Wealth Management
distribution network, and to a more limited extent, certain Wealth Management
products are distributed through the distribution capabilities of CICG. Costs
associated with these intersegment services are borne by each segment through
transfer pricing. The following segment operating results exclude certain
corporate items (see Note 13 to the Consolidated Financial Statements).
Wealth Management
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 11,331 $ 9,505 $ 7,984
Net earnings 1,346 1,056 855
Average assets 46,251 38,276 33,496
- --------------------------------------------------------------------------------
Total employees 46,790 43,850 38,845
- --------------------------------------------------------------------------------
Wealth Management provides a wide range of fee-based products and services
that assist clients around the world in building financial assets and maximizing
client returns in relation to risk tolerance and investment objectives. These
products and services include retail brokerage, asset management, liability
management, retail and private banking, trust and
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retirement services, and insurance products. These products and services are
provided to individual investors, corporations, and institutions through various
distribution networks, including approximately 17,400 Financial Consultants and
Relationship Managers located in more than forty countries, as well as highly
specialized personnel such as banking and insurance specialists.
Financial Consultants, Relationship Managers, and other investment
professionals work with individual investors, small and medium-sized
corporations, and other organizations to address clients' financial concerns,
matching the numerous products offered by Merrill Lynch with the clients'
customized needs. These products include:
o The CMA (Registered Trademark) and CBA (Registered Trademark) accounts for
individuals, WCMA (Registered Trademark) account for small and mid-sized
businesses, and EMA (Service Mark) account for foundations and non-profit
organizations, all of which are types of flexible central asset accounts
for securities transactions, money sweeps, electronic funds-transfer
capabilities, debit card access, and many other financial management
features.
o Investment research programs, such as Merrill Lynch OnLine (Service Mark),
that provide clients with internet access to their accounts and the latest
research and investment recommendations of the firm.
o A wide array of global mutual fund portfolios covering a cross section of
industries and regions of the world.
o Various advisory programs, including Merrill Lynch Consults (Registered
Trademark), Merrill Lynch Mutual Fund Advisor (Service Mark), Asset Power
(Service Mark), Global Funds Advisor (Service Mark), and Merrill Lynch
Financial Advantage (Service Mark).
o Liability management services, in which mortgage and other consumer loans,
margin lending, and commercial financing are offered.
o Private banking services, which provide high net worth customers outside
of the U.S. with a host of products and services to meet their financial
objectives, including investing and borrowing strategies, investment
management, trust and personal holding company services, and currency
management.
o Insurance services, including annuity and life products for both
retirement and estate planning.
o Trust and other estate planning techniques to protect the assets of
clients and their families.
o Advisory and administrative activities for defined contribution, defined
benefit, and various stock plans.
Within the U.S., Wealth Management has over 670 Private Client offices,
13,600 Financial Consultants, and client assets of $1.1 trillion at year-end
1998, including $298 billion of assets under management. Outside of the U.S.,
Merrill Lynch has over 220 Private Client offices, 3,800 Relationship Managers,
and client assets of more than $300 billion at year-end 1998, including $203
billion of assets under management.
Wealth Management continued to expand its global presence during 1998
through the merger with Midland Walwyn. With Midland Walwyn's approximately
3,200 employees, including 1,300 investment professionals operating in 145
offices, Merrill Lynch has significantly enhanced its presence in Canada. In
Japan, through the formation of MLJS, individual investors are offered the same
consultative approach that Merrill Lynch has employed elsewhere in the world.
Staffed by approximately 2,000 employees, including approximately 1,000
investment professionals in 33 branch offices, Merrill Lynch is the first U.S.
firm to operate a nationwide retail securities network within the country.
The Asset Management business provides investment advisory services to a
wide variety of institutions and retail clients, including pension plans,
corporations, high net worth individuals, and mutual funds. This business was
expanded through the year-end 1997 acquisition of Mercury. Management believes
that this acquisition is critical to Merrill Lynch's global asset-gathering
strategy and, in combination with MLAM, is essential to the success of its
Wealth Management segment. Asset Management services are offered under three
distinct brand names around the world: Merrill Lynch Asset Management, Merrill
Lynch Mercury Asset Management, and Hotchkis and Wiley. Based on assets under
management, Merrill Lynch is one of the largest investment managers in the world
with $501 billion in assets at year-end 1998. These assets are well diversified
in terms of client type, asset type, and client location (see next page).
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Presented are three pie charts illustrating Merrill Lynch's assets under
management in terms of client type, asset type, and client location at year-end
1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT AT YEAR-END 1998
- --------------------------------------------------------------------------------
<S> <C>
CLIENT TYPE
Retail 52%
Institutional 48
ASSET TYPE
Equity 52%
Fixed-Income and other 48
CLIENT LOCATION
U.S. 59%
Non-U.S. 41
- --------------------------------------------------------------------------------
</TABLE>
Net earnings for Wealth Management were $1.3 billion in 1998, up 27% from
$1.1 billion in 1997 and up 57% from $855 million in 1996. Net revenues were
$11.3 billion, up 19% and 42% from 1997 and 1996, respectively. The fee-based
nature of many of Wealth Management's revenues, including commissions and asset
management and portfolio service fees, has increased the stability of Merrill
Lynch's earnings, thereby mitigating some of the market volatility experienced
by the CICG business in the latter half of 1998. Increased trading volumes on
global exchanges and the continued growth in fee-based revenues have led to
record revenues in both commissions revenues and asset management and portfolio
service fees during 1998. The profitability of the Wealth Management segment has
also improved from 1997 and 1996 because of robust markets, increased
productivity, and expanded product lines. Substantially all of Wealth
Management's fixed expenses were covered by fee-based revenues in 1998.
CICG
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 6,522 $ 6,751 $ 5,637
Net earnings 882 1,145 930
Average assets 328,184 249,864 186,328
- --------------------------------------------------------------------------------
Total employees 17,010 15,850 13,755
- --------------------------------------------------------------------------------
CICG provides investment banking and strategic merger and acquisition
advisory services, as well as equity and debt trading and capital markets
services to corporations, financial institutions, and governments around the
world. CICG raises capital for its clients on favorable terms through securities
underwriting, private placements, and loan syndication.
CICG trades securities, currencies, and other products and writes
over-the-counter derivatives to satisfy customer demand for these instruments.
With more than 2,000 equity research professionals and equity trading activities
in 23 countries, Merrill Lynch maintains one of the most powerful equity trading
and underwriting capabilities of any firm in the world. Through its expertise in
government and corporate debt trading, CICG is also the leader in global
distribution of new issue and secondary debt securities. CICG's client-focused
strategy provides investors with opportunities to diversify their portfolios,
manage risk, and enhance returns by tailoring investments and structuring
derivatives to meet clients' customized needs.
In 1998, CICG's net earnings were $882 million, down 23% from 1997 and 5%
from 1996 levels. CICG's net revenues decreased 3% from year-end 1997 to $6.5
billion, primarily due to the significant market volatility in the latter half
of the year which affected global financial markets, especially debt markets.
Revenues from equity products were a record $3.6 billion in 1998 due to
increased client demand for equities and equity derivatives in both the U.S. and
Europe. CICG's global equities business has grown substantially over the last
few years, due to the successful integration of Smith New Court, which was
acquired in 1995, as well as through acquisitions in Australia, Canada, South
Africa, Spain, and Thailand. As a result, equity revenues, both trading and
underwriting, have grown nearly 150% since 1995, with over 36% of 1998 revenues
from non-U.S. locations.
In debt products, the unprecedented movement in credit spreads during the
1998 third quarter led to valuation
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and counterparty losses that significantly impacted certain of Merrill Lynch's
debt trading businesses. Despite a favorable interest rate environment, debt
underwriting levels were also down because of reduced investor demand and issuer
activity in the second half of 1998. As a result of these market conditions,
trading inventories, particularly emerging market instruments and other
credit-sensitive products, were reduced. In addition, staff reductions in
certain debt businesses were implemented during the last quarter of the year to
better balance the cost base relative to the revenue outlook.
Merrill Lynch's investment banking and strategic services activities
reached record levels in 1998. Merrill Lynch remained the leading underwriter of
global debt and equity securities for the 10th consecutive year, with a 14.1%
market share in 1998, according to SDC. Origination revenues for debt and equity
securities were $1.3 billion, down 2% from 1997 and up 24% from 1996. In
addition, Merrill Lynch's global market share of initial public offerings nearly
doubled from 1997. CICG is also a leading advisor for mergers and acquisitions,
and in 1998 ranked No. 1 and No. 2, respectively, in U.S. completed and global
announced transactions, according to SDC. Through the strengthening of its
client relationships, CICG has steadily increased its global completed merger
and acquisition market share and revenues by 32% and 43%, respectively, as
compared with 1997 levels, and 62% and 178%, respectively, when compared with
1996.
GLOBAL OPERATIONS
Merrill Lynch's non-U.S. operations are organized into six geographic
regions:
o Europe, Middle East, and Africa,
o Asia Pacific,
o Australia and New Zealand,
o Japan,
o Canada, and
o Latin America.
In 1998, certain of Merrill Lynch's CICG businesses were impacted by
significant volatility that affected many global financial markets. The strong
performance of the Wealth Management segment, however, helped to mitigate the
effect of this volatility on Merrill Lynch's operating results.
Despite the market turbulence during 1998, Merrill Lynch continued to
strategically expand its non-U.S. operations. This expansion, which included the
integration of Mercury and Midland Walwyn and the start-up of the retail
brokerage business in Japan, coupled with synergies from previous acquisitions,
enabled Merrill Lynch to continue to benefit from increasing demand for global
investments.
The following summary of regional operating results excludes goodwill
amortization, financing costs for the Mercury acquisition, and the staff
reduction provision.
Europe, Middle East, and Africa
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 2,808 $ 1,982 $ 1,563
Earnings before income taxes 307 360 301
Average assets 134,664 73,251 59,935
- --------------------------------------------------------------------------------
Total full-time employees 7,090 6,470 4,610
- --------------------------------------------------------------------------------
Merrill Lynch operates in Europe, the Middle East, and Africa as a dealer
in a wide array of equity and debt products, as well as providing asset
management, investment banking, private banking, and research services.
Merrill Lynch enhanced its presence in the region during 1998 through the
successful integration of Mercury, the leading U.K. asset management firm. As a
result of the acquisition, Merrill Lynch now manages five of the top ten pension
funds in the world and includes 50 of the U.K.'s 100 largest public companies as
its clients. This acquisition demonstrates Merrill Lynch's commitment to its
strategic objective of becoming a global leader in the asset management business
and expands the region's depth and range of products and services.
Building on the foundations of the 1995 Smith New Court acquisition,
equities revenues in this region have increased almost four-fold over the last
three years. This growth reflects Merrill Lynch's position as a preeminent
equities firm in the region in origination, secondary trading, and research.
In 1998, net revenues for the region increased 42% from 1997, primarily
due to asset management fees relating to Mercury, as well as higher investment
banking and equity trading revenues, partially offset by lower debt trading
revenues.
The 15% decrease from 1997 in earnings before income taxes was primarily
attributable to significantly reduced
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revenues resulting from the adverse trading conditions experienced in debt
markets in the 1998 second half.
In 1997, net revenues for the Europe, Middle East, and Africa region
increased 27% from 1996. The increase was primarily attributable to higher
commissions and trading revenues. Earnings before income taxes rose 20%
resulting from higher revenues, partially offset by increases in infrastructure
costs to support business growth in the region.
Asia Pacific
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 338 $ 489 $ 361
Earnings (loss) before income taxes (165) (34) 36
Average assets 6,562 4,707 6,513
- --------------------------------------------------------------------------------
Total full-time employees 1,620 1,690 1,300
- --------------------------------------------------------------------------------
Merrill Lynch serves a broad retail and institutional client base
throughout the Asia Pacific region. From offices in the People's Republic of
China and its special administrative Hong Kong region, Singapore, Taiwan, South
Korea, Thailand, Malaysia, Indonesia, India and the Philippines, a full range of
Wealth Management and CICG products are offered. Merrill Lynch has an
established trading presence and exchange memberships in virtually all financial
markets in the region and, during 1998, obtained membership on the Korean and
Thai stock exchanges.
Despite continuing financial turbulence in 1998, Merrill Lynch continued
its commitment to expand businesses in this region through the acquisition of a
majority stake in Phatra Securities Company Limited, Thailand's leading
investment bank. Merrill Lynch has successfully integrated Phatra, and is
actively developing new product lines in the Thai markets. Client investment
opportunities in this region were enhanced during 1998 with the introduction of
Mercury mutual funds. During the year, Merrill Lynch was named the leader in
fixed-income research by "Finance Asia Magazine" and was ranked the No. 2
overall Asian research firm by "Institutional Investor".
Net revenues in the region were down 31% from 1997 as continued economic
turmoil in many markets across the region adversely impacted debt and investment
banking revenues. Debt trading results suffered from widening of credit spreads
and severely reduced liquidity across global debt markets. Currency volatility
and political uncertainty in the region also contributed to lower debt trading
and origination revenues. These reduced revenues also negatively impacted
pre-tax earnings. However, solid equity trading results and Private Client
revenues enabled Merrill Lynch to strengthen its leading position in these
businesses across the region.
In 1997, net revenues in the region were up 35% from 1996, benefiting from
strong trading volume and investment banking activity during the first half of
the year, partially offset by declining revenues in the 1997 second half as
currency devaluations across the region significantly affected equity and debt
markets. The pre-tax loss in 1997 was due to specific client provisions and
increased expenses associated with regional expansion, partially offset by
higher trading revenues.
Australia and New Zealand
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 224 $ 177 $ 60
Earnings before income taxes 36 25 7
Average assets 2,789 2,939 1,103
- --------------------------------------------------------------------------------
Total full-time employees 830 780 160
- --------------------------------------------------------------------------------
In the Australia and New Zealand region, Merrill Lynch provides a broad
mix of Wealth Management and CICG products. In 1998, Merrill Lynch established
itself as one of Australia's top three Private Client firms through extensive
recruitment of Relationship Managers and the enhancement of products such as the
Cash Management Trust (Service Mark). As a result, the region's margin lending
and asset management businesses grew substantially in 1998. Merrill Lynch was
also ranked the No. 1 brokerage firm in Australia in the recent "Financial
Products Research Group Survey".
Growth in this region was primarily attributable to the integration of the
1996 acquisition of McIntosh Securities Limited, one of the largest securities
brokerage firms in Australia and New Zealand, as well as the addition of the
staff and clients in 1997 of the Centaurus Corporate Finance Group, a top-tier
Australian merger and acquisition advisory firm. Merrill Lynch was the lead
manager on three of the four largest initial public offerings in the region
during 1998 and led the industry in institutional commissions.
Net revenues for the region increased 27% from 1997. The increase
primarily resulted from higher investment banking revenues due to several large
equity underwritings. Commissions revenues and asset management and portfolio
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service fees also benefited from synergies relating to the McIntosh and Mercury
acquisitions.
Earnings before income taxes rose 44% from 1997, reflecting increased
revenues that were partially offset by higher compensation costs due to
additional hirings in the Wealth Management segment.
Net revenues in the Australia and New Zealand region nearly tripled in
1997 from 1996 due to higher equity trading and investment banking revenues.
Earnings before income taxes rose due to increased revenues, in part offset by
increases in incentive and production-related compensation due to regional
expansion.
Japan
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 574 $ 416 $ 408
Earnings (loss) before income taxes (11) 74 109
Average assets 10,224 7,910 5,007
- --------------------------------------------------------------------------------
Total full-time employees 2,880 780 630
- --------------------------------------------------------------------------------
Following the establishment of MLJS and Merrill Lynch Mercury Asset
Management Japan ("MLMJ"), Merrill Lynch now provides an integrated range of
Wealth Management and CICG products and services in Japan.
MLJS entered the Private Client business in 1998 by hiring approximately
2,000 employees from Yamaichi Securities and opening 33 branch offices
throughout Japan. MLJS provides financial products and services to individuals
and small to mid-sized corporate and institutional clients.
During 1998, MLMJ was formed via the merger of three existing asset
management companies. Through this company, Merrill Lynch is one of the leading
managers of Japanese pension funds, a provider of a wide range of mutual funds,
and is poised to capitalize on the continuing deregulation of the Japanese asset
management industry.
The region's CICG business, which operates under the name Merrill Lynch
Japan ("MLJ"), remained strong in 1998 with record revenues achieved in debt and
equity businesses. MLJ has also seized opportunities arising from financial
services regulatory reforms in Japan, which are expected to benefit underwriting
and merger and acquisition advisory activities and trading volume.
Net revenues in the Japan region were up 38% from 1997, primarily due to
improved profitability from corporate bond trading, higher assets under
management, and increased services provided to financial institutions resulting
from regulatory reform.
The pre-tax loss in 1998 is primarily the result of a $230 million pre-tax
loss from the start-up of MLJS. Excluding MLJS, the region had record pre-tax
earnings of $219 million.
Net revenues in the Japan region in 1997 were up 2% from 1996, due to
increased derivative trading revenues and sales of cross-border products,
partially offset by lower trading revenues for local products. Earnings before
income taxes decreased 32% due to higher compensation costs associated with
regional expansion, offset in part by higher revenues.
Canada
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 625 $ 702 $ 615
Earnings before income taxes 46 134 118
Average assets 11,612 11,869 8,469
- --------------------------------------------------------------------------------
Total full-time employees 3,700 3,280 2,950
- --------------------------------------------------------------------------------
Note: Amounts have been restated to include Midland Walwyn as required under
pooling-of-interests accounting.
In 1998, Merrill Lynch merged with Midland Walwyn Inc., one of Canada's
premier securities firms. With this transaction, Merrill Lynch significantly
expanded its capabilities in Canada beyond its traditional strengths in
investment banking and debt markets. Today, Merrill Lynch is a full-service firm
in the region with a growing presence serving individual and institutional
clients, as well as corporate and government issuers.
Merrill Lynch's Private Client network in Canada ranks as one of the top
three in Canada, with a team of more than 1,300 investment professionals serving
approximately 600,000 individuals. Merrill Lynch Asset Management Group Canada,
with $2 billion in assets under management, launched the first two of a planned
series of proprietary mutual funds in 1998.
In CICG, an independent study of all underwritings in 1998 by Canadian
issuers, compiled by "FP Data Group", ranked Merrill Lynch No. 1 in
international equity and debt financings and No. 3 in all financings.
"Euromoney" ranked Merrill Lynch as the Best Foreign Securities firm in Canada
in 1998.
Net revenues for the region declined by 11% from 1997, due to declines in
underwriting, debt trading, and commissions revenues caused by global market
uncertainties. These
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declines were partially offset by strong growth in merger and acquisition
advisory revenues and asset management fees.
Earnings before income taxes dropped significantly from 1997, because of a
decrease in revenues and $40 million in merger and integration-related expenses.
Net revenues in 1997 increased 14% from 1996, due to stronger investment
banking and commissions revenues. These higher revenues, combined with lower
expenses, led to a 14% increase in earnings before income taxes in 1997.
Latin America
- --------------------------------------------------------------------------------
(dollars in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Net revenues $ 392 $ 524 $ 435
Earnings (loss) before income taxes (67) 141 146
Average assets 11,874 10,629 5,968
- --------------------------------------------------------------------------------
Total full-time employees 980 900 850
- --------------------------------------------------------------------------------
In Latin America, Merrill Lynch provides various brokerage and investment
services. Included in this region are certain U.S. offices that primarily serve
Latin American clients. In the first half of 1998, Latin American markets
experienced a mild recovery from 1997 price declines. During the second half of
the year, political and economic events in other regions, as well as delays in
International Monetary Fund support for Brazil, adversely affected revenues in
Latin American markets. Merrill Lynch successfully completed a $4.7 billion
Telebras HOLDRs (Service Mark) (Holding Company Depositary Receipts) issuance,
in addition to obtaining memberships on the Sao Paulo and Rio de Janeiro stock
exchanges in April.
Net revenues for the region decreased 25% from 1997 as trading and
investment banking revenues decreased due to market turbulence that occurred
throughout most of the year. These declines were partially offset by higher
volume driven commissions revenues.
The pre-tax loss during 1998 was the result of increased variable
compensation, brokerage, clearing, and exchange costs, and communications and
technology expenses.
Net revenues in 1997 increased 20% from 1996, due to stronger investment
banking and commissions revenues. Earnings before income taxes decreased 3% as
increases in compensation and benefits and brokerage, clearing, and exchange
fees more than offset the higher revenues.
BALANCE SHEET
Overview
Management continually monitors and evaluates the level and composition of
the balance sheet based on average daily balances, which are determined on a
settlement date basis. Financial statement balances are recorded on a trade date
basis as required under generally accepted accounting principles.
In 1998, average total assets were $380 billion, up 31% from $289 billion
in 1997. Average total liabilities in 1998 rose 31% to $367 billion from $280
billion in 1997. The major components in the growth of average total assets and
liabilities are summarized as follows:
- --------------------------------------------------------------------------------
(in millions) INCREASE GROWTH
- --------------------------------------------------------------------------------
AVERAGE ASSETS
Receivables under resale agreements and
securities borrowed transactions $ 13,257 11%
Trading assets 34,528 32
Securities pledged as collateral 17,813 N/M
Customer receivables 11,502 41
Goodwill 4,893 N/M
AVERAGE LIABILITIES
Payables under repurchase agreements
and securities loaned transactions $ 19,641 19%
Trading liabilities 10,840 19
Obligation to return securities received
as collateral 32,458 N/M
Long-term borrowings 16,274 46
- --------------------------------------------------------------------------------
N/M Not meaningful.
The adoption of SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", which requires the recognition of
collateral received or provided for certain resale and repurchase agreements,
increased the average balances of trading assets and securities pledged as
collateral by $14 billion and $18 billion, respectively, with a corresponding
increase of $32 billion in the obligation to return securities received as
collateral (for more information on SFAS No. 127, see Note 2 to the Consolidated
Financial Statements).
Balance sheet levels were, on average, higher in 1998 compared to 1997.
Year-end 1998 balances, however, generally remained consistent with year-end
1997 balances, resulting from a reduction in the balance sheet, particularly in
trading
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inventory and secured financing transactions, during the 1998 second half. The
discussion that follows analyzes the changes in year-end financial statement
balances of major asset and liability categories.
Trading-Related Assets and Liabilities
Trading-related balances primarily consist of trading assets and
liabilities, receivables under resale agreements and securities borrowed
transactions, payables under repurchase agreements and securities loaned
transactions, and certain receivable/payable balances that result from trading
activities. Trading-related balances as a percentage of total assets and
liabilities, excluding collateral recognized under SFAS No. 127, are as follows:
Presented are two pie charts illustrating Merrill Lynch's trading-
related balances as percentages of total assets and total liabilities,
respectively, excluding collateral recognized under SFAS No. 127.
- --------------------------------------------------------------------------------
ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
TRADING-RELATED ASSETS:
Trading Assets 36%
Resale Agreements and Securities Borrowed 31
Receivables 16
----
83
NON-TRADING-RELATED ASSETS 17
----
100%
====
- -------------------------------------------------------------------------------
TRADING-RELATED LIABILITIES:
Trading Liabilities 23%
Repurchase Agreements and Securities Loaned 25
Payables 11
----
59
NON-TRADING-RELATED LIABILITIES 41(1)
----
100%
====
- -------------------------------------------------------------------------------
(1) 24% of the 41% consisted of borrowings to fund trading-related assets.
Although trading-related balances comprise a significant portion of the
balance sheet, the magnitude of these balances does not necessarily convey a
sense of the risk profile assumed by Merrill Lynch. The market and credit risks
associated with trading-related balances are mitigated through various hedging
strategies, as discussed in the following sections (see Note 3 to the
Consolidated Financial Statements for descriptions of market and credit risks).
Merrill Lynch reduces a significant portion of the credit risk associated
with trading-related receivables by requiring counterparties to post cash or
securities as collateral in accordance with collateral maintenance policies. The
chart that follows depicts the value of collateral maintained at December 25,
1998 for trading-related assets to reduce counterparty credit risk.
Presented is a bar graph illustrating the collateral maintained for the
respective balance sheet trading-related receivables.
- --------------------------------------------------------------------------------
COLLATERALIZED TRADING-RELATED RECEIVABLES
(in billions)
- --------------------------------------------------------------------------------
TRADING-RELATED COLLATERAL
RECEIVABLES MAINTAINED
--------------- ----------
Derivative Contract Receivables(a) $ 30 $ 6
Receivables under Resale Agreements 50 53
Receivables under Securities Borrowed
Transactions 37 36
Other Receivables(b) 48 29
---- ----
$165 $124
==== ====
- --------------------------------------------------------------------------------
(a) Included in trading assets. Collateral is not maintained for securities and
other cash instruments.
(b) Collateral presented does not include overcollateralization, i.e., Merrill
Lynch maintains collateral in excess of customer margin loan receivables.
"Trading Assets and Liabilities"
Trading inventory principally represents securities purchased ("long"
positions), securities sold but not yet purchased ("short" positions), and the
fair value of derivative contracts (see Note 1 to the Consolidated Financial
Statements). These positions are primarily the result of market-making, hedging,
and proprietary activities.
Merrill Lynch acts as a market-maker in a wide range of securities,
resulting in a significant amount of trading inventory to facilitate customer
transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary
trading inventory in seeking to profit from existing or projected market
opportunities.
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Merrill Lynch uses both cash instruments and derivatives to manage trading
inventory market risks. As a result of these hedging techniques, a significant
portion of trading assets and liabilities represents hedges of other trading
positions. Long U.S. Government securities, for example, may be hedged with
short interest rate futures contracts. These hedging techniques, which are
generally initiated at the trading unit level, are supplemented by corporate
risk management policies and procedures (see the Risk Management section for a
description of risk management policies and procedures and a discussion of the
effectiveness of hedging techniques).
Trading assets at year-end 1998, including the $6.1 billion of collateral
recognized under SFAS No. 127, were virtually unchanged from year-end 1997. U.S.
Government and agencies securities increased while corporate debt and preferred
stock positions decreased, as a result of investors migrating to higher credit
quality instruments. Trading liabilities decreased from $71 billion to $64
billion, primarily as a result of a reduction in short U.S. Government and
agencies securities used as hedges, partially offset by higher levels of
equities, convertible debentures, and contractual agreements.
"Resale/Repurchase Agreements and Securities Borrowed/Loaned Transactions"
Repurchase agreements and, to a lesser extent, securities loaned
transactions are used to fund a significant portion of trading assets. Likewise,
Merrill Lynch uses resale agreements and securities borrowed transactions to
obtain the securities needed for delivery on short positions. These transactions
are typically short-term in nature since a significant portion are entered into
on an overnight or open basis. Resale and repurchase agreements entered into on
a term basis typically mature within 90 days.
Merrill Lynch also enters into these transactions to meet customers'
needs. These "matched-book" repurchase and resale agreements or securities
borrowed and loaned transactions are entered into with different customers using
the same underlying securities, generating a spread between the interest revenue
on the resale agreements or securities borrowed transactions and the interest
expense on the repurchase agreements or securities loaned transactions.
Exposures on these transactions are limited by their typically short-term nature
and collateral maintenance policies. The following graph illustrates the
balances related to these activities at December 25, 1998.
Presented is a bar graph illustrating the nature of resale/repurchase
agreements and securities borrowed/loaned transactions, differentiating between
matched-book and non-matched-book for total resale agreements, repurchase
agreements, securities borrowed, and securities loaned balances of $50,188
million, $59,501 million, $37,525 million, and $7,626 million, respectively.
- --------------------------------------------------------------------------------
RESALE/REPURCHASE AGREEMENTS AND
SECURITIES BORROWED/LOANED TRANSACTIONS
- --------------------------------------------------------------------------------
MATCHED- NON-MATCHED-
BOOK BOOK
-------- ------------
Resale Agreements 54% 46%
Repurchase Agreements 44 56
Securities Borrowed 14 86
Securities Loaned 69 31
- --------------------------------------------------------------------------------
Receivables under resale agreements and securities borrowed transactions
and payables under repurchase agreements and securities loaned transactions
decreased 18% and 15% from year-end 1997, respectively, as a result of lower
funding requirements due to reductions in inventory levels and matched-book
trading activity.
"Other Trading-Related Receivables and Payables"
Securities trading may lead to various customer or broker-dealer balances.
Broker-dealer balances may also result from recording trading inventory on a
trade date basis. Certain receivable and payable balances also arise when
customers or broker-dealers fail to pay for securities purchased or fail to
deliver securities sold, respectively. These receivables are generally fully
collateralized by the securities that the customer or broker-dealer purchased
but did not receive. Customer receivables also include margin loans
collateralized by customer-owned securities held by Merrill Lynch. Collateral
policies significantly limit Merrill Lynch's credit exposure to customers and
broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will
sell securities that have not been paid for, or purchase securities sold but not
delivered, after a relatively short period of time, or will require additional
margin
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collateral, as necessary. These measures reduce market risk exposure related to
these balances.
Interest receivable and payable balances related to trading inventory are
principally short-term in nature. Interest balances for resale and repurchase
agreements, securities borrowed and loaned transactions, and customer margin
loans are generally considered when determining the collateral requirements
related to these transactions.
Trading-related receivables were up $7.0 billion from 1997, primarily from
higher open agency clearing transactions and increases in margin and other
collateralized loans. Trading-related payables increased $6.8 billion during
1998 due to heightened customer activity and a net payable that results from
recording inventory on a trade date basis.
Non-Trading Assets
"Investments"
Merrill Lynch's investing activities primarily consist of holding liquid
debt and equity securities, investments of insurance subsidiaries, merchant
banking and venture capital investments, and investments to hedge deferred
compensation liabilities (see Note 4 to the Consolidated Financial Statements
for further information). Investments grew from $10.0 billion at year-end 1997
to $11.7 billion at year-end 1998, as a result of increased investments held by
non-trading entities and investments in partnerships, joint ventures, and real
estate.
"Loans, Notes, and Mortgages"
Merrill Lynch's portfolio of loans, notes, and mortgages includes mortgage
loans on residences, working capital loans to small and medium-sized businesses,
and syndicated loans. Merrill Lynch generally maintains collateral on these
extensions of credit in the form of securities, liens on real estate, perfected
security interests in other assets of the borrower, and guarantees. Loans,
notes, and mortgages rose $3.4 billion in 1998 to $7.7 billion due to increased
consumer lending activities. Merrill Lynch maintained collateral of $5.9 billion
at December 25, 1998 to reduce related default risk.
"Other"
Other non-trading assets include goodwill (related primarily to the
Mercury acquisition), equipment and facilities, and other assets, which were up
slightly from year-end 1997 levels.
Non-Trading Liabilities
"Borrowings"
Portions of trading and non-trading assets are funded through borrowings,
primarily commercial paper and long-term borrowings (see the Capital Adequacy
and Liquidity section for more information on funding sources).
Commercial paper decreased from $30.4 billion at year-end 1997 to $16.8
billion at year-end 1998 in order to reduce Merrill Lynch's use of short-term
unsecured funding. Outstanding long-term borrowings increased to $57.6 billion
at December 25, 1998 from $43.1 billion at December 26, 1997. Major components
of the change in long-term borrowings for 1998 and 1997 follow:
- --------------------------------------------------------------------------------
(dollars in billions) 1998 1997
- --------------------------------------------------------------------------------
Beginning of year $ 43.1 $ 26.2
Issuances 29.3 25.1
Maturities (15.8) (8.2)
Other 1.0 -
------ ------
End of year(1) $ 57.6 $ 43.1
====== ======
Average maturity in years of long-term borrowings,
when measured to:
Maturity 4.4 3.5
Earlier of the call or put date 4.0 3.1
- --------------------------------------------------------------------------------
(1) At year-end 1998 and 1997, $43.9 and $31.2 billion of long-term borrowings
had maturity dates beyond one year, respectively.
Demand and time deposits increased $3.0 billion in 1998 as a result of
higher customer deposits in banking subsidiaries.
"Other"
Other non-trading liabilities include liabilities of insurance
subsidiaries and other payables, which decreased slightly from year-end 1997
levels.
Preferred Securities Issued by Subsidiaries
Preferred securities issued by subsidiaries consist primarily of Trust
Originated Preferred Securities (Service Mark) ("TOPrS" (Service Mark)) (see
Note 6 to the Consolidated Financial Statements for further information). TOPrS
proceeds are utilized as part of general balance sheet funding (see the Capital
Adequacy and Liquidity section for more information). Preferred securities
issued by subsidiaries rose $2.0 billion during 1998 as a result of three TOPrS
issuances.
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Stockholders' Equity
Stockholders' equity at December 25, 1998 increased 19% to $10.1 billion
from $8.5 billion at year-end 1997. The 1998 increase resulted from net earnings
and the net effect of employee stock transactions, partially offset by
dividends.
At December 25, 1998, total common shares outstanding, excluding shares
exchangeable into common stock, were 356.3 million, 5% higher than the 339.3
million shares outstanding at December 26, 1997. The increase was attributable
principally to employee stock grants and option exercises.
Total shares exchangeable into common stock at year-end 1998, issued in
connection with the Midland Walwyn merger, were 4.5 million. In the merger,
Merrill Lynch also issued 4.2 million shares of common stock.
There were no common stock repurchases during 1998. Merrill Lynch
repurchased 13.3 million shares of common stock during 1997 at an average price
of $48.91 per share. In 1998, Merrill Lynch rescinded its share repurchase
authority in order to facilitate pooling-of-interests accounting for the Midland
Walwyn merger.
CAPITAL ADEQUACY AND LIQUIDITY
The primary objectives of Merrill Lynch's capital structure and funding
policies are to:
o Ensure sufficient equity capital to absorb losses,
o Support the business strategies, and
o Assure liquidity at all times, across market cycles, and through periods
of financial stress.
Capital Adequacy
Among U.S. institutions engaged primarily in the global securities
business, Merrill Lynch is one of the most highly capitalized, with $9.7 billion
in common equity, $425 million in preferred stock, and $2.6 billion of
subsidiaries' preferred securities at December 25, 1998.
Merrill Lynch continually reviews overall equity capital needs to ensure
that its equity capital base can support the estimated risks and needs of its
businesses, as well as the regulatory and legal capital requirements of its
subsidiaries. Merrill Lynch uses statistically based risk models, developed in
conjunction with risk management practices, to estimate potential losses arising
from market and credit risks. Equity capital needs are determined based on these
models, which dynamically capture changes in risk profile. Merrill Lynch also
assesses the need for equity capital to support business risks that may not be
adequately measured through these risk models, as well as the potential use of
equity capital to support growth. Merrill Lynch determines the appropriateness
of its equity capital composition, which includes common stock, preferred stock,
and preferred securities issued by subsidiaries, taking into account the
perpetual nature of its preferred stock and TOPrS. Based on these analyses and
criteria, management believes that Merrill Lynch's equity capital base of $12.8
billion is adequate.
Merrill Lynch operates in many regulated businesses that require various
minimum levels of capital (see Note 12 to the Consolidated Financial Statements
for further information). Merrill Lynch's broker-dealer, banking, insurance, and
futures commission merchant activities are subject to regulatory requirements
that may restrict the free flow of funds to affiliates. Regulatory approval is
generally required for paying dividends in excess of certain established levels,
making affiliated investments, and entering into management and service
agreements with affiliated companies.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------------
PERIOD-END
December 25, 1998 23.5x 15.5x
December 26, 1997 32.4x 20.7x
AVERAGE(3)
Year ended December 25, 1998 32.9x 19.2x
Year ended December 26, 1997 35.3x 21.3x
- --------------------------------------------------------------------------------
(1) Total assets to Total stockholders' equity and Preferred securities issued
by subsidiaries.
(2) Total assets less (a) Securities received as collateral, net of securities
pledged as collateral, (b) Securities pledged as collateral, (c)
Receivables under resale agreements and securities borrowed transactions,
to Total stockholders' equity and Preferred securities issued by
subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of
assets, hedging strategies, or off-balance-sheet exposures. Thus, Merrill Lynch
does not rely on overall leverage ratios to assess risk-based capital adequacy.
Liquidity
Merrill Lynch's liquidity policy is to maintain alternative funding
sources such that all debt obligations maturing within one year can be repaid
when due without issuing new
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unsecured debt or liquidating business assets. Primary alternative funding
sources to unsecured borrowings are repurchase agreements, securities loaned,
and secured bank loans, which require pledging unhypothecated marketable
securities. Other funding sources include liquidating cash equivalents;
securitizing loan assets; and drawing on committed, unsecured bank credit
facilities that, at December 25, 1998, totaled $6.9 billion and were not drawn
upon. Merrill Lynch maintains a contingency funding plan, covering an extended
time horizon, which outlines actions that would be taken in the event of a
severe funding disruption.
Merrill Lynch regularly reviews the level and mix of its assets and
liabilities to assess its ability to conduct core business activities without
issuing new unsecured debt or drawing upon its bank credit facilities. The mix
of assets and liabilities provides flexibility in managing liquidity since a
significant portion of assets turns over frequently and is typically
match-funded with liabilities having similar maturities and cash flow
characteristics. At December 25, 1998, a significant portion of Merrill Lynch's
assets was considered readily marketable by management.
Merrill Lynch typically concentrates its unsecured, general-purpose
funding at the ML & Co. level, except where tax regulations, time zone
differences, or other business considerations make this impractical. The
benefits of this strategy are enhanced control, reduced financing costs, wider
name recognition by creditors, and greater flexibility to meet variable funding
requirements of subsidiaries.
Merrill Lynch strives to expand and diversify its funding programs,
markets, and investor and creditor base. Merrill Lynch benefits by distributing
a significant portion of its liabilities and equity through its own sales force
to a large, diversified global client base. Available funding sources include:
o repurchase agreements and securities loaned transactions,
o U.S., Canadian, Euro, Japanese, and Australian commercial paper programs,
o letters of credit,
o master notes,
o demand and time deposits issued through Merrill Lynch's banking
subsidiaries,
o bank loans,
o long-term debt, including medium-term notes,
o TOPrS,
o preferred stock, and
o common stock.
Additionally, Merrill Lynch maintains access to significant uncommitted
credit lines, both secured and unsecured, from a large group of banks.
During 1998, Merrill Lynch undertook measures to extend the maturity of
its liabilities and to reduce its use of short-term unsecured funding.
Commercial paper represented 6% and 10% of total assets at year-end 1998 and
1997, respectively. Merrill Lynch maintains strict concentration standards for
commercial paper and other short-term borrowings, including limits for any
single investor.
In addition to equity capital sources, Merrill Lynch views long-term debt
as a stable funding source for its core balance sheet assets. Long-term, less
liquid assets are fully funded with long-term sources of capital, which include
the non-current portion of long-term debt, TOPrS, preferred stock, and common
equity. Generally, non-interest-earning investments and fixed assets are
financed with fixed-rate long-term debt and equity capital, while trading and
other current assets are financed with a combination of short-term funding,
floating-rate long-term debt, and equity capital. Foreign currency-denominated
assets are typically funded with like-currency-denominated borrowings. Merrill
Lynch routinely uses derivative transactions, including interest rate and
foreign currency swaps, to reduce its borrowing costs and interest rate and
currency exposures.
As part of an overall liquidity management strategy, Merrill Lynch's
insurance subsidiaries regularly review the funding requirements of their
contractual obligations for in-force, fixed-rate life insurance and annuity
contracts as well as expected future acquisition and maintenance expenses for
all contracts. The insurance subsidiaries market primarily variable life
insurance and variable annuity products. These products are not subject to the
interest rate, asset/liability matching, or credit risks attributable to
fixed-rate products, thereby reducing the insurance subsidiaries' risk profile
and liquidity demands. At December 25, 1998, approximately 85% of invested
assets of insurance subsidiaries were considered liquid by management.
"Credit Ratings"
The cost and availability of unsecured financing generally are dependent
on credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and
TOPrS were rated by several recognized credit rating agencies at December 25,
1998 as follows:
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND
RATING AGENCY RATINGS TOPrS RATINGS
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA, Inc. AA AA-
Japan Rating & Investment Information, Inc. AA Not Rated
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- --------------------------------------------------------------------------------
Approximately $75.4 billion of indebtedness at December 25, 1998 is
considered senior indebtedness as defined under various indentures.
CAPITAL PROJECTS AND EXPENDITURES
Merrill Lynch continually prepares for the future by expanding its
operations and investing in new technology to improve service to clients. To
support business expansion, for example, Merrill Lynch is building a new
European headquarters in London for approximately $650 million; $120 million has
been spent to date. Completion of this facility is expected in 2001. During
1997, Merrill Lynch also approved a plan to construct an office complex in
central New Jersey to consolidate certain operations. Construction costs are
estimated at approximately $325 million, and completion of this facility is
anticipated in 2000.
Significant technology initiatives include Merrill Lynch Trusted Global
Advisor (Service Mark) ("TGA" (Service Mark)) and Year 2000 and European
Economic and Monetary Union systems compliance. The TGA system, a technology
platform which is now available to virtually all Financial Consultants, was
completed during the 1998 third quarter. In the future, new system applications
and systems upgrades will continue to be added to the platform as necessary.
Year 2000 Compliance Initiative
As the millennium approaches, Merrill Lynch has undertaken initiatives to
address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the result
of a widespread programming technique that causes computer systems to identify a
date based on the last two numbers of a year, with the assumption that the first
two numbers of the year are "19." As a result, the year 2000 would be stored as
"00," causing computers to incorrectly interpret the year as 1900. Left
uncorrected, the Y2K problem may cause information technology systems (e.g.,
computer databases) and non-information technology systems (e.g., elevators) to
produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal
Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. The
resource-intensive renovation phase (as further discussed) of Merrill Lynch's
Year 2000 efforts was approximately 95% completed as of January 31, 1999.
Merrill Lynch will focus primarily on completing its renovation and testing and
on integration of the Year 2000 programs of recent acquisitions during the
remainder of 1999. In order to focus attention on the Y2K problem, management
has deferred certain other technology projects; however, this deferral is not
expected to have a material adverse effect on the company's business, results of
operations, or financial condition.
The failure of Merrill Lynch's technology systems relating to a Y2K
problem would likely have a material adverse effect on the company's business,
results of operations, and financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies, and
other assets. The Y2K problem could also increase Merrill Lynch's exposure to
risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative,
which is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been organized
into six phases: planning, pre-renovation, renovation, production testing,
certification, and integration testing.
The planning phase involved defining the scope of the Year 2000 Compliance
Initiative, including its annual budget and strategy, and determining the level
of expert knowledge available within Merrill Lynch regarding particular systems
or applications. The pre-renovation phase involved developing a detailed
enterprisewide inventory of applications and systems, identifying the scope of
necessary renovations to each application or system, and establishing a
conversion schedule. During the renovation phase, source code is actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or
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application is tested using a variety of Year 2000 scenarios. The production
testing phase validates that a renovated system is functionally the same as the
existing production version, that renovation has not introduced defects, and
that expanded or windowed date fields continue to handle current dates properly.
The certification phase validates that a system can run successfully in a Year
2000 environment. The integration testing phase, which will occur throughout
1999, validates that a system can successfully interface with both internal and
external systems. Finally, as Merrill Lynch continues to implement new systems,
they are also being tested for Year 2000 readiness.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and testing
of computer systems for the Y2K problem were approved. All plans for both
mission-critical and non-mission-critical systems are tracked and monitored. The
work associated with the Year 2000 Compliance Initiative has been accomplished
by Merrill Lynch employees, with the assistance of consultants where necessary.
As part of the production testing and certification phases, Merrill Lynch
has performed, and will continue to perform, both internal and external Year
2000 testing intended to address the risks from the Y2K problem. As of January
31, 1999, production testing was approximately 93% completed. In July 1998,
Merrill Lynch participated in an industrywide Year 2000 systems test sponsored
by the Securities Industry Association ("SIA"), in which selected firms tested
their computer systems in mock stock trades that simulated dates in December
1999 and January 2000. Merrill Lynch will participate in further industrywide
testing sponsored by the SIA, currently scheduled for March and April 1999,
which will involve an expanded number of firms, transactions, and conditions.
Merrill Lynch also participated in various other domestic and international
industry tests during 1998.
Merrill Lynch continues to survey and communicate with third parties whose
Year 2000 readiness is important to the company. Information technology and
non-information technology vendors and service providers are contacted in order
to obtain their Year 2000 compliance plans. Based on the nature of the response
and the importance of the product or service involved, Merrill Lynch determines
if additional testing is needed. The results of these efforts are maintained in
a database that is accessible throughout the firm. Third parties that have been
contacted include transactional counterparties, exchanges, and clearinghouses; a
process to access and rate their responses has been developed. This information
as well as other Year 2000 readiness information on particular countries and
their political subdivisions will be used by Merrill Lynch to manage risk
resulting from the Y2K problem. Management is unable at this point to ascertain
whether all significant third parties will successfully address the Y2K problem.
Merrill Lynch will continue to monitor third parties' Year 2000 readiness to
determine if additional or alternative measures are necessary. In connection
with information technology and non-information technology products and
services, contingency plans, which are developed at the business unit level, may
include selection of alternate vendors or service providers and changing
business practices so that a particular system is not needed. In the case of
securities exchanges and clearinghouses, risk mitigation could include the
re-routing of business. In light of the interdependency of the parties in or
serving the financial markets, however, there can be no assurance that all Y2K
problems will be identified and remediated on a timely basis or that all
remediation will be successful. The failure of exchanges, clearing
organizations, vendors, service providers, counterparties, regulators, or others
to resolve their own processing issues in a timely manner could have a material
adverse effect on Merrill Lynch's business, results of operations, and financial
condition.
At year-end 1998, the total estimated expenditures for the entire Year
2000 Compliance Initiative were approximately $425 million, of which
approximately $125 million was remaining. The majority of these remaining
expenditures are expected to cover testing, risk management, and contingency
planning. There can be no assurance that the costs associated with such
remediation efforts will not exceed those currently anticipated by Merrill
Lynch, or that the costs associated with the remediation efforts or the possible
failure of such remediation efforts would not have a material adverse effect on
Merrill Lynch's business, results of operations, or financial condition.
European Economic and Monetary Union
("EMU") Initiatives
As of January 1, 1999, the "euro" was adopted as the common legal currency
of participating member states of the EMU. As a consequence of the introduction
of and conversion to the euro, Merrill Lynch was required to make significant
changes to nearly 200 global business systems in order to reflect the
substitution of the euro for the 11 member national currencies and the European
currency unit. The introduction
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of the euro brings about fundamental changes in the structure and nature of
European financial markets, including the creation of a unified, more liquid
capital market in Europe. As financial markets in EMU member states converge and
local barriers are removed, competition is expected to increase.
The introduction of the euro affects all Merrill Lynch facilities that
transact, distribute, or provide custody or recordkeeping for securities or cash
denominated in the currency of a participating member state. Merrill Lynch's
systems or procedures that handle such securities or cash were modified in order
to implement the conversion to the euro. The implementation phase is continuing
into the first quarter of 1999 to resolve any post-conversion issues. The
success of Merrill Lynch's euro conversion efforts was dependent on the
euro-compliance of third parties, such as trading counterparties, financial
intermediaries (e.g., securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors.
As of the end of the 1998 fiscal year, the total estimated expenditures
associated with the introduction of and conversion to the euro were
approximately $79 million, of which $1 million is remaining to be spent during
the first quarter of 1999 on compliance efforts and project administration.
Management believes that it has identified and evaluated all of the systems and
operational modifications necessary for the conversion to the euro. On January
4, 1999 and since then, Merrill Lynch has conducted normal business operations,
having successfully completed its conversion program. Management does not expect
the introduction of the euro to have a negative effect on its future business,
currency risk, or competitive positioning in the European markets.
RISK MANAGEMENT
Through its operating activities, Merrill Lynch is exposed to market,
credit, and other risks. These risks are continually monitored, evaluated, and
managed firmwide through a comprehensive risk management process. The proper
execution of this process leads to more effective management of these risks,
helping to reduce the likelihood of earnings volatility over time.
The primary responsibility in the risk management process rests with
individual business units in managing the risks that arise from individual
transactions or portfolios of similar transactions. Business units manage these
risks by adhering to established risk policies and procedures, advanced hedging
techniques, and the distribution strength of our global sales force.
To supplement risk management at the business unit level, Merrill Lynch
has developed corporate governance policies and procedures that require
corporate personnel, who are independent of business units, to participate in
the risk management process (see the Corporate Governance section). To ensure a
proper system of checks and balances, these units are independent of the
business units and report to other senior executives in the firm.
Merrill Lynch's firmwide risk management process is based on the belief
that there is more to risk management than identifying and measuring risk. The
process itself has been strengthened by experience, but the underlying
philosophy is essentially unchanged. This philosophy is based on the following
eight principles:
1. The most important tools in any risk process are experience, judgment, and
constant communication.
2. Vigilance, discipline, and an awareness of risk must be continuously
emphasized throughout the firm.
3. Management must provide a clear and simple statement as to what can and
cannot be done in committing capital.
4. Risk policies and procedures must be clear, well communicated, and
understood.
5. Risk managers must consider the unexpected, probe for potential problems,
test for weaknesses, and help identify potential for loss.
6. Reporting on risk exposures and variables must be accurate and timely.
7. The process must be flexible to permit adaptation to changing
environments, including the evolving goals of Merrill Lynch itself.
8. The key objective must be to minimize the possibility of incurring
unacceptable loss. Such losses usually arise from unexpected events that
most statistical model-based risk methodologies cannot predict.
The overall effectiveness of Merrill Lynch's risk management process is
illustrated by analyzing actual net trading-related revenues over time. The
nature of Merrill Lynch's trading-related activities, which are principally
client order flow-driven, combined with its risk management strategies, help to
reduce earnings volatility. A distribution of weekly net trading-related
revenues, net of reserves, for each of the last three years is presented in the
graph that follows:
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Presented is a bar graph illustrating the distribution of weekly net
trading-related revenues by revenue band for 1996, 1997, and 1998.
- --------------------------------------------------------------------------------
DISTRIBUTION OF WEEKLY NET
TRADING-RELATED REVENUES BY YEAR
($ IN MILLIONS)
- --------------------------------------------------------------------------------
Number of weeks
---------------
1996 1997 1998
---- ---- ----
Less than $0 - - 5
$0-50 1 4 7
$50-100 31 12 9
$100-150 20 31 17
Over $150 - 5 14
---- ---- ----
52 52 52
==== ==== ====
- --------------------------------------------------------------------------------
Corporate Governance
Merrill Lynch's corporate governance policies and procedures require
specific resource units to assist in the identification, assessment, and control
of risks. The groups responsible for the maintenance of these policies and
procedures include Global Risk and Credit Management ("Risk Management"), as
well as Finance, Audit, Treasury, Operations, and Law and Compliance ("Control
Units").
Risk Management is organized into divisions overseeing market and credit
risks ("Market Risk Division" and "Credit Risk Division", respectively). These
divisions are managed by a single head of Risk Management, who is a member of
the Executive Management Committee.
Risk Management has the authority to set and monitor firmwide risk levels
related to trading exposures and counterparty credit limits, and to veto
proposed transactions (see further discussion in the Market Risk and Credit Risk
sections). Many transactions are subject to prior approval from Risk Management,
including underwriting commitments of equity, high-yield, and emerging market
securities, real estate financings, and bridge loans, as well as most
derivatives and syndicated loans. In addition, Risk Management and
representatives from other Control Units approve new types of transactions as
part of the new product review process.
In addition to independent risk management responsibilities, senior
management from Risk Management and the Control Units take an active role in the
oversight of the risk management process through the Risk Control and Reserve
Committees.
The Risk Control Committee provides general risk oversight for all
institutional trading activities, which includes setting quantitative limits for
market and credit risks and developing guidelines for the approval of new
products. The Risk Control Committee, chaired by the head of Risk Management,
reports periodically to the Audit and Finance Committee of the Board of
Directors and is independent of Merrill Lynch's business units.
The Reserve Committee monitors valuation and certain other risks
associated with assets and liabilities. Merrill Lynch establishes balance sheet
reserves for existing conditions, events, or circumstances that may indicate
that the realizable value of an asset has been reduced below its carrying value
or that a liability has been incurred. The Reserve Committee, chaired by the
Chief Financial Officer, reviews and approves firmwide reserve levels, as well
as changes in reserve methodologies. The Reserve Committee meets monthly to
review current market conditions and to act on specific issues. Merrill Lynch's
reserves take into account management's judgment and are generally based on:
o identification of specific risks and exposures,
o formulas, and
o aging, concentration, and liquidity analyses.
The following discussions of market, credit, operating, and other risks
highlight specific policies and procedures for risk identification, assessment,
and control. For information on qualitative aspects of market and credit risk,
see Note 3 to the Consolidated Financial Statements.
Market Risk
Market risk is the potential change in a financial instrument's value
caused by fluctuations in interest and currency exchange rates, equity and
commodity prices, and credit spreads. The Market Risk Division is responsible
for measuring, monitoring, and controlling market risk on trading positions,
including the establishment of trading limits throughout the firm, which may not
be exceeded without prior approval.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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The Market Risk Division comprises three functional groups: the
Quantitative Risk Management Group; the Analytics, Reporting, and Technology
Group; and the Risk Managers Group. The Quantitative Risk Management Group
independently tests and reviews valuation and risk models used throughout the
firm's trading businesses. The Analytics, Reporting, and Technology Group
designs and develops risk processes and analytics which support portfolio
measurement, establishment of trading limits, and compliance with various
reporting requirements. The Risk Managers Group has primary responsibility for
the independent risk assessment and limits establishment of individual trading
units and is organized along geographic and product lines to ensure direct and
frequent communication with the business areas.
The Market Risk Division has established certain controls and guidelines
to supplement hedging of market risks at the trading unit level (see Trading
Assets and Liabilities in the Balance Sheet section for further information on
these techniques). In addition, the Division performs regular, formal risk
reviews with senior trading managers.
The Market Risk Division uses several proprietary risk technology tools,
including a scenario/value-at-risk system, a risk inventory database, a trading
limit monitoring system, and trading system access. The scenario/value-at-risk
system performs daily sensitivity and value-at-risk analysis on trading
positions. The risk inventory database provides daily consolidation of
securities inventory exposure by product, credit rating, country, etc., along
with concentrations of exposure. The trading limit monitoring system enables the
Division to review compliance with established limits. Access to trading systems
allows the Division to monitor positions and perform computerized analytics.
Merrill Lynch uses mathematical risk models, including value-at-risk and
sensitivity analysis, to help estimate its exposure to market risk.
Nevertheless, management believes that the use of mathematical risk models alone
may provide a greater sense of security than warranted; therefore, reliance on
these models should be limited. In fact, because of the inability of
mathematical risk models to quantify large-scale potential financial events with
any precision, these models only serve to supplement other risk management
efforts. The 1998 third quarter market turmoil is an example of such a financial
event.
Value-at-risk is a statistical measure of the potential loss in the fair
value of a portfolio due to adverse movements in underlying risk factors. For
these disclosures, Merrill Lynch uses a historical simulation approach to
estimate value-at-risk using a 99% confidence level and a two-week holding
period for trading and non-trading instruments. Sensitivities to market risk
factors are aggregated and combined with a database of historical biweekly
changes in market factors to simulate a series of profits and losses. The level
of loss that is exceeded in that series 1% of the time is used as the estimate
for the 99% confidence level value-at-risk. The Market Risk Division continually
enhances its value-at-risk model both in terms of analytic methodology and
historical time series data, both of which can impact final value-at-risk
numbers. Trading units communicate daily to the Division the sensitivity of
their positions to changes in risk factors.
A number of assumptions must be made to obtain the sensitivities and
simulated profits and losses. There is no reason to believe that the
historically simulated profits and losses have any predictive power for the
future distribution of profits and losses. For instance, the unprecedented
volatility experienced in the 1998 third quarter demonstrated the limitations of
value-at-risk models. Prior to that period, the largest widening of credit
spreads in emerging markets ever experienced over a one-month period was
approximately 200 basis points, including the peso crisis in 1994. In contrast,
emerging market spreads widened by approximately 900 basis points during a
three-week period in the 1998 third quarter. Value-at-risk, even using a 99%
confidence level, would only have considered a widening of approximately 200
basis points.
Hypothetical gains and losses from simulated changes in risk factors for
trading instruments would be reflected in earnings since these instruments are
accounted for at fair value. Hypothetical gains and losses from simulated
changes in risk factors for non-trading instruments generally would not be
reflected in earnings since these instruments are typically accounted for at
historical cost.
The overall total value-at-risk amounts are presented across major risk
categories, including exposure to volatility risk found in certain products,
e.g., options. The table that follows presents Merrill Lynch's value-at-risk for
trading instruments at year-end 1998 and 1997 and the 1998 average value-at-risk
calculated on a quarterly basis.
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- --------------------------------------------------------------------------------
YEAR-END YEAR-END AVERAGE
(in millions) 1998 1997 1998
- --------------------------------------------------------------------------------
TRADING VALUE-AT-RISK
Interest rate(1) $ 116 $ 85 $ 97
Equity 4 53 27
Commodity 4 24 12
Currency 25 39 33
Volatility 13 103 38
----- ----- -----
162 304 207
Diversification benefit (49) (144) (79)
----- ----- -----
Overall $ 113(2) $ 160(2) $ 128
===== ===== =====
- --------------------------------------------------------------------------------
(1) Includes credit spread risk.
(2) Overall value-at-risk using a 95% confidence level and a one-day holding
period was $21 and $69 million at year-end 1998 and 1997, respectively.
While trading interest rate value-at-risk increased, Merrill Lynch
decreased its equity, commodity, currency, and volatility values-at-risk across
trading businesses during 1998. These risk reductions reduced overall
value-at-risk by 29% from year-end 1997 to year-end 1998.
The table that follows presents Merrill Lynch's value-at-risk for
non-trading instruments at year-end 1998 and 1997 and the 1998 average
value-at-risk calculated on a quarterly basis:
- --------------------------------------------------------------------------------
YEAR-END YEAR-END AVERAGE
(in millions) 1998 1997 1998
- --------------------------------------------------------------------------------
NON-TRADING VALUE-AT-RISK
Interest rate(1) $ 179 $ 15 $ 78
Currency 82 23 53
Equity 11 7 11
----- ---- ----
272 45 142
Diversification benefit (86) (15) (45)
----- ---- ----
Overall $ 186(2) $ 30(2) $ 97
===== ==== ====
- --------------------------------------------------------------------------------
(1) Includes credit spread risk.
(2) Overall value-at-risk using a 95% confidence level and a one-day holding
period was $34 and $5 million at year-end 1998 and 1997, respectively.
The increase in non-trading interest rate value-at-risk is primarily due
to the issuance of $4 billion in fixed-rate financing, including TOPrS. Merrill
Lynch did not hedge the resulting interest rate risk since long-term
non-interest-earning assets are partially financed with fixed-rate long-term
debt (see the Capital Adequacy and Liquidity section for further information).
The increase in non-trading currency value-at-risk is attributable to greater
British pound exposure resulting from growth in non-U.S. operations.
Credit Risk
Credit risk represents the loss that Merrill Lynch would incur if a
counterparty or issuer failed to perform its contractual obligations. Policies
and procedures have been established with the objective of protecting against
unacceptable credit losses, including:
o reviewing and establishing limits for credit exposures,
o further mitigating counterparty credit exposures through various
techniques, including maintaining collateral, and obtaining the right to
terminate transactions or collect collateral in the event of a credit
rating downgrade, and
o continually assessing the creditworthiness of counterparties and issuers.
The Credit Risk Division is organized geographically, with industry
specialization in the U.S.
Within the Credit Risk Division, counterparty credit approval levels are
established based on counterparty or issuer credit quality and the potential
risk of the transaction. Credit officers set limits by counterparty or issuer,
recommend credit reserves, and manage credit exposures. Transactions that exceed
prescribed levels must be approved by the Credit Committee, which includes
several Directors of Corporate Credit and the Chief Credit Officer. Regional
credit groups, in addition to evaluating the creditworthiness of specific
counterparties, enhance country analysis by ensuring that total credit risks are
within country concentration limits. Within the Credit Department, the Sovereign
Risk group analyzes the political, economic, and financial conditions of
individual countries, establishes country credit ratings, and recommends overall
country risk limits.
The credit system tracks information from automated and manual sources to
enable the Credit Risk Division to monitor counterparty/issuer, product, and
country concentrations. This system aggregates credit exposure by
counterparty/issuer, maintains overall counterparty/issuer and specific product
limits, and identifies limit review dates by counterparty/issuer. Detailed
information on firmwide inventory positions and executed transactions, including
current and potential credit exposure, is updated frequently and compared with
limits. Collateral holdings, which reduce credit exposure, are also tracked on
the credit system.
Credit exposures related to Merrill Lynch's retail customer business,
including mortgages and home equity lines of credit, customer margin accounts,
and working capital facilities to small businesses, are continually monitored.
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Operating Risk
Operating risk focuses on Merrill Lynch's ability to accumulate, process,
protect, and communicate information necessary to conduct business in a global
market environment, and also includes the execution of legal, fiduciary, and
agency responsibilities. Merrill Lynch manages operating risk in many ways,
including maintaining backup facilities, using technology, employing experienced
personnel, and maintaining a comprehensive system of internal controls.
Merrill Lynch maintains key backup facilities worldwide and updates
systems and equipment as required in response to changes in business conditions
and technology needs. An example is the extensive work currently being performed
to become Year 2000-compliant (see the Capital Projects and Expenditures
section). In addition, experienced operations personnel provide support and
control for trading, clearance, and settlement activities and perform custodial
functions for customer and proprietary assets. Merrill Lynch regularly reviews
its framework of internal controls, taking into account changing circumstances.
Corrective actions are taken to address control deficiencies, and opportunities
for improvement are implemented when cost-effective.
From a legal standpoint, risk arises from the enforceability of clients'
and counterparties' obligations to, and receivables from, Merrill Lynch,
including obtaining contractual provisions intended to reduce credit exposure by
providing for the netting of mutual obligations. The firm seeks to mitigate such
risk by:
o developing policies that enhance enforceability of transactions,
o monitoring compliance with internal policies and external regulations, and
o requiring consultation with internal and external legal advisors for
non-standard transactions.
Fiduciaries and agents have obligations to act on behalf of others. Such
risks are inherent in brokerage and investment management activities. Merrill
Lynch has a number of policies in place to ensure that fiduciary obligations to
clients are met and that Merrill Lynch is in compliance with applicable legal
and regulatory requirements.
Other Risks
Liquidity risk arises in the course of Merrill Lynch's general funding
activities and in the management of the balance sheet. This risk includes both
the risk of being unable to raise funding with appropriate maturity and interest
rate characteristics and the risk of being unable to liquidate an asset in a
timely manner at a reasonable price. For more information on how Merrill Lynch
manages liquidity risk, see the Capital Adequacy and Liquidity section.
Other risks Merrill Lynch encounters include political, tax, and
regulatory risks. These risks revolve around the impact that changes in local
laws, regulatory requirements, or tax statutes would have on the viability,
profitability, or cost-effectiveness of existing or future transactions. To help
mitigate the effects of these risks, Merrill Lynch constantly reviews new and
pending legislation and regulations by employing professionals in the
jurisdictions in which the company operates to actively follow these issues and
participate in related interest groups.
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
Non-investment grade holdings and highly leveraged transactions involve
risks related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and
holds non-investment grade cash instruments in connection with its investment
banking, market-making, and derivative structuring activities. Non-investment
grade trading inventories have increased in recent years to satisfy growing
client demand for higher-yielding investments, including emerging market and
other non-U.S. securities. During the second half of 1998, however, these
exposures were intentionally reduced as a result of market volatility.
Non-investment grade holdings have been defined as debt and preferred equity
securities rated as BB+ or lower, or equivalent ratings by recognized credit
rating agencies, sovereign debt in emerging markets, amounts due under
derivative contracts from non-investment grade counterparties, and other
instruments that, in the opinion of management, are non-investment grade.
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Derivatives may also expose Merrill Lynch to credit risk related to the
underlying security where a derivative contract can either synthesize ownership
of the underlying security (e.g., long total return swap) or potentially force
ownership of the underlying security (e.g., short put option). In addition,
derivatives may subject Merrill Lynch to credit spread or issuer default risk,
in that changes in credit spreads or in the credit quality of the underlying
securities may adversely affect the derivatives' fair values. Merrill Lynch
engages in various hedging strategies to reduce its exposure associated with
non-investment grade positions, such as purchasing an option to sell the related
security or entering into other offsetting derivative contracts.
In addition to engaging in business involving non-investment grade
positions, Merrill Lynch provides financing and advisory services to, and
invests in, companies entering into leveraged transactions, which may include
leveraged buyouts, recapitalizations, and mergers and acquisitions. Merrill
Lynch provides extensions of credit to leveraged companies in the form of senior
and subordinated debt, as well as bridge financing on a select basis. In
addition, Merrill Lynch syndicates loans for non-investment grade companies or
in connection with highly leveraged transactions and may retain a residual
portion of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
Trading Exposures
The following table summarizes trading exposures to non-investment grade
or highly leveraged issuers or counterparties at year-end 1998 and 1997:
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 7,932 $ 13,049
Derivatives 4,939 3,420
Trading liabilities - cash instruments (920) (2,970)
Collateral on derivative assets (2,457) (599)
------- --------
Net trading asset exposure 9,494 12,900
Derivative notionals with credit exposure(1) 2,633 3,654
Derivative notionals that hedge credit exposure(1) (3,927) (4,235)
------- --------
Net exposure $ 8,200 $ 12,319
======= ========
- --------------------------------------------------------------------------------
(1) Represents amount subject to strike or reference price.
Included in the preceding table are debt and equity securities and bank
loans of companies in various stages of bankruptcy proceedings or in default. At
December 25, 1998, the carrying value of such debt and equity securities totaled
$74 million, of which 84% resulted from Merrill Lynch's market-making activities
in such securities. This compared with $142 million at December 26, 1997, of
which 56% related to market-making activities. In addition, Merrill Lynch held
distressed bank loans totaling $156 million and $432 million at year-end 1998
and 1997, respectively.
Non-Trading Exposures
The following table summarizes non-trading exposures to non-investment
grade or highly leveraged issuers or counterparties at year-end 1998 and 1997:
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Marketable investment securities $ 39 $ 648
Investments of insurance subsidiaries 148 192
Loans (net of allowance for loan losses):
Bridge loans 66 -
Other loans(1) 1,099 467
Other investments:
Partnership interests(2) 852(3) 315
Other equity investments(4) 459 170
- --------------------------------------------------------------------------------
(1) Represented outstanding loans to 82 and 48 companies at year-end 1998 and
1997, respectively.
(2) Included is $279 and $233 million in investments at year-end 1998 and
1997, respectively, related to deferred compensation plans, for which the
default risk of the investments rests with the participating employees.
(3) Included in this amount is a $300 million investment in the hedge fund
Long Term Capital Portfolio, L.P.
(4) Invested in 89 and 72 enterprises at year-end 1998 and 1997, respectively.
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The following table summarizes Merrill Lynch's commitments with exposure
to non-investment grade or highly leveraged counterparties at year-end 1998 and
1997:
- --------------------------------------------------------------------------------
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 227 $ 60
Unutilized revolving lines of credit and other
lending commitments 1,678(1) 485
- --------------------------------------------------------------------------------
(1) Includes a $1.1 billion commitment to a counterparty related to
acquisition financing. Subsequent to year-end, the acquisition was
completed, with substantially all of the acquisition financing syndicated
to third parties.
At December 25, 1998, the largest industry exposure was to the financial
services sector, which accounted for 43% of total non-investment grade positions
and highly leveraged transactions.
CASH FLOWS
During 1998, Merrill Lynch disbursed $5.3 billion to acquire the
outstanding shares of Mercury. This purchase was financed primarily with
proceeds from long-term borrowings.
LITIGATION
Certain actions have been filed against Merrill Lynch in connection with
Merrill Lynch's business activities. Although the ultimate outcome of these
actions cannot be ascertained at this time and the results of legal proceedings
cannot be predicted with certainty, it is the opinion of management that the
resolution of these actions will not have a material adverse effect on the
financial condition or the results of operations of Merrill Lynch as set forth
in the Consolidated Financial Statements contained herein.
RECENT DEVELOPMENTS
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and for Hedging Activities". SFAS
No. 133 requires all derivatives, including certain derivatives embedded in
other contracts, to be recorded on the balance sheet at fair value. SFAS No.
133, which is effective for Merrill Lynch beginning January 1, 2000, will
primarily impact Merrill Lynch's accounting and reporting of derivatives used to
hedge borrowings and other non-trading assets and liabilities. Merrill Lynch is
currently evaluating the expected impact of adopting this standard.
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MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY
Management of Merrill Lynch & Co., Inc. is responsible for preparing the
financial statements and related notes contained in this Annual Report. The
consolidated financial statements and notes are prepared in accordance with
generally accepted accounting principles. Other financial data included in the
Annual Report are consistent with those in the financial statements.
Management recognizes the importance of safeguarding Merrill Lynch's
assets and integrity. Therefore, Management devotes considerable attention to
understanding the risks of its businesses, promoting the highest standards of
ethical conduct, exercising responsible stewardship over Merrill Lynch's assets,
and presenting fair financial statements.
Merrill Lynch regularly reviews its framework of internal controls, taking
into account changing circumstances. Corrective actions are taken to address
control deficiencies, and other opportunities for improvement are implemented
when cost effective.
The framework of internal control includes policies, procedures, and
organizational structures that are overseen by a predominantly independent Board
of Directors. Several committees of the Board actively participate in setting
policy and monitoring controls. The Audit and Finance Committee, which consists
of five independent directors, examines Merrill Lynch's compliance with
acceptable business standards and ethics in accordance with its written charter
of responsibilities and duties. It also reviews significant financial issues and
recommends overall policies regarding market and credit risk, as well as funding
requirements. The Management Development and Compensation Committee, also
composed entirely of independent directors, oversees procedures for developing
and assessing the performance of Merrill Lynch's employees with an emphasis on
ethical business behavior.
Oversight is provided by independent units within Merrill Lynch, working
together to maintain Merrill Lynch's internal control standards.
Corporate Audit reports directly to the Audit and Finance Committee,
providing independent appraisals of Merrill Lynch's internal accounting controls
and compliance with established policies and procedures.
Finance establishes accounting policies and procedures, measures and
monitors financial risk, and prepares financial statements that fairly present
the underlying transactions and events of Merrill Lynch.
Global Risk and Credit Management is both independent from business line
management and has oversight responsibility for Merrill Lynch's market and
credit risks. This group has clear authority to enforce trading and credit
limits using various systems and procedures to monitor positions and risks.
Law and Compliance serves in a counseling and advisory role to Management.
In this role, the group develops policies; monitors compliance with internal
policies, external rules, and industry regulations; and provides support in
connection with the execution of various transactions.
The independent auditors, Deloitte & Touche LLP, perform annual audits of
Merrill Lynch's financial statements in accordance with generally accepted
auditing standards, including a review of the internal accounting control
system. The independent auditors openly discuss with the Audit and Finance
Committee their views on the quality of the financial statements and related
disclosures and the adequacy of Merrill Lynch's internal accounting controls.
Quarterly review reports on the interim financial statements are also issued by
Deloitte & Touche LLP. Merrill Lynch's independent auditors are appointed each
year by the Audit and Finance Committee and are given unrestricted access to all
financial records and related data, including minutes of meetings of
stockholders, Board of Directors, and committees of the Board.
<TABLE>
<S> <C> <C>
/s/ David H. Komansky /s/ Herbert M. Allison, Jr. /s/ E. Stanley O'Neal
David H. Komansky Herbert M. Allison, Jr. E. Stanley O'Neal
Chairman of the Board President and Executive Vice President and
and Chief Executive Officer Chief Operating Officer Chief Financial Officer
</TABLE>
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DESCRIPTION OF BUSINESS
Merrill Lynch & Co., Inc. ("ML & Co.") is a holding company that provides
investment, financing, insurance, and related services to individuals and
institutions on a global basis through its broker, dealer, banking, insurance,
and other financial services subsidiaries. Its principal subsidiaries include:
o Merrill Lynch, Pierce, Fenner & Smith Incorporated, a U.S.-based
broker-dealer in securities;
o Merrill Lynch International, a U.K.-based broker-dealer in securities and
dealer in equity derivatives;
o Merrill Lynch Government Securities Inc., a dealer in U.S. Government
securities; and
o Merrill Lynch Capital Services, Inc., a dealer in interest rate, currency,
and credit derivatives.
Services provided to clients by ML & Co. and subsidiaries include:
o securities brokerage, trading, and underwriting;
o investment banking, strategic services, and other corporate finance
advisory activities, including loan syndication;
o asset management and other investment advisory and recordkeeping services;
o dealing and brokerage of swaps, options, forwards, futures, and other
derivatives;
o securities clearance services;
o debt, equity, and economic research activities;
o banking, trust, and lending services; and
o insurance sales and underwriting services.
INDEPENDENT AUDITORS' REPORT
[LOGO]
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the accompanying consolidated balance sheets of Merrill
Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of December 25, 1998 and
December 26, 1997 and the related consolidated statements of earnings, changes
in stockholders' equity, comprehensive income and cash flows for each of the
three years in the period ended December 25, 1998. These financial statements
are the responsibility of Merrill Lynch's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Merrill Lynch at December 25,
1998 and December 26, 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 25, 1998 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1998
Merrill Lynch changed its method of accounting for certain internal-use software
development costs to conform with Statement of Position 98-1.
/s/ Deloitte & Touche LLP
New York, New York
February 22, 1999
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CONSOLIDATED STATEMENTS OF EARNINGS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Commissions $ 5,799 $ 4,995 $ 4,085
Interest and dividends 19,314 17,299 13,125
Principal transactions 2,651 3,827 3,531
Investment banking 3,264 2,876 2,022
Asset management and portfolio service fees 4,202 3,002 2,431
Other 623 500 519
------- ------- -------
TOTAL REVENUES 35,853 32,499 25,713
Interest Expense 18,306 16,243 12,092
------- ------- -------
NET REVENUES 17,547 16,256 13,621
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits 9,199 8,333 7,012
Communications and technology 1,749 1,255 1,010
Occupancy and related depreciation 867 736 742
Advertising and market development 688 613 527
Brokerage, clearing, and exchange fees 683 525 433
Professional fees 552 520 385
Goodwill amortization 226 65 50
Provision for costs related to staff reductions 430 - -
Other 1,057 1,098 834
------- ------- -------
TOTAL NON-INTEREST EXPENSES 15,451 13,145 10,993
------- ------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,096 3,111 2,628
Income Tax Expense 713 1,129 980
Dividends on Preferred Securities Issued by Subsidiaries 124 47 -
------- ------- -------
NET EARNINGS $ 1,259 $ 1,935 $ 1,648
======= ======= =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,220 $ 1,896 $ 1,602
======= ======= =======
EARNINGS PER COMMON SHARE
Basic $ 3.43 $ 5.57 $ 4.63
======= ======= =======
Diluted $ 3.00 $ 4.79 $ 4.08
======= ======= =======
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
57
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CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amount)
<TABLE>
<CAPTION>
DECEMBER 25, 1998 DECEMBER 26, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 12,530 $ 12,073
--------- ---------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR
DEPOSITED WITH CLEARING ORGANIZATIONS 6,590 5,357
--------- ---------
RECEIVABLES UNDER RESALE AGREEMENTS AND
SECURITIES BORROWED TRANSACTIONS 87,713 107,443
--------- ---------
MARKETABLE INVESTMENT SECURITIES 4,605 3,309
--------- ---------
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 25,318 24,031
Contractual agreements 21,979 21,205
Corporate debt and preferred stock 21,166 32,537
U.S. Government and agencies 15,421 9,848
Non-U.S. governments and agencies 7,474 10,221
Mortgages, mortgage-backed, and asset-backed 7,023 7,312
Other 3,358 2,937
--------- ---------
101,739 108,091
Securities received as collateral, net of securities
pledged as collateral 6,106 -
--------- ---------
Total 107,845 108,091
--------- ---------
SECURITIES PLEDGED AS COLLATERAL 8,184 -
--------- ---------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $48
in 1998 and $50 in 1997) 29,559 27,319
Brokers and dealers 8,872 5,182
Interest and other 9,278 8,185
--------- ---------
Total 47,709 40,686
--------- ---------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,485 4,833
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses
of $124 in 1998 and $130 in 1997) 7,687 4,310
OTHER INVESTMENTS 2,590 1,829
EQUIPMENT AND FACILITIES (net of accumulated depreciation
and amortization of $3,482 in 1998 and $2,955 in 1997) 2,761 2,099
GOODWILL (net of accumulated amortization of $338 in 1998
and $131 in 1997) 5,364 5,467
OTHER ASSETS 1,741 1,483
--------- ---------
TOTAL ASSETS $ 299,804 $ 296,980
========= =========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
58
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 25, 1998 DECEMBER 26, 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED
TRANSACTIONS $ 67,127 $ 79,167
--------- ---------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 18,679 34,340
--------- ---------
DEMAND AND TIME DEPOSITS 13,744 10,712
--------- ---------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 23,840 20,632
Equities and convertible debentures 21,558 15,817
U.S. Government and agencies 7,939 18,186
Non-U.S. governments and agencies 7,245 10,460
Corporate debt and preferred stock 2,878 5,764
Other 254 355
--------- ---------
Total 63,714 71,214
--------- ---------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 14,290 -
--------- ---------
OTHER PAYABLES
Customers 20,972 17,514
Brokers and dealers 7,899 4,224
Interest and other 18,738 22,784
--------- ---------
Total 47,609 44,522
--------- ---------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,319 4,716
LONG-TERM BORROWINGS 57,563 43,143
--------- ---------
TOTAL LIABILITIES 287,045 287,814
--------- ---------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,627 627
--------- ---------
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, PREFERRED SECURITIES ISSUED BY
SUBSIDIARIES, AND STOCKHOLDERS' EQUITY $ 299,804 $ 296,980
========= =========
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
59
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKHOLDERS' EQUITY
9% CUMULATIVE PREFERRED STOCK, SERIES A
Balance, beginning and end of year $ 425 $ 425 $ 425
======= ======= =======
REMARKETED PREFERRED STOCK, SERIES C
Balance, beginning of year - 194 194
Redeemed - (194) -
------- ------- -------
Balance, end of year - - 194
======= ======= =======
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 425 $ 425 $ 619
======= ======= =======
COMMON STOCKHOLDERS' EQUITY
SHARES EXCHANGEABLE INTO COMMON STOCK
Balance, beginning of year $ 66 $ 46 $ 44
Net activity 5 20 2
Exchanges (5) - -
------- ------- -------
Balance, end of year 66 66 46
======= ======= =======
COMMON STOCK
Balance, beginning and end of year 630 630 630
======= ======= =======
PAID-IN CAPITAL
Balance, beginning of year 1,001 925 858
Issuance of stock:
To employees 430 76 67
Other (4) - -
------- ------- -------
Balance, end of year 1,427 1,001 925
======= ======= =======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustment (net of tax)
Balance, beginning of year (85) 7 8
Translation adjustment (net of tax) (53) (92) (1)
------- ------- -------
Balance, end of year (138) (85) 7
------- ------- -------
Net Unrealized Gains on Investment Securities Available-for-Sale (net of tax)
Balance, beginning of year 38 9 25
Net unrealized gains (losses) on investment securities
available-for-sale (60) 34 (97)
Other adjustments(a) 38 (5) 81
------- ------- -------
Balance, end of year 16 38 9
------- ------- -------
Balance, end of year $ (122) $ (47) $ 16
======= ======= =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
60
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAINED EARNINGS
Balance, beginning of year $ 9,579 $ 7,938 $ 6,535
Net earnings 1,259 1,935 1,648
Cash dividends declared:
9% Cumulative Preferred stock (38) (38) (38)
Remarketed Preferred stock - (1) (9)
Common stock (325) (255) (198)
-------- ------- -------
Balance, end of year 10,475 9,579 7,938
======== ======= =======
TREASURY STOCK, AT COST
Balance, beginning of year (2,677) (2,769) (2,114)
Treasury stock purchased - (644) (1,146)
Issued out of treasury (net of reacquisitions):
Employees 556 736 491
Other 20 - -
-------- ------- -------
Balance, end of year (2,101) (2,677) (2,769)
======== ======= =======
UNALLOCATED ESOP REVERSION SHARES, AT COST
Balance, beginning of year - (24) (63)
Allocation of shares to participants - 24 39
-------- ------- -------
Balance, end of year - - (24)
======== ======= =======
EMPLOYEE STOCK TRANSACTIONS
Balance, beginning of year (438) (314) (254)
Net issuance of employee stock grants (599) (351) (251)
Amortization of employee stock grants 359 218 183
Repayment of employee loans 10 9 8
-------- ------- -------
Balance, end of year (668) (438) (314)
======== ======= =======
TOTAL COMMON STOCKHOLDERS' EQUITY $ 9,707 $ 8,114 $ 6,448
======== ======= =======
TOTAL STOCKHOLDERS' EQUITY $ 10,132 $ 8,539 $ 7,067
======== ======= =======
- ---------------------------------------------------------------------------------------
</TABLE>
(a) Other adjustments relate to policyholder liabilities, deferred policy
acquisition costs, and deferred income taxes.
See Notes to Consolidated Financial Statements.
61
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS $ 1,259 $ 1,935 $ 1,648
------- ------- -------
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustment:
Foreign currency translation losses, net of gains (131) (96) (17)
Deferred income taxes 78 4 16
------- ------- -------
Total (53) (92) (1)
------- ------- -------
Net unrealized gains (losses) on investment securities
available-for-sale:
Net unrealized holding gains (losses) arising
during the period (10) 50 (68)
Reclassification adjustment for gains
included in net earnings (50) (16) (29)
------- ------- -------
Net unrealized gains (losses) on investment securities (60) 34 (97)
Adjustments for:
Policyholder liabilities 16 10 64
Deferred policy acquisition costs 4 - 9
Deferred income taxes 18 (15) 8
------- ------- -------
Total (22) 29 (16)
------- ------- -------
Total Other Comprehensive Loss (75) (63) (17)
------- ------- -------
COMPREHENSIVE INCOME $ 1,184 $ 1,872 $ 1,631
======= ======= =======
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
62
<PAGE>
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CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings $ 1,259 $ 1,935 $ 1,648
Noncash items included in earnings:
Depreciation and amortization 585 473 436
Policyholder reserves 227 240 269
Goodwill amortization 226 65 50
Other 278 1,336 869
(Increase) decrease in operating assets(a):
Trading assets 6,332 (31,246) (15,574)
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations (1,233) (2,242) (266)
Receivables under resale agreements and securities borrowed transactions 19,940 (22,373) (19,328)
Customer receivables (2,229) (7,957) (3,845)
Brokers and dealers receivables (3,690) 1,132 3,043
Other 188 (4,068) (704)
Increase (decrease) in operating liabilities(a):
Trading liabilities (7,474) 26,770 10,219
Payables under repurchase agreements and securities loaned transactions (12,040) 12,346 6,573
Customer payables 3,458 4,731 686
Brokers and dealers payables 3,675 399 (2,660)
Other 864 2,274 2,515
-------- -------- --------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 10,366 (16,185) (16,069)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Maturities of available-for-sale securities 3,983 3,376 3,057
Sales of available-for-sale securities 3,426 2,198 1,341
Purchases of available-for-sale securities (8,676) (6,383) (4,374)
Maturities of held-to-maturity securities 831 1,081 920
Purchases of held-to-maturity securities (877) (752) (555)
Loans, notes, and mortgages (3,405) (989) (1,196)
Acquisitions, net of cash acquired (5,235) (13) (135)
Sales of subsidiaries, net of cash disposed 202 - -
Other investments and other assets (1,398) (240) (388)
Equipment and facilities (1,231) (863) (483)
-------- -------- --------
CASH USED FOR INVESTING ACTIVITIES (12,380) (2,585) (1,813)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for):
Commercial paper and other short-term borrowings (15,661) 7,019 8,763
Demand and time deposits 3,032 1,336 1,163
Issuance and resale of long-term borrowings 29,269 25,087 16,509
Settlement and repurchase of long-term borrowings (15,833) (8,242) (7,440)
Issuance of subsidiaries' preferred securities 2,000 300 276
Common and preferred stock transactions 27 (694) (919)
Dividends (363) (294) (245)
-------- -------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 2,471 24,512 18,107
-------- -------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 457 5,742 225
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,073 6,331 6,106
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,530 $ 12,073 $ 6,331
======== ======== ========
- ----------------------------------------------------------------------------------------------------------------
(a) Net of effects of acquisitions and divestitures.
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Income taxes $ 579 $ 910 $ 1,139
Interest 18,357 15,390 11,801
</TABLE>
See Notes to Consolidated Financial Statements.
63
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
TABLE OF CONTENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ..................... 64
NOTE 2. OTHER SIGNIFICANT EVENTS ....................................... 69
NOTE 3. TRADING AND RELATED ACTIVITIES ................................. 70
NOTE 4. INVESTMENTS AND OTHER NON-TRADING ASSETS ....................... 74
NOTE 5. BORROWINGS AND OTHER NON-TRADING LIABILITIES ................... 77
NOTE 6. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES .................... 79
NOTE 7. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE .................... 79
NOTE 8. COMMITMENTS AND CONTINGENCIES .................................. 81
NOTE 9. EMPLOYEE BENEFIT PLANS ......................................... 83
NOTE 10. EMPLOYEE INCENTIVE PLANS ....................................... 86
NOTE 11. INCOME TAXES ................................................... 89
NOTE 12. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS .............. 90
NOTE 13. SEGMENT, PRODUCT, AND GEOGRAPHIC INFORMATION ................... 91
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Merrill Lynch & Co., Inc. ("ML & Co.") provides investment, financing,
insurance, and related services to individuals and institutions on a global
basis through its broker, dealer, banking, insurance, and other financial
services subsidiaries. Its principal subsidiaries include:
o Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
U.S.-based broker-dealer in securities;
o Merrill Lynch International ("MLI"), a U.K.-based broker-dealer in
securities and dealer in equity derivatives;
o Merrill Lynch Government Securities Inc. ("MLGSI"), a dealer in U.S.
Government securities; and
o Merrill Lynch Capital Services, Inc., a dealer in interest rate, currency,
and credit derivatives.
Services provided to clients by ML & Co. and subsidiaries (collectively,
"Merrill Lynch") include:
o securities brokerage, trading, and underwriting;
o investment banking, strategic services, and other corporate finance
advisory activities, including loan syndication;
o asset management and other investment advisory and recordkeeping services;
o dealing and brokerage of swaps, options, forwards, futures, and other
derivatives;
o securities clearance services;
o debt, equity, and economic research activities;
o banking, trust, and lending services; and
o insurance sales and underwriting services.
Basis of Presentation
The Consolidated Financial Statements include the accounts of Merrill
Lynch and are presented in accordance with U.S. generally accepted accounting
principles and prevailing industry practices. All material intercompany
transactions and balances have been eliminated.
Certain reclassifications and format changes have been made to prior year
amounts to conform to the current year presentation. Prior period amounts have
also been restated to reflect the merger of Midland Walwyn Inc. with Merrill
Lynch, which has been accounted for as a pooling-of-interests. The Consolidated
Financial Statements reflect the results of operations, financial position,
changes in stockholders' equity, and
64
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
cash flows as if the two companies had always been combined (see Note 2 for
further information).
The Consolidated Financial Statements are presented in U.S. dollars. Many
non-U.S. subsidiaries have a functional currency (i.e., the currency in which
activities are primarily conducted) that is other than the U.S. dollar, often
the currency of the country in which a subsidiary is domiciled. Subsidiaries'
assets and liabilities are translated to U.S. dollars at year-end exchange
rates, while revenues and expenses are translated at average exchange rates
during the year. Adjustments that result from translating amounts in a
subsidiary's functional currency, net of hedging gains or losses and related tax
effects, are reported in stockholders' equity as a component of Accumulated
other comprehensive income. All other translation adjustments are included in
earnings.
In presenting the Consolidated Financial Statements, management makes
estimates regarding certain trading inventory valuations, the outcome of
litigation, the carrying amount of goodwill, the realization of deferred tax
assets and insurance deferred acquisition costs, and other matters that affect
the reported amounts and disclosure of contingencies in the financial
statements. Estimates, by their nature, are based on judgment and available
information. As such, actual results could differ materially from those
estimates.
Merrill Lynch defines cash equivalents as short-term, highly liquid
securities and interest-earning deposits with original maturities of 90 days or
less, other than those used for trading purposes. For purposes of the
Consolidated Statements of Cash Flows, cash flows from derivatives are
classified in operating activities.
At December 25, 1998 and December 26, 1997, substantially all financial
instrument assets are carried at fair value or amounts that approximate fair
value. Fair values of financial instruments are disclosed in Notes 3, 4, 5,
and 8.
Trading Activities
Merrill Lynch's trading activities consist primarily of securities
brokerage, trading, and underwriting; derivatives dealing and brokerage; and
securities financing transactions. Trading assets and trading liabilities
consist of cash instruments (such as securities) and derivative instruments used
for trading purposes or for hedging other trading inventory.
"Securities"
Trading securities and other cash instruments (e.g., loans held for
trading purposes) are recorded on a trade date basis at fair value. Included in
trading liabilities are securities that Merrill Lynch has sold but did not own
and will therefore be obligated to purchase at a future date ("short sales").
Changes in fair value (i.e., unrealized gains and losses) are recognized as
principal transactions revenues in the current period. Realized gains and losses
and any related interest amounts are included in principal transactions revenues
and interest revenues and expenses, depending on the nature of the instrument.
Fair values of trading securities are based on quoted market prices,
pricing models (utilizing indicators of general market conditions or other
economic measurements), or management's estimates of amounts to be realized on
settlement, assuming current market conditions and an orderly disposition over a
reasonable period of time.
"Derivatives"
A derivative is typically defined as an instrument whose value is
"derived" from an underlying instrument or index such as a future, forward,
swap, or option contract, or other financial instrument with similar
characteristics. The derivative definition excludes all cash instruments,
including those that derive their values or contractually required cash flows
from an underlying instrument or index, such as mortgage-backed securities,
interest-only and principal-only obligations, and indexed debt instruments. It
also excludes option features embedded in cash instruments, such as conversion
features and call provisions embedded in bonds.
Derivative contracts often involve future commitments to exchange interest
payment streams or currencies based on a notional or contractual amount (e.g.,
interest rate swaps or currency forwards) or to purchase or sell other financial
instruments at specified terms on a specified date (e.g., options to buy or sell
securities or currencies). Different types of derivatives can also be combined
to meet specialized needs (e.g., swaptions).
Derivatives are often referred to as off-balance-sheet instruments since
their notional amounts or underlying instruments are not reflected on the
balance sheet; however, the fair values of trading derivatives are recorded in
trading assets and liabilities. Derivatives are reported separately as assets
and liabilities unless a legal right of setoff exists under a
65
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
master netting agreement enforceable at law. Balances related to swap and
forward transactions and foreign currency options are included in Contractual
agreements on the Consolidated Balance Sheets. All other derivative balances are
recorded in the related cash instrument caption. The fair value of equity
options purchased, for example, is recorded in the Equities and convertible
debentures trading asset caption.
Changes in fair values of derivatives are recorded as principal
transactions revenues in the current period. Fair values for certain
exchange-traded derivatives, principally futures and certain options, are based
on quoted market prices. Fair values for over-the-counter ("OTC") derivative
financial instruments, principally forwards, options, and swaps, represent
amounts that would be received from or paid to a third party in settlement of
these instruments. These amounts are determined using pricing models based on
the present value of estimated future cash flows employing mid-market valuations
with appropriate adjustments. These adjustments are integral components of the
mark-to-market process and relate to credit quality and concentration, market
liquidity, and exposure close-out costs associated with unmatched positions.
Adjustments are also made for administrative costs incurred to service periodic
cash flows and to maintain hedges over the life of the contract. A portion of
income related to long-term contracts is recognized as the related
administrative costs are incurred.
New, complex products may have immature or limited two-way markets. The
precision of the pricing model for a complex product, which involves multiple
variables and assumptions, will evolve over time. As these products develop,
Merrill Lynch continually refines its pricing models based on experience to
correlate more closely to the market risk of these instruments.
"Securities Financing Transactions"
Merrill Lynch enters into repurchase and resale agreements and securities
borrowed and loaned transactions to accommodate customers (i.e., matched-book),
finance firm inventory positions, and obtain securities for settlement. Merrill
Lynch also engages in securities financing for customers through margin lending
(see Customer Transactions).
Resale and repurchase agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts plus
accrued interest. Merrill Lynch's policy is to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
resale agreements. To ensure that the market value of the underlying collateral
remains sufficient, collateral is valued daily, and Merrill Lynch may require
counterparties to deposit additional collateral or return collateral pledged,
when appropriate. Substantially all repurchase and resale activities are
transacted under master netting agreements that give Merrill Lynch the right, in
the event of default, to liquidate collateral held and to offset receivables and
payables with the same counterparty. Merrill Lynch offsets certain repurchase
and resale agreement balances with the same counterparty on the Consolidated
Balance Sheets.
Securities borrowed and loaned transactions are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions require
Merrill Lynch to provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives collateral in the
form of cash or other securities for securities loaned transactions. For these
transactions, the fees received or paid by Merrill Lynch are recorded as
interest revenue or expense. On a daily basis, Merrill Lynch monitors the market
value of securities borrowed or loaned against the collateral value. Although
substantially all securities borrowing and lending activities are transacted
under master netting agreements, such receivables and payables with the same
counterparty are not set off on the Consolidated Balance Sheets.
Merrill Lynch recognizes, on the balance sheet, collateral received or
provided in certain resale and repurchase agreements (see Note 2 for further
information).
Investment Banking and Advisory Services
Underwriting revenues and fees for merger and acquisition advisory
services are accrued when services for the transactions are substantially
completed. Deal-related expenses are deferred to match revenue recognition.
Customer Transactions
Customer securities and commodities transactions are recorded on a
settlement date basis. Receivables from and payables to customers include
amounts due on cash and margin transactions. Securities owned by customers,
including those that collateralize margin or other similar transactions, are not
reflected on the Consolidated Balance Sheets.
Commissions charged for executing customer transactions are accrued on a
trade date basis and are included in
66
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
current period earnings. Production-related compensation and benefits expense is
accrued to match revenue recognition.
Mutual fund distribution fee revenues are accrued as earned, and
redemption fee revenues are recognized upon receipt. Certain compensation costs
related to sales of rear-load open-end mutual funds are deferred to match
revenue recognition.
Investing Activities
Merrill Lynch's non-broker-dealer subsidiaries hold debt and equity
investments, which are principally classified as held-to-maturity, trading, or
available-for-sale.
Held-to-maturity investments are debt securities that Merrill Lynch has
the positive intent and ability to hold to maturity. These investments are
recorded at amortized cost unless a decline in value is deemed
other-than-temporary, in which case the carrying value is reduced. The
amortization of premiums or accretion of discounts and any unrealized losses
deemed other-than-temporary are included in current period earnings.
Debt and equity securities purchased principally for the purpose of resale
in the near-term are classified as trading investments and are reported at fair
value. Unrealized gains or losses on these investments are included in current
period earnings.
Other debt and equity securities that are not categorized as
held-to-maturity or trading are classified as available-for-sale and reported at
fair value. Unrealized gains or losses on these securities are reported in
stockholders' equity as a component of Accumulated other comprehensive income,
net of applicable income taxes and other related items.
Restricted equity investment securities or equity investment securities
without available market quotations are reported at the lower of cost or
estimated net realizable value. Adjustments in carrying values are included in
current period earnings.
Realized gains and losses on investments are included in current period
earnings. The cost basis of each investment sold is specifically identified for
purposes of computing realized gains and losses.
Lending Activities
Merrill Lynch's lending activities include loan originations,
syndications, securitizations, and servicing. Merrill Lynch also engages in
secondary market loan trading and margin lending (see Trading Activities and
Customer Transactions, respectively).
Loans held for investment purposes, including consumer and small business
loans and the residual portion of commercial loans syndicated by Merrill Lynch,
are carried at their principal amount outstanding. The allowance for loan losses
is established through provisions that are based on management's assessment of
the collectibility of the loan portfolio. Loans are charged off against the
allowance for loan losses when management determines that collection of
principal is unlikely.
Loans held for sale, which include certain residential mortgage and home
equity loans, are reported at the lower of cost (less allowance for loan losses)
or estimated fair value determined on a portfolio basis. Mortgage servicing
assets and residual interests in mortgage loans underlying Real Estate Mortgage
Investment Conduits and revolving trusts are (1) recognized upon sales of loans
when servicing is retained, and (2) amortized into income in proportion to and
over the estimated life of the net servicing revenue. Mortgage servicing assets
are recognized at the present value of future cash flows, periodically evaluated
for impairment, and included in Other assets on the Consolidated Balance Sheets.
Residual interests are categorized as available-for-sale (see Investing
Activities) and reported in Other investments on the Consolidated Balance
Sheets.
Borrowing Activities
Merrill Lynch's unsecured general-purpose funding is principally obtained
from commercial paper and long-term borrowings. Commercial paper, which is
issued at a discount, is recorded at the proceeds received and accreted to its
par value. Long-term borrowings are carried at the principal amount borrowed,
net of unamortized discounts or premiums.
As part of overall asset/liability management, Merrill Lynch monitors the
interest rate, currency, equity, and other risk exposures of its assets and
liabilities. Derivatives are common tools used to manage these risks.
Derivatives that hedge borrowings and other non-trading assets and liabilities
are accounted for on an accrual basis, with amounts to be paid or received
recognized as adjustments to the related interest expense or revenue. Unrealized
gains and losses on other financing derivatives are recognized currently.
Derivatives used for hedging borrowings and other non-trading assets and
liabilities must be effective at reducing the risk being managed
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
and be designated as a hedge at inception. Realized gains and losses on early
terminations of derivatives are deferred over the remaining lives of the hedged
assets or liabilities. At December 25, 1998 and December 26, 1997, there were no
deferred amounts related to terminated contracts.
Insurance Activities
Insurance liabilities are future benefits payable under annuity and
interest-sensitive life insurance contracts and include deposits received plus
interest credited during the contract accumulation period, the present value of
future payments for contracts which have annuitized, and a mortality provision
for certain products. Certain policyholder liabilities are also adjusted for
those investments classified as available-for-sale. Liabilities for unpaid
claims consist of the mortality benefit for reported claims and an estimate of
unreported claims based upon prior experience.
Substantially all security investments of insurance subsidiaries are
classified as available-for-sale and recorded at fair value. These investments
support Merrill Lynch's in-force, universal life-type contracts. Merrill Lynch
records adjustments to deferred acquisition costs and policyholder account
balances which, when combined, are equal to the adjustment that would have been
recorded if those available-for-sale investments had been sold at their
estimated fair values and the proceeds reinvested at current yields. The
corresponding credits or charges for these adjustments are recorded in
stockholders' equity as a component of Accumulated other comprehensive income,
net of applicable income taxes.
Certain variable costs related to the sale or acquisition of new and
renewal insurance contracts have been deferred, to the extent deemed
recoverable, and amortized over the estimated lives of the contracts in
proportion to the estimated gross profit for each group of contracts.
Merrill Lynch maintains separate accounts representing segregated funds
held for purposes of funding variable life and annuity contracts. Separate
account assets are accounted for as customer assets since the contract holders
bear the risk of ownership, consistent with Merrill Lynch's other investment
products. Accordingly, separate account assets and the related liabilities are
not consolidated with the assets and liabilities of Merrill Lynch.
Stock-Based Compensation
Merrill Lynch accounts for stock-based compensation in accordance with the
intrinsic value-based method in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", rather than the fair value-based
method in Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation". Compensation expense for stock
options is not recognized since Merrill Lynch grants stock options without any
intrinsic value. Compensation expense related to other stock-based compensation
plans is recognized over the vesting period. For certain stock-based
compensation grants, the unamortized portion of the grant value is reflected as
a reduction of stockholders' equity in Employee stock transactions on the
Consolidated Balance Sheets.
Goodwill
Goodwill, which represents the cost of acquired businesses in excess of
fair value of the related net assets at acquisition, is amortized on a
straight-line basis. Goodwill associated with the purchase of the Mercury Asset
Management Group is amortized over 30 years (see Note 2 for additional
information). Goodwill related to other acquisitions is amortized over periods
generally not exceeding fifteen years. Goodwill is evaluated periodically for
impairment.
Equipment and Facilities
Equipment and facilities primarily consist of technology hardware and
software and leasehold improvements. Equipment and facilities are reported at
historical cost, net of accumulated depreciation and amortization, except for
land which is reported at historical cost.
Depreciation and amortization are computed using the straight-line method.
Equipment is depreciated over its estimated useful life, while leasehold
improvements are amortized over the lesser of the improvement's estimated
economic useful life or the term of the lease. Maintenance and repair costs are
expensed as incurred.
Included in the Occupancy and related depreciation expense category was
depreciation and amortization of $190, $167, and $163, in 1998, 1997, and 1996,
respectively. Depreciation and amortization recognized in the Communications and
technology expense category was $395, $306, and $273, for 1998, 1997, and 1996,
respectively.
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
In 1998, Merrill Lynch also began capitalizing certain costs incurred in
the development of internal-use software (see Note 2). These amounts are
amortized over the useful life of the developed software, which is generally
three years.
Income Taxes
ML & Co. and certain of its wholly owned subsidiaries file a consolidated
U.S. federal income tax return.
Merrill Lynch uses the asset and liability method in providing income
taxes on all transactions that have been recognized in the Consolidated
Financial Statements. The asset and liability method requires that deferred
taxes be adjusted to reflect the tax rates at which future taxable amounts will
be settled or realized. The effects of tax rate changes on future deferred tax
liabilities and deferred tax assets, as well as other changes in income tax
laws, are recognized in net earnings in the period such changes are enacted.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
NOTE 2. OTHER SIGNIFICANT EVENTS
Accounting Changes
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires
capitalization of certain internal-use software development costs. The SOP was
adopted early for 1998 and resulted in the capitalization of software
development costs of $72 in 1998, or $.12 per diluted share.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that all start-up costs be expensed as
incurred. Closed-end mutual fund distribution costs, previously deferred and
amortized by Merrill Lynch over a four-year period, are required to be expensed
under the SOP. The SOP was adopted early as of the beginning of 1998, and the
impact of adoption was not material.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", issued by the Financial Accounting
Standards Board in 1996, provides guidance for determining whether a transfer of
a financial asset is treated as a sale or a financing. Merrill Lynch adopted the
provisions of SFAS No. 125 not deferred by SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of Statement No. 125", for all transactions
entered into after December 31, 1996.
In 1998, Merrill Lynch adopted SFAS No. 127, which requires balance sheet
recognition of collateral related to certain secured financing transactions
entered into after December 31, 1997. The adoption of such provisions creates
the following additional captions on Merrill Lynch's balance sheet:
o Securities received as collateral, net of securities pledged as
collateral;
o Securities pledged as collateral; and
o Obligation to return securities received as collateral.
The balances recognized in these captions primarily represent securities
received as collateral in matched-book term resale and repurchase agreements for
which the collateral provider does not have the explicit contractual right to
substitute.
Mergers, Acquisitions, and Divestitures
On August 26, 1998, Merrill Lynch acquired the outstanding shares of
Midland Walwyn Inc. ("Midland"), a Canadian broker-dealer, in a share exchange.
Each Midland shareholder received either 0.24 shares of ML & Co. common stock or
0.24 exchangeable shares of Merrill Lynch & Co., Canada Ltd. for every Midland
share held (see Note 7). The merger was accounted for as a pooling-of-interests;
prior period financial statements have been restated (see Note 1).
During 1998, Merrill Lynch acquired a U.S. employee benefits consulting
firm and a majority interest in a non-U.S. investment bank, in transactions
accounted for as purchases. Aggregate consideration of $92 was paid, and
goodwill of $56 was recorded in connection with these acquisitions.
In 1998, Merrill Lynch sold a U.S. residential real estate services
subsidiary and a New York Stock Exchange specialist subsidiary, recognizing
pre-tax gains totaling $138.
At year-end 1997, Merrill Lynch recorded the acquisition of the Mercury
Asset Management Group ("Mercury"), a U.K.-based global asset manager. In 1998,
approximately $5.3 billion in cash was paid as consideration. Goodwill of
approximately $4.8 billion was recorded related to the acquisition. In 1997,
Merrill Lynch also acquired a 401(k) service provider for $13, recognizing
goodwill of $10.
Merrill Lynch completed several acquisitions in 1996, including two
non-U.S. securities firms and a U.S. asset man-
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
ager. Aggregate consideration of $232 was paid and goodwill of $167 was recorded
in connection with these acquisitions.
For acquisitions accounted for as purchases, the operating results of
acquired companies are included in Merrill Lynch's results of operations
commencing with the acquisition date.
Provision for Costs Related to Staff Reductions
During the 1998 third quarter, Merrill Lynch recognized a $430 provision
for costs related to staff reductions ($288 after-tax). The provision covered
primarily severance costs, but also included costs to terminate long-term
contracts and leases related to personnel reductions and resized businesses. The
staff reduction program includes reductions, through termination and attrition,
of approximately 3,400 personnel, or about 5% of the global workforce.
Approximately 63% of terminated personnel were producers and direct support
staff in certain Corporate and Institutional Client Group businesses, and the
remaining were personnel in Wealth Management businesses and certain corporate
areas. In addition, full-time equivalent consultants, mainly involved in
technology projects, were reduced by approximately 900. Severance payments,
which may be in the form of one-time or periodic payments, are made once the
employee ceases employment.
At December 25, 1998, 87% of the personnel had been terminated or notified
of termination, and severance payments of $48 were made. The provision liability
at December 25, 1998 was $369, which primarily represented severance payments
for personnel receiving periodic payments. At January 29, 1999, the cumulative
severance benefits paid and the remaining provision liability were $215 and
$197, respectively. The staff reductions were substantially completed as of
January 29, 1999 and are expected to be fully completed by March 1999.
NOTE 3. TRADING AND RELATED ACTIVITIES
As part of its trading activities, Merrill Lynch provides to clients
brokerage, dealing, financing, and underwriting services for a broad range of
products. While trading activities are primarily generated by client order flow,
Merrill Lynch also takes selective proprietary positions based on expectations
of future market movements and conditions. Merrill Lynch's trading strategies
rely on the integrated management of its client-driven and proprietary
positions, along with the related hedging and financing.
Interest revenue and expense are integral components of trading
activities. In assessing the profitability of trading activities, Merrill Lynch
views net interest and principal transactions revenues in the aggregate. For
further information on Merrill Lynch's net trading results, see Management's
Discussion and Analysis (unaudited) - Principal Transactions.
Certain trading activities expose Merrill Lynch to market and credit
risks. These risks are managed in accordance with established risk management
policies and procedures that are described in Management's Discussion and
Analysis (unaudited) - Risk Management.
Market Risk
Market risk is the potential change in an instrument's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, credit spreads, or other risks. The level of market risk is influenced
by the volatility and the liquidity in the markets in which financial
instruments are traded.
Merrill Lynch seeks to mitigate market risk associated with trading
inventories by employing hedging strategies that correlate rate, price, and
spread movements of trading inventories and related financing and hedging
activities. Merrill Lynch uses a combination of cash instruments and derivatives
to hedge its market exposures. The following discussion describes the types of
market risk faced by Merrill Lynch.
"Interest Rate Risk"
Interest rate risk arises from the possibility that changes in interest
rates will affect the value of financial instruments. Interest rate swap
agreements, Eurodollar futures, and U.S. Treasury securities and futures are
common interest rate risk management tools. The decision to manage interest rate
risk using futures or swap contracts, as opposed to buying or selling short U.S.
Treasury or other securities, depends on current market conditions and funding
considerations.
Interest rate swap agreements used by Merrill Lynch include caps, collars,
floors, basis swaps, and leveraged swaps. Interest rate caps and floors provide
the purchaser protection against rising and falling interest rates,
respectively. Interest rate collars combine a cap and a floor, providing the
purchaser with a predetermined interest rate range. Basis swaps are a type of
interest rate swap agreement where variable rates are
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
received and paid, but are based on different index rates. Leveraged swaps are
another type of interest rate swap where changes in the variable rate are
multiplied by a contractual leverage factor, such as four times three-month
LIBOR (London Interbank Offered Rate). Merrill Lynch's exposure to interest rate
risk resulting from these leverage factors is typically hedged with other
financial instruments.
"Currency Risk"
Currency risk arises from the possibility that fluctuations in foreign
exchange rates will impact the value of financial instruments. Merrill Lynch's
trading assets and liabilities include both cash instruments denominated in and
derivatives linked to over 70 currencies, including the Japanese yen, German
mark, Swiss franc, British pound, and Italian lira. Currency forwards and
options are commonly used to manage currency risk associated with these
instruments. Currency swaps may also be used in situations where a long-dated
forward market is not available or where the end-user needs a customized
instrument to hedge a foreign currency cash flow stream. Typically, parties to a
currency swap initially exchange principal amounts in two currencies, agreeing
to exchange interest payments and to re-exchange the currencies at a future date
and exchange rate.
"Equity Price Risk"
Equity price risk arises from the possibility that equity security prices
will fluctuate, affecting the value of equity securities and other instruments
that derive their value from a particular stock, a defined basket of stocks, or
a stock index. Instruments typically used by Merrill Lynch to manage equity
price risk include equity options, warrants, and equity securities. Equity
options, for example, can require the writer to purchase or sell a specified
stock or to make a cash payment based on changes in the market price of that
stock, basket of stocks, or stock index.
"Credit Spread Risk"
Credit spread risk arises from the possibility that changes in credit
spreads will affect the value of financial instruments. Credit spreads represent
the credit risk premiums required by market participants for a given credit
quality, i.e., the additional yield that a debt instrument issued by a AA-rated
entity must produce over a risk-free alternative (e.g., U.S. Treasury
instrument). Certain instruments are used by Merrill Lynch to manage this type
of risk. Swaps and options, for example, can be designed to mitigate losses due
to changes in credit spreads, as well as credit downgrade or default of the
issuer. Credit risk resulting from default on counterparty obligations is
discussed in the Credit Risk section.
"Commodity Price and Other Risks"
Merrill Lynch views its commodity contracts as financial instruments since
they are generally settled in cash and not by delivery of the underlying
commodity. Commodity price risk results from the possibility that the price of
the underlying commodity may rise or fall. Cash flows from commodity contracts
are based on the difference between an agreed-upon fixed price and a price that
varies with changes in a specified commodity price or index. Commodity contracts
held by Merrill Lynch principally relate to energy, precious metals, and base
metals.
Merrill Lynch is also a party to financial instruments that contain risks
not correlated to typical financial risks. Securities or derivatives, for
example, may be linked to the occurrence of certain weather conditions or
natural catastrophes. Merrill Lynch generally mitigates the risk associated with
these transactions by entering into offsetting derivative transactions.
Credit Risk
Merrill Lynch is exposed to risk of loss if an issuer or a counterparty
fails to perform its obligations under contractual terms and the collateral
held, if any, is deemed worthless ("default risk"). Both cash instruments and
derivatives expose Merrill Lynch to default risk. Credit risk arising from
changes in credit spreads was previously discussed in the Market Risk section.
Merrill Lynch has established policies and procedures for mitigating
credit risk on principal transactions, including reviewing and establishing
limits for credit exposure, maintaining collateral, and continually assessing
the creditworthiness of counterparties. For further information, see
Management's Discussion and Analysis (unaudited) - Risk Management - Credit
Risk.
In the normal course of business, Merrill Lynch executes, settles, and
finances various customer securities transactions. Execution of these
transactions includes the purchase and sale of securities by Merrill Lynch.
These activities may expose Merrill Lynch to default risk arising from the
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
potential that customers or counterparties may fail to satisfy their
obligations. In these situations, Merrill Lynch may be required to purchase or
sell financial instruments at unfavorable market prices to satisfy obligations
to other customers or counterparties. In addition, Merrill Lynch seeks to
control the risks associated with its customer margin activities by requiring
customers to maintain collateral in compliance with regulatory and internal
guidelines.
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired, and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, Merrill
Lynch may purchase the underlying security in the market and seek reimbursement
for losses from the counterparty.
"Concentrations of Credit Risk"
Merrill Lynch's exposure to credit risk (both default and credit spread)
associated with its trading and other activities is measured on an individual
counterparty basis, as well as by groups of counterparties that share similar
attributes. Concentrations of credit risk can be affected by changes in
political, industry, or economic factors. To reduce the potential for risk
concentration, credit limits are established and monitored in light of changing
counterparty and market conditions.
At December 25, 1998, Merrill Lynch's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration
consists of both direct and indirect exposures. Direct exposure, which primarily
results from trading asset and investment security positions in instruments
issued by the U.S. Government and its agencies, amounted to $17,377 and $11,708
at December 25, 1998 and December 26, 1997, respectively. Merrill Lynch's
indirect exposure results from maintaining U.S. Government and agencies
securities as collateral, primarily for resale agreements and securities
borrowed transactions. Merrill Lynch's direct credit exposure on these
transactions is with the counterparty; thus Merrill Lynch has credit exposure to
the U.S. Government and its agencies only in the event of the counterparty's
default. Securities issued by the U.S. Government or its agencies held as
collateral at December 25, 1998 and December 26, 1997 totaled $54,784 and
$60,868, respectively.
At December 25, 1998, Merrill Lynch had concentrations of credit risk with
other counterparties, including a European sovereign rated AA by recognized
credit rating agencies. Total exposure to this counterparty was $1,197, or 0.4%
of total assets. At December 26, 1997, Merrill Lynch had concentrations of
credit risk with a European sovereign and an investment company totaling $3,405,
or 1.1% of total assets, excluding collateral held.
Merrill Lynch's most significant industry credit concentration is with
financial institutions. Financial institutions include other brokers and
dealers, commercial banks, finance companies, insurance companies, and
investment companies. This concentration arises in the normal course of Merrill
Lynch's brokerage, trading, financing, and underwriting activities. Merrill
Lynch also monitors credit exposures worldwide by region. Within these regions,
sovereign governments represent the most significant concentration, followed by
financial institutions.
In the normal course of business, Merrill Lynch purchases, sells,
underwrites, and makes markets in non-investment grade instruments. In
conjunction with merchant banking activities, Merrill Lynch also provides
extensions of credit and makes equity investments to facilitate leveraged
transactions. These activities expose Merrill Lynch to a higher degree of credit
risk than is associated with trading, investing in, and underwriting investment
grade instruments and extending credit to investment grade counterparties. See
Management's Discussion and Analysis (unaudited) - Non-Investment Grade Holdings
and Highly Leveraged Transactions for further information.
Trading Derivatives
Merrill Lynch's trading derivatives consist of derivatives provided to
customers and derivatives entered into for proprietary trading strategies or
risk management purposes.
The fair values of derivatives used in trading activities at year-end 1998
and 1997 follow:
- --------------------------------------------------------------------------------
DECEMBER 25, 1998 DECEMBER 26, 1997
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------- ----------- ------- -----------
Swap agreements $17,938 $19,747 $16,189 $15,703
Forward contracts 2,882 2,822 3,805 3,539
Options 8,841 12,195 5,987 10,970
- --------------------------------------------------------------------------------
The following table presents the average fair values of Merrill Lynch's
trading derivatives for 1998 and 1997, calculated on a monthly basis:
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
AVERAGE FAIR VALUE
---------------------------------------------------------
1998 1997
------------------------- -------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
Swap agreements $ 19,096 $ 17,272 $ 13,888 $ 12,002
Forward contracts 3,227 3,178 2,340 2,181
Options 8,551 11,420 4,946 7,131
- --------------------------------------------------------------------------------
The notional or contractual amounts of derivatives provide only a measure
of involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments.
The notional or contractual amounts of derivatives used for trading
purposes by type of risk follow:
- --------------------------------------------------------------------------------
RISK
---------------------------------------------------------
INTEREST EQUITY COMMODITY
(in billions) RATE(1)(2) CURRENCY(3) PRICE AND OTHER
- --------------------------------------------------------------------------------
DECEMBER 25, 1998
Swap agreements $ 2,006 $ 170 $ 19 $ 5
Forward contracts 62 229 - 6
Futures contracts 184 2 10 3
Options purchased 254 93 71 4
Options written 192 96 58 6
DECEMBER 26, 1997
Swap agreements $ 1,482 $ 159 $ 17 $ 2
Forward contracts 59 196 1 15
Futures contracts 202 1 15 2
Options purchased 99 71 60 3
Options written 133 73 44 3
- --------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent "To
Be Announced" mortgage pools that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
Most of Merrill Lynch's trading derivative transactions are relatively
short-term in duration with a weighted-average maturity of approximately 2.9
years at December 25, 1998 and 2.8 years at December 26, 1997. For trading
derivatives outstanding at December 25, 1998, the following table presents the
notional or contractual amounts of derivatives expiring in future years based on
contractual expiration:
After
(in billions) 1999 2000 2001 2002 2002 Total
- --------------------------------------------------------------------------------
Swap agreements $ 533 $ 376 $ 236 $ 204 $ 851 $ 2,200
Forward contracts 276 3 14 2 2 297
Futures contracts 70 51 25 8 45 199
Options purchased 266 40 21 21 74 422
Options written 166 65 29 24 68 352
------- ----- ----- ----- ------- -------
Total $ 1,311 $ 535 $ 325 $ 259 $ 1,040 $ 3,470
======= ===== ===== ===== ======= =======
- --------------------------------------------------------------------------------
The notional or contractual values of derivatives do not represent default
risk exposure. Default risk is limited to the current cost of replacing
derivative contracts in a gain position. Default risk exposure varies by type of
derivative. Swap agreements and forward contracts are generally OTC-transacted
and thus are exposed to default risk to the extent of their replacement cost.
Since futures contracts are exchange-traded and usually require daily cash
settlement, the related risk of accounting loss is generally limited to a
one-day net positive change in market value. Option contracts can be
exchange-traded or OTC-transacted. Purchased options have default risk to the
extent of their replacement cost. Written options represent a potential
obligation to counterparties and, accordingly, do not subject Merrill Lynch to
default risk.
Merrill Lynch attempts to enter into International Swaps and Derivatives
Association, Inc. master agreements or their equivalent ("master netting
agreements") with each of its counterparties. Master netting agreements provide
protection in bankruptcy in certain circumstances and, in some cases, enable
receivables and payables with the same counterparty to be offset on the
Consolidated Balance Sheets, providing for a more meaningful balance sheet
presentation of credit exposure.
To reduce default risk, Merrill Lynch requires collateral, principally
U.S. Government and agencies securities, on certain derivative transactions.
From an economic standpoint, Merrill Lynch evaluates default risk exposures net
of related collateral. The following is a summary of counterparty credit ratings
for the replacement cost (net of $5,700 of collateral) of trading derivatives in
a gain position by maturity at December 25, 1998.
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
CREDIT ------------------------------------- MATURITY
RATING(1) 0-3 3-5 5-7 OVER 7 NETTING(2) TOTAL
- --------------------------------------------------------------------------------
AAA $ 1,753 $ 583 $ 396 $ 388 $ (176) $ 2,944
AA+/AA 1,760 1,012 403 1,256 (999) 3,432
AA- 2,435 1,163 676 899 (832) 4,341
A+/A 3,458 1,371 407 838 (716) 5,358
A- 1,396 1,017 338 349 (293) 2,807
BBB 1,267 1,025 571 332 (598) 2,597
BB+ 632 323 73 322 (249) 1,101
Other 905 488 390 397 (799) 1,381
-------- ------- ------- ------- ------- --------
Total $ 13,606 $ 6,982 $ 3,254 $ 4,781 $(4,662) $ 23,961
======== ======= ======= ======= ======= ========
- --------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent.
(2) Represents netting of payable balances with receivable balances for the
same counterparty across maturity band categories. Receivable and payable
balances with the same counterparty in the same maturity category,
however, are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch attempts to mitigate
default risk on derivatives by entering into transactions with provisions that
enable Merrill Lynch to terminate or reset the terms of the derivative contract.
Securities Financing Transactions
Merrill Lynch enters into secured borrowing and lending transactions to
finance trading inventory positions, obtain securities for settlement, and meet
customers' needs (see Management's Discussion and Analysis (unaudited) - Balance
Sheet for further information). Outstanding receivables and payables under
resale and repurchase agreements and securities borrowed and loaned transactions
at year-end 1998 and 1997 are as follows:
- --------------------------------------------------------------------------------
1998 1997
-------- --------
RECEIVABLES UNDER:
Resale agreements $ 50,188 $ 71,904
Securities borrowed transactions 37,525 35,539
-------- ---------
Total $ 87,713 $ 107,443
======== =========
- --------------------------------------------------------------------------------
PAYABLES UNDER:
Repurchase agreements $ 59,501 $ 72,127
Securities loaned transactions 7,626 7,040
-------- ---------
Total $ 67,127 $ 79,167
======== =========
- --------------------------------------------------------------------------------
Due to the short-term nature of most of these transactions, the fair value
of these receivables and payables approximate their carrying value. Included
above are also certain long-term resale agreements for which interest rate risk
is hedged using derivatives. At December 25, 1998 and December 26, 1997, the
notional amounts of these derivatives were $7 billion and $5 billion,
respectively. The combined fair value of these long-term resale agreements and
related hedges approximate their combined carrying value on both dates.
Under these agreements and transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and agencies, asset-backed,
corporate debt, equity, and non-U.S. governments and agencies securities. When
providing collateral for these transactions, Merrill Lynch delivers its own
securities, securities borrowed from counterparties, and securities owned by
customers collateralizing margin loans and other obligations. The market value
of securities owned by Merrill Lynch that have been loaned or pledged to
counterparties as collateral for obligations of Merrill Lynch, primarily related
to repurchase agreements, were $35,762 and $28,658 at December 25, 1998 and
December 26, 1997, respectively.
NOTE 4. INVESTMENTS AND OTHER NON-TRADING ASSETS
Investments
Merrill Lynch has several broad categories of investments on its
Consolidated Balance Sheets, including Marketable investment securities,
Investments of insurance subsidiaries, and Other investments.
Marketable investment securities consist of liquid debt and equity
securities, including those held (1) to manage cash flows related to certain
liabilities of Merrill Lynch's banking subsidiaries or (2) by a subsidiary for
credit rating agency purposes. Investments of insurance subsidiaries, primarily
debt securities, are used to fund policyholder liabilities. Other investments
consist of equity and debt securities, including those acquired in connection
with merchant banking activities. Certain merchant banking investments are
subject to restrictions that may limit Merrill Lynch's ability to realize its
investment until such restrictions expire.
Marketable investment securities and certain investments of insurance
subsidiaries and other investments are classified as held-to-maturity, trading,
or available-for-sale securities as described in Note 1. Investment securities
reported on the Consolidated Balance Sheets at December 25, 1998 and December
26, 1997 are as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
1998 1997
------- -------
MARKETABLE INVESTMENT SECURITIES
Available-for-sale $ 4,070 $ 2,392
Held-to-maturity 354 322
Trading 181 595
------- -------
Total $ 4,605 $ 3,309
======= =======
- --------------------------------------------------------------------------------
INVESTMENTS OF INSURANCE SUBSIDIARIES
Available-for-sale $ 2,917 $ 3,338
Trading 17 16
Non-qualifying(1)(2) 1,551 1,479
------- -------
Total $ 4,485 $ 4,833
======= =======
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
Available-for-sale $ 435 $ 500
Held-to-maturity 290 233
Non-qualifying(1)(3) 1,865 1,096
------- -------
Total $ 2,590 $ 1,829
======= =======
- --------------------------------------------------------------------------------
(1) Non-qualifying for SFAS No. 115 purposes.
(2) Primarily consists of insurance policy loans.
(3) Includes merchant banking investments and investments hedging deferred
compensation liabilities.
Information regarding investment securities subject to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 25, 1998 DECEMBER 26, 1997
----------------------------------------------- -----------------------------------------------
COST/ GROSS GROSS ESTIMATED COST/ GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Corporate debt $ 2,771 $ 61 $ (31) $ 2,801 $ 3,136 $ 78 $ (8) $ 3,206
U.S. Government and agencies 658 7 (1) 664 650 4 - 654
Municipals 1,721 15 (13) 1,723 936 2 (1) 937
Mortgage-backed securities 1,572 18 (2) 1,588 1,036 47 (1) 1,082
Other debt securities 183 1 (4) 180 109 1 (2) 108
------- ----- ----- ------- ------- ----- ----- -------
Total debt securities 6,905 102 (51) 6,956 5,867 132 (12) 5,987
Equity securities 447 26 (7) 466 247 1 (5) 243
------- ----- ----- ------- ------- ----- ----- -------
Total $ 7,352 $ 128 $ (58) $ 7,422 $ 6,114 $ 133 $ (17) $ 6,230
======= ===== ===== ======= ======= ===== ===== =======
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DECEMBER 25, 1998 DECEMBER 26, 1997
----------------------------------------------- -----------------------------------------------
COST/ GROSS GROSS ESTIMATED COST/ GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
----------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY
Corporate debt $ 38 $ 1 $ - $ 39 $ 189 $ 1 $ - $ 190
U.S. Government and agencies 263 29 - 292 211 - - 211
Municipals 144 64 (2) 206 35 44 (1) 78
Mortgage-backed securities 87 - - 87 119 2 - 121
Other debt securities 112 - (2) 110 1 - - 1
----- ---- ---- ----- ----- ---- ---- -----
Total $ 644 $ 94 $ (4) $ 734 $ 555 $ 47 $ (1) $ 601
===== ==== ==== ===== ===== ==== ==== =====
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
75
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
The amortized cost and estimated fair value of debt securities at December
25, 1998, by contractual maturity, for available-for-sale and held-to-maturity
investments follow:
- --------------------------------------------------------------------------------
AVAILABLE-FOR-SALE HELD-TO-MATURITY
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- --------- --------- ---------
Due in one year
or less $ 1,286 $ 1,285 $ 203 $ 203
Due after one year
through five years 1,565 1,591 254 297
Due after five years
through ten years 993 1,006 29 49
Due after ten years 1,489 1,486 71 98
------- ------- ----- -----
5,333 5,368 557 647
Mortgage-backed
securities 1,572 1,588 87 87
------- ------- ----- -----
Total(1) $ 6,905 $ 6,956 $ 644 $ 734
======= ======= ===== =====
- --------------------------------------------------------------------------------
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
The proceeds and gross realized gains (losses) from the sale of
available-for-sale investments are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
Proceeds $ 3,426 $ 2,198 $ 1,341
Gross realized gains 74 27 41
Gross realized losses (27) (11) (12)
- --------------------------------------------------------------------------------
Net unrealized gains (losses) from investment securities classified as
trading included in the 1998, 1997, and 1996 Consolidated Statements of Earnings
were $6, $(21), and $(1), respectively.
Other Non-Trading Assets
The fair value of most other non-trading financial instrument assets
approximates their carrying value. Such assets include cash and cash
equivalents, cash and securities segregated for regulatory purposes or deposited
with clearing organizations, and other receivables. Other financial instrument
assets with carrying values that differ from their fair values follow:
- --------------------------------------------------------------------------------
DECEMBER 25, 1998 DECEMBER 26, 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------
Loans, notes, and
mortgages(1) $ 7,471 $ 7,480 $ 4,197 $ 4,230
Merchant banking equity
investment and loan
portfolio(2) 241 355 275 403
- --------------------------------------------------------------------------------
(1) Excludes loans related to merchant banking activities.
(2) Merchant banking investments are non-qualifying for SFAS No. 115 purposes.
Fair value for merchant banking equity investments, including partnership
interests (both included in Other investments on the Consolidated Balance
Sheets), is estimated using a number of methods, including earnings multiples,
cash flow analysis, and review of underlying financial conditions and other
market factors. These instruments may be subject to restrictions (e.g., consent
of other investors) that may limit Merrill Lynch's ability to realize currently
the estimated fair value. Accordingly, Merrill Lynch's current estimate of fair
value and the ultimate realization on these instruments may differ.
Fair value for loans made in connection with merchant banking activities,
consisting primarily of senior and subordinated debt, is estimated using
discounted cash flows. Merrill Lynch's estimated fair value for other loans,
notes, and mortgages is determined based on loan characteristics. For certain
homogeneous categories of loans, including residential mortgages and home equity
loans, fair value is estimated using market price quotations or previously
executed transactions for securities backed by similar loans, adjusted for
credit risk and other individual loan characteristics. For Merrill Lynch's
variable-rate loan receivables, fair value approximates carrying value.
In addition to the merchant banking investments noted in the table above,
Merrill Lynch has made investments in Long Term Capital Portfolio L.P. ("LTCP")
and Bloomberg L.P. ("Bloomberg"), which are not readily marketable.
In 1998, in conjunction with 13 other financial institutions, Merrill
Lynch made a $300 capital infusion to LTCP, a hedge fund significantly affected
by the 1998 third quarter market turmoil. At December 25, 1998, the fair value
of this investment approximates its carrying value of $300.
Merrill Lynch holds a passive minority interest in Bloomberg, a privately
held limited partnership that provides information services to financial
institutions. In 1996, Merrill Lynch sold one-third of its interest to the
majority interest
76
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
holder, resulting in a pre-tax gain of $155. Due to the nature and terms of the
sale, the sale price is not necessarily indicative of the fair value of Merrill
Lynch's remaining investment. In addition, given the contractual restrictions on
disposition, the fair value of the remaining investment is not readily
determinable as of December 25, 1998. Management believes, however, that the
fair value of this investment may significantly exceed its carrying value of
$28.
Merrill Lynch enters into derivative hedges of interest rate risk on
various non-trading assets, including certain investments. At December 25, 1998
and December 26, 1997, the notional amounts of derivatives hedging these
positions were $10 billion and $4 billion, respectively. The combined fair value
of hedged non-trading assets and related hedges approximates their combined
carrying value at both dates.
Merrill Lynch uses currency derivatives to hedge certain exposures arising
from investments in and loans to non-U.S. subsidiaries. At December 25, 1998 and
December 26, 1997, the notional amounts of these currency derivatives were $4
billion and $2 billion, respectively.
NOTE 5. BORROWINGS AND OTHER NON-TRADING LIABILITIES
Borrowings
Merrill Lynch issues U.S. and non-U.S. dollar-denominated debt instruments
with both variable and fixed interest rates, primarily at the ML & Co. level.
These borrowing activities may create exposure to market risk, most notably
interest rate and currency risk. Merrill Lynch typically uses derivatives to
better match the interest rate and currency characteristics of assets and
liabilities, thereby reducing risk exposures. Derivatives used most frequently
include swap agreements that:
o convert fixed-rate interest payments into variable payments,
o change the underlying interest rate basis or reset frequency, or
o convert non-U.S. dollar payments into U.S. dollars.
Merrill Lynch also issues debt containing embedded options that link the
repayment of these obligations to the performance of an equity or other index
(e.g., S&P 500), an industry basket of stocks, or an individual stock. The
contingent components of these indexed debt obligations are hedged with
derivatives.
Borrowings at December 25, 1998 and December 26, 1997 are presented below:
- --------------------------------------------------------------------------------
1998 1997
-------- --------
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS
Commercial paper $ 16,758 $ 30,379
Other 1,921 3,961
-------- --------
Total $ 18,679 $ 34,340
======== ========
- ------------------------------------------------------------------------- ------
DEMAND AND TIME DEPOSITS
Demand $ 4,454 $ 3,537
Time 9,290 7,175
-------- --------
Total $ 13,744 $ 10,712
======== ========
- --------------------------------------------------------------------------------
LONG-TERM BORROWINGS
Fixed-rate obligations:(1)
U.S. dollar-denominated $ 12,595 $ 7,136
Non-U.S. dollar-denominated 1,189 1,878
Variable-rate obligations:(2)(3)
U.S. dollar-denominated 4,077 2,803
Non-U.S. dollar-denominated 1,303 1,276
Medium-term notes:(3)(4)
U.S. dollar-denominated 24,916 20,090
Non-U.S. dollar-denominated 13,483 9,960
-------- --------
Total $ 57,563 $ 43,143
======== ========
- --------------------------------------------------------------------------------
(1) At December 25, 1998, U.S. dollar-denominated fixed-rate obligations are
due 1999 to 2028 at interest rates ranging from 5.5% to 10.4%; non-U.S.
dollar-denominated fixed-rate obligations are due 1999 to 2002 at interest
rates ranging from 2.6% to 12.1%.
(2) Variable interest rates are generally based on rates such as LIBOR, the
U.S. Treasury Bill Rate, or the Federal Funds Rate.
(3) Included are various equity-linked or indexed instruments.
(4) The medium-term note program provides for issuances that may bear fixed or
variable interest rates and may have maturities that range from nine
months to 30 years from the date of issue.
Long-term borrowings at December 25, 1998, based on their contractual
terms, mature as follows:
- --------------------------------------------------------------------------------
1999 $ 13,714
2000 7,049
2001 7,985
2002 6,398
2003 6,154
2004 and thereafter 16,263
--------
Total $ 57,563
========
- --------------------------------------------------------------------------------
Certain long-term borrowing agreements contain provisions whereby the
borrowings are redeemable at the option of the holder at specified dates prior
to maturity. Management believes, however, that a significant portion of
77
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
such borrowings may remain outstanding beyond their earliest redemption date.
The notional or contractual amounts of derivatives used to hedge exposures
related to borrowings at December 25, 1998 and December 26, 1997 follow:
- --------------------------------------------------------------------------------
(in billions) 1998 1997
---- ----
Interest rate derivatives(1) $ 56 $ 44
Currency derivatives(1) 12 8
Equity derivatives 5 3
- --------------------------------------------------------------------------------
(1) Includes swap contracts totaling $2 billion in notional amounts that
contain embedded options hedging callable debt at both dates.
Most of these derivatives are entered into with Merrill Lynch's derivative
dealer subsidiaries, which intermediate interest rate, currency, and equity
risks with third parties in the normal course of their trading activities.
The effective weighted-average interest rates for borrowings, which
include the impact of hedges, at December 25, 1998 and December 26, 1997 were:
- --------------------------------------------------------------------------------
1998 1997
---- ----
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS 5.28% 5.43%
DEMAND AND TIME DEPOSITS 4.54 4.67
LONG-TERM BORROWINGS
Fixed-rate obligations 6.69 7.00
Variable-rate obligations 5.46 5.84
Medium-term notes 5.52 5.86
- --------------------------------------------------------------------------------
The fair value of borrowings and related hedges is estimated using current
market prices and pricing models. The carrying and fair values of these
instruments are summarized as follows:
- --------------------------------------------------------------------------------
DECEMBER 25, 1998 DECEMBER 26, 1997
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS $ 18,679 $ 18,670 $ 34,340 $ 34,333
Related derivative:
Assets (15) (14) (21) (19)
Liabilities - 5 - 2
-------- -------- -------- --------
Total $ 18,664 $ 18,661 $ 34,319 $ 34,316
======== ======== ======== ========
- --------------------------------------------------------------------------------
DEMAND AND TIME DEPOSITS $ 13,744 $ 13,745 $ 10,712 $ 10,726
Related derivative:
Assets (27) (10) (7) (10)
Liabilities 4 21 3 2
-------- -------- -------- --------
Total $ 13,721 $ 13,756 $ 10,708 $ 10,718
======== ======== ======== ========
- --------------------------------------------------------------------------------
LONG-TERM BORROWINGS $ 57,563 $ 58,237 $ 43,143 $ 43,706
Related derivative:
Assets (1,387) (2,701) (811) (1,953)
Liabilities 790 1,243 921 1,032
-------- -------- -------- --------
Total $ 56,966 $ 56,779 $ 43,253 $ 42,785
======== ======== ======== ========
- --------------------------------------------------------------------------------
Subsequent to year-end 1998 and through February 19, 1999, long-term
borrowings, net of repayments and repurchases, increased approximately $3,301.
"Borrowing Facilities"
Merrill Lynch has obtained committed, unsecured revolving credit
facilities aggregating $6.9 billion under agreements with 67 banks. The
agreements contain covenants requiring, among other things, that Merrill Lynch
maintain specified levels of net worth, as defined in the agreements, on the
date of an advance. At December 25, 1998, none of these credit facilities had
been drawn upon.
The credit quality, amounts, and terms of the credit facilities are
continually monitored and modified as warranted by business conditions. Under
the existing agreements, the credit facilities mature as follows: $1.2 billion
in February 1999, $1.6 billion in April 1999, $2.1 billion in May 1999, and $2.0
billion in September 1999. At maturity, Merrill Lynch may convert amounts
borrowed, if any, into term loans that would mature in two years.
Other Non-Trading Liabilities
The fair value of other financial instrument liabilities approximate their
carrying value. Such liabilities include
78
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
payables to customers and brokers and dealers, and insurance and other
liabilities.
NOTE 6. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
Preferred securities issued by subsidiaries, which represent preferred
minority interests in consolidated subsidiaries, consist of perpetual
trust-issued preferred securities and other subsidiary-issued preferred
securities.
Trust Originated Preferred Securities(Service Mark) ("TOPrS"(Service
Mark)) are issued to investors by trusts created by Merrill Lynch. Using the
issuance proceeds, the trusts purchase Partnership Preferred Securities,
representing limited partnership interests. Using the purchase proceeds, the
limited partnerships extend loans to ML & Co. and one or more subsidiaries of ML
& Co. The trusts and partnerships are consolidated subsidiaries of Merrill
Lynch. ML & Co. has guaranteed, on a subordinated basis, the payment in full of
all distributions and other payments on the TOPrS to the extent that the trusts
have funds legally available. This guarantee and a similar partnership
distribution guarantee are subordinated to all other liabilities of ML & Co. and
rank equally with preferred stock of ML & Co.
The table below presents data related to the issuance of TOPrS by Merrill
Lynch Capital Trust I, II, III, IV, and V. All TOPrS issued have a liquidation
value of $25 per security, have a perpetual life, and can be redeemed at the
option of the trusts, in whole or in part, at the liquidation value on or after
their respective optional redemption dates. Distributions are payable from the
date of original issuance and are payable quarterly if, as, and when the trusts
have funds available for payment.
- --------------------------------------------------------------------------------
ANNUAL OPTIONAL
DISTRIBUTION ISSUE REDEMPTION LIQUIDATION
TOPrS RATE DATE DATE VALUE
- --------------------------------------------------------------------------------
I 7.75% Dec. 1996 Dec. 2006 $ 275
II 8.00 Feb. 1997 Mar. 2007 300
III 7.00 Jan. 1998 Mar. 2008 750
IV 7.12 Jun. 1998 Jun. 2008 400
V 7.28 Nov. 1998 Sep. 2008 850
-------
$ 2,575
=======
- --------------------------------------------------------------------------------
In addition, $52 of preferred securities of other subsidiaries were
outstanding at year-end 1998 and 1997.
NOTE 7. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Preferred Equity
ML & Co. is authorized to issue 25,000,000 shares of undesignated
preferred stock, $1.00 par value per share. All shares of currently outstanding
preferred stock constitute one and the same class that have equal rank and
priority over common stockholders as to dividends and in the event of
liquidation.
"9% Cumulative Preferred Stock, Series A"
ML & Co. has issued 17,000,000 Depositary Shares, each representing a
one-four-hundredth interest in a share of 9% Cumulative Preferred Stock, Series
A, liquidation preference value of $10,000 per share ("9% Preferred Stock"). The
9% Preferred Stock is a single series consisting of 42,500 shares with an
aggregate liquidation preference of $425, all of which was outstanding at
year-end 1998, 1997, and 1996.
Dividends on the 9% Preferred Stock are cumulative from the date of
original issue and are payable quarterly when declared by the authority of the
Board of Directors. The 9% Preferred Stock is perpetual and redeemable on or
after December 30, 2004 at the option of ML & Co., in whole or in part, at a
redemption price equal to $10,000 per share, plus accrued and unpaid dividends
(whether or not declared) to the date fixed for redemption.
"Remarketed Preferred (Service Mark) Stock, Series C"
During 1997, all outstanding shares of Remarketed Preferred Stock, Series
C were redeemed. Dividend rates in effect prior to redemption ranged from 3.80%
to 4.15% per annum.
Common Stock
In 1998, stockholders approved the proposal to amend ML & Co.'s
certificate of incorporation to increase the authorized number of shares of
common stock from 500 million to 1 billion.
In 1997, the Board of Directors declared a two-for-one common stock split
effected in the form of a 100% stock dividend. The par value of the common stock
remained at $1.33 1/3 per share. Accordingly, an adjustment from paid-in capital
to common stock of $315 was made to preserve the par value of the post-split
shares. All share and per share data have been restated for the effect of the
split. Dividends paid on common
79
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
stock were $.92, $.75, and $.58 per share in 1998, 1997, and 1996, respectively.
The following table summarizes the activity in outstanding common stock
for 1998, 1997, and 1996:
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
BEGINNING OF YEAR
Issued 472,660,324 472,660,324 472,660,324
Shares in treasury (133,400,971) (137,234,132) (117,681,492)
ESOP reversion shares - (3,077,556) (8,025,038)
----------- ----------- -----------
Outstanding 339,259,353 332,348,636 346,953,794
----------- ----------- -----------
ACTIVITY
Shares purchased - (13,301,100) (36,606,400)
Shares issued:
To employees(1) 16,291,477 20,211,817 22,001,242
Share exchanges 325,459 - -
Acquisition 407,776 - -
----------- ----------- -----------
Net activity 17,024,712 6,910,717 (14,605,158)
----------- ----------- -----------
END OF YEAR
Issued 472,660,324 472,660,324 472,660,324
Shares in treasury (116,376,259) (133,400,971) (137,234,132)
ESOP reversion shares - - (3,077,556)
----------- ----------- -----------
Outstanding 356,284,065 339,259,353 332,348,636
=========== =========== ===========
- --------------------------------------------------------------------------------
(1) Net of reacquisitions.
Shares Exchangeable into Common Stock
In 1998, Merrill Lynch & Co., Canada Ltd. issued 4,831,224 Exchangeable
Shares in connection with Merrill Lynch's merger with Midland (see Note 2).
Holders of Exchangeable Shares have dividend, voting, and other rights
equivalent to those of ML & Co. common stockholders. Exchangeable Shares may be
exchanged at any time, at the option of the holder, on a one-for-one basis for
ML & Co. common stock. Merrill Lynch may redeem all outstanding Exchangeable
Shares for ML & Co. common stock after January 31, 2011, or earlier under
certain circumstances.
During 1998, 325,459 Exchangeable Shares were converted to ML & Co. common
stock. At year-end 1998, 4,505,765 Exchangeable Shares were outstanding.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents cumulative gains and
losses on items that are not reflected in earnings. The balances at December 25,
1998 and December 26, 1997 are as follows:
- --------------------------------------------------------------------------------
1998 1997
----- -----
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Unrealized losses, net of gains $(241) $(110)
Deferred income taxes 103 25
----- -----
Total (138) (85)
----- -----
UNREALIZED GAINS ON INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
Unrealized gains, net of losses 56 116
Adjustments for:
Policyholder liabilities (38) (54)
Deferred policy acquisition costs - (4)
Deferred income taxes (2) (20)
----- -----
Total 16 38
----- -----
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $(122) $ (47)
===== =====
- --------------------------------------------------------------------------------
Stockholder Rights Plan
In 1997, the Board of Directors approved and adopted the amended and
restated Stockholder Rights Plan. The amended and restated Stockholder Rights
Plan provides for the distribution of preferred purchase rights ("Rights") to
common stockholders. The Rights separate from the common stock ten days
following the earlier of: (a) an announcement of an acquisition by a person or
group ("acquiring party") of 15% or more of the outstanding common shares of ML
& Co., or (b) the commencement of a tender or exchange offer for 15% or more of
the common shares outstanding. One Right is attached to each outstanding share
of common stock and will attach to all subsequently issued shares. Each Right
entitles the holder to purchase 1/100 of a share (a "Unit") of Series A Junior
Preferred Stock, par value $1.00 per share, at an exercise price of $300 per
Unit at any time after the distribution of the Rights. The Units are
nonredeemable and have voting privileges and certain preferential dividend
rights. The exercise price and the number of Units issuable are subject to
adjustment to prevent dilution.
If, after the Rights have been distributed, either the acquiring party
holds 15% or more of ML & Co.'s outstanding shares or ML & Co. is a party to a
business combination or other specifically defined transaction, each Right
(other than those held by the acquiring party) will entitle the holder to
receive, upon exercise, a Unit of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of the
Right. The Rights expire in 2007, and are redeemable at the option of a majority
of the directors of ML & Co. at $.01 per Right at any time until the
80
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
tenth day following an announcement of the acquisition of 15% or more of ML &
Co.'s common stock.
Earnings Per Share
Basic earnings per share ("EPS") is calculated by dividing earnings
available to common stockholders by the weighted-average number of common shares
outstanding. Diluted EPS is similar to basic EPS, but adjusts for the effect of
the potential issuance of common shares. The following table presents the
computations of basic and diluted EPS:
- --------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
Net earnings $ 1,259 $ 1,935 $ 1,648
Preferred stock dividends 39 39 46
-------- -------- --------
Net earnings applicable to
common stockholders 1,220 1,896 1,602
Interest on convertible debt - - 1
-------- -------- --------
$ 1,220 $ 1,896 $ 1,603
======== ======== ========
- --------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares
outstanding (basic shares)(1) 355,589 340,096 346,043
------- ------- -------
Effect of dilutive instruments(2)
Employee stock options 29,184 29,748 21,934
FCCAAP shares 16,548 20,574 19,570
Restricted units 4,895 5,258 4,727
ESPP shares 46 45 56
Convertible debt - 134 660
------- ------- -------
Dilutive potential common shares 50,673 55,759 46,947
------- ------- -------
Diluted shares(3) 406,262 395,855 392,990
======= ======= =======
- --------------------------------------------------------------------------------
Basic EPS $ 3.43 $ 5.57 $ 4.63
Diluted EPS 3.00 4.79 4.08
- --------------------------------------------------------------------------------
(1) Includes shares exchangeable into common stock.
(2) See Note 10 for a description of these instruments and issuances
subsequent to December 25, 1998.
(3) At year-end 1998, 1997, and 1996, there were 486, 7, and 58 instruments,
respectively, that were considered antidilutive and thus were not included
in the above calculations.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Litigation
There are civil actions, arbitration proceedings, and claims pending
against Merrill Lynch as of December 25, 1998, some of which involve claims for
substantial amounts. Included among these matters is an action (the "Orange
County Action") that is pending in the United States District Court for the
Central District of California, commenced on January 12, 1995 by Orange County,
California ("Orange County") and the Orange County Investment Pools, both of
which filed bankruptcy petitions in the United States Bankruptcy Court for the
Central District of California (the "Bankruptcy Court") on December 6, 1994. ML
& Co. and certain of its subsidiaries are named as defendants in connection with
Merrill Lynch's business activities with the Orange County Treasurer-Tax
Collector. On May 17, 1996, the Bankruptcy Court confirmed a plan pursuant to
which Orange County emerged from bankruptcy.
In June 1998, the Orange County Action and a related action brought by the
Irvine Ranch Water District were settled. Under the settlement terms, ML & Co.
undertook to pay $400 to Orange County and $17 to the Irvine Ranch Water
District and to return approximately $20 of excess collateral. 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. to
Orange County will be due approximately five business days after expiration of
the time for any party to appeal from this District Court finding of good faith,
which expiration will occur 60 days after entry of final judgment incorporating
the bar order.
In addition, other actions are pending against or on behalf of ML & Co.,
and/or against certain of its officers, directors, and employees and certain of
its subsidiaries. These include class actions and stockholder derivative actions
brought by persons alleging harm to themselves or to Merrill Lynch arising out
of Merrill Lynch's business activities.
Although the ultimate outcome of these actions cannot be ascertained at
this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of management that the resolution of these matters
will not have a material adverse effect on the financial condition or results of
operations of Merrill Lynch as set forth in the Consolidated Financial
Statements contained herein.
Lending and Guarantees
Merrill Lynch enters into commitments to extend credit, predominantly at
variable interest rates, in connection with certain merchant banking and loan
syndication transactions. Customers may also be extended loans or lines of
credit collateralized by first and second mortgages on real estate, certain
liquid assets of small businesses, or securities. Merrill Lynch also issues
various guarantees to counterparties in connection
81
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
with certain leasing, agency securities lending, securitization, and other
transactions. These commitments and guarantees usually have a fixed expiration
date and are contingent on certain contractual conditions that may require
payment of a fee by the counterparty. Once commitments are drawn upon or
guarantees are issued, Merrill Lynch may require the counterparty to post
collateral depending upon creditworthiness and market conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements, as commitments and guarantees may expire without being drawn upon.
At December 25, 1998 and December 26, 1997, Merrill Lynch had the
following commitments and guarantees:
- --------------------------------------------------------------------------------
1998 1997
-------- -------
Commitments to extend credit $ 10,388 $ 5,839
Third party guarantees 17,842 5,251
- --------------------------------------------------------------------------------
The fair value of the outstanding guarantees was $18 and $25 at December
25, 1998 and December 26, 1997, respectively.
Leases
Merrill Lynch has entered into various noncancelable long-term lease
agreements for premises that expire through 2025. During 1996, Merrill Lynch
incurred a pre-tax charge of $40 related to the resolution of Olympia & York's
bankruptcy that affected Merrill Lynch's long-term sublease agreements in the
World Financial Center Headquarters ("WFC"). Merrill Lynch has also entered into
various noncancelable short-term lease agreements, which are primarily
commitments of less than one year under equipment leases.
At December 25, 1998, future noncancelable minimum rental commitments
under leases with remaining terms exceeding one year are as follows:
- --------------------------------------------------------------------------------
WFC OTHER TOTAL
------- ------- -------
1999 $ 140 $ 313 $ 453
2000 143 270 413
2001 145 250 395
2002 151 207 358
2003 158 168 326
2004 and thereafter 1,747 658 2,405
------- ------- -------
Total $ 2,484 $ 1,866 $ 4,350
======= ======= =======
- --------------------------------------------------------------------------------
The minimum rental commitments shown above have not been reduced by $753
of minimum sublease rentals to be received in the future under noncancelable
subleases. Certain leases contain renewal or purchase options or escalation
clauses providing for increased rental payments based upon maintenance, utility,
and tax increases.
Net rent expense for each of the last three years is presented below:
- --------------------------------------------------------------------------------
1998 1997 1996
----- ----- -----
Rent expense $ 537 $ 468 $ 438
Sublease revenue (112) (104) (48)
----- ----- -----
Net rent expense $ 425 $ 364 $ 390
===== ===== =====
- --------------------------------------------------------------------------------
Other Commitments
In the normal course of business, Merrill Lynch enters into commitments
for underwriting transactions. Settlement of these transactions as of December
25, 1998 would not have a material effect on the consolidated financial
condition of Merrill Lynch.
In connection with trading activities, Merrill Lynch had commitments at
December 25, 1998 and December 26, 1997 to enter into resale and repurchase
agreements as follows:
- --------------------------------------------------------------------------------
1998 1997
------- -------
Resale agreements $ 5,392 $ 3,440
Repurchase agreements 4,456 4,469
- --------------------------------------------------------------------------------
Merrill Lynch also obtains letters of credit from issuing banks to satisfy
various counterparty collateral requirements in lieu of depositing cash or
securities collateral. Letters of credit aggregated $2,222 and $1,063 at
December 25, 1998 and December 26, 1997, respectively.
In connection with merchant banking activities, Merrill Lynch has
committed to purchase $369 and $88 of partner-
82
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
ship interests at December 25, 1998 and December 26, 1997, respectively.
Merrill Lynch has entered into agreements with providers of market data,
communications, and systems consulting services. At December 25, 1998 and
December 26, 1997, minimum fee commitments over the life of these agreements
aggregated $300 and $348, respectively.
NOTE 9. EMPLOYEE BENEFIT PLANS
Merrill Lynch provides retirement and other postemployment benefits to its
employees worldwide through defined contribution and defined benefit pension
plans and other postretirement benefit plans. Merrill Lynch reserves the right
to amend or terminate these plans at any time.
Defined Contribution Pension Plans
The U.S. defined contribution plans consist of the Retirement Accumulation
Plan ("RAP"), the Employee Stock Ownership Plan ("ESOP"), and the 401(k) Savings
& Investment Plan ("401K"). The RAP, ESOP, and 401K cover substantially all U.S.
employees who have met service requirements.
Merrill Lynch established the RAP and the ESOP, collectively known as the
"Retirement Program," for the benefit of employees with one year of service. A
separate retirement account is maintained for each participant.
In 1989, the ESOP trust purchased from Merrill Lynch 47,851,236 shares of
ML & Co. common stock with residual funds from a terminated defined benefit
pension plan ("Reversion Shares") and loan proceeds from a subsidiary of Merrill
Lynch ("Leveraged Shares").
Merrill Lynch credits a participant's account and records pension expense
under the Retirement Program based on years of service and eligible
compensation. This expense is funded by quarterly allocations of Leveraged and
Reversion Shares and, if necessary, cash, to participants' accounts based on a
specified formula. Leveraged and Reversion Shares are released in accordance
with the terms of the ESOP. If the fair market value of the shares released is
less than the formula allocation to participants' accounts, cash contributions
are made to the RAP. Reversion Shares were allocated to participants' accounts
over a period of eight years, ending in 1997. Leveraged Shares are allocated to
participants' accounts as principal is repaid on the loan to the ESOP, which
matures in 1999. Principal and interest on the loan are payable quarterly upon
receipt of dividends on certain shares of common stock or other cash
contributions.
ESOP shares are considered to be either allocated (contributed to
participants' accounts), committed (scheduled to be contributed at a specified
future date but not yet released), or unallocated (not committed or allocated).
Share information at December 25, 1998 is as follows:
- --------------------------------------------------------------------------------
REVERSION LEVERAGED
SHARES SHARES
---------- ----------
Allocated 38,962,348 7,748,048
Committed - 163,101
Unallocated - 977,739
- --------------------------------------------------------------------------------
The remaining cost of the unallocated Leveraged Shares of $6 at December
25, 1998 is recorded as a reduction of stockholders' equity and represents the
remaining ESOP loan balance.
Additional information on ESOP activity follows:
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Dividends used for debt service(1) $ 7 $ 7 $ 8
Compensation costs funded
with ESOP shares 49 193 190
- --------------------------------------------------------------------------------
(1) Dividends on all Leveraged Shares are used for debt service on the ESOP
loan.
Employees can participate in the 401K by contributing, on a tax-deferred
basis, up to 15% of their eligible compensation, but not more than the maximum
annual amount allowed by law. Merrill Lynch's contributions are equal to
one-half of the first 4% of each participant's eligible compensation contributed
to the 401K, up to a maximum of fifteen hundred dollars annually. No corporate
contributions are made for participants who are also Employee Stock Purchase
Plan participants (see Note 10).
Merrill Lynch also sponsors various non-U.S. defined contribution plans.
The costs of benefits under the RAP, 401K, and non-U.S. plans are expensed
during the related service period.
83
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Defined Benefit Pension Plans
Merrill Lynch has purchased a group annuity contract that guarantees the
payment of benefits vested under a U.S. defined benefit plan that was terminated
in accordance with the applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). At year-end 1998 and 1997, a substantial portion
of the assets supporting the annuity contract was invested in U.S. Government
and agencies securities. Merrill Lynch, under a supplemental agreement, may be
responsible for, or benefit from, actuarial experience and investment
performance of the annuity assets. Merrill Lynch also maintains supplemental
defined benefit plans for certain U.S. employees.
Employees of certain non-U.S. subsidiaries participate in various local
defined benefit plans. These plans provide benefits that are generally based on
years of credited service and a percentage of the employee's eligible
compensation during the final years of employment. Merrill Lynch's funding
policy has been to contribute annually the amount necessary to satisfy local
funding standards.
The following table provides a summary of the changes in the plans'
benefit obligations and assets for 1998 and 1997, a statement of the funded
status of the plans as of year-end 1998 and 1997, and the amounts recognized in
the Consolidated Balance Sheets:
- --------------------------------------------------------------------------------
1998 1997
------- -------
PROJECTED BENEFIT OBLIGATIONS
Balance, beginning of year $ 1,928 $ 1,639
Service cost 54 32
Interest cost 122 109
Net actuarial loss 55 69
Benefits paid (77) (61)
Acquisitions - 171
Other 8 (31)
------- -------
Balance, end of year 2,090 1,928
------- -------
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year 2,151 1,768
Actual return on plan assets 282 314
Contributions 46 34
Benefits paid (77) (61)
Acquisitions - 121
Other 8 (25)
------- -------
Balance, end of year 2,410 2,151
------- -------
FUNDED STATUS 320 223
Unrecognized net actuarial gains (215) (120)
Unrecognized prior service cost 3 4
Unrecognized net transition obligation 2 3
------- -------
NET AMOUNT RECOGNIZED $ 110 $ 110
======= =======
Assets 234 209
Liabilities (124) (99)
------- -------
NET AMOUNT RECOGNIZED $ 110 $ 110
======= =======
- --------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $111, $96, and $50, respectively, as of December 25,
1998, and $97, $80, and $45, respectively, as of December 26, 1997. These plans
primarily represent U.S. supplemental plans not subject to ERISA or non-U.S.
plans where funding strategies vary due to legal requirements and local
practices.
84
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Pension cost included the following components:
- --------------------------------------------------------------------------------
1998 1997 1996
----- ----- -----
DEFINED CONTRIBUTION PLAN COST $ 177 $ 218 $ 224
----- ----- -----
DEFINED BENEFIT PLANS(1)
Service cost for benefits earned
during the year 54 32 25
Interest cost on projected
benefit obligation 122 109 104
Expected return on plan assets (141) (121) (122)
Deferral and amortization
of unrecognized items 7 - 7
----- ----- -----
Total defined benefit plan cost 42 20 14
----- ----- -----
TOTAL PENSION COST $ 219 $ 238 $ 238
===== ===== =====
- --------------------------------------------------------------------------------
(1) The following actuarial assumptions were used in calculating the defined
benefit cost and benefit obligations. Weighted-average rates as of the
beginning of the year are:
1999 1998 1997
----- ----- -----
Discount rate 5.5% 6.3% 6.7%
Rate of compensation increase 5.7 5.6 5.4
Expected rate of return on plan assets 6.2 6.6 6.9
- --------------------------------------------------------------------------------
Postretirement Benefits Other Than Pensions
Merrill Lynch provides health and life insurance benefits to retired
employees under a plan that covers substantially all U.S. employees who have met
age and service requirements. The health care component is contributory, with
certain retiree contributions adjusted periodically; the life insurance
component of the plan is noncontributory. The accounting for costs of health
care benefits anticipates future changes in cost-sharing provisions. Merrill
Lynch pays claims as incurred. Full-time employees of Merrill Lynch become
eligible for these benefits upon attainment of age 55 and completion of ten
years of service. Merrill Lynch also sponsors similar plans that provide health
care benefits to retired employees of certain non-U.S. subsidiaries. As of
December 25, 1998, none of these plans had been funded.
The following table provides a summary of the changes in the plans'
benefit obligations and assets for 1998 and 1997, and a statement of the funded
status of the plans as of year-end 1998 and 1997:
- --------------------------------------------------------------------------------
1998 1997
----- -----
ACCUMULATED BENEFIT OBLIGATIONS
Balance, beginning of year $ 211 $ 173
Service cost 8 6
Interest cost 13 11
Net actuarial (gain) loss (12) 15
Benefits paid (7) (6)
Acquisitions - 15
Other 1 (3)
----- -----
Balance, end of year 214 211
----- -----
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year - -
Contributions 7 6
Benefits paid (7) (6)
----- -----
Balance, end of year - -
----- -----
FUNDED STATUS OF THE PLANS (214) (211)
Unrecognized net actuarial (gain) loss (3) 8
Unrecognized prior service cost (1) (1)
----- -----
ACCRUED BENEFIT LIABILITIES $(218) $(204)
===== =====
- --------------------------------------------------------------------------------
Other postretirement benefit cost included the following components:
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Service cost $ 8 $ 6 $ 6
Interest cost 13 11 11
Amortization of unrecognized (gain) loss - - -
---- ---- ----
Total other postretirement benefit cost $ 21 $ 17 $ 17
==== ==== ====
- --------------------------------------------------------------------------------
The following actuarial assumptions were used in calculating the
postretirement benefit cost and obligations. Weighted-average rates as of the
beginning of the year are:
- --------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Discount rate 6.3% 6.4% 6.8%
Health care cost trend rates(1)
Initial 7.0 7.5 8.0
2012 and thereafter 5.5 5.5 5.5
- --------------------------------------------------------------------------------
(1) Assumed to decrease gradually until 2012 and remain constant thereafter.
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plans. A one percent change in the assumed
health care cost trend rate would have the following effects:
85
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
1% INCREASE 1% DECREASE
------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Effect on:
Other postretirement
benefit cost $ 4 $ 3 $ (4) $ (3)
Accumulated
benefit obligation 35 26 (30) (22)
- --------------------------------------------------------------------------------
Postemployment Benefits
Merrill Lynch provides certain postemployment benefits for employees on
extended leave due to injury or illness and for terminated employees. Employees
who are disabled due to non-work-related illness or injury are entitled to
disability income, medical coverage, and life insurance. Merrill Lynch also
provides severance benefits to terminated employees. In addition, Merrill Lynch
is mandated by U.S. state and federal regulations to provide certain other
postemployment benefits. Merrill Lynch funds these benefits through a
combination of self-insured and insured plans.
Merrill Lynch recognized $439, $30, and $31 in 1998, 1997, and 1996,
respectively, of postemployment benefits expense, which included severance costs
for terminated employees of $424, $18, and $14 in 1998, 1997, and 1996,
respectively. The severance costs for 1998 include amounts related to the staff
reduction provision (see Note 2). Although all full-time employees are eligible
for severance benefits, no additional amounts were accrued as of December 25,
1998 since future severance costs are not estimable.
NOTE 10. EMPLOYEE INCENTIVE PLANS
To align the interests of employees with those of stockholders, Merrill
Lynch sponsors several employee compensation plans that provide eligible
employees with stock or options to purchase shares. The total compensation cost
recognized in earnings for stock-based compensation plans for 1998, 1997, and
1996 was $453, $318, and $269, respectively. Merrill Lynch also sponsors
deferred cash compensation plans for eligible employees.
Long-Term Incentive Compensation Plans ("LTIC Plans")
and Equity Capital Accumulation Plan ("ECAP")
LTIC Plans and ECAP provide for grants of equity and equity-related
instruments to certain employees. LTIC Plans provide for the issuance of
Restricted Shares, Restricted Units, and Nonqualified Stock Options, as well as
Incentive Stock Options, Performance Shares, Performance Units, Performance
Options, Stock Appreciation Rights, and other securities of Merrill Lynch. ECAP
provides for the issuance of Restricted Shares, as well as Performance Shares.
As of December 25, 1998, no instruments other than Restricted Shares, Restricted
Units, and Nonqualified Stock Options had been granted.
"Restricted Shares and Units"
Restricted Shares are shares of ML & Co. common stock carrying voting and
dividend rights. A Restricted Unit is deemed equivalent in fair market value to
one share of common stock, is payable in cash or shares of common stock, and
receives cash payments equivalent to dividends. Under these plans, such shares
and units are restricted from sale, transfer, or assignment until the end of the
restricted period, and such shares and units are subject to forfeiture during
the vesting period for grants under LTIC Plans or the restricted period for
grants under ECAP.
The activity for Restricted Shares and Units under these plans during 1998
and 1997 follows:
- --------------------------------------------------------------------------------
LTIC PLANS ECAP
---------------------------- ----------
RESTRICTED RESTRICTED RESTRICTED
SHARES UNITS SHARES
----------- ---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 25, 1998 240,000,000 N/A 52,400,000
December 26, 1997 200,000,000 N/A 52,400,000
- --------------------------------------------------------------------------------
AVAILABLE FOR ISSUANCE AT:(1)
December 25, 1998 69,342,410 N/A 2,985,313
December 26, 1997 44,703,329 N/A 2,935,408
- --------------------------------------------------------------------------------
OUTSTANDING, END OF 1996 8,962,962 9,274,900 4,131,744
Granted - 1997 3,662,390 3,819,904 48,747
Paid, forfeited, or released
from contingencies (2,779,206) (3,197,062) (299,926)
---------- ---------- ---------
OUTSTANDING, END OF 1997 9,846,146 9,897,742 3,880,565
Granted - 1998 4,265,945 4,641,545 6,443
Paid, forfeited, or released
from contingencies (519,246) (3,680,398) (68,398)
---------- ---------- ---------
OUTSTANDING, END OF 1998(2) 13,592,845 10,858,889 3,818,610
========== ========== =========
- --------------------------------------------------------------------------------
(1) Includes shares reserved for issuance upon the exercise of stock options.
(2) In February 1999, 33,766 and 3,235,932 Restricted Shares and Units under
LTIC Plans, respectively, and 1,450 ECAP Restricted Shares were granted to
eligible employees.
86
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- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
The weighted-average fair value per share or unit for 1998, 1997, and 1996
grants follows:
- --------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
LTIC Plans
Restricted Shares $ 66.20 $ 46.31 $ 28.97
Restricted Units 64.77 44.47 28.69
ECAP Restricted Shares 81.78 66.99 28.76
- --------------------------------------------------------------------------------
Merrill Lynch sponsors other plans similar to LTIC Plans in which
restricted shares and units are granted to employees and non-employee directors.
The table below summarizes information related to restricted shares and units
for these other plans:
- --------------------------------------------------------------------------------
RESTRICTED RESTRICTED
SHARES UNITS
---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 25, 1998 6,300,000 400,000
December 26, 1997 6,300,000 400,000
OUTSTANDING AT:
December 25, 1998 316,823 40,051
December 26, 1997 258,929 31,862
- --------------------------------------------------------------------------------
"Nonqualified Stock Options"
Nonqualified Stock Options granted under LTIC Plans in 1989 through 1995
generally become exercisable over four years in equal installments commencing
one year after the date of grant. Options granted in 1996 and thereafter
generally are exercisable over five years. The exercise price of these options
is equal to 100% of the fair market value (as defined in LTIC Plans) of a share
of ML & Co. common stock on the date of grant. Nonqualified Stock Options expire
ten years after their grant date.
The activity for Nonqualified Stock Options under LTIC Plans for 1998,
1997, and 1996 follows:
- --------------------------------------------------------------------------------
WEIGHTED-
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
------------ --------------
OUTSTANDING, BEGINNING OF 1996 60,146,634 $ 13.65
Granted - 1996 13,633,940 27.28
Exercised (8,481,030) 10.45
Forfeited (1,486,888) 25.43
----------
OUTSTANDING, END OF 1996 63,812,656 16.72
Granted - 1997 15,323,524 42.18
Exercised (9,065,189) 12.24
Forfeited (1,363,699) 31.27
----------
OUTSTANDING, END OF 1997 68,707,292 22.69
Granted - 1998 11,971,105 62.74
Exercised (7,732,322) 15.41
Forfeited (694,661) 44.88
----------
OUTSTANDING, END OF 1998(1) 72,251,414 29.89
==========
- --------------------------------------------------------------------------------
(1) In January 1999, eligible participants were granted Nonqualified Stock
Options and Performance Options for 9,893,225 and 19,959,423 shares,
respectively. Performance options vest based on Merrill Lynch's
achievement of performance criteria over a period not exceeding 9 years.
At year-end 1998, 1997, and 1996, options exercisable under LTIC Plans
were 38,518,400, 36,380,942, and 35,532,334, respectively.
The table below summarizes information related to outstanding and
exercisable options at year-end 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER EXERCISE REMAINING NUMBER EXERCISE
PRICE OUTSTANDING PRICE LIFE (YEARS)(1) EXERCISABLE PRICE
- --------------- ----------- -------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 5.00 - $21.99 33,947,586 $ 14.34 3.99 31,658,066 $ 14.10
$22.00 - $38.99 12,637,203 27.53 7.15 4,562,973 27.55
$39.00 - $55.99 12,848,038 40.59 8.21 2,205,990 40.59
$56.00 - $72.99 12,496,607 62.03 9.17 91,371 67.86
$73.00 - $89.99 321,980 89.53 9.58 - -
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Based on original contractual life of ten years.
87
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
At consummation of Merrill Lynch's merger with Midland (see Note 2), each
Midland optionholder received 0.24 options on ML & Co. common stock, with the
vesting period and contractual life identical to the terms of the original
grant. Information at year-end 1998, 1997, and 1996 related to these options
follows:
- --------------------------------------------------------------------------------
OPTIONS WEIGHTED-AVERAGE
OUTSTANDING EXERCISE PRICE
----------- ----------------
1998 642,370 $ 36.16
1997 743,634 31.04
1996 688,146 28.08
- --------------------------------------------------------------------------------
At year-end 1998, 1997, and 1996, such options exercisable were 292,215,
284,578, and 243,404, respectively.
The weighted-average fair value of options granted in 1998, 1997, and 1996
was $21.52, $14.62, and $7.58 per option, respectively. Fair value is estimated
as of the grant date based on a Black-Scholes option pricing model using the
following weighted-average assumptions:
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.81% 6.74% 5.68%
Expected life 6 yrs. 6 yrs. 5 yrs.
Expected volatility 28.10% 26.86% 26.35%
Dividend yield 1.28% 1.47% 1.91%
- --------------------------------------------------------------------------------
The weighted-average fair value of options granted by Midland in 1998,
1997, and 1996 was $14.07, $15.01, and $15.28 respectively.
See Pro Forma Compensation Expense in the following Employee Stock
Purchase Plans section for additional information.
Employee Stock Purchase Plans ("ESPP")
ESPP plans allow eligible employees to invest from 1% to 10% of their
eligible compensation to purchase ML & Co. common stock at a price generally
equal to 85% of its fair market value. These purchases are made on four
quarterly investment dates through payroll deductions. Up to 50,300,000 shares
of common stock have been authorized for issuance under ESPP. The activity in
ESPP during 1998, 1997, and 1996 follows:
- --------------------------------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Available, beginning of year 7,251,343 8,267,360 9,992,526
Authorized during year - 300,000 -
Purchased through plan (1,261,248) (1,316,017) (1,725,166)
--------- --------- ---------
Available, end of year 5,990,095 7,251,343 8,267,360
========= ========= =========
- --------------------------------------------------------------------------------
The weighted-average fair value of ESPP stock purchase rights exercised by
employees in 1998, 1997, and 1996 was $11.31, $7.66, and $4.38 per right,
respectively.
"Pro Forma Compensation Expense"
No compensation expense has been recognized for Merrill Lynch's grants of
stock options under LTIC Plans or ESPP purchase rights (see Note 1 for
accounting policy). Based on the fair value of stock options and purchase
rights, Merrill Lynch would have recognized compensation expense, net of taxes,
of $95, $56, and $27 for 1998, 1997, and 1996, respectively, resulting in pro
forma net earnings and earnings per share as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
----- ----- -----
NET EARNINGS
As reported $ 1,259 $ 1,935 $ 1,648
Pro forma 1,164 1,879 1,621
EARNINGS PER SHARE
As reported:
Basic $ 3.43 $ 5.57 $ 4.63
Diluted 3.00 4.79 4.08
Pro forma:
Basic 3.16 5.41 4.55
Diluted 2.77 4.65 4.01
- --------------------------------------------------------------------------------
In the table above, pro forma compensation expense associated with option
grants is recognized over the vesting period. The impact of applying SFAS No.
123 on pro forma disclosure is not representative of the potential impact on pro
forma net earnings for future years, which will include the cumulative effect of
expense related to vesting of 1995 and subsequent grants.
Financial Consultant Capital Accumulation Award Plans ("FCCAAP")
Under FCCAAP, eligible employees in Merrill Lynch's Private Client groups
are granted awards generally based upon their prior year's performance. Payment
for an award is contingent upon continued employment for a period of time and
88
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
is subject to forfeiture during that period. The award is generally payable ten
years from the date of grant in a fixed number of shares of ML & Co. common
stock unless the fair market value of such shares is less than a specified
minimum value plus interest, in which case the minimum value is paid in cash.
Eligible participants may defer awards beyond the scheduled payment date. FCCAAP
may also provide for the issuance of Restricted Shares that vest ten years from
the date of the original award and carry voting and dividend rights. Only shares
of common stock held as treasury stock may be issued under FCCAAP.
At December 25, 1998, shares subject to outstanding awards totaled
31,375,873, while 18,154,644 shares were available for issuance through future
awards. The fair value of awards granted under FCCAAP during 1998, 1997, and
1996 was $67.94, $42.09, and $25.34 per award, respectively.
Incentive Equity Purchase Plan ("IEPP")
IEPP allowed selected employees to purchase shares of ML & Co. common
stock ("Book Value Shares") at a price equal to book value per common share.
Book Value Shares, which otherwise may not be resold, may be sold back to
Merrill Lynch at book value or exchanged at any time for a specified number of
freely transferable common shares. Book Value Shares outstanding under IEPP were
1,814,000 at December 25, 1998. In 1995, IEPP was amended to reduce the
authorized shares to zero and prohibit the reuse of any surrendered shares. No
further offerings will be made under this plan.
Merrill Lynch Investment Certificate Program ("MLICP")
Under MLICP, eligible employees in Merrill Lynch's Private Client groups
are issued investment certificates based on their performance. The certificates
mature ten years from the date issued and are payable in cash if certain
performance criteria are achieved and the employee is continuously employed for
the ten-year period, with certain exceptions. The certificates bear interest
commencing with the date on which the performance requirements are achieved. As
of year-end 1998 and 1997, $353 and $292, respectively, were accrued under this
plan.
Other Deferred Compensation Plans
Merrill Lynch sponsors other deferred compensation plans in which eligible
employees may participate. Generally, contributions to the plans are made on a
tax-deferred basis by participants. Contributions are invested by Merrill Lynch
in mutual funds and other funds sponsored by Merrill Lynch, and the plans may
include a leverage feature. The plans' investments and the amounts accrued by
Merrill Lynch under the plans are both included in the Consolidated Balance
Sheets. Plan investments totaled $648 and $554, respectively, at December 25,
1998 and December 26, 1997. Accrued liabilities at those dates were $532 and
$441, respectively.
NOTE 11. INCOME TAXES
Income tax provisions (benefits) on earnings consisted of:
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
U.S. FEDERAL
Current $ 673 $ 856 $ 515
Deferred (180) (94) (119)
U.S. STATE AND LOCAL
Current 105 (15) 198
Deferred 10 7 (54)
NON-U.S
Current 412 400 496
Deferred (307) (25) (56)
----- ------- ------
Total $ 713 $ 1,129 $ 980
===== ======= ======
- --------------------------------------------------------------------------------
The corporate statutory tax rate was 35.0% for the three years presented.
A reconciliation of statutory U.S. federal income taxes to Merrill Lynch's
income tax provisions for earnings follows:
- -------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
U.S. federal income tax at statutory rate $ 734 $ 1,089 $ 920
U.S. state and local income taxes, net 74 (5) 94
Pension plan transaction (3) 6 12
Non-U.S. operations (33) 41 3
Tax-exempt interest (51) (26) (21)
Dividends received deduction (30) (33) (34)
Other, net 22 57 6
----- ------- -----
Income tax expense $ 713 $ 1,129 $ 980
===== ======= =====
- -------------------------------------------------------------------------------
89
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Deferred income taxes are provided for the effects of temporary
differences between the tax basis of an asset or liability and its reported
amount in the Consolidated Balance Sheets. These temporary differences result in
taxable or deductible amounts in future years. Details of Merrill Lynch's
deferred tax assets and liabilities follow:
- --------------------------------------------------------------------------------
1998 1997 1996
------- ------- -------
DEFERRED TAX ASSETS
Valuation and other reserves(1) $ 1,225 $ 940 $ 895
Deferred compensation 679 478 351
Employee benefits 120 109 115
Other 375 116 285
------- ------- -------
Gross deferred tax assets 2,399 1,643 1,646
Valuation allowances(2) (42) (26) (30)
------- ------- -------
Total deferred tax assets 2,357 1,617 1,616
------- ------- -------
DEFERRED TAX LIABILITIES
Lease transactions 148 116 114
Employee benefits 64 58 54
Accelerated tax depreciation 17 26 44
Other 190 178 88
------- ------- -------
Total deferred tax liabilities 419 378 300
------- ------- -------
NET DEFERRED TAX ASSET $ 1,938 $ 1,239 $ 1,316
======= ======= =======
- --------------------------------------------------------------------------------
(1) Primarily related to Trading assets and Other payables.
(2) Related to net operating loss carryforwards not expected to be realized.
At December 25, 1998, Merrill Lynch had net operating loss carryforwards
as follows: $48 in U.S. federal (expiring 2009), $261 in U.S. states (expiring
2005), $76 in Hong Kong (no expiration), $63 in Germany (no expiration), $59 in
Japan (expiring 2003), and $42 in Canada (expiring 2005).
Income tax benefits of $336, $173, and $30 were allocated to stockholders'
equity related to employee compensation transactions for 1998, 1997, and 1996,
respectively.
Earnings before income taxes included approximately $44, $805, and $800 of
earnings attributable to non-U.S. subsidiaries for 1998, 1997, and 1996,
respectively. Cumulative undistributed earnings of non-U.S. subsidiaries not
previously taxed in the U.S. were approximately $2,230 at December 25, 1998. No
deferred U.S. federal income taxes have been provided for the undistributed
earnings to the extent that they have been permanently reinvested in Merrill
Lynch's non-U.S. operations. Assuming utilization of non-U.S. tax credits,
Merrill Lynch estimates that approximately $240 of U.S. federal income taxes and
$110 of non-U.S. withholding taxes would be incurred on the repatriation of such
earnings.
NOTE 12. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
MLPF&S, a U.S. registered broker-dealer, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under the
alternative method permitted by this rule, the minimum required net capital, as
defined, shall not be less than 2% of aggregate debit items arising from
customer transactions. At December 25, 1998, MLPF&S's regulatory net capital of
$3,224 was 14% of aggregate debit items, and its regulatory net capital in
excess of the minimum required was $2,761.
MLI, a U.K. registered broker-dealer, is subject to capital requirements
of the Financial Services Authority ("FSA"). Financial resources, as defined,
must exceed the total financial resources requirement of the FSA. In 1997, MLI
became Merrill Lynch's primary global equity derivatives dealer (previously
Merrill Lynch Capital Markets PLC). At December 25, 1998, MLI's financial
resources were $3,711, exceeding the minimum requirement by $1,124.
MLGSI, a primary dealer in U.S. Government securities, is subject to the
capital adequacy requirements of the Government Securities Act of 1986. This
rule requires dealers to maintain liquid capital in excess of market and credit
risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 25,
1998, MLGSI's liquid capital of $1,441 was 261% of its total market and credit
risk, and liquid capital in excess of the minimum required was $778.
Merrill Lynch's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. As
of December 25, 1998, $483, representing 89% of the insurance subsidiaries' net
assets, was unavailable for distribution to Merrill Lynch.
Over 80 other subsidiaries are subject to regulatory requirements
promulgated by the regulatory and exchange authorities of the jurisdictions in
which they operate. These regulatory restrictions may limit the amounts that
these subsidiaries can pay in dividends or advance to Merrill Lynch. At December
25, 1998, restricted net assets of these subsidiaries were $3,555.
90
<PAGE>
[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
In addition, to satisfy rating agency standards, a credit intermediary
subsidiary of Merrill Lynch must also meet certain minimum capital requirements.
At December 25, 1998, this minimum capital requirement was $490.
With the exception of regulatory restrictions on subsidiaries' abilities
to pay dividends, there are no restrictions on ML & Co.'s present ability to pay
dividends on common stock, other than (1) ML & Co.'s obligation to make payments
on its preferred stock and subsidiaries' TOPrS, and (2) the governing provisions
of the Delaware General Corporation Law.
NOTE 13. SEGMENT, PRODUCT, AND GEOGRAPHIC INFORMATION
Segment Information
In reporting to management, Merrill Lynch's operating results are
categorized into two business segments: Wealth Management and CICG. For
information on each segment's activities, see Management's Discussion and
Analysis (unaudited) - Business Segments.
The principal methodology used in preparing the segment results in the
table that follows is:
o Revenues and expenses are assigned to segments where directly
attributable.
o A portion of CICG principal transactions and investment banking revenues
are allocated to Wealth Management based on production credits generated
by Financial Consultants and other investment professionals.
o Interest is allocated based on management's assessment of the relative
risk of segment assets and liabilities.
o Goodwill amortization, Mercury financing costs, and the staff reduction
provision are not attributed to segments because management excludes these
items from segment operating results in evaluating segment performance.
o Residual revenues and expenses (i.e., those related to overhead and
support units) are attributed to segments based on specific methodologies
(e.g., headcount, square footage, intersegment agreements).
o Income taxes are attributed based on tax rates in the tax jurisdictions in
which the segment activity takes place.
Management believes that the following information by business segment
provides a reasonable representation of each segment's contribution to the
consolidated amounts:
- --------------------------------------------------------------------------------
WEALTH CORPORATE
MANAGEMENT CICG ITEMS TOTAL
---------- --------- --------- ---------
1998
Net interest revenue(a) $ 1,015 $ 299 $ (306)(b) $ 1,008
All other revenues 10,316 6,223 - 16,539
-------- --------- ------- ---------
Net revenues 11,331 6,522 (306) 17,547
Non-interest expenses,
excluding staff reduction
provision 9,260 5,535 226(c) 15,021
Provision for costs related
to staff reductions - - 430(d) 430
-------- --------- ------- ---------
Earnings before income taxes 2,071 987 (962) 2,096
Income tax expense (benefit) 725 105 (117) 713
Dividends on preferred
securities issued
by subsidiaries - - 124 124
-------- --------- ------- ---------
Net earnings $ 1,346 $ 882 $ (969) $ 1,259
======== ========= ======= =========
Year-end total assets $ 45,726 $ 248,714 $ 5,364 $ 299,804
======== ========= ======= =========
- --------------------------------------------------------------------------------
1997
Net interest revenue(a) $ 860 $ 196 $ - $ 1,056
All other revenues 8,645 6,555 - 15,200
-------- --------- ------- ---------
Net revenues 9,505 6,751 - 16,256
Non-interest expenses 7,872 5,208 65(c) 13,145
-------- --------- ------- ---------
Earnings before income taxes 1,633 1,543 (65) 3,111
Income tax expense 577 398 154 1,129
Dividends on preferred
securities issued
by subsidiaries - - 47 47
-------- --------- ------- ---------
Net earnings $ 1,056 $ 1,145 $ (266) $ 1,935
======== ========= ======= =========
Year-end total assets $ 38,781 $ 252,732 $ 5,467 $ 296,980
======== ========= ======= =========
- --------------------------------------------------------------------------------
1996
Net interest revenue(a) $ 751 $ 282 $ - $ 1,033
All other revenues 7,233 5,355 - 12,588
-------- --------- ------- ---------
Net revenues 7,984 5,637 - 13,621
Non-interest expenses 6,602 4,341 50(c) 10,993
-------- --------- ------- ---------
Earnings before income taxes 1,382 1,296 (50) 2,628
Income tax expense 527 366 87 980
-------- --------- ------- ---------
Net earnings $ 855 $ 930 $ (137) $ 1,648
======== ========= ======= =========
Year-end total assets $ 31,553 $ 185,080 $ 633 $ 217,266
======== ========= ======= =========
- --------------------------------------------------------------------------------
(a) Management views interest income net of interest expense in evaluating
results.
(b) Represents Mercury financing costs.
(c) Represents goodwill amortization.
(d) Had this amount been allocated to segments, $163 and $267 would have been
allocated to Wealth Management and CICG, respectively.
91
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[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Product Information
Merrill Lynch delivers a wide variety of products to clients:
o Brokerage: Executing or facilitating security and commodity trades for
retail clients and assisting clients in allocating their assets. (Includes
commissions and net interest.)
o Asset management and portfolio services: Offering customers access to a
wide array of asset management services and other fee-based products.
o Lending: Serving investors' liability management needs by providing margin
lending, mortgage and other consumer loans, and commercial financing.
o Trading: Satisfying institutional customer demand for securities,
currencies, and other products by maintaining securities inventories and
writing over-the-counter derivatives. Through structured notes and
derivatives, investors are provided with opportunities to diversify their
portfolios, manage risk, and enhance returns. (Includes commissions,
principal transactions revenues, and net interest.)
o Origination: Raising capital for clients through securities underwritings,
private placements, and loan syndications.
o Strategic services: Providing advice on mergers and acquisitions, sales,
divestitures, and joint ventures.
The following table summarizes Merrill Lynch's net revenues by product.
- --------------------------------------------------------------------------------
1998 1997 1996
-------- -------- --------
WEALTH MANAGEMENT
Brokerage $ 6,412 $ 5,851 $ 5,057
-------- -------- --------
Asset management and portfolio services:
Asset management fees 2,075 1,232 1,010
Portfolio service fees 1,150 826 608
Other fees 977 944 813
-------- -------- --------
Total 4,202 3,002 2,431
-------- -------- --------
Lending 577 477 378
Other 140 175 118
-------- -------- --------
Total Wealth Management 11,331 9,505 7,984
-------- -------- --------
CICG
Trading:
Debt 847 2,242 2,072
Equity 2,761 2,024 1,658
-------- -------- --------
Total 3,608 4,266 3,730
-------- -------- --------
Origination:
Debt 488 593 489
Equity 841 770 587
-------- -------- --------
Total 1,329 1,363 1,076
-------- -------- --------
Strategic services 1,102 797 430
Other 483 325 401
-------- -------- --------
Total CICG 6,522 6,751 5,637
-------- -------- --------
TOTAL WEALTH MANAGEMENT AND CICG 17,853 16,256 13,621
Corporate (306) - -
-------- -------- --------
TOTAL $ 17,547 $ 16,256 $ 13,621
======== ======== ========
- --------------------------------------------------------------------------------
92
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[LOGO]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
Geographic Information
Merrill Lynch operates in both U.S. and non-U.S. markets. Merrill Lynch's
non-U.S. business activities are conducted through offices in six regions:
o Europe, Middle East, and Africa,
o Asia Pacific,
o Australia and New Zealand,
o Japan,
o Canada, and
o Latin America.
For further information on activities in these regions, see Management's
Discussion and Analysis (unaudited) - Global Operations.
The principal methodology used in preparing the geographic data in the
table that follows is:
o Commissions revenues are recorded based on the location of the sales
force,
o Trading revenues are principally recorded based on the location of the
trader,
o Investment banking revenues are recorded based on the location of the
client,
o Asset management and portfolio service fees are recorded based on the
location of the fund manager,
o Earnings before income taxes include the allocation of certain shared
expenses among regions, and
o Intercompany transfers are based primarily on service agreements.
The information that follows, in management's judgment, provides a
reasonable representation of each region's contribution to the consolidated
amounts.
- --------------------------------------------------------------------------------
1998 1997 1996
--------- --------- ---------
NET REVENUES
Europe, Middle East, and Africa $ 2,808 $ 1,982 $ 1,563
Asia Pacific 338 489 361
Australia and New Zealand 224 177 60
Japan 574 416 408
Canada 625 702 615
Latin America 392 524 435
--------- --------- ---------
Total Non-U.S 4,961 4,290 3,442
U.S. 12,892 11,966 10,179
Corporate (306) - -
--------- --------- ---------
Total $ 17,547 $ 16,256 $ 13,621
========= ========= =========
- --------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
Europe, Middle East, and Africa $ 307 $ 360 $ 301
Asia Pacific (165) (34) 36
Australia and New Zealand 36 25 7
Japan (11) 74 109
Canada 46 134 118
Latin America (67) 141 146
--------- --------- ---------
Total Non-U.S 146 700 717
U.S. 2,912 2,476 1,961
Corporate (962) (65) (50)
--------- --------- ---------
Total $ 2,096 $ 3,111 $ 2,628
========= ========= =========
- --------------------------------------------------------------------------------
AVERAGE ASSETS
Europe, Middle East, and Africa $ 134,664 $ 73,251 $ 59,935
Asia Pacific 6,562 4,707 6,513
Australia and New Zealand 2,789 2,939 1,103
Japan 10,224 7,910 5,007
Canada 11,612 11,869 8,469
Latin America 11,874 10,629 5,968
--------- --------- ---------
Total Non-U.S 177,725 111,305 86,995
U.S. 196,710 176,835 132,829
Corporate 5,573 680 519
--------- --------- ---------
Total $ 380,008 $ 288,820 $ 220,343
========= ========= =========
- --------------------------------------------------------------------------------
93
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SUPPLEMENTAL FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
QUARTERLY INFORMATION
The unaudited quarterly results of operations of Merrill Lynch for 1998
and 1997 are prepared in conformity with generally accepted accounting
principles and reflect all adjustments (which consist of normal recurring
accruals and a provision for costs related to staff reductions) that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the periods presented. Results of any interim period are not
necessarily indicative of results for a full year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
For the Quarter Ended
-----------------------------------------------------------------------------------
DEC. 25, SEPT. 25, JUNE 26, MAR. 27, DEC. 26, SEPT. 26, JUNE 27, MAR. 28,
1998 1998 1998(1) 1998(1) 1997(1) 1997(1) 1997(1) 1997(1)
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $ 8,172 $ 8,712 $ 9,581 $ 9,388 $ 8,311 $ 8,338 $ 8,200 $ 7,650
Interest Expense 4,091 4,863 4,726 4,626 4,301 4,196 4,090 3,656
------- ------- ------- ------- ------- ------- ------- -------
Net Revenues 4,081 3,849 4,855 4,762 4,010 4,142 4,110 3,994
Non-Interest Expenses 3,562 4,054(2) 3,940 3,895 3,275 3,353 3,306 3,211
------- ------- ------- ------- ------- ------- ------- -------
Earnings (Loss) Before Income Taxes
and Dividends on Preferred
Securities Issued by Subsidiaries 519 (205) 915 867 735 789 804 783
Income Tax Expense (Benefit) 119 (75) 339 330 254 275 300 300
Dividends on Preferred Securities
Issued by Subsidiaries 41 33 27 23 12 12 13 10
------- ------- ------- ------- ------- ------- ------- -------
Net Earnings (Loss) $ 359 $ (163) $ 549 $ 514 $ 469 $ 502 $ 491 $ 473
======= ======= ======= ======= ======= ======= ======= =======
Earnings (Loss) Per Common Share(3)
Basic $ .97 $ (.48) $ 1.52 $ 1.44 $ 1.34 $ 1.45 $ 1.42 $ 1.36
Diluted .86 (.48) 1.31 1.26 1.15 1.24 1.24 1.16
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts have been restated from that originally reported on Form 10-Q to
reflect the Midland Walwyn merger as required under pooling-of-interests
accounting.
(2) Includes a $430 million provision for costs related to staff reductions.
(3) Restated for the 1997 two-for-one common stock split.
DIVIDENDS PER COMMON SHARE
- --------------------------------------------------------------------------------
(Declared and paid)
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
------- ------- ------- -------
1998 $ .20 $ .24 $ .24 $ .24
1997 .15 .20 .20 .20
- --------------------------------------------------------------------------------
Dividends per common share amounts give effect to the 1997 two-for-one
common stock split. With the exception of regulatory restrictions on
subsidiaries' abilities to pay dividends, there are no restrictions on ML &
Co.'s present ability to pay dividends on common stock, other than (a) ML &
Co.'s obligation to make payments on its preferred stock and subsidiaries'
preferred securities, and (b) the governing provisions of the Delaware General
Corporation Law. Certain subsidiaries' ability to declare dividends may also be
limited (see Note 12 to the Consolidated Financial Statements).
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified
calendar quarters are noted below. Prices have been restated for the 1997
two-for-one common stock split.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
(At calendar period-end)
1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
--------------------- --------------------- --------------------- -------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------- --------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $ 87 1/2 $ 60 7/16 $ 100 $ 82 1/4 $ 109 1/8 $ 45 5/8 $ 80 $ 35 3/4
1997 52 39 1/4 63 7/8 42 1/16 75 1/8 59 1/16 78 3/16 61 1/4
- ---------------------------------------------------------------------------------------------------
</TABLE>
The approximate number of record holders of ML & Co. common stock as of
February 12, 1999 was 19,400. As of February 19, 1999, the closing price of ML &
Co. common stock as reported on the Consolidated Transaction Reporting System
was $72 3/8.
94
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BOARD OF DIRECTORS
- --------------------------------------------------------------------------------
HERBERT M. ALLISON, JR.
President and Chief Operating Officer of Merrill Lynch...55 years old...joined
Merrill Lynch in 1971.
W.H. CLARK
Corporate Director...former Chairman and Chief Executive Officer of Nalco
Chemical Company, a producer of specialty chemicals...66 years old...elected a
Director of Merrill Lynch in 1995.
JILL K. CONWAY
Visiting Scholar, Massachusetts Institute of Technology...President of Smith
College from 1975 to 1985...64 years old...elected a Director of Merrill Lynch
in 1978.
STEPHEN L. HAMMERMAN
Vice Chairman of the Board and General Counsel of Merrill Lynch...61 years
old...joined Merrill Lynch in 1978.
EARLE H. HARBISON, JR.
Chairman of the Board of Harbison Corporation, a manufacturer of molded plastic
products...former Chairman of the Executive Committee and former President and
Chief Operating Officer of Monsanto Company...70 years old...elected a Director
of Merrill Lynch in 1987.
GEORGE B. HARVEY
Corporate Director...former Chairman of the Board, President and Chief Operating
Officer of Pitney Bowes Inc., a provider of mailing, office and logistics
systems and management and financial services...67 years old...elected a
Director of Merrill Lynch in 1993.
WILLIAM R. HOOVER
Chairman of the Executive Committee of, Consultant to, and former Chairman of
the Board, Chief Executive Officer and President of, Computer Sciences
Corporation, a provider of information technology consulting, systems
integration and outsourcing to industry and government...69 years old...elected
a Director of Merrill Lynch in 1995.
DAVID H. KOMANSKY
Chairman of the Board and Chief Executive Officer of Merrill Lynch...59 years
old...joined Merrill Lynch in 1968.
ROBERT P. LUCIANO
Corporate Director...Director and former Chairman of the Board and Chief
Executive Officer of Schering-Plough Corporation, a health and personal care
products company...65 years old...elected a Director of Merrill Lynch in 1989.
DAVID K. NEWBIGGING
Chairman of the Board of Friends' Provident Life Office, a United Kingdom-based
life assurance company...former Chairman of the Board of Equitas Holdings
Limited...former Chairman and Senior Managing Director of Jardine, Matheson &
Co. Limited...65 years old...elected a Director of Merrill Lynch in 1996.
AULANA L. PETERS
Partner in the law firm of Gibson, Dunn & Crutcher...former Commissioner of the
U.S. Securities and Exchange Commission...57 years old...elected a Director of
Merrill Lynch in 1994.
JOHN J. PHELAN, JR.
Corporate Director...former Chairman and Chief Executive Officer of the New York
Stock Exchange, Inc....Senior Adviser, Boston Consulting Group...member of the
Council on Foreign Relations...former President of the International Federation
of Stock Exchanges ...67 years old...elected a Director of Merrill Lynch in
1991.
JOHN L. STEFFENS
Vice Chairman of the Board and Head of U.S. Private Client Group of Merrill
Lynch...57 years old...joined Merrill Lynch in 1963.
WILLIAM L. WEISS
Corporate Director...Chairman Emeritus and former Chairman of the Board and
Chief Executive Officer of Ameritech Corporation, a provider of communications
products and services...69 years old...elected a Director of Merrill Lynch in
1993.
95
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EXECUTIVE MANAGEMENT
- --------------------------------------------------------------------------------
[PHOTO]
DAVID H. KOMANSKY
Chairman of the Board
and Chief Executive Officer
[PHOTO]
PAUL W. CRITCHLOW
Senior Vice President
Marketing and Communications
[PHOTO]
CAROL GALLEY
Senior Vice President and
Co-Head of Merrill Lynch
Mercury Asset Management
[PHOTO]
HERBERT M. ALLISON, JR.
President and
Chief Operating Officer
[PHOTO]
THOMAS W. DAVIS
Executive Vice President and
Head of Corporate and
Institutional Client Group
[PHOTO]
EDWARD L. GOLDBERG
Executive Vice President
Operations Services Group
[PHOTO]
JOHN L. STEFFENS
Vice Chairman of the Board and Head of U.S.
Private Client Group
[PHOTO]
RICHARD A. DUNN
Senior Vice President
Global Risk and
Credit Management
[PHOTO]
JEROME P. KENNEY
Executive Vice President
Corporate Strategy and Research
[PHOTO]
STEPHEN L. HAMMERMAN
Vice Chairman of the Board
and General Counsel
[PHOTO]
BARRY S. FRIEDBERG
Executive Vice President and
Chairman of Corporate and
Institutional Client Group
[PHOTO]
Michael J.P. Marks
Executive Chairman
of Merrill Lynch Europe,
Middle East & Africa
96
<PAGE>
[PHOTO]
JOHN A. MCKINLEY, JR.
Senior Vice President
Chief Technology Officer and
Head of Technology Group
[PHOTO]
WINTHROP H. SMITH, JR.
Executive Vice President and
Head of International Private
Client Group and Chairman,
Merrill Lynch International Inc.
[PHOTO]
JOHN G. HEIMANN
[PHOTO]
E. STANLEY O'NEAL
Executive Vice President and
Chief Financial Officer
[PHOTO]
MARY E. TAYLOR
Senior Vice President
Human Resources
[PHOTO]
ARTHUR ZEIKEL
[PHOTO]
THOMAS H. PATRICK
Executive Vice President
and Chairman
Special Advisory Services
[PHOTO]
STEPHEN A. ZIMMERMAN
Senior Vice President and
Co-Head of Merrill Lynch
Mercury Asset Management
[PHOTO]
JEFFREY M. PEEK
Executive Vice President
and Head of Asset
Management Group
TWO VALUED MEMBERS of Merrill Lynch Executive Management -- John G. Heimann,
Chairman of Merrill Lynch Global Financial Institutions, and Arthur Zeikel,
Chairman of Merrill Lynch Asset Management -- retired in 1999. Mr. Heimann, who
came to Merrill Lynch in 1984, was instrumental in the firm's expansion in
Europe and the Middle East and served ably as the senior relationship manager
with financial institutions around the world. Mr. Zeikel, a 23-year Merrill
Lynch veteran, was President of MLAM since its inception in 1977, building one
of the largest asset management businesses in the world and introducing mutual
funds to literally millions of investors. Each has contributed in strong and
lasting ways to our firm, and their legacies will live on at Merrill Lynch for
many years to come.
97
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MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
EXECUTIVE OFFICES
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, New York 10281-1332
COMMON STOCK
EXCHANGE LISTINGS
The common stock of Merrill Lynch (trading symbol MER) is listed on the New York
Stock Exchange, Chicago Stock Exchange, Pacific Exchange, Paris Bourse, London
Stock Exchange and Tokyo Stock Exchange.
TRANSFER AGENT AND REGISTRAR
Merrill Lynch & Co., Inc. is the principal transfer agent for its own common
stock. Questions from registered stockholders on dividends, lost and stolen
certificates, changes of legal or dividend addresses, and other matters relating
to registered stockholder status should be sent to:
Merrill Lynch & Co., Inc.
P.O. Box 20, Church Street Station
New York, NY 10277-1004
Attn: Andrea L. Dulberg, Secretary
However, registered stockholders wishing to transfer their stock should continue
to do so through the following transfer agent and registrar:
ChaseMellon Shareholder Services
P.O. Box 3310
South Hackensack, NJ 07606-1910
1-800-851-9677
PREFERRED STOCK
EXCHANGE LISTING
Depositary Shares representing 1/400 of a share of 9% Cumulative Preferred
Stock, Series A, are listed on the New York Stock Exchange.
TRANSFER AGENT AND REGISTRAR
Citibank, N.A.
111 Wall Street, Fifth Floor
New York, NY 10043
Attn: Corporate Trust Department
FORM 10-K ANNUAL REPORT FOR 1998
This Annual Report of Merrill Lynch & Co., Inc. contains much of the financial
information that will be included in the 1998 Annual Report on Form 10-K to be
filed with the Securities and Exchange Commission. Merrill Lynch will furnish a
copy of its 1998 Annual Report on Form 10-K (including financial statements and
financial schedules but excluding other exhibits), without charge, to any person
upon request addressed to Andrea L. Dulberg, Secretary, Merrill Lynch & Co.,
Inc., P.O. Box 20, Church Street Station, New York, NY 10277-1004.
EQUAL EMPLOYMENT OPPORTUNITY
Merrill Lynch is committed to Equal Employment Opportunity and to attracting and
retaining the most qualified employees, regardless of race, national origin,
religion, gender, age, or disability. For more information, write to Westina
Matthews, Senior Director, First Vice President, Corporate Responsibility,
Merrill Lynch & Co., Inc., World Financial Center, North Tower, New York, NY
10281-1331.
CHARITABLE CONTRIBUTIONS
A summary of the Corporation's charitable contributions is available upon
written request to the Secretary.
ANNUAL MEETING
The 1999 Annual Meeting of Merrill Lynch & Co., Inc. stockholders will take
place at the Merrill Lynch Conference and Training Center, 800 Scudders Mill
Road, Plainsboro, New Jersey. The meeting is scheduled for Wednesday, April 14,
1999, beginning at 10:00 a.m. (local time).
Designed by DeSola Group, Inc.
Executive portrait photography by Chris Jones
VISIT OUR WEBSITE AT WWW.ML.COM
98
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
The following are subsidiaries of ML & Co. as of FEBRUARY 24, 1999 and the
states or jurisdictions in which they are organized. Indentation indicates the
principal parent of each subsidiary. Except as otherwise specified, in each case
ML & Co. owns, directly or indirectly, at least 99% of the voting securities of
each subsidiary. The names of particular subsidiaries have been omitted because,
considered in the aggregate as a single subsidiary, they would not constitute,
as of the end of the year covered by this report, a "significant subsidiary" as
that term is defined in Rule 1.02(w) of Regulation S-X under the Securities
Exchange Act of 1934.
<TABLE>
<CAPTION>
STATE OR JURIS-
NAME DICTION OF ENTITY
- ---- -----------------
<S> <C>
Merrill Lynch & Co., Inc. ........................................................................... Delaware
Merrill Lynch, Pierce, Fenner & Smith Incorporated/1/ .......................................... Delaware
Broadcort Capital Corp. .................................................................... Delaware
Merrill Lynch Life Agency Inc./2/ .......................................................... Washington
Merrill Lynch Professional Clearing Corp./3/ ............................................... Delaware
Merrill Lynch Bank & Trust Co. ................................................................. New Jersey
Merrill Lynch Capital Services, Inc. ........................................................... Delaware
Merrill Lynch Government Securities Inc. ....................................................... Delaware
Merrill Lynch Money Markets Inc. ........................................................... Delaware
Merrill Lynch Group, Inc. ...................................................................... Delaware
Merrill Lynch & Co., Canada Ltd. ........................................................... Ontario
Merrill Lynch Canada Inc. ............................................................. Nova Scotia
Mercury Asset Management Group Ltd./4/ ..................................................... England
Mercury Asset Management Holdings Ltd.................................................. England
Merrill Lynch Asset Management L.P./5/...................................................... Delaware
Merrill Lynch Capital Partners, Inc. ....................................................... Delaware
Merrill Lynch Futures Inc. ................................................................. Delaware
Merrill Lynch Group Holdings Limited........................................................ Ireland
Merrill Lynch Capital Markets Bank Limited............................................. Ireland
Merrill Lynch Insurance Group, Inc. ........................................................ Delaware
Merrill Lynch Life Insurance Company................................................... Arkansas
ML Life Insurance Company of New York.................................................. New York
Merrill Lynch International Finance Corporation............................................. New York
Merrill Lynch International Bank Limited............................................... England
Merrill Lynch Bank (Suisse) S.A. .................................................. Switzerland
Merrill Lynch Mortgage Capital Inc. ........................................................ Delaware
Merrill Lynch Bank USA...................................................................... Utah
Merrill Lynch Trust Company/6/ ............................................................. New Jersey
Merrill Lynch Business Financial Services Inc. ........................................ Delaware
Merrill Lynch Credit Corporation....................................................... Delaware
Merrill Lynch Investment Partners Inc. ..................................................... Delaware
</TABLE>
- ------------------------------
1 MLPF&S also conducts business as "Merrill Lynch & Co."
2 Similarly named affiliates and subsidiaries that engage in the sale of
life insurance and annuity products are incorporated in various other
jurisdictions.
3 The preferred stock of the corporation is owned by an unaffiliated group
of investors.
4 Held through several intermediate holding companies.
5 Merrill Lynch Asset Management L.P. is a limited partnership whose
general partner is Princeton Services, Inc. and whose limited partner is
ML & Co.
6 Similarly named affiliates and subsidiaries that provide trust and
custodial services are incorporated in various other jurisdictions.
<PAGE>
<TABLE>
<CAPTION>
STATE OR JURIS-
NAME DICTION OF ENTITY
---- -----------------
<S> <C>
MERRILL LYNCH & CO., INC.
MERRILL LYNCH GROUP, INC. (CONT'D)
MLDP Holdings, Inc./7/ ..................................................................... Delaware
Merrill Lynch Derivative Products AG................................................... Switzerland
ML IBK Positions Inc. ...................................................................... Delaware
Merrill Lynch Capital Corporation...................................................... Delaware
ML Leasing Equipment Corp./8/ .............................................................. Delaware
Merrill Lynch International Incorporated........................................................ Delaware
Merrill Lynch (Australasia) Pty Limited..................................................... New South Wales
Merrill Lynch International (Australia) Limited........................................ New South Wales
Merrill Lynch International Bank............................................................ United States
Merrill Lynch International Holdings Inc. .................................................. Delaware
Merrill Lynch Bank (Austria) Aktiengesellschaft A.G. .................................. Austria
Merrill Lynch Bank and Trust Company (Cayman) Limited ................................. Cayman Islands,
British West Indies
Merrill Lynch Capital Markets A.G. .................................................... Switzerland
Merrill Lynch Europe PLC............................................................... England
Merrill Lynch Europe Holdings Limited ............................................. England
Merrill Lynch International.................................................... England
Merrill Lynch, Pierce, Fenner & Smith (Brokers & Dealers) Limited.................. England
Merrill Lynch Europe Ltd. ............................................................. Cayman Islands,
British West Indies
Merrill Lynch France .................................................................. France
Merrill Lynch Capital Markets (France) S.A. ....................................... France
Merrill Lynch (Asia Pacific) Limited .................................................. Hong Kong
Merrill Lynch Far East Limited..................................................... Hong Kong
Merrill Lynch Japan Incorporated............................................................ Cayman Islands
British West Indies
</TABLE>
- ------------------
7 Merrill Lynch Group, Inc. owns 100% of this corporation's outstanding
common voting stock. 100% of the outstanding preferred voting stock is
held by outside parties.
8 This corporation has more than 45 direct or indirect subsidiaries
operating in the United States and serving as either general partners or
associate general partners of limited partnerships.
2
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in the following Registration
Statements of Merrill Lynch & Co., Inc. and subsidiaries of our reports dated
February 22, 1999, (which express an unqualified opinion and which report on the
consolidated financial statements includes an explanatory paragraph relating to
a change in the method of accounting for certain internal-use software
development costs) appearing in and incorporated by reference in this Annual
Report on Form 10-K for the year ended December 25, 1998.
Filed on Form S-8:
Registration Statement No. 33-41942 (1986 Employee Stock Purchase Plan)
Registration Statement No. 33-17908 (Incentive Equity Purchase Plan)
Registration Statement No. 33-33336 (Long-Term Incentive Compensation Plan)
Registration Statement No. 33-51831 (Long-Term Incentive Compensation Plan)
Registration Statement No. 33-51829 (401(k) Savings and Investment Plan)
Registration Statement No. 33-54154 (Non-Employee Directors' Equity Plan)
Registration Statement No. 33-54572 (401(k) Savings and Investment Plan
(Puerto Rico))
Registration Statement No. 33-56427 (Amended and Restated 1994 Deferred
Compensation Plan for a Select Group of Eligible Employees)
Registration Statement No. 33-55155 (1995 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 33-60989 (1996 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-09779 (1997 Deferred Compensation Plan
for a Select Group of Eligible Employees)
<PAGE>
Registration Statement No. 333-32209 (1998 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-00863 (401(k) Savings & Investment Plan)
Registration Statement No. 333-13367 (Restricted Stock Plan for Former
Employees of Hotchkis and Wiley)
Registration Statement No. 333-15009 (1997 KECALP Deferred Compensation
Plan for a Select Group of Eligible Employees)
Registration Statement No. 333-17099 (Deferred Unit and Stock Unit Plan
for Non-Employee Directors)
Registration Statement No. 333-18915 (Long-Term Incentive Compensation Plan
for Managers and Producers)
Registration Statement No. 333-33125 (Employee Stock Purchase Plan for
Employees of Merrill Lynch Partnerships)
Registration Statement No. 333-41425 (401(k) Savings & Investment Plan)
Registration Statement No. 333-56291 (Long-Term Incentive Compensation Plan
for Managers and Producers)
Registration Statement No. 333-60211 (1999 Deferred Compensation Plan
for a Select Group of Eligible Employees)
Registration Statement No. 333-62311 (Replacement Options; Midland Walwyn
Inc.)
Filed on Form S-3:
Debt Securities:
Registration Statement No. 33-54218
Registration Statement No. 2-78338
Registration Statement No. 2-89519
Registration Statement No. 2-83477
Registration Statement No. 33-03602
<PAGE>
Registration Statement No. 33-17965
Registration Statement No. 33-27512
Registration Statement No. 33-35456
Registration Statement No. 33-42041
Registration Statement No. 33-45327
Registration Statement No. 33-49947
Registration Statement No. 33-51489
Registration Statement No. 33-52647
Registration Statement No. 33-60413
Registration Statement No. 33-61559
Registration Statement No. 33-65135
Registration Statement No. 333-13649
Registration Statement No. 333-25255
Registration Statement No. 333-28537
Registration Statement No. 333-44173
Registration Statement No. 333-59997
Registration Statement No. 333-68747
Medium Term Notes:
Registration Statement No. 2-96315
Registration Statement No. 33-03079
Registration Statement No. 33-05125
Registration Statement No. 33-09910
Registration Statement No. 33-16165
<PAGE>
Registration Statement No. 33-19820
Registration Statement No. 33-23605
Registration Statement No. 33-27549
Registration Statement No. 33-38879
Other Securities:
Registration Statement No. 33-33335 (Common Stock)
Registration Statement No. 33-45777 (Common Stock)
Registration Statement No. 33-55363 (Preferred Stock)
Registration Statement No. 333-02275 (Long-Term Incentive Compensation Plan)
Registration Statement No. 333-16603 (TOPrS)
Registration Statement No. 333-20137 (TOPrS)
Registration Statement No. 333-24889 (Long-Term Incentive Compensation Plan,
and Long-Term Incentive Compensation Plan for Managers and Producers)
Registration Statement No. 333-36651 (Hotchkis and Wiley Resale)
Registration Statement No. 333-42859 (TOPrS)
Registration Statement No. 333-59263 (Exchangeable Shares of Merrill Lynch &
Co., Canada Ltd. re: Midland Walwyn Inc.)
Registration Statement No. 333-67903 (Howard Johnson & Company Resale)
/s/ Deloitte and Touche LLP
New York, New York
March 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-25-1998
<PERIOD-START> DEC-27-1997
<PERIOD-END> DEC-25-1998
<CASH> 12,530
<RECEIVABLES> 47,709
<SECURITIES-RESALE> 50,188
<SECURITIES-BORROWED> 37,525
<INSTRUMENTS-OWNED> 135,260<F1>
<PP&E> 2,761
<TOTAL-ASSETS> 299,804
<SHORT-TERM> 32,423
<PAYABLES> 28,871
<REPOS-SOLD> 59,501
<SECURITIES-LOANED> 7,626
<INSTRUMENTS-SOLD> 78,004<F2>
<LONG-TERM> 57,563
0
425
<COMMON> 630
<OTHER-SE> 9,077
<TOTAL-LIABILITY-AND-EQUITY> 299,804<F3>
<TRADING-REVENUE> 2,651
<INTEREST-DIVIDENDS> 19,314
<COMMISSIONS> 5,799
<INVESTMENT-BANKING-REVENUES> 3,264
<FEE-REVENUE> 4,202
<INTEREST-EXPENSE> 18,306
<COMPENSATION> 9,199
<INCOME-PRETAX> 2,096
<INCOME-PRE-EXTRAORDINARY> 2,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,259
<EPS-PRIMARY> 3.43
<EPS-DILUTED> 3.00
<FN>
<F1>Includes $6,106 of securities received as collateral, net of securities
pledged as collateral, and $8,184 of securities pledged as collateral, recorded pursuant to
the provisions of Statement of Financial Accounting Standards No. 127 ("SFAS
No. 127").
<F2>Includes $14,290 in obligation to return securities received as collateral,
recorded pursuant to the provisions of SFAS No. 127.
<F3>Includes $2,627 in Preferred Securities issued by Subsidiaries.
</FN>
</TABLE>
<PAGE>
EXHIBIT 99(i)
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 incorporated by reference
in Part Two, Item 8, "Financial Statements and Supplementary Data," of this
Annual Report on Form 10-K.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Merrill Lynch as of December 27,
1996, December 29, 1995 and December 30, 1994, the related consolidated
statements of earnings, changes in stockholders' equity and cash flows for each
of the two years in the period ended December 29, 1995 and the related
consolidated statement of comprehensive income for the year ended December 29,
1995 (none of which are presented or incorporated by reference herein); and we
expressed unqualified opinions on those consolidated financial statements. In
our opinion, the information set forth in Exhibit 12 under the captions "Ratio
of Earnings to Fixed Charges" and "Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends" for each of the five years in the period ended
December 25, 1998 included in this Annual Report on Form 10-K, is fairly stated,
in all material respects, in relation to the consolidated financial statements
from which it has been derived.
/s/ Deloitte and Touche LLP
New York, New York
February 22, 1999
<PAGE>
EXHIBIT 99(ii)
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 thereon are incorporated by
reference in Part Two, Item 8, "Financial Statements and Supplementary Data," of
this Annual Report on Form 10-K.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Merrill Lynch as of December 27,
1996, December 29, 1995 and December 30, 1994, the related consolidated
statements of earnings, changes in stockholders' equity and cash flows for each
of the two years in the period ended December 29, 1995 and the related
consolidated statement of comprehensive income for the year ended December 29,
1995 (none of which are presented or incorporated by reference herein); and we
expressed unqualified opinions on those consolidated financial statements. In
our opinion, the information set forth in the "Selected Financial Data" under
the captions "Operating Results," "Financial Position," and "Common Share Data"
included in the 1998 Annual Report to Stockholders and incorporated by reference
in this Annual Report on Form 10-K, is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.
/s/ Deloitte and Touche LLP
New York, New York
February 22, 1999
