SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
-------------
COMMISSION FILE NUMBER 1-7182
------
MERRILL LYNCH & CO., INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2740599
--------------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
4 WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080
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(Address of principal executive offices) (Zip Code)
(212) 449-1000
--------------------------------------------------------------------------------
Registrant's telephone number, including area code
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
399,067,937 shares of Common Stock and 2,583,689 Exchangeable Shares as of the
close of business on August 4, 2000. The Exchangeable Shares, which were issued
by Merrill Lynch & Co., Canada Ltd. in connection with the merger with Midland
Walwyn Inc., are exchangeable at any time into Common Stock on a one-for-one
basis and entitle holders to dividend, voting, and other rights equivalent to
Common Stock.
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. Financial Statements
-----------------------------
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------
JUNE 30, JUNE 25, PERCENT
(dollars in millions, except per share amounts) 2000 1999 INC.(DEC.)
------- ------- ----------
<S> <C> <C> <C>
NET REVENUES
Commissions $ 1,642 $ 1,592 3.1 %
Principal transactions 1,420 1,064 33.5
Investment banking 1,087 908 19.7
Asset management and portfolio service fees 1,413 1,159 21.9
Other 272 175 55.4
------- -------
Subtotal 5,834 4,898 19.1
------- -------
Interest and dividend revenues 5,065 3,732 35.7
Less interest expense 4,202 3,190 31.7
------- -------
Net interest profit 863 542 59.2
------- -------
TOTAL NET REVENUES 6,697 5,440 23.1
------- -------
NON-INTEREST EXPENSES
Compensation and benefits 3,443 2,729 26.2
Communications and technology 579 536 8.0
Occupancy and related depreciation 256 232 10.3
Advertising and market development 262 201 30.3
Brokerage, clearing, and exchange fees 196 170 15.3
Professional fees 166 143 16.1
Goodwill amortization 54 56 (3.6)
Other 363 342 6.1
------- -------
TOTAL NON-INTEREST EXPENSES 5,319 4,409 20.6
------- -------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 1,378 1,031 33.7
Income Tax Expense 427 310 37.7
Dividends on Preferred Securities Issued by Subsidiaries 49 48 2.1
------- -------
NET EARNINGS $ 902 $ 673 34.0
======= =======
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 892 $ 664 34.3
======= =======
EARNINGS PER COMMON SHARE
Basic $ 2.29 $ 1.80
======= =======
Diluted $ 2.01 $ 1.57
======= =======
DIVIDEND PAID PER COMMON SHARE $ 0.30 $ 0.27
======= =======
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 389.1 368.3
======= =======
Diluted 443.7 421.3
======= =======
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------
JUNE 30, JUNE 25, PERCENT
(dollars in millions, except per share amounts) 2000 1999 INC.(DEC.)
------- ------- ----------
<S> <C> <C> <C>
NET REVENUES
Commissions $ 3,794 $ 3,159 20.1 %
Principal transactions 3,207 2,509 27.8
Investment banking 2,083 1,540 35.3
Asset management and portfolio service fees 2,803 2,268 23.6
Other 510 308 65.6
-------- --------
Subtotal 12,397 9,784 26.7
-------- --------
Interest and dividend revenues 9,528 7,413 28.5
Less interest expense 7,981 6,491 23.0
-------- --------
Net interest profit 1,547 922 67.8
-------- --------
TOTAL NET REVENUES 13,944 10,706 30.2
-------- --------
NON-INTEREST EXPENSES
Compensation and benefits 7,251 5,490 32.1
Communications and technology 1,157 1,016 13.9
Occupancy and related depreciation 506 459 10.2
Advertising and market development 506 353 43.3
Brokerage, clearing, and exchange fees 388 324 19.8
Professional fees 313 261 19.9
Goodwill amortization 110 113 (2.7)
Other 760 663 14.6
-------- --------
TOTAL NON-INTEREST EXPENSES 10,991 8,679 26.6
-------- --------
EARNINGS BEFORE INCOME TAXES AND DIVIDENDS ON
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,953 2,027 45.7
Income Tax Expense 916 648 41.4
Dividends on Preferred Securities Issued by Subsidiaries 98 97 1.0
-------- --------
NET EARNINGS $ 1,939 $ 1,282 51.2
======== ========
NET EARNINGS APPLICABLE TO COMMON STOCKHOLDERS $ 1,920 $ 1,263 52.0
======== ========
EARNINGS PER COMMON SHARE
Basic $ 4.98 $ 3.45
======== ========
Diluted $ 4.38 $ 3.02
======== ========
DIVIDENDS PAID PER COMMON SHARE $ 0.57 $ 0.51
======== ========
AVERAGE SHARES USED IN COMPUTING
EARNINGS PER COMMON SHARE
Basic 385.4 366.2
======== ========
Diluted 438.0 418.5
======== ========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(dollars in millions) 2000 1999
---------------------------------------------------------------------------- ------- -----------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 11,401 $ 10,827
CASH AND SECURITIES SEGREGATED FOR REGULATORY PURPOSES
OR DEPOSITED WITH CLEARING ORGANIZATIONS 5,929 5,880
RECEIVABLES UNDER RESALE AGREEMENTS AND SECURITIES BORROWED TRANSACTIONS 107,094 99,741
MARKETABLE INVESTMENT SECURITIES 18,519 10,145
TRADING ASSETS, AT FAIR VALUE
Equities and convertible debentures 28,261 23,593
Corporate debt and preferred stock 18,165 20,346
Contractual agreements 17,869 22,701
U.S. Government and agencies 8,750 15,376
Non-U.S. governments and agencies 8,148 4,892
Mortgages, mortgage-backed, and asset-backed 8,194 7,394
Municipals and money markets 3,191 2,427
--------- ---------
92,578 96,729
Securities received as collateral, net of securities pledged as collateral 12,292 10,005
--------- ---------
Total 104,870 106,734
--------- ---------
SECURITIES PLEDGED AS COLLATERAL 9,818 9,699
--------- ---------
OTHER RECEIVABLES
Customers (net of allowance for doubtful accounts of $79 in 2000 and $56 in 1999) 44,650 39,850
Brokers and dealers 15,638 9,095
Interest and other 7,497 7,505
--------- ---------
Total 67,785 56,450
--------- ---------
INVESTMENTS OF INSURANCE SUBSIDIARIES 4,002 4,097
LOANS, NOTES, AND MORTGAGES (net of allowance for loan losses of
$171 in 2000 and $146 in 1999) 12,133 11,187
OTHER INVESTMENTS 3,472 3,410
EQUIPMENT AND FACILITIES (net of accumulated depreciation and
amortization of $4,398 in 2000 and $4,069 in 1999) 3,172 3,117
GOODWILL (net of accumulated amortization of $626 in 2000 and $543 in 1999) 4,592 4,952
OTHER ASSETS 2,321 1,832
--------- ---------
TOTAL ASSETS $ 355,108 $ 328,071
========= =========
</TABLE>
4
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
(dollars in millions, except per share amount) 2000 1999
----------------------------------------------------------------------------------------- ------- -----------
<S> <C> <C>
LIABILITIES
PAYABLES UNDER REPURCHASE AGREEMENTS AND
SECURITIES LOANED TRANSACTIONS $ 83,613 $ 71,578
COMMERCIAL PAPER AND OTHER SHORT-TERM BORROWINGS 20,556 25,595
DEMAND AND TIME DEPOSITS 29,902 17,602
TRADING LIABILITIES, AT FAIR VALUE
Contractual agreements 17,812 27,030
Equities and convertible debentures 26,544 20,231
U.S. Government and agencies 9,532 10,816
Non-U.S. governments and agencies 6,766 6,311
Corporate debt, preferred stock, and other 3,804 3,405
--------- ---------
Total 64,458 67,793
--------- ---------
OBLIGATION TO RETURN SECURITIES RECEIVED AS COLLATERAL 22,110 19,704
--------- ---------
OTHER PAYABLES
Customers 23,132 22,722
Brokers and dealers 8,872 11,397
Interest and other 18,538 18,601
--------- ---------
Total 50,542 52,720
--------- ---------
LIABILITIES OF INSURANCE SUBSIDIARIES 3,989 4,087
LONG-TERM BORROWINGS 61,489 53,465
--------- ---------
TOTAL LIABILITIES 336,659 312,544
--------- ---------
PREFERRED SECURITIES ISSUED BY SUBSIDIARIES 2,722 2,725
--------- ---------
STOCKHOLDERS' EQUITY
PREFERRED STOCKHOLDERS' EQUITY 425 425
--------- ---------
COMMON STOCKHOLDERS' EQUITY
Shares exchangeable into common stock 39 59
Common stock, par value $1.33 1/3 per share; authorized: 1,000,000,000 shares;
issued: 2000 - 472,716,448 shares; 1999 - 472,714,925 shares 630 630
Paid-in capital 3,065 1,863
Accumulated other comprehensive loss (net of tax) (400) (389)
Retained earnings 14,368 12,667
--------- ---------
17,702 14,830
Less: Treasury stock, at cost: 2000 - 84,320,231 shares; 1999 - 104,949,595 shares 1,407 1,817
Employee stock transactions 993 636
--------- ---------
TOTAL COMMON STOCKHOLDERS' EQUITY 15,302 12,377
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 15,727 12,802
--------- ---------
TOTAL LIABILITIES, PREFERRED SECURITIES ISSUED BY SUBSIDIARIES,
AND STOCKHOLDERS' EQUITY $ 355,108 $ 328,071
========= =========
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
-------------------------------
(dollars in millions) JUNE 30, JUNE 25,
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,939 $ 1,282
Noncash items included in earnings:
Depreciation and amortization 404 336
Policyholder reserves 97 104
Goodwill amortization 110 113
Amortization of stock-based compensation 244 222
Other 251 179
(Increase) decrease in operating assets(a):
Trading assets 4,678 4,727
Cash and securities segregated for regulatory purposes
or deposited with clearing organizations (49) 869
Receivables under resale agreements and securities borrowed transactions (7,353) (18,803)
Customer receivables (4,823) (5,729)
Brokers and dealers receivables (6,543) 1,500
Other (311) (1,397)
Increase (decrease) in operating liabilities(a):
Trading liabilities (3,335) 8,442
Payables under repurchase agreements and securities loaned transactions 12,035 11,460
Customer payables 410 (2,606)
Brokers and dealers payables (2,525) 116
Other 40 1,927
-------- --------
CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (4,731) 2,742
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (payments for):
Maturities of available-for-sale securities 4,575 2,666
Sales of available-for-sale securities 2,308 1,808
Purchases of available-for-sale securities (16,036) (4,804)
Maturities of held-to-maturity securities 464 329
Purchases of held-to-maturity securities (337) (346)
Loans, notes, and mortgages (960) (317)
Acquisitions, net of cash acquired - (20)
Other investments and other assets (479) (984)
Equipment and facilities (459) (425)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (10,924) (2,093)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments for):
Commercial paper and other short-term borrowings (5,039) (3,052)
Demand and time deposits 12,300 2,700
Issuance and resale of long-term borrowings 17,178 11,395
Settlement and repurchase of long-term borrowings (8,395) (12,194)
Issuance of treasury stock 414 149
Other common and preferred stock transactions 9 (184)
Dividends (238) (206)
-------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 16,229 (1,392)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 574 (743)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 10,827 12,530
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,401 $ 11,787
======== ========
(a) Net of effects of acquisitions.
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 290 $ 33
Interest 7,631 6,360
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
MERRILL LYNCH & CO., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(dollars in millions, except per share amounts)
--------------------------------------------------------------------------------
NOTE 1. BASIS OF PRESENTATION
--------------------------------------------------------------------------------
The Consolidated Financial Statements include the accounts of Merrill Lynch &
Co., Inc. ("ML & Co.") and subsidiaries (collectively, "Merrill Lynch"). All
material intercompany balances have been eliminated. The December 31, 1999
consolidated balance sheet was derived from the audited financial statements.
The interim consolidated financial statements for the three- and six-month
periods are unaudited; however, in the opinion of Merrill Lynch management, all
adjustments, consisting only of normal recurring accruals, necessary for a fair
statement of the results of operations have been included.
These unaudited financial statements should be read in conjunction with the
audited financial statements included in Merrill Lynch's Annual Report included
as an exhibit to Form 10-K for the year ended December 31, 1999. The nature of
Merrill Lynch's business is such that the results of any interim period are not
necessarily indicative of results for a full year. Certain reclassifications
have also been made to prior period financial statements, where appropriate, to
conform to the current period presentation.
--------------------------------------------------------------------------------
NOTE 2. SHORT-TERM BORROWINGS
--------------------------------------------------------------------------------
Short-term borrowings at June 30, 2000 and December 31, 1999 are presented
below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
JUNE 30, DEC. 31,
2000 1999
------- -------
<S> <C> <C>
PAYABLES UNDER REPURCHASE AGREEMENTS
AND SECURITIES LOANED TRANSACTIONS
Repurchase agreements $73,486 $64,954
Securities loaned transactions 10,127 6,624
------- -------
Total $83,613 $71,578
======= =======
COMMERCIAL PAPER AND OTHER SHORT-TERM
BORROWINGS
Commercial paper $18,129 $24,198
Bank loans and other 2,427 1,397
------- -------
Total $20,556 $25,595
======= =======
DEMAND AND TIME DEPOSITS
Demand $ 3,381 $ 3,498
Time 26,521 14,104
------- -------
Total $29,902 $17,602
======= =======
--------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
--------------------------------------------------------------------------------
NOTE 3. SEGMENT INFORMATION
--------------------------------------------------------------------------------
In reporting to management, Merrill Lynch's operating results are categorized
into three business segments: the Corporate and Institutional Client Group
("CICG"), the Private Client Group ("PCG") and Merrill Lynch Investment Managers
("MLIM"). Prior period amounts have been restated to distribute the Corporate
tax benefit to the segments and to more closely align revenues and expenses with
segment balance sheets. For information on each segment's activities, see
Management's Discussion and Analysis - Business Segments and the 1999 Annual
Report included as an exhibit to Form 10-K.
Operating results by business segment follow:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS TOTAL
-------- ------- ------ --------- --------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
JUNE 30, 2000
Non-interest revenues $ 2,684 $ 2,603 $ 589 $ (42)(a) $ 5,834
Net interest revenue(b) 495 389 13 (34)(c) 863
-------- ------- ------ ------ --------
Net revenues 3,179 2,992 602 (76) 6,697
Non-interest expenses 2,152 2,674 480 13 (d) 5,319
-------- ------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,027 318 122 (89) 1,378
Income tax expense (benefit) 314 102 38 (27) 427
Dividends on preferred securities
issued by subsidiaries - - - 49 49
-------- ------- ------ ------ --------
Net earnings (loss) $ 713 $ 216 $ 84 $ (111) $ 902
======== ======= ====== ====== ========
Total assets $277,883 $70,435 $2,198 $4,592 $355,108
======== ======= ====== ====== ========
-------------------------------------------------------------------------------------------------------------------
8
<PAGE>
--------------------------------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS TOTAL
-------- ------- ------ --------- --------
THREE MONTHS ENDED
JUNE 25, 1999
Non-interest revenues $ 2,074 $ 2,345 $ 533 $ (54)(a) $ 4,898
Net interest revenue(b) 312 283 3 (56)(c) 542
-------- ------- ------ ------ --------
Net revenues 2,386 2,628 536 (110) 5,440
Non-interest expenses 1,719 2,263 427 - (d) 4,409
-------- ------- ------ ------ --------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 667 365 109 (110) 1,031
Income tax expense (benefit) 185 124 35 (34) 310
Dividends on preferred securities
issued by subsidiaries - - - 48 48
-------- ------- ------ ------ --------
Net earnings (loss) $ 482 $ 241 $ 74 $ (124) $ 673
======== ======= ====== ====== ========
Total assets $265,436 $52,011 $2,314 $4,979 $324,740
======== ======= ====== ====== ========
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the elimination of intersegment revenues.
(b) Management views interest income net of interest expense in evaluating
results.
(c) Represents Mercury financing costs.
(d) Represents goodwill amortization of $54 million and $56 million, net of
elimination of intersegment expenses of $41 million and $56 million, for the
three months ended June 30, 2000 and June 25, 1999, respectively.
9
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS TOTAL
------ ------ ------ --------- -------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED
JUNE 30, 2000
Non-interest revenues $5,734 $5,607 $1,189 $(133)(a) $12,397
Net interest revenue(b) 825 773 23 (74)(c) 1,547
------ ------ ------ ----- -------
Net revenues 6,559 6,380 1,212 (207) 13,944
Non-interest expenses 4,424 5,583 983 1 (d) 10,991
------ ------ ------ ----- -------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 2,135 797 229 (208) 2,953
Income tax expense (benefit) 625 280 74 (63) 916
Dividends on preferred securities
issued by subsidiaries - - - 98 98
------ ------ ------ ----- -------
Net earnings (loss) $1,510 $ 517 $ 155 $(243) $ 1,939
====== ====== ====== ===== =======
------------------------------------------------------------------------------------------------------------------
CORPORATE
CICG PCG MLIM ITEMS TOTAL
------ ------ ------ --------- -------
SIX MONTHS ENDED
JUNE 25, 1999
Non-interest revenues $4,198 $4,683 $1,020 $(117)(a) $ 9,784
Net interest revenue(b) 493 542 2 (115)(c) 922
------ ------ ------ ----- -------
Net revenues 4,691 5,225 1,022 (232) 10,706
Non-interest expenses 3,349 4,482 855 (7)(d) 8,679
------ ------ ------ ----- -------
Earnings (loss) before income taxes
and dividends on preferred securities
issued by subsidiaries 1,342 743 167 (225) 2,027
Income tax expense (benefit) 388 274 59 (73) 648
Dividends on preferred securities
issued by subsidiaries - - - 97 97
------ ------ ------ ----- -------
Net earnings (loss) $ 954 $ 469 $ 108 $(249) $ 1,282
====== ====== ====== ===== =======
------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Represents the elimination of intersegment revenues.
(b) Management views interest income net of interest expense in evaluating
results.
(c) Represents Mercury financing costs.
(d) Represents goodwill amortization of $110 million and $113 million, net of
elimination of intersegment expenses of $109 million and $120 million, for
the six months ended June 30, 2000 and June 25, 1999, respectively.
10
<PAGE>
--------------------------------------------------------------------------------
NOTE 4. COMPREHENSIVE INCOME
--------------------------------------------------------------------------------
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net earnings $902 $673 $1,939 $1,282
---- ---- ------ ------
Other comprehensive income (loss), net of tax:
Currency translation adjustment (59) (42) (68) (159)
Net unrealized gain (loss) on investment
securities available-for-sale 47 (5) 57 (38)
---- ---- ------ ------
Total other comprehensive loss, net (12) (47) (11) (197)
---- ---- ------ ------
Comprehensive income $890 $626 $1,928 $1,085
==== ==== ====== ======
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
NOTE 5. EARNINGS PER COMMON SHARE
--------------------------------------------------------------------------------
Information relating to earnings per common share computations follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings $ 902 $ 673 $ 1,939 $ 1,282
Preferred stock dividends 10 9 19 19
-------- -------- -------- --------
Net earnings applicable to
common stockholders $ 892 $ 664 $ 1,920 $ 1,263
======== ======== ======== ========
(shares in thousands)
Weighted-average shares outstanding 389,077 368,273 385,359 366,156
-------- -------- -------- --------
Effect of dilutive instruments(1)(2):
Employee stock options 32,908 30,984 31,936 30,408
FCCAAP shares 14,667 16,640 14,387 16,594
Restricted units 6,988 5,323 6,285 5,242
ESPP shares 25 47 51 64
-------- -------- -------- --------
Dilutive potential common shares 54,588 52,994 52,659 52,308
-------- -------- -------- --------
Total weighted-average diluted shares 443,665 421,267 438,018 418,464
======== ======== ======== ========
------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 2.29 $ 1.80 $ 4.98 $ 3.45
Diluted earnings per common share $ 2.01 $ 1.57 $ 4.38 $ 3.02
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) During the 2000 second quarter and the 1999 second quarter, there were 404
thousand and 3,785 thousand instruments, respectively, that were
considered antidilutive and were not included in the above computations.
(2) See Note 11 to Consolidated Financial Statements in the 1999 Annual
Report included as an exhibit to Form 10-K for a description of these
instruments.
11
<PAGE>
--------------------------------------------------------------------------------
NOTE 6. DERIVATIVES, COMMITMENTS, AND OTHER CONTINGENCIES
--------------------------------------------------------------------------------
Merrill Lynch enters into various derivative contracts to meet clients' needs
and to manage its own market risks. Derivative contracts often involve future
commitments to exchange interest payment streams or currencies (such as interest
rate and currency swaps or foreign exchange forwards) or to purchase or sell
other financial instruments at specified terms on a specified date. Options, for
example, can be purchased or written on a wide range of financial instruments
such as securities, currencies, futures, and various market indices.
The notional or contractual amounts of derivatives provide only a measure of
involvement in these types of transactions and represent neither the amounts
subject to the various types of market risk nor the future cash requirements
under these instruments. The notional or contractual amounts of derivatives used
for trading purposes and included in trading inventory by type of risk follow:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
INTEREST EQUITY COMMODITY
(in billions) RATE(1)(2) CURRENCY(3) PRICE PRICE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JUNE 30, 2000
-------------
Swap agreements $ 2,586 $ 180 $ 45 $ 1
Forward contracts 161 175 4 5
Futures contracts 214 4 12 2
Options purchased 64 120 46 2
Options written 76 70 54 3
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
----------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain derivatives subject to interest rate risk are also exposed to the
credit spread risk of the underlying financial instrument.
(2) Forward contracts subject to interest rate risk principally represent
"To Be Announced" mortgage pools that bear interest rate as well as
principal prepayment risk.
(3) Included in the currency risk category are certain contracts that are also
subject to interest rate risk.
12
<PAGE>
The notional or contractual amounts of non-trading derivatives used to hedge
market risk exposures on non-trading assets and liabilities at June 30, 2000 and
December 31, 1999 follow:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
JUNE 30, DEC. 31,
(in billions) 2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
Borrowings:
Interest rate risk(1) $ 40 $ 44
Currency risk 1 1
Equity risk 7 3
Investment securities(2) 13 11
Resale and repurchase agreements(2) 6 6
Customer receivables(2) 7 6
Investment in non-U.S. subsidiaries(3) 4 3
Other 3 3
---------------------------------------------------------------------------------
</TABLE>
(1) Includes $9 billion and $10 billion of instruments that also contain
currency risk at June 30, 2000 and December 31, 1999, respectively,
and $4 billion of instruments that also contain equity risk at both
June 30, 2000 and December 31, 1999.
(2) Primarily hedging interest rate risk.
(3) Hedging currency risk.
Most of these derivatives are entered into with Merrill Lynch's derivative
dealer subsidiaries, which hedge interest rate, currency, and equity risks in
the normal course of their trading activities. Realized gains and losses on
early terminations of derivatives are deferred over the remaining lives of the
hedged assets or liabilities. At June 30, 2000, there were $13 million in
deferred gains relating to a derivative contract terminated during 1999.
In the normal course of business, Merrill Lynch enters into underwriting
commitments and commitments to extend credit. Settlement of these commitments as
of June 30, 2000 would not have a material effect on the consolidated financial
condition of Merrill Lynch.
As of June 30, 2000, Merrill Lynch has been named as parties in various actions,
some of which involve claims for substantial amounts. Although the results of
legal actions cannot be predicted with certainty, it is the opinion of
management that the resolution of these actions will not have a material adverse
effect on Merrill Lynch's financial condition; however, such resolution could
have a material adverse impact on quarterly operating results in future periods,
depending in part on the results for such periods. Refer to Part II - Other
Information for additional information on legal proceedings.
--------------------------------------------------------------------------------
NOTE 7. REGULATORY REQUIREMENTS
--------------------------------------------------------------------------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a registered
broker-dealer, is subject to the net capital requirements of Rule 15c3-1 under
the Securities Exchange Act of 1934. Under the alternative method permitted by
this rule, the minimum required net capital, as defined, shall not be less than
2% of aggregate debit items arising from customer transactions. At June 30,
2000, MLPF&S's regulatory net capital of $3.7 billion was 13% of aggregate debit
items, and its regulatory net capital in excess of the minimum required was $3.1
billion.
Merrill Lynch International ("MLI"), a U.K. registered broker-dealer, is subject
to the capital requirements of the Financial Services Authority ("FSA").
Financial resources, as defined, must exceed the total financial resources
requirement of the FSA. At June 30, 2000, MLI's financial resources were $4.3
billion and exceeded the minimum requirement by $1.0 billion.
13
<PAGE>
Merrill Lynch Government Securities Inc. ("MLGSI"), a primary dealer in U.S.
Government securities, is subject to the capital adequacy requirements of the
Government Securities Act of 1986. This rule requires dealers to maintain liquid
capital in excess of market and credit risk, as defined, by 20% (a 1.2-to-1
capital-to-risk standard). At June 30, 2000, MLGSI's liquid capital of $1.6
billion was 371% of its total market and credit risk, and liquid capital in
excess of the minimum required was $1.1 billion.
--------------------------------------------------------------------------------
NOTE 8. SUBSEQUENT EVENTS
--------------------------------------------------------------------------------
On July 14, 2000, Merrill Lynch acquired Herzog, Heine, Geduld, Inc. ("Herzog"),
a leading Nasdaq market maker, through an exchange offer followed by a merger of
a wholly-owned subsidiary of Merrill Lynch & Co., Inc. with and into Herzog.
Pursuant to the offer and the merger, each Herzog shareholder was entitled to
receive 141.87751 shares of ML & Co. common stock for each Herzog share held. A
total of 8,550,300 shares of ML & Co. common stock will be issued in connection
with this transaction. Of this amount, 8,466,597 shares were issued on July 14,
2000, and 83,703 shares will be issued upon receipt of required documents from
certain Herzog shareholders.
The merger will be accounted for as a pooling-of-interests and is not expected
to have a significant impact on the results of operations, financial position,
and cash flows of Merrill Lynch.
On July 18, 2000, Merrill Lynch's Board of Directors declared a two-for-one
common stock split, to be effected in the form of a 100% stock dividend, payable
on August 31, 2000 to stockholders of record on August 4, 2000. The par value of
the common stock will remain at $1.33 1/3 per share. Accordingly, an adjustment
from paid-in capital to common stock will be required to preserve the par value
of the post-split shares. Pro forma earnings per share, giving retroactive
effect to the two-for-one common stock split, for the three- and six-month
periods ended June 30, 2000 and June 25, 1999 follow:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Earning per common share:
Basic $1.15 $0.90 $2.49 $1.72
Diluted $1.01 $0.79 $2.19 $1.51
Weighted average shares
(in millions):
Basic 778.2 736.5 770.7 732.3
Diluted 887.3 842.5 876.0 836.9
--------------------------------------------------------------------------------------------------
</TABLE>
Financial information contained elsewhere in these financial statements has not
been adjusted to reflect the impact of the common stock split.
14
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
To the Board of Directors and Stockholders of
Merrill Lynch & Co., Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Merrill Lynch & Co., Inc. and subsidiaries ("Merrill Lynch") as of June 30,
2000, and the related condensed consolidated statements of earnings for the
three- and six-month periods ended June 30, 2000 and June 25, 1999, and the
consolidated statements of cash flows for the six-month periods ended June 30,
2000 and June 25, 1999. These financial statements are the responsibility of
Merrill Lynch's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America
(hereinafter referred to as "generally accepted auditing standards"), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Merrill Lynch as of December 31,
1999, and the related consolidated statements of earnings, changes in
stockholders' equity, comprehensive income and cash flows for the year then
ended (not presented herein); and in our report dated February 28, 2000, we
expressed an unqualified opinion and included an explanatory paragraph for the
change in accounting method in 1998 for certain internal-use software
development costs to conform with Statement of Position 98-1. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1999 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Deloitte & Touche LLP
New York, New York
August 11, 2000
15
<PAGE>
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Merrill Lynch & Co., Inc. ("ML & Co." and, together with its subsidiaries and
affiliates, "Merrill Lynch") is a holding company that, through its subsidiaries
and affiliates, provides investment, financing, advisory, insurance, and related
services worldwide. Merrill Lynch conducts its businesses in global financial
markets that are influenced by numerous unpredictable factors including economic
conditions, monetary policies, liquidity, international and regional political
events, regulatory developments, the competitive environment, and investor
sentiment. These conditions or events can significantly affect the volatility of
financial markets. While greater volatility increases risk, it may also increase
order flow in businesses such as trading and brokerage. Revenues and net
earnings may vary significantly from period to period due to these unpredictable
factors and the resulting market volatility.
The financial services industry continues to be affected by the intensifying
competitive environment, as demonstrated by consolidation through mergers and
acquisitions, as well as diminishing margins in many mature products and
services, and competition from new entrants as well as established competitors
using the internet to establish or expand their businesses. In addition, the
passage of the Gramm-Leach-Bliley Act in November of 1999 represented a
significant accomplishment in the effort to modernize the financial services
industry in the U.S. by repealing anachronistic laws that separated commercial
banking, investment banking and insurance activities. The Gramm-Leach-Bliley
Act, together with other changes in the financial services industry made
possible by previous reforms, has increased the number of companies competing
for a similar customer base.
In addition to providing historical information, Merrill Lynch may make or
publish forward-looking statements about management expectations, strategic
objectives, business prospects, anticipated financial performance, and other
similar matters. A variety of factors, many of which are beyond its control,
affect the operations, performance, business strategy, and results of Merrill
Lynch and could cause actual results and experience to differ materially from
the expectations expressed in these statements. These factors include, but are
not limited to, the factors listed in the previous paragraphs, as well as
actions and initiatives taken by both current and potential competitors, the
impact of current pending and future legislation and regulation throughout the
world, and the other risks detailed in the following sections.
MERRILL LYNCH UNDERTAKES NO RESPONSIBILITY TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS.
--------------------------------------------------------------------------------
BUSINESS ENVIRONMENT
--------------------------------------------------------------------------------
Global financial markets experienced a slowdown in activity in the second
quarter of 2000, as evidenced by a decline in stock and bond issuances and lower
exchange trading volumes. The Federal Reserve Board's campaign to curb inflation
through a series of interest rate hikes beginning in June of 1999 started to
effect the U.S. economy, as evidenced by a mild decline in consumer spending. In
addition, the downturns experienced in market indices, such as the mid-April dip
in the Nasdaq Composite Index, led to a decline in investor confidence and a
less favorable IPO environment.
Long-term U.S. interest rates, as measured by the yield on the 10-year U.S.
Treasury bond, remained essentially unchanged from the end of the first quarter,
ending the period at approximately 6.01%. Short-term U.S. rates, however, were
on the rise, after the Federal Reserve Board raised interest rates a half a
point to the highest level since 1991, the sixth interest rate hike over the
past year. Short-term interest rates in Europe generally increased during the
second quarter, and were higher compared with the 1999 second quarter. Credit
spreads, which represent the risk premium over the risk-free rate paid by an
issuer (based on the issuer's perceived creditworthiness), widened in the second
quarter of 2000.
16
<PAGE>
U.S. equity indices, which achieved extraordinary gains in 1999, declined
substantially in the 2000 second quarter. Investor concern about the direction
of interest rates, inflation, and stock overvaluation contributed to market
corrections in most equity indices. The technology-heavy Nasdaq Composite Index
was down 13.3% from the start of the quarter, but up 47.7% from June of 1999.
The decline for the quarter was due in part to increased investor emphasis on
future earnings, which caused a shift from growth to value stocks. The Dow Jones
Industrial Average dropped a modest 4.3% during the quarter, and was down 4.8%
from the end of the second quarter of 1999. The S&P 500 also fell slightly from
the end of the 2000 first quarter, but advanced 6.0% from the end of the
corresponding 1999 period.
Global equity markets, as measured by the Dow Jones World Index, declined 5.9%
during the quarter, but were up 14.3% since the end of the second quarter of
1999. The renewed strength of both the Japanese yen and the euro, and concern
over rising U.S. interest rates prevented many global equity markets from
achieving any significant gains. During the quarter, Tokyo stocks fell 10% in
U.S. dollar and 8% in local currency terms as the Bank of Japan maintained its
zero-interest rate policy. With the exception of Venezuela, which led all Dow
Jones country indices with a 26% gain, Latin American equity markets were
primarily flat compared with the first quarter. European markets also suffered
during the quarter, as the European Central Bank raised its key interest rate
during the quarter in order to control inflation.
Rising interest rates contributed to a decrease in global debt underwriting
volume during the second quarter of 2000, which dropped to $617 billion from
$772 billion in the 2000 first quarter and $816 billion in the 1999 second
quarter, according to Thomson Financial Securities Data. Equity underwriting was
stronger in dollar terms, as total proceeds from IPO underwriting in the U.S.
reached $25 billion for the quarter, which was only slightly lower than the $29
billion record achieved in the 1999 fourth quarter. However, only 104 companies
entered the market compared with 141 during the first quarter of 2000 and 168
during the fourth quarter of 1999, as the market for initial public offerings of
dot-com retailers and Web-based business-to-business companies disappeared.
After a strong beginning, U.S. merger and acquisition activities tapered off in
the 2000 second quarter, due in part to the higher cost of financing deals. U.S.
announced mergers and acquisitions totalled only $251 billion in the quarter,
compared with $490 billion in the second quarter of 1999, and $566 billion in
the first quarter of 2000, according to Thomson Financial Securities Data. The
first quarter of 2000 benefited from the AOL/Time Warner merger. However, global
announced mergers and acquisitions remained strong for the first half of 2000 at
$1.7 trillion compared with $1.5 trillion in the first half of 1999, due to both
the buoyant first quarter and strong levels of merger activity in Europe.
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 market volatility on
Merrill Lynch's business as a whole.
17
<PAGE>
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED % INCREASE
------------------------------------- 2Q00 VERSUS
JUNE 30, MARCH 31, JUNE 25, ---------------
(dollars in millions, except per share amounts) 2000 2000 1999 1Q00 2Q99
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $10,899 $11,026 $8,630 (1)% 26%
Net revenues 6,697 7,247 5,440 (8) 23
Pre-tax earnings 1,378 1,575 1,031 (13) 34
Net earnings 902 1,037 673 (13) 34
Net earnings applicable to common stockholders 892 1,028 664 (13) 34
Earnings per common share
Basic 2.29 2.69 1.80 (15) 27
Diluted 2.01 2.38 1.57 (16) 28
Annualized return on average common
stockholders' equity 24.3 % 31.1 % 25.4 %
Effective tax rate 31.0 31.0 30.1
-------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following discussion compares the second quarters of 2000 and 1999 and,
where deemed appropriate, contrasts the second and first quarters of 2000.
Merrill Lynch's 2000 second quarter net earnings were $902 million, the second
highest quarterly earnings ever, up 34% from the $673 million reported in the
1999 second quarter, and down 13% from the record $1.037 billion reported in the
first quarter of 2000. Earnings per common share were $2.29 basic and $2.01
diluted, compared with $1.80 basic and $1.57 diluted in the 1999 second quarter.
Net revenues were $6.7 billion, up 23% from the 1999 second quarter, as new
highs were achieved in asset management and portfolio service fees, underwriting
fees, and net interest income.
Annualized return on common equity was 24.3% in the second quarter of 2000. The
pre-tax profit margin was 20.6%.
For the first half of 2000, net earnings reached a record $1.9 billion, up 51%
from the previous record of $1.3 billion set in the first half of 1999.
Year-to-date earnings per common share were $4.98 basic and $4.38 diluted,
compared with $3.45 basic and $3.02 diluted in the comparable period a year ago.
Annualized return on average common stockholders' equity was 27.6% for the first
six months of 2000 versus 25.0% for the first six months of 1999.
Commissions revenues are summarized as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 25, % JUNE 30, JUNE 25, %
(in millions) 2000 1999 INC.(DEC.) 2000 1999 INC.(DEC.)
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Listed and over-the-counter $ 903 $ 914 (1)% $2,156 $1,796 20 %
Mutual funds 525 469 12 1,186 952 25
Other 214 209 2 452 411 10
------ ------ ------ ------
Total $1,642 $1,592 3 $3,794 $3,159 20
====== ====== ====== ======
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Commissions revenues were $1.6 billion, up 3% from the 1999 second quarter,
primarily due to higher mutual fund sales. The growth in Unlimited Advantage
(Service Mark) and other asset-priced services resulted in the shift of certain
revenues previously recorded as commissions to asset management and portfolio
service fees.
Net trading revenues, representing principal transactions revenues and related
net interest, are presented in the table below. Interest revenue and expense
amounts are based on management's assessment of the cost to finance trading
positions, after consideration of the underlying liquidity of these positions.
Trading and related hedging and financing activities affect the recognition of
both principal transactions revenues and net interest and dividend revenues. In
assessing the profitability of its trading activities, Merrill Lynch aggregates
net interest and principal transactions revenues. For financial reporting
purposes, however, realized and unrealized gains and losses on trading
positions, including hedges, are recorded in principal transactions revenues.
The net interest carry (i.e., the spread representing interest earned less
financing costs) for trading positions, including hedges, is recorded either as
principal transactions revenues or net interest revenues, depending on the
nature of the specific instruments. Changes in the composition of trading
inventories and hedge positions can cause the recognition of revenues within
these categories to fluctuate.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
PRINCIPAL TRANSACTIONS NET INTEREST NET TRADING
REVENUES REVENUES REVENUES
---------------------- ----------------- ------------------
(in millions) 2000 1999 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER
Equities and equity derivatives $ 770 $ 429 $ 122 $ 134 $ 892 $ 563
Debt and debt derivatives 650 635 103 87 753 722
------ ------ ----- ----- ------ ------
Total $1,420 $1,064 $ 225 $ 221 $1,645 $1,285
====== ====== ===== ===== ====== ======
FIRST HALF
Equities and equity derivatives $1,958 $1,097 $ 187 $ 148 $2,145 $1,245
Debt and debt derivatives 1,249 1,412 241 234 1,490 1,646
------ ------ ----- ----- ------ ------
Total $3,207 $2,509 $ 428 $ 382 $3,635 $2,891
====== ====== ===== ===== ====== ======
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net trading revenues were $1.6 billion, up 28% from $1.3 billion in the 1999
second quarter primarily as a result of higher revenues from equities and equity
derivatives.
Equities and equity derivatives net trading revenues were $892 million, up 58%
from the second quarter of 1999, primarily driven by an increase in global
equity portfolio trading. Higher trading volume in U.S. and global equity
markets also contributed to the year-over-year increase.
Debt and debt derivatives net trading revenues were $753 million, up 4% from the
second quarter a year ago, due to higher revenues from U.S. debt derivatives and
mortgages, partially offset by lower revenues from global high-yield secondary
trading.
19
<PAGE>
Investment banking revenues were $1.1 billion in the second quarter of 2000, up
20% from the second quarter a year ago.
A summary of Merrill Lynch's investment banking revenues follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 % INC. 2000 1999 % INC.
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Underwriting $ 720 $ 594 21% $1,343 $1,021 32%
Strategic advisory services 367 314 17 740 519 43
------ ----- ------ ------
Total $1,087 $ 908 20 $2,083 $1,540 35
====== ===== ====== ======
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Underwriting revenues rose 21% from the 1999 second quarter to reach a record
$720 million, led by strong equity underwriting. Merrill Lynch retained its
position as leading underwriter of total debt and equity offerings in the U.S.
and global markets during the second quarter of 2000. In addition, Merrill Lynch
remained number one in U.S. and global debt underwriting. Merrill Lynch's
underwriting market share information based on transaction value follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------
JUNE 30, 2000 JUNE 25, 1999
---------------- ---------------
MARKET MARKET
SHARE RANK SHARE RANK
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. PROCEEDS
Debt 15.5 % 1 14.2 % 1
Equity 18.2 2 11.9 3
Debt and equity 15.8 1 14.0 1
GLOBAL PROCEEDS
Debt 12.1 1 11.6 1
Equity 13.4 3 11.1 3
Debt and equity 12.2 1 11.7 1
----------------------------------------------------------------------------------
</TABLE>
Source: Thomson Financial Securities Data statistics based on full credit to
book manager.
Strategic advisory services fees increased 17% from the 1999 second quarter to
$367 million, primarily as a result of higher levels of merger and acquisition
activity during the quarter. Merrill Lynch's merger and acquisition market share
information based on transaction value follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
THREE MONTHS ENDED
--------------------------------------------
JUNE 30, 2000 JUNE 25, 1999
---------------- ------------------
MARKET MARKET
SHARE RANK SHARE RANK
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMPLETED TRANSACTIONS
U.S. 42.9 % 2 23.1 % 3
Global 44.8 3 22.2 3
ANNOUNCED TRANSACTIONS
U.S. 21.4 4 37.8 2
Global 15.0 6 32.4 2
----------------------------------------------------------------------------------
</TABLE>
Source: Thomson Financial Securities Data statistics based on full credit to
both target and acquiring companies' advisors.
20
<PAGE>
A summary of asset management and portfolio service fees is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 % INC. 2000 1999 % INC.
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset management fees $ 597 $ 545 10 % $1,235 $1,070 15 %
Portfolio service fees 546 362 51 1,029 695 48
Account fees 133 130 2 268 257 4
Other fees 137 122 12 271 246 10
------ ------ ------ ------
Total $1,413 $1,159 22 $2,803 $2,268 24
====== ====== ====== ======
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset management and portfolio service fees rose 22% from the 1999 second
quarter to a new quarterly high of $1.4 billion. Asset management fees increased
10% from a year ago, as a result of the continued growth in assets under
management, which reached $555 billion at the end of the second quarter of 2000.
Excluding retail money market funds, which declined as a result of the
implementation of Merrill Lynch's U.S. banking strategy, assets under management
grew 11% from the second quarter of 1999. (For further information on the U.S.
banking strategy, see Business Segments - Private Client Group.) This growth was
attributable to a net inflow of customer assets as well as asset appreciation.
Portfolio service fees increased 51% from the comparable period last year, as
assets in asset-priced accounts continued to grow, driven by growth in Unlimited
Advantage(Service Mark) and Merrill Lynch Consults (Registered Trademark). The
majority of the revenues associated with these accounts is included in portfolio
service fees, with the remainder in asset management fees.
Total assets in Private Client accounts or under management were $1.8 trillion
at the end of the second quarter of 2000, representing an increase of $242
billion, or 16%, from the end of the second quarter a year ago. Assets under
management, which are included in total assets in Private Client accounts or
under management, totalled $555 billion at the end of the second quarter of
2000, an increase of $39 billion from the end of the second quarter last year,
as discussed in the previous paragraph. The changes in these balances are noted
as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
NET CHANGES DUE TO
-------------------------------
JUNE 25, NET NEW ASSET JUNE 30,
(in billions) 1999 MONEY(1) APPRECIATION(2) 2000
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets in Private Client accounts
or under management $ 1,530 $ 148 $ 94 $ 1,772
Total assets under management 516 21 (3) 18 555
----------------------------------------------------------------------------------------------------------------
</TABLE>
1. Includes reinvested dividends.
2. Includes foreign exchange translation adjustments of $(10) billion.
3. Includes net outflows of retail money market funds due to the implementation
of Merrill Lynch's U.S. banking strategy.
Other revenues were up 55% from the 1999 second quarter to $272 million,
primarily due to increased income from investments.
21
<PAGE>
Significant components of interest and dividend revenues and interest expense
follow:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND REVENUES
Resale agreements and securities
borrowed transactions $1,876 $1,421 $3,553 $2,788
Trading assets 783 790 1,620 1,741
Margin lending 1,209 685 2,270 1,368
Dividends 326 235 452 315
Other 871 601 1,633 1,201
------ ------ ------ ------
Total 5,065 3,732 9,528 7,413
------ ------ ------ ------
INTEREST EXPENSE
Repurchase agreements and securities
loaned transactions 1,602 1,258 2,952 2,494
Borrowings 1,597 1,104 2,976 2,215
Trading liabilities 410 424 858 951
Other 593 404 1,195 831
------ ------ ------ ------
Total 4,202 3,190 7,981 6,491
------ ------ ------ ------
NET INTEREST AND DIVIDEND PROFIT $ 863 $ 542 $1,547 $ 922
====== ====== ====== ======
---------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and dividend revenues and expenses are a function of the level and mix
of interest-earning assets and interest-bearing liabilities and the prevailing
level, term structure, and volatility of interest rates. Net interest and
dividend profit was a record $863 million in the second quarter of 2000, up 59%
from the second quarter of 1999, mainly due to increased customer-lending
balances, higher dividend revenues, and changes in asset/liability composition.
(For further information on balance sheet composition, see Average Assets and
Liabilities.)
Merrill Lynch hedges certain of its long- and short-term borrowings, primarily
with interest rate and currency swaps, to better match the interest rate and
currency characteristics of the borrowings to the assets funded by borrowing
proceeds. The effect of this hedging activity, which is included in "Borrowings"
in the previous table, increased/(decreased) interest expense by $44 million and
$(87) million for the 2000 and 1999 second quarters, respectively, and by $36
million and $(165) million for the 2000 and 1999 six months, respectively.
22
<PAGE>
Merrill Lynch's non-interest expenses are summarized below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------------- ------------------------
JUNE 30, MARCH 31, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation and benefits $3,443 $3,808 $2,729 $7,251 $5,490
------ ------ ------ ------- ------
Non-interest expenses,
excluding compensation and benefits:
Communications and technology 579 578 536 1,157 1,016
Occupancy and related depreciation 256 250 232 506 459
Advertising and market development 262 244 201 506 353
Brokerage, clearing, and exchange fees 196 192 170 388 324
Professional fees 166 147 143 313 261
Goodwill amortization 54 56 56 110 113
Other 363 397 342 760 663
------ ------ ------ ------- ------
Total non-interest expenses,
excluding compensation and benefits 1,876 1,864 1,680 3,740 3,189
------ ------ ------ ------- ------
Total non-interest expenses $5,319 $5,672 $4,409 $10,991 $8,679
====== ====== ====== ======= ======
Compensation and benefits
as a percentage of net revenues 51.4% 52.5% 50.2% 52.0% 51.3%
Compensation and benefits as a percentage of
pre-tax earnings before compensation and benefits 71.4 70.7 72.6 71.1 73.0
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Non-interest expenses, excluding compensation costs, were virtually unchanged
from the first quarter of 2000 and up 12% from the second quarter of 1999. These
expenses were 28.0% of net revenues for the second quarter of 2000, down from
30.9% for the comparable quarter in 1999.
Compensation and benefits, the largest expense category, were $3.4 billion, up
26% from the 1999 second quarter, as increased profitability led to higher
incentive compensation, but down 10% from the first quarter of 2000.
Compensation and benefits as a percentage of net revenues was 51.4% for the
second quarter of 2000, compared to 50.2% in the second quarter last year and
down from 52.5% in the previous quarter.
Communications and technology expenses were $579 million, unchanged from the
previous quarter. These expenses increased 8% from the 1999 second quarter,
mainly due to higher technology-related depreciation and increased communication
maintenance costs.
Occupancy and related depreciation expense was $256 million in the second
quarter of 2000, virtually unchanged from the first quarter of 2000 and up 10%
from the comparable quarter a year ago.
Advertising and market development expense rose 7% from the previous quarter and
30% from the 1999 second quarter to $262 million. The increases were due to
higher business development expenses and sales promotion costs associated with
increased business activity. In addition, higher advertising costs resulting
from the launch of new products and corporate brand promotion contributed to the
year-over-year increase.
Brokerage, clearing, and exchange fees of $196 million for the second quarter
remained unchanged from the first quarter and were up 15% from the first
quarter a year ago, mainly due to increased transaction volume.
Professional fees were $166 million, up 13% from the prior quarter and up 16%
from the 1999 second quarter, primarily due to higher employment service fees,
partially offset by lower consulting fees. In addition, higher legal fees
contributed to the year-over-year increase.
23
<PAGE>
Goodwill amortization was $54 million in the second quarter of 2000, virtually
unchanged from the first quarter of 2000 and the second quarter of 1999. Other
expenses were $363 million, down 9% from the preceding quarter and up 6% from
the second quarter of last year.
The effective tax rate was 31.0% for the second and first quarters of 2000,
compared to 30.1% in the second quarter of 1999. The effective tax rates for the
first six months of 2000 and 1999 were 31.0% and 32.0%, respectively.
--------------------------------------------------------------------------------
BUSINESS SEGMENTS
--------------------------------------------------------------------------------
Merrill Lynch reports the results of its business within three business
segments: Corporate and Institutional Client Group ("CICG"), Private Client
Group ("PCG"), and Merrill Lynch Investment Managers ("MLIM"). CICG's activities
primarily involve providing services to corporate, institutional, and
governmental clients throughout the world. PCG provides investment, financing,
insurance, tax, and other financial services and products to retail clients
globally. MLIM provides investment management services to a wide variety of
retail and institutional clients. For further information on services provided
to clients within these segments, see the 1999 Form 10-K and the 1999 Annual
Report included as an exhibit thereto.
Certain MLIM and CICG products are distributed by PCG distribution networks, and
to a more limited extent, certain MLIM products are distributed through the
distribution capabilities of CICG. Expenses and revenues associated with these
intersegment activities are recognized in each segment and eliminated at the
corporate level. Expenses of $41 million and $56 million for the 2000 and 1999
second quarters, and $109 million and $120 million for the 2000 and 1999 six
months, respectively, were eliminated. Revenues of $42 million and $54 million
for the 2000 and 1999 second quarters, and $133 million and $117 million for the
2000 and 1999 six months, respectively, were also eliminated. In addition,
revenue sharing agreements for shared activities are in place and the results of
each segment reflect the agreed upon portion of these activities. The segment
operating results exclude certain corporate items, which reduced net earnings
for the 2000 and 1999 second quarters by $111 million and $124 million, and the
2000 and 1999 six months by $243 million and $249 million, respectively. (See
Note 3 to Consolidated Financial Statements - Unaudited.)
--------------------------------------------------------------------------------
CORPORATE AND INSTITUTIONAL CLIENT GROUP
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $3,179 $2,386 $6,559 $4,691
Net earnings 713 482 1,510 954
--------------------------------------------------------------------------------------
</TABLE>
CICG posted strong results for the quarter in a less robust market environment.
Net revenues were $3.2 billion for the quarter, representing a 33% increase from
the second quarter of 1999, and net earnings were $713 million, up 48% from the
1999 second quarter. Equity markets had a particularly outstanding quarter,
emphasized by growth in equity trading revenues worldwide. Equity underwriting
revenues were also up from the second quarter of 1999, as Merrill Lynch's global
market share increased to 13.4% from 11.1% in the second quarter of 1999,
according to Thomson Financial Securities Data. The strategic advisory business
also posted solid results for the quarter, due to the execution of numerous
landmark merger and acquisition transactions, with revenues 17% above the second
quarter of 1999. Revenues from the Debt Markets business were down from the
second quarter of 1999, as rising interest rates during the quarter led to
decreased industry-wide debt underwriting activity. Total global debt
underwriting volume declined 24%, from $816 billion in the 1999 second quarter
to $617 billion in the second quarter of 2000. Merrill Lynch retained its
position as the leading underwriter of total debt and equity securities, both in
the U.S. and globally, as well as the #1 position in U.S. and global debt
underwriting, according to Thomson Financial Securities Data.
24
<PAGE>
CICG continued to pursue several strategic initiatives during the quarter. A
merger with Herzog, Heine, Geduld, Inc., the third largest Nasdaq market maker,
was announced during the quarter. This transaction, which closed in July, will
expand Merrill Lynch's market-making activity in Nasdaq and other
over-the-counter stocks and enhance its global equity franchise. Merrill Lynch
also collaborated with other financial firms to create BondBook LLC, an
electronic bond trading system and TheMuniCenter, a web-based marketplace for
municipal securities.
--------------------------------------------------------------------------------
PRIVATE CLIENT GROUP
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $2,992 $2,628 $6,380 $5,225
Net earnings 216 241 517 469
-------------------------------------------------------------------------------------
</TABLE>
Net revenues for PCG were $3.0 billion in the second quarter of 2000, up 14%
from $2.6 billion in the 1999 second quarter. In the U.S., net revenues for the
second quarter were up 12% from the year ago period, and internationally, net
revenues were up 26%, driven primarily by increased volumes of equity and mutual
fund transactions. Net earnings for the quarter were $216 million, down 10% from
the 1999 second quarter, as a result of increased expenses. The decrease was due
in part to an increase in headcount during the twelve months, as PCG's worldwide
financial consultant force grew by 1,700. In July 2000, it was announced that
actions were being taken to realign and strengthen the U.S. private client
business, which would include both the reallocation and reduction of staff.
Total assets in U.S. client accounts remained essentially unchanged from the
first quarter at $1.4 trillion; net new money inflows were $11 billion during
the quarter. Outside the U.S., client assets were $146 billion, with $7 billion
of net new money in the second quarter. Total assets in asset-priced accounts
rose 3% from the first quarter to $209 billion, an increase of 80% from the
second quarter of 1999.
Unlimited Advantage, Merrill Lynch's total access fee-based account, continued
to grow, with an increase in revenues of 25% compared with the first quarter of
2000. Client assets in Unlimited Advantage accounts reached $90 billion at the
end of the quarter. Additionally, client assets in ML Direct, the online
investing service for self-directed investors, grew 28% during the quarter to
$2.7 billion in its second full quarter of operation. In the U.S., two-thirds of
a million clients now have on-line access to their accounts through ML Online
and ML Direct, compared with fewer than 250,000 a year ago. ML Direct was named
as one of the "Best Online Brokers of 2000" by Money magazine, receiving four
and a half out of five possible stars, and was praised as one of the "best
values of all surveyed brokers" by Business Week.
As part of its U.S. Banking Strategy, in June of 2000 Merrill Lynch began to
redirect cash inflows from certain Cash Management Accounts ("CMA") and other
types of accounts from taxable money market funds included in assets under
management, to bank deposits at Merrill Lynch banks. As a result, U.S. bank
deposits included on the consolidated balance sheet grew to $19 billion from $3
billion at the end of the 1999 second quarter and $7 billion at the end of the
first quarter of 2000.
In April 2000, Merrill Lynch announced a 50/50 joint venture with HSBC to create
the first global online banking and investment services company, serving
individual customers outside the U.S. The rollout of the joint venture is on
schedule, and is expected to launch in the United Kingdom before the end of the
year.
25
<PAGE>
--------------------------------------------------------------------------------
MERRILL LYNCH INVESTMENT MANAGERS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 30, JUNE 25, JUNE 30, JUNE 25,
(in millions) 2000 1999 2000 1999
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $602 $536 $1,212 $1,022
Net earnings 84 74 155 108
-------------------------------------------------------------------------------------
</TABLE>
The asset management business was re-branded during the quarter as Merrill Lynch
Investment Managers. Net revenues and net earnings for MLIM were $602 million
and $84 million, respectively, in the second quarter of 2000, up 12% and 14%
from $536 million and $74 million in the 1999 second quarter. Assets under
management ended the quarter at $555 billion, up 8% from the end of the 1999
second quarter. Excluding retail money market funds, which declined as a result
of the implementation of the U.S. banking strategy, assets under management grew
11% from the same period last year. MLIM had net new money of $18 billion in the
quarter, excluding the retail money market outflows. Much of the new money
during the quarter was attributable to Merrill Lynch Quantitative Advisors,
which won sizable mandates from a number of New York City pension plans.
--------------------------------------------------------------------------------
CAPITAL ADEQUACY AND LIQUIDITY
--------------------------------------------------------------------------------
The primary objectives of Merrill Lynch's capital structure and funding policies
are to:
1. Ensure sufficient equity capital to absorb losses,
2. Support the business strategies, and
3. Assure liquidity at all times, across market cycles, and through periods of
financial stress.
These objectives and Merrill Lynch's capital structure and funding policies
are discussed more fully in the 1999 Annual Report included as an exhibit to
Form 10-K.
Among U.S. institutions engaged primarily in the global securities business,
Merrill Lynch is one of the most highly capitalized, with $15.3 billion in
common equity, $425 million in preferred stock, and $2.7 billion of preferred
securities issued by subsidiaries at June 30, 2000. Preferred securities issued
by subsidiaries consist primarily of Trust Originated Preferred Securities
(Service Mark) ("TOPrS"(Service Mark)). Based on various analyses and criteria,
management believes that Merrill Lynch's equity capital base of $18.4 billion is
adequate.
Merrill Lynch's leverage ratios were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
ADJUSTED
LEVERAGE LEVERAGE
RATIO(1) RATIO(2)
--------------------------------------------------------------------------
<S> <C> <C>
PERIOD END
June 30, 2000 19.2x 12.2x
December 31, 1999 21.1x 13.4x
AVERAGE(3)
Six months ended June 30, 2000 21.0x 13.1x
Year ended December 31, 1999 23.2x 14.4x
--------------------------------------------------------------------------
</TABLE>
(1) Total assets to total stockholders' equity and preferred securities issued
by subsidiaries.
(2) Total assets less (a) securities received as collateral,
net of securities pledged as collateral, (b) securities pledged as
collateral, and (c) receivables under resale agreements and
securities borrowed transactions, to total stockholders' equity and
preferred securities issued by subsidiaries.
(3) Computed using month-end balances.
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.
26
<PAGE>
Commercial paper outstanding totaled $18.1 billion at June 30, 2000 and $24.2
billion at December 31, 1999, which was equal to 5.1% and 7.4% of total assets
at June 30, 2000 and year-end 1999, respectively. This decrease was due in part
to the U.S. banking strategy. Outstanding long-term borrowings increased to
$61.5 billion at June 30, 2000 from $53.5 billion at December 31, 1999. Major
components of the change in long-term borrowings during the first six months of
2000 follow:
<TABLE>
<CAPTION>
----------------------------------------------
(in billions)
----------------------------------------------
<S> <C>
Balance at December 31, 1999 $53.5
Issuances 17.2
Maturities (8.4)
Other, net (0.8)
-----
Balance at June 30, 2000 (1) $61.5
=====
----------------------------------------------
</TABLE>
(1) At June 30, 2000, $45.1 billion of long-term borrowings had maturity dates
beyond one year.
In addition to equity capital sources, Merrill Lynch views long-term debt as a
stable funding source for its core balance sheet assets. Other sources of
liquidity include a committed, senior, unsecured bank credit facility that, at
June 30, 2000, totalled $8.0 billion and was not drawn upon. Additionally,
Merrill Lynch maintains access to significant uncommitted credit lines, both
secured and unsecured, from a large group of banks.
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 June 30, 2000
as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
SENIOR PREFERRED STOCK
DEBT AND TOPrS
RATING AGENCY RATINGS RATINGS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Fitch AA AA-
Moody's Investors Service, Inc. Aa3 aa3
Rating and Investment Information, Inc. (Japan) AA A+
Standard & Poor's AA- A
Thomson Financial BankWatch, Inc. AA+ Not Rated
---------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
AVERAGE ASSETS AND LIABILITIES
--------------------------------------------------------------------------------
Merrill Lynch monitors changes in its balance sheet using average daily balances
that are determined on a settlement date basis and reported for management
information purposes. For financial statements and risk management purposes,
balances are recorded on a trade date basis. The following discussion compares
changes in settlement date average daily balances.
For the first six months of 2000, average total assets were $361 billion, up 8%
from $333 billion for the 1999 fourth quarter. Average total liabilities
increased 8% to $344 billion from $318 billion for the 1999 fourth quarter. The
major components in the changes in average total assets and liabilities for the
first six months of 2000 as compared with the fourth quarter of 1999 are
summarized as follows:
27
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
(in millions) INCREASE (DECREASE) CHANGE
---------------------------------------------------------------------------------------------------
<S> <C> <C>
AVERAGE ASSETS
Trading assets $ 9,593 9 %
Receivables under resale agreements and securities
borrowed transactions 5,688 6
Customer receivables 5,246 11
Marketable investment securities 5,085 68
Securities pledged as collateral (3,330) (25)
AVERAGE LIABILITIES
Trading liabilities $ 8,517 13 %
Commercial paper and other short-term borrowings 6,954 41
Customer payables 4,438 20
Long-term borrowings 3,673 7
Payables under repurchase agreements and
securities loaned transactions 3,298 4
Demand and time deposits 2,902 18
---------------------------------------------------------------------------------------------------
</TABLE>
During the first six months of 2000, trading assets and liabilities rose as
volume increased, benefiting from higher customer demand. Additionally,
securities borrowed and securities loaned transactions rose due to increased
matched-book activity. Higher trading volume during the first six months, as
compared with the fourth quarter of 1999, also caused an increase in the average
customer receivable and payable balances. The growth in marketable investment
securities was due to increased portfolio investments by Merrill Lynch's U.S.
bank subsidiaries, resulting from the U.S. banking strategy. (For further
information on the U.S. banking strategy, see Business Segments - Private Client
Group.) In addition to the increase in securities loaned transactions, the
growth in average assets was funded by an increase in commercial paper, demand
and time deposits, and long-term borrowings, particularly medium-term notes.
--------------------------------------------------------------------------------
NON-INVESTMENT GRADE HOLDINGS
--------------------------------------------------------------------------------
Non-investment grade holdings, which include transactions with highly leveraged
counterparties, involve risks related to the creditworthiness of the issuers or
counterparties and the liquidity of the market for such investments. Merrill
Lynch recognizes these risks and, whenever possible, employs strategies to
mitigate exposures. The specific components and overall level of non-investment
grade positions may vary significantly from period to period as a result of
inventory turnover, investment sales, and asset redeployment.
In the normal course of business, Merrill Lynch underwrites, trades, and holds
non-investment grade cash instruments in connection with its investment banking,
market-making, and derivative structuring activities. Non-investment grade
holdings have been defined as debt and preferred equity securities rated as BB+
or lower, or equivalent ratings by recognized credit rating agencies, sovereign
debt in emerging markets, amounts due under derivative contracts from
non-investment grade counterparties, and other instruments that, in the opinion
of management, are non-investment grade.
28
<PAGE>
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 June 30, 2000, Merrill Lynch had
derivatives with notionals of $2.0 billion with non-investment grade credit
exposure. Derivatives may also subject Merrill Lynch to credit spread or issuer
default risk, in that changes in credit spreads or in the credit quality of the
underlying securities may adversely affect the derivatives' fair values. Merrill
Lynch seeks to manage these risks by engaging in various hedging strategies to
reduce its exposure associated with non-investment grade positions, such as
purchasing an option to sell the related security or entering into other
offsetting derivative contracts. At June 30, 2000, Merrill Lynch had derivatives
with notionals of $2.0 billion that hedged non-investment grade credit exposure.
Merrill Lynch provides financing and advisory services to, and invests in,
companies entering into leveraged transactions, which may include leveraged
buyouts, recapitalizations, and mergers and acquisitions. Merrill Lynch provides
extensions of credit to leveraged companies in the form of senior and
subordinated debt, as well as bridge financing on a select basis. In addition,
Merrill Lynch syndicates loans for non-investment grade companies or in
connection with highly leveraged transactions and may retain a residual portion
of these loans.
Merrill Lynch holds direct equity investments in leveraged companies and
interests in partnerships that invest in leveraged transactions. Merrill Lynch
has also committed to participate in limited partnerships that invest in
leveraged transactions. Future commitments to participate in limited
partnerships and other direct equity investments will be made on a select basis.
--------------------------------------------------------------------------------
TRADING EXPOSURES
--------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's non-investment grade trading
exposures:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
June 30, Dec. 31,
(in millions) 2000 1999
-------------------------------------------------------------------------
<S> <C> <C>
Trading assets:
Cash instruments $5,786 $5,630
Derivatives 4,552 4,033
Trading liabilities - cash instruments (834) (997)
Collateral on derivative assets (2,419) (1,344)
------ ------
Net trading asset exposure $7,085 $7,322
====== ======
-------------------------------------------------------------------------
</TABLE>
Among the trading exposures included in the preceding table are debt and equity
securities and bank loans of companies in various stages of bankruptcy
proceedings or in default. At June 30, 2000, the carrying value of such debt and
equity securities totaled $259 million, of which 98% resulted from Merrill
Lynch's market-making activities in such securities. This compared with $133
million at December 31, 1999, of which 89% related to market-making activities.
Also included are distressed bank loans with a carrying value totaling $120
million and $86 million at June 30, 2000 and December 31, 1999, respectively.
29
<PAGE>
--------------------------------------------------------------------------------
NON-TRADING EXPOSURES
--------------------------------------------------------------------------------
The following table summarizes Merrill Lynch's non-investment grade non-trading
exposures:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
JUNE 30, DEC. 31,
(in millions) 2000 1999
--------------------------------------------------------------------------------------
<S> <C> <C>
Marketable investment securities $ 256 $ 58
Investments of insurance subsidiaries 119 108
Loans (net of allowance for loan losses):
Bridge loans 190 68
Other loans(1) 1,758 1,331
Other investments:
Partnership interests (2) 1,267 1,368
Other equity investments (3) 288 369
--------------------------------------------------------------------------------------
</TABLE>
(1) Represents outstanding loans to 124 and 115 companies at June 30, 2000
and December 31, 1999, respectively.
(2) Includes $604 million and $599 million in investments at June 30, 2000 and
December 31, 1999, respectively, related to deferred compensation plans,
for which the default risk of the investments generally rests with the
participating employees.
(3) Includes investments in 60 and 62 enterprises at June 30, 2000 and December
31, 1999, repectively.
The following table summarizes Merrill Lynch's commitments with exposure to
non-investment grade counterparties:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
JUNE 30, DEC. 31,
(in millions) 2000 1999
---------------------------------------------------------------------------------------------
<S> <C> <C>
Additional commitments to invest in partnerships $ 304 $ 200
Unutilized revolving lines of credit and other
lending commitments 3,562 (1) 2,462
---------------------------------------------------------------------------------------------
</TABLE>
(1) Subsequent to the end of the second quarter, these commitments were reduced
by $465 million.
30
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA
---------------------------------------------------------------------------------------------------------------------------------
2ND QTR. 3RD QTR. 4TH QTR. 1ST QTR. 2ND QTR.
1999 1999 1999 2000 2000
-------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLIENT ASSETS (in billions):
U.S. Client Assets $ 1,245 $ 1,212 $ 1,360 $ 1,446 $ 1,436
Non-U.S. Client Assets 285 302 336 345 336
-------- --------- -------- -------- --------
Total Assets in Private Client Accounts
or Under Management $ 1,530 $ 1,514 $ 1,696 $ 1,791 $ 1,772
======== ========= ======== ======== ========
ASSETS UNDER MANAGEMENT(1): $ 516 $ 514 $ 557 $ 568 $ 555
Retail 268 268 280 291 271
Institutional 248 246 277 277 284
Equity 272 271 307 310 316
Fixed-Income 102 100 99 100 100
Money Market 142 143 151 158 139
U.S. 310 304 324 333 328
Non-U.S. 206 210 233 235 227
ASSETS IN ASSET-PRICED ACCOUNTS $ 116 $ 131 $ 168 $ 203 $ 209
---------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING:
Global Debt and Equity:
Volume (in billions) $ 107 $ 108 $ 85 $ 103 $ 88
Market Share 11.7% 13.5% 13.9% 11.3% 12.2%
U.S. Debt and Equity:
Volume (in billions) $ 83 $ 86 $ 67 $ 83 $ 71
Market Share 14.0% 16.8% 16.7% 14.3% 15.8%
---------------------------------------------------------------------------------------------------------------------------------
FULL-TIME EMPLOYEES:
U.S. 46,700 48,000 49,000 50,100 51,500
Non-U.S. 17,300 18,000 18,200 18,500 19,200
-------- --------- -------- -------- --------
Total 64,000 66,000 67,200 68,600 70,700
======== ========= ======== ======== ========
Financial Consultants and
Other Investment Professionals 18,400 18,700 19,000 19,400 20,200
---------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT:
Net Earnings (in millions) $ 673 $ 572 $ 764 $ 1,037 $ 902
Annualized Return on Average
Common Stockholders' Equity 25.4% 20.2% 23.8% 31.1% 24.3%
Earnings per Common Share:
Basic $ 1.80 $ 1.52 $ 2.03 $ 2.69 $ 2.29
Diluted 1.57 1.34 1.80 2.38 2.01
---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET (in millions):
Total Assets $324,740 $ 312,936 $328,071 $363,944 $355,108
Total Stockholders' Equity 11,446 12,100 12,802 14,467 15,727
Book Value Per Common Share 29.87 31.49 33.20 36.37 39.04
---------------------------------------------------------------------------------------------------------------------------------
SHARE INFORMATION (in thousands):
Weighted-Average Shares Outstanding:
Basic 368,273 370,347 371,962 381,641 389,077
Diluted 421,267 419,090 420,603 432,372 443,665
Common Shares Outstanding 368,960 370,777 372,839 386,071 391,974
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Certain prior period amounts have been restated to conform to the current
period presentation.
31
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
-----------------
JAS SECURITIES LITIGATION. The JAS Securities Litigation case described in ML &
Co.'s 1999 Form 10-K and Form 10-Q for the 2000 first quarter has been settled
for $8.9 million, subject to execution of a definitive settlement agreement and
court approval.
SUMITOMO CORPORATION LITIGATION. Merrill Lynch paid Sumitomo Corporation $275
million plus legal fees, and Sumitomo released Merrill Lynch from any claims
stemming from losses in connection with unauthorized copper trading. Merrill
Lynch had substantially provided for the settlement, which did not have a
material impact on the earnings reported in the second quarter of 2000. The
settlement was previously reported in ML & Co.'s Form 8-K dated May 24, 2000.
Both the JAS Securities Litigation and Sumitomo Corporation Litigation were
settled without an adjudication of the merits of the claims and Merrill Lynch
denied liability in connection with the settlements.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
ML & Co. has issued unregistered common stock in connection with the Herzog,
Heine, Geduld, Inc. ("Herzog") merger described in Note 8 to the Consolidated
Financial Statements - Unaudited in this report. Under the merger agreement, ML
& Co. acquired all of the outstanding common stock of Herzog and each Herzog
shareholder is entitled to receive 141.87751 shares of ML & Co. common stock for
each Herzog share. A total of 8,550,300 shares of ML & Co. common stock will be
issued to the Herzog shareholders. Of this amount, 8,466,597 shares were issued
on July 14, 2000, and 83,703 shares will be issued upon receipt of required
documents from certain Herzog shareholders. The ML & Co. common stock was issued
in accordance with Rule 506 of Regulation D in transactions not involving any
public offering within the meaning of Section 4(2) of the Securities Act of
1933. There is no underwriter for the shares sold to the Herzog shareholders. ML
& Co. plans to file a registration statement under the Securities Act of 1933 to
register the resale of the ML & Co. shares by the Herzog shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 18, 2000, ML & Co. held its Annual Meeting of Stockholders. Further
details concerning matters submitted for stockholder vote can be found in ML &
Co.'s Quarterly Report on Form 10-Q for the 2000 first quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
(4) Instruments defining the rights of security holders,
including indentures:
Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K,
ML & Co. hereby undertakes to furnish to the Securities and
Exchange Commission, upon request, copies of the instruments
defining the rights of holders of long-term debt securities of ML
& Co. that authorize an amount of securities constituting 10%
or less of the total assets of ML & Co. and its subsidiaries
on a consolidated basis.
(11) Statement re: computation of per common share earnings.
(12) Statement re: computation of ratios.
(15) Letter re: unaudited interim financial information.
(27) Financial Data Schedule.
32
<PAGE>
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed by ML & Co. with
the Securities and Exchange Commission during the quarterly period
covered by this Report:
(i) Current Report dated April 17, 2000 for the purpose of filing the
Preliminary Unaudited Earnings Summary of ML & Co. for the three-
month period ended March 31, 2000.
(ii) Current Report dated May 3, 2000 for the purpose of filing the
Preliminary Unaudited Consolidated Balance Sheet of ML & Co. as of
March 31, 2000.
(iii)Current Report dated May 24, 2000 for the purpose of announcing
the resolution of issues between Merrill Lynch and Sumitomo
Corporation concerning losses sustained by Sumitomo in connection
with unauthorized copper trading.
(iv) Current Report dated June 29, 2000 for the purpose of filing the
form of ML & Co.'s S&P 500 Market Index Target-Term Securities
(Registered Trademark) due June 29, 2007.
33
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MERRILL LYNCH & CO., INC.
----------------------------------
(Registrant)
Date: August 11, 2000 By: /s/ Thomas H. Patrick
----------------------------------
Thomas H. Patrick
Executive Vice President and
Chief Financial Officer
34
<PAGE>
INDEX TO EXHIBITS
Exhibits
11 Statement re: computation of per common share earnings.
12 Statement re: computation of ratios.
15 Letter re: unaudited interim financial information.
27 Financial Data Schedule.
<PAGE>
