SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 24, 1999
------------------
COMMISSION FILE NUMBER 1-7182
------
MERRILL LYNCH & CO., INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
- --------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
WORLD FINANCIAL CENTER, NORTH TOWER,
NEW YORK, NEW YORK 10281-1332
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 449-1000
- --------------------------------------------------------------------------------
Registrant's telephone number, including area code
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
366,660,192 shares of Common Stock and 4,009,359 Exchangeable Shares as of
the close of business on October 29, 1999. 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.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
--------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------
SEPT. 24, SEPT. 25, PERCENT(1)
(dollars in millions, except per share amounts) 1999 1998 INC. (DEC.)
-------- -------- ----------
<S> <C> <C> <C>
NET REVENUES
Commissions $ 1,440 $ 1,449 (0.7)%
Principal transactions 1,059 279 279.6
Investment banking 948 711 33.3
Asset management and portfolio service fees 1,183 1,043 13.5
Other 117 151 (22.7)
------- -------
Subtotal 4,747 3,633 30.7
Interest and dividends 3,665 4,712 (22.2)
Interest expense 3,144 4,496 (30.1)
------- -------
Net interest profit 521 216 141.3
------- -------
TOTAL NET REVENUES 5,268 3,849 36.9
------- -------
NON-INTEREST EXPENSES
Compensation and benefits 2,746 2,009 36.7
Communications and technology 481 487 (1.3)
Occupancy and related depreciation 230 227 1.3
Advertising and market development 190 203 (6.4)
Brokerage, clearing, and exchange fees 170 186 (8.9)
Professional fees 144 165 (12.9)
Goodwill amortization 57 55 3.6
Provision for costs related to staff reductions - 430 N/M
Other 359 292 23.0
------- -------
TOTAL NON-INTEREST EXPENSES 4,377 4,054 7.9
------- -------
EARNINGS (LOSS) BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 891 (205) N/M
Income Tax Expense (Benefit) 271 (75) N/M
Dividends on Preferred Securities Issued by Subsidiaries 48 33 48.6
------- -------
NET EARNINGS (LOSS) $ 572 $ (163) N/M
======= =======
NET EARNINGS (LOSS) APPLICABLE TO COMMON STOCKHOLDERS $ 562 $ (173) N/M
======= =======
EARNINGS (LOSS) PER COMMON SHARE
Basic $ 1.52 $ (0.48) N/M
======= =======
Diluted $ 1.34 $ (0.48) N/M
======= =======
DIVIDEND PAID PER COMMON SHARE $ 0.27 $ 0.24 12.5
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 370.3 357.6 3.6
======= =======
Diluted 419.1 357.6 17.2
======= =======
- ------------------------------------------------------------
</TABLE>
(1) Percentages are based on actual numbers before rounding.
N/M: Not Meaningful.
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-----------------------------------
SEPT. 24, SEPT. 25, PERCENT(1)
(dollars in millions, except per share amounts) 1999 1998 INC. (DEC.)
-------- -------- ----------
<S> <C> <C> <C>
NET REVENUES
Commissions $ 4,599 $ 4,375 5.1 %
Principal transactions 3,568 2,439 46.3
Investment banking 2,489 2,440 2.0
Asset management and portfolio service fees 3,452 3,156 9.3
Other 424 368 15.4
------- -------
Subtotal 14,532 12,778 13.7
Interest and dividends 11,077 13,951 (20.6)
Interest expense 9,635 13,263 (27.4)
------- -------
Net interest profit 1,442 688 109.7
------- -------
TOTAL NET REVENUES 15,974 13,466 18.6
------- -------
NON-INTEREST EXPENSES
Compensation and benefits 8,237 6,980 18.0
Communications and technology 1,497 1,311 14.2
Occupancy and related depreciation 689 645 6.7
Advertising and market development 543 580 (6.3)
Brokerage, clearing, and exchange fees 494 509 (3.0)
Professional fees 404 459 (12.0)
Goodwill amortization 170 166 2.5
Provision for costs related to staff reductions - 430 N/M
Other 1,022 809 26.4
------- -------
TOTAL NON-INTEREST EXPENSES 13,056 11,889 9.8
------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,918 1,577 85.0
Income Tax Expense 918 595 54.4
Dividends on Preferred Securities Issued by Subsidiaries 146 82 76.7
------- -------
NET EARNINGS $ 1,854 $ 900 106.0
======= =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,825 $ 871 109.4
======= =======
EARNINGS PER COMMON SHARE
Basic $ 4.97 $ 2.46 102.0
======= =======
Diluted $ 4.36 $ 2.14 103.7
======= =======
DIVIDENDS PAID PER COMMON SHARE $ 0.78 $ 0.68 14.7
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 367.6 354.1 3.8
======= =======
Diluted 418.7 406.7 2.9
======= =======
- ------------------------------------------------------------
</TABLE>
(1) Percentages are based on actual numbers before rounding.
N/M: Not Meaningful.
See Notes to Consolidated Financial Statements
3
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPT. 24, DEC. 25,
(dollars in millions) 1999 1998
- -------------------------------------------------------------------------------- -------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 12,014 $ 12,530
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 5,034 6,590
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES BORROWED TRANSACTIONS 95,703 87,713
MARKETABLE INVESTMENT SECURITIES 6,436 4,605
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 20,859 25,318
Contractual agreements 21,260 21,979
Corporate debt and preferred stock 22,429 21,166
U.S. Government and agencies 10,624 15,421
Non-U.S. governments and agencies 6,505 7,474
Mortgages, mortgage-backed, and asset-backed 6,980 7,023
Other 3,171 3,358
-------- --------
91,828 101,739
Securities received as collateral, net of securities pledged as collateral 9,581 6,106
-------- --------
Total 101,409 107,845
-------- --------
SECURITIES PLEDGED AS COLLATERAL 13,652 8,184
-------- --------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $49 in 1999 and $48 in 1998) 34,276 29,559
Brokers and dealers 10,181 8,872
Interest and other 8,078 9,278
-------- --------
Total 52,535 47,709
-------- --------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,255 4,485
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $144 in 1999 and 9,018 7,687
$124 in 1998)
OTHER INVESTMENTS 2,966 2,590
EQUIPMENT AND FACILITIES (net of accumulated depreciation and
amortization of $3,909 in 1999 and $3,482 in 1998) 3,007 2,761
GOODWILL (net of accumulated amortization of $494 in 1999 and $338 in 1998) 5,081 5,364
OTHER ASSETS 1,826 1,741
------- --------
TOTAL ASSETS $312,936 $299,804
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPT. 24, DEC. 25,
(dollars in millions, except per share amount) 1999 1998
- -------------------------------------------------------------------------- -------- -------
<S> <C> <C>
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $ 69,724 $ 67,127
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 13,680 18,679
DEMAND AND TIME DEPOSITS 16,852 13,744
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 26,284 23,840
Equities and convertible debentures 14,585 21,558
U.S. Government and agencies 14,377 7,939
Non-U.S. governments and agencies 6,419 7,245
Corporate debt and preferred stock 5,207 2,878
Other 250 254
-------- --------
Total 67,122 63,714
-------- --------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 23,233 14,290
-------- --------
OTHER PAYABLES
Customers 19,080 20,972
Brokers and dealers 10,632 7,899
Interest and other 18,230 18,738
-------- --------
Total 47,942 47,609
-------- --------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,160 4,319
LONG-TERM BORROWINGS 55,400 57,563
-------- --------
TOTAL LIABILITIES 298,113 287,045
-------- --------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,723 2,627
-------- --------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
-------- --------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 59 66
Common stock, par value $1.33 1/3 per share; authorized: 1,000,000,000 shares;
issued: 1999 - 472,661,774; 1998 - 472,660,324 630 630
Paid-in capital 1,763 1,427
Accumulated other comprehensive loss (net of tax) (303) (122)
Retained earnings 12,010 10,475
-------- --------
14,159 12,476
Less: Treasury stock, at cost: 1999 - 106,662,270 shares; 1998 - 116,376,259 shares 1,856 2,101
Employee stock transactions 628 668
-------- --------
TOTAL COMMON STOCKHOLDERS' EQUITY 11,675 9,707
-------- --------
TOTAL STOCKHOLDERS' EQUITY 12,100 10,132
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $312,936 $299,804
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------
(dollars in millions) SEPT. 24, SEPT. 25,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,854 $ 900
Noncash items included in earnings:
Depreciation and amortization 515 428
Policyholder reserves 154 171
Goodwill amortization 170 166
Other 555 397
(Increase) decrease in operating assets(a):
Trading assets 9,166 (9,845)
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations 1,556 (152)
Receivables under resale agreements and securities borrowed transactions (7,990) (8,647)
Customer receivables (4,717) (2,564)
Brokers and dealers receivables (1,309) (2,138)
Other 534 (273)
Increase (decrease) in operating liabilities(a):
Trading liabilities 3,408 (1,290)
Payables under repurchase agreements and securities loaned transactions 2,597 21,007
Customer payables (1,892) 3,213
Brokers and dealers payables 2,733 1,545
Other (707) 909
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 6,627 3,827
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 3,460 3,011
Sales of available-for-sale securities 2,344 2,227
Purchases of available-for-sale securities (6,693) (6,204)
Maturities of held-to-maturity securities 709 628
Purchases of held-to-maturity securities (744) (643)
Loans, notes, and mortgages (1,350) (2,872)
Acquisitions, net of cash acquired (20) (5,227)
Other investments and other assets (348) (757)
Equipment and facilities (762) (888)
Disposition of subsidiary - 61
-------- --------
CASH USED FOR INVESTING ACTIVITIES (3,404) (10,664)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings (4,999) (4,574)
Demand and time deposits 3,108 2,931
Issuance and resale of long-term borrowings 12,800 22,611
Settlement and repurchase of long-term borrowings (14,432) (11,052)
Issuance of subsidiaries' preferred securities 96 1,150
Issuance of treasury stock 182 169
Other common stock transactions (175) (165)
Dividends (319) (267)
-------- --------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (3,739) 10,803
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (516) 3,966
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,530 12,073
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,014 $ 16,039
======== ========
(a) Net of effects of acquisitions.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 657 $ 432
Interest 9,616 12,690
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 24, 1999
(dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 25, 1998
consolidated balance sheet was derived from the audited financial statements.
The interim consolidated financial statements for the three- and nine-month
periods are unaudited; however, in the opinion of Merrill Lynch management, all
adjustments, consisting only of normal recurring accruals and a 1998 provision
for costs related to staff reductions, necessary for a fair statement of the
results of operations have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report included
as an exhibit to Form 10-K for the year ended December 25, 1998. The nature of
Merrill Lynch's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
- --------------------------------------------------------------------------------
NOTE 2. SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Short-term borrowings at September 24, 1999 and December 25, 1998 are presented
below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
SEPT. 24, DEC. 25,
1999 1998
-------- -------
<S> <C> <C>
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $ 62,219 $59,501
Securities loaned transactions 7,505 7,626
-------- -------
Total $ 69,724 $67,127
======== =======
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $ 11,720 $16,758
Bank loans and other 1,960 1,921
-------- -------
Total $ 13,680 $18,679
======== =======
DEMAND AND TIME DEPOSITS
Demand $ 4,871 $ 4,454
Time 11,981 9,290
-------- -------
Total $ 16,852 $13,744
======== =======
- ---------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 3. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
- --------------------------------------------------------------------------------
In July 1999, Merrill Lynch Yen TOPrS Trust 1 (the "Issuing Trust") issued (Yen)
10 billion ($96 at September 24, 1999) of 2.7% Yen Trust Originated Preferred
Securities. The Issuing Trust holds preferred securities of a trust (the
"Funding Trust") which is also a subsidiary of ML & Co. The assets of the
Funding Trust consist primarily of debt securities of ML & Co. and certain of
its controlled affiliates. ML & Co. has guaranteed, on a subordinated basis,
certain payments of the Issuing Trust and the Funding Trust.
7
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4. SEGMENT INFORMATION
- --------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into two business segments: Wealth Management and Corporate and Institutional
Client Group ("CICG"). For more information on these segments, see the 1998
Annual Report included as an exhibit to Form 10-K.
Operating results by business segment follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WEALTH CORPORATE
MANAGEMENT CICG ITEMS TOTAL
---------- -------- --------- --------
THREE MONTHS ENDED
SEPT. 24, 1999
<S> <C> <C> <C> <C>
Net interest revenue (a) $ 325 $ 255 $ (59)(b) $ 521
All other revenues 2,639 2,108 - 4,747
------- -------- -------- --------
Net revenues 2,964 2,363 (59) 5,268
Non-interest expenses 2,551 1,769 57 (c) 4,377
------- -------- -------- --------
Earnings before income taxes 413 594 (116) 891
Income tax expense (benefit) 139 160 (28) 271
Dividends on preferred securities
issued by subsidiaries - - 48 48
------- -------- -------- --------
Net earnings $ 274 $ 434 $ (136) $ 572
======= ======== ======== ========
Total assets $57,261 $250,594 $ 5,081 $312,936
======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
WEALTH CORPORATE
MANAGEMENT CICG ITEMS TOTAL
---------- -------- --------- --------
THREE MONTHS ENDED
SEPT. 25, 1998
<S> <C> <C> <C> <C>
Net interest revenue (a) $ 235 $ 62 $ (81)(b) $ 216
All other revenues 2,573 1,060 - 3,633
------- -------- -------- --------
Net revenues 2,808 1,122 (81) 3,849
Non-interest expenses, excluding
staff reduction provision 2,384 1,185 55 (c) 3,624
Provision for costs related to staff
reductions - - 430 (d) 430
------- -------- -------- --------
Earnings (loss) before income taxes 424 (63) (566) (205)
Income tax expense (benefit) 192 (49) (218) (75)
Dividends on preferred securities
issued by subsidiaries - - 33 33
------- -------- -------- --------
Net earnings (loss) $ 232 $ (14) $ (381) $ (163)
======= ======== ======== ========
Total assets $44,193 $303,785 $ 5,413 $353,391
======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WEALTH CORPORATE
MANAGEMENT CICG ITEMS TOTAL
---------- -------- --------- --------
NINE MONTHS ENDED
SEPT. 24, 1999
<S> <C> <C> <C> <C>
Net interest revenue (a) $ 895 $ 735 $ (188)(b) $ 1,442
All other revenues 8,254 6,278 - 14,532
------- -------- -------- --------
Net revenues 9,149 7,013 (188) 15,974
Non-interest expenses 7,722 5,164 170 (c) 13,056
------- -------- -------- --------
Earnings before income taxes 1,427 1,849 (358) 2,918
Income tax expense (benefit) 519 525 (126) 918
Dividends on preferred securities
issued by subsidiaries - - 146 146
------- -------- -------- --------
Net earnings $ 908 $ 1,324 $ (378) $ 1,854
======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
WEALTH CORPORATE
MANAGEMENT CICG ITEMS TOTAL
---------- -------- --------- --------
NINE MONTHS ENDED
SEPT. 25, 1998
<S> <C> <C> <C> <C>
Net interest revenue (a) $ 696 $ 218 $ (226)(b) $ 688
All other revenues 7,809 4,969 - 12,778
-------- -------- -------- --------
Net revenues 8,505 5,187 (226) 13,466
Non-interest expenses, excluding
staff reduction provision 7,030 4,263 166 (c) 11,459
Provision for costs related to staff
reductions - - 430 (d) 430
-------- -------- -------- --------
Earnings before income taxes 1,475 924 (822) 1,577
Income tax expense (benefit) 629 264 (298) 595
Dividends on preferred securities
issued by subsidiaries - - 82 82
------- -------- -------- --------
Net earnings $ 846 $ 660 $ (606) $ 900
======= ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Management views interest income net of interest expense in evaluating
results.
(b) Represents Mercury financing costs.
(c) Represents goodwill amortization from acquisitions.
(d) Had this amount been allocated to segments, $163 and $267 would have been
allocated to Wealth Management and CICG, respectively.
9
<PAGE>
- --------------------------------------------------------------------------------
NOTE 5. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) $ 572 $ (163) $ 1,854 $ 900
Other comprehensive income (loss), net of tax:
Currency translation adjustment 41 (9) (118) (4)
Net unrealized losses on investment
securities available-for-sale (25) (9) (63) (8)
-------- -------- -------- --------
Total other comprehensive income (loss), net 16 (18) (181) (12)
-------- -------- -------- --------
Comprehensive income (loss) $ 588 $ (181) $ 1,673 $ 888
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 6. EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings(loss) $ 572 $ (163) $ 1,854 $ 900
Preferred stock dividends 10 10 29 29
Net earnings(loss) applicable to -------- -------- -------- --------
common stockholders $ 562 $ (173) $ 1,825 $ 871
======== ======== ======== ========
(shares in thousands)
Weighted-average shares outstanding 370,347 357,620 367,553 354,134
-------- -------- -------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 27,105 29,546 29,307 30,853
FCCAAP shares 16,195 16,232 16,461 16,710
Restricted units 5,409 5,023 5,298 4,947
ESPP shares 34 32 54 52
-------- -------- -------- --------
Dilutive potential common shares 48,743 50,833 51,120 52,562
-------- -------- -------- --------
Total weighted-average diluted shares 419,090 408,453 (3) 418,673 406,696
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings(loss) per common share $ 1.52 $ (0.48) $ 4.97 $ 2.46
Diluted earnings(loss) per common share $ 1.34 $ (0.48)(3) $ 4.36 $ 2.14
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During the 1999 third quarter, there were 4,093 instruments that were
considered antidilutive and were not included in the above computations.
(2) See Note 10 to Consolidated Financial Statements in the 1998 Annual Report
included as an exhibit to Form 10-K for a description of these instruments.
(3) Since accounting principles require that a net loss not be diluted by
potential common shares, diluted loss per share for the 1998 third
quarter is calculated using only weighted-average shares outstanding.
10
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7. DERIVATIVES, COMMITMENTS, AND OTHER CONTINGENCIES
- --------------------------------------------------------------------------------
Merrill Lynch enters into various derivative contracts to meet clients' needs
and to manage its own market risks. Derivative contracts often involve future
commitments to exchange interest payment streams or currencies (such as interest
rate and currency swaps or foreign exchange forwards) or to purchase or sell
other financial instruments at specified terms on a specified date. Options, for
example, can be purchased or written on a wide range of financial instruments
such as securities, currencies, futures, and various market indices.
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments. The notional or contractual amounts of derivatives used
for trading purposes and included in trading inventory by type of risk follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Equity Commodity
Rate Currency Price Price
(in billions) Risk(1)(2) Risk(3) Risk Risk
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SEPT. 24, 1999
- --------------
Swap agreements $2,536 $137 $ 25 $ 7
Forward contracts 110 170 - 1
Futures contracts 271 5 12 1
Options purchased 136 80 51 6
Options written 243 87 54 7
DEC. 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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent "To Be
Announced" mortgage pools that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
- --------------------------------------------------------------------------------
The notional or contractual amounts of derivatives at September 24, 1999 and
December 25, 1998 used to hedge all other exposures, primarily borrowings,
follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPT. 24, DEC. 25,
(in billions) 1999 1998
-------- -------
<S> <C> <C>
Interest rate derivatives(1) $68 $71
Currency derivatives(1) 23 19
Equity derivatives 5 5
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes swap contracts totaling $2 billion in notional amounts that
contain embedded options hedging callable debt at September 24, 1999 and
December 25, 1998.
11
<PAGE>
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. Realized gains and losses on early terminations of
derivatives are deferred over the remaining lives of the hedged assets or
liabilities. At September 24, 1999, $29 of such gains were deferred; $20 of this
amount will be recognized over the next year and the remaining $9 will be
recognized over the next five years.
In the normal course of business, Merrill Lynch enters into underwriting
commitments and commitments to extend credit. Settlement of these commitments as
of September 24, 1999 would not have a material effect on the consolidated
financial condition of Merrill Lynch. Subsequent to quarter end, Merrill Lynch
extended a $2.5 billion loan commitment to an investment grade company in
connection with a proposed acquisition transaction. Merrill Lynch intends to
syndicate a significant portion of this loan commitment.
Refer to Part II - Other Information for a discussion of legal proceedings.
In September 1999, Merrill Lynch paid remaining liabilities of $400 and $17 plus
interest in settlement of the Orange County action and the related Irvine Ranch
Water District action, respectively.
- --------------------------------------------------------------------------------
NOTE 8. REGULATORY REQUIREMENTS
- --------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under
the Securities Exchange Act of 1934. Under the alternative method permitted by
this rule, the minimum required net capital, as defined, shall not be less than
2% of aggregate debit items arising from customer transactions. At September 24,
1999, MLPF&S's regulatory net capital of $4,147 was 17% of aggregate debit
items, and its regulatory net capital in excess of the minimum required was
$3,663.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is
subject to the capital requirements of the Financial Services Authority ("FSA").
Financial resources, as defined, must exceed the total financial resources
requirement of the FSA. At September 24, 1999, MLI's financial resources were
$3,574 and exceeded the minimum requirement by $926.
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in
U.S. Government securities, is subject to the capital adequacy requirements of
the Government Securities Act of 1986. This rule requires dealers to maintain
liquid capital in excess of market and credit risk, as defined, by 20% (a
1.2-to-1 capital-to-risk standard). At September 24, 1999, MLGSI's liquid
capital of $1,627 was 387% of its total market and credit risk, and liquid
capital in excess of the minimum required was $1,122.
- --------------------------------------------------------------------------------
NOTE 9. COMMON STOCK
- --------------------------------------------------------------------------------
In February 1999, ML & Co. issued 1,450 shares of common stock to certain
non-U.S. employees in connection with an employee incentive plan grant, thereby
increasing issued shares to 472,661,774.
12
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
- -------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of September 24,
1999, and the related condensed consolidated statements of earnings for the
three- and nine-month periods ended September 24, 1999 and September 25, 1998
and the condensed consolidated statement of cash flows for the nine-month
periods ended September 24, 1999 and September 25, 1998. These financial
statements are the responsibility of Merrill Lynch's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch as of December 25,
1998, and the related consolidated statements of earnings, changes in
stockholders' equity, comprehensive income and cash flows for the year then
ended (not presented herein); and in our report dated February 22, 1999, we
expressed an unqualified opinion and included an explanatory paragraph for the
change in accounting method for certain internal-use software development costs
to conform with Statement of Position 98-1. In our opinion, the information set
forth in the accompanying condensed consolidated balance sheet as of December
25, 1998 is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/ Deloitte and Touche LLP
New York, New York
November 5, 1999
13
<PAGE>
- --------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, advisory, insurance, and related
services worldwide. Merrill Lynch conducts its businesses in global financial
markets that are influenced by numerous unpredictable factors including economic
conditions, monetary policies, liquidity, international and regional political
events, regulatory developments, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility of
financial markets. While greater volatility increases risk, it may also increase
order flow in businesses such as trading and brokerage. Revenues and net
earnings may vary significantly from period to period due to these unpredictable
factors and the resulting market volatility.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, diminishing margins in many mature products and services, as well
as significant growth in the market for on-line trading services. The relaxation
of banks' barriers to entry into the securities industry and expansion by
insurance companies into traditional brokerage products, coupled with the
imminent repeal of the laws separating commercial and investment banking
activities and other financial services, 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 paragraphs, as well as:
o actions and initiatives 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 PUBLICLY OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
- --------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
- --------------------------------------------------------------------------------
Global financial markets were affected by a modest slowdown during the 1999
third quarter, after a generally strong first six months. A midsummer U.S. stock
market correction, combined with uncertainty regarding the direction of U.S.
interest rates and weakness in the U.S. dollar versus the Japanese yen,
contributed to lower trading and debt underwriting activity industrywide.
Investor and issuer demand were up significantly from the 1998 third quarter,
when an unprecedented widening of credit spreads and diminished liquidity
negatively impacted global financial markets.
Long-term U.S. interest rates, as measured by the yield on the 30 year U.S.
Treasury bond, declined slightly during the 1999 third quarter, but were higher
compared with the year-ago period. Short-term U.S. rates, however, rose in June
and again in August, when the Federal Reserve raised the overnight lending rate
twenty-five basis points. Long-term interest rates in Europe generally increased
during the 1999 third quarter, and were higher compared with the 1998 third
quarter. Credit spreads, which represent the risk premium over the risk-free
rate paid by an issuer (based on the issuer's perceived creditworthiness),
widened in the 1999 third quarter, but not as dramatically as in the year-ago
period.
U.S. equity indices, which posted overall gains during the 1999 first half, lost
some of their momentum in the 1999 third quarter. The Federal Reserve's decision
to raise the overnight lending rate on two separate occasions, in addition to
investor concern about potential rate increases and inflation, contributed
14
<PAGE>
to declines in most equity indices. The Dow Jones Industrial Average and the S&P
500 fell 5.8% and 6.6%, respectively, in the 1999 third quarter erasing all
gains achieved since April, but were up 31.8% and 26.1%, respectively, from the
end of the year-ago period. Aided by gains in certain technology stocks, the
NASDAQ increased 2.2% in the quarter and 62.1% compared with the end of the 1998
third quarter.
The renewed strength of the Japanese yen and concern over rising U.S. interest
rates prevented many global equity markets from achieving the significant gains
recorded in the 1999 first half. During the quarter, Tokyo stocks rose 20% in
U.S. dollar terms but only 5% in local currency terms as the Bank of Japan's
monetary policy remained unchanged. Virtually all other Asian equity markets
suffered declines during the quarter, while Latin American equity indices gave
up nearly all of the gains posted earlier in the year. European markets
continued their sluggish performance during the 1999 third quarter, as evidenced
by the decline in most equity indices and the continued weakening of the euro.
Concerns over U.S. interest rates contributed to a decrease in global debt
underwriting volume during the 1999 third quarter, which declined 25% from $399
billion in the 1999 second quarter to approximately $300 billion, according to
Thomson Financial Securities Data. In addition, the 1999 third quarter had the
lowest high-yield debt underwriting volume since the 1996 third quarter. Equity
issuances were down from the 1999 second quarter, but were nearly double the
1998 third quarter volume.
Strategic services activities remained strong during the 1999 third quarter,
reflecting a continuation of the high level of merger and acquisition activity
experienced in the 1999 first half. Global announced mergers and acquisitions
totaled $766 billion in the 1999 third quarter, up from $552 billion in the 1999
second quarter and $535 billion in the year-ago period, according to Thomson
Financial Securities Data. Non-U.S. strategic services continued to dominate
merger and acquisition activity, with European companies involved in four of the
five largest announced transactions during the 1999 third quarter.
Due to changes in the competitive environment, Merrill Lynch continually
evaluates its businesses across varying market conditions for profitability and
alignment with long-term strategic objectives. Merrill Lynch seeks to mitigate
the effects of volatility and market downturns by exploring selective expansion
of its global presence, developing and maintaining long-term client
relationships, monitoring costs and risks, and continuing to diversify revenue
sources.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED INCREASE (DECREASE)
------------------------------------------- 3Q99 VERSUS
SEPT. 24, JUNE 25, SEPT. 25, -------------------
(dollars in millions, except per share amounts) 1999 1999 1998 2Q99 3Q98
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 8,412 $ 8,630 $ 8,345 (3)% 1%
Net revenues 5,268 5,440 3,849 (3) 37
Pre-tax earnings (loss) 891 1,031 (205) (14) N/M
Net earnings (loss) 572 673 (163) (15) N/M
Net earnings (loss) applicable
to common stockholders 562 664 (173) (15) N/M
Earnings (loss) per common share
Basic 1.52 1.80 (0.48) (1) (16) N/M
Diluted 1.34 1.57 (0.48) (1) (15) N/M
Annualized return on average common
stockholders' equity 20.2% 25.4% (7.3)%(2)
Effective tax rate 30.4 30.0 36.4
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excluding the special provision for staff reductions, basic and diluted
earnings per common share were $0.32 and $0.28, respectively.
(2) Excluding the special provision for staff reductions, annualized return on
average common stockholders' equity was 4.8%.
15
<PAGE>
The following discussion compares the third quarters of 1999 and 1998 and, where
appropriate, contrasts the 1999 third and second quarters.
Merrill Lynch's net earnings were $572 million for the 1999 third quarter,
compared with a net loss of $163 million in the year-ago period, which included
a special provision for costs related to staff reductions ($288 million
after-tax, $430 million pre-tax). Excluding the special provision, net earnings
were up $447 million from the 1998 third quarter. Basic and diluted earnings per
common share for the 1999 third quarter were $1.52 and $1.34, respectively,
versus $0.32 and $0.28 in the 1998 third quarter, excluding the special
provision.
Net revenues were $5.3 billion, up 37% from the 1998 third quarter, led by
record revenues in investment banking and asset management and portfolio service
fees, and sharply higher principal transactions revenues and net interest.
Non-U.S. net revenues advanced to 36% of total net revenues in the 1999 third
quarter, versus 21% in the 1998 third quarter and 33% in the 1999 second
quarter.
Net earnings for the 1999 nine months were a record $1.9 billion, versus $900
million in the corresponding 1998 period. Year-to-date basic and diluted
earnings per common share were $4.97 and $4.36, respectively, compared with
$2.46 and $2.14 in the corresponding 1998 period. Annualized return on average
common stockholders' equity was 23.3% for the 1999 nine months versus 12.9% for
the 1998 first nine months. Excluding the special provision, 1998 nine-month
earnings were $1.2 billion, or $2.85 per diluted common share. On the same
basis, annualized return on average common stockholders' equity was 17.1%
in 1998.
Earnings on a cash basis, which exclude goodwill amortization, were $629 million
for the 1999 third quarter, and $2.0 billion for the nine-month period. On the
same basis, excluding the special provision, 1998 third quarter and nine-month
earnings were $180 million and $1.4 billion, respectively.
Commissions revenues are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -----------------------
SEPT. 24, SEPT. 25, % SEPT. 24, SEPT. 25, %
(in millions) 1999 1998 INC.(DEC.) 1999 1998 INC.(DEC.)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Listed and over-the-counter $ 800 $ 818 (2)% $ 2,596 $ 2,386 9%
Mutual funds 422 445 (5) 1,374 1,442 (5)
Other 218 186 17 629 547 15
-------- -------- -------- --------
Total $ 1,440 $ 1,449 (1) $ 4,599 $ 4,375 5
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commissions revenues declined modestly from the 1998 third quarter as higher
revenues from short-term debt instruments were more than offset by lower mutual
fund sales and listed securities revenues. Lower industry trading volume
contributed to these declines.
16
<PAGE>
Significant components of interest and dividend revenues and interest expense
follow:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- -----------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
(in millions) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $ 1,397 $ 1,969 $ 4,184 $ 5,989
Trading assets 788 1,251 2,529 3,685
Margin lending 703 712 2,071 2,105
Dividends 141 142 456 448
Other 636 638 1,837 1,724
-------- -------- -------- --------
Total 3,665 4,712 11,077 13,951
======== ======== ======== ========
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 1,224 1,909 3,719 5,513
Borrowings 1,087 1,458 3,302 4,250
Trading liabilities 402 673 1,352 2,160
Other 431 456 1,262 1,340
-------- -------- -------- --------
Total 3,144 4,496 9,635 13,263
======== ======== ======== ========
NET INTEREST AND DIVIDEND PROFIT $ 521 $ 216 $ 1,442 $ 688
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and dividend revenues and expenses are a function of the level and mix
of interest-earning assets and interest-bearing liabilities and the prevailing
level, term structure, and volatility of interest rates. Net interest and
dividend profit in the 1999 third quarter was sharply higher compared with the
1998 third quarter, partially due to lower funding costs, changes in asset
composition, and a steepening yield curve.
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate and
currency characteristics of the borrowings to the assets funded by borrowing
proceeds. The effect of this hedging activity, which is included in "Borrowings"
in the previous table, (decreased)/increased interest expense by $(69) million
and $2 million for the 1999 and 1998 third quarters, respectively, and by $(234)
million and $(20) million for the 1999 and 1998 nine months, respectively.
17
<PAGE>
The following table provides information on aggregate 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL NET TRADING
TRANSACTIONS INTEREST NET
REVENUES REVENUES REVENUES
------------------ ------------------ -----------------
(in millions) 1999 1998 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
THIRD QUARTER
- -------------
Equities and equity derivatives $ 429 $ 337 $ 104 $ 36 $ 533 $ 373
Debt and debt derivatives 464 (190) 61 (63) 525 (253)
Mortgages and municipals 119 80 63 66 182 146
Foreign exchange 47 52 (1) (2) 46 50
------- ------- ------- ------- ------- -------
Total $ 1,059 $ 279 $ 227 $ 37 $ 1,286 $ 316
======= ======= ======= ======= ======= =======
NINE MONTHS
- -----------
Equities and equity derivatives $ 1,518 $ 1,258 $ 303 $ 81 $ 1,821 $ 1,339
Debt and debt derivatives 1,571 785 133 (91) 1,704 694
Mortgages and municipals 323 235 217 180 540 415
Foreign exchange 156 161 - (2) 156 159
------- ------- ------- ------- ------- -------
Total $ 3,568 $ 2,439 $ 653 $ 168 $ 4,221 $ 2,607
======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Trading net revenues increased $970 million from the 1998 third quarter to $1.3
billion in the 1999 third quarter as a result of higher revenues in nearly all
categories, particularly in debt and debt derivatives trading.
Equities and equity derivatives trading net revenues were $533 million, up 43%
from the 1998 third quarter, due in part to higher global convertible revenues
compared with the 1998 third quarter. A general improvement in market conditions
also contributed to increased revenues from certain other equity products.
Debt and debt derivatives trading net revenues were $525 million in the 1999
third quarter, compared with a $253 million loss in the corresponding 1998
period. Revenues from corporate bond trading and European credit trading
increased significantly from the 1998 third quarter, when severe market
volatility led to losses in emerging market and other credit-sensitive
fixed-income products. Latin American and Asian debt revenues dramatically
improved from the corresponding 1998 quarter, due in part to more stable market
conditions and tighter credit spreads.
Mortgages and municipals revenues increased 25% to $182 million in the 1999
third quarter, partially due to higher customer demand. Foreign exchange
revenues were down 8% to $46 million in the 1999 third quarter.
18
<PAGE>
Investment banking revenues reached a record $948 million in the 1999 third
quarter, up 33% from the corresponding 1998 period as a result of higher debt
and equity underwriting and record strategic services fees. A summary of Merrill
Lynch's investment banking revenues follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -------------------
SEPT. 24, SEPT. 25, % SEPT. 24, SEPT. 25, %
(in millions) 1999 1998 INC. 1999 1998 INC.(DEC.)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Underwriting $ 565 $ 384 47% $ 1,586 $ 1,648 (4)%
Strategic services 383 327 17 903 792 14
-------- -------- -------- --------
Total $ 948 $ 711 33 $ 2,489 $ 2,440 2
======== ======== ======== ========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Both debt and equity underwriting revenues were significantly higher compared
with the 1998 third quarter, when global market volatility led to an
industrywide slowdown in new issuances. Merrill Lynch remained the leading
underwriter of total debt and equity offerings during the 1999 third quarter, in
addition to obtaining the number one ranking in worldwide initial public
offerings and increasing its market share in virtually all categories from the
1998 third quarter. Merrill Lynch's underwriting market share information based
on transaction value follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------------
SEPT. 24, 1999 SEPT. 25, 1998
--------------- ---------------
MARKET MARKET
SHARE RANK SHARE RANK
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. PROCEEDS
Debt 17.4% 1 14.9% 1
Equity 12.4 2 12.1 2
Debt and equity 17.1 1 15.2 1
GLOBAL PROCEEDS
Debt 13.5 1 13.1 1
Equity 14.4 3 9.4 4
Debt and equity 13.7 1 13.5 1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic services fees increased 17% from the 1998 third quarter and 22% from
the 1999 second quarter to a record $383 million, benefiting from higher levels
of merger and acquisition activity, particularly in Europe. Merrill Lynch's
merger and acquisition market share information for the 1999 and 1998 third
quarters based on transaction value follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------------------------
SEPT. 24, 1999 SEPT. 25, 1998
------------------- ------------------
MARKET MARKET
SHARE RANK SHARE RANK
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPLETED TRANSACTIONS
U.S. 20.5% 4 40.1% 1
Global 24.4 3 28.9 1
ANNOUNCED TRANSACTIONS
U.S. 23.5 3 45.8 2
Global 24.7 4 32.1 2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
19
<PAGE>
Merrill Lynch's asset management and portfolio service fees are summarized
below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- ---------------------
SEPT. 24, SEPT. 25, % SEPT. 24, SEPT. 25, %
(in millions) 1999 1998 INC.(DEC.) 1999 1998 INC. (DEC.)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset management fees $ 546 $ 501 9 % $1,617 $1,553 4 %
Portfolio service fees 385 310 24 1,079 850 27
Account fees 124 110 13 382 344 11
Other fees 128 122 5 374 409 (9)
------ ------ ------ ------
Total $1,183 $1,043 13 $3,452 $3,156 9
====== ====== ====== ======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset management fees increased from the 1998 third quarter due to the 10%
growth in assets under management, attributable to a net inflow of customer
assets and asset appreciation since September 25, 1998. During the 1999 third
quarter, assets under management decreased less than 1% as a result of a decline
in asset values associated with the U.S. stock market, and net redemptions from
both retail and institutional accounts. This decline was partially offset by
reinvested dividends and foreign exchange gains. Record portfolio service fees
resulted in part from a nearly 200,000 increase in the number of fee-based
accounts since the end of the 1998 third quarter, including those related to
Merrill Lynch Consults (Registered Trademark) and Unlimited Advantage (Service
Mark), Merrill Lynch's new fee-based financial service. Total assets in
fee-based accounts totaled $117 billion at the end of the 1999 third quarter, up
significantly from $73 billion at September 25, 1998. The majority of the
revenues associated with these accounts is included in portfolio service fees,
with the remainder in asset management fees. Account fees rose, due in part to
an increase in Individual Retirement Account/Keogh and Cash Management Account
fees.
Total assets in Wealth Management client accounts or under management were $1.5
trillion at September 24, 1999, representing a $195 billion increase from
September 25, 1998 and a $16 billion decrease from June 25, 1999. The third
quarter decline resulted from a merger related loss of an employee group stock
plan, which had assets of $23 billion. Assets under management, which are
included in total assets in Wealth Management client accounts or under
management, totaled $514 billion at the end of the 1999 third quarter, an
increase of $47 billion from the end of the 1998 third quarter, and a decrease
of less than 1% from the end of the 1999 second quarter, as discussed in the
previous paragraph. The changes in these balances are noted as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SEPT. 25, NEW ASSET SEPT. 24,
(in billions) 1998 MONEY(1) APPRECIATION(2) 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets in Wealth Management
client accounts or under management $1,319 $64 $131 $1,514
Total assets under management 467 13 34 514
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1 Includes reinvested dividends of $11 billion.
(2) Includes foreign exchange translation adjustments of $(7) billion.
Other revenues decreased 23% from the 1998 third quarter to $117 million in the
1999 third quarter, due in part to lower realized investment gains and the 1998
third quarter gain on the sale of a residential real estate subsidiary.
20
<PAGE>
Merrill Lynch's non-interest expenses are summarized below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- ---------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
(in millions) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Compensation and benefits $ 2,746 $ 2,009 $ 8,237 $ 6,980
-------- -------- -------- --------
Non-interest expenses, excluding compensation and benefits:
Communications and technology 481 487 1,497 1,311
Occupancy and related depreciation 230 227 689 645
Advertising and market development 190 203 543 580
Brokerage, clearing, and exchange fees 170 186 494 509
Professional fees 144 165 404 459
Goodwill amortization 57 55 170 166
Provision for costs related to staff reductions - 430 - 430
Other 359 292 1,022 809
-------- -------- -------- --------
Total non-interest expenses,
excluding compensation and benefits 1,631 2,045 4,819 4,909
-------- -------- -------- --------
Total non-interest expenses $ 4,377 $ 4,054 $ 13,056 $ 11,889
======== ======== ======== ========
Compensation and benefits
as a percentage of net revenues 52.1 % 52.2 % 51.6 % 51.8 %
Compensation and benefits as a percentage of
pre-tax earnings before compensation and benefits 75.5 90.0 (1) 73.8 77.7 (1)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes provision for costs related to staff reductions.
Non-interest expenses, excluding compensation costs, were up 1% from the 1998
third quarter (excluding the special provision) and were down 3% from the 1999
second quarter.
Compensation and benefits, the largest expense category, rose $737 million from
the 1998 third quarter, or 37%, to $2.7 billion as increased profitability led
to significantly higher incentive compensation. Compensation and benefits as a
percentage of net revenues was 52.1% for the 1999 third quarter and 51.6% for
the 1999 nine months, in line with the ratios for each of the last three years.
Communications and technology costs declined 1% from the 1998 third quarter to
$481 million in the 1999 third quarter, due in part to reductions in Y2K
consulting costs, increased capitalization of certain software costs related to
various initiatives, including Merrill Lynch's self directed on-line trading
platform, and higher preferred vendor discounts. Occupancy and related
depreciation expense was $230 million in the 1999 third quarter, virtually
unchanged from the comparable 1998 period.
Advertising and market development expense was $190 million, down 6% from the
1998 third quarter, principally due to reductions in sales promotion and global
travel and entertainment expenses. Brokerage, clearing, and exchange fees
decreased 9% to $170 million due in part to lower global trading volume.
Professional fees were $144 million, down 13% from the 1998 third quarter.
Goodwill amortization was $57 million in the 1999 third quarter, virtually
unchanged from the year-ago quarter. Other expenses were $359 million, up 23%
from a year ago, due in part to unfavorable foreign exchange movements related
to the Japanese yen versus the U.S. dollar and higher provisions related to
various legal and business matters.
For the third quarter of 1999, the effective tax rate was 30.4%, virtually
unchanged from the 1999 second quarter rate but down from 36.4% in the 1998
third quarter, benefiting from tax-advantaged financing and higher tax-exempt
and non-U.S. income. The year-to-date effective tax rate was 31.5%.
21
<PAGE>
- --------------------------------------------------------------------------------
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 for
individual investors, corporations, institutions, and governments. These
strategic priorities serve largely the same customer base, provide similar
products and services, utilize comparable distribution channels to deliver those
products and services, operate in a highly regulated environment, and
accordingly, are managed and evaluated on an aggregate basis. 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 primarily
involve providing equity and debt sales and trading, underwriting and strategic
advisory services, and other capital markets services to corporate,
institutional, and governmental clients throughout the world. For further
information on services provided to clients within these segments, see the 1998
Form 10-K and the 1998 Annual Report included as an exhibit thereto.
The segment operating results exclude certain corporate items, which reduced net
earnings for the 1999 and 1998 third quarters by $136 million and $381 million,
respectively. Corporate items reduced the 1999 and 1998 nine-month net earnings
by $378 million and $606 million, respectively. (See Note 4 to Consolidated
Financial Statements - Unaudited.)
- --------------------------------------------------------------------------------
WEALTH MANAGEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- ------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
(in millions) 1999 1998 1999 1998
- ---------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Net revenues $ 2,964 $2,808 $ 9,149 $ 8,505
Net earnings 274 232 908 846
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net revenues and net earnings for Wealth Management were approximately $3.0
billion and $274 million, respectively, in the 1999 third quarter, up 6% and 18%
from $2.8 billion and $232 million in the 1998 third quarter. Record revenues in
asset management and portfolio service fees, resulting from significant growth
in the number of fee-based accounts and market appreciation, contributed to
these results.
In the U.S., total assets in Wealth Management client accounts or under
management were $1,191 billion at September 24, 1999, which included $304
billion in assets under management. Outside the U.S., total assets in Wealth
Management client accounts or under management were $323 billion. Assets under
management outside the U.S. were $210 billion at the end of the third quarter.
In the asset management business, U.S. mutual fund performance strengthened
significantly during the 1999 first nine months, as funds containing 76% of
client assets outperformed their Lipper median. Initiatives in Japan continued
to improve during the quarter, with year-to-date net revenues ahead of
management's expectations. For the quarter, net revenues in Japan were up over
50% from the 1999 second quarter and client assets grew approximately 40% (20%,
excluding the impact of foreign exchange) to nearly $8 billion. Unlimited
Advantage, Merrill Lynch's new fee-based financial service, has also been
positively received, and since the June 1st announcement date, has added nearly
100,000 new accounts and total assets of over $16 billion, approximately 20% of
which is new money. In addition, approximately 80,000 Financial Advantage
(Service Mark) and Asset Power (Service Mark) accounts containing $24 billion in
total assets were converted to Unlimited Advantage accounts. Over time this
initiative will lead to a shift from commissions revenues to asset management
and portfolio service fees.
Wealth Management and CICG also further expanded their investment in electronic
communications networks by jointly purchasing an equity stake in Archipelago,
which is expected to provide retail and institutional clients enhanced access to
trading markets. In December 1999, Merrill Lynch, through the launch of a new ML
Online platform and ML Direct (Service Mark), will substantially increase
clients' choices to access on-line trading capabilities. This initiative is in
its early stages and based on information currently available, we cannot predict
with certainty the impact it will have on revenues or earnings in future
periods.
22
<PAGE>
- --------------------------------------------------------------------------------
CICG
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- -----------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
(in millions) 1999 1998 1999 1998
- ----------------------------------------------- ------------------------
<S> <C> <C> <C> <C>
Net revenues $ 2,363 $ 1,122 $ 7,013 $ 5,187
Net earnings (loss) 434 (14) 1,324 660
- --------------------------------------------------------------------------------
</TABLE>
CICG net revenues were approximately $2.4 billion in the 1999 third quarter,
more than double the net revenues in the 1998 third quarter, when global market
turbulence adversely impacted trading and origination revenues. Revenues were in
line with 1999 second quarter results, despite a more difficult market
environment. Net earnings were $434 million during the quarter, compared with a
net loss of $14 million in the 1998 third quarter. Debt trading and origination
revenues were both sharply higher compared with the 1998 third quarter, when
CICG experienced losses in credit sensitive products related to the disruption
in global debt markets. Equity trading and origination revenues increased from
the 1998 third quarter due in part to a more favorable market environment and
improved underwriting market share. In addition, Merrill Lynch was ranked #1 in
worldwide initial public offerings for the 1999 third quarter. The Global
Equities business had record revenues for the 1999 nine months. CICG earnings
also benefited from record strategic services fees during the 1999 third
quarter, as a result of higher levels of merger and acquisition activity,
particularly in Europe.
- --------------------------------------------------------------------------------
CAPITAL ADEQUACY AND LIQUIDITY
- --------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure
and funding policies are to:
1. Ensure sufficient equity capital to absorb losses,
2. Support the business strategies, and
3. Assure liquidity at all times, across market
cycles, and through periods of financial stress.
These objectives and Merrill Lynch's capital structure and funding policies are
discussed more fully in the 1998 Annual Report included as an exhibit to Form
10-K.
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $11.7 billion in
common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries at September 24, 1999. Preferred securities
issued by subsidiaries consist primarily of Trust Originated Preferred
Securities (Service Mark) ("TOPrS" (Service Mark)). Based on various analyses
and criteria, management believes that Merrill Lynch's equity capital base of
$14.8 billion is adequate to support the business across market cycles.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------
<S> <C> <C>
PERIOD END
September 24, 1999 21.1x 13.1x
December 25, 1998 23.5x 15.5x
AVERAGE (3)
Nine months ended September 24, 1999 23.5x 14.6x
Year ended December 25, 1998 32.9x 19.2x
- --------------------------------------------------------------------------
</TABLE>
(1) Total assets to total stockholders' equity and preferred securities
issued by subsidiaries.
(2) Total assets less (a) securities received as collateral, net of
securities pledged as collateral, (b) securities pledged as collateral,
and (c) receivables under resale agreements and securities borrowed
transactions, to total stockholders' equity and preferred securities
issued by subsidiaries.
(3) Computed using month-end balances.
23
<PAGE>
An asset-to-equity leverage ratio does not reflect the risk profile of assets,
hedging strategies, or off-balance sheet exposures. Thus, Merrill Lynch does not
rely on overall leverage ratios to assess risk-based capital adequacy.
Commercial paper outstanding totaled $11.7 billion at September 24, 1999 and
$16.8 billion at December 25, 1998, which was equal to 3.7% and 5.6% of total
assets at September 24, 1999 and year-end 1998, respectively. Outstanding
long-term borrowings decreased to $55.4 billion at September 24, 1999 from $57.6
billion at December 25, 1998. Major components of the change in long-term
borrowings during the 1999 first nine months follow:
<TABLE>
<CAPTION>
- ----------------------------------------------
(in billions)
- ----------------------------------------------
<S> <C>
Balance at December 25, 1998 $57.6
Issuances 12.8
Maturities (14.4)
Other, net (0.6)
-----
Balance at September 24, 1999 (1) $55.4
=====
- ----------------------------------------------
</TABLE>
(1) At the end of the 1999 third quarter, $45.4 billion of long-term borrowings
had maturity dates beyond one year.
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its core balance sheet assets. Other sources of
liquidity are unsecured committed bank credit facilities that, at September 24,
1999, totaled $8.0 billion and were not drawn upon. Additionally, Merrill Lynch
maintains access to significant uncommitted credit lines, both secured and
unsecured, from a large group of banks.
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 September 24,
1999 as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPrS
RATING AGENCY RATINGS RATINGS
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA, Inc. AA AA-
Japan Rating & Investment Information, Inc. AA A+
Moody's Investors Service, Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch, Inc. AA+ Not Rated
- ---------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
- --------------------------------------------------------------------------------
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. For more
information, see the 1998 Annual Report included as an exhibit to Form 10-K.
- --------------------------------------------------------------------------------
YEAR 2000 COMPLIANCE
As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address
the Year 2000 problem (the "Y2K problem"), as more fully described in the 1998
Annual Report. 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 legal liability and its need for liquidity.
The renovation phase of Merrill Lynch's Year 2000 system efforts, as described
in the 1998 Annual Report, was 100% completed as of June 30, 1999, and
production testing was also 100% completed as of that date. In March and April
1999, Merrill Lynch successfully participated in U.S. industrywide testing
sponsored by the Securities Industry Association. These tests involved an
expanded number of firms, transactions, and conditions compared with those
previously conducted. Merrill Lynch has participated in and continues to
participate in numerous industry tests throughout the world.
Merrill Lynch's business units have developed and tested contingency plans. The
plans identify critical processes, potential Y2K problems, and personnel,
processes, and available resources needed to maintain operations. However, the
failure of exchanges, clearing organizations, vendors, service providers,
clients and 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.
In light of the interdependency of the parties in or serving the financial
markets, there can be no assurance that all Y2K problems will be identified and
remedied on a timely basis or that all remediation and contingency planning will
be successful. Public uncertainty regarding successful remediation of the Y2K
problem may cause a reduction in activity in the financial markets. This could
result in reduced liquidity as well as increased volatility. Disruption or
suspension of activity in the world's financial markets is also possible. In
some non-U.S. markets in which Merrill Lynch does business, the level of
awareness and remediation efforts relating to the Y2K problem are thought to be
less advanced than in the U.S. 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. Merrill Lynch's
year-end balance sheet levels will depend on Y2K risks and many other factors,
including business opportunities and customer demand.
As of September 24, 1999, the total estimated expenditure of existing and
incremental resources for the Year 2000 compliance initiative was approximately
$520 million. This estimate includes $104 million of occupancy, communications,
and other related overhead expenditures, as Merrill Lynch is applying a fully
costed pricing methodology for this project. Of the total estimated
expenditures, approximately $40 million, related to continued testing,
contingency planning, risk management and the wind down of the efforts, has not
yet been spent. There can be no assurance that the costs associated with such
efforts will not exceed those currently anticipated by Merrill Lynch, or that
the possible failure of such efforts will not have a material adverse effect on
Merrill Lynch's business, results of operations, or financial condition.
25
<PAGE>
- --------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
Merrill Lynch monitors changes in its balance sheet using average daily balances
that are determined on a settlement date basis and reported for management
information purposes. Financial statement balances are recorded on a trade date
basis as required under generally accepted accounting principles. The following
discussion compares changes in settlement date average daily balances.
For the nine months of 1999, average total assets were $328 billion, down 4%
from $342 billion for the 1998 fourth quarter. Average total liabilities
decreased 5% to $314 billion from $329 billion for the 1998 fourth quarter. The
major components in the decline in average total assets and liabilities for the
nine months of 1999 are summarized as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(in millions) INCREASE (DECREASE) CHANGE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE ASSETS
Trading assets $ (10,576) (9)%
Securities pledged as collateral (1,888) (14)
Loans, notes, and mortgages 1,016 13
AVERAGE LIABILITIES
Payables under repurchase agreements
and securities loaned transactions $ (11,258) (10)%
Commercial paper and other short-term borrowings (8,328) (24)
Trading liabilities 2,625 4
Long-term borrowings 2,221 4
- --------------------------------------------------------------------------------------------------------
</TABLE>
Merrill Lynch reduced its balance sheet levels during the 1998 fourth quarter.
Average balances in the 1999 nine months were lower in comparison due to
continued reductions in debt trading assets and related funding, primarily
repurchase agreements. Lower matched-book activity also contributed to the
reductions in payables under repurchase agreements. The decrease in commercial
paper and other short-term borrowings resulted from a shift towards longer-term
borrowings, primarily during the 1999 first quarter, and reductions in certain
non-trading assets. Merrill Lynch continually monitors its balance sheet and
reassesses its funding needs.
- --------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
- --------------------------------------------------------------------------------
Non-investment grade holdings, which include transactions with highly leveraged
counterparties, involve risks related to the creditworthiness of the issuers or
counterparties and the liquidity of the market for such investments. Merrill
Lynch recognizes these risks and, whenever possible, employs strategies to
mitigate exposures. The specific components and overall level of non-investment
grade positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
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 past year, however, these exposures were reduced
in conjunction with the reduction in the balance sheet trading assets.
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.
26
<PAGE>
Derivatives may also subject Merrill Lynch to credit spread or issuer default
risk, in that changes in credit spreads or in the credit quality of the
underlying securities may adversely affect the derivatives' fair values. Merrill
Lynch 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 Merrill Lynch's non-investment grade trading
exposures:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
SEPT. 24, DEC. 25,
(in millions) 1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Trading assets:
Cash instruments $6,120 $7,606
Derivatives 3,854 4,675
Trading liabilities - cash instruments (1,097) (920)
Collateral on derivative assets (875) (2,192)
------ ------
Net trading asset exposure $8,002 $9,169
====== ======
- -----------------------------------------------------------------------
</TABLE>
Among the trading exposures 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 September 24, 1999, the carrying value of such
debt and equity securities totaled $70 million, of which 88% resulted from
Merrill Lynch's market-making activities in such securities. This compared with
$72 million at December 25, 1998, of which 86% related to market-making
activities. Also included are distressed bank loans with a carrying value
totaling $156 million at both September 24, 1999 and December 25, 1998.
27
<PAGE>
- --------------------------------------------------------------------------------
NON-TRADING EXPOSURES
The following table summarizes Merrill Lynch's non-investment grade non-trading
exposures:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
SEPT. 24, DEC. 25,
(in millions) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
Marketable investment securities $116 $ 39
Investments of insurance subsidiaries 111 148
Loans (net of allowance for loan losses):
Bridge loans - 66
Other loans(1) 815 1,058
Other investments:
Partnership interests (2)(3) 956 852
Other equity investments (4) 372 459
- -------------------------------------------------------------------------
</TABLE>
(1) Represented outstanding loans to 110 and 80 companies at September 24, 1999
and December 25, 1998, respectively.
(2) Included is $449 million and $279 million in investments at September 24,
1999 and December 25, 1998, respectively, related to deferred
compensation plans, for which the default risk of the investments
generally rests with the participating employees.
(3) During the 1999 third quarter, Merrill Lynch received two distributions from
the hedge fund Long-Term Capital Portfolio, L.P., which reduced its
investment to $153 million at September 24, 1999. Subsequent to quarter
end, Merrill Lynch received an additional distribution of $74 million.
(4) Invested in 75 and 89 enterprises at September 24, 1999 and
December 25,1998, respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade counterparties:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
SEPT. 24, DEC. 25,
(in millions) 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Additional commitments to invest in partnerships $ 204 $ 227
Unutilized revolving lines of credit and other
lending commitments 1,544 1,678
- ---------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
- ------------------------------------------------------------------------------------------------------------------------------------
3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR. 3RD QTR.
1998 1998 1999 1999 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CLIENT ACCOUNTS (in billions):
U.S. Client Assets $ 1,065 $ 1,164 $ 1,186 $ 1,226 $ 1,191
Non-U.S. Client Assets 254 282 298 304 323
------- ------- ------- ------- -------
Total Assets in Wealth Management
Client Accouts or Under Management $ 1,319 $ 1,446 $ 1,484 $ 1,530 $ 1,514
======== ======= ======= ======= =======
ASSETS UNDER MANAGEMENT: $ 467 $ 501 $ 515 $ 516 $ 514
Retail 255 276 274 275 275
Institutional 212 225 241 241 239
Equity 238 262 267 272 271
Fixed-Income/Other 229 239 248 244 243
U.S. 279 298 306 310 304
Non-U.S. 188 203 209 206 210
U.S. FEE-BASED PROGRAM ASSETS(a) $ 73 $ 84 $ 92 $ 105 $ 117
- ------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (in billions) $ 81 $ 85 $ 116 $ 104 $ 103
Market Share 13.5% 13.5% 11.7% 11.3% 13.7%
U.S. Debt and Equity:
Volume (in billions) $ 73 $ 81 $ 107 $ 89 $ 82
Market Share 15.2% 15.2% 15.9% 13.6% 17.1%
- ------------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 47,700 46,500 46,100 46,700 48,000
Non-U.S. 17,900 17,300 17,000 17,300 18,000
------- ------- ------- ------- -------
Total 65,600 63,800 63,100 64,000 66,000
======= ======= ======= ======= =======
Financial Consultants and
Other Investment Professionals 18,000 18,100 18,000 18,400 18,700
- ------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (Loss) (in millions) $ (163) $ 359 $ 609 $ 673 $ 572
Economic Profit (Loss) (in millions)(b) (485) 43 275 310 183
Annualized Return on Average
Common Stockholders' Equity (7.3)% 14.8% 24.6% 25.4% 20.2%
Earnings (Loss) per Common Share:
Basic $ (0.48) $ 0.97 $ 1.65 $ 1.80 $ 1.52
Diluted (0.48) 0.86 1.44 1.57 1.34
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $353,391 $299,804 $314,620 $324,740 $312,936
Total Stockholders' Equity 9,779 10,132 10,692 11,446 12,100
Book Value Per Common Share 26.12 26.89 28.05 29.87 31.49
- ------------------------------------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted-Average Shares Outstanding:
Basic 357,620 359,864 364,039 368,273 370,347
Diluted 357,620 404,872 415,662 421,267 419,090
Common Shares Outstanding 358,492 361,209 366,168 368,960 370,777
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Includes Merrill Lynch Consults (Registered Trademark), Unlimited Advantage
(Service Mark), Private Portfolio Group, Mutual Fund Advisor (Service
Mark), and other fee-based programs.
(b) Net earnings available to common shareholders less the cost of common
equity capital.
29
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
-----------------
Merrill Lynch has been named as a party in various actions, including those
described below. Merrill Lynch believes it has strong defenses to and, where
appropriate, will vigorously contest these actions. It is the opinion of
management that the resolution of these actions will not have a material adverse
effect on the financial condition of Merrill Lynch, but might be material to
Merrill Lynch's results of operations in any given period.
Sumitomo Litigation. Between June and August 1999, four purported class actions
were filed against Merrill Lynch and third parties. Plaintiffs assert that
Merrill Lynch was part of an alleged conspiracy with Sumitomo Corporation and
others to inflate copper prices, and they seek unspecified damages and other
relief under the antitrust laws. Two actions are pending in Superior Court for
the County of San Diego, California (Heliotrope General, Inc. v. Sumitomo Corp.,
et al.; R.W. Strang Mechanical v. Sumitomo Corp., et al.), and two are pending
in the federal district court for the Western District of Wisconsin (Loeb
Industries, Inc. v. Sumitomo Corp., et al; Metal Prep Co., Inc. v. Sumitomo
Corp., et al.).
In July 1999, Merrill Lynch paid fines of approximately $15 million and $10
million to settle administrative actions brought, respectively, by the Commodity
Futures Trading Commission and the London Metal Exchange. These actions alleged
that by providing financing and trading advice, Merrill Lynch aided and abetted
Sumitomo's alleged manipulation of copper prices. Merrill Lynch settled the
actions without admitting or denying the allegations.
JAS Securities Litigation. On July 14, 1999, JAS Securities LLP filed a breach
of contract action, brought as a purported class action, against Merrill Lynch
in Delaware Superior Court (JAS Securities LLP v. Merrill Lynch). The complaint
alleges that Merrill Lynch used the wrong formula for redeeming certain
exchangeable debt securities prior to maturity and that the use of the correct
formula would have resulted in a payment of more than $70 million above what
Merrill Lynch paid to redeem these securities. Although not alleged in the
complaint, plaintiff has asserted that actual damages are approximately $255
million. Merrill Lynch believes that the correct formula was used in redeeming
the securities.
Item 5. Other Information
-----------------
The 2000 Annual Meeting of Stockholders will be held at 10:00 a.m. on Tuesday,
April 18, 2000 at the Merrill Lynch & Co., Inc. Conference and Training Center,
800 Scudders Mill Road, Plainsboro, New Jersey. Any stockholder of record
entitled to vote generally for the election of directors may nominate one or
more persons for election as a director at such meeting only if proper written
notice of such stockholder's intent to make such nomination or nominations, in
accordance with the provisions of ML & Co.'s Certificate of Incorporation, has
been given to the Secretary of ML & Co., 100 Church Street, 12th Floor, New
York, New York 10080-6512, no earlier than February 3, 2000 and no later than
February 28, 2000. In addition, in accordance with provisions of ML & Co.'s
By-Laws, any stockholder intending to bring any other business before the
meeting must advise ML & Co. in writing of the stockholder's intent to do so on
or before February 28, 2000. In order to be included in ML & Co.'s proxy
statement, stockholder proposals must be received by ML & Co. at its principal
executive offices not later than November 8, 1999.
30
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
(3) By-Laws of Merrill Lynch & Co., Inc. effective as of
July 26, 1999.
(4) Instruments defining the rights of security holders,
including indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
ML & Co. hereby undertakes to furnish to the Securities
and Exchange Commission, upon request, copies of the
instruments defining the rights of holders of long-term
debt securities of ML & Co. that authorize an amount of
securities constituting 10% or less of the total assets
of ML & Co. and its subsidiaries on a consolidated
basis.
(11) Statement re: computation of per common share earnings
(12) Statement re: computation of ratios
(15) Letter re: unaudited interim financial information
(27) Financial Data Schedule
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by ML & Co. with
the Securities and Exchange Commission during the quarterly period
covered by this report:
(i) Current Report dated July 12, 1999 for the purpose of filing
a press release relating to the retirement of ML & Co.'s
President and Chief Operating Officer, Herbert M. Allison,
Jr.
(ii) Current Report dated July 13, 1999 for the purpose of filing
ML & Co.'s Preliminary Unaudited Earnings Summary for the
three- and six-month periods ended June 25, 1999.
(iii) Current Report dated July 21, 1999 for the purpose of filing
the form of ML & Co.'s Russell 2000 (Registered Trademark)
Market Index Target-Term Securities (Service Mark) due July
21, 2006.
(iv) Current Report dated August 4, 1999 for the purpose of
filing the form of ML & Co.'s Nikkei 225 Market Index
Target-Term Securities due August 4, 2006.
(v) Current Report dated August 4, 1999 for the purpose of
filing the form of ML & Co.'s S&P 500 Market Index
Target-Term Securities due August 4, 2006.
(vi) Current Report dated September 20, 1999 for the purpose of
filing the forms of ML & Co.'s Nikkei 225 Market Index
Target-Term Securities due September 20, 2002 and ML & Co.'s
Energy Select Sector SPDRs(Registered Trademark) Fund Market
Index Target-Term Securities due September 20, 2006.
- -----------------
SPDRs is a registered trademark of The McGraw-Hill Companies, Inc. and has
been licensed for use in connection with the listing and trading of Select
Sector SPDRs on the American Stock Exchange.
31
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
-------------------------
(Registrant)
Date: November 5, 1999 By: /s/ E. Stanley O'Neal
------------------------
E. Stanley O'Neal
Executive Vice President and
Chief Financial Officer
32
<PAGE>
INDEX TO EXHIBITS
Exhibits
3 By-Laws of Merrill Lynch & Co., Inc. effective as of July 26, 1999
11 Statement re: computation of per common share earnings
12 Statement re: computation of ratios
15 Letter re: unaudited interim financial information
27 Financial Data Schedule
<PAGE>
Exhibit 3
- -----------------------------------------------------------------
- -----------------------------------------------------------------
BY-LAWS
OF
MERRILL LYNCH & CO., INC.
-----------
Effective July 26, 1999
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<PAGE>
INDEX
to
BY-LAWS
of
MERRILL LYNCH & CO., INC.
PAGE
ARTICLE I - OFFICES......................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting........................... 1
Section 2. Special Meetings......................... 1
Section 3. Notice of, and Business at, Meetings..... 1
Section 4. Waiver of Notice......................... 3
Section 5. Organization............................. 3
Section 6. Inspectors of Election................... 3
Section 7. Stockholders Entitled to Vote............ 4
Section 8. Quorum and Adjournment................... 4
Section 9. Order of Business........................ 4
Section 10. Vote of Stockholders..................... 4
Section 11. Shares Entitled to More or Less Than One
Vote..................................... 5
ARTICLE III - BOARD OF DIRECTORS
Section 1. Election and Term........................ 5
Section 2. Qualification............................ 5
Section 3. Number................................... 5
Section 4. General Powers........................... 6
Section 5. Place of Meetings........................ 6
Section 6. Organization Meetings.................... 6
Section 7. Regular Meetings......................... 6
Section 8. Special Meetings; Notice and Waiver of
Notice................................... 6
Section 9. Organization of Meetings................. 7
Section 10. Quorum and Manner of Acting.............. 7
Section 11. Voting................................... 7
Section 12. Action without a Meeting................. 7
Section 13. Resignations............................. 8
Section 14. Removal of Directors..................... 8
Section 15. Vacancies................................ 8
Section 16. Directors' Compensation.................. 8
ARTICLE IV - COMMITTEES
Section 1. Constitution and Powers.................. 8
Section 2. Place of Meetings........................ 9
Section 3. Meetings; Notice and Waiver of Notice.... 9
Section 4. Organization of Meetings................. 9
Section 5. Quorum and Manner of Acting.............. 9
Section 6. Voting................................... 10
Section 7. Records.................................. 10
Section 8. Vacancies................................ 10
Section 9. Members' Compensation.................... 10
Section 10. Emergency Management Committee........... 10
ARTICLE V - THE OFFICERS
Section 1. Officers - Qualifications................ 11
Section 2. Term of Office; Vacancies................ 11
Section 3. Removal of Elected Officers.............. 11
Section 4. Resignations............................. 11
Section 5. Officers Holding More Than One Office.... 11
Section 6. The Chairman of the Board................ 11
Section 7. The President............................ 12
Section 8. The Vice Chairmen of the Board........... 12
Section 9. The Executive Vice Presidents............ 13
Section 10. The Senior Vice Presidents............... 13
Section 11. The Vice Presidents...................... 13
Section 12. The Secretary............................ 13
Section 13. The Treasurer............................ 13
Section 14. Additional Duties and Authority.......... 14
Section 15. Compensation............................. 14
ARTICLE VI - STOCK AND TRANSFERS OF STOCK
Section 1. Stock Certificates....................... 14
Section 2. Transfers of Stock....................... 14
Section 3. Lost Certificates........................ 14
Section 4. Determination of Holders of Record for
Certain Purposes......................... 15
ARTICLE VII - CORPORATE SEAL
Section 1. Seal..................................... 15
Section 2. Affixing and Attesting................... 15
ARTICLE VIII - MISCELLANEOUS
Section 1. Fiscal Year.............................. 15
Section 2. Signatures on Negotiable Instruments..... 15
Section 3. References to Article and Section Numbers
and to the By-Laws and the
Certificate of Incorporation..............16
ARTICLE IX - AMENDMENTS..................................... 16
<PAGE>
BY-LAWS
OF
MERRILL LYNCH & CO., INC.
-------------
ARTICLE I.
OFFICES
Merrill Lynch & Co., Inc. (hereinafter called the "Corporation") may
establish or discontinue, from time to time, such offices and places of business
within or without the State of Delaware as the Board of Directors may deem
proper for the conduct of the Corporation's business.
ARTICLE II.
MEETINGS OF STOCKHOLDERS
Section 1. Annual Meeting. The annual meeting of the holders of shares of
such classes or series of stock as are entitled to notice thereof and to vote
thereat pursuant to the provisions of the Certificate of Incorporation
(hereinafter called the "Annual Meeting of Stockholders") for the purpose of
electing directors and transacting such other business as may come before it
shall be held in each year at such time, on such day and at such place, within
or without the State of Delaware, as shall be designated by the Board of
Directors.
Section 2. Special Meetings. In addition to such meetings as are provided
for by law or by the Certificate of Incorporation, special meetings of the
holders of any class or series or of all classes or series of the Corporation's
stock may be called at any time by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors and may be held at such time, on such day and at such place, within or
without the State of Delaware, as shall be designated by the Board of Directors.
Section 3. Notice of, and Business at, Meetings.
a. Notice. Except as otherwise provided by law, written notice of each
meeting of stockholders shall be given either by delivering a notice personally
or mailing a notice to each stockholder of record entitled to vote thereat. If
mailed, the notice shall be directed to the stockholder in a postage-prepaid
envelope at his address as it appears on the stock books of the Corporation
unless, prior to the time of mailing, he shall have filed with the Secretary a
written request that notices intended for him be mailed to some other address,
in which case it shall be mailed to the address designated in such request.
Notice of each meeting of stockholders shall be in such form as is approved by
<PAGE>
2
the Board of Directors and shall state the purpose or purposes for which the
meeting is called, the date and time when and the place where it is to be held,
and shall be delivered personally or mailed not more than sixty (60) days and
not less than ten (10) days before the day of the meeting. Except as otherwise
provided by law, the business which may be transacted at any special meeting of
stockholders shall consist of and be limited to the purpose or purposes so
stated in such notice. The Secretary or an Assistant Secretary or the Transfer
Agent of the Corporation shall, after giving such notice, make an affidavit
stating that notice has been given, which shall be filed with the minutes of
such meeting.
b. Business. No business may be transacted at an annual meeting of
stockholders, other than business that is either (a) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors (or any duly authorized committee thereof), (b) otherwise properly
brought before the annual meeting by or at the direction of the Board of
Directors (or any duly authorized committee thereof) or (c) otherwise properly
brought before the annual meeting by any stockholder of the Corporation who (i)
is a stockholder of record on the date of the giving of the notice provided for
in this Section 3(b) and on the record date for the determination of
stockholders entitled to vote at such annual meeting and (ii) complies with the
notice procedures set forth in this Section 3(b).
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received by the Secretary of the Corporation not less than fifty
(50) days prior to the date of the annual meeting of stockholders; provided,
that in the event that less than 60 days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder in order to be timely must be so received not later than the close
of business on the tenth (10th) day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure of the date
of the annual meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Corporation which are
owned beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
<PAGE>
3
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 3(b), provided, however, that, once
business has been properly brought before the annual meeting in accordance with
such procedures, nothing in this Section 3(b) shall be deemed to preclude
discussion by any stockholder of any such business. If the Chairman of an annual
meeting determines that business was not properly brought before the annual
meeting in accordance with the foregoing procedures, the Chairman shall declare
to the meeting that the business was not properly brought before the meeting and
such business shall not be transacted.
Section 4. Waiver of Notice. Whenever notice is required to be given under
any provision of law or of the Certificate of Incorporation or the By-Laws, a
waiver thereof in writing or by telegraph, cable or other form of recorded
communication, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting of stockholders shall constitute a waiver of notice of such
meeting, except when the person attends such meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of stockholders need be
specified in any waiver of notice unless so required by the Certificate of
Incorporation.
Section 5. Organization. The Chairman of the Board shall act as chairman
at all meetings of stockholders at which he is present, and as such chairman
shall call such meetings of stockholders to order and preside thereat. If the
Chairman of the Board shall be absent from any meeting of stockholders, the
duties otherwise provided in this Section 5 of Article II to be performed by him
at such meeting shall be performed at such meeting by the officer prescribed by
Section 6 of Article V. The Secretary of the Corporation shall act as secretary
at all meetings of the stockholders, but in his absence the chairman of the
meeting may appoint any person present to act as secretary of the meeting.
Section 6. Inspectors of Election. a. The Chairman of the Board shall, in
advance of any meeting of stockholders, appoint one or more inspectors to act at
the meeting and make a written report thereof. The Chairman of the Board may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector with strict impartiality and according to the best of his
ability.
b. The inspectors shall: (1) ascertain the number of shares outstanding
and the voting power of each; (2) determine the shares represented at a meeting
and the validity of proxies and ballots; (3) count all votes and ballots; (4)
determine and retain for a reasonable period a record of the disposition of any
challenges made to any determination by the inspectors; and (5) certify their
<PAGE>
4
determination of the number of shares represented at the meeting, and their
count of all votes and ballots. The inspectors may appoint or retain other
persons or entities to assist the inspectors in the performance of their duties.
Section 7. Stockholders Entitled to Vote. The Board of Directors may fix a
date not more than sixty (60) days nor less than ten (10) days prior to the date
of any meeting of stockholders, as a record date for the determination of the
stockholders entitled to notice of and to vote at such meeting and any
adjournment thereof, and in such case such stockholders and only such
stockholders as shall be stockholders of record on the date so fixed shall be
entitled to notice of, and to vote at, such meeting and any adjournment thereof,
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid. No record date shall precede the date
on which the Board of Directors establishes such record date. The Secretary
shall prepare and make or cause to be prepared and made, at least ten (10) days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at such meeting, arranged in alphabetical order and showing the
address of each such stockholder and the number of shares registered in the name
of each such stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place, specified in the notice of the meeting, within the city where the meeting
is to be held, or, if not so specified, at the place where the meeting is to be
held. Such list shall be produced and kept at the time and place of the meeting
during the whole time thereof, and subject to the inspection of any stockholder
who may be present.
Section 8. Quorum and Adjournment. Except as otherwise provided by law or
by the Certificate of Incorporation, the holders of a majority of the shares of
stock entitled to vote at the meeting present in person or by proxy without
regard to class or series shall constitute a quorum at all meetings of the
stockholders. In the absence of a quorum, the holders of a majority of such
shares of stock present in person or by proxy may adjourn any meeting, from time
to time, until a quorum shall be present. At any such adjourned meeting at which
a quorum may be present, any business may be transacted which might have been
transacted at the meeting as originally called. No notice of any adjourned
meeting need be given other than by announcement at the meeting that is being
adjourned, provided that if the adjournment is for more than thirty (30) days,
or if after the adjournment a new record date is fixed for the adjourned
meeting, then a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
Section 9. Order of Business. The order of business at all meetings of
stockholders shall be as determined by the chairman of the meeting.
Section 10. Vote of Stockholders. Except as otherwise required by law or
by the Certificate of Incorporation or by the By-Laws, all action by
stockholders shall be taken at a stockholders' meeting. Every stockholder of
record, as determined pursuant to Section 7 of this Article II, and who is
entitled to vote, shall, except as otherwise expressly provided in the
Certificate of Incorporation with respect to any class or series of the
<PAGE>
5
Corporation's capital stock, be entitled at every meeting of the stockholders to
one vote for every share of stock standing in his name on the books of the
Corporation. Every stockholder entitled to vote may authorize another person or
persons to act for him by proxy duly appointed by an instrument in writing,
subscribed by such stockholder and executed not more than three (3) years prior
to the meeting, unless the instrument provides for a longer period. The
attendance at any meeting of stockholders of a stockholder who may theretofore
have given a proxy shall not have the effect of revoking such proxy. Election of
directors shall be by written ballot but, unless otherwise provided by law, no
vote on any question upon which a vote of the stockholders may be taken need be
by ballot unless the chairman of the meeting shall determine that it shall be by
ballot or the holders of a majority of the shares of stock present in person or
by proxy and entitled to participate in such vote shall so demand. In a vote by
ballot each ballot shall state the number of shares voted and the name of the
stockholder or proxy voting. Except as otherwise provided in Sections 14 and 15
of Article III or by the Certificate of Incorporation, directors shall be
elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
directors. Except as otherwise provided by law or by the Certificate of
Incorporation, the affirmative vote of a majority of shares present in person or
represented by proxy at the meeting and entitled to vote on the subject shall be
the act of the stockholders.
Section 11. Shares Entitled to More or Less than One Vote. If any class or
series of the Corporation's capital stock shall be entitled to more or less than
one vote for any share, on any matter, every reference in the By-Laws to a
majority or other proportion of stock shall refer to such majority or other
proportion of the votes of such stock.
ARTICLE III.
BOARD OF DIRECTORS
Section 1. Election and Term. Except as otherwise provided by law or by
the Certificate of Incorporation, and subject to the provisions of Sections 13,
14 and 15 of this Article III, directors shall be elected at the Annual Meeting
of Stockholders to serve until the Annual Meeting of Stockholders in the third
year following their election and until their successors are elected and qualify
or until their earlier resignation or removal.
Section 2. Qualification. No one shall be a director who is not the owner
of shares of Common Stock of the Corporation. Acceptance of the office of
director may be expressed orally or in writing.
Section 3. Number. The number of directors may be fixed from time to time
by resolution of the Board of Directors but shall not be less than three (3) nor
more than thirty (30).
<PAGE>
6
Section 4. General Powers. The business, properties and affairs of the
Corporation shall be managed by, or under the direction of, the Board of
Directors, which, without limiting the generality of the foregoing, shall have
power to elect and appoint officers of the Corporation, to appoint and direct
agents, to grant general or limited authority to officers, employees and agents
of the Corporation to make, execute and deliver contracts and other instruments
and documents in the name and on behalf of the Corporation and over its seal,
without specific authority in each case, and, by resolution adopted by a
majority of the whole Board of Directors, to appoint committees of the Board of
Directors in addition to those appointed pursuant to Article IV hereof, the
membership of which may consist of one or more directors, and which may advise
the Board of Directors with respect to any matters relating to the conduct of
the Corporation's business. The Board of Directors may designate one or more
directors as alternate members of any committee, including those appointed
pursuant to Article IV hereof, who may replace any absent or disqualified member
at any meeting of the committee. In addition, the Board of Directors may
exercise all the powers of the Corporation and do all lawful acts and things
which are not reserved to the stockholders by law or by the Certificate of
Incorporation.
Section 5. Place of Meetings. Meetings of the Board of Directors may be
held at any place, within or without the State of Delaware, from time to time
designated by the Board of Directors.
Section 6. Organization Meeting. A newly elected Board of Directors shall
meet and organize, and also may transact any other business which might be
transacted at a regular meeting thereof, as soon as practicable after each
Annual Meeting of Stockholders, at the place at which such meeting of
stockholders took place, without notice of such meeting, provided a majority of
the whole Board of Directors is present. If such a majority is not present, such
organization meeting may be held at any other time or place which may be
specified in a notice given in the manner provided in Section 8 of this Article
III for special meetings of the Board of Directors, or in a waiver of notice
thereof.
Section 7. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times as may be determined by resolution of the Board of
Directors and no notice shall be required for any regular meeting. Except as
otherwise provided by law, any business may be transacted at any regular meeting
of the Board of Directors.
Section 8. Special Meetings; Notice and Waiver of Notice. Special meetings
of the Board of Directors shall be called by the Secretary on the request of the
Chairman of the Board, the President or a Vice Chairman of the Board, or on the
request in writing of any three other directors stating the purpose or purposes
of such meeting. Notice of any special meeting shall be in form approved by the
Chairman of the Board, the President or a Vice Chairman of the Board, as the
case may be. Notices of special meetings shall be mailed to each director,
addressed to him at his residence or usual place of business, not later than two
(2) days before the day on which the meeting is to be held, or shall be sent to
<PAGE>
7
him at such place by telegraph, cable or other form of recorded communication or
be delivered personally or by telephone, not later than the day before such day
of meeting. Notice of any meeting of the Board of Directors need not be given to
any director if he shall sign a written waiver thereof either before or after
the time stated therein, or if he shall attend a meeting, except when he attends
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any special meeting of the Board of Directors need be specified in any
notice or written waiver of notice unless so required by the Certificate of
Incorporation or by the By-Laws. Unless limited by law, by the Certificate of
Incorporation or by the By-Laws, any and all business may be transacted at any
special meeting.
Section 9. Organization of Meetings. The Chairman of the Board shall
preside at all meetings of the Board of Directors at which he is present. If the
Chairman of the Board shall be absent from any meeting of the Board of
Directors, the duties otherwise provided in this Section 9 of Article III to be
performed by him at such meeting shall be performed at such meeting by the
officer prescribed by Section 6 of Article V. If no such officer is present at
such meeting, one of the directors present shall be chosen by the members of the
Board of Directors present to preside at such meeting. The Secretary of the
Corporation shall act as the secretary at all meetings of the Board of
Directors, and in his absence a temporary secretary shall be appointed by the
chairman of the meeting.
Section 10. Quorum and Manner of Acting. Except as otherwise provided by
Section 6 of this Article III, at every meeting of the Board of Directors
one-third (1/3) of the total number of directors constituting the whole Board of
Directors shall constitute a quorum but in no event shall a quorum be
constituted by less than two (2) directors. Except as otherwise provided by law
or by the Certificate of Incorporation, or by Section 15 of this Article III, or
by Section 1 or Section 8 of Article IV, or by Section 3 of Article V, or by
Article IX, the act of a majority of the directors present at any such meeting,
at which a quorum is present, shall be the act of the Board of Directors. In the
absence of a quorum, a majority of the directors present may adjourn any
meeting, from time to time, until a quorum is present. No notice of any
adjourned meeting need be given other than by announcement at the meeting that
is being adjourned. Members of the Board of Directors or any committee thereof
may participate in a meeting of the Board of Directors or of such committee by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation by a member of the Board of Directors in a meeting pursuant to
this Section 10 of Article III shall constitute his presence in person at such
meeting.
Section 11. Voting. On any question on which the Board of Directors shall
vote, the names of those voting and their votes shall be entered in the minutes
of the meeting if any member of the Board of Directors so requests at the time.
Section 12. Action without a Meeting. Except as otherwise provided by law
or by the Certificate of Incorporation, any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting, if prior to such action all members of the Board of
Directors or of such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or the committee.
<PAGE>
8
Section 13. Resignations. Any director may resign at any time upon written
notice of resignation to the Corporation. Any resignation shall be effective
immediately unless a date certain is specified for it to take effect, in which
event it shall be effective upon such date, and acceptance of any resignation
shall not be necessary to make it effective, irrespective of whether the
resignation is tendered subject to such acceptance.
Section 14.Removal of Directors. Subject to the rights of the holders of
any series of Preferred Stock or any other class of capital stock of the
Corporation (other than the Common Stock) then outstanding, (i) any director, or
the entire Board of Directors, may be removed from office at any time, but only
for cause, by the affirmative vote of the holders of record of outstanding
shares representing at least 80% of the voting power of all the shares of
capital stock of the Corporation then entitled to vote generally in the election
of directors, voting together as a single class, and (ii) any director may be
removed from office at any time, but only for cause, by the affirmative vote of
a majority of the entire Board of Directors.
Section 15. Vacancies. Subject to the rights of the holders of any series
of Preferred Stock or any other class of capital stock of the Corporation (other
than the Common Stock) then outstanding, any vacancies in the Board of Directors
for any reason, including by reason of any increase in the number of directors,
shall, if occurring prior to the expiration of the term of office of the class
in which such vacancy occurs, be filled only by the Board of Directors, acting
by the affirmative vote of a majority of the remaining directors then in office,
although less than a quorum, and any directors so elected shall hold office
until the next election of the class for which such directors have been elected
and until their successors are elected and qualify.
Section 16. Directors' Compensation. Any and all directors may receive
such reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any director from serving the Corporation in any
other capacity and receiving compensation therefor.
ARTICLE IV.
COMMITTEES
Section 1. Constitution and Powers. The Board of Directors may, by
resolution adopted by affirmative vote of a majority of the whole Board of
Directors, appoint one or more committees of the Board of Directors, which
committees shall have such powers and duties as the Board of Directors shall
properly determine. Unless otherwise provided by the Board of Directors, no such
other committee of the Board of Directors shall be composed of fewer than two
(2) directors.
<PAGE>
9
Section 2. Place of Meetings. Meetings of any committee of the Board of
Directors may be held at any place, within or without the State of Delaware,
from time to time designated by the Board of Directors or such committee.
Section 3. Meetings; Notice and Waiver of Notice. Regular meetings of any
committee of the Board of Directors shall be held at such times as may be
determined by resolution either of the Board of Directors or of such committee
and no notice shall be required for any regular meeting. Special meetings of any
committee shall be called by the secretary thereof upon request of any two
members thereof. Notice of any special meeting of any committee shall be in form
approved by the Chairman of the Board, the President or a Vice Chairman of the
Board, as the case may be. Notices of special meetings shall be mailed to each
member, addressed to him at his residence or usual place of business, not later
than two (2) days before the day on which the meeting is to be held, or shall be
sent to him at such place by telegraph, cable or any other form of recorded
communication, or be delivered personally or by telephone, not later than the
day before such day of meeting. Neither the business to be transacted at, nor
the purpose of, any special meeting of any committee, need be specified in any
notice or written waiver of notice unless so required by the Certificate of
Incorporation or the By-Laws. Notices of any such meeting need not be given to
any member of any committee, however, if waived by him as provided in Section 8
of Article III, and the provisions of such Section 8 with respect to waiver of
notice of meetings of the Board of Directors shall apply to meetings of any
committee as well.
Section 4. Organization of Meetings. The most senior officer of the
Corporation present, if any be members of the committee, and, if not, the
director present who has served the longest as a director, except as otherwise
expressly provided by the Board of Directors or the committee, shall preside at
all meetings of any committee. The Secretary of the Corporation, except as
otherwise expressly provided by the Board of Directors, shall act as secretary
at all meetings of any committee and in his absence a temporary secretary shall
be appointed by the chairman of the meeting.
Section 5. Quorum and Manner of Acting. One-third (1/3) of the members of
any committee then in office shall constitute a quorum for the transaction of
business, and the act of a majority of those present at any meeting at which a
quorum is present, shall be the act of such committee. In the absence of a
quorum, a majority of the members of any committee present, or, if two or fewer
members shall be present, any member of the committee present or the Secretary,
may adjourn any meeting, from time to time, until a quorum is present. No notice
of any adjourned meeting need be given other than by announcement at the meeting
<PAGE>
10
that is being adjourned. The provisions of Section 10 of Article III with
respect to participation in a meeting of a committee of the Board of Directors
and the provisions of Section 12 of Article III with respect to action taken by
a committee of the Board of Directors without a meeting shall apply to
participation in meetings of and action taken by any committee.
Section 6. Voting. On any question on which any committee shall vote, the
names of those voting and their votes shall be entered in the minutes of the
meeting if any member of such committee so requests.
Section 7. Records. All committees shall keep minutes of their acts and
proceedings, which shall be submitted at the next regular meeting of the Board
of Directors unless sooner submitted at an organization or special meeting of
the Board of Directors, and any action taken by the Board of Directors with
respect thereto shall be entered in the minutes of the Board of Directors.
Section 8. Vacancies. Any vacancy among the appointed members or alternate
members of any committee of the Board of Directors may be filled by affirmative
vote of a majority of the whole Board of Directors.
Section 9. Members' Compensation. Members of all committees may receive
such reasonable compensation for their services as such, whether in the form of
salary or a fixed fee for attendance at meetings, with expenses, if any, as the
Board of Directors may from time to time determine. Nothing herein contained
shall be construed to preclude any member of any committee from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 10. Emergency Management Committee. In the event that a quorum of
the Board of Directors cannot readily be convened as a result of emergency
conditions following a catastrophe or disaster, then all the powers and duties
vested in the Board of Directors shall vest automatically in an Emergency
Management Committee which shall consist of all readily available members of the
Board of Directors and which Committee shall have and may exercise all of the
powers of the Board of Directors in the management of the business and affairs
of the Corporation. Two members shall constitute a quorum. Other provisions of
these By-Laws notwithstanding, the Emergency Management Committee shall call a
meeting of the Board of Directors as soon as circumstances permit, for the
purpose of filling vacancies on the Board of Directors and its committees and to
take such other action as may be appropriate; and if the Emergency Management
Committee determines that less than a majority of the members of the Board of
Directors are available for service, the Emergency Management Committee shall,
as soon as practicable, issue a call for a special meeting of stockholders for
the election of directors. The powers of the Emergency Management Committee
shall terminate upon the convening of the meeting of the Board of Directors
above prescribed at which a majority of the members thereof shall be present, or
upon the convening of the above prescribed meeting of stockholders, whichever
first shall occur.
<PAGE>
11
ARTICLE V.
THE OFFICERS
Section 1. Officers - Qualifications. The elected officers of the
Corporation shall be a Chairman of the Board, a Secretary and a Treasurer and
may also include one or more Vice Chairmen of the Board, a President, one or
more Executive Vice Presidents, one or more Senior Vice Presidents and one or
more Vice Presidents. The elected officers shall be elected by the Board of
Directors. The Chairman of the Board, the President and each Vice Chairman of
the Board, shall be selected from the directors. Assistant Secretaries,
Assistant Treasurers and such other officers as may be deemed necessary or
appropriate may be appointed by the Board of Directors or may be appointed
pursuant to Section 6 of this Article V.
Section 2. Term of Office; Vacancies. So far as is practicable, all
elected officers shall be elected at the organization meeting of the Board of
Directors in each year, and except as otherwise provided in Sections 3 and 4,
and subject to the provisions of Section 6, of this Article V, shall hold office
until the organization meeting of the Board of Directors in the next subsequent
year and until their respective successors are elected and qualify or until
their earlier resignation or removal. All appointed officers shall hold office
during the pleasure of the Board of Directors and the Chairman of the Board. If
any vacancy shall occur in any office, the Board of Directors may elect or
appoint a successor to fill such vacancy for the remainder of the term.
Section 3. Removal of Elected Officers. Any elected officer may be removed
at any time, either for or without cause, by affirmative vote of a majority of
the whole Board of Directors, at any regular meeting or at any special meeting
called for the purpose and, in the case of any officer not more senior than a
Senior Vice President, by affirmative vote of a majority of the whole committee
of the Board of Directors so empowered at any regular meeting or at any special
meeting called for the purpose.
Section 4. Resignations. Any officer may resign at any time, upon written
notice of resignation to the Corporation. Any resignation shall be effective
immediately unless a date certain is specified for it to take effect, in which
event it shall be effective upon such date, and acceptance of any resignation
shall not be necessary to make it effective, irrespective of whether the
resignation is tendered subject to such acceptance.
Section 5. Officers Holding More Than One Office. Any officer may hold two
or more offices the duties of which can be consistently performed by the same
person.
Section 6. The Chairman of the Board. The Chairman of the Board shall be
the chief executive officer of the Corporation. He shall direct, coordinate and
control the Corporation's business and activities and its operating expenses and
capital expenditures, and shall have general authority to exercise all the
<PAGE>
12
powers necessary for the chief executive officer of the Corporation, all in
accordance with basic policies established by and subject to the control of the
Board of Directors. He shall be responsible for the employment or appointment of
employees, agents and officers (except officers to be elected by the Board of
Directors pursuant to Section 1 of this Article V) as may be required for the
conduct of the business and the attainment of the objectives of the Corporation,
and shall have authority to fix compensation as provided in Section 15 of this
Article V. He shall have authority to suspend or to remove any employee, agent
or appointed officer of the Corporation and to suspend for cause any elected
officer of the Corporation and, in the case of the suspension for cause of any
such elected officer, to recommend to the Board of Directors what further action
should be taken. He shall have general authority to execute bonds, deeds and
contracts in the name and on behalf of the Corporation. As provided in Section 5
of Article II, he shall act as chairman at all meetings of the stockholders at
which he is present, and, as provided in Section 9 of Article III, he shall
preside at all meetings of the Board of Directors at which he is present. In the
absence of the Chairman of the Board, his duties shall be performed and his
authority may be exercised by the President, and, in the absence of the Chairman
of the Board and the President, such duties shall be performed and such
authority may be exercised by such officer as may have been designated by the
most senior officer of the Corporation who has made any such designation, with
the right reserved to the Board of Directors to make the designation or
supersede any designation so made.
Section 7. The President. The President, if any, shall be the chief
operating officer of the Corporation. He shall implement the general directives,
plans and policies formulated by the Chairman of the Board pursuant to the
By-Laws, in general shall have authority to exercise all powers delegated to him
by the Chairman of the Board and shall establish operating and administrative
plans and policies and direct and coordinate the Corporation's organizational
components, within the scope of the authority delegated to him by the Board of
Directors or the Chairman of the Board. He shall have general authority to
execute bonds, deeds and contracts in the name and on behalf of the Corporation
and responsibility for the employment or appointment of such employees, agents
and officers (except officers to be elected by the Board of Directors pursuant
to Section 1 of this Article V) as may be required to carry on the operations of
the business and authority to fix compensation of such employees, agents and
officers as provided in Section 15 of this Article V. He shall have authority to
suspend or to remove any employee or agent of the Corporation (other than
officers). As provided in Section 6 of this Article V, in the absence of the
Chairman of the Board, the President shall perform all the duties and exercise
the authority of the Chairman of the Board. In the absence of the President, his
duties shall be performed and his authority may be exercised by the Chairman of
the Board. In the absence of the President and the Chairman of the Board, the
duties of the President shall be performed and his authority may be exercised by
such officer as may have been designated by the most senior officer of the
Corporation who has made any such designation, with the right reserved to the
Board of Directors to make the designation or supersede any designation so made.
Section 8. The Vice Chairmen of the Board. The several Vice Chairmen of
the Board, if any, shall perform such duties and may exercise such authority as
may from time to time be conferred upon them by the Board of Directors, the
Chairman of the Board or the President.
<PAGE>
13
Section 9. The Executive Vice Presidents. The several Executive Vice
Presidents, if any, shall perform such duties and may exercise such authority as
may from time to time be conferred upon them by the Board of Directors, the
Chairman of the Board or the President.
Section 10. The Senior Vice Presidents. The several Senior Vice
Presidents, if any, shall perform such duties and may exercise such authority as
may from time to time be conferred upon them by the Board of Directors, the
Chairman of the Board, the President, any Vice Chairman of the Board or any
Executive Vice President.
Section 11. The Vice Presidents. The several Vice Presidents, if any,
shall perform such duties and may exercise such authority as may from time to
time be conferred upon them by the Board of Directors, the Chairman of the
Board, the President, any Vice Chairman of the Board or any Executive Vice
President.
Section 12. The Secretary. The Secretary shall attend to the giving of
notice of all meetings of stockholders and of the Board of Directors and
committees thereof, and, as provided in Section 5 of Article II and Section 9 of
Article III, shall keep minutes of all proceedings at meetings of the
stockholders and of the Board of Directors at which he is present, as well as of
all proceedings at all meetings of committees of the Board of Directors at which
he has served as secretary, and where some other person has served as secretary
thereto, the Secretary shall maintain custody of the minutes of such
proceedings. As provided in Section 2 of Article VII, he shall have charge of
the corporate seal and shall have authority to attest any and all instruments or
writings to which the same may be affixed. He shall keep and account for all
books, documents, papers and records of the Corporation, except those for which
some other officer or agent is properly accountable. He shall generally perform
all the duties usually appertaining to the office of secretary of a corporation.
In the absence of the Secretary, such person as shall be designated by the
Chairman of the Board shall perform his duties.
Section 13. The Treasurer. The Treasurer shall have the care and custody
of all the funds of the Corporation and shall deposit the same in such banks or
other depositories as the Board of Directors or any officer or officers, or any
officer and agent jointly, thereunto duly authorized by the Board of Directors,
shall, from time to time, direct or approve. Except as otherwise provided by the
Board of Directors or in the Corporation's plan of organization, the Treasurer
shall keep a full and accurate account of all moneys received and paid on
account of the Corporation, shall render a statement of accounts whenever the
Board of Directors shall require, shall perform all other necessary acts and
duties in connection with the administration of the financial affairs of the
Corporation and shall generally perform all the duties usually appertaining to
the office of the treasurer of a corporation. Whenever required by the Board of
<PAGE>
14
Directors, the Treasurer shall give bonds for the faithful discharge of the
duties of that office in such sums and with such sureties as the Board of
Directors shall approve. In the absence of the Treasurer, such person as shall
be designated by the President shall perform such duties.
Section 14. Additional Duties and Authority. In addition to the foregoing
specifically enumerated duties and authority, the several officers of the
Corporation shall perform such other duties and may exercise such further
authority as the Board of Directors may, from time to time, determine, or as may
be assigned to them by any superior officer.
Section 15. Compensation. Except as fixed or controlled by the Board of
Directors or otherwise, compensation of all officers and employees shall be
fixed by the Chairman of the Board, or by the President within the limits
approved by the Chairman of the Board, or by other officers of the Corporation
exercising authority granted to them under the plan of organization of the
Corporation.
ARTICLE VI.
STOCK AND TRANSFERS OF STOCK
Section 1. Stock Certificates. The capital stock of the Corporation shall
be represented by certificates signed by, or in the name of the Corporation by,
the Chairman of the Board, the President or a Vice Chairman of the Board, and by
the Secretary or an Assistant Secretary or by the Treasurer or an Assistant
Treasurer, and sealed with the seal of the Corporation. If such stock
certificate is countersigned by a Transfer Agent other than the Corporation or
its employee or by a Registrar other than the Corporation or its employee, any
other signature on the certificate may be a facsimile, engraved or printed. Such
seal may be a facsimile, engraved or printed. In case any such officer, Transfer
Agent or Registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, Transfer Agent or
Registrar before such certificate is issued by the Corporation, it may
nevertheless be issued by the Corporation with the same effect as if such
officer, Transfer Agent or Registrar had not ceased to be such at the date of
its issue. The certificates representing the capital stock of the Corporation
shall be in such form as shall be approved by the Board of Directors.
Section 2. Transfers of Stock. Transfers of stock shall be made on the
books of the Corporation by the person named in the certificate, or by an
attorney lawfully constituted in writing, and upon surrender and cancellation of
a certificate or certificates for a like number of shares of the same class or
series of stock, duly endorsed or accompanied by proper evidence of succession,
assignment or authority to transfer, and with such proof of the authenticity of
the signatures as the Corporation or its agents may reasonably require and with
all required stock transfer tax stamps affixed thereto and canceled or
accompanied by sufficient funds to pay such taxes.
Section 3. Lost Certificates. In case any certificate of stock shall be
lost, stolen or destroyed, the Board of Directors, in its discretion, or any
officer or officers thereunto duly authorized by the Board of Directors, may
authorize the issue of a substitute certificate in place of the certificate so
lost, stolen or destroyed; provided, however, that, in each such case, the
applicant for a substitute certificate shall furnish evidence to the
Corporation, which it determines in its discretion is satisfactory, of the loss,
theft or destruction of such certificate and of the ownership thereof, and also
such security or indemnity as may be required by it.
<PAGE>
15
Section 4. Determination of Holders of Record for Certain Purposes. In
order to determine the stockholders or other holders of securities entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of capital stock or other securities or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, not
more than sixty (60) days prior to the date of payment of such dividend or other
distribution or allotment of such rights or the date when any such rights in
respect of any change, conversion or exchange of stock or securities may be
exercised, and in such case only holders of record on the date so fixed shall be
entitled to receive payment of such dividend or other distribution or to receive
such allotment of rights, or to exercise such rights, notwithstanding any
transfer of any stock or other securities on the books of the Corporation after
any such record date fixed as aforesaid. No record date shall precede the date
on which the Board of Directors establishes such record date.
ARTICLE VII.
CORPORATE SEAL
Section 1. Seal. The seal of the Corporation shall be in the form of a
circle and shall bear the name of the Corporation and in the center of the
circle the words "Corporate Seal, Delaware" and the figures "1973".
Section 2. Affixing and Attesting. The seal of the Corporation shall be in
the custody of the Secretary, who shall have power to affix it to the proper
corporate instruments and documents, and who shall attest it. In his absence, it
may be affixed and attested by an Assistant Secretary, or by the Treasurer or an
Assistant Treasurer or by any other person or persons as may be designated by
the Board of Directors.
ARTICLE VIII.
MISCELLANEOUS
Section 1. Fiscal Year. The fiscal year of the Corporation shall end on the
last Friday of December in each year and the succeeding fiscal year shall begin
on the day next succeeding the last day of the preceding fiscal year.
Section 2. Signatures on Negotiable Instruments. All bills, notes, checks
or other instruments for the payment of money shall be signed or countersigned
by such officers or agents and in such manner as, from time to time, may be
prescribed by resolution (whether general or special) of the Board of Directors,
or may be prescribed by any officer or officers, or any officer and agent
jointly, thereunto duly authorized by the Board of Directors.
<PAGE>
16
Section 3. References to Article and Section Numbers and to the By-Laws
and the Certificate of Incorporation. Whenever in the By-Laws reference is made
to an Article or Section number, such reference is to the number of an Article
or Section of the By-Laws. Whenever in the By-Laws reference is made to the
By-Laws, such reference is to these By-Laws of the Corporation, as amended, and
whenever reference is made to the Certificate of Incorporation, such reference
is to the Certificate of Incorporation of the Corporation, as amended, including
all documents deemed by the General Corporation Law of the State of Delaware to
constitute a part thereof.
ARTICLE IX.
AMENDMENTS
The By-Laws may be altered, amended or repealed at any Annual Meeting of
Stockholders, or at any special meeting of holders of shares of stock entitled
to vote thereon, provided that in the case of a special meeting notice of such
proposed alteration, amendment or repeal be included in the notice of meeting,
by a vote of the holders of a majority of the shares of stock present in person
or by proxy at the meeting and entitled to vote thereon, or (except as otherwise
expressly provided in any By-Law adopted by the stockholders) by the Board of
Directors at any valid meeting by affirmative vote of a majority of the whole
Board of Directors.
<TABLE>
<CAPTION>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF PER COMMON SHARE EARNINGS
(In Millions, Except Per Share Amounts)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS
Net earnings $ 572 $ (163) $1,854 $ 900
Preferred stock dividends (10) (10) (29) (29)
----- ------ ------ -----
Net earnings applicable to
common stockholders $ 562 $ (173) $1,825 $ 871
===== ====== ====== =====
WEIGHTED-AVERAGE SHARES OUTSTANDING 370.3 357.6 367.6 354.1
----- ------ ------ -----
Effect of Dilutive Instruments:
Employee stock options 27.1 29.6 29.3 30.9
FCCAAP shares 16.2 16.2 16.4 16.7
Restricted units 5.4 5.1 5.3 4.9
ESPP shares 0.1 - 0.1 0.1
----- ------ ------ -----
DILUTIVE POTENTIAL COMMON SHARES 48.8 50.9 51.1 52.6
----- ------ ------ -----
TOTAL WEIGHTED-AVERAGE DILUTED SHARES 419.1 408.5 (1) 418.7 406.7
===== ====== ====== =====
BASIC EARNINGS PER SHARE $1.52 $(0.48) $ 4.97 $2.46
===== ====== ====== =====
DILUTED EARNINGS PER SHARE $1.34 $(0.48)(1) $ 4.36 $2.14
===== ====== ====== =====
</TABLE>
(1) Since accounting principles require that a net loss not be diluted by
potential comman shares, diluted loss per share for the 1998 third quarter is
calculated using weighted-average shares outstanding only.
Basic and diluted earnings per share are based on actual numbers before
rounding.
<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)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pre-tax earnings (loss) from continuing operations $ 891 $ (205) $2,918 $ 1,577
Add: Fixed charges (excluding
capitalized interest and preferred security
dividend requirements of subsidiaries) 3,197 4,553 9,792 13,411
------ ------ ------ -------
Pre-tax earnings before fixed charges 4,088 4,348 12,710 14,988
====== ====== ====== =======
Fixed charges:
Interest 3,138 4,493 9,612 13,247
Other (a) 110 94 332 249
------ ------ ------ -------
Total fixed charges 3,248 4,587 9,944 13,496
====== ====== ====== =======
Preferred stock dividend requirements 14 15 41 46
------ ------ ------ -------
Total combined fixed charges
and preferred stock dividends $3,262 $4,602 $9,985 $13,542
====== ====== ====== =======
Ratio of earnings to fixed charges (b) 1.26 0.95 1.28 1.11
Ratio of earnings to combined fixed charges
and preferred stock dividends (b) 1.25 0.94 1.27 1.11
</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.
(b) The ratio calculations indicate a less than one-to-one coverage for
the three months ended September 25, 1998. Pre-tax loss from
continuing operations for the three months ended September 25, 1998
is inadequate to cover the fixed charges. The deficient amounts for
the respective ratios are $239 and $254.
Exhibit 15
November 5, 1999
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, NY 10281
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim condensed
consolidated financial information of Merrill Lynch & Co., Inc. and subsidiaries
("Merrill Lynch") as of September 24, 1999 and for the three- and nine-month
periods ended September 24, 1999 and September 25, 1998 as indicated in our
report dated November 5, 1999; because we did not perform an audit, we expressed
no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 24, 1999, is
incorporated by reference in the following documents, as amended:
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. 333-00863 (401(k) Savings & Investment Plan)
Registration Statement No. 333-09779 (1997 Deferred Compensation Plan
for a Select Group of Eligible Employees)
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. 333-32209 (1998 Deferred Compensation Plan
for a Select Group of Eligible Employees)
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.)
Registration Statement No. 333-85421 (401(k) Savings and Investment Plan)
Registration Statement No. 333-85423 (2000 Deferred Compensation Plan for
a Select Group of Eligible Employees)
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
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
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)
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
/s/ Deloitte & Touche LLP
New York, New York
November 5, 1999
<TABLE> <S> <C>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-24-1999
<CASH> 12,014
<RECEIVABLES> 52,535
<SECURITIES-RESALE> 57,151
<SECURITIES-BORROWED> 38,552
<INSTRUMENTS-OWNED> 137,702 <F1>
<PP&E> 3,007
<TOTAL-ASSETS> 312,936
<SHORT-TERM> 30,532
<PAYABLES> 29,712
<REPOS-SOLD> 62,219
<SECURITIES-LOANED> 7,505
<INSTRUMENTS-SOLD> 90,355 <F2>
<LONG-TERM> 55,400
0
425
<COMMON> 630
<OTHER-SE> 11,045
<TOTAL-LIABILITY-AND-EQUITY> 312,936 <F3>
<TRADING-REVENUE> 3,568
<INTEREST-DIVIDENDS> 11,077
<COMMISSIONS> 4,599
<INVESTMENT-BANKING-REVENUES> 2,489
<FEE-REVENUE> 3,452
<INTEREST-EXPENSE> 9,635
<COMPENSATION> 8,237
<INCOME-PRETAX> 2,918
<INCOME-PRE-EXTRAORDINARY> 2,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,854
<EPS-BASIC> 4.97
<EPS-DILUTED> 4.36
<FN>
<F1> Includes $9,581 of securities received as collateral, net of
securities pledged as collateral, and $13,652 of securities
pledged as collateral, recorded pursuant to the provisions of
Statement of Financial Accounting Standards No. 127 ("SFAS
No. 127").
<F2> Includes $23,233 of obligation to return securities received
as collateral, recorded pursuant to the provisions of SFAS
No. 127.
<F3> Includes $2,723 of Preferred Securities issued by
Subsidiaries.
</FN>
</TABLE>
