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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the fiscal year ended December 31, 1999 Commission file number 1-7182
Merrill Lynch & Co., Inc.
(Exact name of Registrant as specified in its charter)
Delaware 13-2740599
(I.R.S. Employer Identification No.)
(State or other jurisdiction of
incorporation or organization)
10281
(Zip Code)
World Financial Center--North Tower
250 Vesey Street
New York, New York
(Address of principal executive
offices)
Registrant's telephone number, including area code: (212) 449-1000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $1.33 1/3 and attached New York Stock Exchange;
Rights to Purchase Series A Junior Preferred Chicago Stock Exchange;
Stock Pacific Exchange; Paris
Stock Exchange; London Stock
Exchange; and Tokyo Stock
Exchange
Depositary Shares representing 1/400th share of New York Stock Exchange
9% Cumulative Preferred Stock, Series A
S&P 500 Market Index Target-Term Securities New York Stock Exchange
("MITTS Securities") due May 10, 2001;
Technology MITTS Securities due August 15,
2001; Healthcare/Biotechnology Portfolio MITTS
Securities due October 31, 2001; Nikkei 225
MITTS Securities due June 14, 2002; S&P 500
MITTS Securities due September 16, 2002; MITTS
Securities based upon the Dow Jones Industrial
Average (the "Dow Jones") due January 14,
2003; S&P 500 MITTS Securities due September
28, 2005; Top Ten Yield MITTS Securities due
August 15, 2006; S&P 500 Inflation Adjusted
MITTS Securities due September 24, 2007; 5
3/4% Stock Return Income DEbt Securities
("STRIDES Securities") due June 1, 2000; 7
7/8% Structured Yield Product Exchangeable for
Stock ("STRYPES") due February 1, 2001; and 6
1/4% STRYPES due July 1, 2001.
Nikkei 225 MITTS Securities due September 20,
2002; Major 8 European MITTS Securities due American Stock Exchange
August 30, 2002; Major 11 International MITTS
Securities due December 6, 2002; Russell 2000
MITTS Securities due September 30, 2004;
Global MITTS Securities due December 22, 2004;
S&P 500 MITTS Securities due July 1, 2005;
Nikkei 225 MITTS Securities due September 21,
2005; Energy Select Sector SPDR Fund MITTS
Securities due February 21, 2006; EuroFund
MITTS Securities due February 28, 2006; S&P
500 MITTS Securities due March 27, 2006;
Consumer Staples Select Sector SPDR Fund MITTS
Securities due April 19, 2006; Select Sector
SPDR Fund Growth Portfolio MITTS Securities
due May 25, 2006; Major 11 International MITTS
Securities due May 26, 2006; MITTS Securities
based upon the Dow Jones due June 26, 2006;
Russell 2000 MITTS Securities due July 21,
2006; Nikkei 225 MITTS Securities due August
4, 2006; S&P 500 MITTS Securities due August
4, 2006; Energy Select Sector SPDR Fund MITTS
Securities due September 20, 2006; Medium-Term
Notes ("MTN"), Series B, 3% Stock-Linked Notes
due June 10, 2000; MTN, Series B, 5% Stock-
Linked Notes due July 3, 2000; MTN, Series B,
Stock-Linked Notes due November 28, 2003; MTN,
Series B, 1% Callable and Exchangeable Stock-
Linked Notes due April 19, 2004; MTN, Series
B, 3.125% Callable Stock-Linked Notes due
January 22, 2005; MTN, Series B, 1.5%
Principal Protected Notes due December 15,
2005; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due February
8, 2006; MTN, Series B, 0.25% Callable and
Exchangeable Portfolio-Linked Notes due April
27, 2006; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due May 10,
2006; MTN, Series B, 1% Callable and
Exchangeable Stock-Linked Notes due July 20,
2006; Oracle Corporation Indexed Callable
Protected Growth Securities ("ProGroS
Securities") due March 31, 2003; Telebras
Indexed Callable ProGroS Securities due May
19, 2005; 5 1/4% Nasdaq-100 Index STRIDES
Securities due August 23, 2000; AMEX Oil Index
Stock Market Annual Reset Term Notes ("SMART
Notes") due December 29, 2000; Russell 2000
Index Call Warrants Expiring May 25, 2001; and
Bond Index Notes, Domestic Master Series 1999A
due December 23, 2002.
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of the close of business on February 23, 2000, there were 383,049,771
shares of Common Stock and 4,008,129 Exchangeable Shares outstanding. The
Exchangeable Shares, which were issued by Merrill Lynch & Co., Canada Ltd. in
connection with the merger with Midland Walwyn Inc., are exchangeable at any
time into Common Stock on a one-for-one basis and entitle holders to dividend,
voting, and other rights equivalent to Common Stock.
As of the close of business on February 23, 2000, the aggregate market value
of the voting stock, comprising the Common Stock and the Exchangeable Shares,
held by non-affiliates of the Registrant was approximately $36 billion.
Documents Incorporated By Reference: Merrill Lynch & Co., Inc. 1999 Annual
Report to Stockholders and Merrill Lynch & Co., Inc. Proxy Statement for its
2000 Annual Meeting of Stockholders dated March 9, 2000, each incorporated by
reference in Parts I-IV in this Form 10-K.
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TABLE OF CONTENTS
Part I.
<S> <C> <C>
Item 1 Business.............................................................................................. 1
Overview.............................................................................................. 1
Business Environment.................................................................................. 2
Description of Business Activities.................................................................... 2
Competition........................................................................................... 11
Regulation............................................................................................ 11
Item 2 Properties............................................................................................ 13
Item 3 Legal Proceedings..................................................................................... 14
Item 4 Matters Submitted to a Vote of Securityholders........................................................ 16
Executive Officers of Merrill Lynch & Co., Inc........................................................ 16
Part II.
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................................. 18
Item 6 Selected Financial Data............................................................................... 18
Item 7 Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................ 18
Item 7A Quantitative and Qualitative Disclosures About Market Risk............................................ 18
Item 8 Financial Statements and Supplementary Data........................................................... 18
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................................................ 18
Part III.
Item 10 Directors and Executive Officers of the Registrant.................................................... 19
Item 11 Executive Compensation................................................................................ 19
Item 12 Security Ownership of Certain Beneficial Owners and Management........................................ 19
Item 13 Certain Relationships and Related Transactions........................................................ 19
Part IV.
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 19
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PART I
Item 1. Business
Overview
Merrill Lynch & Co., Inc.,* a Delaware corporation formed in 1973, is a
holding company that, through its subsidiaries and affiliates, provides
investment, financing, advisory, insurance, and related products and services on
a global basis, including:
. securities brokerage, trading, and underwriting
. investment banking, strategic services, including mergers and acquisitions,
and other corporate finance advisory activities
. asset management
. brokerage and related activities in swaps, options, forwards, futures, and
other derivatives
. securities clearance services
. equity, debt and economic research
. banking, trust, and lending services, including mortgage lending and related
services
. insurance sales and underwriting services
. investment advisory and related recordkeeping services
Merrill Lynch provides these products and services to a wide array of
clients, including individual investors, small businesses, corporations,
governments and governmental agencies, and financial institutions.
Merrill Lynch's business has three business segments: the Private Client
Group ("PCG"), the Asset Management Group ("AMG") and the Corporate and
Institutional Client Group ("CICG"). Merrill Lynch provides financial services
worldwide through subsidiaries and affiliates that frequently participate in the
facilitation and consummation of a single transaction. This organizational
structure is designed to enhance the delivery of services to Merrill Lynch's
diverse global client base and position it for worldwide growth. Merrill Lynch
has organized its operations outside the United States into six regions:
Europe, Middle East, and Africa
Asia Pacific
Australia and New Zealand
Japan
Canada
Latin America
Merrill Lynch conducts its global business from various locations
throughout the world. Its world headquarters facility is located at the World
Financial Center in New York City and its other principal U.S. business and
operational centers are in New Jersey, Colorado, Florida, and California.
Merrill Lynch has a presence in 42 countries outside the U.S., including offices
in Buenos Aires, Dubai, Dublin, Frankfurt, Geneva, Hong Kong, Johannesburg,
London, Madrid, Mexico City, Milan, Paris, Sao Paulo, Singapore, Sydney,
Toronto, Tokyo and Zurich.
Merrill Lynch employed 67,200 people at the end of 1999.
At the end of 1999, total assets in client accounts or under management
were nearly $1.7 trillion. In 1999, according to Thomson Financial Services
Data, Merrill Lynch achieved the top ranking in U.S. debt and equity
underwriting, and ranked third in U.S. completed and announced mergers and
acquisitions. Merrill Lynch was the leading
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* Unless the context otherwise requires, the term "Merrill Lynch" means Merrill
Lynch & Co., Inc. and includes the consolidated subsidiaries of Merrill Lynch
& Co., Inc. The term "ML & Co." is used herein where appropriate to refer to
Merrill Lynch & Co., Inc., the parent holding company.
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global debt and equity underwriter and ranked second in announced and third in
completed non-U.S. mergers and acquisitions transactions.
Financial information concerning Merrill Lynch for each of the three fiscal
years ended on the last Friday in December of 1999, 1998, and 1997, including
the amount of total revenue contributed by classes of similar products or
services that accounted for 10% or more of its consolidated revenues in any one
of these fiscal periods, as well as information with respect to Merrill Lynch's
operations by segment and geographic area is set forth in Merrill Lynch's
Consolidated Financial Statements and the Notes thereto in the Merrill Lynch &
Co., Inc. 1999 Annual Report to Stockholders (the "Annual Report") included as
an exhibit to this Form 10-K.
Business Environment
The financial services industry, in which Merrill Lynch is a leading
participant, is highly competitive and highly regulated. This industry and the
global financial markets are influenced by numerous uncontrollable factors.
These factors include economic conditions, monetary policies, the liquidity of
global markets, international and regional political events, regulatory
developments, the competitive environment, and investor sentiment. These
conditions or events can significantly affect the volatility of financial
markets. While greater volatility increases risk, it may also increase order
flow in businesses such as trading and brokerage. Revenues and net earnings may
vary significantly from period to period due to these unpredictable factors and
the resulting market volatility.
The financial services industry continues to be affected by the
intensifying competitive environment, as demonstrated by consolidation through
mergers and acquisitions, as well as diminishing margins in many mature products
and services, and competition from new entrants as well as established
competitors using the internet to establish or expand their businesses. In
addition, the passage of the Gramm-Leach-Bliley Act in November of 1999
represented a significant accomplishment in the effort to modernize the
financial services industry in the U.S. by repealing anachronistic laws that
separated commercial banking, investment banking and insurance activities. The
Gramm-Leach-Bliley Act, together with the other changes in the financial
services industry made possible by previous reforms, has increased the number of
companies competing for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but are
not limited to, the factors listed in the previous paragraph, as well as actions
and initiatives taken by both current and potential competitors, the effect of
current, pending, and future legislation and regulation both in the United
States and throughout the world, and the other risks and uncertainties detailed
in Competition and Regulation below and in Management's Discussion and Analysis
in the Annual Report. Merrill Lynch undertakes no responsibility to update or
revise any forward-looking statements.
Description of Business Activities
The business activities of certain significant U.S. and non-U.S. Merrill
Lynch subsidiaries comprising its three business segments are described below.
Each subsidiary may provide products and services from some or all of these
business segments. See Management's Discussion and Analysis and the Notes to the
Consolidated Financial Statements in the Annual Report for further information
about Merrill Lynch's business activities and policies, its business segments,
products and services, and the geographic markets within which it operates.
The Private Client Group
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Through offices around the world, the PCG provides products and services
related to the accumulation and management of wealth, including, for example,
brokerage and related activities; retirement, investment and custody services;
insurance; business financial services; and banking, trust services, mortgage
lending and related activities.
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Brokerage, Dealer and Related Activities:
In the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") is a broker (i.e., agent) for individual clients, as well as
corporate, institutional and governmental clients, and a dealer (i.e. acts for
its own account) in the purchase and sale of corporate securities, primarily
equity and debt securities traded on exchanges or in the over-the-counter
markets. MLPF&S also acts as a broker and a dealer in the purchase and sale of
money market instruments, government securities, high-yield bonds, municipal
securities, futures, and options, including option contracts for the purchase
and sale of various types of securities. In addition, MLPF&S acts as broker
and/or mutual fund selected dealer in the purchase and sale of mutual funds.
MLPF&S has established commission rates or fixed charges for all brokerage
services that it performs. For accounts that are actively traded, however,
MLPF&S's policy is to negotiate commissions based on economies of scale and the
complexity of the particular trading transaction and, additionally, for its
institutional customers, based on the competitive environment and trading
opportunities.
In July 1999, MLPF&S introduced Unlimited Advantage(Service Mark), in
which U.S. clients receive a broad range of Merrill Lynch services for an annual
asset-based fee. At the end of 1999 there were over 260,000 Unlimited Advantage
accounts with aggregate client assets of approximately $63 billion, of which $9
billion represented new client assets. In December 1999, Merrill Lynch launched
ML Direct(Service Mark), an online service offering trading execution and real-
time account position information.
MLPF&S provides financing to clients, including margin lending and other
extensions of credit. In a margin-based transaction, MLPF&S extends credit for a
portion of the market value of the securities in the client's account up to the
limit imposed by internal MLPF&S policies and applicable margin rules and
regulations. Since MLPF&S may have financial exposure if a client fails to meet
a margin call, any margin loan made by MLPF&S is collateralized by securities in
the client's margin account. Financial reviews, margin procedures, and other
credit standards have been implemented in an effort to limit any exposures
resulting from this margin lending activity. Interest on margin loans is an
important source of revenue for MLPF&S. To finance margin loans, MLPF&S uses
funds on which it pays interest (including parent company borrowings), funds on
which it does not pay interest (including its own capital), funds derived from
client's free credit balances to the extent permitted by regulations, and funds
derived from securities loaned.
Merrill Lynch, through Merrill Lynch Futures Inc. ("MLF") and other
subsidiaries, acts as a broker for the purchase and sale of futures contracts
and options on such futures contracts for corporate and institutional clients,
but ceased such activities for individual clients in early 2000. See The
Corporate and Institutional Client Group-Brokerage and Related Activities below.
Merrill Lynch Investment Partners Inc. ("MLIP") sponsors or manages
commodity pools, hedge funds and fund of funds products designed to meet a
variety of client objectives. MLF acts as commodity broker for MLIP-sponsored
funds and MLPF&S or an affiliate acts as selling agent. MLIP is one of the
largest sponsors of managed futures funds in terms of both fund assets and
financial and personnel resources. MLIP is an integrated business which
includes research, finance, operations, systems, administration, sales and
marketing. MLIP's functions include selecting and monitoring trading advisors
and hedge fund managers, as well as allocating and reallocating fund capital
among them. At the end of 1999, approximately $2.3 billion in equity was
invested or was to be invested in 39 U.S. and non-U.S. commodity pools, hedge
funds and fund-of-funds products.
MLPF&S sponsors the Defined Asset Funds(Service Mark) group of funds.
These funds are unit investment trusts registered in the United States under the
Investment Company Act of 1940 and offshore in the Republic of Ireland and the
Cayman Islands under applicable regulations. Defined Asset Funds invest in U.S.
and non-U.S. equity securities, municipal, corporate, and U.S. Government and
non-U.S. debt obligations. At the end of 1999, approximately $20.9 billion of
client funds were invested in Defined Asset Funds worldwide.
MLPF&S provides a wide range of client services, including effecting trades
in equity, fixed-income and other securities through its securities account
services, such as its Cash Management Account(Registered Trademark) financial
services program (the "CMA(Registered Trademark) account"). At the end of 1999,
there were more than 2.0 million CMA accounts held by Merrill Lynch's U.S.
customers with aggregate assets of approximately $550 billion and there were
approximately 61,000 CMA accounts held
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by Merrill Lynch's non-U.S. clients with aggregate assets of approximately $36.6
billion. MLPF&S offers various other products such as Merrill Lynch
Consults(Registered Trademark), the Merrill Lynch Mutual Fund Advisor(Service
Mark) program, the Merrill Lynch Mutual Fund Advisor Selects(Service Mark)
program, and the Financial Foundation(Registered Trademark) report.
Outside the United States, Merrill Lynch provides comprehensive brokerage
and investment services and related products on a global basis to private
clients. These services and products are made available through a network of
offices located in more than 30 countries outside the United States. The
brokerage and other services provided by MLPF&S are offered on a global basis to
private clients; in addition, in certain countries such as the UK, Japan, Canada
and Australia, clients can open accounts with Merrill Lynch affiliates that are
locally regulated. Banking and trust services, and asset management services,
are also offered globally to private clients, as described below under The
Private Client Group - Banking, Trust, Mortgage Lending and Related Activities
and The Asset Management Group, respectively. In addition, during 1999 an
online account information service was made available to international private
clients.
Group Employee Services and Retirement, Investment and Custody Services:
Through its Group Employee Services division, MLPF&S is one of the largest
bundled service providers of 401(k) plans in the United States. MLPF&S provides
a wide variety of retirement plan products, particularly benefits consulting,
administration, investment, employee education, and communication services to
401(k) and other benefit plans. At the end of 1999, it provided these services
to over 20,000 corporate sponsored 401(k) plans, representing over $111 billion
in plan assets. Its services to this market were enhanced by Merrill Lynch's
1998 acquisition of Howard Johnson & Company, a benefits and actuarial
consulting firm which administers plans for more than 255 companies with more
than one million participants. Merrill Lynch is also a leading provider of
administrative services for stock option and stock purchase plans.
MLPF&S provides custodial services to individual investors in connection
with the investors' maintenance of Individual Retirement Accounts ("IRAs"),
including IRAs established under Simplified Employee Pension and SIMPLE plans.
At the end of 1999, there were approximately $181.5 billion in customer assets
in more than 2.6 million Merrill Lynch IRAs, which includes approximately
358,000 Roth and Education IRAs representing more than $4.4 billion in client
assets.
Business Financial Services:
Merrill Lynch provides financing services to small- and medium-sized
businesses in conjunction with the Working Capital Management(Service Mark)
account ("WCMA(Registered Trademark) account") through Merrill Lynch Business
Financial Services Inc. ("MLBFS"). The WCMA account combines business checking,
borrowing, investment, and electronic funds transfer services into one account
for participating business clients. At the end of 1999, there were more than
142,000 WCMA accounts that, in the aggregate, had investment assets of more than
$106 billion.
In addition to providing qualifying clients with short-term working capital
financing through the WCMA commercial line of credit, MLBFS offers assistance to
business clients with their term lending, equipment, and other asset-based
financing needs, as well as financing for owner-occupied commercial real estate.
In 1999, MLBFS originated more than $1.9 billion in new small business and other
commercial loans and, at the end of 1999, total outstanding loans were more than
$2.6 billion, of which approximately 97% were secured by tangible assets pledged
by customers.
Merrill Lynch also provides business advisory services, including strategic
services to middle market companies.
Insurance Activities:
Merrill Lynch's insurance services consist of the underwriting of life
insurance and annuity products by Merrill Lynch Life Insurance Company ("MLLIC")
and ML Life Insurance Company of New York ("ML Life") and of the sale of
proprietary and non-proprietary life insurance and annuity products through
Merrill Lynch Life Agency Inc. and other insurance agencies affiliated or
associated with MLPF&S operating in the United States and Canada.
MLLIC, an Arkansas stock life insurance company, is authorized to
underwrite insurance and annuities products in 49 states, Puerto Rico, the
District of Columbia, Guam, and the U.S. Virgin Islands. These products are
marketed to
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MLPF&S customers. Although authorized to do so, it does not presently underwrite
accident and health insurance. At year-end 1999, MLLIC had approximately $14.4
billion of life insurance in force. At year-end 1999, MLLIC had annuity
contracts in force of more than $10.3 billion in value.
ML Life, a New York stock life insurance company, is authorized to
underwrite life insurance, annuities, and accident and health insurance in nine
states; however, it does not presently underwrite accident and health insurance.
At year-end 1999, ML Life had approximately $1.9 billion of life insurance in
force, which amount included approximately $936 million reinsured from yearly
renewable term insurance of an unaffiliated insurer. At year-end 1999, ML Life
had annuity contracts in force of approximately $836 million in value.
Through agency agreements, licensed affiliate insurance agencies and other
insurance agencies associated with MLPF&S sell life and health insurance and
annuity products. A significant portion of these sales consists of products
underwritten by MLLIC and ML Life.
Banking, Trust, Mortgage Lending and Related Activities:
Merrill Lynch Bank & Trust Co. ("MLBT") and Merrill Lynch Bank USA
("MLBUSA"), both of which are state chartered depository institutions insured by
the Federal Deposit Insurance Corporation, offer certificates of deposit, money
market deposit accounts (including deposit accounts offered through the Insured
Savings(Service Mark) Account program for the CMA service, the Retirement Asset
Savings Program(Registered Trademark) for certain Merrill Lynch retirement
accounts and, beginning in December 1999, the Banking Advantage(Registered
Trademark) program for ML Direct accounts) and other deposit accounts, originate
and purchase secured loans, and issue VISA(Registered Trademark) cards.
Merrill Lynch provides personal trust, employee benefit trust, and
custodial services to clients in the U.S. through eight state-chartered trust
institutions and a federally chartered savings bank. Trust services outside of
the United States are provided by Merrill Lynch Bank and Trust Company (Cayman)
Limited ("MLBT Cayman").
Merrill Lynch Credit Corporation ("MLCC") offers a broad selection of real
estate-based lending products enabling clients to purchase and refinance their
homes as well as to manage their other personal credit needs. MLCC offers a
variety of adjustable-rate and fixed-rate first mortgage loans throughout the
United States, including the PrimeFirst(Service Mark) mortgage program. In
addition, MLCC originates and services home equity credit lines and other
mortgage loans as well as services mortgage loans for affiliated and
unaffiliated financial institutions. MLCC uses a variety of financing techniques
to fund its loan portfolio, including securitizing its mortgages for sale into
the secondary marketplace. MLCC also offers securities-based non-purpose lending
through its Omega(Service Mark) account, a personal line of credit using
eligible securities as collateral that is accessible by VISA(Registered
Trademark) card and by check.
Merrill Lynch International Bank Limited ("MLIB Limited"), a United Kingdom
bank provides collateralized lending, letter of credit services and foreign
exchange trading services to, and accepts deposits from, international clients.
Merrill Lynch Bank (Suisse) S.A., a Swiss bank, provides loans, deposits and
portfolio management services, and individual client services to non-U.S.
individual clients.
The Asset Management Group
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Merrill Lynch's asset management activities are conducted through AMG
using, principally, the Merrill Lynch, Mercury and Hotchkis and Wiley brand
names. The principal subsidiaries engaged in these activities are Merrill Lynch
Asset Management LP ("MLAM") and Mercury Asset Management Ltd ("MAM"). AMG is
one of the largest asset management organizations in the world having total
assets under management of approximately $557 billion at the end of 1999
compared with approximately $501 billion at the end of 1998.
At the end of 1999, through portfolio managers located in the United
States, the United Kingdom, Japan, Australia, Hong Kong, Canada, Switzerland and
Singapore, AMG managed a wide variety of investment products. These ranged from
money market funds and other forms of short-term fixed-income investments to
long-term taxable and tax-exempt fixed-income funds or portfolios, along a broad
spectrum of quality ratings and maturities. AMG also manages a wide variety of
equity and balanced funds or portfolios that invest in more than 60 markets
globally.
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AMG offers a wide array of taxable fixed-income, tax-exempt fixed-income,
equity and balanced open-ended mutual funds in the United States. The MLAM
brand of mutual funds (except for its money-market funds) are generally offered
pursuant to the Merrill Lynch Select Pricing(Service Mark) system, which allows
investors four pricing alternatives. The Hotchkis and Wiley brand of mutual
funds are sold to clients on a no-load basis. The Mercury Asset Management brand
of mutual funds, introduced in 1998, are distributed through Merrill Lynch's
distribution network both inside and outside the United States. AMG also offers
a broad family of unit trusts in the United Kingdom under the Mercury brand. In
1998, AMG introduced a new family of 17 mutual funds with the Merrill Lynch
Mercury Asset Management (Japan) brand that are distributed through Merrill
Lynch Japan Securities Co., Ltd.
AMG offers all of its brands of mutual funds to clients in other global
markets through both the Merrill Lynch distribution network and through
unaffiliated financial intermediaries. Of the more than $63 billion of mutual
funds sold by MLPF&S in 1999, approximately $20 billion represented sales of
mutual funds advised by Merrill Lynch Asset Management or Merrill Lynch Mercury
Asset Management. At the end of 1999, AMG advised approximately $266 billion
globally of mutual funds or their non-U.S. equivalent.
AMG provides separate account investment management services to a
geographically diversified client base that includes pension funds,
corporations, governments, supranational organizations, central banks and other
institutions. Marketing offices in over 15 countries further support these
services. At the end of 1999, the total assets under management of such services
were approximately $247 billion. AMG offers similarly structured separate
account investment management services for individual clients and smaller
institutions and corporations both in the United States, the United Kingdom and
globally. The total assets under management for these services were $44 billion
at the end of 1999.
The Corporate and Institutional Client Group
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The CICG businesses, comprising one of Merrill Lynch's business segments,
provide comprehensive investment banking, financing, and related products and
services to corporations, institutional clients and sovereign governments
throughout the world. These activities are conducted through a network of
subsidiaries, including MLPF&S, Merrill Lynch International ("MLI"), and a
number of other subsidiaries located in and outside the United States. CICG's
activities predominately involve providing investment banking and other
strategic mergers and acquisition advisory services, trading, both as a broker
and as a dealer, in equity and debt securities and derivative instruments,
publishing and disseminating equity, debt and economic research products and
services and providing various other capital markets services, including
securities clearance activities.
CICG's operations in the United States are conducted primarily out of
Merrill Lynch's headquarters in New York City and from offices located
throughout the United States, including Chicago, Houston, Boston, San Francisco,
Palo Alto, and Menlo Park, California. Merrill Lynch's CICG activities outside
the United States are conducted through MLI and the many non-U.S., locally-
established affiliates strategically located throughout the world, and a network
of offices, including representative and liaison offices, located in more than
40 countries outside the United States. This office network services sovereigns,
major "money center" institutions as well as thousands of regional institutions.
Investment Banking Activities:
Merrill Lynch is a leading global investment banking firm that participates
in every aspect of investment banking for corporate, institutional, and
governmental clients and acts in principal, agency, and advisory capacities.
Advisory services include advice on strategic matters, including mergers and
acquisitions, divestitures, spin-offs, restructurings, capital structuring,
leveraged buyouts, and defensive projects. Merrill Lynch provides a wide variety
of financial services, including underwriting the sale of securities to the
public, privately placing securities with investors, providing structured and
derivative financings, including project financing, and mortgage and lease
financing.
Merrill Lynch, either directly or through affiliates, provides advice,
valuation services, and financing assistance and engages in the underwriting and
private placement of high-yield securities in connection with, among other
things, leveraged buyouts and other acquisition-related transactions. It has,
from time to time, taken principal positions in transactions and has extended
credit to clients in the form of senior and subordinated debt, as well as
provided bridge financing on a select basis, and syndicated loans. Before
engaging in any of these financing activities, an analysis is
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performed to ascertain the underlying creditworthiness of the particular client
and the liquidity of the market for securities that may be issued in connection
with any such financings and to determine the likelihood of refinancing within a
reasonable period. Additionally, equity interests in the subject companies are,
from time to time acquired as part of, or in connection with, such activities.
Merrill Lynch has engaged in the business of making private equity
investments in companies and sponsoring and managing private equity funds that
have invested in equity and debt securities of various companies. The limited
partners of the funds managed by Merrill Lynch affiliates are primarily private
corporate and institutional investors. Merrill Lynch, through MLPF&S, MLI, and
its other subsidiaries, may underwrite, trade, invest, and make markets in
certain securities of companies in which the Merrill Lynch managed funds have
invested, and may also provide financial advisory services to these companies.
Brokerage, Dealer and Related Activities:
In the United States, MLPF&S is a broker for corporate, institutional and
governmental clients, and is a dealer in the purchase and sale of corporate
securities, primarily equity and debt securities traded on exchanges or in the
over-the-counter markets. MLPF&S also acts as a broker and a dealer in the
purchase and sale of mutual funds, money market instruments, government
securities, high-yield bonds, municipal securities, futures, and options,
including option contracts for the purchase and sale of various types of
securities. Merrill Lynch, through MLPF&S, MLI, and various of its subsidiaries
as described below, is a dealer in equity and fixed income securities of a
significant number of U.S. and non-U.S. issuers, in U.S. and other sovereign
government obligations, in U.S. municipal securities, and in mortgage-backed and
asset-backed securities.
As an adjunct to its trading activities conducted by its subsidiaries,
Merrill Lynch places its capital at risk by engaging in block positioning to
facilitate transactions in large blocks of listed and over-the-counter
securities and by engaging, from time to time, in arbitrage transactions for its
own account. In its block positioning activities, securities are purchased, or
are sold short for its own account, without having full commitments for their
resale or covering purchase, thereby employing its capital to effect large
transactions. Such positioning activities are undertaken after analyzing a given
security's marketability, and any position taken typically is liquidated as soon
as practicable. In addition, Merrill Lynch facilitates various trading
strategies involving the purchase and sale of financial futures contracts and
options and, in connection with this activity, it may establish positions for
its own account and risk.
MLPF&S regularly makes a market in the equity securities of approximately
550 U.S. corporations. In addition, it engages in dealer transactions in
approximately 5,400 securities of non-U.S. issuers traded in the over-the-
counter markets, and conducts market-making activities with clients and other
dealers. MLI regularly makes a market and trades in the equity securities of
approximately 2,200 non-U.S. corporations. MLPF&S and MLI are also dealers in
mortgage-backed, asset-backed, and corporate fixed-income securities.
Through its subsidiary, Merrill Lynch Government Securities Inc. ("MLGSI"),
Merrill Lynch is a primary dealer in obligations issued or guaranteed by the
United States Government and regularly makes a market in securities issued by
Federal agencies and other government-sponsored entities, including Government
National Mortgage Association, Federal National Mortgage Association, and
Federal Home Loan Mortgage Corporation. It deals in mortgage-backed pass-
through certificates issued by certain of these entities, and also in related
futures, options, and forward contracts for its own account, to hedge its own
risk, and to facilitate customers' transactions. As a primary dealer, MLGSI acts
as a counterparty to the Federal Reserve Bank of New York and regularly reports
positions and activities to the Federal Reserve Bank of New York.
An integral part of its business involves entering into repurchase
agreements whereby funds are obtained by the Merrill Lynch subsidiary engaging
in the transaction pledging its own securities as collateral. The repurchase
agreements provide financing for dealer inventory and serve as short-term
investments for customers, which customers include certain Merrill Lynch
affiliates. As part of its business as a dealer in governmental obligations, the
Merrill Lynch affiliate also enters into reverse repurchase agreements whereby
it provides funds against the pledge of collateral by customers. Such agreements
provide the Merrill Lynch affiliate with needed collateral and provide its
customers with temporary liquidity for their investments in United States
Government and agency securities or other non-U.S. government securities.
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Various non-U.S. Merrill Lynch subsidiaries act as dealers in certain
securities issued or guaranteed by the governments where such subsidiaries are
located.
Derivative Dealing Activities:
Merrill Lynch, through MLPF&S, MLI, as well as Merrill Lynch Capital
Services, Inc. ("MLCS") and Merrill Lynch Derivative Products AG ("MLDP") act as
intermediaries and principals in a variety of interest rate, currency, and other
over-the-counter derivative transactions. MLI engages in the equity and credit
derivatives business in the over-the-counter markets, and Merrill Lynch Capital
Markets Bank Limited ("MLCMBL") is a credit intermediary and conducts part of
Merrill Lynch's non-dollar swap activities. MLCS and MLDP are Merrill Lynch's
primary derivative product dealers.
MLCS primarily acts as a counterparty for certain derivative financial
products, including interest rate and currency swaps, caps and floors, currency
options, and credit derivatives. MLCS maintains positions in interest-bearing
securities, financial futures, and forward contracts primarily to hedge its
derivative exposures. In the normal course of its business, MLCS enters into
repurchase and resale agreements with certain affiliated companies. MLCS also
engages in certain commodity-related transactions as a principal, and is
licensed as a power marketer by the Federal Energy Regulatory Commission.
MLDP acts as an intermediary for certain derivative products, including
interest rate and currency swaps, between MLCS and counterparties that are
highly rated or otherwise acceptable to MLDP. Its activities address the desire
of certain swap customers to limit their trading to those dealers having the
highest credit quality. MLDP has been assigned the Aaa, AAA, and AAA
counterparty rating by the rating agencies, Moody's Investors Service, Inc.,
Standard & Poor's, and Fitch IBCA, Inc., respectively. Customers meeting certain
credit criteria enter into swaps with MLDP and, in turn, MLDP enters into
offsetting mirror swaps with MLCS. However, MLCS is required to provide MLDP
with collateral to meet certain exposures MLDP may have to MLCS.
Merrill Lynch Capital Markets Bank Limited, an Irish bank with branch
offices in Frankfurt, Johannesburg, Labuan (Malaysia), Milan, and Tokyo, acts as
a credit intermediary and conducts part of Merrill Lynch's non-dollar swap
activities. It engages in foreign exchange, and swap and other derivative
transactions, in addition to its underwriting, lending and institutional sales
activities.
Foreign Exchange Activities:
Merrill Lynch provides foreign exchange trading services to corporations
and institutions in various countries through Merrill Lynch International Bank,
an Edge Act corporation ("MLIB"), MLIB Limited and MLCMBL.
Mortgage Dealing Activities:
Merrill Lynch Mortgage Capital Inc. ("MLMCI") is a dealer in whole loan
mortgages, mortgage loan participations, mortgage servicing, and corporate bank
loans. MLMCI, through its CMO Passport(Service Mark) service, provides dealers
and investors with general indicative information and analytic capability with
respect to collateralized mortgage obligations, mortgage pass-through
certificates, and asset-backed securities. As an integral part of its business,
MLMCI enters into repurchase agreements whereby it obtains funds by pledging its
own whole loans as collateral. The repurchase agreements provide financing for
MLMCI's inventory and serve as short-term investments for MLMCI's customers.
MLMCI also enters into reverse repurchase agreements through which it provides
funds to customers collateralized by whole loan mortgages, thereby providing
them with temporary liquidity. MLMCI also has a mortgage conduit that purchases
commercial and multi-family mortgage loans from lenders and securitizes these
loans for sale to investors. In addition, MLMCI provides to its clients short-
term financing secured by performing and non-performing commercial real estate.
MLMCI also makes proprietary equity investments in U.S. and non-U.S. companies
owning performing, sub-performing and non-performing real estate and mortgages.
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Money Markets Activities:
Merrill Lynch, through various subsidiaries including Merrill Lynch Money
Markets Inc. ("MLMMI"), provides a full range of origination, trading, and
marketing services with respect to money market instruments such as commercial
paper, bankers' acceptances, and institutional certificates of deposit. Merrill
Lynch also provides services in connection with the origination of medium-term
notes issued by U.S. and non-U.S. corporations and short- and medium-term bank
notes issued by financial institutions, and through MLPF&S and MLI, it trades
and markets such notes. MLMMI is also a commercial paper dealer for U.S. and
non-U.S. corporations and financial institutions. MLMMI also acts as a dealer
for U.S. and non-U.S. financial institutions in the certificate of deposit and
bankers' acceptance markets and in connection with the purchase of certificates
of deposit from Federally-insured depository institutions. Such instruments are
resold to certain institutional customers such as banks, insurance companies,
investment companies, pension plans, and state and local governments. MLMMI, in
cooperation with MLPF&S, originates certificates of deposit issued by bank and
thrift institutions that are sold to a broad range of individual investors of
MLPF&S.
Futures Business Activities:
Merrill Lynch's futures business activity is conducted through MLF and
other subsidiaries. MLF holds memberships on all major commodity and financial
futures exchanges and clearing associations in the United States and it also
carries positions reflecting trades executed on exchanges outside of the United
States. Other Merrill Lynch subsidiaries also hold memberships on major
commodity and financial futures exchanges and clearing associations outside the
U.S. and may also carry positions in proprietary and customer accounts. All
futures and futures options transactions are executed, cleared through and/or
carried by MLF and other Merrill Lynch subsidiaries engaged in futures
activities. In certain contracts, or on certain exchanges, third party brokers
are utilized to execute and/or clear trades. As part of its brokerage
activities, MLPF&S, as a futures commission merchant, introduces customers to
MLF for the purchase and sale of futures contracts and options on futures
contracts. MLPF&S and certain of its affiliates may also take proprietary
market positions in futures and futures options in certain instances.
In early 2000, Merrill Lynch refocused its futures activities on financial
futures and options, and discontinued its sales and floor execution activities
for agricultural and metals futures and options contracts.
Research Services:
The Global Securities Research & Economics Group provides equity, fixed-
income, and economic research services on a global basis to Merrill Lynch's
institutional and individual client sales forces and their customers. This group
covers and distributes fundamental equity and fixed-income research, technical
market and quantitative analyses, convertible securities analyses, investment
and fixed-income strategy recommendations, high-yield debt securities research,
credit research on municipal securities, and futures research information.
Merrill Lynch consistently ranks among the leading research providers in
the industry, and its analysts and other professionals cover approximately 3,700
companies located in 26 countries, with approximately half of the staff now
dedicated to non-U.S. research activities. Current information and investment
opinions on these companies, as well as on industry sectors and countries, are
available to Merrill Lynch's individual and institutional customers through
their financial consultants and account executives, and through various
electronic means, including Merrill Lynch's websites.
Securities Clearing Services:
MLPF&S provides securities clearing services through its subsidiaries,
Broadcort Capital Corp. ("BCC") and Merrill Lynch Professional Clearing Corp.
("MLPCC"). BCC provides these services to over 100 unaffiliated broker-dealers.
Those utilizing BCC's clearing services may also execute transactions through
BCC's fixed-income desk and participate in underwritings of Defined Asset Funds
sponsored by MLPF&S. While the introducing broker-dealer firm retains all sales
functions with their customers, BCC services the customers' accounts and handles
all settlement and credit aspects of transactions. MLPCC clears transactions for
specialists and market-makers on various national and regional stock exchanges;
clears commodities futures transactions for clients through a divisional
clearing arrangement with MLF; and clears transactions of arbitrageurs,
customers, and other professional trading entities. Merrill Lynch Canada Inc.
provides securities clearing services to eight unaffiliated Canadian securities
dealers.
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Significant Strategic Initiatives
Among Merrill Lynch's significant strategic initiatives were e-commerce
developments in our evolving business model for the delivery of information and
products and services to our clients. In PCG, this change means that on-line
services and research may be combined with the personalized advice of a Merrill
Lynch Financial Consultant. In CICG, this change means the introduction of an
enhanced business model for institutional debt and equity issuance, trading, and
servicing activities. Examples of these, and other recent strategic
initiatives, include the following:
. Launched in July, Unlimited Advantage(Service Mark), a nondiscretionary
brokerage service, with asset-based pricing, subject to a minimum annual
charge of $1,500. Percentage rates charged to customers decline as assets
increase. Unlimited Advantage(Service Mark) offers U.S. clients a wide array
of services, including virtually unlimited trading for most investors in most
securities, unlimited enrolled accounts, traditional financial consultant
relationships, a CMA(Registered Trademark) Visa(Registered Trademark)
Signature(Service Mark) card with a travel rewards program, a financial plan,
online capabilities, and access to Merrill Lynch research.
. Introduced in October, International Asset Power(Service Mark) and Asset
Partner (Service Mark), in Canada, the international versions of Unlimited
Advantage.
. Introduced in December, ML Direct(Service Mark), a new Internet account for
U.S. clients preferring a self-directed approach to investing. The online
service addresses investment and cash management needs to guide customer
decision making. In addition to online equity trading for as little as $29.95
per trade, clients can purchase and sell mutual funds, receive Merrill Lynch
research, and purchase fixed-income products. ML Direct also provides access
to the Global Investor Network(Service Mark), Merrill Lynch's multimedia
platform featuring timely audio and video reports from analysts, in addition
to banking services and online shopping.
. Formed the Direct Markets group to develop integrated, electronically-
delivered products and services for CICG clients worldwide, including
research, analytics, investment information, underwriting, trading, and
account reporting. During the 1999 fourth quarter, Direct Markets introduced
its first version of iDeal(Service Mark), a new software platform for
offering all types of debt and equity securities that is designed to increase
the efficiency of the underwriting process, enhance the dissemination of
information, and broaden distribution.
. Announced in December a strategic alliance with Multex.com to co-develop
global research and information web sites for Merrill Lynch's CICG clients,
and to develop technology that will offer clients expanded market data and
news, as well as interactive investor conference calls to give customers
real-time access to Merrill Lynch's research analysts.
. Invested in electronic trading and market systems, such as Primex,
Archipelago and TradeWeb.
. Established an integrated global Asset Management Group with three regional
operating units servicing a diverse worldwide clientele. In addition, the
initiatives included the hire of new senior marketing officers and senior
investment managers, including chief investment officers and senior portfolio
managers, as well as a quantitative management team, Merrill Lynch
Quantitative Advisors. These changes have contributed to expanded product
lines, including both active and quantitative investment funds, improved
investment performance across both retail and institutional funds, and
expanded distribution through Merrill Lynch's sales channels and external
distribution partners.
. In January 2000, announced the expansion of Merrill Lynch's banking
initiatives, which will include new deposit product offerings to be
introduced in the first half of 2000. These new products will include
Federally-insured interest-bearing bank deposits into which cash from certain
Merrill Lynch client accounts, previously swept into money market mutual
funds, will be swept. It is anticipated that the new deposit product
offerings will enhance the deposit base at Merrill Lynch's two FDIC-insured
U.S. banking subsidiaries.
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Competition
All aspects of Merrill Lynch's business are intensely competitive,
particularly in the underwriting, trading, and advisory activities, and have
been affected by the entry of several new and non-traditional competitors such
as commercial banks and insurance companies and Internet broker-dealers, and by
the consolidation of others. Merrill Lynch competes for clients, market share,
and human talent in every aspect of its business. It competes directly on a
worldwide basis with other U.S. and non-U.S. trading, investment banking and
financial advisory service firms, brokers and dealers in securities and futures.
It also competes with commercial banks and their affiliates in these businesses,
particularly in its derivatives and capital markets businesses. Many of Merrill
Lynch's non-U.S. competitors may have competitive advantages in their home
markets. Merrill Lynch's competitive position depends to an extent on prevailing
worldwide economic conditions and U.S. and non-U.S. governmental policies.
Through its subsidiaries and affiliates, Merrill Lynch also competes for
investment funds with mutual fund management companies, insurance companies,
finance and investment advisory companies, banks, and trust companies and
institutions. Merrill Lynch competes for its individual and institutional
clients on the basis of price, the range of products that it offers, the quality
of its services, its financial resources, and product and service innovation.
Financial services companies also compete to attract and retain successful
financial consultants and other revenue-producing personnel. Merrill Lynch's
insurance businesses operate in highly competitive environments. Many insurance
companies, both stock and mutual, are older and larger and have more substantial
financial resources and larger agency relationships than do Merrill Lynch's
insurance subsidiaries.
For a further discussion of the competitive environment, see Business
Environment above.
Regulation
Certain aspects of Merrill Lynch's business, as that of its competitors and
the financial services industry in general, are subject to stringent regulation
by U.S. Federal and state regulatory agencies and securities exchanges and by
various non-U.S. governmental agencies or regulatory bodies, securities
exchanges, and central banks, each of which have been charged with the
protection of the financial markets and the interests of those participating in
those markets. These regulatory agencies in the United States include, among
others, the Securities and Exchange Commission ("SEC"), Commodity Futures
Trading Commission ("CFTC"), Federal Deposit Insurance Corporation ("FDIC"),
Municipal Securities Rulemaking Board ("MSRB"), the New York State Banking
Department ("NYSBD") and Office of Thrift Supervision ("OTS"). In other areas of
the world, these regulators include, in the United Kingdom, the Financial
Services Authority ("FSA") (which has assumed the banking supervisory role
previously undertaken by the Bank of England) the Securities and Futures
Authority ("SFA"), and the Investment Management Regulatory Organization
("IMRO"), and elsewhere, the Central Bank of Ireland, the Federal Banking
Supervisory Authority in Germany, the Swiss Federal Banking Commission, the
Japanese Financial Supervisory Agency, the Monetary Authority of Singapore, the
Office of Superintendent of Financial Institutions in Canada, the Canadian
Securities Administrators, the Securities Commission in Argentina, the
Securities Commission in Brazil, the Securities Commission in Mexico and the
Securities and Futures Commission in Hong Kong, among many others.
Additional legislation and regulations and changes in rules promulgated by
the SEC or other U.S. Federal and state governmental regulatory authorities and
self-regulatory organizations and by non-U.S. governments and governmental
regulatory agencies may directly affect the manner of operation and
profitability of Merrill Lynch.
United States Regulatory Oversight and Supervision:
MLPF&S and certain other subsidiaries of ML & Co. are registered as broker-
dealers with the SEC and as such are subject to regulation by the SEC and by
self-regulatory organizations, such as the National Association of Securities
Dealers, Inc. (the "NASD") and the securities exchanges of which each is a
member. Certain Merrill Lynch subsidiaries and affiliates, including MLPF&S,
MLAM, and MLIP, are registered as investment advisers with the SEC.
Those Merrill Lynch entities that are broker-dealers registered with the
SEC and members of U.S. national securities exchanges are subject to Rule 15c3-1
under the Securities Exchange Act of 1934 (the "Exchange Act") which is designed
to measure the general financial condition and liquidity of a broker-dealer.
Under this rule, they are required to maintain the minimum net capital deemed
necessary to meet broker-dealers' continuing commitments to customers and
others. Under certain circumstances, this rule limits the ability of ML&Co. to
withdraw capital from such broker-dealers. Additional information regarding
certain net capital requirements is set forth in Note 13 to the Consolidated
Financial Statements in the Annual Report.
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Certain Merrill Lynch subsidiaries are also subject to the risk assessment
rules adopted by the SEC under the Market Reform Act of 1990, which require,
among other things, that certain broker-dealers maintain and preserve records
and other information, describe risk management policies and procedures, and
report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operating condition of the broker-dealer.
Broker-dealers are also subject to other regulations covering the
operations of their business, including sales and trading practices, use of
client funds and securities, and conduct of directors, officers, and employees.
Broker-dealers are also subject to regulation by state securities administrators
in those states where they do business. Violations of the stringent regulations
governing the actions of a broker-dealer can result in the revocation of broker-
dealer licenses, the imposition of censures or fines, the issuance of cease and
desist orders, and the suspension or expulsion from the securities business of a
firm, its officers, or employees. The SEC and the national securities exchanges
emphasize in particular the need for supervision and control by broker-dealers
of their employees.
The SEC, various banking regulators, the Financial Accounting Standards
Board, and Congressional committees, among others, have launched a number of
initiatives which have the effect of increasing regulation, and requiring
greater disclosure, of financial instruments, including derivatives positions
and activities. Merrill Lynch, along with certain other major U.S. securities
firms, has implemented a voluntary oversight framework to address issues related
to capital, management controls, and counterparty relationships arising out of
the over-the-counter derivatives activities of unregulated affiliates of SEC-
registered broker-dealers and CFTC-registered futures commission merchants.
Merrill Lynch formed its Risk Oversight Committee as an extension of its risk
management process to provide general oversight of risk management for all of
its institutional trading activities and to monitor compliance with its
commitments respecting this voluntary oversight initiative.
MLIP and QA Advisers LLC are registered with the Commodity Futures Trading
Commission as commodity pool operators and commodity trading advisors.
MLGSI is subject to regulation by the NASD and the Chicago Board of Trade
and is required to maintain minimum net capital pursuant to rules of the U.S.
Department of the Treasury. Merrill Lynch's municipal finance professionals are
subject to various trading and underwriting regulations of the MSRB. MLPF&S and
MLF are registered futures commission merchants and regulated by the CFTC, the
National Futures Association ("NFA"), and the commodity exchanges of which each
is a member. The CFTC and the NFA impose net capital requirements on these
companies. MLIP is registered with the CFTC as a commodity pool operator and a
commodity trading advisor and is a member of the NFA in such capacities.
Merrill Lynch's banking and lending activities are supervised and regulated
by a number of different Federal and state regulatory agencies. MLBT is
regulated primarily by the State of New Jersey and by the FDIC. Certain of the
activities of MLBFS and MLCC are regulated by the New Jersey Department of
Banking. In addition to New Jersey, MLCC is also licensed or registered to
conduct its lending activities in 35 other jurisdictions and MLBFS is licensed
or registered in 8 states, subjecting each to regulation and examination by the
appropriate authorities in those states.
MLBUSA is regulated primarily by the State of Utah and by the FDIC. MLIB is
regulated by the Federal Reserve Bank of New York. Merrill Lynch's U.S. trust
institutions are subject to regulation by the OTS in the case of the federal
savings bank and by the bank regulatory agencies in the states where the state-
chartered institutions are incorporated.
Merrill Lynch's insurance subsidiaries are subject to state insurance
regulatory supervision. ML Life is subject to regulation and supervision by the
New York State Insurance Department. MLLIC is subject to regulation and
supervision by the Insurance Department of the State of Arkansas. Both MLLIC and
ML Life are subject to similar regulation in the other states in which they are
licensed.
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Non-U.S. Regulatory Oversight and Supervision:
Merrill Lynch's business is also subject to extensive regulation by various
non-U.S. governments, securities exchanges, central banks, and regulatory
bodies, particularly in those countries where it has established an office.
Certain Merrill Lynch subsidiaries are regulated as broker-dealers under the
laws of the jurisdictions in which they operate.
MLI and MLIB Limited are regulated in the United Kingdom by the SFA.
Merrill Lynch Capital Markets Bank Limited, which engages in the derivatives
business, is regulated by the Central Bank of Ireland and the New York State
Banking Department. Merrill Lynch's activities in Australia are regulated by the
Australian Securities and Investment Commission or the Australian Prudential
Regulation Authority, and its Hong Kong and Singapore operations are regulated
and supervised by the Hong Kong Securities and Futures Commission and The
Monetary Authority of Singapore, respectively. Merrill Lynch's Japanese business
is subject to the regulation of the Financial Supervisory Agency as well as
other Japanese regulatory authorities. Merrill Lynch Phatra Securities is
regulated primarily by the Securities and Exchange Commission of Thailand and
the Stock Exchange of Thailand.
Merrill Lynch Canada is an investment dealer in Canada and is regulated
under the laws of the Canadian provinces by securities commissions and by the
Investment Dealers Association of Canada. It is also a member of all major
Canadian exchanges and is subject to their rules and regulations.
The business of MLAM and MAM is regulated by a number of non-U.S.
regulatory agencies or bodies. Their activities in the United Kingdom are
regulated by IMRO and the Personal Investment Authority and, in other
jurisdictions, by local regulators.
Merrill Lynch's activities in Mexico are regulated by Securities Commission
in Mexico, its activities in Argentina by the Securities Commission in
Argentina, and its activities in Brazil by the Securities Commission in Brazil.
Merrill Lynch's subsidiaries engaged in banking and trust activities
outside the United States are regulated by various governmental entities in the
particular jurisdiction where they are chartered, incorporated, and/or conduct
their business activities. In addition to being regulated by the NYSBD, MLIB
Limited is regulated by the FSA in respect of its banking activities (previously
by the Bank of England) and The Monetary Authority of Singapore. Merrill Lynch
Bank (Suisse) S.A. is regulated by the Swiss Federal Banking Commission. MLBT
Cayman is regulated by the Cayman Monetary Authority and the Florida Department
of Banking. Banco Merrill Lynch is regulated by the Brazilian Central Bank.
Item 2. Properties
Merrill Lynch has a number of offices throughout the world. Other than
those described below as being owned, substantially all offices of Merrill Lynch
subsidiaries throughout the world are located in leased premises. Facilities
owned or occupied by Merrill Lynch are believed to be adequate for the purposes
for which they are currently used and are well maintained. Set forth below is
a brief description and the approximate square footage of the principal
facilities of Merrill Lynch. Each of these principal facilities support all of
Merrill Lynch's segments, other than the property on King William Street in
London referred to below, which is utilized solely by our Asset Management
Group. The information regarding Merrill Lynch's property lease commitments is
set forth in Note 9 to the Consolidated Financial Statements under the caption
Leases in the Annual Report.
Principal Facilities in the United States:
Merrill Lynch's executive offices and principal administrative offices are
located in leased premises at the World Financial Center in New York City.
Separate Merrill Lynch affiliates lease both the North Tower (1,800,000 square
feet) and the South Tower (2,500,000 square feet); both leases expire in 2013.
Merrill Lynch occupies the entire North Tower and approximately half the South
Tower. Another Merrill Lynch affiliate is a partner in the partnership that
holds the ground lessee's interest in the North Tower.
In New York City, MLPF&S also holds a lease for 662,000 square feet in
lower Manhattan expiring in 2007. In 1998, Merrill Lynch began partial occupancy
of a 760,000 square foot building at 222 Broadway, which was purchased by a
subsidiary in 1997; as third party leases expire, Merrill Lynch intends to
occupy the entire building. In New Jersey, Merrill Lynch affiliates own a
389,000 square foot hotel, conference and training center, a 669,000 square foot
office
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building in Plainsboro, and a 414,000 square foot building on 34 acres at 300
Davidson Avenue in Somerset. MLPF&S holds a 590,000 square foot lease at 101
Hudson Street in Jersey City. In 1999, Merrill Lynch affiliates leased land and
commenced construction on facilities in Hopewell, New Jersey which will
consolidate existing operations and allow for future expansion. Initial
operations are scheduled to commence in the Fall of 2000. Merrill Lynch
affiliates own a 54-acre campus in Jacksonville, Florida, with four buildings,
and a 70-acre campus in Englewood, Colorado with two buildings.
Principal Facilities Outside the United States:
In London, Merrill Lynch leases 250,000 square feet at Ropemaker Place with
a cancellation right in 2002. In 1998, Merrill Lynch purchased a site in the
City of London and is currently constructing a headquarters complex of 550,000
square feet. The new headquarters will replace the Ropemaker facility, and is
expected to be occupied in 2001. An additional 170,000 square feet of office
space is also leased at Farringdon Road. This lease, which has a 25 year term,
commenced in 1990. Merrill Lynch also leases approximately 140,000 square feet
under a lease expiring in 2014 on King William Street, where Merrill Lynch
Mercury Asset Management's operations are headquartered.
Item 3. Legal Proceedings
ML & Co., certain of its subsidiaries, including MLPF&S, and other persons have
been named as parties in civil actions and arbitration proceedings, including
those described below. Each of the following actions is reported as of March 6,
2000.
Sumitomo Litigation.
In December 1999, Merrill Lynch entered into an agreement in principle with
the plaintiffs to settle two purported class actions in the United States
District Court for the Western District of Wisconsin (Loeb Industries, Inc. v.
Sumitomo Corp., et al., instituted June 7, 1999; Metal Prep Co., Inc. v.
Sumitomo Corp., et al., instituted July 30, 1999) and two purported class
actions in the Superior Court for the County of San Diego (Heliotrope General,
Inc. v. Sumitomo Corp., et al., instituted July 8, 1999; R.W. Strang Mechanical
v. Sumitomo Corp., et al., instituted August 20, 1999) for a total of $20
million. Those actions alleged that Merrill Lynch conspired with Sumitomo
Corporation and others to inflate copper prices. These matters were settled
without an adjudication of the merits of the claims and Merrill Lynch denied
liability in connection with the settlement. The settlement in principle is
subject to the execution of a definitive settlement agreement and court
approval.
JAS Securities Litigation.
JAS Securities LLP v. Merrill Lynch, instituted July 14, 1999, was brought
against Merrill Lynch as a purported class action in the Superior Court of the
State of Delaware, on behalf of beneficial owners of certain exchangeable debt
securities. The complaint alleges breach of contract based on Merrill Lynch's
alleged use of an incorrect formula for redeeming certain exchangeable debt
securities prior to their maturity. Plaintiff has asserted that damages are
approximately $255 million. Merrill Lynch has moved to dismiss the action and
plaintiff has moved for partial summary judgment on its claims.
Orange County Litigation
The following actions filed against ML & Co. in connection with Merrill
Lynch's business activities with the Treasurer-Tax Collector of Orange County,
California ("Orange County") have been settled:
City of Atascadero, et al. v. Merrill Lynch, Pierce, Fenner & Smith Inc.,
et al., instituted September 15, 1995, was brought in the Superior Court of the
State of California, San Francisco County by 14 California public entities
against ML & Co., and certain of its subsidiaries and employees. Plaintiffs
alleged, among other things, that the defendants violated state and federal law
in connection with Merrill Lynch's business activities with the Orange County
Treasurer-Tax Collector. In February 2000, Merrill Lynch and the plaintiffs
agreed to settle the case for $32.5 million and payment was made on March 3,
2000. The matter was settled without an adjudication of the merits of the
claims and Merrill Lynch denied liability in connection with the settlement.
14
<PAGE>
DeLeon v. Merrill Lynch, Pierce, Fenner & Smith Inc., et al., instituted
December 13, 1994, was brought against MLPF&S, an affiliate, and an employee of
Merrill Lynch as a purported class action in the Superior Court of the State of
California, Orange County, on behalf of individuals whose funds were invested by
the Orange County Treasurer-Tax Collector, alleging breaches of fiduciary duties
and acts of professional negligence in connection with Merrill Lynch's business
activities with the Orange County Treasurer-Tax Collector. Plaintiffs have
agreed to dismiss the case voluntarily without the payment of any damages by
Merrill Lynch.
The following action filed against ML & Co. in connection with Merrill
Lynch's business activities with Orange County is outstanding:
Balan v. Merrill Lynch & Co., Inc., et al., instituted December 16, 1994,
was brought as a purported class action in the United States District Court for
the Southern District of New York on behalf of purchasers of ML & Co.'s common
stock between March 31, 1994 and December 6, 1994 alleging, among other things,
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder by ML & Co. and two of its present or former directors
and officers in connection with Merrill Lynch's disclosure with respect to its
business activities with the Orange County Treasurer-Tax Collector. Damages in
an unspecified amount are sought. Merrill Lynch has moved to dismiss the
action, and is awaiting decision on its motion.
Shareholder Derivative Litigation
In the following shareholder derivative action ML & Co. is named as a
nominal defendant because the action purports to be brought on behalf of ML &
Co. and any recovery obtained by plaintiffs would be for the benefit of ML &
Co.:
Miller v. Schreyer, et al., a consolidated derivative action instituted
October 11, 1991 in the Supreme Court of the State of New York, New York County,
alleges, among other things, breach of fiduciary duty against certain present or
former ML & Co. directors, and against Transmark USA, Inc. and one of its
principals in connection with securities trading transactions that occurred at
year-end 1984, 1985, 1986, and 1988 between subsidiaries of ML & Co. and a
subsidiary of Transmark USA, Inc., Guarantee Security Life Insurance Company,
which was later liquidated. Damages in an unspecified amount are sought.
Merrill Lynch has moved to dismiss the action, and is awaiting a decision on its
motion.
ML & Co. believes it has strong defenses to, and, where appropriate, will
vigorously contest the actions described above that have not already been
settled. Although the ultimate outcome of the actions described above and other
civil actions, arbitration proceedings, and claims pending against ML & Co. or
its subsidiaries as of March 6, 2000, cannot be ascertained at this time and the
results of legal proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these actions will not have a
material adverse effect on the financial condition or the results of operations
of Merrill Lynch as set forth in the Consolidated Financial Statements of
Merrill Lynch included in the Annual Report, but may be material to the
Company's operating results for any particular period.
15
<PAGE>
Item 4. Matters Submitted to a Vote of Securityholders
There were no matters submitted to a vote of security holders during the
1999 fourth quarter.
EXECUTIVE OFFICERS OF MERRILL LYNCH & CO., INC.
The following table sets forth the name, age, present title, principal
occupation, and certain biographical information for the past five years for ML
& Co.'s executive officers, all of whom have been elected by the ML & Co. Board
of Directors and have been appointed as members of the Merrill Lynch Executive
Management Committee. Unless otherwise indicated, the officers listed are of ML
& Co. Under ML & Co.'s by-laws, elected officers are elected annually to hold
office until their successors are elected and qualify or until their earlier
resignation or removal.
David H. Komansky, 60
Chairman of the Board since April 1997; Chief Executive Officer since December
1996; President and Chief Operating Officer from January 1995 to April 1997;
Executive Vice President, Debt and Equity Markets Group from May 1993 to January
1995.
Thomas W. Davis, 46
Executive Vice President and President of Corporate and Institutional Client
Group since March 1998; Executive Vice President and Co-Head of Corporate and
Institutional Client Group from April 1997 to March 1998; Managing Director and
Co-Head of Investment Banking Group from April 1995 to April 1997; Co-Head of
Equity Markets Group from 1993 to April 1995.
Edward L. Goldberg, 59
Executive Vice President, Operations Services Group since January 1999;
Executive Vice President, Operations, Services and Technology from April 1991 to
January 1999.
Stephen L. Hammerman, 62
Vice Chairman of the Board since April 1992; General Counsel since October 1984.
Jerome P. Kenney, 58
Executive Vice President, Corporate Strategy and Research since October 1990,
concurrently with Executive Vice President, Corporate Credit from May 1993 to
May 1995.
John A. McKinley, Jr., 42
Executive Vice President since January 2000; Head of the Technology Group since
January 1999; Chief Technology Officer since October 1998; Senior Vice President
from October 1998 to January 2000. Joined Merrill Lynch in October 1998. Prior,
Chief Technology and Information Officer, General Electric Capital Services,
October 1995 to October 1998; Partner, Ernst & Young LLP, October 1992 to
November 1995.
E. Stanley O'Neal, 48
Executive Vice President and President of U.S. Private Client Group since
February 2000, Executive Vice President and Chief Financial Officer from March
1998 to February 2000; Executive Vice President and Co-Head of Corporate and
Institutional Client Group from April 1997 to March 1998; Managing Director and
Head of Global Capital Markets Group from April 1995 to April 1997; Managing
Director, Investment Banking and Head of Financing Services Group from June 1993
to April 1995.
16
<PAGE>
Thomas H. Patrick, 56
Executive Vice President and Chief Financial Officer since February 2000,
Executive Vice President and Chairman of Special Advisory Services from March
1993 to February 2000.
Jeffrey M. Peek, 53
Executive Vice President, President of Asset Management Group and President and
Chief Executive Officer of MLAM since December 1997; Managing Director and Co-
Head of Investment Banking Group from March 1997 to December 1997; Senior Vice
President and Director, Global Securities Research & Economics from April 1995
to March 1997; Head of Global Industries Group, Investment Banking, from
November 1993 to March 1995.
Winthrop H. Smith, Jr., 50
Executive Vice President and President of International Private Client Group
since April 1997; Chairman, Merrill Lynch International Incorporated since April
1993; Executive Vice President, International from June 1992 to April 1997.
John L. Steffens, 58
Chairman of U.S. Private Client Group since February 2000; Vice Chairman of the
Board since April 1997; President of U.S. Private Client Group from April 1997
to February 2000; Executive Vice President, Private Client Group from October
1990 to April 1997.
____________
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Information relating to the principal market in which the Registrant's
Common Stock is traded, the high and low sales prices per share for each full
quarterly period within the two most recent fiscal years, the approximate number
of holders of record of Common Stock, and the frequency and amount of any cash
dividends declared for the two most recent fiscal years is set forth under the
captions "Dividends Per Common Share" and "Stockholder Information" on page 88
of the Annual Report and such information is incorporated herein by reference.
Item 6. Selected Financial Data
Selected financial data for the Registrant and its subsidiaries for each of
the last five fiscal years is set forth in the financial table "Selected
Financial Data" on page 27 of the Annual Report (excluding for this purpose the
financial ratio, leverage, and employee information set forth under the headings
"Financial Ratios" and "Employee Statistics"). Such information is incorporated
herein by reference and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto on pages 55 to 87 in the Annual
Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis of Financial Condition and Results of
Operations is set forth on pages 28 to 53 of the Annual Report under the caption
"Management's Discussion and Analysis" and is incorporated herein by reference.
All of such information should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto on pages 55 to 87 in the Annual
Report.
Item 7A Quantitative and Qualitative Disclosures about Market Risk
Quantitative and qualitative disclosure about market risk is set forth on
pages 49 to 50 of the Annual Report under the caption "Management's Discussion
and Analysis" and in Note 3 to the Consolidated Financial Statements, and is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Registrant and its
subsidiaries, together with the Notes thereto and the Report of Independent
Auditors thereon, are contained in the Annual Report on pages 54 to 87, and are
incorporated herein by reference. In addition, the information on page 88 of the
Annual Report under the caption "Quarterly Information" is incorporated herein
by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the last two fiscal years.
18
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Election of Directors" on
pages 4 to 7 of ML & Co.'s Proxy Statement dated March 9, 2000 for its 2000
Annual Meeting of Stockholders (the "2000 Proxy Statement") is incorporated
herein by reference. For a list of the members of the ML & Co. Board of
Directors and of the ML & Co. executive officers, see pages 89 to 91, of the
Annual Report.
Item 11. Executive Compensation
Information relating to ML & Co. executive officer and director
compensation set forth on pages 16 to 26 and page 28 of the 2000 Proxy Statement
is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information concerning security ownership of certain beneficial owners
of ML & Co. Common Stock on pages 1 and 2 of the 2000 Proxy Statement and the
information concerning the security ownership of ML & Co. directors and
executive officers on pages 10 and 11 of the 2000 Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions set
forth under the caption "Certain Transactions" on page 27 of the 2000 Proxy
Statement is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedule, And Reports On Form 8-K
(a) Documents filed as part of this Report:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed hereunder
are listed on page F-1 hereof by reference to the corresponding page
number in the Annual Report.
2. Financial Statement Schedule
The financial statement schedule required to be filed hereunder is
listed on page F-1 hereof and the schedule included herewith appears
on pages F-2 through F-6 hereof.
3. Exhibits
Certain of the following exhibits were previously filed as exhibits to
other reports or registration statements filed by the Registrant and
are incorporated herein by reference to such reports or registration
statements as indicated parenthetically below by the appropriate
report reference date or registration statement number. For
convenience, Quarterly Reports on Form 10-Q, Annual Reports on Form
10-K, Current Reports on Form 8-K, and Registration Statements on Form
S-3 are designated herein as "10-Q", "10-K", "8-K", and "S-3",
respectively.
(3) Articles of Incorporation and By-Laws
19
<PAGE>
(i)(a) Restated Certificate of Incorporation of ML & Co., effective as of
April 28, 1998 (Exhibit (3)(i) to 10-Q for the quarter ended March 27,
1998 ("First Quarter 1998 10-Q")).
(b) Form of certificate representing the 9% Cumulative Preferred Stock,
Series A, par value $1.00 per share, of ML & Co. (the "9% Preferred
Stock") (Exhibit 3(i) to First Quarter 1998 10-Q).
*(c) Form of Depositary Receipt evidencing the Depositary Shares for the 9%
Preferred Stock.
(d) Certificate of Designation of ML & Co. establishing the rights,
preferences, privileges, qualifications, Restrictions, and limitations
relating to the 9% Preferred Stock (filed as part of Exhibit (3)(i) to
First Quarter 1998 10-Q).
*(e) Deposit Agreement dated as of November 3, 1994 among ML & Co.,
Citibank, N.A. as Depositary, and The holders from time to time of the
Depositary Receipts.
(f) Certificate of Designation dated December 17, 1987 for Series A Junior
Preferred Stock (Exhibit 3(f) to S-3 (file No. 33-19975)).
(g) Certificate of Designation dated August 20, 1998 for Special Voting
Stock, relating to ML & Co.'s Restated Certificate of Incorporation
effective as of April 28, 1998 (Exhibit (3) to 10-Q for the quarter
ended September 25, 1998 ("Third Quarter 1998 10-Q")).
(h) Form of Amended and Restated Rights Agreement dated as of December 2,
1997 between ML & Co. and ChaseMellon Shareholder Services, L.L.C.
(Exhibit 4 to 8-K dated December 2, 1997).
(ii) By-Laws of ML & Co., effective as of September 24, 1999 (Exhibit 3 to
1999 10-Q for the quarter ended September 24, 1999).
(4) Instruments defining the rights of security holders, including indentures
ML & Co. hereby undertakes to furnish to the SEC, upon request, copies
of any unfiled agreements defining the rights of holders of long-term
debt securities of ML & Co., none of which authorize an amount of
securities that exceed 10% of the total assets of ML & Co.
*(i) Senior Indenture dated as of April 1, 1983, as amended and restated as
of April 1, 1987, between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (the "1983 Senior Indenture") and
the Supplemental Indenture thereto dated as of March 15, 1990.
*(ii) Sixth Supplemental Indenture dated as of October 25, 1993 to the 1983
Senior Indenture.
(iii) Twelfth Supplemental Indenture to the 1983 Senior Indenture dated as of
September 1, 1998 between ML & Co. and The Chase Manhattan Bank
(formerly known as Chemical Bank, as successor by merger to
Manufacturers Hanover Trust Company) (Exhibit 4(a) to 8-K dated October
21, 1998).
(iv) Senior Indenture dated as of October 1, 1993 between ML & Co. and The
Chase Manhattan Bank (successor by merger to The Chase Manhattan Bank
N.A.) (the "1993 Senior Indenture")(Exhibit (4) (iv) to 10-K for fiscal
year ended December 25,1998 ("1998 10-K")).
(v) First Supplemental Indenture to the 1993 Senior Indenture, dated as of
June 1, 1998, between ML & Co. and The Chase Manhattan Bank (successor
by merger to The Chase Manhattan Bank N.A.) (Exhibit 4(a) to 8-K dated
July 2, 1998).
(vi) Form of S&P 500 Market Index Target-Term Security due March 27, 2006
(Exhibit 4 to 8-K dated March 26, 1999).
20
<PAGE>
(vii) Form of Consumer Staples Select Sector SPDR Fund Market Index
Target-Term Security due April 19, 2006 (Exhibit 4 to 8-K dated
April 19, 1999).
(viii) Form of Major 11 International Market Index Target-Term Security
due May 26, 2006 (Exhibit 4 to 8-K dated May 26, 1999).
(ix) Form of Russell 2000 Index Call Warrant Expiring May 25, 2001
(Exhibit 4 to 8-K dated May 28, 1999).
(x) Form of Select Sector SPDR Fund Growth Portfolio Market Index
Target-Term Security due May 25, 2006 (Exhibit 4 to 8-K dated May
28, 1999).
(xi) Form of Market Index Target-Term Security based upon the Dow Jones
Industrial Average due June 26, 2006 (Exhibit 4 to 8-K dated June
25, 1999).
(xii) Form of Russell 2000 Market Index Target-Term Security due July 21,
2006 (Exhibit 4 to 8-K dated July 21, 1999).
(xiii) Form of Nikkei 225 Market Index Target-Term Security due August 4,
2006 (Exhibit 4 (b) to 8-K dated August 4, 1999).
(xiv) Form of S&P 500 Market Index Target-Term Security due August 4,
2006 (Exhibit 4 to 8-K dated August 4, 1999).
(xv) Form of Nikkei 225 Market Index Target-Term Security due September
20, 2002 (Exhibit 4 (a) to 8-K dated September 20, 1999).
(xvi) Form of Energy Select Sector SPDR Fund Market Index Target-Term
Security due September 20, 2006 (Exhibit 4 (b) to 8-K dated
September 20, 1999).
(xvii) Form of Bond Index Note, Domestic Master Series 1999A due December
23, 2002 (Exhibit 4 to 8-K dated December 22, 1999).
(xviii) Form of Global Market Index Target-Term Security due December 22,
2004 (Exhibit 4 to 8-K dated December 22, 1999).
(10) Material Contracts
*(i) Form of ML & Co. 1978 Equity Purchase Plan as amended through
January 16, 1995.
*(ii) Form of ML & Co. Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, as amended
through November 10, 1994.
(iii) ML & Co. Long-Term Incentive Compensation Plan, as amended through
July 26, 1999 (Exhibit 10(i) to 10-Q for the quarter ended June 25,
1999 ("Second Quarter 1999 10-Q")).
(iv) ML & Co. Equity Capital Accumulation Plan, as amended through July
26, 1996 (Exhibit 10(iii) to Second Quarter 1999 10-Q).
(v) ML & Co. Executive Officer Compensation Plan.
(vi) Written description of Retirement Program for Non-Employee
Directors of ML & Co., as amended June 29, 1988 (Pages 23 to 24 of
ML & Co.'s Proxy Statement for the 1999 Annual Meeting of
Stockholders contained in ML & Co.'s Schedule 14A filed on March 4,
1998).
21
<PAGE>
(vii) Form of Severance Agreement between ML & Co. and certain of its
directors and executive officers (Exhibit 10(x) to 10-K for fiscal
year ended December 29, 1995).
(viii) Form of Indemnification Agreement entered into with all current
directors of ML & Co. and to be Entered into with all future
directors of ML & Co. (Exhibit 10 (viii) to 1998 10-K).
(ix) Written description of ML & Co.'s incentive compensation programs
(Exhibit 10 (ix) to 1998 10-K).
(x) Written description of ML & Co.'s compensation policy for executive
officers and directors (Pages 13 to 15 and pages 22 to 24 of ML &
Co.'s Proxy Statement for the 1999 Annual Meeting of Stockholders
contained in ML & Co.'s Schedule 14A filed on March 5, 1999).
(xi) Merrill Lynch KECALP L.P. 1986 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 2-99800)).
(xii) Merrill Lynch KECALP L.P. 1987 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-11355)).
(xiii) Merrill Lynch KECALP L.P. 1989 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-26561)).
(xiv) Merrill Lynch KECALP L.P. 1991 (Exhibit 1(b) to Registration
Statement on Form N-2 (File No. 33-39489)).
(xv) Merrill Lynch KECALP L.P. 1994 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 33-51825)).
(xvi) Merrill Lynch KECALP L.P. 1997 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 333-15035)).
(xvii) Merrill Lynch KECALP L.P. 1999 (Exhibit 1(a)(ii) to Registration
Statement on Form N-2 (File No. 333-59143)).
(xviii) ML & Co. Deferred Restricted Unit Plan for Executive Officers
(Exhibit 10(xxiii) to 10-K for fiscal Year ended December 27, 1996
("1996 10-K")).
*(xix) ML & Co. 1995 Deferred Compensation Plan for a Select Group of
Eligible Employees.
(xx) ML & Co. Fee Deferral Plan for Non-Employee Directors, as amended
through April 15, 1997 (Exhibit 10 to 1997 10-Q for the quarter
ended March 28, 1997).
(xxi) ML & Co. 1996 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 29, 1995).
(xxii) ML & Co. 1997 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(xxvii) to 1996 10-K).
(xxiii) ML & Co. 1999 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10 to Third Quarter 1998 10-Q).
*(xxiv) ML & Co. 2000 Deferred Compensation Plan for a Select Group of
Eligible Employees.
(xxv) ML & Co. 1997 KECALP Deferred Compensation Plan for a Select
Group of Eligible Employees (Exhibit 10(i) to 10-Q for the
quarter ended June 27, 1997).
22
<PAGE>
(xxvi) ML & Co. Deferred Unit and Stock Unit Plan for Non-Employee
Directors (Exhibit 10 to First Quarter 1998 10-Q).
(xxvii) ML & Co. Long-Term Incentive Compensation Plan for Managers and
Producers (Exhibit 10(ii) to Second Quarter 1999 10-Q).
(xxviii) Executive Annuity Agreement dated as of January 27, 1997 by and
between ML & Co. and David H. Komansky (Exhibit 10(xxxi) to 1996
10-K).
(xxix) Amendment dated September 18, 1996 to Deferred Compensation Plans
(amending the Amended and Restated 1994 Deferred Compensation
Agreement for a Select Group of Eligible Employees, the ML & Co.
1995 Deferred Compensation Plan for a Select Group of Eligible
Employees, and the ML & Co. 1996 Deferred Compensation Plan for a
Select Group of Eligible Employees) (Exhibit 10(xxxii) to 1996
10-K).
(xxx) ML & Co. 1998 Deferred Compensation Plan for a Select Group of
Eligible Employees (Exhibit 10(i) to 10-Q for the quarter ended
September 26, 1997 (the "Third Quarter 1997 10-Q")).
(xxxi) ML & Co. Program for the Deferral of Stock Option Gains for a
Select Group of Eligible Employees (Exhibit 10(iv) to Third Quarter
1997 10-Q).
(xxxii) Amendment dated February 12, 1998 to the ML & Co. Deferred
Compensation Plans for a Select Group of Eligible Employees for the
years 1994, 1995, 1996, and 1997 (Exhibit 10.32 to 10-K for the
fiscal year ended December 26, 1997 ("1997 10-K")).
(xxxiii) Amendment dated February 12, 1998 to the ML & Co. Deferred
Restricted Unit Plan for Executive Officers (Exhibit 10.33 to 1997
10-K).
*(11) Statement re computation of per share earnings.
*(12) Statement re computation of ratios.
*(13) Excerpt of 1999 Annual Report to Stockholders.
*(21) Subsidiaries of ML & Co.
*(23) Consent of Independent Auditors, Deloitte & Touche LLP.
*(27) Financial Data Schedule.
*(99) Additional Exhibits.
(i) Opinion of Deloitte & Touche LLP with respect to the Ratio of
Earnings to Fixed Charges and Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends, which is included in Exhibit
12.
(ii) Opinion of Deloitte & Touche LLP with respect to certain
information in the Selected Financial Data, which is incorporated
by reference in Part II, Item 6.
23
<PAGE>
(b) Reports on Form 8-K:
The following Current Reports on Form 8-K were filed by the
Registrant during the fourth quarter of 1999 with the Commission
under the caption "Item 5. Other Events":
(i) Current Report on Form 8-K dated October 12, 1999 for the purpose of
filing Merrill Lynch & Co.'s Preliminary Unaudited Earnings Summary
for the three and nine-month periods ended September 24, 1999.
(ii) Current Report on Form 8-K dated October 27, 1999 for the purpose of
filing Merrill Lynch & Co.'s Preliminary Unaudited Consolidated
Balance Sheet as of September 24, 1999.
(iii) Current Report on Form 8-K dated December 22, 1999 for the purpose of
filing the form of Merrill Lynch & Co. Bond Index Notes, Domestic
Master Series 1999A due December 23, 2002.
(iv) Current Report on Form 8-K dated December 22, 1999 for the purpose of
filing the form of Merrill Lynch & Co. Global Market Index Target-
Term Securities due December 22, 2004.
* Filed herewith
24
<PAGE>
MERRILL LYNCH & CO., INC.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
ITEMS 14(A)(1) AND 14(A)(2)
Page Reference
--------------
1999 Annual
Report to
Form 10-K Stockholders
--------- ------------
Consolidated Financial Statements
- ---------------------------------
Independent Auditors' Report 54
Consolidated Statements of Earnings 55
Consolidated Balance Sheets 56-57
Consolidated Statements of Changes in Stockholders'
Equity 58-59
Consolidated Statements of Comprehensive Income 60
Consolidated Statements of Cash Flows 61
Notes to Consolidated Financial Statements 62-87
Financial Statements Schedule
- -----------------------------
Schedule I--Condensed Financial Information of
Registrant F-2 to F-6
Condensed Statements of Earnings F-2
Condensed Balance Sheets F-3
Condensed Statements of Cash Flows F-4
Notes to Condensed Financial Statements F-5
Independent Auditors' Report F-6
Specifically incorporated elsewhere herein by
reference are certain portions of the following
unaudited items:
(i) Selected Financial Data 27
(ii) Management's Discussion and Analysis 28-53
(iii) Quarterly Information 88
Schedules not listed are omitted because of the absence of the conditions under
which they are required or because the information is included in the
Consolidated Financial Statements and Notes thereto in the 1999 Annual Report to
Stockholders, which are incorporated herein by reference.
F-1
<PAGE>
Condensed Statements of Earnings (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF EARNINGS
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
- ----------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Interest (principally from affiliates) ................... $ 3,693 $ 4,476 $ 3,937
Management service fees (from affiliates) ................ 336 321 296
Other .................................................... 20 109 4
------- ------- -------
Total Revenues ........................................... 4,049 4,906 4,237
Interest Expense ......................................... 4,094 4,942 4,077
------- ------- -------
Net Revenues ............................................. (45) (36) 160
------- ------- -------
NON-INTEREST EXPENSES
Compensation and benefits ................................ 323 236 281
Other .................................................... 358 394 307
------- ------- -------
Total Non-Interest Expenses .............................. 681 630 588
------- ------- -------
EQUITY IN EARNINGS OF AFFILIATES ........................... 3,104 1,727 2,222
------- ------- -------
EARNINGS BEFORE INCOME TAXES ............................... 2,378 1,061 1,794
Income Tax Benefit ......................................... 240 198 141
------- ------- -------
NET EARNINGS ............................................... $ 2,618 $ 1,259 $ 1,935
======= ======= =======
OTHER COMPREHENSIVE LOSS, NET OF TAX....................... (267) (75) (63)
------- ------- -------
COMPREHENSIVE INCOME....................................... $ 2,351 $ 1,184 $ 1,872
======= ======= =======
NET EARNINGS APPLICABLE TO
COMMON STOCKHOLDERS ....................................... $ 2,580 $ 1,220 $ 1,896
======= ======= =======
- --------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Condensed Financial Statements
F-2
<PAGE>
Condensed Balance Sheets (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED BALANCE SHEETS
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 25,
1999 1998
- ------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents .............................................. $ 379 $ --
Marketable investment securities ....................................... 1,197 --
Loans to, receivables from and preference securities
of affiliates ....................................................... 84,538 80,492
Investments in affiliates, at equity ................................... 11,037 9,745
Equipment and facilities (net of accumulated
depreciation and amortization of $330 in 1999 and $289 in 1998) ..... 210 160
Other receivables and assets ........................................... 2,192 2,197
-------- --------
TOTAL ASSETS ........................................................... $ 99,553 $ 92,594
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Commercial paper and other short-term borrowings ....................... $ 24,057 $ 16,986
Loans from and payables to affiliates .................................. 5,981 4,046
Other liabilities and accrued interest ................................. 4,734 4,301
Long-term borrowings ................................................... 51,979 57,129
-------- --------
Total Liabilities ...................................................... 86,751 82,462
-------- --------
STOCKHOLDERS' EQUITY
Preferred Stockholders' Equity ......................................... 425 425
-------- --------
Common Stockholders' Equity:
Shares exchangeable into common stock ............................. 59 66
Common stock, par value $1.33 1/3 per share;
authorized: 1,000,000,000 shares;
issued 1999-472,714,925 shares, 1998-472,660,324 shares.......... 630 630
Paid-in capital ................................................... 1,863 1,427
Accumulated other comprehensive loss (net of tax) ................. (389) (122)
Retained earnings ................................................. 12,667 10,475
-------- --------
14,830 12,476
Less: Treasury stock, at cost: 1999-104,949,595 shares;
1998-116,376,259 shares 1,817 2,101
Employee stock transactions ................................. 636 668
-------- --------
Total Common Stockholders' Equity ...................................... 12,377 9,707
-------- --------
Total Stockholders' Equity ............................................. 12,802 10,132
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................. $ 99,553 $ 92,594
======== ========
- ------------------------------------------------------------------------------------------------------
See Notes to Condensed Financial Statements
</TABLE>
F-3
<PAGE>
Condensed Statements of Cash Flows (Parent Company Only)
Schedule 1
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MERRILL LYNCH & CO., INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
YEAR ENDED LAST FRIDAY IN DECEMBER
-------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Earnings .............................................. $ 2,618 $ 1,259 $ 1,935
Noncash items included in earnings:
Equity in earnings of affiliates ........................ (3,104) (1,727) (2,222)
Depreciation and amortization ........................... 45 30 30
Other ................................................... 15 (183) 103
(Increase) decrease in
Operating assets, net of operating liabilities .......... 123 - (216)
Dividends and partnership distributions from affiliates ... 1,781 868 1,126
-------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES ................... 1,478 247 756
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Loans to affiliates, net of payments .................... (2,257) 774 (22,164)
Sales of available for sale securities .................. 12 - -
Purchases of available for sale securities .............. (1,198) - -
Investments in affiliates, net of dispositions .......... (4) (436) (60)
Equipment and facilities ................................ (95) (35) (54)
-------- -------- --------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES ........ (3,542) 303 (22,278)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings ........ 7,071 (13,621) 5,770
Issuance and resale of long-term borrowings ............. 11,685 27,153 23,592
Settlement and repurchases of long-term borrowings ...... (16,092) (13,933) (6,665)
Repurchase of remarketed preferred stock ................ - - (194)
Common stock transactions ............................... 200 27 (500)
Dividends to shareholders ............................... (421) (363) (294)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ........ 2,443 (737) 21,709
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ 379 (187) 187
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................ - 187 -
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR ...................... $ 379 $ - $ 187
======== ======== ========
- -------------------------------------------------------------------------------------------------------
Supplemental Disclosure
Cash paid for:
Income taxes ........................................... 261 280 555
Interest ............................................... 4,149 4,906 3,904
</TABLE>
See Notes to Condensed Financial Statements
F-4
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (PARENT COMPANY ONLY)
NOTE 1. BASIS OF PRESENTATION
The condensed unconsolidated financial statements of Merrill Lynch &
Co., Inc. ("ML & Co." or the "Parent Company") should be read in conjunction
with the Consolidated Financial Statements of Merrill Lynch & Co., Inc. and
subsidiaries (collectively, "Merrill Lynch") and the Notes thereto in the
Merrill Lynch 1999 Annual Report to Stockholders (the "Annual Report") included
as an exhibit to this Form 10-K. Certain reclassification and format changes
have been made to prior year amounts to conform to the current year
presentation. Prior year amounts have also been restated to reflect the merger
of Midland Walwyn with ML & Co. (see Note 2 to the Consolidated Financial
Statements in the Annual Report).
Investments in affiliates are accounted for in accordance with the equity
method.
For information on the following, refer to the indicated Notes to the
Consolidated Financial Statements within the Annual Report.
. Long-term borrowings (Note 5)
. Stockholders' equity (Note 8)
. Commitments and contingencies (Note 9)
. Employee incentive plans (Note 11)
The Parent Company hedges certain risks arising from long-term borrowing
payment obligations and investments in and loans to foreign subsidiaries. See
Notes 5 and 6 to the Consolidated Financial Statements, respectively, for
additional information.
Note 2. Guarantees
ML & Co. issues guarantees of counterparty obligations in connection
with certain activities of subsidiaries (see Note 9 to the Consolidated
Financial Statements for further information).
The Parent Company also guarantees certain obligations of subsidiaries,
including obligations associated with foreign exchange forward contracts and
interest rate swap transactions.
ML & Co. also guarantees obligations related to Trust Originated
Preferred Securities(Service Mark) issued by subsidiaries (see Note 7 to the
Consolidated Financial Statements).
F-5
<PAGE>
[LOGO]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and December 25,
1998, and for each of the three years in the period ended December 31, 1999, and
have issued our report thereon dated February 28, 2000, which report expresses
an unqualified opinion and includes an explanatory paragraph for the change in
accounting method in 1998 for certain internal-use software development costs to
conform with Statement of Position 98-1. Such consolidated financial statements
and our report are included in your 1999 Annual Report to Stockholders and are
incorporated herein by reference. Our audits also included the financial
statement schedule of Merrill Lynch, listed in Item 14. Such financial statement
schedule is the responsibility of Merrill Lynch's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
F-6
<PAGE>
<TABLE>
<S> <C>
/s/ W. H. Clark
- ------------------------------------------------ -------------------------
Signatures W.H. CLARK W. H. Clark
Director
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, /s/ Jill K. Conway
the Registrant has duly caused this report to be -------------------------
signed on its behalf by the undersigned, JILL K. CONWAY Jill K. Conway
thereunto duly authorized on the 9th day of Director
March, 2000.
/s/ Stephen L. Hammerman
-------------------------
Merrill Lynch & Co., Inc. STEPHEN L. HAMMERMAN Stephen L. Hammerman
Registrant Director
/s/ Andrea L. Dulberg /s/ George B. Harvey
------------------------- -------------------------
ANDREA L. DULBERG Andrea L. Dulberg GEORGE B. HARVEY George B. Harvey
Secretary Director
Pursuant to the requirements of the Securities /s/ William R. Hoover
Exchange Act of 1934, this report has been -------------------------
signed below by the following persons on behalf WILLIAM R. HOOVER William R. Hoover
of the Registrant in the capacities indicated Director
on the 9th day of March, 2000.
/s/ David H. Komansky /s/ Robert P. Luciano
------------------------- -------------------------
DAVID H. KOMANSKY David H. Komansky ROBERT P. LUCIANO Robert P. Luciano
Director, Director
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) /s/ David K. Newbigging
-------------------------
DAVID K. NEWBIGGING David K. Newbigging
Director
/s/ Thomas H. Patrick
----------------------------- /s/ Aulana L. Peters
THOMAS H. PATRICK Thomas H. Patrick -------------------------
Executive Vice President AULANA L. PETERS Aulana L. Peters
Chief Financial Officer Director
(Principal Financial Officer)
/s/ John J. Phelan, Jr.
-------------------------
JOHN J. PHELAN, JR. John J. Phelan, Jr.
/s/ Ahmass L. Fakahany Director
-----------------------------
AHMASS L. FAKAHANY
Senior Vice President /s/ John L. Steffens
and Controller -------------------------
(Principal Accounting Officer) JOHN L. STEFFENS John L. Steffens
Director
/s/ William L. Weiss
-------------------------
WILLIAM L. WEISS William L. Weiss
Director
</TABLE>
II-1
<PAGE>
Exhibit 3(i)(c)
[FORM OF FACE OF RECEIPT!]
NUMBER DEPOSITARY SHARES
DR
DEPOSITARY RECEIPT FOR DEPOSITARY SHARES, EACH REPRESENTING ONE-FOUR
HUNDREDTH OF ONE SHARE Of 9% CUMULATIVE PREFERRED STOCK,
SERIES A,
OF
MERRILL LYNCH & CO., INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP
---------
SEE REVERSE FOR CERTAIN DEFINITIONS
CITIBANK, N.A., as Depositary (the "Depositary"), hereby certifies that
is the registered owner of DEPOSITARY SHARES
("Depositary Shares"), each Depositary Share representing one-four hundredth of
one share of 9% Cumulative Preferred Stock, Series A, par value $1.00 per share
(the "Stock"), of Merrill Lynch & Co., Inc., a Delaware corporation (the
"Corporation"), on deposit with the Depositary, subject to the terms and
entitled to the benefits of the Deposit Agreement dated as of November 3, 1994
(the "Deposit Agreement"), among the Corporation, the Depositary and the holders
from time to time of the Depositary Receipts. By accepting this Depositary
Receipt, the holder hereof becomes a party to and agrees to be bound by all the
terms and conditions of the Deposit Agreement. This Depositary Receipt shall not
be valid or obligatory for any purpose or entitled to any benefits under
the Deposit Agreement unless it shall have been executed by the Depositary
by the manual signature of a duly authorized officer or, if executed in
facsimile by the Depositary, countersigned by a Registrar in respect of the
Depositary Receipts by the manual signature of a duly authorized officer
thereof.
Dated:
CITIBANK, N.A., Depositary
By________________________
Authorized Officer
<PAGE>
[FORM OF REVERSE OF RECEIPT]
MERRILL LYNCH & CO., INC.
MERRILL LYNCH & CO., INC. WILL FURNISH WITHOUT CHARGE TO EACH
RECEIPTHOLDER WHO SO REQUESTS A COPY OF THE DEPOSIT AGREEMENT AND A COPY OR
SUMMARY OF THE CERTIFICATE OF DESIGNATIONS OF THE 9% CUMULATIVE PREFERRED STOCK,
SERIES A, OF MERRILL LYNCH & CO., INC. ANY SUCH REQUEST IS TO BE ADDRESSED TO
THE DEPOSITARY NAMED ON THE FACE OF THIS RECEIPT.
-------------------------
- --------------------------------------------------------------------------------
The Corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof of the
Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or to the
Transfer Agent or Registrar.
EXPLANATION OF ABBREVIATIONS
The following abbreviations when used in the form of ownership on the face of
this certificate shall be construed as though they were written out in full
according to applicable laws or regulations. Abbreviations in addition to those
appearing below may be used.
Phrase Abbreviation Equivalent Phrase Abbre
JT TEN As joint tenants, with right TEN BY ENT
of survivorship and not as tenants
in common
TEN IN COM As tenants in common UNIF GIFT MI
Word Word
Abbreviation Equivalent Abbreviation Equivalent
ADM Administrator(s) EST Estate, of
Estate of
Administratrix EX Executor(s),
Executrix
AGMT Agreement FBO For the
benefit of
ART Article FDN Foundation
CH Chapter GDN Guardians)
CUST Custodian for GDNSHP Guardianship
DEC Declaration MIN Minor(s)
================================================================================
For value received, ____________________ hereby sell(s), assigns(s) and
transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
<PAGE>
T!
HOUT CHARGE TO EACH
AGREEMENT AND A COPY OR
CUMULATIVE PREFERRED STOCK,
UEST IS TO BE ADDRESSED TO
- -----------------------------
stockholder who so requests
participating, optional or
s thereof of the
restrictions of such
to the Corporation or to
ownership on the face of
ere written out in full
iations in addition to those
Phrase Abbreviation Equivalent
of survivorship TEN BY ENT As tenants by the entireties
UNIF GIFT MIN ACT Uniform Gifts to Minors Act
Word
ion Equivalent Abbreviation Equivalent
Estate, of Estate of PAR Paragraph
Executor(s), Executrix PL Public Law
For the benefit of TR (As) trustees(s), for, of
Foundation U Under
Guardian(s) UA Under agreement
Guardianship UW Under will of, Of will of,
Minor(s) Under last will & testament
================================================================================
by sell(s), assign(s) and
UMBER OF ASSIGNEE
- ---------------------------
- ---------------------------
POSTAL ZIP CODE OF ASSIGNEE
- ---------------------------
<PAGE>
______________________ Depositary Shares represented by the within Receipt, and
do(es) hereby irrevocably constitute and appoint _____________ Attorney to
transfer the said Depositary Shares on the books of the within named Depositary
with full power of substitution in the premises.
Dated________________
------------------------------------------------------------
NOTICE: The signature to the assignment must correspond with
the name as written upon the face of this Receipt in every
particular, without alteration or enlargement or any change
whatsoever.
SIGNATURE GUARANTEED
- --------------------------------------------------------------
NOTICE: The signature(s) should be guaranteed by an eligible
guarantor institution (banks, stockbrokers, savings and loan
associations, and credit unions with membership in an
approved signature guarantee medallion program), pursuant to
Rule 17Ad-15 under the Securities Exchange Act of 1934.
A-2
<PAGE>
Exhibit 3(i)(e)
================================================================================
MERRILL LYNCH & CO., INC.
CITIBANK, N.A., As Depositary
AND
THE HOLDERS FROM TIME TO TIME OF
THE DEPOSITARY RECEIPTS DESCRIBED HEREIN
----------------
DEPOSIT AGREEMENT
----------------
Dated as of November 3, 1994
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
Page
ARTICLE I
Definitions
ARTICLE II
Form of Receipts, Deposit of Stock,
Execution and Delivery, Transfer,
Surrender and Redemption of Receipts
SECTION 2.01. Form and Transfer of Receipts ................................ 2
SECTION 2.02. Deposit of Stock; Execution and Delivery
of Receipts in Respect Thereof ............................... 4
SECTION 2.03. Registration of Transfer of Receipts.......................... 5
SECTION 2.04. Split-ups and Combinations of Receipts;
Surrender of Receipts and Withdrawal of
Stock ........................................................ 5
SECTION 2.05. Limitations on Execution and Delivery,
Transfer, Surrender and Exchange of
Receipts ..................................................... 6
SECTION 2.06. Lost Receipts, etc. .......................................... 7
SECTION 2.07. Cancellation and Destruction of
Surrendered Receipts ......................................... 7
SECTION 2.08. Redemption of Stock .......................................... 7
ARTICLE III
Certain Obligations of
Holders of Receipts and the Company
SECTION 3.01. Filing Proofs, Certificates and Other
Information .................................................. 9
SECTION 3.02. Payment of Taxes or Other
Governmental Charges ......................................... 9
SECTION 3.03. Warranty as to Stock ......................................... 9
SECTION 3.04. Warranty as to Receipts ...................................... 9
ARTICLE IV
The Deposited Securities; Notices
SECTION 4.01. Cash Distributions .......................................... 10
SECTION 4.02. Distributions Other than Cash, Rights,
Preferences or Privileges ................................... 10
SECTION 4.03. Subscription Rights, Preferences or
Privileges .................................................. 11
<PAGE>
i
<PAGE>
PAGE
----
SECTION 4.04. Notice of Dividends, etc.; Fixing Record
Date for Holders of Receipts ................................ 12
SECTION 4.05. Voting Rights ............................................... 12
SECTION 4.06. Changes Affecting Deposited Securities
and Reclassifications, Recapitalizations, etc. ............. 13
SECTION 4.07. Delivery of Reports ......................................... 14
SECTION 4.08. Lists of Receipt Holders .................................... 14
ARTICLE V
The Depositary, the Depositary's
Agents, the Registrar and the Company
SECTION 5.01. Maintenance of Offices, Agencies and
Transfer Books by the Depositary;
Registrar ................................................... 14
SECTION 5.02. Prevention of or Delay in Performance
the Depositary, the Depositary's Agents,
the Registrar or the Company ................................ 15
SECTION 5.03. Obligations of the Depositary, the
Depositary's Agents, the Registrar and
the Company ................................................. 15
SECTION 5.04. Resignation and Removal of the
Depositary; Appointment of Successor
Depositary .................................................. 16
SECTION 5.05. Corporate Notices and Reports ............................... 17
SECTION 5.06. Indemnification by the Company .............................. 18
SECTION 5.07. Fees, Charges and Expenses .................................. 18
ARTICLE VI
Amendment and Termination
SECTION 6.01. Amendment ................................................... 19
SECTION 6.02. Termination ................................................. 19
ARTICLE VII
Miscellaneous
SECTION 7.01. Counterparts ................................................ 20
SECTION 7.02. Exclusive Benefit of Parties ................................ 20
SECTION 7.03. Invalidity of Provisions .................................... 20
SECTION 7.04. Notices ..................................................... 21
SECTION 7.05. Depositary's Agents ......................................... 22
SECTION 7.06. Holders of Receipts Are Parties ............................. 22
SECTION 7.07. Governing Law ............................................... 22
SECTION 7.08. Inspection of Deposit Agreement ............................. 22
ii
<PAGE>
PAGE
----
SECTION 7.09. Headings ................................................... 22
FORM OF FACE OF RECEIPT .................................................. A-1
FORM OF REVERSE OF RECEIPT ............................................... A-2
iii
<PAGE>
DEPOSIT AGREEMENT dated as of November 3, 1994, among MERRILL LYNCH & CO..
INC., a Delaware corporation (the "Company"), Citibank, N.A., a national banking
association (the "Depositary"), and the holders from time to time of the
Receipts described herein.
WHEREAS, it is desired to provide, as hereinafter set forth in this Deposit
Agreement, for the deposit of shares of 9% Cumulative Preferred Stack, Series A,
of MERRILL LYNCH & CO., INC. With the Depositary for the purposes set forth in
this Deposit Agreement and for the issuance hereunder of Receipts evidencing
Depositary Shares in respect of the Stock so deposited; and
WHEREAS, the Receipts are to be substantially in the form of Exhibit A
annexed hereto, with appropriate insertions, modifications and omissions, as
hereinafter provided in this Deposit Agreement;
NOW, THEREFORE, in consideration of the premises, the parties hereto agree
as follows:
ARTICLE I
Definitions
-----------
The following definitions shall for all purposes, unless otherwise
indicated, apply to the respective terms used in this Deposit Agreement:
"Certificate" shall mean the Certificate of Designations filed with the
secretary of State of the State of Delaware establishing the Stock as a series
of preferred stock of the Company.
"Company" shall mean Merrill Lynch & Co., Inc., a Delaware a corporation,
and its successors.
"Deposit Agreement" shall mean this Deposit Agreement, as amended or
supplemented from time to time in accordance with the terms hereof.
"Depositary" shall mean Citibank, N.A., and any successor as Depositary
hereunder.
"Depositary Shares" shall mean Depositary shares, each representing one-
four hundredth of one share of Stock and evidenced by a Receipt.
"Depositary's Agent" shall mean an agent appointed by the Depositary
pursuant to Section 7.05.
<PAGE>
"Depositary's Office" shall mean the principal office of the Depositary, at
which at any particular time its depositary receipt business shall be
administered.
"Receipt" shall mean one of the depositary receipts, substantially in the
form set forth as Exhibit A hereto, issued hereunder, whether in definitive or
temporary form and evidencing the number of Depositary Shares held of record by
the record holder of such Depositary Shares.
"record holder" or "holder" as applied to a Receipt shall mean the person
in whose name a Receipt is registered on the books of the Depositary maintained
for such purpose.
"Registrar" shall mean the Depositary or such other bank or trust company
which shall be appointed by the Company to register ownership and transfers of
Receipts as herein provided and if a Registrar shall be so appointed,
references herein to "the books" of or maintained by the Depository shall be
deemed, as applicable, to refer as well to the register maintained by such
Registrar for such purpose.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock" shall mean shares of the Company's 9% Cumulative Preferred Stock,
Series A, par value $1.00 per share, $10,000 liquidation preference per share.
ARTICLE II
Form of Receipts, Deposit of Stock,
Execution and Delivery, Transfer,
Surrender and Redemption of Receipts
-----------------------------------
SECTION 2.01. Form and Transfer of Receipts. Definitive Receipts shall be
------------------------------
engraved or printed or lithographed on steel-engraved borders, with appropriate
insertions, modifications and omissions, as hereinafter provided. Pending the
preparation of definitive Receipts, the Depositary, upon the written order of
the Company, delivered in compliance with Section 2.02, shall execute and
deliver temporary Receipts which are printed, lithographed, typewritten,
mimeographed or otherwise substantially of the tenor of the definitive Receipts
in lieu of which they are issued and with such appropriate insertions,
omissions, substitutions and other variations as the persons executing such
Receipts may determine, as evidenced by their execution of such Receipts. If
temporary Receipts are issued, the Company and the Depositary will cause
definitive Receipts to be prepared without unreasonable delay. After the
preparation of definitive Receipts, the temporary Receipts shall be exchangeable
for definitive Receipts upon surrender of the temporary Receipts
2
<PAGE>
at an office described in the penultimate paragraph of Section 2.02, without
charge to the holder. Upon surrender for cancellation of any one or more
temporary Receipts, the Depositary shall execute and deliver in exchange
therefor definitive Receipts representing the same number of Depositary Shares
as represented by the surrendered temporary Receipt or Receipts. Such exchange
shall be made at the Company's expense and without any charge therefor. Until so
exchanged, the temporary Receipts shall in all respects be entitled to the same
benefits under this Agreement, and with respect to the Stock, as definitive
Receipts.
Receipts shall be executed by the Depositary by the manual signature of a
duly authorized officer of the Depositary; provided, that such signature
---------
may be a facsimile if a Registrar for the Receipts (other than the Depositary)
shall have been appointed and such Receipts are countersigned by a duly
authorized officer of the Registrar. No Receipt shall be entitled to any
benefits under this Deposit Agreement or be valid or obligatory for any purpose
unless it shall have been executed manually by a duly authorized officer of the
Depositary or, if a Registrar for the Receipts (other than the Depositary) shall
have been appointed, by manual or facsimile signature of a duly authorized
officer of the Depositary and countersigned by a duly authorized officer of such
Registrar. The Depositary shall record on its books each Receipt so signed and
delivered as hereinafter provided.
Receipts shall be in denominations of any number of whole Depositary
Shares.
Receipts may be endorsed with or have incorporated in the text thereof
such legends or recitals or changes not inconsistent with the provisions of this
Deposit Agreement as may be required by the Depositary and approved by the
Company or required to comply with any applicable law or any regulation
thereunder or with the rules and regulations of any securities exchange upon
which the Stock, the Depositary Shares or the Receipts may be listed or to
conform with any usage with respect thereto, or to indicate any special
limitations or restrictions to which any particular Receipts are subject.
Title to Depositary Shares evidenced by a Receipt which is properly
endorsed or accompanied by a properly executed instrument of transfer, shall be
transferable by delivery with the same effect as in the case of a negotiable
instrument; provided, however, that until transfer of a Receipt shall be
-------- ------
registered on the books of the Depositary as provided in Section 2.03, the
Depositary may, notwithstanding any notice to the contrary, treat the record
holder thereof at such time as the absolute owner thereof for the purpose of
determining the person entitled to distributions of dividends or other
distributions or
3
<PAGE>
to any notice provided for in this Deposit Agreement and for all other purposes.
SECTION 2.02. Deposit of Stock; Execution and Delivery of Receipts in
-------------------------------------------------------
Respect Thereof. Subject to the terms and conditions of this Deposit Agreement,
- ---------------
the Company may from time to time deposit shares of the Stock under this Deposit
Agreement by delivery to the Depositary of a certificate or certificates for the
Stock to be deposited, properly endorsed or accompanied, if required by the
Depositary, by a duly executed instrument of transfer or endorsement, in
form satisfactory to the Depositary, together with all such certifications as
may be required by the Depositary in accordance with the provisions of this
Deposit Agreement, and together with a written order of the Company directing
the Depositary to execute and deliver to, or upon the written order of, the
person or persons stated in such order a Receipt or Receipts evidencing in the
aggregate the number of Depositary Shares representing such deposited Stock.
Deposited Stock shall be held by the Depositary at the Depositary's office
or at such other place or places as the Depositary shall determine. The
Depositary shall not lend any Stock deposited hereunder.
Upon receipt by the Depositary of a certificate or certificates for Stock
deposited in accordance with the provisions of this Section, together with the
other documents required as above specified, and upon recordation of the Stock
on the books of the Company in the name of the Depositary or its nominee, the
Depositary, subject to the terms and conditions of this Deposit Agreement, shall
execute and deliver to or upon the order of the person or persons named in one
written order delivered to the Depositary referred to in the first paragraph of
this Section, a Receipt or Receipts evidencing in the aggregate the number of
Depositary Shares representing the Stock so deposited and registered in such
name or names as may be requested by such person or persons. The Depositary
shall execute and deliver such Receipt or Receipts at the Depositary's Office or
such other offices, if any, as the Depositary may designate. Delivery at other
offices shall be at the risk and expense of the person requesting such delivery.
SECTION 2.03. Registration of Transfer of Receipts. Subject to the terms
------------------------------------
and conditions of this Deposit Agreement, the Depositary shall register on its
books from time to time transfers of Receipts upon any surrender thereof by the
holder in person or by duly authorized attorney, properly endorsed or
accompanied by a properly executed instrument of transfer. Thereupon, the
Depositary shall execute a new Receipt or Receipts evidencing the same aggregate
number of Depositary Shares as those evidenced by the Receipt or Receipts
surrendered and
4
<PAGE>
deliver such new Receipt or Receipts to or upon the order of the person entitled
thereto.
The Depositary shall not be required (a) to issue, transfer or exchange any
Receipts for a period beginning at the opening of business fifteen days next
preceding any selection of Depositary Shares and Stock to be redeemed and ending
at the close of business on the day of the mailing of notice of redemption, or
(b) to transfer or exchange for another Receipt any Receipt called or being
called for redemption in whole or in part except as provided in section 2.08.
SECTION 2.04. Split-ups and Combinations of Receipts; Surrender of Receipts
-------------------------------------------------------------
and Withdrawal of Stock. Upon surrender of a Receipt or Receipts at the
- ------------------------
Depositary's Office or at such other offices as it may designate for the purpose
of effecting a split-up or combination of such Receipt or Receipts, and subject
to the terms and conditions of this Deposit Agreement, the Depositary shall
execute a new Receipt or Receipts in the authorized denomination or
denominations requested, evidencing the aggregate number of Depositary Shares
evidenced by the Receipt or Receipts surrendered, and shall deliver such new
Receipt or Receipts to or upon the order of the holder of the Receipt or
Receipts so surrendered.
Any holder of a Receipt or Receipts may withdraw the number of whole shares
of Stock and all money and other property, if any, represented thereby by
surrendering such Receipt or Receipts, at the Depositary's Office or at such
other offices as the Depositary may designate for such withdrawals. Thereafter,
without unreasonable delay, the Depositary shall deliver to such holder, or to
the person or persons designated by such holder as hereinafter provided, the
number of whole shares of Stock and all money and other property, if any,
represented by the Receipt or Receipts so surrendered for withdrawal, but
holders of such whole shares of Stock will not thereafter be entitled to deposit
such Stock hereunder or to receive a Receipt evidencing Depositary Shares
therefor. If a Receipt delivered by the holder to the Depositary in connection
with such withdrawal shall evidence a number of Depositary Shares in excess of
the number of Depositary Shares representing the number of whole shares of Stock
to be so withdrawn, the Depositary shall at the same time, in addition to such
number of whole shares of Stock and such money and other property, if any, to be
so withdrawn, deliver to such holder, or subject to Section 2.03 upon his order,
a new Receipt evidencing such excess number of Depositary Shares. In no event
will fractional shares of Stock be delivered by the Depositary. Delivery of the
Stock and money and other property, if any, being withdrawn may be made by the
delivery of such certificates, documents of title and other instruments as the
Depositary may deem appropriate.
5
<PAGE>
If the Stock and the money and other property, if any, being withdrawn are
to be delivered to a person or persons other than the record holder of the
Receipt or Receipts being surrendered for withdrawal of Stock, such holder
shall execute and deliver to the Depositary a written order so directing the
Depositary and the Depositary may require that the Receipt or Receipts
surrendered by such holder for Withdrawal of such shares of Stock be properly
endorsed in blank or accompanied by a properly executed instrument of transfer
in blank.
Delivery of the Stock and the money and other property, if any, represented
by Receipts surrendered for withdrawal shall be made by the Depositary at the
Depositary's Office, except that, at the request, risking expense of the holder
surrendering such Receipt or Receipts and for the account of the holder thereof,
such delivery may be made at such other place as may be designated by such
holder.
SECTION 2.05. Limitations on Execution and Delivery, Transfer, Surrender
----------------------------------------------------------
and Exchange of Receipts. As a condition precedent to the execution and
- -------------------------
delivery, registration of transfer, split-up, combination, surrender or exchange
of any Receipt, the Depositary, any of the Depositary's Agents or the Company
may require payment to it of a sum sufficient for the payment (or, in the event
that the Depositary or the Company shall have made such payment, the
reimbursement to it) of any charges or expenses payable by the holder of a
Receipt pursuant to Section 5.07, may require the production of evidence
satisfactory to it as to the identity and genuineness of any signature and may
also require compliance with such regulations, if any, as the Depositary or the
Company may establish consistent with the provisions of this Deposit Agreement.
The deposit of Stock may be refused, the delivery of Receipts against Stock
may be suspended, the registration of transfer of Receipts may be refused and
the registration of transfer, surrender or exchange of outstanding Receipts may
be suspended (i) during any period when the register of stockholders of the
Company is closed or (ii) if any such action is deemed necessary or advisable by
the Depositary, any of the Depositary's Agents or the Company at any time or
from time to time because of any requirement of Law or of any government or
governmental body or commission or under any provision 3f this Deposit
Agreement.
SECTION 2.06. Lost Receipts, etc. In case any receipt shall be mutilated,
-------------------
destroyed, lost or stolen, the Depositary in its discretion may execute and
deliver a Receipt of like form and tenor in exchange and substitution for such
mutilated Receipt, or in lieu of and in substitution for such destroyed, lost or
stolen Receipt, upon (i) the filing by the holder thereof with the Depositary
of evidence satisfactory to the Depositary of such destruction or loss or theft
of such Receipt, of the authenticity
6
<PAGE>
thereof and of his or her ownership thereof and (ii) the holder thereof
furnishing of the Depositary with reasonable indemnification satisfactory to the
Depositary.
SECTION 2.07. Cancellation and Destruction of Surrendered Receipts. All
----------------------------------------------------
Receipts surrendered to the Depositary or any Depositary's Agent shall be
cancelled by the Depositary. Except as prohibited by applicable law or
regulation, the Depositary is authorized and directed to destroy all Receipts so
cancelled.
SECTION 2.08. Redemption of Stock. Whenever the Company shall be permitted
--------------------
and shall elect to redeem shares of Stock in accordance with the provisions of
the Certificate, it shall (unless otherwise agreed to in writing with the
Depositary) give or cause to be given to the Depositary, not less than 25 days
and not more than 75 days prior to the Redemption Date (as defined below),
notice of the date of such proposed redemption of Stock and of the number of
such shares held by the Depositary to be so redeemed and the applicable
redemption price, which notice shall be accompanied by a certificate from the
Company stating that such redemption of Stock is in accordance with the
provisions of the Certificate. On the date of such redemption, provided that the
Company shall then have paid or caused to be paid in full to the Depositary the
redemption price of the Stock to be redeemed, plus an amount equal to any
accrued and unpaid dividends thereon to the date fixed for redemption, in
accordance with the provisions of the Certificate, the Depositary shall redeem
the number of Depositary Shares representing such Stock. The Depositary shall
mail notice of the Company's redemption of Stock and the proposed simultaneous
redemption of the number of Depositary Shares representing the Stock to be
redeemed by first-class mail, postage prepaid, not less than 10 and not more
than 60 days prior to the date fixed for redemption of such Stock and Depositary
Shares (the "Redemption Date"), to the record holders of the Receipts evidencing
the Depositary Shares to be so redeemed at the addresses of such holders as they
appear on the records of the Depositary; but neither failure to mail any such
notice of redemption of Depositary Shares to one or more such holders nor any
defect in any notice of redemption of Depositary Shares to one or more such
holders shall affect the sufficiency of the proceedings for redemption as to the
other holders. Each such notice shall state: (i) the Redemption Date, (ii) the
number of Depositary Shares to be redeemed and, if less than all the Depository
Shares held by any such holder are to be redeemed, the number of such Depositary
Shares held by such holder to be so redeemed; (iii) the redemption price; (iv)
the place or places where Receipts evidencing Depositary Shares are to be
surrendered for payment of the redemption price; and (v) that dividends in
respect of the Stock represented by the Depositary Shares to be redeemed will
cease to accrue on such Redemption Date. In case less than all the outstanding
Depositary Shares are to be
7
<PAGE>
redeemed, the Depositary Shares to be so redeemed shall be selected by the
Depositary by Lot or pro rata (as nearly as may be), as determined by the
Depositary in its sole discretion to be equitable.
Notice having been mailed by the Depositary as aforesaid, from and after
the Redemption Date (unless the Company shall have failed to provide the funds
necessary to redeem the Stock evidenced by the Depositary Shares called for
redemption) (i) dividends on the shares of Stock so called for Redemption shall
cease to accrue from and after such date, (ii) the Depositary Shares being
redeemed from such proceeds shall be deemed no longer to be outstanding, (iii)
all rights of the holders of Receipts evidencing such Depositary Shares (except
the right to receive the redemption price) shall, to the extent of such
Depositary Shares, cease and terminate, and (iv) upon surrender in accordance
with such redemption notice of the Receipts evidencing any such Depositary
Shares called for redemption (properly endorsed or assigned for transfer, if the
Depositary or applicable law shall so require), such Depositary Shares shall be
redeemed by the Depositary at a redemption price per Depositary Share equal to
one-four hundredth of the redemption price per share of Stock so redeemed plus
all money and other property, if any, represented by such Depositary Shares,
including all amounts paid by the Company in respect of dividends which on the
Redemption Date have accrued on the shares of Stock to be so redeemed and have
not therefore been paid.
If fewer than all of the Depositary Shares evidenced by a Receipt are
called for redemption, the Depositary will deliver to the holder of such Receipt
upon its surrender to the Depositary, together with the redemption payment, a
new Receipt evidencing the Depositary Shares evidenced by such prior receipt and
not called for redemption.
ARTICLE III
Certain Obligations of
Holders of Receipts and the Company
----------------------------------
SECTION 3.01. Filing Proofs, Certificates and Other Information. Any holder
-------------------------------------------------
of a Receipt may be required from time to time to file such proof of residence,
or other matters or other information, to execute such certificates and to make
such representations and warranties as the Depositary or the Company may
reasonably deem necessary or proper. The Depositary or the Company may withhold
the delivery, or delay the registration of transfer or redemption, of any
Receipt or the withdrawal of the Stock represented by the Depositary Shares
evidenced by any Receipt or the distribution of any dividend or other
distribution or the sale of any rights or of the proceeds thereof until such
8
<PAGE>
proof or other information is filed or such certificates are executed or such
representations and warranties are made.
SECTION 3.02. Payment of Taxes or Other
-------------------------
Governmental Charges. Holders of Receipts shall be obligated to make payments
- --------------------
to the Depositary of certain charges and expenses, as provided in Section 5.07.
Registration of transfer of any Receipt or any withdrawal of Stock and all money
or other property, if any, represented by the Depositary Shares evidenced by
such Receipt may be refused until any such payment due is made, and any
dividends, interest payments or other distributions may be withheld or any part
of or all the Stock or other property represented by the Depositary Shares
evidenced by such Receipt and not theretofore sold may be sold for the account
of the holder thereof (after attempting by reasonable means to notify such
holder prior to such sale), and such dividends, interest payments or other
distributions or the proceeds of any such sale may be applied to any payment of
such charges or expenses, the holder of such Receipt remaining liable for any
deficiency.
SECTION 3.03. Warranty as to Stock. The Company hereby represents and
---------------------
warrants that the Stock, when issued, will be duly authorized, validly issued,
fully paid and nonassessable. Such representation and warranty shall survive the
deposit of the Stock and the issuance of Receipts.
SECTION 3.04. Warranty as to Receipts. The Company hereby represents and
------------------------
warrants that the Receipts, when issued, will represent legal and valid
interests in the Stock. Such representation and warranty shall survive the
deposit of the Stock and the issuance of Receipts.
ARTICLE IV
The Deposited Securities; Notices
--------------------------------
SECTION 4.01. Cash Distributions. Whenever the Depositary shall receive any
------------------
receive any cash dividend or other cash distribution on Stock, the Depositary
shall, subject to Sections 3.01 and 3.02, distribute to record holders of
Receipts on the record date fixed pursuant to Section 4.04 such amounts of such
dividend or distribution as are, as nearly as practicable, in proportion to the
respective numbers of Depositary Shares evidenced by the Receipts held by such
holders; provided, however, that in case the Company or the Depositary shall be
-------- -------
required to withhold and shall withhold from any cash dividend or other cash
distribution in respect of the Stock an amount on account of taxes, the amount
made available for distribution or distributed in respect of Depositary Shares
shall be reduced accordingly. The Depositary shall distribute or make available
for distribution, as the case may be, only such amount, however,
9
<PAGE>
as can be distributed without attributing to any of Depository Shares a fraction
of one cent, and any balance not so distributable shall be held by the
Depositary (Without liability for interest thereon) and shall be added to and be
treated as part of the next sum received by the Depositary for distribution to
record holders of Receipts then outstanding.
SECTION 4.02. Distributions Other than Cash, Rights, Preferences or
-----------------------------------------------------
Privileges. Whenever the Depository shall receive any distribution other than
- ----------
cash, rights, preferences or privileges upon Stock; the Depositary shall,
subject to Sections 3.01 and 3.02, distribute to record holders of Receipts on
the record date fixed pursuant to Section 4.04 such amounts of the securities or
property received by it as are, as nearly as practicable, in proportion to the
respective numbers of Depositary Shares evidenced by the Receipts held by such
holders, in any manner that the Depositary may deem equitable and practicable
for accomplishing such distribution. If in the opinion of the Depositary such
distribution cannot be made proportionately among such record holders, or if for
any other reason (including any requirement that the Company or the Depositary
withhold an amount on account of taxes) the Depositary deems, after consultation
with the Company, such distribution not to be feasible, the Depositary may, with
the approval of the Company, adopt such method as it deems equitable and
practicable for the purpose of effecting such distribution, including the sale
(at public or private sale) of the securities or property thus received, or any
part thereof, in a commercially reasonable manner. The net proceeds of any such
sale shall, subject to Sections 3.01 and 3.02, be distributed or made available
for distribution, as the case may be, by the Depositary to record holders of
Receipts as provided by Section 4.01 in the case of a distribution received in
cash. The Company shall not make any distribution of such securities or property
to the Depositary and the Depositary shall not make any distribution of such
securities or property to the holders of Receipts unless the Company shall have
provided an opinion of counsel stating that such securities or property, have
been registered under the Securities Act or do not need to be registered in
connection with such distributions.
SECTION 4.03. Subscription Rights, Preferences or Privileges. If the
-----------------------------------------------
Company shaft at any time offer or cause to be offered to the persons in whose
names Stock is recorded on the books of the Company any rights, preferences or
privileges to subscribe for or to purchase any securities or any rights,
preferences or privileges of any other nature, such rights, preferences or
privileges shall in each such instance be made available by the Depositary to
the record holders of Receipts in such manner as the Depositary may determine,
either by the issue to such record holders of warrants representing such rights,
preferences or privileges or by such other method as may be approved by the
Depositary in its discretion with the approval of
10
<PAGE>
the Company; provided, however, that (i) if at the time of issue or offer of any
-------- -------
such rights, preferences or privileges the Depositary determines that it is not
lawful or (after consultation with the Company) not feasible to make such
rights, preferences or privileges available to holders of Receipts by the issue
of warrants or otherwise, or (ii) if and to the extent so instructed by holders
of Receipts who do not desire to exercise such rights, preferences or
privileges, then the Depositary, in its discretion (with approval of the
Company, in any case where the Depositary has determined that it is not feasible
to make such rights, preferences or privileges available), may, if applicable
laws or the terms of such rights, preferences or privileges permit such
transfer, sell such rights, preferences or privileges at public or private sale,
at such place or places and upon such terms as it may deem proper. The net
proceeds of any such sale shall, subject to Sections 3.01 and 3.02, be
distributed by the Depositary to the record J holders of Receipts entitled
thereto as provided by Section 4.01 in the case of a distribution received in
cash.
The Company shall notify the Depositary whether registration under the
Securities Act of the securities to which any rights, preferences or privileges
relate is required in order for holders of Receipts to be offered or sold the
securities to which such rights, preferences or privileges relate, and the
Company agrees with the Depositary that it will file promptly a registration
statement pursuant to such Act with respect to such rights, preferences or
privileges and securities and use its best efforts and take all steps available
to it to cause such registration statement to become effective sufficiently in
advance of the expiration of such rights, preferences or privileges to enable
such holders to exercise such rights, preferences or privileges. In no event
shall the Depositary make available to the holders of Receipts any right,
preference or privilege to subscribe for or to purchase any securities unless
and until such registration statement shall have become effective, or the
Company shall have provided to the Depositary an opinion of counsel to the
effect that the offering and sate of such securities to such holders are exempt
from registration under the provisions of the Securities Act.
The Company shall notify the Depositary whether any other action under the
laws of any jurisdiction or any governmental or administrative authorization,
consent or permit is required in order for such rights, preferences or
privileges to be made available to holders of Receipts, and the Company agrees
with the Depositary that the Company will use its reasonable best efforts to
take such action or obtain such authorization, consent or permit sufficiently in
advance of the expiration of such rights, preferences or privileges to enable
such holders to exercise such rights, preferences or privileges.
11
<PAGE>
SECTION 4.04. Notice of Dividends, etc.; Fixing Record Date for Holders of
------------------------------------------------------------
Receipts. Whenever any cash dividend or other cash distribution shall become
- --------
payable or any distribution other than cash shall be made, or if rights,
preferences or privileges shall at any time be offered, with respect to Stock,
or whenever the Depositary shall receive notice of any meeting at which holders
of Stock are entitled to vote or of which holders of Stock are entitled to
notice, or whenever the Depositary and the Company shall decide it is
appropriate, the Depositary shall in each such instance fix a record date (which
shall be the same date as the record date fixed by the Company with respect to
or otherwise in accordance with the terms of the Stock) for the determination of
the holders of Receipts who shall be entitled to receive such dividend,
distribution, rights, preferences or privileges or the net proceeds of the sale
thereof, or to give instructions for the exercise of voting rights at any such
meeting, or who shall be entitled to notice of such meeting or for any other
appropriate reasons.
SECTION 4.05. Voting Rights. Upon receipt of notice of any meeting at which
-------------
the holders of Stock are entitled to vote, the Depositary shall, as soon as
practicable thereafter, mail to the record holders of Receipts a notice which
shall contain (i) such information as is contained in such notice of meeting and
(ii) a statement that the holders may, subject to any applicable restrictions,
instruct the Depositary as to the exercise of the voting rights pertaining to
the amount of Stock represented by their respective Depositary Shares (including
an express indication that instructions may be given to the Depositary to give
a discretionary proxy to a person designated by the Company) and a brief
statement as to the manner in which such instructions may be given. Upon the
written request of the holders of Receipts on the relevant record date, the
Depositary shall endeavor insofar as practicable to vote or cause to be voted,
in accordance with the instructions set forth in such requests, the maximum
number of whole shares of Stock represented by the Depositary Shares
evidenced by all Receipts as to which any particular voting instructions are
received. The Company hereby agrees to take all reasonable action which may be
deemed necessary by the Depositary in order to enable the Depositary to vote
such Stock or cause such Stock to be voted. In the absence of specific
instructions from the holder of a Receipt, the Depositary will not vote (but, at
its discretion, may appear at any meeting with respect to such Stock unless
directed to the contrary by the holders of all the Receipts) to the extent of
the Stock represented by the Depositary Shares evidenced by such Receipt.
SECTION 4.06. Changes Affecting Deposited Securities and Reclassifications,
-------------------------------------------------------------
Recapitalizations, etc. Upon any change in par or stated value, split-up,
- ----------------------
combination or any other reclassification of the Stock, or upon any
recapitalization,
12
<PAGE>
reorganization, merger or consolidation affecting the Company or to which it is
a party, the Depositary may in its discretion with the approval of, and shall
upon the instructions of, the Company, and (in either case) in such manner as
the Depositary may deem equitable, (i) make such adjustments as are certified by
the Company in the fraction of an interest represented by one Depositary Share
in one share of Stock as may be necessary fully to reflect the effects of such
change in par or stated value, split-up, combination or other reclassification
of Stock, or of such recapitalization, reorganization, merger or consolidation
and (ii) treat any securities which shall be received by the Depositary in
exchange for or upon conversion of or in respect of the Stock as new deposited
securities so received in exchange for or upon conversion or in respect of such
Stock. In any such case the Depositary may in its discretion, with the approval
of the Company, execute and deliver additional Receipts or may call for the
surrender of all outstanding Receipts to be exchanged for new Receipts
specifically describing such new deposited securities. Anything to the contrary
herein notwithstanding, holders of Receipts shall have the right from and after
the effective date of any such change in par or stated value, split-up,
combination or other reclassification of the Stock or any such recapitalization,
reorganization, merger or consolidation to surrender such Receipts to the
Depositary with instructions to convert, exchange or surrender the Stock
represented thereby only into or for, as the case may be, the kind and amount of
shares of stock and other securities and property and cash into which the Stock
represented by such Receipts might have been converted or for which such Stock
might have been exchanged or surrendered immediately prior to the effective date
of such transaction.
SECTION 4.07. Delivery of Reports. The Depositary shall furnish to holders
-------------------
of Receipts any reports and communications received from the Company which are
received by the Depositary and which the Company is required to furnish to the
holders of the Stock.
SECTION 4.08. Lists of Receipt Holders. Promptly upon request from time to
------------------------
time by the Company, the Depositary shall furnish to it a list, as of the most
recent practicable date, of the names, addresses and holdings of Depositary
Shares of all record holders of Receipts.
ARTICLE V
The Depositary, the Depositary's
Agents, the Registrar and the Company
-------------------------------------
SECTION 5.01. Maintenance of Offices, Agencies and Transfer Books by the
----------------------------------------------------------
Depositary; Registrar. Upon execution of this Deposit Agreement, the Depositary
- ---------------------
shall maintain at the
13
<PAGE>
Depositary's Office, facilities for the execution and delivery, registration and
registration of transfer, surrender and exchange of Receipts, and at the offices
of the Depositary's Agents, if any, facilities for the delivery, registration of
transfer, surrender and exchange of Receipts, all in accordance with the
provisions of this Deposit Agreement.
The Depositary shall keep books at the Depositary's Office for the
registration and registration of transfer of Receipts, which books at all
reasonable times shall be open for inspection by the record holders of Receipts;
provided that any such holder requesting to exercise such right shall certify to
- --------
the Depositary that such inspection shall be for a proper purpose reasonably
related to such person's interest as an owner of Depositary Shares evidenced by
the Receipt.
The Depositary may close such books, at any time or from time to time, when
deemed expedient by it in connection with the performance of its duties
hereunder.
The Depositary may, with the approval of the Company, appoint a Registrar
for registration of the Receipts or the Depositary Shares evidenced thereby. If
the Receipts or the Depositary Shares evidenced thereby or the Stock represented
by such Depositary Shares shall be listed on one or more national stock
exchanges, the Depositary will appoint a Registrar (acceptable to the Company)
for registration of such Receipts or Depositary Shares in accordance with any
requirements of such exchange. Such Registrar (which may be the Depositary if so
permitted by the requirements of any such exchange) may be removed and a
substitute registrar appointed by the Depositary upon the request or with the
approval of the Company. If the Receipts, such Depositary Shares or such Stock
are listed on one or more other stock exchanges, the Depositary will, at the
request of the Company, arrange such facilities for the delivery, registration,
registration of transfer, surrender and exchange of such Receipts, such
Depasitary Shares or such Stock as may be required by law or applicable stock
exchange regulation.
SECTION 5.02. Prevention of or Delay in Performance by the Depositary, the
------------------------------------------------------------
Depositary's Agents, the Registrar or the Company. Neither the Depositary nor
- -------------------------------------------------
any Depositary's Agent nor any Registrar nor the Company shall incur any
liability to any holder of any Receipt if by reason of any provision of any
present or future law, or regulation thereunder, of the United States of America
or of any other governmental authority or, in the case of the Depositary, the
Depositary's Agent or the Registrar, by reason of any provision, present or
future, of the Company's Certificate of Incorporation, as amended (including the
Certificate) or by reason of any act of God or war or other circumstance beyond
the control of the relevant party, the Depositary, the Depositary's Agent, the
Registrar or the Company
14
<PAGE>
shall be prevented or forbidden from, or subjected to any penalty on account of,
doing or performing any act or thing which the terms of this Deposit Agreement
provide shall be done or performed; nor shall the Depository, any Depository's
Agent, any Registrar or the Company incur liability to any holder of a Receipt
(i) by reason of any nonperformance or delay, caused as aforesaid, in the
performance of any act or thing which the terms of this Deposit Agreement shall
provide shall or may be done or performed, or (ii) by reason of any exercise
of, or failure to exercise, any discretion provided for in this Deposit
Agreement except, in the case of any such exercise or failure to exercise
discretion not caused as aforesaid, if caused by the negligence or willful
misconduct of the party charged with such exercise or failure to exercise.
SECTION 5.03. Obligations of the Depository, the Depository's Agents, the
----------------------------------------------------------
Registrar and the Company. Neither the Depository nor any Depositary's Agent nor
- -------------------------
any Registrar nor the Company assumes any obligation or shall be subject to any
liability under this Deposit Agreement to holders of Receipts other than for its
negligence, willful misconduct or bad faith.
Neither the Depository nor any Depository's Agent nor any Registrar nor the
Company shall be under, any obligation to appear in, prosecute or defend any
action, suit or other proceeding in respect of the Stock, the Depository shares
or the Receipts which in its opinion may involve it in expense or Liability
unless indemnity satisfactory to it against all expense and liability be
furnished as often as may be required.
Neither the Depository nor any Depository's Agent nor arty Registrar nor
the Company shall be liable for any action or any failure to act by it in
reliance upon the written advice of legal counsel or accountants, or information
from any person presenting Stock for deposit, any holder of a Receipt or any
other person believed by it in good faith to be competent to give such
information. The Depository, any Depository's Agent, any Registrar and the
Company may each rely and shall each be protected in acting upon any written
notice, request, direction or other document believed by it to be genuine and to
have been signed or presented by the proper party or parties.
The Depository shall not be responsible for any failure to carry out any
instruction to vote any of the shares of stock or for the manner or effect of
any such vote made, as long as any such action or non-action is in good faith.
The Depository undertakes, and any Registrar shall be required to undertake, to
perform such duties and only such duties as are specifically set forth in this
Agreement, and no implied covenants or obligations shall be read into this
Agreement against the Depository or any Registrar.
15
<PAGE>
The Depository, the Depository's Agents, and any Registrar may own and deal
in any class of securities of the Company and its affiliates and in Receipts.
The Depository may also act as transfer agent or registrar of any of the
securities of the Company and its affiliates.
SECTION 5.04. Resignation and Removal of the Depository; Appointment of
---------------------------------------------------------
Successor Depository. The Depository may at any time resign as Depository
- --------------------
hereunder by delivering notice of its election to do so to the Company, such
resignation to take effect upon the appointment of a successor Depositary and
its acceptance of such appointment as hereinafter provided.
The Depository may at any time be removed by the Company by notice of such
removal delivered to the Depository, such removal to take effect upon the
appointment of a successor depository hereunder and its acceptance of such
appointment as hereinafter provided.
In case at any time the Depository acting hereunder shall resign or be
removed, the Company shall, within 60 days after the delivery of the notice of
resignation or removal, as the case may be, appoint a successor Depository,
which shall be a bank or trust company having its principal office in the United
States of America and having a combined capital and surplus of at least
$50,000,000. If no successor Depository shall have been so appointed and have
accepted appointment within 60 days after delivery of such notice, the resigning
or removed Depositary may petition any court of competent jurisdiction for the
appointment of a successor Depository. Every successor Depository shall execute
and deliver to its predecessor and to the Company an instrument in writing
accepting its appointment hereunder, and thereupon such successor Depository,
without any further act or deed, shall become fully vested with all the rights,
powers, duties and obligations of its predecessor and for all purposes shall be
the Depository under this Deposit Agreement, and such predecessor, upon payment
of all sums due it and on the written request of the Company, shall promptly
execute and deliver an instrument transferring to such successor all rights and
powers of such predecessor hereunder, shall duly assign, transfer and deliver
all right, title and interest it the Stock and any moneys or property held
hereunder to such successor, and shall deliver to such successor a list of the
record holders of all outstanding Receipts and such records, books and other
information in its possession relating thereto. Any successor Depository shall
promptly mail notice of its appointment to the record holders of Receipts.
Any corporation into or with which the Depository may be merged,
consolidated or converted shall be the successor of such Depository without the
execution or filing of any document or any further act, and notice thereof shall
not be required
16
<PAGE>
hereunder. Such successor Depository may authenticate the Receipts in the name
of the predecessor Depository or in the name of the successor Depository.
SECTION 5.05. Corporate Notices and Reports. The Company agrees that it
------------------------------
will deliver to the Depository, and the Depositary will, promptly after receipt
thereof, transmit to the record holders of Receipts, in each case at the
addresses recorded in the Depository's books, copies of all notices and reports
(including without limitation financial statements) required by law, by the
rules of any national securities exchange upon which the Stock, the Depository
Shares or the Receipts are listed or by the Company's Restated Certificate of
Incorporation (including the Certificate), to be furnished to the record holders
of Receipts. Such transmission will be at the Company's expense and the Company
will provide the Depositary with such number of copies of such documents as
the Depository may reasonably request. In addition, the Depositary will transmit
to the record holders of Receipts at the Company's expense such other documents
as may be requested by the Company.
SECTION 5.06. Indemnification by the Company. The Company shall indemnify
-------------------------------
the Depository, any Depository's Agent and any Registrar against, and hold each
of them harmless from, any loss, liability or expense (including the reasonable
costs and expenses of defending itself) which may arise out of acts performed or
omitted in connection with this Agreement and the Receipts by the Depository,
any Registrar or any of their respective agents (including any Depositary's
Agent), except for any liability arising out of negligence, willful misconduct
or bad faith on the respective parts of any such person or persons. The
obligations of the Company set forth in this Section 5.06 shall survive any
succession of any Depositary, Registrar or Depository's Agent.
SECTION 5.07. Fees, Charges and Expenses. The Company agrees promptly to
---------------------------
pay the Depository the compensation to be agreed upon with the Company for all
services rendered by the Depository hereunder and to reimburse the Depository
for its reasonable out-of-pocket expenses (including reasonable counsel fees and
expenses) incurred by the Depository without negligence, willful misconduct, bad
faith or breach of this Agreement on its part in connection with the services
rendered by it hereunder. The Company shall pay all charges of the Depository in
connection with the initial deposit of the Stock and the initial issuance of the
Depository Shares, all withdrawals of shares of the Stock by owners of
Depositary Shares, and any redemption or exchange of the Stock at the option of
the Company. The Company shall pay all transfer and other taxes and governmental
charges arising solely from the existence of the depository arrangements. All
other transfer and other taxes and governmental charges shall be at the expense
of holders of Depository Shares evidenced by
17
<PAGE>
Receipts. If, at the request of a holder of Receipts, the Depositary incurs
charges or expenses for which the Company is not otherwise liable hereunder,
such holder will be liable for such charges and expenses. All other charges and
expenses of the Depositary and any Depositary's Agent hereunder and of any
Registrar (including, in each case, reasonable fees and expenses of counsel)
incident to the performance of their respective obligations hereunder will be
paid upon consultation and agreement between the Depositary and the Company as
to the amount and nature of such charges and expenses. The Depositary shall
present its statement for charges and expenses to the Company at such intervals
as the Company and the Depositary may agree.
ARTICLE VI
Amendment and Termination
------------------------
SECTION 6.01. Amendment. The form of the Receipts and any provisions of
---------
this Deposit Agreement may at any time and from time to time be amended by
agreement between the Company and the Depositary in any respect which they may
deem necessary or desirable; provided, however, that no such amendment which
-------- -------
shall materially and adversely alter the rights of the holders of Receipts shall
be effective unless such amendment shall have been approved by the holders of at
least a majority (or, in the case of amendments relating to or affecting rights
to receive dividends or distributions or voting or redemption rights two-thirds
of the holders) of the Depositary Shares then outstanding. Every holder of an
outstanding Receipt at the time any such amendment becomes effective shall be
deemed by continuing to hold such receipt, to consent and agree to such
amendment and to be bound by the Depositary Agreement as amended thereby. In no
event shall any amendment impair the right, subject to the provisions of
sections 2.05 and 2.05 and Article III, of any owner of Depositary Shares to
surrender any Receipt evidencing such Depositary Shares to the Depositary with
instructions to deliver to the holder the Stock and all money and other
property, if any, represented thereby, except in order to comply with mandatory
provisions of applicable law or the rules and regulations of any governmental
body, agency or commission, or applicable stock exchange.
SECTION 5.02. Termination. This Agreement may be terminated by the Company
------------
at any time upon not less than 60 days prior written notice to the Depositary,
in which case, at least 30 days prior to the date fixed in such notice for such
termination, the Depositary will mail notice of such termination the record
holders of all Receipts then outstanding.
If any Receipts shall remain outstanding after the date of termination of
this Deposit Agreement, the Depositary
18
<PAGE>
thereafter shall discontinue the transfer of Receipts, shall suspend the
distribution of dividends to the holders thereof and shall not give any further
notices (other than notice of such termination) or perform any further acts
under this Deposit Agreement, except that the Depositary shall continue to
collect dividends and other distributions pertaining to Stock, shall sell
rights, preferences or privileges as provided in this Deposit Agreement and
shall continue to deliver the Stock and any money and other property, if any,
represented by Receipts upon surrender thereof by the holders thereof. At any
time after the expiration of two years from the date of termination, the
Depositary may sell Stock then held hereunder at public or private sale, at such
places and upon such terms as it deems proper and may thereafter hold the net
proceeds of any such sale, together with any money and other property held by it
hereunder, without liability for interest, for the benefit, pro rata in
accordance with their holdings, of the holders of Receipts that have not
theretofore been surrendered. After making such sale, the Depositary shall be
discharged from all obligations under this Deposit Agreement except to account
for such net proceeds and money and other property.
This Agreement may be terminated by the Company or the Depositary only if
(i) all outstanding Depositary Shares have been redeemed pursuant to Section
2.08, (ii) there shall have been made a final distribution in respect of the
Stock in connection with any liquidation, dissolution or winding up of the
Company and such distribution shall have been distributed to the holders of
Depositary Shares pursuant to Section 4.01 or 4.02, as applicable or (iii) upon
the consent of holders of Depositary Receipts representing not less than
two-thirds of the Depositary Shares outstanding.
Upon the termination of this Deposit Agreement, the Company shall be
discharged from all obligations under this Deposit Agreement except for its
obligations to the Depositary, any Depositary's Agent and any Registrar under
Sections 5.06 and 5.07.
ARTICLE VII
Miscellaneous
-------------
SECTION 7.01. Counterparts. This Deposit Agreement may be executed in any
------------
number of counterparts, and by each of the parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed an original but all such counterparts taken together shall constitute
one and the same instrument.
19
<PAGE>
SECTION 7.02. Exclusive Benefit of Parties. This Deposit Agreement is for
----------------------------
the exclusive benefit of the parties hereto, and their respective successors
hereunder, and shall not be deemed to give any legal or equitable right, remedy
or claim to any other person whatsoever.
SECTION 7.03. Invalidity of Provisions. In case any ore or wore of the
------------------------
provisions contained in this Deposit Agreement or in the Receipts should be or
become invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein or therein shall
in no way be affected, prejudiced or disturbed thereby.
SECTION 7.04. Notices. Any and all notices to by given to the Company
-------
hereunder or under the Receipts shall be in writing and shall be deemed to have
been duty given if personally delivered or sent by mail, or by telegram or
facsimile transmission confirmed by letter, addressed to the Company at
Merrill Lynch & Co., Inc.
100 Church Street, 12th Floor
New York, New York 10007
Attention: Secretary
Facsimile No.: (212) 602-8436
with a copy to:
Merrill Lynch & Co., Inc.
World Financial Center
South Tower, 7th Floor
New York, New York 10080-6107
Attention: Treasurer
Facsimile No.: (212) 236-6004
or at any other addresses of which the Company shall have notified the
Depositary in writing.
Any and all notices to be given to the Depositary hereunder or under the
Receipts shall be in writing and shall be deemed to have been duly given if
personally delivered or sent by mail, or by telegram or facsimile transmission
confirmed by letter, addressed to the Depositary at the Depositary's office at
Citibank, N.A.
120 Wall Street, 13th Floor
New York, New York 10043
Attention: Corporate Trust Department
Facsimile No.:(212)480-1614
or at any other address of which the Depositary shall have notified the Company
in writing.
20
<PAGE>
Any and all notices to be given to any record holder of a Receipt
hereunder or under the Receipts shall be in writing and shall be deemed to have
been duly given if personally delivered or sent by mail, or by telegram or
facsimile transmission confirmed by letter, addressed to such record holder at
the address of such record holder as it appears on the books of the Depositary,
or if such holder shall have timely filed with the Depositary a written request
that notices intended for such holder be mailed to some other address, at the
address designated in such request.
Delivery of a notice sent by mail or by telegram or facsimile transmission
shall be deemed to be effected at the time when a duly addressed letter
containing the same (or a confirmation thereof in the case of a telegram or
facsimile transmission) is deposited, postage prepaid, in a post office letter
box. The Depositary or the Company may, however, act upon any telegram or
facsimile" transmission received by it from the other or from any holder of a
Receipt, notwithstanding that such telegram or facsimile transmission shall not
subsequently be confirmed by letter or as aforesaid.
SECTION 7.05. Depositary's Agents. The Depositary may from time to time
-------------------
appoint Depositary's Agents to act in any respect for the Depositary for the
purposes of this Deposit Agreement and may at any time appoint additional
Depositary's Agents and vary or terminate the appointment of such Depositary's
Agents. The Depositary will promptly notify the Company of any, such action.
The Company hereby also appoints the Depositary as Registrar and Transfer
Agent in respect of the Receipts and the Depositary hereby accepts such
Appointments.
SECTION 7.06. Holders of Receipts Are Parties. The holders of Receipts
-------------------------------
from time to time shall be parties to this Deposit Agreement and shall be bound
by all of the terms and conditions hereof and of the Receipts by acceptance of
delivery thereof.
SECTION 7.07. Governing Law. This Deposit Agreement and the Receipts and
-------------
all rights hereunder and thereunder and provisions hereof and thereof shall be
governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable conflicts of law principles.
SECTION 7.08. Inspection of Deposit Agreement. Copies of this Deposit
-------------------------------
Agreement shall be filed with the Depositary and the Depository's Agents and
shall be open to inspection during business hours at the Depositary's Office and
the respective offices of the Depositary's Agents, if any, by any holder of a
Receipt.
21
<PAGE>
SECTION 7.09. Headings. The headings of articles and sections in this
--------
Deposit Agreement and in the form of the Receipt set forth in Exhibit A hereto
have been inserted for convenience only and are not to be regarded as a part of
this Deposit Agreement or the Receipts or to have any bearing upon the meaning
or interpretation of any provision contained herein or in the Receipts.
22
<PAGE>
IN WITNESS WHEREOF, the Company and the Depositary have duly executed this
Agreement as of the day and year first above set forth, and all holders of
Receipts shall become parties hereto by and upon acceptance by them of delivery
of Receipts issued in accordance with the terms hereof.
MERRILL LYNCH & CO., INC.
Attested by
____________________________ BY___________________________
Secretary Treasurer
SEAL
Attested by CITITBANK N.A.
____________________________ BY__________________________
SEAL
23
<PAGE>
Exhibit 4(i)
================================================================================
MERRILL LYNCH & CO., INC.
TO
Manufacturers Hanover Trust Company, Trustee
___________________________________
SUPPLEMENTAL INDENTURE
Dated as of March 15, 1990
___________________________________
Supplement to Indenture
Dated as of April 1, 1983
Senior Debt Securities
================================================================================
<PAGE>
SUPPLEMENTAL INDENTURE, dated as of March 15, 1990, between MERRILL
LYNCH & CO., INC., a Delaware corporation, having its principal office at
Merrill Lynch World Headquarters, North Tower, World Financial Center, 250 Vesey
Street, New York, New York 10281-1220 and MANUFACTURERS HANOVER TRUST COMPANY, a
New York corporation, as Trustee under an Indenture hereinafter mentioned,
having its Corporate Trust Office at 450 West 33rd Street, New York, New York.
RECITALS
The Company has heretofore executed and delivered its Indenture, dated
as of April 1, 1983, as previously supplemented and as previously restated as of
April 1, 1987 (such Indenture as previously supplemented and restated being
herein referred to as the "Original Indenture"), dated as of April 1, 1983, to
the Trustee to provide for the issuance from time to time of its unsecured and
unsubordinated debentures, notes or other evidences of senior indebtedness.
Section 901 of the Original Indenture provides that the Company, when
authorized by a Board Resolution, and the Trustee may enter into a supplemental
indenture without the consent of any Holders to make any provisions with respect
to matters or questions arising under the Indenture which shall not be
inconsistent with the provisions of the Original Indenture and which shall not
adversely affect the interests of the Holders of Securities of any series in any
material respect.
The Company has duly authorized the execution and delivery of this
Supplemental Indenture, and all things necessary to make this Supplemental
Indenture a valid agreement of the Company, in accordance with its terms, have
been done.
NOW, THEREFORE, in consideration of the premises and the sum of one
dollar duly paid by the Company to the Trustee, the receipt of which is hereby
acknowledged, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows:
ARTICLE One
AMENDMENT
.1. Section 101 of the Indenture is amended by inserting after the
definition of "United States Alien" the following definition:
"U.S. Depository" or "Depository" means, with respect
to the Securities of any series issuable or issued in whole
or in part in the form of one or more global Securities, the
Person designated as U.S. Depository by the Company pursuant
to Section 301, which must be a clearing agency registered
under the Securities Exchange Act of 1934, as amended, and,
if so provided pursuant to Section 301 with respect to the
Securities of an series, any successor to such Person. If at
any time there is more than one such Person, "U.S.
Depository" shall mean, with respect to any series of
2
<PAGE>
Securities, the qualifying entity which has been appointed
with respect to the Securities of that series.
.2. Section 104(a) of the Indenture is amended by adding the following
subsection thereto:
Without limiting the generality of this Section 104,
unless otherwise established in or pursuant to a Board
Resolution or set forth or determined in an Officers'
Certificate, or established in one or more indentures
supplemental hereto, pursuant to Section 301, a Holder,
including a U.S. Depository that is a Holder of a global
Security, may make, give or take, by a proxy, or proxies,
duly appointed in writing, any request, demand,
authorization, direction, notice, consent, waiver or other
action provided in this Indenture to be made, given or taken
by Holders, and a U.S. Depository that is a Holder of a
global Security may provide its proxy or proxies to the
beneficial owners of interests in any such global Security
through such U.S. Depository's standing instructions and
customary practices.
The Trustee shall fix a record date for the purpose of
determining the Persons who are beneficial owners of
interests in any permanent global Security held by a U.S.
Depository entitled under the procedures of such U.S.
Depository to make, give or take, by a proxy or proxies duly
appointed in writing, any request, demand, authorization,
direction, notice, consent, waiver or other action provided
in this Indenture to be made, given or taken by Holders. If
such a record date is fixed, the Holders on such record date
or their duly appointed proxy or proxies, and only such
Persons, shall be entitled to make, give or take such
request, demand, authorization, direction, notice, consent,
waiver or other action, whether or not such Holders remain
Holders after such record date. No such request, demand,
authorization, direction, notice, consent, waiver or other
action shall be valid or effective if made, given or taken
more than 90 days after such record date.
.3. Section 301 of the Indenture is amended by deleting subsection (3)
thereof and substituting in its place the following:
(3) whether Securities of the series are to be issuable
as Registered Securities, Bearer Securities (with or without
coupons) or both; any restrictions applicable to the offer,
sale or delivery of Bearer Securities and the terms upon
which Bearer Securities of the series may be exchanged for
Registered Securities of the series and vice versa; and
whether any Securities of the series are to be
3
<PAGE>
issuable initially in global form and, if so, (i) whether
beneficial owners of interests in any such global Security
may exchange such interests for Securities of such series
and of like tenor of any authorized form and denomination
and the circumstances under which any such exchanges may
occur, if other than in the manner specified in Section 305
and (ii) the name of the depository or the U.S. Depository,
as the case may be, with respect to any global Security;
.4. Section 305 of the Indenture is amended by adding the following
paragraph as the seventh paragraph thereof:
Notwithstanding the foregoing, except as otherwise
specified as contemplated by Section 301, any global
Security shall be exchangeable only if (i) the Securities
Depository is at any time unwilling or unable to continue as
Securities Depository and a successor depository is not
appointed by the Company within 60 days, (ii) the Company
executes and delivers to the Trustee a Company Order to the
effect that such global Security shall be so exchangeable,
or (iii) an Event of Default has occurred and is continuing
with respect to the Securities. If the beneficial owners of
interests in a global Security are entitled to exchange such
interests for Securities of such series and of like tenor
and principal amount of any authorized form and
denomination, as specified as contemplated by Section 301,
then without unnecessary delay but in any event not later
than the earliest date on which such interests may be so
exchanged, the Company shall deliver to the Trustee
definitive Securities of that series in aggregate principal
amount equal to the principal amount of such global
Security, executed by the Company. On or after the earliest
date on which such interests may be so exchanged, such
global Securities shall be surrendered from time to time by
the U. S. Depository or such other depository as shall be
specified in the Company Order with respect thereto, and in
accordance with instructions given to the Trustee and the
U.S. Depository or such depository, as the case may be
(which instructions shall be in writing but need not comply
with Section 102 or be accompanied by an Opinion of
Counsel), as shall be specified in the Company Order with
respect thereto to the Trustee, as the Company's agent for
such purpose, to be exchanged, in whole or in part, for
definitive Securities of the same series without charge. The
Trustee shall authenticate and make available for delivery,
in exchange for each portion of such surrendered global
Security, a like aggregate principal amount of definitive
Securities of the same series of authorized denominations
and of like tenor as the portion of such global Security to
be exchanged which (unless
4
<PAGE>
the Securities of the series are not issuable both as Bearer
Securities and as Registered Securities, in which case the
definitive Securities exchanged for the global Security
shall be issuable only in the form in which the Securities
are issuable, as specified as contemplated by Section 301)
shall be in the form of Bearer Securities or Registered
Securities, or any combination thereof, as shall be
specified by the beneficial owner thereof; provided,
however, that no such exchanges may occur during a period
beginning at the opening of business 15 days before any
selection of Securities of that series to be redeemed and
ending on the relevant Redemption Date; and provided,
further, that (unless otherwise specified as contemplated by
Section 301) no Bearer Security delivered in exchange for a
portion of a global Security shall be mailed or otherwise
delivered to any location in the United States. Promptly
following any such exchange in part, such global Security
shall be returned by the Trustee to such depository or the
U.S. Depository, as the case may be, or such other
depository or U.S. Depository referred to above in
accordance with the instructions of the Company referred to
above. If a Registered Security is issued in exchange for
any portion of a global Security after the close of business
at the office or agency where such exchange occurs on (i)
any Regular Record Date and before the opening of business
at such office or agency on the relevant Interest Payment
Date, or (ii) any Special Record Date and before the opening
of business at such office or agency on the related proposed
date for payment of interest or Defaulted Interest, as the
case may be, interest will not be payable on such Interest
Payment Date or proposed date for payment, as the case may
be, in respect of such Registered Security, but will be
payable on such Interest Payment Date or proposed date for
payment, as the case may be, only to the Person to whom
interest in respect of such portion of such global Security
is payable in accordance with the provisions of this
Indenture.
.5. Section 1107 of the Indenture is hereby amended by adding the
following sentence at the end thereof:
"If a Security in global form is so surrendered, the
Company shall execute, and the Trustee shall authenticate
and deliver to the U.S. Depository or other depository for
such Security in global form as shall be specified in the
Company Order with respect thereto to the Trustee, without
service charge, a new Security in global form in a
denomination equal to and in exchange for the unredeemed
portion of the principal of the Security in global form so
surrendered."
5
<PAGE>
ARTICLE Two
MISCELLANEOUS PROVISIONS
.1. For all purposes of this Supplemental Indenture, except as otherwise
stated herein, terms used in capitalized form in this Supplemental Indenture and
defined in the Original Indenture have the meanings specified in the Original
Indenture.
.2. All of the provisions of the Original Indenture with respect to the
rights, duties and immunities of the Trustee shall be applicable in respect
hereof as fully and with like effect as if set forth herein in full.
.3. The recitals contained herein shall be taken as the statements of
the Company, and the Trustee assumes no responsibility for their correctness.
The Trustee makes no representations as to the validity or sufficiency of this
Supplemental Indenture.
.4. This Supplemental Indenture shall be governed by and construed in
accordance with the laws of the jurisdiction which govern the Original Indenture
and its construction.
.5. This Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
.6. This Supplemental Indenture shall become effective as of the date
first written above with respect to Securities issued on or after the date
hereof.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
MERRILL LYNCH & CO., INC.
[Corporate Seal]
By /s/ Thomas H. Patrick
_____________________________________
Executive Vice President
and Chief Financial Officer
Attest:
/s/ Gregory T. Russo
___________________
Secretary
MANUFACTURERS HANOVER TRUST
COMPANY, as Trustee
[Corporate Seal]
By /s/ F. J. Grippo
_____________________________________
Vice President
Attest:
___________________
Trust Officer
7
<PAGE>
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 15th day of March, 1990, before me personally came Thomas H.
Patrick, to me known, who, being by me duly sworn, did depose and say that he is
Executive Vice President and Chief Financial Officer of MERRILL LYNCH & CO.,
INC., one of the corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by authority of
the Executive Committee of the Board of Directors of said corporation, and that
he signed his name thereto by like authority.
/s/ William R. Massey
_____________________________________
Notary Public
[NOTARIAL SEAL]
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 15th day of March, 1990, before me personally came F. J. Grippo, to
me known, who, being by me duly sworn, did depose and say that he is a Vice
President of MANUFACTURERS HANOVER TRUST COMPANY, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ William R. Massey
_____________________________________
Notary Public
[NOTARIAL SEAL]
8
<PAGE>
[CONFORMED COPY]
================================================================================
MERRILL LYNCH & CO., INC.
TO
Manufacturers Hanover Trust Company, Trustee
----------------
Indenture
----------------
Dated as of April 1, 1983
and
Restated as of April 1, 1987
(Including the Fourth Supplemental
Indenture, dated as of April 1, 1987)
Senior Debt Securities
================================================================================
<PAGE>
MERRILL LYNCH & CO., INC.
Reconciliation and tie between Trust Indenture Act of 1939 and
Indenture, dated as of April 1, 1983 and restated as of April 1, 1987
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
- --------------------------- -----------------
<S> <C>
(S)310(a)(1) ..................................................... 609
(a)(2) ...................................................... 609
(a)(3) ...................................................... Not Applicable
(a)(4) ...................................................... Not Applicable
(b) ......................................................... 608,610
(S)311(a) ..................................................... 613(a),(c)
(b) ......................................................... 613(b),(c)
(b)(2) ...................................................... 703(a)(2),703(b)
(S)312(a)...................................................... 701,702(a)
(b) ......................................................... 702(b)
(c) ......................................................... 702(c)
(S)313(a) ..................................................... 703(a)
(b)(1) ...................................................... Not Applicable
(b)(2) ...................................................... 703(b)
(c) ......................................................... 703(c)
(d) ......................................................... 703(d)
(S)314(a) ..................................................... 704
(b) ......................................................... Not Applicable
(c)(1) ...................................................... 102
(c)(2) ...................................................... 102
(c)(3) ...................................................... Not Applicable
(d) ......................................................... Not Applicable
(e) ......................................................... 102
(S)315(a) ..................................................... 601(a)
(b) ......................................................... 602,703(a)(6)
(c) ......................................................... 601(b)
(d) ......................................................... 601(c)
(d)(1) ...................................................... 601(a)(1),(c)(1)
(d)(2) ...................................................... 601(c)(2)
(d)(3) ...................................................... 601(c)(3)
(e) ......................................................... 514
(S)316(a) ..................................................... 101
(a)(1)(A) ................................................... 502,512
(a)(1)(B) ................................................... 513
(a)(2) ...................................................... Not Applicable
(b) ......................................................... 508
(S)317(a)(1) .................................................. 503
(a)(2) ...................................................... 504
(b) ......................................................... 1003
(S)318(a) ..................................................... 108
</TABLE>
- -----------
Note: This reconciliation and tie shall not, for any purpose, be deemed to
be a part of the Indenture.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PARTIES.................................................................. 1
RECITALS................................................................. 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions............................................... 2
Act....................................................... 2
Additional Amounts........................................ 2
Affiliate................................................. 3
Authenticating Agent...................................... 3
Authorized Newspaper...................................... 3
Bearer Security........................................... 3
Board of Directors........................................ 3
Board Resolution.......................................... 3
Business Day.............................................. 3
Commission................................................ 3
Company................................................... 3
Company Request and Company Order......................... 4
Controlled Subsidiary..................................... 4
Corporate Trust Office.................................... 4
corporation............................................... 4
coupon.................................................... 4
Defaulted Interest........................................ 4
Dollars................................................... 4
Event of Default.......................................... 4
Holder.................................................... 4
Indenture................................................. 4
interest.................................................. 4
Interest Payment Date..................................... 4
Maturity.................................................. 5
MLPF&S.................................................... 5
Officers' Certificate..................................... 5
Opinion of Counsel........................................ 5
Original Issue Discount Security.......................... 5
Outstanding............................................... 5
Paying Agent.............................................. 6
Person.................................................... 6
Place of Payment.......................................... 6
Predecessor Security...................................... 6
Redemption Date........................................... 6
Redemption Price.......................................... 6
Registered Security....................................... 6
Regular Record Date....................................... 7
Responsible Officer....................................... 7
Security or Securities.................................... 7
Security Register and Security Registrar.................. 7
Special Record Date....................................... 7
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Stated Maturity.............................................. 7
Subsidiary................................................... 7
Trustee...................................................... 7
Trust Indenture Act.......................................... 7
United States................................................ 8
United States Alien.......................................... 8
Vice President............................................... 8
Voting Stock................................................. 8
SECTION 102. Compliance Certificates and Opinions......................... 8
SECTION 103. Form of Documents Delivered to Trustee....................... 9
SECTION 104. Acts of Holders.............................................. 9
SECTION 105. Notices, etc. to Trustee and Company......................... 11
SECTION 106. Notice to Holders of Securities; Waiver...................... 11
SECTION 107. Language of Notices, etc..................................... 12
SECTION 108. Conflict with Trust Indenture Act............................ 12
SECTION 109. Effect of Headings and Table of Contents..................... 12
SECTION 110. Successors and Assigns....................................... 13
SECTION 111. Separability Clause.......................................... 13
SECTION 112. Benefits of Indenture........................................ 13
SECTION 113. Governing Law................................................ 13
SECTION 114. Legal Holidays............................................... 13
ARTICLE TWO
Security Forms
SECTION 201. Forms Generally.............................................. 13
SECTION 202. Form of Trustee's Certificate of Authentication.............. 14
ARTICLE THREE
The Securities
SECTION 301. Amount Unlimited; Issuable in Series......................... 14
SECTION 302. Denominations................................................ 17
SECTION 303. Execution, Authentication, Delivery and Dating............... 17
SECTION 304. Temporary Securities......................................... 19
SECTION 305. Registration, Transfer and Exchange.......................... 19
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities............. 21
SECTION 307. Payment of Interest; Interest Rights Preserved............... 23
SECTION 308. Persons Deemed Owners........................................ 24
SECTION 309. Cancellation................................................. 25
SECTION 310. Computation of Interest...................................... 25
ARTICLE FOUR
Satisfaction and Discharge
SECTION 401. Satisfaction and Discharge of Indenture...................... 25
SECTION 402. Application of Trust Money................................... 27
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ARTICLE FIVE
Remedies
SECTION 501. Events of Default............................................ 27
SECTION 502. Acceleration of Maturity; Rescission and Annulment........... 28
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
Trustee...................................................... 29
SECTION 504. Trustee May File Proofs of Claim............................. 30
SECTION 505. Trustee May Enforce Claims Without Possession of Securities
or Coupons................................................... 31
SECTION 506. Application of Money Collected............................... 31
SECTION 507. Limitation on Suits.......................................... 31
SECTION 508. Unconditional Right of Holders to Receive Principal, Premium
and Interest................................................. 32
SECTION 509. Restoration of Rights and Remedies........................... 32
SECTION 510. Rights and Remedies Cumulative............................... 33
SECTION 511. Delay or Omission Not Waiver................................. 33
SECTION 512. Control by Holders of Securities............................. 33
SECTION 513. Waiver of Past Defaults...................................... 33
SECTION 514. Undertaking for Costs........................................ 34
SECTION 515. Waiver of Stay or Extension Laws............................. 34
ARTICLE SIX
The Trustee
SECTION 601. Certain Duties and Responsibilities.......................... 35
SECTION 602. Notice of Defaults........................................... 36
SECTION 603. Certain Rights of Trustee.................................... 36
SECTION 604. Not Responsible for Recitals or Issuance of Securities....... 37
SECTION 605. May Hold Securities.......................................... 37
SECTION 606. Money Held in Trust.......................................... 38
SECTION 607. Compensation and Reimbursement............................... 38
SECTION 608. Disqualifications; Conflicting Interests..................... 38
SECTION 609. Corporate Trustee Required; Eligibility...................... 43
SECTION 610. Resignation and Removal; Appointment of Successor............ 44
SECTION 611. Acceptance of Appointment by Successor....................... 45
SECTION 612. Merger, Conversion, Consolidation or Succession to Business.. 46
SECTION 613. Preferential Collection of Claims Against Company............ 47
SECTION 614. Appointment of Authenticating Agent.......................... 50
ARTICLE SEVEN
Holder's Lists and Reports by Trustee and Company
SECTION 701. Company to Furnish Trustee Names and Addresses of Holders.... 52
SECTION 702. Preservation of Information; Communications to Holders....... 53
SECTION 703. Reports by Trustee........................................... 54
SECTION 704. Reports by Company........................................... 55
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ARTICLE EIGHT
Consolidation, Merger, Sale, Lease or Conveyance
SECTION 801. Consolidations and Mergers of Company and Sales, Leases and
Conveyances Permitted Subject to Certain Conditions......... 56
SECTION 802. Rights and Duties of Successor Corporation.................. 57
SECTION 803. Officers' Certificate and Opinion of Counsel................ 57
ARTICLE NINE
Supplemental Indentures
SECTION 901. Supplemental Indentures without Consent of Holders.......... 57
SECTION 902. Supplemental Indentures with Consent of Holders............. 58
SECTION 903. Execution of Supplemental Indentures........................ 60
SECTION 904. Effect of Supplemental Indentures........................... 60
SECTION 905. Conformity with Trust Indenture Act......................... 60
SECTION 906. Reference in Securities to Supplemental Indentures.......... 60
ARTICLE TEN
Covenants
SECTION 1001. Payment of Principal, Premium, if any, and Interest......... 60
SECTION 1002. Maintenance of Office or Agency............................. 61
SECTION 1003. Money for Securities Payments to be Held in Trust........... 62
SECTION 1004. Additional Amounts.......................................... 63
SECTION 1005. Statement as to Compliance; Notice of Certain Defaults...... 64
SECTION 1006. Limitation Upon Creation of Liens on Voting Stock of Certain
Subsidiaries................................................ 65
SECTION 1007. Limitation on Disposition of Voting Stock of, and Merger and
Sale of Assets by, MLPF&S................................... 65
SECTION 1008. Waiver of Certain Covenants................................. 66
ARTICLE ELEVEN
Redemption of Securities
SECTION 1101. Applicability of Article.................................... 66
SECTION 1102. Election to Redeem; Notice to Trustee....................... 66
SECTION 1103. Selection by Trustee of Securities to be Redeemed........... 66
SECTION 1104. Notice of Redemption........................................ 67
SECTION 1105. Deposit of Redemption Price................................. 68
SECTION 1106. Securities Payable on Redemption Date....................... 68
SECTION 1107. Securities Redeemed in Part................................. 69
ARTICLE TWELVE
Sinking Funds
SECTION 1201. Applicability of Article.................................... 69
SECTION 1202. Satisfaction of Sinking Fund Payments with Securities....... 70
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SECTION 1203. Redemption of Securities for Sinking Fund................... 70
ARTICLE THIRTEEN
Repayment at the Option of Holders
SECTION 1301. Applicability of Article.................................... 71
ARTICLE FOURTEEN
Meetings of Holders of Securities
SECTION 1401. Purposes for Which Meetings May Be Called................... 71
SECTION 1402. Call, Notice and Place of Meetings.......................... 72
SECTION 1403. Persons Entitled to Vote at Meetings........................ 72
SECTION 1404. Quorum; Action.............................................. 72
SECTION 1405. Determination of Voting Rights; Conduct and Adjournment
of Meetings................................................. 73
SECTION 1406. Counting Votes and Recording Action of Meetings............. 74
ARTICLE FIFTEEN
Miscellaneous Provisions
SECTION 1501. Securities in Foreign Currencies............................ 75
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INDENTURE, dated as of April 1, 1983 and restated as of April 1, 1987,
between Merrill Lynch & Co., Inc., a Delaware corporation (hereinafter called
the "Company"), having its principal office at One Liberty Plaza, 165 Broadway,
New York, New York 10080 and Manufacturers Hanover Trust Company, a New York
corporation, as Trustee (hereinafter called the "Trustee") having its Corporate
Trust Office at 600 Fifth Avenue, New York, N.Y. 10020.
Recitals of The Company
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured and
unsubordinated debentures, notes or other evidences of senior indebtedness
(hereinafter called the "Securities"), unlimited as to principal amount, to bear
such rates of interest, to mature at such time or times, to be issued in one or
more series and to have such other provisions as shall be fixed as hereinafter
provided.
The Company has heretofore executed and delivered an Indenture between the
Company and the Trustee dated as of April 1, 1983 (the "Original Indenture") and
supplements to the Original Indenture in the form of a First Supplemental
Indenture, dated as of July 1, 1985, a Second Supplemental Indenture, dated as
of December 24, 1985 and a Third Supplemental Indenture, dated as of April 15,
1986 (such First, Second and Third Supplemental Indentures, together with the
Original Indenture, being herein referred to as the "Supplemented Indenture").
Section 901 of the Original Indenture provides that the Company, when
authorized by a Board Resolution, and the Trustee may enter into a supplemental
indenture without the consent of any Holders to make any provisions with respect
to matters or questions arising under the Indenture, provided such provisions
shall not be inconsistent with the provisions of the Original Indenture and
shall not adversely affect the interests of the Holders of Securities of any
series in any material respect.
The Company deems it advisable, not inconsistent with the provisions of the
Original Indenture and not adverse to the interests of the Holders of Securities
of any series to amend the Original Indenture pursuant to a Fourth Supplemental
Indenture, dated as of April 1, 1987. Also as of April 1, 1987, the Company
restates this Indenture pursuant to the terms and provisions of this Indenture
as supplemented by such First, Second, Third and Fourth Supplemental Indentures,
each difference between the Supplemented Indenture and the Indenture as restated
herein being pursuant to the terms and provisions of said Fourth Supplemental
Indenture.
The Company has duly authorized the execution and delivery of this Fourth
Supplemental Indenture and restatement of the Indenture, and all things
necessary to make this Fourth Supplemental Indenture and restatement of the
Indenture a valid agreement of the Company, in accordance with its terms, have
been done.
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Now, Therefore, in consideration of the premises and the sum of one dollar
duly paid by the Company to the Trustee, the receipt of which is hereby
acknowledged, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders, as follows:
Now, Therefore, This Indenture Witnesseth:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Securities or of series thereof, as
follows:
Article One
Definitions and Other Provisions of General Application
1. Definitions.
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles and, except as otherwise herein expressly provided, the term
"generally accepted accounting principles" with respect to any computation
required or permitted hereunder shall mean such accounting principles as are
generally accepted at the date of such computation; and
(4) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that
Article.
"Act" when used with respect to any Holder has the meaning specified in
Section 104.
"Additional Amounts" means any additional amounts which are required by a
Security or by or pursuant to a Board Resolution, under circumstances specified
therein, to be paid by the Company in respect of certain taxes imposed on
certain Holders and which are owing to such Holders.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
to Section 614 to act on behalf of the Trustee to authenticate Securities of one
or more series.
"Authorized Newspaper" means a newspaper, in an official language of the
country of publication or in the English language, customarily published on each
Business Day, whether or not published on Saturdays, Sundays or holidays, and of
general circulation in the place in connection with which the term is used or in
the financial community of such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any Business Day.
"Bearer Security" means any Security in the form established pursuant to
Section 201 which is payable to bearer.
"Board of Directors" means either the Board of Directors of the Company or
the Executive Committee thereof.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" with respect to any Place of Payment means each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which banking
institutions in that Place of Payment are authorized or obligated by law to
close, except as may otherwise be provided in the form of Securities of any
particular series pursuant to the provisions of this Indenture.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Company" means the Person named as the "Company" in the first paragraph of
this instrument until a successor corporation shall have become such pursuant to
the
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applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Request" and "Company Order" mean, respectively, a written request
or order signed in the name of the Company by the Chairman of the Board, the
President, a Vice President or by the Treasurer, and by an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Controlled Subsidiary" means any corporation more than 80% of the
outstanding Voting Stock, except for qualifying shares, of which shall at the
time be owned directly or indirectly by the Company.
"Corporate Trust Office" means the office of the Trustee at which at any
particular time its corporate trust business shall be administered.
"corporation" includes corporations, associations, companies and business
trusts.
"coupon" means any interest coupon appertaining to a Bearer Security.
"Defaulted Interest" has the meaning specified in Section 307.
"Dollars" or $ or any similar reference shall mean the currency of the
United States, except as may otherwise be provided in the form of Securities of
any particular series pursuant to the provisions of this Indenture.
"Event of Default" has the meaning specified in Section 501.
"Holder", when used with respect to any Security, means in the case of a
Registered Security, the Person in whose name the Security is registered in the
Security Register and in the case of a Bearer Security, the bearer thereof and,
when used with respect to any coupon, means the bearer thereof.
"Indenture" means this instrument as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof, and shall include each
Officers' Certificate delivered to the Trustee pursuant to Section 303.
"interest", when used with respect to an Original Issue Discount Security
which by its terms bears interest only after Maturity, means interest payable
after Maturity, and, when used with respect to a Security which provides for the
payment of Additional Amounts pursuant to Section 1004, includes such Additional
Amounts.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the applicable Securities.
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"Maturity" when used with respect to any Security means the date on which
the principal of such Security or an installment of principal becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption, request for redemption or
otherwise.
"MLPF&S" means Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
Delaware corporation.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the President, a Vice President or the Treasurer, and by an Assistant
Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered
to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may (except as
otherwise expressly provided in this Indenture) be an employee of or counsel for
the Company, or other counsel acceptable to the Trustee.
"Original Issue Discount Security" means a Security issued pursuant to this
Indenture which provides for declaration of an amount less than the principal
thereof to be due and payable upon acceleration pursuant to Section 502.
"Outstanding" when used with respect to Securities means, as of the date of
determination, all Securities theretofore authenticated and delivered under this
Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered to
the Trustee for cancellation;
(ii) Securities for whose payment or redemption money in the
necessary amount has been theretofore deposited with the Trustee or any Paying
Agent (other than the Company) in trust or set aside and segregated in trust
by the Company (if the Company shall act as its own Paying Agent) for the
Holders of such Securities and any coupons thereto appertaining, provided
that, if such Securities are to be redeemed, notice of such redemption has
been duly given pursuant to this Indenture or provision therefor satisfactory
to the Trustee has been made; and
(iii) Securities which have been paid pursuant to Section 306 or in
exchange for or in lieu of which other Securities have been authenticated and
delivered pursuant to this Indenture, other than any such Securities in
respect of which there shall have been presented to the Trustee proof
satisfactory to it that such Securities are held by a bona fide purchaser in
whose hands such Securities are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder or are present at
a meeting of Holders of Securities for quorum purposes, the principal amount of
an Original Issue Discount
5
<PAGE>
Security that may be counted in making such determination and that shall be
deemed to be Outstanding for such purposes shall be equal to the amount of the
principal thereof that could be declared to be due and payable pursuant to the
terms of such Original Issue Discount Security at the time the taking of such
action by the Holders of such requisite principal amount is evidenced to the
Trustee as provided in Section 104(a), and, provided further, that Securities
owned beneficially by the Company or any other obligor upon the Securities or
any Affiliate of the Company or such other obligor, other than Securities
purchased in connection with the distribution or trading thereof, shall be
disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which the
Trustee knows to be so owned shall be so disregarded. Securities so owned which
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee the pledgee's right so to act
with respect to such Securities and that the pledgee is not the Company or any
other obligor upon the Securities or any Affiliate of the Company or such other
obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of (and premium, if any) or interest on any Securities on behalf of
the Company.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment" when used with respect to the Securities of any series,
means the place or places where the principal of (and premium, if any) and
interest on the Securities of that series are payable as specified as provided
pursuant to Section 301.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any Security
authenticated and delivered under Section 306 in exchange for or in lieu of a
lost, destroyed, mutilated or stolen Security or a Security to which a
mutilated, destroyed, lost or stolen coupon appertains shall be deemed to
evidence the same debt as the lost, destroyed, mutilated or stolen Security or
the Security to which a mutilated, destroyed, lost or stolen coupon appertains.
"Redemption Date" when used with respect to any Security to be redeemed
means the date fixed for such redemption by or pursuant to this Indenture.
"Redemption Price" when used with respect to any Security to be redeemed
means the price at which it is to be redeemed as determined pursuant to the
provisions of this Indenture.
"Registered Security" means any Security established pursuant to Section
201 which is registered in the Security Register.
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"Regular Record Date" for the interest payable on a Registered Security on
any Interest Payment Date means the date, if any, specified in such Security as
the "Regular Record Date".
"Responsible Officer" when used with respect to the Trustee means the
chairman or vice-chairman of the board of directors, the chairman or vice
chairman of the executive committee of the board of directors, the president,
any vice president (whether or not designated by a number or a word or words
added before or after the title "vice president"), the secretary, any assistant
secretary, the treasurer, any assistant treasurer, the cashier, any assistant
cashier, any trust officer or assistant trust officer, or any other officer of
the Trustee customarily performing functions similar to those performed by any
of the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Security" or "Securities" means any Security or Securities, as the case
may be, authenticated and delivered under this Indenture.
"Security Register"Error! Reference source not found. and "Security
Registrar" have the respective meanings specified in Section 305.
"Special Record Date" for the payment of any Defaulted Interest on the
Registered Securities of any series means a date fixed by the Trustee pursuant
to Section 307.
"Stated Maturity" when used with respect to any Security or any installment
of principal thereof or interest thereon means the date specified in such
Security or a coupon representing such installment of interest as the fixed date
on which the principal of such Security or such installment of principal or
interest is due and payable.
"Subsidiary" means any corporation of which at the time of determination
the Company and/or one or more Subsidiaries owns or controls directly or
indirectly more than 50% of the shares of Voting Stock. "Wholly-owned", when
used with reference to a Subsidiary, means a Subsidiary of which all of the
outstanding capital stock (except for qualifying shares) is owned by the Company
or by one or more wholly-owned Subsidiaries.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such with respect to
one or more series of Securities pursuant to the applicable provisions of this
Indenture, and thereafter "Trustee" shall mean each Person who is then a Trustee
hereunder, and if at any time there is more than one such Person, "Trustee" as
used with respect to the Securities of any series shall mean the Trustee with
respect to the Securities of that series.
"Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at
the date as of which this instrument was executed, except as provided in Section
905.
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"United States" means the United States of America (including the States
and the District of Columbia), its territories and possessions and other areas
subject to its jurisdiction.
"United States Alien" means any Person who, for United States Federal
income tax purposes, is a foreign corporation, a non-resident alien individual,
a non-resident alien fiduciary of a foreign estate or trust, or a foreign
partnership one or more of the members of which is, for United States Federal
income tax purposes, a foreign corporation, a non-resident alien individual or a
non-resident alien fiduciary of a foreign estate or trust.
"Vice President" when used with respect to the Company shall mean any Vice
President of the Company whether or not designated by a number or a word or
words added before or after the title "Vice- President".
"Voting Stock" means stock of the class or classes having general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such corporation provided that, for the
purposes hereof, stock which carries only the right to vote conditionally on the
happening of an event shall not be considered voting stock whether or not such
event shall have happened.
2. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent, if any,
provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include
(1) a statement that each individual signing such certificate or
opinion has read such condition or covenant and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such condition or covenant
has been complied with; and
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(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
3. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
4. Acts of Holders.
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given or taken by Holders may
be embodied in and evidenced by one or more instruments of substantially similar
tenor signed by such Holders in person or by agent duly appointed in writing.
If, but only if, Securities of a series are issuable as Bearer Securities, any
request, demand, authorization, direction, notice, consent, waiver or other
action provided by this Indenture to be given or taken by Holders of Securities
of such series may, alternatively, be embodied in and evidenced by the record of
Holders of Securities of such series voting in favor thereof, either in person
or by proxies duly appointed in writing, at any meeting of Holders of Securities
of such series duly called and held in accordance with the provisions of Article
Fourteen, or a combination of such instruments and any such record. Except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments or record or both are delivered to the Trustee
and, where it is hereby expressly required, to the Company. Such instrument or
instruments and any such record (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments and so voting at any
9
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such meeting. Proof of execution of any such instrument or of a writing
appointing any such agent, or of the holding by any Person of a Security, shall
be sufficient for any purpose of this Indenture and (subject to Section 601)
conclusive in favor of the Trustee and the Company and any agent of the Trustee
or the Company, if made in the manner provided in this Section. The record of
any meeting of Holders of Securities shall be proved in the manner provided in
Section 1406.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved in any reasonable manner which the Trustee
deems sufficient and in accordance with such reasonable rules as the Trustee may
determine; and the Trustee may in any instance require further proof with
respect to any of the matters referred to in this Section.
(c) The ownership of Registered Securities and the principal amount and
serial numbers of Registered Securities held by any Person, and the date of
holding the same, shall be proved by the Security Register.
(d) The principal amount and serial numbers of Bearer Securities held by
any Person, and the date of holding the same, may be proved by the production of
such Bearer Securities or by a certificate executed, as depositary, by any trust
company, bank, banker or other depositary reasonably acceptable to the Company,
wherever situated, if such certificate shall be deemed by the Trustee to be
satisfactory, showing that at the date therein mentioned such Person had on
deposit with such depositary, or exhibited to it, the Bearer Securities therein
described; or such facts may be proved by the certificate or affidavit of the
Person holding such Bearer Securities, if such certificate or affidavit is
deemed by the Trustee to be satisfactory. The Trustee and the Company may assume
that such ownership of any Bearer Security continues until (1) another
certificate or affidavit bearing a later date issued in respect of the same
Bearer Security is produced, or (2) such Bearer Security is produced to the
Trustee by some other Person, or (3) such Bearer Security is surrendered in
exchange for a Registered Security, or (4) such Bearer Security is no longer
Outstanding. The principal amount and serial numbers of Bearer Securities held
by the Person so executing such instrument or writing and the date of holding
the same may also be proved in any other manner which the Trustee deems
sufficient.
(e) If the Company shall solicit from the Holders of any Registered
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may, at its option, by Board Resolution, fix in
advance a record date for the determination of Holders of Registered Securities
entitled to give such request, demand, authorization, direction, notice,
consent, waiver or other Act, but the Company shall have no obligation to do so.
If such a record date is fixed, such request, demand, authorization, direction,
notice, consent, waiver or other Act may be given before or after such record
date, but only the Holders of Registered Securities of record at the close of
business on such record date shall be deemed to be Holders for the purposes of
determining whether Holders of the requisite proportion of Outstanding
Securities have authorized or agreed or consented to such request, demand,
authorization, direction, notice, consent, waiver or
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other Act, and for that purpose the Outstanding Securities shall be computed as
of such record date; provided that no such authorization, agreement or consent
by the Holders of Registered Securities on such record date shall be deemed
effective unless it shall become effective pursuant to the provisions of this
Indenture not later than six months after the record date.
(f) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Security shall bind every future Holder of
the same Security and the Holder of every Security issued upon the registration
of transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done or suffered to be done by the Trustee, any Security Registrar, any
Paying Agent or the Company in reliance thereon, whether or not notation of such
action is made upon such Security.
5. Notices, etc. to Trustee and Company.
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or
with the Trustee at its Corporate Trust Office, or
(2) the Company by the Trustee or by any Holder shall be sufficient for
every purpose hereunder (unless otherwise herein expressly provided) if in
writing and mailed, first-class postage prepaid, to the Company addressed
to the attention of its Treasurer at the address of its principal office
specified in the first paragraph of this instrument or at any other address
previously furnished in writing to the Trustee by the Company.
6. Notice to Holders of Securities; Waiver.
Except as otherwise expressly provided herein or in the form of Securities
of any particular series pursuant to the provisions of this Indenture, where
this Indenture provides for notice to Holders of Securities of any event,
(1) such notice shall be sufficiently given to Holders of Registered
Securities if in writing and mailed, first-class postage prepaid, to each
Holder of a Registered Security affected by such event, at his address as
it appears in the Security Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such
notice; and
(2) such notice shall be sufficiently given to Holders of Bearer
Securities, if any, if published in an Authorized Newspaper in The City of
New York and, if the Securities of such series are then listed on any stock
exchange outside the United States, in an Authorized Newspaper in such city
as the Company shall advise the
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Trustee that such stock exchange so requires, on a Business Day at least
twice, the first such publication to be not earlier than the earliest date
and not later than the latest date prescribed for the giving of such
notice.
In any case where notice to Holders of Registered Securities is given by
mail, neither the failure to mail such notice, nor any defect in any notice so
mailed, to any particular Holder of a Registered Security shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice to Holders of Bearer Securities
given as provided herein. In case by reason of the suspension of regular mail
service or by reason of any other cause it shall be impracticable to give such
notice by mail, then such notification as shall be made with the approval of the
Trustee shall constitute a sufficient notification for every purpose hereunder.
In case by reason of the suspension of publication of any Authorized
Newspaper or Authorized Newspapers or by reason of any other cause it shall be
impracticable to publish any notice to Holders of Bearer Securities as provided
above, then such notification to Holders of Bearer Securities as shall be given
with the approval of the Trustee shall constitute sufficient notice to such
Holders for every purpose hereunder. Neither failure to give notice by
publication to Holders of Bearer Securities as provided above, nor any defect in
any notice so published, shall affect the sufficiency of any notice mailed to
Holders of Registered Securities as provided above.
Where this Indenture provides for notice in any manner, such notice may be
waived in writing by the Person entitled to receive such notice, either before
or after the event, and such waiver shall be the equivalent of such notice.
Waivers of notice by Holders of Securities shall be filed with the Trustee, but
such filing shall not be a condition precedent to the validity of any action
taken in reliance upon such waiver.
7. Language of Notices, etc.
Any request, demand, authorization, direction, notice, consent, election or
waiver required or permitted under this Indenture shall be in the English
language, except that, if the Company so elects, any published notice may be in
an official language of the country of publication.
8. Conflict with Trust Indenture Act.
If any provision hereof limits, qualifies or conflicts with another
provision hereof which is required to be included in this Indenture by any of
the provisions of the Trust Indenture Act, such required provisions shall
control.
9. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
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10. Successors and Assigns.
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
11. Separability Clause.
In case any provision in this Indenture or in the Securities or coupons
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
12. Benefits of Indenture.
Nothing in this Indenture or in the Securities or coupons, express or
implied, shall give to any Person, other than the parties hereto, any Security
Registrar, any Paying Agent and their successors hereunder and the Holders of
Securities or coupons, any benefit or any legal or equitable right, remedy or
claim under this Indenture.
13. Governing Law.
This Indenture and the Securities and coupons shall be governed by and
construed in accordance with the laws of the State of New York.
14. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date or Stated
Maturity of any Security shall not be a Business Day at any Place of Payment,
then (notwithstanding any other provision of this Indenture or the Securities or
coupons other than a provision in the Securities which specifically states that
such provision shall apply in lieu of this Section) payment of interest or any
Additional Amounts or principal (and premium, if any) need not be made at such
Place of Payment on such date, but may be made on the next succeeding Business
Day at such Place of Payment with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity, and no
interest shall accrue on the amount so payable for the period from and after
such Interest Payment Date, Redemption Date or Stated Maturity, as the case may
be.
Article Two
Security Forms
1. Forms Generally.
The Registered Securities, if any, of each series and the Bearer
Securities, if any, of each series, related coupons, if any, and temporary
global Securities, if any, shall be in the form established by or pursuant to a
Board Resolution or in one or more indentures supplemental hereto, shall have
appropriate insertions, omissions, substitutions and other
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variations as are required or permitted by this Indenture or any indenture
supplemental hereto and may have such letters, numbers or other marks of
identification and such legends or endorsements placed thereon as may,
consistently herewith, be determined by the officers executing such Securities,
as evidenced by their execution of such Securities.
Unless otherwise provided as contemplated by Section 301 with respect to
any series of Securities, the Securities of each series shall be issuable in
registered form without coupons. If so provided as contemplated by Section 301,
the Securities of a series also shall be issuable in bearer form, with or
without interest coupons attached.
The definitive Securities and coupons shall be printed, lithographed or
engraved or produced by any combination of these methods on a steel engraved
border or steel engraved borders or may be produced in any other manner, all as
determined by the officers executing such Securities, as evidenced by their
execution of such Securities or coupons.
2. Form of Trustee's Certificate of Authentication.
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
Manufacturers Hanover Trust Company,
as Trustee
By: _____________________________________
Authorized Officer
Article Three
The Securities
1. Amount Unlimited; Issuable in Series.
The aggregate principal amount of Securities which may be authenticated and
delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto:
(1) the title of the Securities and the series in which such Securities
shall be included;
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(2) any limit upon the aggregate principal amount of the Securities of such
title or the Securities of such series which may be authenticated and
delivered under this Indenture (except for Securities authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu of,
other Securities of the series pursuant to Section 304, 305, 306, 906 or
1107);
(3) whether Securities of the series are to be issuable as Registered
Securities, Bearer Securities (with or without coupons) or both, any
restrictions applicable to the offer, sale or delivery of Bearer Securities
and the terms upon which Bearer Securities of the series may be exchanged for
Registered Securities of the series and vice versa;
(4) the date as of which any Bearer Securities of the series and any
temporary global Security representing Outstanding Securities of the series
shall be dated if other than the date of original issuance of the first
Security of the series to be issued;
(5) if Securities of the series are to be issuable as Bearer Securities,
whether interest in respect of any portion of a temporary Bearer Security in
global form (representing all of the Outstanding Bearer Securities of the
series) payable in respect of an Interest Payment Date prior to the exchange
of such temporary Bearer Security for definitive Securities of the series
shall be paid to any clearing organization with respect to the portion of such
temporary Bearer Security held for its account and, in such event, the terms
and conditions (including any certification requirements) upon which any such
interest payment received by a clearing organization will be credited to the
Persons entitled to interest payable on such Interest Payment Date;
(6) the date or dates on which the principal of such Securities is payable;
(7) the rate or rates at which such Securities shall bear interest, if any,
or any method by which such rate or rates shall be determined, the date or
dates from which such interest shall accrue, the Interest Payment Dates on
which such interest shall be payable and the Regular Record Date for the
interest payable on Registered Securities on any Interest Payment Date,
whether and under what circumstances Additional Amounts on such securities
shall be payable in respect of specified taxes, assessments or other
governmental charges withheld or deducted and, if so, whether the Company has
the option to redeem the affected Securities rather than pay such Additional
Amounts, and the basis upon which interest shall be calculated if other than
that of a 360-day year of twelve 30-day months;
(8) the place or places, if any, in addition to or other than the Borough
of Manhattan, The City of New York, where the principal of (and premium, if
any) and interest on or Additional Amounts, if any, payable in respect of such
Securities shall be payable;
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(9) the period or periods within which, the price or prices at which and
the terms and conditions upon which such Securities may be redeemed, in whole
or in part, at the option of the Company;
(10) the obligation, if any, of the Company to redeem or purchase such
Securities pursuant to any sinking fund or analogous provisions or at the
option of a Holder thereof and the period or periods within which, the price
or prices at which and the terms and conditions upon which such Securities
shall be redeemed or purchased, in whole or in part, pursuant to such
obligation, and any provisions for the remarketing of such Securities;
(11) the denominations in which Registered Securities of the series, if
any, shall be issuable if other than denominations of $1,000 and any integral
multiple thereof, and the denominations in which Bearer Securities of the
series, if any, shall be issuable if other than the denomination of $5,000;
(12) if other than the principal amount thereof, the portion of the
principal amount of such Securities which shall be payable upon declaration of
acceleration of the Maturity thereof pursuant to Section 502;
(13) if other than such coin or currency of the United States of America as
at the time of payment is legal tender for payment of public or private debts,
the coin or currency, including composite currencies, in which payment of the
principal of (and premium, if any) and interest, if any, on, and Additional
Amounts in respect of such Securities shall be payable;
(14) if the principal of (and premium, if any) or interest, if any, on, and
Additional Amounts in respect of, such Securities are to be payable, at the
election of the Company or a Holder thereof, in a coin or currency, including
composite currencies, other than that in which the Securities are stated to be
payable, the period or periods within which, and the terms and conditions upon
which, such election may be made;
(15) if the amount of payments of principal of (and premium, if any) or
interest, if any, on, and Additional Amounts in respect of, such Securities
may be determined with reference to an index, formula or other method or based
on a coin or currency other than that in which the Securities are stated to be
payable, the manner in which such amounts shall be determined;
(16) if the Securities of such series are to be issuable in definitive form
(whether upon original issue or upon exchange of a temporary Security of such
series) only upon receipt of certain certificates or other documents or
satisfaction of other conditions, then the form and terms of such
certificates, documents or conditions; and
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(17) any other terms of such Securities (which terms shall not be
inconsistent with the provisions of this Indenture).
All Securities of any one series and the coupons appertaining to Bearer
Securities of such series, if any, shall be substantially identical except as to
denomination and the rate or rates of interest, if any, and Stated Maturity, the
date from which interest, if any, shall accrue and except as may otherwise be
provided in or pursuant to such Board Resolution and set forth in such Officers'
Certificate or in any such indenture supplemental hereto. All Securities of any
one series need not be issued at the same time, and unless otherwise provided, a
series may be reopened for issuances of additional Securities of such series.
If any of the terms of the Securities of any series are established by action
taken pursuant to a Board Resolution, a copy of an appropriate record of such
action shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the
Officers' Certificate setting forth the terms of such series.
2. Denominations.
Unless other denominations and amounts may from time to time be fixed by or
pursuant to a Board Resolution, the Registered Securities of each series, if
any, shall be issuable in registered form without coupons in denominations of
$1,000 and any integral multiple thereof and the Bearer Securities of each
series, if any, shall be issuable in the denomination of $5,000, or in such
other denominations and amounts as may from time to time be fixed by or pursuant
to a Board Resolution.
3. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by its Chairman of
the Board, President, Vice President serving as Chief Financial Officer or its
Treasurer under its corporate seal reproduced thereon and attested by its
Secretary or one of its Assistant Secretaries. The signature of any of these
officers on the Securities may be manual or facsimile. Coupons shall bear the
facsimile signature of the Treasurer or any Assistant Treasurer of the Company.
Securities and coupons bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and delivery of this
Indenture, the Company may deliver Securities of any series, together with any
coupons appertaining thereto, executed by the Company to the Trustee for
authentication, together with the Board Resolution and Officers' Certificate or
supplemental indenture with
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respect to such Securities referred to in Section 301 and a Company Order for
the authentication and delivery of such Securities, and the Trustee in
accordance with the Company Order and subject to the provisions hereof shall
authenticate and deliver such Securities. In authenticating such Securities, and
accepting the additional responsibilities under this Indenture in relation to
such Securities, the Trustee shall be entitled to receive, and (subject to
Section 601) shall be fully protected in relying upon, an Opinion of Counsel
stating,
(a) the form and terms of such Securities and coupons, if any, have
been established in conformity with the provisions of this Indenture;
(b) that all conditions precedent to the authentication and delivery
of such Securities, together with the coupons, if any, appertaining
thereto, have been complied with and that such Securities and coupons, when
authenticated and delivered by the Trustee and issued by the Company in the
manner and subject to any conditions specified in such Opinion of Counsel,
will constitute valid and legally binding obligations of the Company,
enforceable in accordance with their terms, subject to bankruptcy,
insolvency, reorganization and other laws of general applicability relating
to or affecting the enforcement of creditors' rights and to general equity
principles;
(c) that all laws and requirements in respect of the execution and
delivery by the Company of such Securities and coupons, if any, have been
complied with; and
(d) as to such other matters as the Trustee may reasonably request.
The Trustee shall not be required to authenticate such Securities if the
issue of such Securities pursuant to this Indenture will affect the Trustee's
own rights, duties or immunities under the Securities and this Indenture or
otherwise in a manner which is not reasonably acceptable to the Trustee or if
the Trustee being advised by counsel determines that such action may not
lawfully be taken.
Each Registered Security shall be dated the date of its authentication.
Each Bearer Security and any temporary Bearer Security in global form shall be
dated as of the date specified as contemplated by Section 301.
No Security or coupon appertaining thereto shall be entitled to any benefit
under this Indenture or be valid or obligatory for any purpose, unless there
appears on such Security a certificate of authentication substantially in the
form provided for in Section 202 or 614 executed by or on behalf of the Trustee
by the manual signature of one of its authorized signers, and such certificate
upon any Security shall be conclusive evidence, and the only evidence, that such
Security has been duly authenticated and delivered hereunder. Except as
permitted by Section 306 or 307, the Trustee shall not authenticate and deliver
any Bearer Security unless all appurtenant coupons for interest then matured
have been detached and cancelled.
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4. Temporary Securities.
Pending the preparation of definitive Securities of any series, the Company
may execute and deliver to the Trustee, and upon Company Order the Trustee shall
authenticate and deliver, in the manner provided in Section 303, temporary
Securities of such series which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued, in registered form, or, if authorized, in bearer form with one or
more coupons or without coupons, and with such appropriate insertions,
omissions, substitutions and other variations as the officers executing such
Securities may determine, as evidenced by their execution of such Securities. In
the case of Bearer Securities of any series, such temporary Securities may be in
global form, representing all of the Outstanding Bearer Securities of such
series.
Except in the case of temporary Securities in global form, which shall be
exchanged in accordance with the provisions thereof, if temporary Securities of
any series are issued, the Company will cause definitive Securities of that
series to be prepared without unreasonable delay. After the preparation of
definitive Securities, the temporary Securities of such series shall be
exchangeable for definitive Securities of such series containing identical terms
and provisions upon surrender of the temporary Securities of such series at an
office or agency of the Company maintained for such purpose pursuant to Section
1002, without charge to the Holder. Upon surrender for cancellation of any one
or more temporary Securities of any series (accompanied by any unmatured coupons
appertaining thereto) the Company shall execute and the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Securities of authorized denominations of the same series containing
identical terms and provisions; provided, however, that no definitive Bearer
Security, except as provided pursuant to Section 301, shall be delivered in
exchange for a temporary Registered Security; and provided, further, that a
definitive Bearer Security shall be delivered in exchange for a temporary Bearer
Security only in compliance with the conditions set forth therein. Unless
otherwise specified as contemplated by Section 301 with respect to a temporary
global Security, until so exchanged the temporary Securities of any series shall
in all respects be entitled to the same benefits under this Indenture as
definitive Securities of such series.
5. Registration, Transfer and Exchange.
With respect to the Registered Securities of each series, if any, the
Company shall cause to be kept at an office or agency of the Company maintained
pursuant to Section 1002, a register (herein sometimes referred to as the
"Security Register") in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of the Registered
Securities of each series and of transfers of the Registered Securities of each
series. Such office or agency shall be the "Security Registrar" for the
Registered Securities, if any, of each series of Securities. In the event that
the Trustee shall not be the Security Registrar, it shall have the right to
examine the Security Register at all reasonable times.
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Upon surrender for registration of transfer of any Registered Security of
any series at any office or agency of the Company maintained for that series
pursuant to Section 1002, the Company shall execute, and the Trustee shall
authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Registered Securities of the same series, of any
authorized denominations, of a like aggregate principal amount bearing a number
not contemporaneously outstanding and containing identical terms and provisions.
At the option of the Holder, Registered Securities of any series may be
exchanged for other Registered Securities of the same series containing
identical terms and provisions, in any authorized denominations, and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged at
any such office or agency. Whenever any Registered Securities are so surrendered
for exchange, the Company shall execute, and the Trustee shall authenticate and
deliver, the Registered Securities which the holder making the exchange is
entitled to receive.
At the option of the Holder, Bearer Securities of any series may be
exchanged for Registered Securities of the same series containing identical
terms and provisions, of any authorized denominations and aggregate principal
amount, upon surrender of the Bearer Securities to be exchanged at any such
office or agency, with all unmatured coupons and all matured coupons in default
thereto appertaining. If the Holder of a Bearer Security is unable to produce
any such unmatured coupon or coupons or matured coupon or coupons in default,
such exchange may be effected if the Bearer Securities are accompanied by
payment in funds acceptable to the Company and the Trustee in an amount equal to
the face amount of such missing coupon or coupons, or the surrender of such
missing coupon or coupons may be waived by the Company and the Trustee if there
is furnished to them such security or indemnity as they may require to save each
of them and any Paying Agent harmless. If thereafter the Holder of such Security
shall surrender to any Paying Agent any such missing coupon in respect of which
such a payment shall have been made, such Holder shall be entitled to receive
the amount of such payment; provided, however, that, except as otherwise
provided in Section 1002, interest represented by coupons shall be payable only
upon presentation and surrender of those coupons at an office or agency located
outside the United States. Notwithstanding the foregoing, in case a Bearer
Security of any series is surrendered at any such office or agency in exchange
for a Registered Security of the same series and like tenor after the close of
business at such office or agency on (i) any Regular Record Date and before the
opening of business at such office or agency on the relevant Interest Payment
Date, or (ii) any Special Record Date and before the opening of business at such
office or agency on the related date for payment of Defaulted Interest, such
Bearer Security shall be surrendered without the coupon relating to such
Interest Payment Date or proposed date of payment, as the case may be (or, if
such coupon is so surrendered with such Bearer Security, such coupon shall be
returned to the person so surrendering the Bearer Security), and interest or
Defaulted Interest, as the case may be, will not be payable on such Interest
Payment Date or proposed date for payment, as the case may be, in respect of the
Registered
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Security issued in exchange for such Bearer Security, but will be payable only
to the Holder of such coupon when due in accordance with the provisions of this
Indenture.
If expressly provided with respect to the Securities of any series, at the
option of the Holder, Registered Securities of such series may be exchanged for
Bearer Securities upon such terms and conditions as may be provided with respect
to such series.
Whenever any Securities are so surrendered for exchange, the Company shall
execute, and the Trustee shall authenticate and deliver, the Securities which
the Holder making the exchange is entitled to receive.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company, evidencing the same
debt, and entitled to the same benefits under this Indenture, as the Securities
surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of
transfer, or for exchange or redemption shall (if so required by the Company or
the Security Registrar for such series of Security presented) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and such Security Registrar duly executed, by the Holder thereof or
his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange, or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 304, 906 or 1107 not involving any transfer.
The Company shall not be required (i) to issue, register the transfer of or
exchange any Securities of any series during a period beginning at the opening
of business 15 days before the day of the mailing of a notice of redemption of
Securities of that series selected for redemption under Section 1103 and ending
at the close of business on the day of such mailing, or (ii) to register the
transfer of or exchange any Registered Security so selected for redemption in
whole or in part, except, in the case of any Security to be redeemed in part,
the portion thereof not to be redeemed, or (iii) to exchange any Bearer Security
so selected for redemption except that such a Bearer Security may be exchanged
for a Registered Security of that series, provided that such Registered Security
shall be immediately surrendered for redemption with written instruction for
payment consistent with the provisions of this Indenture.
6. Mutilated, Destroyed, Lost and Stolen Securities.
If any mutilated Security or a Security with a mutilated coupon
appertaining to it is surrendered to the Trustee, the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a new Security
of the same series containing identical
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terms and of like principal amount and bearing a number not contemporaneously
outstanding, with coupons corresponding to the coupons, if any, appertaining to
the surrendered Security.
If there be delivered to the Company and to the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security or coupon,
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security or coupon has been acquired by a
bona fide purchaser, the Company shall execute and upon its request the Trustee
shall authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security or in exchange for the Security to which a destroyed, lost or stolen
coupon appertains (with all appurtenant coupons not destroyed, lost or stolen),
a new Security of the same series containing identical terms and of like
principal amount and bearing a number not contemporaneously outstanding, with
coupons corresponding to the coupons, if any, appertaining to such destroyed,
lost or stolen Security or to the Security to which such destroyed, lost or
stolen coupon appertains.
In case any such mutilated, destroyed, lost or stolen Security or coupon
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security or coupon; provided,
however, that payment of principal of (and premium, if any) and any interest on
Bearer Securities shall, except as otherwise provided in Section 1002, be
payable only at an office or agency located outside the United States and,
unless otherwise specified as contemplated by Section 301, any interest on
Bearer Securities shall be payable only upon presentation and surrender of the
coupons appertaining thereto.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Security of any series, with its coupons, if any, issued pursuant
to this Section in lieu of any destroyed, lost or stolen Security, or in
exchange for a Security to which a destroyed, lost or stolen coupon appertains,
shall constitute an original additional contractual obligation of the Company,
whether or not the destroyed, lost or stolen Security and its coupons, if any,
or the destroyed, lost or stolen coupon shall be at any time enforceable by
anyone, and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series and their
coupons, if any, duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities or coupons.
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7. Payment of Interest; Interest Rights Preserved.
Interest on any Registered Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall, if so provided in
such Security, be paid to the Person in whose name that Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest. In case a Bearer Security of any series is
surrendered in exchange for a Registered Security of such series after the close
of business (at an office or agency in a Place of Payment for such series) on
any Regular Record Date and before the opening of business (at such office or
agency) on the next succeeding Interest Payment Date, such Bearer Security shall
be surrendered without the coupon relating to such Interest Payment Date and
interest will not be payable on such Interest Payment Date in respect of the
Registered Security issued in exchange for such Bearer Security, but will be
payable only to the Holder of such coupon when due in accordance with the
provisions of this Indenture.
Any interest on any Registered Security of any series which is payable, but
is not punctually paid or duly provided for, on any Interest Payment Date for
such Registered Security (herein called "Defaulted Interest") shall forthwith
cease to be payable to the Holder on the relevant Regular Record Date by virtue
of having been such Holder; and such Defaulted Interest may be paid by the
Company, at its election in each case, as provided in Clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the Persons in whose names the Registered Securities affected (or their
respective Predecessor Securities) are registered at the close of business
on a Special Record Date for the payment of such Defaulted Interest, which
shall be fixed in the following manner. The Company shall notify the
Trustee in writing of the amount of Defaulted Interest proposed to be paid
on each such Registered Security and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount of
money equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest
which shall be not more than 15 days and not less than 10 days prior to the
date of the proposed payment and not less than 10 days after the receipt by
the Trustee of the notice of the proposed payment. The Trustee shall
promptly notify the Company of such Special Record Date and, in the name
and at the expense of the Company, shall cause notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor to
be mailed, first-class postage prepaid, to each Holder of such Registered
Securities at his address as it appears in the Security Register not less
than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company, cause a similar
notice to be published at least once in a newspaper, customarily published
in the English language on each Business Day and of general
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circulation in the Borough of Manhattan, The City of New York, but such
publication shall not be a condition precedent to the establishment of such
Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been mailed as
aforesaid, such Defaulted Interest shall be paid to the Persons in whose
names such Registered Securities (or their respective Predecessor
Securities) are registered at the close of business on such Special Record
Date and shall no longer be payable pursuant to the following Clause (2).
In case a Bearer Security of any series is surrendered at the office or
agency in a Place of Payment for such series in exchange for a Registered
Security of such series after the close of business at such office or
agency on any Special Record Date and before the opening of business at
such office or agency on the related proposed date for payment of Defaulted
Interest, such Bearer Security shall be surrendered without the coupon
relating to such proposed date of payment and Defaulted Interest will not
be payable on such proposed date of payment in respect of the Registered
Security issued in exchange for such Bearer Security, but will be payable
only to the Holder of such coupon when due in accordance with the
provisions of this Indenture.
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which such Securities may be listed, and upon such notice as
may be required by such exchange, if, after notice given by the Company to
the Trustee of the proposed payment pursuant to this Clause, such payment
shall be deemed practicable by the Trustee.
At the option of the Company, interest on Registered Securities of any
series that bear interest may be paid by mailing a check to the address of the
person entitled thereto as such address shall appear in the Security Register.
Subject to the foregoing provisions of this Section and Section 305, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
8. Persons Deemed Owners.
Prior to due presentment of a Registered Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Registered Security is registered as the
owner of such Registered Security for the purpose of receiving payment of
principal of (and premium, if any), and (subject to Sections 305 and 307)
interest on and Additional Amounts with respect to, such Registered Security and
for all other purposes whatsoever, whether or not such Registered Security be
overdue, and neither the Company, the Trustee nor any agent of the Company or
the Trustee shall be affected by notice to the contrary.
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The Company, the Trustee and any agent of the Company or the Trustee may
treat the bearer of any Bearer Security and the bearer of any coupon as the
absolute owner of such Security or coupon for the purpose of receiving payment
thereof or on account thereof and for all other purposes whatsoever, whether or
not such Security or coupon be overdue, and neither the Company, the Trustee nor
any agent of the Company or the Trustee shall be affected by notice to the
contrary.
9. Cancellation.
All Securities and coupons surrendered for payment, redemption,
registration of transfer or exchange or for credit against any sinking fund
payment shall, if surrendered to any Person other than the Trustee, be delivered
to the Trustee, and any such Securities and coupons and Securities and coupons
surrendered directly to the Trustee for any such purpose shall be promptly
cancelled by it. The Company may at any time deliver to the Trustee for
cancellation any Securities previously authenticated and delivered hereunder
which the Company may have acquired in any manner whatsoever, and all Securities
so delivered shall be promptly cancelled by the Trustee. No Securities shall be
authenticated in lieu of or in exchange for any Securities cancelled as provided
in this Section, except as expressly permitted by this Indenture. All cancelled
Securities and coupons held by the Trustee shall be destroyed by it unless by a
Company Order the Company directs their return to it.
10. Computation of Interest.
Except as otherwise specified as contemplated by Section 301 for Securities
of any series, interest on the Securities of each series shall be computed on
the basis of a 360-day year of twelve 30-day months.
Article Four
Satisfaction And Discharge
1. Satisfaction and Discharge of Indenture.
Upon the direction of the Company by a Company Order this Indenture shall
cease to be of further effect (except as to any surviving rights of registration
of transfer or exchange of Securities herein expressly provided for and any
right to receive Additional Amounts, as provided in Section 1004), and the
Trustee, on demand of and at the expense of the Company, shall execute proper
instruments acknowledging satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and delivered and all coupons
appertaining thereto (other than (i) coupons appertaining to Bearer
Securities surrendered for exchange for Registered Securities and maturing
after such exchange,
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whose surrender is not required or has been waived as provided in Section
305, (ii) Securities and coupons which have been destroyed, lost or stolen
and which have been replaced or paid as provided in Section 306, (iii)
coupons appertaining to Securities called for redemption and maturing after
the relevant Redemption Date, whose surrender has been waived as provided
in Section 1107, and (iv) Securities and coupons for whose payment money
has theretofore been deposited in trust or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged from such
trust, as provided in Section 1003) have been delivered to the Trustee for
cancellation; or
(B) all such Securities and, in the case of (i) or (ii) below, any
such coupons appertaining thereto not theretofore delivered to the Trustee
for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity within
one year, or
(iii) if redeemable at the option of the Company, are to be
called for redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption by the Trustee in the
name, and at the expense, of the Company,
and the Company, in the case of (i), (ii) or (iii) above, has deposited or
caused to be deposited with the Trustee as trust funds in trust for the
purpose an amount sufficient to pay and discharge the entire indebtedness
on such Securities and coupons not theretofore delivered to the Trustee for
cancellation, for principal (and premium, if any) and interest, and any
Additional Amounts with respect thereto, to the date of such deposit (in
the case of Securities which have become due and payable) or to the Stated
Maturity or Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent herein
provided for relating to the satisfaction and discharge of this Indenture have
been complied with.
In the event there are Securities of two or more series hereunder, the Trustee
shall be required to execute an instrument acknowledging satisfaction and
discharge of this Indenture only if requested to do so with respect to
Securities of all series as to which it is Trustee and if the other conditions
thereto are met. In the event there are two or more Trustees hereunder, then the
effectiveness of any such instrument shall be conditioned upon receipt of such
instruments from all Trustees hereunder.
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Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 607 and, if money shall
have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
2. Application of Trust Money.
Subject to the provisions of the last paragraph of Section 1003, all money
deposited with the Trustee pursuant to Section 401 shall be held in trust and
applied by it, in accordance with the provisions of the Securities, the coupons
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and any interest and Additional Amounts for whose payment such money has
been deposited with the Trustee; but such money need not be segregated from
other funds except to the extent required by law.
Article Five
Remedies
1. Events of Default.
"Event of Default", wherever used herein with respect to Securities of any
series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) default in the payment of any interest upon or any Additional Amounts
payable in respect of any Security of that series when such interest or
Additional Amounts becomes due and payable, and continuance of such default
for a period of 30 days; or
(2) default in the payment of the principal of (and premium, if any, on)
any Security of that series when it becomes due and payable at Maturity; or
(3) default in the deposit of any sinking fund payment, when and as due by
the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or warranty of
the Company in this Indenture (other than a covenant or warranty a default in
whose performance or whose breach is elsewhere in this Section specifically
dealt with or which has been expressly included in this Indenture solely for
the benefit of series of Securities other than that series), and continuance
of such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Company by the Trustee or to the
Company and the Trustee by the Holders of at least
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10% in principal amount of the Outstanding Securities of that series a
written notice specifying such default or breach and requiring it to be
remedied and stating that such notice is a "Notice of Default" hereunder;
or
(5) a court having jurisdiction in the premises shall enter a decree
or order for relief in respect of the Company in an involuntary case under
any applicable bankruptcy, insolvency or other similar law now or hereafter
in effect, or appointing a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or similar official) of the Company or for any
substantial part of its property, or ordering the winding-up or liquidation
of its affairs, and such decree or order shall remain unstayed and in
effect for a period of 60 consecutive days; or
(6) the Company shall commence a voluntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, or
shall consent to the entry of an order for relief in an involuntary case
under any such law, or shall consent to the appointment of or taking
possession by a receiver, liquidator, assignee, trustee, custodian,
sequestrator (or similar official) of the Company or for any substantial
part of its property, or shall make any general assignment for the benefit
of creditors, or shall fail generally to pay its debts as they become due
or shall take any corporate action in furtherance of any of the foregoing;
or
(7) any other Event of Default provided with respect to Securities of
that series.
2. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default with respect to Securities of any series at the time
Outstanding occurs and is continuing, then and in every such case the Trustee or
the Holders of not less than 25% in principal amount of the Outstanding
Securities of that series may declare the principal of all the Securities of
that series, or such lesser amount as may be provided for in the Securities of
that series, to be due and payable immediately, by a notice in writing to the
Company (and to the Trustee if given by the Holders), and upon any such
declaration such principal or such lesser amount shall become immediately due
and payable.
At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of a majority in principal amount of the
Outstanding Securities of that series, by written notice to the Company and the
Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient to
pay
(A) all overdue installments of interest on and any Additional Amounts
payable in respect of all Securities of that series,
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(B) the principal of (and premium, if any, on) any Securities of that
series which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate or rates borne by or provided
for in such Securities,
(C) to the extent that payment of such interest is lawful, interest upon
overdue installments of interest and Additional Amounts at the rate or rates
borne by or provided for in such Securities, and
(D) all sums paid or advanced by the Trustee hereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel;
and
(2) all Events of Default with respect to Securities of that series, other
than the non-payment of the principal of Securities of that series which has
become due solely by such declaration of acceleration, have been cured or
waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
3. Collection of Indebtedness and Suits for Enforcement by Trustee.
The Company covenants that if
(1) default is made in the payment of any installment of interest on
or any Additional Amounts payable in respect of any Security when such
interest or Additional Amounts shall have become due and payable and such
default continues for a period of 30 days, or
(2) default is made in the payment of the principal of (or premium, if
any, on) any Security at its Maturity,
the Company will, upon demand of the Trustee, pay to it, for the benefit of the
Holders of such Securities and coupons, the whole amount then due and payable on
such Securities and coupons for principal (and premium, if any) and interest and
Additional Amounts, if any, with interest upon the overdue principal (and
premium, if any) and, to the extent that payment of such interest shall be
legally enforceable, upon overdue installments of interest or any Additional
Amounts, at the rate or rates borne by or provided for in such Securities, and,
in addition thereto, such further amount as shall be sufficient to cover the
costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for
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the collection of the sums so due and unpaid, and may prosecute such proceeding
to judgment or final decree, and may enforce the same against the Company or any
other obligor upon such Securities and collect the moneys adjudged or decreed to
be payable in the manner provided by law out of the property of the Company or
any other obligor upon such Securities, wherever situated.
If an Event of Default with respect to Securities of any series occurs and is
continuing, the Trustee may in its discretion proceed to protect and enforce its
rights and the rights of the Holders of Securities of such series and any
related coupons by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
4. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise,
(i) to file and prove a claim for the whole amount, or such lesser amount
as may be provided for in the Securities of that series, of principal (and
premium, if any) and interest and any Additional Amounts owing and unpaid
in respect of the Securities and to file such other papers or documents as
may be necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents or counsel) and of
the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any receiver, assignee, trustee, liquidator, sequestrator (or other similar
official) in any such judicial proceeding is hereby authorized by each Holder of
Securities and coupons to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders of Securities and coupons, to pay to the Trustee any amount due to it
for the reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and any other amounts due the Trustee under
Section 607.
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Nothing herein contained shall be deemed to authorize the Trustee to authorize
or consent to or accept or adopt on behalf of any Holder of a Security or coupon
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or coupons or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder of a Security or coupon in
any such proceeding.
5. Trustee May Enforce Claims Without Possession of Securities or
Coupons.
All rights of action and claims under this Indenture or any of the
Securities or coupons may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or coupons or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery or judgment shall, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, be for the ratable benefit of the Holders of the Securities and
coupons in respect of which such judgment has been recovered.
6. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (and premium,
if any), interest or any Additional Amounts, upon presentation of the Securities
or coupons, or both, as the case may be, and the notation thereon of the payment
if only partially paid and upon surrender thereof if fully paid:
First: To the payment of all amounts due the Trustee under Section 607;
Second: To the payment of the amounts then due and unpaid upon the
Securities and coupons for principal (and premium, if any) and interest and any
Additional Amounts payable in respect of which or for the benefit of which such
money has been collected, ratably, without preference or priority of any kind,
according to the aggregate amounts due and payable on such Securities and
coupons for principal (and premium, if any), interest and Additional Amounts,
respectively;
Third: The balance, if any, to the Person or Persons entitled thereto.
7. Limitation on Suits.
No Holder of any Security of any series or any related coupons shall have
any right to institute any proceeding, judicial or otherwise, with respect to
this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless
(1) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Securities of that series;
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(2) the Holders of not less than 25% in principal amount of the
Outstanding Securities of that series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(5) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the Outstanding Securities of that series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other such
Holders or Holders of any other series, or to obtain or to seek to obtain
priority or preference over any other Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all such Holders.
8. Unconditional Right of Holders to Receive Principal, Premium and
Interest.
Notwithstanding any other provision in this Indenture, the Holder of any
Security or coupon shall have the right, which is absolute and unconditional, to
receive payment of the principal of (and premium, if any) and (subject to
Sections 305 and 307) interest on and any Additional Amounts in respect of such
Security or payment of such coupon on the respective Stated Maturity or
Maturities expressed in such Security or coupon (or, in the case of redemption,
on the Redemption Date) and to institute suit for the enforcement of any such
payment, and such right shall not be impaired without the consent of such
Holder.
9. Restoration of Rights and Remedies.
If the Trustee or any Holder of a Security or coupon has instituted any
proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, the Trustee and the Holders of Securities and coupons shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
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10. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities or coupons in the last paragraph
of Section 306, no right or remedy herein conferred upon or reserved to the
Trustee or to the Holders of Securities or coupons is intended to be exclusive
of any other right or remedy, and every right and remedy shall, to the extent
permitted by law, be cumulative and in addition to every other right and remedy
given hereunder or now or hereafter existing at law or in equity or otherwise.
The assertion or employment of any right or remedy hereunder, or otherwise,
shall not prevent the concurrent assertion or employment of any other
appropriate right or remedy.
11. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any Security or
coupon to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this Article
or by law to the Trustee or to the Holders of Securities or coupons may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders of Securities or coupons, as the case may be.
12. Control by Holders of Securities.
The Holders of a majority in principal amount of the Outstanding Securities
of any series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on the Trustee with respect to the Securities of
such series, provided that
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction, and
(3) such direction is not unduly prejudicial to the rights of other
Holders of Securities of such series.
13. Waiver of Past Defaults.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of such series and any related coupons waive any past default
hereunder with respect to such series and its consequences, except a default
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(1) in the payment of the principal of (and premium, if any) or
interest on or Additional Amounts payable in respect of any Security of
such series, or
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every purpose
of this Indenture; but no such waiver shall extend to any subsequent or other
default or impair any right consequent thereon.
14. Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security or
coupon by his acceptance thereof shall be deemed to have agreed, that any court
may in its discretion require, in any suit for the enforcement of any right or
remedy under this Indenture, or in any suit against the Trustee for any action
taken, suffered or omitted by it as Trustee, the filing by any party litigant in
such suit, other than the Trustee, of an undertaking to pay the costs of such
suit, and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
including the Trustee, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; but the provisions of this
Section shall not apply to any suit instituted by the Company, the Trustee or by
any Holder, or group of Holders, holding in the aggregate more than 10% in
principal amount of the Outstanding Securities of any series, or to any suit
instituted by any Holder of any Security or coupon for the enforcement of the
payment of the principal of (and premium, if any) or interest on or any
Additional Amounts in respect of any Security or the payment of any coupon on or
after the respective Stated Maturities expressed in such Security (or, in the
case of redemption, on or after the Redemption Date) or interest on any overdue
principal of any Security.
15. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do so) that it
will not at any time insist upon, or plead, or in any manner whatsoever claim or
take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
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Article Six
The Trustee
1. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties, and only such
duties, as are specifically set forth in this Indenture, and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements of this Indenture; but in
the case of any such certificates or opinions which by any provisions
hereof are specifically required to be furnished to the Trustee, the
Trustee shall be under a duty to examine the same to determine whether or
not they conform to the requirements of this Indenture.
(b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(1) this Subsection shall not be construed to limit the effect of
Subsection (a) of this Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Responsible Officer, unless it shall be proved that the
Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action taken
or omitted to be taken by it in good faith in accordance with the direction
of the Holders of a majority in principal amount of the Outstanding
Securities of any series, relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture with respect to the Securities of such series; and
(4) no provision of this Indenture shall require the Trustee to
expend or risk its own funds or otherwise incur any financial liability in
the performance of any of its duties hereunder, or in the exercise of any
of its rights or powers, if it shall have
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reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(d) Whether or not therein expressly so provided, every provision of this
Indenture relating to the conduct or affecting the liability of or affording
protection to the Trustee shall be subject to the provisions of this Section.
2. Notice of Defaults.
Within 90 days after the occurrence of any default hereunder with respect
to the Securities of any series, the Trustee shall transmit by mail to all
Holders of Securities of such series entitled to receive reports pursuant to
Section 703 (c), notice of such default hereunder known to the Trustee, unless
such default shall have been cured or waived; provided, however, that, except in
the case of a default in the payment of the principal of (and premium, if any)
or interest on, or any Additional Amounts with respect to, any Security of such
series or in the payment of any sinking fund installment with respect to
Securities of such series, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determine that the withholding of such notice is in the interests of the
Holders of Securities and coupons of such series; and provided, further, that in
the case of any default of the character specified in Section 501(4) with
respect to Securities of such series, no such notice to Holders shall be given
until at least 30 days after the occurrence thereof. For the purpose of this
Section, the term "default" means any event which is, or after notice or lapse
of time or both would become, an Event of Default with respect to Securities of
such series.
3. Certain Rights of Trustee.
Except as otherwise provided in Section 601:
(a) the Trustee may rely and shall be protected in acting or refraining
from acting upon any resolution, certificate, statement, instrument, opinion,
report, notice, request, direction, consent, order, bond, debenture, note, or
other paper or document reasonably believed by it to be genuine and to have been
signed or presented by the proper party or parties,
(b) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order (other than
delivery of any Security to the Trustee for authentication and delivery pursuant
to Section 303 which shall be sufficiently evidenced as provided therein) and
any resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
(c) whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any
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action hereunder, the Trustee (unless other evidence be herein specifically
prescribed) may, in the absence of bad faith on its part, rely upon an Officers'
Certificate;
(d) the Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon;
(e) the Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Holders of Securities of any series or any related coupons pursuant to this
Indenture, unless such Holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(f) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion, may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney; and
(g) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
4. Not Responsible for Recitals or Issuance of Securities.
The recitals contained herein and in the Securities, except the Trustee's
certificate of authentication, and in any coupons shall be taken as the
statements of the Company, and the Trustee or any Authenticating Agent assumes
no responsibility for their correctness. The Trustee makes no representations as
to the validity or sufficiency of this Indenture or of the Securities or
coupons. The Trustee or any Authenticating Agent shall not be accountable for
the use or application by the Company of Securities or the proceeds thereof.
5. May Hold Securities.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other agent of the Company, in its individual or any other
capacity, may become the owner or pledgee of Securities and coupons and, subject
to Sections 608 and 613, may otherwise deal with the Company with the same
rights it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.
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6. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be segregated from
other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as otherwise
agreed with the Company.
7. Compensation and Reimbursement.
The Company agrees
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents and counsel), except any such expense,
disbursements or advance as may be attributable to its negligence or bad
faith; and
(3) to indemnify the Trustee and its agents for, and to hold them
harmless against, any loss, liability or expense incurred without
negligence or bad faith on their part, arising out of or in connection with
the acceptance or administration of the trust or trusts hereunder,
including the costs and expenses of defending themselves against any claim
or liability in connection with the exercise or performance of any of their
powers or duties hereunder.
As security for the performance of the obligations of the Company under
this Section the Trustee shall have a lien prior to the Securities of any series
upon all property and funds held or collected by the Trustee as such, except
funds held in trust for the payment of principal of (or premium, if any) or
interest on Securities.
8. Disqualifications; Conflicting Interests.
(a) If the Trustee has or shall acquire any conflicting interest, as
defined in this Section, with respect to the Securities of any series, it shall,
within 90 days after ascertaining that it has such conflicting interest, either
eliminate such conflicting interest or resign with respect to the Securities of
that series in the manner and with the effect hereinafter specified in this
Article.
(b) In the event that the Trustee shall fail to comply with the provisions
of Subsection (a) of this Section with respect to the Securities of any series,
the Trustee shall, within 10 days after the expiration of such 90-day period,
transmit, in the manner and to the extent provided in Section 703(c) to all
Holders of Securities of that series notice of such failure.
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(c) For the purposes of this Section, the Trustee shall be deemed to have
a conflicting interest with respect to the Securities of any series, if
(1) the Trustee is trustee under this Indenture with respect to the
Outstanding Securities of any series other than that series or is trustee
under another indenture under which any other securities, or certificates
of interest or participation in any other securities, of the Company are
outstanding, unless such other indenture is a collateral trust indenture
under which the only collateral consists of Securities issued under this
Indenture, provided that there shall be excluded from the operation of this
paragraph (A) this Indenture with respect to the Securities of any series
other than that series, and (B) any indenture or indentures under which
other securities, or certificates of interest or participation in other
securities, of the Company are outstanding, if
(i) this Indenture and such other indenture or indentures are
wholly unsecured and such other indenture or indentures are
hereafter qualified under the Trust Indenture Act, unless the
Commission shall have found and declared by order pursuant to
Section 305(b) or Section 307(c) of the Trust Indenture Act that
differences exist between the provisions of this Indenture with
respect to Securities of that series and one or more other series
or the provisions of such other indenture or indentures which are
so likely to involve a material conflict of interest as to make
it necessary in the public interest or for the protection of
investors to disqualify the Trustee from acting as such under
this Indenture with respect to the Securities of that series and
such other series or under such other indenture or indentures, or
(ii) the Company shall have sustained the burden of proving, on
application to the Commission and after opportunity for hearing
thereon, that trusteeship under this Indenture with respect to
the Securities of that series and such other series or such other
indenture or indentures is not so likely to involve a material
conflict of interest as to make it necessary in the public
interest or for the protection of investors to disqualify the
Trustee from acting as such under this Indenture with respect to
the Securities of that series and such other series under such
other indenture or indentures;
(2) the Trustee or any of its directors or executive officers is an
obligor upon the Securities or an underwriter for the Company;
(3) the Trustee directly or indirectly controls or is directly or
indirectly controlled by or is under direct or indirect common control with
the Company or an underwriter for the Company;
(4) the Trustee or any of its directors or executive officers is a
director, officer, partner, employee, appointee or representative of the
Company, or of an underwriter (other than the Trustee itself) for the
Company who is currently engaged in the business of underwriting, except
that (i) one individual may be a director or an
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executive officer, or both, of the Trustee and a director or an executive
officer, or both, of the Company but may not be at the same time an
executive officer of both the Trustee and the Company; (ii) if and so long
as the number of directors of the Trustee in office is more than nine, one
additional individual may be a director or an executive officer, or both,
of the Trustee and a director of the Company; and (iii) the Trustee may be
designated by the Company or by any underwriter for the Company to act in
the capacity of transfer agent, registrar, custodian, paying agent, fiscal
agent, escrow agent, or depositary, or in any other similar capacity, or,
subject to the provisions of paragraph (1) of this Subsection, to act as
trustee, whether under an indenture or otherwise;
(5) 10% or more of the voting securities of the Trustee is
beneficially owned either by the Company or by any director, partner, or
executive officer thereof, or 20% or more of such voting securities is
beneficially owned, collectively, by any two or more of such persons; or
10% or more of the voting securities of the Trustee is beneficially owned
either by an underwriter for the Company or by any director, partner or
executive officer thereof, or is beneficially owned, collectively, by any
two or more such persons;
(6) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), (i) 5% or more of the voting securities, or 10% or
more of any other class of security, of the Company not including the
Securities issued under this indenture and securities issued under any
other indenture under which the Trustee is also trustee, or (ii) 10% or
more of any class of security of an underwriter for the Company;
(7) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 5% or more of the voting securities of any person who,
to the knowledge of the Trustee, owns 10% or more of the voting securities
of, or controls directly or indirectly or is under direct or indirect
common control with, the Company;
(8) the Trustee is the beneficial owner of, or holds as collateral
security for an obligation which is in default (as hereinafter in this
Subsection defined), 10% or more of any class of security of any person
who, to the knowledge of the Trustee, owns 50% or more of the voting
securities of the Company; or
(9) the Trustee owns, on May 15 in any calendar year, in the capacity
of executor, administrator, testamentary or inter vivos trustee, guardian,
committee or conservator, or in any other similar capacity, an aggregate of
25% or more of the voting securities, or of any class of security, of any
person, the beneficial ownership of a specified percentage of which would
have constituted a conflicting interest under paragraph (6), (7) or (8) of
this Subsection. As to any such securities of which the Trustee acquired
ownership through becoming executor, administrator, or testamentary trustee
of an estate which included them, the provisions of the preceding sentence
shall not apply,
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for a period of two years from the date of such acquisition, to the extent
that such securities included in such estate do not exceed 25% of such
voting securities or 25% of any such class of security. Promptly after May
15 in each calendar year, the Trustee shall make a check of its holdings of
such securities in any of the above-mentioned capacities as of such May 15.
If the Company fails to make payment in full of the principal of (or
premium, if any) or interest on any of the Securities when and as the same
becomes due and payable, and such failure continues for 30 days thereafter,
the Trustee shall make a prompt check of its holding of such securities in
any of the above-mentioned capacities as of the date of the expiration of
such 30-day period, and after such date, notwithstanding the foregoing
provisions of this paragraph, all such securities so held by the Trustee,
with sole or joint control over such securities vested in it, shall, but
only so long as such failure shall continue, be considered as though
beneficially owned by the Trustee for the purposes of paragraphs (6), (7)
and (8) of this Subsection.
The specification of percentages in paragraphs (5) to (9), inclusive, of
this Subsection shall not be construed as indicating that the ownership of such
percentages of the securities of a person is or is not necessary or sufficient
to constitute direct or indirect control for the purposes of paragraph (3) or
(7) of this Subsection.
For the purposes of paragraphs (6), (7), (8) and (9) of this Subsection
only, (i) the terms "security" and "securities" shall include only such
securities as are generally known as corporate securities, but shall not include
any note or other evidence of indebtedness issued to evidence an obligation to
repay moneys lent to a person by one or more banks, trust companies or banking
firms, or any certificate of interest or participation in any such note or
evidence of indebtedness; (ii) an obligation shall be deemed to be "in default"
when a default in payment of principal shall have continued for 30 days or more
and shall not have been cured; and (iii) the Trustee shall not be deemed to be
the owner or holder of (A) any security which it holds as collateral security,
as trustee or otherwise, for an obligation which is not in default as defined in
clause (ii) above, or (B) any security which it holds as collateral security
under this Indenture, irrespective of any default hereunder, or (C) any security
which it holds as agent for collection, or as custodian, escrow agent, or
depositary, or in any similar representative capacity.
(d) For the purposes of this Section:
(1) The term "underwriter", when used with reference to the Company,
means every person who, within three years prior to the time as of which
the determination is made, has purchased from the Company with a view to,
or has offered or sold for the Company in connection with, the distribution
of any security of the Company outstanding at such time, or has
participated or has had a direct or indirect participation in any such
undertaking, or has participated or has had a participation in the direct
or indirect underwriting of any such undertaking, but such term shall not
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include a person whose interest was limited to a commission from an
underwriter or dealer not in excess of the usual and customary
distributors' or sellers' commission.
(2) The term "director" means any director of a corporation, or any
individual performing similar functions with respect to any organization,
whether incorporated or unincorporated.
(3) The term "person" means an individual, a corporation, a
partnership, an association, a joint-stock company, a trust, an
unincorporated organization, or a government or political subdivision
thereof. As used in this paragraph, the term "trust" shall include only a
trust where the interest or interests of the beneficiary or beneficiaries
are evidenced by a security.
(4) The term "voting security" means any security presently entitling
the owner or holder thereof to vote in the direction or management of the
affairs of a person, or any security issued under or pursuant to any trust,
agreement or arrangement whereby a trustee or trustees or agent or agents
for the owner or holder of such security are presently entitled to vote in
the direction or management of the affairs of a person.
(5) The term "Company" means any obligor upon the Securities.
(6) The term "executive officer" means the president, every vice
president, every trust officer, the cashier, the secretary, and the
treasurer of a corporation, and any individual customarily performing
similar functions with respect to any organization whether incorporated or
unincorporated, but shall not include the chairman of the board of
directors.
(e) The percentages of voting securities and other securities specified in
this Section shall be calculated in accordance with the following provisions:
(1) A specified percentage of the voting securities of the Trustee,
the Company or any other person referred to in this Section (each of whom
is referred to as a "person" in this paragraph) means such amount of the
outstanding voting securities of such person as entitles the holder or
holders thereof to cast such specified percentage of the aggregate votes
which the holders of all the outstanding voting securities of such person
are entitled to cast in the direction or management of the affairs of such
person.
(2) A specified percentage of a class of securities of a person means
such percentage of the aggregate amount of securities of the class
outstanding.
(3) The term "amount", when used in regard to securities, means the
principal amount if relating to evidences of indebtedness, the number of
shares if relating to capital shares, and the number of units if relating
to any other kind of security.
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(4) The term "outstanding" means issued and not held by or for the
account of the issuer. The following securities shall not be deemed
outstanding within the meaning of this definition:
(i) securities of an issuer held in a sinking fund relating to
securities of the issuer of the same class;
(ii) securities of an issuer held in a sinking fund relating to
another class of securities of the issuer, if the obligation evidenced
by such other class of securities is not in default as to principal or
interest or otherwise;
(iii) securities pledged by the issuer thereof as security for an
obligation of the issuer not in default as to principal or interest or
otherwise; and
(iv) securities held in escrow if placed in escrow by the issuer
thereof;
provided, however, that any voting securities of an issuer shall be
deemed outstanding if any person other than the issuer is entitled to
exercise the voting rights thereof.
(5) A security shall be deemed to be of the same class as another
security if both securities confer upon the holder or holders thereof
substantially the same rights and privileges; provided, however, that, in
the case of secured evidences of indebtedness, all of which are issued
under a single indenture, differences in the interest rates or maturity
dates of various series thereof shall not be deemed sufficient to
constitute such series different classes; and provided, further, that, in
the case of unsecured evidences of indebtedness, differences in the
interest rates or maturity dates thereof shall not be deemed sufficient to
constitute them securities of different classes, whether or not they are
issued under a single indenture.
9. Corporate Trustee Required; Eligibility.
There shall at all times be a Trustee hereunder which shall be a
corporation organized and doing business under the laws of the United States of
America, any State or the District of Columbia, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of at
least $5,000,000 and subject to supervision or examination by Federal or State
authority. If such corporation publishes reports of condition at least annually,
pursuant to law or to the requirements of said supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect hereinafter specified in this Article.
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10. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee under Section 611.
(b) The Trustee may resign at any time with respect to the Securities of
one or more series by giving written notice thereof to the Company. If the
instrument of acceptance by a successor Trustee required by Section 611 shall
not have been delivered to the Trustee within 30 days after the giving of such
notice of resignation, the resigning Trustee may petition any court of competent
jurisdiction for the appointment of a successor Trustee with respect to such
series.
(c) The Trustee may be removed at any time with respect to the Securities
of any series by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series, delivered to the Trustee and to the
Company.
(d) If at anytime:
(1) the Trustee shall fail to comply with Section 608(a) after
written request therefor by the Company or by any Holder of a Security who
has been a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under Section 609 and
shall fail to resign after written request therefor by the Company or by
any such Holder of a Security, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to all Securities, or (ii) subject to Section 514, any
Holder of a Security who has been a bona fide Holder of a Security of any series
for at least six months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the removal of the
Trustee with respect to all Securities of such series and the appointment of a
successor Trustee or Trustees.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, with respect
to the Securities of one or more series, the Company, by a Board Resolution,
shall promptly appoint a successor Trustee or Trustees with respect to the
Securities of that or those series (it being understood that any such successor
Trustee may be appointed with respect to the Securities of one or more or all of
such series and that at any time there shall be only one Trustee with respect to
the Securities of any particular series) and shall comply with the applicable
requirements of Section 611. If, within one year after such resignation,
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removal or incapability, or the occurrence of such vacancy, a successor Trustee
with respect to the Securities of any series shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Securities of such
series delivered to the Company and the retiring Trustee, the successor Trustee
so appointed shall, forthwith upon its acceptance of such appointment in
accordance with the applicable requirements of Section 611, become the successor
Trustee with respect to the Securities of such series and to that extent
supersede the successor Trustee appointed by the Company. If no successor
Trustee with respect to the Securities of any series shall have been so
appointed by the Company or the Holders of Securities and accepted appointment
in the manner required by Section 611, any Holder of a Security who has been a
bona fide Holder of a Security of such series for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee with respect
to the Securities of such series.
(f) The Company shall give notice of each resignation and each removal of
the Trustee with respect to the Securities of any series and each appointment of
a successor Trustee with respect to the Securities of any series by mailing
written notice of such event by first-class mail, postage prepaid, to the
Holders of Registered Securities, if any, of such series as their names and
addresses appear in the Security Register and, if Securities of such series are
issued as Bearer Securities, by publishing notice of such event once in an
Authorized Newspaper in each Place of Payment located outside the United States.
Each notice shall include the name of the successor Trustee with respect to the
Securities of such series and the address of its Corporate Trust Office.
11. Acceptance of Appointment by Successor.
(a) In case of the appointment hereunder of a successor Trustee with
respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Company and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee; but, on the request
of the Company or the successor Trustee, such retiring Trustee shall, upon
payment of its charges, execute and deliver an instrument transferring to such
successor Trustee all the rights, powers and trusts of the retiring Trustee and
shall duly assign, transfer and deliver to such successor Trustee all property
and money held by such retiring Trustee hereunder.
(b) In case of the appointment hereunder of a successor Trustee with
respect to the Securities of one or more (but not all) series, the Company, the
retiring Trustee and each successor Trustee with respect to the Securities of
one or more series shall execute and deliver an indenture supplemental hereto
wherein each successor Trustee shall accept such appointment and which (1) shall
contain such provisions as shall be necessary or desirable to transfer and
confirm to, and to vest in, each successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the Securities of that
or
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those series to which the appointment of such successor Trustee relates, (2) if
the retiring Trustee is not retiring with respect to all Securities, shall
contain such provisions as shall be deemed necessary or desirable to confirm
that all the rights, powers, trusts and duties of the retiring Trustee with
respect to the Securities of that or those series as to which the retiring
Trustee is not retiring shall continue to be vested in the retiring Trustee, and
(3) shall add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee, it being understood that nothing herein or
in such supplemental indenture shall constitute such Trustees co-trustees of the
same trust, that each such Trustee shall be trustee of a trust or trusts
hereunder separate and apart from any trust or trusts hereunder administered by
any other such Trustee and that no Trustee shall be responsible for any notice
given to, or received by, or any act or failure to act on the part of any other
Trustee hereunder, and upon the execution and delivery of such supplemental
indenture the resignation or removal of the retiring Trustee shall become
effective to the extent provided therein, such retiring Trustee shall with
respect to the Securities of that or those series to which the appointment of
such successor Trustee relates have no further responsibility for the exercise
of rights and powers or for the performance of the duties and obligations vested
in the Trustee under this Indenture other than as hereinafter expressly set
forth, and each such successor Trustee without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and duties
of the retiring Trustee with respect to the Securities of that or those series
to which the appointment of such successor Trustee relates; but, on request of
the Company or any successor Trustee, such retiring Trustee shall duly assign,
transfer and deliver to such successor Trustee, to the extent contemplated by
such supplemental indenture, the property and money held by such retiring
Trustee hereunder with respect to the Securities of that or those series to
which the appointment of such successor Trustee relates.
(c) Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in
paragraph (a) or (b) of this Section, as the case may be.
(d) No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
12. Merger, Conversion, Consolidation or Succession to Business.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or
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consolidation to such authenticating Trustee may adopt such authentication and
deliver the Securities so authenticated with the same effect as if such
successor Trustee had itself authenticated such Securities.
13. Preferential Collection of Claims Against Company.
(a) Subject to Subsection (b) of this Section, if the Trustee shall be or
shall become a creditor, directly or indirectly, secured or unsecured, of the
Company within four months prior to a default, as defined in Subsection (c) of
this Section, or subsequent to such a default, then, unless and until such
default, shall be cured, the Trustee shall set apart and hold in a special
account for the benefit of the Trustee individually, the Holders of the
Securities and coupons and the holders of other indenture securities (as defined
in Subsection (c) of this Section):
(1) an amount equal to any and all reductions in the amount due and
owing upon any claim as such creditor in respect of principal or interest,
effected after the beginning of such four months' period and valid as
against the Company and its other creditors, except any such reduction
resulting from the receipt or disposition of any property described in
paragraph (2) of this Subsection, or from the exercise of any right of set-
off which the Trustee could have exercised if a petition in bankruptcy had
been filed by or against the Company upon the date of such default; and
(2) all property received by the Trustee in respect of any claim as
such creditor, either as security therefor, or in satisfaction or
composition thereof, or otherwise, after the beginning of such four months'
period, or an amount equal to the proceeds of any such property, if
disposed of, subject, however, to the rights, if any, of the Company and
its other creditors in such property or such proceeds.
Nothing herein contained, however, shall affect the right of the Trustee:
(A) to retain for its own account (i) payments made on account of any
such claim by any Person (other than the Company) who is liable thereon,
and (ii) the proceeds of the bona fide sale of any such claim by the
Trustee to a third Person, and (iii) distributions made in cash, securities
or other property in respect of claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to
the Federal Bankruptcy Code or applicable State law;
(B) to realize, for its own account, upon any property held by it as
security for any such claim, if such property was so held prior to the
beginning of such four months' period;
(C) to realize, for its own account, but only to the extent of the
claim hereinafter mentioned, upon any property held by it as security for
any such claim, if such claim was created after the beginning of such four
months' period and such property was received as security therefor
simultaneously with the creation thereof, and if the
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Trustee shall sustain the burden of proving that at the time such property
was so received the Trustee had no reasonable cause to believe that a
default, as defined in Subsection (c) of this Section, would occur within
four months; or
(D) to receive payment on any claim referred to in paragraph (B) or
(C), against the release of any property held as security for such claim as
provided in paragraph (B) or (C), as the case may be, to the extent of the
fair value of such property.
For the purposes of paragraphs (B), (C) and (D), property substituted after
the beginning of such four months' period for property held as security at the
time of such substitution shall, to the extent of the fair value of the property
released, have the same status as the property released, and, to the extent that
any claim referred to in any of such paragraphs is created in renewal of or in
substitution for or for the purpose of repaying or refunding any pre-existing
claim of the Trustee as such creditor, such claim shall have the same status as
such pre-existing claim.
If the Trustee shall be required to account, the funds and property held in
such special account and the proceeds thereof shall be apportioned between the
Trustee, the Holders of Securities and the holders of other indenture securities
in such manner that the Trustee, the Holders of Securities and the holders of
other indenture securities realize, as a result of payments from such special
account and payments of dividends on claims filed against the Company in
bankruptcy or receivership or in proceedings for reorganization pursuant to the
Federal Bankruptcy Code or applicable State law, the same percentage of their
respective claims, figured before crediting to the claim of the Trustee anything
on account of the receipt by it from the Company of the funds and property in
such special account and before crediting to the respective claims of the
Trustee and the Holders of Securities and the holders of other indenture
securities dividends on claims filed against the Company in bankruptcy or
receivership or in proceedings for reorganization pursuant to the Federal
Bankruptcy Code or applicable State law, but after crediting thereon receipts on
account of the indebtedness represented by their respective claims from all
sources other than from such dividends and from funds and property so held in
such special account. As used in this paragraph, with respect to any claim, the
term "dividends" shall include any distribution with respect to such claim, in
bankruptcy or receivership or proceedings for reorganization pursuant to the
Federal Bankruptcy Code or applicable State law, whether such distribution is
made in cash, securities, or other property, but shall not include any such
distribution with respect to the secured portion, if any, of such claim. The
court in which such bankruptcy, receivership or proceedings for reorganization
is pending shall have jurisdiction (i) to apportion between the Trustee and the
Holders of Securities and the holders of other indenture securities, in
accordance with the provisions of this paragraph, the funds and property held in
such special account and proceeds thereof, or (ii) in lieu of such
apportionment, in whole or in part, to give to the provisions of this paragraph
due consideration in determining the fairness of the distributions to be made to
the Trustee and the Holders of Securities and the holders of other indenture
securities with respect to their respective claims, in which event it shall not
be necessary to liquidate or to appraise the value of any securities or other
property
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held in such special account or as security for any such claim, or to make a
specific allocation of such distributions as between the secured and unsecured
portions of such claims, or otherwise to apply the provisions of this paragraph
as a mathematical formula.
Any Trustee which has resigned or been removed after the beginning of such
four months' period shall be subject to the provisions of this Subsection as
though such resignation or removal had not occurred. If any Trustee has
resigned or been removed prior to the beginning of such four months' period, it
shall be subject to the provisions of this Subsection if and only if the
following conditions exist:
(i) the receipt of property or reduction of claim, which would
have given rise to the obligation to account, if such Trustee had
continued as Trustee, occurred after the beginning of such four
months' period; and
(ii) such receipt of property or reduction of claim occurred
within four months after such resignation or removal.
(b) There shall be excluded from the operation of Subsection (a) of this
Section a creditor relationship arising from:
(1) the ownership or acquisition of securities issued under any
indenture, or any security or securities having a maturity of one year or
more at the time of acquisition by the Trustee;
(2) advances authorized by a receivership or bankruptcy court of
competent jurisdiction, or by this Indenture, for the purpose of preserving
any property which shall at any time be subject to the lien of this
Indenture or of discharging tax liens or other prior liens or encumbrances
thereon, if notice of such advances and of the circumstances surrounding
the making thereof is given to the Holders of Securities at the time and in
the manner provided in this Indenture;
(3) disbursements made in the ordinary course of business in the
capacity of trustee under an indenture, transfer agent, registrar,
custodian, paying agent, fiscal agent or depositary, or other similar
capacity;
(4) an indebtedness created as a result of services rendered or
premises rented; or an indebtedness created as a result of goods or
securities sold in a cash transaction, as defined in Subsection (c) of this
Section;
(5) the ownership of stock or of other securities of a corporation
organized under the provisions of Section 25(a) of the Federal Reserve Act,
as amended, which is directly or indirectly a creditor of the Company; or
(6) the acquisition, ownership, acceptance or negotiation of any
drafts, bills of exchange, acceptances or obligations which fall within the
classification of self-liquidating paper as defined in Subsection (c) of
this Section.
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(c) For the purpose of this Section only:
(1) the term "default" means any failure to make payment in full of
the principal of or interest on any of the Securities or upon the other
indenture securities when and as such principal or interest becomes due and
payable;
(2) the term "other indenture securities" means securities upon which
the Company is an obligor outstanding under any other indenture (i) under
which indenture and as to which securities the Trustee is also trustee,
(ii) which contains provisions substantially similar to the provisions of
this Section, and (iii) under which a default exists at the time of the
apportionment of the funds and property held in such special account;
(3) the term "cash transaction" means any transaction in which full
payment for goods or securities sold is made within seven days after
delivery of the goods or securities in currency or in checks or other
orders drawn upon banks or bankers and payable upon demand;
(4) the term "self-liquidating paper" means any draft, bill of
exchange, acceptance or obligation which is made, drawn, negotiated or
incurred by the Company for the purpose of financing the purchase,
processing, manufacture, shipment, storage or sale of goods, wares or
merchandise and which is secured by documents evidencing title to,
possession of, or lien upon, the goods, wares or merchandise or the
receivables or proceeds arising from the sale of the goods, wares or
merchandise previously constituting the security, provided the security is
received by the Trustee simultaneously with the creation of the creditor
relationship with the Company arising from the making, drawing, negotiating
or incurring of the draft, bill of exchange, acceptance or obligation; and
(5) the term "Company" means any obligor upon the Securities.
14. Appointment of Authenticating Agent.
The Trustee may appoint an Authenticating Agent or Agents with respect to
one or more series of Securities which shall be authorized to act on behalf of
the Trustee to authenticate Securities of such series issued upon original issue
or exchange, registration of transfer or partial redemption thereof or pursuant
to Section 306, and Securities so authenticated shall be entitled to the
benefits of this Indenture and shall be valid and obligatory for all purposes as
if authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Company and shall at all times be a corporation organized and
doing business under the laws of the United States
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of America, any State thereof or the District of Columbia, authorized under such
laws to act as Authenticating Agent, having a combined capital and surplus of
not less than $5,000,000 and subject to supervision or examination by Federal or
State authority. If such Authenticating Agent publishes reports of condition at
least annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any corporation succeeding to the corporate agency or
corporate trust business of an Authenticating Agent, shall continue to be an
Authenticating Agent, provided such corporation shall be otherwise eligible
under this Section, without the execution or filing of any paper or any further
act on the part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and to the Company. The Trustee may at any time
terminate the agency of an Authenticating Agent by giving written notice thereof
to such Authenticating Agent and to the Company. Upon receiving such a notice
of resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall (i) mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Registered Securities, if any, of the series with respect to which such
Authenticating Agent will serve, as their names and addresses appear in the
Security Register, and (ii) if Securities of the series are issued as Bearer
Securities, publish notice of such appointment at least once in an Authorized
Newspaper in the place where such successor Authenticating Agent has its
principal office if such office is located outside the United States. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Trustee agrees to pay each Authenticating Agent from time to time
reasonable compensation for its services under this Section, and the Trustee
shall be entitled to be reimbursed for such payments, subject to the provisions
of Section 607.
The provisions of Sections 308, 604 and 605 shall be applicable to each
Authenticating Agent.
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If an appointment with respect to one or more series is made pursuant to
this Section, the Securities of such series may have endorsed thereon, in
addition to the Trustee's certificate of authentication, an alternate
certificate of authentication in the following form:
This is one of the Securities of the series designated therein referred to
in the within-mentioned Indenture.
______________________________________
As Trustee
By:___________________________________
As Authenticating Agent
By:___________________________________
Authorized Signatory
If all of the Securities of any series may not be originally issued at one
time, and if the Trustee does not have an office capable of authenticating
Securities upon original issuance located in a Place of Payment where the
Company wishes to have Securities of such series authenticated upon original
issuance, the Trustee, if so requested in writing (which writing need not comply
with Section 102) by the Company, shall appoint in accordance with this Section
614 an Authenticating Agent having an office in a Place of Payment designated by
the Company with respect to such series of Securities.
Article Seven
Holder's Lists and Reports by Trustee and Company
1. Company to Furnish Trustee Names and Addresses of Holders.
The Company will furnish or cause to be furnished to the Trustee
(a) semi-annually, not later than fifteen days after the Regular Record
Date for interest for each series of Securities, a list, in such form as the
Trustee may reasonably require, of the names and addresses of the Holders of
Registered Securities of such series as of such Regular Record Date, or if there
is no Regular Record Date for interest for such series of Securities, semi-
annually, upon such dates as are set forth in the Board Resolution or indenture
supplemental hereto authorizing such series, and
(b) at such other times as the Trustee may request in writing, within 30
days after the receipt by the Company of any such request, a list of similar
form and content as of a date not more than 15 days prior to the time such list
is furnished,
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provided, however, that, so long as the Trustee is the Security Registrar, no
such list shall be required to be furnished.
2. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders of Securities (i) contained in
the most recent list furnished to the Trustee for each series as provided in
Section 701, (ii) received by the Trustee for each series in the capacity of
Security Registrar if the Trustee is then acting in such capacity and (iii)
filed with it within the two preceding years pursuant to Section 703 (c) (2).
The Trustee may destroy any list furnished to it as provided in Section 701 upon
receipt of a new list so furnished, and destroy not earlier than two years after
filing, any information filed with it pursuant to Section 703 (c) (2).
(b) If three or more Holders of Securities of any series (hereinafter
referred to as "applicants") apply in writing to the Trustee, and furnish to the
Trustee reasonable proof that each such applicant has owned a Security of such
series for a period of at least six months preceding the date of such
application, and such application states that the applicants desire to
communicate with other Holders of Securities of such series with respect to
their rights under this Indenture or under the Securities and is accompanied by
a copy of the form of proxy or other communication which such applicants propose
to transmit, then the Trustee shall, within five business days after the receipt
of such application, at its election, either
(i) afford such applicants access to the information preserved
at the time by the Trustee in accordance with Section 702(a), or
(ii) inform such applicants as to the approximate number of
Holders of Securities whose names and addresses appear in the
information preserved at the time by the Trustee in accordance with
Section 702 (a), and as to the approximate cost of mailing to such
Holders the form of proxy or other communication, if any, specified in
such application.
If the Trustee shall elect not to afford such applicants access to such
information, the Trustee shall, upon the written request of such applicants,
mail to each Holder of Securities whose name and address appears in the
information preserved at the time by the Trustee in accordance with Section
702(a), a copy of the form of proxy or other communication which is specified in
such request, with reasonable promptness after a tender to the Trustee of the
material to be mailed and of payment, or provision for the payment, of the
reasonable expenses of mailing, unless within five days after such tender the
Trustee shall mail to such applicants and file with the Commission, together
with a copy of the material to be mailed, a written statement to the effect
that, in the opinion of the Trustee, such mailing would be contrary to the best
interests of the Holders of Securities or would be in violation of applicable
law. Such written statement shall specify the basis of such opinion. If the
Commission, after opportunity for a hearing upon the
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objections specified in the written statement so filed, shall enter an order
refusing to sustain any of such objections or if, after the entry of an order
sustaining one or more of such objections, the Commission shall find, after
notice and opportunity for hearing, that all the objections so sustained have
been met and shall enter an order so declaring, the Trustee shall mail copies of
such material to all such Holders of Securities with reasonable promptness after
the entry of such order and the renewal of such tender; otherwise the Trustee
shall be relieved of any obligation or duty to such applicants respecting their
application.
(c) Every Holder of Securities or coupons, by receiving and holding the
same, agrees with the Company and the Trustee that neither the Company nor the
Trustee nor any Paying Agent nor any Security Registrar shall be held
accountable by reason of the disclosure of any such information as to the names
and addresses of the Holders of Securities in accordance with Section 702(b),
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under Section 702(b).
3. Reports by Trustee.
(a) Within 60 days after May 15 of each year commencing with the year
1984, the Trustee shall transmit by mail to all Holders of Securities, as their
names and addresses appear in the Security Register, a brief report dated as of
such May 15 with respect to:
(1) its eligibility under Section 609 and its qualifications under
Section 608, or in lieu thereof, if to the best of its knowledge it has
continued to be eligible and qualified under said Sections, a written
statement to such effect;
(2) the character and amount of any advances (and if the Trustee
elects so to state, the circumstances surrounding the making thereof) made
by the Trustee (as such) which remain unpaid on the date of such report,
and for the reimbursement of which it claims or may claim a lien or charge,
prior to that of the Securities, on any property or funds held or collected
by it as Trustee, except that the Trustee shall not be required (but may
elect) to report such advances if such advances so remaining unpaid
aggregate not more than 1/2 of 1% of the principal amount of the Securities
Outstanding on the date of such report;
(3) the amount, interest rate and maturity date of all other
indebtedness owing by the Company (or by any other obligor on the
Securities) to the Trustee in its individual capacity, on the date of such
report, with a brief description of any property held as collateral
security therefor, except an indebtedness based upon a creditor
relationship arising in any manner described in Section 613 (b) (2), (3),
(4) or (6);
(4) the property and funds, if any, physically in the possession of
the Trustee as such on the date of such report;
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(5) any additional issue of Securities which the Trustee has not
previously reported; and
(6) any action taken by the Trustee in the performance of its duties
hereunder which it has not previously reported and which in its opinion
materially affects the Securities, except action in respect of a default,
notice of which has been or is to be withheld by the Trustee in accordance
with Section 602.
(b) The Trustee shall transmit by mail to all Holders of Securities, as
provided in Subsection (c) of this Section, a brief report with respect to the
character and amount of any advances (and if the Trustee elects so to state, the
circumstances surrounding the making thereof) made by the Trustee (as such)
since the date of the last report transmitted pursuant to Subsection (a) of this
Section (or if no such report has yet been so transmitted, since the date of
execution of this instrument) for the reimbursement of which it claims or may
claim a lien or charge, prior to that of the Securities, on property or funds
collected by it as Trustee, and which it has not previously reported pursuant to
this Subsection, except that the Trustee shall not be required (but may elect)
to report such advances if such advances remaining unpaid at any time aggregate
10% or less of the principal amount of the Securities Outstanding at such time,
such report to be transmitted within 90 days after such time.
(c) Reports pursuant to this Section shall be transmitted by mail:
(1) to all Holders of Registered Securities, as the names and
addresses of such Holders appear in the Security Register;
(2) to such Holders of Bearer Securities as have, within the two
years preceding such transmission, filed their names and addresses with the
Trustee for that purpose; and
(3) except in the case of reports pursuant to Subsection (b) of this
Section, to each Holder of a Security whose name and address is preserved
at the time by the Trustee, as provided in Section 702(a).
(d) A copy of each such report shall, at the time of such transmission to
Holders of Securities, be filed by the Trustee with each stock exchange upon
which the Securities are listed, with the Commission and with the Company. The
Company will notify the Trustee when any Securities are listed on any stock
exchange.
4. Reports by Company.
The Company shall:
(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the
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Commission may from time to time by rules and regulations prescribe) which
the Company may be required to file with the Commission pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934; or, if the
Company is not required to file information, documents or reports pursuant
to either of said Sections, then it shall file with the Trustee and the
Commission, in accordance with rules and regulations prescribed from time
to time by the Commission, such of the supplementary and periodic
information, documents and reports which may be required pursuant to
Section 13 of the Securities Exchange Act of 1934 in respect of a security
listed and registered on a national securities exchange as may be
prescribed from time to time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Company with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit within 30 days after the filing thereof with the
Trustee, in the manner and to the extent provided in Section 703(c) with
respect to reports pursuant to Section 703(a), such summaries of any
information, documents and reports required to be filed by the Company
pursuant to paragraphs (1) and (2) of this Section as may be required by
rules and regulations prescribed from time to time by the Commission.
Article Eight
Consolidation, Merger, Sale, Lease or Conveyance
1. Consolidations and Mergers of Company and Sales, Leases and
Conveyances Permitted Subject to Certain Conditions.
The Company may consolidate with, or sell, lease or convey all or
substantially all of its assets to, or merge with or into any other corporation,
provided that in any such case, (i) either the Company shall be the continuing
corporation, or the successor corporation shall be a corporation organized and
existing under the laws of the United States of America or a State thereof and
such successor corporation shall expressly assume the due and punctual payment
of the principal of (and premium, if any), any interest on, and any Additional
Amounts payable pursuant to Section 1004 with respect to, all the Securities,
according to their tenor, and the due and punctual performance and observance of
all of the covenants and conditions of this Indenture to be performed by the
Company by supplemental indenture satisfactory to the Trustee, executed and
delivered to the Trustee by such corporation, and (ii) the Company or such
successor corporation, as the case may be, shall not, immediately after such
merger or consolidation, or such sale, lease or conveyance, be in default in the
performance of any such covenant or condition.
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2. Rights and Duties of Successor Corporation.
In case of any such consolidation, merger, sale, lease or conveyance and
upon any such assumption by the successor corporation, such successor
corporation shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the party of the first part, and the
predecessor corporation, except in the event of a lease, shall be relieved of
any further obligation under this Indenture and the Securities and coupons. Such
successor corporation thereupon may cause to be signed, and may issue either in
its own name or in the name of the Company, any or all of the Securities and
coupons issuable hereunder which theretofore shall not have been signed by the
Company and delivered to the Trustee; and, upon the order of such successor
corporation, instead of the Company, and subject to all the terms, conditions
and limitations in this Indenture prescribed, the Trustee shall authenticate and
shall deliver any Securities and coupons which previously shall have been signed
and delivered by the officers of the Company to the Trustee for authentication,
and any Securities or coupons which such successor corporation thereafter shall
cause to be signed and delivered to the Trustee for that purpose. All the
Securities and coupons so issued shall in all respects have the same legal rank
and benefit under this Indenture as the Securities and coupons theretofore or
thereafter issued in accordance with the terms of this Indenture as though all
of such Securities and coupons had been issued at the date of the execution
hereof.
In case of any such consolidation, merger, sale, lease or conveyance, such
changes in phraseology and form (but not in substance) may be made in the
Securities and coupons thereafter to be issued as may be appropriate.
3. Officers' Certificate and Opinion of Counsel.
The Trustee, subject to the provisions of Sections 601 and 603, may receive
an Officers' Certificate and an Opinion of Counsel as conclusive evidence that
any such consolidation, merger, sale, lease or conveyance, and any such
assumption, complies with the provisions of this Article.
Article Nine
Supplemental Indentures
1. Supplemental Indentures without Consent of Holders.
Without the consent of any Holders of Securities or coupons, the Company,
when authorized by a Board Resolution, and the Trustee, at any time and from
time to time, may enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
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(1) to evidence the succession of another corporation to the Company,
and the assumption by any such successor of the covenants of the Company
herein and in the Securities contained; or
(2) to add to the covenants of the Company, for the benefit of the
Holders of all or any series of Securities (and if such covenants are to be
for the benefit of less than all series of Securities, stating that such
covenants are expressly being included solely for the benefit of such
series) or to surrender any right or power herein conferred upon the
Company; or
(3) to add to or change any of the provisions of this Indenture to
provide that Bearer Securities may be registrable as to principal, to
change or eliminate any restrictions on the payment of principal (or
premium, if any) on Registered Securities or of principal (or premium, if
any) or any interest on Bearer Securities, to permit Registered Securities
to be exchanged for Bearer Securities or to permit the issuance of
Securities in uncertificated form, provided any such action shall not
adversely affect the interests of the Holders of Securities of any series
or any related coupons in any material respect; or
(4) to establish the form of terms of Securities of any series as
permitted by Sections 201 and 301; or
(5) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one or
more series and to add to or change any of the provisions of this Indenture
as shall be necessary to provide for or facilitate the administration of
the trusts hereunder by more than one Trustee, pursuant to the requirements
of Section 611(b); or
(6) to cure any ambiguity, to correct or supplement any provision
herein which may be defective or inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture which shall not be inconsistent with
the provisions of this Indenture which shall not adversely affect the
interest of the Holders of Securities of any series or any related coupons
in any material respect; or
(7) to add to, delete from or revise the conditions, limitations and
restrictions on the authorized amount, terms or purposes of issue,
authentication and delivery of Securities, as herein set forth; or
(8) to secure the Securities pursuant to Section 1005.
2. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than 66K% in principal amount
of the Outstanding Securities of each series affected by such supplemental
indenture, by Act of said Holders delivered to the Company and the Trustee, the
Company, when authorized
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by a Board Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders of Securities of such series
under this Indenture; provided, however, that no such supplemental indenture
shall, without the consent of the Holder of each Outstanding Security affected
thereby,
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any Security, or reduce the principal amount
thereof or the rate of interest thereon or any Additional Amounts payable
in respect thereof, or any premium payable upon the redemption thereof, or
change the obligation of the Company to pay Additional Amounts pursuant to
Section 1004 (except as contemplated by Section 801(i) and permitted by
Section 901 (1)), or reduce the amount of the principal of an Original
Issue Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 502, or change any
Place of Payment where, or the coin or currency in which, any Security or
any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date), or
(2) reduce the percentage in principal amount of the Outstanding
Securities of any series, the consent of whose Holders is required for any
such supplemental indenture, or the consent of whose Holders is required
for any waiver (of compliance with certain provisions of this Indenture or
certain defaults hereunder and their consequences) provided for in this
Indenture, or reduce the requirements of Section 1404 for quorum or voting,
or
(3) modify any of the provisions of this Section, or Section 513, or
Section 1007, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Security affected
thereby.
A supplemental indenture which changes or eliminates any covenant or other
provision of this Indenture which has expressly been included solely for the
benefit of one or more particular series of Securities, or which modifies the
rights of the Holders of Securities of such series with respect to such covenant
or other provision, shall be deemed not to affect the rights under this
Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders of Securities under this
Section to approve the particular form of any proposed supplemental indenture,
but it shall be sufficient if such Act shall approve the substance thereof.
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3. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and (subject to Section 601) shall be fully protected in relying upon, an
Opinion of Counsel stating that the execution of such supplemental indenture is
authorized or permitted by this Indenture. The Trustee may, but shall not be
obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
4. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this Article, this
Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Securities theretofore or thereafter authenticated and delivered hereunder
and of any coupons appertaining thereto shall be bound thereby.
5. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
6. Reference in Securities to Supplemental Indentures.
Securities of any series authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article may, and shall if required
by the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Securities of any series so modified as to conform, in the opinion of the
Trustee and the Company, to any such supplemental indenture may be prepared and
executed by the Company and authenticated and delivered by the Trustee in
exchange for Outstanding Securities of such series.
ARTICLE TEN
Covenants
1. Payment of Principal, Premium, if any, and Interest.
The Company covenants and agrees for the benefit of the Holders of each
series of Securities that it will duly and punctually pay the principal of (and
premium, if any), interest on and any Additional Amounts payable in respect of
the Securities of that series in accordance with the terms of such series of
Securities, any coupons appertaining thereto and this Indenture. Any interest
due on and any Additional Amounts payable in respect of Bearer Securities on or
before Maturity, other than Additional Amounts, if any, payable as provided in
Section 1004 in respect of principal of (or premium, if any, on)
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such a Security, shall be payable only upon presentation and surrender of the
several coupons for such interest installments as are evidenced thereby as they
severally mature.
2. Maintenance of Office or Agency.
The Company will maintain in each Place of Payment for any series of
Securities an office or agency where Securities of that series (but not Bearer
Securities, except as otherwise provided below, unless such Place of Payment is
located outside the United States) may be presented or surrendered for payment,
where Securities of that series may be surrendered for registration of transfer
or exchange and where notices and demands to or upon the Company in respect of
the Securities of that series and this Indenture may be served. If Securities of
a series are issuable as Bearer Securities, the Company will maintain, subject
to any laws or regulations applicable thereto, an office or agency in a Place of
Payment for such series which is located outside the United States where
Securities of such series and the related coupons may be presented and
surrendered for payment (including payment of any additional amounts payable on
Securities of such series pursuant to Section 1004); provided, however, that if
the Securities of such series are listed on The Stock Exchange of the United
Kingdom and the Republic of Ireland or the Luxembourg Stock Exchange or any
other stock exchange located outside the United States and such stock exchange
shall so require, the Company will maintain a Paying Agent in London, Luxembourg
or any other required city located outside the United States, as the case may
be, so long as the Securities of such series are listed on such exchange. The
Company will give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the Corporate Trust Office of the
Trustee, except that Bearer Securities of that series and the related coupons
may be presented and surrendered for payment (including payment of any
Additional Amounts payable on Bearer Securities of that series pursuant to
Section 1004) at the place specified for the purpose pursuant to Section 301,
and the Company hereby appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands.
Except as otherwise provided in the form of Bearer Security of any
particular series pursuant to the provisions of this Indenture, no payment of
principal, premium or interest on Bearer Securities shall be made at any office
or agency of the Company in the United States or by check mailed to any address
in the United States or by transfer to an account maintained with a bank located
in the United States; provided, however, payment of principal of and any premium
and interest in U.S. dollars (including Additional Amounts payable in respect
thereof) on any Bearer Security may be made at the Corporate Trust Office of the
Trustee in the Borough of Manhattan, The City of New York if (but only if)
payment of the full amount of such principal, premium, interest or Additional
Amounts at all offices outside the United States maintained for the purpose by
the Company in accordance with this Indenture is illegal or effectively
precluded by exchange controls or other similar restrictions.
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The Company may also from time to time designate one or more other offices
or agencies where the Securities of one or more series may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designations; provided, however, that no such designation or rescission shall in
any manner relieve the Company of its obligation to maintain an office or agency
in each Place of Payment for Securities of any series for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and of any change in the location of any such other office or
agency. Unless otherwise set forth in a Board Resolution or indenture
supplemental hereto with respect to a series of Securities, the Company hereby
designates as the Place of Payment for each series of Securities the Borough of
Manhattan, The City of New York, and initially appoints the Trustee at its
Corporate Trust Office as the Company's office or agency for each of such
purposes in such city.
3. Money for Securities Payments to be Held in Trust.
If the Company shall at any time act as its own Paying Agent with respect
to any series of Securities, it will, on or before each due date of the
principal of (and premium, if any), or interest on, any of the Securities of
that series, segregate and hold in trust for the benefit of the Persons entitled
thereto a sum sufficient to pay the principal (and premium, if any) or interest
so becoming due until such sums shall be paid to such Persons or otherwise
disposed of as herein provided, and will promptly notify the Trustee of its
action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any series of
Securities, it will, on or prior to each due date of the principal of (and
premium, if any), or interest on, any Securities of that series, deposit with a
Paying Agent a sum sufficient to pay the principal (and premium, if any) or
interest so becoming due, such sum to be held in trust for the benefit of the
Persons entitled to such principal, premium or interest, and (unless such Paying
Agent is the Trustee) the Company will promptly notify the Trustee of its action
or failure so to act.
The Company will cause each Paying Agent for any series of Securities other
than the Trustee to execute and deliver to the Trustee an instrument in which
such Paying Agent shall agree with the Trustee, subject to the provisions of
this Section, that such Paying Agent will
(1) hold all sums held by it for the payment of the principal of (and
premium, if any) or interest on Securities of that series in trust for the
benefit of the Persons entitled thereto until such sums shall be paid to
such Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Securities of that series) in the making of any
payment of principal (and premium, if any) or interest on the Securities of
that series; and
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(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the satisfaction
and discharge of this Indenture or of any other purpose, pay, or by Company
Order direct any Paying Agent to pay, to the Trustee all sums held in trust by
the Company or such Paying Agent, such sums to be held by the Trustee upon the
same trusts as those upon which such sums were held by the Company or such
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.
Except as otherwise provided in the form of Securities of any particular
series pursuant to the provisions of this Indenture, any money deposited with
the Trustee or any Paying Agent, or then held by the Company, in trust for the
payment of the principal of (and premium, if any) or interest on any Security of
any series and remaining unclaimed for three years after such principal (and
premium, if any) or interest has become due and payable shall be paid to the
Company on Company Request, or (if then held by the Company) shall be discharged
from such trust; and the Holder of such Security or any coupon appertaining
thereto shall thereafter, as an unsecured general creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that the
aforementioned three year period shall be two years with respect to Securities
of any series established pursuant to Section 301 on and after April 1, 1987;
provided further, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Company cause to
be published once, in an Authorized Newspaper in each Place of Payment or to be
mailed to Holders of Registered Securities, or both, notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication or mailing, any unclaimed
balance of such money then remaining will be repaid to the Company.
4. Additional Amounts.
If the Securities of a series provide for the payment of Additional
Amounts, the Company will pay to the Holder of any Security of any series or any
coupon appertaining thereto Additional Amounts as provided therein. Whenever in
this Indenture there is mentioned, in any context, the payment of the principal
of (or premium, if any) or interest on, or in respect of, any Security of any
series or any related coupon or the net proceeds received on the sale or
exchange of any Security of any series, such mention shall be deemed to include
mention of the payment of Additional Amounts provided for in this Section to the
extent that, in such context, Additional Amounts are, were or would be payable
in respect thereof pursuant to the provisions of this Section and express
mention of the payment of Additional Amounts (if applicable) in any provisions
hereof shall not
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be construed as excluding Additional Amounts in those provisions hereof where
such express mention is not made.
If the Securities of a series provide for the payment of Additional
Amounts, at least 10 days prior to the first Interest Payment Date with respect
to that series of Securities (or if the Securities of that series will not bear
interest prior to Maturity, the first day on which a payment of principal (and
premium, if any) is made), and at least 10 days prior to each date of payment of
principal (and premium, if any) or interest if there has been any change with
respect to the matters set forth in the below-mentioned Officers' Certificate,
the Company will furnish the Trustee and the Company's principal Paying Agent or
Paying Agents, if other than the Trustee, with an Officers' Certificate
instructing the Trustee and such Paying Agent or Paying Agents whether such
payment of principal (and premium, if any) or interest on the Securities of that
series shall be made to Holders of Securities of that series or the related
coupons who are United States Aliens without withholding for or on account of
any tax, assessment or other governmental charge described in the Securities of
that Series. If any such withholding shall be required, then such Officers'
Certificate shall specify by country the amount, if any, required to be withheld
on such payments to such Holders of Securities or coupons and the Company will
pay to the Trustee or such Paying Agent the Additional Amounts required by this
Section. The Company covenants to indemnify the Trustee and any Paying Agent
for, and to hold them harmless against, any loss, liability or expense
reasonably incurred without negligence or bad faith on their part arising out of
or in connection with actions taken or omitted by any of them in reliance on any
Officers' Certificate furnished pursuant to this Section.
5. Statement as to Compliance; Notice of Certain Defaults.
(a) The Company will deliver to the Trustee, within 120 days after the end
of each fiscal year, a written statement, which need not comply with Section
102, signed by the Chairman of the Board, the President or a Vice President and
by the Treasurer, an Assistant Treasurer, the Controller or an Assistant
Controller of the Company, stating, as to each signer thereof, that
(1) a review of the activities of the Company during such year and of
performance under this Indenture has been made under his supervision, and
(2) to the best of his knowledge, based on such review, (a) the
Company has fulfilled all of its obligations under this Indenture
throughout such year, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default known to him and the
nature and status thereof, and (b) no event has occurred and is continuing
which is, or after notice or lapse of time or both would become, an Event
of Default, or, if such an event has occurred and is continuing, specifying
each such event known to him and the nature and status thereof.
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(b) The Company will deliver to the Trustee within five days after the
occurrence thereof, written notice of any event which after notice or lapse of
time or both would become an Event of Default pursuant to Clause (4) of Section
501.
6. Limitation Upon Creation of Liens on Voting Stock of Certain
Subsidiaries.
The Company will not, and it will not permit any Subsidiary at any time
directly or indirectly to, create, assume, incur or permit to exist any
indebtedness for borrowed money secured by a pledge, lien or other encumbrance
(any pledge, lien or other encumbrance being hereinafter in this Section
referred to as a "lien") on the Voting Stock of any Subsidiary (other than a
Subsidiary which, at the time of incurrence of such secured indebtedness, has a
net worth, as determined in accordance with generally accepted accounting
principles, of less than $3,000,000) without making effective provision whereby
the Outstanding Securities and coupons appertaining thereto, if any (and, if the
Company so elects, any other indebtedness ranking on a parity with the
Securities), shall be secured equally and ratably with such secured indebtedness
so long as such other indebtedness shall be so secured; provided, however, that
the foregoing covenant shall not be applicable to liens for taxes or assessments
or governmental charges or 1evies not then due and delinquent or the validity of
which is being contested in good faith or which are less than $1,000,000 in
amount, liens created by or resulting from any litigation or legal proceeding
which is currently being contested in good faith by appropriate proceedings or
which involve claims of less than $1,000,000, or deposits to secure (or in lieu
of) surety, stay, appeal or customs bonds.
If the Company shall hereafter be required to secure the Securities and
coupons appertaining thereto, if any, equally and ratably with any other
indebtedness pursuant to this Section, (i) the Company will promptly deliver to
the Trustee an Officers' Certificate stating that the foregoing covenant has
been complied with, and an Opinion of Counsel stating that in the opinion of
such counsel the foregoing covenant has been complied with and that any
instruments executed by the Company or any Subsidiary in the performance of the
foregoing covenant comply with the requirements of the foregoing covenant and
(ii) the Trustee is hereby authorized to enter into an indenture or agreement
supplemental hereto and to take such action, if any, as it may deem advisable to
enable it to enforce the rights of the holders of the Securities and coupons
appertaining thereto, if any, so secured.
7. Limitation on Disposition of Voting Stock of, and Merger and Sale of
Assets by, MLPF&S.
The Company will not:
(a) sell, transfer or otherwise dispose of any shares of Voting Stock of
MLPF&S or permit MLPF&S to issue, sell, or otherwise dispose of any shares of
its Voting Stock, unless, after giving effect to any such transaction, MLPF&S
remains a Controlled Subsidiary; or
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(b) permit MLPF&S to
(i) merge or consolidate, unless the surviving company is a
Controlled Subsidiary; or
(ii) convey or transfer its properties and assets substantially as an
entirety to any Person, except to one or more Controlled Subsidiaries.
8. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with any term,
provision or condition set forth in Sections 1004 to 1007 inclusive, with
respect to the Securities of any series if before the time for such compliance
the Holders of at least a majority in principal amount of the Outstanding
Securities of such series shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such term,
provision or condition, but no such waiver shall extend to or affect such term,
provision or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Company and the duties of
the Trustee in respect of any such term, provision or condition shall remain in
full force and effect.
Article Eleven
Redemption of Securities
1. Applicability of Article.
Redemption of Securities of any series at the option of the Company as
permitted or required by the terms of such Securities shall be made in
accordance with the terms of such Securities and this Article.
2. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities shall be evidenced by
a Company Order. In case of any redemption at the election of the Company of
less than all of the Securities of any series with the same issue date, interest
rate and Stated Maturity, the Company shall, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the Trustee of such Redemption Date and of
the principal amount of Securities of such series to be redeemed.
3. Selection by Trustee of Securities to be Redeemed.
If less than all the Securities of any series with the same issue date,
interest rate and Stated Maturity are to be redeemed, the particular Securities
to be redeemed shall be selected not more than 60 days prior to the Redemption
Date by the Trustee, from the
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Outstanding Securities of such series not previously called for redemption, by
such method as the Trustee shall deem fair and appropriate and which may provide
for the selection for redemption of portions of the principal amount of
Registered Securities of such series; provided, however, that no such partial
redemption shall reduce the portion of the principal amount of a Registered
Security of such series not redeemed to less than the minimum denomination for a
Security of that series established pursuant to Section 302.
The Trustee shall promptly notify the Company and the Security Registrar
(if other than itself) in writing of the Securities selected for redemption and,
in the case of any Securities selected for partial redemption, the principal
amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise requires,
all provisions relating to the redemption of Securities shall relate, in the
case of any Securities redeemed or to be redeemed only in part, to the portion
of the principal of such Securities which has been or is to be redeemed.
4. Notice of Redemption.
Notice of redemption shall be given in the manner provided in Section 106,
not less than 30 nor more than 60 days prior to the Redemption Date, unless a
shorter period is specified in the Securities to be redeemed, to the Holders of
Securities to be redeemed. Failure to give notice by mailing in the manner
herein provided to the Holder of any Registered Securities designated for
redemption as a whole or in part, or any defect in the notice to any such
Holder, shall not affect the validity of the proceedings for the redemption of
any other Securities or portion thereof.
Any notice that is mailed to the Holder of any Registered Securities in the
manner herein provided shall be conclusively presumed to have been duly given,
whether or not such Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities of any series are to be
redeemed, the identification (and, in the case of partial redemption, the
principal amount) of the particular Securities to be redeemed,
(4) in case any Registered Security is to be redeemed in part only,
the notice which relates to such Security shall state that on and after the
Redemption Date, upon surrender of such Security, the Holder of such
Security will receive, without charge, a new Registered Security or
Registered Securities of authorized denominations for the principal amount
thereof remaining unredeemed,
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(5) that on the Redemption Date the Redemption Price will become due
and payable upon each such Security to be redeemed, and, if applicable,
that interest thereon shall cease to accrue on and after said date,
(6) the place or places where such Securities, together in the case
of Bearer Securities with all coupons appertaining thereto, if any,
maturing after the Redemption Date, are to be surrendered for payment of
the Redemption Price, and
(7) that the redemption is for a sinking fund, if such is the case.
A notice of redemption published as contemplated by Section 106 need not
identify particular Registered Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
5. Deposit of Redemption Price.
On or prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and (except if the Redemption
Date shall be an Interest Payment Date) accrued interest on and any Additional
Amounts with respect thereto, all the Securities or portions thereof which are
to be redeemed on that date.
6. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the Securities so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest and the coupons for such
interest appertaining to any Bearer Securities so to be redeemed, except to the
extent provided below, shall be void. Upon surrender of any such Security for
redemption in accordance with said notice, together with all coupons, if any,
appertaining thereto maturing after the Redemption Date, such Security shall be
paid by the Company at the Redemption Price, together with accrued interest (and
any Additional Amounts) to the Redemption Date; provided, however, that
installments of interest on Bearer Securities whose Stated Maturity is on or
prior to the Redemption Date shall be payable only upon presentation and
surrender of coupons for such interest (at an office or agency located outside
the United States except as otherwise provided in Section 1002), and provided,
further, that installments of interest on Registered Securities whose Stated
Maturity is on or prior to the Redemption Date shall be payable to the Holders
of such Securities, or one or more Predecessor Securities, registered as such at
the close of
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business on the relevant Record Dates according to their terms and
the provisions of Section 307.
If any Bearer Security surrendered for redemption shall not be accompanied
by all appurtenant coupons maturing after the Redemption Date, such Security may
be paid after deducting from the Redemption Price an amount equal to the face
amount of all such missing coupons, or the surrender of such missing coupon or
coupons may be waived by the Company and the Trustee if there be furnished to
them such security or indemnity as they may require to save each of them and any
Paying Agent harmless. If thereafter the Holder of such Security shall surrender
to the Trustee or any Paying Agent any such missing coupon in respect of which a
deduction shall have been made from the Redemption Price, such Holder shall be
entitled to receive the amount so deducted; provided, however, that interest
(and any Additional Amounts) represented by coupons shall be payable only upon
presentation and surrender of those coupons at an office or agency located
outside of the United States except as otherwise provided in Section 1002.
If any Security called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate prescribed therefor in the
Security.
7. Securities Redeemed in Part.
Any Registered Security which is to be redeemed only in part shall be
surrendered at any office or agency of the Company maintained for that purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or his attorney
duly authorized in writing) and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security without service charge,
a new Registered Security or Securities of the same series, containing identical
terms and provisions, of any authorized denomination as requested by such Holder
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Security so surrendered.
ARTICLE TWELVE
Sinking Funds
1. Applicability of Article.
The provisions of this Article shall be applicable to any sinking fund for
the retirement of Securities of a series, except as otherwise permitted or
required by any form of Security of such series issued pursuant to this
Indenture.
The minimum amount of any sinking fund payment provided for by the terms of
Securities of any series is herein referred to as a "mandatory sinking fund
payment", and
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any payment in excess of such minimum amount provided for by the terms of
Securities of such series is herein referred to as an "optional sinking fund
payment". If provided for by the terms of Securities of any series, the cash
amount of any sinking fund payment may be subject to reduction as provided in
Section 1202. Each sinking fund payment shall be applied to the redemption of
Securities of any series as provided for by the terms of Securities of such
series.
2. Satisfaction of Sinking Fund Payments with Securities.
The Company may, in satisfaction of all or any part of any sinking fund
payment with respect to the Securities of such series to be made pursuant to the
terms of such Securities as provided for by the terms of such series (1) deliver
Outstanding Securities of such series (other than any of such Securities
previously called for redemption or any of such Securities in respect of which
cash shall have been released to the Company), together in the case of any
Bearer Securities of such series with all unmatured coupons appertaining
thereto, and (2) apply as a credit Securities of such series which have been
redeemed either at the election of the Company pursuant to the terms of such
series of Securities or through the application of permitted optional sinking
fund payments pursuant to the terms of such Securities, provided that such
series of Securities have not been previously so credited. Such Securities shall
be received and credited for such purpose by the Trustee at the Redemption Price
specified in such Securities for redemption through operation of the sinking
fund and the amount of such sinking fund payment shall be reduced accordingly.
If as a result of the delivery or credit of Securities of any series in lieu of
cash payments pursuant to this Section 1202, the principal amount of Securities
of such series to be redeemed in order to exhaust the aforesaid cash payment
shall be less than $100,000, the Trustee need not call Securities of such series
for redemption, except upon Company Request, and such cash payment shall be held
by the Trustee or a Paying Agent and applied to the next succeeding sinking fund
payment, provided, however, that the Trustee or such Paying Agent shall at the
request of the Company from time to time pay over and deliver to the Company any
cash payment so being held by the Trustee or such Paying Agent upon delivery by
the Company to the Trustee of Securities of that series purchased by the Company
having an unpaid principal amount equal to the cash payment requested to be
released to the Company.
3. Redemption of Securities for Sinking Fund.
Not less than 60 days prior to each sinking fund payment date for any
series of Securities, the Company will deliver to the Trustee an Officers'
Certificate specifying the amount of the next ensuing mandatory sinking fund
payment for that series pursuant to the terms of that series, the portion
thereof, if any, which is to be satisfied by payment of cash and the portion
thereof, if any, which is to be satisfied by delivering and crediting of
Securities of that series pursuant to Section 1202, and the optional amount, if
any, to be added in cash to the next ensuing mandatory sinking fund payment, and
will also deliver to the Trustee any Securities to be so credited and not
theretofore delivered. If such Officers' Certificate shall specify an optional
amount to be added in cash to the next
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ensuing mandatory sinking fund payment, the Company shall thereupon be obligated
to pay the amount therein specified. Not less than 30 days before each such
sinking fund payment date the Trustee shall select the Securities to be redeemed
upon such sinking fund payment date in the manner specified in Section 1103 and
cause notice of the redemption thereof to be given in the name of and at the
expense of the Company in the manner provided in Section 1104. Such notice
having been duly given, the redemption of such Securities shall be made upon the
terms and in the manner stated in Sections 1106 and 1107.
Article Thirteen
Repayment At The Option Of Holders
1. Applicability of Article.
Securities of any series which are repayable at the option of the Holders
thereof before their Stated Maturity shall be repaid in accordance with the
terms of the Securities of such series. The repayment of any principal amount
of Securities pursuant to such option of the Holder to require repayment of
Securities before their Stated Maturity, for purposes of Section 309, shall not
operate as a payment, redemption or satisfaction of the indebtedness represented
by such Securities unless and until the Company, at its option, shall deliver or
surrender the same to the Trustee with a directive that such Securities be
cancelled. Notwithstanding anything to the contrary contained in this Article
Thirteen, in connection with any repayment of Securities, the Company may
arrange for the purchase of any Securities by an agreement with one or more
investment bankers or other purchasers to purchase such Securities by paying to
the Holders of such Securities on or before the close of business on the
repayment date an amount not less than the repayment price payable by the
Company on repayment of such Securities, and the obligation of the Company to
pay the repayment price of such Securities shall be satisfied and discharged to
the extent such payment is so paid by such purchasers.
Article Fourteen
Meetings of Holders of Securities.
1. Purposes for Which Meetings May Be Called.
If Securities of a series are issuable as Bearer Securities, a meeting of
Holders of Securities of such series may be called at any time and from time to
time pursuant to this Article to make, give or take any request, demand,
authorization, direction, notice, consent, waiver or other action provided by
this Indenture to be made, given or taken by Holders of Securities of such
series.
71
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2. Call, Notice and Place of Meetings.
(a) The Trustee may at any time call a meeting of Holders of Securities of
any series for any purpose specified in Section 1401, to be held at such time
and at such place in the Borough of Manhattan, The City of New York, or in
London as the Trustee shall determine. Notice of every meeting of Holders of
Securities of any series, setting forth the time and the place of such meeting
and in general terms the action proposed to be taken at such meeting, shall be
given, in the manner provided in Section 106, not less than 21 nor more than 180
days prior to the date fixed for the meeting.
(b) In case at any time the Company, pursuant to a Board Resolution, or
the Holders of at least 10% in principal amount of the Outstanding Securities of
any series shall have requested the Trustee to call a meeting of the Holders of
Securities of such series for any purpose specified in Section 1401, by written
request setting forth in reasonable detail the action proposed to be taken at
the meeting, and the Trustee shall not have made the first publication of the
notice of such meeting within 21 days after receipt of such request or shall not
thereafter proceed to cause the meeting to be held as provided herein, then the
Company or the Holders of Securities of such series in the amount above
specified, as the case may be, may determine the time and the place in the
Borough of Manhattan, The City of New York, or in London for such meeting and
may call such meeting for such purposes by giving notice thereof as provided in
subsection (a) of this Section.
3. Persons Entitled to Vote at Meetings.
To be entitled to vote at any meeting of Holders of Securities of any
series, a Person shall be (1) a Holder of one or more Outstanding Securities of
such series, or (2) a Person appointed by an instrument in writing as proxy for
a Holder or Holders of one or more Outstanding Securities of such series by such
Holder or Holders. The only Persons who shall be entitled to be present or to
speak at any meeting of Holders of Securities of any series shall be the Persons
entitled to vote at such meeting and their counsel, any representatives of the
Trustee and its counsel and any representatives of the Company and its counsel.
4. Quorum; Action.
The Persons entitled to vote a majority in principal amount of the
Outstanding Securities of a series shall constitute a quorum for a meeting of
Holders of Securities of such series; provided, however, that if any action is
to be taken at such meeting with respect to a consent or waiver which this
Indenture expressly provides may be given by the Holders of not less than
66/2/3/% in principal amount of the Outstanding Securities of a series, the
Persons entitled to vote 66/2/3/% in principal amount of the Outstanding
Securities of such series shall constitute a quorum. In the absence of a quorum
within 30 minutes of the time appointed for any such meeting, the meeting shall,
if convened at the request of Holders of Securities of such series, be
dissolved. In any other case the meeting may be adjourned for a period of not
less than 10 days as determined by the
72
<PAGE>
chairman of the meeting prior to the adjournment of such meeting. In the absence
of a quorum at any such adjourned meeting, such adjourned meeting may be further
adjourned for a period of not less than 10 days as determined by the chairman of
the meeting prior to the adjournment of such adjourned meeting. Notice of the
reconvening of any adjourned meeting shall be given as provided in Section
1402(a), except that such notice need be given only once not less than five days
prior to the date on which the meeting is scheduled to be reconvened. Notice of
the reconvening of an adjourned meeting shall state expressly the percentage, as
provided above, of the principal amount of the Outstanding Securities of such
series which shall constitute a quorum.
Except as limited by the proviso to Section 902, any resolution presented
to a meeting or adjourned meeting duly reconvened at which a quorum is present
as aforesaid may be adopted only by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Securities of that series;
provided, however, that, except as limited by the proviso to Section 902, any
resolution with respect to any consent or waiver which this Indenture expressly
provides may be given by the Holders of not less than 66/2/3/% in principal
amount of the Outstanding Securities of a series may be adopted at a meeting or
an adjourned meeting duly convened and at which a quorum is present as aforesaid
only by the affirmative vote of the Holders of 66/2/3/% in principal amount of
the Outstanding Securities of that series; and provided, further, that except as
limited by the proviso to Section 902, any resolution with respect to any
request, demand, authorization, direction, notice, consent, waiver or other
action which this Indenture expressly provides may be made, given or taken by
the Holders of a specified percentage, which is less than a majority, in
principal amount of the Outstanding Securities of a series may be adopted at a
meeting or an adjourned meeting duly reconvened and at which a quorum is present
as aforesaid by the affirmative vote of the Holders of such specified percentage
in principal amount of the Outstanding Securities of that series.
Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and the related coupons,
whether or not present or represented at the meeting.
5. Determination of Voting Rights; Conduct and Adjournment of Meetings.
(a) Notwithstanding any other provisions of this Indenture, the Trustee
may make such reasonable regulations as it may deem advisable for any meeting of
Holders of Securities of such series in regard to proof of the holding of
Securities of such series and of the appointment of proxies and in regard to the
appointment and duties of inspectors of votes, the submission and examination of
proxies, certificates and other evidence of the right to vote, and such other
matters concerning the conduct of the meeting as it shall deem appropriate.
Except as otherwise permitted or required by any such regulations, the holding
of Securities shall be proved in the manner specified in Section 104 and the
appointment of any proxy shall be proved in the manner specified in Section 104
or by having the signature of the person executing the proxy witnessed or
guaranteed by any
73
<PAGE>
trust company, bank or banker authorized by Section 104 to certify to the
holding of Bearer Securities. Such regulations may provide that written
instruments appointing proxies, regular on their face, may be presumed valid and
genuine without the proof specified in Section 104 or other proof.
(b) The Trustee shall, by an instrument in writing, appoint a temporary
chairman of the meeting, unless the meeting shall have been called by the
Company or by Holders of Securities as provided in Section 1402(b), in which
case the Company or the Holders of Securities of the series calling the meeting,
as the case may be, shall in like manner appoint a temporary chairman. A
permanent chairman and a permanent secretary of the meeting shall be elected by
vote of the Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting.
(c) At any meeting each Holder of a Security of such series or proxy shall
be entitled to one vote for each $1,000 principal amount of Securities of such
series held or represented by him; provided, however, that no vote shall be cast
or counted at any meeting in respect of any Security challenged as not
Outstanding and ruled by the chairman of the meeting to be not Outstanding. The
chairman of the meeting shall have no right to vote, except as a Holder of a
Security of such series or proxy.
(d) Any meeting of Holders of Securities of any series duly called
pursuant to Section 1402 at which a quorum is present may be adjourned from time
to time by Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting; and the
meeting may be held as so adjourned without further notice.
6. Counting Votes and Recording Action of Meetings.
The vote upon any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of such series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in triplicate of all votes cast at the meeting. A record, at least in
triplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 1402 and, if
applicable, Section 1404. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company, and another to the Trustee to be
preserved by the
74
<PAGE>
Trustee, the latter to have attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the matters
therein stated.
Article Fifteen
Miscellaneous Provisions
1. Securities in Foreign Currencies.
Whenever this Indenture provides for (i) any action by, or the
determination of any of the rights of, Holders of Securities of any series in
which not all of such Securities are denominated in the same currency, or (ii)
any distribution to Holders of Securities, in the absence of any provision to
the contrary in the form of Security of any particular series, any amount in
respect of any Security denominated in a currency other than United States
dollars shall be treated for any such action or distribution as that amount of
United States dollars that could be obtained for such amount on such reasonable
basis of exchange and as of the record date with respect to Registered
Securities of such series (if any) for such action, determination of rights or
distribution (or, if there shall be no applicable record date, such other date
reasonably proximate to the date of such action, determination of rights or
distribution) as the Company may specify in a written notice to the Trustee or,
in the absence of such written notice, as the Trustee may determine.
* * * * *
This instrument may be executed in any number of counterparts, each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same instrument.
75
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Fourth Supplemental
Indenture, dated as of April 1, 1987, and restatement of the Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
Merrill Lynch & Co., Inc.
[Corporate Seal]
By /s/ D. B. Brunson
-----------------------------------
Vice President and Treasurer
Attest:
/s/ Stephen M. M. Miller
- -----------------------------
Secretary
Manufacturers Hanover Trust Company
[Corporate Seal]
By /s/ F. J. Grippo
-----------------------------------
Vice President
Attest:
/s/ Joyce E. Behymer
- -----------------------------
Trust Officer
76
<PAGE>
State of New York: )
) ss.:
County of New York: )
On the 31st day of March, 1987, before me personally came D. B. Brunson, to
me known, who, being by me duly sworn, did depose and say that he is Vice
President and Treasurer of Merrill Lynch & Co., Inc., one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ Christa M. Bowen
--------------------------------------
Notary Public
[Notarial Seal] CHRISTA M. BOWEN
Notary Public, State of New York
No. 30-4723478
Qualified in Nassau County
Certificate filed in New York County
Commission Expires August 31, 1988
State of New York: )
) ss.:
County of New York: )
On the 31st day of March, 1987, before me personally came F. J. Grippo, to
me known, who, being by me duly sworn, did depose and say that he is a Vice
President of Manufacturers Hanover Trust Company, one of the corporations
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by authority of the Board of Directors of said
corporation, and that he signed his name thereto by like authority.
/s/ Christa M. Bowen
-------------------------------------
Notary Public
[Notarial Seal] CHRISTA M. BOWEN
Notary Public, State of New York
No. 30-4723478
Qualified in Nassau County
Certificate filed in New York County
Commission Expires August 31, 1988
77
<PAGE>
EXHIBIT 4 (ii)
MERRILL LYNCH & CO., INC.
TO
THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION)
as Successor Trustee
and
CHEMICAL BANK, as Resigning Trustee
(each with respect to the series designated
"Medium-Term Notes")
________________________________________
SIXTH SUPPLEMENTAL INDENTURE
Dated as of October 25, 1993
________________________________________
Supplemental to Indenture
Dated as of April 1, 1983
as Amended
<PAGE>
SIXTH SUPPLEMENTAL INDENTURE, dated as of October 25, 1993, to the Indenture (as
defined below), by and among MERRILL LYNCH & CO., INC., a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
having its principal office at the World Financial Center, New York, New York
10080, THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION), a national banking
association duly organized and existing under the laws of the United States of
America (the "Successor Trustee"), having its Corporate Trust Office at 4 Chase
MetroTech Center, Brooklyn, New York 11245, and CHEMICAL BANK, a corporation
duly organized and existing under the laws of the State of New York and
successor by merger to MANUFACTURERS HANOVER TRUST COMPANY (the "Resigning
Trustee"), having its Corporate Trust Office at 450 West 33rd Street, New York,
New York 10001.
RECITALS OF THE COMPANY
The Company has heretofore executed and delivered its Indenture, dated as
of April 1, 1983 (as amended to the date hereof, the "Indenture") to the
Resigning Trustee to provide for the issuance from time to time of its unsecured
and unsubordinated debentures, notes or other evidences of senior indebtedness,
including a series of Securities designated the Company's Medium-Term Notes (the
"Medium-Term Notes"). The term "Indenture" shall mean such Indenture as amended
by the Trust Indenture Reform Act of 1990.
Section 610(b) of the Indenture provides that the Trustee may resign at any
time with respect to the Securities of one or more series, and that should such
resignation occur, the Company, by a Board Resolution, pursuant to Section
610(e), shall authorize the appointment of a successor Trustee with respect to
the Securities of that or those series.
Section 610(a) of the Indenture provides that no resignation of the
retiring Trustee shall become effective until the acceptance of appointment by a
successor Trustee.
Sections 611(b) and 901(5) of the Indenture provide that the Company, the
retiring Trustee, and each successor Trustee with respect to the Securities of
such one or more series, when authorized by a Board Resolution, shall execute
and deliver an indenture supplemental to the Indenture, without the consent of
any Holders, to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the securities of one or more series.
The Resigning Trustee has notified the Company of its intention to resign
as Trustee with respect to the series of Securities designated Medium-Term Notes
issued under the Indenture, and the Successor Trustee has indicated its
willingness to accept such appointment as successor Trustee with respect to such
series.
The Company deems it advisable to supplement the indenture to provide for
such resignation and the successorship of the Successor Trustee with respect to
the series of Securities designated Medium-Term Notes.
<PAGE>
The Company has duly authorized the execution and delivery of this Sixth
Supplemental Indenture, and all actions necessary to make this Sixth
Supplemental Indenture a valid agreement of the Company, in accordance with its
terms, have been done.
NOW, THEREFORE, the Company, the Successor Trustee and the Resigning
Trustee, for and in consideration of the premises and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby covenant and agree, for the equal and proportionate benefit of all
Holders, as follows:
ARTICLE I
---------
THE RESIGNING TRUSTEE
---------------------
1. Pursuant to Section 610(b) of the Indenture, the Resigning Trustee
hereby notifies the Company that the Resigning Trustee is hereby resigning as
Trustee under the Indenture with respect to the series of Securities designated
Medium-Term Notes.
2. The Resigning Trustee hereby assigns, transfers, delivers and confirms
to the Successor Trustee (i) all the rights, title and interest of the Resigning
Trustee in and to the trust under the Indenture with respect to the series of
Securities designated Medium-Term Notes, (ii) all the rights, powers, trusts and
duties of the Trustee under the Indenture with respect to the series of
Securities designated Medium-Term Notes, and (iii) all property and money, if
any, held by the Resigning Trustee under the Indenture with respect to the
series of Securities designated Medium-Term Notes. The Resigning Trustee shall
execute and deliver such further instruments and shall do such other things as
the Successor Trustee may reasonably require so as to more fully and certainly
vest and confirm in the Successor Trustee, all the rights, powers, trusts and
duties hereby assigned, transferred, delivered and confirmed to the Successor
Trustee.
3. The Resigning Trustee hereby acknowledges and confirms that all of the
rights, powers, trusts and duties of the Resigning Trustee with respect to all
series of Securities issued under the Indenture other than those designated
Medium-Term Notes shall continue and remain vested in the Resigning Trustee.
SECTION 104. The Resigning Trustee hereby resigns as Paying Agent with
respect to the series of Securities designated Medium-Term Notes, as Registrar
with respect to the series of Securities designated Medium-Term Notes, and as
the office or agency maintained by the Company pursuant to Section 1002 of the
Indenture with respect to the series of Securities designated Medium-Term Notes.
ARTICLE II
----------
THE COMPANY
-----------
1. The Company hereby accepts the resignation of the Resigning Trustee as
Trustee under the Indenture with respect to the series of Securities designated
Medium-Term Notes.
3
<PAGE>
2. The Secretary or Assistant Secretary of the Company who is attesting
to the execution of this Agreement by the Company hereby certifies that Exhibit
A annexed hereto is a copy of the Board Resolutions which were duly adopted by
the Board of Directors of the Company, which resolutions are in full force and
effect on the date hereof, and which authorized certain officers of the Company
to (a) appoint the Successor Trustee as Trustee under the Indenture with respect
to the series of Securities designated Medium-Term Notes, and (b) execute and
deliver such agreements and other instruments as may be necessary or desirable
to effectuate the succession of the Successor Trustee as Trustee under the
Indenture with respect to the series of Securities designated Medium-Term Notes.
3. The Company hereby appoints the Successor Trustee as Trustee under the
Indenture with respect to the series of Securities designated Medium-Term Notes
to succeed to, and hereby confirms to, the Successor Trustee, all the rights,
powers, trusts and duties of the Resigning Trustee under the Indenture with
respect to the series of Securities designated Medium-Term Notes with like
effect as if originally named as Trustee in the Indenture with respect to the
Securities of such series. The Company shall execute and deliver such further
instruments and such other things as the Successor Trustee may reasonably
require so as to more fully and certainly vest and confirm in the Successor
Trustee, all the rights, powers, trusts and duties hereby assigned, transferred,
delivered and confirmed to the Successor Trustee.
4. Promptly after the effectiveness of this Sixth Supplemental Indenture,
the Company shall cause a notice, substantially in the form of Exhibit B annexed
hereto, to be sent to each Holder of the Medium-Term Notes in accordance with
the provisions of Section 610(f) of the Indenture.
5. The Company represents and warrants to the Resigning Trustee and to
the Successor Trustee that, to the best of its knowledge, no event has occurred
and is continuing which is, or after notice or lapse of time or both would
become, an Event of Default under Section 501 of the Indenture.
6. The Company hereby acknowledges and confirms that all of the rights,
powers, trusts and duties of the Resigning Trustee with respect to all series of
Securities issued under the Indenture other than those designated Medium-Term
Notes shall continue and remain vested in the Resigning Trustee.
7. The Company hereby appoints the Successor Trustee as Paying Agent with
respect to the series of Securities designated Medium-Term Notes, as Registrar
with respect to the series of Securities designated Medium-Term Notes, and as
the Company's office and agency maintained pursuant to Section 1002 of the
Indenture with respect to the series of Securities designated Medium-Term Notes.
4
<PAGE>
ARTICLE III
-----------
THE SUCCESSOR TRUSTEE
---------------------
1. The Successor Trustee hereby represents and warrants to the Resigning
Trustee and to the Company that the Successor Trustee is not disqualified under
the provisions of Section 608 and is eligible under the provisions of Section
609 of the Indenture to act as Trustee with respect to the series of Securities
designated Medium-Term Notes issued under the Indenture.
2. The Successor Trustee hereby accepts its appointment as successor
Trustee under the Indenture with respect to the series of Securities designated
Medium-Term Notes issued under the Indenture and accepts, and shall hereby be
vested with, all the rights, powers, trusts and duties of the Resigning Trustee
as Trustee with respect to the series of Securities designated Medium-Term
Notes, upon the terms and conditions set forth therein, with like effect as if
originally named as Trustee with respect to the Securities of such series under
the Indenture.
3. The Successor Trustee hereby acknowledges and confirms that all of the
rights, powers, trusts and duties of the Resigning Trustee with respect to all
series of Securities issued under the Indenture other than those designated
Medium-Term Notes shall continue and remain vested in the Resigning Trustee.
4. The Successor Trustee hereby accepts its appointment as Paying Agent
with respect to the series of Securities designated Medium-Term Notes, as
Registrar with respect to the series of Securities designated Medium-Term Notes,
and as the Company's office and agency maintained pursuant to Section 1002 of
the Indenture with respect to the series of Securities designated Medium-Term
Notes.
ARTICLE IV
----------
MISCELLANEOUS PROVISIONS
------------------------
1. For all purposes of this Sixth Supplemental Indenture, except as
otherwise stated herein, terms used in capitalized form in this Sixth
Supplemental Indenture and defined in the Indenture have the meanings specified
in the Indenture.
2. All of the provisions of the Indenture with respect to the rights,
powers, trusts and duties of each of the Successor Trustee and the Resigning
Trustee, including the provisions of Section 611(b), shall be applicable to each
as fully and with like effect as if set forth herein, except as has been amended
or altered by this Sixth Supplemental Indenture herein.
3. This Sixth Supplemental Indenture shall be governed by and construed
in accordance with the laws of the State of New York applicable to agreements
made and to be performed in said State.
5
<PAGE>
4. This Sixth Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
5. This Sixth Supplemental Indenture shall become effective as of the
opening of business on the 25th of October, 1993, upon the execution and
delivery hereof by each of the parties hereto.
6. The Recitals contained herein shall be taken as the statements of the
Company, and the Resigning Trustee assumes no responsibility for their
correctness. The Resigning Trustee makes no representations as to the validity
or sufficiency of this Sixth Supplemental Indenture.
7. Notwithstanding the resignation of the Resigning Trustee effected
hereby, the Company shall remain obligated under Section 607 of the Indenture to
compensate, reimburse and indemnify the Resigning Trustee in connection with its
trusteeship with respect to the series of Securities designated Medium-Term
Notes.
8. The Company, the Resigning Trustee and the Successor Trustee hereby
acknowledge receipt of an executed and acknowledged counterpart of this
Agreement and the effectiveness thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
MERRILL LYNCH & CO., INC.
[SEAL)
By: _______________________________
Name:
Title:
Attest
____________________________
6
<PAGE>
THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)
(SEAL)
/s/ James Heaney
By: _______________________________
Name: James Heaney
Title: Vice President
Attest
____________________________
CHEMICAL BANK
(SEAL)
/s/ F.J. Grippo
By: _______________________________
Name: F.J. Grippo
Title: Vice President
Attest
____________________________
7
<PAGE>
EXHIBIT 10(i)
As amended through January 16, 1995
MERRILL LYNCH & CO., INC.
-------------------------
1978 INCENTIVE EQUITY PURCHASE PLAN
-----------------------------------
1. Purpose and Effect of Plan.
---------------------------
The purpose of this 1978 Incentive Equity Purchase Plan (the "Plan") is
to secure for Merrill Lynch & Co., Inc., a Delaware corporation (the "Company"),
and its stockholders the benefits of the incentive inherent in Common Stock
ownership by selected employees of the Company and its subsidiaries who will be
responsible for continued long-term growth and to stimulate the efforts of such
employees by encouraging capital appreciation and giving suitable recognition to
services which will contribute materially to the success of the Company. It is
intended that the Plan will aid in retaining, encouraging and attracting
employees of exceptional ability because of the opportunity offered to acquire a
proprietary interest in the business.
2. Shares Reserved for the Plan.
-----------------------------
No further shares of Common Stock, par value $1.33 1/3 per share, of the
Company ("Common Stock") may be sold under the Plan, the sale of shares under
the Plan having been discontinued; provided, however, that the Plan shall
-------- -------
continue in effect with respect to all Book Value Shares sold under the Plan
prior to January 16, 1995, and the rights and obligations of the holders of such
Book Value Shares, and the rights and obligations of the Company with respect
such Book Value Shares, under the Plan and the related agreements of sale
shall be unaffected by the discontinuation of the sale of shares under the Plan.
For purposes of the Plan, the terms "Market Shares" and "Book Value Shares"shall
have the following meanings: "Market Shares" shall mean shares of Common Stock
of the Company for which there is a generally recognized trading market and
which are freely transferable; "Book Value Shares" shall mean shares of Common
Stock of the Company, which shall be shares of the same class as Market Shares
and which shall have all of the same designation, preferences and relative,
participating, optional or other rights, and qualifications, limitations or
restrictions thereon (including, without limitation, voting, dividend and
liquidation rights), as Market Shares, except that they shall not be
transferable except to the Company and except that they shall be subject to the
repurchase provisions set forth in Section 5 hereof and in the repurchase
agreement referred to therein. Book Value Shares shall include any shares issued
in respect of any Book Value Shares by reason of dividends thereon or splits,
combinations or reclassifications thereof.
1
<PAGE>
3. Administration of the Plan.
--------------------------
(a) The Plan shall be administered by a committee, to be known as the
Management Development and Compensation Committee (the "Committee"), of not less
than three members appointed by and composed of members of the Board of
Directors of the Company. Members of the Committee shall not be eligible to
participate in the Plan while serving on the Committee, nor shall they have been
eligible to participate in the Plan for a period of one year prior to the
commencement of their service on the Committee. The Committee shall have full
authority, from time to time: (1) subject to the provisions of Section 4 hereof,
to determine, after receiving the recommendations of the management of the
Company, which of the employees of the Company or any of its present or future
subsidiaries shall participate in the Plan and the extent and terms of such
participation; (2) to prescribe the form or forms of the instruments and
repurchase agreements evidencing any sale or rights under the Plan (which forms
shall be consistent with the Plan); (3) to adopt, amend, and rescind such rules
and regulations as, in its opinion, may be advisable in the administration of
the Plan; and (4) to construe and interpret the Plan, the rules and regulations
and the instruments and repurchase agreements utilized under the Plan and to
make all other determinations deemed necessary or advisable for the
administration of the Plan. The Committee's interpretation and construction of
any provision of the Plan or any instrument or repurchase agreement utilized
thereunder and any determination by the Committee pursuant to any provision of
the Plan or any such instrument or repurchase agreement shall be final and
conclusive.
(b) Any offer of Book Value Shares under the Plan shall be in writing
and shall be entirely discretionary and nothing in the Plan shall be deemed to
give any officer or employee any right to purchase any shares. All decisions,
determinations, and implementation by the Committee shall be final and binding.
(c) The Committee shall hold meetings at such times and places as it
may determine. The Committee may request advice or assistance or employ such
other persons as are necessary for proper administration of the Plan. A quorum
of the Committee shall consist of a majority of its members and the Committee
may act by vote of a majority of its members at a meeting at which a quorum is
present, or without a meeting by a written consent to the action taken signed by
all members of the Committee. The Board of Directors may from time to time
appoint members of the Committee in substitution of members previously appointed
and may fill vacancies, however caused, in the Committee.
2
<PAGE>
4. Eligibility and Participation.
-----------------------------
(a) Subject to the provisions of this Plan, Book Value Shares may be
sold only to such employees of the Company or any of its present or future
subsidiaries (defined to include any corporation, partnership or other
organization of which the Company owns or controls, directly or indirectly, not
less than 50% of the total combined voting power of all classes of stock or
other equity interests) who, (i) in the opinion of the Committee, after
receiving the recommendations of the management of the Company, exercise such
functions or discharge such responsibilities that they merit consideration as
selected employees; and (ii) have not made, during the 12-month period
preceding the Purchase Date with respect to any offer of Book Value Shares
hereunder, a hardship withdrawal of Elective 401(k) Deferrals as defined under
the Merrill Lynch & Co., Inc. Savings & Investment Plan.
(b) An eligible employee may be sold Book Value Shares hereunder and
may thereafter be sold additional Book Value Shares if the Committee shall so
determine.
5. Sales of Book Value Shares.
--------------------------
Book Value Shares may be sold to eligible employees from time to time
upon the following terms and conditions:
(a) The purchase price for each Book Value Share shall be the Book
Value Per Share on the Valuation Date next preceding the Purchase Date such Book
Value Share is purchased by an eligible employee.
"Book Value Per Share" as of any given date, for purposes of the Plan,
shall mean the common stockholders' equity as reported in the consolidated
financial statements of the Company (as distributed to stockholders of the
Company) at the Valuation Date coincident with or next preceding such given
date (except as provided in clause (d)), in each case divided by the number of
shares of the Common Stock of the Company outstanding as of such Valuation Date
(excluding treasury stock and shares of Series A Junior Preferred Stock, par
value $1.00 per share, if any), which calculation shall be made before giving
effect to the sale or repurchase of Book Value Shares on such Valuation Date;
provided, however, that the Book Value Per Share, only for purposes of
calculating the price at which Book Value Shares will be repurchased by the
Company under clause (d), may be adjusted to such an extent as may be determined
by the Committee to preserve the benefit of the arrangement for the Company, its
employees and stockholders, if in the opinion of the Committee, after
consultation with the Company's independent public accountants, changes in the
Company's accounting policies, acquisitions or other unusual or extraordinary
items have disproportionately and materially affected the number of shares of
Common Stock outstanding or the Company's common stockholders' equity.
"Valuation Date", for purposes of the Plan, shall mean the last day of each
quarterly accounting period then utilized by the Company. "Purchase Date", for
purposes of the Plan, shall mean a date
3
<PAGE>
fixed by the Committee in connection with each offer of a Book Value Share under
the Plan, provided, however, that such date shall be at least seven business
days before the Valuation Date immediately next succeeding the Valuation Date
utilized for calculating the purchase price of such Book Value Share pursuant
to clause (a).
(b) An employee who is offered the right, through a written offer, to
purchase Book Value Shares under the Plan must irrevocably agree on or prior to
the Purchase Date set forth in such offer to purchase any or all of the number
of Book Value Shares indicated in such offer; provided, however, that if an
offer is not accepted in full it must be accepted in a number of shares which is
an integral multiple of 100. Book Value Shares shall be sold to an employee only
upon the simultaneous receipt by the Company of the full purchase price for such
shares, determined in accordance with clause (a), and a repurchase agreement, in
form satisfactory to the Committee, executed by the employee and containing the
restrictions set forth in clause (c), providing for the resale of the Company of
the Book Value Shares so purchased upon the terms specified in clause (d), and
containing such other provisions as the Committee shall determine. The purchase
price for Book Value Shares shall be payable in cash or, at the discretion of
the Committee, all or part of the purchase price may be paid through the
assignment and delivery to the Company of Market Shares (valued at the Fair
Market Value thereof on the date of such delivery in accordance with clause
(i)).
(c) Book Value Shares may not be sold, assigned or transferred, but may
be pledged or otherwise encumbered.
(d) Each employee purchasing any Book Value Shares shall agree that
upon the earlier of (i) termination of such employee's employment for any reason
other than retirement or disability (as both terms are defined by the Committee)
or death or (ii) the lapse of a period of five years from the date of such
employee's retirement or disability or (iii) the lapse of a period of six months
from the date of such employee's death or (iv) the delivery of a written request
by the Committee or the delivery of a written request by such employee to the
Company (provided, however, that such request may not be made by such employee
until a period of at least six months has elapsed since such Book Value Shares
were purchased by such employee) or, in the case of death, the legal
representative of such employee's estate, such employee or his estate, as the
case may be, shall, on a date specified by the Committee, within thirty days of
such termination, lapse or request, unless such Book Value Shares have been
surrendered pursuant to clause (f), sell to the Company, and the Company shall
repurchase, all Book Value Shares then owned by such employee or his estate, as
the case may be; provided, however, that in the case of a request pursuant to
(iv) above, such request may state that only a particular number of Book Value
Shares (in integral multiples of 100) shall be sold to the Company whereupon
only such number of Book Value Shares shall be sold to the Company and
repurchased by the Company. Any purchase by the Company pursuant to this clause
(d) shall be at a price per share equal to the Book Value Per Share as of the
Valuation Date coincident with or next preceding the date of
4
<PAGE>
such termination, lapse or request; provided, however, that if the Board of
Directors has ordered the preparation of, or has received, consolidated
financial statements of the Company certified by the Company's independent
public accountants since such Valuation Date, the Book Value Per Share shall be
based on such certified financial statements until the next succeeding Valuation
Date. Payment for Book Value Shares repurchased, less any applicable transfer
taxes and amounts required to be withheld pursuant to Section 13 hereof, shall
be made by the Company, as promptly as the amount of such payment becomes
ascertainable, in cash, or, in the discretion of the Committee, in a number of
Market Shares or other securities issued by the Company having an aggregate Fair
Market Value as at the business day preceding the date of resale to the Company
equal to the amount payable to the employee (except that an employee whose
employment was terminated due to retirement or disability, or the estate of such
employee, may request that the Company's obligation be satisfied by the delivery
of Market Shares, but the discretion to delivery any such Market Shares shall be
in the sole discretion of the Committee) or in a combination of the foregoing;
provided, however, that in the event the payment is to be made in securities
issued by the Company other than Market Shares, notice of such payment shall be
delivered to the employee or his estate, as the case may be, at least ten
business days prior to the intended date of payment by the Company. In the event
that the Committee has given notice that payment is to be made in other than
cash or Market Shares, then at any time after a termination, lapse or request
under this clause (d) and the surrender of Book Value Shares hereunder, and
until five business days prior to the intended date of payment by the Company,
such Book Value Shares may be surrendered pursuant to clause (f) and the
surrender under this clause (d) shall be deemed withdrawn.
(e) Each certificate issued in respect of Book Value Shares sold under
the Plan shall be registered in the name of the employee, and shall bear a
legend that includes the following language:
"The transferability of this certificate and the shares of stock
represented hereby is restricted and the shares are subject to
the further terms and conditions contained in the Merrill Lynch
& Co., Inc. 1978 Incentive Equity Purchase Plan and in a repurchase
agreement executed pursuant thereto. A copy of such Plan is on file
in the office of the Secretary of Merrill Lynch & Co., Inc."
(f) At any time, or from time to time, any employee or, in the case of
death, the legal representative of the employee's estate, may surrender to the
Company any Book Value Shares then owned by such employee or estate, as the case
may be, and request that such shares be released from the restrictions and
rights contained in the governing repurchase agreement. As soon as practicable
after receipt of the foregoing, the Company shall deliver to such employee or
estate, as the case may be, for each Book Value Share surrendered, a number of
Market Shares equal to the quotient (not to exceed 1.00) obtained by dividing
the Book Value Per Share at which such Book Value Share was purchased by the
employee from the Company by the Fair Market
5
<PAGE>
Value per share of Common Stock on the business day immediately preceding the
Purchase Date on which such Book Value Share was purchased by the employee;
provided, however, that under no circumstances shall the Company be required, in
connection with any surrender, pursuant to this clause (f), to deliver a number
of Market Shares in excess of the number of Book Value Shares surrendered.
(g) The Company shall not be obligated to deliver any fractional Market
Shares under this Plan as a result of the repurchase of any Book Value Shares
under clause (d) or the surrender of any Book Value Shares under clause (f), but
instead shall deliver to the employee or estate, as the case may be, an amount
of cash equal to the corresponding fraction of the Fair Market Value per share
of Common Stock on the date of surrender of such Book Value Shares. In
addition, the number of Market Shares deliverable to an employee or estate, as
the case may be, shall be reduced for any applicable transfer taxes and amounts
required to be withheld pursuant to Section 13 hereof.
(h) After the delivery of Market Shares to an employee or the estate of
an employee under either clause (d) or (f), the repurchase agreement or
agreements previously entered into between the Company and such employee or
estate, as the case may be, shall continue in full force and effect, but only as
to the Book Value Shares, if any, which the employee continues to own.
(i) For purposes of the Plan, "Fair Market Value" of any security on any
given date shall be determined by the Committee by any fair and reasonable
means, including (a) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter market, the mean of
the highest and lowest bid prices for such security on the date in question, or
there are no such bid prices for such security on such date, the mean of the
highest and lowest bid prices on the first day prior thereto on which such
prices appear, or (b) if the security is listed for trading on one or more
national securities exchanges, the mean of the high and low sales prices on the
principal such exchange on the date in question, or if such security shall not
have been traded on such principal exchange on such date, the mean of the high
and low sales prices on such principal exchange on the first day prior thereto
on which such security was so traded, provided, however, if the Distribution
-------- -------
Date defined in the Rights Agreement dated as of December 16, 1987) (the "Rights
Agreement") between the Company and Manufacturers Hanover Trust Company shall
have occurred and the Rights (as defined in the Rights Agreement) shall then be
represented by separate certificates rather than by certificates representing
the Common Stock, there shall be added to such value as determined in (a) or (b)
above, as the case may be, (i) if the Rights are not listed for trading on a
national securities exchange but are traded in the over-the-counter market, the
mean of the highest and lowest bid prices of the Rights on the date in question,
or, if there are no such bid prices for the Rights on such date, the mean of the
highest and lowest bid prices on the first date prior thereto on which such
prices appear or (ii) if the Rights are listed for trading on one or more
national securities exchanges, the mean of the high and low sales prices of the
Rights on the
6
<PAGE>
principal such exchange on the date in question, or if the Rights shall not
have been traded on such principal exchange on such date, the mean of the high
and low sales prices on such principal exchange on the first day prior thereto
on which the Rights were so traded.
6. Rights Not transferable.
------------------------
No rights granted under the Plan or repurchase agreements are assignable
or transferable by an employee other than by will or the laws of descent and
distribution.
7. Tax Litigation.
--------------
The Company shall have the right to contest, at its expense, any tax
ruling or decision, administrative or judicial on an issue which is related to
the Plan or any repurchase agreement and which the committee believes to be
important to holders of shares of Common Stock sold under the Plan, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
8. Amendment of the Plan.
----------------------
The Board of Directors or the Committee (but no other committee of the
Board of Directors) may from time to time alter, amend, modify, suspend or
discontinue the Plan or alter or amend any and all of the repurchase agreements
entered into hereunder, provided, however, that no change shall be made in the
maximum number of shares which may be sold under the plan (other than
adjustments made pursuant to Section 9 hereof), the method by which the price at
which Book Value Shares may be sold or repurchased is determined, the method of
ascertaining Book Value Per Share (other than adjustments made pursuant to
Section 5 hereof) or the terms of the exchange of Book Value Shares for Market
Shares without the approval of the holders of a majority of the shares of Common
Stock represented in person or by proxy at a meeting of stockholders. No
amendment or modification of the Plan or any repurchase agreement shall operate
so as to adversely affect any employee with respect to Book Value Shares already
purchased without the consent of such employee.
9. Adjustment in Case of Changes Affecting the Common Stock.
---------------------------------------------------------
In the event of a subdivision or consolidation of outstanding shares of
Common Stock or other capital adjustment, or the payment of a stock dividend
thereon, the number of shares reserved or authorized to be reserved under the
Plan shall be increased or reduced proportionately and the Book Value Per
Share and the terms of the exchange of Book Value Shares for Market Shares
increased or reduced proportionately, and such other adjustments shall be made
as may be deemed necessary or equitable by the Committee. Subject to any
required action by the stockholders of the Company, if the Company shall be the
surviving or resulting corporation in any merger or consolidation, any
repurchase agreement under the Plan
7
<PAGE>
shall cover the shares which the employee receives upon the merger or
consolidation in respect of the shares covered by the repurchase agreement. In
the event of a change in the Company's presently authorized Common Stock which
is limited to a change in the designation thereof or a change of authorized
shares with par value into the same number of shares with a different par value
or into the same number of shares without par value, the shares resulting from
any such change shall be deemed to be Common Stock within the meaning of the
Plan. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Committee to give
proper effect to such event.
10. Governmental and Other Regulations.
-----------------------------------
The Plan, and the sale of shares hereunder, and the Company's obligation
to repurchase or exchange shares, shall be subject to all applicable Federal and
state laws, rules and regulations, and to such approvals by any regulatory or
governmental agency which may, in the opinion of counsel for the Company, be
required.
11. Indemnification of Committee.
-----------------------------
Service on the Committee shall constitute service as a Director of the
Company so that members of the Committee shall be entitled to indemnification
and reimbursement as Directors of the Company pursuant to its Certificate of
Incorporation, By-Laws or resolutions of its Board of Directors or stockholders.
12. Effective Date.
---------------
The Plan shall not become effective unless and until approved by the
vote of the holders of a majority of the shares of Common Stock represented in
person or by proxy at the meeting of stockholders to which it is presented.
13. Withholding.
-----------
Amounts paid or shares delivered under the Plan shall be reduced by any
sums required to be withheld by the Company.
8
<PAGE>
Exhibit 10(ii)
MERRILL LYNCH & CO., INC.
AMENDED AND RESTATED
1994 DEFERRED COMPENSATION AGREEMENT
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF NOVEMBER 10, 1994
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
<PAGE>
MERRILL LYNCH & CO., INC.
AMENDED AND RESTATED
1994 DEFERRED COMPENSATION AGREEMENT
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
Page
----
RECITALS.... 1
I. GENERAL............................................................. 1
1.1 Purpose and Intent............................................. 1
1.2 Definitions.................................................... 1
II. ELIGIBILITY................................................ 4
2.1 Eligible Employees............................................. 4
(a) General Rule............................................... 4
(b) Individuals First Employed During Election Year or
Agreement Year............................................ 4
(c) Wages Subject to Legal Process............................. 4
III. DEFERRAL ELECTIONS; ACCOUNTS........................................ 5
3.1 Deferral Elections............................................. 5
(a) Timing and Manner of Making of Elections................... 5
(b) Irrevocability of Deferral Election........................ 5
(c) Application of Election.................................... 5
3.2 Crediting to Accounts.......................................... 5
3.3 Minimum Requirements for Deferral.............................. 5
(a) Minimum Requirements....................................... 5
(b) Failure to Meet Requirements............................... 6
3.4 Benchmark Return Options; Adjustment of Accounts............... 6
(a) Selection of Benchmark Return Options...................... 6
(b) Adjustment of Accounts..................................... 6
(c) Annual Charge.............................................. 7
3.5 Rescission of Deferral Election................................ 7
(a) Prior to December 1, 1994.................................. 7
(b) Adverse Tax Determination.................................. 7
(c) Rescission For Amounts Not Yet Earned...................... 8
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT..................... 8
4.1 No Trust or Fund Created; General Creditor Status.............. 8
4.2 Non-Assignability.............................................. 8
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans 8
V. PAYMENT OF ACCOUNT.................................................. 8
5.1 Payment Date................................................... 8
5.2 Termination of Employment...................................... 9
(a) Death or Retirement........................................ 9
(b) Other Termination of Employment............................ 9
(c) Leave of Absence, Transfer or Disability................... 9
(d) Discretion to Alter Payment Date........................... 9
-i-
<PAGE>
Page
----
5.3 Withholding of Taxes........................................... 9
5.4 Beneficiary ................................................... 9
(a) Designation of Beneficiary................................. 9
(b) Change in Beneficiary...................................... 10
(c) Default Beneficiary........................................ 10
(d) If the Beneficiary Dies During Payment..................... 10
5.5 Hardship Distributions......................................... 10
VI. ADMINISTRATION OF THE AGREEMENT..................................... 11
6.1 Powers of the Administrator.................................... 11
6.2 Payments on Behalf of an Incompetent........................... 11
6.3 Corporate Books and Records Controlling........................ 11
VII. MISCELLANEOUS PROVISIONS............................................ 11
7.1 Litigation..................................................... 11
7.2 Headings Are Not Controlling................................... 11
7.3 Governing Law.................................................. 12
7.4 Amendment and Termination...................................... 12
7.5 Agreement Binding on Successors and Assigns.................... 12
7.6 Invalidity of Provisions....................................... 12
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
AMENDED AND RESTATED
1994 DEFERRED COMPENSATION AGREEMENT
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
WHEREAS, Merrill Lynch & Co., Inc. ("ML & Co.") has entered into agreements
to defer compensation with certain of its employees or the employees of its
affiliates;
WHEREAS, ML & Co. now wishes to amend and restate such agreements to
increase the flexibility and benefit of such agreements to the participants
therein in order to encourage the participants to continue their employment;
NOW, THEREFORE, effective November 10, 1994, all agreements collectively
known as the Merrill Lynch & Co., Inc. 1994 Deferred Compensation Agreement for
a Select Group of Eligible Employees are hereby amended and restated in their
entirety as set forth below:
ARTICLE I
GENERAL
1.1 Purpose and Intent.
The purpose of the Agreement is to encourage the employees who are integral
to the success of the business of the Company to continue their employment by
providing them with flexibility in meeting their future income needs. It is
intended that this Agreement be unfunded and maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees within the meaning of Title I of ERISA, and all
decisions concerning who is to be considered a member of that select group and
how this Agreement shall be administered and interpreted shall be consistent
with this intention.
1.2 Definitions.
For the purpose of the Agreement, the following terms shall have the
meanings indicated.
"Account Balance" means, as of any date, the Deferred Amounts credited to a
Participant's Account, adjusted in accordance with Section 3.4 to reflect the
performance of the Participant's Selected Benchmark Return Options, the Annual
Charge and any payments made from the Account to the Participant prior to that
date.
"Account" means the reserve account established on the books and records of
ML & Co. for each Participant to record the Participant's interest under the
Agreement.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation, or estate planning and
business insurance specialist incentive compensation, in each case exclusive of
base salary, earned by a Participant during the period from October 1, 1993 to
December 31 1994, and payable after January 1, 1994, as a result of the
Participant's production credit level.
<PAGE>
"Administrator" means the Director of Human Resources of ML & Co., or his
functional successor, or any other person or committee designated as
Administrator of the Agreement by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Agreement" means this Merrill Lynch & Co., Inc. Amended and Restated 1994
Deferred Compensation Agreement for a Select Group of Eligible Employees.
"Agreement Year" means the Fiscal Year ending in 1995.
"Annual Charge" means the charge to the Participant's Account provided for
in Section 3.4(c).
"Benchmark Return Options" means such Merrill Lynch mutual funds or other
investment vehicles as the Administrator may from time to time designate for the
purpose of indexing Accounts hereunder. In the event a Benchmark Return Option
ceases to exist or is no longer to be a Benchmark Return Option, the
Administrator may designate a substitute Benchmark Return Option for such
discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation, FCCAAP Payment and/or Sign-On Bonus. In no
event shall a Participant's base pay be considered Compensation (i.e., an amount
subject to deferral under this Agreement).
"Deferral Percentage" means the percentage (which shall be in whole
percentage increments and not more than 90%), specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Agreement.
"Deferred Amounts" means the amounts of Compensation actually deferred by
the Participant under this Agreement.
"Election Year" means the 1993 calendar year.
"Eligible Compensation" means a Participant's "eligible compensation" as
determined, from time to time, for purposes of ML & Co.'s Basic Group Life
Insurance Plan.
"Eligible Employee" means an employee eligible to defer amounts under this
Agreement, as determined under Section 2.1 hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
2
<PAGE>
"FCCAAP" means the Merrill Lynch 1984 Asset Accumulation Award Plan.
"FCCAAP Payment" means the amount of cash, if any, that would, but for
deferral under this Agreement, be payable to the Participant as soon as
practicable following January 1, 1995 in accordance with the terms of Section 8
of FCCAAP (including a Proportional Amount of any Forfeited Amount).
"Fiscal Month" means the monthly period used by ML & Co. for financial
accounting purposes.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"Full-Time Domestic Employee" means a full-time employee of the Company
paid from the Company's domestic based payroll (other than any U.S. citizen or
"green card" holder who is employed outside the United States).
"Full-Time Expatriate Employee" means a U.S. citizen or "green card" holder
employed by the Company outside the United States and selected by the
Administrator as eligible to participate in the Agreement (subject to the other
eligibility criteria).
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Agreement.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the Selected Benchmark Return Option for which the value is
to be determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Agreement.
"Remaining Deferred Amounts" means a Participant's Deferred Amounts times a
fraction equal to the number of remaining installment payments divided by the
total number of installment payments.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
"Selected Benchmark Return Option" means a Benchmark Return Option selected
by the Participant in accordance with Section 3.4.
3
<PAGE>
"Sign-On Bonus" means a single-sum amount paid or payable during the
Agreement Year upon commencement of employment to a new Eligible Employee, in
addition to base pay and other Compensation, to induce him or her to become an
employee of the Company.
"Variable Incentive Compensation" means the variable incentive compensation
or office manager incentive compensation that is paid in cash to certain
employees of the Company generally in January or February of the Agreement Year
with respect to the prior Fiscal Year, which for purposes of this Agreement is
considered earned during the Agreement Year regardless of when it is actually
paid to the Participant.
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
(a) General Rule. An individual is an Eligible Employee if he or she (i)
is a Full-Time Domestic Employee or a Full-Time Expatriate Employee, (ii) has at
least $200,000 of Eligible Compensation for the Election Year, (iii) has
attained at least the title of Vice President, Director or Managing Director, or
holds a National Sales Management position with the Company (a "National Sales
Manager"), and (iv) (A) is a financial consultant or an estate planning and
business insurance specialist, who was a member in 1993 of the Chairman's Club,
the Charles E. Merrill Circle, the Society of Eagles, the Falcons Club or the
Win Smith Fellows, (B) is a National Sales Manager (C) is a member of the
International Private Banking Group, (D) is a non-producing employee in the
Senior Manager or Senior Consultant Band (Q Band) or above, or (E) is a
producing employee in grade 95 or above; provided, that non-producing employees
--------
in the Director Band (R Band) or above and producing employees in grade 97 or
above (or their executive equivalents) shall not be required to meet condition
(ii) hereof, and provided, further, that employees who were 1993 Win Smith
-------- -------
Fellows shall not be required to meet condition (iii) hereof.
(b) Individuals First Employed During Election Year or Agreement Year.
Subject to the approval of the Administrator in his sole discretion, an
individual who is first employed by the Company during the Election Year or the
Agreement Year is an Eligible Employee if his or her Eligible Compensation is
greater than $200,000 and he or she is either employed as a National Sales
Manager or is to be nominated for at least the title of Vice President, Director
or Managing Director at the first opportunity following his or her commencement
of employment with the Company.
(c) Wages Subject to Legal Process. An individual shall not, however, be
an Eligible Employee if as of the deadline for submission of elections specified
in Section 3.1(a) the individual's wages have been attached or are being
garnished or are otherwise restrained pursuant to legal process.
4
<PAGE>
ARTICLE III
DEFERRAL ELECTIONS; ACCOUNTS
3.1 Deferral Elections.
(a) Timing and Manner of Making of Elections. An election to defer
Compensation for payment in accordance with Section 5.1 shall be made by
submitting to the Administrator such forms as the Administrator may prescribe.
Each election submitted must specify a Maximum Deferral and a Deferral
Percentage with respect to each category of Compensation to be deferred. All
elections by a Participant to defer Compensation under the Agreement must be
received by the Administrator or such person as he may designate for the purpose
by no later than September 30, 1993; provided, however, that the Eligible
-------- -------
Employee's election to defer a Sign-On Bonus must be part of such Eligible
Employee's terms and conditions of employment agreed to prior to the Eligible
Employee's first day of employment with the Company.
(b) Irrevocability of Deferral Election. Except as provided in Sections
3.5 and 5.5, an election to defer the receipt of any Compensation made under
Section 3.1(a) is irrevocable once submitted to the Administrator or his
designee. The Administrator's acceptance of an election to defer Compensation
shall not, however, affect the contingent nature of such Compensation under the
plan or program under which such Compensation is payable.
(c) Application of Election. The Participant's Deferral Percentage will be
applied to each payment of Compensation to which the Participant's deferral
election applies, provided, that the aggregate of the Participant's Deferred
--------
Amounts shall not exceed the Participant's Maximum Deferral. If a Participant
has made deferral elections with respect to more than one category of
Compensation, this Section 3.1(c) shall be applied separately with respect to
each such category.
3.2 Crediting to Accounts.
A Participant's Deferred Amounts will be credited to the Participant's
Account, as soon as practicable (but in no event later than 90 days) after the
last day of the Fiscal Month during which such Deferred Amounts would, but for
deferral, have been paid and will be accounted for in accordance with Section
3.4.
3.3 Minimum Requirements for Deferral.
(a) Minimum Requirements. Notwithstanding any other provision of this
Agreement, no deferral will be effected under this Agreement with respect to a
Participant if:
(i) the Participant is not an Eligible Employee as of December 31,
1993,
(ii) the Participant's election as applied to the Participant's Variable
Incentive Compensation (determined by substituting the Election
Year for the Agreement Year) or Adjusted Compensation (determined
by substituting the Fiscal Year ending in 1992 for the Fiscal Year
ending in 1994) would have resulted in an annual deferral of less
than $15,000, or
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<PAGE>
(iii) the greater of (A) the sum of (1) the compensation amount listed on
the Participant's W-2 form for 1994 and (2) any Compensation that
is accelerated which the Participant may receive in December 1993
which would have been payable in calendar year 1994 in the absence
of the action of the Company to accelerate the payment, and (B) the
Participant's Eligible Compensation for calendar year 1995, is less
than $200,000;
provided, that any Participant who first becomes an employee of the Company
- --------
during the Agreement Year shall not be required to satisfy conditions (i) and
(ii).
(b) Failure to Meet Requirements. If any of the requirements of Section
3.3(a) are not met by a Participant, the Deferred Amounts will be paid to the
Participant, without adjustment to reflect the performance of any Selected
Benchmark Return Option, as soon as practicable after it has been determined
that the requirement has not been met provided, however, that if the Participant
-------- -------
fails to meet the requirements of Section 3.3(a)(iii), the Participant will
receive the greater of the Deferred Amounts or the Account Balance.
3.4 Benchmark Return Options; Adjustment of Accounts.
(a) Selection of Benchmark Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select one or
more Benchmark Return Options and the percentage of the Participant's Account to
be adjusted to reflect the performance of each Selected Benchmark Return Option.
All elections of Selected Benchmark Return Options shall be in multiples of 10%
unless the Administrator determines that lower increments are administratively
feasible, in which case such lower increment shall apply. A Participant may, by
complying with such procedures as the Administrator may prescribe on a uniform
and nondiscriminatory basis, including procedures specifying the frequency with
respect to which such changes may be effected (but not more than twelve times in
any calendar year), change the Selected Benchmark Return Options to be
applicable with respect to his or her Account.
(b) Adjustment of Accounts. While each Participant's Account does not
represent the Participant's ownership of, or any ownership interest in, any
particular assets, the Account shall be adjusted to reflect the investment
experience of the Participant's Selected Benchmark Return Options in the same
manner as if investments in accordance with the Participant's elections had
actually been made through the ML Benefit Services Platform and ML II Core
Recordkeeping System, or any successor system used for keeping records of
Participants' Accounts (the "ML II System"). In adjusting Accounts, the timing
of receipt of Participant instructions by the ML II System shall control the
timing and pricing of the notional investments in the Participant's Selected
Benchmark Return Options in accordance with the rules of operation of the ML II
System and its requirements for placing corresponding investment orders, as if
orders to make corresponding investments were actually to be made, except that
in connection with the crediting of Deferred Amounts to the Participant's
Account and distributions from the Account, appropriate deferral allocation
instructions shall be treated as received from the Participant prior to the
close of transactions through the ML II System on the relevant day. Each
Selected Benchmark Return Option shall be valued using the Net Asset Value of
the Selected Benchmark Return Option as of the relevant day, provided, that, in
--------
valuing a Selected Benchmark Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Agreement shall be the price reported for actual transactions
in that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with
6
<PAGE>
such transactions, provided, further, that, if there are no such transactions
-------- -------
effected through the ML II System on the relevant day, the value of the security
shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such security,
or if such security is not traded on such principal exchange on
that day, the average of the high and low sales prices on such
exchange on the first day prior thereto on which such security
was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined by
the Administrator by whatever means he considers appropriate in
his sole discretion.
(c) Annual Charge. As of the last day of each Fiscal Year or such earlier
day in December as the Administrator shall determine, an Annual Charge of 2.0%
of the Participant's Deferred Amounts (exclusive of any appreciation or
depreciation determined under Section 3.4 (b)) shall be applied to reduce the
Account Balance (but not below zero). In the event that the Participant elects
to have the Account Balance paid in installments, this Annual Charge will be
charged on the Remaining Deferred Amounts after giving effect to the installment
payments. In the event that the Account Balance is paid out completely during a
Fiscal Year prior to the date that the Annual Charge is assessed, a pro rata
--------
Annual Charge will be deducted from amounts to be paid to the Participant to
cover that fraction of the Fiscal Year that Deferred Amounts (or Remaining
Deferred Amounts in the case of installment payments) were maintained hereunder.
The Annual Charge shall be applied as a pro rata reduction of the Account
--------
Balance indexed to each of the Participant's Selected Benchmark Return Options.
In applying the Annual Charge, the pricing principles set forth in Section
3.4(b) will be followed.
3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1993. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1993, and (ii) if the Administrator, in his sole discretion and upon evidence of
such basis that he finds persuasive (including a material applicable change in
the Participant's U.S. Federal and/or foreign income tax rate during the period
between October 1, 1993 and December 1, 1993), agrees to the rescission of the
election. The Deferred Amounts will be paid to the Participant as soon as
practicable subject to a reduction for any applicable withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options will be paid
to the
7
<PAGE>
Participant as soon as practicable, and no additional amounts will be deferred
pursuant to this Agreement.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his sole discretion terminate any deferral
elections made hereunder with respect to compensation not yet earned and no
further amounts will be deferred. Amounts previously deferred will continue to
be governed by the terms of this Agreement.
ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNT
4.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and any Participant, the Participant's beneficiary
or estate, or any other person. Title to and beneficial ownership of any funds
represented by the Account Balance will at all times remain in ML & Co.; such
funds will continue for all purposes to be a part of the general funds of ML &
Co. and may be used for any corporate purpose. No person will, by virtue of the
provisions of this Agreement, have any interest whatsoever in any specific
assets of the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO
RECEIVE PAYMENTS FROM ML & CO. UNDER THIS AGREEMENT, SUCH RIGHT WILL BE NO
GREATER THAN THE RIGHT OF ANY UNSECURED GENERAL CREDITOR OF ML & CO.
4.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Agreement, by written will, or by the laws of descent
and distribution.
4.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
ARTICLE V
PAYMENT OF ACCOUNT
5.1 Payment Date.
A Participant's Account Balance will be paid by ML & Co., as elected by the
Participant at the time of his or her deferral election, either in a single sum
to be paid, or in the number of annual installments (not to exceed 15) chosen by
the Participant to commence, as specified, (i) in the month following the month
of the Participant's Retirement or death, (ii) in any month and year selected by
8
<PAGE>
the Participant after the end of 1994, (iii) in any month in the calendar year
following the Participant's Retirement, but in no event may the date elected
under clause (i), (ii) or (iii) result in payment (in the case of a single sum)
or commencement of payment (in the case of installment payments) later than the
month following the Participant's 70th birthday. The amount of each annual
installment, if any, shall be a fraction of the Account Balance as of the last
day of the month immediately preceding the month in which the payment is to be
made, the numerator of such fraction shall be one and the denominator of such
fraction shall be the number of remaining installments (including the
installment to be made).
5.2 Termination of Employment.
(a) Death or Retirement. If the Participant dies or retires prior to
payment, then the Account Balance will be paid to the Participant in accordance
with the Participant's election (in the event of Retirement) or to the
Participant's beneficiary (in the event of death) in accordance with the
Participant's election of either installment payments or a lump sum, provided,
--------
however, that in the event that a beneficiary of the Participant's Account
- -------
Balance is the Participant's estate or is otherwise not a natural person, the
applicable portion of the Account Balance will be paid in lump sum to such
beneficiary.
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balance will be paid to the Participant, in a lump sum, as soon
thereafter as is practicable.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 5.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balance be paid at some other time or that it be paid in installments; provided,
--------
that no such direction that adversely affects the rights of the Participant or
his or her beneficiary under this Agreement shall be implemented without the
consent of the affected Participant or beneficiary. This direction may be
revoked by the Administrator at any time in his sole discretion.
5.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
5.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Agreement if the primary beneficiary does not
survive the
9
<PAGE>
Participant. The Participant may designate more than one person as the
Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing,
any change in beneficiary or contingent beneficiary will automatically revoke
prior such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Agreement only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. Effective January 1, 1995, in the event a
Participant does not designate a beneficiary, or no designated beneficiary
survives the Participant, the Participant's beneficiary shall be the
Participant's surviving spouse, if the Participant is married at the time of his
or her death and not subject to a court-approved agreement or court decree of
separation, or otherwise the person or persons designated to receive benefits on
account of the Participant's death under the ML & Co. Basic Group Life Insurance
Plan (the "Life Insurance Plan"). However, if an unmarried Participant does not
have coverage in effect under the Life Insurance Plan, or the Participant has
assigned his or her death benefit under the Life Insurance Plan, any amounts
payable to the Participant's beneficiary under the Agreement will be paid to the
Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated.
5.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Agreement. Hardship shall be deemed to exist only
on account of expenses for medical care (described in Code Section 213(d)) of
the Participant, the Participant's spouse or the Participant's dependents
(described in Code Section 152); payment of unreimbursed tuition and related
educational fees for the Participant, the Participant's spouse or the
Participant's dependents; the need to prevent the Participant's eviction from
or, foreclosure on, the Participant's principal residence; unreimbursed damages
resulting from a natural disaster; or such other financial need deemed by the
Administrator in his sole discretion to be immediate and substantial.
10
<PAGE>
ARTICLE VI
ADMINISTRATION OF THE AGREEMENT
6.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe, and
administer this Agreement so as to ensure that it provides deferred compensation
for the Participant as a member of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Agreement
unless attributable to his willful misconduct or lack of good faith. The
Administrator may designate persons to carry out the specified responsibilities
of the Administrator and shall not be liable for any act or omission of a person
as designated.
6.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
6.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of Adjusted Compensation,
Incentive Compensation, FCCAAP Payment, Sign-On Bonus, Eligible Compensation,
the Deferred Amounts, the Account Balance, the designation of a beneficiary, or
any other matters.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the
Agreement and that the Administrator believes to be important to Participants,
and to conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 Headings Are Not Controlling.
The headings contained in this Agreement are for convenience only and will
not control or affect the meaning or construction of any of the terms or
provisions of this Agreement.
11
<PAGE>
7.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Agreement
will be construed in accordance with and governed by the laws of the State of
New York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Agreement at any time, except that no such amendment or
termination shall adversely affect the right of a Participant to his or her
Account Balance as of the date of such amendment or termination.
7.5 Agreement Binding on Successors and Assigns.
This Agreement will be binding upon and inure to the benefit of ML & Co.
and its successors and assigns; the Participant and the Participant's heirs,
executors, administrators and legal representatives; and the Participant's
beneficiary(ies) and the heirs, executors, administrators and legal
representatives of such beneficiary(ies).
7.6 Invalidity of Provisions.
If any provision of this Agreement or the application thereof shall for any
reason be invalid or unenforceable, such provision shall be limited only to the
extent necessary in the circumstances to make it valid and enforceable. In any
event, the remaining provisions of this Agreement will continue in full force
and effect.
12
<PAGE>
Exhibit 10(xix)
MERRILL LYNCH & CO., INC.
1995 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
<PAGE>
MERRILL LYNCH & CO., INC.
1995 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
Page
----
I. GENERAL............................................................. 1
1.1 Purpose and Intent.............................................. 1
1.2 Definitions..................................................... 1
II. ELIGIBILITY......................................................... 3
2.1 Eligible Employees.............................................. 3
(a) General Rule............................................. 3
(b) Individuals First Employed During Election Year
or Plan Year............................................ 4
(c) Wages Subject to Legal Process........................... 4
III. DEFERRAL ELECTIONS; ACCOUNTS........................................ 4
3.1 Deferral Elections.............................................. 4
(a) Timing and Manner of Making of Elections................. 4
(b) Irrevocability of Deferral Election...................... 4
(c) Application of Election.................................. 4
3.2 Crediting to Accounts........................................... 5
3.3 Minimum Requirements for Deferral............................... 5
(a) Minimum Requirements..................................... 5
(b) Failure to Meet Requirements............................. 5
3.4 Benchmark Return Options; Adjustment of Accounts................ 5
(a) Selection of Benchmark Return Options.................... 5
(b) Adjustment of Accounts................................... 6
(c) Annual Charge............................................ 6
3.5 Rescission of Deferral Election................................. 7
(a) Prior to December 1, 1994................................ 7
(b) Adverse Tax Determination................................ 7
(c) Rescission For Amounts Not Yet Earned.................... 7
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT.............................. 7
4.1 No Trust or Fund Created; General Creditor Status............... 7
4.2 Non-Assignability............................................... 8
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans.......................................... 8
V. PAYMENT OF ACCOUNT.................................................. 8
5.1 Payment Date.................................................... 8
5.2 Termination of Employment....................................... 8
(a) Death or Retirement...................................... 8
(b) Other Termination of Employment.......................... 8
(c) Leave of Absence, Transfer or Disability................. 8
(d) Discretion to Alter Payment Date......................... 9
5.3 Withholding of Taxes............................................ 9
-i-
<PAGE>
Page
----
5.4 Beneficiary .................................................... 9
(a) Designation of Beneficiary............................... 9
(b) Change in Beneficiary.................................... 9
(c) Default Beneficiary...................................... 9
(d) If the Beneficiary Dies During Payment................... 9
5.5 Hardship Distributions.......................................... 10
VI. ADMINISTRATION OF THE PLAN.......................................... 10
6.1 Powers of the Administrator..................................... 10
6.2 Payments on Behalf of an Incompetent............................ 10
6.3 Corporate Books and Records Controlling......................... 10
VII. MISCELLANEOUS PROVISIONS............................................ 11
7.1 Litigation...................................................... 11
7.2 Headings Are Not Controlling.................................... 11
7.3 Governing Law................................................... 11
7.4 Amendment and Termination....................................... 11
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
1995 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
ARTICLE I
GENERAL
1.1 Purpose and Intent.
The purpose of the Plan is to encourage the employees who are integral to
the success of the business of the Company to continue their employment by
providing them with flexibility in meeting their future income needs. It is
intended that this Plan be unfunded and maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees within the meaning of Title I of ERISA, and all decisions
concerning who is to be considered a member of that select group and how this
Plan shall be administered and interpreted shall be consistent with this
intention.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"Account Balance" means, as of any date, the Deferred Amounts credited to a
Participant's Account, adjusted in accordance with Section 3.4 to reflect the
performance of the Participant's Selected Benchmark Return Options, the Annual
Charge and any payments made from the Account to the Participant prior to that
date.
"Account" means the reserve account established on the books and records of
ML & Co. for each Participant to record the Participant's interest under the
Plan.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation, or estate planning and
business insurance specialist incentive compensation, in each case exclusive of
base salary, earned by a Participant during the Fiscal Year ending in 1995, and
payable after January 1, 1995, as a result of the Participant's production
credit level.
"Administrator" means the Director of Human Resources of ML & Co., or his
functional successor, or any other person or committee designated as
Administrator of the Plan by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Annual Charge" means the charge to the Participant's Account provided for
in Section 3.4(c).
"Benchmark Return Options" means such Merrill Lynch mutual funds or other
investment vehicles as the Administrator may from time to time designate for the
purpose of indexing Accounts hereunder. In the event a Benchmark Return Option
ceases to exist or is no longer to be a Benchmark Return Option, the
Administrator may designate a substitute Benchmark Return Option for such
discontinued option.
<PAGE>
"Board of Directors" means the Board of Directors of ML & Co.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation and/or Sign-On Bonus. In no event shall a
Participant's base pay be considered Compensation (i.e., an amount subject to
deferral under this Plan).
"Deferral Percentage" means the percentage (which shall be in whole
percentage increments and not more than 90%), specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Plan.
"Deferred Amounts" means the amounts of Compensation actually deferred by
the Participant under this Plan.
"Election Year" means the 1994 calendar year.
"Eligible Compensation" means a Participant's "eligible compensation" as
determined, from time to time, for purposes of ML & Co.'s Basic Group Life
Insurance Plan.
"Eligible Employee" means an employee eligible to defer amounts under this
Plan, as determined under Section 2.1 hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiscal Month" means the monthly period used by ML & Co. for financial
accounting purposes.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"Full-Time Domestic Employee" means a full-time employee of the Company
paid from the Company's domestic based payroll (other than any U.S. citizen or
"green card" holder who is employed outside the United States).
"Full-Time Expatriate Employee" means a U.S. citizen or "green card" holder
employed by the Company outside the United States and selected by the
Administrator as eligible to participate in the Plan (subject to the other
eligibility criteria).
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Plan.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
2
<PAGE>
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the Selected Benchmark Return Option for which the value is
to be determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. 1995 Deferred Compensation Plan
for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 1995.
"Remaining Deferred Amounts" means a Participant's Deferred Amounts times a
fraction equal to the number of remaining installment payments divided by the
total number of installment payments.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
"Selected Benchmark Return Option" means a Benchmark Return Option selected
by the Participant in accordance with Section 3.4.
"Sign-On Bonus" means a single-sum amount paid or payable during the Plan
Year upon commencement of employment to a new Eligible Employee, in addition to
base pay and other Compensation, to induce him or her to become an employee of
the Company.
"Variable Incentive Compensation" means the variable incentive compensation
or office manager incentive compensation that is paid in cash to certain
employees of the Company generally in January or February of the Plan Year with
respect to the prior Fiscal Year, which for purposes of this Plan is considered
earned during the Plan Year regardless of when it is actually paid to the
Participant.
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
(a) General Rule. An individual is an Eligible Employee if he or she (i)
is a Full-Time Domestic Employee or a Full-Time Expatriate Employee, (ii) has at
least $200,000 of Eligible Compensation for the Election Year, (iii) has
attained at least the title of Vice President, Director or Managing Director, or
holds a National Sales Management position with the Company (a "National Sales
Manager"), and (iv) (A) is a financial consultant or an estate planning and
business insurance specialist, who was a member in 1994 of the Chairman's Club,
the Charles E. Merrill Circle, the Society of Eagles, the Falcons Club or the
Win Smith Fellows, (B) is a National Sales Manager, (C) is
3
<PAGE>
a member of the International Private Banking Group, (D) is a non-producing
employee in the Senior Manager or Senior Consultant Band (Q Band) or above, or
(E) is a producing employee in grade 95 or above; provided, that non-producing
--------
employees in the Director Band (R Band) or above and producing employees in
grade 97 or above (or their executive equivalents) shall not be required to meet
condition (ii) hereof, and provided, further, that employees who were 1994 Win
-------- -------
Smith Fellows shall not be required to meet condition (iii) hereof.
(b) Individuals First Employed During Election Year or Plan Year. Subject
to the approval of the Administrator in his sole discretion, an individual who
is first employed by the Company during the Election Year or the Plan Year is an
Eligible Employee if his or her Eligible Compensation is greater than $200,000
and he or she is either employed as a National Sales Manager or is to be
nominated for at least the title of Vice President, Director or Managing
Director at the first opportunity following his or her commencement of
employment with the Company.
(c) Wages Subject to Legal Process. An individual shall not, however, be
an Eligible Employee if as of the deadline for submission of elections specified
in Section 3.1(a) the individual's wages have been attached or are being
garnished or are otherwise restrained pursuant to legal process.
ARTICLE III
DEFERRAL ELECTIONS; ACCOUNTS
3.1 Deferral Elections.
(a) Timing and Manner of Making of Elections. An election to defer
Compensation for payment in accordance with Section 5.1 shall be made by
submitting to the Administrator such forms as the Administrator may prescribe.
Each election submitted must specify a Maximum Deferral and a Deferral
Percentage with respect to each category of Compensation to be deferred. All
elections by a Participant to defer Compensation under the Plan must be received
by the Administrator or such person as he may designate for the purpose by no
later than September 30, 1994; provided, however, that the Eligible Employee's
-------- -------
election to defer a Sign-On Bonus must be part of such Eligible Employee's terms
and conditions of employment agreed to prior to the Eligible Employee's first
day of employment with the Company.
(b) Irrevocability of Deferral Election. Except as provided in Sections
3.5 and 5.5, an election to defer the receipt of any Compensation made under
Section 3.1(a) is irrevocable once submitted to the Administrator or his
designee. The Administrator's acceptance of an election to defer Compensation
shall not, however, affect the contingent nature of such Compensation under the
plan or program under which such Compensation is payable.
(c) Application of Election. The Participant's Deferral Percentage will be
applied to each payment of Compensation to which the Participant's deferral
election applies, provided, that the aggregate of the Participant's Deferred
--------
Amounts shall not exceed the Participant's Maximum Deferral. If a Participant
has made deferral elections with respect to more than one category of
Compensation, this Section 3.1(c) shall be applied separately with respect to
each such category.
4
<PAGE>
3.2 Crediting to Accounts.
A Participant's Deferred Amounts will be credited to the Participant's
Account, as soon as practicable (but in no event later than 90 days) after the
last day of the Fiscal Month during which such Deferred Amounts would, but for
deferral, have been paid and will be accounted for in accordance with Section
3.4.
3.3 Minimum Requirements for Deferral.
(a) Minimum Requirements. Notwithstanding any other provision of this
Plan, no deferral will be effected under this Plan with respect to a Participant
if:
(i) the Participant is not an Eligible Employee as of December 31,
1994,
(ii) the Participant's election as applied to the Participant's Variable
Incentive Compensation (determined by substituting the Election
Year for the Plan Year) or Adjusted Compensation (determined by
substituting the Fiscal Year ending in 1993 for the Fiscal Year
ending in 1995) would have resulted in an annual deferral of less
than $15,000, or
(iii) the greater of (A) the sum of (1) the compensation amount listed on
the Participant's W-2 form for 1995 and (2) any Compensation that
is accelerated which the Participant may receive in December 1994
which would have been payable in calendar year 1995 in the absence
of the action of the Company to accelerate the payment, and (B) the
Participant's Eligible Compensation for calendar year 1996, is less
than $200,000;
provided, that any Participant who first becomes an employee of the Company
- --------
during the Plan Year shall not be required to satisfy conditions (i) and (ii).
(b) Failure to Meet Requirements. If any of the requirements of Section
3.3(a) are not met by a Participant, the Deferred Amounts will be paid to the
Participant, without adjustment to reflect the performance of any Selected
Benchmark Return Option, as soon as practicable after it has been determined
that the requirement has not been met provided, however, that if the Participant
-------- -------
fails to meet the requirements of Section 3.3(a) (iii), the Participant will
receive the greater of the Deferred Amounts or the Account Balance.
3.4 Benchmark Return Options; Adjustment of Accounts.
(a) Selection of Benchmark Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select one or
more Benchmark Return Options and the percentage of the Participant's Account to
be adjusted to reflect the performance of each Selected Benchmark Return Option.
All elections of Selected Benchmark Return Options shall be in multiples of 10%
unless the Administrator determines that lower increments are administratively
feasible, in which case such lower increment shall apply. A Participant may, by
complying with such procedure as the Administrator may prescribe on a uniform
and nondiscriminatory basis, including procedures specifying the frequency with
respect to which such changes may be effected (but not more than twelve times in
any calendar year), change the Selected Benchmark Return Options to be
applicable with respect to his or her Account.
5
<PAGE>
(b) Adjustment of Accounts. While each Participant's Account does not
represent the Participant's ownership of, or any ownership interest in, any
particular assets, the Account shall be adjusted to reflect the investment
experience of the Participant's Selected Benchmark Return Options in the same
manner as if investments in accordance with the Participant's elections had
actually been made through the ML Benefit Services Platform and ML II Core
Recordkeeping System, or any successor system used for keeping records of
Participants' Accounts (the "ML II System"). In adjusting Accounts, the timing
of receipt of Participant instructions by the ML II System shall control the
timing and pricing of the notional investments in the Participant's Selected
Benchmark Return Options in accordance with the rules of operation of the ML II
System and its requirements for placing corresponding investment orders, as if
orders to make corresponding investments were actually to be made, except that
in connection with the crediting of Deferred Amounts to the Participant's
Account and distributions from the Account, appropriate deferral allocation
instructions shall be treated as received from the Participant prior to the
close of transactions through the ML II System on the relevant day. Each
Selected Benchmark Return Option shall be valued using the Net Asset Value of
the Selected Benchmark Return Option as of the relevant day, provided, that, in
--------
valuing a Selected Benchmark Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions,
provided, further, that, if there are no such transactions effected through the
- -------- -------
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale
prices for that day on the principal exchange for such security,
or if such security is not traded on such principal exchange on
that day, the average of the high and low sales prices on such
exchange on the first day prior thereto on which such security
was so traded;
(ii) if the security is not listed for trading on a national
securities exchange but is traded in the over-the-counter
market, the average of the highest and lowest bid prices for
such security on the relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined by
the Administrator by whatever means he considers appropriate in
his sole discretion.
(c) Annual Charge. As of the last day of each Fiscal Year or such earlier
day in December as the Administrator shall determine, an Annual Charge of 2.0%
of the Participant's Deferred Amounts (exclusive of any appreciation or
depreciation determined under Section 3.4 (b)) shall be applied to reduce the
Account Balance (but not below zero). In the event that the Participant elects
to have the Account Balance paid in installments, this Annual Charge will be
charged on the Remaining Deferred Amounts after giving effect to the installment
payments. In the event that the Account Balance is paid out completely during a
Fiscal Year prior to the date that the Annual Charge is assessed, a pro rata
--------
Annual Charge will be deducted from amounts to be paid to the Participant to
cover that fraction of the Fiscal Year that Deferred Amounts (or Remaining
Deferred Amounts in the case of installment payments) were maintained hereunder.
The Annual Charge shall be applied as a pro rata reduction of the Account
--------
Balance indexed to each of the Participant's Selected Benchmark Return Options.
In applying the Annual Charge, the pricing principles set forth in Section
3.4(b) will be followed.
6
<PAGE>
3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1994. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1994, and (ii) if the Administrator, in his sole discretion and upon evidence of
such basis that he finds persuasive (including a material applicable change in
the Participant's U.S. Federal and/or foreign income tax rate during the period
between October 1, 1994 and November 30, 1994), agrees to the rescission of the
election. The Deferred Amounts will be paid to the Participant as soon as
practicable subject to a reduction for any applicable withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options will be paid
to the Participant as soon as practicable, and no additional amounts will be
deferred pursuant to this Plan.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his sole discretion terminate any deferral
elections made hereunder with respect to compensation not yet earned and no
further amounts will be deferred. Amounts previously deferred will continue to
be governed by the terms of this Plan.
ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNT
4.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between the ML & Co. and any Participant, the Participant's
beneficiary or estate, or any other person. Title to and beneficial ownership
of any funds represented by the Account Balance will at all times remain in ML &
Co.; such funds will continue for all purposes to be a part of the general funds
of ML & Co. and may be used for any corporate purpose. No person will, by
virtue of the provisions of this Plan, have any interest whatsoever in any
specific assets of the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT
TO RECEIVE PAYMENTS FROM ML & CO. UNDER THIS PLAN, SUCH RIGHT WILL BE NO GREATER
THAN THE RIGHT OF ANY UNSECURED GENERAL CREDITOR OF ML & CO.
7
<PAGE>
4.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution.
4.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
The effect of deferral on pension and welfare benefit plans in which the
Participant may be a participant will depend upon the provisions of each such
plan, as amended from time to time.
ARTICLE V
PAYMENT OF ACCOUNT
5.1 Payment Date.
A Participant's Account Balance will be paid by ML & Co., as elected by the
Participant at the time of his or her deferral election, either in a single sum,
or in the number of annual installments (not to exceed 15) chosen by the
Participant to commence, as specified, (i) in the month following the month of
the Participant's Retirement or death, (ii) in any month or year selected by the
Participant after the end of 1995, (iii) in any month in the calendar year
following the Participant's Retirement, but in no event may the date elected
under clause (i), (ii) or (iii) result in commencement of payments later than
the month following the Participant's 70th birthday. The amount of each annual
installment, if any, shall be a fraction of the Account Balance as of the last
day of the month immediately preceding the month in which the payment is to be
made, the numerator of such fraction shall be one and the denominator of such
fraction shall be the number of remaining installments (including the
installment to be made).
5.2 Termination of Employment.
(a) Death or Retirement. If the Participant dies or retires prior to
payment, then the Account Balance will be paid to the Participant in accordance
with the Participant's election (in the event of Retirement) or to the
Participant's beneficiary (in the event of death) in accordance with the
Participant's election of either installment payments or a lump sum, provided,
--------
however, that in the event that a beneficiary of the Participant's Account
- -------
Balance is the Participant's estate or is otherwise not a natural person, the
applicable portion of the Account Balance will be paid in lump sum to such
beneficiary.
(b) Other Termination of Employment. If the Participant's employment
terminates at any time for any reason other than death or Retirement, the
Account Balance will be paid to the Participant, in a lump sum, as soon
thereafter as is practicable.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
8
<PAGE>
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 5.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his sole discretion, direct that the Account
Balance be paid at some other time or that it be paid in installments; provided,
--------
that no such direction that adversely affects the rights of the Participant or
his or her beneficiary under this Plan shall be implemented without the consent
of the affected Participant or beneficiary. This direction may be revoked by
the Administrator at any time in his sole discretion.
5.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
5.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Plan if the primary beneficiary does not
survive the Participant. The Participant may designate more than one person as
the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing,
any change in beneficiary or contingent beneficiary will automatically revoke
prior such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Plan only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. In the event a Participant does not designate a
beneficiary, or no designated beneficiary survives the Participant, the
Participant's beneficiary shall be the Participant's surviving spouse, if the
Participant is married at the time of his or her death and not subject to a
court-approved agreement or court decree of separation, or otherwise the person
or persons designated to receive benefits on account of the Participant's death
under the ML & Co. Basic Group Life Insurance Plan (the "Life Insurance Plan").
However, if an unmarried Participant does not have coverage in effect under the
Life Insurance Plan, or the Participant has assigned his or her death benefit
under the Life Insurance Plan, any amounts payable to the Participant's
beneficiary under the Plan will be paid to the Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated.
9
<PAGE>
5.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe, and
administer this Plan so as to ensure that it provides deferred compensation for
the Participant as a member of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his willful misconduct or lack of good faith. The Administrator
may designate persons to carry out the specified responsibilities of the
Administrator and shall not be liable for any act or omission of a person as
designated.
6.2 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
6.3 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event a
question arises hereunder concerning the amount of Adjusted Compensation,
Incentive Compensation, Eligible
10
<PAGE>
Compensation, the Deferred Amounts, the Account Balance, the designation of a
beneficiary, or any other matters.
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
7.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Plan will
be construed in accordance with and governed by the laws of the State of New
York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balance
as of the date of such amendment or termination.
11
<PAGE>
Exhibit 10(xxiv)
MERRILL LYNCH & CO., INC.
2000 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
DATED AS OF SEPTEMBER 1, 1999
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
<PAGE>
MERRILL LYNCH & CO., INC.
2000 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
Table of Contents
Page
----
I. GENERAL.......................................................... 1
1.1 Purpose and Intent.......................................... 1
1.2 Definitions................................................. 1
II. ELIGIBILITY...................................................... 5
2.1 Eligible Employees.......................................... 5
(a) General Rule....................................... 5
(b) Individuals First Employed During Election Year
or Plan Year...................................... 6
(c) Disqualifying Factors.............................. 6
III. DEFERRAL ELECTIONS; ACCOUNTS..................................... 6
3.1 Deferral Elections.......................................... 6
(a) Timing and Manner of Making of Elections........... 6
(b) Irrevocability of Deferral Election................ 6
(c) Application of Election............................ 6
3.2 Crediting to Accounts....................................... 7
(a) Initial Deferrals.................................. 7
(b) KECALP............................................. 7
(c) Hedge Fund(s)...................................... 7
3.3 Minimum Requirements for Deferral........................... 7
(a) Minimum Requirements............................... 7
(b) Failure to Meet Requirements....................... 8
3.4 Return Options; Adjustment of Accounts...................... 8
(a) Selection of KECALP Return Option.................. 8
(b) Selection of Mutual Fund Return Options............ 8
(c) Selection of the KECALP Leverage Percentage
by Eligible Participants.......................... 8
(d) Adjustments of KECALP.............................. 8
(e) Adjustment of Debit Balance........................ 9
(f) Adjustment of Mutual Fund Return Balances.......... 9
(g) Annual Charge...................................... 10
(h) Rollover Option.................................... 10
3.5 Rescission of Deferral Election............................. 11
(a) Prior to December 1, 1999.......................... 11
(b) Adverse Tax Determination.......................... 11
(c) Rescission For Amounts Not Yet Earned.............. 11
IV. STATUS OF DEFERRED AMOUNTS AND ACCOUNT........................... 11
4.1 No Trust or Fund Created; General Creditor Status........... 11
4.2 Non-Assignability........................................... 12
4.3 Effect of Deferral on Benefits Under Pension and
Welfare Benefit Plans...................................... 12
-i-
<PAGE>
Page
----
V. PAYMENT OF ACCOUNT............................................... 12
5.1 Manner of Payment........................................... 12
(a) Regular Payment Elections........................ 12
(b) Modified Installment Payments.................... 12
5.2 Termination of Employment................................... 13
(a) Death or Retirement.............................. 13
(b) Other Termination of Employment - Forfeiture
of Leverage..................................... 13
(c) Leave of Absence, Transfer or Disability......... 14
(d) Discretion to Alter Payment Date................. 14
5.3 Withholding of Taxes........................................ 14
5.4 Beneficiary ................................................ 14
(a) Designation of Beneficiary....................... 14
(b) Change in Beneficiary............................ 15
(c) Default Beneficiary.............................. 15
(d) If the Beneficiary Dies During Payment........... 15
5.5 Hardship Distributions...................................... 15
5.6 Domestic Relations Orders................................... 16
VI. ADMINISTRATION OF THE PLAN....................................... 16
6.1 Powers of the Administrator................................. 16
6.2 Payments on Behalf of an Incompetent........................ 16
6.3 Corporate Books and Records Controlling..................... 16
VII. MISCELLANEOUS PROVISIONS......................................... 17
7.1 Litigation.................................................. 17
7.2 Headings Are Not Controlling................................ 17
7.3 Governing Law............................................... 17
7.4 Amendment and Termination................................... 17
-ii-
<PAGE>
MERRILL LYNCH & CO., INC.
2000 DEFERRED COMPENSATION PLAN
FOR A SELECT GROUP OF ELIGIBLE EMPLOYEES
ARTICLE I
GENERAL
1.1 Purpose and Intent.
The purpose of the Plan is to encourage the employees who are integral to
the success of the business of the Company to continue their employment by
providing them with flexibility in meeting their future income needs. It is
intended that this Plan be unfunded and maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees within the meaning of Title I of ERISA, and all decisions
concerning who is to be considered a member of that select group and how this
Plan shall be administered and interpreted shall be consistent with this
intention.
1.2 Definitions.
For the purpose of the Plan, the following terms shall have the meanings
indicated.
"Account" means the reserve account established on the books and records of
ML & Co. for each Participant to record the Participant's interest under the
Plan.
"Account Balance" means, as of any date, the Deferred Amounts credited to a
Participant's Account, adjusted in accordance with Section 3.4 to reflect the
performance of the Participant's Selected Benchmark Return Options, the Annual
Charge, and any payments made from the Account to the Participant prior to that
date.
"Adjusted Compensation" means the financial consultant incentive
compensation, account executive incentive compensation or estate planning and
business insurance specialist incentive compensation, in each case exclusive of
base salary, earned by a Participant during the Fiscal Year ending in 2000, and
payable after January 1, 2000, as a result of the Participant's production
credit level, or such other similar items of compensation as the Administrator
shall designate as "Adjusted Compensation" for purposes of this Plan.
"Administrator" means the Director of Human Resources of ML & Co., or his
or her functional successor, or any other person or committee designated as
Administrator of the Plan by the MDCC.
"Affiliate" means any corporation, partnership, or other organization of
which ML & Co. owns or controls, directly or indirectly, not less than 50% of
the total combined voting power of all classes of stock or other equity
interests.
"Annual Charge" means the charge to a Participant's Account provided for in
Section 3.4(g).
<PAGE>
"Applicable Federal Rate" means the applicable federal rate for short-term
(0-3 years) obligations of the United States Treasury established in January of
each year.
"Available Balance" means amounts in a Participant's Account after the
Debit Balance has been reduced to zero.
"Average Leveraged Principal Amount" means, for each Participant, for any
period, the sum of the Leveraged Principal Amounts outstanding at the end of
each day in the period divided by the number of days in such period.
"Benchmark Return Options" means such investment vehicles as the
Administrator may from time to time designate for the purpose of indexing
Accounts hereunder. In the event a Benchmark Return Option ceases to exist or
is no longer to be a Benchmark Return Option, the Administrator may designate a
substitute Benchmark Return Option for such discontinued option.
"Board of Directors" means the Board of Directors of ML & Co.
"Career Retirement" means a Participant's termination of employment with
the Company for reasons other than for cause on or after: (i) the Participant's
55th birthday, if the Participant has at least 5 years of service; (ii) the
Participant's 50th birthday, if the Participant has at least 10 years of
service; (iii) the Participant's 45th birthday, if the Participant has at least
15 years of service, or (iv) at any age, if the Participant has at least 20
years of service, provided that, in each case, following such termination such
Participant does not engage in any activity that, in the sole judgment of the
Administrator, is in competition with the business of the Company.
"Code" means the U.S. Internal Revenue Code of 1986, as amended from time
to time.
"Company" means ML & Co. and all of its Affiliates.
"Compensation" means, as relevant, a Participant's Adjusted Compensation,
Variable Incentive Compensation and/or Sign-On Bonus, or such other items or
items of compensation as the Administrator, in his sole discretion, may specify
in a particular instance.
"Debit Balance" means, as of any date the negative dollar amount, if any,
representing each of: (1) the aggregate Annual Charge, accrued in accordance
with Section 3.4(g)(i); and (2) any Leveraged Principal Amount (together with
any pro rata Interest Amounts determined in accordance with Section 3.4(g)(ii),
if applicable), as reduced by any distributions recorded from KECALP Units
recorded in a Participant's Account or chargeoffs against the Liquid Balance in
such Account in accordance with Section 3.4(e).
"Deferral Percentage" means the percentage (which, unless the
Administrator, in his sole discretion, determines otherwise, shall be in whole
percentage increments and not more than 90%) specified by the Participant to be
the percentage of each payment of Compensation he or she wishes to defer under
the Plan.
"Deferred Amounts" means, except as provided in Section 5.6, the amounts of
Compensation actually deferred by the Participant under this Plan.
"Election Year" means the 1999 calendar year.
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"Eligible Compensation" means (1) for persons eligible for the Variable
Incentive Compensation Program or other similar programs: (A) a Participant's
1998 base earnings (and/or 1998 Adjusted Compensation) plus (B) any cash bonus
awarded in early 1999, and (2) for persons ineligible for such bonus programs, a
Participant's 1998 Adjusted Compensation.
"Eligible Employee" means an employee eligible to defer amounts under this
Plan, as determined under Section 2.1 hereof.
"ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Fiscal Month" means the monthly period used by ML & Co. for financial
accounting purposes.
"Fiscal Year" means the annual period used by ML & Co. for financial
accounting purposes.
"Full-Time Domestic Employee" means a full-time employee of the Company
paid from the Company's domestic based payroll (other than any U.S. citizen or
"green card" holder who is employed outside the United States).
"Full-Time Expatriate Employee" means a U.S. citizen or "green card" holder
employed by the Company outside the United States and selected by the
Administrator as eligible to participate in the Plan (subject to the other
eligibility criteria).
"Hedge Fund Return Option(s)" means one or more multi-advisor hedge funds
structured and managed by Merrill Lynch Investment Partners Inc. that are
offered as Benchmark Return Options.
"Hedge Fund Unit(s)" means the record-keeping units credited to the
Accounts of Participants who have chosen one or more Hedge Fund Return Options.
"Initial Leveraged Amount" means the initial dollar amount by which a
Participant's deferral into KECALP Units is leveraged as determined in
accordance with Section 3.4(c).
"Interest" means the hypothetical interest accruing on a Participant's
Average Leveraged Principal Amount at the Applicable Federal Rate.
"Interest Amounts" means, for any Participant, as of any date, the amount
of Interest that has accrued to such date on such Participant's Average
Leveraged Principal Amount, from the date on which a Participant's Leveraged
Principal Amount is established, or from the most recent date that Interest
Amounts were added to the Leveraged Principal Amount.
"KECALP Return Option" means the option of indexing returns hereunder to
the performance of a KECALP limited partnership, on a leveraged or unleveraged
basis.
"KECALP Units" means the record-keeping units credited to the Accounts of
Participants who have chosen the KECALP Return Option.
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"Leveraged or Unleveraged Distributions" means the distributions to a
Participant's Account attributable to the leveraged or unleveraged portion (as
the case may be) of a Participant's KECALP Units.
"Leverage-Eligible Participants" means persons who have at least $400,000
of Total Compensation for the Election Year and otherwise qualify, in accordance
with standards determined by the Administrator, to select a KECALP Return Option
on a leveraged basis.
"Leverage Percentage" means the percentage of leverage chosen by a
Leverage-Eligible Participant, which percentage will be subject to limits
determined by the Administrator.
"Leveraged Principal Amount" means a Participant's Initial Leveraged
Amount, if any, as adjusted to reflect the addition of Interest Amounts (or any
pro rata Interest Amounts).
"Liquid Balance" means, as of any date, the Deferred Amounts credited to a
Participant's Account, adjusted (either up or down) to reflect: (1) the
performance of the Participant's Mutual Fund Return Balances as provided in
Section 3.4(f); (2) distributions with respect to KECALP Units made in
accordance with Section 3.4(d); (3) reduction of any Debit Balance as provided
in Section 3.4(e); and (4) any payments to the Participant under Article V
hereof.
"Maximum Deferral" means the whole dollar amount specified by the
Participant to be the amount of Compensation he or she elects to be deferred
under the Plan.
"MDCC" means the Management Development and Compensation Committee of the
Board of Directors.
"ML & Co." means Merrill Lynch & Co., Inc.
"Mutual Fund Return Options" means the mutual funds chosen as Benchmark
Return Options by the Administrator.
"Net Asset Value" means, with respect to each Benchmark Return Option that
is a mutual fund or other commingled investment vehicle for which such values
are determined in the normal course of business, the net asset value, on the
date in question, of the vehicle for which such value is being determined.
"Participant" means an Eligible Employee who has elected to defer
Compensation under the Plan.
"Plan" means this Merrill Lynch & Co., Inc. 2000 Deferred Compensation Plan
for a Select Group of Eligible Employees.
"Plan Year" means the Fiscal Year ending in 2000.
"Retirement" means a Participant's (i) termination of employment with the
Company for reasons other than for cause on or after the Participant's 65th
birthday, or (ii) resignation on or after the Participant's 55th birthday if the
Participant has at least 10 years of service, or (iii) resignation at any age
with the express approval of the Administrator, which will be granted only if
the termination is found by the Administrator to be in, or not contrary to, the
best interests of the Company.
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"Remaining Deferred Amounts" means a Participant's Deferred Amounts times a
fraction equal to the number of remaining installment payments divided by the
total number of installment payments.
"Selected Benchmark Return Option" means a Benchmark Return Option selected
by the Participant in accordance with Section 3.4.
"Sign-On Bonus" means a single-sum amount paid or payable to a new Eligible
Employee during the Plan Year upon commencement of employment, in addition to
base pay and other Compensation, to induce him or her to become an employee of
the Company, or any similar item of compensation as the Administrator shall
designate as "Sign-On Bonus" for purposes of this Plan.
"Total Compensation" means Eligible Compensation plus the grant value, as
determined by ML & Co. at the time of grant, of stock-based awards that are
granted to certain employees of the Company generally in January or February of
the Plan Year with respect to the prior Fiscal Year, which, for purposes of this
Plan, are considered earned during the Plan Year regardless of when they are
actually granted or paid to the Participant.
"Undistributed Deferred Amounts" means, as of any date on which the Annual
Charge is determined, a Participant's Deferred Amounts (exclusive of any
appreciation or depreciation) minus, for each distribution to a Participant
prior to such date, an amount equal to the product of the Deferred Amounts and a
fraction the numerator of which is the amount of such distribution and the
denominator of which is the combined Net Asset Value (prior to distribution) of
the Participant's Account as of the date of the relevant distribution.
"Variable Incentive Compensation" means the variable incentive compensation
or office manager incentive compensation that is paid in cash to certain
employees of the Company generally in January or February of the Plan Year with
respect to the prior Fiscal Year, which for purposes of this Plan is considered
earned during the Plan Year regardless of when it is actually paid to the
Participant, or such other similar items of compensation as the Administrator
shall designate as "Variable Incentive Compensation" for purposes of this Plan.
"401(k) Plan" means the Merrill Lynch & Co., Inc. 401(k) Savings &
Investment Plan.
ARTICLE II
ELIGIBILITY
2.1 Eligible Employees.
(a) General Rule. An individual is an Eligible Employee if he or she (i)
is a Full-Time Domestic Employee or a Full-Time Expatriate Employee, (ii) has at
least $225,000 of Eligible Compensation for the Election Year, (iii) has
attained at least the title of Vice President, Director or Managing Director, or
holds a National Sales Management position with the Company (a "National Sales
Manager"), and (A) is a financial consultant or an estate planning and business
insurance specialist, who was a member in 1999 of the Chairman's Club, the
Charles E. Merrill Circle, the Society of Eagles, the Falcons Club, the Circle
of Champions, the Circle of Excellence
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or the Director's Circle, (B) is a member of the International Private Banking
Group, (C) is employed as an Investment Manager for Merrill Lynch Asset
Management, (D) is an employee in the 2 Band or above, or (E) is a producing
employee in grade 95 or above; provided, that employees in the 1 Band or above
--------
and producing employees in grade 97 or above (or their executive equivalents)
shall not be required to meet condition (ii) hereof; and provided, further, that
-------- -------
employees who were 1999 Win Smith Fellows shall not be required to meet
condition (iii) hereof.
(b) Individuals First Employed During Election Year or Plan Year. Subject
to the approval of the Administrator in his or her sole discretion, an
individual who is first employed by the Company during the Election Year or the
Plan Year is an Eligible Employee if his or her Eligible Compensation, together,
if applicable, with the amount of any Variable Incentive Compensation that will
be payable to such individual in the next annual bonus cycle pursuant to a
written bonus guarantee, is greater than $225,000, and he or she is either
employed as a National Sales Manager or is to be nominated for at least the
title of Vice President, Director or Managing Director at the first opportunity
following his or her commencement of employment with the Company.
(c) Disqualifying Factors. An individual shall not be an Eligible Employee
if either (i) as of the deadline for submission of elections specified in
Section 3.1(a), the individual's wages have been attached or are being garnished
or are otherwise restrained pursuant to legal process, or (ii) within 13 months
prior to the deadline for submission of elections specified in Section 3.1(a),
the individual has made a hardship withdrawal of Elective 401(k) Deferrals as
defined under the 401(k) Plan.
ARTICLE III
DEFERRAL ELECTIONS; ACCOUNTS
3.1 Deferral Elections.
(a) Timing and Manner of Making of Elections. An election to defer
Compensation for payment in accordance with Article V shall be made by
submitting to the Administrator such forms as the Administrator may prescribe in
whatever manner that the Administrator may indicate. Each election submitted
must specify a Maximum Deferral and a Deferral Percentage with respect to each
category of Compensation to be deferred. All elections by a Participant to
defer Compensation under the Plan must be received by the Administrator or such
person as he may designate for the purpose by no later than September 30 of the
Election Year (or such later date as the Administrator, in his sole discretion,
may specify in any particular instance) or, in the event such date is not a
business day, the immediately preceding business day; provided, however, that
-------- -------
the Eligible Employee's election to defer a Sign-On Bonus must be part of such
Eligible Employee's terms and conditions of employment agreed to prior to the
Eligible Employee's first day of employment with the Company.
(b) Irrevocability of Deferral Election. Except as provided in Sections
3.5 and 5.5, an election to defer the receipt of any Compensation made under
Section 3.1(a) is irrevocable once submitted to the Administrator or his
designee. The Administrator's acceptance of an
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election to defer Compensation shall not, however, affect the contingent nature
of such Compensation under the plan or program under which such Compensation is
payable.
(c) Application of Election. The Participant's Deferral Percentage will be
applied to each payment of Compensation to which the Participant's deferral
election applies, provided that the aggregate of the Participant's Deferred
--------
Amounts shall not exceed the Participant's Maximum Deferral. If a Participant
has made deferral elections with respect to more than one category of
Compensation, this Section 3.1(c) shall be applied separately with respect to
each such category.
3.2 Crediting to Accounts.
(a) Initial Deferrals. A Participant's Deferred Amounts will be credited to
the Participant's Account as soon as practicable (but in no event later than the
end of the following month) after the last day of the Fiscal Month during which
such Deferred Amounts would, but for deferral, have been paid and will be
accounted for in accordance with Section 3.4. No interest will accrue, nor will
any adjustment be made to an Account, for the period until the Deferred Amounts
are credited.
(b) KECALP. Upon the closing of any Merrill Lynch KECALP Return Option, a
Participant's Account will be credited with a number of units determined by
dividing by $1,000 the sum of the following: (1) the portion of the Account
Balance that the Participant has elected to allocate to the KECALP Return
Option, as of the day prior to the closing date; and (2) the Participant's
Initial Leveraged Amount (computed in accordance with Section 3.4(c)). Any
amounts not applied to the KECALP Unit Account will remain in a Participant's
Account (or be applied to reduce a Participant's Debit Balance). No fractional
units will be credited.
3.3 Minimum Requirements for Deferral.
(a) Minimum Requirements. Notwithstanding any other provision of this
Plan, no deferral will be effected under this Plan with respect to a Participant
if:
(i) the Participant is not an Eligible Employee as of December 31,
1999,
(ii) the Participant's election as applied to the Participant's Variable
Incentive Compensation (determined by substituting the Election
Year for the Plan Year) or Adjusted Compensation (determined by
substituting the Fiscal Year immediately prior to the Fiscal Year
ending in the Election Year for the Fiscal Year ending in the Plan
Year) would have resulted in an annual deferral of less than
$15,000, or
(iii) the greater of (A) the sum of (1) the "Medicare wages" amount
listed on the Participant's W-2 form for the Plan Year, and (2) any
Compensation that is accelerated which the Participant may receive
in December of the Election Year which would have been payable in
the Plan Year in the absence of the action of the Company to
accelerate the payment, or (B) the Participant's Eligible
Compensation for the Plan Year, is less than $225,000;
provided, that any Participant who first becomes an employee of the Company
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during the Plan Year shall not be required to satisfy conditions (i) and (ii).
Condition (ii) shall not be construed to require a Participant's elections to
result in an actual deferral of at least $15,000.
------
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(b) Failure to Meet Requirements. If the requirements of Section 3.3(a)(i)
or (ii) are not met by a Participant to whom such requirements are applicable,
such Participant's Deferred Amounts, if any, will be paid to such Participant,
without adjustment to reflect the performance of any Selected Benchmark Return
Option, as soon as practicable after it has been determined that the
requirements have not been met. If the requirements of Section 3.3(a)(iii) are
not met by a Participant, the greater of such Participant's Deferred Amounts or
Account Balance will be paid to such Participant as soon as practicable after it
has been determined that the requirements have not been met.
3.4 Return Options; Adjustment of Accounts.
(a) Selection of KECALP Return Options. In any year that a KECALP
partnership is offered, eligible Participants may select the KECALP Return
Option (and designate any Leverage Percentage). Participants should be aware
that once the closing of the relevant KECALP partnership has occurred,
Participants will not be able to change their elections of such options.
(b) Selection of Mutual Fund Return Options. Coincident with the
Participant's election to defer Compensation, the Participant must select the
percentage of the Participant's Account to be adjusted to reflect the
performance of Mutual Fund Return Options, for use when a Participant's Account
has a Liquid Balance. All elections shall be in multiples of 1%. A Participant
may, by complying with such procedures as the Administrator may prescribe on a
uniform and nondiscriminatory basis, including procedures specifying the
frequency with respect to which such changes may be effected (but not more than
12 times in any calendar year), change the Selected Benchmark Return Options to
be applicable with respect to his or her Account.
(c) Selection of the KECALP Leverage Percentage by Eligible Participants.
Prior to the closing of the offering of a KECALP partnership, Leverage-Eligible
Participants who select the KECALP Return Option on a leveraged basis must
choose their Leverage Percentage, in accordance with standards determined by the
Administrator, by submitting such forms as the Administrator shall prescribe.
Prior to the closing of a KECALP partnership, the Administrator will determine
each Leverage-Eligible Participant's Initial Leveraged Amount by applying such
Participant's Leverage Percentage to the dollar value of the portion of the
Participant's Account Balance allocated to the KECALP Return Option. The Initial
Leveraged Amount will be recorded as the Leveraged Principal Amount, to which
amount Interest Amounts will be added annually in accordance with Section
3.4(e).
(d) Adjustments of KECALP. Whenever a distribution is paid on an actual
unit of a KECALP partnership, an amount equal to such per unit distribution
times the number of units in the Participant's Account will first be applied
against any Debit Balance, as provided in Section 3.4(e), and then, if any
portion of such distribution remains after the Debit Balance is reduced to zero,
be credited to the Participant's Account to be indexed to the Mutual Fund Return
Option(s) chosen by the Participant. Because the KECALP Return Option is
illiquid, payouts to Participants under Article V hereof will be made only from
amounts credited to a Participant's Account after the Debit Balance is reduced
to zero. The KECALP Units and the Debit Balance will also be adjusted in
accordance with Section 5.2 hereof in the event of a Participant's termination.
(e) Adjustment of Debit Balance. Any Debit Balance shall be reduced as soon
as possible against either (i) any Liquid Balance, or (ii) any distributions
relating to KECALP Units. Reductions of the Debit Balance, as provided in the
foregoing sentence, shall be applied first to reduce the Debit Balance
attributable to accrued
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Annual Charges and then, after all such accrued Annual Charges have been
satisfied, to reduce any Leveraged Principal Amount. As of the last day of each
Fiscal Year, Interest Amounts computed by the Administrator shall be added to
the Leveraged Principal Amount. If on any date the Leveraged Principal Amount
would be discharged completely as a result of distributions or chargeoffs,
Interest Amounts will be computed though such date and added to the Leveraged
Principal Amount as of such date.
(f) Adjustment of Mutual Fund Return Balances. While the Participant's
Balances do not represent the Participant's ownership of, or any ownership
interest in, any particular assets, the Balances attributable to Mutual Fund
Return Options shall be adjusted to reflect credits or debits relating to
distributions with respect to the KECALP Units or chargeoffs against the Debit
Balance and to reflect the investment experience of the Participant's Mutual
Fund Return Options in the same manner as if investments or dispositions in
accordance with the Participant's elections had actually been made through the
ML Benefit Services Platform and ML II Core Recordkeeping System, or any
successor system used for keeping records of Participants' Accounts (the "ML II
System"). In adjusting Accounts, the timing of receipt of Participant
instructions or credits or debits by the ML II System shall control the timing
and pricing of the notional investments in the Participant's Mutual Fund Return
Options in accordance with the rules of operation of the ML II System and its
requirements for placing corresponding investment orders, as if orders to make
corresponding investments or dispositions were actually to be made, except that
in connection with the crediting of Deferred Amounts or distributions to the
Participant's Account and distributions from or debits to the Account,
appropriate deferral allocation instructions shall be treated as received from
the Participant prior to the close of transactions through the ML II System on
the relevant day. Each Mutual Fund Return Option shall be valued using the Net
Asset Value of the Mutual Fund Return Option as of the relevant day; provided,
--------
that, in valuing a Mutual Fund Return Option for which a Net Asset Value is not
computed, the value of the security involved for determining Participants'
rights under the Plan shall be the price reported for actual transactions in
that security through the ML II System on the relevant day, without giving
effect to any transaction charges or costs associated with such transactions;
provided, further, that, if there are no such transactions effected through the
- -------- -------
ML II System on the relevant day, the value of the security shall be:
(i) if the security is listed for trading on one or more national
securities exchanges, the average of the high and low sale prices
for that day on the principal exchange for such security, or if such
security is not traded on such principal exchange on that day, the
average of the high and low sales prices on such exchange on the
first day prior thereto on which such security was so traded;
(ii) if the security is not listed for trading on a national securities
exchange but is traded in the over-the-counter market, the average
of the highest and lowest bid prices for such security on the
relevant day; or
(iii) if neither clause (i) nor (ii) applies, the value determined by the
Administrator by whatever means he considers appropriate in his sole
discretion.
All debits and charges against the Account shall be applied as a pro rata
--------
reduction of the portion of the Account Balance indexed to each of the
Participant's Mutual Fund Return Options.
(g) Annual Charge. As of the last day of each Fiscal Year or such earlier
day in December as the Administrator shall determine, an Annual Charge of 2.0%
of the Participant's Deferred Amounts (exclusive of any appreciation or
depreciation determined under Section 3.4 (f)) shall be applied to reduce the
Account Balance.
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(i) In the event that all or any portion of the Account Balance is
indexed to a Benchmark Return Option with less than daily liquidity,
the Annual Charge will accrue as a Debit Balance and be paid out of
future amounts credited to the Account Balance.
(ii) In the event that the Participant elects to have the Account Balance
paid in installments, the Annual Charge will be charged on the
Remaining Deferred Amounts after giving effect to the installment
payments.
(iii) In the event that the Account Balance is paid out completely during a
Fiscal Year prior to the date upon which the Annual Charge is
assessed, a pro --- rata Annual Charge will be deducted from amounts
to be paid to the Participant ---- to cover that fraction of the
Fiscal Year that Deferred Amounts (or Remaining Deferred Amounts in
the case of installment payments) were maintained hereunder. The
Annual Charge shall be applied as a pro rata reduction of the portion
of the -------- Account Balance indexed to each of the Participant's
Selected Benchmark Return Options. In applying the Annual Charge, the
pricing principles set forth in Section 3.4(f) will be followed.
(h) Rollover Option. In the discretion of the Administrator or a designee,
additional Benchmark Return Options, including Return Options with less than
daily liquidity, may be offered to all Participants under the Plan or to a more
limited group of Participants, if appropriate because of regulatory
requirements. In such event, Participants will be entitled, in such manner as
the Administrator shall determine, to elect that all or a portion of Account
Balances be indexed to such Benchmark Return Options.
(i) With respect to Benchmark Return Options that do not provide daily
liquidity: (A) payments under Article V will be made in accordance
with a Participant's election at the time of the Participant's
original deferral, with any adjustments required for the more limited
liquidity of such Return Option; (B) Participants may be limited in
their ability to elect, change or continue their Benchmark Return
Options in accordance with such terms and conditions as the
Administrator or a designee may determine; and (C) the Annual Charge
shall be accrued and paid, when possible, upon liquidation of all or
any portion of the Benchmark Return Option, provided that no payment
shall be made to a Participant under Article V hereof until all
accrued Annual Charges have been paid.
(ii) In the event that such limited liquidity options include future KECALP
Partnerships, the designated amounts shall be credited to such
Participant, accounted for, adjusted and paid out to such Participant
in accordance with the terms and conditions of this Plan as they
related to the KECALP Return Option.
3.5 Rescission of Deferral Election.
(a) Prior to December 1, 1999. A deferral election hereunder may be
rescinded at the request of a Participant only (i) on or before December 1,
1999, and (ii) if the Administrator, in his sole discretion and upon evidence of
such basis that he finds persuasive (including a material applicable change in
the Participant's U.S. Federal and/or foreign income tax rate during the period
between September 30, 1999 and November 30, 1999), agrees to the rescission of
the election. In the event that the Administrator agrees to the rescission, the
Deferred Amounts, if
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any, credited to the Participant's Account will be paid to the Participant as
soon as practicable thereafter, subject to reduction for any applicable
withholding taxes.
(b) Adverse Tax Determination. Notwithstanding the provisions of Section
3.5(a), a deferral election may be rescinded at any time if (i) a final
determination is made by a court or other governmental body of competent
jurisdiction that the election was ineffective to defer income for purposes of
U.S. Federal, state, local or foreign income taxation and the time for appeal
from this determination has expired, and (ii) the Administrator, in his sole
discretion, decides, upon the Participant's request and upon evidence of the
occurrence of the events described in (i) hereof that he finds persuasive, to
rescind the election. Upon such rescission, the Account Balance, including any
adjustment for performance of the Selected Benchmark Return Options, will be
paid to the Participant as soon as practicable, and no additional amounts will
be deferred pursuant to this Plan.
(c) Rescission For Amounts Not Yet Earned. Upon the Participant's written
request, the Administrator may in his sole discretion terminate any deferral
elections made hereunder with respect to Compensation not yet earned and no
further amounts will be deferred. In addition, in the event a Participant
receives a hardship withdrawal under the 401(k) Plan, the Administrator shall,
as of the date the Participant's Elective 401(k) Deferrals (as defined in the
401(k) Plan) are suspended under the 401(k) Plan as a result of such hardship
withdrawal, terminate the Participant's deferrals under this Plan in accordance
with the preceding sentence, as if the Participant had requested rescission in
writing. In each case, amounts previously deferred will continue to be governed
by the terms of this Plan.
ARTICLE IV
STATUS OF DEFERRED AMOUNTS AND ACCOUNT
4.1 No Trust or Fund Created; General Creditor Status.
Nothing contained herein and no action taken pursuant hereto will be
construed to create a trust or separate fund of any kind or a fiduciary
relationship between ML & Co. and any Participant, the Participant's beneficiary
or estate, or any other person. Title to and beneficial ownership of any funds
represented by the Account Balance will at all times remain in ML & Co.; such
funds will continue for all purposes to be a part of the general funds of ML &
Co. and may be used for any corporate purpose. No person will, by virtue of the
provisions of this Plan, have any interest whatsoever in any specific assets of
the Company. TO THE EXTENT THAT ANY PERSON ACQUIRES A RIGHT TO RECEIVE PAYMENTS
FROM ML & CO. UNDER THIS PLAN, SUCH RIGHT WILL BE NO GREATER THAN THE RIGHT OF
ANY UNSECURED GENERAL CREDITOR OF ML & CO.
4.2 Non-Assignability.
The Participant's right or the right of any other person to the Account
Balance or any other benefits hereunder cannot be assigned, alienated, sold,
garnished, transferred, pledged, or encumbered except by a written designation
of beneficiary under this Plan, by written will, or by the laws of descent and
distribution.
4.3 Effect of Deferral on Benefits Under Pension and Welfare Benefit Plans.
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The effect of deferral on pension and welfare benefit plans in which the
Participant may participate will depend upon the provisions of each such plan,
as amended from time to time.
12
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ARTICLE V
PAYMENT OF ACCOUNT
5.1 Manner of Payment.
(a) Regular Payment Elections. A Participant's Account Balance will be
paid by the Company, as elected by the Participant at the time of his or her
deferral election, either in a single payment to be made, or in the number of
annual installments (not to exceed 15) chosen by the Participant to commence,
(i) in the month following the month of the Participant's Retirement or death,
(ii) in any month and year selected by the Participant after the end of 2000, or
(iii) in any month in the calendar year following the Participant's Retirement;
provided that, if a Participant's election would result in payment (in the case
- --------
of a single payment) or commencement of payment (in the case of installment
payments) after the Participant's 70th birthday, then, notwithstanding the
Participant's elections, the Company will pay, or commence payment of, the
Participant's Account Balance in the month following the Participant's 70th
birthday unless the Participant continues to be an active full time employee at
such time, in which case the Company will pay, or commence payment of, the
Participant's Account Balance in the month following the Participant's cessation
of active service (to the extent payment has not already been made or
commenced). The amount of each annual installment, if applicable, shall be
determined by multiplying the Account Balance as of the last day of the month
immediately preceding the month in which the payment is to be made by a
fraction, the numerator of which is one and the denominator of which is the
number of remaining installment payments (including the installment payment to
be made). In the event that immediately prior to the lump sum payment or the
initial installment payment, all or any portion of a Participant's Account
Balance remains indexed to a Benchmark Return Option with less than daily
liquidity, such payment shall be adjusted, if necessary, for the liquidity
restraints of the Benchmark Return Option and, in the case of an election of 11
or more installment payments commencing upon Retirement or a date certain
coincident with Retirement, shall be delayed until such Account Balance is fully
liquid.
[(b) Modified Installment Payments. In lieu of one of the regular payment
elections provided for in Section 5.1(a), a Participant may elect to receive the
Account Balance in at least 11 but no more than 15 annual installment payments
("modified installment payments"), such modified installment payments to
commence on the last business day in March in the year following the
Participant's Retirement or death (the "Initial Payment Date"), provided that,
in the event that immediately prior to the initial payment of such installment
payments, all or any portion of a Participant's Account Balance remains indexed
to a Benchmark Return Option with less than daily liquidity, such initial
payment shall be delayed until such Account Balance is fully liquid. The
modified installment payments shall be computed in accordance with last sentence
of Section 5.1(a) and will in all other respects be treated like regular
installment payments under the Plan. By electing modified installment payments,
the Participant agrees that at any time prior to the last day of February
immediately preceding a Participant's Initial Payment Date (the "Determination
Date"), ML & Co. shall have the right, without the consent of the Participant or
any beneficiary, to change the Participant's method of payment to 11 annuitized
payments ("annuitized payments"), in the event that, in the sole discretion of
the Administrator, it is determined that such a change is necessary or
appropriate in order to preserve the intended state tax benefits of the modified
installment payments to the Participant or any beneficiary. In the event that
the Administrator determines that annuitized payments shall be made, the amount
13
<PAGE>
of the annuitized payments will be determined by applying the Discount Rate, as
defined below, to the Account Balance as of the Determination Date to create a
stream of 11 equal annual payments. If annuitized payments are to be made, then
the Account Balance shall cease to be adjusted pursuant to Section 3.4 as of the
Determination Date (except that a pro rata Annual Charge will be deducted from
--- ----
the Account Balance prior to calculation of the annuitized payments to cover the
fraction of the Fiscal Year preceding the Determination Date) and the Company's
only obligation to the Participant shall be to make the annuitized payments when
due. As used herein, Discount Rate shall mean ML & Co.'s then-applicable after-
tax cost of borrowing and is defined as (A) x (B), where (A) is equal to 1 minus
ML & Co.'s then-effective tax rate, expressed as a decimal, and (B) is equal to
the sum of: (i) the annual yield on the then-current 5-year U.S. Treasury Note,
and (ii) a spread (which will not be less than 0.10%) indicative of ML & Co.'s
borrowing cost for transactions of similar structure and average maturity to the
annuity, as determined by ML & Co.]
5.2 Termination of Employment.
(a) Death or Retirement. Upon a Participant's death, Career Retirement, or
Retirement prior to payment, the Account Balance will be paid, in accordance
with the Participant's elections and as provided in Section 5.1(a) or (b), as
applicable, to the Participant (in the event of Career Retirement or Retirement)
or to the Participant's beneficiary (in the event of death); provided, however,
-------- -------
that in the event that a beneficiary of the Participant's Account is the
Participant's estate or is otherwise not a natural person, then (i) if the
Participant has elected a regular payment election pursuant to Section 5.1(a),
the applicable portion of the Account Balance will be paid in a single payment
to such beneficiary notwithstanding any election of installment payments, and
(ii) if the Participant has elected modified installment payments pursuant to
Section 5.1(b), the applicable portion of the Account Balance will continue to
be payable as modified installment payments or annuitized payments, as the case
may be, in accordance with Section 5.1(b), but only to a single person
consisting of the administrator or executor of the Participant's estate or
another person lawfully designated by the administrator or executor (and in the
event no such person is designated within a reasonable time, payment will be
made in a lump sum).
(b) Other Termination of Employment - Forfeiture of Leverage. If the
Participant's employment terminates at any time for any reason other than death,
Career Retirement or Retirement, then, notwithstanding the Participant's
elections hereunder, any Available Benchmark Return Account Balance will be paid
to the Participant, as soon as practicable, in a single payment if the Account
Balance is fully liquid, or as available, as soon thereafter as is practicable,
notwithstanding the Participant's elections hereunder. In the event that a
Participant's employment terminates at any time for any reason other than death,
disability, Career Retirement or Retirement, such Participant will forfeit all
rights to the leveraged portion of such Participant's KECALP Unit Account,
including any future Leveraged Distributions, unless the Administrator, in his
sole discretion, determines that such forfeiture would be detrimental to Merrill
Lynch based on the Net Asset Value of the KECALP Units; provided, however, that
such forfeiture will not occur: if (1) the Participant is terminated by ML & Co.
as the result of a reduction in staff, (2) the Participant delivers to ML & Co.
a release of claims (in a form approved by the Director of Human Resources of ML
& Co. and counsel) he or she may have against the corporation or any of its
subsidiaries and (3) such Participant complies with the terms of such release.
In the event of such forfeiture, the Participant's Account Balance and Debit
Balance will be restated by the Administrator, as of the date of termination, to
reflect what such balances would have been had the Participant selected no
leverage under Section 3.4(c). To the extent necessary, the Participant's
Account Balance will also be adjusted, as of the
14
<PAGE>
date of the termination, to credit the Participant with the amount of any
Unleveraged Distributions that were previously applied to the repayment of the
Leveraged Principal Amount and any Interest Amounts and, to the extent
necessary, any Leveraged Distributions paid out to the Participant will be
restated as a Debit Balance. Leveraged and Unleveraged Distributions shall be
deemed to have been applied and distributed proportionately. All calculations
hereunder shall be made by the Administrator and shall be final and
determinative.
(c) Leave of Absence, Transfer or Disability. The Participant's employment
will not be considered as terminated if the Participant is on an approved leave
of absence or if the Participant transfers or is transferred but remains in the
employ of the Company or if the Participant is eligible to receive disability
payments under the ML & Co. Basic Long-Term Disability Plan.
(d) Discretion to Alter Payment Date. Notwithstanding the provisions of
Sections 5.2(a) and (b), if the Participant's employment terminates for any
reason, the Administrator may, in his or her sole discretion, direct that the
Account Balance be paid at some other time or that it be paid in installments;
provided that no such direction that adversely affects the rights of the
- --------
Participant or his or her beneficiary under this Plan shall be implemented
without the consent of the affected Participant or beneficiary. This direction
may be revoked by the Administrator at any time in his sole discretion.
5.3 Withholding of Taxes.
ML & Co. will deduct or withhold from any payment to be made or deferred
hereunder any U.S. Federal, state or local or foreign income or employment taxes
required by law to be withheld or require the Participant or the Participant's
beneficiary to pay any amount, or the balance of any amount, required to be
withheld.
5.4 Beneficiary.
(a) Designation of Beneficiary. The Participant may designate, in a
writing delivered to the Administrator or his designee before the Participant's
death, a beneficiary to receive payments in the event of the Participant's
death. The Participant may also designate a contingent beneficiary to receive
payments in accordance with this Plan if the primary beneficiary does not
survive the Participant. The Participant may designate more than one person as
the Participant's beneficiary or contingent beneficiary, in which case (i) no
contingent beneficiary would receive any payment unless all of the primary
beneficiaries predeceased the Participant, and (ii) the surviving beneficiaries
in any class shall share in any payments in proportion to the percentages of
interest assigned to them by the Participant.
(b) Change in Beneficiary. The Participant may change his or her
beneficiary or contingent beneficiary (without the consent of any prior
beneficiary) in a writing delivered to the Administrator or his designee before
the Participant's death. Unless the Participant states otherwise in writing,
any change in beneficiary or contingent beneficiary will automatically revoke
prior such designations of the Participant's beneficiary or of the Participant's
contingent beneficiary, as the case may be, under this Plan only; and any
designations under other deferral agreements or plans of the Company will remain
unaffected.
(c) Default Beneficiary. In the event that a Participant does not
designate a beneficiary, or no designated beneficiary survives the Participant,
the Participant's beneficiary shall be the Participant's surviving spouse, if
the Participant is married at the time of his or her death and not
15
<PAGE>
subject to a court-approved agreement or court decree of separation, or
otherwise the person or persons designated to receive benefits on account of the
Participant's death under the ML & Co. Basic Group Life Insurance Plan (the
"Life Insurance Plan"). However, if an unmarried Participant does not have
coverage in effect under the Life Insurance Plan, or the Participant has
assigned his or her death benefit under the Life Insurance Plan, any amounts
payable to the Participant's beneficiary under the Plan will be paid to the
Participant's estate.
(d) If the Beneficiary Dies During Payment. If a beneficiary who is
receiving or is entitled to receive payments hereunder dies after the
Participant dies, but before all the payments have been made, the portion of the
Account Balance to which that beneficiary was entitled will be paid as soon as
practicable in one lump sum to such beneficiary's estate and not to any
contingent beneficiary the Participant may have designated; provided, however,
-------- -------
that if the beneficiary was receiving modified installment payments or
annuitized payments pursuant to Section 5.1(b), the applicable portion of the
Account Balance will continue to be paid as modified installment payments or
annuitized payments, as the case may be, in accordance with Section 5.1(b), but
only to a single person consisting of the administrator or executor of the
beneficiary's estate or another person lawfully designated by the administrator
or executor (and in the event no such person is designated within a reasonable
time, payment will be made in a lump sum).
5.5 Hardship Distributions.
ML & Co. may pay to the Participant, on such terms and conditions as the
Administrator may establish, such part or all of the Account Balance as he may,
in his sole discretion based upon substantial evidence submitted by the
Participant, determine necessary to alleviate hardship caused by an
unanticipated emergency or necessity outside of the Participant's control
affecting the Participant's personal or family affairs. Such payment will be
made only at the Participant's written request and with the express approval of
the Administrator and will be made on the date selected by the Administrator in
his sole discretion. The balance of the Account, if any, will continue to be
governed by the terms of this Plan. Hardship shall be deemed to exist only on
account of expenses for medical care (described in Code Section 213(d)) of the
Participant, the Participant's spouse or the Participant's dependents (described
in Code Section 152); payment of unreimbursed tuition and related educational
fees for the Participant, the Participant's spouse or the Participant's
dependents; the need to prevent the Participant's eviction from or, foreclosure
on, the Participant's principal residence; unreimbursed damages resulting from a
natural disaster; or such other financial need deemed by the Administrator in
his sole discretion to be immediate and substantial.
5.6 Domestic Relations Orders.
Notwithstanding the Participant's elections hereunder, ML & Co. will pay
to, or to the Participant for the benefit of, the Participant's spouse or former
spouse the portion of the Participant's Account Balance specified in a valid
court order entered in a domestic relations proceeding involving the
Participant's divorce or legal separation. Such payment will be made net of any
amounts the Company may be required to withhold under applicable federal, state
or local law. After such payment, references herein to the Participant's
"Deferred Amounts" (including, without limitation, for purposes of determining
the Annual Charge applicable to any remaining Account Balance) shall mean the
Participant's original Deferred Amounts times an amount equal to one minus a
fraction, the numerator of which is the gross amount (prior to withholding) paid
pursuant to the order, and the denominator of which is the Participant's Account
Balance immediately prior to payment.
16
<PAGE>
ARTICLE VI
ADMINISTRATION OF THE PLAN
6.1 Powers of the Administrator.
The Administrator has full power and authority to interpret, construe and
administer this Plan so as to ensure that it provides deferred compensation for
the Participants as members of a select group of management or highly
compensated employees within the meaning of Title I of ERISA. The
Administrator's interpretations and construction hereof, and actions hereunder,
including any determinations regarding the amount or recipient of any payments,
will be binding and conclusive on all persons for all purposes. The
Administrator will not be liable to any person for any action taken or omitted
in connection with the interpretation and administration of this Plan unless
attributable to his willful misconduct or lack of good faith. The Administrator
may designate persons to carry out the specified responsibilities of the
Administrator and shall not be liable for any act or omission of a person as
designated.
6.2 Rabbi Trust
Creation of Trust. The Administrator shall create a Grantor Trust to hold
assets representing the amounts deferred under this Plan on such terms and
conditions as the Administrator shall approve. The trustee of the Rabbi Trust
shall be a party unaffiliated with the Company.
6.3 Payments on Behalf of an Incompetent.
If the Administrator finds that any person who is entitled to any payment
hereunder is a minor or is unable to care for his or her affairs because of
disability or incompetency, payment of the Account Balance may be made to anyone
found by the Administrator to be the committee or other authorized
representative of such person, or to be otherwise entitled to such payment, in
the manner and under the conditions that the Administrator determines. Such
payment will be a complete discharge of the liabilities of ML & Co. hereunder
with respect to the amounts so paid.
6.4 No Right of Set-Off.
Unless specifically authorized by a Participant, the Company shall have no
right of set-off with respect to any Participant's Account Balances or Account
under the Plan and unless so authorized, the Company shall not withhold any sums
owed to a Participant under the Plan.
6.5 Corporate Books and Records Controlling.
The books and records of the Company will be controlling in the event that
a question arises hereunder concerning the amount of Adjusted Compensation,
Incentive Compensation, Sign-On Bonus, Eligible Compensation, the Deferred
Amounts, the Account Balance, the designation of a beneficiary, or any other
matters.
17
<PAGE>
ARTICLE VII
MISCELLANEOUS PROVISIONS
7.1 Litigation.
The Company shall have the right to contest, at its expense, any ruling or
decision, administrative or judicial, on an issue that is related to the Plan
and that the Administrator believes to be important to Participants, and to
conduct any such contest or any litigation arising therefrom to a final
decision.
7.2 Headings Are Not Controlling.
The headings contained in this Plan are for convenience only and will not
control or affect the meaning or construction of any of the terms or provisions
of this Plan.
7.3 Governing Law.
To the extent not preempted by applicable U.S. Federal law, this Plan will
be construed in accordance with and governed by the laws of the State of New
York as to all matters, including, but not limited to, matters of validity,
construction, and performance.
7.4 Amendment and Termination.
ML & Co., through the Administrator, reserves the right to amend or
terminate this Plan at any time, except that no such amendment or termination
shall adversely affect the right of a Participant to his or her Account Balance
(as reduced by the Annual Charge, the Debit Balance or the Leveraged Principal
Amount and Interest thereon, as set forth in Section 3.4) as of the date of such
amendment or termination.
18
<PAGE>
EXHIBIT 11
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
----------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net earnings $2,618 $1,259 $1,935 $1,648 $1,126
Preferred stock dividends (38) (39) (39) (46) (48)
------ ------ ------ ------ ------
Net earnings applicable to common stockholders 2,580 1,220 1,896 1,602 1,078
Interest on convertible debt - - - 1 1
------ ------ ------ ------ ------
2,580 1,220 1,896 1,603 1,079
====== ====== ====== ====== ======
Weighted-average shares outstanding (Basic shares) 368.7 355.6 340.1 346.0 361.2
------ ------ ------ ------ ------
Effect of dilutive instruments:
Employee stock options 27.9 29.2 29.7 21.9 19.9
FCCAAP shares 15.9 16.6 20.6 19.6 18.7
Restricted units 5.6 4.9 5.3 4.7 2.4
ESPP shares - - - .1 .1
Convertible debt - - .2 .7 .6
------ ------ ------ ------ ------
Dilutive potential common shares 49.4 50.7 55.8 47.0 41.7
------ ------ ------ ------ ------
Diluted shares 418.1 406.3 395.9 393.0 402.9
====== ====== ====== ====== ======
BASIC EARNINGS PER SHARE $ 7.00 $ 3.43 $ 5.57 $ 4.63 $ 2.98
====== ====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 6.17 $ 3.00 $ 4.79 $ 4.08 $ 2.68
====== ====== ====== ====== ======
</TABLE>
Note: Basic and diluted earnings per share are based on actual numbers before
rounding.
<PAGE>
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)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997 1996 1995
----------- ----------- ----------- ------------ ------------
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
Pre-tax earnings from continuing operations 4,078 2,096 3,111 2,629 1,836
Add: Fixed charges (excluding
capitalized interest and preferred security
dividend requirements of subsidiaries) 13,222 17,223 15,121 11,589 11,021
----------- ----------- ----------- ------------ ------------
Pre-tax earnings before fixed charges 17,300 19,319 18,232 14,218 12,857
Fixed charges:
Interest(a) 12,978 17,004 14,934 11,414 10,876
Other (b) 448 351 236 182 153
----------- ----------- ----------- ------------ ------------
Total fixed charges 13,426 17,355 15,170 11,596 11,029
Preferred stock dividend requirements 55 58 61 73 77
Total combined fixed charges
----------- ----------- ----------- ------------ ------------
and preferred stock dividends 13,481 17,413 15,231 11,669 11,106
----------- ----------- ----------- ------------ ------------
Ratio of earnings to fixed charges 1.29 1.11 1.20 1.23 1.17
Ratio of earnings to combined fixed charges
and preferred stock dividends 1.28 1.11 1.20 1.22 1.16
</TABLE>
(a) Prior period amounts have been restated to conform to the current year
presentation.
(b) Other fixed charges consist of the interest factor in rentals, amortization
of debt issuance costs, preferred security dividend requirements of
subsidiaries, and capitalized interest.
<PAGE>
Exhibit 13
FINANCIAL TABLE OF CONTENTS
- ---------------------------
27 SELECTED FINANCIAL DATA
28 MANAGEMENT'S DISCUSSION AND ANALYSIS
28 Business Environment
29 Results of Operations
30 Commissions
30 Principal Transactions
31 Investment Banking
32 Asset Management and Portfolio Service Fees
32 Other Revenues
33 Interest and Dividends
33 Non-Interest Expenses
34 Income Taxes
35 Strategic Business Initiatives
36 Business Segments
39 Global Operations
42 Balance Sheet
45 Capital Adequacy and Liquidity
47 Capital Projects and Expenditures
47 Risk Management
51 Non-Investment Grade Holdings and
Highly Leveraged Transactions
52 Cash Flows
52 Litigation
52 Recent Developments
53 MANAGEMENT'S DISCUSSION OF
FINANCIAL RESPONSIBILITY
54 INDEPENDENT AUDITORS' REPORT
55 CONSOLIDATED FINANCIAL STATEMENTS
55 Consolidated Statements of Earnings
56 Consolidated Balance Sheets
58 Consolidated Statements of Changes in
Stockholders' Equity
60 Consolidated Statements of Comprehensive Income
61 Consolidated Statements of Cash Flows
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
62 NOTE 1. Summary of Significant Accounting Policies
66 NOTE 2. Other Significant Events
67 NOTE 3. Trading and Related Activities
71 NOTE 4. Investments
72 NOTE 5. Borrowings
73 NOTE 6. Fair Value Information and Non-Trading
Derivatives
74 NOTE 7. Preferred Securities Issued by Subsidiaries
75 NOTE 8. Stockholders' Equity and Earnings Per Share
76 NOTE 9. Commitments and Contingencies
77 NOTE 10. Employee Benefit Plans
80 NOTE 11. Employee Incentive Plans
83 NOTE 12. Income Taxes
84 NOTE 13. Regulatory Requirements and
Dividend Restrictions
84 NOTE 14. Segment, Product, and Geographic Information
88 SUPPLEMENTAL FINANCIAL INFORMATION
88 Quarterly Information
88 Dividends Per Common Share
88 Stockholder Information
26
<PAGE>
SELECTED FINANCIAL DATA
- -----------------------
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
(53 weeks) (52 weeks) (52 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Total Revenues $ 34,879 $ 34,574 $ 31,209 $ 25,043 $ 21,501
Less Interest Expense 13,010 17,027 14,953 11,422 10,886
-------- -------- -------- -------- --------
Net Revenues 21,869 17,547 16,256 13,621 10,615
Non-Interest Expenses 17,791 15,451 13,145 10,993 8,779
-------- -------- -------- -------- --------
Earnings Before Income Taxes and
Dividends on Preferred
Securities Issued by
Subsidiaries 4,078 2,096 3,111 2,628 1,836
Income Tax Expense 1,265 713 1,129 980 710
Dividends on Preferred Securities Issued by Subsidiaries 195 124 47 - -
-------- -------- -------- -------- --------
Net Earnings $ 2,618 $ 1,259 $ 1,935 $ 1,648 $ 1,126
======== ======== ======== ======== ========
Net Earnings Applicable to Common Stockholders(a) $ 2,580 $ 1,220 $ 1,896 $ 1,602 $ 1,078
======== ======== ======== ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $328,071 $299,804 $296,980 $217,266 $179,452
Short-Term Borrowings(b) $114,775 $ 98,267 $123,400 $103,009 $ 86,663
Long-Term Borrowings $ 53,465 $ 57,563 $ 43,143 $ 26,206 $ 17,389
Preferred Securities Issued by Subsidiaries $ 2,725 $ 2,627 $ 627 $ 327 $ 51
Total Stockholders' Equity $ 12,802 $ 10,132 $ 8,539 $ 7,067 $ 6,288
- -----------------------------------------------------------------------------------------------------------------------------
COMMON SHARE DATA(C)
(in thousands, except per share amounts)
Earnings Per Share:
Basic $ 7.00 $ 3.43 $ 5.57 $ 4.63 $ 2.98
======== ======== ======== ======== ========
Diluted $ 6.17 $ 3.00 $ 4.79 $ 4.08 $ 2.68
======== ======== ======== ======== ========
Weighted-Average Shares Outstanding:
Basic 368,718 355,589 340,096 346,043 361,193
Diluted 418,131 406,262 395,855 392,990 402,852
Shares Outstanding at Year End(d) 367,765 356,284 339,259 332,349 346,953
Shares Repurchased(e) - - 13,301 36,606 39,861
Average Share Repurchase Price - - $ 48.91 $ 31.30 $ 23.48
Book Value Per Share $ 33.20 $ 26.89 $ 23.63 $ 19.24 $ 16.25
Dividends Paid Per Share $ 1.05 $ 0.92 $ 0.75 $ 0.58 $ 0.505
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL RATIOS
Pre-tax Margin(f) 18.6% 11.9% 19.1% 19.3% 17.3%
Profit Margin(g) 12.0% 7.2% 11.9% 12.1% 10.6%
Common Dividend Payout Ratio 15.0% 26.3% 13.4% 12.5% 17.0%
Return on Average Assets 0.8% 0.3% 0.7% 0.7% 0.5%
Return on Average Common Stockholders' Equity 23.5% 13.4% 26.5% 26.6% 19.8%
Average Leverage(h) 23.2x 32.9x 35.3x 33.3x 32.1x
Average Adjusted Leverage(i) 14.4x 19.2x 21.3x 19.8x 19.4x
- -----------------------------------------------------------------------------------------------------------------------------
EMPLOYEE STATISTICS
Full-Time Employees:
U.S. 49,000 46,500 45,800 42,100 39,250
Non-U.S. 18,200 17,300 13,900 10,500 9,250
-------- -------- -------- -------- --------
Total 67,200 63,800 59,700 52,600 48,500
======== ======== ======== ======== ========
Financial Consultants and Other Investment Professionals 19,000 18,100 16,600 15,600 14,900
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Net earnings less preferred stock dividends.
(b) Consists of Payables under repurchase agreements and securities loaned
transactions,Commercial paper and other short-term borrowings,and Demand
and time deposits.
(c) All share and per share data have been restated for the 1997 two-for-one
common stock split (see Note 8 to the Consolidated Financial Statements).
(d) Does not include 4,009, 4,506, 4,718, 4,134, and 3,932 shares exchangeable
into common stock (see Note 8 to the Consolidated Financial Statements) at
year-end 1999, 1998, 1997, 1996, and 1995, respectively. Also does not
include 3,078, and 8,026 unallocated reversion shares held in the Employee
Stock Ownership Plan at year-end 1996 and 1995, respectively,which are not
considered outstanding for accounting purposes.
(e) Does not include shares either (i) owned by employees and used to pay for
the exercise of stock options or (ii) stock withheld from employee stock
option exercises to pay associated taxes.
(f) Earnings Before Income Taxes and Dividends on Preferred Securities Issued
by Subsidiaries to Net Revenues.
(g) Net Earnings to Net Revenues.
(h) Average Total assets to average Total stockholders'equity and Preferred
securities issued by subsidiaries.
(i) Average Total assets less average (a) Securities received as collateral,net
of securities pledged as collateral,(b) Securities pledged as
collateral,(c) Receivables under resale agreements and securities borrowed
transactions,to average Total stockholders'equity and Preferred securities
issued by subsidiaries.
Selected Financial Data 27
<PAGE>
TABLE OF CONTENTS
28 Business Environment
29 Results of Operations
30 Commissions
30 Principal Transactions
31 Investment Banking
32 Asset Management and
Portfolio Service Fees
32 Other Revenues
33 Interest and Dividends
33 Non-Interest Expenses
34 Income Taxes
35 Strategic Business Initiatives
36 Business Segments
39 Global Operations
42 Balance Sheet
45 Capital Adequacy and Liquidity
47 Capital Projects and Expenditures
47 Risk Management
51 Non-Investment Grade Holdings
and Highly Leveraged
Transactions
52 Cash Flows
52 Litigation
52 Recent Developments
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co.") is a holding company that, through its
subsidiaries and affiliates, (therein "Merrill Lynch") provides investment,
financing, advisory, insurance, and related services worldwide. The financial
services industry, in which Merrill Lynch is a leading participant, is highly
competitive and highly regulated. This industry and the global financial markets
are influenced by numerous uncontrollable factors. These factors include
economic conditions, monetary policies, the liquidity of global markets,
international and regional political events, regulatory developments, the
competitive environment, and investor sentiment. These conditions or events can
significantly affect the volatility of financial markets. While greater
volatility increases risk, it may also increase order flow in businesses such as
trading and brokerage. Revenues and net earnings may vary significantly from
period to period due to these unpredictable factors and the resulting market
volatility.
The financial services industry continues to be affected by the
intensifying competitive environment, as demonstrated by consolidation through
mergers and acquisitions, as well as diminishing margins in many mature products
and services, and competition from new entrants as well as established
competitors using the Internet to establish or expand their businesses. In
addition, the passage of the Gramm-Leach-Bliley Act in November of 1999
represented a significant accomplishment in the effort to modernize the
financial services industry in the U.S. by repealing anachronistic laws that
separated commercial, investment banking, and insurance activities, which
together with other recent changes in the financial services industry, have
increased the number of companies competing for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, and results of Merrill Lynch and could cause
actual results and experience to differ materially from the expectations
expressed in these statements. These factors include, but are not limited to,
the factors listed in the previous paragraph, as well as actions and initiatives
taken by both current and potential competitors, the effect of current, pending,
and future legislation and regulation both in the United States and throughout
the world, and the other risks detailed in the following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
BUSINESS ENVIRONMENT
- --------------------
Global financial markets rebounded significantly in 1999, after a very volatile
second half of 1998. Markets benefited from tightening credit spreads, which
represent the risk premium paid by an issuer over the risk-free rate (based on
the issuer's credit rating or perceived creditworthiness), increased investor
demand, and improved liquidity in debt markets. U.S. equity indices continued to
advance to record levels for the fifth consecutive year, despite a midsummer
downturn in the stock market, a series of interest rate hikes by the Federal
Reserve beginning in June, and weakness in the U.S. dollar versus the Japanese
yen. Most non-U.S. markets recovered sharply in 1999, posting significant gains
in equity indices during the first six months of the year, but retreating
somewhat in the third quarter due to U.S. interest rate concerns. Following the
Federal Reserve's November 1999 announcement of a neutral bias toward interest
28
<PAGE>
rates, global market indices soared, contributing to record trading and
commissions revenues industrywide for 1999.
U.S. bond rates steadily increased throughout 1999, as inflationary fears
led the Federal Reserve to increase the overnight lending rate by twenty-five
basis points three times, in June, August, and November. The yield on the
30-year U.S. Treasury bond reached 6.48% at year-end, up from 5.10% at the
beginning of 1999. In Europe, a decline in industrial production and exports led
the European Central Bank and the Bank of England to reduce short-term rates by
fifty and twenty-five basis points, respectively. Long-term rates in Europe,
however, increased modestly throughout 1999. Credit spreads generally tightened
throughout 1999, with the exception of the 1999 third quarter, when spreads
reached their widest point since the 1998 Russian debt crisis.
U.S. equity markets experienced extraordinary gains during 1999, led by an
unprecedented demand for communications and technology stocks. The Nasdaq
advanced a record 85.6% in 1999, with more than half of the gain recorded during
the last two months of the year. Despite a series of interest rate increases, a
midsummer downturn in the stock market, and Year 2000 concerns, both the Dow
Jones Industrial Average and S&P 500 reached record levels, up 25.2% and 19.5%,
respectively, in 1999. Performances within these indices were mixed, however, as
67% of equities within these indices were down 20% or more from their fifty-two
week highs.
Global equity indices significantly advanced in 1999, as world markets
recovered from the credit crisis that occurred during the latter half of 1998.
Emerging market indices produced the biggest rally, led primarily by Brazil,
South Korea, and Mexico, which all rose more than 80% in local currency terms.
International Monetary Fund support, as well as a reduction in interest rates,
helped Brazilian markets recover from a currency devaluation. The South Korean
economy benefited from low interest rates and strong corporate earnings, while
an increase in exports and investment from abroad fueled markets in Mexico.
Demand by foreign investors for Japanese equities, in addition to government
intervention to control the rise in the yen, contributed to the advance in
Japanese market indices, which rose 50% in local currency terms during 1999.
European markets, which experienced sluggish growth during most of the year,
rebounded in the 1999 fourth quarter, led by an increase in manufacturing levels
and exports in Germany. The euro, however, continued to weaken throughout most
of 1999, sinking below $1 in December and declining 14% against the U.S. dollar
in 1999.
Global underwriting volume reached near record levels during 1999, led by
record activity in equity underwriting and initial public offerings. Equity
issuances totaled $173 billion during 1999, representing a 50% increase over
1998 levels and surpassing the previous record of $124 billion set in 1997.
Initial public offerings surged to $69 billion during the year, a 38% increase
from the record $50 billion recorded in 1996. Contributing to the increased
volume was record demand for technology, media, and telecommunications
offerings, which accounted for two-thirds of all new stock issues in 1999.
Concerns over U.S. interest rates and inflation led to a modest decline in debt
issuances during 1999. As a result, proceeds from U.S. debt issuances decreased
4% overall from 1998 to $1.9 trillion in 1999, representing the first year-over-
year decline in debt underwriting since 1995.
Strategic advisory services activities reached record levels in 1999,
reflecting a continuation of the high level of merger and acquisition activity
experienced during 1998. Companies continued to seek strategic alliances to
increase earnings growth, better compete in existing markets, and expand into
new markets and businesses. While announced mergers and acquisitions in the U.S.
increased over 7% from 1998 to a record $1.8 trillion, European deals advanced
to over $1.2 trillion, more than double the 1998 level. During 1999, the largest
announced merger and acquisition deal ever and the largest announced
cross-border transaction ever both occurred in Europe, contributing to the surge
in activity for the year.
Merrill Lynch continually evaluates its businesses for profitability and
performance under varying market conditions and, in light of the evolving
conditions in its competitive environment, for alignment with its long-term
strategic objectives. Maintaining long-term client relationships, closely
monitoring costs and risks, diversifying revenue sources, and expanding
strategically, all contribute to mitigating the effects of volatility on Merrill
Lynch's business as a whole.
RESULTS OF OPERATIONS
- ---------------------
- --------------------------------------------------------------------------------
(in millions, except per share amounts)
1999 vs.
---------------
1999 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Total revenues $34,879 $34,574 $31,209 0.9% 11.8%
Net revenues 21,869 17,547 16,256 24.6 34.5
Earnings before income
taxes and dividends
on preferred securities
issued by subsidiaries 4,078 2,096 3,111 94.6 31.1
Net earnings 2,618 1,259 1,935 107.9 35.3
Net earnings applicable to
common stockholders 2,580 1,220 1,896 111.5 36.1
Earnings per common share:
Basic 7.00 3.43 5.57 104.1 25.7
Diluted 6.17 3.00 4.79 105.7 28.8
Return on average common
stockholders' equity 23.5% 13.4% 26.5%
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 29
<PAGE>
During 1999, record revenues were achieved in all revenue categories,
including commissions, principal transactions, investment banking, asset
management and portfolio service fees, and net interest profit. These revenues
were partially offset by increased costs related to compensation and benefits,
advertising and market development, and communications and technology.
Merrill Lynch reported 1999 net earnings of $2.6 billion, or $6.17 per
diluted share with a return on average common stockholders' equity of 23.5%.
This compares with $1.3 billion or $3.00 per diluted share reported in 1998,
which included a $288 million after-tax provision for costs related to staff
reductions. Excluding this provision, 1998 net earnings were $1.5 billion, or
$3.71 per diluted share. Return on average common stockholders' equity on this
basis was 16.4% in 1998. In 1997, Merrill Lynch reported net earnings of $1.9
billion, or $4.79 per diluted share. Return on average common stockholders'
equity for 1997 was 26.5%.
On a cash basis, which excludes goodwill amortization, earnings were $2.8
billion, up from $1.8 billion in 1998 excluding the staff reduction provision.
On the same basis, diluted earnings per share were $6.71 versus $4.27 in 1998,
and return on average common stockholders' equity in 1999 was 24.4%. In 1997,
earnings on a cash basis were $2.0 billion, or $4.95 per diluted share.
The 1999 results reflected record results in the equity markets and
investment banking businesses, and a substantial increase in profitability from
debt-related activities versus the difficulties encountered in the 1998
fixed-income markets. The Private Client and Asset Management businesses each
recorded strong results on record revenues in Commissions and Asset management
and portfolio service fees.
The following discussion provides details of major revenue and expense
categories and other pertinent information on Merrill Lynch's business
activities, financial condition, liquidity, and risks. Certain prior year
amounts have been restated to conform with the current year presentation.
COMMISSIONS
- -----------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Listed and over-the-counter $3,597 $3,185 $2,759
Mutual funds 1,868 1,871 1,594
Other 869 743 642
------ ------ ------
Total $6,334 $5,799 $4,995
====== ====== ======
- --------------------------------------------------------------------------------
Commissions revenues advanced 9% in 1999 to a record $6.3 billion,
primarily due to increases in global listed securities volume and
over-the-counter securities transactions. Commissions from listed securities
were up 11% from 1998 as a result of higher trading volumes, particularly on
non-U.S. exchanges. Mutual fund commissions were virtually unchanged, and other
commissions revenues advanced 17% in 1999, primarily due to increased sales of
money market instruments and third party annuity contracts.
Commissions revenues rose 16% in 1998. Increased volume led to higher
listed and over-the-counter securities transaction revenues, while strong sales
of U.S. and non-U.S. mutual funds increased mutual fund commissions.
PRINCIPAL TRANSACTIONS
- ----------------------
The table that follows provides information on trading revenues, including
related net interest. Interest revenue and expense amounts are based on
management's assessment of the cost to finance trading positions, after
consideration of the underlying liquidity of these positions.
Trading and related hedging and financing activities affect the recognition
of both principal transactions revenues and net interest and dividend revenues.
In assessing the profitability of its trading activities, Merrill Lynch
aggregates net interest and principal transactions revenues. For financial
reporting purposes, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest revenues, depending on the
nature of the specific instruments. Changes in the composition of trading
inventories and hedge positions can cause the recognition of revenues within
these categories to fluctuate.
- --------------------------------------------------------------------------------
(in millions)
Principal Net Net
Transactions Interest Trading
Revenues Revenues Revenues(1)
- --------------------------------------------------------------------------------
1999
Equities and equity derivatives $ 1,989 $ 226 $ 2,215
Debt and debt derivatives 2,170 282 2,452
Mortgages (5) 255 250
Foreign exchange 207 - 207
------- ------- -------
Total $ 4,361 $ 763 $ 5,124
======= ======= =======
- --------------------------------------------------------------------------------
1998
Equities and equity derivatives $ 1,593 $ 9 $ 1,602
Debt and debt derivatives 890 (37) 853
Mortgages (33) 259 226
Foreign exchange 201 (3) 198
------- ------- -------
Total $ 2,651 $ 228 $ 2,879
======= ======= =======
- --------------------------------------------------------------------------------
1997
Equities and equity derivatives $ 1,290 $ (54) $ 1,236
Debt and debt derivatives 2,335 35 2,370
Mortgages 28 160 188
Foreign exchange 174 1 175
------- ------- -------
Total $ 3,827 $ 142 $ 3,969
======= ======= =======
- --------------------------------------------------------------------------------
(1) Excludes commissions. For further information on trading results, see Note
3 to the Consolidated Financial Statements.
30 Management's Discussion and Analysis
<PAGE>
Net trading revenues were $5.1 billion in 1999, up 78% from 1998 due to
significantly improved global market conditions in 1999 compared with 1998.
Market conditions were generally favorable in 1999, including rising U.S. stock
prices and narrowing credit spreads.
Equities and equity derivatives net trading revenues advanced 38% from 1998
to $2.2 billion, due to significantly higher revenues from both U.S. and
non-U.S. equities as well as convertibles. The increase in revenues was largely
due to an increase in trading volumes in global markets, particularly in Europe
and Japan, and higher market share. Net revenues from global convertibles
benefited from improved market conditions, especially in the U.S.
Debt and debt derivatives net trading revenues were $2.5 billion, up
sharply from 1998, when revenues suffered from significant uncertainty in global
debt markets, and an unprecedented widening of credit spreads and the absence of
liquidity in debt markets led to severe losses in the third and fourth quarters.
Increased volume, tightening credit spreads and a more stable global environment
led to increased revenues in 1999, particularly in the U.S.
Net revenues from mortgages were $250 million in 1999, up 11% from 1998.
Foreign exchange net trading revenues remained virtually unchanged for the year.
In 1998, net trading revenues were down 27% from 1997 due to the
significant volatility in global debt markets. An increase in volume of non-U.S.
equities and equity derivative transactions led to advances in equities and
equity derivatives net trading revenues (up 30%). Debt and debt derivatives net
trading revenues were $853 million compared to $2.4 billion in 1997, as
valuations of corporate and emerging market bonds were significantly impacted by
widening credit spreads and reduced liquidity in the third quarter of 1998. In
addition, 1998 results reflect credit losses on emerging market-related debt
derivatives in the latter half of the year. A more favorable mortgage
environment led to increased net revenues (up 20%). Fluctuations in the U.S.
dollar versus various currencies led to higher net foreign exchange revenues (up
13%).
INVESTMENT BANKING
- ------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Underwriting revenues $2,301 $2,162 $2,079
Strategic advisory services revenues 1,313 1,102 797
------ ------ ------
Total $3,614 $3,264 $2,876
====== ====== ======
- --------------------------------------------------------------------------------
Investment banking revenues rose 11% in 1999 to a record $3.6 billion,
benefiting from increased revenues from underwriting and from record merger and
acquisition advisory fees.
Underwriting
Increased equity underwriting revenues were partly offset by lower corporate
bond and high yield underwriting revenues. Merrill Lynch retained its position
as the leading underwriter of total debt and equity securities for the 12th
consecutive year in the U.S. and for the 11th consecutive year globally. Merrill
Lynch's underwriting market share information based on transaction value
follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Market Market Market
Share Rank Share Rank Share Rank
- --------------------------------------------------------------------------------
U.S. PROCEEDS
Debt 16.0% 1 14.9% 1 14.9% 1
Equity 12.5 3 15.8 1 14.8 1
Debt and Equity 15.8 1 15.4 1 15.1 1
GLOBAL PROCEEDS
Debt 12.4% 1 13.1% 1 12.7% 1
Equity 12.2 3 13.4 2 13.2 2
Debt and Equity 12.6 1 13.5 1 13.0 1
- --------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic Advisory Services
Strategic advisory services fees rose 19% in 1999 to a record $1.3 billion,
benefiting from strong merger and acquisition activity, particularly in Europe.
Merrill Lynch's merger and acquisition market share information based on
transaction value follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Market Market Market
Share Rank Share Rank Share Rank
- --------------------------------------------------------------------------------
COMPLETED
TRANSACTIONS
U.S. 22.8% 3 33.0% 1 28.3% 1
Global 22.4 3 25.3 2 18.9 3
ANNOUNCED
TRANSACTIONS
U.S. 27.6% 3 31.5% 2 28.0% 1
Global 32.0 3 25.1 3 18.7 3
- --------------------------------------------------------------------------------
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies'advisors.
Investment banking revenues in 1998 increased 13% from 1997 due to
increased underwriting revenues and strong merger and acquisition advisory fees.
Management's Discussion and Analysis 31
<PAGE>
ASSET MANAGEMENT AND PORTFOLIO SERVICE FEES
- -------------------------------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Asset management fees $2,263 $2,075 $1,232
Portfolio service fees 1,479 1,150 826
Account fees 499 451 422
Other fees 512 526 522
------ ------ ------
Total $4,753 $4,202 $3,002
====== ====== ======
- --------------------------------------------------------------------------------
Revenues from asset management and portfolio service fees rose 13% in 1999
to a record $4.8 billion, primarily due to strong growth in assets under
management and assets in fee-based accounts.
Asset management fees increased 9% in 1999 due to growth in assets under
management attributable to market appreciation and net inflows of new money.
Portfolio service fees were up 29% in 1999, benefiting from significant growth
in client accounts and assets in fee-based accounts, including Merrill Lynch
Consults(Registered Trademark) and Unlimited Advantage(Service Mark), Merrill
Lynch's new total access fee-based account which was introduced in 1999. Account
fees rose 11%, principally as a result of increases in the number of Working
Capital Management Accounts ("WCMA(Registered Trademark)") and Cash Management
Accounts ("CMA(Registered Trademark)").
In 1998, asset management and portfolio service fees advanced 40% from
1997, primarily due to the December 1997 acquisition of Mercury Asset Management
Group ("Mercury") and growth in assets under management, which benefited from
significant growth in both client accounts and assets in fee-based accounts.
Merrill Lynch's year-end assets in Private Client accounts or under
management for 1999, 1998, and 1997 are summarized as follows:
- --------------------------------------------------------------------------------
(in billions)
1999 vs.
-------------
1999 1998 1997 1998 1997
- --------------------------------------------------------------------------------
ASSETS IN PRIVATE CLIENT
ACCOUNTS OR UNDER
MANAGEMENT(1)
U.S. $1,338 $1,164 $ 979 15% 37%
Non-U.S 358 282 250 27 43
------ ------ ------
Total $1,696 $1,446 $1,229 17 38
====== ====== ======
ASSETS UNDER
MANAGEMENT
Retail $ 291 $ 276 $ 240 5 21
Institutional 266 225 208 18 28
------ ------ ------
Total $ 557 $ 501 $ 448 11 24
====== ====== ======
U.S.FEE-BASED
PROGRAM ASSETS(2) $ 151 $ 84 $ 60 80 152
401(K) ASSETS $ 111 $ 99 $ 74 12 50
- --------------------------------------------------------------------------------
(1) Includes certain assets that are also included in Assets Under Management.
(2) Including Unlimited Advantage, Merrill Lynch Consults, Private Portfolio
Group, and Mutual Fund Advisor(Service Mark).
Changes in assets in Private Client accounts or under management from
year-end 1998 to year-end 1999 are described below:
- --------------------------------------------------------------------------------
(in billions)
NET CHANGES DUE TO
-----------------------
YEAR-END NEW ASSET YEAR-END
1998 MONEY(1) APPRECIATION 1999
- --------------------------------------------------------------------------------
Assets in Private Client
accounts or under
management $1,446 $ 104 $ 146 $1,696
Assets under management 501 18 38 557
- --------------------------------------------------------------------------------
(1) Includes reinvested dividends of $11 billion.
OTHER REVENUES
- --------------
Other revenues were $720 million in 1999, up 16% from 1998. Other revenues
include investment and real estate gains and losses, and partnership
distributions. The increase in other revenues during 1999 was primarily
attributable to higher investment gains and partnership revenues.
In 1998, other revenues increased 25% from 1997 to $623 million,
principally due to a pre-tax gain of approximately $100 million from the sale of
Merrill Lynch's New York Stock Exchange specialist business.
32 Management's Discussion and Analysis
<PAGE>
INTEREST AND DIVIDENDS
- ----------------------
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $ 5,761 $ 7,694 $ 6,831
Trading assets 3,931 5,218 5,240
Margin lending 2,982 2,757 2,207
Other 2,423 2,366 1,731
------- ------- -------
15,097 18,035 16,009
------- ------- -------
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 4,830 7,134 6,016
Borrowings 4,606 5,500 4,623
Trading liabilities 1,743 2,619 2,983
Other 1,831 1,774 1,331
------- ------- -------
13,010 17,027 14,953
------- ------- -------
NET INTEREST AND DIVIDEND PROFIT $ 2,087 $ 1,008 $ 1,056
======= ======= =======
- --------------------------------------------------------------------------------
Interest and dividend revenues and expenses are a function of the level and
mix of interest-earning assets and interest-bearing liabilities, and the
prevailing level and volatility of interest rates. Net interest and dividend
profit was up sharply from 1998, principally due to increases in interest
spreads attributable to a steepening yield curve and efficiencies in financing.
In 1998, interest and dividend profit was down 5% from 1997, largely due to
additional financing costs related to the December 1997 Mercury acquisition.
Merrill Lynch hedges its long- and short-term borrowings, primarily with
interest rate and currency swaps, to better match the interest rate and currency
characteristics of the borrowings to the assets funded by borrowing proceeds.
The effect of this hedging activity, which is included in "Borrowings" above,
decreased interest expense for 1999, 1998, and 1997 by $269 million, $62
million, and $81 million, respectively (see Note 5 to the Consolidated Financial
Statements).
NON-INTEREST EXPENSES
- ---------------------
Merrill Lynch's non-interest expenses are summarized as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Compensation and benefits $11,153 $ 9,199 $ 8,333
------- ------- -------
Non-interest expenses,excluding
compensation and benefits:
Communications and technology 2,038 1,749 1,255
Occupancy and related depreciation 941 867 736
Advertising and market development 779 688 613
Brokerage,clearing,and exchange fees 678 683 525
Professional fees 567 552 520
Goodwill amortization 227 226 65
Provision for costs related to staff
reductions - 430 -
Other 1,408 1,057 1,098
------- ------- -------
Total non-interest expenses,excluding
compensation and benefits 6,638 6,252 4,812
------- ------- -------
Total non-interest expenses $17,791 $15,451 $13,145
======= ======= =======
Compensation and benefits as a
percentage of net revenues 51.0% 52.4% 51.3%
Compensation and benefits as a
percentage of pre-tax earnings
before compensation and benefits 73.2% 78.5%(1) 72.8%
- --------------------------------------------------------------------------------
(1) Excluding provision for costs related to staff reductions.
Non-interest expenses were $17.8 billion in 1999, compared with $15.5
billion in 1998. The largest expense category, compensation and benefits, was up
21% from 1998 due to higher incentive and Financial Consultant compensation,
resulting from increased profitability and strong business volume. An increase
in the number of full-time employees also contributed to this increase,
including a full year of Merrill Lynch Japan Securities Co. ("MLJS") staff
operating costs. The number of full-time employees was 67,200 at year-end 1999,
up approximately 3,400 since the end of 1998. This increase is attributable to
strategic business expansion, primarily in the Private Client Group and growth
in existing businesses.
Communications and technology expense rose 17% in 1999 to $2.0 billion due
to higher technology-related depreciation and communication maintenance and
support, partly related to new strategic online initiatives implemented in 1999.
Occupancy and related depreciation increased 9% to $941 million as a result of
continued global expansion.
Advertising and market development expense was $779 million, up 13% from
1998 because of increased costs related to new advertising campaigns launched
during the year, including those related to the new online initiatives.
Brokerage, clearing, and exchange fees remained virtually unchanged from the
prior year. Professional fees rose 3% to $567 million due in part to higher
employment service fees. Goodwill amortization was substantially unchanged at
$227 million for the year, and other
Management's Discussion and Analysis 33
<PAGE>
expenses rose 33% from 1998 due in part to higher provisions related to various
business, operational, and legal matters and unfavorable foreign exchange
movements related to the Japanese yen versus the U.S. dollar.
Non-interest expenses in 1998 were up 18% compared to 1997. Approximately
60% of this increase was attributable to the acquisition of Mercury, the
start-up of MLJS, and a 1998 staff reduction provision. In the 1998 third
quarter, Merrill Lynch recorded a $430 million ($288 million after-tax)
provision for costs related to staff reductions aimed at reducing fixed and
semi-fixed costs and resizing certain debt trading businesses. The staff
reduction provision covered primarily severance costs, as well as costs to
terminate long-term contracts and leases related to personnel reductions and
resized businesses (see Note 2 to the Consolidated Financial Statements).
Compensation and benefits rose 10% in 1998 due to an increase in the number
of full-time employees and higher Financial Consultant compensation, slightly
offset by lower incentive compensation. Communications and technology expense
advanced 39% in 1998, primarily due to increased systems consulting costs
related to various initiatives, including Year 2000. Occupancy costs increased
18%, as a result of continued global expansion, particularly associated with
MLJS and Mercury. Advertising and market development expense rose 12%, partly
due to the start-up of MLJS and the Roth IRA campaign, and higher recognition
program costs. Brokerage, clearing, and exchange fees were up 30%, principally
due to custody and clearing costs for Mercury. Professional fees rose 6% due to
higher costs for strategic market studies and one-time integration costs for
Midland Walwyn Inc. ("Midland Walwyn"). Goodwill amortization increased $161
million to $226 million as a result of the Mercury acquisition. Other expenses
were down 4% from 1997 due to reductions in provisions for various business
activities and legal matters.
The following bar graph illustrates fee-based revenues as a percentage of
fixed and semi-fixed expenses for the past five years.
- -------------------------------------------------------------------------------
FEE-BASED REVENUES AS A PERCENTAGE OF
FIXED AND SEMI-FIXED EXPENSES
($ in millions)
FIXED AND
FEE-BASED SEMI-FIXED
REVENUES(2) EXPENSES %
----------- ---------- -----
1999 $6,842 $8,812 78
1998 6,042 7,930 76(1)
1997 4,364 6,569 66
1996 3,703 5,584 66
1995 3,188 4,671 68
(1) The increase in this percentage compared to 1997 is primarily due to higher
fee-based revenues resulting from the Mercury acquisition.
(2) Fee-based revenues principally include asset management and portfolio
service fees and net margin interest.
- -------------------------------------------------------------------------------
INCOME TAXES
- ------------
Merrill Lynch's 1999 income tax provision was $1.3 billion, representing a 31.0%
effective tax rate compared with 34.0% in 1998 and 36.3% in 1997. The decline in
the 1999 effective tax rate was primarily attributable to additional lower-taxed
non-U.S. income, higher tax-exempt income, and additional tax-advantaged
financing. The 1998 decline was primarily attributable to higher tax-exempt
income and additional tax-advantaged financing.
Deferred tax assets and liabilities are recorded for the effects of
temporary differences between the tax basis of an asset or liability and its
reported amount in the financial statements. Merrill Lynch assessed its ability
to realize deferred tax assets primarily based on a strong earnings history and
the absence of negative evidence as discussed in Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. During the
last 10 years, average pre-tax earnings were $2.1 billion. Accordingly,
management believes that it is more likely than not that deferred tax assets,
net of related valuation allowances, will be realized (see Note 12 to the
Consolidated Financial Statements).
34 Management's Discussion and Analysis
<PAGE>
STRATEGIC BUSINESS INITIATIVES
- ------------------------------
Among Merrill Lynch's strategic initiatives were e-commerce developments in our
evolving business model for the delivery of information and products and
services to our clients. In the Private Client Group ("PCG"), this change means
that online services and research may be combined with the personalized advice
of a Merrill Lynch Financial Consultant. In the Corporate and Institutional
Client Group ("CICG"), this change means the introduction of an enhanced
business model for institutional debt and equity issuance, trading, and client
activities. Examples of these, and other recent strategic initiatives, include
the following:
. Launched in July, Unlimited Advantage, a nondiscretionary brokerage
service, with asset-based pricing, subject to a minimum annual charge of
$1,500. Percentage rates charged to customers decline as assets increase.
Unlimited Advantage offers U.S. clients a wide array of services, including
virtually unlimited trading for most investors in most securities,
unlimited enrolled accounts, traditional Financial Consultant
relationships, a CMA(Registered Trademark)Visa(Registered Trademark)
Signature(Service Mark)card with a travel rewards program, a financial
plan, online capabilities, and access to Merrill Lynch research.
. Introduced in October, International Asset Power(Service Mark)and Asset
Partner(Service Mark), in Canada, the international versions of Unlimited
Advantage.
. Introduced in December, ML Direct(Service Mark), a new Internet account for
U.S. clients preferring a self-directed approach to investing. The online
service addresses investment and cash management needs to guide customer
decision making. In addition to online equity trading for as little as
$29.95 per trade, clients can purchase and sell mutual funds, receive
Merrill Lynch research, and purchase fixed-income products. ML Direct also
provides access to the Global Investor Network(Service Mark), Merrill
Lynch's multimedia platform featuring timely audio and video reports from
analysts, in addition to banking services and online shopping.
. Formed the Direct Markets group to develop integrated, electronically-
delivered products and services for CICG clients worldwide, including
research, analytics, investment information, underwriting, trading, and
account reporting. During the 1999 fourth quarter, Direct Markets
introduced its first version of iDeal(Service Mark), a new software
platform for offering all types of debt and equity securities that is
designed to increase the efficiency of the underwriting process, enhance
the dissemination of information, and broaden distribution.
. Announced in December, a strategic alliance with Multex.com to co-develop
global research and information web sites for Merrill Lynch's CICG clients,
and to develop technology that will offer clients expanded market data and
news, as well as interactive investor conference calls to give customers
real-time access to Merrill Lynch's research analysts.
. Invested in electronic trading and market systems, such as Primex,
Archipelago, and TradeWeb.
. Established an integrated global Asset Management Group ("AMG") with three
regional operating units servicing a diverse worldwide clientele. In
addition, the initiatives included the hire of new senior marketing
officers and senior investment managers, including chief investment
officers and senior portfolio managers, as well as a quantitative
management team, Merrill Lynch Quantitative Advisors. These changes have
contributed to expanded product lines, including both active and
quantitative investment funds, improved investment performance across both
retail and institutional funds, and expanded distribution through Merrill
Lynch's sales channels and external distribution partners.
. In January 2000, announced the expansion of Merrill Lynch's banking
initiatives, which will include new deposit product offerings to be
introduced in the first half of 2000. These new products will include
Federally-insured interest-bearing bank deposits into which cash from
certain Merrill Lynch client accounts, previously swept into money market
mutual funds, will be swept. It is anticipated that the new deposit product
offerings will enhance the deposit base at Merrill Lynch's two FDIC-insured
U.S.banking subsidiaries.
In 1998, Merrill Lynch executed its global business strategy by:
. Opening 33 retail offices in Japan through MLJS, which resulted in $12
billion in client assets held by Merrill Lynch in Japan at year-end 1999,
. Merging with Midland Walwyn, one of Canada's premier securities firms,
. Purchasing a majority interest in Phatra Securities Company Limited,
Thailand's leading investment bank, for $65 million,
. Acquiring Howard Johnson & Co., a U.S. employee benefits consulting firm,
for $27 million, and
. Divesting a majority interest in Lender's Service, Inc., a residential real
estate service subsidiary, and a 100% interest in Merrill Lynch's New York
Stock Exchange specialist subsidiary.
Acquisitions made in 1997 included Mercury, for which approximately $5.3
billion was paid, and MasterWorks, a 401(k) service provider, for which $13
million was paid. In addition, Merrill Lynch hired the employees of Centaurus
Corporate Finance Group, a strategic advisor in Australia.
Management's Discussion and Analysis 35
<PAGE>
BUSINESS SEGMENTS
- -----------------
Merrill Lynch reports the results of its business within three business
segments: CICG, PCG, and AMG. CICG's activities primarily involve providing
services to corporate, institutional, and government clients throughout the
world. PCG provides investment, financing, insurance, tax, and other financial
services and products to its clients, globally. AMG provides investment
management services to a wide variety of retail and institutional clients.
Certain AMG and CICG products are distributed by PCG distribution networks,
and to a more limited extent, certain AMG products are distributed through the
distribution capabilities of CICG. Costs and revenues associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. In addition, revenue sharing agreements for shared activities
are in place and the results of each segment reflect the agreed upon portion of
these activities. The following segment operating results, which exclude certain
corporate items, represent the information that is relied upon by management in
its decision-making processes. In relying upon these numbers, management
understands that restatements will occur to reflect reallocations of revenues
and expenses which result from changes in Merrill Lynch's business strategy (see
Note 14 to the Consolidated Financial Statements).
CORPORATE AND INSTITUTIONAL CLIENT GROUP
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 9,328 $ 6,549 $ 6,789
Net earnings 1,906 961 1,186
- --------------------------------------------------------------------------------
Total employees 11,138 10,723 10,553
- --------------------------------------------------------------------------------
CICG provides investment banking and strategic merger and acquisition
advisory services, as well as equity and debt trading and capital markets
services to corporations, financial institutions, and governments around the
world. CICG raises capital for its clients on favorable terms through securities
underwriting, private placements, and loan syndications. CICG trades securities,
currencies, and other products and contracts over-the-counter derivatives to
satisfy customer demand for these instruments. With more than 2,000 equity
research, sales, trading, and capital markets professionals and equity trading
activities in 28 countries, Merrill Lynch maintains one of the most powerful
equity trading and underwriting capabilities of any firm in the world. Through
its expertise in government and corporate debt trading, CICG is also the leader
in global distribution of new issue and secondary debt securities. CICG's
client-focused strategy provides investors with opportunities to diversify their
portfolios, manage risk, and enhance returns by tailoring investments and
structuring derivatives to meet clients' customized needs. In line with the
firmwide strategic initiative in e-commerce, in 1999, CICG established Direct
Markets which will enhance existing CICG businesses by serving as a vehicle for
creating the "next generation" business model for institutional debt and equity
issuance, trading, and servicing activities and for capitalizing on the
opportunities created by the Internet to reach institutional clients and
investors.
In 1999, CICG's net earnings were $1.9 billion, up nearly 100% from 1998
and 61% from 1997 levels. CICG's net revenues increased 42% from 1998 to $9.3
billion, primarily due to a significant improvement in global market conditions.
In 1998, the highly volatile global markets, particularly in the latter half of
the year, negatively impacted financial markets, especially debt markets.
Revenues from CICG equity products were a record $4.7 billion in 1999 due
to increased client demand for equities and equity derivatives in both the U.S.
and Europe. CICG's global equities business has grown substantially over the
last few years. In addition, CICG has substantially grown its equity derivatives
and portfolio trading activities during this period. As a result, equity
revenues, both trading and underwriting, have grown substantially since 1995,
with 56% of 1999 revenues from non-U.S. locations.
Debt trading revenues were significantly higher in 1999 compared to 1998,
primarily due to a recovery from the global market turmoil experienced in the
second half of 1998, when the unprecedented movement in credit spreads led to
valuation and counterparty losses that significantly impacted certain of Merrill
Lynch's debt trading businesses.
Merrill Lynch's investment banking and strategic advisory services
activities reached record levels in 1999. Merrill Lynch remained the leading
underwriter of global debt and equity securities for the 11th consecutive year,
with a 12.6% market share in 1999, according to Thomson Financial Securities
Data. Origination revenues for debt and equity securities were $1.6 billion, up
14% from 1998 and 10% from 1997. Through the strengthening of its client
relationships, CICG has increased its revenues from strategic advisory services
by 17% and 66% as compared with 1998 and 1997, respectively.
PRIVATE CLIENT GROUP
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 10,688 $ 9,596 $ 8,532
Net earnings 925 949 730
- --------------------------------------------------------------------------------
Total employees 44,946 42,543 38,856
- --------------------------------------------------------------------------------
During 1999, PCG announced evolutionary changes to its retail business,
introducing major e-commerce initiatives, tailored by region, designed to
provide clients greater choice and flexi-
36 Management's Discussion and Analysis
<PAGE>
bility, together with a wide range of products and services to meet their
diverse financial needs. Major components of PCG's 1999 initiatives include:
. The July, 1999 launch of Unlimited Advantage, a U.S. fee-based financial
service that empowers Financial Consultants to compete aggressively for a
total financial relationship with clients. Since its inception, Unlimited
Advantage has been successful in its asset-gathering strategy, attracting
assets at a rate more than 20 times faster than previous fee-based
products. At year-end 1999, Unlimited Advantage accounts totaled over
260,000 with assets of $63 billion, of which $9 billion represented new
money. Assets include approximately 81,000 ML Financial Advantage(Service
Mark)and Asset Power(Service Mark)accounts containing $24 billion in total
assets, which were converted to Unlimited Advantage accounts during the
year. Over time, this initiative will lead to a shift from commissions
revenues to asset management and portfolio service fees. However, we cannot
predict with certainty the impact that this initiative will have on
revenues or earnings.
. The October, 1999 introduction of the international versions of Unlimited
Advantage, International Asset Power in most regions, and Asset Partner in
Canada.
. The December, 1999 introduction of ML Direct, an online investing service
for self-directed investors in the U.S. At year-end 1999, more than 5,300
ML Direct accounts had been opened with more than $300 million in assets.
Due to the short time period since the inception of ML Direct, we cannot
predict with certainty the impact that this initiative will have on
revenues or earnings.
The formation of MLJS in 1998 has proved essential in establishing Merrill
Lynch's presence in Japan. During 1998, Merrill Lynch began offering individual
investors in Japan the same consultative approach employed elsewhere in the
world and became the first U.S. firm to operate a nationwide retail securities
network within the country. In addition, PCG's global presence and position in
Canada have strengthened since the 1998 merger with Midland Walwyn. Rebounding
from the severe global market turmoil in 1998, Midland Walwyn client assets
increased 24% in 1999 to $33 billion at year end.
PCG provides a wide range of other fee-based products and services that
assist clients around the world to build financial assets and maximize returns
in relation to risk tolerance and investment objectives. These products and
services include retail brokerage, asset and liability management, retail and
private banking, trust and generational planning services, and insurance
products. Outside the U.S., PCG's products and services also include private
banking services, which provide high-net-worth individuals with a host of
products and services to meet their financial objectives, including investing
and borrowing strategies, investment management, trust and personal holding
company services, and currency management. PCG products and services are
provided to individual investors, corporations, and institutions through various
distribution networks, including approximately 18,200 Financial Consultants in
nearly 1,000 Private Client offices in 36 countries.
Financial Consultants and other investment professionals work with
individual investors, small and medium-sized corporations, and other
organizations to address clients' financial concerns by matching the numerous
products offered by Merrill Lynch with the clients' customized needs. These
products include:
. The CMA and CBA(Registered Trademark) accounts for individuals, WCMA
account for small and mid-sized businesses, and EMA(Service Mark)account
for foundations and non-profit organizations, all of which are types of
flexible central asset accounts for securities transactions, money sweeps,
electronic funds-transfer capabilities, debit card access, and many other
financial management features.
. A wide array of global mutual fund portfolios covering a cross section of
industries and regions of the world.
. Various advisory services and brokerage pricing alternatives, including
Merrill Lynch Consults, Mutual Fund Advisor, and Global Funds
Advisor(Service Mark).
. Other services provided include mortgages and other consumer loans, margin
lending, commercial financing, annuity and life products, trust and other
estate planning techniques, and advisory and administrative activities for
defined contribution, defined benefit, and various stock plans.
Total Private Client customer assets reached $1.5 trillion at year-end
1999, up 17% for the year. Assets in U.S. Private Client fee-based programs were
up 80% in 1999 to $151 billion on strong gains in ML Consults and Unlimited
Advantage.
Net earnings for PCG were $925 million in 1999, down 3% from $949 million
in 1998 and up 27% from $730 million in 1997. Net revenues were $10.7 billion,
up 11% and 25% from 1998 and 1997, respectively. Increased trading volumes on
global exchanges and the continued growth in fee-based revenues have led to
record revenues in both Commissions revenues and Asset management and portfolio
service fees during 1999. The profitability of the PCG business decreased
slightly in 1999 as a result of higher technology expenses and increased
advertising expenses, including those related to Unlimited Advantage, ML Direct,
and MLJS. PCG results in 1998 included start-up and integration costs associated
with MLJS and Midland Walwyn, respectively.
Management's Discussion and Analysis 37
<PAGE>
ASSET MANAGEMENT GROUP
- -------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- -------------------------------------------------------------------------------
Net revenues $ 2,268 $ 1,979 $ 1,239
Net earnings 335 292 264
- -------------------------------------------------------------------------------
Total employees 3,535 3,202 2,924
- -------------------------------------------------------------------------------
AMG provides investment management services to a diverse global clientele
of institutions, including pension plans and corporations, high-net-worth
individuals, mutual funds, and other investment vehicles. The December 1997
acquisition of Mercury has proved critical to Merrill Lynch's global asset-
gathering strategy and, in combination with Merrill Lynch Asset Management
("MLAM"), is essential to the success of AMG's business. During 1999, AMG
integrated its business into a single global organization with three regional
operating units serving a wide variety of clients, with a special focus in the
U.S., Japan, and Europe. In line with this realignment and focus, AMG expanded
its products and services as well as its distribution channels. AMG services are
now offered under three distinct brand names around the world, Merrill Lynch
Asset Management, Merrill Lynch Mercury Asset Management, and Hotchkis and
Wiley. In the U.S., Merrill Lynch branded products are available primarily
through the PCG distribution channel, while the Mercury and Hotchkis and Wiley
products are available through both PCG and third-party distribution networks.
Outside the U.S., Merrill Lynch, Mercury, and Atlas (offered in Canada only)
branded products are available through both the Merrill Lynch distribution
network and other financial intermediaries.
In 1999, the introduction of new senior management, including new chief
investment and marketing officers, senior portfolio managers, and an experienced
quantitative management team, contributed to improved investment performance
across retail and institutional products and permitted enhanced product
distribution. The U.S. retail mutual fund offerings were expanded to include
greater representation in growth areas, particularly technology. In addition,
quantitative management capabilities were enhanced with the formation of Merrill
Lynch Quantitative Advisors, a management unit offering products that utilize
quantitative techniques designed to provide consistent and high investment
returns. AMG's sales capabilities through third-party and internal distribution
channels also strengthened during 1999, particularly through increased wholesale
product offerings.
At year-end 1999, assets under management were a record $557 billion, up
11% during 1999, with increases across virtually all asset classes, client
bases, and client locations. Of particular note were the increases in assets
under management in Japan and Australia, two of AMG's target non-U.S. markets.
Based on assets under management, Merrill Lynch is one of the largest investment
managers in the world.
Presented are three pie charts illustrating Merrill Lynch's assets under
management in terms of Client Base, Client Location and Asset Class at year-end
1999.
- --------------------------------------------------------------------------------
ASSETS UNDER MANAGEMENT AT YEAR-END 1999
- --------------------------------------------------------------------------------
CLIENT BASE
Retail 52%
Institutional 48%
CLIENT LOCATION
U.S. 58%
Non-U.S. 42%
ASSET CLASS
Equity and Balanced 55%
Fixed Income - Medium and Long Duration 17%
Fixed Income - Short Duration 28%
- --------------------------------------------------------------------------------
AMG's assets under management for each of the last three years were
comprised of the following:
- --------------------------------------------------------------------------------
(in billions)
1999 1998 1997
- --------------------------------------------------------------------------------
Equity and balanced $ 306 $ 267 $ 252
Fixed income:
Medium and long duration 95 90 81
Short duration 156 144 115
- --------------------------------------------------------------------------------
Total assets under management $ 557 $ 501 $ 448
- --------------------------------------------------------------------------------
Net earnings for AMG were $335 million in 1999, up 15% from $292 million in
1998 and up 27% from $264 million in 1997. Results in 1999 include an after-tax
investment gain of approximately $45 million. Net revenues were $2.3 billion, up
15% and 83% from 1998 and 1997, respectively. The 1998 increase reflects the
December 1997 purchase of Mercury. Profitability of the AMG business also
improved from 1998 and 1997 because of robust markets, increased productivity,
and expanded product lines.
38 Management's Discussion and Analysis
<PAGE>
GLOBAL OPERATIONS
- -----------------
Merrill Lynch's non-U.S. operations are organized into six geographic regions:
. Europe, Middle East, and Africa,
. Asia Pacific,
. Australia and New Zealand,
. Japan,
. Canada, and
. Latin America.
The following summary of regional operating results excludes goodwill
amortization, financing costs for the Mercury acquisition, and the 1998 staff
reduction provision.
EUROPE, MIDDLE EAST, AND AFRICA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 4,222 $ 2,844 $ 1,949
Earnings before income taxes 1,290 452 328
- --------------------------------------------------------------------------------
Total full-time employees 7,658 7,178 6,477
- --------------------------------------------------------------------------------
Merrill Lynch operates in Europe, the Middle East, and Africa as a dealer
in a wide array of equity and debt products, as well as providing asset
management, investment banking, private banking, and research services. In line
with its strategy of becoming a global leader with a strong local presence in
key markets, Merrill Lynch now has 45 offices in 20 countries in the region.
As a result of the December 1997 acquisition of Mercury, Merrill Lynch has
preeminent asset management capabilities in this region. The asset management
group is the largest active fund manager in Europe, with assets under management
of $288 billion at year-end 1999. Merrill Lynch Mercury received a number of
prestigious awards in Europe, including #1 Asset Management Group according to
the 1999 Primark/Extel Survey, and #1 Fund Management Group as ranked by the
1999 Reuters UK Larger Companies Survey.
All of the region's businesses achieved record results in 1999, with
notable contributions from equity markets and investment banking. Merrill Lynch
has established itself as the leading equities house in the region, and was
ranked #1 Research House by Reuters and #1 All-Europe Research Team by the 1999
Institutional Investor Survey. 1999 was the most successful year ever for
investment banking in Europe, as Merrill Lynch participated in a number of top
deals in the region, including winning "Best M&A Deal of the Year" and "Best
Buyout Deal of the Year" from Corporate Finance Magazine. Merrill Lynch was also
awarded the #1 position in European IPOs after acting as lead manager on the
"European IPO of the Year", as ranked by IFR Magazine. In addition, the
international version of Unlimited Advantage, International Asset Power, was
launched in October 1999, and in 2000 Merrill Lynch aims to establish leadership
in e-commerce in Europe through aggressive development of a regional Direct
Markets Group. Customers in this region will also have access to online trading
in 2000.
In 1999, net revenues for the region increased 48% from 1998, primarily due
to higher investment banking and equity trading revenues, as well as increased
asset management fees. Debt trading revenues also contributed to the increase,
as market conditions stabilized compared to the second half of 1998.
The $838 million increase from 1998 in earnings before income taxes was
primarily attributable to significantly increased revenues resulting primarily
from investment banking activities, partially offset by a rise in compensation
costs.
In 1998, net revenues for the region increased 46% from 1997, primarily
attributable to asset management fees relating to Mercury, as well as higher
investment banking and equity trading revenues, partly offset by lower debt
trading revenues. Earnings before income taxes increased 38% from 1997.
ASIA PACIFIC
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 813 $ 333 $ 478
Earnings (loss) before income taxes 230 (182) (26)
- --------------------------------------------------------------------------------
Total full-time employees 1,605 1,516 1,624
- --------------------------------------------------------------------------------
Merrill Lynch serves a broad retail and institutional client base
throughout the Asia Pacific region and offers a full range of Private Client,
Asset Management, and CICG products. Merrill Lynch operates from offices in the
People's Republic of China and its special administrative Hong Kong region,
Singapore, Taiwan, South Korea, Thailand, Malaysia, Indonesia, India, and the
Philippines. Merrill Lynch has an established trading presence and exchange
memberships in all major financial markets in the region. The Private Client
business operates seven Private Client offices throughout the Asia Pacific
region, including two offices in the Western U.S., offering investment services
and wealth management products to its clients.
After a year of financial turbulence in 1998, Merrill Lynch had its best
year ever in terms of financial performance in the region. Merrill Lynch
completed deals across most Asian markets and was associated with some of the
most complex and high profile transactions in the region. IFR Magazine ranked
Merrill Lynch Asia Pacific Equity House of the Year and Asia Pacific Bond House
of the Year. Merrill Lynch was also named Best Securities Firm in Asia by
Euromoney, Best Bank for Equity Origination by Global Finance, and Institutional
Investor Magazine ranked Merrill Lynch #1 in Asian Equity and Fixed Income
Research.
Net revenues in the region were up $480 million in 1999 as global markets
stabilized. The increase resulted from strong revenues from equities and equity
derivatives and record Private
Management's Discussion and Analysis 39
<PAGE>
Client revenues, as well as increased asset management fees, with a 20% increase
in assets under management. Earnings before income taxes rose $412 million to
$230 million, primarily as a result of increased equity and debt trading
activity.
In 1998, net revenues in the region were down 30% from 1997, as economic
turmoil adversely impacted debt markets. However, solid equity trading results
and Private Client revenues enabled Merrill Lynch to strengthen its leading
position in these businesses across the region.
AUSTRALIA AND NEW ZEALAND
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 253 $ 221 $ 163
Earnings before income taxes 32 22 12
- --------------------------------------------------------------------------------
Total full-time employees 865 827 852
- --------------------------------------------------------------------------------
In the Australia and New Zealand region, Merrill Lynch provides a broad mix
of Private Client, Asset Management, and CICG products. Assets under management
grew 77% during the year, with total net inflows tripling over 1998 levels. The
increase in Private Client assets was due to an increased product range, a more
focused and expanded sales force, and improved market conditions. The Private
Client Group continued to focus on gathering client assets, resulting in a 62%
increase in total client assets. In the third quarter of 1999, Merrill Lynch
became the first U.S. asset manager to offer U.S.-registered mutual funds in
Australia. International equities and mutual funds were introduced to Australian
investors during the year, and three new fee-based products were offered in
1999, including the international version of Unlimited Advantage. In New
Zealand, the International CMA account was successfully introduced, and
customers in Australia will have access to self-directed Internet trading in
early 2000.
Merrill Lynch's Investment Banking team strengthened its role in the region
as a preeminent strategic and financial advisor to Australian and New Zealand
corporations in 1999. Merrill Lynch is one of the region's leading strategic
advisors to listed companies, and advised on the two largest completed public
company M&A transactions. Debt markets, which had its most profitable year ever,
is recognized as a leading provider of structured and credit products, in
addition to more traditional strengths in cross border origination. Equity
markets also continued to perform well, characterized by structural innovation
and landmark transactions, including the first major Australian Internet
offering. Merrill Lynch was named Best Foreign Securities House in Australia by
Finance Asia Magazine and Best Investment Bank in Australia and New Zealand by
the Greenwich Survey.
Net revenues for the region increased 14% from 1998 and 55% from 1997. The
increase primarily resulted from growth in the Private Client and Asset
Management businesses. Earnings before income taxes increased 45% from 1998 and
nearly tripled since 1997.
JAPAN
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 1,062 $ 592 $ 433
Earnings (loss) before income taxes 20 (108) 62
- --------------------------------------------------------------------------------
Total full-time employees 3,160 2,881 766
- --------------------------------------------------------------------------------
Following the establishment of MLJS and Merrill Lynch Mercury Asset
Management Japan ("MLMJ") in 1998, Merrill Lynch continued to enhance its
presence in the region during 1999 with the successful alignment of its various
businesses in Japan. The firm now provides an integrated range of Private
Client, Asset Management, and CICG products and services to individual, small to
mid-sized corporate, and institutional clients. In 1999, synergies between CICG
and Private Client resulted in the successful distribution of five notable
public offerings through MLJS, in addition to numerous new products introduced
and distributed by MLJS to the retail market.
The firm's CICG business, which operates under the name Merrill Lynch Japan
("MLJ") continued to improve its performance in 1999, with record revenues in
its debt, equity, and advisory businesses. Merrill Lynch has significantly
expanded its origination activities and presence in Japan, ranking #2 in
Japanese announced M&A, and #1 in foreign underwriting for both Japanese equity
and debt issuances, according to Thomson Financial Securities Data. MLJ also
became the first foreign financial institution in Japan to be a lead manager on
a domestic equity new issuance, and has seized business opportunities arising
from the ongoing restructuring of Japanese financial institutions.
In 1999, MLJS began to capitalize on the shift in personal assets in Japan,
from low-yielding deposits to equities, professionally managed funds, and higher
yielding products, while operating under an environment of a more variable
compensation structure for Financial Consultants, continued deregulation,
innovative products, and robust equity markets. Client assets reached $12
billion at year-end 1999, an increase of $10 billion since year-end 1998, and
the number of client accounts more than doubled during the year.
MLMJ, one of the leading managers of Japanese pension funds and a provider
of a wide range of mutual funds, is poised to capitalize on the continuing
deregulation of the Japanese asset management industry. Assets under management
continued to grow rapidly in both the institutional and retail areas while
Japanese equity accounts managed in Tokyo for overseas clients also grew
significantly due to strong performance.
40 Management's Discussion and Analysis
<PAGE>
Net revenues in the Japan region were up 79% from 1998, reflecting strong
performance in all businesses. These higher revenues were offset by a full year
of fixed expenses and higher production-related compensation costs associated
with MLJS.
Net revenues in the Japan region in 1998 were up 37% from 1997, primarily
due to improved profitability from corporate bond trading, higher assets under
management, and increased services provided to financial institutions resulting
from regulatory reform. The pre-tax loss in 1998 was primarily the result of the
start-up costs associated with MLJS.
CANADA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 619 $ 642 $ 708
Earnings before income taxes 65 25 99
- --------------------------------------------------------------------------------
Total full-time employees 3,744 3,703 3,288
- --------------------------------------------------------------------------------
In 1998, Merrill Lynch merged with Midland Walwyn, one of Canada's premier
securities firms. With this transaction, Merrill Lynch significantly expanded
its capabilities in Canada beyond its traditional strengths in investment
banking and debt markets. Today, Merrill Lynch is a full-service firm in the
region with a growing presence, serving individual and institutional clients, as
well as corporate and government issuers.
Merrill Lynch's Private Client business in Canada made significant progress
in 1999. The company's Private Client business ranks as the third largest in
Canada, with a team of more than 1,250 investment professionals serving
approximately 600,000 individuals. MLAM Group Canada, which now includes Merrill
Lynch Mercury, reached $4.8 billion in assets under management, an increase of
55% from the end of 1998. MLAM Group Canada also launched 17 new mutual funds
and introduced a managed wrap program. In October 1999, Merrill Lynch introduced
Asset Partner, the Canadian version of the Unlimited Advantage account.
In CICG, Merrill Lynch was ranked the #1 Investment Bank and #1 in research
by 174 Canadian-based corporations who took part in the 1999 Reuters Survey. The
Debt Markets group jointly led a $2 billion Government Debt Offering which was
voted "Sovereign Deal of the Year" by Euroweek, and also earned "Canadian Deal
of the Year" from Euroweek as joint lead on a debt offering for a Canadian
province.
Net revenues for the region were down slightly from 1998. However, Merrill
Lynch Canada gained significant market share within the Canadian market, and is
positioned to build on this momentum if equity markets improve. Earnings before
income taxes increased 160% from 1998, primarily due to costs incurred in 1998
due to the Midland Walwyn merger.
Net revenues in 1998 declined 9% from 1997, due to decreased underwriting,
debt trading, and commissions revenues caused by uncertainties in global
markets. These declines were partially offset by strong growth in merger and
acquisition advisory revenues and asset management fees. Earnings before income
taxes dropped significantly from 1997 because of a decline in revenues and $40
million in merger and integration-related expenses.
LATIN AMERICA
- --------------------------------------------------------------------------------
(dollars in millions)
1999 1998 1997
- --------------------------------------------------------------------------------
Net revenues $ 614 $ 412 $ 523
Earnings (loss) before income taxes 137 (53) 123
- --------------------------------------------------------------------------------
Total full-time employees 1,172 1,192 904
- --------------------------------------------------------------------------------
In Latin America, Merrill Lynch provides various brokerage and investment
services, including financial planning, investment banking, research, and asset
management, including a newly established asset management presence in Brazil.
Included in this region are certain U.S. offices that primarily serve Latin
American clients.
Volatility stemming from the fourth quarter 1998 emerging market crisis
continued in the first quarter of 1999; high interest rates and increased
foreign capital outflow resulted in a 70% devaluation in the Brazilian real in
the first quarter of 1999. The devaluation had a ripple effect throughout all
Latin American economies, as Brazil is the largest economy in the region.
Subsequent to the first quarter of 1999, the Latin American economy rebounded
due to political and structural changes, as well as robust global markets.
In the second quarter of 1999, Merrill Lynch was appointed by the largest
oil company in Spain as advisor on the significant acquisition of YPF, the large
Argentine oil company. Merrill Lynch continued to receive high honors in
numerous categories, including best M&A firm in Latin America according to
Euromoney, and for the third consecutive year, Merrill Lynch received first
place in Institutional Investor's 1999 Latin America Research Team.
Merrill Lynch's private banking efforts in the region were significant in
1999, as assets in the region grew 20%. In early 2000, Santander Securities
Corporation purchased Merrill Lynch's retail brokerage business in Puerto Rico.
Net revenues for the region increased 49% from 1998 as trading and
investment banking revenues were negatively impacted by volatile global markets
throughout most of 1998. Pre-tax earnings rose $190 million from 1998 due to
significantly improved performance by the debt markets group.
Net revenues in 1998 decreased 21% from 1997 as trading and investment
banking activities were adversely affected by the market turbulence that
occurred throughout most of 1998. The pre-tax loss in 1998 resulted from
increased variable compensation, brokerage, clearing, and exchange costs, and
communication and technology expenses.
Management's Discussion and Analysis 41
<PAGE>
BALANCE SHEET
- -------------
OVERVIEW
Management continually monitors and evaluates on a daily basis the level and
composition of the balance sheet.
In 1999, average total assets were $331 billion, down 12% from $376 billion
in 1998. Average total liabilities in 1999 decreased 13% to $317 billion from
$365 billion in 1998. The major components of the decrease in average total
assets and liabilities are summarized as follows:
- --------------------------------------------------------------------------------
(in millions)
INCREASE (DECREASE) CHANGE
- --------------------------------------------------------------------------------
AVERAGE ASSETS
Receivables under resale agreements and
securities borrowed transactions $ (20,331) (16)%
Trading assets (29,979) (21)
Securities pledged as collateral (5,584) (31)
Customer receivables 5,982 14
Loans,notes,and mortgages 2,361 35
AVERAGE LIABILITIES
Payables under repurchase agreements and
securities loaned transactions $ (27,394) (22)%
Commercial paper and other short-term
borrowings (17,726) (57)
Obligation to return securities received
as collateral (10,251) (32)
Long-term borrowings 5,806 11
Demand and time deposits 2,529 23
- --------------------------------------------------------------------------------
Balance sheet levels were, on average, lower in 1999 compared to 1998.
Year-end 1999 balances, however, were higher compared with year-end 1998
balances, primarily resulting from increases in secured financing transactions,
customer receivables, marketable investment securities, and commercial paper and
other short term borrowings. The discussion that follows analyzes the changes in
year-end financial statement balances of major asset and liability categories.
TRADING-RELATED ASSETS AND LIABILITIES
Trading-related balances primarily consist of trading assets and liabilities,
receivables under resale agreements and securities borrowed transactions,
payables under repurchase agreements and securities loaned transactions, and
certain receivable/payable balances that result from trading activities. At
December 31, 1999 total trading-related assets and liabilities were $251 billion
and $174 billion, respectively. Presented are two pie charts illustrating
trading-related balances as a percentage of total assets and liabilities,
excluding collateral recognized under SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
- --------------------------------------------------------------------------------
ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
TRADING-RELATED ASSETS:
Trading Assets 32%
Resale Agreements and Securities Borrowed 32
Receivables 18
---
82
NON-TRADING-RELATED ASSETS 18
---
100%
===
TRADING-RELATED LIABILITIES:
Trading Liabilities 23%
Repurchase Agreements and Securities Loaned 24
Payables 12
---
59
NON-TRADING-RELATED LIABILITIES 41
---
100%
===
- --------------------------------------------------------------------------------
Although trading-related balances comprise a significant portion of the
balance sheet, the magnitude of these balances does not necessarily convey a
sense of the risk profile assumed by Merrill Lynch. The market and credit risks
associated with trading-related balances are mitigated through various hedging
strategies, as discussed in the following sections (see Note 3 to the
Consolidated Financial Statements for descriptions of market and credit risks).
Merrill Lynch reduces a significant portion of the credit risk associated
with trading-related receivables by requiring counterparties to post cash or
securities as collateral in accordance with collateral maintenance policies. The
bar graph that follows depicts the value of collateral maintained at December
31, 1999 for trading-related assets to reduce counterparty credit risk.
42 Management's Discussion and Analysis
<PAGE>
- --------------------------------------------------------------------------------
COLLATERALIZED TRADING-RELATED RECEIVABLES
(in billions)
- --------------------------------------------------------------------------------
TRADING-RELATED COLLATERAL
RECEIVABLES MAINTAINED
--------------- ----------
Derivative Contract Receivables(a) $ 28 $ 4
Receivables under Resale Agreements 58 62
Receivables under Securities Borrowed Transactions 42 41
Other Receivables(b) 56 39
- --------------------------------------------------------------------------------
(a) Included in trading assets. Collateral is not maintained for securities and
other cash instruments.
(b) Collateral presented does not include over collateralization, i.e., Merrill
Lynch maintains collateral in excess of customer margin loan receivables.
Trading Assets and Liabilities
Trading inventory principally represents securities purchased ("long"
positions), securities sold but not yet purchased ("short" positions), and the
fair value of derivative contracts (see Note 1 to the Consolidated Financial
Statements). These positions are primarily the result of market-making, hedging,
and proprietary activities.
Merrill Lynch acts as a market-maker in a wide range of securities,
resulting in a significant amount of trading inventory to facilitate customer
transaction flow. To a lesser degree, Merrill Lynch also maintains proprietary
trading inventory in seeking to profit from existing or projected market
opportunities.
Merrill Lynch uses both cash instruments and derivatives to manage trading
inventory market risks. As a result of these hedging techniques, a significant
portion of trading assets and liabilities represents hedges of other trading
positions. Long U.S. Government securities, for example, may be hedged with
short interest rate futures contracts. These hedging techniques, which are
generally initiated at the trading unit level, are supplemented by corporate
risk management policies and procedures (see the Risk Management section for a
description of risk management policies and procedures).
Trading assets at year-end 1999, including the $10 billion of collateral
recognized under SFAS No. 125, were down 1% from year-end 1998. Collateral
recognized under SFAS No. 125 and contractual agreements increased, while
non-U.S. Government and agencies securities declined. Trading liabilities
increased from $64 billion to $68 billion, primarily as a result of higher
levels of contractual agreements and U.S. Government and agencies, partially
offset by declines in non-U.S. governments and agencies and equities and
convertible debentures.
Resale/Repurchase Agreements and Securities Borrowed/Loaned Transactions
Repurchase agreements and, to a lesser extent, securities loaned transactions
are used to fund a significant portion of trading assets. Likewise, Merrill
Lynch uses resale agreements and securities borrowed transactions to obtain the
securities needed for delivery on short positions. These transactions are
typically short-term in nature since a significant portion are entered into on
an overnight or open basis. Resale and repurchase agreements entered into on a
term basis typically mature within 90 days.
Merrill Lynch also enters into these transactions to meet customers' needs.
These "matched-book" repurchase and resale agreements or securities borrowed and
loaned transactions are entered into with different customers using the same
underlying securities, generating a spread between the interest revenue on the
resale agreements or securities borrowed transactions and the interest expense
on the repurchase agreements or securities loaned transactions. Exposures on
these transactions are limited by their typically short-term nature and
collateral maintenance policies.
Presented is a bar graph illustrating the nature of resale/repurchase
agreements and securities borrowed/loaned transactions, differentiating between
matched-book and non-matched-book for total resale agreements, repurchase
agreements, securities borrowed, and securities loaned balances of $58,034
million, $64,954 million, $41,707 million, and $6,624 million, respectively.
- --------------------------------------------------------------------------------
RESALE/REPURCHASE AGREEMENTS AND
SECURITIES BORROWED/LOANED TRANSACTIONS
- --------------------------------------------------------------------------------
MATCHED-BOOK NON-MATCHED-BOOK
------------ ----------------
Resale Agreements 51% 49%
Repurchase Agreements 46 54
Securities Borrowed 11 89
Securities Loaned 71 29
- --------------------------------------------------------------------------------
Receivables under resale agreements and securities borrowed transactions
and payables under repurchase agreements and securities loaned transactions in
1999
Management's Discussion and Analysis 43
<PAGE>
increased 14% and 7% from year-end 1998, respectively, as a result of higher
matched book activity.
Other Trading-Related Receivables and Payables
Securities trading may lead to various customer or broker-dealer balances.
Broker-dealer balances may also result from recording trading inventory on a
trade date basis. Certain receivable and payable balances also arise when
customers or broker-dealers fail to pay for securities purchased or fail to
deliver securities sold, respectively. These receivables are generally fully
collateralized by the securities that the customer or broker-dealer purchased
but did not receive. Customer receivables also include margin loans
collateralized by customer-owned securities held by Merrill Lynch. Collateral
policies significantly limit Merrill Lynch's credit exposure to customers and
broker-dealers. Merrill Lynch, in accordance with regulatory requirements, will
sell securities that have not been paid for, or purchase securities sold but not
delivered, after a relatively short period of time, or will require additional
margin collateral, as necessary. These measures reduce market risk exposure
related to these balances.
Interest receivable and payable balances related to trading inventory are
principally short-term in nature. Interest balances for resale and repurchase
agreements, securities borrowed and loaned transactions, and customer margin
loans are generally considered when determining the collateral requirements
related to these transactions.
Trading-related receivables in 1999 were up $9 billion from 1998, primarily
due to increases in margin and other collateralized loans. Trading-related
payables increased $5 billion during 1999 due to heightened customer activity
and a net payable that results from recording inventory on a trade date basis.
NON-TRADING ASSETS
Investments
Merrill Lynch's investments, which includes Investments of Insurance
Subsidiaries, primarily consist of holdings of liquid debt and equity securities
for liquidity and asset/liability matching purposes, merchant banking and
venture capital investments, including technology investments, such as
Electronic Communications Networks, and investments to hedge deferred
compensation liabilities (see Note 4 to the Consolidated Financial Statements
for further information). Investments grew from $11.7 billion at year-end 1998
to $17.7 billion at year-end 1999, as a result of increases in most categories.
Loans, Notes, and Mortgages
Merrill Lynch's portfolio of loans, notes, and mortgages includes mortgage loans
on residences, working capital loans to small and medium-sized businesses, and
syndicated loans. Merrill Lynch generally maintains collateral on these
extensions of credit in the form of securities, liens on real estate, perfected
security interests in other assets of the borrower, and guarantees. Loans,
notes, and mortgages rose $3.5 billion in 1999 to $11.2 billion due to increased
consumer lending activities. Merrill Lynch maintained collateral of $6.8 billion
at December 31, 1999 to reduce related default risk.
Other
Other non-trading assets, which include goodwill (related primarily to the
Mercury acquisition), equipment and facilities, and other assets, were up
slightly from year-end 1998 levels.
NON-TRADING LIABILITIES
Borrowings
Portions of trading and non-trading assets are funded through borrowings,
primarily commercial paper and long-term borrowings (see the Capital Adequacy
and Liquidity section for more information on funding sources).
Commercial paper increased from $16.8 billion at year-end 1998 to $24.2
billion at year-end 1999. Demand and time deposits increased $5.1 billion in
1999 as a result of higher customer deposits in banking subsidiaries.
Outstanding long-term borrowings decreased to $53.5 billion at December 31, 1999
from $57.6 billion at December 25, 1998. Major components of the change in
long-term borrowings for 1999 and 1998 follow:
- --------------------------------------------------------------------------------
(dollars in billions)
1999 1998
- --------------------------------------------------------------------------------
Beginning of year $ 57.6 $ 43.1
Issuances 15.1 29.3
Maturities (18.6) (15.8)
Other (.6) 1.0
------ ------
End of year(1) $ 53.5 $ 57.6
====== ======
Average maturity in years of long-term
borrowings, when measured to:
Maturity 4.8 4.4
Earlier of the call or put date 4.2 4.0
- --------------------------------------------------------------------------------
(1) At year-end 1999 and 1998, $45.0 billion and $43.9 billion of long-term
borrowings had maturity dates beyond one year,respectively.
Other
Other non-trading liabilities, which include liabilities of insurance
subsidiaries and other payables, increased slightly from year-end 1998 levels.
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
Preferred securities issued by subsidiaries consist primarily of Trust
Originated Preferred Securities(Service Mark) ("TOPrS"(Service Mark)) (see Note
7 to the Consolidated Financial Statements for further information). TOPrS
proceeds are utilized as part of general balance sheet funding (see the Capital
Adequacy and Liquidity section
Management's Discussion and Analysis 44
<PAGE>
for more information). Preferred securities issued by subsidiaries rose $98
million during 1999 as a result of a yen-denominated TOPrS issuance.
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1999 increased 26% to $12.8 billion from
$10.1 billion at year-end 1998. The 1999 increase resulted from net earnings and
the net effect of employee stock transactions, partially offset by dividends.
At December 31, 1999, total common shares outstanding, excluding shares
exchangeable into common stock, were 367.8 million, 3% higher than the 356.3
million shares outstanding at December 25, 1998. The increase was attributable
principally to employee stock grants and option exercises.
Total shares exchangeable into common stock at year-end 1999, issued in
connection with the Midland Walwyn merger, were 4.0 million, compared with 4.5
million at year-end 1998. As a result of the merger, Merrill Lynch also issued
4.2 million shares of common stock.
There were no common stock repurchases during 1999. In 1998, Merrill Lynch
rescinded its share repurchase authority in order to facilitate pooling-of-
interests accounting for the Midland Walwyn merger.
CAPITAL ADEQUACY AND LIQUIDITY
- ------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
. Ensure sufficient equity capital to absorb losses,
. Support the business strategies, and
. Assure liquidity at all times, across market cycles, and through periods
of financial stress.
CAPITAL ADEQUACY
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $12.4 billion in
common equity, $425 million in preferred stock, and $2.7 billion of TOPrS at
December 31, 1999.
Merrill Lynch continually reviews overall equity capital needs to ensure
that its equity capital base can support the estimated risks and needs of its
businesses, as well as the regulatory and legal capital requirements of its
subsidiaries. Merrill Lynch uses statistically based risk models, developed in
conjunction with risk management practices, to estimate potential losses arising
from market and credit risks. Equity capital needs are determined based on these
models, which dynamically capture changes in risk profile. Merrill Lynch also
assesses the need for equity capital to support business risks that may not be
adequately measured through these risk models, as well as the potential use of
equity capital to support growth. Merrill Lynch determines the appropriateness
of its equity capital composition, which includes common stock, preferred stock,
and TOPrS, taking into account the perpetual nature of its preferred stock and
TOPrS. Based on these analyses and criteria, management believes that Merrill
Lynch's equity capital base of $15.5 billion is adequate.
Merrill Lynch operates in many regulated businesses that require various
minimum levels of capital (see Note 13 to the Consolidated Financial Statements
for further information). Merrill Lynch's broker-dealer, banking, insurance, and
futures commission merchant activities are subject to regulatory requirements
that may restrict the free flow of funds to affiliates. Regulatory approval is
generally required for paying dividends in excess of certain established levels
and making affiliated investments.
Merrill Lynch's leverage ratios were as follows:
- --------------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
- --------------------------------------------------------------------------------
PERIOD-END
December 31,1999 21.1x 13.4x
December 25,1998 23.5x 15.5x
AVERAGE(3)
Year ended December 31,1999 23.2x 14.4x
Year ended December 25,1998 32.9x 19.2x
- --------------------------------------------------------------------------------
(1) Total assets to Total stockholders' equity and Preferred securities issued
by subsidiaries.
(2) Total assets less (a) Securities received as collateral, net of securities
pledged as collateral,(b) Securities pledged as collateral,(c) Receivables
under resale agreements and securities borrowed transactions, to Total
stockholders' equity and Preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
An asset-to-equity leverage ratio does not reflect the risk profile of
assets, hedging strategies, or off-balance-sheet exposures. Thus, Merrill Lynch
does not rely on overall leverage ratios to assess risk-based capital adequacy.
LIQUIDITY
Liquidity risk occurs when there are timing differences between cash inflows
from the businesses and cash outflows for business needs and maturing debt
obligations. Merrill Lynch's liquidity policy is to maintain alternative funding
sources such that all unsecured debt obligations maturing within one year can be
repaid when due without issuing new unsecured debt or liquidating business
assets. Primary alternative funding sources to unsecured borrowings are
repurchase agreements, securities loaned, and secured bank loans, which require
pledging unhypothecated marketable securities held for trading or liquidity
purposes. Other funding sources include liquidating cash equivalents;
securitizing loan assets; and drawing on a committed, senior, unsecured bank
credit facility that, at December 31,
Management's Discussion and Analysis 45
<PAGE>
1999, totaled $8 billion and was not drawn upon. Merrill Lynch maintains a
contingency funding plan, which out-lines actions that would be taken in the
event of a severe funding disruption.
Merrill Lynch regularly reviews the level and mix of its assets and
liabilities to assess its ability to conduct core business activities without
issuing new unsecured debt or drawing upon its bank credit facilities. The mix
of assets and liabilities provides flexibility in managing liquidity since a
significant portion of assets turns over frequently and is typically match-
funded with liabilities having similar maturities and cash flow characteristics.
At December 31, 1999, a significant portion of Merrill Lynch's assets was
considered readily marketable by management.
Merrill Lynch typically concentrates its unsecured, general-purpose funding
at the ML & Co. level, except where tax regulations, time zone differences, or
other business considerations make this impractical. The benefits of this
strategy are enhanced control, reduced financing costs, wider name recognition
by creditors, and greater flexibility to meet variable funding requirements of
subsidiaries.
Merrill Lynch strives to expand and diversify its funding programs,
markets, and investor and creditor base. Merrill Lynch benefits by distributing
a significant portion of its liabilities and equity through its own sales force
to a large, diversified global client base. Available funding sources include:
. repurchase agreements and securities loaned transactions,
. U.S., Canadian, Euro, Japanese, and Australian commercial paper programs,
. letters of credit,
. master notes,
. demand and time deposits issued through Merrill Lynch's banking
subsidiaries,
. bank loans,
. long-term debt,
. TOPrS,
. preferred stock, and
. common stock.
Additionally, Merrill Lynch maintains access to significant uncommitted
credit lines, both secured and unsecured, from a large group of banks.
Commercial paper represented 7% and 6% of total assets at year-end 1999 and
1998, respectively. Merrill Lynch maintains strict concentration standards for
commercial paper and other short-term borrowings, including limits for any
single investor.
In addition to equity capital sources, Merrill Lynch views long-term debt
as a stable funding source for its core balance sheet assets. Long-term, less
liquid assets are fully funded with long-term sources of capital, which include
the non-current portion of long-term debt, TOPrS, preferred stock, and common
equity. Generally, trading and other current assets are financed with a
combination of short-term funding, long-term debt, and equity capital.
As part of an overall liquidity management strategy, Merrill Lynch's
insurance subsidiaries regularly review the funding requirements of their
contractual obligations for in-force, fixed-rate life insurance and annuity
contracts as well as expected future acquisition and maintenance expenses for
all contracts. The insurance subsidiaries develop and market primarily variable
life insurance and variable annuity products. These products are not subject to
the interest rate, asset/liability matching, or credit risks attributable to
fixed-rate products, thereby reducing the insurance subsidiaries' risk profile
and liquidity demands. At December 31, 1999, approximately 84% of invested
assets of insurance subsidiaries were considered liquid by management.
Asset and Liability Management
The relationship between assets and liabilities is managed on a consolidated
basis across businesses and subsidiaries. Merrill Lynch routinely issues debt in
a variety of maturities and currencies to achieve the lowest cost financing
possible. Merrill Lynch uses derivative transactions, including interest rate
swaps, to more closely match the duration of these borrowings to the duration of
the assets being funded to minimize interest rate risk. Merrill Lynch also
enters into currency swaps, to ensure that foreign-currency denominated assets
are funded with like-currency denominated liabilities (to the extent that the
currency cannot be sourced more efficiently through a direct debt issuance).
Merrill Lynch uses swaps for asset and liability management to reduce its
interest expense and effective borrowing rate.
Credit Ratings
The cost and availability of unsecured financing generally are dependent on
credit ratings. Merrill Lynch's senior long-term debt, preferred stock, and
TOPrS were rated by several recognized credit rating agencies at December 31,
1999 as follows:
- --------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND
RATING AGENCY RATINGS TOPrS RATINGS
- --------------------------------------------------------------------------------
Duff & Phelps Credit Rating Co. AA AA-
Fitch IBCA,Inc. AA AA-
Japan Rating & Investment Information,Inc. AA A+
Moody's Investors Service,Inc. Aa3 aa3
Standard & Poor's AA- A
Thomson BankWatch,Inc. AA+ Not Rated
- --------------------------------------------------------------------------------
Approximately $78.1 billion of indebtedness at December 31, 1999 is
considered senior indebtedness as defined under various indentures.
46 Management's Discussion and Analysis
<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. To support
business expansion, for example, Merrill Lynch is building a new European
headquarters in London, for approximately $650 million; approximately $180
million has been spent to date.
Significant technology initiatives include decimalization, the Securities
and Exchange Commission's mandated initiative, extended hours trading, and
numerous other projects related to Merrill Lynch's e-commerce initiatives across
all businesses. The decimalization project involves systems application
alterations and upgrades in order to comply with the industry-mandated
conversion of listed equities and options from fractional to decimal pricing
beginning in July 2000. Extended hours trading involves systems remediations,
and extended availability of online systems.
YEAR 2000 COMPLIANCE INITIATIVE
In 1999 Merrill Lynch completed its efforts to address the Year 2000 issue (the
"Y2K issue"). The Y2K issue was the result of a widespread programming technique
that caused computer systems to identify a date based on the last two numbers of
a year, with the assumption that the first two numbers of the year are "19." As
a result, the year 2000 would be stored as "00,"causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the Y2K issue may have caused
serious failures in information technology systems and other systems.
In 1995 Merrill Lynch established the Year 2000 Compliance Initiative to
address the internal and external risks associated with the Y2K issue. The
Initiative consisted of six phases, completed by the millennium: planning,
pre-renovation, renovation, production testing, certification, and integration
testing. Contingency plans were established in the event of any failures or
disruptions.
Through the date of this report, there have been no material failures or
disruptions of systems or services at Merrill Lynch attributable to the Y2K
issue. Similarly we have not been notified of any material failure or
disruption of systems or services affecting third parties in their capacity to
transact business with Merrill Lynch or in Merrill Lynch's capacity to transact
business with others. Merrill Lynch continues to monitor the performance of its
systems for any possible future failures or disruptions attributable to the Y2K
issue.
As of December 31, 1999 the total estimated expenditure of existing and
incremental resources for the Year 2000 Compliance Initiative was approximately
$510 million, including $102 million of occupancy, communications, and other
related overhead expenditures, as Merrill Lynch is applying a fully costed
pricing methodology for this project. At December 31, 1999, of the total
estimated expenditures, approximately $12 million, related to continued testing,
contingency planning, risk management, and the wind down of the efforts, had not
yet been spent.
RISK MANAGEMENT
- ---------------
RISK MANAGEMENT PHILOSOPHY
Risk-taking is an integral part of Merrill Lynch's business. Through its
operating activities, Merrill Lynch is exposed to a variety of risks, including
market, credit, liquidity, and process risk. Merrill Lynch's business segments
remain primarily accountable for managing the risks of their business
activities.
To ensure that these risks are effectively identified, evaluated,
monitored, and managed, Merrill Lynch has established a comprehensive risk
management process. Key components include:
. a formal risk governance framework which defines the firm's risk
oversight process,
. review of the risk oversight process by the Audit and Finance Committee
of the Board of Directors,
. segregation of risk oversight responsibilities between Merrill Lynch's
executive, business, and control functions and active communication and
coordination among these functions,
. clearly articulated risk tolerance levels, set by the Executive
Management Committee ("EMC") and reviewed continually with the goal of
ensuring that Merrill Lynch's risks are consistent with its strategies
and capabilities, as well as current and anticipated business and market
conditions,
. risk policies and procedures, and
. advanced analytic tools.
The ultimate goal of the process is to ensure that Merrill Lynch's
exposures are identified, acknowledged, and understood at the appropriate levels
within the firm and that, to the extent possible, risk-related losses occur
within acceptable, predetermined tolerance levels.
Risk management is a dynamic function, influenced by industry, technology,
regulatory, and market forces, and Merrill Lynch is continually refining its
internal risk management processes. Enhancements are being created in a number
of areas, including process risk management, scenario analysis, leveraged
counterparty risk management, country risk management, stress testing, and
risk-adjusted performance measurement. As the environment changes, Merrill Lynch
will strive to maintain innovative policies and procedures in the management of
its risk.
The overall effectiveness of Merrill Lynch's risk management process is
illustrated by analyzing actual net trading-related revenues over time. Merrill
Lynch's trading-related activities, largely a client order flow-driven business,
combined with its risk management strategies, help to reduce earnings
volatility. Presented is a bar graph illustrating the distribution of weekly net
trading-related revenues by revenue band for 1997, 1998, and 1999.
Management's Discussion and Analysis 47
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTION OF WEEKLY NET TRADING-RELATED REVENUES BY YEAR
(dollars in millions)
- --------------------------------------------------------------------------------
Number of weeks
----------------------
1997 1998 1999
---- ---- ----
Less than $0 - 5 -
$0-50 4 7 1
$50-100 12 9 5
$100-150 31 17 21
Over $150 5 14 26
--- --- ---
52 52 53
=== === ===
- --------------------------------------------------------------------------------
Risk Governance Structure
Merrill Lynch's risk governance structure involves the Audit and Finance
Committee of the Board of Directors, the EMC, the Risk Oversight Committee
("ROC"), the business segments, Corporate Risk Management ("CRM"), and various
corporate governance committees.
. The Audit and Finance Committee of the Board of Directors, comprised
entirely of external directors, has authorized the ROC to establish
Merrill Lynch's risk management policies.
. The EMC establishes risk tolerance for the firm and authorizes changes in
Merrill Lynch's risk profile. It also ensures that the risks assumed by
Merrill Lynch are managed within these tolerance levels, verifies that
Merrill Lynch has implemented appropriate policies for the effective
management of risks, and approves substantive changes to risk policies,
including those proposed by the ROC. Particular attention is paid to risk
concentration and illiquidity.
. The ROC, comprised of senior business and control managers and chaired by
the Head of CRM, oversees Merrill Lynch's risks, ensures that the
business units create and implement processes to identify, measure, and
monitor risks, assists the EMC in determining risk tolerance levels for
Merrill Lynch's business units, monitors the activities of Merrill
Lynch's corporate governance committees, and reports significant issues
and transactions to the EMC and the Audit and Finance Committee.
. Corporate governance committees exist to create policy, review activity,
and ensure new and existing business initiatives remain within
established risk tolerance levels. These committees include the New
Product Review Committee, Debt and Equity Capital Commitment Committees,
Reserve Committee, and Special Transactions Review Committee.
Representatives of the principal independent control functions
participate as voting members of these committees. These committees
report regularly to the ROC.
Risk Framework
Merrill Lynch has developed a mechanism known as the Risk Framework to define
and communicate its tolerance for risk and raise as exceptions certain areas of
risk concentration. Risks are measured against Framework limits on a continuous
basis, and exceptions and violations are reported, investigated, and addressed
at the appropriate level of management. The Framework has been approved by the
EMC and the risk parameters utilized by the Framework have been reviewed by the
Audit and Finance Committee. The EMC reviews the Framework annually and approves
material changes; the ROC reports substantive Framework changes to the Audit and
Finance Committee. The Framework establishes broad risk limits for Merrill
Lynch. Market risk limits are intended to constrain exposure to specific classes
of market risk and Value-at-Risk ("VaR"). VaR is a statistical measure of the
potential loss in the fair value of a portfolio due to adverse movements in
underlying risk factors. Credit risk limits are intended to constrain the
magnitude and duration of exposure to individual counterparties, types of
counterparties, countries, and financing collateral. The Risk Framework has been
established for CICG and is in the process of being expanded to other business
units and Treasury.
Business Segments
Business segments are responsible for ensuring that appropriate processes are in
place to identify, monitor, manage, and report the risks of their businesses
working within the confines of the Risk Framework.
Corporate Risk Management
CRM is an independent control function responsible for Merrill Lynch's risk
management process. The group is headed by a member of the EMC who reports to
the Chief Financial Officer; the Head of CRM also chairs the ROC. CRM manages
Merrill Lynch's market risks (representing the potential change in value of
trading instruments caused by fluctuations in interest and currency exchange
rates, equity and commodity prices, credit spreads or other risks) and credit
risks (representing the potential for loss that can occur as a result of an
impairment in the credit-worthiness of an issuer or counterparty or a default by
an issuer or counterparty on its contractual obligations). CRM also provides
48 Management's Discussion and Analysis
<PAGE>
the firm with an overview of risks on a portfolio basis and develops systems and
tools to facilitate the risk management process.
CRM is comprised of the following groups:
. The CICG Market Risk Management Group defines the products and markets in
which CICG can transact, identifies and quantifies the market risks to
which businesses are exposed, establishes limits within the CICG Risk
Framework to constrain concentrations of risk, and monitors exposures
against these limits. The Group also has a dedicated unit which reviews,
tests, and stresses the mathematical models used by Merrill Lynch's
business and control units and performs revaluations, stress tests, and
hedging analyses.
. The CICG Credit Risk and Capital Commitments Group assesses and rates the
creditworthiness of potential and existing institutional counterparties and
establishes credit limits within the Framework based on counterparty/issuer
credit quality and the potential risk of transactions. The Group reviews
and approves credit exposures and commitments to specific
counterparties/issuers within CICG, and works with business managers to
structure transactions in order to mitigate and/or manage credit risk
within acceptable tolerance levels.
. The Private Client Credit Group assesses the creditworthiness of potential
and existing Private Client business unit counterparties, establishes
credit limits within the Framework based on credit quality, risk, and
diversification factors, reviews and approves credit exposures to specific
clients within the PCG, and works with business managers to structure
transactions in order to mitigate and/or manage credit risk within
acceptable tolerance levels.
. The Portfolio Risk Management Group integrates the disciplines of credit,
market, and process risk management into a single framework that identifies
and controls risks at a firmwide level. The Group develops management tools
that guide judgement on the sources/magnitudes of risk and the use of
capital in support of such risk, and creates and maintains a firmwide
management control framework for process risk. The Portfolio Group also
oversees market risk within Merrill Lynch's Treasury and PCG units and is
responsible for developing and managing the firm's country risk process.
. The Risk Infrastructure Group provides CRM with the technology, analytics,
and resources to quantify, monitor, and manage Merrill Lynch's market,
credit, and portfolio risks. The Group develops systems and analytic tools
to facilitate the collation, aggregation, and analysis of transactions,
positions, and exposures, and designs and implements methodologies for
measuring and managing credit and market risks.
MARKET RISK
Merrill Lynch uses several mathematical techniques to assess the risk of its
positions and portfolios. In particular, CRM quantifies the sensitivities of
Merrill Lynch's trading portfolio to changes in market parameters and utilizes
these sensitivities, together with historical data on benchmark market
parameters, to estimate distributions of the potential earnings and losses that
the portfolio would have incurred had it been subject to the market movements
which occurred during the historic period. From these distributions are derived
a number of risk statistics including VaR.
VaR estimates the amount that Merrill Lynch could lose, with a specified
degree of confidence, over a given time interval. The VaR statistic for a
particular risk category represents the amount that Merrill Lynch could lose due
to market movements in that risk category. The VaR for Merrill Lynch's portfolio
is less than the sum of the VaRs for individual risk categories because
movements in different risk categories occur at different times and,
historically, extreme movements have not occurred in all risk categories
simultaneously. The difference between the sum of the VaRs for individual risk
categories and the VaR calculated for all the risk categories is shown in the
following tables and may be viewed as a measure of the diversification within
Merrill Lynch's portfolio. CRM believes that the tabulated risk measures provide
some guidance as to the amount Merrill Lynch could lose in future periods. Like
all statistics, however, they need to be interpreted with a clear understanding
of their assumptions and limitations. For these disclosures, Merrill Lynch uses
a historical simulation approach to estimate value-at-risk using a 99%
confidence level and a two-week holding period for trading and non-trading
instruments. Sensitivities to market risk factors are aggregated and combined
with a database of historical biweekly changes in market factors to simulate a
series of profits and losses. The level of loss that is exceeded in that series
1% of the time is used as the estimate for the 99% confidence level VaR.
The overall total VaR amounts are presented across major risk categories,
including exposure to volatility risk found in certain products, e.g., options.
The table that follows presents Merrill Lynch's VaR for trading instruments at
year-end 1999 and 1998 and the 1999 average VaR calculated on a quarterly basis.
In late 1999, CRM enhanced its VaR model and thus for comparison purposes, year-
end 1998 amounts have been restated. In addition, for purposes of calculating
the 1999 average, the quarter-end data for the first three quarters of 1999 have
also been restated.
Management's Discussion and Analysis 49
<PAGE>
- --------------------------------------------------------------------------------
(in millions)
Year-end Year-end Average
1999 1998 1999
- --------------------------------------------------------------------------------
TRADING VALUE-AT-RISK(1)
Interest rate and credit spread $ 111 $ 136 $ 114
Equity 34 28 44
Commodity 12 3 9
Currency 11 26 12
Volatility 53 24 39
-------- ------- -------
221 217 218
Diversification benefit (69) (75) (73)
-------- ------- -------
Overall(2) $ 152 $ 142 $ 145
======== ======= =======
- --------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
(2) Overall VaR using a 95% confidence level and a one-day holding period was
$19 million and $32 million at year-end 1999 and 1998, respectively.
During 1999, overall VaR increased, primarily due to increases in the
equity, commodity, and volatility VaR, partially offset by a decrease in
interest rate and credit spread and currency VaR.
The table that follows presents Merrill Lynch's VaR for non-trading
instruments at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
Year-end Year-end
1999 1998
- --------------------------------------------------------------------------------
NON-TRADING VALUE-AT-RISK(1)
Interest rate and credit spread $ 20 $ 75
Currency 52 77
Equity 26 10
Volatility 1 -
---- -----
99 162
Diversification benefit (35) (49)
---- ----
Overall $ 64 $ 113
==== =====
- --------------------------------------------------------------------------------
(1) Based on a 99% confidence level and a two-week holding period.
In addition to the amounts reported in the accompanying table, non-trading
interest rate VaR associated with Merrill Lynch's TOPrS at year-end 1999 and
1998 was $102 million and $119 million, respectively. TOPrS, which are
fixed-rate perpetual preferred securities, are considered a component of Merrill
Lynch's equity capital and, therefore, the associated interest rate sensitivity
is not hedged.
The decrease in non-trading interest rate VaR is primarily due to a
decrease in interest rate and credit spread risk (see the Capital Adequacy and
Liquidity section for further information).
CREDIT RISK
Credit risk represents the loss that Merrill Lynch would incur if a counterparty
or issuer failed to perform its contractual obligations. Policies and procedures
have been established with the objective of protecting against unacceptable
credit losses, including: reviewing and establishing limits for credit
exposures, further mitigating counterparty credit exposures through various
techniques, including maintaining collateral and obtaining the right to
terminate transactions or collect collateral in the event of a credit rating
downgrade, and continually assessing the credit-worthiness of counterparties and
issuers.
Credit exposures related to Merrill Lynch's retail customer business,
including mortgages and home equity lines of credit, customer margin accounts,
and working capital facilities to small businesses, are continually monitored.
Merrill Lynch enters into International Swaps and Derivatives Association,
Inc. master agreements or their equivalent ("master netting agreements") with
each of its derivative counterparties whenever possible. Master netting
agreements provide protection in bankruptcy in certain circumstances and, in
some cases, enable receivables and payables with the same counterparty to be
offset on the Consolidated Balance Sheets, providing for a more meaningful
balance sheet presentation of credit exposure.
In addition, to reduce default risk, Merrill Lynch requires collateral,
principally U.S. Government and agencies securities, on certain derivative
transactions. From an economic standpoint, Merrill Lynch evaluates default risk
exposures net of related collateral. The following is a summary of counterparty
credit ratings for the replacement cost (net of $4.2 billion of collateral) of
trading derivatives in a gain position by maturity at December 31, 1999.
- --------------------------------------------------------------------------------
YEARS TO MATURITY CROSS-
CREDIT ------------------------------- MATURITY
RATING(1) 0-3 3-5 5-7 OVER 7 NETTING(2) TOTAL
- --------------------------------------------------------------------------------
AAA $ 753 $ 288 $ 91 $ 174 $ (288) $ 1,018
AA+/AA 2,013 597 208 528 (341) 3,005
AA- 4,115 2,626 1,106 3,467 (4,530) 6,784
A+/A 3,133 1,509 560 1,100 (1,840) 4,462
A- 1,656 895 414 400 (268) 3,097
BBB 1,600 876 335 204 (224) 2,791
BB+ 1,049 298 214 109 (498) 1,172
Other 808 215 369 198 (73) 1,517
-------- ------- ------- ------- -------- --------
Total $ 15,127 $ 7,304 $ 3,297 $ 6,180 $ (8,062) $ 23,846
======== ======= ======= ======= ======== ========
- --------------------------------------------------------------------------------
(1) Represents credit rating agency equivalent.
(2) Represents netting of payable balances with receivable balances for the
same counterparty across maturity band categories.Receivable and payable
balances with the same counterparty in the same maturity category, however,
are net within the maturity category.
In addition to obtaining collateral, Merrill Lynch mitigates default risk
on derivatives whenever possible by entering into transactions with provisions
that enable Merrill Lynch to terminate or reset the terms of the derivative
contract.
PROCESS RISK
Process risk is the risk of direct or indirect loss resulting from
inadequate controls or business disruption relating to people, internal
processes, systems, or external events. Examples of process risks faced by the
firm could be systems failure, human error, fraud, major fire, or other
disasters.
Merrill Lynch manages process risks in many ways including maintaining a
comprehensive system of internal controls, using technology, employing
experienced personnel, maintaining backup facilities, conducting internal
audits, and emphasiz-
50 Management's Discussion and Analysis
<PAGE>
ing the importance of management oversight. In addition, Merrill Lynch has
established a new process risk management function within CRM to focus on
further enhancing the management of these risks. This new Group is charged with
developing a firm-wide process risk management framework, as well as policies
and procedures aimed at establishing a consistent approach to identify, monitor,
and manage process risks across all business lines. The Group recognizes a
variety of risk management tools and techniques to reinforce the firm's strong
risk management culture. These include summarizing and monitoring process risk
related losses on a regular basis, developing risk indicators to facilitate
proactive risk management capabilities, and self-assessments to identify risks,
corresponding controls, and measures for improvement.
OTHER RISKS
Liquidity risk arises in the course of Merrill Lynch's general funding
activities and in the management of the balance sheet. This risk includes both
the risk of being unable to raise funding with appropriate maturity and interest
rate characteristics and the risk of being unable to liquidate an asset in a
timely manner at a reasonable price. For more information on how Merrill Lynch
manages liquidity risk, see the Capital Adequacy and Liquidity section.
Other risks Merrill Lynch encounters include political, tax, and regulatory
risks. These risks revolve around the impact that changes in local laws,
regulatory requirements, or tax statutes would have on the viability,
profitability, or cost-effectiveness of existing or future transactions. To help
mitigate the effects of these risks, Merrill Lynch constantly reviews new and
pending legislation and regulations by employing professionals in the
jurisdictions in which the company operates to actively follow these issues and
participate in related interest groups.
NON-INVESTMENT GRADE HOLDINGS AND HIGHLY LEVERAGED TRANSACTIONS
- ---------------------------------------------------------------
Non-investment grade holdings and highly leveraged transactions involve risks
related to the creditworthiness of the issuers or counterparties and the
liquidity of the market for such investments. Merrill Lynch recognizes these
risks and, whenever possible, employs strategies to mitigate exposures. The
specific components and overall level of non-investment grade and highly
leveraged positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and
holds non-investment grade cash instruments in connection with its investment
banking, market-making, and derivative structuring activities. Non-investment
grade holdings have been defined as debt and preferred equity securities rated
as BB+ or lower or equivalent ratings by recognized credit rating agencies,
sovereign debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
In addition to the amounts included in the following table, derivatives may
also expose Merrill Lynch to credit risk related to the underlying security
where a derivative contract can either synthesize ownership of the underlying
security (e.g., long total return swaps) or potentially force ownership of the
underlying security (e.g., short put options). At year-end 1999 and 1998,
Merrill Lynch had derivatives with notionals of $2.9 billion and $1.6 billion,
respectively, with non-investment grade credit exposure. Derivatives may also
subject Merrill Lynch to credit spread or issuer default risk, in that changes
in credit spreads or in the credit quality of the underlying securities may
adversely affect the derivatives' fair values. Merrill Lynch seeks to manage
these risks by engaging in various hedging strategies to reduce its exposure
associated with non-investment grade positions, such as purchasing an option to
sell the related security or entering into other offsetting derivative
contracts. At year-end 1999 and 1998, Merrill Lynch had derivatives with
notionals of $3.8 billion and $4.7 billion, respectively, that hedge non-
investment grade credit exposure.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies, in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies, or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will continue to be made on a
select basis.
TRADING EXPOSURES
The following table summarizes trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Trading assets:
Cash instruments $ 5,279 $ 7,462
Derivatives 4,033 4,675
Trading liabilities - cash instruments (997) (920)
Collateral on derivative assets (1,344) (2,192)
------- -------
Net trading asset exposure $ 6,971 $ 9,025
======= =======
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 51
<PAGE>
Included in the preceding table are debt and equity securities and bank
loans of companies in various stages of bankruptcy proceedings or in default. At
December 31, 1999, the carrying value of such debt and equity securities totaled
$64 million, of which 78% resulted from Merrill Lynch's market-making activities
in such securities. This compared with $72 million at December 25, 1998, of
which 86% related to market-making activities. In addition, Merrill Lynch held
distressed bank loans totaling $86 million and $156 million at year-end 1999 and
1998, respectively.
NON-TRADING EXPOSURES
The following table summarizes non-trading exposures to non-investment grade or
highly leveraged issuers or counterparties at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Marketable investment securities $ 58 $ 39
Investments of insurance subsidiaries 108 148
Loans (net of allowance for loan losses):
Bridge loans(1) 68 66
Other loans(2) 1,169 1,058
Other investments:
Partnership interests(3)(4) 1,368 852
Other equity investments(5) 369 459
- --------------------------------------------------------------------------------
(1) Subsequent to year-end, $40 million of this loan was repaid. In addition,
Merrill Lynch extended a $56 million bridge loan to a counterparty in
connection with an acquisition transaction.
(2) Represents outstanding loans to 129 and 80 companies at year-end 1999 and
1998, respectively.
(3) Includes $599 million and $279 million in investments at year-end 1999 and
1998, respectively, related to deferred compensation plans, for which the
default risk of the investments rests with the participating employees.
(4) Includes a $3 million and $300 million investment in the hedge fund Long
Term Capital Portfolio, L.P. at year-end 1999 and 1998, respectively.
(5) Includes investments in 62 and 89 enterprises at year-end 1999 and 1998,
respectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade or highly leveraged counterparties at year-end 1999 and
1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
- --------------------------------------------------------------------------------
Additional commitments to invest in partnerships $ 200 $ 227
Unutilized revolving lines of credit and
other lending commitments 2,585(1) 1,678
- --------------------------------------------------------------------------------
(1) Subsequent to year-end 1999, $900 million of these commitments were
terminated.
At December 31, 1999, the largest industry exposure was to the financial
services sector, which accounted for 34% of total non-investment grade positions
and highly leveraged transactions.
CASH FLOWS
- ----------
During 1998, Merrill Lynch disbursed $5.3 billion to acquire the outstanding
shares of Mercury. This purchase was financed primarily with proceeds from
long-term borrowings.
LITIGATION
- ----------
Certain actions have been filed against Merrill Lynch in connection with Merrill
Lynch's business activities. Although the ultimate outcome of these actions
cannot be ascertained at this time and the results of legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these actions will not have a material adverse effect on Merrill Lynch's
financial condition; however, such resolution could have a material adverse
impact on quarterly operating results in future periods, depending in part on
the results for such periods.
RECENT DEVELOPMENTS
- -------------------
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board deferred for one year the
effective date of the accounting and reporting requirements of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires
Merrill Lynch to recognize all derivatives as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair value.
Currently, the majority of Merrill Lynch's derivatives are recognized at fair
value in trading assets and liabilities, as they are entered into in a dealing
capacity. However, Merrill Lynch also enters into derivatives to hedge its
exposures relating to non-trading assets and liabilities, some of which are not
carried at fair value depending on the nature of the derivative and the related
hedged item.
Merrill Lynch will adopt the provisions of SFAS No. 133 on January 1, 2001,
which will primarily impact the accounting for derivatives used to hedge
borrowings. Merrill Lynch has undertaken ongoing initiatives to address the
adoption of SFAS No. 133. This evaluation includes the impact of implementation
guidance under development. As the impact of adoption is largely dependent on
the derivative positions existing at year-end 2000, Merrill Lynch is unable to
quantify the impact of adoption at this time.
52 Management's Discussion and Analysis
<PAGE>
MANAGEMENT'S DISCUSSION OF FINANCIAL RESPONSIBILITY
- ---------------------------------------------------
Management of Merrill Lynch & Co., Inc. is responsible for preparing the
financial statements and related notes contained in this Annual Report. The
consolidated financial statements and notes are prepared in accordance with
generally accepted accounting principles. Other financial data included in the
Annual Report are consistent with those in the financial statements.
Management recognizes the importance of safeguarding Merrill Lynch's assets
and integrity. Therefore, Management devotes considerable attention to
understanding the risks of its businesses, promoting the highest standards of
ethical conduct, exercising responsible stewardship over Merrill Lynch's assets,
and presenting fair financial statements.
Merrill Lynch regularly reviews its framework of internal controls, taking
into account changing circumstances. Corrective actions are taken to address
control deficiencies, and other opportunities for improvement are implemented
when cost effective.
The framework of internal control includes policies, procedures, and
organizational structures that are overseen by a predominantly independent Board
of Directors. Several committees of the Board actively participate in setting
policy and monitoring controls. The Audit and Finance Committee, which consists
of five independent directors, examines Merrill Lynch's compliance with
acceptable business standards and ethics in accordance with its written charter
of responsibilities and duties. It also reviews significant financial issues and
recommends overall policies regarding market and credit risk, as well as funding
requirements. The Management Development and Compensation Committee, also
composed entirely of independent directors, oversees procedures for developing
and assessing the performance of Merrill Lynch's employees with an emphasis on
ethical business behavior.
Oversight is provided by independent units within Merrill Lynch, working
together to maintain Merrill Lynch's internal control standards.
Corporate Audit reports directly to the Audit and Finance Committee,
providing independent appraisals of Merrill Lynch's internal accounting controls
and compliance with established policies and procedures.
Finance establishes accounting policies and procedures, measures and
monitors financial risk, and prepares financial statements that fairly present
the underlying transactions and events of Merrill Lynch. Corporate Risk
Management is both independent from business line management and has oversight
responsibility for Merrill Lynch's market and credit risks. This group has clear
authority to enforce trading and credit limits using various systems and
procedures to monitor positions and risks.
Law and Compliance serves in a counseling and advisory role to Management.
In this role, the group develops policies; monitors compliance with internal
policies, external rules, and industry regulations; assesses litigation risk
exposure; and provides support in connection with the execution of various
transactions.
The independent auditors, Deloitte & Touche LLP, perform annual audits of
Merrill Lynch's financial statements in accordance with generally accepted
auditing standards, including a review of the internal accounting control
system. The independent auditors openly discuss with the Audit and Finance
Committee their views on the quality of the financial statements and related
disclosures and the adequacy of Merrill Lynch's internal accounting controls.
Quarterly review reports on the interim financial statements are also issued by
Deloitte & Touche LLP. Merrill Lynch's independent auditors are appointed each
year by the Audit and Finance Committee and are given unrestricted access to all
financial records and related data, including minutes of meetings of
stockholders, Board of Directors, and committees of the Board.
/s/ David H. Komansky
David H. Komansky
Chairman of the Board and Chief Executive Officer
/s/ Thomas H. Patrick
Thomas H. Patrick
Executive Vice President and Chief Financial Officer
Management's Discussion and Analysis 53
<PAGE>
[LOGO OF DELOITTE & TOUCHE]
INDEPENDENT AUDITORS' REPORT
- ----------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MERRILL LYNCH & CO., INC.:
We have audited the accompanying consolidated balance sheets of Merrill Lynch &
Co., Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and
December 25, 1998 and the related consolidated statements of earnings, changes
in stockholders' equity, comprehensive income, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of Merrill Lynch's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Merrill Lynch at December 31,
1999 and December 25, 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in 1998
Merrill Lynch changed its method of accounting for certain internal-use software
development costs to conform with Statement of Position 98-1.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
54
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(53 weeks) (52 weeks) (52 weeks)
<S> <C> <C> <C>
NET REVENUES
Commissions $ 6,334 $ 5,799 $ 4,995
Principal transactions 4,361 2,651 3,827
Investment banking 3,614 3,264 2,876
Asset management and portfolio service fees 4,753 4,202 3,002
Other 720 623 500
---------- ---------- ----------
Subtotal 19,782 16,539 15,200
Interest revenue and dividends 15,097 18,035 16,009
Less interest expense 13,010 17,027 14,953
---------- ---------- ----------
Net interest profit 2,087 1,008 1,056
---------- ---------- ----------
TOTAL NET REVENUES 21,869 17,547 16,256
---------- ---------- ----------
NON-INTEREST EXPENSES
Compensation and benefits 11,153 9,199 8,333
Communications and technology 2,038 1,749 1,255
Occupancy and related depreciation 941 867 736
Advertising and market development 779 688 613
Brokerage, clearing, and exchange fees 678 683 525
Professional fees 567 552 520
Goodwill amortization 227 226 65
Provision for costs related to staff reductions - 430 -
Other 1,408 1,057 1,098
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSES 17,791 15,451 13,145
---------- ---------- ----------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 4,078 2,096 3,111
Income Tax Expense 1,265 713 1,129
Dividends on Preferred Securities Issued by Subsidiaries 195 124 47
---------- ---------- ----------
NET EARNINGS $ 2,618 $ 1,259 $ 1,935
========== ========== ==========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 2,580 $ 1,220 $ 1,896
========== ========== ==========
EARNINGS PER COMMON SHARE
Basic $ 7.00 $ 3.43 $ 5.57
========== ========== ==========
Diluted $ 6.17 $ 3.00 $ 4.79
========== ========== ==========
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 55
<PAGE>
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 25, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS $ 10,827 $ 12,530
---------- ----------
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES OR
DEPOSITED WITH CLEARING ORGANIZATIONS 5,880 6,590
---------- ----------
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES
BORROWED TRANSACTIONS 99,741 87,713
---------- ----------
MARKETABLE INVESTMENT SECURITIES 10,145 4,605
---------- ----------
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 23,593 25,318
Contractual agreements 22,701 21,979
Corporate debt and preferred stock 20,346 21,166
U.S. Government and agencies 15,376 15,421
Mortgages, mortgage-backed, and asset-backed 7,394 7,023
Non-U.S. governments and agencies 4,892 7,474
Municipals and money markets 2,427 3,358
---------- ----------
96,729 101,739
Securities received as collateral, net of securities pledged as collateral 10,005 6,106
---------- ----------
Total 106,734 107,845
---------- ----------
SECURITIES PLEDGED AS COLLATERAL 9,699 8,184
---------- ----------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $56 in 1999 and $48 in 1998) 39,850 29,559
Brokers and dealers 9,095 8,872
Interest and other 7,505 9,278
---------- ----------
Total 56,450 47,709
---------- ----------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,097 4,485
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of $146 in 1999 and
$124 in 1998) 11,187 7,684
OTHER INVESTMENTS 3,410 2,590
EQUIPMENT AND FACILITIES (net of accumulated depreciation and amortization
of $4,069 in 1999 and $3,482 in 1998) 3,117 2,761
GOODWILL (net of accumulated amortization of $543 in 1999 and $338 in 1998) 4,952 5,364
OTHER ASSETS 1,832 1,741
---------- ----------
TOTAL ASSETS $ 328,071 $ 299,804
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
56 Consolidated Financial Statements
<PAGE>
<TABLE>
DECEMBER 31,1999 DECEMBER 25,1998
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
<S> <C> <C>
PAYABLES UNDER REPURCHASE AGREEMENTS AND SECURITIES LOANED TRANSACTIONS $ 71,578 $ 67,127
---------- ----------
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 25,595 18,679
---------- ----------
DEMAND AND TIME DEPOSITS 17,602 12,461
---------- ----------
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 27,030 23,840
Equities and convertible debentures 20,231 21,558
U.S. Government and agencies 10,816 7,939
Non-U.S. governments and agencies 6,311 7,245
Corporate debt, preferred stock, and other 3,405 3,132
---------- ----------
Total 67,793 63,714
---------- ----------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 19,704 14,290
---------- ----------
OTHER PAYABLES
Customers 22,722 22,255
Brokers and dealers 11,397 7,899
Interest and other 18,601 18,738
---------- ----------
Total 52,720 48,892
---------- ----------
LIABILITIES OF INSURANCE SUBSIDIARIES 4,087 4,319
LONG-TERM BORROWINGS 53,465 57,563
---------- ----------
TOTAL LIABILITIES 312,544 287,045
---------- ----------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,725 2,627
---------- ----------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
---------- ----------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 59 66
Common stock (par value $1.33 1/3 per share; authorized: 1,000,000,000 shares;
issued 1999-472,714,925 shares, 1998-472,660,324 shares) 630 630
Paid-in capital 1,863 1,427
Accumulated other comprehensive loss (net of tax) (389) (122)
Retained earnings 12,667 10,475
---------- ----------
14,830 12,476
Less: Treasury stock, at cost (1999-104,949,595 shares; 1998-116,376,259 shares) 1,817 2,101
Employee stock transactions 636 668
---------- ----------
TOTAL COMMON STOCKHOLDERS' EQUITY 12,377 9,707
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 12,802 10,132
---------- ----------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES, AND STOCKHOLDERS'
EQUITY $ 328,071 $ 299,804
========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 57
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
- ----------------------------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PREFERRED STOCKHOLDERS' EQUITY
9% CUMULATIVE PREFERRED STOCK, SERIES A
Balance, beginning and end of year $ 425 $ 425 $ 425
====== ====== ======
REMARKETED PREFERRED STOCK, SERIES C
Balance, beginning of year - - 194
Redeemed - - (194)
------ ------ ------
Balance, end of year - - -
------ ------ ------
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 425 $ 425 $ 425
====== ====== ======
COMMON STOCKHOLDERS' EQUITY
SHARES EXCHANGEABLE INTO COMMON STOCK
Balance, beginning of year $ 66 $ 66 $ 46
Net activity - 5 20
Exchanges (7) (5) -
------ ------ ------
Balance, end of year 59 66 66
====== ====== ======
COMMON STOCK
Balance, beginning and end of year 630 630 630
====== ====== ======
PAID-IN CAPITAL
Balance, beginning of year 1,427 1,001 925
Issuance of stock:
To employees 440 430 76
Other (4) (4) -
------ ------ ------
Balance, end of year 1,863 1,427 1,001
====== ====== ======
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Foreign Currency Translation Adjustment (net of tax)
Balance, beginning of year (138) (85) 7
Translation adjustment (164) (53) (92)
------ ------ ------
Balance, end of year (302) (138) (85)
------ ------ ------
Net Unrealized Gains (Losses) on Investment Securities
Available-for-Sale (net of tax)
Balance, beginning of year 16 38 9
Net unrealized gains (losses) on investment securities
available-for-sale (223) (60) 34
Other adjustments(a) 120 38 (5)
------ ------ ------
Balance, end of year (87) 16 38
------ ------ ------
Balance, end of year $ (389) $ (122) $ (47)
====== ====== ======
- ---------------------------------------------------------------------------------------------------------
</TABLE>
58 Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RETAINED EARNINGS
Balance, beginning of year $ 10,475 $ 9,579 $ 7,938
Net earnings 2,618 1,259 1,935
Cash dividends declared:
9% Cumulative Preferred stock (38) (38) (38)
Remarketed Preferred stock - - (1)
Common stock (388) (325) (255)
-------- -------- -------
Balance, end of year 12,667 10,475 9,579
======== ======== =======
TREASURY STOCK, AT COST
Balance, beginning of year (2,101) (2,677) (2,769)
Treasury stock purchased - - (644)
Issued out of treasury (net of reacquisitions):
Employees 273 556 736
Other 11 20 -
-------- -------- -------
Balance, end of year (1,817) (2,101) (2,677)
======== ======== =======
UNALLOCATED ESOP REVERSION SHARES, AT COST
Balance, beginning of year - - (24)
Allocation of shares to participants - - 24
-------- -------- -------
Balance, end of year - - -
======== ======== =======
EMPLOYEE STOCK TRANSACTIONS
Balance, beginning of year (668) (438) (314)
Net issuance of employee stock grants (380) (599) (351)
Amortization of employee stock grants 406 359 218
Repayment of employee loans 6 10 9
-------- -------- -------
Balance, end of year (636) (668) (438)
======== ======== =======
TOTAL COMMON STOCKHOLDERS' EQUITY $ 12,377 $ 9,707 $ 8,114
======== ======== =======
TOTAL STOCKHOLDERS' EQUITY $ 12,802 $ 10,132 $ 8,539
======== ======== =======
- -----------------------------------------------------------------------------------------------------------------
(a) Other adjustments relate to policyholder liabilities, deferred policy acquisition costs, and income taxes.
See Notes to Consolidated Financial Statements.
</TABLE>
Consolidated Financial Statements 59
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET EARNINGS $ 2,618 $ 1,259 $ 1,935
======= ======= =======
OTHER COMPREHENSIVE LOSS:
Foreign currency translation adjustment:
Foreign currency translation losses, net of gains (116) (131) (96)
Income taxes (48) 78 4
------- ------- -------
Total (164) (53) (92)
------- ------- -------
Net unrealized gains (losses) on investment securities
available-for-sale:
Net unrealized holding gains (losses) arising
during the period (229) (10) 50
Reclassification adjustment for (gains) losses
included in net earnings 6 (50) (16)
------- ------- -------
Net unrealized gains (losses) on investment securities (223) (60) 34
Adjustments for:
Policyholder liabilities 35 16 10
Deferred policy acquisition costs 35 4 -
Income taxes 50 18 (15)
------- ------- -------
Total (103) (22) 29
------- ------- -------
Total Other Comprehensive Loss (267) (75) (63)
------- ------- -------
COMPREHENSIVE INCOME $ 2,351 $ 1,184 $ 1,872
======= ======= =======
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
60 Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(dollars in millions)
<TABLE>
<CAPTION>
Year Ended Last Friday in December
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings $ 2,618 $ 1,259 $ 1,935
Noncash items included in earnings:
Depreciation and amortization 718 585 473
Policyholder reserves 205 227 240
Goodwill amortization 227 226 65
Amortization of stock-based compensation 406 359 218
Other 626 (34) 1,036
(Increase) decrease in operating assets:(a)
Trading assets 4,177 6,332 (31,246)
Cash and securities segregated for regulatory purposes or
deposited with clearing organizations 710 (1,233) (2,242)
Receivables under resale agreements and securities borrowed (12,028) 19,940 (22,373)
transactions
Customer receivables (10,304) (2,229) (7,957)
Brokers and dealers receivables (223) (3,690) 1,132
Other 1,100 126 (4,068)
Increase (decrease) in operating liabilities:(a)
Trading liabilities 4,079 (7,474) 26,770
Payables under repurchase agreements and securities loaned 4,451 (12,040) 12,346
transactions
Customer payables 467 3,922 5,091
Brokers and dealers payables 3,498 3,675 399
Other (546) 873 2,356
------- ------- -------
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 181 10,824 (15,825)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from (payments for):
Maturities of available-for-sale securities 4,155 3,983 3,376
Sales of available-for-sale securities 3,071 3,426 2,198
Purchases of available-for-sale securities (11,802) (8,676) (6,383)
Maturities of held-to-maturity securities 995 831 1,081
Purchases of held-to-maturity securities (1,015) (877) (752)
Loans, notes, and mortgages (3,541) (3,405) (989)
Acquisitions, net of cash acquired (20) (5,235) (13)
Sales of subsidiaries, net of cash disposed - 202 -
Other investments and other assets (855) (1,398) (240)
Equipment and facilities (1,074) (1,231) (863)
------- ------- -------
CASH USED FOR INVESTING ACTIVITIES (10,086) (12,380) (2,585)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (payments for):
Commercial paper and other short-term borrowings 6,916 (15,661) 7,019
Demand and time deposits 5,141 2,568 976
Issuance and resale of long-term borrowings 15,057 29,269 25,087
Settlement and repurchase of long-term borrowings (18,598) (15,833) (8,242)
Issuance of subsidiaries' preferred securities 98 2,000 300
Issuance of treasury stock 213 194 154
Other common and preferred stock transactions (199) (161) (848)
Dividends (426) (363) (294)
------- ------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 8,202 2,013 24,152
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,703) 457 5,742
CASH AND CASH EQUIVALENTS,BEGINNING OF YEAR 12,530 12,073 6,331
------- ------- -------
CASH AND CASH EQUIVALENTS,END OF YEAR $ 10,827 $ 12,530 $ 12,073
======= ======= =======
- ---------------------------------------------------------------------------------------------------------
(a) Net of effects of acquisitions and divestitures.
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Income taxes $ 633 $ 579 $ 910
Interest 13,118 17,078 14,119
</TABLE>
See Notes to Consolidated Financial Statements.
Consolidated Financial Statements 61
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
TABLE OF CONTENTS
62 NOTE 1. Summary of Significant
Accounting Policies
66 NOTE 2. Other Significant Events
67 NOTE 3. Trading and Related
Activities
71 NOTE 4. Investments
72 NOTE 5. Borrowings
73 NOTE 6. Fair Value Information and
Non-Trading Derivatives
74 NOTE 7. Preferred Securities
Issued by Subsidiaries
75 NOTE 8. Stockholders' Equity and
Earnings Per Share
76 NOTE 9. Commitments and
Contingencies
77 NOTE 10. Employee Benefit Plans
80 NOTE 11. Employee Incentive Plans
83 NOTE 12. Income Taxes
84 NOTE 13. Regulatory Requirements
and Dividend Restrictions
84 NOTE 14. Segment, Product, and
Geographic Information
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------
DESCRIPTION OF BUSINESS
Merrill Lynch & Co., Inc. ("ML & Co.") provides investment, financing,
insurance, and related services to individuals and institutions on a global
basis through its broker, dealer, banking, insurance, and other financial
services subsidiaries. Its principal subsidiaries include:
. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a
U.S.-based broker-dealer in securities;
. Merrill Lynch International ("MLI"), a U.K.-based broker-dealer in
securities and dealer in equity derivatives;
. Merrill Lynch Government Securities Inc. ("MLGSI"), a dealer in U.S.
Government securities;
. Merrill Lynch Capital Services, Inc., a dealer in interest rate,
currency, and credit derivatives;
. Merrill Lynch Asset Management, LP, a U.S.-based asset management
company; and
. Merrill Lynch Mercury Asset Management, a U.K.-based asset management
company.
Services provided to clients by ML & Co. and subsidiaries (collectively,
"Merrill Lynch") include:
. securities brokerage, trading, and underwriting;
. investment banking, strategic services, and other corporate finance
advisory activities, including loan syndication;
. asset management and other investment advisory and recordkeeping
services;
. dealing and brokerage of swaps, options, forwards, futures, and other
derivatives;
. securities clearance services;
. debt, equity, and economic research activities;
. banking, trust, and lending services; and
. insurance sales and underwriting services.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Merrill Lynch and
are presented in accordance with U.S. generally accepted accounting principles
and prevailing industry practices. All material intercompany transactions and
balances have been eliminated.
Certain reclassifications and format changes have been made to prior year
amounts to conform to the current year presentation. All 1997 amounts have been
restated to reflect the 1998 merger of Midland Walwyn Inc. ("Midland Walwyn")
with Merrill Lynch, which has been accounted for as a pooling-of-interests (see
Note 2 for further information).
The Consolidated Financial Statements are presented in U.S. dollars. Many
non-U.S. subsidiaries have a functional currency (i.e., the currency in which
activities are primarily conducted) that is other than the U.S. dollar, often
the currency of the country in which a subsidiary is domiciled. Subsidiaries'
assets and liabilities are translated to U.S. dollars at year-end exchange
rates, while revenues and expenses are translated at average exchange rates
during the year. Adjustments that result from translating amounts in a
subsidiary's functional currency, net of hedging gains or losses and related tax
effects, are reported in stockholders' equity as a component of Accumulated
other comprehensive loss. All other translation adjustments are included in
earnings.
In presenting the Consolidated Financial Statements, management makes
estimates regarding certain trading inventory valuations, the outcome of
litigation, the carrying amount of
62
<PAGE>
goodwill, the realization of deferred tax assets and insurance deferred
acquisition costs, and other matters that affect the reported amounts and
disclosure of contingencies in the financial statements. Estimates, by their
nature, are based on judgment and available information. Therefore, actual
results could differ materially from those estimates.
Merrill Lynch defines cash equivalents as short-term, highly liquid
securities and interest-earning deposits with original maturities of 90 days or
less, other than those used for trading purposes. For purposes of the
Consolidated Statements of Cash Flows, cash flows from derivatives are
classified in operating activities.
At December 31, 1999 and December 25, 1998, substantially all financial
instrument assets and the majority of financial instrument liabilities are
carried at fair value or amounts that approximate fair value. Fair values of
financial instruments are disclosed in Note 6.
TRADING ACTIVITIES
Merrill Lynch's trading activities consist primarily of securities brokerage,
trading, and underwriting; derivatives dealing and brokerage; and securities
financing transactions. Trading assets and trading liabilities consist of cash
instruments (such as securities) and derivative instruments used for trading
purposes or for hedging other trading inventory.
Securities
Trading securities and other cash instruments (e.g., loans held for trading
purposes) are reported on a trade date basis at fair value. Included in trading
liabilities are securities that Merrill Lynch has sold but did not own and will
therefore be obligated to purchase at a future date ("short sales"). Changes in
fair value (i.e., unrealized gains and losses) are recognized as principal
transactions revenues in the current period. Realized gains and losses and any
related interest amounts are included in principal transactions revenues and
interest revenues and expenses, depending on the nature of the instrument.
Fair values of trading securities are based on quoted market prices,
pricing models (utilizing indicators of general market conditions or other
economic measurements), or management's estimates of amounts to be realized on
settlement, assuming current market conditions and an orderly disposition over a
reasonable period of time.
Derivatives
A derivative is typically defined as an instrument whose value is "derived" from
an underlying instrument or index such as a futures, forward, swap, or option
contract, or other financial instrument with similar characteristics. Derivative
contracts often involve future commitments to exchange interest payment streams
or currencies based on a notional or contractual amount (e.g., interest rate
swaps or currency forwards) or to purchase or sell other financial instruments
at specified terms on a specified date (e.g., options to buy or sell securities
or currencies).
Derivatives are often referred to as off-balance-sheet instruments since
neither their notional amounts nor the underlying instruments are reflected on
the balance sheet; however, the fair values of trading derivatives are recorded
in trading assets and liabilities. Derivatives are reported separately as assets
and liabilities unless a legal right of setoff exists under a master netting
agreement enforceable at law. Balances related to swap and forward transactions
and foreign currency options are included in Contractual agreements on the
Consolidated Balance Sheets. All other derivative balances are recorded in the
related cash instrument caption. The fair value of equity options purchased, for
example, is recorded in the Equities and convertible debentures trading asset
caption.
Changes in fair values of derivatives are recorded as principal
transactions revenues in the current period. Fair values for certain
exchange-traded derivatives, principally futures and certain options, are based
on quoted market prices. Fair values for over-the-counter ("OTC") derivative
financial instruments, principally forwards, options, and swaps, represent
amounts that would be received from or paid to a third party in settlement of
these instruments. These amounts are determined using pricing models based on
the present value of estimated future cash flows employing mid-market valuations
with appropriate adjustments. These adjustments are integral components of the
mark-to-market process and relate to credit quality and concentration, market
liquidity, and exposure close-out costs associated with unmatched positions.
Adjustments are also made for administrative costs incurred to service periodic
cash flows and to maintain hedges over the life of the contract. A portion of
income related to long-term contracts is recognized as the related
administrative costs are incurred.
New, complex instruments may have immature or limited markets. The
precision of the pricing model for a complex product, which involves multiple
variables and assumptions, will evolve over time. As the markets for these
products develop, Merrill Lynch continually refines its pricing models based on
experience to correlate more closely to the market risk of these instruments.
Securities Financing Transactions
Merrill Lynch enters into repurchase and resale agreements and securities
borrowed and loaned transactions to accommodate customers (i.e., matched-book),
finance firm inventory positions, and obtain securities for settlement. Merrill
Lynch also engages in securities financing for customers through margin lending
(see Customer Transactions).
Notes to Consolidated Financial Statements 63
<PAGE>
Resale and repurchase agreements are accounted for as collateralized
financing transactions and are recorded at their contractual amounts plus
accrued interest. Merrill Lynch's policy it to obtain possession of collateral
with a market value equal to or in excess of the principal amount loaned under
resale agreements. To ensure that the market value of the underlying collateral
remains sufficient, collateral is valued daily, and Merrill Lynch may require
counterparties to deposit additional collateral or return collateral pledged,
when appropriate. Substantially all repurchase and resale activities are
transacted under master netting agreements that give Merrill Lynch the right, in
the event of default, to liquidate collateral held and to offset receivables and
payables with the same counterparty. Merrill Lynch offsets certain repurchase
and resale agreement balances with the same counterparty on the Consolidated
Balance Sheets.
Securities borrowed and loaned transactions are recorded at the amount of
cash collateral advanced or received. Securities borrowed transactions require
Merrill Lynch to provide the counterparty with collateral in the form of cash,
letters of credit, or other securities. Merrill Lynch receives collateral in the
form of cash or other securities for securities loaned transactions. For these
transactions, the fees received or paid by Merrill Lynch are recorded as
interest revenue or expense. On a daily basis, Merrill Lynch monitors the market
value of securities borrowed or loaned against the collateral value. Although
substantially all securities borrowing and lending activities are transacted
under master netting agreements, such receivables and payables with the same
counterparty are not set off on the Consolidated Balance Sheets.
Merrill Lynch recognizes collateral received or provided in certain resale
and repurchase agreements in the following balance sheet captions:
. Securities received as collateral, net of securities pledged as
collateral;
. Securities pledged as collateral; and
. Obligation to return securities received as collateral.
The balances reported under these captions primarily represent securities
received as collateral in matched-book term resale and repurchase agreements for
which the collateral provider does not have the explicit contractual right to
substitute.
Interest rate swaps may be used to modify the interest rate characteristics
of long-term resale and repurchase agreements. These swaps are accounted for on
an accrual basis, with amounts to be paid or received recognized as adjustments
to interest expense or revenue. (See the Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives.)
INVESTMENT BANKING AND ADVISORY SERVICES
Underwriting revenues and fees for merger and acquisition advisory services are
accrued when services for the transactions are substantially completed.
Transaction-related expenses are deferred to match revenue recognition.
CUSTOMER TRANSACTIONS
Customer securities and commodities transactions are recorded on a
settlement date basis. Receivables from and payables to customers include
amounts due on cash and margin transactions. Securities owned by customers,
including those that collateralize margin or other similar transactions, are not
reflected on the Consolidated Balance Sheets.
Commissions charged for executing customer transactions are accrued on a
trade date basis and are included in current period earnings. Financial
Consultant compensation and benefits expense is accrued in the same period as
revenue is recognized.
Mutual fund distribution fee revenues are accrued as earned, and redemption
fee revenues are recognized upon receipt. Certain compensation costs related to
sales of rear-load open-end mutual funds are deferred to match revenue
recognition.
INVESTING ACTIVITIES
Merrill Lynch's non-broker-dealer subsidiaries hold debt and equity investments,
which are primarily classified as available-for-sale.
Debt and marketable equity securities classified as available-for-sale are
reported at fair value. Unrealized gains or losses on these securities are
reported in stockholders' equity as a component of Accumulated other
comprehensive loss, net of applicable income taxes and other related items.
Debt securities that Merrill Lynch has the positive intent and ability to
hold to maturity are classified as held-to-maturity. These investments are
recorded at amortized cost unless a decline in value is deemed other than
temporary, in which case the carrying value is reduced. The amortization of
premiums or accretion of discounts and any unrealized losses deemed other than
temporary are included in current period earnings.
Debt and marketable equity securities purchased principally for the purpose
of resale in the near-term are classified as trading investments and are
reported at fair value. Unrealized gains or losses on these investments are
included in current period earnings.
Restricted equity investment securities or equity investment securities
without available market quotations are reported at the lower of cost or
estimated net realizable value. Adjustments in carrying values are included in
current period earnings.
Realized gains and losses on investments are included in current period
earnings. The cost basis of each investment sold
64 Notes to Consolidated Financial Statements
<PAGE>
is specifically identified for purposes of computing realized gains and losses.
Derivative contracts may be used to modify interest rate characteristics of
available-for-sale securities. Merrill Lynch also uses derivatives to manage the
currency exposure arising from investments in non-U.S. subsidiaries (see Basis
of Presentation for accounting policy for these investments). Unrealized gains
and losses on these derivatives are reported net of tax in stockholders' equity
as a component of Accumulated other comprehensive loss, along with unrealized
gains and losses from the hedged items. (See Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives).
LENDING ACTIVITIES
Merrill Lynch's lending activities include loan originations, syndications,
securitizations, and servicing. Merrill Lynch also engages in secondary market
loan trading and margin lending (see Trading Activities and Customer
Transactions, respectively).
Loans held for investment purposes, including consumer and small business
loans and the residual portion of commercial loans syndicated by Merrill Lynch,
are carried at their principal amount outstanding. The allowance for loan losses
is established through provisions that are based on management's assessment of
the collectibility of the loan portfolio. Loans are charged off against the
allowance for loan losses when management determines that collection of
principal is unlikely.
Loans held for sale, which include certain residential mortgage and home
equity loans, are reported at the lower of cost (less allowance for loan losses)
or estimated fair value determined on a portfolio basis. Mortgage servicing
assets and residual interests in mortgage loans underlying Real Estate Mortgage
Investment Conduits and revolving trusts are (1) recognized upon sales of loans
when servicing is retained, and (2) amortized into income in proportion to and
over the estimated life of the net servicing revenue. Mortgage servicing assets
are recognized at the present value of future cash flows, periodically evaluated
for impairment, and included in Other assets on the Consolidated Balance Sheets.
Residual interests are categorized as available-for-sale (see Investing
Activities) and reported in Other investments on the Consolidated Balance
Sheets.
BORROWING ACTIVITIES
Merrill Lynch's unsecured general-purpose funding is principally obtained from
commercial paper and long-term borrowings. Commercial paper, which is issued at
a discount, is recorded at the proceeds received and accreted to its par value.
Long-term borrowings are carried at the principal amount borrowed, net of
unamortized discounts or premiums.
Merrill Lynch uses derivatives to manage the interest rate, currency, and
equity risk exposures of its borrowings. Derivatives that hedge the interest
rate risk on borrowings are generally accounted for on an accrual basis, with
amounts to be paid or received recognized as adjustments to the related interest
expense. Unrealized gains and losses on other financing derivatives are
recognized currently. (See following Non-trading Derivatives section for
additional information on accounting policy for non-trading derivatives.)
NON-TRADING DERIVATIVES
As part of its overall risk management strategy, Merrill Lynch uses derivatives
to manage its market risk exposures arising from non-trading assets and
liabilities. These exposures include interest rate, currency, equity and other
risks. Derivatives used for hedging borrowings and other non-trading assets and
liabilities must be effective at reducing the risk being managed and be
designated as a hedge at inception.
Realized gains and losses on early terminations of derivatives are deferred
over the remaining lives of the hedged assets or liabilities. At December 31,
1999, there was $27 million in deferred gains relating to a derivative contract
terminated during 1999. At December 25, 1998, there were no such deferred
amounts.
INSURANCE ACTIVITIES
Insurance liabilities are future benefits payable under annuity and
interest-sensitive life insurance contracts and include deposits received plus
interest credited during the contract accumulation period, the present value of
future payments for contracts which have annuitized, and a mortality provision
for certain products. Certain policyholder liabilities are also adjusted for
those investments classified as available-for-sale. Liabilities for unpaid
claims consist of the mortality benefit for reported claims and an estimate of
unreported claims based upon prior experience.
Substantially all security investments of insurance subsidiaries are
classified as available-for-sale and recorded at fair value. These investments
support Merrill Lynch's in-force, universal life-type contracts. Merrill Lynch
records adjustments to deferred acquisition costs and policyholder account
balances which, when combined, are equal to the adjustment that would have been
recorded if those available-for-sale investments had been sold at their
estimated fair values and the proceeds reinvested at current yields. The
corresponding credits or charges for these adjustments are recorded in
stockholders' equity as a component of Accumulated other comprehensive loss, net
of applicable income taxes.
Certain variable costs related to the sale or acquisition of new and
renewal insurance contracts have been deferred, to the extent deemed
recoverable, and amortized over the
Notes to Consolidated Financial Statements 65
<PAGE>
estimated lives of the contracts in proportion to the estimated gross profit for
each group of contracts.
Merrill Lynch maintains separate accounts representing segregated funds
held for purposes of funding variable life and annuity contracts. Separate
account assets are accounted for as customer assets since the contract holders
bear the risk of ownership, consistent with Merrill Lynch's other investment
products. Accordingly, separate account assets and the related liabilities are
not consolidated with the assets and liabilities of Merrill Lynch.
STOCK-BASED COMPENSATION
Merrill Lynch accounts for stock-based compensation in accordance with the
intrinsic value-based method in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, rather than the fair value-based
method in Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. Compensation expense for stock options
is not recognized since Merrill Lynch grants stock options without any intrinsic
value. Compensation expense related to other stock-based compensation plans is
recognized over the vesting period. For certain stock-based compensation grants,
the unamortized portion of the grant value is reflected as a reduction of
stockholders' equity in Employee stock transactions on the Consolidated Balance
Sheets.
GOODWILL
Goodwill, which represents the cost of acquired businesses in excess of fair
value of the related net assets at acquisition, is amortized on a straight-line
basis. Goodwill associated with the purchase of the Mercury Asset Management
Group ("Mercury") is amortized over 30 years (see Note 2 for additional
information). Goodwill related to other acquisitions is amortized over periods
generally not exceeding fifteen years.
Goodwill is evaluated for impairment upon occurrence of an event that leads
to a significant reduction in expected future cash flows associated with the
acquired entity. These events could include, but are not limited to, the loss of
a major client, the loss of market share, an unanticipated reduction in the
revenue stream, or an unanticipated increase in the entity's cost structure.
Once it has been determined that conditions for potential impairment exist,
impairment assessment will be determined by comparing the carrying value of
goodwill to its estimated value based on a discounted cash flow valuation model.
Impairment is determined to occur when the estimated value of the goodwill falls
significantly below its recorded value. This analysis is based on appropriate
assumptions, including a discount rate that reflects the acquired entity's
weighted average cost of capital.
EQUIPMENT AND FACILITIES
Equipment and facilities primarily consist of technology hardware and software,
leasehold improvements, and owned facilities. Equipment and facilities are
reported at historical cost, net of accumulated depreciation and amortization,
except for land, which is reported at historical cost.
Depreciation and amortization are computed using the straight-line method.
Equipment is depreciated over its estimated useful life, while leasehold
improvements are amortized over the lesser of the improvement's estimated
economic useful life or the term of the lease. Maintenance and repair costs are
expensed as incurred.
Included in the Occupancy and related depreciation expense category was
depreciation and amortization of $205 million, $190 million, and $167 million in
1999, 1998, and 1997, respectively. Depreciation and amortization recognized in
the Communications and technology expense category was $513 million, $395
million, and $306 million for 1999, 1998, and 1997, respectively.
In 1998, Merrill Lynch also began capitalizing certain costs incurred in
the development of internal-use software (see Note 2). These amounts are
amortized over the useful life of the developed software, generally not
exceeding three years.
INCOME TAXES
ML & Co. and certain of its wholly owned subsidiaries file a consolidated U.S.
federal income tax return.
Merrill Lynch uses the asset and liability method in providing income taxes
on all transactions that have been recognized in the Consolidated Financial
Statements. The asset and liability method requires that deferred taxes be
adjusted to reflect the tax rates at which future taxable amounts are expected
to be settled or realized. The effects of tax rate changes on future deferred
tax liabilities and deferred tax assets, as well as other changes in income tax
laws, are recognized in net earnings in the period such changes are enacted.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
NOTE 2. OTHER SIGNIFICANT EVENTS
- --------------------------------
ACCOUNTING CHANGES
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires
capitalization of certain internal-use software development costs. The SOP was
adopted early for 1998 and resulted in the capitalization of software
development costs of $146 million in 1999 and $72 million in 1998.
66 Notes to Consolidated Financial Statements
<PAGE>
In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of
Start-Up Activities, which requires that all start-up costs be expensed as
incurred. Closed-end mutual fund distribution costs, previously deferred and
amortized by Merrill Lynch over a four-year period, are required to be expensed
under the SOP. The SOP was adopted early as of the beginning of 1998, and the
impact of adoption was not material.
MERGERS, ACQUISITIONS, AND DIVESTITURES
In August 1998, Merrill Lynch acquired the outstanding shares of Midland Walwyn,
a Canadian broker-dealer, in a share exchange. Each Midland Walwyn shareholder
received either 0.24 shares of ML & Co. common stock or 0.24 exchangeable shares
of Merrill Lynch & Co., Canada Ltd. for every Midland Walwyn share held (see
Note 8). The merger was accounted for as a pooling-of-interests; the
Consolidated Financial Statements reflect the results of operations, financial
position, changes in stockholders' equity, and cash flows as if the two
companies had always been combined.
During 1998, Merrill Lynch acquired Howard Johnson & Co., a U.S. employee
benefits consulting firm and a majority interest in a non-U.S. investment bank
in transactions accounted for as purchases. Aggregate consideration of $92
million was paid, and goodwill of $56 million was recorded in connection with
these acquisitions. In addition, Merrill Lynch sold a U.S. residential real
estate services subsidiary and a New York Stock Exchange specialist subsidiary,
recognizing pre-tax gains totaling $138 million.
At year-end 1997, Merrill Lynch recorded the acquisition of Mercury, a
U.K.-based global asset manager. In 1998, approximately $5.3 billion in cash was
paid as consideration. Goodwill of approximately $4.8 billion was recorded
related to the acquisition. In 1997, Merrill Lynch also acquired a 401(k)
service provider for $13 million, recognizing goodwill of $10 million.
For acquisitions accounted for as purchases, the operating results of
acquired companies are included in Merrill Lynch's results of operations
commencing with the acquisition date.
PROVISION FOR COSTS RELATED TO STAFF REDUCTIONS
During the 1998 third quarter, Merrill Lynch recognized a $430 million provision
for costs related to staff reductions ($288 million after-tax). The provision
covered primarily severance costs, but also included costs to terminate
long-term contracts and leases related to personnel reductions and resized
businesses. The staff reduction program included reductions, through termination
and attrition, of approximately 3,400 personnel, or about 5% of the global
workforce.
At December 31, 1999, the remaining liability was $54 million, which
primarily represents remaining severance payments for personnel receiving
periodic payments. All staff reductions were fully completed during 1999 and all
severance payments will be completed in 2000.
NOTE 3. TRADING AND RELATED ACTIVITIES
- --------------------------------------
As part of its trading activities, Merrill Lynch provides to clients brokerage,
dealing, financing, and underwriting services for a broad range of products.
While trading activities are primarily generated by client order flow, Merrill
Lynch also takes selective proprietary positions based on expectations of future
market movements and conditions. Merrill Lynch's trading strategies rely on the
integrated management of its client-driven and proprietary positions, along with
the related hedging and financing.
Interest revenue and expense are integral components of trading activities.
In assessing the profitability of trading activities, Merrill Lynch views net
interest and principal transactions revenues in the aggregate. For further
information on Merrill Lynch's net trading results, see Management's Discussion
and Analysis (unaudited) - Principal Transactions.
Certain trading activities expose Merrill Lynch to market and credit risks.
These risks are managed in accordance with established risk management policies
and procedures that are described in Management's Discussion and Analysis
(unaudited) - Risk Management.
MARKET RISK
Market risk is the potential change in an instrument's value caused by
fluctuations in interest and currency exchange rates, equity and commodity
prices, credit spreads, or other risks. The level of market risk is influenced
by the volatility and the liquidity in the markets in which financial
instruments are traded.
Merrill Lynch seeks to mitigate market risk associated with trading
inventories by employing hedging strategies that correlate rate, price, and
spread movements of trading inventories and related financing and hedging
activities. Merrill Lynch uses a combination of cash instruments and derivatives
to hedge its market exposures. The following discussion describes the types of
market risk faced by Merrill Lynch.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of financial instruments. Interest rate swap agreements,
Eurodollar futures, and U.S. Treasury securities and futures are common interest
rate risk management tools. The decision to manage interest rate risk using
futures or swap contracts, as opposed to buying or selling short U.S. Treasury
or other securities, depends on current market conditions and funding
considerations.
Notes to Consolidated Financial Statements 67
<PAGE>
Interest rate swap agreements used by Merrill Lynch include caps, collars,
floors, basis swaps, and leveraged swaps. Interest rate caps and floors provide
the purchaser protection against rising and falling interest rates,
respectively. Interest rate collars combine a cap and a floor, providing the
purchaser with a predetermined interest rate range. Basis swaps are a type of
interest rate swap agreement where variable rates are received and paid, but are
based on different index rates. Leveraged swaps are another type of interest
rate swap where changes in the variable rate are multiplied by a contractual
leverage factor, such as four times three-month LIBOR (London Interbank Offered
Rate). Merrill Lynch's exposure to interest rate risk resulting from these
leverage factors is typically hedged with other financial instruments.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange
rates will impact the value of financial instruments. Merrill Lynch's trading
assets and liabilities include both cash instruments denominated in and
derivatives linked to over 70 currencies, including the euro, Japanese yen,
German mark, Swiss franc, British pound, and Italian lira. Currency forwards and
options are commonly used to manage currency risk associated with these
instruments. Currency swaps may also be used in situations where a long-dated
forward market is not available or where the end-user needs a customized
instrument to hedge a foreign currency cash flow stream. Typically, parties to a
currency swap initially exchange principal amounts in two currencies, agreeing
to exchange interest payments and to re-exchange the currencies at a future date
and exchange rate.
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will
fluctuate, affecting the value of equity securities and other instruments that
derive their value from a particular stock, a defined basket of stocks, or a
stock index. Instruments typically used by Merrill Lynch to manage equity price
risk include equity options, warrants, and baskets of equity securities. Equity
options, for example, can require the writer to purchase or sell a specified
stock or to make a cash payment based on changes in the market price of that
stock, basket of stocks, or stock index.
Credit Spread Risk
Credit spread risk arises from the possibility that changes in credit spreads
will affect the value of financial instruments. Credit spreads represent the
credit risk premiums required by market participants for a given credit quality,
i.e., the additional yield that a debt instrument issued by a AA-rated entity
must produce over a risk-free alternative (e.g., U.S. Treasury instrument).
Certain instruments are used by Merrill Lynch to manage this type of risk. Swaps
and options, for example, can be designed to mitigate losses due to changes in
credit spreads, as well as the credit downgrade or default of the issuer. Credit
risk resulting from default on counterparty obligations is discussed in the
Credit Risk section.
Commodity Price and Other Risks
Merrill Lynch views its commodity contracts as financial instruments since they
are generally settled in cash and not by delivery of the underlying commodity.
Commodity price risk results from the possibility that the price of the
underlying commodity may rise or fall. Cash flows from commodity contracts are
based on the difference between an agreed-upon fixed price and a price that
varies with changes in a specified commodity price or index. Commodity contracts
held by Merrill Lynch principally relate to energy, precious metals, and base
metals.
Merrill Lynch is also a party to financial instruments that contain risks
not correlated to typical financial risks. Securities or derivatives, for
example, may be linked to the occurrence of certain weather conditions or
natural catastrophes. Merrill Lynch generally mitigates the risk associated with
these transactions by entering into offsetting derivative transactions.
CREDIT RISK
Merrill Lynch is exposed to risk of loss if an issuer or a counter-party fails
to perform its obligations under contractual terms and the collateral held, if
any, is deemed worthless ("default risk"). Both cash instruments and derivatives
expose Merrill Lynch to default risk. Credit risk arising from changes in credit
spreads was previously discussed in the Market Risk section.
Merrill Lynch has established policies and procedures for mitigating credit
risk on principal transactions, including reviewing and establishing limits for
credit exposure, maintaining collateral, and continually assessing the
creditworthiness of counterparties. For further information, see Management's
Discussion and Analysis (unaudited) - Risk Management - Credit Risk.
In the normal course of business, Merrill Lynch executes, settles, and
finances various customer securities transactions. Execution of these
transactions includes the purchase and sale of securities by Merrill Lynch.
These activities may expose Merrill Lynch to default risk arising from the
potential that customers or counterparties may fail to satisfy their
obligations. In these situations, Merrill Lynch may be required to purchase or
sell financial instruments at unfavorable market prices to satisfy obligations
to other customers or counterparties. In addition, Merrill Lynch seeks to
control the risks associated with its customer margin activities by requiring
customers to maintain collateral in compliance with regulatory and internal
guidelines.
68 Notes to Consolidated Financial Statements
<PAGE>
Liabilities to other brokers and dealers related to unsettled transactions
(i.e., securities failed-to-receive) are recorded at the amount for which the
securities were acquired, and are paid upon receipt of the securities from other
brokers or dealers. In the case of aged securities failed-to-receive, Merrill
Lynch may purchase the underlying security in the market and seek reimbursement
for losses from the counterparty.
Concentrations of Credit Risk
Merrill Lynch's exposure to credit risk (both default and credit spread)
associated with its trading and other activities is measured on an individual
counterparty basis, as well as by groups of counterparties that share similar
attributes. Concentrations of credit risk can be affected by changes in
political, industry, or economic factors. To reduce the potential for risk
concentration, credit limits are established and monitored in light of changing
counterparty and market conditions.
At December 31, 1999, Merrill Lynch's most significant concentration of
credit risk was with the U.S. Government and its agencies. This concentration
consists of both direct and indirect exposures. Direct exposure, which primarily
results from trading asset and investment security positions in instruments
issued by the U.S. Government and its agencies, amounted to $17.0 billion and
$17.4 billion at December 31, 1999 and December 25, 1998, respectively. Merrill
Lynch's indirect exposure results from maintaining U.S. Government and agencies
securities as collateral for resale agreements and securities borrowed
transactions. Merrill Lynch's direct credit exposure on these transactions is
with the counterparty; thus Merrill Lynch has credit exposure to the U.S.
Government and its agencies only in the event of the counterparty's default.
Securities issued by the U.S. Government or its agencies held as collateral for
resale agreements and securities borrowed transactions at December 31, 1999 and
December 25, 1998 totaled $43.8 billion and $54.8 billion, respectively.
At December 31, 1999, Merrill Lynch had concentrations of credit risk with
other counterparties, including a corporate counterparty rated AAA by recognized
credit rating agencies. Total unsecured exposure to this counterparty was $857
million, or 0.3% of total assets.
Merrill Lynch's most significant industry credit concentration is with
financial institutions. Financial institutions include other brokers and
dealers, commercial banks, finance companies, insurance companies, and
investment companies. This concentration arises in the normal course of Merrill
Lynch's brokerage, trading, financing, and underwriting activities. Merrill
Lynch also monitors credit exposures worldwide by region. Within these regions,
sovereign governments represent the most significant concentration, followed by
financial institutions.
In the normal course of business, Merrill Lynch purchases, sells,
underwrites, and makes markets in non-investment grade instruments. In
conjunction with merchant banking activities, Merrill Lynch also provides
extensions of credit and makes equity investments to facilitate leveraged
transactions. These activities expose Merrill Lynch to a higher degree of credit
risk than is associated with trading, investing in, and underwriting investment
grade instruments and extending credit to investment grade counterparties. See
Management's Discussion and Analysis (unaudited) - Non-Investment Grade Holdings
and Highly Leveraged Transactions for further information.
TRADING DERIVATIVES
Merrill Lynch's trading derivatives consist of derivatives provided to customers
and derivatives entered into for proprietary trading strategies or risk
management purposes.
The fair values of derivatives used in trading activities at year-end 1999
and 1998 follow:
- --------------------------------------------------------------------------------
(in millions)
December 31, 1999 December 25, 1998
--------------------- ----------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Swap agreements $ 19,984 $ 24,204 $ 17,938 $ 19,747
Forward contracts 2,232 2,385 2,882 2,822
Options 5,785 7,823 8,841 12,195
- --------------------------------------------------------------------------------
The following table presents the average fair values of Merrill Lynch's
trading derivatives for 1999 and 1998, calculated using month-end balances:
- --------------------------------------------------------------------------------
(in millions)
Average Fair Value
------------------------------------------------
1999 1998
--------------------- ---------------------
Assets Liabilities Assets Liabilities
-------- ----------- -------- -----------
Swap agreements $ 16,724 $ 20,575 $ 19,096 $ 17,272
Forward contracts 2,030 2,127 3,227 3,178
Options 7,358 8,333 8,551 11,420
- --------------------------------------------------------------------------------
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments.
The notional or contractual amounts of derivatives used for trading purposes
by type of risk follow:
Notes to Consolidated Financial Statements 69
<PAGE>
- --------------------------------------------------------------------------------
(in billions)
RISK
----------------------------------------------------------
INTEREST EQUITY COMMODITY
RATE(1)(2) CURRENCY(3) PRICE AND OTHER
-------------- ----------- ------ ---------
DECEMBER 31, 1999
Swap agreements $ 2,470 $ 175 $ 27 $ 3
Forward contracts 94 153 3 1
Futures contracts 224 3 12 3
Options purchased 216 102 53 2
Options written 270 71 53 4
DECEMBER 25, 1998
Swap agreements $ 2,006 $ 170 $ 19 $ 5
Forward contracts 62 229 - 6
Futures contracts 184 2 10 3
Options purchased 254 93 71 4
Options written 192 96 58 6
- --------------------------------------------------------------------------------
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent "To
Be Announced" mortgage pools that bear interest rate as well as principal
prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
Most of Merrill Lynch's trading derivative transactions are relatively
short-term in duration with a weighted-average maturity of approximately 2.9
years at December 31, 1999 and December 25, 1998. For trading derivatives
outstanding at December 31, 1999, the following table presents the notional or
contractual amounts of derivatives expiring in future years based on contractual
expiration:
- --------------------------------------------------------------------------------
(in billions)
After
2000 2001 2002 2003 2003 Total
-------- ----- ----- ----- ------- -------
Swap agreements $ 657 $ 373 $ 325 $ 243 $ 1,077 $ 2,675
Forward contracts 221 27 - - 3 251
Futures contracts 91 48 32 33 38 242
Options purchased 249 18 19 12 75 373
Options written 268 33 24 16 57 398
-------- ----- ----- ----- ------- -------
Total $ 1,486 $ 499 $ 400 $ 304 $ 1,250 $ 3,939
======== ===== ===== ===== ======= =======
- --------------------------------------------------------------------------------
The notional or contractual values of derivatives do not represent default
risk exposure. Default risk is limited to the current cost of replacing
derivative contracts in a gain position. Default risk exposure varies by type of
derivative. Swap agreements and forward contracts are generally OTC-transacted
and thus are exposed to default risk to the extent of their replacement cost.
Since futures contracts are exchange-traded and usually require daily cash
settlement, the related risk of accounting loss is generally limited to a one-
day net positive change in market value. Option contracts can be exchange-traded
or OTC-transacted. Purchased options have default risk to the extent of their
replacement cost. Written options represent a potential obligation to
counterparties and, accordingly, do not subject Merrill Lynch to default risk.
Merrill Lynch enters into International Swaps and Derivatives Association,
Inc. master agreements or their equivalent ("master netting agreements") with
each of its counterparties, whenever possible. Master netting agreements provide
protection in bankruptcy in certain circumstances and, in some cases, enable
receivables and payables with the same counterparty to be offset on the
Consolidated Balance Sheets, providing for a more meaningful balance sheet
presentation of credit exposure.
To reduce default risk, Merrill Lynch requires collateral, principally U.S.
Government and agencies securities, on certain derivative transactions. From an
economic standpoint, Merrill Lynch evaluates default risk exposures net of
related collateral. At December 31, 1999, such collateral amounted to $4.2
billion. In addition to obtaining collateral, Merrill Lynch attempts to mitigate
default risk on derivatives by entering into transactions with provisions that
enable Merrill Lynch to terminate or reset the terms of the derivative contract.
See Management's Discussion and Analysis (unaudited) - Risk Management - Credit
Risk for further information on credit risk related to derivatives.
SECURITIES FINANCING TRANSACTIONS
Merrill Lynch enters into secured borrowing and lending transactions to finance
trading inventory positions, obtain securities for settlement, and to meet
customers' needs (see Management's Discussion and Analysis (unaudited) - Balance
Sheet for further information). Outstanding receivables and payables under
resale and repurchase agreements and securities borrowed and loaned transactions
at year-end 1999 and 1998 are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
-------- --------
RECEIVABLES UNDER:
Resale agreements $ 58,034 $ 50,188
Securities borrowed transactions 41,707 37,525
-------- --------
Total $ 99,741 $ 87,713
======== ========
- --------------------------------------------------------------------------------
PAYABLES UNDER:
Repurchase agreements $ 64,954 $ 59,501
Securities loaned transactions 6,624 7,626
-------- --------
Total $ 71,578 $ 67,127
======== ========
- --------------------------------------------------------------------------------
Under these agreements and transactions, Merrill Lynch either receives or
provides collateral, including U.S. Government and agencies, asset-backed,
corporate debt, equity, and non-U.S. governments and agencies securities. When
providing collateral for these transactions, Merrill Lynch delivers its own
securities, securities borrowed from counterparties, and securities owned by
customers collateralizing margin loans and other obligations. The market value
of securities owned by Merrill Lynch that have been loaned or pledged to
counterparties as collateral for obligations of Merrill Lynch, primarily related
to repurchase agreements, were
70 Notes to Consolidated Financial Statements
<PAGE>
$31,731 million and $35,762 million at December 31, 1999 and December 25, 1998,
respectively.
Merrill Lynch hedges interest rate risk exposures on long-dated resale and
repurchase agreements (see Note 6).
NOTE 4. INVESTMENTS
- -------------------
Merrill Lynch has several broad categories of investments on its Consolidated
Balance Sheets, including Marketable investment securities, Investments of
insurance subsidiaries, and Other investments.
Marketable investment securities consist of highly liquid debt and equity
securities, including those held for liquidity management purposes and those
held by a subsidiary for credit rating agency purposes. Investments of insurance
subsidiaries, primarily debt securities, are used to fund policyholder
liabilities. Other investments consist of equity and debt securities, including
those acquired in connection with merchant banking activities. Certain merchant
banking investments are subject to restrictions that may limit Merrill Lynch's
ability to realize its investment until such restrictions expire.
Marketable investment securities and certain investments of insurance
subsidiaries and other investments are classified as available-for-sale,
held-to-maturity, or trading as described in Note 1. Investment securities
reported on the Consolidated Balance Sheets at December 31, 1999 and
December 25, 1998 are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
MARKETABLE INVESTMENT SECURITIES
Available-for-sale $ 9,484 $ 4,070
Held-to-maturity 362 354
Trading 299 181
------- -------
Total $10,145 $ 4,605
======= =======
- --------------------------------------------------------------------------------
INVESTMENTS OF INSURANCE SUBSIDIARIES
Available-for-sale $ 2,499 $ 2,917
Trading 22 17
Non-qualifying(1)(2) 1,576 1,551
------- -------
Total $ 4,097 $ 4,485
======= =======
- --------------------------------------------------------------------------------
OTHER INVESTMENTS
Available-for-sale $ 494 $ 435
Held-to-maturity 312 290
Non-qualifying(1)(3) 2,604 1,865
------- -------
Total $ 3,410 $ 2,590
======= =======
- --------------------------------------------------------------------------------
(1) Non-qualifying for SFAS No. 115 purposes.
(2) Primarily consists of insurance policy loans.
(3) Includes merchant banking investments and investments hedging deferred
compensation liabilities.
Information regarding investment securities subject to SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
December 31, 1999 December 25, 1998
------------------------------------------------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
Corporate debt $ 4,976 $ 10 $ (178) $ 4,808 $ 2,771 $ 61 $ (31) $ 2,801
U.S.Government and agencies 974 1 (18) 957 658 7 (1) 664
Municipals 2,120 7 (5) 2,122 1,721 15 (13) 1,723
Mortgage-backed securities 3,808 16 (26) 3,798 1,572 18 (2) 1,588
Other debt securities 293 - (6) 287 183 1 (4) 180
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total debt securities 12,171 34 (233) 11,972 6,905 102 (51) 6,956
Equity securities 528 12 (35) 505 447 26 (7) 466
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total $ 12,699 $ 46 $ (268) $ 12,477 $ 7,352 $ 128 $ (58) $ 7,422
========= ========== ========== ========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(in millions)
December 31, 1999 December 25, 1998
------------------------------------------------------------------------------------------
Cost/ Gross Gross Estimated Cost/ Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY
Corporate debt $ - $ - $ - $ - $ 38 $ 1 $ - $ 39
U.S.Government and agencies 405 17 - 422 263 29 - 292
Municipals 66 12 (51) 27 144 64 (2) 206
Mortgage-backed securities 68 - (1) 67 87 - - 87
Other debt securities 135 - - 135 112 - (2) 110
--------- ---------- ---------- --------- --------- ---------- ---------- ---------
Total $ 674 $ 29 $ (52) $ 651 $ 644 $ 94 $ (4) $ 734
========= ========== ========== ========= ========= ========== ========== =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes to Consolidated Financial Statements 71
<PAGE>
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, for available-for-sale and held-to-maturity
investments follow:
- --------------------------------------------------------------------------------
(in millions)
Available-for-Sale Held-to-Maturity
---------------------- ----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
Due in one year
or less $ 2,807 $ 2,807 $ 231 $ 231
Due after one year
through five years 1,846 1,816 197 205
Due after five years
through ten years 1,003 962 29 11
Due after ten years 2,707 2,589 149 137
--------- --------- --------- ---------
8,363 8,174 606 584
Mortgage-backed
securities 3,808 3,798 68 67
--------- --------- --------- ---------
Total(1) $12,171 $11,972 $ 674 $ 651
========= ========= ========= =========
- --------------------------------------------------------------------------------
(1) Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
The proceeds and gross realized gains (losses) from the sale of
available-for-sale investments are as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ------- -------
Proceeds $ 3,071 $ 3,426 $ 2,198
Gross realized gains 22 74 27
Gross realized losses (28) (27) (11)
- --------------------------------------------------------------------------------
Net unrealized gains (losses) from investment securities classified as
trading included in the 1999, 1998, and 1997 Consolidated Statements of Earnings
were $46 million, $6 million, and $(21) million, respectively.
Merrill Lynch hedges interest rate risk exposures on certain investments
(see Note 6 for further information).
NOTE 5. BORROWINGS
- ------------------
Merrill Lynch issues U.S. and non-U.S. dollar-denominated debt instruments with
both variable and fixed interest rates, primarily at the ML & Co. level. These
borrowing activities may create exposure to market risk, most notably interest
rate and currency risk. Merrill Lynch typically uses derivatives to better match
the interest rate and currency characteristics of assets and liabilities,
thereby reducing risk exposures. Derivatives used most frequently include swap
agreements that:
. convert fixed-rate interest payments into variable payments,
. change the underlying interest rate basis or reset frequency, and
. convert non-U.S. dollar payments into U.S. dollars.
Merrill Lynch also issues debt whose repayment terms are linked to the
performance of an equity or other index (e.g., S&P 500), basket of securities,
or an individual security. The contingent components of these indexed debt
obligations are hedged with derivatives (see Note 6 for further information).
Borrowings at December 31, 1999 and December 25, 1998 are presented below:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS
Commercial paper $24,198 $16,758
Other 1,397 1,921
------- -------
Total $25,595 $18,679
======= =======
- --------------------------------------------------------------------------------
DEMAND AND TIME DEPOSITS
Demand $ 3,498 $ 3,171
Time 14,104 9,290
------- -------
Total $17,602 $12,461
======= =======
- --------------------------------------------------------------------------------
LONG-TERM BORROWINGS
Fixed-rate obligations:(1)
U.S.dollar-denominated $13,150 $12,595
Non-U.S. dollar-denominated 1,287 1,189
Variable-rate obligations:(2)(3)
U.S.dollar-denominated 3,338 4,077
Non-U.S.dollar-denominated 1,918 1,303
Medium-term notes:(3)(4)
U.S.dollar-denominated 22,166 24,916
Non-U.S.dollar-denominated 11,606 13,483
------- -------
Total $53,465 $57,563
======= =======
- --------------------------------------------------------------------------------
(1) At December 31, 1999, U.S.dollar-denominated fixed-rate obligations are due
between 2000 and 2028 at interest rates ranging from 6.0% to 8.4%;
non-U.S. dollar-denominated fixed-rate obligations are due between 2000 and
2002 at interest rates ranging from 2.6% to 9.3%.
(2) Variable interest rates are generally based on rates such as LIBOR, the
U.S. Treasury Bill Rate, or the Federal Funds Rate.
(3) Included are various equity-linked or other indexed instruments.
(4) The medium-term note program provides for issuances that may bear fixed or
variable interest rates and may have maturities that range from nine months
to 30 years from the date of issue.
Long-term borrowings at December 31, 1999, based on their contractual terms,
mature as follows:
- --------------------------------------------------------------------------------
(in millions)
2000 $ 8,448
2001 9,280
2002 7,971
2003 5,825
2004 3,549
2005 and thereafter 18,392
-------
Total $53,465
=======
- --------------------------------------------------------------------------------
Certain long-term borrowing agreements contain provisions whereby the
borrowings are redeemable at the option of the holder at specified dates prior
to maturity.
72 Notes to Consolidated Financial Statements
<PAGE>
Management believes, however, that a significant portion of such borrowings will
remain outstanding beyond their earliest redemption date.
The effective weighted-average interest rates for borrowings, which include
the impact of hedges, at December 31, 1999 and December 25, 1998 were:
- --------------------------------------------------------------------------------
1999 1998
---- ----
COMMERCIAL PAPER AND OTHER
SHORT-TERM BORROWINGS 5.94% 5.28%
DEMAND AND TIME DEPOSITS 4.34 4.54
LONG-TERM BORROWINGS
Fixed-rate obligations 6.90 6.69
Variable-rate obligations 6.14 5.46
Medium-term notes 6.21 5.52
- --------------------------------------------------------------------------------
Subsequent to year-end 1999 and through February 25, 2000, long-term
borrowings, net of repayments and repurchases, decreased approximately $505
million.
Borrowing Facilities
Merrill Lynch has obtained a committed, senior unsecured revolving credit
facility aggregating $8 billion under an agreement with a bank. The agreement
contains covenants requiring, among other things, that Merrill Lynch maintain
specified levels of net worth, as defined in the agreement, on the date of an
advance. At December 31, 1999, this credit facility was not drawn upon.
The credit quality, amounts, and terms of this credit facility are
continually monitored and modified as warranted by business conditions. Under
the existing agreement, the credit facility will mature in May 2000. At
maturity, Merrill Lynch may convert amounts borrowed, if any, into term loans
that would mature in two years.
NOTE 6. FAIR VALUE INFORMATION AND NON-TRADING DERIVATIVES
- ----------------------------------------------------------
FAIR VALUE INFORMATION
The following information is presented to help the reader gain an
understanding of the relationship between the amounts reported in Merrill
Lynch's financial statements and the related fair values. Specific accounting
policies are discussed in Note 1.
At December 31, 1999, $299 billion or 91% of Merrill Lynch's total assets
and $229 billion or 73% of Merrill Lynch's total liabilities were carried at
fair value or at amounts that approximate fair value. At December 25, 1998, $276
billion, or 92%, of Merrill Lynch's total assets and $204 billion, or 71%, of
Merrill Lynch's liabilities were carried at fair value or at amounts that
approximate such values. Financial instruments that are carried at fair value
include cash and cash equivalents, cash segregated for regulatory purposes or
deposited with clearing organizations, trading assets and liabilities,
available-for-sale and trading securities included in marketable investment
securities, certain investments of insurance subsidiaries, and certain other
investments. (See Notes 3 and 4 for information related to these instruments).
Financial instruments recorded at amounts that approximate fair value
include most receivables under resale agreements and securities borrowed
transactions, receivables, payables under repurchase agreements and securities
loaned, commercial paper and other short-term borrowings, demand deposits, and
other payables. The fair value of these items is not materially sensitive to
shifts in market interest rates because of the limited term to maturity of many
of these instruments and/or their variable interest rates.
The following table shows financial instruments with carrying values that
differ from their fair values.
- --------------------------------------------------------------------------------
(in millions)
Assets Liabilities
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ------- -------- -------
DECEMBER 31, 1999
Held-to-maturity
investments $ 674 $ 651
Merchant banking and
other financial instruments(1) 2,605 2,917
Loans,notes,and mortgages 11,187 11,211
Long-term borrowings $53,465 $53,063
Non-trading derivatives 1,220 1,514 2,191 2,669
- --------------------------------------------------------------------------------
DECEMBER 25, 1998
Held-to-maturity
investments $ 644 $ 734
Merchant banking and other
financial instruments(1) 1,834 1,891
Loans,notes,and mortgages 7,687 7,712
Long-term borrowings $57,563 $58,237
Non-trading derivatives 1,429 2,725 794 1,269
- --------------------------------------------------------------------------------
(1) Merchant banking equity investments are non-qualifying for SFAS No. 115
purposes.
Fair value for merchant banking equity investments, including partnership
interests (included in Other investments on the Consolidated Balance Sheets), is
estimated using a number of methods, including earnings multiples, cash flow
analyses, and review of underlying financial conditions and other market
factors. These instruments may be subject to restrictions (e.g., consent of
other investors) that may limit Merrill Lynch's ability to realize currently the
estimated fair value. Accordingly, Merrill Lynch's current estimate of fair
value and the ultimate realization on these instruments may differ. Included in
merchant banking and other financial instruments in the previous table is
Merrill Lynch's investment in Long Term Capital Portfolio, L.P. ("LTCP"). In
1998, in conjunction with 13 other
Notes to Consolidated Financial Statements 73
<PAGE>
financial institutions, Merrill Lynch made a $300 million capital infusion to
LTCP, a hedge fund significantly affected by the 1998 third quarter market
turmoil. At December 31, 1999, this investment has been substantially repaid.
In addition to investments noted in the previous table, Merrill Lynch also
holds a passive minority interest in Bloomberg, L.P., a privately held limited
partnership that provides information services to financial institutions. The
fair value of the investment is not readily determinable as of December 31,
1999. Management believes, however, that the fair value of this instrument may
significantly exceed its carrying value of $28 million.
Fair value for loans made in connection with merchant banking activities,
consisting primarily of senior and subordinated debt, is estimated using
discounted cash flows. Merrill Lynch's estimate of fair value for other loans,
notes, and mortgages is determined based on loan characteristics. For certain
homogeneous categories of loans, including residential mortgages and home equity
loans, fair value is estimated using market price quotations or previously
executed transactions for securities backed by similar loans, adjusted for
credit risk and other individual loan characteristics. For Merrill Lynch's
variable-rate loan receivables, carrying value approximates fair value.
The fair values of long-term borrowings and related hedges are estimated
using current market prices and pricing models.
The fair value of outstanding third party guarantees was $41 million and
$54 million at December 31, 1999 and December 25, 1998, respectively.
NON-TRADING DERIVATIVES
The notional or contractual amounts of non-trading derivatives used to hedge
market risk exposures on non-trading assets and liabilities at December 31, 1999
and December 25, 1998 follow:
- --------------------------------------------------------------------------------
(in billions)
1999 1998
---- ----
Borrowings:
Interest rate risk(1) $ 44 $ 54
Currency risk 1 -
Equity risk 3 1
Investment securities(2) 11 6
Resale and repurchase agreements(2) 6 8
Customer loans(2) 6 2
Investments in non-U.S.subsidiaries(3) 3 4
Other 3 4
- --------------------------------------------------------------------------------
(1) Includes $10 billion and $12 billion of instruments which also contain
currency risk and $4 billion and $1 billion of instruments that also
contain equity risk at year-end 1999 and 1998, respectively.
(2) Primarily hedging interest rate risk.
(3) Hedging currency risk.
The combined fair value of hedged items and related derivative hedges
approximates their combined carrying value at year-end 1999 and 1998. Most of
these derivatives are entered into with Merrill Lynch's derivative dealer
subsidiaries, which hedge interest rate, currency, and equity risks in the
normal course of their trading activities.
NOTE 7. PREFERRED SECURITIES ISSUED BY SUBSIDIARIES
- ---------------------------------------------------
Preferred securities issued by subsidiaries, which represent preferred minority
interests in consolidated subsidiaries, primarily consist of perpetual trust-
issued preferred securities.
Trust Originated Preferred Securities(Service Mark) ("TOPrS"(Service Mark))
are issued to investors by trusts created by Merrill Lynch. Using the issuance
proceeds, the trusts purchase Partnership Preferred Securities, representing
limited partnership interests. Using the purchase proceeds, the limited
partnerships extend loans to ML & Co. and one or more subsidiaries of ML & Co.
The trusts and partnerships are consolidated subsidiaries of Merrill Lynch. ML &
Co. has guaranteed, on a subordinated basis, the payment in full of all
distributions and other payments on the TOPrS to the extent that the trusts have
funds legally available. This guarantee and a similar partnership distribution
guarantee are subordinated to all other liabilities of ML & Co. and rank equally
with preferred stock of ML & Co.
The table below presents data related to the issuance of TOPrS by Merrill
Lynch Capital Trust I, II, III, IV, and V. All TOPrS issued have a liquidation
value of $25 per security, have a perpetual life, and can be redeemed at the
option of the trusts, in whole or in part, at the liquidation value on or after
their respective optional redemption dates. Distributions are payable from the
date of original issuance and are payable quarterly if, as, and when the trusts
have funds available for payment.
- --------------------------------------------------------------------------------
(in millions)
Annual Optional
Distribution Issue Redemption Liquidation
TOPrS Rate Date Date Value
- ----- ------------ --------- ---------- -----------
I 7.75% Dec. 1996 Dec. 2006 $ 275
II 8.00 Feb. 1997 Mar. 2007 300
III 7.00 Jan. 1998 Mar. 2008 750
IV 7.12 Jun. 1998 Jun. 2008 400
V 7.28 Nov. 1998 Sep. 2008 850
Other(1) 2.70 Jul. 1999 Jun. 2004 98
-------
$ 2,673
=======
- -------------------------------------------------------------------------------
(1) Represents Yen-denominated TOPrS issued by Merrill Lynch Yen TOPrS Trust I.
In addition, $52 million of preferred securities of other subsidiaries were
outstanding at year-end 1999 and 1998.
74 Notes to Consolidated Financial Statements
<PAGE>
NOTE 8. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
- ---------------------------------------------------
PREFERRED EQUITY
ML & Co. is authorized to issue 25,000,000 shares of undesignated preferred
stock, $1.00 par value per share. All shares of currently outstanding preferred
stock constitute one and the same class that have equal rank and priority over
common stockholders as to dividends and in the event of liquidation.
9% Cumulative Preferred Stock, Series A
ML & Co. has issued 17,000,000 Depositary Shares, each representing a one-four-
hundredth interest in a share of 9% Cumulative Preferred Stock, Series A,
liquidation preference value of $10,000 per share ("9% Preferred Stock"). The 9%
Preferred Stock is a single series consisting of 42,500 shares with an aggregate
liquidation preference of $425 million, all of which was outstanding at year-end
1999, 1998, and 1997.
Dividends on the 9% Preferred Stock are cumulative from the date of
original issue and are payable quarterly when declared by the authority of the
Board of Directors. The 9% Preferred Stock is perpetual and redeemable on or
after December 30, 2004 at the option of ML & Co., in whole or in part, at a
redemption price equal to $10,000 per share, plus accrued and unpaid dividends
(whether or not declared) to the date fixed for redemption.
Remarketed Preferred(Service Mark) Stock, Series C
During 1997, all outstanding shares of Remarketed Preferred Stock, Series C were
redeemed. Dividend rates in effect prior to redemption ranged from 3.80% to
4.15% per annum.
COMMON STOCK
In 1999, ML & Co. issued 54,601 shares of common stock to certain non-U.S.
employees in connection with an employee incentive plan grant, thereby
increasing issued shares to 472,714,925.
In 1998, stockholders approved the proposal to amend ML & Co.'s certificate
of incorporation to increase the authorized number of shares of common stock
from 500 million to 1 billion.
In 1997, the Board of Directors declared a two-for-one common stock split
effected in the form of a 100% stock dividend. The par value of the common stock
remained at $1.33 1/3 per share. Accordingly, a transfer from paid-in capital to
common stock of $315 million was made to preserve the par value of the
post-split shares. All share and per share data have been restated for the
effect of the split. Dividends paid on common stock were $1.05, $.92, and $.75
per share in 1999, 1998, and 1997, respectively.
The following table summarizes the activity in outstanding common stock for
1999, 1998, and 1997:
- --------------------------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
BEGINNING OF YEAR
Issued 472,660,324 472,660,324 472,660,324
Shares in treasury (116,376,259) (133,400,971) (137,234,132)
ESOP reversion shares - - (3,077,556)
------------ ------------ ------------
Outstanding 356,284,065 339,259,353 332,348,636
------------ ------------ ------------
ACTIVITY
Common stock issued 54,601 - -
Shares purchased - - (13,301,100)
Shares issued from treasury:
To employees(1)(2) 10,930,248 16,291,477 20,211,817
Share exchanges 496,416 325,459 -
Acquisition - 407,776 -
------------ ------------ ------------
Net activity 11,481,265 17,024,712 6,910,717
------------ ------------ ------------
END OF YEAR
Issued 472,714,925 472,660,324 472,660,324
Shares in treasury (104,949,595) (116,376,259) (133,400,971)
------------ ------------ ------------
Outstanding 367,765,330 356,284,065 339,259,353
============ ============ ============
- --------------------------------------------------------------------------------
(1) Net of reacquisitions from employees of 177,066, 348,466, and 440,016 in
1999, 1998, and 1997, respectively.
(2) See Note 11 for a description of employee incentive plans.
SHARES EXCHANGEABLE INTO COMMON STOCK
In 1998, Merrill Lynch & Co., Canada Ltd. issued 4,831,224 Exchangeable Shares
in connection with Merrill Lynch's merger with Midland Walwyn (see Note 2).
Holders of Exchangeable Shares have dividend, voting, and other rights
equivalent to those of ML & Co. common stockholders. Exchangeable Shares may be
exchanged at any time, at the option of the holder, on a one-for-one basis for
ML & Co. common stock. Merrill Lynch may redeem all outstanding Exchangeable
Shares for ML & Co. common stock after January 31, 2011, or earlier under
certain circumstances.
During 1999 and 1998, 496,416 and 325,459 Exchangeable Shares, respectively,
were converted to ML & Co. common stock. At year-end 1999, 4,009,349
Exchangeable Shares were outstanding, compared with 4,505,765 at year-end 1998.
ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss represents net cumulative gains and losses
on items that are not reflected in earnings. The components at December 31, 1999
and December 25, 1998 are as follows:
Notes to Consolidated Financial Statements 75
<PAGE>
- --------------------------------------------------------------------------------
(in millions)
1999 1998
----- -----
FOREIGN CURRENCY TRANSLATION ADJUSTMENT
Unrealized losses,net of gains $(357) $(241)
Income taxes 55 103
----- -----
Total (302) (138)
----- -----
UNREALIZED GAINS (LOSSES) ON INVESTMENT
SECURITIES AVAILABLE-FOR-SALE
Net unrealized gains (losses) (167) 56
Adjustments for:
Policyholder liabilities (3) (38)
Deferred policy acquisition costs 35 -
Income taxes 48 (2)
----- -----
Total (87) 16
----- -----
TOTAL ACCUMULATED OTHER COMPREHENSIVE LOSS $(389) $(122)
===== =====
- --------------------------------------------------------------------------------
STOCKHOLDER RIGHTS PLAN
In 1997, the Board of Directors approved and adopted the amended and restated
Stockholder Rights Plan. The amended and restated Stockholder Rights Plan
provides for the distribution of preferred purchase rights ("Rights") to common
stockholders. The Rights separate from the common stock ten days following the
earlier of: (a) an announcement of an acquisition by a person or group
("acquiring party") of 15% or more of the outstanding common shares of ML & Co.,
or (b) the commencement of a tender or exchange offer for 15% or more of the
common shares outstanding. One Right is attached to each outstanding share of
common stock and will attach to all subsequently issued shares. Each Right
entitles the holder to purchase 1/100 of a share (a "Unit") of Series A Junior
Preferred Stock, par value $1.00 per share, at an exercise price of $300 per
Unit at any time after the distribution of the Rights. The Units are
nonredeemable and have voting privileges and certain preferential dividend
rights. The exercise price and the number of Units issuable are subject to
adjustment to prevent dilution.
If, after the Rights have been distributed, either the acquiring party
holds 15% or more of ML & Co.'s outstanding shares or ML & Co. is a party to a
business combination or other specifically defined transaction, each Right
(other than those held by the acquiring party) will entitle the holder to
receive, upon exercise, a Unit of preferred stock or shares of common stock of
the surviving company with a value equal to two times the exercise price of the
Right. The Rights expire in 2007, and are redeemable at the option of a majority
of the directors of ML & Co. at $.01 per Right at any time until the tenth day
following an announcement of the acquisition of 15% or more of ML & Co.'s common
stock.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by dividing earnings available to
common stockholders by the weighted-average number of common shares outstanding.
Diluted EPS is similar to basic EPS, but adjusts for the effect of the potential
issuance of common shares. The following table presents the computations of
basic and diluted EPS:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------ ------ ------
Net earnings $2,618 $1,259 $1,935
Preferred stock dividends 38 39 39
------ ------ ------
Net earnings applicable to
common stockholders $2,580 $1,220 $1,896
====== ====== ======
- --------------------------------------------------------------------------------
(shares in thousands)
Weighted-average shares
outstanding (basic shares)(1) 368,718 355,589 340,096
------- ------- -------
Effect of dilutive instruments(2)
Employee stock options 27,850 29,184 29,748
FCCAAP shares 15,947 16,548 20,574
Restricted units 5,569 4,895 5,258
ESPP shares 47 46 45
Convertible debt - - 134
------- ------- -------
Dilutive potential common shares 49,413 50,673 55,759
------- ------- -------
Diluted shares(3) 418,131 406,262 395,855
======= ======= =======
- --------------------------------------------------------------------------------
Basic EPS $7.00 $3.43 $5.57
Diluted EPS 6.17 3.00 4.79
- --------------------------------------------------------------------------------
(1) Includes shares exchangeable into common stock.
(2) See Note 11 for a description of these instruments and issuances subsequent
to December 31, 1999.
(3) At year-end 1999, 1998, and 1997, there were 1,575, 486, and 7 instruments,
respectively, that were considered antidilutive and thus were not included
in the above calculations.
NOTE 9. COMMITMENTS AND CONTINGENCIES
- -------------------------------------
LITIGATION
At December 31, 1999, Merrill Lynch has been named as parties in various
actions, some of which involve claims for substantial amounts. Although the
results of legal actions cannot be predicted with certainty, it is the opinion
of management that the resolution of these actions will not have a material
adverse effect on Merrill Lynch's financial condition; however, such resolution
could have a material adverse impact on quarterly operating results in future
periods, depending in part on the results for such periods.
LENDING AND GUARANTEES
Merrill Lynch enters into commitments to extend credit, predominantly at
variable interest rates, in connection with certain merchant banking and loan
syndication transactions. Customers may also be extended loans or lines of
credit collateralized by first and second mortgages on real estate, certain
liquid assets of small businesses, or securities. Merrill Lynch also issues
various guarantees to counterparties in connection with certain leasing,
securitization, and other transactions. These commit-
76 Notes to Consolidated Financial Statements
<PAGE>
ments and guarantees usually have a fixed expiration date and are contingent on
certain contractual conditions that may require payment of a fee by the
counterparty. Once commitments are drawn upon or guarantees are issued, Merrill
Lynch may require the counterparty to post collateral depending upon
creditworthiness and market conditions.
The contractual amounts of these commitments and guarantees represent the
amounts at risk should the contract be fully drawn upon, the client default, and
the value of the existing collateral become worthless. The total amount of
outstanding commitments and guarantees may not represent future cash
requirements, as commitments and guarantees may expire without being drawn upon.
At December 31, 1999 and December 25, 1998, Merrill Lynch had the following
commitments and guarantees:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
---- ----
Commitments to extend credit $ 14,871 $ 15,937
Third party guarantees 1,739 17,842
- --------------------------------------------------------------------------------
LEASES
Merrill Lynch has entered into various noncancelable long-term lease agreements
for premises that expire through 2025. Merrill Lynch has also entered into
various noncancelable short-term lease agreements, which are primarily
commitments of less than one year under equipment leases.
At December 31, 1999, future noncancelable minimum rental commitments under
leases with remaining terms exceeding one year are as follows:
- --------------------------------------------------------------------------------
(in millions)
WFC(1) Other Total
------ ------ ------
2000 $ 144 $ 346 $ 490
2001 145 313 458
2002 150 272 422
2003 158 217 375
2004 179 176 355
2005 and thereafter 1,564 671 2,235
------ ------ ------
Total $2,340 $1,995 $4,335
====== ====== ======
- --------------------------------------------------------------------------------
(1) World Financial Center Headquarters.
The minimum rental commitments shown above have not been reduced by $674
million of minimum sublease rentals to be received in the future under
noncancelable subleases. Certain leases contain renewal or purchase options or
escalation clauses providing for increased rental payments based upon
maintenance, utility, and tax increases.
Net rent expense for each of the last three years is presented below:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
Rent expense $ 585 $ 537 $ 468
Sublease revenue (101) (112) (104)
----- ----- -----
Net rent expense $ 484 $ 425 $ 364
===== ===== =====
- --------------------------------------------------------------------------------
OTHER COMMITMENTS
In the normal course of business, Merrill Lynch enters into commitments for
underwriting transactions. Settlement of these transactions as of December 31,
1999, would not have a material effect on the consolidated financial condition
of Merrill Lynch.
In connection with trading activities, Merrill Lynch had commitments at
December 31, 1999 and December 25, 1998 to enter into resale and repurchase
agreements as follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
Resale agreements $ 850 $ 5,392
Repurchase agreements 1,624 4,456
- --------------------------------------------------------------------------------
Merrill Lynch also obtains letters of credit from issuing banks to satisfy
various counterparty collateral requirements in lieu of depositing cash or
securities collateral. Letters of credit aggregated $2,585 million and $2,222
million at December 31, 1999 and December 25, 1998, respectively.
In connection with merchant banking activities, Merrill Lynch has committed
to purchase $252 million and $369 million of partnership interests at December
31, 1999 and December 25, 1998, respectively.
Merrill Lynch has entered into agreements with providers of market data,
communications, and systems consulting services. At December 31, 1999, minimum
fee commitments over the remaining life of these agreements aggregated $223
million.
NOTE 10. EMPLOYEE BENEFIT PLANS
- -------------------------------
Merrill Lynch provides retirement and other postemployment benefits to its
employees worldwide through defined contribution and defined benefit pension
plans and other postretirement benefit plans. Merrill Lynch reserves the right
to amend or terminate these plans at any time.
In 1999, Merrill Lynch changed its measurement date for both its defined
benefit pension and other postretirement benefit plans from year-end to
September quarter-end. Prior period information has not been restated since the
impact of the change is not material.
Notes to Consolidated Financial Statements 77
<PAGE>
DEFINED CONTRIBUTION PENSION PLANS
The U.S. defined contribution plans consist of the Retirement Accumulation Plan
("RAP"), the Employee Stock Ownership Plan ("ESOP"), and the 401(k) Savings &
Investment Plan ("401K"). The RAP, ESOP, and 401K cover substantially all U.S.
employees who have met service requirements.
Merrill Lynch established the RAP and the ESOP, collectively known as the
"Retirement Program," for the benefit of employees with one year of service. A
separate retirement account is maintained for each participant.
In 1989, the ESOP trust purchased from Merrill Lynch 47,851,236 shares of ML
& Co. common stock with residual funds from a terminated defined benefit pension
plan ("Reversion Shares") and loan proceeds from a subsidiary of Merrill Lynch
("Leveraged Shares").
Merrill Lynch credited a participant's account and recorded pension expense
under the Retirement Program based on years of service and eligible
compensation. This expense is funded by quarterly allocations of Leveraged and
Reversion Shares and, when necessary, cash, to participants' accounts based on a
specified formula. Leveraged and Reversion Shares are released in accordance
with the terms of the ESOP. Reversion Shares were allocated to participants'
accounts over a period of eight years, ending in 1997. Leveraged Shares were
allocated to participants' accounts as principal was repaid on the loan to the
ESOP, which matured in 1999. Principal and interest on the loan were payable
quarterly upon receipt of dividends on certain shares of common stock or other
cash contributions. At December 31, 1999, all Reversion and Leveraged Shares had
been allocated.
Additional information on ESOP activity follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
---- ---- ----
Compensation costs funded
with ESOP shares $ 49 $ 49 $ 193
Dividends used for debt service(1) 2 7 7
- --------------------------------------------------------------------------------
(1) Dividends on all Leveraged Shares were used for debt service on the ESOP
loan through April 1, 1999. Dividends on unallocated Leveraged Shares only
were used for this purpose through the end of the 1999 third quarter, when
the loan was repaid.
Employees can participate in the 401K by contributing, on a tax-deferred
basis, up to 15% of their eligible compensation, but not more than the maximum
annual amount allowed by law. Merrill Lynch's contributions are equal to
one-half of the first 4% of each participant's eligible compensation contributed
to the 401K, up to a maximum of fifteen hundred dollars annually. No corporate
contributions are made for participants who are also Employee Stock Purchase
Plan participants (see Note 11).
Merrill Lynch also sponsors various non-U.S. defined contribution plans.
The costs of benefits under the RAP, 401K, and non-U.S. plans are expensed
during the related service period.
DEFINED BENEFIT PENSION PLANS
Merrill Lynch has purchased a group annuity contract that guarantees the payment
of benefits vested under a U.S. defined benefit plan that was terminated in
accordance with the applicable provisions of the Employee Retirement Income
Security Act of 1974 ("ERISA"). At year-end 1999 and 1998, a substantial portion
of the assets supporting the annuity contract was invested in U.S. Government
and agencies securities. Merrill Lynch, under a supplemental agreement, may be
responsible for, or benefit from, actuarial experience and investment
performance of the annuity assets. Merrill Lynch also maintains supplemental
defined benefit plans for certain U.S. employees.
Employees of certain non-U.S. subsidiaries participate in various local
defined benefit plans. These plans provide benefits that are generally based on
years of credited service and a percentage of the employee's eligible
compensation during the final years of employment. Merrill Lynch's funding
policy has been to contribute annually the amount necessary to satisfy local
funding standards.
The following table provides a summary of the changes in the plans'
benefit obligations, assets, and funded status for the nine-month period ended
September 24, 1999 and the year ended December 25, 1998 and the amounts
recognized in the Consolidated Balance Sheets at year-end 1999 and 1998:
78 Notes to Consolidated Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
(in millions)
1999 1998
------- -------
PROJECTED BENEFIT OBLIGATIONS
Balance, beginning of year $ 2,090 $ 1,928
Service cost 49 54
Interest cost 114 122
Net actuarial (gain) loss (170) 55
Benefits paid (68) (77)
Other (28) 8
------- -------
Balance, end of period 1,987 2,090
------- -------
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year 2,410 2,151
Actual return on plan assets (156) 282
Contributions 55 46
Benefits paid (68) (77)
Other (25) 8
------- -------
Balance, end of period 2,216 2,410
------- -------
FUNDED STATUS 229 320
Unrecognized net actuarial gains (103) (215)
Unrecognized prior service cost (benefit) (1) 3
Unrecognized net transition obligation 2 2
Fourth quarter activity net 11 -
------- -------
NET AMOUNT RECOGNIZED $ 138 $ 110
======= =======
Assets $ 265 $ 234
Liabilities (127) (124)
------- -------
NET AMOUNT RECOGNIZED $ 138 $ 110
======= =======
- --------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $119 million, $103 million, and $57 million,
respectively, as of September 24, 1999, and $111 million, $96 million, and $50
million, respectively, as of December 25, 1998. These plans primarily represent
U.S. supplemental plans not subject to ERISA or non-U.S. plans where funding
strategies vary due to legal requirements and local practices.
The actuarial assumptions used in calculating the projected benefit
obligation at September 24, 1999 and December 25, 1998 are as follows:
- --------------------------------------------------------------------------------
1999 1998
---- ----
Discount rate 6.5% 5.5%
Rate of compensation increase 4.0 5.7
Expected rate of return on plan assets 6.7 6.2
- --------------------------------------------------------------------------------
Pension cost included the following components:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
----- ----- -----
DEFINED CONTRIBUTION PLAN COST $ 234 $ 177 $ 218
----- ----- -----
DEFINED BENEFIT PLANS
Service cost for benefits earned
during the year 49 54 32
Interest cost on projected
benefits obligation 114 122 109
Expected return on plan assets (136) (141) (121)
Deferral and amortization
of unrecognized items - 7 -
----- ----- -----
Total defined benefit plan cost 27 42 20
----- ----- -----
TOTAL PENSION COST $ 261 $ 219 $ 238
===== ===== =====
- --------------------------------------------------------------------------------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Merrill Lynch provides health and life insurance benefits to retired employees
under a plan that covers substantially all U.S. employees who have met age and
service requirements. The health care component is contributory, with certain
retiree contributions adjusted periodically; the life insurance component of the
plan is noncontributory. The accounting for costs of health care benefits
anticipates future changes in cost-sharing provisions. Merrill Lynch pays claims
as incurred. Full-time employees of Merrill Lynch become eligible for these
benefits upon attainment of age 55 and completion of ten years of service.
Merrill Lynch also sponsors similar plans that provide health care benefits to
retired employees of certain non-U.S. subsidiaries. At December 31, 1999, none
of these plans had been funded.
The following table provides a summary of the changes in the plans' benefit
obligations, assets, and funded status for the nine-month period ended September
24, 1999 and the year-ended December 25, 1998, and the amounts recognized in the
Consolidated Balance Sheets at year-end 1999 and 1998:
- --------------------------------------------------------------------------------
(in millions)
1999 1998
----- -----
ACCUMULATED BENEFIT OBLIGATIONS
Balance, beginning of year $ 214 $ 211
Service cost 9 8
Interest cost 14 13
Net actuarial gain (33) (12)
Benefits paid (8) (7)
Other (2) 1
----- -----
Balance, end of period 194 214
----- -----
FAIR VALUE OF PLAN ASSETS
Balance, beginning of year - -
Contributions 8 7
Benefits paid (8) (7)
----- -----
Balance, end of period - -
----- -----
FUNDED STATUS (194) (214)
Unrecognized net actuarial gain (37) (3)
Unrecognized prior service cost - (1)
Fourth quarter activity, net 2 -
----- -----
ACCRUED BENEFIT LIABILITIES $(229) $(218)
===== =====
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 79
<PAGE>
The actuarial assumptions used in calculating the postretirement
accumulated benefit obligations at September 24, 1999 and December 25, 1998 are
as follows:
- --------------------------------------------------------------------------------
1999 1998
---- ----
Discount rate 7.5% 6.3%
Health care cost trend rates(1)
Initial 8.4 7.0
2012 and thereafter 5.0 5.5
- --------------------------------------------------------------------------------
(1) Assumed to decrease gradually until 2012 and remain constant thereafter.
Other postretirement benefits cost included the following components:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
---- ---- ----
Service cost $ 9 $ 8 $ 6
Interest cost 14 13 11
Other (4) - -
---- ---- ----
Total other postretirement benefits cost $ 19 $ 21 $ 17
==== ==== ====
- --------------------------------------------------------------------------------
The assumed health care cost trend rate has a significant effect on the
amounts reported for the health care plans. A one percent change in the assumed
health care cost trend rate would have the following effects:
- --------------------------------------------------------------------------------
(in millions)
1% INCREASE 1% DECREASE
--------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
Effect on:
Other postretirement
benefits cost $ 5 $ 4 $ (4) $ (4)
Accumulated benefit
obligation 29 35 (24) (30)
- --------------------------------------------------------------------------------
POSTEMPLOYMENT BENEFITS
Merrill Lynch provides certain postemployment benefits for employees on extended
leave due to injury or illness and for terminated employees. Employees who are
disabled due to non-work-related illness or injury are entitled to disability
income, medical coverage, and life insurance. Merrill Lynch also provides
severance benefits to terminated employees. In addition, Merrill Lynch is
mandated by U.S. state and federal regulations to provide certain other
postemployment benefits. Merrill Lynch funds these benefits through a
combination of self-insured and insured plans.
Merrill Lynch recognized $33 million, $439 million, and $30 million in 1999,
1998, and 1997, respectively, of postemployment benefits expense, which
included severance costs for terminated employees of $26 million, $424 million,
and $18 million in 1999, 1998, and 1997, respectively. The severance costs for
1998 include amounts related to the staff reduction provision (see Note 2).
Although all full-time employees are eligible for severance benefits, no
additional amounts were accrued as of December 31, 1999 since future severance
costs are not estimable.
NOTE 11. EMPLOYEE INCENTIVE PLANS
- ---------------------------------
To align the interests of employees with those of stockholders, Merrill Lynch
sponsors several employee compensation plans that provide eligible employees
with stock or options to purchase shares. The total compensation cost recognized
in earnings for stock-based compensation plans for 1999, 1998, and 1997 was $463
million, $453 million, and $318 million, respectively. Merrill Lynch also
sponsors deferred cash compensation plans for eligible employees.
LONG-TERM INCENTIVE COMPENSATION PLANS ("LTIC PLANS") AND EQUITY CAPITAL
ACCUMULATION PLAN ("ECAP")
LTIC Plans and ECAP provide for grants of equity and equity-related instruments
to certain employees. LTIC Plans provide for the issuance of Restricted Shares,
Restricted Units, and Nonqualified Stock Options, as well as Incentive Stock
Options, Performance Shares, Performance Units, Performance Options, Stock
Appreciation Rights, and other securities of Merrill Lynch. ECAP provides for
the issuance of Restricted Shares, as well as Performance Shares. As of December
31, 1999, no instruments other than Restricted Shares, Restricted Units,
Nonqualified Stock Options, and Performance Options had been granted.
Restricted Shares and Units
Restricted Shares are shares of ML & Co. common stock carrying voting and
dividend rights. A Restricted Unit is deemed equivalent in fair market value to
one share of common stock, is payable in cash or shares of common stock, and
receives cash payments equivalent to dividends. Under these plans, such shares
and units are restricted from sale, transfer, or assignment until the end of the
restricted period, and such shares and units are subject to forfeiture during
the vesting period for grants under LTIC Plans or the restricted period for
grants under ECAP.
The activity for Restricted Shares and Units under these plans during 1999
and 1998 follows:
80 Notes to Consolidated Financial Statements
<PAGE>
- --------------------------------------------------------------------------------
LTIC Plans ECAP
----------------------- ----------
Restricted Restricted Restricted
Shares Units Shares
---------- ---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 31, 1999 240,000,000 N/A 52,400,000
December 25, 1998 240,000,000 N/A 52,400,000
- --------------------------------------------------------------------------------
AVAILABLE FOR ISSUANCE AT:(1)
December 31, 1999 38,638,551 N/A 2,889,840
December 25, 1998 69,342,410 N/A 2,985,313
- --------------------------------------------------------------------------------
OUTSTANDING, END OF 1997 9,846,146 9,897,742 3,880,565
Granted - 1998 4,389,218 4,641,545 6,443
Paid, forfeited, or released
from contingencies (519,246) (3,680,398) (68,398)
---------- ---------- ----------
OUTSTANDING, END OF 1998 13,716,118 10,858,889 3,818,610
Granted - 1999 181,785 5,012,283 207,900
Paid, forfeited, or released
from contingencies (777,753) (3,288,730) (195,713)
---------- ---------- ----------
OUTSTANDING, END OF 1999(2) 13,120,150 12,582,442 3,830,797
========== ========== ==========
- --------------------------------------------------------------------------------
(1) Includes shares reserved for issuance upon the exercise of stock options.
(2) In February 2000, 100,836 and 6,774,239 Restricted Shares and Units under
LTIC Plans, respectively, were granted to eligible employees.
The weighted-average fair value per share or unit for 1999, 1998, and 1997
grants follows:
- --------------------------------------------------------------------------------
1999 1998 1997
------- ------- -------
LTIC Plans
Restricted Shares $ 75.80 $ 65.95 $ 46.31
Restricted Units 74.98 64.77 44.47
ECAP Restricted Shares 85.36 81.78 66.99
- --------------------------------------------------------------------------------
Merrill Lynch sponsors other plans similar to LTIC Plans in which
restricted shares and units are granted to employees and non-employee directors.
The accompanying table summarizes information related to restricted shares and
units for these other plans:
- --------------------------------------------------------------------------------
Restricted Restricted
Shares Units
---------- ----------
AUTHORIZED FOR ISSUANCE AT:
December 31, 1999 6,300,000 400,000
December 25, 1998 6,300,000 400,000
OUTSTANDING AT:
December 31, 1999 269,909 37,936
December 25, 1998 316,823 40,051
- --------------------------------------------------------------------------------
Nonqualified Stock Options
Nonqualified Stock Options granted under LTIC Plans in 1989 through 1995
generally become exercisable over four years in equal installments commencing
one year after the date of grant. Options granted in 1996 and thereafter
generally are exercisable over five years. The exercise price of these options
is equal to 100% of the fair market value (as defined in LTIC Plans) of a share
of ML & Co. common stock on the date of grant. Nonqualified Stock Options expire
ten years after their grant date.
In 1999, Merrill Lynch granted performance options under the LTIC plan.
These options vest based on Merrill Lynch's achievement of performance criteria
over a period not exceeding nine years.
At consummation of Merrill Lynch's merger with Midland Walwyn (see Note
2), each Midland Walwyn optionholder received 0.24 options on ML & Co. common
stock, with the vesting period and contractual life identical to the terms of
the original grant.
The activity for Nonqualified Stock Options and Performance Options under
LTIC Plans and Midland Walwyn options for 1999, 1998, and 1997 follows:
- --------------------------------------------------------------------------------
Weighted-
Options Average
Outstanding Exercise Price
----------- --------------
OUTSTANDING, BEGINNING OF 1997 64,500,802 $ 16.84
Granted - 1997 15,564,256 42.15
Exercised (9,226,197) 12.46
Forfeited (1,387,935) 31.25
----------
OUTSTANDING, END OF 1997 69,450,926 22.78
Granted - 1998 12,119,989 62.76
Exercised (7,968,828) 15.82
Forfeited (708,303) 44.88
----------
OUTSTANDING, END OF 1998 72,893,784 29.97
Granted - 1999 29,924,940 72.00
Exercised (7,485,120) 17.90
Forfeited (2,818,160) 63.89
----------
OUTSTANDING, END OF 1999(1) 92,515,444 55.97
==========
- --------------------------------------------------------------------------------
(1) In January 2000, 19,825,344 Nonqualified Stock Options were granted to
eligible employees.
At year-end 1999, 1998, and 1997, options exercisable were 41,784,354,
38,810,615, and 36,665,520, respectively.
The table below summarizes information related to outstanding and
exercisable options at year-end 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Exercise Remaining Number Exercise
Exercise Price Outstanding Price Life (years)(1) Exercisable Price
- --------------- ----------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$5.00 - $19.99 22,870,268 $ 13.57 2.88 22,870,268 $ 13.57
$20.00 - $39.99 17,439,967 25.37 5.42 12,300,933 24.49
$40.00 - $71.99 23,898,079 51.41 7.64 6,550,257 40.63
$72.00 - $89.99 28,307,130 72.55 9.20 62,896 89.53
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on original contractual life of ten years.
Notes to Consolidated Financial Statements 81
<PAGE>
The weighted-average fair value of options granted in 1999, 1998, and 1997
was $24.78, $21.43, and $14.63 per option, respectively. Fair value is
estimated as of the grant date based on a Black-Scholes option pricing model
using the following weighted-average assumptions:
- --------------------------------------------------------------------------------
1999 1998 1997
------ ------ ------
Risk-free interest rate 4.67% 5.81% 6.74%
Expected life 5 yrs. 6 yrs. 6 yrs.
Expected volatility 40.89% 28.10% 26.86%
Dividend yield 1.33% 1.28% 1.47%
- --------------------------------------------------------------------------------
See Pro Forma Compensation Expense in the following Employee Stock Purchase
Plans section for additional information.
EMPLOYEE STOCK PURCHASE PLANS ("ESPP")
ESPP plans allow eligible employees to invest from 1% to 10% of their eligible
compensation to purchase ML & Co. common stock at a price generally equal to 85%
of its fair market value. These purchases are made on four quarterly investment
dates through payroll deductions. Up to 50,300,000 shares of common stock have
been authorized for issuance under ESPP. The activity in ESPP during 1999, 1998,
and 1997 follows:
- --------------------------------------------------------------------------------
1999 1998 1997
--------- --------- ---------
Available,beginning of year 5,990,095 7,251,343 8,267,360
Authorized during year - - 300,000
Purchased through plan (1,376,274) (1,261,248) (1,316,017)
--------- --------- ---------
Available,end of year 4,613,821 5,990,095 7,251,343
========= ========= =========
- --------------------------------------------------------------------------------
The weighted-average fair value of ESPP stock purchase rights exercised by
employees in 1999, 1998, and 1997 was $12.50, $11.31, and $7.66 per right,
respectively.
Pro Forma Compensation Expense
No compensation expense has been recognized for Merrill Lynch's grants of stock
options under LTIC Plans or ESPP purchase rights (see Note 1 for accounting
policy). Pro forma compensation expense associated with option grants is
recognized over the vesting period. Based on the fair value of stock options and
purchase rights, Merrill Lynch would have recognized compensation expense, net
of taxes, of $292 million, $95 million, and $56 million for 1999, 1998, and
1997, respectively, resulting in pro forma net earnings and earnings per share
as follows:
- --------------------------------------------------------------------------------
(in millions, except per share amounts)
1999 1998 1997
-------- -------- --------
NET EARNINGS
As reported $ 2,618 $ 1,259 $ 1,935
Pro forma 2,326 1,164 1,879
EARNINGS PER SHARE
As reported:
Basic $ 7.00 $ 3.43 $ 5.57
Diluted 6.17 3.00 4.79
Pro forma:
Basic 6.21 3.16 5.41
Diluted 5.47 2.77 4.65
- --------------------------------------------------------------------------------
FINANCIAL CONSULTANT CAPITAL ACCUMULATION AWARD PLANS ("FCCAAP")
Under FCCAAP, eligible employees in Private Client are granted awards generally
based upon their prior year's performance. Payment for an award is contingent
upon continued employment for a period of time and is subject to forfeiture
during that period. The award is generally payable ten years from the date of
grant in a fixed number of shares of ML & Co. common stock unless the fair
market value of such shares is less than a specified minimum value plus
interest, in which case the minimum value is paid in cash. Eligible participants
may defer awards beyond the scheduled payment date. FCCAAP may also provide for
the issuance of Restricted Shares that vest ten years from the date of the
original award and carry voting and dividend rights. Only shares of common stock
held as treasury stock may be issued under FCCAAP.
At December 31, 1999, shares subject to outstanding awards totaled
28,262,763, while 15,518,581 shares were available for issuance through future
awards. The fair value of awards granted under FCCAAP during 1999, 1998, and
1997 was $71.44, $67.94, and $42.09 per award, respectively.
INCENTIVE EQUITY PURCHASE PLAN ("IEPP")
IEPP allowed selected employees to purchase shares of ML & Co. common stock
("Book Value Shares") at a price equal to book value per common share. Book
Value Shares, which otherwise may not be resold, may be sold back to Merrill
Lynch at book value or exchanged at any time for a specified number of freely
transferable common shares. Book Value Shares outstanding under IEPP were
1,743,500 at December 31, 1999. In 1995, IEPP was amended to reduce the
authorized shares to zero and prohibit the reuse of any surrendered shares. No
further offerings will be made under this plan.
MERRILL LYNCH INVESTMENT CERTIFICATE PROGRAM ("MLICP")
Under MLICP, eligible employees in Private Client are issued investment
certificates based on their performance. The certificates mature ten years from
the date issued and are
82 Notes to Consolidated Financial Statements
<PAGE>
payable in cash if certain performance criteria are achieved and the employee is
continuously employed for the ten-year period, with certain exceptions. The
certificates bear interest commencing with the date on which the performance
requirements are achieved. At year-end 1999 and 1998, $409 million and $353
million, respectively, were accrued under this plan.
OTHER DEFERRED COMPENSATION PLANS
Merrill Lynch sponsors other deferred compensation plans in which eligible
employees may participate. Generally, contributions to the plans are made on a
tax-deferred basis by participants. Contributions are invested by Merrill Lynch
in mutual funds and other funds sponsored by Merrill Lynch, and the plans may
include a leverage feature. The plans' investments and the amounts accrued by
Merrill Lynch under the plans are both included in the Consolidated Balance
Sheets. Plan investments totaled $1.2 billion and $648 million, respectively, at
December 31, 1999 and December 25, 1998. Accrued liabilities at those dates were
$1.0 billion and $587 million, respectively.
NOTE 12. INCOME TAXES
- ---------------------
Income tax provisions (benefits) on earnings consisted of:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ----- -------
U.S. FEDERAL
Current $ 773 $ 673 $ 856
Deferred (80) (180) (94)
U.S.STATE AND LOCAL
Current (34) 105 (15)
Deferred (42) 10 7
NON-U.S.
Current 617 412 400
Deferred 31 (307) (25)
------- ----- -------
TOTAL $ 1,265 $ 713 $ 1,129
======= ===== =======
- --------------------------------------------------------------------------------
The corporate statutory tax rate was 35.0% for the three years presented. A
reconciliation of statutory U.S. federal income taxes to Merrill Lynch's income
tax provisions for earnings follows:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ----- -------
U.S.federal income tax at
statutory rate $ 1,427 $ 734 $ 1,089
U.S.state and local income taxes,net(1) (49) 74 (5)
Non-U.S.operations (80) (71) 1
Tax-exempt interest (64) (51) (26)
Dividends received deduction (28) (30) (33)
Other,net 59 57 103
------- ----- -------
Income tax expense $ 1,265 $ 713 $ 1,129
======= ===== =======
- --------------------------------------------------------------------------------
(1) Includes adjustments to prior year accruals.
Deferred income taxes are provided for the effects of temporary differences
between the tax basis of an asset or liability and its reported amount in the
Consolidated Balance Sheets. These temporary differences result in taxable or
deductible amounts in future years. Details of Merrill Lynch's deferred tax
assets and liabilities follow:
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
------- ------- -------
DEFERRED TAX ASSETS
Deferred compensation $ 1,020 $ 679 $ 478
Valuation and other reserves(1) 782 1,225 940
Employee benefits 185 120 109
Other 621 375 116
------- ------- -------
Gross deferred tax assets 2,608 2,399 1,643
Valuation allowances(2) (82) (42) (26)
------- ------- -------
Total deferred tax assets 2,526 2,357 1,617
------- ------- -------
DEFERRED TAX LIABILITIES
Lease transactions 143 148 116
Employee benefits 74 64 58
Other 295 207 204
------- ------- -------
Total deferred tax liabilities 512 419 378
------- ------- -------
NET DEFERRED TAX ASSETS $ 2,014 $ 1,938 $ 1,239
======= ======= =======
- --------------------------------------------------------------------------------
(1) Primarily related to Trading assets and Other payables.
(2) Related to net operating loss carryforwards not expected to be realized.
At December 31, 1999, Merrill Lynch had U.S. net operating loss
carryforwards of $310 million and non-U.S. net operating loss carryforwards of
$370 million. The U.S. amounts are primarily state carryforwards expiring in
various years after 2005 and the non-U.S. amounts are primarily Japanese
carryforwards expiring in various years after 2002.
Income tax benefits of $281 million, $336 million, and $173 million were
allocated to stockholders' equity related to employee compensation transactions
for 1999, 1998, and 1997, respectively.
Earnings before income taxes included approximately $1,447 million, $44
million, and $805 million of earnings attributable to non-U.S. subsidiaries for
1999, 1998, and 1997, respectively. Cumulative undistributed earnings of
non-U.S. subsidiaries not previously taxed in the U.S. were approximately $3.3
billion at December 31, 1999. No deferred U.S. federal income taxes have been
provided for the undistributed earnings to the extent that they are permanently
reinvested in Merrill Lynch's non-U.S. operations. Merrill Lynch estimates that
approximately $160 million of non-U.S. withholding taxes and, assuming
utilization of foreign tax credits, approximately $300 million of U.S. federal
income taxes would be incurred on the repatriation of such earnings.
Notes to Consolidated Financial Statements 83
<PAGE>
NOTE 13. REGULATORY REQUIREMENTS AND DIVIDEND RESTRICTIONS
- ----------------------------------------------------------
MLPF&S, a U.S. registered broker-dealer, is subject to the net capital
requirements of Rule 15c3-1 under the Securities Exchange Act of 1934. Under
the alternative method permitted by this rule, the minimum required net capital,
as defined, shall not be less than 2% of aggregate debit items arising from
customer transactions. At December 31, 1999, MLPF&S's regulatory net capital of
$3,352 million was 12% of aggregate debit items, and its regulatory net capital
in excess of the minimum required was $2,780 million.
MLI, a U.K. registered broker-dealer, is subject to capital requirements of
the Financial Services Authority ("FSA"). Financial resources, as defined, must
exceed the total financial resources requirement of the FSA. In 1997, MLI became
Merrill Lynch's primary global equity derivatives dealer (previously Merrill
Lynch Capital Markets PLC). At December 31, 1999, MLI's financial resources were
$3,747 million, exceeding the minimum requirement by $492 million.
MLGSI, a primary dealer in U.S. Government securities, is subject to the
capital adequacy requirements of the Government Securities Act of 1986. This
rule requires dealers to maintain liquid capital in excess of market and credit
risk, as defined, by 20% (a 1.2-to-1 capital-to-risk standard). At December 31,
1999, MLGSI's liquid capital of $1,739 million was 481% of its total market and
credit risk, and liquid capital in excess of the minimum required was $1,305
million.
Merrill Lynch's insurance subsidiaries are subject to various regulatory
restrictions that limit the amount available for distribution as dividends. At
December 31, 1999, $444 million, representing 88% of the insurance subsidiaries'
net assets, was unavailable for distribution to Merrill Lynch.
Approximately 80 other subsidiaries are subject to regulatory and other
requirements of the jurisdictions in which they operate. These regulatory
restrictions may limit the amounts that these subsidiaries can pay in dividends
or advance to Merrill Lynch. At December 31, 1999, restricted net assets of
these subsidiaries were $5.3 billion.
In addition, to satisfy rating agency standards, a credit intermediary
subsidiary of Merrill Lynch must also meet certain minimum capital requirements.
At December 31, 1999, this minimum capital requirement was $288 million.
With the exception of regulatory restrictions on subsidiaries' abilities to
pay dividends, there are no restrictions on ML & Co.'s present ability to pay
dividends on common stock, other than (1) ML & Co.'s obligation to make payments
on its TOPrS, and (2) the governing provisions of the Delaware General
Corporation Law.
NOTE 14. SEGMENT, PRODUCT, AND GEOGRAPHIC INFORMATION
- -----------------------------------------------------
SEGMENT INFORMATION
In reporting to management during 1999, Merrill Lynch's operating results were
categorized into three business segments: the Corporate and Institutional Client
Group ("CICG"), the Private Client Group ("PCG") and the Asset Management Group
("AMG"). Prior period amounts have been restated to conform to the 1999
presentation. For information on each segment's activities, see Management's
Discussion and Analysis (unaudited) - Business Segments.
The principal methodology used in preparing the segment results in the
table that follows is:
. Revenues and expenses are assigned to segments where directly
attributable.
. Principal transaction and investment banking revenues and related costs
resulting from the client activities of PCG are allocated among CICG and
PCG based on production credits, share counts, trade counts, and other
measures which estimate relative value.
. Revenues and expenses related to certain retail money market funds are
assigned to PCG.
. The 401(k) business is reported as a 50/50 joint venture between AMG and
PCG.
. Revenues and expenses related to mutual fund shares bearing a contingent
deferred sales charge are reflected in segment results as if AMG and PCG
were unrelated entities.
. Interest (cost of carry) is allocated based on management's assessment of
the relative risk of segment assets and liabilities.
. Goodwill amortization, Mercury financing costs, and the staff reduction
provision are not attributed to segments because management excludes
these items from segment operating results in evaluating segment
performance. The elimination of intersegment revenues and expenses is
also included in Corporate items (including intersegment eliminations).
. Residual revenues and expenses (i.e., those related to overhead and
support units) are attributed to segments based on specific methodologies
(e.g., headcount, square footage, intersegment agreements).
. Income taxes are attributed based on tax rates in the tax jurisdictions
in which the segment activity takes place.
84 Notes to Consolidated Financial Statements
<PAGE>
Management believes that the following information by business segment
provides a reasonable representation of each segment's contribution to the
consolidated amounts:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in millions)
CORPORATE ITEMS
(INCLUDING
INTERSEGMENT
CICG PCG AMG ELIMINATIONS) TOTAL
-------------- ----------- ----------- ------------------- -------------
1999
<S> <C> <C> <C> <C> <C> <C>
All other revenues $ 8,303 $ 9,450 $ 2,223 $ (194)(1) $ 19,782
Net interest revenue(2) 1,025 1,238 45 (221)(3) 2,087
---------- ---------- ---------- --------- ---------
Net revenues 9,328 10,688 2,268 (415) 21,869
Non-interest expenses 6,760 9,265 1,752 14(4) 17,791
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 2,568 1,423 516 (429) 4,078
Income tax expense (benefit) 662 498 181 (76) 1,265
Dividends on preferred
securities issued by subsidiaries - - - 195 195
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 1,906 $ 925 $ 335 $ (548) $ 2,618
========== ========== ========== ========= =========
Year-end total assets $ 264,130 $ 56,579 $ 2,410 $ 4,952 $ 328,071
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1998
All other revenues $ 6,177 $ 8,678 $ 1,955 $ (271)(1) $ 16,539
Net interest revenue(2) 372 918 24 (306)(3) 1,008
---------- ---------- ---------- --------- ---------
Net revenues 6,549 9,596 1,979 (577) 17,547
Non-interest expenses,excluding
staff reduction provision 5,453 8,101 1,529 (62)(4) 15,021
Provision for costs related to
staff reduction - - - 430(5) 430
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,096 1,495 450 (945) 2,096
Income tax expense (benefit) 135 546 158 (126) 713
Dividends on preferred securities
issued by subsidiaries - - - 124 124
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 961 $ 949 $ 292 $ (943) $ 1,259
========== ========== ========== ========= =========
Year-end total assets $ 247,646 $ 44,691 $ 2,103 $ 5,364 $ 299,804
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
1997
All other revenues $ 6,557 $ 7,706 $ 1,241 $ (304)(1) $ 15,200
Net interest revenue(2) 232 826 (2) - 1,056
---------- ---------- ---------- --------- ---------
Net revenues 6,789 8,532 1,239 (304) 16,256
Non-interest expenses 5,166 7,374 834 (229)(4) 13,145
---------- ---------- ---------- --------- ---------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,623 1,158 405 (75) 3,111
Income tax expense 437 428 141 123 1,129
Dividends on preferred securities
issued by subsidiaries - - - 47 47
---------- ---------- ---------- --------- ---------
Net earnings (loss) $ 1,186 $ 730 $ 264 $ (245) $ 1,935
========== ========== ========== ========= =========
Year-end total assets $ 252,587 $ 38,061 $ 865 $ 5,467 $ 296,980
========== ========== ========== ========= =========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the elimination of intersegment revenues.
(2) Management views interest income net of interest expense in evaluating
results.
(3) Represents Mercury financing costs.
(4) Represents goodwill amortization of $227, $226, and $65, net of elimination
of intersegment expenses $213, $288, and $294 for 1999, 1998, and 1997,
respectively.
(5) Had this amount been allocated to segments, $259, $88, and $83 would have
been allocated to CICG, PCG, and AMG, respectively.
Notes to Consolidated Financial Statements 85
<PAGE>
PRODUCT INFORMATION
Merrill Lynch delivers a wide variety of products to clients:
. Brokerage: Executing or facilitating security and commodity trades for
retail clients and assisting clients in allocating their assets.
(Includes commissions, net interest, and principal transactions).
. Asset management and portfolio services: Offering customers access to a
wide array of asset management services and other fee-based products.
. Lending: Serving investors' liability management needs by providing margin
lending, mortgage and other consumer loans, and commercial financing.
. Trading: Satisfying institutional customer demand for securities,
currencies, and other products by maintaining securities inventories and
writing over-the-counter derivatives. Through structured notes and
derivatives, investors are provided with opportunities to diversify their
portfolios, manage risk, and enhance returns. Also included are revenues
related to proprietary positions. (Includes commissions, principal
transactions revenues, and net interest).
. Origination: Raising capital for clients through securities underwritings,
private placements, and loan syndications.
. Strategic advisory services: Providing advice on mergers and acquisitions,
sales, divestitures, and joint ventures.
The following table summarizes Merrill Lynch's net revenues by product.
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
-------- -------- -------
CICG
Trading:
Debt $ 2,397 $ 899 $ 2,232
Equity 3,638 2,722 2,052
-------- -------- -------
Total 6,035 3,621 4,284
-------- -------- -------
Origination:
Debt 450 484 587
Equity 1,104 884 820
-------- -------- -------
Total 1,554 1,368 1,407
-------- -------- -------
Strategic advisory services 1,270 1,081 765
Other 469 479 333
-------- -------- -------
Total CICG 9,328 6,549 6,789
-------- -------- -------
PCG
Brokerage 6,741 6,221 5,755
-------- -------- -------
Fee-based services:
Portfolio service fees 1,459 1,134 805
Asset management fees 583 589 402
Other fees 1,042 988 944
-------- -------- -------
Total 3,084 2,711 2,151
-------- -------- -------
Lending 731 577 477
Other 132 87 149
-------- -------- -------
Total Private Client 10,688 9,596 8,532
-------- -------- -------
AMG
Fee-based services:
Asset management fees 1,680 1,486 830
Other fees 3 - 21
-------- -------- -------
Total 1,683 1,486 851
-------- -------- -------
Other 585 493 388
-------- -------- -------
Total Asset Management 2,268 1,979 1,239
-------- -------- -------
CORPORATE ITEMS
(INCLUDING INTERSEGMENT
ELIMINATIONS) (415) (577) (304)
-------- -------- -------
Total $ 21,869 $ 17,547 $ 16,256
======== ======== =======
- --------------------------------------------------------------------------------
86 Notes to Consolidated Financial Statements
<PAGE>
GEOGRAPHIC INFORMATION
Merrill Lynch operates in both U.S. and non-U.S. markets. Merrill Lynch's
non-U.S. business activities are conducted through offices in six regions:
. Europe, Middle East, and Africa,
. Asia Pacific,
. Australia and New Zealand,
. Japan,
. Canada, and
. Latin America.
For further information on activities in these regions, see Management's
Discussion and Analysis (unaudited) - Global Operations.
The principal methodology used in preparing the geographic data in the
table that follows is:
. Commissions revenues are recorded based on the location of the sales
force,
. Trading revenues are principally recorded based on the location of the
trader,
. Investment banking revenues are recorded based on the location of the
client,
. Asset management and portfolio service fees are recorded based on the
location of the fund manager,
. Earnings before income taxes include the allocation of certain shared
expenses among regions, and
. Intercompany transfers are based primarily on service agreements.
The information that follows, in management's judgment, provides a
reasonable representation of each region's contribution to the consolidated
amounts.
- --------------------------------------------------------------------------------
(in millions)
1999 1998 1997
-------- -------- --------
NET REVENUES
Europe, Middle East, and Africa $ 4,222 $ 2,844 $ 1,949
Asia Pacific 813 333 478
Australia and New Zealand 253 221 163
Japan 1,062 592 433
Canada 619 642 708
Latin America 614 412 523
-------- -------- --------
Total Non-U.S. 7,583 5,044 4,254
U.S. 14,507 12,809 12,002
Corporate (221) (306) -
-------- -------- --------
Total $ 21,869 $ 17,547 $ 16,256
======== ======== ========
- --------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES
AND DIVIDENDS ON
PREFERRED SECURITIES
ISSUED BY SUBSIDIARIES
Europe,Middle East,and Africa $ 1,290 $ 452 $ 328
Asia Pacific 230 (182) (26)
Australia and New Zealand 32 22 12
Japan 20 (108) 62
Canada 65 25 99
Latin America 137 (53) 123
-------- -------- --------
Total Non-U.S. 1,774 156 598
U.S. 2,733 2,885 2,588
Corporate (429) (945) (75)
-------- -------- --------
Total $ 4,078 $ 2,096 $ 3,111
======== ======== ========
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements 87
<PAGE>
SUPPLEMENTAL FINANCIAL INFORMATION
- ----------------------------------
QUARTERLY INFORMATION
The unaudited quarterly results of operations of Merrill Lynch for 1999 and 1998
are prepared in conformity with generally accepted accounting principles and
reflect all adjustments (which consist of normal recurring accruals and a
provision for costs related to staff reductions) that are, in the opinion of
management, necessary for a fair presentation of the results of operations for
the periods presented. Results of any interim period are not necessarily
indicative of results for a full year.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per share amounts)
For the Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------
DEC.31, SEPT.24, JUNE 25, MAR.26, DEC.25, SEPT.25, JUNE 26, MAR.27,
1999 1999 1999 1999 1998 1998 1998 1998
------- ------- ------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $ 9,270 $ 8,412 $ 8,630 $ 8,567 $ 7,845 $ 8,345 $ 9,321 $ 9,062
Interest Expense 3,375 3,144 3,190 3,301 3,764 4,496 4,466 4,300
------- ------- ------- ------- ------- -------- -------- -------
Net Revenues 5,895 5,268 5,440 5,266 4,081 3,849 4,855 4,762
Non-Interest Expenses 4,735 4,377 4,409 4,270 3,562 4,054(1) 3,940 3,895
------- ------- ------- ------- ------- -------- -------- -------
Earnings (Loss) Before Income Taxes
and Dividends on Preferred
Securities Issued by Subsidiaries 1,160 891 1,031 996 519 (205) 915 867
Income Tax Expense (Benefit) 346 271 310 338 119 (75) 339 330
Dividends on Preferred Securities
Issued by Subsidiaries 50 48 48 49 41 33 27 23
------- ------- ------- ------- ------- -------- -------- -------
Net Earnings (Loss) $ 764 $ 572 $ 673 $ 609 $ 359 $ (163) $ 549 $ 514
======= ======= ======= ======= ======= ======== ======== =======
Earnings (Loss) Per Common Share
Basic $ 2.03 $ 1.52 $ 1.80 $ 1.65 $ .97 $ (.48) $ 1.52 $ 1.44
Diluted 1.80 1.34 1.57 1.44 .86 (.48) 1.31 1.26
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes a $430 million provision for costs related to staff reductions.
DIVIDENDS PER COMMON SHARE
- --------------------------------------------------------------------------------
(declared and paid)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999 $ .24 $ .27 $ .27 $ .27
1998 .20 .24 .24 .24
- --------------------------------------------------------------------------------
With the exception of regulatory restrictions on subsidiaries' abilities to pay
dividends, there are no restrictions on ML & Co.'s present ability to pay
dividends on common stock, other than (a) ML & Co.'s obligation to make payments
on its preferred stock and subsidiaries' preferred securities, and (b) the
governing provisions of the Delaware General Corporation Law. Certain
subsidiaries' ability to declare dividends may also be limited (see Note 13 to
the Consolidated Financial Statements).
STOCKHOLDER INFORMATION
Consolidated Transaction Reporting System prices for the specified calendar
quarters are noted below.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(at calendar period-end)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-------------------- -------------------- -------------------- ---------------------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
-------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 94 1/2 $ 65 5/8 $ 102 1/2 $ 66 1/16 $ 81 7/16 $ 62 $ 88 7/16 $ 62 3/8
1998 $ 87 1/2 $ 60 7/16 $ 100 $ 82 1/4 $ 109 1/8 $ 45 5/8 $ 80 $ 35 3/4
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The approximate number of record holders of ML & Co. common stock as of February
18, 2000 was 16,600. As of February 25, 2000, the closing price of ML & Co.
common stock as reported on the Consolidated Transaction Reporting System was
$95 7/8.
88
<PAGE>
BOARD OF DIRECTORS
- ------------------
W.H. CLARK
Corporate Director...former Chairman of the Board and Chief Executive Officer of
Nalco Chemical Company, a producer of specialty chemicals...67 years
old...elected a Director of Merrill Lynch in 1995.
JILL K. CONWAY
Visiting Scholar, Massachusetts Institute of Technology... President of Smith
College from 1975 to 1985...65 years old...elected a Director of Merrill Lynch
in 1978.
STEPHEN L. HAMMERMAN
Vice Chairman of the Board of Merrill Lynch...62 years old... joined Merrill
Lynch in 1978.
GEORGE B. HARVEY
Corporate Director...former Chairman of the Board, President and Chief Operating
Officer of Pitney Bowes Inc., a provider of mailing, office and logistics
systems and management and financial services...68 years old...elected a
Director of Merrill Lynch in 1993.
WILLIAM R. HOOVER
Chairman of the Executive Committee of, Consultant to, and former Chairman of
the Board, Chief Executive Officer and President of, Computer Sciences
Corporation, a provider of information technology consulting, systems
integration and outsourcing to industry and government...70 years old...elected
a Director of Merrill Lynch in 1995.
DAVID H. KOMANSKY
Chairman of the Board and Chief Executive Officer of Merrill Lynch...60 years
old...joined Merrill Lynch in 1968.
ROBERT P. LUCIANO
Corporate Director...Director, Chairman Emeritus and former Chairman of the
Board and Chief Executive Officer of Schering-Plough Corporation, a health and
personal care products company...66 years old...elected a Director of Merrill
Lynch in 1989.
DAVID K. NEWBIGGING
Chairman of the Board of Friends' Provident Life Office, a United Kingdom-based
life assurance company...former Chairman of the Board of Equitas Holdings
Limited...former Chairman of the Board and Senior Managing Director of Jardine,
Matheson & Co. Limited...66 years old...elected a Director of Merrill Lynch in
1996.
AULANA L. PETERS
Partner in the law firm of Gibson, Dunn & Crutcher LLP...former Commissioner of
the U.S. Securities and Exchange Commission...58 years old...elected a Director
of Merrill Lynch in 1994.
JOHN J. PHELAN, JR.
Corporate Director...former Chairman and Chief Executive Officer of the New York
Stock Exchange, Inc....Senior Adviser, Boston Consulting Group...member of the
Council on Foreign Relations... former President of the International Federation
of Stock Exchanges...68 years old...elected a Director of Merrill Lynch in
1991.
JOHN L. STEFFENS
Vice Chairman of the Board and Chairman of U.S. Private Client Group of Merrill
Lynch...58 years old...joined Merrill Lynch in 1963.
WILLIAM L. WEISS
Corporate Director...Chairman Emeritus and former Chairman of the Board and
Chief Executive Officer of Ameritech Corporation, a provider of communications
and information services...70 years old...elected a Director of Merrill Lynch in
1993.
Board of Directors 89
<PAGE>
EXECUTIVE MANAGEMENT
- --------------------
On February 14, 2000, Merrill Lynch announced the following management changes.
Merrill Lynch Vice Chairman John L. (Launny) Steffens was named Chairman of the
U.S. Private Client Group. Executive Vice President E. Stanley O'Neal, who had
been serving as Merrill Lynch's Chief Financial Officer, was named to succeed
Mr. Steffens as President of U.S. Private Client Group. Mr. O'Neal will be
succeeded as Chief Financial Officer by Executive Vice President Thomas H.
Patrick, who had been serving as Chairman, Special Advisory Services.
[PHOTO]
DAVID H. KOMANSKY
Chairman of the Board and Chief Executive Officer
[PHOTO]
JOHN L. STEFFENS
Vice Chairman of the Board and Chairman of U.S. Private Client Group
[PHOTO]
STEPHEN L. HAMMERMAN
Vice Chairman of the Board
[PHOTO]
PAUL W. CRITCHLOW
Senior Vice President Communications and Public Affairs
[PHOTO]
THOMAS W. DAVIS
Executive Vice President and President of Corporate and Institutional Client
Group
[PHOTO]
RICHARD A. DUNN
Senior Vice President and Head of Corporate Risk Management
[PHOTO]
BARRY S. FRIEDBERG
Executive Vice President and Chairman of Corporate and Institutional Client
Group
90 Executive Management
<PAGE>
[PHOTO]
CAROL GALLEY
Chief Operating Officer Asset Management Group
[PHOTO]
EDWARD L. GOLDBERG
Executive Vice President Operations Services Group
[PHOTO]
JAMES P. GORMAN
Executive Vice President and Chief Marketing Officer
[PHOTO]
JEROME P. KENNEY
Executive Vice President Corporate Strategy and Research
[PHOTO]
MICHAEL J.P. MARKS
Executive Chairman of Merrill Lynch Europe, Middle East & Africa
[PHOTO]
JOHN A. MCKINLEY, JR.
Executive Vice President and Chief Technology Officer
[PHOTO]
E. STANLEY O'NEAL
Executive Vice President and President of U.S. Private Client Group
[PHOTO]
THOMAS H. PATRICK
Executive Vice President and Chief Financial Officer
[PHOTO]
JEFFREY M. PEEK
Executive Vice President and President of Asset Management Group
[PHOTO]
WINTHROP H. SMITH, JR.
Executive Vice President and Chairman, Merrill Lynch International Inc. and
President of International Private Client Group
[PHOTO]
MARY E. TAYLOR
Senior Vice President Human Resources
[PHOTO]
STEPHEN A. ZIMMERMAN
Chief Operating Officer Asset Management Group
Executive Management 91
<PAGE>
MERRILL LYNCH & CO., INC.
- -------------------------
EXECUTIVE OFFICES
Merrill Lynch & Co., Inc.
World Financial Center
North Tower
New York, New York 10281-1332
COMMON STOCK
Exchange Listings
The common stock of Merrill Lynch (trading symbol MER) is listed on the New York
Stock Exchange, Chicago Stock Exchange, Pacific Exchange, Paris Bourse, London
Stock Exchange and Tokyo Stock Exchange.
Transfer Agent and Registrar
Merrill Lynch & Co., Inc. is the principal transfer agent for its own common
stock. Questions from registered stockholders on dividends, lost and stolen
certificates, changes of legal or dividend addresses, and other matters relating
to registered stockholder status should be sent to:
Merrill Lynch & Co., Inc.
P.O. Box 20, Church Street Station
New York, NY 10277-1004
Attn: Darryl W. Colletti, Assistant Secretary
However, registered stockholders wishing to transfer their stock should continue
to do so through the following transfer agent and registrar:
ChaseMellon Shareholder Services
P.O. Box 3310
South Hackensack, NJ 07606-1910
1-800-851-9677
PREFERRED STOCK
Exchange Listing
Depositary Shares representing 1/400 of a share of 9% Cumulative Preferred
Stock, Series A, are listed on the New York Stock Exchange.
Transfer Agent and Registrar
Citibank, N.A.
111 Wall Street, Fifth Floor
New York, NY 10043
Attn: Corporate Trust Department
FORM 10-K ANNUAL REPORT FOR 1999
This Annual Report of Merrill Lynch & Co., Inc. contains much of the financial
information that will be included in the 1999 Annual Report on Form 10-K to be
filed with the U.S. Securities and Exchange Commission. Merrill Lynch will
furnish a copy of its 1999 Annual Report on Form 10-K (including financial
statements and financial schedules but excluding other exhibits), without
charge, to any person upon request addressed to Andrea L. Dulberg, Corporate
Secretary, Merrill Lynch & Co., Inc., 222 Broadway, 17th Floor, New York, NY
10038.
EQUAL EMPLOYMENT OPPORTUNITY
Merrill Lynch is committed to Equal Employment Opportunity and to attracting and
retaining the most qualified employees, regardless of race, national origin,
religion, gender, age, or disability. For more information, write to Westina
Matthews Shatteen, First Vice President, Corporate Responsibility, Merrill Lynch
& Co., Inc., World Financial Center, North Tower, New York, NY 10281-1331.
CHARITABLE CONTRIBUTIONS
A summary of the Corporation's charitable contributions is available upon
written request to the Secretary.
ANNUAL MEETING
The 2000 Annual Meeting of Merrill Lynch & Co., Inc. stockholders will take
place at the Merrill Lynch Conference and Training Center, 800 Scudders Mill
Road, Plainsboro, New Jersey. The meeting is scheduled for Tuesday, April 18,
2000, beginning at 10:00 a.m. (local time).
Designed by DeSola Group, Inc.
Executive portrait photography by Chris Jones
VISIT OUR WEBSITE AT WWW.ML.COM
92 Corporate Information
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
------------------------------
The following are subsidiaries of ML & Co. as of February 25, 2000 and the
states or jurisdictions in which they are organized. Indentation indicates the
principal parent of each subsidiary. Except as otherwise specified, in each case
ML & Co. owns, directly or indirectly, at least 99% of the voting securities of
each subsidiary. The names of particular subsidiaries have been omitted because,
considered in the aggregate as a single subsidiary, they would not constitute,
as of the end of the year covered by this report, a "significant subsidiary" as
that term is defined in Rule 1.02(w) of Regulation S-X under the Securities
Exchange Act of 1934.
<TABLE>
<CAPTION>
Name State or Jurisdiction of Entity
- ---- -------------------------------
<S> <C>
Merrill Lynch & Co., Inc. Delaware
Merrill Lynch, Pierce, Fenner & Smith Incorporated/1/ Delaware
Broadcort Capital Corp. Delaware
Merrill Lynch Life Agency Inc./2/ Washington
Merrill Lynch Professional Clearing Corp./3/ Delaware
Merrill Lynch Bank & Trust Co. New Jersey
Merrill Lynch Capital Services, Inc. Delaware
Merrill Lynch Government Securities, Inc. Delaware
Merrill Lynch Money Markets Inc. Delaware
Merrill Lynch Group, Inc. Delaware
Merrill Lynch & Co., Canada Ltd. Ontario
Merrill Lynch Canada Inc. Canada
Mercury Asset Management Group Ltd/4/ England
Mercury Asset Management Holdings Ltd England
Merrill Lynch Asset Management, L.P./5/ Delaware
Merrill Lynch Capital Partners, Inc. Delaware
Merrill Lynch Futures Inc. Delaware
Merrill Lynch Insurance Group, Inc. Delaware
Merrill Lynch Life Insurance Company Arkansas
ML Life Insurance Company of New York New York
Merrill Lynch International Finance Corporation New York
Merrill Lynch International Bank Limited England
Merrill Lynch Bank (Suisse) S.A. Switzerland
Merrill Lynch Group Holdings Limited Ireland
Merrill Lynch Capital Markets Bank Limited Ireland
Merrill Lynch Mortgage Capital Inc. Delaware
Merrill Lynch Bank USA Utah
Merrill Lynch Trust Company/6/ New Jersey
Merrill Lynch Business Financial Services Inc. Delaware
Merrill Lynch Credit Corporation Delaware
Merrill Lynch Investment Partners Inc. Delaware
</TABLE>
- ----------------------
/1/ MLPF&S also conducts business as "Merrill Lynch & Co."
/2/ Similarly named affiliates and subsidiaries that engage in the sale of life
insurance and annuity products are incorporated in various other
jurisdictions.
/3/ The preferred stock of the corporation is owned by an unaffiliated group of
investors.
/4/ Held through several intermediate holding companies.
/5/ Merrill Lynch Asset Management, L.P. is a limited partnership whose general
partner is Princeton Services, Inc. and whose limited partner is ML & Co.
/6/ Similarly named affiliates and subsidiaries that provide trust and custodial
services are incorporated in various other jurisdictions.
<PAGE>
<TABLE>
<CAPTION>
Name State or Jurisdiction of Entity
- ---- -------------------------------
<S> <C>
MLDP Holdings, Inc./7/ Delaware
Merrill Lynch Derivative Products AG Switzerland
ML IBK Positions, Inc. Delaware
Merrill Lynch Capital Corporation Delaware
ML Leasing Equipment Corp./8/ Delaware
Merrill Lynch International Incorporated Delaware
Merrill Lynch (Australasia) Pty Limited New South Wales
Merrill Lynch International (Australia) Limited/9/ New South Wales
Merrill Lynch International Bank United States
Merrill Lynch International Holdings Inc. Delaware
Merrill Lynch Bank and Trust Company (Cayman) Limited Cayman Islands,
British West Indies
Merrill Lynch Capital Markets AG Switzerland
Merrill Lynch Europe PLC England
Merrill Lynch Europe Holdings Limited England
Merrill Lynch International/10/ England
Merrill Lynch, Pierce, Fenner & Smith
(Brokers & Dealers) Limited England
Merrill Lynch Europe Ltd. Cayman Islands,
British West Indies
Merrill Lynch France France
Merrill Lynch Capital Markets (France) S.A. France
Merrill Lynch (Asia Pacific) Limited Hong Kong
Merrill Lynch Far East Limited Hong Kong
Merrill Lynch Japan Incorporated Cayman Islands,
British West Indies
</TABLE>
- -----------------
/7/ Merrill Lynch Group, Inc. owns 100% of this corporation's outstanding
common voting stock. 100% of the outstanding preferred voting stock is
held by outside parties.
/8/ This corporation has more than 45 direct or indirect subsidiaries operating
in the United States and serving as either general partners or associate
general partners of limited partnerships.
/9/ Held through an intermediate subsidiary.
/10/ Partially owned by another indirect subsidiary of ML & Co.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
- -----------------------------
We consent to the incorporation by reference in the following Registration
Statements of Merrill Lynch & Co., Inc. and subsidiaries of our reports dated
February 28, 2000, (which express an unqualified opinion and which report on the
consolidated financial statements includes an explanatory paragraph relating to
a change in the method of accounting in 1998 for certain internal-use software
development costs) appearing in and incorporated by reference in this Annual
Report on Form 10-K for the year ended December 31, 1999.
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)
<PAGE>
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)
Registration Statement No. 333-92663 (Long-Term Compensation Plan for
Managers and Producers)
Filed on Form S-3:
Debt Securities:
Registration Statement No. 33-54218
<PAGE>
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
<PAGE>
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)
/s/ Deloitte & Touche LLP
New York, New York
March 9, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,827
<RECEIVABLES> 56,450
<SECURITIES-RESALE> 58,034
<SECURITIES-BORROWED> 41,707
<INSTRUMENTS-OWNED> 145,252<F1>
<PP&E> 3,117
<TOTAL-ASSETS> 328,071
<SHORT-TERM> 43,197
<PAYABLES> 52,720
<REPOS-SOLD> 64,954
<SECURITIES-LOANED> 6,624
<INSTRUMENTS-SOLD> 87,497<F2>
<LONG-TERM> 53,465
0
425
<COMMON> 630
<OTHER-SE> 11,747
<TOTAL-LIABILITY-AND-EQUITY> 328,071<F3>
<TRADING-REVENUE> 4,361
<INTEREST-DIVIDENDS> 15,097
<COMMISSIONS> 6,334
<INVESTMENT-BANKING-REVENUES> 3,614
<FEE-REVENUE> 4,753
<INTEREST-EXPENSE> 13,010
<COMPENSATION> 11,153
<INCOME-PRETAX> 4,078
<INCOME-PRE-EXTRAORDINARY> 4,078
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,618
<EPS-BASIC> 7.00
<EPS-DILUTED> 6.17
<FN>
<F1>Includes $10,005 of securities received as collateral, net of securities
pledged as collateral, and $9,699 of securities pledged as collateral,
recorded pursuant to the provisions of Statement of Financial Accounting
Standards No. 127 ("SFAS No. 127").
<F2>Includes $19,704 of obligation to return securities received as collateral,
recorded pursuant to the provisions of SFAS No. 127.
<F3>Includes $2,725 of Preferred Securities issued by Subsidiaries.
</FN>
</TABLE>
<PAGE>
Exhibit 99(i)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and December 25,
1998 and for each of the three years in the period ended December 31, 1999 and
have issued our report thereon dated February 28, 2000, which report expresses
an unqualified opinion and includes an explanatory paragraph for the change in
accounting method in 1998 for certain internal-use software development costs.
Such consolidated financial statements and our report thereon are incorporated
by reference in Part Two, Item 8, "Financial Statements and Supplementary Data,"
of this Annual Report on Form 10-K.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Merrill Lynch as of December 26,
1997, December 27, 1996 and December 29, 1995, the related consolidated
statements of earnings, changes in stockholders' equity, comprehensive income,
and cash flows for each of the two years in the period ended December 27, 1996
(none of which are presented or incorporated by reference herein); and we
expressed unqualified opinions on those consolidated financial statements. In
our opinion, the information set forth in Exhibit 12 under the captions "Ratio
of Earnings to Fixed Charges" and "Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends" for each of the five years in the period ended
December 31, 1999 included in this Annual Report on Form 10-K, is fairly stated,
in all material respects, in relation to the consolidated financial statements
from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
<PAGE>
Exhibit 99(ii)
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have audited the consolidated financial statements of Merrill Lynch & Co.,
Inc. and subsidiaries ("Merrill Lynch") as of December 31, 1999 and December 25,
1998 and for each of the three years in the period ended December 31, 1999 and
have issued our report thereon dated February 28, 2000, which report expresses
an unqualified opinion and includes an explanatory paragraph for the change in
accounting method in 1998 for certain internal-use software development costs.
Such consolidated financial statements and our report thereon are incorporated
by reference in Part Two, Item 8, "Financial Statements and Supplementary Data,"
of this Annual Report on Form 10-K.
We have also previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheets of Merrill Lynch as of December 26,
1997, December 27, 1996 and December 29, 1995, the related consolidated
statements of earnings, changes in stockholders' equity, comprehensive income,
and cash flows for each of the two years in the period ended December 27, 1996
(none of which are presented or incorporated by reference herein); and we
expressed unqualified opinions on those consolidated financial statements. In
our opinion, the information set forth in the "Selected Financial Data" under
the captions "Operating Results," "Financial Position," and "Common Share Data"
included in the 1999 Annual Report to Stockholders and incorporated by reference
in this Annual Report on Form 10-K, is fairly stated, in all material respects,
in relation to the consolidated financial statements from which it has been
derived.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2000
